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

China Merchants Bank H / Equity Bottom-Up

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.  

China Merchants Bank – Massive 4Q20 Charge-Offs

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>Regulatory pressure is driving Ant Group to place its financial operations into a holding company which would be subject to bank-like regulation, as Chinese regulators seek increasing oversight of the fast growth in consumer and SMB debt</li>
<li>Furthermore, and more importantly, press reports indicate that regulators are pushing for Chinese FinTech giants to share their consumer credit data with state entities, to enhance the centralized “big data” repository at the PBoC</li>
<li>The planned launch of the PBoC’s digital currency - the e-yuan – is intended to try to level the playing field between electronic payments leaders Alipay (Ant) and WeChat pay (Tencent) and the bank system, as well as giving the state a powerful tool for digital financial surveillance</li>
<li>For Ant, more bank-like regulation of credit would imply higher capital requirement for its credit operations as well as slower loan growth, with the sharing of Ant Group’s many terabytes of data with the authorities also potentially detracting from Ant Group’s “big data” edge and, by extension, valuation</li>
<li>We take a preliminary stab at a revised SOTP valuation range – despite the lack of clear regulatory parameters so far – of USD130-160bn for Ant Group, a far cry from the market’s estimated USD250bn+ valuation in 4Q20</li>
<li>We see further upside potential in the near term for Chinese SOE banks, as regulators begin to level the regulatory playing filed with FinTech; it is also time, in our view, to look again at <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, 33% shareholder in Ant Group</li>
<li>Risks to our negative view on Ant Group include a less aggressive implementation of regulatory rules on Chinese FinTech, and only limited disclosure on its “big data” lake</li>
</ul>


Regulatory pressure is driving Ant Group to place its financial operations into a holding company which would be subject to bank-like regulation, as Chinese regulators seek increasing oversight of the fast growth in consumer and SMB debt
Furthermore, and more importantly, press reports indicate that regulators are pushing for Chinese FinTech giants to share their consumer credit data with state entities, to enhance the centralized “big data” repository at the PBoC
The planned launch of the PBoC’s digital currency - the e-yuan – is intended to try to level the playing field between electronic payments leaders Alipay (Ant) and WeChat pay (Tencent) and the bank system, as well as giving the state a powerful tool for digital financial surveillance
For Ant, more bank-like regulation of credit would imply higher capital requirement for its credit operations as well as slower loan growth, with the sharing of Ant Group’s many terabytes of data with the authorities also potentially detracting from Ant Group’s “big data” edge and, by extension, valuation
We take a preliminary stab at a revised SOTP valuation range – despite the lack of clear regulatory parameters so far – of USD130-160bn for Ant Group, a far cry from the market’s estimated USD250bn+ valuation in 4Q20
We see further upside potential in the near term for Chinese SOE banks, as regulators begin to level the regulatory playing filed with FinTech; it is also time, in our view, to look again at Alibaba Group (BABA US), 33% shareholder in Ant Group
Risks to our negative view on Ant Group include a less aggressive implementation of regulatory rules on Chinese FinTech, and only limited disclosure on its “big data” lake


Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation

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 mass hysteria that has engulfed so many countries’ media appears well gone from China. This is perhaps one of the most important steps to regain normalcy. With this difference, China's banks can benefit from better top line growth than perhaps others globally, while a more stable underlying economy is certainly valuable for banks.

The mass hysteria that has engulfed so many countries’ media appears well gone from China. This is perhaps one of the most important steps to regain normalcy. With this difference, China's banks can benefit from better top line growth than perhaps others globally, while a more stable underlying economy is certainly valuable for banks.

China – No Mass Hysteria, Banks To Benefit

Postal Savings Bank of China C / Equity Bottom-Up

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

Postal Savings Bank – D-SIB Spurs Placement

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; 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 December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; 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

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)

China Merchants Bank – Massive 4Q20 Charge-Offs

CHINA MERCHANTS BANK: CMB announced a poor set of preliminary 4Q20 results, as profit declined 22.7% QOQ. Credit risk has substantially increased...

Thomas J. Monaco

Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation

Ant Group is under great state focus and under pressure to share its many terabytes of "big data" with PBoC, hurting its SOTP valuation; yet,...

Victor Galliano

China – No Mass Hysteria, Banks To Benefit

The mass hysteria that has engulfed so many countries’ media appears well gone in China. This is perhaps the most important step to regain...

Daniel Tabbush

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

China Banks – About Time

CHINA BANKS: PBOC and CBIRC Released Finalized D-SIB Standards and Indicated Tighter Regulations. Aggressive Capital Raises Are Expected.

Thomas J. Monaco

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