Matters:

The Postbank released its 2024 semi-annual report. The first half of the year achieved operating income of 176.8 billion yuan, a year-on-year decrease of 0.1%, and realized net profit to mother of 48.8 billion yuan, a negative increase of 1.5% over the previous year, and an annualized weighted average ROE of 11.4%. At the end of 24 and a half years, total assets reached 16.4 trillion yuan, up 8.5% year on year, of which total loans increased 10.7% year on year. Deposits increased 11.8% year over year.

Ping An's point of view:

There was a slight negative increase in revenue, which dragged down the year-on-year decline in profit. The year-on-year growth rate of the Postbank's net profit at the end of the half year fell 0.2 percentage points to -1.5% from the first quarter. We estimate that it was mainly affected by a slight decline in revenue.

In terms of revenue, the semi-annual revenue growth rate fell 1.5 percentage points to -0.1% from the first quarter, and the margins of interest and non-interest income declined. The year-on-year growth rates of interest and non-interest income decreased by 1.3 pct, 2.7 pct to 1.8% and -7.5%, respectively, from the first quarter. Affected by the narrowing of interest spreads, the year-on-year increase in the company's interest income declined, but remained in a positive growth range. In terms of non-interest income, the year-on-year decline in income was 16.7% (-18.2%, 24Q1). The decline was narrower than in the first quarter, but it was still the main drag on non-interest income. The decline was mainly caused by a decrease in agency insurance business revenue; other non-interest income increased 1.5% (16.7%, 24Q1) year on year, and the increase declined from the first quarter. We believe it was mainly affected by fluctuations in bond investment income exchange rates and fluctuations. On the cost side, the company's semi-annual credit impairment losses fell 16.6% year on year (-18.9%, 24Q1), and business and management expenses increased 4.5% year on year (7.6%, 24Q1). Against the backdrop of a slowdown in revenue, the company maintained stable profits by increasing cost control and provision for backfeed.

Interest spreads have shown resilience, and credit expansion has remained steady. The company's semi-annual net interest spread was 1.91% (1.92%, 24Q1), showing strong resilience against the backdrop of declining interest spreads in the industry as a whole. The company's loan yield at the end of the year fell 24BP to 3.89% from the end of '23, mainly dragged down by retail loans. The company's retail loan interest rate fell 58BP to 4.37% year on year at the end of the year. We expect this is related to the slow recovery of the real estate market and insufficient demand for personal finance. Interest rates on the deposit-side fell 5BP to 1.48% from the end of '23. Among them, interest rates on corporate deposits and personal deposits declined by 1BP and 7BP to 1.32% and 1.50%, respectively. The company reduced deposit interest rates and relieved the pressure on the cost side by controlling deposit-side high-interest liabilities.

In terms of size, the company's total assets increased 8.5% (+11.1%, 24Q1) year over year, with loan size increasing 10.7% (11.8%, 24Q1) year on year. We expect the decline in loan growth to be mainly affected by the decline in the growth rate of public loans. At the end of the half year, corporate loans and retail loans increased 15.0%/8.8% year on year, respectively, down 3.2 pct and 1.4 pct from the growth rate of the first quarter. On the debt side, the year-on-year growth rate of deposits at the end of the half year increased 1.3 percentage points from the first quarter to 11.8%, with steady growth.

Asset quality remained stable, and poor retail sales rose slightly. The Postbank's non-performing rate at the end of the half-year period was the same as the first quarter. We calculate that the company's semi-annual annualized non-performing loan generation rate decreased by 11BP to 0.74% at the end of 23, and asset quality remained stable. Looking at forward-looking indicators, the attention rate at the end of the half year increased by 10BP to 0.81% compared to the first quarter, and the overdue rate rose 15BP to 1.06% from the end of 23. The increase was mainly due to fluctuations in retail sales. The retail loan non-performing rate rose 2BP to 1.14% from the beginning of the year. The subsequent trend still needs attention. In terms of provision, provision coverage and loan coverage decreased by 1.26 pct/3bp to 326%/2.72% in the first quarter at the end of the half year. The absolute level is still high, and risk offsetting capacity remains stable.

Investment advice: Focus on retail restoration and continued differentiated competitive advantage. As a major state-owned bank with prominent retail attributes, the Postbank maintains a wide range of customer reach with its unique “ownership+agency” model. The regional advantages of the county and the central and western regions continue to be stable, and the customer base is solid and reliable. We maintain the company's 24-26 profit forecast. The company's 24-26 EPS is expected to be 0.88/0.93/0.98 yuan, respectively, and the corresponding profit growth rate is 1.7%/4.9%/5.2%, respectively. Currently, the stock price of Postbank's 24-26 PB is 0.56x/0.52x/0.48x, respectively. Taking into account the company's solid customer base on the debt side, potential improvement space on the asset side, and the asset quality performance of leading peers, we maintain the company's “Highly Recommended” rating.

Risk warning: 1) The economic downturn has led to a rise in pressure on the asset quality of the industry that exceeds expectations. 2) As interest rates declined, industry interest spreads narrowed beyond expectations. 3) Increased pressure on housing companies' cash flow has led to an increase in credit risk.