We held an investor conference call with PAB on 20 Mar, during which management shared some color on potential impact from COVID-19 and business outlook for FY20. There are likely near-term pressures on margin and asset quality, but the Bank’s successful retail transformation has laid a solid fundamental to weather through economic cycles, in our view.
- Asset quality pressure more visible in 2Q-3Q20. Management expects MSE/corporate in cyclical industries to be the key casualty of COVID-19. That said, we may not see much fluctuation in NPLs in 1Q20, as companies’ existing orders and cash on hand would still be able to support their loan repayment. Lack of demand and break of supply chain will amplify the impact in coming months, even with rising work resumption. PAB sees current retail/corporate loan mix of 60%/40% appropriate and should help to withstand macro uncertainties.
- Retail growth target remains unchanged despite temporary slowdown. Subdued consumption activities will weigh on PAB’s retail loan expansion in 1Q20, but management keeps steady full-year growth target for key retail products, such as credit card and auto finance. Retail business remains as the Bank’s strategic focus, and the quality of customers migrated from other business channels of Ping An Group is expected to be better than that of market peers.
- NIM may narrow but should outperform peers. Credit loosening and LPR reform have been driving down banks’ asset yields at faster pace than liability cost, despite lower MLF/reverse repo rates. PAB’s strategy is to shorten its liability duration, such as increasing proportion of demand deposits and lifting interbank borrowing during low-interest period. Management is confident to maintain current NIM advantage over peers.
- “Double 15” target stays on track. Management emphasized that PAB is still striving to achieve the “Double 15” target (for both earnings growth and ROE) set by Ping An Group. Prudent impairment charges in 4Q19 and book value dilution from CB conversion were major overhangs on current ROE.
- Maintain BUY and RMB 19.80 TP. We keep our FY20-21E earnings forecasts unchanged, but raise NPL ratio estimates by 10bp/7bp to 1.68%/1.53% to reflect higher NPL formation due to COVID-19. Given PAB’s largely intact long-term outlook, we suggest to accumulate the stock after recent share price dips.
