Overall asset quality steady in 3Q22
PSBC posted steady profitability in 3Q22. 1) Shareholders’ net profit rose by 14.48% yoy in 3Q22, a steady performance compared with the 14.88% yoy in 1H22. The profit growth was partly due to fast growth in net fee and commission income, and smaller credit impairment losses. 2) NIM was 2.23% in 3Q22, compared with 2.27% in 1H22 (or 2.37% in 3Q21), consistent with the policy of reducing real financing cost for market entities.
Per the management, NIM of the Company faces tremendous downward pressure, in line with the 1Y and 5Y LPR cuts. On Sep. 29, the PBOC and the CBIRC also announced that governments of qualified cities could decide whether to maintain, lower or cancel the lower limit for interest rates on local newly-issued first-home mortgages by the end of 2022. We expect continuing pressure on lending rates and NIMs across the sector, although the establishment of an adjustment mechanism for deposit interest rates (banks may adjust their deposit rates according to the 10Y government bond yield and 1Y LPR) may help stabilize liability costs. 3) Overall asset quality remained stable. As of end-3Q22, the aggregate NPL ratio was 0.83%, equal to the 0.83% at end-1H22, and the allowance to NPL ratio was kept at around ~404%, vs. ~409% at end-1H22. There was some increased pressure, as balance of special mention loan increased by 10.7% qoq at end-3Q22. The NPL formation ratio remained at 0.77% at end-3Q22 vs. end-1H22. 4) The net fee and commission income maintained fast growth, up by 40.3% yoy in 3Q22. 5) The Company’s overall business performance in 3Q22 was resilient, although NIM will be under pressure in next few quarters.
Proposed non-public issuance of A shares; Maintain BUY
PSBC is trading at ~4.2x 22E P/E and ~0.48x 22E P/B. Maintain BUY for PSBC on its resilient 3Q22 performance and fast growth in net fee and commission incomes. PSBC proposed non-public issuance of A shares, which shall not exceed RMB45 billion, and will be fully used to replenish the core tier 1 capital of the Bank. The Company’s EPS might be slightly diluted by ~5% after the issuance. Cut TP to HKD5.10, equal to ~0.65x 22E P/B (A 10% discount to its past 5-yr average P/B). Key catalysts: better-than-expected asset quality, NIM expansion; key downside risks: worse-than-expected asset quality, NIM pressure.