An attractive retail bank as China transits to a domestic consumption-driven economy

With its retail-oriented banking structure and strong support from its parent group, Ping An Insurance (HKEX:2318), we believe Ping An Bank (SHE:000001) has great potential to grow as China transits to a domestic consumption-driven economy. In this article, we will provide an update on Ping An Bank, as well as some key takeaways from its FY2021 results.

Ferlyn Tan |  Published on 13 May 2022

• Unlike the Big Four banks, Ping An Bank’s (SHE:000001) focus is on its retail business, which we believe will be its key earnings driver going forward. 

• For its upcoming FY2021 results, PAB pre-announced that it managed to deliver a set of strong results, recording a positive growth of 25.6% year-on-year (YoY) in net income. 

• We believe there is still untapped potential within the consumer credit space, a trend which PAB can benefit from.

• PAB’s wealth management segment is also expected to grow as wealthy investors are constantly looking for more avenues to park and grow their assets. 

• The positive effects of investments in technology can be seen in PAB’s improved efficiency and lower cost-to-income ratio over the years.

• Based on a fair PB of 1.2X, we arrived at a target price of CNY 25.2, which represents an upside potential of over 70% compared to its last traded price of CNY 14.6 on 11 May 2022.

Armed with its superior technology capabilities and innovations, Ping An Bank (SHE:000001) is undoubtedly one of the top retail banks in China. As shared in our previous article, PAB has embarked on its digital transformation strategy in 2016 and has recently been named the World’s Best Digital Bank 2020 by Euromoney, the first Chinese institution to win this award. 

Unlike the Big Four banks, PAB’s focus is on the retail business, which spans three key business segments: consumer finance, retail services for the mass affluent, as well as private banking and wealth management for the high-net-worth individuals (HNWI). 

However, over the past year, PAB suffered a sell-off due to concerns over China’s real estate sector. One key reason behind this correction was PAB’s slightly higher-than-average real estate loan exposure. In this article, we provide an update on Ping An Bank and share some key takeaways from its FY2021 results.

Key takeaways from PAB’s FY2021 results

Generally, PAB has delivered a set of strong results, recording a positive growth of 25.6% year-on-year (YoY) in net income, largely driven by its retail business (Table 1). 

Table 1: PAB’s FY2021 results key takeaways

	FY2021 key takeaways
Ping An Bank (SHE:000001)	– FY2021 net profit attributable to shareholders increased by 25.6% YoY – Loan loss provision continued to rise in 4Q21, with FY2021 loan loss reserve ratio increasing by 57bps YoY – FY2021 total loans and deposits grew by 15% and 10% respectively since the start of 2021 – FY2021 ROE grew to 10.8%, compared to FY2020’s ROE of 9.6% – Annualised NIM fell by 7bps to 2.79% since the start of the year – CET1 ratio fell slightly to 8.6% (minimum 7.5%)
Source: Bloomberg Finance L.P., iFAST compilationsData as of FY2021 report

In FY2021, PAB’s non-performing loans fell by 16 basis points (bps) to 1.02%, and its impairment losses on credit, as a percentage of loan assets, has also improved. This was due to a high base effect, given that the peak of the COVID-19 pandemic occurred in the first half of 2020.

In comparison to 2H20, we observed that impairment losses in 1H21 grew by 20% before normalising in 2H21. This sudden surge in impairment losses came from its corporate clients. While there is no breakdown of the impairment losses, we opine that this could be in response to its higher-than-average loan exposure to China’s real estate developers. Relevant provisions with regards to China Fortune Land were also made in its 1H21 results.

While PAB may have set aside higher provisions, we acknowledge that it may still face higher credit risk given its higher-than-average real estate exposure. However, PAB shared that it will strengthen its risk management measures going forward, lending mainly to developers focused on Tier-1, and selected Tier-2 and Tier-3 cities with net population inflows, as well as developers that demonstrate strong cash-generating capabilities. In its 4Q21 briefing, the management also shared that the underlying assets of its developer loans are in a good position, with valid collaterals for all those loans. 

Retail business will be PAB’s key earnings driver 

Going forward, PAB’s retail business will be a key earnings driver for the company. Its retail business generally focuses on three business segments: consumer finance, retail services for the mass affluent, as well as private banking and wealth management for the high-net-worth individuals (HNWI).  

Looking at its consumer finance business segment, as of FY2021, over 60% of the bank’s loans were extended to retail customers, mostly made up of mortgage, auto and credit card related loans. 

