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

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.     

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20.

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20. 

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.  

Hang Seng Bank – HSBC Fingerprints All Over This Print

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> results beat expectations, despite higher than anticipated credit costs. HSBC reported profits before tax of $1.4bn, down 58% year-over-year, excluding last years’ goodwill impairment. In addition, the firm managed to outline a major shift in balance sheet and income statement objectives without drawing undue attention to them. Nonetheless, the strategic update was more evolutionary than revolutionary. The share price jumped by over 6.5% in Hong Kong, but traded lower in London, following these revelations.Although the firm intends to distribute earnings as a dividend, it did not announce a share buy-back for 2021 and it may not undertake one next year either. Management stated that it targets a dividend payout ratio of 40% to 55% from 2022 and that it will reassess the buy-back issue when it determines that there is “excess capital’. We see this as a sign of confidence in the firm’s growth prospects that is balanced by a mature sense to retain capital for unexpected events and opportunities.These disclosures are largely credit positive. The higher-than-expected credit provisioning showcases a more conservative and realistic mindset than most competitors regarding the near-term impacts of the Covid-19 crisis. While we highlighted these provisioning needs, we honestly did not expect the bank to incur these costs. Please see <a href="https://www.smartkarma.com/insights/hsbc-capital-forbearance-and-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:47598" rel="noopener">HSBC: Capital, Forbearance and Covid-19 Sensitivity</a> for more details. In our view, the increased credit charges over increased shareholder distributions are a clear credit positive. Unfortunately, much of this is already priced into HSBC's credit securities.Strategically, another Asia-pivot was announced with an emphasis on Wealth and Personal Banking (WPB) activities, complemented by increased Commercial Banking and lower Global Banking and Markets (GMB) operations.Ostensibly this means that the firm seeks to operate with a lower level of liquidity while increasing the risk profile of the lending franchise. This will increase the firm’s beta to economic activity in China’s Greater Bay area while it reduces sensitivity to global market volatility. Provided the increased lending to the real economy is balanced with an increase in stable fee income from Wealth and Personal Banking, this may be credit neutral and shareholder positive. Lowering the weight of GBM relative to Commercial Banking in Asia without a commensurate increase in WPB would not be credit friendly. That is the execution risk going forward for credit investors. For now, we are prepared to give this management the benefit of the doubt due, in part, to the responsible way it recently increased provisions while controlling costs and shrinking the loan portfolio in 2020 through Q4.

HSBC Holdings' (HSBA LN) results beat expectations, despite higher than anticipated credit costs. HSBC reported profits before tax of $1.4bn, down 58% year-over-year, excluding last years’ goodwill impairment. In addition, the firm managed to outline a major shift in balance sheet and income statement objectives without drawing undue attention to them. Nonetheless, the strategic update was more evolutionary than revolutionary. The share price jumped by over 6.5% in Hong Kong, but traded lower in London, following these revelations.Although the firm intends to distribute earnings as a dividend, it did not announce a share buy-back for 2021 and it may not undertake one next year either. Management stated that it targets a dividend payout ratio of 40% to 55% from 2022 and that it will reassess the buy-back issue when it determines that there is “excess capital’. We see this as a sign of confidence in the firm’s growth prospects that is balanced by a mature sense to retain capital for unexpected events and opportunities.These disclosures are largely credit positive. The higher-than-expected credit provisioning showcases a more conservative and realistic mindset than most competitors regarding the near-term impacts of the Covid-19 crisis. While we highlighted these provisioning needs, we honestly did not expect the bank to incur these costs. Please see HSBC: Capital, Forbearance and Covid-19 Sensitivity for more details. In our view, the increased credit charges over increased shareholder distributions are a clear credit positive. Unfortunately, much of this is already priced into HSBC's credit securities.Strategically, another Asia-pivot was announced with an emphasis on Wealth and Personal Banking (WPB) activities, complemented by increased Commercial Banking and lower Global Banking and Markets (GMB) operations.Ostensibly this means that the firm seeks to operate with a lower level of liquidity while increasing the risk profile of the lending franchise. This will increase the firm’s beta to economic activity in China’s Greater Bay area while it reduces sensitivity to global market volatility. Provided the increased lending to the real economy is balanced with an increase in stable fee income from Wealth and Personal Banking, this may be credit neutral and shareholder positive. Lowering the weight of GBM relative to Commercial Banking in Asia without a commensurate increase in WPB would not be credit friendly. That is the execution risk going forward for credit investors. For now, we are prepared to give this management the benefit of the doubt due, in part, to the responsible way it recently increased provisions while controlling costs and shrinking the loan portfolio in 2020 through Q4.

HSBC Q4 ’20: Surprisingly Credit Positive Results and Strategic Update

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.

Unlike may US and Asian banks, this UK and global bank was not able to see profit recovery and narrowing credit costs in the final quarter of the year. One may hard-pressed to find a comparable peer with a similar 54% decline in QoQ profit.

Unlike may US and Asian banks, this UK and global bank was not able to see profit recovery and narrowing credit costs in the final quarter of the year. One may hard-pressed to find a comparable peer with a similar 54% decline in QoQ profit. 

HSBC – Opposite Direction To Many Peers

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance.  The Group operates worldwide.

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HSBC Holdings (5 HK)

Standard Chartered - What A Mess

STANDARD CHARTERED: STAN reported 2H20 losses of USD 315 mn, declining 122.5% HOH as it struggled across the board. Negative operating jaws for...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

OVERSEA CHINESE BANKING CORP: Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line would've declined...

Thomas J. Monaco

Hang Seng Bank – HSBC Fingerprints All Over This Print

HANG SENG BANK: Hang Seng reported both a weak and low quality 2H20 result - declining 17.5% HOH due loan contraction and NIM compression. The...

Thomas J. Monaco

HSBC Q4 ’20: Surprisingly Credit Positive Results and Strategic Update

HSBC announced a major shift in objectives without drawing undue attention. It seeks to operate at a lower liquidity level and a higher beta to...

Hank Calenti, CFA

HSBC – Opposite Direction To Many Peers

Significantly higher credit costs, far higher operating costs and sharply lower profit in the quarter. Not similar to many peer banks.

Daniel Tabbush

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