代写CCT5907、代写Python/C++编程

日期：2023-03-05 10:42

CCT5907 International Financial Statement Analysis

Term 1, 2023

1

Topics and Key Learning Objectives

1. FREQ Liquidity

Liquidity v. Solvency

Traditional liquidity ratios not useful

Analyse the payment schedule

– China Minsheng

– Singapore Airlines

2. FREQ Solvency

Solvency: a different way to calculate leverage

3. FREQ Asset quality

Westpac 2018 full year

Westpac scenarios

– FREQ asset quality impact on FREQ solvency

4. FREQ Off-balance sheet items Citigroup 2008

5. Other perspectives: including system or country level

2

Liquidity risk FREQ : Short term cash crunch

China’s US dollar debt defaults climb as coronavirus, US tensions hit firms’ bottom lines

https://finance.yahoo.com/news/chinas-us-dollar-debt-defaults-093000880.html

Liquidity crunch FREQ default Solvency FREQ: “Evergrande Warns of Looming Cash Crunch, Spooking Investors”

https://www.bloomberg.com/news/articles/2020-09-24/evergrande-warns-of-looming-liquidity-crunch-spooking-investors

Evergrande

FREQ solvency (already over-leveraged and restructuring stalled)

FREQ liquidity

Liquidity v Solvency: not the same thing

Liquidity: short term cash crunch, business may be okay

Solvency: too much debt, unable to service, bankruptcy risk

Liquidity crisis may lead to Solvency crisis

Solvency crisis may lead to Liquidity crisis

Acceleration of debt (why default may result in Solvency crisis)

Default of interest payment? must pay entire loan

Other lenders will want their loans paid back

All lenders wants their money back immediately

https://www.sapling.com/8012721/mean-accelerate-loan

(not for presentation or examinable but to explain “acceleration” a securities law concept)

Update Feb 2022: https://www.bloomberg.com/news/articles/2022-02-11/china-moves-to-ease-developer-cash-access-evergrande-update

Sept 2022: https://login.wwwproxy1.library.unsw.edu.au/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=159080721&site=ehost-live&scope=site

Jargons alert: Default Bottom lines Market Confidence Liquidity crunch Liquidity v Solvency Monetary easing

3

Traditional liquidity ratios may not be completely informative?

(From reference text Eg 6.9 Comparing cash cycles, p244)

INFERENCE (depends on traditional or modern view)

Which company has best operating cycle/ cashflow management? HP / Dell

Which company has best Current Ratio? HP / Dell

Traditional view

CA / CL ≥ 1, better if ≥ 2)

Rationale: in a liquidity crisis can fire sell CA (will get less than face value) to pay CL

Negative working capital

CA – CL < 0, CA / CL < 1

Use other people’s money to run your business. Examples: Customer’s money Unearned

Revenue (CL), drag out payment to suppliers (A/P ≡ CL)

FREQ: Liquidity crisis for Dell & Lenovo? Neither

Explanation: you would be wrong if you had traditional view

FY (note the FYE date) 2009 2008 2007

Days Sales Outstanding (DSO) 38 35 36

Days Inventory on Hand (DOH) 8 7 8

Less: Days payable outstanding (DPO) (82) (67) (80)

Dell (36) (25) (36)

Lenovo (30) (23) (28)

Hewlett Packard 14 20 24

Receivables turnover

=Sales/Average Debtors

Inventory turnover

=COGS/Average Inventory

(Use Sales if COGS not available)

Payables turnover

=(COGS+OPEX)/Average

Payables

(Excluding D&A, interests and tax)

Days = 365/Turnover

Cash Conversion Cycle Days =

Receivables Days + Inventory

Days – Payable Days

(The shorter, the better the performance,

in general)

4

Alternative? Analyse payment schedule

Liquidity concerns both operating and financing payments

Traditional current and quick ratios, and cash conversion cycle may

only indicate liquidity to meet operating payments for goods and services

For financing related payments, identify when interest or principal

payment will fall due and if Company has sufficient cash/cashflow to cover.

This is especially true where term loans or listed debts exist.

