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Morningstar | PSBC’s Revenue Growth Continued to Slow, While Fundamentals Largely Intact

No-moat Postal Savings Bank of China’s, or PSBC’s, first-quarter results reflected slowing growth momentum continued in the past quarter. The results were roughly in line with first-quarter net profit contributing 35% of our estimated full-year profits, or 6% year-on-year growth in 2019. Net profit growth rebounded to 12% from 9.8% in 2018. While the pickup in net profit growth was primarily helped by lower credit costs compared with 2018, total revenue growth also slowed to 8% from 16% in 2018. Accordingly, preprovision operating profits slowed to 14% from 40% in 2018. We expect topline growth is likely to slow further in the coming quarters due to high base in the year-ago period, weakening pricing for inclusive finance and rural banking business, and ongoing bank wealth management business restructuring. We expect to see modest rebound after the third quarter of 2019 as those negative impact gradually abates.

The planned increase in credit card issuance in 2019 should also support improving fee income growth in the second half. Looking into the longer term, PSBC should be able to maintain higher growth than SOE peers thanks to its structural advantages including a strong deposit base, low loan to deposit ratio and greater potential for operating efficiency improvement. As such we leave our key assumptions unchanged and retained our HKD 5.50 per share fair value estimate. The shares are undervalued, trading at 15% discount and 0.7 times 2019 price/book, assuming a 11% growth in book value per share. We believe current valuation level presents an attractive entry point for long-term investors.

First-quarter net interest income grew 11% primarily on a 10.5% growth in interest-earning assets and one basis point increase in net interest margin, or NIM. As the rising NIM trend starting from 2017 has been reverse since the fourth quarter of 2018, PSBC accelerated asset growth to buffer against ongoing NIM contraction. We estimated PSBC’s NIM fell by 16 and 11 basis points respectively in the first quarter and the previous quarter. As PSBC has higher than peer exposure to inclusive finance, which represented about 13% of total loans (versus the 2% to 5% range for SOE peers) and its average loan pricing is higher than peer at 6.36% (versus peers of below 5.30%), we expect PSBC will face higher downward pressure on NIM in coming quarters. We are not too much concerned as its increasing asset allocation into higher-return bank loan will partially offset such impact.

Contrary to quarter-on-quarter increase in bad debt ratios in the fourth quarter of 2018, PSBC’s credit quality showed signs of stabilizing, falling 3 basis points to 0.83% from 0.86% in 2018 and remained the lowest level in the industry. Bad debt formation ratio increased to 0.58% from 0.35% in the year-ago period but remained well below 2018’s level of 1.14%. PSBC continued to increase credit costs, with bad debt reserve covering 3.6 times of total bad debts, the highest in the industry. Despite PSBC’s higher-than-peer exposure to inclusive finance, we are not worried about its credit quality due to a long operating history, high geographic diversification and much lower average loan per customer than peers. Bad debt ratio of such loan category declined by 23 basis points to 2.9%. Besides, other loan categories including private-enterprise loans and small business loans saw similar improvement in credit quality.