Incident: On April 1**** An Bank announced its 2024 quarterly report. 1Q24 achieved revenue, profit before provision, and net profit of 38.77 billion yuan, 27.95 billion, and 14.93 billion, compared with -14%, -14.9%, and +2.3%, respectively.
The annualized weighted average ROE was 13.36%, a year-on-year decrease of 1.02pct. The reviews are as follows:
Revenue expectations are under pressure, and provisions are boosting profits.
Revenue side: Net interest income and median income continued to be pressured, and other non-interest income from proprietary investments performed well. Ping An Bank's revenue for the first quarter of 2024 was -14% year over year, up 5.6 pcts from 2023; the main drag was the continued narrowing of interest spreads and the increase in net interest income. Specifically: ① Net interest income was -21.7% YoY, an increase of 12.3pct over 2023. Mainly, net interest spreads continue to narrow and credit scale growth is slowing down.
Net interest spread for 1Q24 was 2.01%, down 37BP from 2023. Loan balances at the end of the quarter grew by +1.2% year over year, down 1.1 pct from the end of 2023. ② Net revenue from handling fees and commissions was -19.1% year-on-year, an increase of 16.5pct compared to 2023. Among them, due to factors such as reduced fees on banking insurance channels and declining sales of equity funds, wealth management fee revenue was 1,074 billion yuan, a decrease of 54% over the previous year. ③ Other non-interest net income was $6.432 billion, +56.7% year over year; accounting for 16.6% of revenue, up 7.5 pcts year on year. Among them, the profit and loss from changes in fair value was 1,572 billion yuan, an increase of more than 28 times over the previous year; investment income was 4.202 billion yuan, an increase of 42.4% over the previous year.
Cost side: Continue to control expenses, reduce credit costs, and maintain positive net profit growth. The company continues to strengthen the refined management of expenses, reduce costs and increase efficiency. 1Q24 management expenses were -11.7% year-on-year, and the cost-revenue ratio remained low. Credit impairment losses were -35% YoY, loan impairment losses were -14.9% YoY, and credit costs were reduced to 1.29%. The provision coverage rate at the end of the quarter was 261.7%, down 16 pcts from the beginning of the year. Thanks to provisions, net profit increased 2.3% year over year, which is basically in line with expectations.
The growth rate of scale continues to slow, and retail risk appetite is actively adjusted and the structure is optimized.
At the end of March, Ping An Bank's loan balance was +1.2% year-on-year, and the growth rate was 1.1 pct slower than at the end of 23. Q1 New loans were added in a single quarter of 74.5 billion, a year-on-year decrease of 35.7 billion dollars. Among them, public loans increased by 155.9 billion dollars, and personal loans decreased by 99.6 billion dollars (the balance of credit cards, consumer loans, and operating loans all decreased compared to the beginning of the year). Ping An Bank's personal loan business is in the stage of adjustment and optimization; the main thing is to increase the proportion of medium- and low-risk customer groups, raise risk management and control strategies, and entry thresholds.
Net interest spreads continued to narrow, in line with expectations.
The net interest spread for 1Q24 was 2.01%, down 37BP from 2023; down 10BP from 4Q23, in line with expectations. ① Asset side: Under the influence of the 5-year LPR reduction of 25 BP at the beginning of the year, concentrated pricing of loans in the first quarter, and weak demand for effective credit, the yield on 1Q24 loans and interest-bearing assets decreased by 14 BP and 10 BP, respectively. ② Debt side: The rigidity of deposit costs has not improved significantly, and the 1Q24 deposit interest rate increased by 3BP to 2.22% month-on-month. Interest payment rates for personal deposits fell by 1BP month-on-month, reflecting that deposit interest rate cut dividends may gradually begin to be released. Interest rates on public deposits rose 3BP month-on-month. Among them, interest rates on public term deposits increased by 11BP month-on-month, which may be related to continued high interest rates in the foreign currency market.
We judge that asset-side returns may continue to decline in 2024, and debt-side deposit cost reduction dividends are expected to be gradually released; interest spreads will continue to be under pressure, but returns are expected to remain stable after risk adjustment.
Asset quality was generally stable, and asset quality for public real estate, consumer loans, and operating loans fluctuated, and asset quality book indicators rose slightly from low level to month. At the end of the first quarter, the non-performing loan ratio was 1.07%, up 1BP from month to month; the share of concerned loans was 1.77%, up 2 BP from month to month. Loans overdue for more than 90 days have a deviation of 0.61, and the criteria for determining non-compliance are strict. It is estimated that the net generation rate of non-performing loans after write-off was 2.78%, an increase of 0.31 pct over the previous month.
Judging from the quality of segmented loan assets: ① To public: At the end of the first quarter, the non-performing ratio of general corporate loans was 0.78%, up 4BP from the end of 23. Among them, the non-performing ratio of loans to public real estate was 1.18%, up 32BP from the end of 23. ② Retail: At the end of the first quarter, the personal loan non-performing rate was 1.41%, up 4BP from the end of '23. Among them, the credit card defect rate was 2.77%, the same as at the end of 23, and the non-performing balance decreased by 862 million compared to the end of 23.
The consumer loan non-performing ratio was 1.39%, up 16 BP from the end of 23; the non-performing balance increased by 392 million yuan. The operating loan non-performing ratio was 0.88%, up 5BP from the end of '23. The housing mortgage loan non-performing rate was 0.3%, the same as at the end of '23. Under current economic pressure, credit and high-yield loans on the retail side are still under adverse pressure, but with the company actively adjusting risk appetite and optimizing the structure, they are generally expected to be manageable.
Investment advice: We expect Ping An Bank loans to maintain small single-digit growth in 2024. Interest spreads are still under pressure, but the decline is narrowing; non-interest income has recovered steadily, and revenue is expected to remain under pressure. However, considering the overall stability of asset quality and sufficient provisions, net profit is expected to be released smoothly under the demand for sustainable support to the real economy. Net profit is expected to increase by 2%, 4.2%, and 5.2% year-on-year in 2024-2026, corresponding to BVPS of 23.18, 25.73, and 28.42 yuan/share, respectively. The closing price on April 19, 2024 was 10.69 yuan/share, corresponding to a net market ratio of 0.46 times, maintaining the “Highly Recommended” rating.
Risk warning: Economic recovery and physical demand have fallen short of expectations, and the speed of statement expansion, net interest spread levels, and asset quality have been impacted.