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*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

*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*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

China Banks – Some Clarity On LGFV Financing

*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.

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Credit

We highlighted <a href="https://www.smartkarma.com/entities/china-huarong-asset-management-26375cc4-728e-4f75-b058-64298b10f256" target="_blank" data-smartkarma-citation="entities:28089:1" rel="noopener">China Huarong Asset Management (HUAZ CH)</a> (Huarong) in our debut  “The Chinese Credit Chronicle (CCC)” last month on Huarong’s annual report delay. The subsequent events have stabilized Huarong’s HRINTH complex somewhat before the market fears Huarong’s debt could be restructured.
The rating downgrades by Fitch and Moody’s are less of an issue, in our view, as they are simply actions to catch up with what the market fears. Huarong’s story is less flamboyant than the HNA Group Limited (HNA) and yet it highlights the very same problem with HNA in terms of a lack of transparency and implicit support by the Chinese government. Both were eventually rescued by state-owned Chinese banks and both could be restructured down the road.
At the end of the day, we believe Huarong has been viewed as a quasi-sovereign credit and even rating agencies have been being caught by surprise as the market doubts support from the Chinese government will be certain. For Huarong, we still believe government support can be expected, but we believe the dust has not settled yet on the liabilities (and losses) that Huarong may have in store for bondholders. As a result, we cannot recommend buying Huarong’s HRINTH complex.
In a greater context, the risk we see here is that the rating agencies may revamp their methodologies to assess Chinese government-related entities (GREs). The adjustment could result in a wholesale downgrade of those GREs which are spread negative, not just for the Chinese GREs, but also other Chinese credits with implicit support from the central and local Chinese governments. We note that Chinese issuers have come a long way in terms of corporate governance improvement but transparency remains one of the key reasons why developed market USD bonds trade much tighter than Chinese USD bonds with the same rating, and this Huarong saga is a reminder that the spread will not narrow anytime in the near future.

We highlighted China Huarong Asset Management (HUAZ CH) (Huarong) in our debut  “The Chinese Credit Chronicle (CCC)” last month on Huarong’s annual report delay. The subsequent events have stabilized Huarong’s HRINTH complex somewhat before the market fears Huarong’s debt could be restructured.
The rating downgrades by Fitch and Moody’s are less of an issue, in our view, as they are simply actions to catch up with what the market fears. Huarong’s story is less flamboyant than the HNA Group Limited (HNA) and yet it highlights the very same problem with HNA in terms of a lack of transparency and implicit support by the Chinese government. Both were eventually rescued by state-owned Chinese banks and both could be restructured down the road.
At the end of the day, we believe Huarong has been viewed as a quasi-sovereign credit and even rating agencies have been being caught by surprise as the market doubts support from the Chinese government will be certain. For Huarong, we still believe government support can be expected, but we believe the dust has not settled yet on the liabilities (and losses) that Huarong may have in store for bondholders. As a result, we cannot recommend buying Huarong’s HRINTH complex.
In a greater context, the risk we see here is that the rating agencies may revamp their methodologies to assess Chinese government-related entities (GREs). The adjustment could result in a wholesale downgrade of those GREs which are spread negative, not just for the Chinese GREs, but also other Chinese credits with implicit support from the central and local Chinese governments. We note that Chinese issuers have come a long way in terms of corporate governance improvement but transparency remains one of the key reasons why developed market USD bonds trade much tighter than Chinese USD bonds with the same rating, and this Huarong saga is a reminder that the spread will not narrow anytime in the near future.

Equity Bottom-Up

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%.

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%. 

China Everbright Bank – Credit Remains Troublesome

China Merchants Bank H / Equity Bottom-Up

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling.

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling. 

China Merchants Bank – Pig Still In Python

China

China Development Bank operates as a government development bank. The Company provides deposits, loans, financing, bond issuance, investment, treasury operation, and other services. China Development Bank offers services worldwide. 

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China Development Bank (SDBZ CH)

China Banks – Some Clarity On LGFV Financing

CHINA BANKS: Recently the CBIRC issued guidance to both banks and insurers on implicit debt of LGFV via Document 15. Clarification was needed given...

Thomas J. Monaco

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 Huarong: No Confidence Motion

China Huarong could be the first domino to fall on the confidence on the implicit support by the Chinese government. Rating agencies' scramble to...

Bondcritic

China Everbright Bank – Credit Remains Troublesome

CHINA EVERBRIGHT BANK: Operating results grew 27.4% QOQ, driven by positive operating jaws. Credit continues to weaken and the loss reserve...

Thomas J. Monaco

China Merchants Bank – Pig Still In Python

CHINA MERCHANTS BANK: CMB reported a 1Q21 QOQ results increase of 54.4% driven by net interest income; fee growth; and lower expenses. Net new...

Thomas J. Monaco

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