EUR 850.00 For Business Accounts Only

Morningstar | 000001 Updated Forecasts and Estimates from 20 Sep 2018

No-moat Ping An Bank’s second-quarter results indicated recovering momentum in the bank’s revenue and earnings growth, attributable to good progress in its retail banking transformation and rising loan rates as a result of financial deleveraging in China. With 5.9% and 6.5% respective year-on-year growth in revenue and net profits, versus the 0.8% and 6.1% respective growth rates in the first quarter, the first-half results were in line with our expectations. The results highlighted the bank’s strong deposit growth and the first expansion in net interest margin, or NIM, following five quarters of contractions. NIM increased by 2 basis points against last quarter. Strong fee-income growth was boosted by the fast-growing credit card business. However, operating efficiency is seeing pressure due to elevated technology investment, and bad-debt ratios for certain loan categories also picked up with the tightening of financial regulation on shadow banking exposure. We retain our CNY 12 fair value estimate, as we have not made material changes to our key assumptions.

Despite weaker financial performance in the short run, we remain positive on Ping An Bank’s long-term outlook, thanks to its strong management execution and fast-paced retail transformation, supported by a vast customer base and the fully integrated online and offline platform of its parent. Shares are undervalued, trading at a 26% discount to our fair value estimate and 0.75 times forward price/book. We believe this is a good entry point for long-term investors, as the market has lost patience in its retail banking transformation and is disappointed by its weaker-than-peer NIM performance, which by its nature requires a long period of time to enhance customer experience and loyalty before customers will place their wealth with the bank.

Growth in total deposit balance seemed mediocre, up 4% from 2017, driven by 0.8% growth in corporate deposits and 19% growth in retail deposits. However, growth momentum was strong when looking into daily average numbers, which indicated 20% and 38% respective growth rates from 2017. We’re impressed by the bank’s ability to achieve a steady corporate deposit base while reducing risky credit exposure by about CNY 500 billion, both on the balance sheet and off the balance sheet, since late 2016. This was supported by the bank’s technology-empowered services, which helped strengthen its position as a government bank, transaction bank, and investment bank for its key strategic customers.

Retail banking remained on a fast growth track, contributing 54% of total loans, 51% of total revenue, and 68% of total net profits, versus 50%, 40%, and 65% in 2017. Credit card loans, the automatic approved small-business loans, and home mortgages were the main growth drivers for the first half, growing 27%, 21%, and 12% from 2017. Growth in auto loans and other automatic approval consumption loans slowed to 8%, primarily due to weak auto sales and the bank’s rising risk aversion as defaults emerged on peer-to-peer platforms. Customer migration was well on track, while growth in retail customers and assets under management inevitably slowed to 10% and 12% from 2017. The group’s platform contributed to about 40% of new wealth management customers and 43% of customer AUM, a similar proportion to last year.

Credit quality showed signs of stabilization, and the provision level has improved, with the bad-debt ratio steady at 1.68% and the bad-debt formation ratio significantly declining to 1.6% from 2.9% in 2017. Meanwhile, provision coverage improved to 176% from 151% in 2017. Prompted by the regulator’s push to recognize loans overdue more than 90 days as bad debts and accelerate bad-debt disposal, provisions covered 96% of total overdue loans, versus 75% in 2017. PAB recognized 80% of total loans overdue more than 90 days, up from 70% in 2017. We expect a steady credit quality outlook for the bank for the near term, as its flagship retail products including home mortgage, credit card, auto loans, and automatically approved loans now accounted for about 46% of total loans, and credit quality is healthy for these categories. However, we also see worsening in certain corporate loans, including in the manufacturing and property industries. Credit costs fell slightly to 2.51% versus 2.7% in 2017, and we expect PAB’s credit cost will remain at a high level to gradually digest credit risks in the corporate sector.