Key points of investment

Incident: The company released its 2024 quarterly report. In Q1, the company achieved operating income of 89.430 billion yuan (+1.44%, YoY) and realized net profit of 25.926 billion yuan (-1.35%, YoY). At the end of Q1, the Postbank's non-performing loan ratio was 0.84%, up 1 bps from month to month. The provision coverage rate was 326.87%, down 20.70 pct from month to month.

Net interest income has maintained steady growth, and agent savings fees are highly rigid. Q1 achieved net interest revenue of 71,573 billion yuan, an increase of 3.13% over the previous year. The growth rate remained in the leading position of the major banks, mainly due to the steady expansion of asset size and a slowdown in the decline in net interest spreads.

Q1's net profit to mother fell 1.35% year on year, which was significantly slower than the growth rate of net interest income, mainly due to the high rigidity of agent savings fees and the decline in intermediary business revenue. In terms of agency savings fees, affected by residents' strong desire to save, the year-on-year deposit growth rate increased 0.72 percentage points to 10.48% compared to the end of Q4 in 2023. The growth rate was faster than that of peers, which provided some support for the rigidity of savings agency fees. Affected by this, Q1 management expenses increased 7.61% year over year, significantly faster than revenue growth. In terms of intermediary business, due to the “integration of reporting and banking” policy, agency insurance revenue declined significantly, resulting in a year-on-year decrease of 18.21% in processing fees and commissions. In order to cope with the impact of the decline in agency insurance business revenue, the Postbank adopted a quantitative price compensation strategy to mitigate the decline in insurance consignment business revenue by increasing the penetration rate of insurance products among customers. According to the performance conference, the decline in revenue from the Q1 intermediate business narrowed month by month. It is expected that the impact of “integration of reporting and banking” will gradually narrow in the future, and the pressure on intermediate business revenue is expected to slow further.

The scale has maintained rapid growth, and investment in advantageous fields is strong. The Q1 company achieved rapid growth in asset size, with total assets reaching 16.33 trillion yuan, an increase of 11.12% over the previous year. Among them, the total loan amount (excluding accrued interest) increased 11.80% year over year to 8.52 trillion yuan. In the new loan structure, retail loans increased by RMB 17.954 billion, accounting for 45.81%; loans to public loans increased by RMB 267.915 billion, accounting for 71.79%; and bill discounting decreased by RMB 65.688 billion, accounting for -17.60%. In terms of credit investment, the company adheres to the “volume and price insurance” balance. The balance of differentiated credit growth reached 5.31 trillion yuan, accounting for 62.34% of the balance of various loans, an increase of 0.35 percentage points over the end of the previous year. The increase in “two small” loans, which mainly focus on the “three rural areas” and small and micro enterprises, both hit record highs. By sector, in terms of retail loans, the Postbank has been steadily implementing a strategy of differentiated growth poles, increasing credit investment in rural revitalization, focusing on “two small” and consumer loan investments, and personal microfinance has achieved rapid growth. As of the end of Q1, 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. In terms of public loans, the company has responded positively to policy calls and made efforts in key areas such as manufacturing, infrastructure construction, specialization and green finance, and the scale of loans for small enterprises and companies has grown rapidly. The decline in the scale of bill discounting is expected to be mainly due to better demand for public loans, and the impulse motivation to discount notes has weakened accordingly.

The debt-side advantage was maintained, and interest spreads in a single quarter rebounded month-on-month for the first time in recent years. Affected by heavy pricing at the beginning of the year and interest rate cuts on existing mortgages, the company's net interest spread continued to narrow along with the industry: the Q1 net interest spread was 1.92%, down 17 bps from the previous year. As deposit costs have been controlled, the decline in interest spreads in the Q1 banking sector is quite common. The company's net interest spread performance is in line with industry trends: the year-on-year decline in Q1 companies' net interest spreads was about 5 bps narrower than in Q4 in 2023, and is in a lower position of 15 bp to 23 bp in the year-on-year decline range for each quarter since the second half of 2022. On the asset side, it is estimated that the Q1 interest rate fell by about 25 bp to 3.38% year on year, and the decline was close to the average for each quarter of 2023. On the debt side, in 2023, the company improved the value deposit development mechanism to promote continuous optimization of debt terms, types and interest rate structures. The improvement in deposit costs was clearly better than that of comparable banks, and this advantage continued to be maintained in Q1 of 2024. It is estimated that the Q1 interest rate fell by nearly 7 bp to 1.50% year on year, close to the average for each quarter of 2023, and still larger than comparable banks. On a month-on-month basis, Q1 interest spreads rose 2 bps from 2023q4, the first month-on-month increase since the second half of 2021, mainly due to the fact that interest rates tend to be consistent with the month-on-month decline in interest rates (previously, the decline in return on assets was significantly greater than the interest rate on debt payments), confirming that interest rate cuts on the deposit and loan side of the banking sector are more synchronized, which has positive significance for the future trend of interest spreads.

Asset quality remains stable, and overdue rates and attention rates are in line with industry trends. At the end of Q1, the Postbank's non-performing loan ratio, overdue loan ratio and the proportion of concerned loans were 0.84%, 0.99%, and 0.71%, respectively, up 1 bps, 8 bp and 3 bps from month to month, respectively. The rise in overdue rates and concerns is consistent with industry trends, reflecting the impact of macroeconomic fluctuations on asset quality in the banking sector. Structurally, the quality of retail loan assets, such as personal microloans, is mainly under pressure. Due to the fragmentation of the Postbank's microfinance loans, the amount is generally below 200,000 yuan, and the company's risk management is perfect, it is expected that the quality of assets will remain stable in the future and will still maintain excellent standards in the industry. At the end of Q1, the Postbank's provision coverage rate was 326.87%, down 20.70 pcts from the previous month. Mainly due to the weakening of accrual strength, Q1 companies accrued credit impairment losses of 6.984 billion yuan, a year-on-year decrease of 18.98%.

Profit forecast and investment advice: The Postbank has customer advantages in the fields of retail, inclusiveness, agriculture, and green. These fields receive strong policy support, and it is expected that scale growth will maintain a comparative advantage. At the same time, due to policy orientation, interest rates on loan types related to advantageous areas may decline further along with the market, and LPR repricing is gradually progressing. It is expected that net interest spreads will still be under pressure. In view of the slowdown in loan interest rate cuts, deposit interest rate adjustments will also ease pressure on the debt side, and the net interest rate slope is expected to slow down.

The company's historical burden is small, the customer base is good, risk management is solid, and asset quality is expected to remain excellent. Q1's interest income grew steadily, and intermediary business revenue was adversely affected by “integration of reporting and banking”, and agent savings fees were more rigid, driven by scale. We adjusted profit forecasts accordingly. Operating revenue for 2024-2026 was 3543, 3762, and 396.9 billion yuan, respectively (the original forecast was 3500, 3694, 394.1 billion yuan), and net profit to the mother was 876, 906, and 92.9 billion yuan, respectively (the original forecast was 884, 943, and 99 billion yuan). The net assets per common share are expected to be 8.68, 9.20, and 9.74 yuan in 2024-2026, corresponding to the closing price of 5.00 yuan on May 10, 0.58, 0.54, and 0.51 times. Maintain the company's “gain” investment rating.

Risk warning: Asset quality has deteriorated dramatically, loan interest rates have declined sharply, deposit regularization has intensified, and scale growth falls short of expectations.