Robust PPOP growth to offset higher impairment charge Key trends of 1Q16 results Ping An Bank (PAB) released 1Q16 results with net profit of Rmb6.1bn, up 8.1% yoy. The bank delivered strong PPOP growth of 44% yoy, due mainly to aggressive asset allocation. Its exposure to relatively higher-yielding but riskier receivable investments grew notably by 25% qoq to account for 14% of total assets. The growth came at the expense of capital consumption, with its CET-1 ratio declining by 33bps to 8.70% at March-end. Key trends of 1Q16 results PPOP growth of 44% yoy was a result of net interest income growth of 21% yoy and fee income growth of 50% yoy, offset by rising credit costs of 308bps (1Q15: 177bps). NIM stayed resilient with a decline of 2bps qoq to 2.87% in 1Q16 (+14bps yoy), mainly due to strong growth in receivable investments, limited mortgage exposure (3.6% of loan book) and bond swap with lower-yielding tranches. Net fee income grew by 50.4% yoy, mainly driven by wealth management business. Total WMP balance of the bank reached Rmb1.04trn in 1Q16, up 40% from the beginning of the year. Asset quality deteriorated further in 1Q16 with total NPLs up 12% qoq to account for 1.56% of total loans (4Q15: 1.45%). We estimate its gross NPL formation rate in 1Q16 moderated to 294bps (2H15: 314bps). SML rose by 7.9% qoq to account for 4.31% of loans (4Q15: 4.15%). With credit cost of 308bps charged in 1Q16, NPL coverage dropped to 161% (4Q15: 166%) with a slightly higher gross coverage ratio of 2.52% (4Q15: 2.41%). Credit allocation leaned towards corporate sector, with new corporate loans accounting for 91% of total new loans in 1Q16. In contrast to the sector trend, its retail loan balance fell slightly by 0.7% qoq. Fast capital consumption with total RWA up 8.1% qoq in 1Q16, outpacing asset growth of 6.9% qoq on the back of fast expansion in receivables investment. As a result, the CET-1 ratio dropped 33bps qoq to 8.70%. Due to Rmb20bn preferred shares issued in March, tier-1 and total CAR rose 78bps and 67bps qoq to 9.81% and 11.61%, respectively. Valuation and risks We value the bank using a three-stage Gordon Growth Model (PV= (ROE-g)/(COE-g)), with our target price based on 2016E book value. Key downside risks: weaker-than-expected asset quality deterioration; faster-than-expected capital consumption; weaker-than-expected synergies with Ping An Group.

Strong PPOP growth to offset higher provisions; Buy maintained. Ping An Bank (PAB) reported 9M15 NPAT of Rmb17.7bn, up 13.0% yoy,accounting for 81% of our 2015 full-year forecasts. Its 3Q15 NPAT ofRmb6.2bn (up 9.5% yoy) was mainly driven by robust PPOP growth of 31%yoy, offset by elevated credit costs of 234bps. We estimate the bank recordeda higher NPL formation rate of 313bps in 3Q15 (2Q15: 215bps), partly due totighter NPL classification during the quarter, as evidenced by falling specialmention loan balance and less overdue loans beyond 90 days as a percentageof NPL balance. Reflecting strong growth momentum on product innovationand group synergy to offset credit risk, we maintain our Buy rating on PAB. 3Q15 – running the numbers. PAB’s NIM expanded by 16bps yoy (or up 7bps qoq) to 2.76%, together withAIEA up 16% yoy, leading to a strong growth in net interest income of 23%yoy. Its NIM expansion was mainly due to 1) falling cost in deposits andcertificates of deposits issued on policy easing; 2) rising portion of higheryieldingpersonal loans, e.g. Dai Dai Ping An. Fee income growth softened to29% yoy in 3Q15 (2Q15: up 83% yoy) due mainly to stock market consolidationand seasonality of advisory fee income. With 3Q15 Opex growing only by12.8% yoy against 23.4% yoy for total revenue, its cost-to-income ratio dippedby 3.6% yoy to 38.8%. With loan growth of 22% yoy exceeding deposit growthof 14% yoy, PAB’s LDR rose by 4.3% yoy to 70%. Rising NPL formation on tighter bad loan classification – a positive sign. Despite a stable NPL ratio at 1.34% as of 3Q15, if incorporating the gross NPLwrite-off of