Silver Point

Thomas J. Monaco

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

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

The next step for banks is to purge costs. As banks brace for more defaults, less loan demand,  higher credit costs, we must expect a wholesale effort on cutting costs. Many banks held off on their cost cutting plans early in the year to ease financial stress for staff and their dependents. It is doubtful that this lasts, especially with more countries reinstating insane policies of locking down citizens as an attempt to stop C19 deaths. The one controllable for banks is operating costs. However, this raises an additional question of ‘free banking’ as put forward by SmartKarma some weeks ago. Perhaps this is when more banks begin charging for basic banking services, alongside cost cutting.

The next step for banks is to purge costs. As banks brace for more defaults, less loan demand,  higher credit costs, we must expect a wholesale effort on cutting costs. Many banks held off on their cost cutting plans early in the year to ease financial stress for staff and their dependents. It is doubtful that this lasts, especially with more countries reinstating insane policies of locking down citizens as an attempt to stop C19 deaths. The one controllable for banks is operating costs. However, this raises an additional question of ‘free banking’ as put forward by SmartKarma some weeks ago. Perhaps this is when more banks begin charging for basic banking services, alongside cost cutting.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.      

DBS Group Holdings – Not Trending The Right Way Yet

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers.

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers. 

Oversea Chinese Banking Corp – Still Not A Great Eastern

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

United Kingdom

Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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Standard Chartered (STAN LN)

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

Global Banks – Cost Purge

We must expect the previously good delta in credit costs to wane or to reverse altogether alongside renewed lockdowns. To preserve profit, banks...

Daniel Tabbush

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

Global Banks – Cost Purge

We must expect the previously good delta in credit costs to wane or to reverse altogether alongside renewed lockdowns. To preserve profit, banks...

Daniel Tabbush

DBS Group Holdings – Not Trending The Right Way Yet

DBS GROUP HOLDINGS: Trends Are Poor. Costs Higher, Revenues Lower, and Provision Trend Likely To Be Reversed As We Head Into 2021.

Thomas J. Monaco

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco