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

*Lower Tax Rate Offset By Massive Provisions: CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and   *Credit Risk Now Accelerating: With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital.

*Lower Tax Rate Offset By Massive Provisions: CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and   *Credit Risk Now Accelerating: With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital. 

CIMB Group – Heading Deeper Into the Woods

*Another Poor Set Of Results Expected: Pre-market on March 12, 2021, AIA Group (1299.HK) [AIA] is set to release its 4Q20/full year  results. By our calculation, AIA’s overall Value of New Business (VONB) is expected to decline 33% YOY on a constant exchange rate basis – declining on a linked quarter basis, due largely to weaker volumes and margins.AIA’s product mix remains sub-optimal with the single premium product remaining the focus due to the COVID-19 impact on face-to-face agency sales;  and *No Hong Kong Rebound In Sight: The focus should remain Hong Kong, where a 60% plus YOY decline in VONB would not be out of the question as its border with mainland China continued to remain closed due to COVID-19 restrictions. This should continue to weigh on results over the next few quarters as well.

*Another Poor Set Of Results Expected: Pre-market on March 12, 2021, AIA Group (1299.HK) [AIA] is set to release its 4Q20/full year  results. By our calculation, AIA’s overall Value of New Business (VONB) is expected to decline 33% YOY on a constant exchange rate basis – declining on a linked quarter basis, due largely to weaker volumes and margins.AIA’s product mix remains sub-optimal with the single premium product remaining the focus due to the COVID-19 impact on face-to-face agency sales;  and *No Hong Kong Rebound In Sight: The focus should remain Hong Kong, where a 60% plus YOY decline in VONB would not be out of the question as its border with mainland China continued to remain closed due to COVID-19 restrictions. This should continue to weigh on results over the next few quarters as well. 

AIA Group – 4Q Results Likely To Remain Very Challenging

*Solid Core Operating Result: CIMB Group (CIMB.MK) [CIMB] reported 3Q20 results of MYR 194 mn, declining MYR 83 mn (30.0%) linked quarter. However, when we exclude securities gains/losses, core operating results actually came in at MYR 293 mn  - exceeding 2Q20 operating losses of MYR 58 mn; and *Credit Risk Decelerating: CIMB’s NPLs declined MYR 999.9 mn (7.5%) to MYR 12.9 bn, and represent 3.38% of total loans – improving 24 bp linked quarter. With NCOs of MYR 1.2 bn, we find that net new NPLs increased MYR 187.5 mn or 5.6% on an annualized basis. Despite the improvement, we believe that reserve cover is too light by MYR 1.5 bn – which represents just over three quarters of profit before tax.

*Solid Core Operating Result: CIMB Group (CIMB.MK) [CIMB] reported 3Q20 results of MYR 194 mn, declining MYR 83 mn (30.0%) linked quarter. However, when we exclude securities gains/losses, core operating results actually came in at MYR 293 mn  - exceeding 2Q20 operating losses of MYR 58 mn; and *Credit Risk Decelerating: CIMB’s NPLs declined MYR 999.9 mn (7.5%) to MYR 12.9 bn, and represent 3.38% of total loans – improving 24 bp linked quarter. With NCOs of MYR 1.2 bn, we find that net new NPLs increased MYR 187.5 mn or 5.6% on an annualized basis. Despite the improvement, we believe that reserve cover is too light by MYR 1.5 bn – which represents just over three quarters of profit before tax. 

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Malaysia has demonstrated the strengths of constitutional monarchy at a time when its northern neighbour, Thailand, is undergoing convulsions over King Rama X's consolidation of power in a de facto absolute monarchy (although Thailand too is a de jure constitutional monarchy since 1932). On 25th October, Malaysia's king (Agong) rejected Prime Minister Muhyiddin's advice (given 2 days earlier) to declare a state of Emergency (which would have suspended parliament, and been a significant blow to Malaysian democracy). After a sudden spurt in Covid cases, the Agong declared the incumbent government needed stability to deal with the challenge. Thus the Agong prolonged the life of Muhyiddin's weak, fraying coalition while preserving Malaysia's democracy. While the Agong's actions preserved democracy, he clearly did everything to ensure that Leader of the Opposition Anwar Ibrahim could not become Prime Minister -- delaying meeting him for 3 weeks, then sending a clear signal to UMNO (the former ruling party, which had indicated it would support Anwar's bid) that it should stay neutral. The upshot is that the Islamist PAS, which had been isolated by most other parties in the past, is now in a strong bargaining position relative to the main constituents of the rickety ruling coalition -- Muhyiddin's Perikatan Nasional (PN, of which PAS is currently a member) and UMNO-led Barisan Nasional (BN).At the next general election (not due before May 2023, but likely to be held sooner), PAS is likely to align more with UMNO, although some of the latter's members will defect to Anwar's PKR beforehand. Muhyiddin's party PPBM (with 31 seats in a parliament of 222 currently) appears to be unpopular, mainly because Azmin Ali (its effective deputy leader) is seen as having betrayed PKR (Anwar's party, of which he was effective deputy leader previously). If BN-PAS are to allow PPBM into their alliance, the latter will receive a lower allocation of seats, PAS more than it has currently. While an UMNO-PPBM-PAS alliance of Malay Muslims could be electorally potent, it will drive Malaysia very far away from the non-racial (or at least multi-racial) vision on which PH (Pakatan Harapan) fought and won the 2018 election. Despite the short-term relief from the non-declaration of Emergency, the direction that Malaysian politics is now taking (with PAS increasingly in the ascendant) is deeply negative for the country's future.

