Incidents:
On August 28, the Bank of Xiamen released its semi-annual report for 2023, achieving operating income of 2.96 billion yuan, an increase of 3.6% over the previous year, and net profit of 1.43 billion yuan, an increase of 15.9% over the previous year. The annualized weighted average return on net assets was 12.28%, an increase of 1.12 pct over the previous year.
Comment:
Revenue growth has remained steady, and profits have remained high. The year-on-year growth rates of the company's 1H23 revenue, profit before provision, and net return profit were 3.6%, -1.5%, and 15.9%, respectively, with changes of -1.4, -1.4, and 0.9 pct from 1Q23, respectively. Among them, the year-on-year growth rates of net interest income and non-interest income were -1.6% and 24%, respectively, down 2.4 and 0.1 pct from 1Q23.
Split the year-on-year profit growth rate structure. Scale expansion, non-interest, and provision are the main contributors, driving performance growth rates of 12.3, 11, and 29.6 pct, respectively. Judging from marginal changes, boosting factors mainly include: increased non-interest and provision contributions; drag factors mainly include: scaling up, narrowing contributions, and increasing negative income tax drag on income tax.
Asset investment focuses more on price balance, and the pace of table expansion has slowed down. The company added $12.9 billion in interest-bearing assets in a single quarter, a year-on-year decrease of 19.7 billion yuan, and a year-on-year balance growth rate of 5.8 pct to 0.8% compared to the end of 1Q. Judging from the investment structure of interest-bearing assets, the volume of new loans, financial investments, and interbank assets in the 2Q quarter was 1.2 billion, -9.2 billion, and -2.5 billion respectively, with year-on-year decreases of 5.4 billion, 700 million, and 4.4 billion, respectively. Among them, the loan balance grew 9% year on year, down 2.8 pct from the end of the 1st quarter. At this stage, the downward pressure on the macroeconomic economy is increasing, and the demand for effective financing from micro actors is relatively weak, yet the “countercyclical” adjustment on the policy side remains strong. As a result, the conflict between credit supply and demand has increased, putting pressure on loan pricing.
However, in the credit business, the Bank of Xiamen has always sought a better match between risk and return. In the current economic situation, companies tend to be cautious about investing in credit rather than simply “exchanging price for volume,” which has slowed down the 2Q expansion rate. At the same time, the company 1H23 continues to reduce pressure on high-risk industries such as real estate, which is also hampering loan growth.
Structural adjustment takes priority over scale growth, and credit resources are concentrated in key areas such as green, science and innovation, and inclusiveness. In the 2Q quarterly new loan structure, corporate loans, retail loans, and bill discounts increased by -1.6 billion, -800 million, and 1.2 billion dollars respectively. Among them, corporate loans and retail loans decreased by 6.3 billion yuan and 2.1 billion yuan, respectively, and bill discounts increased 3.6 billion yuan over the same period last year. The loan structure was further split, and the Bank of Xiamen's credit resources were concentrated in key areas such as green, science and innovation, and inclusiveness. By the end of the 2Q, the Bank of Xiamen's green loans, “high-tech loans”, and inclusive small and micro enterprise loans had increased by 44.6%, 12.5%, and 9%, respectively, compared to the beginning of the year, far higher than the 0.4% increase in the bank's loans; in the first half of the year, green loans, “high-tech loans”, and inclusive small and micro enterprise loans had increased 1.8 billion, 800 million, and 5.5 billion dollars respectively, higher than the incremental level of 900 million in total loans.
The contraction of bank underwriting business and the drop in pressure on high-cost deposits have dragged down deposit growth. The company added interest-paying debt of 11.5 billion dollars in a single quarter, a year-on-year decrease of 143 billion yuan, and the balance growth rate decreased by 5.9 pct to 0.4% compared to 1Q. Judging from the structure of additional interest-paying debt, the size of new deposits, payable bonds, and interbank debt in 2Q in a single quarter was -143 billion, 1.3 billion, and 1.4 billion respectively.
Among them, deposits decreased by 42.1 billion yuan year on year, and payable bonds and interbank debt increased by 5.6 billion yuan and 18.2 billion yuan respectively; deposit balances grew -12.7% year on year, down 20.9 pct from the end of the 1st quarter. Further investigating the deposit structure, the size of corporate deposits, retail deposits, and security deposit deposits added in the 2Q quarter was -2.5 billion, 1.3 billion, and -13 billion, respectively. Among them, corporate deposits and security deposit deposits decreased by 22.4 billion yuan and 17.6 billion dollars, respectively, over the same period last year. 2Q continues to reduce the deposit pressure on high-interest corporate deposits. At the same time, the amount of money drafts accepted by banks dropped by 15.7 billion dollars compared to the beginning of the year, which also hampered the size of security deposit deposits to a certain extent.