“Cash-strapped China Minsheng Investment seeks money from its

employees”

https://www.reuters.com/article/us-china-minsheng-funding/cash-strapped-china-minsheng-

investment-seeks-money-from-its-employees-idUSKCN1SG11U?il=0

China Minsheng Investment Group (CMIG), among the country’s largest private

investment firms, is raising funds from its employees (?Company is desperate) as

it seeks to combat a liquidity squeeze

According to Refinitiv data, CMIG has 12 outstanding yuan bonds worth 29.75

billion yuan ($4.37 billion). It has also issued bonds worth $800 million through

Boom Up Investments Ltd, a subsidiary domiciled in the British Virgin Islands.

Note due Nov 2019: market thinks will default so bond price fallen below face

value

5

Another example: Singapore Airlines

Great analysis, concluding liquidity crisis and predicting a government bailout

‘SINGAPORE AIRLINES LTD (SGX: C6L) IS IN DEEP TROUBLE AND RIGHTS ISSUE CALL IS IMMINENT”

https://blog.investingnote.com/singapore-airlines-ltd-sgx-c6l-deep-trouble-rights-issue-call-imminent/

Check out the liquidity analysis of payment schedules of bond maturities

What was the outcome since a year has passed?

Subsequent event review….

See Singapore Airlines Limited 31 March 2021 Q4

presentation slide 26 (research exercise)

6

Solvency FREQ : How to calculate leverage

Deutsche Bank 'horribly undercapitalized' - U.S. regulator

https://www.reuters.com/article/us-financial-regulation-deutsche-

idUSBRE95D0X620130614

“A top U.S. banking regulator called Deutsche Bank's capital levels

"horrible" and said it is the worst on a list of global banks based on

one measurement of leverage ratios. … using a tougher leverage

ratio measurement - which compares a bank's shareholder equity to

its total assets without using risk-weightings … Deutsche's leverage

ratio stood at 1.63 percent, according to Hoenig's numbers, which

are based on European IFRS accounting rules as of the end of

2012.”

Basel III Leverage ratio framework – executive summary

https://www.bis.org/fsi/fsisummaries/b3_lrf.pdf

https://www.investopedia.com/terms/l/leverageratio.asp

(2 URLs to present together)

7

Solvency: How to calculate leverage (cont’d)

Accounting equation: A = L + E

Leverage as combination of any two items, eg

– A/E : accounting textbook preferred

– L/A : finance textbook preferred

– A/L, L/E : news articles sometimes

– E/A (in %)

Income statement: interest coverage

Will not be covered in this course

E/A: Hoenig prefers, previous slide (DrL agrees)

Capital adequacy regulatory requirements expressed in this way

although using regulatory definitions and not accounting definitions

(see Westpac material)

Lecture03 BalanceSheet.xlsx

See “My Balance Sheet”

Simplistic illustration of solvency analysis

8

Asset quality FREQ

measurement quality and liquidity quality

FREQ Asset quality

‘S&P Global expects coronavirus to cost banks $2.1 trillion”

https://www.reuters.com/article/us-health-coronavirus-banks-creditlosses-idUSKBN24A2B2

Expected credit loss model : Financial instruments for doubtful loans and receivables: Not examinable (taught in ACCT5943), but analyst should

understand the basic concept of (a) 12-month expected credit loss and (b) life-time expected credit loss for asset quality provision measurement.

https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-applying-expected-credit-loss-model-trade-receivables-using-provision-matrix-030519.pdf

9

Why Westpac? Riskiest of Australia’s Big 4 banks

… also because it is where DrL put his paltry savings, so he did his homework to see if he

would lose his savings if a crisis occured

#2, 23% of Australian mortgage market (Presentation, p.37)

“Westpac to address asset quality, big mortgage switch”

https://www.afr.com/business/banking-and-finance/westpac-to-address-asset-quality-big-mortgage-switch-20180504-h0zo08

(AFR accessible via UNSW Lib, otherwise quotes below are sufficient)

“Westpac is more focused on mortgages than ANZ and NAB, and is the nation's largest lender to landlords.”

“Westpac is also the most sensitive of the big four banks to a sharp rise in short-term funding costs that appear to

have been triggered by US policy changes.”

Asset quality:

“Westpac was the subject of a bearish UBS research, which cut its recommendation to "sell" on concerns

about the bank's mortgage quality.”

