As we move into the final quarter of 2024, the landscape for Postal Savings Bank (PSB) reveals a mix of cautious optimism and significant challenges. Recent developments indicate that the bank is navigating a complex financial environment characterized by the effects of macroeconomic policies and shifting market demands. With a notable adjustment in interest rates and an evolving lending landscape, how is PSB faring in its quest to maintain sustainable growth and profitability?

The pressure on Postal Savings Bank's interest-earning asset yields has somewhat alleviated as demand trends show signs of recovery, largely attributed to a series of policy implementations aimed at bolstering the banking sector. In October, the bank, following the lead of other major state-owned banks, enacted its most substantial deposit rate cuts in recent years. These reductions are expected to have a lasting positive impact on the bank's cost structure, thereby potentially narrowing the downward pressure on net interest margins.

On October 30, PSB released its quarterly report, shedding light on its performance over the first three quarters of the year. The bank recorded an operating income of 260.3 billion yuan, reflecting a marginal increase of 0.1% year-on-year. This growth, although modest, marks an improvement from a previous decline observed in the first half of the year, suggesting a gradual recovery in business operations. The bank also reported a net profit attributable to shareholders of 75.8 billion yuan, up 0.2% year-on-year, breaking a previous trend of declines.

Advertisement

As a marker of its financial health, the annualized weighted average return on equity (ROE) now stands at 11.8%, which, while demonstrating resilience, is down 1.1 percentage points from the previous year. Simultaneously, the annualized average return on total assets (ROA) has experienced a slight dip to 0.62%, down 0.07 percentage points year-on-year. The performance impacts can largely be traced back to a year-over-year decline in net interest margins, which has hindered net profit growth.

As of the end of the third quarter, PSB's total asset scale reached 16.7 trillion yuan, a robust increase of 9.3% compared to the previous year. This growth was primarily fueled by a 9.5% rise in total loans and an impressive 11.2% increase in deposits. Notably, the bank's corporate loans played a significant role in driving this growth, although the pace of overall deposit growth remains consistent with industry trends.

Intriguingly, the bank's net interest income increased by 1.5% year-on-year, showcasing a resilient performance despite preceding challenges. The third quarter alone saw a modest growth rate of 0.7% year-over-year. Despite these gains, the net interest margin for the first three quarters stood at 1.89%, a decline of 2 basis points from the first half of the year. Using estimates, the net interest margin for the third quarter is calculated at 1.77%, indicating a quarter-over-quarter decrease of 1 basis point, as both yield on interest-earning assets and cost of interest-bearing liabilities have shown parallel declines.

However, not all indicators are favorable. As of the end of the third quarter, PSB's non-performing loan (NPL) ratio saw a mild increase to 0.86%, reflecting upward pressure from both the attention loan rate (up to 0.91%) and overdue loan rate (up to 1.11%). The bank's provisioning coverage ratio has also been on a downward trajectory, dipping to 301.9%—a stark drop since the end of 2021, signaling the critical need for vigilance in risk management and oversight.

A closer inspection of PSB's income structure reveals an intricate interplay of various revenue streams. The net interest income constituted a considerable portion of the bank's total operating income, amounting to 214.9 billion yuan and reflecting a year-on-year increase of 1.46%. Meanwhile, non-interest income amounted to 45.4 billion yuan, demonstrating a year-on-year decline of 5.95%, albeit with a narrowing margin in the rate of decline. The third quarter saw a notable return to profitability, as the bank's net profit, driven by prudent provisioning adjustments, transitioned from negative territory to a positive growth trajectory.

The shifting landscape of interest rates serves as both a challenge and an opportunity for PSB. The bank has effectively recalibrated its approach in response to the central bank's downward adjustments in the Loan Prime Rate (LPR) and mortgage interest rates, leading to an anticipated easing of net interest margin pressures in the latter half of the year. Predominantly, as the market grapples with the realities of re-pricing existing housing loans, a more supportive environment for lending and broader economic growth could emerge.

The bank's push towards enhancing its fee-based income through a diversified service offering aligns with broader regulatory reforms aimed at revitalizing the financial sector. This strategic pivot has not only sought to stem declines in non-interest income but also to bolster overall revenue stability. By investing in intermediate business services, such as investment banking, trading, and corporate finance, PSB aims to unlock new revenue channels amid tightening margins.

In the midst of the ongoing transformations, the bank has displayed a commendable performance regarding its wealth management offerings, which have become a focal point of differentiation amid the competitive landscape. By the end of September, the bank's retail Assets Under Management (AUM) exceeded 16 trillion yuan, reflecting a growth rate of 7.55% since the end of the previous year. The accumulation of high-value clientele highlights the effectiveness of PSB’s customer engagement initiatives and retention strategies.

Perhaps the most critical insight into PSB’s ongoing strategy is its unwavering commitment to lowering costs, particularly regarding its savings agency fees. In late September, the bank recalibrated its fee tier structure to better align with current market conditions. The comprehensive agency fee rate has been adjusted down to 1.08%, leading to di minimis cost savings, an essential factor in a sustained effort to enhance profitability margins in a softening rate environment.

Despite the challenges, including tightening margins and increased scrutiny on credit quality, the bank has succeeded in cultivating a robust appetite for lending against a backdrop of cautious consumer behavior. The ability to maintain competitive deposit rates has positioned PSB advantageously, allowing it to capture a sizable share of the deposit market, which remains a cornerstone of its funding strategy.

As we look ahead, the trajectory for PSB will heavily depend on upcoming policy maneuvers and macroeconomic indicators. The bank continues to grapple with pressure on its interest margin arising from adjustments made to housing loan rates and pricing shifting in the LPR. Nevertheless, the anticipated benefits from recent deposit rate cuts are expected to cushion some of the immediate impacts on the assets side while setting up a stable long-term financial foundation.

Conclusively, while the simplifications in PSB's business model present a consistent theme of resilience, the necessity for continuous vigilance toward asset quality, non-performing loans, and revenue diversification remains paramount. Addressing these challenges with a mindset focused on sustainability will be crucial as PSB transforms its extensive customer base into a wellspring of reliable revenue growth and operational excellence in the months to come.