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

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.      

DBS Group Holdings – Not Trending The Right Way Yet

*Weak Great Eastern Returns: Great Eastern Life (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. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers.

*Weak Great Eastern Returns: Great Eastern Life (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. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers. 

Oversea Chinese Banking Corp – Still Not A Great Eastern

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

Bank Negara Indonesia Persero / Equity Bottom-Up

*Islamic Banking Merger In Indonesia: Bank Rakyat Indonesia’s (BBRI.IJ) Islamic banking subsidiary, Bank BRI Syariah (BRIS.IJ) announced that it had signed a conditional merger agreement related to the proposed merger with two other Indonesian state bank Islamic banking subsidiaries including Bank Mandiri Syah (BMRI.IJ) [BSM] and Bank BNI Syariah (BBNI.IJ) [BNIS]; and*National Champion To Compete Globally: Sharia-compliance is regarded as the foundation of Islamic banking. With the largest Muslim population globally at 228 mn, it would make sense that Indonesia should have a national champion which is sharia-compliant. In the case of Indonesia, there are currently 14 sharia-compliant commercial bank with IDR 353 tn (USD 24 bn) in assets or about 4.2% of system-wide assets.  The proposed merger would create a new entity with over INR 200 bn – which could place it amongst the world’s largest global competitors for Islamic finance. We’d also anticipate the development global sukuk (Islamic debt) underwriting for local Indonesian companies.

*Islamic Banking Merger In Indonesia: Bank Rakyat Indonesia’s (BBRI.IJ) Islamic banking subsidiary, Bank BRI Syariah (BRIS.IJ) announced that it had signed a conditional merger agreement related to the proposed merger with two other Indonesian state bank Islamic banking subsidiaries including Bank Mandiri Syah (BMRI.IJ) [BSM] and Bank BNI Syariah (BBNI.IJ) [BNIS]; and*National Champion To Compete Globally: Sharia-compliance is regarded as the foundation of Islamic banking. With the largest Muslim population globally at 228 mn, it would make sense that Indonesia should have a national champion which is sharia-compliant. In the case of Indonesia, there are currently 14 sharia-compliant commercial bank with IDR 353 tn (USD 24 bn) in assets or about 4.2% of system-wide assets.  The proposed merger would create a new entity with over INR 200 bn – which could place it amongst the world’s largest global competitors for Islamic finance. We’d also anticipate the development global sukuk (Islamic debt) underwriting for local Indonesian companies. 

Hong Kong

Standard Chartered plc is an international banking group operating principally in Asia, Africa, and the Middle East.  The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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Standard Chartered (2888 HK)

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Citigroup – Watch The Negative Jaws

CITIGROUP: Investors Shouldn't Be Fooled By The EPS Beat Led By A Massive Pre-emptive Provision Cut. Bank Has Negative Operating Jaws, Worsening...

Thomas J. Monaco

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DBS Group Holdings – Not Trending The Right Way Yet

DBS GROUP HOLDINGS: Trends Are Poor. Costs Higher, Revenues Lower, and Provision Trend Likely To Be Reversed As We Head Into 2021.

Thomas J. Monaco

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Citigroup – Watch The Negative Jaws

CITIGROUP: Investors Shouldn't Be Fooled By The EPS Beat Led By A Massive Pre-emptive Provision Cut. Bank Has Negative Operating Jaws, Worsening...

Thomas J. Monaco

Bank BNI – Sharing Sharia

Merger Of Indonesia's SOE Bank Sharia Complaint Subsidiaries Creates National Champion With Designs On Being Globally Competitive

Thomas J. Monaco