Core views
Ping An Bank continued its business strategy for the third quarter in 4Q23, continuing to adjust its investment strategy, reducing the share of high-risk and high-priced retail loans on the asset side, while also tightening bad certification standards, actively exposing related risks, and further strengthening the risk bottom line. Although Ping An Bank's leading business strategy will put some pressure on its interest spreads and revenue growth rate in the short term, a cleaner balance sheet will also help it start a new growth cycle earlier than its peers when signs of economic recovery are determined. Furthermore, Ping An Bank raised the 2023 dividend rate to 30%, and the corresponding dividend rate is 7.03%, which is higher than that of peers.
occurrences
On March 14, Ping An Bank announced its 2023 performance report. In 2023, it achieved operating income of 164.699 billion yuan, a year-on-year decrease of 8.4% (9M23: -7.7%), and realized net profit to mother of 46.455 billion yuan, an increase of 2.1% (9M23:8.1%). The 4Q23 defect rate was 1.06%, up 2 bps quarter-on-quarter; 4Q23 provision coverage fell 5pct quarter-on-quarter to 277.6%.
Brief review
1. Revenue for the whole year was under pressure, and there was a slight positive increase in performance. In 2023, Ping An Bank achieved operating income of 164.699 billion yuan, a year-on-year decrease of 8.4%, of which net interest income decreased 8.4% year-on-year, and the decline was further expanded from the previous three quarters. On the one hand, the bank's external operating environment was poor in the fourth quarter, and on the other hand, it was due to Ping An Bank's active adjustment of its business structure during the economic downturn. Interest spreads were pressured by operating strategies, and procedures dragged down revenue; net fee revenue was affected by various rate cuts in the fourth quarter and the “integration of banking and banking reporting” channels for the whole year; Ping An Bank achieved net profit of 46.455 billion yuan in the year, down to 2.1% year-on-year growth, but maintained a slight positive growth rate.
Fewer provisions and an increase in the size of interest-bearing assets are the main reasons for the slight positive increase in Ping An Bank's performance. In terms of performance attributions, fewer provisions and an increase in the size of interest-bearing assets contributed 9.9% and 4.8% to profits, respectively. Meanwhile, narrowing interest spreads, and other non-interest income had a negative impact on profits of 11.5%, 1.3%, and 0.7%, respectively.
In response to the current economic form, Ping An Bank has actively adjusted its investment structure since the second half of 2023 to increase investment in assets with relatively lower risk and more stable returns.
We believe that although Ping An Bank's interest spreads will come under pressure in the short term due to adjustments in its business strategy, a cleaner balance sheet will also help Ping An Bank to start a new growth cycle earlier than its peers when signs of economic recovery are determined.
2. The asset structure was actively optimized, the medium- and low-risk customer base was actively expanded, and the net interest spread continued to narrow. Ping An Bank's net interest spread for 4Q23 was 2.11%, down 19bps from quarter to quarter. Net interest spread in 2023 was 2.38%, down 9bps from 9M23. According to the detailed analysis, the 4Q23 loan interest rate decline of 25 bps month-on-month was the main reason Ping An Bank's net interest spread was under pressure. On the debt side, multiple cuts in deposit listing interest rates have effectively hedged the impact of the deposit regularization trend, and debt costs have remained flat from quarter to quarter.
On the asset side, a stable investment strategy puts pressure on loan pricing in the short term. In terms of price, Ping An Bank's 4Q23 yield on interest-bearing assets fell 19bps to 4.34% from quarter to quarter, loan yield fell 25 bps to 5.08% from quarter to quarter, and 4Q23 retail loan prices fell sharply by 29 bps to 6.10% from quarter to quarter. In terms of asset structure, Ping An Bank's share of loans declined further in 4Q23, falling 1.1 pct to 61.0% from quarter to quarter, while the share of bond investment rose 0.6 pct to 24.9% from quarter to quarter. In terms of credit structure, in the fourth quarter, Ping An Bank continued its investment strategy for the third quarter, actively reducing the size of retail loans. Ping An Bank's 4Q23 retail loan size decreased by 0.1% from quarter to quarter, and the share of retail loans fell 1.7 pct to 58% from quarter to quarter. Among them, the relatively risky credit card and auto finance loan scale decreased by 5.1% and 1.8%, respectively.
