Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Ping An A-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> are trading at parity versus the H-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>. This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at parity to the H-shares was in July last year. Since then, the premium of A-shares to H-shares touched a high of over 16% before moving lower to trade at parity again.With the Ping An A-shares trading at parity versus the H-shares, the risk/reward is attractive to setting up a premium expansion trade.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an expansion of the premium.

The Ping An A-shares Ping An Insurance Group Co Of China (601318 CH) are trading at parity versus the H-shares Ping An Insurance (H) (2318 HK). This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at parity to the H-shares was in July last year. Since then, the premium of A-shares to H-shares touched a high of over 16% before moving lower to trade at parity again.With the Ping An A-shares trading at parity versus the H-shares, the risk/reward is attractive to setting up a premium expansion trade.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an expansion of the premium.

Ping An A/H Premium: Nearing a Discount; Set Up for Expansion

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

Thematic (Sector/Industry)

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on April 2, 2021 released finalized new capital standards for the country’s domestic systemically important banks (D-SIBs), and indicated that the need for banking  crisis liquidation plans; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value.

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on April 2, 2021 released finalized new capital standards for the country’s domestic systemically important banks (D-SIBs), and indicated that the need for banking  crisis liquidation plans; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value. 

China Banks – Big Capital Raises Coming

Equity Bottom-Up

Industrial Bank Co Ltd A / Equity Bottom-Up

*Weak 4Q20 Numbers: Industrial Bank (601166.CH) [Industrial] reported fairly disappointing 4Q20 earnings result of CNY 14.8 bn – declining CNY 4.5 bn (23.5%) on a linked quarter basis. From an operating perspective, Industrial struggled this quarter with negative operating jaws, as revenues declined CNY 925 mn (1.8%) whilst expenses increased CNY 3.4 bn (27.2%); and*COVID Credit Hangover Persists: In our view, the stated credit figures far from tell the entire story. Net new NPLs amounted to CNY 20.6 bn or increasing an alarming 145.4% on an annualized basis. When one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light by CNY 36 bn, in our view, which amounts to about two quarters of pre-tax results at Industrial.

*Weak 4Q20 Numbers: Industrial Bank (601166.CH) [Industrial] reported fairly disappointing 4Q20 earnings result of CNY 14.8 bn – declining CNY 4.5 bn (23.5%) on a linked quarter basis. From an operating perspective, Industrial struggled this quarter with negative operating jaws, as revenues declined CNY 925 mn (1.8%) whilst expenses increased CNY 3.4 bn (27.2%); and*COVID Credit Hangover Persists: In our view, the stated credit figures far from tell the entire story. Net new NPLs amounted to CNY 20.6 bn or increasing an alarming 145.4% on an annualized basis. When one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light by CNY 36 bn, in our view, which amounts to about two quarters of pre-tax results at Industrial.    

China Citic Bank Corp Ltd H / Equity Bottom-Up

*Poor Result Even Before Provision Cut:China CITIC Bank (998.HK) [CITIC] reported 2H20 results of CNY 23.6 bn, declining CNY 3.6 bn (13.3%) HOH. Unlike other mainland Chinese banks, CITIC gives almost no breakdown of revenues. Nevertheless, the poor HOH results were driven by negative operating jaws as revenues declined CNY 9.2 bn (9.1%) while operating expenses increased CNY 6.6 bn (27.8%); and*Credit Still A Major Challenge: Riskier and chunkier real estate and construction NPLs increased 211 bp and 293 bp HOH, respectively. Further, we note zero reprieve in net new NPL growth at CNY 41.1 bn  - growing 106.9% on an annualized basis – this remains very troubling. We calculate that the accelerated net new NPL growth has caused CITIC to be underprovided for in the neighborhood of CNY 101 bn or nearly a full year of stated PBT.

*Poor Result Even Before Provision Cut:China CITIC Bank (998.HK) [CITIC] reported 2H20 results of CNY 23.6 bn, declining CNY 3.6 bn (13.3%) HOH. Unlike other mainland Chinese banks, CITIC gives almost no breakdown of revenues. Nevertheless, the poor HOH results were driven by negative operating jaws as revenues declined CNY 9.2 bn (9.1%) while operating expenses increased CNY 6.6 bn (27.8%); and*Credit Still A Major Challenge: Riskier and chunkier real estate and construction NPLs increased 211 bp and 293 bp HOH, respectively. Further, we note zero reprieve in net new NPL growth at CNY 41.1 bn  - growing 106.9% on an annualized basis – this remains very troubling. We calculate that the accelerated net new NPL growth has caused CITIC to be underprovided for in the neighborhood of CNY 101 bn or nearly a full year of stated PBT.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement by <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> that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see <a href="https://www.smartkarma.com/compose/insight/49970/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.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.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: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement by Credit Suisse (CSGN VX) that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.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: Employment Numbers Confirm a Hot US Economy

China

Agricultural Bank of China Limited provides a full range of commercial banking services. The Banks services includes RMB and foreign currency deposit, loan, international and domestic settlement, bill discount, currency trading, bank guarantee, and treasury bill underwriting.

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Agricultural Bank Of China (1288 HK)

Ping An A/H Premium: Nearing a Discount; Set Up for Expansion

With the Ping An Insurance A-shares trading at parity to the H-shares, the risk/reward favours an AH Premium expansion trade. Watch for change in H...

Brian Freitas

China Banks – Big Capital Raises Coming

CHINA BANKS: The PBOC and CBIRC released finalized new capital standards for the country’s D-SIBs. Equity raises require P/BV over 1.0x and many of...

Thomas J. Monaco

Industrial Bank – Not Out Of The Woods

INDUSTRIAL BANK: Industrial reported a disappointing QOQ 4Q20 earnings decline of 23.5%. Industrial struggled with negative operating jaws, and...

Thomas J. Monaco

China CITIC Bank – No Credit Deserved

China CITIC Bank: CITIC reported poor 2H20 results. Poor results were driven by negative operating jaws. Riskier real estate/construction NPLs...

Thomas J. Monaco

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

Strong US employment figures may push yields higher as we start the week. Thereafter, rising virus versus vaccine issues may impact market...

Hank Calenti, CFA

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