“… the bank's lending standards was worse than previously assumed. The other banks fared better in

that [PwC] 2016 assessment.”

10

Westpac 2018 earnings announcement

Westpac 30 September 2018 Full Year Results

Overall Information Page

https://www.westpac.com.au/about-westpac/investor-centre/events-and-presentations/2018-presentations-and-agm/

Results Announcement (Management Discussions and Analysis - MD&A)

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/ASX_2018_Full_Year_Profit_Announcement.pdf

Overview structure: PR cover, ASX form cover, media release (asset quality, p.v; outlook, p.vi), results

(p.1-142)

Statutory net profit (GAAP) vs Cash earnings (p.iii); cash earnings description (p.5)

“While earnings were flat, our balance sheet remains strong across all dimensions of asset quality, capital

(=solvency), and liquidity.

“Westpac’s mortgage book remains fundamentally sound, with around 70% of Australian customers

ahead on repayments 2 and 90 day delinquencies remaining low.

Mr Hartzer said Westpac continues to focus on addressing issues that have been highlighted during the

Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry.

Presentation Pack

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/1H18_WBC_presentation_and_IDP.pdf

Note on p.61 income down 3% margin decline, customer remediation

11

Westpac’s Leverage Ratios

(See Results– MD&A document ,p.40-41)

Common equity Tier 1 capital ratio (CET1) 10.63%

Understanding movements

YoY: 30 Sep 2017: 10.56% ↗ 30 Sep 2018: 10.63%

HoH: 31 Mar 2018: 10.50% ↗ 30 Sep 2018: 10.63% (Half)

QoQ: 30 Sep 2018: 10.63% ↘ 31 Dec 2018: 10.4%

APRA leverage ratio: 5.84% (Results, p.141 definition)

Accounting (Hoenig): 64,573/879,592=7.34%

Leverage ratio using Basel: 6.48% (p.41, bottom table)

We know investors seem to focus on CET1 because it is discussed in the news

Reconciliation of regulatory and accounting capital (p.44)

Note what is deducted: goodwill, deferred tax assets, capitalised expenses

Because intangibles or accruals cannot be sold off separately in a solvency crisis, or are worth nothing

Regulatory to Accounting reconciliation is not examinable, but understanding why some items are deducted is

examinable

12

Westpac’s asset quality threats

Composition of Australian mortgage (presentation pack, p.18): See the I/O (interest only) trend reduction

Principle & interest: 61%

Interest only (investors): 35%, capacity to pay once I/O resets to P/I

I/O reset: $292b in mortgages

“Thousands of Australians face financial strain as interest-only period comes to an end”

https://www.domain.com.au/news/thousands-of-australians-face-financial-strain-as-interest-only-period-comes-to-an-end-930218/

“ 'Liar loans' surge to record highs, despite mortgage lending crackdown: UBS report”

https://www.abc.net.au/news/2019-09-30/liar-loans-record-high-mortgage-lending-property-crackdown-ubs/11559440

32-36% of total mortgages, worth $500b

Can assume Westpac has about a quarter (23% market)?

COVID: have Australian banks made sufficient loan loss provisions?

Deferred loans (a bland statement from Australian Banking Association - ABA)

https://www.ausbanking.org.au/6-month-loan-assessments-begin-as-australians-resume-loan-repayments/

NAB auditing loans

https://www.dailymail.co.uk/news/article-8754665/NAB-boss-reveals-warning-signs-Australian-banks-facing-huge-waves-loan-defaults.html

(To do these 3 as a single presentation – about the same issue)

13

Westpac’s asset quality scenarios

See Lecture03 BalanceSheet.xlsx, again

Accounting (Hoenig) leverage ratio: 64,573 / 879,592 = 7.34%

Identifying items 90 days past due, or otherwise in default, and not impaired (p.100)

? If impaired, adjusted leverage ratio: (64573 - 3023) / (879592 – 3023 ) = 7.02%