As China transits to a domestic consumption-driven economy, we believe this signals a huge opportunity for PAB’s retail banking business to grow. For instance, credit card loans are usually a function of the consumption level of an economy. At the same time, the increasing urbanisation rate in China also suggests room for growth in demand for property and cars. While we acknowledge that property demand is likely to slow down given the cooling measures imposed, we believe that the relaxation of hukou ?? (i.e. household registration) restriction will continue to create a sustainable demand for property, albeit at a slower pace compared to historical growth rates. 

Therefore, we believe there is still untapped potential within the consumer credit space, a trend which PAB can benefit from. 

Meanwhile, we also see huge growth potential in PAB’s retail and HNWIs wealth management business segment. As China’s disposable income and personal savings increase, these wealthy investors will look for more avenues to park and grow their assets, especially if they no longer see real estate as an investment that is as attractive as before. Therefore, we believe the growth in its wealth management segment will be a key earnings driver for PAB’s retail business going forward (Chart 1).

Chart 1: PAB’s fast-growing AUM 

Reaping benefits from its technology investments 

We believe PAB’s investment in technology is one of its key differentiating factors from other retail banks. Leveraging on its parent group Ping An Insurance’s resources, PAB upgraded and digitalised itself using technologies, such as artificial intelligence (AI), big data, cloud computing, and biological recognition.

The positive effects of investments in technology can be seen in PAB’s improved efficiency and lower cost-to-income ratio over the years. As shared in our previous article, revenue is no longer limited by its number of employees, thanks to the accelerated adoption of digital channels. We observed that PAB’s income per staff continued to improve, with its cost-to-income ratio lowering even further by about 1 percentage point in FY2021. 

Chart 2: PAB has the highest and fastest growth rate when it comes to income per staff

Leveraging on the Ping An ecosystem

Amidst the global tightening cycle, China is moving in the opposite direction. Both the one-year and five-year loan prime rates (LPR) have been cut to tackle an economic slowdown. Looking ahead, we can expect PAB’s net interest margins (NIM) to narrow further as a result of the rate cuts.

However, as highlighted previously, one of PAB’s greatest competitive advantages is the support from its parent group, Ping An Insurance (HKEX:2318). For instance, under the Ping An ecosystem business model, Ping An Insurance will help to channel corporate deposits to PAB, while PAB will focus on extending retail loans. Given how the cost of corporate deposits is generally lower than retail deposits, and how retail loans have higher yields than corporate loans, this has helped to provide a level of support for PAB’s net interest margin in today’s low-interest-rate environment (Chart 3). 

Chart 3: PAB’s NIM seems to be more resilient than its peers 

Moreover, PAB has guided that it will optimise its asset and liabilities structure to mitigate the negative impact on NIM. It also strives to continue achieving the highest NIM among comparable peers. 

Key investment risks

At this juncture, we believe that further lockdowns across the cities as a result of rising COVID-19 cases in China is one of the biggest risks faced by PAB.  

We observed that March retail sales have fallen by 3.5% year-on-year, likely due to the recent COVID-19 flare-ups and mobility restrictions in some major cities such as Shanghai. April’s data is likely to remain sluggish due to the extended lockdowns and we believe this will directly impact PAB’s retail business, card fees, and retail loans. At the same time, the banks may also face challenges in terms of asset quality amidst the lockdown, leading to higher provisions in anticipation of rising defaults in the coming quarter.  

Therefore, in the event that this lockdown is extended again, there may be further downside risks to the banks’ prospects and profitability. 

Consider PAB to take part in China’s fast-growing retail banking space

Investors can participate in China’s fast-growing retail banking space with Ping An Bank (SHE:00001). We believe PAB will emerge as one of the biggest winners as China transits to a domestic-consumption driven economy. Coupled with the strong support from its parent group, Ping An Insurance (HKEX:2318), we see strong potential for PAB to grow in the coming years. 

Due to the sell-off driven by concerns over China’s real estate sector, PAB is currently trading at a more attractive level. Based on a fair PB of 1.2X, we arrived at a 2023 target price of CNY 25.2, which represents an upside potential of over 70% compared to its last traded price of CNY 14.6 as of 13 May 2022 (Table 2). 

Table 2: PAB’s valuation

	Ping An Bank (SHE:000001)
Fair PB	1.2X
Target price (CNY)	25.2
Current price (CNY)	14.6
Upside potential	72.7%
Average dividend yield	2.2%
Source: Bloomberg Finance L.P., iFAST estimationsData as of 13 May 2022

Looking ahead, with its retail-oriented banking structure and strong support from its parent group, Ping An Insurance (HKEX:2318), we believe Ping An Bank has great potential to grow as China transits to a domestic-consumption driven economy.