We held a post-results conference call with PSBC on 9 Apr, during which management provided some update on operating condition and business outlook. This reaffirmed our view that the Bank will stand out as an excellent defensive play against macro slowdown amid COVID-19’s outbreak.
- Full-year loan and deposit target is achievable. PSBC expected new loans in 1Q20 to surpass that in 1Q19, driven by reviving demand and accelerated lending pace in Mar. In particular, management saw stable expansion in key retail products, such as mortgage and agriculture-related micro financing. However, credit card loan fell RMB5bn in 1Q20. Corporate loan growth remained steady on ample infrastructure and manufacturing project reserves. Favorable policy for new economy and consumption recovery will further stir up credit demand in 2H20.
- Solid buffer against potential asset quality shock. PSBC’s NPL + SML ratio only amounted to 1.52%, less than 1/3 of sector average. Loss recognition is stringent, as it has classified 97% >30day overdue loans into NPL. Provision coverage of 389.5% was more than twice of sector average, and NPL balance would have to swell 80% to bring provision coverage down to similar level as Big-5 peers (214%). The Bank follows a “barbell” strategy for loan portfolio, where customers are mainly retail/small enterprises or large/quality corporates. Loan exposure to industries directly affected by the pandemic (catering, accommodation, tourism, and entertainment) was merely 0.13%.
- Multiple tactics to uphold NIM. During current falling-rate cycle, PSBC will take action on both asset and liability sides to stabilize NIM trend. Detailed measures include: 1) Lifting LDR (53.4% as of 4Q19), which was still 20ppt lower than Big-5 average. 2) Boosting proportion of retail loans (55.3% as of 4Q19) by allocating 60% of new loans to retail segment. 3) Lengthening asset duration. 4) Optimizing deposit structure by raising proportion of demand deposit (up 1ppt to 37.3% in 2H19). 5) Moderately increasing interbank funding based on liquidity condition.
- MSE business more sustainable vs SOE peers. Given existing large-scaled MSE loans (13.1% of total loans in 4Q19), PSBC is not subject to regulatory requirement for other SOE banks of realizing 30% MSE loan growth in 1H20 and 0.5ppt overall financing cost decline in 2020. Average yield of PSBC’s MSE loans extended in 2019 was 6.25%, 80-90bp above that of Big-5. Moreover, its MSE customers are in a wide range of industries, thus less vulnerable to sector-specific risks.
- Active cooperation with Fintech players. Since introducing Ant Financial and Tencent as strategic investors in 2015, PSBC has maintained closer business relationship with Fintech giants compare to banking peers. Mr Liang Shidong, former VP of Ant Financial, joined PSBC as Chief Risk Officer in Jan 2020. PSBC Huabei (邮储花呗), an online consumer finance product, was launched in Oct 2019. Cumulative lending amount has exceeded RMB100bn with <1% NPL ratio.
- Maintain BUY and HK$6.70 TP. We kept our FY20-22E earnings forecasts unchanged. Our TP of HK$6.70 is based on GGM-derived target P/B of 0.95x and FY20E BPS of RMB6.3.
