Report
Iris Tan
EUR 850.00 For Business Accounts Only

Morningstar | Ping An Bank’s Revenue Growth Accelerated on NIM Expansion; Retail Loan Growth Slowed Significantly

No-moat Ping An Bank’s first-quarter results delivered accelerating year-on-year growth in revenue and net profits of 16% and 13%, respectively, versus the 10% and 7% growth in 2018. The results are roughly in line to deliver our 11% net profit growth forecast for the full year. Importantly, growth in pre-provision operating profit continued to trend up to 17% from 10% in 2018. We expect the bank’s growth momentum for the second quarter will remain strong, fueled by continuous NIM expansion and recovery in fee income. While contrary to market consensus, we expect Ping An Bank’s NIM will face increasing downward pressure in the second half as a result of limited downside of interbank rates and slower growth in higher-return retail loans. Retail loan shares represented nearly 60% of total loans, while credit quality of major retail loan categories showed signs of modest weakening since mid-2018.

We believe the slowdown in retail loan growth is inevitable after a robust expansion starting from 2015. As such we leave our major assumptions unchanged and retain our CNY 13.50 fair value estimate. Shares are fairly valued, trading at 7% premium to our fair value estimate and 1.05 times 2019 forward P/B. While we remain long-term positive on the bank's retail banking transformation on significant potential of customer migration from its parent and strong management execution, we believe the market might have been overoptimistic about the bank's positive earnings impact of the regulator’s stimulus efforts.

Growth in net interest income accelerated to 11% from 1.0% in 2018, driven by a 28-basis-point increase in NIM while interest-earning assets contracted by 1% from the year-ago period. Positively, Ping An Bank’s NIM continued its expansion since the first quarter of 2018. This was attributed to increasing allocation to loans and bond investment, which represented about 59% and 18%, respectively, of total assets to take advantage of rising yields in these categories. On the liability front, we’re pleased to see a strong recovery in deposit growth, with deposit share expanding to 68% of total interest-bearing liabilities. This, coupled with falling interbank funding rate resulted in a 14-basis-point decline in the bank’s total funding costs.

Over the past quarter, we are also delighted to see healthy recovery in the bank’s corporate banking business after a two-year-long restructuring. Corporate deposits grew 6% from 2018 after no growth in the past two years, while corporate loans grew 2% after a two-year contraction. We believe this is a wise strategy given credit quality of corporate loan has improved to industry average level and growth in retail loan will inevitably slow down. We expect the gradual shift in new loan mix will limit further upside for average loan pricing, as corporate loan rates are likely to fall at a faster pace than retail loan rates in the first half of 2019.

The bank saw emerging pressure in retail credit quality while corporate credit quality saw improvement. Bad debt ratio slightly fell to 1.73% from 1.75% in 2018. Bad debt formation rate declined to 1.4% from 2.5% in 2018. Special-mentioned loans continued to fall by 3% from 2018, while loans overdue within 90 days rose 5% and loans overdue more than 90 days remained flattish. After a two-year restructuring, bad debt ratios of corporate loans declined to 2.59%. As retail bad debt ratio reversed the declining trend since 2015, slightly rebounding 3 basis points to 1.1%, Management has prudently slowed down lending related to credit card, auto, and micro business. We expect retail loan growth will see modest rebound in the second half but remain lower than the previous year's level.
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

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

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We have operations in 27 countries.

Analysts
Iris Tan

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