Based on the local and deep ploughing areas, Xi'an Bank continues to deepen the transformation of "digitization, characteristics and integration", which is expected to inject new momentum into the sustainable development of the company. Maintain the "overweight" rating.

Matters: Xi'an Bank released its mid-2022 report that operating income and homed net profit in the first half of the year fell 8.5% and 13.4% respectively compared with the same period last year; the non-performing rate decreased by 0.03pct to 1.22% on a quarter-on-quarter basis.

The level of negative income and profit growth narrowed in the second quarter. The company's net profit in the first half of the year was-13.4% compared with the same period last year (- 14.1% in the first quarter). Taken apart: 1) the growth rate at the revenue end was slightly positive, and the operating income in the first half was-8.5% year-on-year (+ 3.0% in the second quarter), mainly due to the repair of non-interest income growth. 2) the expenditure side is generally stable. In the first half of the year, the company's cost-to-income ratio increased by 1.28pct to 24.97% compared with the same period last year, and business and management fees were-3.62% year-on-year, showing the effect of cost control. In terms of provision, the asset impairment loss in the first half of the year was 1.5% higher than that in the same period last year (year-on-year-24.0% in the first quarter). In the context of revenue-side repair in the second quarter, the provision strengthened prudent thinking.

In the second quarter, the expansion of the table was repaired, and the spread performance was relatively weak. In the first half of the year, the company's net interest income was-9.8% compared with the same period last year (first quarter-9.8%). According to the split of volume and price: 1) the scale expansion returned to positive growth. Due to the local epidemic at the end of last year, the company's total assets increased by-1.5% in the first quarter. Asset growth returned to positive growth in the second quarter (+ 3.6%). In that quarter, the company took the initiative to strengthen the allocation of credit assets and investment assets. 2) the margin of net interest margin weakened in the second quarter, and the company disclosed that the net interest margin was 1.74%, which was 1.91% lower than the level of last year (1.91%). According to the average method at the beginning and end of the period, the net interest margin decreased above 5bp in the second quarter, and the repricing drag after the interest rate cut at the asset end is expected to be the main reason.

The marginal growth of middle income picked up, and other non-interest performances were outstanding in the second quarter. In the first half of the year, the company's non-interest income was + 0.7% year-on-year (- 60.4% in the first quarter). Specific split: 1) the net income of fees and commissions decreased by 23.8% year-on-year (- 41.3% in the first quarter). The related investment banking business (- 76.7%) and trade finance (- 27.9%) were relatively dragged down in the first half of the year. 2) other non-interest income is + 29.9% year-on-year (year-on-year-75.0% in the first quarter), and the change in investment income and fair value in the second quarter combined recorded 205 million income, an increase of 179 million over the same period last year. It is expected that the increase in the scale of investment assets will work together with the downward trend of the market interest rate center.

The write-off and disposal efforts have been intensified, and the quality of book assets has been stable. The company's non-performing loan ratio fell 0.03pct to 1.22% quarter-on-quarter in the second quarter, while the company focused on the loan ratio also fell 0.19pct to 2.41% over the same period. In the first half of the year, the change in provisions showed that the company's write-off scale was 1.674 billion (a significant increase of 1.047 billion over the same period last year). Overall, after the impact of the epidemic at the end of last year, the company's asset quality was in the stage of disposal and repair. In terms of provision, the asset impairment loss in the first half of the year increased by 1.5% compared with the same period last year (- 24.0% in the first quarter), and the provision provision strengthened prudent thinking in the context of revenue-side repair in the second quarter; the company's half-year-end provision coverage rate was 209.74% (down 10.57pct from the first quarter), and the loan ratio was 2.56% (down 0.2pct from the first quarter), and there may still be supplementary needs in the next stage.

Risk factors: the macroeconomic decline has exceeded expectations, leading to a significant deterioration in asset quality.

Investment suggestion: Xi'an Bank has a foothold in the local and deep farming areas, and continues to deepen the transformation of "digitization, characteristics and integration", which is expected to inject new momentum into the sustainable development of the company. Considering that the profit factors of the company are still in the process of recovery since the second quarter, the company's 2022 EPS forecast for 23 years is 0.58 PB (the original forecast is 0.67 Universe 0.71 yuan), and the current stock price corresponds to 0.53x Universe in 2022. Combined with the three-stage dividend discount model (DDM), and with reference to the similar asset size and business structure of Qilu Bank and the Bank of Qingdao (average 0.69x PB,Wind consensus expectation), slightly adjust the company's A-share target valuation to 0.65x PB (2022), corresponding to the target price of 4.00 yuan. Maintain the company's "overweight" rating.