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

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] released its 1H21 results. Operating profit amounted to USD 3.2 bn, increasing 5% YOY, while VONB improved 22% YOY to USD 1.8 bn due to a combination of higher new sales volume (ANP up across all markets ex-Hong Kong which declined 11% YOY) and VONB margin expansion from (up 4.6% to 59.0%). Net profit improved to USD 3.2 bn, increasing 47% YOY due to the large negative investment variance in 1H20; and* China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong.

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] released its 1H21 results. Operating profit amounted to USD 3.2 bn, increasing 5% YOY, while VONB improved 22% YOY to USD 1.8 bn due to a combination of higher new sales volume (ANP up across all markets ex-Hong Kong which declined 11% YOY) and VONB margin expansion from (up 4.6% to 59.0%). Net profit improved to USD 3.2 bn, increasing 47% YOY due to the large negative investment variance in 1H20; and* China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong. 

*Another Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported a 1H21 result of HKD 8.8 bn, improving HKD 1.2 bn (16.3%) HOH. However, core operating results improved only nominally by HKD 52 mn or 0.8% over the period. Were it not for the unreasonable decline of HKD 639 mn (65.3%) in loss provisions as credit deteriorated, results would have been far worse;  and*Provisions Now Significantly Understated: While the current NPL ratio is not alarming on its face, the HOH increase in net new NPLs is HKD 1.7 bn or 23.5% annualized - decelerating from the HKD 3.0 bn or 201% annualized at 2H20. We find Hang Seng under-provided for to the tune of HKD 10.6 bn or nearly 1.5x the bank’s core operating result.

*Another Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported a 1H21 result of HKD 8.8 bn, improving HKD 1.2 bn (16.3%) HOH. However, core operating results improved only nominally by HKD 52 mn or 0.8% over the period. Were it not for the unreasonable decline of HKD 639 mn (65.3%) in loss provisions as credit deteriorated, results would have been far worse;  and*Provisions Now Significantly Understated: While the current NPL ratio is not alarming on its face, the HOH increase in net new NPLs is HKD 1.7 bn or 23.5% annualized - decelerating from the HKD 3.0 bn or 201% annualized at 2H20. We find Hang Seng under-provided for to the tune of HKD 10.6 bn or nearly 1.5x the bank’s core operating result.

Hang Seng Bank – Wuihfung Remains In Full Control

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Challenging Result: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 2Q21 net profit of SGD 1.2 bn, a SGD 341 mn (22.7%) decrease on a linked quarter basis. OCBC’s bottom-line weakness was primarily attributable to two factors: 1) SGD 71 mn (44.1%) increase in the loss provision, which is well justified given the re-acceleration in net new NPL growth; and 2) SGD 362 mn (24.6%) decrease in overall fee revenues, driven primarily by weaker attributable Great Eastern (GE.SP) earnings which likely will be here to stay; and  *Credit Breaking Down After Reprieve:  By our calculation, we find that net new NPL growth has re-acclerated to SGD 771 mn or 78.3% on an annualized basis versus a negative SGD 78 mn or 8.0% for 1Q21. Given the increase in net new NPLs, reserve would appear to now be wanting by SGD 3.1 bn or just under three quarters of bottom-line results.

*Challenging Result: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 2Q21 net profit of SGD 1.2 bn, a SGD 341 mn (22.7%) decrease on a linked quarter basis. OCBC’s bottom-line weakness was primarily attributable to two factors: 1) SGD 71 mn (44.1%) increase in the loss provision, which is well justified given the re-acceleration in net new NPL growth; and 2) SGD 362 mn (24.6%) decrease in overall fee revenues, driven primarily by weaker attributable Great Eastern (GE.SP) earnings which likely will be here to stay; and  *Credit Breaking Down After Reprieve:  By our calculation, we find that net new NPL growth has re-acclerated to SGD 771 mn or 78.3% on an annualized basis versus a negative SGD 78 mn or 8.0% for 1Q21. Given the increase in net new NPLs, reserve would appear to now be wanting by SGD 3.1 bn or just under three quarters of bottom-line results.

Oversea Chinese Banking Corp. – Re-Accelerating Credit Risk

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

Hong Kong

The Bank of East Asia, Limited and its subsidiaries provide general banking, related financial, business corporate, and investor services.

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Bank of East Asia (23 HK)

AIA Group – Its Own Worst Enemy

AIA GROUP: AIA's 1H21 operating profit improved 5% YOY off of a low base, while VONB improved 22%. With all of its aggressive moves in mainland...

Thomas J. Monaco

Hang Seng Bank – Wuihfung Remains In Full Control

HANG SENG BANK: Hang Seng reported a poor 1H21 HOH operating result. If provisions didn't decline 65%, results would have been worse. It under...

Thomas J. Monaco

DBS Group Holdings – Bad Print

DBS: DBS QOQ 2Q21 results declined 15.1% due to poor revenues and higher provisions. We worry that DBS has not caught the LVB risk, net new NPLs re...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Re-Accelerating Credit Risk

OVERSEA CHINESE BANKING: OCBC reported a QOQ 2Q21 net profit decline of 22.7% driven by higher provisions and weaker associate income. Net new NPLs...

Thomas J. Monaco

Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

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