Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<p><strong><em>*It Keeps Getting Worse: </em></strong>Between China Evergrande Group’s (3333.HK) [Evergrande] operational and liquidity troubles, large property price discounts, the precipitous drop in the value of its non-property-related development business, and a more challenging industry outlook, we would expect that Evergrande’s corporate restructure to be riddled with challenges; and </p><p><strong><em>*Authorities Finally Stepping In:</em></strong> The China Financial Stability and Development Committee (CFSDC) has signed off on Evergrande’s proposal to renegotiate debt payment deadlines with banks and other creditors, after the company missed interest and principal payments on several loans and delayed payments to suppliers amid difficulties accessing new financing – signaling that Evergrande has been greenlighted to re-negotiate funding terms with creditors.</p>

*It Keeps Getting Worse: Between China Evergrande Group’s (3333.HK) [Evergrande] operational and liquidity troubles, large property price discounts, the precipitous drop in the value of its non-property-related development business, and a more challenging industry outlook, we would expect that Evergrande’s corporate restructure to be riddled with challenges; and *Authorities Finally Stepping In: The China Financial Stability and Development Committee (CFSDC) has signed off on Evergrande’s proposal to renegotiate debt payment deadlines with banks and other creditors, after the company missed interest and principal payments on several loans and delayed payments to suppliers amid difficulties accessing new financing – signaling that Evergrande has been greenlighted to re-negotiate funding terms with creditors.

China Evergrande Group – Not Likely A Smooth Restructure

Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

<p><strong>Monthly Newsletter | May 2021</strong></p>
<p>Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.</p>
<p><strong>Both the asset and liability sides of the banks' balance sheets hit a wall in April. </strong>Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.</p>
<p><strong>Deleveraging real estate exposures remains a top priority for the regulators. </strong>New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  </p>
<p><strong>We expect the central bank to maintain a neutral policy for the remainder of 2021. </strong>The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.</p>
<p><strong>We will remain underweight the H-share banks against MSCI China <a href="https://www.smartkarma.com/entities/msci-china-index" target="_blank" data-smartkarma-citation="entities:22895:1" rel="noopener">(MXCN INDEX)</a> until 2Q21 earnings. </strong>Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.</p>
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<p><strong>Related Insights</strong></p>
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<a href="https://www.smartkarma.com/insights/icbc-the-prefs-are-junk-and-should-trade-like-it" target="_blank" data-smartkarma-citation="insights:51598" rel="noopener">ICBC: The Prefs Are Junk and Should Trade Like It</a> </li>
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<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </li>
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Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China (MXCN INDEX) until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.


Related Insights




ICBC: The Prefs Are Junk and Should Trade Like It 

ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 



Glut and Famine: China's Monetary Conditions a Notch Tighter in May

<p><strong><em>*Don’t Be Misled By Better Numbers: </em></strong>Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and </p><p><strong><em>*Credit Risk Rising: </em></strong>As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      </p>

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      

ICBC – Be Very Wary Of Worsening Credit

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

China Bohai Bank   / Equity Capital Markets

<div><p><a href="https://www.smartkarma.com/entities/china-bohai-bank" target="_blank" data-smartkarma-citation="entities:29034:1" rel="noopener">China Bohai Bank (9668 HK)</a> is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only nationwide joint-stock commercial bank in China that has a foreign bank, <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a>, as its promoter and founder. Bohai will commence trading on Thursday, 16 July. Bohai priced its IPO at HK$4.80 per share, towards the bottom end of the indicative price range of HK$4.75-4.98 per share. Bohai raised net proceeds of HK$13,470.6 million ($1.7 billion).</p></div><div><div><div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/china-bohai-bank-ipo-initiation-the-bucks-stop-here" target="_blank" rel="noopener">our initiation note</a>, we stated that our analysis suggests that Bohai’s fundamentals are attractive as the positives (loan book growth, improving operating metrics) far outweigh the negatives (high NPL ratio). Despite the improving sentiment towards Chinese online game companies (based on the recent multiple expansion), we continue to believe that Bohai is fully valued at the IPO price.</p></div></div></div>

