Incident: Ping An Bank disclosed its 2024 quarterly report. It achieved revenue of 38.8 billion yuan in the first quarter, down 14% year on year; realized net profit of 14.9 billion yuan, up 2.3% year on year; 1Q24 non-performing rate rose 1bp to 1.07% from quarter to quarter, and provision coverage fell 16 pct to 262% from quarter to quarter.

Profits continued to increase steadily and slightly, but overall, interest spreads narrowed sharply year over year and mid-term income declined at a high level, which together dragged down deep negative revenue growth. Ping An Bank's revenue in 1Q24 fell 14% year over year (2023: -8.4%). Although it was in line with our forecast expectations, it was significantly weaker than the industry as a whole (expected -15% in the forecast; expected to be -4.4% for the stock bank as a whole); net profit to the mother increased 2.3% year over year, slightly better than the forward-looking judgment (2023:2.1%; forecast 0.4% in the outlook). Judging from the driving factors, ① The decline in interest spreads exceeded expectations, compounded by continuous structural optimization on the asset side, putting pressure on both volume and price. The 1q24 interest spread narrowed by more than 60 bps year on year, dragging down the revenue growth rate of 17.2 pct; the average daily interest-bearing asset growth rate was only about 2% year over year, contributing about 1.8 pct to revenue growth, making it difficult to make up for the volume. ② The mid-term income declined under a high base, and other non-interest income related to financial market investments boosted non-interest performance. Earnings in 1Q24 fell 19% year on year, dragging down revenue growth of 3.8 pct; benefiting from declining market interest rates, significant increases in investment income and fair value changes (other non-interest income increased 57% year over year) contributed 5.2 pct to revenue growth. ③ Provision for continued backfeeding is contributing to a profit growth rate of 15.8pct, supporting a steady increase in profit.

The focus of the first quarterly report: ① Loan premiums are no longer there. How to adjust the asset structure, balance reasonable, and prudent risk-return, for example, is the focus of Ping An Bank at this stage. In the process, interest spreads have narrowed in line with capital market expectations, but we believe that the phased goal of reshaping the balance sheet structure should continue to be watched. The growth rate of Ping An Bank loans slowed to 1.2% in 1Q24, but structurally, by increasing investment in the four basic industries and the three emerging industries, the pressure on loans with high risk premiums in retail continued to fall, and achieved a smooth transition in the restructuring of stock assets. ② Interest spreads declined significantly year over year, but the month-on-month decline subsided. The 1Q24 interest spread fell to 2.01%, a year-on-year decrease of 63 bps, but the quarter-on-month decline was only 11 bps (3Q23/4Q23 decreased 16/19 bps, respectively). ③ Strengthen bad disposal efforts, keep asset quality relatively stable, and focus on real estate risk management and new retail generation and poor digestion. In 1Q24, Ping An Bank's non-performing rate remained low at 1.07%, a slight increase of 1 bps from the beginning of the year. The leading bad indicators were generally the same as at the beginning of the year. At this stage, the generation of defects remains high. New defects are mainly concentrated in real estate, retail consumer goods, and operating loans. Follow-up attention will be paid to the progress of risk management.

Credit investment slowed further in the first quarter, but intensifying structural adjustments and optimizing the stock asset structure were the main tone. Ping An Bank loan growth rate in 1Q24 slowed to 1.2% (3.8% in 4Q23), adding 74.6 billion dollars in loans in a single quarter, a year-on-year decrease of 35.7 billion dollars. Judging from the new loan structure, the resource allocation for the “four basic industries” and the “three major emerging industries” will be increased for public sector refinement. 1Q24 added 155.9 billion dollars in general loans to the public sector, an increase of 75.9 billion yuan over the previous year. Among them, the four basic industries of infrastructure, automotive ecology, utilities, and real estate, as well as the three emerging industries of new manufacturing, new energy, and new lifestyle, added more than 160 billion dollars, an increase of more than 57 billion yuan over the previous year. In contrast, pressure reduction on high-risk premium assets such as credit cards and consumer products will continue to be increased, and the loan structure will be adjusted. There was a net decrease of 99.6 billion dollars in retail loans in 1Q24, and the net pressure drop in a single quarter exceeded the full year of 2023 (a decrease of about 70 billion dollars in 2023). Among them, credit cards, consumer loans, and operating loans decreased net by 31.1 billion dollars/34.2 billion, respectively. Furthermore, due to early loan repayment, the mortgage balance fell slightly by 700 million yuan compared to the beginning of the year.