? Others in spreadsheet

As-is E/A leverage ratio = 7.34% Adjusted E/A leverage ratio = 7.02%

14

Off-balance sheet FREQ

Citigroup’s 2008 US$1 trillion in mysterious assets

http://www.smh.com.au/business/citigroups-mysterious-assets-20080715-3ffx.html

Lecture03 BalanceSheet.xlsx, again

High leverage led to solvency crisis requiring government bailout

“Citigroup gets massive government bailout”

https://www.reuters.com/article/us-citigroup/citigroup-gets-massive-government-bailout-idUSTRE4AJ45G20081124

Citigroup share prices https://yhoo.it/2FwSU2P

See stock price collapse Mar 2009, < $1 pre-split

Select Events > Stock Split to see reverse 10-1 on 05/01/2011 which obscures collapse in share price prior to

GFC

Recent accounting standards on financial instruments (AASB 7, 9, 132,139) and leases (AASB16)

Increasing accounting regulation has decreased the scope and risk of off-balancing financing

These are improving the completeness assertion of entities’ balance sheet and their risk assessment

There could still be other completeness and off-balance sheet risks an analyst should look out for.

Jargons alert: Off-Balance Sheet vs On-Balance Sheet Mortgage-backed Securities and CDOs Reverse Stock Split

15

Other perspectives: system or country level

Asset quality: evergreening loans and bad debts

https://www.mondaq.com/india/financial-restructuring/751730/ever-greening-of-loans-and-bad-debts--rbi39s-stand-and-its-implications

Off-balance sheet: Shadow Banking

Peer-to-peer: unregulated, a lot of (ponzi) scams

https://www.scmp.com/economy/china-economy/article/3039715/p2p-chinas-once-booming-lending-industry-must-close-within

Wealth management products; unregulated, implied guarantees when there is none

https://www.scmp.com/business/banking-finance/article/2102341/chinas-28tr-yuan-wealth- management-products-

under-mounting

China Local Government Financing Vehicles

https://www.scmp.com/news/china/economy/article/2142692/chinese-local-governments-us24-billion-concealed-debts-

revealed

China: difficult to do liquidity/solvency analysis (maybe other countries as well)

https://www.bloomberg.com/news/articles/2019-12-26/china-s-government-is-letting-a-wave-of-bond-defaults-just-happen

https://login.wwwproxy1.library.unsw.edu.au/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=140920797&si

te=ehost-live&scope=site

(same article, one might be behind paywall the other might be ok, if not get via UNSW lib)

“It’s incredibly difficult to do true credit analysis for most borrowers in China,” says Michel Lowy, chief executive officer at

Hong Kong-based banking group SC Lowy. “Ultimately it has a lot less to do with the quality of the businesses that are

underneath and a lot more to do with who is supporting them, who owns them, and what is the goal of their setup.”

But rising defaults also mean that global investors have to abandon some assumptions about which borrowers are safe.

It’s getting more dangerous to count on some companies being, in essence, too connected to

fail. (DrL changed the sequence of quotes for a more logical flow)

Enforceability is also a problem: see first article, e.g. about Founder Group

Jargons alert: Evergreen loans Peer to Peer Lending

16

Follow-up

on previously discussed entities, articles, concepts and short-selling trading strategy

“Carson Block of Muddy Waters with another 'short', plus some thoughts on analyst 'conflicts of interest'

https://remarkboard.com/m/cnbc-screamfest-culminates-with-muddy-waters-teasing- reveal/1f0c9jcoocsq8

“MW is Short Nano-X Imaging Ltd.”

https://www.muddywatersresearch.com/research/nnox/mw-is-short-nnox/

Muddy Waters setting up short selling video channel

https://www.zer0es.tv/

Free (for now) investment course

Is Tesla the Big Short 2.0?

https://www.philstockworld.com/2020/09/23/the-big-shorts-michael-burry-targets- tesla-in-series-of-tweets/

Another short, first identified by Hindenburg

https://hindenburgresearch.com/nikola/

All links on this page are not examinable, but are available for presentation. They are to provide your with an exposure to a financial

statements analysis outcome: where a firm is believed to be over-valued and share prices are expected to drop; and short-selling could be a

viable analyst’s recommendation. Recommend that you download/print the research reports for your own learning

Jargons alert: Sell-side vs buy-side analyst Short-Selling Conflict of interest (independent analyst)