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

Postal Savings Bank of China C / Equity Bottom-Up

*Blowout 3Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB], mainland China’s youngest large commercial bank, reported 3Q21 bottom-line results of CNY 23.5 bn – increasing CNY 3.7 bn (18.6%) linked quarter. Much of the improvement at PSB is due to credit leverage, as loss provisions declined CNY 9.3 bn (54.3%); and*Credit Quality Continues Its Positive Turn, But Reserves More Than Adequate: Net new NPLs did increase CNY 7.8 bn or 61.0% annualized versus CNY 14.9 bn or 116.6% at 2Q21. Despite the increase in net new NPLs, it would appear that PSB’s reserves would remain excessive to the tune of CNY 100 bn or about a year of pre-tax profits – begging the question of why not reverse loss reserves?

*Blowout 3Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB], mainland China’s youngest large commercial bank, reported 3Q21 bottom-line results of CNY 23.5 bn – increasing CNY 3.7 bn (18.6%) linked quarter. Much of the improvement at PSB is due to credit leverage, as loss provisions declined CNY 9.3 bn (54.3%); and*Credit Quality Continues Its Positive Turn, But Reserves More Than Adequate: Net new NPLs did increase CNY 7.8 bn or 61.0% annualized versus CNY 14.9 bn or 116.6% at 2Q21. Despite the increase in net new NPLs, it would appear that PSB’s reserves would remain excessive to the tune of CNY 100 bn or about a year of pre-tax profits – begging the question of why not reverse loss reserves?

Postal Savings Bank of China – Reserve Reversals Expected

*Quarter Highlighted By Weak Credit: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q21 results of CNY 11.7 bn – increasing CNY 4.1 bn (55.0%). Don’t shoot off the streamers just yet, credit quality was abysmal and Ping An is seemingly pulling on its bank lever to offset what looks to be another quarter self-inflicted harm  within its investment portfolio;  and *Credit Challenges: By our analysis, we find that credit remains incredibly challenged as net new NPLs are now accelerating at Indian bank pace of CNY 12.4 bn or 159.8% annualized.  Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves remain CNY 19 bn light.

*Quarter Highlighted By Weak Credit: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q21 results of CNY 11.7 bn – increasing CNY 4.1 bn (55.0%). Don’t shoot off the streamers just yet, credit quality was abysmal and Ping An is seemingly pulling on its bank lever to offset what looks to be another quarter self-inflicted harm  within its investment portfolio;  and *Credit Challenges: By our analysis, we find that credit remains incredibly challenged as net new NPLs are now accelerating at Indian bank pace of CNY 12.4 bn or 159.8% annualized.  Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves remain CNY 19 bn light.

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.

China Merchants Bank H / Equity Bottom-Up

<ul>
<li>In this report we conduct a credit quality review of eleven Chinese banks ahead of 3Q21 results, in the light of the Evergrande and real estate sector headwinds; we also assess the banks’ profitability ratios and their capacity to absorb increasing credit losses</li>
<li>We examine the NPL provisioning levels of Chinese banks and, more importantly, we supplement domestic headline NPL ratio metrics with their domestic category of Special Mention loans</li>
<li>In addition, we compare these domestic metrics to internationally recognised IFRS yardsticks of stage 2 and Stage 3 loans</li>
<li>A recent academic study estimates that Chinese banks’ loan delinquency levels could be two to four times higher than the stated NPL ratio, due largely to “hidden” NPLs through off balance sheet exposures</li>
<li>With the increased concern regarding real estate and mortgage exposures in particular, we research on-balance credit quality metrics in this report, broadening and deepening the credit quality assessment of Chinese banks with the aim to better capture credit impairments as well as sub-standard credit quality</li>
<li>We conclude that the best placed Chinese banks to weather the worsening headwinds on credit quality are <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> and <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a> with <a href="https://www.smartkarma.com/entities/industrial-and-commercial-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> being one name to watch; the most exposed to further credit quality deterioration, in our view, are <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a> and <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> </li>
<li>Risks to our positive view on PSBC and China Merchants Bank include worse than expected delinquency ratios going forward, especially in mortgage and real estate, driving cost of risk charges higher; upside risks to our negative view on China Minsheng Bank and China CITIC Bank include better than expected credit quality easing the pressure on cost of risk charges</li>
</ul>


