High receivable exposure hints at inflated earnings
Investments classified as receivables accounted for 13% of Ping An Bank's total assetsas of end-2015, up 25% YoY (Q116: +25% QoQ). Its exposure to investmentreceivables is among the highest of the A-share listed joint-stock banks. Thesereceivables are, in essence, loans that have been repackaged into trust or assetmanagement products, which are provisioned for at a lower rate than ordinary loansdespite carrying a similar level of credit risk.
Growth still robust before provisions but profit eroded by rising credit costs
Judging by NIM, Ping An Bank has performed well compared with other joint-stockbanks over the past few quarters, aided by an improving financing mix, in our view. Webelieve cross-selling opportunities among subsidiaries of Ping An Group will continue tosupport fee income growth over the short and medium term. However, we are morefocused on the bank's asset quality, with rising credit costs representing a significantproblem.
Forecasts now extended to 2020E
Due to rising credit costs, we expect Ping An Bank's NPAT growth to slip into the singledigits in 2016-17E, down from its double-digit rates of the past three years.
Valuation: Maintain Neutral rating; price target down to Rmb8.80
We apply a 0.85x P/BV multiple to our 2016 BVPS estimate of Rmb10.4 to derive ourprice target. Our target P/BV is based on long-term sustainable ROE of 11%, cost ofequity of 12.1% and a long-term growth rate of 5%. Ping An Bank is trading at 0.9x2016E P/BV, with a dividend yield of 1.9%. We believe the shares are fairly valued.