On the debt side, the dividends of lower deposit interest rates hedge against the effects of regularization, and costs remain stable. In terms of the average daily deposit structure, the share of Ping An Bank retail time deposits increased by 0.9 pct from quarter to quarter in 4Q23, driving the overall share of time deposits upward, and the trend of deposit fixed-term deposits continues. However, benefiting from multiple cuts in deposit listing interest rates in 2023, the full release of policy dividends effectively hedged the negative impact of the regularization trend. 4Q23 retail and public deposit costs fell 2 bps, 1 bp to 2.34% and 2.12%, respectively, from quarter to quarter, supporting interest-bearing debt costs to remain flat to 2.28% from quarter to quarter.
3. The criteria for determining bad performance have been significantly tightened, and the ability to offset risks is relatively stable. Ping An Bank's 4Q23 defect rate increased 2 bps to 1.06% from quarter to quarter, and 4Q23 plus write-off defect generation rate (estimated value) increased 57 bps from quarter to quarter by 256 bps. Looking at bad by industry, the ratio of bad loans to public and retail loans increased by 2 bps and 4 bps from quarter to quarter to 0.63% and 1.37%, respectively. The month-on-month rise in the non-performing rate in the fourth quarter was due, on the one hand, to the unfavorable exposure as scheduled after some support policies were withdrawn, but on the other hand, it was also due to Ping An Bank's active risk exposure after tightening the criteria for bad certification, and the risk bottom line was further strengthened.
In terms of forward-looking indicators, as of 4Q23, Ping An Bank's interest rate fell 2 bps to 1.75% from quarter to quarter, and the overdue rate fell 1 bps to 1.42% from quarter to quarter, and potential risks continued to be clarified. In terms of bad certification standards, in 4Q23, Ping An Bank loans overdue for 90 days and 60 days or more decreased by 7 bps and 6 bps to 59% and 74%, respectively, from quarter to quarter. The bad certification standards were significantly tightened, and asset quality was further consolidated. The 4Q23 provision coverage rate decreased by 5 pct from quarter to quarter to 277.6%, and remained relatively high, and risk offsetting capacity was stable.
4. The quantity and quality of wealth management clients has risen sharply, and the average household size has been growing steadily. By the end of 2023, Ping An Bank's retail customer AUM and private banking customer AUM had increased by 12.4% and 18.2% respectively from the beginning of the year to 4.03 trillion and 1.92 trillion yuan; wealth customers were 1.377,500 and 90,200 private bank customers, up 8.9% and 12.0% respectively from the beginning of the year. In terms of average household size, Ping An Bank's average account AUM and average private bank AUM increased by 10.3% and 5.5%, respectively, over the same period last year, and the average household size achieved steady growth.
Wealth management revenues are under pressure due to lower rates. In 2023, Ping An Bank achieved wealth management fee revenue of 65.84% billion yuan, an increase of 2.1% year on year. Among them, agent wealth management revenue decreased 5.7% year on year to 948 million yuan, and agent insurance revenue increased 50.7% year on year to 2,989 billion yuan. The growth rates were all declining from the previous three quarters.
5. Investment advice and profit forecast: Ping An Bank 4Q23 continued its business strategy for the third quarter, continued to adjust investment strategies, reduce the share of high-risk and high-priced retail loans on the asset side, and at the same time tightened bad certification standards, actively exposed related risks, and further strengthened the risk bottom line. Although Ping An Bank's leading business strategy will put some pressure on its interest spreads and revenue growth rate in the short term, a cleaner balance sheet will also help it start a new growth cycle earlier than its peers when signs of economic recovery are determined. Revenue growth in 2024, 2025, and 2026 is expected to be -7.2%, 4.4%, 6.5%, and profit growth rates of 2.4%, 6.1%, and 9.4%. Furthermore, Ping An Bank raised the 2023 dividend rate to 30%, and the corresponding dividend rate is 7.03%, which is higher than that of peers. Currently, Ping An Bank's stock price is only 0.46 times 24-year PB. The valuation is severely suppressed by factors such as insufficient expectations for economic recovery and pessimistic market sentiment. The cost performance ratio is outstanding, and the purchase rating is maintained.
6. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.