In this report we conduct a credit quality review of eleven Chinese banks ahead of 3Q21 results, in the light of the Evergrande and real estate sector headwinds; we also assess the banks’ profitability ratios and their capacity to absorb increasing credit losses
We examine the NPL provisioning levels of Chinese banks and, more importantly, we supplement domestic headline NPL ratio metrics with their domestic category of Special Mention loans
In addition, we compare these domestic metrics to internationally recognised IFRS yardsticks of stage 2 and Stage 3 loans
A recent academic study estimates that Chinese banks’ loan delinquency levels could be two to four times higher than the stated NPL ratio, due largely to “hidden” NPLs through off balance sheet exposures
With the increased concern regarding real estate and mortgage exposures in particular, we research on-balance credit quality metrics in this report, broadening and deepening the credit quality assessment of Chinese banks with the aim to better capture credit impairments as well as sub-standard credit quality
We conclude that the best placed Chinese banks to weather the worsening headwinds on credit quality are China Merchants Bank H (3968 HK) and Postal Savings Bank of China (1658 HK) with ICBC (H) (1398 HK) being one name to watch; the most exposed to further credit quality deterioration, in our view, are China Minsheng Banking H (1988 HK) and China Citic Bank Corp Ltd H (998 HK) 
Risks to our positive view on PSBC and China Merchants Bank include worse than expected delinquency ratios going forward, especially in mortgage and real estate, driving cost of risk charges higher; upside risks to our negative view on China Minsheng Bank and China CITIC Bank include better than expected credit quality easing the pressure on cost of risk charges


Chinese Banks – Focusing on the Credit Quality Challenge

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Ping An A-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> are trading at a 11% premium to the H-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>. This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at a premium this large to the H-shares was in December last year. By mid to late January, the A-shares were trading near parity versus the H-shares.With <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> trading at a 11% premium to <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> the risk/reward is favourable to setting up a premium contraction trade. The current premium lies at the 95th percentile over the last 5 years and the premium has widened faster than that of the HSAHP Index.Northbound and Southbound Stock Connect holdings of <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> and <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> have dropped sharply over the last couple of months, though there has been an uptick over the last couple of weeks.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an contraction of the premium.

The Ping An A-shares Ping An Insurance Group Co Of China (601318 CH) are trading at a 11% premium to the H-shares Ping An Insurance (H) (2318 HK). This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at a premium this large to the H-shares was in December last year. By mid to late January, the A-shares were trading near parity versus the H-shares.With Ping An Insurance Group Co Of China (601318 CH) trading at a 11% premium to Ping An Insurance (H) (2318 HK) the risk/reward is favourable to setting up a premium contraction trade. The current premium lies at the 95th percentile over the last 5 years and the premium has widened faster than that of the HSAHP Index.Northbound and Southbound Stock Connect holdings of Ping An Insurance Group Co Of China (601318 CH) and Ping An Insurance (H) (2318 HK) have dropped sharply over the last couple of months, though there has been an uptick over the last couple of weeks.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an contraction of the premium.

Ping An A/​H: Discount Turns to a BIG Premium

*Disposal of Shengjing Bank Stake: China Evergrande Group (3333.HK) [Evergrande] announced that it is selling a 19.93% stake in Shengjing Bank (2066.HK) at a take-under price of CNY 5.70 per share (19.8% below market) or at a P/BV or 51.4% - representing a MTM loss of CNY 9.9 bn (USD 1.53 bn) or approximately 2.5% of Evergrande’s stated equity; and  *Systemic Banking Risk Highlighted: Evergrande is alleged to have USD 20 bn in “direct and indirect” risk due to Shengjing Bank, which would represent a true systemic challenge given the bank's size and importance. If the Evergrande exposure of CNY 129.4 bn is remotely correct, it would appear that Shenjiang Bank has been materially under-reporting NPLs. If this figure is correct, a reserve shortfall of CNY 128.4 (USD 19.9 bn) would appear to exist – representing 158% of 2Q21 stated equity and intimating Shengjing Bank is technically insolvent.

