PAB Earnings: Derisking Exercise Progressing Well, Management Upbeat About the Second Half

We lift our fair value estimate for Ping An Bank, or PAB, to CNY 13 per share from CNY 12 to factor in 3- and 5-basis-point increases in our net interest margin, or NIM, forecasts in 2024 and 2025, following management’s more upbeat business outlook. First-half results are on track to meet our 2024 net profit growth estimate of 1.30%. Though revenue continues to contract year on year by 13% versus a 14% decline in the first quarter, net profit growth remains positive at 1.9%. We think the bank is undervalued, trading at 0.45 times 2024 price/book ratio and a 7% dividend yield. While we prefer China Merchants Bank, China Construction Bank, and Industrial and Commercial Bank of China on higher earnings visibility and stable dividends, we believe PAB remains a high-quality bank among our coverage. PAB’s first interim dividend of CNY 2.46 per 10 shares implies payout ratio of 18.5% versus 30% for full-year 2023, but management hinted an upside potential for the full-year payout, which we expect to be in the 20%-30% range. We believe its high dividend yield of 7% versus 3%-5% for peers and improved earnings visibility should support its share price. We expect PAB to be rerated when China’s property market or consumer sentiment recover, given its more cyclical asset mix.