Malaysia has demonstrated the strengths of constitutional monarchy at a time when its northern neighbour, Thailand, is undergoing convulsions over King Rama X's consolidation of power in a de facto absolute monarchy (although Thailand too is a de jure constitutional monarchy since 1932). On 25th October, Malaysia's king (Agong) rejected Prime Minister Muhyiddin's advice (given 2 days earlier) to declare a state of Emergency (which would have suspended parliament, and been a significant blow to Malaysian democracy). After a sudden spurt in Covid cases, the Agong declared the incumbent government needed stability to deal with the challenge. Thus the Agong prolonged the life of Muhyiddin's weak, fraying coalition while preserving Malaysia's democracy. While the Agong's actions preserved democracy, he clearly did everything to ensure that Leader of the Opposition Anwar Ibrahim could not become Prime Minister -- delaying meeting him for 3 weeks, then sending a clear signal to UMNO (the former ruling party, which had indicated it would support Anwar's bid) that it should stay neutral. The upshot is that the Islamist PAS, which had been isolated by most other parties in the past, is now in a strong bargaining position relative to the main constituents of the rickety ruling coalition -- Muhyiddin's Perikatan Nasional (PN, of which PAS is currently a member) and UMNO-led Barisan Nasional (BN).At the next general election (not due before May 2023, but likely to be held sooner), PAS is likely to align more with UMNO, although some of the latter's members will defect to Anwar's PKR beforehand. Muhyiddin's party PPBM (with 31 seats in a parliament of 222 currently) appears to be unpopular, mainly because Azmin Ali (its effective deputy leader) is seen as having betrayed PKR (Anwar's party, of which he was effective deputy leader previously). If BN-PAS are to allow PPBM into their alliance, the latter will receive a lower allocation of seats, PAS more than it has currently. While an UMNO-PPBM-PAS alliance of Malay Muslims could be electorally potent, it will drive Malaysia very far away from the non-racial (or at least multi-racial) vision on which PH (Pakatan Harapan) fought and won the 2018 election. Despite the short-term relief from the non-declaration of Emergency, the direction that Malaysian politics is now taking (with PAS increasingly in the ascendant) is deeply negative for the country's future.    

Agong Asserts Himself, Preventing Change of PM but Disallowing Emergency Rule

United States

iShares MSCI Malaysia ETF is an exchange-traded fund incorporated in the USA. The ETF's objective seeks to provide investment results that correspond to the performance of the Malaysian market, as measured by the MSCI  Malaysia Index. The ETF invests in a representative sample of index stocks using a  "portfolio sampling" technique.

iShares MSCI Malaysia ETF (EWM US)

CIMB Group – Heading Deeper Into the Woods

CIMB GROUP: CIMB reported 4Q20 results improved 9.3% linked quarter, and highlighted by a massive reduction in its tax rate and an enormous...

Thomas J. Monaco

AIA Group – 4Q Results Likely To Remain Very Challenging

AIA GROUP: Pre-market on March 12th, AIA is to release 4Q20/full year results. AIA’s overall VONB is expected to decline 33% YOY- due largely to...

Thomas J. Monaco

CIMB Group – Reserve Cover Light Still

CIMB GROUP: Operating results exhibited linked quarter improvement, although stated results declined. Reserve cover remains quite light despite...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

Agong Asserts Himself, Preventing Change of PM but Disallowing Emergency Rule

Constitutional monarchy saved Malaysian democracy by ruling out an Emergency. But Agong's tilt against Anwar has implicitly made the Islamist PAS...

Prasenjit K. Basu