Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Quantitative Analysis

<a href="https://www.smartkarma.com/entities/ping-an-bank-co-ltd-a" target="_blank" data-smartkarma-citation="entities:681:1" rel="noopener">Ping An Bank Co Ltd A (000001 CH) </a>continues to report benign fundamental trends. The dynamics of the P&amp;L numbers, with respect especially to Funding Costs and Income generation, though have improved markedly since FY18, Q119, and Q219. Then, it seemed that a granular deep-dive highlighted risk factors over opportunity. As the wise <a href="https://www.smartkarma.com/profiles/j-brian-waterhouse" target="_blank" data-smartkarma-citation="accounts:1459" rel="noopener">J. Brian Waterhouse</a> is accustomed to utter "Caveat Emptor!". We should have perhaps stuck faithfully to the PH Score. Shares have followed the value-gauge higher. We can all talk ourselves out of a trade. Or we can miss a genuine turnaround. Or we had a point.What has changed? Well, growth in the Interest Income on Loans is now better aligned to the increase in Deposit Costs. The drop in Interest Expenses on Interest-bearing Liabilities is a marked change since the last quarter. Efficiency, as measured by “core jaws” as a result looks a great deal more healthy. In fact, at 489bps, it represents a remarkable turnaround. We were concerned at FY18 about the level of impaired loans at some US$8.5bn, well in excess of NPLs of US$5.1bn. We do not have this data at Q319 so the jury is out, but we do note again a jump (86% YoY) in the “Doubtful Loans” bucket as well as a 13.6% increase in “Loss Loans”. This keeps us vigilant. The 20% rise in asset writedowns on the P&amp;L and elevated Credit Costs, are testament to Asset Quality strains, disguised somewhat by the unmovable NPL ratio. We were also worried about the high proportion of gains from “non-core” or “other non-Interest Income”. Trading gains can be very volatile and cannot be trusted to underpin an investment case. And here we remain somewhat circumspect. At Q319, Interest Income on securities soared by 50% YoY, accounting for 20% of total Gross Interest Income (approximately the level at FY18) while “other non-Interest Income” reached to 31% of PT Profit. The latter is somewhat on the high side relative to the SOEs at least.The PH Score of 8.8 may provide a further tailwind for the shares. Fundamental trends are constructive with positive change in Profitability, in Efficiency, in Margin, in Capitalisation, and in Provisioning, while Asset Quality was stable though Liquidity eroded. The now not-so- low valuation variable adds somewhat to the overall value-quality gauge. We conclude that post a re-rating, shares are fairly priced at a P/Book of 1.2x and a FV of 13%, and that there are better value opportunities in the China banking market such as specific SOEs, China Citic, and China Everbright Bank among options, let alone other jurisdictions. The P&amp;L volatility at Ping An Bank has us stumped.

Ping An Bank Co Ltd A (000001 CH) continues to report benign fundamental trends. The dynamics of the P&amp;L numbers, with respect especially to Funding Costs and Income generation, though have improved markedly since FY18, Q119, and Q219. Then, it seemed that a granular deep-dive highlighted risk factors over opportunity. As the wise J. Brian Waterhouse is accustomed to utter "Caveat Emptor!". We should have perhaps stuck faithfully to the PH Score. Shares have followed the value-gauge higher. We can all talk ourselves out of a trade. Or we can miss a genuine turnaround. Or we had a point.What has changed? Well, growth in the Interest Income on Loans is now better aligned to the increase in Deposit Costs. The drop in Interest Expenses on Interest-bearing Liabilities is a marked change since the last quarter. Efficiency, as measured by “core jaws” as a result looks a great deal more healthy. In fact, at 489bps, it represents a remarkable turnaround. We were concerned at FY18 about the level of impaired loans at some US$8.5bn, well in excess of NPLs of US$5.1bn. We do not have this data at Q319 so the jury is out, but we do note again a jump (86% YoY) in the “Doubtful Loans” bucket as well as a 13.6% increase in “Loss Loans”. This keeps us vigilant. The 20% rise in asset writedowns on the P&amp;L and elevated Credit Costs, are testament to Asset Quality strains, disguised somewhat by the unmovable NPL ratio. We were also worried about the high proportion of gains from “non-core” or “other non-Interest Income”. Trading gains can be very volatile and cannot be trusted to underpin an investment case. And here we remain somewhat circumspect. At Q319, Interest Income on securities soared by 50% YoY, accounting for 20% of total Gross Interest Income (approximately the level at FY18) while “other non-Interest Income” reached to 31% of PT Profit. The latter is somewhat on the high side relative to the SOEs at least.The PH Score of 8.8 may provide a further tailwind for the shares. Fundamental trends are constructive with positive change in Profitability, in Efficiency, in Margin, in Capitalisation, and in Provisioning, while Asset Quality was stable though Liquidity eroded. The now not-so- low valuation variable adds somewhat to the overall value-quality gauge. We conclude that post a re-rating, shares are fairly priced at a P/Book of 1.2x and a FV of 13%, and that there are better value opportunities in the China banking market such as specific SOEs, China Citic, and China Everbright Bank among options, let alone other jurisdictions. The P&amp;L volatility at Ping An Bank has us stumped.

Ping An Bank: It's the Cost of Funding