Incident: Ping An Bank announced its third quarterly report for 2023. Revenue was 127.63 billion yuan, down 7.7% year on year, and net profit for the parent company was 39.64 billion yuan, up 8.1% year on year.

Performance: Interest spreads are still declining, the growth rate of processing fee revenue has maintained positive growth, and net exchange gain+fair value change profit and loss are dragging down other non-interest performance.

Revenue for the first three quarters was -7.7% year-on-year, an increase of 4pc from the mid-term report (Q3 -15.6% in a single quarter). Interest spreads and other revenue fluctuations were the main drag; profit growth also fell to 8.1%. Specifically:

1) Net interest income: The first three quarters fell 6.2%, an increase of 4pc from the interim report. The net interest spread for the Q3 quarter was 2.3%, down 17 bps from Q2, mainly under pressure on interest rates on the asset side.

A. Asset side: Q3 The yield on interest-bearing assets fell 14 bps to 4.53% month-on-month, and loan interest rates fell 19 bps to 5.33%. Among them, interest rates on public loans rose 5 bps to 4.03% month-on-month, which is expected to be mainly affected by rising interest rates in the foreign currency market; in addition to relatively weak retail demand, the company has also moderately increased credit investment for low-risk businesses and high-quality customers. Although interest rates have declined, the risk is manageable.

B. Debt side: The Q3 interest-paying debt cost ratio (2.28%) increased slightly by 2 bps over the previous month. Among them, deposit interest rates rose slightly by 1 bps to 2.20%, of which there was a slight increase of 1 bp for public deposits, which is relatively stable. Retail deposits increased by 3 bps, mainly affected by the trend of regularization.

2) Non-interest income: The first three quarters fell 11.3% year on year, and the decline increased by 4 pc from the interim report.

A. Net revenue from handling fees and commissions increased by 2.5% in the first three quarters (a further increase of 0.5pc from the mid-report growth rate). Among them, wealth management revenue and handling fee revenue increased 10.4% year on year (agency insurance revenue +98.3% YoY formed good support).

B. Other non-interest income: Q3's quarterly revenue was 3.7 billion yuan, a year-on-year decrease of 2.9 billion yuan. Among them, profit and loss from changes in fair value in a single quarter was 450 million yuan, a year-on-year decrease of 2 billion yuan, mainly affected by fluctuations in the bond market; net exchange income was 82 million yuan, a year-on-year decrease of 1.9 billion yuan, mainly affected by exchange rate changes.

Asset quality: Poor retail sales continue to improve, while bad generation continues to decline.

1) At the end of September, the bad rate was 1.04%, up 1 bps from month to month, attention rate was 1.77%, up 3 bps month on month, overdue rate 1.43%, and a slight increase of 3 bps month on month. The provision coverage rate was 283%, down 9 pc from month to month, and the loan ratio decreased by 6 bps to 2.94%. Although there are some fluctuations in the data, it is expected that the absolute level is still leading the stock bank.

Let's take a look at the split:

A. The non-performing ratio for public (excluding notes) loans (0.72%) increased by 8 bps over the previous month, but remained at a relatively low level. Among them, the non-performing rate for public real estate was 1.47%, an increase of 46 bps over the previous month, which is still relatively manageable. The company itself is also actively reducing related exposure. At the end of September, the balance of real estate-related real and contingent credit, proprietary bond investments, and self-operated non-standard investments that bear credit risk was 296.8 billion yuan; the total balance of business that did not bear credit risk, such as financial investment, entrusted loans, cooperative agency management and consignment sales trusts and funds, and lead underwriting debt financing instruments, etc., which did not bear credit risk, totaled 79.5 billion yuan, a net decrease of 26.8 billion yuan and 10.1 billion yuan, respectively, from the end of the previous year, accounting for 5.38% and 1.44% of total assets.