Rmb8.9bn, we estimate the bank recorded a higher gross NPLformation rate of 313bps, compared with 215bps in 2Q15. We believe PABmay have started to strengthen NPL classification, as we note its SML ratiohas dropped by 16bps qoq to 4.30% in 3Q15. Meanwhile, the bank’s overduebalance fell by 9% qoq to 4.56% of loan book (down 54bps qoq). As a result,overdue loans beyond 90 days accounted for 235% of NPLs, down from 270%in 2Q15. PAB’s NPLs are more concentrated in retail loans with an NPL ratio of2.61%, while corporate loan book only recorded an NPL ratio of 0.64%. Withcredit costs of 234bps in 3Q15 (3Q14: 168bps), NPL coverage and provision-toloanratio dropped to 167% and 2.24%, respectively. Strengthened capital positions, with strong liquidity ratio. PAB’s CET-1 ratio, tier-1 ratio and total CAR improved to 9.14%, 9.14% and11.08% as of 3Q15, up by 29bps, 29bps and 12bos qoq, respectively. The bankreported liquidity ratio of 67% and liquidity coverage ratio of 125% at Sept-end,well above the regulatory floor of 25% and 70%. During 9M15, PAB hasobtained 3.03mn customers by migration through intra-group cross-selling,which contributed 49% of total new customers and 78% of deposit growth.

A small beat with stable operating trends and better-than-peers asset quality. Bank of Beijing (BOBJ) reported 1H15 NPAT of Rmb10bn, up 13.4% yoy, whichwas 3.5% ahead of our estimates and made up 58% of our full-year forecasts. The results were driven by PPOP growth of 18.8% yoy and a stable credit costof 86bps in 1H15. The bank’s asset quality trend is less likely a concern thanthose of peers, with NPL formation rate of merely 29bps in 1H15 on ourestimates. Reflecting prudent risk management, stable operating trends inMSE lending and retail banking segment and solid deposit franchise, wemaintain BOBJ as our top pick among A-share banks. On our estimates, thebank is currently trading at 0.7x 2015E P/B and 4.3x 2015E P/E, against ROE of16.9%. Stable asset quality with low NPL formation rate and strong provision coverage. BOBJ’s asset quality remained stable in 2Q15 as NPL balance merely edged upby 3.4% qoq in 2Q15, resulting in lower NPL ratio of 0.92% (1Q15: 0.93%). Given zero NPL write-off/disposal in 1H15, we estimate gross NPL formationrate to be only 29bps (2H14: 46bps). Contrary to sector trends, its specialmention loan contracted by 13% hoh to 1.05% of total loans as of 2Q15 (1Q15:1.31%). Overdue loans grew modestly by 23% hoh to 1.51% of total loans. Asthe bank charged credit costs of 70bps in 2Q15, NPL coverage ratio and grosscoverage ratio stayed largely flat at 307% (+2% qoq) and 2.83% (-1bps qoq). 2Q15 – running the numbers. In 2Q15, BOBJ reported NPAT of Rmb5.1bn, up by 1.3% qoq and 16.8% yoy. The solid results were driven by strong PPOP growth of 19.2% yoy and stablecredit cost of 70bps. With AIEA expansion of 10% yoy and stable NIM (-4bpsyoy), net interest income grew by 10% yoy in 2Q15. Net fee income grew by41% yoy on the back of robust growth in agency service (+55% yoy) andguarantee and commitment business (+79% yoy). As revenue growth of 16%yoy outpaced OpEx growth of 8.4% yoy, CIR dipped by 1.9% yoy to 27.4% in2Q15. Its core tier-1 ratio declined by 56bps hoh to 8.60% due to cash dividendof Rmb2.64bn booked in 1H15, while total CAR was boosted by issuance ofRmb18bn capital bonds to 11.51% (+43bps hoh) as of June 2015. Its preferredshare worth Rmb15bn is still pending for regulatory approval, which may boostits tier-1 ratio by 125bps upon completion of issuance. Strong business momentum in MSE lending and retail banking. BOBJ grew its MSEs by 12% hoh in 1H15 to Rmb222bn, which accounted for30% of total loan book. On retail side, retail customer base rose by 8.5% hoh to13.2mn with interest income and fee income from retail segment up 20% yoyand 32% yoy respectively. BOBJ accumulatively issued 16.64mn socialinsurance cards, ranking No.1 across the nation. As such, the bank managedto maintain a strong deposit market share of 8% in Beijing as of 1H15.

