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

*SAMR Sideshow: The State Administration for Market Regulations (SAMR) fined Alibaba Holdings (BABA.US) [Alibaba] on December 14, 2020, SAMR has also launched an inquiry into alleged monopolistic practices at Alibaba whereby it pressures merchants who sell goods on Taobao and Tmall to commit to not selling on competitor platforms which is considered “standard market practice” by Alibaba. The most equitable outcome to this practice, in our view, could be the termination of these exclusive relationships, which no doubt will negatively impact revenues – but this is just a sideshow; and*Moving A Rubber Tree Plant: More importantly, however, Alibaba’s Ant Group was summoned to meet with the People’s Bank of China (PBOC), China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSRC), and State Administration of Foreign Exchange (SAFE) – which now follow the abrupt cancellation of Ant Group’s enormous USD 34 bn IPO – the largest IPO in history. A crackdown on Alibaba/Ant and other fintech firms was likely to happen at some point given the unbridled systemic risk they pose both on the lending and funding front which is overshadowed by technology.

*SAMR Sideshow: The State Administration for Market Regulations (SAMR) fined Alibaba Holdings (BABA.US) [Alibaba] on December 14, 2020, SAMR has also launched an inquiry into alleged monopolistic practices at Alibaba whereby it pressures merchants who sell goods on Taobao and Tmall to commit to not selling on competitor platforms which is considered “standard market practice” by Alibaba. The most equitable outcome to this practice, in our view, could be the termination of these exclusive relationships, which no doubt will negatively impact revenues – but this is just a sideshow; and*Moving A Rubber Tree Plant: More importantly, however, Alibaba’s Ant Group was summoned to meet with the People’s Bank of China (PBOC), China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSRC), and State Administration of Foreign Exchange (SAFE) – which now follow the abrupt cancellation of Ant Group’s enormous USD 34 bn IPO – the largest IPO in history. A crackdown on Alibaba/Ant and other fintech firms was likely to happen at some point given the unbridled systemic risk they pose both on the lending and funding front which is overshadowed by technology.  

China Reinsurance (Group) / Equity Bottom-Up

*Investor Day Highlights: China Reinsurance Group (1508.HK) [China Re] discussed its differentiated approach in mainland China’s rapidly evolving health insurance market at its recent Investor Day on December 22nd. Much of the discussion centered on recent developments at its Protection Reinsurance (Protection Re] unit which is China Re’s fastest growing business segment; and  *Results Are Turning:  China Re's 3Q20 earnings of CNY 3.4 bn grew nearly threefold YOY, aided by investment gains. Reinsurance premiums increased 93% YOY at 3Q20 while and P&amp;C premium increased 8% over the period. Earnings were strong across all business units. Solvency was also strong across all three major business lines.

*Investor Day Highlights: China Reinsurance Group (1508.HK) [China Re] discussed its differentiated approach in mainland China’s rapidly evolving health insurance market at its recent Investor Day on December 22nd. Much of the discussion centered on recent developments at its Protection Reinsurance (Protection Re] unit which is China Re’s fastest growing business segment; and  *Results Are Turning:  China Re's 3Q20 earnings of CNY 3.4 bn grew nearly threefold YOY, aided by investment gains. Reinsurance premiums increased 93% YOY at 3Q20 while and P&amp;C premium increased 8% over the period. Earnings were strong across all business units. Solvency was also strong across all three major business lines.

Thematic (Sector/Industry)

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *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; and *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.

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *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; and *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. 

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have.

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have. 

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)

Alibaba Group Holding – Go Limp

ALIBABA GROUP HOLDINGS: SAMR And Chinese Regulators Are Taking A Run At Alibaba/Ant Group Over Antitrust and Systemic Risk Issues.

Thomas J. Monaco

China Reinsurance – Healthy

CHINA REINSURANCE GROUP: Investor Day Highlights Developments At Protection Reinsurance. Results Are Also Turning With China Re's 3Q20 Earnings...

Thomas J. Monaco

US Banks – Capital Unchained

US BANKS: The new FRB rule suggests that the CCAR) bank total capital distribution will be capped at 100% over the previous four quarters beginning...

Thomas J. Monaco

HSBC Holdings Plc – Cut and Run

HSBC HOLDINGS: HSBCNA fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed...

Thomas J. Monaco

Asian Insurers – Mea, Mea EIOPA

ASIA INSURERS: On April 3, 2020, EIOPA temporarily suspended capital management activities," but just reversed course. Many Asia-Pacific insurers...

Thomas J. Monaco