平安银行：Profit expansion back on track;Asset quality a bright spot

Results positives: 1) Loan growth was solid at 3.1% QoQ, mainly driven by retail loans (+5.7% QoQ). In particular, new mortgage (+7.5% QoQ) and auto loans (+10.4% QoQ) remained strong, and credit card resumed expansion (+3.0% QoQ) from 1H20 contraction. Proportion of retail loans increased to 58% of total loans as of 3Q20. 2) Asset quality improved notably. PAB accelerated NPL disposal in 3Q20. As a result, NPL ratio dropped 33bp QoQ to 1.32%, and provision coverage further climbed to 3.4ppt QoQ to 218%. NPLs still covered 104% of >60day overdue loans, indicating stringent loss recognition. 3) Net fee income was up 32.6% YoY, likely on strong bank card and agency services fees. 4) Cost-income ratio fell 1.4ppt YoY to 29% in 3Q20, suggesting better operating efficiency; 5) Stable expansion in retail client base. Number of retail/ wealth/ private banking client rose 1.9%/4.5%/8.2% QoQ. Retail AUM increased 7.2% QoQ to RMB2.49tn.

Results negatives: 1) NIM declined 11bp QoQ to 2.48%. Loan yield slid 32bp QoQ, likely on write-off in retail loans past due and the Bank’s more prudent lending appetite. Lower deposit cost was partly offset by rising interbank funding cost, as market rates rebounded in 3Q20. 2) Trading and investment gain was down 72% YoY, likely due to bond yield hike in 3Q20. 3) Deposits rose 2.5% QoQ, slower than loan growth. LDR increased to 100.5%. 4) Capital position weakened, with 5bp/10bp QoQ decline in Tier1/total CAR.

Maintain BUY and RMB22.8 TP. We keep earnings forecast unchanged, and our TP of RMB22.8 is derived from 1.5x target P/B and FY20E BVPS of RMB15.2.