Ping An Bank: Solid Credit Quality Despite Increasing Top-Line Growth Challenges

We lower our fair value estimate on Ping An Bank 000001, or PAB, to CNY 17.00 from CNY 19.00 after indications of further retail loan pricing pressure on its earnings. First-half 2023 net profit growth accelerated to 14.9% year on year from 13.6% in the first quarter on lower provision expense and operating cost savings, largely in line with our expectation. However, the lower expenses are mitigating a further 25-basis-point contraction in net interest margin, or NIM, that is worse than its peers. This indicates that PAB is more sensitive to intensifying competition in retail loan pricing especially as the consumption recovery has stalled. While we think PAB is inexpensive at the current share price level, trading at a 0.5 times 2023 price/book ratio, investors may need to have a longer holding period given our view for a weaker-than-peer second-half revenue growth outlook.

Credit quality showed marginal improvement. The nonperforming loan, or NPL, ratio declined 2 basis points to 1.03% from March. Provision coverage improved 1.1 percentage points to 292% from the first quarter. Other asset quality indicators, including the special-mentioned loan ratio and overdue loan ratio, reported mild improvements from March by 1 and 13 basis points to 1.74% and 1.4%, respectively. Positively, the retail NPL ratio also reported quarter-on-quarter improvement of 6 basis points to 1.35%, though still 3 basis point higher from end-2022. Despite growing concerns about Chinese bank’s property exposure, PAB’s property developer NPL ratio further declined 21 basis points to 1.01% from 1.22% in March, well below the above 4% NPL ratios for most peers.