Ping An Bank’s Q4 2022 Posted Positive Year-Over-Year Growth in Fee Income

No-moat Ping An Bank 000001, or PAB, reported 2022 revenue growth of 6.2% and net profit growth of 25.3% year on year, in line with its preliminary results. The results were mixed. We are pleased to see that fourth-quarter fee income growth turned positive year on year and the number of wealth customers and asset under management, or AUM, continued a fast expansion, despite escalating economic challenges in the last quarter of 2022. However, fourth-quarter net interest margin, or NIM, reported larger-than-expected contraction by 10 basis points to 2.68% from the third quarter. We expect such downward pressure will continue into the first quarter but should gradually mitigate after the second quarter. We lower our 2023 NIM assumption by 2 basis points to 2.65%, but the negative valuation impact is offset by lower 2023 credit cost of 4 basis points, thus leaving to our fair value estimate for PAB unchanged at CNY 19 per A share.

The stock dropped 2.4% on March 9, the day after the results announcement, and we think this is due to market concerns about the accelerating NIM contraction. We believe the headwinds for NIM and the wealth management business are industrywide. But PAB should be less negatively impacted thanks to its lower-than-peer exposure to medium- to long-term policy loans and strong growth momentum in bancassurance sales. Our top picks for Chinese banks are CMB and PAB, as we expect these retail-focus banks should benefit from higher earning elasticity when consumer sentiment recovers in 2023. The bank remains undervalued, trading at a 30% discount to our valuation and 0.7 times 2023 price/book ratio.