Matters:

The Bank of Shanghai released its semi-annual report for 2023. Operating revenue for the first half of the year was 26.4 billion yuan, a negative increase of 5.66% year-on-year, net profit of 12.8 billion yuan, an increase of 1.27% over the previous year, net interest spread decreased by 14BP to 1.40% from the beginning of the year, the non-performing rate decreased by 3BP to 1.22% from the end of the first quarter, and the provision coverage rate decreased 2.3% to 285% compared to the end of the first quarter.

Ping An's point of view:

The gap between negative revenue growth narrowed, and the decline in median income dragged down overall growth. The company achieved a year-on-year increase of 1.27% (+3.25%) in net profit in the first half of 2023. 23Q1). Profit levels continue to be under pressure. We believe that the main reason is that the decline in revenue levels has dragged down the recovery in profit levels. In the first half of the year, operating income increased by 5.66% year-on-year (-7.12%, 23Q1). The negative growth gap has narrowed. The decline in interest income is an important factor affecting the company's revenue. Net interest income was greatly affected by the decline in asset-side pricing, and greater regional competitive pressure further increased the pressure on asset pricing. Interest income increased by 10.4% year-on-year in the first half of the year (-11.7%, 23Q1). Also, in terms of the medium revenue business, the company's negative growth gap continued to widen, with a year-on-year decline of 17.9% in the first half of the year (-15.7%, 23Q1). It is expected that this is due to a decline in residents' financial management demand due to capital market fluctuations in the second quarter. Overall, the overall pressure trend on the company's revenue side is quite obvious, but looking forward to the next quarter, as the effects of the steady growth policy gradually become apparent, demand release in the Yangtze River Delta region, where the company is deeply involved, is expected to accelerate, and the company's performance is also expected to gradually pick up after it has been built up.

The level of interest spreads continues to be under pressure, and the size of personal savings is growing rapidly. The company's net interest spread at the end of the year 23 was 1.40% (1.54%, 22A). The interest margin level continued to decline, and was clearly affected by repricing and interest rate cuts. In terms of asset-side income, the asset-side yield is 3.66% (3.74%, 22A), of which the loan yield is 4.35% (4.44%, 22A). In terms of debt-side costs, the debt cost ratio reached 2.22%, up 5 BP from the beginning of the year, but its deposit cost ratio declined. The deposit cost rate at the end of the year was 2.10% (2.12%, 22A), mainly due to the increase in the share of current deposits in the company. The share of current deposits at the end of the year increased 2.20 percentage points to 38.3% compared to the beginning of the year. In terms of scale, by the end of the year 23, the company's total assets had increased 7.8% year on year (+7.7%, 23Q1), respectively. The pace of expansion remained stable, and credit investment had slowed in the 2nd quarter. By the end of the year, loans had increased 6.4% year on year (+6.9%, 23Q1). On the debt side, deposit expansion was relatively more positive, with a year-on-year increase of 7.1% (+6.7%, 23Q1). In particular, the size of personal deposits remained at a relatively rapid level, and personal deposits increased by 28.6% compared to the beginning of the year.

Asset quality is stable, moderate and improving, and risk allocation is safe and secure. By the end of the half of 2023, the Bank of Shanghai's non-performing rate fell by 3BP to 1.22% compared to the end of the first quarter, and the non-performing level declined sequentially. Specifically, at the end of the year 23, the non-performing personal loan rate increased by 16BP to 0.98% from the beginning of the year, and the non-performing rate of corporate loans fell by 15BP to 1.41% from the beginning of the year. The decline in the non-performing loan rate in the real estate, construction, and wholesale and retail industries was an important reason driving the decline in the non-performing rate of public loans. We estimate that the company's annualized bad generation rate at the end of the year 23 was 0.87% (0.84%, 22A), and write-off and disposal efforts have increased. Judging from forward-looking indicators, at the end of '23, the company's attention rate was 1.74%, down 3BP from the end of the 1st quarter, and the overdue rate was 1.68% (1.70%, 22A). Overall, the risk was relatively manageable. In terms of provisions, the company's provision coverage rate at the end of the year and loan ratio decreased by 2.3% /11BP to 285%/3.47%, respectively, compared to the end of the first quarter. Although the provision level declined, the overall level remained steady.

Investment advice: Valuation has a safe margin, wait for signs of an inflection point in fundamentals. The Bank of Shanghai continues to be deeply involved in key regions such as the Yangtze River Delta, Guangdong, Hong Kong, Macao, and Beijing-Tianjin-Hebei. The location advantage is obvious. The good credit environment within the region also provides the company with a stable source of revenue. At the same time, 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 has always maintained the number one position in the number of pension customers in Shanghai. Since 2023, industry operations have faced challenges. It is expected that with the restoration of the economic environment and a further recovery in credit demand, the company's fundamentals are expected to reach an inflection point. Based on the company's semi-annual report, we maintain the company's profit forecast for 23-25. We expect the company's 23-25 EPS to be 1.66/1.79/1.93 yuan, respectively, and the corresponding profit growth rate is 6.0%/7.8%/8.0%, respectively. Currently, the company's stock price corresponds to the 23-25 PB of 0.40x/0.37x/0.34x, respectively. The company's current valuation level is still at the bottom of the historical quartile, the margin of safety is sufficient, and the “recommended” rating is maintained.

Risk warning: 1) The macroeconomic downturn has caused the pressure on the industry's asset quality to rise more than expected. 2) As interest rates declined, industry interest spreads narrowed more than expected. 3) Increased cash flow pressure on housing enterprises has led to a rise in credit risk.