B. The retail non-performing rate (1.33%) decreased by 2 bps month-on-month. Among them, the non-performing rates for gas and credit cards were 1.28% and 2.64%, respectively, and decreased by 10 bps and 24 bps from month to month, respectively. Although the non-performing rate of housing mortgages and licensed mortgages fluctuated, it was still at a low level (0.41%); the non-performing rate of new loans was 1.81%, the non-performing rate increased by 36 bps over the previous month, and the non-performing balance only increased slightly, but due to the net reduction in scale, the non-performing rate increased by a certain margin. In the future, as residents' repayment capacity recovers and the company itself strengthens risk management (such as increasing investment in low-risk businesses), it is expected that the quality of retail assets will remain stable, moderate and positive.

2) Increase write-off efforts (44.6 billion yuan of loans were written off in the first three quarters, +9.6% year-on-year), which is expected to be mainly for retail loans. The estimated bad generation rate after write-off was 1.82%, down 16 bps from the interim report.

3) Continue to step up efforts to recover non-performing assets. 26.9 billion yuan of non-performing assets were recovered in the first three quarters, of which 15 billion yuan of principal amount of non-performing assets had been written off (including the recovery of 13.7 billion yuan of non-performing loans that had already been written off).

Assets and liabilities: Deposits are growing steadily, and retail loans continue to be restructured.

1) At the end of September, total assets were 5.52 trillion yuan, an increase of 15.9 billion yuan from the end of June, of which loans were 3.43 trillion yuan, a year-on-year decrease of 13 billion yuan. Mainly, there was a net decrease of 17.6 billion yuan in retail loans and 4.2 billion yuan in depreciation of notes and a steady increase of 8.7 billion yuan for public loans. Looking at retail loans internally, housing mortgage loans increased by 5.6 billion yuan, while new loans, auto loans, and credit cards fell by 21.8 billion yuan, 8.7 billion yuan, and 12 billion yuan respectively. The main reason is that, on the one hand, consumer demand is still weak, and on the other hand, the quality of retail assets in the industry has fluctuated since last year, and Ping An Bank's investment strategy has also been more cautious. Other personal loans (licensed mortgages, personal business loans, etc.) increased by a total of 19.3 billion yuan.

2) At the end of September, the deposit size reached 3.45 trillion yuan, an increase of 73.3 billion yuan over the previous year, of which public and personal deposits increased by 44.2 billion yuan and 29.1 billion yuan respectively. Structurally, the share of current deposits (average daily balance) increased slightly by 0.1 pc to 24.7% month-on-month, and remained stable.

Business: Wealth management has performed well, the scale of financial management has continued to improve month-on-month, and consignment insurance is still growing at a high rate.

1) On the retail side, the total number of retail customers in the bank reached 125 million at the end of September, down 1.45 million from the end of June. It is expected to be mainly related to supervision promoting banks to clean up “sleeping accounts.” AUM was +3.5% month-on-month to close to $4 trillion, and it is expected that deposits and consignment insurance will all contribute to a certain extent. Among them, private bank customers increased 3.2% month-on-month to 89,300, and private AUM increased 0.8% to 1.90 trillion. The entire bank continued to take advantage of Ping An Group's comprehensive financial services. Agent insurance revenue increased 98.3% year on year in the first three quarters and maintained high growth. Furthermore, the financial balance continued to rise to 968 billion yuan month-on-month, and agent personal financial management revenue increased 5.3% year on year in the first three quarters. Revenue from wealth management fees increased by 10.4% year-on-year. Although there was a slight decrease from the interim report, it remained at a good level.

2) On the public side, the driving role of dropshipping and batch businesses continued to increase, bringing in deposits of $286.7 billion at the end of September (+27.5% compared to the beginning of the year).

Investment advice: In the short term, Q3 performance is under overall pressure due to declining interest spreads and non-interest fluctuations, but steady asset quality (poor retail sales continue to improve), active adjustment of the business structure, and steady development of wealth management in a weak market (revenue from the consignment insurance business remains doubled year-on-year), laying a solid foundation for medium- to long-term development. It is expected that future performance still has room for improvement and maintains a “buy” rating.

Risk warning: Macroeconomic downturn; consumption recovery falls short of expectations.