1H21's performance exceeded our expectations.

Huaxia Bank announced 1H21 results, exceeding our expectations, marginal improvement in asset quality, and provision efforts to slow down back-feeding profits. The company's 1H21 achieved revenue of 48.113 billion yuan, an increase of 1.1% over the same period last year, a profit of 34.649 billion yuan before provisions, a decline of 1.7% over the same period last year, and a net profit of 10.98 billion yuan, an increase of 17.6% over the same period last year. From the performance attribution point of view, interest spreads and expenses are the drag factors, and the contribution comes from non-interest income, as well as the reduction of provisions to slow back-feed profits.

Development trend

In volume terms, 1H21's net interest income increased by 1.0% compared with the same period last year. Assets / loans / deposits increased by 7.7%, 6.2%, 1.6%, respectively, while the net interest margin fell 20bps. From the perspective of interest-bearing assets, the rates of return on loans and financial investments, which accounted for 59.9% and 30%, respectively, fell 21bps and 23bps, respectively, resulting in a decline in 13bps in the return on interest-bearing assets and an increase in 5bps on the liability side, mainly because the interbank debt cost ratio, which accounted for 23.9%, rose 37bps compared with the same period last year.

Non-interest growth is mainly due to other non-interest contributions. 1H21 non-interest income rose 1.9 per cent year-on-year, of which net income from fees and commissions fell 13.60 per cent from a year earlier, mainly from credit commitments and bank cards, down 24.01 per cent and 11.26 per cent, respectively. Other non-interest income (investment income, fair value change income, exchange earnings) increased by 55.38% over the same period last year, mainly due to the increase in investment income and the fair value of bonds.

The statement continues to be cleared and the asset quality improves marginally. The rate of non-performing loans was 1.78%, down 1bps and 2bps respectively from the previous month and the beginning of the year, and the balance of non-performing loans was 38.478 billion yuan, down 107 million yuan from the end of the first quarter. The potential non-performing loans decreased significantly, but they were still higher than those of the same industry, with concern loans accounting for 3.27%, and 9bps and 15bps down respectively compared with the previous year and the beginning of the year. The provision coverage rate is 157.40%, which is lower than at the end of the first quarter (4.21ppt) and higher than at the beginning of the year (10.18ppt).

Profit forecast and valuation

Keep profit forecasts for 2021 and 2022 unchanged. The current share price corresponds to 0.4 / 0.3 times price-to-book ratio in 2021 / 2022. Considering that the risky assets are still in the process of clearing, the target price is lowered by 25.1% to 7.10 yuan, corresponding to 0.5 times 2021 price-to-book ratio and 0.4 times 2022 price-to-book ratio, which has 29.6% upside space compared with the current stock price.

Risk

The quality of the assets is not as good as expected.