Date: October 7, 2024
Broker Name: CGS International

Macroeconomic Overview and Policy Impact

A series of policy measures implemented in late September and early October 2024 have positively impacted the sentiment around Ping An Bank (PAB). These measures, designed to revitalize confidence, alleviate macroeconomic uncertainties, and stabilize the property sector, have helped reduce concerns about PAB’s asset quality. The bank is expected to benefit from policies aimed at stimulating household consumption and supporting the property sector. As of the first half of 2024, PAB had a non-mortgage consumer lending mix of 28%, higher than the peer average of 9%, positioning it as a key beneficiary of these policy shifts.

Asset Quality and Valuation

With coordinated policy measures reducing downside risks related to PAB’s asset quality, analysts expect a stabilization in China’s ‘stressed’ corporate NPL (non-performing loan) ratio. This metric, which worsened in the first two quarters of 2024 after improvement throughout 2023, shows signs of improvement. The easing of asset quality concerns has led to a reduction in PAB’s asset quality valuation discount, now at 37%, compared to the previous 44%.

Earnings Forecast and NIM Pressures

Despite the improving sentiment, Ping An Bank continues to face challenges with its pre-provisioning operating profit (PPOP) growth. The forecast for PPOP growth over FY24-26 has been lowered, with net interest margins (NIM) showing no signs of recovery due to a US rate cut cycle. Any benefits from loan prime rate (LPR) cuts are expected to lag behind the reduction in deposit yields. As a result, earnings estimates for FY24-26F have been cut by 5.4-17.7%, primarily driven by weakening PPOP growth.

Updated Target Price and Add Rating

Despite the challenges, the report reiterates an Add rating for PAB, citing its high dividend yield and its potential to benefit from a rebound in household consumption. The target price has been raised to RMB17.70, up from RMB11.90, reflecting reduced asset quality concerns and an improved capital ratio. The key potential catalysts for a stock re-rating include stronger loan demand and a broader economic recovery.

Financial Highlights and Key Metrics

• FY24F EPS Cut: 5.4%
• FY25F EPS Cut: 13.2%
• FY26F EPS Cut: 17.7%
• Target Price: RMB17.70
• Previous Target Price: RMB11.90
• Current Price: RMB12.21
• Market Capitalization: US$33.79 billion
• Dividend Yield (FY24F): 5.96%

Risks and Downside Scenarios

The downside risks to PAB’s performance include a worse-than-expected economic slowdown, which could exacerbate asset quality concerns. Additionally, more significant-than-expected cuts to the loan prime rate could further pressure PAB’s net interest margins, eroding profitability.

ESG Initiatives

PAB’s ESG (Environmental, Social, and Governance) performance has been steadily improving. The bank received a C+ combined ESG score from LSEG in 2023, driven by its commitment to green finance and rural development. PAB has invested RMB117 billion in poverty alleviation and industry revitalization efforts as of December 2023. Moving forward, PAB aims to enhance its contribution to China’s carbon neutrality goals by expanding its green finance initiatives, including green insurance, green investment, and green credit.