Key points of investment
Ping An Bank's dividend ratio increased from 12% exceeding expectations to 30%, and the static dividend rate reached 7%.
Significant increase in dividends to enhance shareholder returns
In 2023, Ping An Bank plans to increase its dividend ratio sharply from 12% in 2022 to 30%, corresponding to a static dividend rate of 7%. We believe it is based on: ① increasing shareholders' return on cash dividends; ② Ping An Bank's endogenous capital balance is sufficient; the 23Q4 core tier 1 capital adequacy ratio increased 0.58pc to 9.22% compared to the beginning of '23, and the net capital increase brought about 10% after ROE dividends, which is significantly higher than the 5% growth rate of RWA.
Ping An Bank's earlier announcement stated that it “intends to steadily increase the dividend ratio on the premise that the profit and capital adequacy ratio meet continuous operation and long-term development.” We believe that during the business adjustment period, Ping An Bank will still be able to maintain a high dividend ratio while the scale growth rate of Ping An Bank remains low.
Business adjustments are painful, and bad things are generating high levels
Looking at dynamic indicators, the real bad TTM generation rate in 23Q4 remained high at 2.45% month-on-month, but the bad TTM generation rate increased (34 bps to 2.47% higher than 23Q3). We speculate that the pressure drop in high-yield and high-risk retail businesses brought risk exposure, which was a pain of business adjustment. According to static indicators, the non-performing rate increased slightly by 2 bps to 1.06% month-on-month, of which the retail loan non-performing rate increased by 4 bps. Looking ahead, Ping An Bank's bad retail sales generation is expected to remain at a high level, and is expected to improve marginally and steadily in the second half of 2024.
The profit economy is declining, and we are looking forward to a steady recovery
Ping An Bank's revenue and profit growth rates in 2023 were -8.4% and 2.1%, respectively, down 0.8 and 6.1 pc from the previous three quarters, respectively. The main sources of pressure are stagnant increases in scale and declining interest spreads due to business restructuring.
(1) The scale growth rate declined. At the end of 23Q4, Ping An Bank's total assets increased 5.0% year on year, and the growth rate decreased by 1.2pc month on month; retail loan balance fell 3.4% month-on-month at the end of 23Q4, making up for public loans (3.8% month-on-month increase), and overall scale growth slowed. With overall retail demand weak and banks actively adjusting risk appetite, this trend is likely to continue in 2024. (2) Interest spreads continued to be adjusted. Interest spreads in the 23Q4 quarter fell 19 bps month-on-month to 2.11%, mainly due to retail loan yields. We expect Ping An Bank to be still in the business adjustment stage in 2024, and revenue pressure will still be strong; however, provisions are still strong, and it is expected to achieve positive profit growth.
Profit forecasting and valuation
Ping An Bank's 23A dividend ratio exceeded expectations and increased to 30%; profits declined due to pain in business adjustments, and a steady recovery is expected. Ping An Bank's net profit is expected to increase by 0.30%/2.35%/7.83% year-on-year in 2024-2026, corresponding to BPS 22.27/23.86/25.63 yuan. The current price corresponds to 0.46/0.43/0.40 times PB. Ping An Bank was given a target valuation of 0.62 x PB in 2024, with a target price of 13.88 yuan/share, and 36% of the current price space.
Risk warning: The macroeconomic economy has stalled, and the bad situation has been greatly exposed.