*Disposal of Shengjing Bank Stake: China Evergrande Group (3333.HK) [Evergrande] announced that it is selling a 19.93% stake in Shengjing Bank (2066.HK) at a take-under price of CNY 5.70 per share (19.8% below market) or at a P/BV or 51.4% - representing a MTM loss of CNY 9.9 bn (USD 1.53 bn) or approximately 2.5% of Evergrande’s stated equity; and  *Systemic Banking Risk Highlighted: Evergrande is alleged to have USD 20 bn in “direct and indirect” risk due to Shengjing Bank, which would represent a true systemic challenge given the bank's size and importance. If the Evergrande exposure of CNY 129.4 bn is remotely correct, it would appear that Shenjiang Bank has been materially under-reporting NPLs. If this figure is correct, a reserve shortfall of CNY 128.4 (USD 19.9 bn) would appear to exist – representing 158% of 2Q21 stated equity and intimating Shengjing Bank is technically insolvent.

China Evergrande Group – Daisy Chain Pulled

China

Industrial and Commercial Bank of China Ltd provides a broad range of personal and corporate commercial banking services all over China.  The Bank's businesses include deposit, loan, credit card, fund underwriting and trust, and foreign currency settlement and trading.

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Ind & Comm Bk Of China (A) (601398 CH)

Postal Savings Bank of China – Reserve Reversals Expected

POSTAL SAVINGS BANK: PSB's QOQ 3Q21 increased 18.6%, due largely to credit leverage and net interest income improvement. PSB’s reserves appear...

Thomas J. Monaco

Ping An Insurance – Breaking The Bank

PING AN: PAB reported 3Q21 QOQ growth of 55.0%. Credit quality was abysmal and Ping An is pulling on its bank lever to offset another quarter self...

Thomas J. Monaco

Chinese Banks – Focusing on the Credit Quality Challenge

Chinese bank headline NPLs understate the system's credit risks at a problematic time; looking beyond the stated NPLs, we like China Merchants &...

Victor Galliano

Ping An A/H: Discount Turns to a BIG Premium

Ping An A-shs are now trading at a 11% premium to the H-shs. This is in the 95th percentile and is partly driven by the buyback on A-shs. We like a...

Brian Freitas

China Evergrande Group – Daisy Chain Pulled

EVERGRANDE: Evergrande is selling a 19.9% stake in Shengjing Bank, leading to a MTM loss of USD 1.53 bn or 2.5% of equity. It's risk outstanding is...

Thomas J. Monaco

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Postal Savings Bank of China – Reserve Reversals Expected

POSTAL SAVINGS BANK: PSB's QOQ 3Q21 increased 18.6%, due largely to credit leverage and net interest income improvement. PSB’s reserves appear...

Thomas J. Monaco

Ping An Insurance – Breaking The Bank

PING AN: PAB reported 3Q21 QOQ growth of 55.0%. Credit quality was abysmal and Ping An is pulling on its bank lever to offset another quarter self...

Thomas J. Monaco

Chinese Banks – Focusing on the Credit Quality Challenge

Chinese bank headline NPLs understate the system's credit risks at a problematic time; looking beyond the stated NPLs, we like China Merchants &...

Victor Galliano

Ping An A/​H: Discount Turns to a BIG Premium

Ping An A-shs are now trading at a 11% premium to the H-shs. This is in the 95th percentile and is partly driven by the buyback on A-shs. We like a...

Brian Freitas

China Evergrande Group – Daisy Chain Pulled

EVERGRANDE: Evergrande is selling a 19.9% stake in Shengjing Bank, leading to a MTM loss of USD 1.53 bn or 2.5% of equity. It's risk outstanding is...

Thomas J. Monaco

Ping An A/H: Discount Turns to a BIG Premium