PSBC’s 3Q20 net profit surprised on the upside, rising 13.5% YoY (vs -28.1% YoY in 2Q20) as credit cost pulled back. YTD earnings contraction narrowed down to -2.7% YoY in 9M20 from -10.0% in 1H20. The Bank has demonstrated strong asset quality resilience during COVID-19’s shock. As the only retail-oriented SOE banks, PSBC should enjoy faster-than-peers earnings expansion when policy intervention abates, and this will reduce the probability of cut in dividend payout ratio. Thanks to limited overseas exposure, recent exacerbation in global pandemic would impose little threat to PSBC’s business. We await further details from results briefing at 10am today.
- Results positives: 1) Solid loan growth of 3.1% QoQ, mainly on extension in retail loans, which accounted for 56.5% of total loans as of 3Q20. Asset mix continued to improve, with credit allocation shifting to loans from lower-yield interbank assets and bond investments. 2) Asset quality remained healthy. NPL formation was subdued at 0.14% (-32bp QoQ) in 3Q20, and NPL ratio fell 1bp QoQ to 0.88%, the lowest among nationwide China banks. Provision coverage climbed 3.1ppt to 403.2%, only trailing CMB. 3) Net fee income growth accelerated to 27.1% YoY in 3Q20, likely on strong bank card and agency service fees. 4) CET1 CAR was boosted by 34bp QoQ to 9.51%.
- Results negatives: 1) Deposit growth was sluggish at 1.4% QoQ, likely due to proactive cleanup of high-interest deposit products and increase in interbank borrowing amid liquidity loosening. 2) NIM slid 2bp in 3Q20, but the pace of decline was notably slower vs 2Q20 (-8bp QoQ). 3) 3Q20 cost-to-income ratio rose 3.9ppt YoY to 59.8%, likely due to rising technology investments.
- Maintain BUY and HK$4.80 TP. We keep earnings forecast unchanged. Our TP of HK$4.80 is derived from 0.71x target P/B and FY20E BVPS of RMB6.1.
