Items:

The Bank of Shanghai released its semi-annual report, with operating income of 27.9 billion yuan in the first half of 2022, an increase of 0.9% over the same period last year, and a net profit of 12.7 billion yuan, an increase of 3.2% over the same period last year. ROE13.26%, dropped 0.66pct compared with the same period last year.

At the end of the first half of the year, total assets totaled 2.81 trillion yuan, an increase of 6.1 percent over the beginning of the year, of which loans and deposits increased by 4.4 percent and 7.1 percent respectively.

Peace viewpoint:

Earnings growth continues to slow, and non-interest is a drag on revenue under the high base effect. Bank of Shanghai's first-half net profit rose 3.2 per cent (vs+5.4%,22Q1) compared with the same period last year, and the growth rate slowed further, mainly due to the decline in revenue growth. The company achieved 0.9 per cent year-on-year revenue growth (vs+2.9%,22Q1) in the first half of the year, and we judge non-interest income as the main drag. The company's non-interest income in the first half of the year decreased by 10.0% compared with the same period last year, mainly affected by the negative growth of net income from fees and commissions. In the first half of the year, it decreased by 18.6% (vs+3.5%,22Q1). On the one hand, the agency fee income, which accounted for the highest proportion (up to 54%), decreased by 22.9% compared with the same period last year, mainly due to the centralized liquidation of stock expected income-based financial products by the company in accordance with the new regulations of asset management in the same period of 21 years. Resulting in a high base On the other hand, the income from consultants and consulting fees decreased by 45.8% compared with the same period last year, accounting for 12% of the total income compared with the same period last year, mainly due to the decline in income from syndicated loans and financial consultants. The company's net interest income rose 5.7 per cent in the first half from a year earlier (vs+9.1%,22Q1), taking into account the relatively steady growth of the company's size, which was mainly affected by the decline in interest spreads.

The narrowing of interest spreads is in line with expectations, and the rapid increase in deposits supports effective cost control on the debt side. The company's first-half net interest margin was 1.66 per cent (vs1.71%,22Q1), narrowing 8BP from the previous year, and we believe that asset-side pricing is the main pressure on narrowing interest margins, given the effective control of debt-side costs. On the asset side, the return on interest-bearing assets fell 15BP to 3.86% in the first half of the year compared with the previous year, and the loan yield also fell 15BP to 4.57%. The reason is that we have seen a structural decline in the proportion of retail credit, which is 1.5% lower than at the beginning of the year (total vs loans are up 4.4% from the beginning of the year), mainly due to a sharp decline in consumer loans with higher returns affected by the epidemic, down 17.0% from the beginning of the year. On the debt side, although the deposit cost rate rose to 2.11% from the previous year, we judge that due to the rising operating pressure of enterprises, public demand deposits increased by only 2.3% compared with the beginning of the year (total vs deposits increased by 7.1% compared with the beginning of the year), and the growth is relatively weak. However, the overall interest-bearing debt cost ratio fell by 4BP to 2.19 per cent in the first half of the year. Thanks to the benign adjustment of the company's debt structure, deposits with lower interest rates have achieved faster growth compared with inter-bank liabilities, and the average daily proportion of deposits in total interest-bearing liabilities has increased by 1.2pct to 60 per cent compared with the same period last year.

Asset quality remains stable and provision coverage is at a high level. At the end of the first half of the year, the company's non-performing rate was 1.25% (vs1.25%,22Q1), unchanged for three consecutive quarters, of which the non-performing balance and bad rate of public loans fell, but the bad rate of personal loans increased by 20BP to 0.97% from the end of last year, among which the bad rate of consumer loans and credit cards increased significantly, in line with our previous expectations. We estimate that the annualized bad generation rate of the company in the first half of the year is 0.72% (vs0.83%,21A), the marginal release of adverse pressure is slow, and the industry level is maintained at a low level. Generally speaking, the company's asset quality index remains robust. According to forward-looking indicators, the company's attention rate at the end of the first half of the year was 1.66%, which was higher than that at the beginning of the year (1BP). It is expected that the asset quality pressure in the future can be controlled. At the end of the first half of the year, the provision coverage rate was 302%, a month-on-month drop of 1.36pct, a month-on-month drop of 3.77%, and a month-on-month drop of 2BP. Under the background that the company's asset quality performance remains stable, the level of risk offset is still sufficient, which will provide strong support for the elastic release of profits after the epidemic.

Investment advice: significant location advantages, pay attention to post-epidemic restoration. Shanghai Bank continues to cultivate key areas such as the Yangtze River Delta, Guangdong, Hong Kong, Macao, Beijing, Tianjin and Hebei, with obvious location advantages, and the good credit environment in the coverage area also provides a stable source of income for the company. On the other hand, the Bank of Shanghai strives to create a differentiated competitive advantage, focusing on the three main lines of consumer finance, wealth management and pension finance, and the number of pension customers has always been in the first place in Shanghai. It is expected that as the epidemic moderates, the economy repairs and consumer credit demand picks up, corporate profits are expected to continue to repair. Combined with the company's semi-annual report, we maintain the company's profit forecast for 22-24, with a corresponding EPS of 1.71max 1.92max 2.16 yuan and a corresponding profit growth rate of 10.5%, 12.1% and 12.4%, respectively. At present, the Bank of Shanghai has a corresponding PB of 0.42x/0.38x/0.35x in 22-23-24, and the company's valuation level is still at the bottom of the historical quantile, with limited downside space, sufficient safety margin, and maintaining a "recommended" rating.

Risk tips: 1) the macroeconomic downturn has led to a higher-than-expected rise in asset quality pressure in the industry. 2) the decline in interest rates has led to a narrowing of industry spreads than expected. 3) the increase of cash flow pressure of real estate enterprises leads to the rise of credit risk.