PSBC’s Stronger-Than-Peer Growth Continues

Postal Savings Bank of China’s 01658 2022 total revenue and net profit growth unsurprisingly decelerated to 5.1% and 11.9%, from 7.8% and 14.5%, respectively, in the first nine months of 2022. To reflect lower net interest margin assumption in 2023, we reduce our fair value estimate to CNY 5.70 from CNY 6 for the A shares but retain it at HKD 6.50 per H share after accounting for a slightly stronger yuan. H shares appear undervalued, trading at a historically low 0.5 times 2023 price/book value. The H share price fell 5% on March 31 following news that PSBC issued new A shares to China Mobile priced at CNY 6.64. We don’t believe the added capital, which lifts its common equity Tier 1 ratio by 62 basis points to 9.98%, reflects any current balance sheet weakness, but rather that PSBC would benefit from the added capital base to meet lending demand in its core rural and small and midsize markets. As the shares are issued at a premium, they have negligible impact on our fair value estimate. However, EPS growth will be diluted to midsingle digits, though we expect net profit growth to stay at about 10% in 2023.

While PSBC’s 2022 revenue growth exceeded that of its state-owned enterprise peers, its 16-basis-point contraction in full-year NIM from 2021′s level was larger than its peers and slightly missed our expectation. We believe the respective 13- and 8-basis-point declines in average loan rate and asset yield from first-half 2022 are major factors contributing to PSBC’s further NIM contraction, though average funding costs eased 2 basis points from the first half.

Though the loan repricing in the first quarter will further weigh on NIM, China’s interbank rates and bond market yields have rebounded in the same period, which should partly offset the NIM pressure. After seeing strong recovery in consumption loans in the first quarter, management expects 2023 retail credit allocation to return to 2021′s level. We expect such a trend to benefit PSBC’s NIM in 2023.