1H22 results in line with our forecast
　　Postal Savings Bank of China (PSBC) announced its 1H22 results: Revenue rose 10% YoY, pre-provision operating profit (PPOP) rose 6.1% YoY, and attributable net profit rose 14.9% YoY, in line with our expectations.
　　Trends to watch
　　Earnings maintained double-digit growth. PSBC’s attributable net profit in 1H22 grew 14.9% YoY, mainly as net fee income and other non-interest income increased 56.4% and 30.7% YoY and asset impairment losses decreased 8% YoY. Loans increased 12.9% YoY, maintaining fast growth. Net interest income grew at a slower YoY pace of 3.8%, mainly due to a 10bps YoY decline in net interest margin (NIM).
　　Net fee income maintained high growth. PSBC’s wealth management (WM) revenue and net fee income in 1H22 grew 36.0% and 56.4% YoY. Excluding the one-off impact of wealth management product business revenue, PSBC’s WM revenue, fee income, and net fee income grew 19.5%, 13.5%, and 31.9% YoY, still better than its peers. In terms of WM business, the bank continued to deepen differentiated customer operations. Wealth customers with assets of more than Rmb500,000 accounted for more than 40% of all personal customers’ new assets under management (AUM) and became a powerful engine for the growth of customer AUM.
　　Asset quality remained solid. PSBC’s non-performing loan (NPL) and special-mention loan (SML) ratios at end-1H22 were 0.83% and 0.51%, up slightly by 1bp and 3bps from end-1Q22. The bank was still ahead of its peers in terms of asset quality. The provision coverage ratio fell 16ppt compared with 1Q22 to 409%, still at a high level. The ratio of NPLs to loans overdue for more than 90 days was 1.37. Loans overdue for more than 60 days were all included in NPLs, and 93.36% of loans overdue for more than 30 days were included in NPLs. We believe the criteria for identifying NPLs were prudent.
　　PSBC plans to enhance liability cost management to stabilize NIM. PSBC’s NIM in 1H22 was 2.27%, down 5bps from 1Q22. Looking ahead, the bank believes credit demand will improve in 2H22, the decline in asset yields will stabilize, and deposit rates are likely to drop under a market-based adjustment mechanism. The bank plans to continue to increase the loan-to-deposit ratio (LDR) and the proportions of real-economy loans and retail loans, to stabilize the overall loan yield. In addition, it plans to increase the allocation to high-yield assets when appropriate, and shrink long-term high-cost deposits to reduce deposit costs.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts. PSBC A-share is trading at 0.6x 2022e and 0.5x 2023e P/B, and H-share is trading at 0.5x 2022e and 0.5x 2023e P/B. We maintain OUTPERFORM ratings for PSBC A-share and H-share. Considering macroeconomic uncertainty, we lower our A-share target price by 20% to Rmb6.74 (which implies 0.9x 2022e and 0.8x 2023e P/B and offers 53.2% upside), and lower our H-share TP by 20% to HK$6.98 (which implies 0.8x 2022e and 0.7x 2023e P/B and offers 52.1% upside).
　　Risks
　　Macroeconomic downturn; spread of real estate industry risks.