Model adjustment
? We adjust FY21F-23F EPS by 0.7-4.5% to reflect our view of a stronger-than-expected FY21F and a weaker economy in FY22F-23F.
? Policy risk has also been milder than we had previously expected and hence we cut our policy risk valuation discount from 50% to 40%.
? Upgrade to Add from Hold. Our TP rises to Rmb3.90 from Rmb2.70 due to valuation roll-forward and a reduced policy risk valuation discount.
Stronger-than-expected FY21F and a weaker FY22F-23F
We forecast FY21F EPS to accelerate to 11% yoy, the strongest since FY12’s 18.8% yoy, mainly due to lower credit costs. We then conservatively expect FY22F EPS growth to slow to 7.7% on a weaker economy, before rebounding to 9% in FY23F.
Milder-than-expected policy risk
We had previously been concerned that given the worsening economy in 2H21, EPS growth would have been more significantly impacted due to policymaker pressure to ‘surrender’ profits; China banks were asked to surrender Rmb1.5tr of profits back in 2020 (see Between a rock and a hard place dated 18 Jun 2020). However, the policy risk has been milder than expected, with ABC likely to report EPS growth in FY21F that hit a nine-year high, in our view. As such, we cut our policy risk valuation discount from 50% to
40%.
Upgrade to Add from Hold; TP raised to Rmb3.90 from Rmb2.70
We value ABC-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to the ‘true’ corporate NPL ratio of 10.5% used within our stress test. However, due to the lower policy risk valuation discount and a valuation roll-forward where we now derive our target price by applying our target P/BV multiples to FY22F BVPS, our TP rises to Rmb3.90 from Rmb2.70. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.