Interest spreads fell by more than 60 bps year on year. This is also due to the high base for the same period last year. It is noted that the quarterly decline has subsided, and tracking pricing trends during the asset restructuring cycle is the key. Ping An Bank's interest spread for 1Q24 was 2.01%, down 63 bps year on year, but the quarter-on-month decline narrowed to 11 bps (4Q23 down 19 bps; down 37 bps for the full year of 2023). Judging from the specific influencing factors, the decline in loan interest rates was the main drag. The 1Q24 loan interest rate fell 14 bps quarterly (48 bps for the full year of 2023), with public (including discounts) and retail falling 13 bps month-on-month, respectively.

The results of improving debt-side deposit costs are not obvious. There is still an increase from month to month due to regularization. Deposit costs in 1Q24 were 2.22%, up 3 bps from quarter to quarter.

Continue to vigorously clean up stock burdens. Asset quality is generally stable, and focus on risk mitigation in real estate, retail and other fields. The 1q24 Ping An Bank non-performing rate increased by 1bP to 1.07% from quarter to quarter. It is estimated that the bad generation rate after annualization plus write-back and recycling was 1.76% (1.93% in 2023). The attention rate for forward-looking indicators increased by 2 bps to 1.77% from the beginning of the year, and the overdue rate remained flat at 1.42% compared to the beginning of the year. The provision coverage rate decreased by 16 pct to 262% from the beginning of the year, maintaining a relatively good level of risk offsetting among stock banks. Looking at different industries, bad sales were mainly concentrated in public real estate and other industries; the retail non-performing balance declined for the fourth consecutive quarter, but due to the faster drop in scale and pressure, the retail defect rate continued to rise. The 1Q24 non-performing ratio increased by 3 bps to 0.66% from the beginning of the year. Among them, the non-performing real estate ratio increased by 32 bps to 1.18% compared to the beginning of the year, and 870 million new non-performing real estate loans were added in a single quarter (a total increase of 1.7 billion yuan in non-performing loans to the public sector). The retail bad balance fell 1.7% quarter-on-quarter, and declined quarterly since 1Q23, mainly due to the continued resolution of bad credit card balances (down 6% quarter-on-quarter); however, due to the faster drop in loan balance pressure, the retail non-performing rate rose by 4 bps to 1.41% from the beginning of the year. Among them, the credit card non-performing rate remained flat at 2.77%, and the consumer loan/operating loan non-performing ratio rose 16 bps per quarter to 1.39%/0.88% from the beginning of the year.

Investment analysis opinion: Slowing down the pace of expansion, reshaping the asset structure, and seeking a new balance between risk and return is Ping An Bank's development idea in line with the new economic cycle. It is hoped that in the next phase of economic recovery and retail recovery, Ping An Bank will revive high-quality growth superior to that of its peers. Maintaining the profit growth forecast for 2024-2026, based on careful consideration of lowering interest spreads and reducing operating expenses, the net profit to mother is expected to grow at 1.1%, 2.6%, and 5.1% year-on-year respectively in 2024-2026. The current stock price is 0.48 times the 2024 PB, maintaining a “buy” rating.

Risk warning: Economic recovery fell short of expectations, asset quality deteriorated beyond expectations; improvements on the retail demand side fell significantly short of expectations, and interest spreads continued to be under pressure.