Report
Iris Tan
EUR 850.00 For Business Accounts Only

Morningstar | PAB Continued to Derisk its Balance Sheet in the Past 3Q

No-moat Ping An Bank’s, or PAB's, third-quarter results indicated the company remained on track in its retail business transformation and derisking of its credit portfolio. 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 slightly undervalued, trading at an 8% discount to our fair value estimate and 0.93 times forward price/book.

We are not too concerned about sharp declines in fee income and net interest income over the past quarter, as it was attributable to accounting changes. Under new accounting rules, income from investment under Fair Value through Profit and Loss, or FVPL, are classified into investment income, rather than interest income, and installment fee which were part of fee income was now recorded as interest income. The change also resulted in lower interest-earning assets and higher net interest margin NIM. PAB’s NIM reported a three-basis-point increase to 2.29% for the first three quarters from mid-2018. We believe this was partially due to the distortion by the accounting change where resulted in lower interest-earning assets. We are delighted to see year-on-year deposit growth rebound to 12% from no growth in the year-ago period, driven by 29% and 8% respective increases in retail and corporate deposits. However, such growth came at higher costs as high-yield structured deposits nearly doubled from 2017 and represented about 20% of total deposits. We have yet to see strong improvement in the bank’s deposit base despite a sharp increase in retail banking business contribution.

By the end of the third quarter, retail banking segment contributed 51.2% of total revenue and 68% of net profits, slightly up 0.1 and zero percentage points from mid-2018. Retail loans and retail deposits grew 27% and 29% from the year-ago period, representing 56% of total loans and 20% of total deposits. In line with peers, total loan growth picked up to 12.8% from 11.6%, while corporate loans contracted by 1.8% from the year-ago period. As bad debt ratios of corporate loans climbed to 2.49% from 2.22% in 2017 and represented about 65% of total bad debts, we expect PAB will continue to derisk its corporate loan portfolio. Credit card loans and small business loans are primary growth drivers of retail loans we expect these two categories have higher potential given favorable government policies and fast-growing e-commerce. The bank also reduced its risk exposure in other financial assets, with total financial investments contracting 5% from 2018. This put additional downward pressures to its top line growth.

Credit quality is a bit mixed, with bad debt ratio remaining flat at 1.68%, while the bank accelerated bad debt disposal. Bad debt balance after adding back accumulated write-offs grew 19% from 2017. Special mentioned loans and overdue loans contracted 1% and 4%, respectively, from 2017, while loans overdue more than 90 days rebounded 3% from mid-2018. Its annualized 2.47% credit costs was a bit disappointing when compared with a 2.80% in the year-ago period. As a result, provision coverage fell to 169% from 173% in mid-2016. As loans overdue more than 90 days represented 119% of total bad debts, we expect PAB will increase credit costs to meet its goal of reducing this ratio to one by 2018.
Underlying
Ping An Bank Co. Ltd. Class A

Ping An Bank is providing commercial banking services approved by Bank of China. Co is engaged in the offering of company loans, deposits, trade finance, company wealth management, and company intermediary services; providing personal loans, deposits, bank cards, personal wealth management services, and other personal intermediary services; local and foreign currency tradings; bond investments and other money market operations; and providing central management on non-performing assets, equity investments and nonclassifiable assets, liabilities, revenues and expenditures. As of Dec 31 2013, Co. had total assets of RMB1,891,741,000,000 and total deposits of RMB1,667,791,000,000.

Provider
Morningstar
Morningstar

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Analysts
Iris Tan

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