PSBC’s 1Q20 net profit rose 8.5% YoY to RMB20.1bn, accounting for 29.4%/30.6% of CMBIS/consensus full-year estimates. Stable NIM, decent asset quality, and improving operating efficiency highlighted the solid set of results. Albeit moderate pace in FY20, the Bank’s earnings growth should continue to top SOE peers. Management indicated during results briefing that PSBC would adhere to its retail-focused business strategy, despite temporary slowdown due to COVID-19. This would rely upon the Bank’s extensive branch network and client resources, and underpin sustained asset quality and margin advantage.
- Results positives: 1) NIM remained largely stable with modest 1bp QoQ contraction to 2.46%, outperforming large bank peers, thanks to solid growth and better structure in deposits. Meanwhile, new loans with lower yield accounted for limited proportion of total loan portfolio. Management targets to back up NIM trend by further lifting LDR and proportion of retail loans. 2) Asset quality stayed healthy. NPL ratio was flat QoQ at 0.86%, and provision coverage slid 2.1ppt QoQ to 387.3%, still the highest among banks under our coverage. SML and overdue loan ratio fell 10bp and 13bp QoQ to 0.56% and 0.90%, suggesting benign NPL formation pressure. However, retail loans’ credit quality suffered a temporary hit in 1Q20. NPL ratio for mortgage and credit card rose 5bp and 33bp QoQ to 0.43% and 2.07%, respectively. 3) Loan expansion was robust at 5.4% QoQ, with 6.7%/4.3% QoQ growth in corporate/retail loans. 4) 1Q20 CIR fell 0.5ppt YoY to 52.8%.
- Results negatives: 1) Net fee income growth slowed to 1.5% YoY from 16.4% YoY in 4Q19, likely due to sluggish bank card fees (45.9% of total fee income in FY19). 2) CET1 CAR declined 26bp YoY to 9.64%, due to fast RWA expansion of 7.8% QoQ. That said, total CAR picked up 105bp QoQ to 14.57%, after the Bank issued RMB80bn perpetual bonds in Mar 2020.
- Maintain BUY with lower TP of HK$6.30. We trim our FY20-21E earnings forecasts by 2.6-5.1%, as we lower assumptions on NIM and fee income growth to reflect COVID-19’s impact. Our new TP of HK$6.30 is based on GGM-derived target P/B of 0.91x and FY20E BPS of RMB6.2.
