Ping An Bank: Revenue Further Declined on Weakening NIM, Lowering Fair Value on Slower Growth

Ping An Bank’s 000001, or PAB’s, year-to-September 2023 net profit growth decelerated to 8% year on year from 15% in the first half, as total revenue further contracted by 8% versus a 4% decline in the first half on weaker-than-expected net interest margin, or NIM, and lower investment income. We reduce our fair value estimate to CNY 14 from CNY 17 per share, after lowering our 2023 and 2024 NIM projections by 7 and 6 basis points, respectively, which result in 4- and 2-percentage-point declines in 2023 and 2024 net profit growths. The results reaffirm our view that retail-heavy banks are more adversely affected by slow economic activities, while PAB’s challenges are likely magnified by its ongoing aggressive de-risking campaign in its retail lending business. This is leading to a shift to low-yield and low-risk mortgage loans and title deed-secured loans. We expect PAB to continue to face greater-than-peer revenue pressures in the fourth quarter and likely in the first half of 2024, as new loan rates adjust down with the significant loan mix shift, and with greater fee income headwinds brought by the ongoing bancassurance commission rate cut.

PAB is undervalued, trading at 0.5 times 2023 price/book. Despite near-term challenges, we appreciate management’s strong execution and expect its proactive de-risking and slow asset expansion during this credit downcycle should translate to better long-term growth when consumer spending recovers. We remain long-term positive about PAB thanks to its competitive strength in retail banking, as evidenced by the resilient double-digit growth in both retail assets under management, or AUM, and wealth management services income. September retail AUM and private bank AUM grew 13% and 21% year on year, respectively, and year-on-year growth in nonprivate bank AUM also rebounded to 7.3% from a 3% low in June.