Postal Savings Bank of China’s (PSBC) attributable net profit grew 5.2% YoY in 2Q23 and 5.2% YoY in 1H23, lower than our expectation, mainly due to weak growth in operating income, decline in NIM and increase in operating expense. Its operating income increased 2.0% YoY in 1H23, lower than 3.5% YoY growth in 1Q23. Its net interest income and net fee and commission income increased 2.3% YoY and 1.8% YoY in 1H23. Despite slow growth in operating income, its operating expense increased 9.9% YoY in 1H23. PSBC maintained outstanding asset quality in 1H23 as its NPL ratio might be still at the lowest level among peers while its allowance to NPL was at the high- end level. As of end-June 2023, its loan-to-deposit ratio reached 58.8%, which might be still at the lower end of banking sector. As of end-June 2023, its loans/deposits increased 8.5%/4.6% from end 2022.
　　Key Factors for Rating
　　Outstanding asset quality maintained in 1H23. Its NPL ratio reached 0.81% at end-June 2023, down from 0.82% at end-March 2023 and 0.84% at end- December 2022. Its NPL ratio remained at the lowest level among peers in 1H23.Its allowance to NPLs reached 381.3% at end-June 2023, largely unchanged from 381.1% at end-March 2023. We expect its NPL to stay at 0.81% in 2H23.
　　NIM declined in 1H23. Net interest income increased 2.3% YoY in 1H23, mainly due to decline in net interest margin (NIM). We noted that its NIM reached 2.08% at end-June 2023, down 1bps from end-March 2023 and 12bps from 2022. We expect its NIM to drop 5bps in 2H23.
　　Proportion of personal mortgage loans in total loans is relatively high. PSBC has relatively higher proportion of personal mortgage loans in total loans among peers as its personal mortgage loans accounted for 30% of total loan. Compared to its peers, PSBC might be more vulnerable to reduction in outstanding mortgage loan rate cut.
　　Valuation
　　Its H shares are now trading at 0.46x 2023E P/B, which we reckon is undervalued. We believe the bank should be trading at a higher P/B valuation considering its outstanding asset quality and higher earnings growth potential.
　　Given the lower-than-expected 1H23 results, we decreased our target price from HK$7.84 to HK$7.19 based on about 0.8x 2023E P/B, down from previous target P/B of 0.85x. Maintain BUY rating.
　　Fee and commission income growth slowed in 1H23. Its net fee and commission income increased 1.8% YoY in 1H23, which is lower than our expectation.As of end-June 2023, the balance of total assets under management (AUM) from retail customers reached about RMB14.52trn, up about 4.6% compared with end- December 2022. The number of wealthy customers reached 4.74m at end-March 2023, up 11.6% compared with end-December 2022. We believe that its net fee and commission income may report positive growth in 2H23 thanks to its firm strategy to promote retail and wealth management business.