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

*We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes.

*We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes. 

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results.

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

Founder & CEO Bond Angle, LLC, Bond Angle, LLC

Vicki Bryan

Founder & CEO Bond Angle, LLC

Bond Angle, LLC

Insightful commentary and analysis on bond markets and market movers, including financial, economic, and industry catalysts and management shenanigans. 

High yield market investment research

Credit

<a href="https://www.smartkarma.com/entities/the-we-company" target="_blank" data-smartkarma-citation="entities:28061:1" rel="noopener">The We Company (WeWork) (WE US)</a> sold its majority stake in its China business to <a href="https://www.ft.com/content/153f2775-72cc-451e-b7a3-03978c69f97b" target="_blank" rel="noopener">Trustbridge Partners</a> for $200 million, a price far below the $5 billion where the unit had been valued in 2018.But in 2018, WeWork was still being pitched by its bankers to investors as worth as much as $100 billion, substantially higher versus my $5-7 billion estimate. Less than a year later WeWork's IPO collapsed and it sunk into insolvency as I had projected (see <a href="https://www.smartkarma.com/insights/gravity-works-as-wework-doesn-t-now-plan-b" target="_blank" data-smartkarma-citation="insights:32107" rel="noopener">Gravity Works As WeWork Doesn't; Now Plan B</a> on 9/17/20). We know how that worked out. Times and fortunes have changed for the worse since then, and now WeWork is lucky to get a meaningful price for any of its still struggling assets, as we can see in the following quick review.Read on as Bond Angle discussion continues...

The We Company (WeWork) (WE US) sold its majority stake in its China business to Trustbridge Partners for $200 million, a price far below the $5 billion where the unit had been valued in 2018.But in 2018, WeWork was still being pitched by its bankers to investors as worth as much as $100 billion, substantially higher versus my $5-7 billion estimate. Less than a year later WeWork's IPO collapsed and it sunk into insolvency as I had projected (see Gravity Works As WeWork Doesn't; Now Plan B on 9/17/20). We know how that worked out. Times and fortunes have changed for the worse since then, and now WeWork is lucky to get a meaningful price for any of its still struggling assets, as we can see in the following quick review.Read on as Bond Angle discussion continues...

Breaking: WeWork Nets $200 Million for China Business

*FT Suggests Sea Change In US Strategy: In a Financial Times article dated May 25th“HSBC board rethinks overhaul and seeks even sharper cuts”, it was discussed that the Board is particularly scrutinizing the bank’s US business – questioning whether the US operation is viable at all. Seemingly, the Board is even contemplating a sale of this franchise; and   *Sale May Cause Group A Massive Capital Raise: In the case of the latest large bank transaction, BB&amp;T paid USD 28.2 bn in an all stock deal for SunTrust – a relatively clean bank in the US south. This amounted to deal metrics of 1.16x P/BV; 2.03x P/TBV; and a deposit premium of 2.44%, by our calculation, at the date of deal announcement. Provided that HSBC Holdings (HSBA.LN/5.HK) can find a cash buyer who only thinks it needs to account for Year 1 of operating losses and replenish the loss of regulatory capital, HSBCNA will cause HSBC to incur a loss on sale of between USD 14.1-16.7 bn. Year 2 valuation is even uglier, as report a loss of between USD 31.3-35.6 bn. A loss of this magnitude represents between 32.0%-36.4% of Group market cap.

*FT Suggests Sea Change In US Strategy: In a Financial Times article dated May 25th“HSBC board rethinks overhaul and seeks even sharper cuts”, it was discussed that the Board is particularly scrutinizing the bank’s US business – questioning whether the US operation is viable at all. Seemingly, the Board is even contemplating a sale of this franchise; and   *Sale May Cause Group A Massive Capital Raise: In the case of the latest large bank transaction, BB&amp;T paid USD 28.2 bn in an all stock deal for SunTrust – a relatively clean bank in the US south. This amounted to deal metrics of 1.16x P/BV; 2.03x P/TBV; and a deposit premium of 2.44%, by our calculation, at the date of deal announcement. Provided that HSBC Holdings (HSBA.LN/5.HK) can find a cash buyer who only thinks it needs to account for Year 1 of operating losses and replenish the loss of regulatory capital, HSBCNA will cause HSBC to incur a loss on sale of between USD 14.1-16.7 bn. Year 2 valuation is even uglier, as report a loss of between USD 31.3-35.6 bn. A loss of this magnitude represents between 32.0%-36.4% of Group market cap.

HSBC Holdings – Letting A Good Crisis Go To Waste

United States

The Goldman Sachs Group, Inc., a bank holding company, is a global investment banking and securities firm specializing in investment banking, trading and principal investments, asset management and securities services.  The Company provides services to corporations, financial institutions, governments, and high-net worth individuals.

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Goldman Sachs Group (GS US)

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

HSBC HOLDINGS PLC: Financial Times Suggesting Board Will Be Presented With Options On US Franchise This Week. This Was A Long Time In Coming.

Thomas J. Monaco

JP Morgan & Co. – Good Credit Omen For US and Global Banks

JPM Results, A Good Credit Omen For US and Global Banks. Reserve Reversals Likely To Be A Trend For 4Q20 Results Season -Although Issues Persist

Thomas J. Monaco

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

MUFG Receives Additional Dilution From Morgan Stanley In Another Overpriced US Transaction. Eaton Vance Was The Fourth In a Series of Wealth...

Thomas J. Monaco

Breaking: WeWork Nets $200 Million for China Business

The We Company (WeWork) (WE US) is lucky to get $200 million for its China business, in my view, even though it had been valued at $5 billion back...

Vicki Bryan

HSBC Holdings – Letting A Good Crisis Go To Waste

*FT Suggests Sea Change In US Strategy: In a Financial Times article dated May 25th“HSBC board rethinks overhaul and seeks even sharper cuts”, it...

Thomas J. Monaco

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