Supply-side reform stabilized NPL formation.
Our analysis of all listed A-share corporate balance sheets shows the hidden NPL ratiodeclined significantly in 2Q16 to 11.7% from 15.8% in 1Q16. This was likelyunderpinned by the recent rebound in raw material prices. It also explains the recentstabilization of NPL formation as evidenced by the sector's flat NPL ratios.
PPOP growth to remain robust, but weak capital position is a concern.
Ping An Bank has fared well compared to other joint-stock banks in terms of NIM inrecent quarters thanks to continued optimization of its funding structure. Cross-sellingopportunities between subsidiaries of Ping An Group will continue to support feeincome growth in the short/medium term, in our view. That said, we are concernedabout the bank's weak capital position, which will likely remain a short-to-mediumtermoverhang on the stock.
Raising EPS forecasts by 7/5% for 2017/18 on lower credit costs.
We raise our EPS forecasts for Ping An Bank by 7/5% for 2017/18 on slightly lowercredit cost assumptions but still expect Ping An Bank to report only single-digit NPATgrowth for 2016/17 compared to double-digit growth over the past 3 years, as creditcosts will likely be at escalated levels in the medium term.
Valuation: Maintain Neutral rating with new PT lifted 7% to Rmb9.40.
We base our price target on a target P/BV multiple of 0.72x applied to 2017E BVPS ofRmb12.95. We assume a long-term sustainable ROE of 11.0%, cost of equity of 13.3%and long-term growth of 5% to derive our target P/BV.