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Leveraged to growth

  • We like PAB for its ROE turnaround potential, its strong consumer lending business and its ability to record strong net profit growth.
  • While its capital ratios are still relatively low, we like its shift to more conservative NPL recognition policies and its buildup of provisioning buffers.
  • Reiterate Add rating. TP cut to Rmb24.9 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5% pt to 10.5%.
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Elevated investor concerns over asset quality & policy risks

We think rising asset quality pressures are manageable from an EPS point of view, for Ping An Bank (PAB), given its sizeable provisioning buffers and conservative nonperforming loan (NPL) recognition ratios. Nevertheless, we think bank share prices could struggle to perform as we believe both property sector’s stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.

Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns about the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% (vs. 9% previously).

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Reiterate Add rating; TP cut to Rmb24.90

We value PAB using a stress-test adjusted GGM. There are no changes to our FY21F- 23F EPS estimates. However, due to a 1.5% pt higher corporate NPL ratio assumption used within our stress test, our TP is cut to Rmb24.90, from Rmb27.20. Potential rerating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.