Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In May of this year, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> made an <a href="https://www.release.tdnet.info/inbs/ek/140120200430403171.pdf" target="_blank" rel="noopener">announcement</a> that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/shinsei-bank-offering-flowers-in-the-wind" target="_blank" data-smartkarma-citation="insights:31638" rel="noopener">Shinsei Bank Offering: Flowers in the Wind</a>, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/654/original/Screenshot%202020-12-21%20at%207.48.00%20PM.png?1608551293" class="editor-image img-responsive" data-smartkarma-image-id="179654"></figure></section>Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1608551363459&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=8303&amp;oth=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100ITI7" target="_blank" rel="noopener">received</a> 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID <a href="https://pdf.irpocket.com/C8303/yCGV/B6S9/bQ8o.pdf" target="_blank" rel="noopener">announce</a> a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had <a href="https://pdf.irpocket.com/C8303/mxGt/rDGI/qr73.pdf" target="_blank" rel="noopener">purchased</a> 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  </section>Discussion ensues below.

In May of this year, Shinsei Bank (8303 JP) made an announcement that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by Mio Kato in Shinsei Bank Offering: Flowers in the Wind, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director received 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID announce a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had purchased 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  Discussion ensues below.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

Data from our bank analytics vendor shows credit risk down substantially from the peak in April to the last week in June. Credit Analytics shows the probability of default (PD) of 64,000 public companies across the world are down more than 50% in some sectors including airlines and oil and gas sectors. For some of the least troubled sectors, PD rates are also down considerably. The implications are positive for banks' credit costs during 2Q20 and during 2H20. And we note that this is in contrast to what some banks were forecasting some months back, of 'similar' credit costs during 2Q20 as in 1Q20.

Data from our bank analytics vendor shows credit risk down substantially from the peak in April to the last week in June. Credit Analytics shows the probability of default (PD) of 64,000 public companies across the world are down more than 50% in some sectors including airlines and oil and gas sectors. For some of the least troubled sectors, PD rates are also down considerably. The implications are positive for banks' credit costs during 2Q20 and during 2H20. And we note that this is in contrast to what some banks were forecasting some months back, of 'similar' credit costs during 2Q20 as in 1Q20.  

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

<ul>
<li>
 Fitch Bank Downgrades: Fitch Ratings (Fitch) has finally gotten around to revising the outlook of the long-term issuer default ratings from Positive to Stable on two state-owned banks and a wholly foreign-owned bank in Vietnam, and the outlook of two JSC banks from Stable to Negative;</li>
<li>
Fitch Concerns: The downgrades stem from sharply lower growth in Vietnam associated with the corona virus pandemic which likely will negatively impact commercial bank credit profiles over the near-term.  Thin capital buffers are another area of concern, as some major banks still struggling to comply with local Basel II requirements. Credit stresses, even if not all are reported as impaired during the relief period, suggest that credit impairments accruing; and</li>
<li>
Our Continued Concerns: We continue to find that net new NPL growth ranges between 50%-150% per annum over the past five years through 2019 – despite the stated NPL figure declining on a growthy loan portfolio and placement of problem loans below the line. Capital requirements under Basel II being extremely difficult to attain/maintain without prospects of capital raise or shrinking their balance sheets, commercial banks are set to continue to struggle to grow.</li>
</ul>



 Fitch Bank Downgrades: Fitch Ratings (Fitch) has finally gotten around to revising the outlook of the long-term issuer default ratings from Positive to Stable on two state-owned banks and a wholly foreign-owned bank in Vietnam, and the outlook of two JSC banks from Stable to Negative;

Fitch Concerns: The downgrades stem from sharply lower growth in Vietnam associated with the corona virus pandemic which likely will negatively impact commercial bank credit profiles over the near-term.  Thin capital buffers are another area of concern, as some major banks still struggling to comply with local Basel II requirements. Credit stresses, even if not all are reported as impaired during the relief period, suggest that credit impairments accruing; and

Our Continued Concerns: We continue to find that net new NPL growth ranges between 50%-150% per annum over the past five years through 2019 – despite the stated NPL figure declining on a growthy loan portfolio and placement of problem loans below the line. Capital requirements under Basel II being extremely difficult to attain/maintain without prospects of capital raise or shrinking their balance sheets, commercial banks are set to continue to struggle to grow.


