Why Ping An Bank's new NPL spike does not signal sharp asset quality deterioration

NPL formation rate rose to 4.17% in 4Q from 2.96% in 3Q.

Ping An Bank (PAB), Ping An Group’s 58%-owned subsidiary, released its 2016 results. According to Maybank Kim Eng, net profit rose 3.4% YoY to CNY22.6b (US$3.2b) in 2016, in-line with expectations and slightly below consensus by 2%.

"The abnormal spike in 4Q new NPLs may raise questions, but we saw evidence that this was just the result of kitchen sinking." 

Here's more from Maybank Kim Eng:

Solid pre-provision profit growth amid cost control
PAB delivered a solid pre-provision profit growth of 27% YoY in 4Q16, as strict control in operating expenses (-37%) more than offset the weak operating income growth (4.3%) amid lower fees and trading income.

Overall loan growth was strong at 21%/3% YoY/QoQ, led by mortgages and consumer loans. NIM also widened 6bps QoQ to 2.72% in 4Q16. We believe PAB will continue to pursue its transformation from corporate bank into a retail franchise with its new management team.

New NPL spike was a likely result of kitchen sinking
The bank’s new NPL formation rate rose to 4.17% in 4Q from 2.96% in 3Q. We believe the unusual spike was kitchen sinking for the new leadership, rather than a sharp deterioration in asset quality.

Two pieces of evidence could support our view: 1) more SMLs were classified as NPLs in 4Q, but the overall SML + NPL ratio remained stable; and 2) the ratio of NPLs to 90D overdue loans increased significantly in 4Q (i.e. more conservative NPL recognition), but 90D overdue loan ratio declined.