Although China’s economy faces some complexities and uncertainties amid slowdown in the property market and recent rebound in the spread of Covid-19 in many cities, we believe Postal Savings Bank of China’s (PSBC) will report stable earnings growth in 3Q22. We expect PSBC’s attributable net profit to grow 11% in 3Q22, against YoY growth of 11.8% in 2Q22 and 17.8% in 1Q22. As a result, its attributable net profit may increase 13.5% YoY in 9M22, against 14.9% YoY growth in 1H22. We expect its operating income to increase 9.5% YoY in 9M22, against YoY growth of 10% in 1H22 and 10.2% in 1Q22. We believe that PSBC will maintain outstanding asset quality in 3Q22 as its NPL ratio might still be at the lowest level among peers while its allowance to NPL might be at the high end level. In our view, the new deposit agency fees agreement will improve its earnings and strengthen its strategic positioning as a large retail bank. PSBC has large room to improve its loan to-deposit ratio and potential to report rapid growth in net fee and commission income in the next two years. Maintain BUY rating.
　　Key Factors for Rating
　　PSBC will maintain outstanding asset quality in 3Q22. We expect its NPL ratio to increase from 0.83% at end June 2022 to 0.84% at end September 2022. Its NPL ratio is likely to remain the lowest level among peers in 9M22. Meanwhile, we expect its allowance to NPLs to reach 407% at end September 2022, slightly lower than 409% at end June 2022.
　　NIM may decline in 3Q22. We expect its net interest margin (NIM) to drop moderately in 3Q22 as asset structure is likely to improve and declining funding costs may help partly offset the pressure on declining yield of IEA. We expect its NIM to reach 2.24% at end September 2022, down 3bps from 2Q22 and 13bps from 2021.
　　Valuation
　　Its H shares are now trading at 0.51x 2022E P/B, which is undervalued. We believe the bank should be trading at a higher PB valuation, thanks to its outstanding asset quality, strong growth in net fee income, higher earnings growth and decent ROAE. We expect its ROAE to reach 11.8% in 2022. However, as one of its strategic investors has recently sold some stakes at PSBC, which may negatively affect investors' risk appetites and market sentiment, we reduced our target price from HK9.02 to HK$8.18, based on 0.94x 2022E P/B, against pervious target of about 1.0x P/B.