Equity Bottom-Up

Vietnam Technological & Commer / Equity Bottom-Up

* Head Start On Economic Return to Normalcy: Vietnam Technological and Commercial Bank (TCB.VN) [Techcombank] is a long-term winner in the Vietnamese banking sector. Techcombank is Vietnam's largest joint stock bank by operating income and PBT – remaining the country’s most profitable bank from an ROA perspective despite having only a 3% deposit market share. Techombank is also the leader in mortgage, bancassurance, credit cards, and investment banking;  * Sector Credit Risks Are High: As we review each bank individually we continue to find that net new NPL growth ranges between 50%-150% per annum over the past five years through 2019 – despite the stated NPL figure declining on a growthy loan portfolio and placement of problem loans below the line. In our view, Vietnam has essentially done very little to address its legacy NPLs - which we estimate to be over USD 50 bn or 20% of total loans – and the SBV’s newly adopted “extend and pretend” policy will be substantially additive to the current heap of problem assets even if not labelled such; and* Capital Pressures Rising: With almost no end in sight to the growth of net new NPLs (doubling every year), and capital requirements under Basel II being extremely difficult to attain/maintain without prospects of capital raise or shrinking their balance sheets, commercial banks are set to continue to struggle to grow. The draft amendments to a Decree for tax payment deferral and the SBV’s request not to pay a cash dividend confirms Basel II compliance pressures.

* Head Start On Economic Return to Normalcy: Vietnam Technological and Commercial Bank (TCB.VN) [Techcombank] is a long-term winner in the Vietnamese banking sector. Techcombank is Vietnam's largest joint stock bank by operating income and PBT – remaining the country’s most profitable bank from an ROA perspective despite having only a 3% deposit market share. Techombank is also the leader in mortgage, bancassurance, credit cards, and investment banking;  * Sector Credit Risks Are High: As we review each bank individually we continue to find that net new NPL growth ranges between 50%-150% per annum over the past five years through 2019 – despite the stated NPL figure declining on a growthy loan portfolio and placement of problem loans below the line. In our view, Vietnam has essentially done very little to address its legacy NPLs - which we estimate to be over USD 50 bn or 20% of total loans – and the SBV’s newly adopted “extend and pretend” policy will be substantially additive to the current heap of problem assets even if not labelled such; and* Capital Pressures Rising: With almost no end in sight to the growth of net new NPLs (doubling every year), and capital requirements under Basel II being extremely difficult to attain/maintain without prospects of capital raise or shrinking their balance sheets, commercial banks are set to continue to struggle to grow. The draft amendments to a Decree for tax payment deferral and the SBV’s request not to pay a cash dividend confirms Basel II compliance pressures.

