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)

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

Founder of Antler Capital

Stanley Tsai, CFA

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
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<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>

Source: Our analysis
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</tr>
</tbody>
</table>
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In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

Macroeconomics

Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China <a href="https://www.smartkarma.com/entities/msci-china-index" target="_blank" data-smartkarma-citation="entities:22895:1" rel="noopener">(MXCN INDEX)</a> until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.

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Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China (MXCN INDEX) until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.


Related Insights




ICBC: The Prefs Are Junk and Should Trade Like It 

ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 



Glut and Famine: China's Monetary Conditions a Notch Tighter in May

*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

*Yongcheng Coal Default: According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and*Watch Your Banks: The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.

*Yongcheng Coal Default: According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and*Watch Your Banks: The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.

China

China CITIC Bank is a major commercial bank offering a comprehensive range of financial products and services, including corporate and personal loans, deposit services, wealth management, private banking, credit cards, investment banking, and international services. The bank also engages in capital markets, inter-bank operations, derivatives, and forex trading. It was founded in April 1987 and is headquartered in Beijing, China.

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China CITIC Bank (998 HK)

China Banks – Screws Tighten On LGFVs

CHINA BANKS: Recently the CBIRC issued guidance on implicit LGFV debt via Document 15 – further tightening the screws on mainland China's financial...

Thomas J. Monaco

China Financials: Silver Linings Playbook

Our Silver Linings Playbook outlines our views on the China financials names that are most likely to remain resilient in the face of macro...

Stanley Tsai, CFA

Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Monetary data in May point to a tighter environment for both lending and funding. Mortgage rates have edged up, but the deposit drain is worrying....

Stanley Tsai, CFA

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

Another Day, Another Default

MAINLAND CHINA DEFAULT: Yongcheng Coal Defaulted On Its Debt, Leading To Concerns About The Credibility Of AAA Rated Corporates In Mainland China...

Thomas J. Monaco

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