Scale is expanding steadily, and credit costs are declining

Net profit, operating income, and PPOP for 23Q1 were +1.1%, +3.1%, +2.4% year-on-year (+1.0%, +4.3%, +5.4% compared to '22). Performance drivers include accelerated credit investment and declining credit costs. It is proposed to pay a dividend of $0.30 per share in '22, with an annual cash dividend ratio of 18.78% (2021:

18.98%), dividend ratio 5.31% (2023/4/28). In view of fluctuations in investment income, we forecast EPS of 1.76/1.86/1.95 yuan for 23-25 and BVPS forecast value of 15.60 yuan for 23, corresponding to 0.36 times PB. Comparatively, the company Wind in '23 unanimously predicted an average PB value of 0.72 times. The company has a lot of room for growth in the province, but since risks in some industries are rising and potential risks are still being clarified, we gave the 23-year target PB0.45 times, with a target price of 7.02 yuan, maintaining the “increase in holdings” rating.

Steady expansion of scale and optimization of debt costs

Total assets, loans, and deposits at the end of March were +6.5%, +13.5%, and +8.3% year-on-year (+6.1%, 11.9%, and 7.0% at the end of '22, respectively), and the growth rates of assets, credit, and deposits all increased. Of the new loans added in Q1, the share of public/retail/notes was 66%/-4%/38%, respectively. The company adheres to a major strategy of serving the local community. Public loans were +15.0% year-on-year at the end of March. Net interest spreads in '22 fell 9 bp to 2.27% from 22H1, the return on interest-bearing assets and the cost ratio of interest-bearing liabilities fell 15 bps and 6 bps from 22H1, and loan yield and deposit cost ratios fell 15 bps and 2 bps from 22H1. Debt costs have improved, mainly due to increased lower costs, accumulation of transactional capital, and active reduction in listing interest rates on some deposits.

The 23Q1 interest spread compared to 22-9 bps is expected to be mainly dragged down by the decline in asset-side pricing.

Investment earnings fluctuate, retail transformation deepens

The year-on-year revenue in 23Q1 was -31.7%, and the growth rate was +5.9 pct compared to the end of '22. There was a significant decline in revenue growth in mid-'22, mainly due to investment banking transaction fee revenue of -63.1% year on year and bank card fee revenue -14.4% year on year. 23Q1 investment income (investment income plus income from changes in fair value plus exchange income) was -21.0% year on year (+1.9% compared to year 22). The decline in investment income was mainly due to changes in the fair value of transactional financial assets, which led to changes in fair value income of transactional financial assets of -92.5% year-on-year. The company promoted the digital, scenario-based and diversified transformation and upgrading of retail business. Retail deposits at the end of March were +17.6% compared to the same period in '22 (+17.1% compared to '22), and retail deposits/total deposits increased by +2.0pct to 46.3% compared to the end of '22. The contribution of retail deposits is becoming more and more prominent.

The decline in credit costs, the level of supplementary capital

The non-performing rate, attention rate, and provision coverage rate at the end of March were 1.49%, 3.24%, and 260% respectively. Compared with +4bp, +39bp, and -1pct at the end of '22, asset quality fluctuated slightly. The balance of loans overdue for 90 days or more in 22 years accounted for 72.5% of non-performing loans. Compared with the end of 22H1 - 16.9pct, risk assessment became stricter. It is estimated that the generation rate of defects in 23Q1 was 0.95%, +0.43pct compared to 22Q4. The annualized credit cost for 23Q1 was 1.46%, -0.07pct compared to the previous year. The capital adequacy ratio at the end of March and the core Tier 1 capital adequacy ratio were 14.20% and 11.03% respectively. Compared with the end of '22, +4bp and +8bp respectively, risk resilience was strengthened.

Risk warning: Economic recovery fell short of expectations, and the deterioration in asset quality exceeded expectations.