Cost reduction drives further valuation repair; retail banking and wealth management (WM) to optimise IEA/IBL structure and improve NIM. In our view, the last valuation repair since early October benefited from stabilised regulatory policies and the economic recovery, while the next round of valuation repair could be driven by ROE improvements resulting from lower liability costs, operating costs and credit costs. We think Ping An Bank (PAB) and Industrial Bank (INDB) have further potential to reduce liability costs. Thanks to a strong client base and aggressive private banking expansion, PAB can cut its interest-bearing liabilities (IBL) cost by growing demand deposits. With its retail transformation, INDB can develop a strong client base for its wealth management products (WMPs) and improve interest-earning assets (IEA) yield.

Digitalisation reform has optimised PAB’s operating costs and its asset quality has improved notably, in contrast to SPD Bank’s (SPDB) asset quality overhang. PAB’s AI-powered client services R&D has led to a 38% decrease in per client operating cost and a 3.3ppt decline in the cost-to-income (COI) ratio in retail banking in 2017-1H20. After the IT upgrade, PAB’s banking outlets have doubled average assets under management (AUM) and doubled or even tripped average revenue. PAB’s asset quality risks became apparent in August 2020 and the nonperforming loan (NPL) ratio has decline steadily since. SPDB underperformed PAB and INDB in reducing the NPL ratio, along with a marked increase in the 90-day (90D) overdue loans ratio. We expect the inflection point of SPDB’s asset quality to appear later than the previously anticipated 2H21e.

Raise 2020-22e earnings estimates for PAB and INDB but lower 2020-22eearnings estimates for SPDB. To reflect the asset-liability structural optimisation, driven by the retail strategy and the technology-powered operating cost reduction at  PAB and INDB, we raise our 2020-22e attributable net profit estimates by 2.5-16.4% for PAB and by 3.8-45.3% for INDB. We cut our 2020-22e attributable net profit estimates by 11.4-18.8% for SPDB, given its lagging retail business and potential asset quality risks.

We like PAB (Buy) and INDB (Buy). With new earnings estimates, we maintain our Buy rating on PAB with a higher target price of RMB22 (from RMB19), we upgrade our rating on INDB to Buy (from Hold) with a higher target price of RMB25 (from RMB18), and we downgrade our rating on SPDB to Hold (from Buy) with a lower target price of RMB10.90 (from RMB13.80). Key risks: 1) credit risks due to an economic slowdown; 2) tightening regulations; and 3) surge in interbank market rates.