Incident: Postbank disclosed the 2024 interim report. The revenue growth rate for the first half of 2024 was -0.11%; profit growth rate before provision was -6.08%; net profit growth rate to mother was -1.51%. The performance was basically in line with expectations. Our comments are as follows:

The net profit growth rate of Postbank in the second quarter of 2024 was -1.70%. Performance growth was mainly supported by growth in scale and provision release, while narrowing net interest spreads, rising costs, and falling non-interest income dragged down performance growth.

Volume: The pace of asset expansion slowed in the second quarter, and the increase in financial assets became the main support ① Asset side: At the end of the first half of 2024, Postbank assets expanded 8.53% year on year, the growth rate fell 2.59 pct month on month, and the rate of asset expansion slowed; the average balance of interest-bearing assets increased 10.45% year on year, and the growth rate decreased 1.82 pct month on month. This is mainly because the Postbank's interbank assets declined sharply in the second quarter, while credit investment was weak, which dragged down the expansion of scale.

Judging from the incremental structure, the expansion of the Postbank's assets in the second quarter was mainly due to an increase in financial assets, while loan investment was less affected by the macroeconomy than in the same period last year. Among them, financial assets increased by 143.2 billion yuan in a single quarter, an increase of 2.5 billion yuan over the previous year; the total loan amount (excluding discounts) increased by 96.4 billion yuan in a single quarter, a decrease of 125.4 billion yuan over the previous year. Looking at the asset structure, at the end of the second quarter of 2024, the share of Postbank loans among interest-bearing assets increased 0.67pct to 52.03% month-on-month, while the share of financial assets increased 0.78pct to 35.00% month-on-month, optimizing the interest-bearing asset structure.

The intensity of the referendum has weakened. In the first half of 2024, market financing demand was weak due to slow macroeconomic recovery. In the second quarter, the Postbank's net increase in public loans (excluding discounts) was 50 billion yuan, a year-on-year decrease of 75.2 billion yuan; at the end of the first half of the year, the scale of public loans (excluding discounts) increased 14.96% year on year, and the growth rate decreased by 3.19 pcts month-on-month. Specifically, the Postbank's investment in public loans was mainly concentrated in the broader infrastructure industry and manufacturing industry. At the end of the first half of the year, the two types of loans accounted for 19.17% and 6.53% of total loans, respectively. Looking at the whole year, the Postbank will increase its support for small and micro enterprises and the “three rural areas.”

Retail credit performance was stable. Currently, the residential sector is unwilling to expand. At the end of the first half of 2024, the Postbank's retail loan balance increased 8.78% year on year, and the growth rate fell 1.39 pct from month to month; the net increase in the single quarter was 46.4 billion yuan, which is close to the increase in public loans (excluding discounts). The Postbank accelerated the digital and intensive transformation of microfinance loans. At the end of the second quarter, personal microfinance balances increased 16.12% year-on-year, making it the most important growth point for retail loans. In addition, credit card balances and personal consumption loans increased by 1.62% and 4.85% year-on-year respectively at the end of the second quarter.

② Debt side: At the end of the first half of 2024, the size of Postbank deposits increased by 11.75%, and the growth rate increased by 1.27pct month-on-month; among them, public deposits and retail deposits increased by 12.43% and 11.67% year-on-year respectively. Looking at a single quarter, deposit growth mainly came from public deposits, with a net increase of 154 billion yuan, an increase of 167 billion yuan over the previous year; however, overall, retail deposits were still the majority, accounting for 88.90% of total deposits. Furthermore, the share of time deposits at the Postbank is still rising. At the end of the second quarter, the share of time deposits increased by 2.17pct to 73.28% compared to the end of the previous year.

