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

*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

*Magic Fairy Dust: Square (SQ.US) has agreed to purchase Afterpay Touch (APT.AU) [Afterpay) for USD 29 bn in an all-stock transaction – implying Afterpay’s shares to be worth AUD 126.21. This is not a bad outcome for Afterpay, which only posts consistent losses. Tencent Holdings (700.HK) [Tencent] stands to gain 462% on its initial stake for a gain of over USD 800 mn – not bad for a passive deal 15 months ago;  and
Risks Remain: In addition to Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations, there are multiple other challenges. We have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. An FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

*Magic Fairy Dust: Square (SQ.US) has agreed to purchase Afterpay Touch (APT.AU) [Afterpay) for USD 29 bn in an all-stock transaction – implying Afterpay’s shares to be worth AUD 126.21. This is not a bad outcome for Afterpay, which only posts consistent losses. Tencent Holdings (700.HK) [Tencent] stands to gain 462% on its initial stake for a gain of over USD 800 mn – not bad for a passive deal 15 months ago;  and
Risks Remain: In addition to Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations, there are multiple other challenges. We have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. An FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

Tencent Holdings – Clairvoyance Pays Off

China Huarong Asset Management / Equity Bottom-Up

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China's largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and *Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China's largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and *Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.

China Huarong Asset Management – Preventing Another Daisy Chain

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and *Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and *Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

China

iShares FTSE A50 China Index ETF is an exchanged-traded fund established in Hong Kong. The investment objective of the iShares FTSE A50 China Index ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of A50 Index.

iShares FTSE/Xinhua A50 China (2823 HK)

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

Tencent Holdings – Clairvoyance Pays Off

TENCENT HOLDINGS: Square has agreed to purchase Afterpay for USD 29 bn, and Tencent stands to gain 462% or over USD 800 mn. While positive,...

Thomas J. Monaco

China Huarong Asset Management – Preventing Another Daisy Chain

CHINA HUARONG: Huarong still continues to teeter on the edge of insolvency. The USD 23.3 bn debt, however, still risks crippling the USD credit...

Thomas J. Monaco

Tencent Holdings – Only The Beginning

TENCENT: Mainland China appears to have taken action against Tencent, with suspension of WeChat new user registrations. Tencent is expected pay a...

Thomas J. Monaco