Matters:

On the evening of April 29, the Postbank disclosed its 2024 quarterly report. 1Q24 achieved operating income of 89.43 billion yuan, up 1.44% year on year, down 0.8 pct from 2023; net profit to mother was 25.93 billion yuan, down 1.35% year on year, and growth rate decreased 2.6 pct from 2023.

Commentary:

The decline in revenue was hampering revenue, interest spreads were resilient, and net interest income performed well. 1) 1Q24 revenue was 1.4% year-on-year, with net interest income of 71.57 billion yuan in a single quarter, up 3.1% year on year. The growth rate was 0.5 pct higher than 4Q23. The main reason was that while the scale maintained a relatively rapid growth rate, the decline in interest spreads narrowed. Net interest spreads in 1Q24 fell by only 2 bps month-on-month, which is superior to comparable peers; however, due to the “integrated reporting and banking” policy, agency insurance fees declined, leading to an 18.2% year-on-year decline in intermediary business revenue, which dragged down revenue growth. It is expected that after reverting to the impact of “integrated reporting and banking”, Postbank's revenue will maintain double-digit growth. 2) Net profit from 1Q24 fell 1.4% year on year, mainly due to a slight increase in retail sales failure generation in the first quarter. The company increased its provisions. The 1Q24 single quarter annualized bad generation rate increased by 2 bps to 0.81% month-on-month, but the non-performing rate only increased slightly by 1 bp to 0.84%, which is still an excellent level in the industry.

Retail loans are growing well, supporting the expansion of scale. In 1Q24, the growth rate of Postbank loans increased 11.8% year on year, slightly down from the 2023 growth rate, mainly due to a slowdown in the growth rate of public loans. However, retail loans maintained a growth rate of more than 10%, and pressure dropped on some notes to release credit lines, and overall loan performance was weak. 1) For the public sector: Public loans (excluding notes) increased 11.4% year on year, down 9.1 pct from the end of 2023; while notes fell 13.9% year on year, down 7.7 pct from the end of 2023; 2) Retail: 1Q24 retail loans increased 10.2% year on year, mainly because the Postbank continued to increase credit investment in key areas of rural revitalization, focusing on “two small” and consumer loans. Personal microloans such as Sannong Xiaowei achieved relatively rapid growth. As of 1Q24, the balance of agricultural loans was 2.33 trillion yuan, an increase of 176.2 billion yuan over the end of the previous year, and the balance of personal microfinance loans was 1.52 trillion yuan, an increase of nearly 130 billion yuan over the end of the previous year.

Interest spreads in the 1Q24 single quarter fell by only 2 bps month-on-month, mainly due to the significant reduction in debt-side cost pressure. According to our hourly point estimates, the 1Q24 net interest spread fell 2 bps to 1.9% month-on-month. Against the backdrop of declining interest spreads among state-owned banks, the comparative advantage of interest spreads continued to expand. 1) Asset side: 1Q24 yield on interest-bearing assets fell 8 bps to 3.38% month-on-month, mainly affected by mortgage loan repricing and LPR cuts; 2) Debt side: 1q24 single-quarter interest-bearing debt cost ratio fell 6bp to 1.49% month-on-month, mainly by optimizing debt types, terms, and interest rate structures. The 1Q24 deposit cost ratio decreased by 5 bps to 1.48% compared to the end of 2023.

The decline in revenue from the banking insurance business is dragging down revenue, diversified revenue capacity is gradually being formed, and the wealth management business foundation is stable. 1) 1Q24 Postbank's revenue was -18.2% year-on-year, mainly affected by the “integration of reporting and banking” policy, which led to a decline in banking insurance business revenue. If this factor is excluded, it may be expected to achieve double-digit year-on-year growth. 2) However, by focusing on the top ten intermediary business products, the Postbank diversifies revenue sources. Investment banking, transaction banking, corporate finance and other sectors are growing rapidly, while revenue growth in the corporate sector is nearly doubling, indicating that the Postbank's diversified and balanced revenue capacity is gradually forming. 3) Postbank's wealth management business foundation is still stable. As of the first quarter of 2024, the retail AUM volume exceeded 16 trillion dollars, and VIP customers/Fujia customers and above reached 5382/5.39 million, respectively, up 4.55%/8.65% from the end of the previous year.

Asset quality is generally stable, and the non-performing rate rose slightly by 1bp to 0.84% month-on-month, which is still the best level in the industry. The 1Q24 Postbank's concern+ defect rate, quarterly annualized bad generation rate, and overdue rate increased by 4 bps, 2 bp to 1.55%, 0.81%, and 0.99%, respectively. Mainly, the quality of retail loan assets such as personal microfinance loans was under pressure. However, the Postbank has always had a light asset quality burden and strict risk control. It is expected that future asset quality will remain stable. Although the provision coverage rate has declined by 20pct to 327% month-on-month, and the overall risk compensation capacity is still strong. Furthermore, the Postbank successfully issued 30 billion yuan of perpetual bonds, further enhancing risk resilience and sustainable development capabilities.

Investment advice: The size of the Postbank has grown rapidly, interest spreads are resilient, the comparative advantage on the debt side is prominent, and the quality of assets remains stable. The Postbank's differentiated development of five major growth poles, including “three rural” finance, small and micro finance, active credit, wealth management, and financial markets. The retail strategy is strong, the development path is clear, and the extensive coverage of 40,000 “ownership+agency” outlets has consolidated its retail advantages. Based on the business situation in the first quarter and the current macro environment, we predict that the company's 2024-2026 revenue growth rate will be 1.7%, 5.7%, 8.1% (previous value was 3.15%/6.01%/8.41%), and the 2024-2026 net profit growth rate will be -0.2%, 4.7%, and 8.3% (previous value was 3.91%/6.27%/8.88%). The current valuation is only 0.56x24PB. Considering that the average PB for the past three years is 0.71X, we give a target PB of 0.68X for 24, corresponding The target price is 5.78 yuan, maintaining the “Recommended” rating.

Risk warning: Bank interest spreads are under further pressure due to insufficient economic growth momentum, and bank credit investment falls short of expectations.