Price: The decline in yield is dragging down interest spreads

We estimate that Postbank's net interest spread for the second quarter of 2024 was 1.90%, down 17 bps from year to month and 2 bps, respectively, which was the main reason affecting performance. Let's take a closer look:

① The yield on interest-bearing assets stabilized month-on-month. We estimate that the return on interest-bearing assets of the Postbank in the second quarter of 2024 was 3.39%, down 3 bps from the first quarter. Specifically, interest rates on public loans have declined little. Mainly, personal loan yields have declined rapidly due to policy factors such as LPR cuts and stock mortgage interest rate cuts. At the same time, returns on financial assets have also declined due to market fluctuations. In the first half of 2024, Postbank loan yields and financial asset returns were 3.89% and 3.12% respectively, a decrease of 24 bps and 10 bps, respectively, compared with the end of the previous year.

② The cost ratio of interest-bearing debt decreased slightly. We estimate that the Postbank's interest-bearing debt cost ratio for the second quarter was 1.50%, down 2 bps from month to month, maintaining a steady downward trend. The Postbank deposit cost ratio fell by 5 bps to 1.48% in the first half of 2024. Despite an increase in the share of time deposits, the reduction in deposit listing interest rates still led to a decline in the cost rate, which provided some support for interest spreads.

The pressure on interest spreads decreased in the second half of the year. As LPR is lowered and the impact of stock mortgage repricing gradually weakens, the pressure on asset-side returns is expected to decrease. At the same time, the company will continue to take advantage of debt-side retail deposits to strengthen deposit cost management, and the decline in interest spreads is expected to narrow further.

Net non-interest income declined year over year. In the second quarter of 2024, the net non-interest income of the Postbank fell 10.33% year on year, and the growth rate decreased by 5.49pct month on month. Among them, net processing fees fell 14.08% year on year, and other non-interest income, mainly investment income, fell 8.13% year on year. The decline in handling fees is mainly due to the sharp decline in agency insurance income due to the “integration of reporting and banking” policy; while business revenue from investment banking and financial management businesses grew rapidly.

Other non-interest income declined slightly from the first quarter due to market fluctuations in the second quarter.

Costs and revenues increased slightly from month to month. The cost to revenue ratio of the Postbank in the second quarter was 60.56%, a slight increase of 1.24 pct from the first quarter and 1.85 pct year on year. Specifically, revenue in the single quarter decreased 1.64% month-on-month, and business and management expenses increased 1.47% month-on-month.

The increase in management fees is mainly due to the increase in the scale of retail deposits absorbed by postal agency outlets, which has led to a sharp increase in savings agency fees.

Asset quality remains good. At the end of the second quarter of 2024, Postbank's non-performing rate was 0.84%, the same as in the first quarter. The bad generation rate (cumulative, annualized) in the first half of the year was 0.74%, down 0.04 pct year on year. Mainly, the bad generation rate for corporate loans fell 0.17 pct to 0.25% from the end of the previous year, while the bad generation rate for personal loans decreased slightly by 4 bps to 1.22% from the end of the previous year. At the end of the second quarter, the Postbank's provision coverage rate was 325.61%, down 1.26pct from the previous quarter. The loan was the same as the previous quarter at 2.72%. The risk compensation capacity was sufficient, and there was little pressure on provision planning. Judging from the risk outlook indicators, the Postbank's attention rate and overdue rate at the end of the second quarter were 0.81% and 1.06%, respectively. They rose 0.1 pct and 0.07 pct from month to month, respectively, and remained low.

Investment advice: Looking at the whole year, the Postbank will increase investment in consumer loans and microfinance on the asset side to increase support for small and micro enterprises and the “three rural areas”; on the debt side, it will continue to absorb low price deposits and take advantage of the “big retail bank”. At the same time, the quality of the company's assets is stable, providing room for performance release. We expect the revenue growth rate of the Postbank in 2024 to be -0.31%, and the net profit growth rate to the mother will be 0.29%. It gives a buy-A investment rating. The target price for 6 months is 5.98 yuan, which is equivalent to 0.7X PB in 2024.

Risk warning: retail transformation fell short of expectations, asset quality deteriorated sharply, macroeconomic recovery fell short of expectations, market fluctuations exceeded expectations, etc.