Ping An Bank:Fundamental recovery takes time;Hold

PAB reported 2Q17 net profit of Rmb6.3bn, up 2% yoy; 1H17 earnings were up 2% yoy, accounting for 51% of our 2017 forecast. The uninspiring 2Q17 results were mainly characterized by higher funding cost, which we believe represents a read-across to other wholesale-funded joint-stock banks (JSBs). NIM fell another 15bps qoq. Asset quality has yet to see major improvement, while capital remains a concern that is not solved by convertible bond issuance. The only sweet spot is the retail strategy, which started to bear fruit in 1H17 with a 40%/64% contribution to revenue/ profit (vs. 29% in 1H16). Net net, we believe it will take more time before we see a fundamental recovery. Hold.

    NIM in 2Q17 was 2.38%, down 15bps qoq or 33bps yoy; we believe it was impacted by a market rate hike and financial deleveraging. Deposit cost was up 11bps qoq to 1.92% and interbank borrowing cost up 28bps qoq to 3.4%. Meanwhile, loan yield continued to decline (5.94% vs. 6.06% in 1Q17). In addition, PAB saw difficulties in growing deposits (up 0.7% yoy).

    Asset quality continued to deteriorate: the NPL ratio nudged up 2bps qoq to 1.76% with the coverage ratio at 161% (163% in 1Q17). The SML ratio stood at 4.14%, up 3bps hoh; meanwhile, >90-day overdue loan/NPL balance remained high at 154% (vs. 158% in 2016). We estimate 2Q17 NPL formation was 284bps, higher than 254bps in 1Q17 but lower than 326bps on average in 2016.

    Weak capital ratio: The CET1 ratio stood at only 8.13% in 2Q17, down 15bps qoq, with RWA density up 35bps qoq to 70.3%. PAB recently announced a Rmb26bn A-share convertible bond plan but we don’t think this can solve the capital issue in the short term. In our view, it may need to further raise capital through a placement and reduce its payout ratio (2016: 12%, vs big 4 banks’ c.30%).

    CIR fell 5.8ppt yoy to 25.9%, driven by a 21% drop in operating expenses. It is worth highlighting that its total employees fell 14% YTD, leading to a 23% yoy decline in labor cost.

    Retail contributed 40% of group revenue and 64% of group profit in 1H17 (29% and 29% in 1H16), which was a positive development in our view. We think this was a result of its strategic focus on retail banking and cross-selling from Ping An Group. We will seek more details during the post-results conference call to be held on 11 August.