China Bohai Bank (9668 HK) is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only nationwide joint-stock commercial bank in China that has a foreign bank, Standard Chartered (STAN LN), as its promoter and founder. Bohai will commence trading on Thursday, 16 July. Bohai priced its IPO at HK$4.80 per share, towards the bottom end of the indicative price range of HK$4.75-4.98 per share. Bohai raised net proceeds of HK$13,470.6 million ($1.7 billion).In our initiation note, we stated that our analysis suggests that Bohai’s fundamentals are attractive as the positives (loan book growth, improving operating metrics) far outweigh the negatives (high NPL ratio). Despite the improving sentiment towards Chinese online game companies (based on the recent multiple expansion), we continue to believe that Bohai is fully valued at the IPO price.

<p><a href="https://www.smartkarma.com/entities/china-bohai-bank" target="_blank" data-smartkarma-citation="entities:29034:1" rel="noopener">China Bohai Bank (9668 HK)</a> is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only nationwide joint-stock commercial bank in China that has a foreign bank, <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a>, as its promoter and founder. Bohai has launched its IPO at a price range of HK$4.75-4.98 per share. At the mid-point of the IPO price range, Bohai will raise net proceeds of HK$13,668.1 million ($1,763 million). </p><div><div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/china-bohai-bank-ipo-initiation-the-bucks-stop-here" target="_blank" rel="noopener">our initiation note</a>, we stated that our analysis suggests that Bohai’s fundamentals are attractive as the positives (loan book growth, improving operating metrics) far outweigh the negatives (high NPL ratio). However, our analysis suggests that Bohai is fully valued at the proposed IPO price range. Although we think that Bohai is a good business, we would give the IPO a pass on valuation grounds.</p></div></div>

China Bohai Bank (9668 HK) is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only nationwide joint-stock commercial bank in China that has a foreign bank, Standard Chartered (STAN LN), as its promoter and founder. Bohai has launched its IPO at a price range of HK$4.75-4.98 per share. At the mid-point of the IPO price range, Bohai will raise net proceeds of HK$13,668.1 million ($1,763 million). In our initiation note, we stated that our analysis suggests that Bohai’s fundamentals are attractive as the positives (loan book growth, improving operating metrics) far outweigh the negatives (high NPL ratio). However, our analysis suggests that Bohai is fully valued at the proposed IPO price range. Although we think that Bohai is a good business, we would give the IPO a pass on valuation grounds.

China

Shanghai Pudong Development Bank Co., Ltd. provides banking services. The Company provides loans, deposits, accounts settlement, foreign exchange, and other services. Shanghai Pudong Development Bank provides its services to individuals, companies, and other groups.

Shanghai Pudong Development Bank Co. (600000 CH)

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Shanghai Pudong Development Bank Co. (600000 CH)

China Evergrande Group – Not Likely A Smooth Restructure

CHINA EVERGRANDE: Evergrande’s operational and liquidity troubles continue, and the CFSDC has signed off on Evergrande’s proposal to renegotiate...

Thomas J. Monaco

Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Monetary data in May point to a tighter environment for both lending and funding. Mortgage rates have edged up, but the deposit drain is worrying....

Stanley Tsai, CFA

ICBC – Be Very Wary Of Worsening Credit

INDUSTRIAL AND COMMERCIAL BANK OF CHINA: Don't Believe The Hype. Numbers Manufactured, and Credit Risk Suggests Long Winter For ICBC and Mainland...

Thomas J. Monaco

China Bohai Bank IPO: Trading Debut

China Bohai Bank (9668 HK) is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only...

Arun George

China Bohai Bank IPO: Valuation Insights

China Bohai Bank (9668 HK) is the youngest nationwide joint-stock commercial bank in China. In 2005, Bohai was established and became the only...

Arun George

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