Resilient performance in 1H22
PSBC posted steady profitability in 1H22. 1) Ordinary shareholders’ net profit rose by 13.1% yoy in 1H22, partly due to fast growth in net fee and commission income, smaller cost to income ratio, and smaller credit impairment losses. 2) NIM was 2.27% in 1H22, compared with 2.32% in 1Q22 (or 2.37% in 1H21), in line with the recent LPR cuts and the policy of reducing real financing cost for market entities. Lending rates and NIMs across the sector face further downward pressure after the 1Y and 5Y LPR cuts on Aug. 22, but PSBC has room to maintain a reasonable NIM by optimizing its loan-to-deposit ratio. 3) Overall asset quality remained. As of end-1H22, the aggregate NPL ratio was 0.83%, similar to the 0.82% at end-1Q22, and the allowance to NPL ratio was kept at around ~409%, vs. ~414% at end-1Q22 (Fig. 1). However, there was increased pressure, as balance of NPL and special mention loan increased by 3.8%/9.2% qoq (or 9.9%/16.2% hoh) at end-1H22. The NPL formation ratio increased from the 0.60% at end-2021 to 0.77% at end-1H22. Both the NPL ratio of real estate corporate loans and that of residential mortgage loans increased hoh at end-1H22. For example, the NPL ratio of real estate corporate loans rose to 1.01% at end-1H22 from 0.02% as of end-2021. The asset quality of personal loans deteriorated in 1H22, in line with the increased unemployment rate in 1H22. 4) The net fee and commission income maintained fast growth, up by 56.4% yoy in 1H22, partly driven by strong performance of wealth management business. 5) The Company’s overall business performance in 1H22 was resilient, although real estate corporate loan and mortgage loan quality is an uncertainty of the banking industry.
Maintain BUY; Cut TP to HKD6.11
PSBC is trading at ~4.8x 22E P/E and ~0.58x 22E P/B. Maintain BUY for PSBC on its resilient 1H22 performance, retail-focused business structure, and fast growth in net fee and commission incomes. Also, PSBC has room to maintain reasonable NIM because it might benefit from its rising loan- to-deposit ratio. Cut TP to HKD6.11, equal to ~0.72x 22E P/B (its historical average). Key catalysts: better-than-expected asset quality, NIM expansion; key downside risks: worse-than-expected asset quality, NIM pressure.