Incident description

Postbank's revenue for the first three quarters of 2024 grew +0.1% year on year (growth rate of -0.1% in the first half of the year, +0.5% growth rate in the single quarter), net profit growth rate +0.2% year on year (growth rate of -1.5% in the first half of the year, +3.5% in the single quarter), and the net interest income growth rate of +1.5% in the first three quarters (+1.8% growth rate in the first half of the year). At the end of the third quarter, the defect rate was +2BP to 0.86% month-on-month, and the provision coverage rate was -24pct to 302% month-on-month.

Incident Reviews

Performance: Early agency rates were reduced beyond expectations, leading to profit release. The year-on-year revenue growth rate for the first three quarters was positive, with net interest income continuing to grow positively. Profits achieved positive growth. At the end of September, agency rate adjustments were announced, effectively saving savings agency expenses for the third quarter. Business and management expenses for the single quarter decreased by 2.2 billion yuan year on year, and profitability was clearly released. Furthermore, thanks to overall excellent asset quality, the amount of credit impairment losses in the income statement for the first three quarters decreased by 10% year on year.

Scale: Personal microfinance is expected to grow well, and the deposit growth rate is leading among major banks. Total loan volume at the end of the third quarter was +7.7% compared to the beginning of the period, and +1.4% month-on-quarter. Public loans were +11.7% compared to the beginning of the period, +1.6% month-on-quarter; notes were +6.2% month-on-month.

Retail loans were +5.7% compared to the beginning of the period and +0.8% month-on-quarter. Personal microfinance loans are expected to maintain a relatively rapid growth rate. Personal microfinance loans at the end of the first half of the year were +10.3% compared to the beginning of the period; mortgages maintained positive growth, +1.2% at the end of the third quarter compared to the beginning of the period, and +0.2% month-on-quarter.

Deposits were +7.5% compared to the beginning of the period and +1.0% month-on-quarter. The only bank with a year-on-year increase in deposits in the first three quarters was mainly lower in public deposits, which were less affected by manual interest payments. Demand deposits accounted for 26.7% at the end of the first half of the year, down 2 pcts from the beginning of the period.

Interest spreads: The cost of debt continues to improve, and interest rates on fully benefiting deposits are expected to be cut in the future. The net interest spread for the first three quarters was 1.89%, down 2BP from the first half of the year. Interest rates on deposits continued to improve. It was revealed that the debt cost ratio for the first three quarters was 1.49%, down 2BP from the first half of the year, further consolidating the low debt cost advantage. The yield on interest-bearing assets is estimated to be 3.36% in the first three quarters, down 4BP from the first half of the year. It is expected that loan yields will continue to decline in the fourth quarter and next year due to mortgage interest rate cuts and LPR cuts. However, the postal bank regularly accounts for a high share of interest-bearing assets (73% at the end of the first half of the year), and deposits account for a high share of interest-bearing assets. It is expected that deposit interest rate cuts can effectively hedge the impact of interest rate cuts on some loans and ease the pressure on interest spreads.

Non-interest: Net revenue from processing fees was hampered by fee cuts. Non-interest income in the first three quarters was -6.0% YoY (growth rate -7.5% in the first half of the year), with net handling fee revenue -12.7% YoY. Revenue from the main agency insurance business declined year-on-year due to fee cuts.

Asset quality: Continue to be excellent, and fluctuations in non-performing rates reflect retail risk. The non-performing rate increased month-on-month at the end of the third quarter. The attention rate was +9BP month-on-month, and the new bad generation rate in the first three quarters was 0.79%, up 5BP from the first half of the year. It is expected to mainly reflect retail risk, which is a common pressure on the industry. It is expected that personal microfinance and small business loans will generate faster in some regions. The absolute level of various asset quality indicators continued to be excellent among the major banks. At the end of the third quarter, provision coverage fell 24 pct to 302% month-on-month to support profits. The absolute level of provision was still high, and risk compensation capacity was outstanding.

Investment advice: Procyclical labels are popular, and they are optimistic about an upward correction in valuation. A shares are currently valued at 0.62x2024PB, with a 2023 dividend rate of 5.0%, and a discount rate of 21% for H shares. The reduction in agency rates in the third quarter unleashed profits, and asset quality had an advantage among major banks. From a long-term perspective, the Postbank has strong retail resource endowments, outstanding advantages in market-based governance mechanisms, and a clear growth path.

At the end of September, an interim dividend ratio of 33.7% (accounting for net profit attributable to common shareholders) was announced. The dividend ratio remains stable, and dividends are expected to be paid in early 2025. As a major bank with a pro-cyclical label, if economic expectations pick up further in the future, it is expected to drive further upward revisions in valuation. At the same time, the dividend ratio is attractive, and it continues to be recommended, maintaining a “buy” rating.

Risk Alerts

1. The downward pressure on the economy increased, and net interest spreads continued to narrow; 2. Asset quality fluctuated, and the non-performing rate increased markedly.