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

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.  

China Construction Bank / Equity Bottom-Up

*Hefty Expense Load In 4Q20: China Construction Bank (939.HK) [CCB] reported 4Q20 results of CNY 65.2 bn, declining CNY 3.0 bn or 4.4% linked quarter. On an operating basis, core earnings declined CNY 4.8 bn (7.5%) linked quarter to CNY 59.1 bn. Results weakness can be attributed to a massive increase in operating expenses and higher taxes; and *Credit Risk Rising: CCB’s While the stated NPL increase in not alarming on its face, the level of net new NPLs – inclusive of NCOs of CNY 27.3 bn – amounted to CNY 32.5 bn or increasing 50.9% on an annualized basis. We also believe that there will be an impact from WMPs. CCB's Non-standard credit asset faced some impact in LGFV and infrastructure. However, when one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light – in the neighborhood of CNY 300 bn which amounts to nearly a year of pre-tax results at CCB.

*Hefty Expense Load In 4Q20: China Construction Bank (939.HK) [CCB] reported 4Q20 results of CNY 65.2 bn, declining CNY 3.0 bn or 4.4% linked quarter. On an operating basis, core earnings declined CNY 4.8 bn (7.5%) linked quarter to CNY 59.1 bn. Results weakness can be attributed to a massive increase in operating expenses and higher taxes; and *Credit Risk Rising: CCB’s While the stated NPL increase in not alarming on its face, the level of net new NPLs – inclusive of NCOs of CNY 27.3 bn – amounted to CNY 32.5 bn or increasing 50.9% on an annualized basis. We also believe that there will be an impact from WMPs. CCB's Non-standard credit asset faced some impact in LGFV and infrastructure. However, when one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light – in the neighborhood of CNY 300 bn which amounts to nearly a year of pre-tax results at CCB.      

China Construction Bank – Still Chunky NPL Increases

Postal Savings Bank of China / Equity Bottom-Up

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

Postal Savings Bank of China – Excess Provisioning

*First Year Of Profitability: ZhongAn Online P&amp;C Insurance (6060.HK) [ZhongAn] reported full year 2020 bottom-line results of CNY 554 mn, an increase of CNY 1.0 bn over losses of CNY 454 mn in 2019. Much of the turnaround in what amounts to ZhongAn’s first year of profitability can be attributed to the YOY volume growth in net earned premium of CNY 3.4 bn (26.7%) to CNY 16.7 bn; and *Credit Insurance &amp; Investment Concerns: The YOY combined ratio improvement of 10.8% to 102.5%, in pur view, is due largely to the improvement in credit insurance whose loss ratio declined from 97% in 2019 to 63%. We have a difficult time believing that little old ZhongAn has figured out the secret sauce to credit insurance risk. With value challenges ahead in ZhongAn’s illiquid securities portfolio (Challenged Tier 2/3 bank negotiable CDs and alternatives) and the CBIRC’s enabling of insurers to increase their concentration in equities, we question solvency margins and future ZhongAn dividends.

*First Year Of Profitability: ZhongAn Online P&amp;C Insurance (6060.HK) [ZhongAn] reported full year 2020 bottom-line results of CNY 554 mn, an increase of CNY 1.0 bn over losses of CNY 454 mn in 2019. Much of the turnaround in what amounts to ZhongAn’s first year of profitability can be attributed to the YOY volume growth in net earned premium of CNY 3.4 bn (26.7%) to CNY 16.7 bn; and *Credit Insurance &amp; Investment Concerns: The YOY combined ratio improvement of 10.8% to 102.5%, in pur view, is due largely to the improvement in credit insurance whose loss ratio declined from 97% in 2019 to 63%. We have a difficult time believing that little old ZhongAn has figured out the secret sauce to credit insurance risk. With value challenges ahead in ZhongAn’s illiquid securities portfolio (Challenged Tier 2/3 bank negotiable CDs and alternatives) and the CBIRC’s enabling of insurers to increase their concentration in equities, we question solvency margins and future ZhongAn dividends.

ZhongAn Online P&C Insurance – Don’t Believe The Hype

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling. 

China Merchants Bank – Pulling On All Levers

Hong Kong

Ping An Securities Group (Holdings) Limited is an investment holding company with a business scope that includes securities dealing and financial services, such as brokerage, underwriting, financial advisory, loan financing, and insurance brokerage, as well as hotel and commercial property development. The company is headquartered in Admiralty, Hong Kong, and is currently in liquidation as of September 2022.

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Ping An Securities (231 HK)

Ping An Insurance – Sea Change At Bank

PING AN INSURANCE: PAB reported a 55.2% QOQ improvement in results. Net new NPLs have increased 53.6% on an annualized basis - far better than the...

Thomas J. Monaco

China Construction Bank – Still Chunky NPL Increases

CHINA CONSTRUCTION BANK: CCB reported a 4Q20 core earnings results decline 7.5% QOQ. Weakness can be attributed to a massive increase in costs and...

Thomas J. Monaco

Postal Savings Bank of China – Excess Provisioning

POSTAL SAVINGS BANK: PSB reported a 40.8% decline in QOQ results, as loss provisioning was too high relative to risk is peaking; and an operating...

Thomas J. Monaco

ZhongAn Online P&C Insurance – Don’t Believe The Hype

ZHONGAN ONLINE P&C INSURANCE: ZhongAn reported full year 2020 bottom-line results of CNY 554 mn. We have a difficult time believing that ZhongAn...

Thomas J. Monaco

China Merchants Bank – Pulling On All Levers

CHINA MERCHANTS BANK: CMB's core operating results came in at just CNY 13.9 bn – declining 40.0% linked quarter. Negative operating jaws, and net...

Thomas J. Monaco

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