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

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% - and solvency is called into question; and  *Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done!

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% - and solvency is called into question; and  *Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done! 

China Evergrande Group – Shoes Dropping At Shenjing

*Bank Call Reveals Nothing: A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  *What Wasn’t Addressed: The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  *Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.

*Bank Call Reveals Nothing: A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  *What Wasn’t Addressed: The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  *Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.   

*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

*Another Weak Number: Waterdrop, Inc. (WDH.US) [Waterdrop] reported its second set of earnings results since its IPO, coming in at a negative CNY 656 mn  - declining CNY 286 mn or 77.3% linked quarter bringing cumulative losses since the IPO to over CNY 1.0 bn or about 38% of IPO funds raised. Challenges came from overall cost growth of CNY 411 mn (30.6%) due primarily to sales and marketing spend; and    *”Notice” To Online Insurers: The China Banking and Insurance Regulatory Commission’s (CBIRC) roll out of the internet insurance revision plan “Notice on Carrying out Special Rectification of Internet Insurance Disorders”, aims to scrutinize mainland China’s insurance technology platforms, ordering firms and agencies to end improper marketing and pricing practices, and improve privacy protections. This will be a direct challenge for Waterdrop and other mainland Chinese insurers.

*Another Weak Number: Waterdrop, Inc. (WDH.US) [Waterdrop] reported its second set of earnings results since its IPO, coming in at a negative CNY 656 mn  - declining CNY 286 mn or 77.3% linked quarter bringing cumulative losses since the IPO to over CNY 1.0 bn or about 38% of IPO funds raised. Challenges came from overall cost growth of CNY 411 mn (30.6%) due primarily to sales and marketing spend; and    *”Notice” To Online Insurers: The China Banking and Insurance Regulatory Commission’s (CBIRC) roll out of the internet insurance revision plan “Notice on Carrying out Special Rectification of Internet Insurance Disorders”, aims to scrutinize mainland China’s insurance technology platforms, ordering firms and agencies to end improper marketing and pricing practices, and improve privacy protections. This will be a direct challenge for Waterdrop and other mainland Chinese insurers. 

*Weaker Quarter: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 2Q21 bottom-line results of CNY 77.7 bn, decreasing CNY 8.0 bn or 9.3% linked quarter. The linked quarter weakness, in our view, can be attributed to negative operating jaws as costs increased CNY 9.4 bn (14.8%) and revenues declined CNY 589 mn (0.3%); and*Credit Risk Continues to Rise: The level of net new NPLs increased 46.4% on annualized basis and remains elevated. When one considers the break-down in credit quality, reserves would appear to be light – in the neighborhood of CNY 86.1 bn, amounting to about one quarter of pre-tax results at ICBC.

*Weaker Quarter: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 2Q21 bottom-line results of CNY 77.7 bn, decreasing CNY 8.0 bn or 9.3% linked quarter. The linked quarter weakness, in our view, can be attributed to negative operating jaws as costs increased CNY 9.4 bn (14.8%) and revenues declined CNY 589 mn (0.3%); and*Credit Risk Continues to Rise: The level of net new NPLs increased 46.4% on annualized basis and remains elevated. When one considers the break-down in credit quality, reserves would appear to be light – in the neighborhood of CNY 86.1 bn, amounting to about one quarter of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Negative Jaws Pressure Results

China

Ping An Bank Co Ltd provides a full range of commercial banking services including RMB and foreign currency deposit, loan, international and domestic settlement, discount, currency trading, letter of credit, bank guarantee, and other related services.

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Ping An Bank Co Ltd A (000001 CH)

China Evergrande Group – Shoes Dropping At Shenjing

EVERGRANDE: Before the Evergrande debacle, Shenjing posted core operating losses and liquidity stress. Despite this, Shengjing Finance absolved...

Thomas J. Monaco

Ping An Insurance – Don’t Bank On It

PING AN: Competitor conference call with PAB reveals nonchalant management. The Group has enormous real estate-related exposure, and questions of...

Thomas J. Monaco

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

Waterdrop – Someone Plug The Dike

WATERDROP: WDH reported its second set of earnings since the IPO, coming in at a negative CNY 656 mn - declining 77.3% QOQ bringing cumulative...

Thomas J. Monaco

Industrial and Commercial Bank of China – Negative Jaws Pressure Results

ICBC: ICBC reported a QOQ 2Q21 bottom-line decline of 9.3% due to negative operating jaws. The level of net new NPLs increased 46.4% annualized...

Thomas J. Monaco

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