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

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see <a href="https://www.smartkarma.com/compose/insight/50207/Bank%20Credit%20Compass:%20Positive%20Total%20Return%20Sweet%20Spot.%20Read%20more:%20https:/skr.ma/2gzmu" target="_blank" rel="noopener">Bank Credit Compass: Positive Total Return Sweet Spot</a> for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see <a href="https://www.smartkarma.com/compose/insight/50207/US%20Banks%20and%20the%20SLR%20Situation:%20Overweight%20JPM%20Tier%201%20Securities.%20Read%20more:%20https:/skr.ma/g6CCF" target="_blank" rel="noopener">US Banks and the SLR Situation: Overweight JPM Tier 1 Securities</a> for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse (CSGN VX)</a> last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see <a href="https://www.smartkarma.com/compose/insight/50207/Credit%20Suisse:%20Skating%20on%20a%20Thin%20Layer%20of%20Capital.%20Read%20more:%20https:/skr.ma/rGLd5" target="_blank" rel="noopener">Credit Suisse: Skating on a Thin Layer of Capital</a> and <a href="https://www.smartkarma.com/compose/insight/50207/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a> for more details.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Executive Summary: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see Bank Credit Compass: Positive Total Return Sweet Spot for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see US Banks and the SLR Situation: Overweight JPM Tier 1 Securities for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from Credit Suisse (CSGN VX) last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see Credit Suisse: Skating on a Thin Layer of Capital and Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Bank Credit Weekly: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with <a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a> and <a href="https://www.smartkarma.com/entities/american-express-co" target="_blank" data-smartkarma-citation="entities:916:1" rel="noopener">American Express Co (AXP US)</a> the key positions.  The FAAMG group of stocks remain key underweight holdings, though <a href="https://www.smartkarma.com/entities/microsoft-corp" target="_blank" data-smartkarma-citation="entities:15273:1" rel="noopener">Microsoft Corp (MSFT US)</a> is the most widely held of the group. <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> is almost totally avoided and in Asia, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> , <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> screen as 'Unloved' by global active Value managers.

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with Citigroup Inc (C US) and American Express Co (AXP US) the key positions.  The FAAMG group of stocks remain key underweight holdings, though Microsoft Corp (MSFT US) is the most widely held of the group. Tesla Motors (TSLA US) is almost totally avoided and in Asia, Meituan (3690 HK) , JD.com Inc (ADR) (JD US) and Pinduoduo (PDD US) screen as 'Unloved' by global active Value managers.

*DOJ Going Overboard:The US Department of Justice (DOJ) has begun investigating Visa (V.US) [Visa] over anticompetitive practices again. This time for alleged restrictions of merchants from routing in-store and online debit-card transactions through less expensive card networks, which is in contravention to the 2010 Durbin Amendment; and*Here Is Where We Think The DOJ Is Wrong: With Visa’s termination of its upstart Plaid acquisition, Visa’s alleged attempt to monopolize the online debit business has already been thwarted. Further, the combination of mix shift toward covered transactions coupled with declining yields has acted as a headwind for Visa's debit interchange fees. That Mastercard (MA.US) has convinced numerous US banks to switch their debit-card portfolios away from Visa evidences competitive pricing pressures. Lastly, there may actually be precedence for Visa’s stance given the recent outcome of the Federal Trade Commission (FTC) v. Qualcomm (QCOM.US) case.

*DOJ Going Overboard:The US Department of Justice (DOJ) has begun investigating Visa (V.US) [Visa] over anticompetitive practices again. This time for alleged restrictions of merchants from routing in-store and online debit-card transactions through less expensive card networks, which is in contravention to the 2010 Durbin Amendment; and*Here Is Where We Think The DOJ Is Wrong: With Visa’s termination of its upstart Plaid acquisition, Visa’s alleged attempt to monopolize the online debit business has already been thwarted. Further, the combination of mix shift toward covered transactions coupled with declining yields has acted as a headwind for Visa's debit interchange fees. That Mastercard (MA.US) has convinced numerous US banks to switch their debit-card portfolios away from Visa evidences competitive pricing pressures. Lastly, there may actually be precedence for Visa’s stance given the recent outcome of the Federal Trade Commission (FTC) v. Qualcomm (QCOM.US) case.

Visa Inc – Noise Creates Buying Opportunity

*Gross Operating Revenues Do NOT Cover Recurring Costs At HSBCNA: HSBC Holdings plc’s (HSBC) [5.HK/HSBA.LN] US subsidiary, HSBC North America (US only) [HSBCNA], reported yet another troubling set of results for 4Q20, losing USD 152.6 mn – down USD 312.6 mn (195.4%) on a linked quarter basis. Excluding non-recurring items, core operating income declined USD 313.6 mn (230.1%) for a loss of USD 177.3 mn over the same period. As it stands again, HSBCNA’s operating costs exceed recurring revenues; *HSBCNA Is Evolving Into An Indian State Bank: Given the credit weakness, we find that NPL/TL and problem assets/TL ratios significantly worsened 92 bp and 160 bp linked quarter, respectively, to 2.82% and 5.01%. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis; and*HSBCNA Should Be Dumped At Any Price: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. We look forward to Group results on February 23rd, and the clarity we will receive on its hot mess in the US.

*Gross Operating Revenues Do NOT Cover Recurring Costs At HSBCNA: HSBC Holdings plc’s (HSBC) [5.HK/HSBA.LN] US subsidiary, HSBC North America (US only) [HSBCNA], reported yet another troubling set of results for 4Q20, losing USD 152.6 mn – down USD 312.6 mn (195.4%) on a linked quarter basis. Excluding non-recurring items, core operating income declined USD 313.6 mn (230.1%) for a loss of USD 177.3 mn over the same period. As it stands again, HSBCNA’s operating costs exceed recurring revenues; *HSBCNA Is Evolving Into An Indian State Bank: Given the credit weakness, we find that NPL/TL and problem assets/TL ratios significantly worsened 92 bp and 160 bp linked quarter, respectively, to 2.82% and 5.01%. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis; and*HSBCNA Should Be Dumped At Any Price: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. We look forward to Group results on February 23rd, and the clarity we will receive on its hot mess in the US.     

HSBC Holdings Plc –American Result Intimates Group Miss

United States

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, leasing, credit cards, and consumer finance.  The Company operates through physical stores, the Internet and other distribution channels across North America and elsewhere internationally.

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Wells Fargo & Co (WFC US)

J.P Morgan Chase & Co. – Well On Track

JP MORGAN CHASE: JPM 1Q21 bottom-line results increased 18.4% linked quarter due to principal transactions and provision reversals. This should...

Thomas J. Monaco

Bank Credit Weekly: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

A confluence of thin volumes, trading holidays and technicals flattened the US rate curve. Bank credit underperformed in a carry-trade unwind. This...

Hank Calenti, CFA

Where Are Global Value Funds Positioned?

With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the active Global Value funds...

Steven Holden

Visa Inc – Noise Creates Buying Opportunity

VISA: The DOJ has again begun investigating Visa over anticompetitive practices due to alleged merchant restrictions to rout online debit-card...

Thomas J. Monaco

HSBC Holdings Plc –American Result Intimates Group Miss

HSBC HOLDINGS PLC: HSBCNA reported troubling results in 4Q20 - declining 195% linked quarter, as operating costs exceed recurring revenues. This...

Thomas J. Monaco

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