PSBC’s 1Q22 results beats our expectation and market consensus. Revenue increased 10.14% YoY to RMB 85.2 bn (NII +4.09% YoY, Fee&commission income +39.59% YoY). Net profit grew 17.34% YoY to RMB 25 bn. NPL ratio stabilized at 0.82% and NIM compressed 4 bps to 2.32%. Maintain BUY on PSBC (1658 HK) with unchanged target price of HK$8.40. PSBC is our top pick in banking sector.
　　Total asset grew 5.45% QoQ to RMB 13.27 tn, driven by 5.5% QoQ of loan growth. Deposit grew 4.98% QoQ and total liability increased 5.41% QoQ to RMB 12.43 tn. Strong growth on net profit lifts annualized ROA and ROE to 0.78% and 14.82%, up 4 bps YoY and 2 bps YoY respectively.
　　SME loan and agricultural-related loan are still the drivers of loan growth in 2022. After pandemic, we expect the bank will also increase loan on infrastructure and clean energy to support the real economy.
　　Optimizing asset and liability structure to maintain a high profitability during loan rate decline. 98.56% of new issued loan goes to real economy and LDR and loan to asset increased 28 bps and 2 bps QoQ. Meanwhile, the bank cut high cost deposit (3-yrs high yield deposit) and focused on acquiring value deposit (short-term deposit with low yield). Improved balance sheet structure reduced the pressure on NIM compression.
　　Strong non-interest income is sustainable. Fee&commission income is expected to grow 20% YoY in 2022 although peers’ guided a weak fee & commission income this year. Distribution on insurance products and WMP, IBD business income, custody income are the drivers on fee&commission income growth.
　　Stock catalyst: Targeted 20% growth on fee & commission income will outperform peers and PSBC will lift LDR to offset part of negative impacts on declining lending rate. Solid asset quality can be maintained in 2H22.
　　Maintain OVERWEIGHT on banking sector and BUY on PSBC (1658 HK)　as our top pick. Our TP of HK$8.40 implies 0.91x 2022E and 0.85x 2023E P/B. The stock is trading at 0.67x/0.62x FY22/23E P/B, equivalent to +1SD of 3-yr historical mean.