Well set for policy tightening; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Banking / Finance Banks Company PSBC Date 5 March 2018 Initiation of Coverage Well set for policy tightening; initiating with Buy Reuters Bloomberg Exchange Ticker 1658.HK 1658 HK HSI 1658 Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Pre-prov profit (CNYm) 67,023 59,830 75,544 92,835 108,453 Net profit (CNYm) 34,859 39,801 45,372 53,539 63,466 EPS (CNY) 0.56 0.53 0.56 0.64 0.74 EPS growth (%) -11.4 -4.2 5.3 14.4 15.0 PER (x) – 6.9 7.0 6.2 5.4 Price/book (x) – 0.82 0.82 0.74 0.66 Yield (net) (%) – 2.0 2.1 2.4 2.8 ROE (%) 15.2 12.9 12.4 12.6 13.0 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close A retail bank with strong deposit base, clean balance sheet and robust growth ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE’S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OF PRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU. Price at 2 Mar 2018 (HKD) 4.86 Price target - 12mth (HKD) 6.00 52-week range (HKD) 5.23 - 4.04 HANG SENG INDEX 30,583 Hans Fan, CFA Research Analyst (+852 ) 2203 6353 hans.fan@db.com Jacky Zuo, CFA Research Analyst (+852 ) 2203 6255 jacky.zuo@db.com Edward Du Research Associate (+852 ) 2203 6185 edward.du@db.com Price/price relative 4.05.06.07.09/163/179/17PSBCHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -6.5 10.5 3.2 HANG SENG INDEX -6.2 5.2 28.9 Source: Deutsche Bank We initiate coverage on Postal Savings Bank of China (PSBC) with a Buy rating and a target price of HK$6.00 (24% upside potential). PSBC fits well into our long-held thesis of accumulating deposit-funded banks (e.g., big 4, CRCB) amid tighter monetary policy and regulations, given its solid deposit franchise and limited asset quality pressure. With the bank driven by further domestic rate hikes and PSBC’s notable loan growth, we expect stronger-than-peers earnings growth (17% CAGR in 2016-19E vs. 6% avg.). As such its ROE should recover after bottoming out in 2017E, in contrast to the sector’s ROE downtrend. Key points to support our Buy rating  A deposit-funded bank, so a key beneficiary of domestic rate up-cycle. With solid deposit franchise (44% loan-to-deposit ratio), PSBC is the bank that is most sensitive to market rate hikes ( 50bps hike = 6% earnings up).  Cleaner balance sheet, so much less impacted by tightening. Unlike peers, which are experiencing asset quality pressure, PSBC could report the lowest NPL formation ratio, given its lower exposure to riskier sectors and shadow banking.  Potential A-share listing (lift CET-1 by 50bps) to support future growth. We expect the bank to lift LDR to 50% by 2020 and achieve a 16% CAGR in its loan book. Valuation, catalysts and risks  Valuation: 0.7x 2018E PB and 6.1x PE, a notable discount of 6% vs. big-four, down from c.28% premium since its IPO. We value PSBC using a three-stage GGM, and base our target price on 2018E book value.  Catalysts: mini hikes in OMO/MLF rate (start from Mar), FY17/1Q18 results  Downside risks: asymmetric benchmark rate hike; operational/compliance Distributed on: 05/03/2018 00:21:34 GMT7T2se3r0Ot6kwoPa 5 March 2018 Banks PSBC Deutsche Bank AG/Hong Kong Page 2 Model updated:02 March 2018 Running the numbers Asia China Banks PSBC Reuters: 1658.HK Bloomberg: 1658 HK Buy Price (2 Mar 18) HKD 4.86 Target Price HKD 6.00 52 Week range HKD 4.04 - 5.23 Market Cap (m) HKDm 393,811 USDm 50,299 Company Profile Founded in 2007, PSBC is a large retail bank in China. It focuses on providing services to SMEs and "agriculture, rural areas and farmers". PSBC has around 40k banking outlets and over 500mn retail customers in China Hans Fan, CFA +852 2203 6353 hans.fan@db.com Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E Data Per Share EPS (stated) (CNY) 0.63 0.56 0.53 0.56 0.64 0.74 EPS FD (stated) (CNY) 0.63 0.56 0.53 0.56 0.64 0.74 EPS FD (DB adj.) (CNY) 0.63 0.56 0.53 0.56 0.64 0.74 Growth rate -