PSBC reported 9M19 net profit of RMB 54.3bn, up 16.2% YoY and accounting for 93.5% of consensus full-year estimate. 3Q19 PPoP growth moderated to 5.4% YoY, as net interest income fell 3.3% YoY on narrowing NIM and CIR rose 0.9ppts YoY on rising opex. However, stronger-than-peers provision coverage enabled the Bank to set aside less impairment charges (-3.2% YoY). This, along with lower tax cost, led to a sequential pick-up in earnings growth to 19.2% YoY (vs 12.2% YoY in 1Q19 and 17.8% YoY 2Q19). We stay upbeat on PSBC given its robust earnings momentum and upcoming A-share offering.
- Results positives: 1) Strong growth in non-interest income, of which net fee income rose 13.3% YoY, likely driven by settlement & clearing, bank card, and agency service businesses; 2) Credit cost declined 21bps YoY and 40bps QoQ to 1.02%, helping to offset a weakening topline growth. 3) AIEA structure continued to optimize, as higher-yield loans grew 3.1% QoQ, while investments and interbank assets shrank 2.2% QoQ and 1.0% QoQ, respectively. 4) Capital position improved. CET1/tier-1/total CAR climbed 30bps/29bps/29bps QoQ to 9.55%/10.55%/13.27%.
- Results negatives: 1) 3Q19 NIM contracted 6bps QoQ to 2.46%, by our estimate. This was largely within expectation, as monetary easing tends to squeeze the margin of PSBC as interbank net lender. 2) Deposit growth remained subdued at 0.7% QoQ, and LDR went up 1.2ppts to 52.9%, still well below peers though. 3) NPL ratio edged up 1bp QoQ to 0.83%, as NPL formation rebounded to 76bps from 21bps in 1H19. Provision coverage retreated 5ppts QoQ to 391%. We believe this was largely due to MoF’s “Draft Financial Rule”, which requires banks to release excess provision as profit. PSBC has likely further strengthened its NPL recognition by classifying all (97% as of 2Q19) above 30-day overdue loans into NPLs.
- Potential valuation boost from A-share offering. PSBC received CSRC’s approval for A-share IPO on 25 Oct and is likely to complete issuance in 4Q19. The Bank’s H-share currently trades at 0.78x FY19E P/B, 8% above sector average of 0.73x. Pricing A-share at RMB 5.50 (common equity per share was RMB 5.4947 as of 2Q19) would imply 28% A/H premium, higher than average 22.4% for the Big-5 banks. With number of new shares amounting to 5.172bn or 5.948bn with full exercise of over-allotment option, total capital raised is estimated at RMB 28.45bn/RMB 32.72bn, which could lift CET1 CAR by 59bps/68bps with moderate 6%/6.84% EPS dilution.
