2Q16earnings in line with expectations
PAB reported 1H16NPAT of Rmb12.3bn, +6% yoy, 52% of FY16E GSe/Windconsensus NPAT. Growth for 2Q16profits moderated to +4% yoy and PPOP to16% yoy, as a softer top line was largely offset by lower staff costs and slowerprovision growth. NPLs are still under pressure, but we see no furtheracceleration. Key trends:(1) 2Q top-line growth moderated to 5% yoy vs 1Qof 33% (excl. VAT impact, 2Q yoy growth was c. 10%). This is partly due to ac. 16bp qoq NIM decline (based on daily avg. balance), mainly on the 53bpqoq fall of loan yields and VAT impact since May, and muted yoy fee growthfrom the high base in 2Q15on the yoy drop in consultant fees.(2) Good costcontrol. Excl. business tax, 2Q expenses were -5% yoy vs +5% in 1H, mainlyon staff cost cuts. Mgmt. expects its cost-income ratio to decline further.(3)Asset quality remains under pressure, but we see no NPL acceleration trend.We estimate NPL formation at 3.1% in 2Q (1Q16: 3.0%; 2Q15: 2.2%), despitethe overdue ratio being flat hoh at 4.5%. NPL ratio of personal commercialloans rose to 5.3% (2015: 4.3%), implying ongoing NPL recognition of MSEs.(4) Loan mix showed less exposure to retail loans and a higher portion ofdiscount bills and infra-related loans. PAB is slowing its retail loan businesspost prior expansion, though its retail client base grew 9%. According to itsanalyst briefing, PAB is adopting a barbell strategy, focusing on large andmicro clients.(5) Off-balance sheet WMPs’ AUM rapidly rose 46% hoh tocomprise 38% of PAB’s deposits. NSCA investments and repo grew 24% hoh,lifting the adj. loan/deposit ratio to 93% from 89% in 2015.
What to do with the stock
We like PAB’s cross-selling synergy with Ping An Group, but wait to seethe effects of its retail business adjustment and asset quality management.Maintain Neutral and 12m RIM-based TP of Rmb9.08(based on 0.98x2016E P/B). Key risks: Better/worse-than-expected NIM and NPLs.