Barely in-line results.
Ping An Bank reported NPAT of RMB12.292bn for H116, up 6.1% YoY and slightlybehind our estimate of RMB12.895bn on higher-than-expected credit costs. NPLincreased 7.3% QoQ in Q216 yet NPL ratio remained flat QoQ at 1.56% as total loansgrowth accelerated to 7.5% QoQ in Q216 as compared to 3.8% in Q116. That said,cost-income ratio was slightly lower than we expected at 28.8% vs our estimate of28.9% thanks to continued cost discipline.
Bad loans showed no sign of improvement yet.
Though NPL ratio appeared to be stabilised in Q216 at 1.56%, unchanged from lastquarter, non-performing loans actually still climbed 7.5% from Q116. Other factorspossibly contributing to the flat NPL ratio 1) accelerated write-off as evidenced byhigher provisioning expenses and lower coverage ratio in 2Q16 and 2) accelerated loangrowth (denominator effect). Specially mentioned loans ratio also edged up slightly to4.34% in Q216 from Q116.
Strong PPOP growth as expected but capital eroded faster than expected.
H116 PPOP came in at RMB36.156bn, up 28.3% driven by both strong net interestincome (NII) and fee income growth with strong cost control. Total loans growth wasstronger than expected at 11.7%% HoH in H116 hence faster capital consumption wasimminent. Core tier 1 ratio as at end-H116 stood at 8.5%, down from 9.0% as at end-2015, one of the lowest among our coverage.
Valuation: high re-cap risk, Neutral rating.
The stock is currently trading at 0.88x 2016E P/B. Despite its strong PPOP growth, wemaintain our Neutral rating considering its high recap risk. Our price target is based on0.85x target P/B, adopting Rmb10.4 2016E BVPS. We derive our target P/B based onthe assumptions of long-term sustainable ROE of 11%, equity cost of 12.1% andterminal growth of 5%.