The 2Q interest spread narrows and the pressure is reduced. The Bank of Xiamen's NIM announced value in the first half of the year was 1.34%, which is 19 bps narrower than in 2022; we estimate that the company's 1H23 interest spread is 1.29%, which is the same as 1Q23. Among them, the estimated return on interest-bearing assets and the cost ratio of interest-paying liabilities were 3.60% and 2.44%, respectively, up 2 bps and 4 bps from 1Q23.
From the asset side, the company's credit business in the second quarter pursued commercial sustainability more, and managed the volume and price balance of credit investment by stabilizing interest spreads. The return on 2Q interest-bearing assets was generally stable; from the debt side, the regularization of deposits made debt costs rigid compared to asset-side pricing. Looking ahead, the Bank of Xiamen adjusted the deposit listing interest rate twice on July 1 and August 7. The interest rate listed for current deposits was reduced by a total of 5 bps, and the cumulative reduction for time deposits was 1 to 13 bps. Among them, the reduction for long-term deposits was relatively large, which will help ease the pressure on deposit regularization.
The growth rate of non-interest income was stable, and the share of non-interest income increased by 4 pct to 24% compared to the same period last year. The company's 1H23 non-interest income grew at a year-on-year rate of 24%, a slight decrease of 0.1 pct from 1Q. Among them, net handling fees and commission revenue grew by -18.4% year-on-year, up 8.2 pct from 1Q. Among them, agency business (YoY +65.7%) was the main contributor; the growth rate of net other non-interest income was 53.8%, down 14.1 pct from 1Q, but remained high. It was mainly driven by profit and loss from changes in fair value (revenue achieved in the first half of the year, loss of 11.5 billion dollars in the same period last year) and other income (YoY +361.5%). Among them, there was a sharp increase in other benefits, mainly due to an increase in incentives for inclusive small and micro loans.
Bad indicators have achieved a “double reduction”, and risk compensation capacity has been further improved. As of the end of 23Q2, the Bank of Xiamen's non-performing loan balance was 1.6 billion yuan, down 130 million from the end of the 1st quarter. The non-performing loan ratio fell 6 bps to 0.8% from the end of the 1st quarter. The non-performing loan ratio achieved a “double drop”. The non-performing loan ratio was far below the industry average; the interest loan ratio was 1.17%, down 10 bps from the end of the 1st quarter; the total non-performing plus concern loan ratio was 1.97%, down 16 bps from the end of the 1st quarter. The company wrote off 780 million non-performing loans in the first half of the year, 400 million more than the previous year, and non-performing disposal increased markedly; the net non-performing disposal rate was 0.66%, up 13 bps from the beginning of the year. In terms of provisions, the company's credit impairment loss/average total assets in the first half of the year were 0.1%, up 5 bps from 1Q, and provision calculation efforts increased; the provision coverage rate was 394.9%, up 21.6 pct from the end of 1Q, and the loan ratio was 3.16%, down 5 bps from the end of 1Q.
The year-on-year growth rate of RWA has clearly slowed, and capital adequacy ratios at all levels have increased. At the end of 23Q2, the company's core level/level/ capital adequacy ratios were 9.89%/10.99%/14.15%, respectively, up 23/26/30 bps from the end of 1Q. The company's capital adequacy ratio at all levels has increased, mainly due to a slowdown in RWA's year-on-year growth rate. At the end of 2Q, the company's RWA growth rate was 8.7% year on year, down 6.1 pct from the end of 1Q. Furthermore, the company's 2Q cash dividend scale was 765 million dollars, and the impact on the company's capital adequacy ratio at all levels was roughly 33 bps.
Profit forecasting, valuation and ratings. The Bank of Xiamen is one of the urban commercial banks with the most complete offsite layout in Fujian Province. The Haixi Economic Zone has strong economic development, and the company's business location advantages are prominent. Bank of Xiamen mainly invests in public business, and mainly in manufacturing, wholesale and retail businesses, while the retail side favors personal business loans and housing mortgage loans. At the same time, the company's asset quality is excellent, and the non-performing loan ratio continues to operate at a low level below 0.9%. The high provision coverage ratio makes the company's risk compensation ability strong, and also greatly expands the profit margin. The company's current issue of convertible bonds has been accepted by the Shanghai Stock Exchange. After the issuance of convertible bonds is successfully implemented, it will help to further increase core Tier 1 capital and expand the company's business space. Maintain the company's EPS forecast for 2023-2025 at 1.09/1.24/1.38 yuan. The current stock price corresponding to the PB valuation is 0.62/0.56/0.51 times, and the corresponding PE valuation is 5.13/4.53/4.05 times, respectively, maintaining the “increase in holdings” rating.
Risk warning: If the macroeconomic economy declines more than expected, it may increase the potential risk of exposure to large amounts of risk.