We view PSBC as an excellent defensive play amid the challenging operating environment post COVID-19’s outbreak. Its extensive branch network and rich customer resource also provide a decent growth potential. Initiate coverage with BUY.
- Solid funding base and asset optimization underpin a superior NIM. PSBC’s unique operation model of self-managed plus agency outlets grants easier access to cheap and stable deposit funding, which accounted for 95% of total liabilities. Cost advantage has enlarged its NIM premium over Big-5 peers amid intensifying deposit competition since 2017. Although falling market rates appeared to weigh on PSBC’s margin due to its interbank net lender position, rising LDR and higher-yield consumption-related loans bode well for NIM outlook. The Bank is a key beneficiary to potential benchmark deposit rate cut. Our analysis indicates 10bp/5bp cut in time/demand deposit rates could boost FY20E NIM and earnings by 8.5bp and 3.0%, respectively.
- Healthy asset quality outlook with a low-risk profile. PSBC has a decent set of asset quality indicators, including NPL ratio of 0.83%, provision coverage of 391%, and lowest SML/overdue loan ratio in the sector. The outstanding asset quality is mainly attributed to: 1) 54.3% proportion for retail loans, of which 61.5% was mortgage; 2) relatively short operating history, hence little legacy NPL issue from previous rounds of credit stimulus; and 3) limited exposure to risky industries. We expect PSBC's lower-than-peer NPL formation to sustain, even with the shock from COVID-19.
- Extensive customer reach offers potential to enhance profitability. PSBC had total 39,680 branches as of 1H19, consisting of 7,945 self-managed and 31,735 agency outlets. Total retail clients amounted to 589mn (vs 627mn for ICBC). We believe its vast branch network and rich customer resource are yet to be fully monetized. Improving branch service capability, deeper customer penetration, and technology utilization would be key drivers for profitability. Merely 6.6% revenue contribution from fee income in 1H19 also implies huge upside for intermediary business.
- Initiate with BUY rating and HK$ 6.70 TP. We expect PSBC to deliver 15.0%/12.8%/15.6% net profit growth in FY19-21E, 1-4% above consensus estimates. PSBC should enjoy a valuation premium over the Big-5, given its higher retail exposure, faster loan and earnings growth, more resilient NIM, and less asset quality risk. Our HK$ 6.70 TP is based on GGM-derived target P/B of 0.95x and FY20E BPS of RMB 6.31.
