Summary. On 20 Aug, PSBC reported 1H19 net profit of RMB 37.4bn, up 14.9% YoY and accounting for 67.2% of consensus full-year estimate. 2Q19 PPoP rose 23.0% YoY, as robust net fee income, strong trading gains, and improving operating efficiency more than offset the slowdown in net interest income growth due to narrowing NIM. Bottom-line earning growth picked up to 17.8% YoY in 2Q19 (from 12.2% YoY in 1Q19), well above other big banks. As a result, 1H19 annualized ROE recovered 0.6ppt YoY to 17.2%.
- Results positive: 1) 1H19 net fee income was up 21.6% YoY, mainly driven by stronger settlement & clearing and bank card fees. The Bank’s non-interest income as of total revenue increased to 16% from 10.4% in FY18; 2) Opex declined 2.1% YoY and CIR retreated 4.8ppt YoY on better cost control. PSBC has been consolidating its physical branches and enhancing the revenue-generating ability of agency outlets. 3) Optimizing AIEA mix with rising proportion of loans (+3.7% QoQ) and security investments (+2.9% QoQ), and smaller proportion of lower-yield interbank asset (-41.3% QoQ). 4) Healthy asset quality as NPL ratio slid 1bp QoQ to 0.82%, and provision coverage climbed 33ppt to 396%, highest among nationwide banks.
- Results negative: 1) 2Q19 NIM contracted 6bp QoQ to 2.52%. Asset yield declined 3bp on falling loan yields, and liability cost edged up 9bp due to deposit cost hike in 1H19. Given limited interbank borrowing, PSBC benefits less from monetary policy easing. 2) Deposits dropped 0.5% QoQ, mainly on shrinking demand deposits amid heightened deposit competition. LDR was up 2.1ppt to 51.7%, still far behind peers. 3) CET-1 and total CAR fell 36bp/46bp QoQ to 9.25%/12.98%. The bank has proposed to issue RMB 80bn perpetual bonds, and its A-share IPO was reportedly under review by CSRC. These together could lift CAR by 225bp, by our estimate.
- Valuation still undemanding. PSBC currently trades at 0.7x FY19E P/B, 10% above sector average of 0.64x but 6% below its historical mean of 0.74x. Potential share price catalysts include further enhancement in operating efficiency, continued boost in asset allocation to loans, and faster-than-expected progress of A-share IPO. PSBC will hold 2Q19 results briefing at 9am today.