Lowering TP by 16.7% on stock dividendsWe cut Bank of Beijing (BOBJ)'s target price by 16.6% to Rmb12.00(Rmb14.39 prior) to reflect the bank's stock dividends of two bonus shares perevery 10 shares with the ex-dividend date of 17 July 2015, which increase itsnumber of outstanding shares from 10,560mn to 12,672mn. We do not expectsignificant changes on the bank's fundamentals. Maintain Buy and top pick among A-share banksWe remain our Buy rating on the stock and mark it our top pick among A-sharebanks, given its solid MSE lending and deposit franchise in home market,prudent risk management and initiatives in internet finance (cooperation withXiaomi and Tencent). We value BOBJ based on full growth 3-stage Gordon-Growth Model (GGM) with a target price of Rmb12.00 (1.4x 2015E P/B),implying 34% upside. On our estimates, BOBJ is trading at 1.0x 2015E P/B and6.5x 2015E P/E.

Cooperation with Xiaomi to tap 25-30mn potential customers; Buy。 BOBJ announced after market close today that it has entered into acooperative contract with Beijing Xiaomi Technology Co (Xiaomi), a leadingmobile internet company in China, to cooperate in mobile payment, lendingand distribution of WMPs. While the direct earnings contribution in the shortterm should be marginal (only 3% of FY14E NPAT), we believe the cooperationshould potentially help the bank to tap a broader customer base (10mn existingretail customers at BOBJ, compared to 25-30mn existing smartphone users atXiaomi) and to reduce operating cost. With its lowest exposure to risky nonstandardizedassets (5.4% of total assets vs. sectors’ 19.2%) and solid depositfranchise in Beijing area, we believe the bank’s fundamental remains strongand has not been fully priced in the current valuation of 0.75x FY14E P/B. Maintain Buy and the top pick among A-share city commercial banks.。 Cooperation on mobile payment, lending and WMP distributionAccording to the statement released by BOBJ, it will work jointly with Xiaomion: 1) promotion of standardized personal loan products; 2) distribution ofWMPs, insurance products and money market funds; 3) mobile paymentbased on Near Field Communication (NFC) function. Leveraged on Xiaomi’sfast-growing customer base (18.7mn smartphones sold in 2013 vs.7.2mn in2012), the bank should be able to generate more cross-selling opportunities. Marginal earnings impact from the cooperation in the short term。 In the short term, we see limited direct earnings impact. Firstly, if we assume1% of Xiaomi’s smartphone uses converted to customers of BOBJ’sconsumption loan products (average loan size of Rmb50k and loan yield at9%), the accretion to FY14E earnings should be around 3%. Secondly, webelieve the bank’s cooperation with Xiaomi should be nonexclusive, asevidenced by past experiences where Alibaba and Tencent had cooperatedwith multiple banks, suggesting potential margin squeeze due to competitions.