Incident: The Postbank disclosed the 2024 third quarter report. The revenue growth rate for the first three quarters of 2024 was 0.09% (interim data was -0.11%); profit growth rate before provision was -1.81% (interim report data was -6.08%); net profit growth rate to mother was 0.22% (interim report data was -1.51%), and the performance was moderately restored. Our comments are as follows:

The net profit growth rate of Postbank in the third quarter of 2024 was 3.50%. Performance growth was mainly supported by growth in scale and cost pressure, while narrowing net interest spreads and provision estimates dragged down performance growth.

Volume: Credit investment supports the steady expansion of the scale of assets

① Asset side: At the end of the third quarter of 2024, the asset size of the Postbank expanded 9.34% year on year, and the growth rate increased 0.81 pct month on month. Among them, the loan size increased 9.46% year on year, down 1.23 pct from the Q2 growth rate. Looking at the single quarter, net loans and interbank assets were the main components supporting the expansion of Postbank's assets. In the third quarter, the two added 127.8 billion yuan and 120.5 billion yuan respectively. At the end of the third quarter, the interest-bearing asset structure of the Postbank was basically stable. The share of loans was 51.80%, a slight decrease of 0.23pct over the previous month; the share of interbank assets increased by 0.64pct to 5.5%. It is expected that the construction of the Postbank's “Post You Win Together” interbank ecosystem platform is showing initial results.

The public loan structure continues to be optimized. Affected by weak market demand, Postbank's general corporate loan size expanded 13.66% year on year in the first three quarters of 2024, and the growth rate decreased by 1.30 pct month on month; in the third quarter, an increase of 56.8 billion yuan was added, a decrease of 28.4 billion yuan over the previous year. Looking at the structure, the ratio of “two small” loan balances, mainly concentrated in the “three rural areas” and small and micro enterprises, to public loans (including discounts) increased by 1.12 pct compared to the end of the previous year, driving the improvement of the loan structure. In terms of investment direction, the Postbank has increased its support for manufacturing, green finance, technological innovation, and inclusive finance.

Retail credit growth is slowing. In the first three quarters of 2024, Postbank retail loans increased 7.30% year-on-year, and the growth rate decreased by 1.49pct month-on-month. The retail loans of the Postbank increased by 36.8 billion yuan in the third quarter, which is expected to be mainly due to the increase in personal microloans in the rural revitalization sector. In the first three quarters of 2024, the company added 28.728 billion yuan in housing loans, contributing to an 8.94% increase in retail loans.

② Debt side: At the end of the third quarter of 2024, the size of Postbank deposits increased by 11.22%, and a better deposit base supported asset expansion. From a structural perspective, Postbank retail deposits at the end of the third quarter were driven by the growth of one-year term deposits and below. The share of total deposits increased 0.1 pct month-on-month to 89.00%, and the deposit structure continued to be optimized.

Price: Net interest spreads continue the downward trend

We estimate that Postbank's net interest spread for the third quarter of 2024 was 1.85%, down 14 bps from year to month and 5 bps, respectively, which was the main factor dragging down the performance.

① The yield on interest-bearing assets continues to decline. In the second half of the year, the yield on interest-bearing assets of the Postbank continued to decline due to the reduction in LPR and weak market demand. At the same time, the share of interbank assets in the interest-bearing assets of the Postbank increased at the end of the third quarter, which is also expected to drag down yields. We estimate that the return on interest-bearing assets of the Postbank in the third quarter of 2024 was 3.28%, down 25 bps from year to month and 11 bps, respectively.

② The cost ratio of interest-bearing debt has decreased. We estimate that Postbank's interest-bearing debt cost ratio for the third quarter was 1.45%, down 12 bps from year to month and 5 bps, respectively. It is expected mainly because bank deposit listing interest rates quickly followed the LPR reduction, which supported the company's interest spreads during the quarter.

At the same time, the proportion of retail deposits in total deposits at the Postbank rose month-on-month at the end of the third quarter. Although the trend of deposit regularization continues, deposits with a term of one year or less grew rapidly, and the debt-side deposit structure improved slightly.

We expect the impact of LPR cuts and stock mortgage repricing in the fourth quarter to continue to be felt, and the return on interest-bearing assets of the Postbank may also be under pressure. However, the retail deposit ratio of the Postbank may continue to rise in the fourth quarter, and the degree of retail-side deposit cashing will also pick up, and the pressure on interest spreads is expected to gradually slow down.

The decline in net non-interest income narrowed. In the third quarter of 2024, the net non-interest income of the Postbank fell 0.99% year on year, and the growth rate increased by 9.34 pct month on month. Among them, net processing fees increased 0.76% year over year, and other non-interest income, mainly investment income, fell 2.58% year on year. The increase in revenue is expected to be mainly driven by businesses such as investment banking and financial management. The decline in other non-interest income may also be due to the low share of transactional financial assets in Postbank's financial assets and failure to redeem profits through transactions in a timely manner.

The cost-revenue ratio improved year over year. The cost to revenue ratio of the Postbank in the third quarter was 60.29%, down 2.94 pct year on year. Since 2024, the Postbank's adjustment of savings agency rates has had an obvious effect. Business and management fees in a single quarter fell 4.17% year on year, and the cost pressure drop contributed 8.26pct positively to the company's net profit growth rate. On the other hand, the company's revenue in a single quarter increased by 0.50% year on year, and the cost to revenue ratio improved year on year as a result of the combination of the two.

Asset quality remains stable. At the end of the third quarter of 2024, Postbank's non-performing rate was 0.86%, a slight increase of 2 bps over the previous month. The bad generation rate (cumulative, annualized) for the first three quarters was 0.79%, a slight increase of 5 bps from month to month. It is expected that the non-performing generation rate of personal loans will increase mainly. Looking at risk forecasting indicators, the Postbank's attention rate and overdue rate were 0.91% and 1.11% respectively at the end of the third quarter, up 0.10pct and 0.05pct, respectively. They remained at a low level, but fluctuations gradually increased. At the end of the third quarter, the Postbank's provision coverage rate was 301.88%, and the loan ratio was 2.59%. The risk compensation capacity was sufficient. Future retail credit risk still needs attention.

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 banks”. The annual interest rate reduction should be less than last year. 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 credit risk is greatly exposed.