Moving up the risk-reward curve
? FY21’s 23% yoy net profit growth led to FY21 ROE finally rising yoy for the first time in seven years.
? Capital raising risk remains our biggest concern, with its FY21 core Tier 1 ratio at 8.6%, 85bp above the regulatory minimum and lowest of peers.
? 4Q21 saw higher risk-higher yielding personal loans strongly rebound qoq, even as 4Q21 special mention loans & <90 days loans overdue notably rose.
? Reiterate Add rating. TP cut to Rmb22.7 from Rmb25.5 on 4.9-12.1% lower FY22F-24F EPS stemming from higher credit cost assumptions.
Strong FY21 results; key issue is capital levels
Ping An Bank’s (PAB) FY21 net profit grew 23% yoy (4Q21: 11.8% yoy), in line with our forecast. This is the strongest net profit growth since FY14’s 30% yoy. FY21F ROE was 10.85%, its first annual rise yoy since FY14. Preliminary profit figures had been earlier announced on 13 Jan 2022. Our key concern remains its FY21 core Tier 1 ratio of 8.6% (-9bp yoy), which is the lowest of the banks under our coverage.
What we liked about the results
In addition to its strong FY21 net profit growth and first ROE rise in seven years, we also liked: i) the continued build-up of provisioning buffers — 4Q21 provisioning coverage ratio was 288.4% (+87% pts yoy, +20% pts qoq); 4Q21 loan loss reserve ratio was 2.94% (+57bp yoy, +13bp qoq); and ii) 4Q21 pre-provision operating profit (PPOP) growth was 21.7% yoy (3Q21: 10.3% yoy; FY21: 11.7% yoy), with 4Q21 net fee income growth at 11.7% yoy (3Q21: -4.1% yoy; FY21: 11.5% yoy).
What we did not like about the results
In addition its capital levels, we are concerned about: i) the ratio of risk-weighted assets to total assets, which rose to 72.5%, the highest since at least FY08; and ii) near-term asset quality pressure, as 4Q21 special mention loan ratio was 1.42% (+5bp qoq, +30bp yoy), with the 4Q21 ratio of loans <90 days overdue at 1.14% (+50bp qoq). 4Q21 nonperforming loan (NPL) ratio was 1.02% (-3bp qoq, -16bp yoy); 4Q21 >90 days overdue loan ratio was 0.74% (-2bp qoq, -14bp yoy).
What else we found interesting about the results
i) 4Q21 Xinyidai loans rose 8.7% yoy and 7.5% qoq, while credit card loans rose 17.4% yoy and 6.2% qoq; these loans are relatively high yield; ii) FY21 credit costs was 2.53% (- 26bp yoy), while 4Q21 credit costs was 2.67% (+24bp yoy); iii) 4Q21 net interest margin (NIM) was 2.74% (-1bp qoq); iv) 4Q21 NPL recognition ratio was 138% (-10bp qoq).
Reiterate Add; stress-test-adjusted GGM-based TP cut to Rmb22.7
Our GGM-based TP falls to Rmb22.7, on 4.9%-12.1% lower FY22F-24F EPS stemming from higher credit costs. Potential re-rating catalysts: better asset quality and ROE. Key downside risks: another wave of Covid-19 and stricter regulations.