Techombank – Still Vietnam’s Best House In A Bad Neighborhood

Bank For Investment And Deve / Equity Bottom-Up

<ul>
<li>
One For the Ages: The Bank for Investment and Development of Vietnam (BID.VN) [BIDV] held a somewhat delusional 2020 Annual General Meeting (AGM). In February 2020, BIDV became the 12th bank to clear its balance due to the VAMC, just as credit quality is likely to take a massive turn for the worse. No doubt it will be hitting up the VAMC for more bonds near-term. To that end, BIDV has already committed to expand its loan bailout to VND 120 tn. BIDV was unfortunately among the Basel II non-compliant despite the sale of a 15% stake to KEB Hana Bank (086790.KS). 2020 forecasts are in the stratosphere and need to come back to earth.</li>
<li>
Reality Check Needed For Vietnam: Fitch Ratings (Fitch) recently lowered Vietnam’s GDP growth to 6.3% from 6.8% in 2020. Given the symbiotic economic relationship between mainland China and Vietnam, we find the Fitch’s GDP growth forecast to be incredibly generous as crisis conditions typically suggest negative GDP growth. The IV Board survey revealed that nearly 30% surveyed had lost between 20-50% of revenues associated with the corona virus, while 60% had lost revenues by over half.  It also suggested that six months of this economic weakness could lead to 74% of surveyed companies to become bankrupt.</li>
<li>
Liquidity Wall: Vietnam is running into a liquidity wall. The sovereign has a high level of public debt (near its 65% debt/GDP cap) – and now growing - which constrains spending while the banking system (as it converts over to the more stringent Basel II capital regime) remains saddled with troubled debt which too has reversed its downward trend - resulting in systemic balance sheet and liquidity constraints.</li>
</ul>



One For the Ages: The Bank for Investment and Development of Vietnam (BID.VN) [BIDV] held a somewhat delusional 2020 Annual General Meeting (AGM). In February 2020, BIDV became the 12th bank to clear its balance due to the VAMC, just as credit quality is likely to take a massive turn for the worse. No doubt it will be hitting up the VAMC for more bonds near-term. To that end, BIDV has already committed to expand its loan bailout to VND 120 tn. BIDV was unfortunately among the Basel II non-compliant despite the sale of a 15% stake to KEB Hana Bank (086790.KS). 2020 forecasts are in the stratosphere and need to come back to earth.

Reality Check Needed For Vietnam: Fitch Ratings (Fitch) recently lowered Vietnam’s GDP growth to 6.3% from 6.8% in 2020. Given the symbiotic economic relationship between mainland China and Vietnam, we find the Fitch’s GDP growth forecast to be incredibly generous as crisis conditions typically suggest negative GDP growth. The IV Board survey revealed that nearly 30% surveyed had lost between 20-50% of revenues associated with the corona virus, while 60% had lost revenues by over half.  It also suggested that six months of this economic weakness could lead to 74% of surveyed companies to become bankrupt.

Liquidity Wall: Vietnam is running into a liquidity wall. The sovereign has a high level of public debt (near its 65% debt/GDP cap) – and now growing - which constrains spending while the banking system (as it converts over to the more stringent Basel II capital regime) remains saddled with troubled debt which too has reversed its downward trend - resulting in systemic balance sheet and liquidity constraints.


BIDV – KEB Hana Has To Be Kicking Itself Now

Vietnam

Military Commercial Joint Stock Bank offers commercial banking services.  The Bank provides services in the areas of personal banking, corporate banking, financial banking, and e-banking.  Military Commercial's services include savings accounts, money lending, money transfers, foreign exchange, and money markets.

Military Commercial Joint Stock Bank (MBB VN)

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Military Commercial Joint Stock Bank (MBB VN)

2021 High Conviction - Shinsei Bank

Shinsei Bank has a particular capital structure different from many other banks. This is due to shareholder register, and capital itself. A new...

Travis Lundy

Banks – Credit Risk, Cratering

Data from our bank analytics vendor shows credit risk down substantially from the peak in April to the last week in June. Credit Analytics shows...

Daniel Tabbush

Vietnam – Fitch Downgrades Banks

Fitch Bank Downgrades: Fitch Ratings (Fitch) has finally gotten around to revising the outlook of the long-term issuer default ratings from...

Thomas J. Monaco

Techombank – Still Vietnam’s Best House In A Bad Neighborhood

* Head Start On Economic Return to Normalcy: Vietnam Technological and Commercial Bank (TCB.VN) [Techcombank] is a long-term winner in the...

Thomas J. Monaco

BIDV – KEB Hana Has To Be Kicking Itself Now

One For the Ages: The Bank for Investment and Development of Vietnam (BID.VN) [BIDV] held a somewhat delusional 2020 Annual General Meeting...

Thomas J. Monaco

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