PAB reported FY19 net profit of RMB 28.2bn, up 13.6% YoY and in line with its preliminary earnings announcement. Key results positives are stable NIM, lower CIR, stricter NPL recognition, and higher dividend payout. We remain upbeat on PAB’s growth prospects and see major catalysts from: 1) continued better-than-peers NIM and asset quality trend, thanks to greater retail exposure; 2) successful transformation in corporate banking, with support from Ping An Group; and 3) management’s boost for wealth management business, in order to make up the long-standing weakness in funding cost.
- Results positives: 1) Loan growth accelerated to 8.0% in 4Q19, as capital was replenished after the conversion of RMB 26bn CB in 3Q19. Corporate loan growth picked up to 10% QoQ, driving a strong deposit growth of 6.3% QoQ. 2) NIM remained stable QoQ at 2.62%, as 10bp decline in loan yield was offset by 8bp/3bp retreat in deposit/interbank funding costs; 3) 4Q19 cost-income ratio fell 2.5ppt YoY to 31.1%, indicating better operating efficiency; 4) Asset quality improved with stricter loss recognition. NPL ratio edged down 3bp QoQ to 1.65%, mainly from 22bp contraction in corporate NPL ratio. Moreover, NPLs has covered 122%/104% of 90/60-day overdue loans, implying less formation pressure going forward; 5) Retail client base continued to expand. No. of retail client rose 3.6% QoQ to 97.1mn, and retail AUM increased 5.9% QoQ to RMB 1.98tn. 6) Management proposed a higher dividend payout of 15%, up 5ppts from FY18.
- Results negatives: 1) Capital ratio declined in 4Q19. CET-1/total CAR slid 64bp/14bp QoQ to 9.1%/13.2% on faster RWA expansion. 2) Retail NPL ratio rose 10bp HoH to 1.19%, due to 29bp and 12bp HoH increase in NPL ratio for credit card (1.66%) and auto finance loans (0.74%). As a precautionary measure, PAB slowed down the growth of credit card overdraft to 5.8%, vs 11.6% total loan growth in 2H19.
- Maintain BUY and lower TP to RMB 19.80. We trim our FY20-21 earnings estimates by 4.2-7.5%, as we lower NIM forecast by 3-5bp and raise credit cost assumption by 8-10bp to reflect COVID-19’s impact. That said, we believe recent share price correction offers a good opportunity to accumulate the stock. Our revised RMB 19.8 TP is based on 1.28x target P/B and FY20E BVPS of RMB 15.5.
