Moving onto the start of a new era
? We see a P/BV re-rating as a 7-year falling ROE cycle reverses, partly due to falling credit costs amid 10-year-high provisioning buffers & rising recoveries.
? We also see its 3-year trend of rising investor interest resuming, after falling in 2H21 partly due to property concerns, which we think has been priced in.
? In particular, the number of shares held by its top 50 shareholders rose almost four-fold over 2Q18 – 2Q21 (Fig 2), before falling slightly since 2Q21.
? Its NIM also remains less impacted than peers by monetary easing, in our view. Reiterate Add rating; TP rises to Rmb25.50. PAB remains a top pick.
We see a P/BV re-rating as a 7-year falling ROE cycle reverses
FY21 ROE rose to 10.8%, up 1.2% pts yoy based on its preliminary FY21 results release. This ROE increase, the first since FY14, is important as investors can now have faith in PAB’s level of sustainable ROEs for the first time in seven years, which is a critical part of the GGM used for bank’s valuation and a core component of investability, in our view.
ROEs can continue to rise driven by multiple factors
We expect ROEs to continue to rise (Fig 1), driven by (i) falling credit costs (Fig 2) amidst improving asset quality and growing writebacks/recoveries (Fig 7) as provisioning buffers are already at 10-year highs (Fig 4), (ii) rebounding fee income growth, and (iii) a better-than-peers net interest margin (NIM) performance, with its loans more resilient to monetary easing versus peers given its highest-of-peers consumer loan mix (Fig 13).
Expect the trend of rapidly rising investor appetite to resume
There has been a significant rise in institutional investor interest in PAB’s shares, with the number of shares owned by its top 50 institutional shareholders almost quadrupling over 2Q18 – 2Q21, before falling 4% over 2Q21 – 4Q21 (Fig 8). We think this was driven by PAB’s notable share price underperformance versus peers (Fig 9), due in part to investor concerns about asset quality amidst property developer weakness. Such concerns are more than priced-in, in our view, as this segment only comprises 10% of PAB’s 1H21 loans (Fig 10), with the 1H21 NPL ratio of this segment the lowest among peers (Fig 11).
Capital raising risks remain as our key concern
While capital levels remain our biggest concern (3Q21’s core Tier 1 ratio at 8.6% or 81bp above new regulatory minimum requirements and the lowest of the banks under our coverage; see Fig 14), we think this issue is well known and is arguably already priced in. We also think its share price could rally strongly once it raises capital, similar to when it successfully placed a convertible bond in early-2019.
Reiterate Add; stress-test adjusted TP rises slightly to Rmb25.5
The slight TP rise is primarily driven by a 4% increase in FY21 – FY23F EPS estimates and hence higher ROE (Fig 16). Potential re-rating catalysts: better asset quality & ROE. Key downside risks: capital raising risks, Covid-19 outbreaks and stricter regulations.