PAB’s 1H20 net profit declined 11.2% YoY to RMB13.7bn, implying 35.5% YoY shrink in 2Q20 earnings. The bottom line weakness mainly came from surging provisions (+57.6% YoY) in 2Q20, as the Bank followed regulatory initiative to build up loss reserves and hold back earnings expansion. However, its revenue/PPoP growth continued to outrun sector peers at 14.3%/18.4% YoY. With notable pick-up in provision coverage and stringent NPL recognition, PAB should see greater room to lower credit cost and unleash earnings potential when policy guidance effect wanes.
- Results positives: 1) Credit extension was solid at 2.4% QoQ. Retail loan growth recovered to 3.6% in 2Q20 from 1Q20 stagnation, driven by mortgage (+6.0% QoQ), auto finance (+11.0% QoQ), and personal business loans (+15.1% QoQ). 2) Non-interest income rose 19.1% YoY in 2Q20, as net fee income gained 13.6% YoY, and trading and investment return grew 34.2% YoY. As a result, revenue structure improved with 36.8% (+2.1ppt QoQ) non-interest income contribution; 3) Cost-income ratio fell 2.5ppt YoY to 27.7%, indicating better operating efficiency; 4) Asset quality remained healthy. NPL ratio was flat at 1.65%, and provision coverage climbed 15ppt QoQ to 215%, higher than joint-stock banks’ average of 204%. Credit card NPL ratio edged up 3bp QoQ, while corporate NPL ratio further slid 5bp QoQ. 5) Steady growth in retail client base. Number of retail/wealth/PB client rose 3.1%/7.7%/8.5% QoQ, and retail AUM increased 8.6% QoQ to RMB2.32tn.
- Results negatives: 1) Deposits shrank 3.1% QoQ, pushing LDR to 100%. Proportion of structured deposits stayed elevated at 22.4%. 2) 2Q20 NIM narrowed 1bp QoQ to 2.59%, as asset yield contraction outweighed funding cost retreat. 3) Capital adequacy ratio dropped, with 27bp/31bp QoQ decline in CET-1/total CAR, due to sluggish earnings and cash dividend payout in 2Q20.
- Maintain BUY and trim TP to RMB18.9. We cut FY20/21 earnings forecast by 12-14%, as we lifted credit cost assumption by 20-24bp to reflect PAB’s prudent provisioning against potential asset quality deterioration. Our revised TP of RMB18.9 is based on 1.24x (from 1.28x) target P/B and FY20E BVPS of RMB15.3.
