In the first half of 2023, Bohai Bank steadily promoted strategic transformation, continuously adjusted its business structure, optimized its business layout, handled risks carefully, and its overall business performance improved steadily.

Matters: Bohai Bank released its 2023 mid-year report. In the first half of the year, it achieved operating income of 13.083 billion yuan and net profit of 4.099 billion yuan, a year-on-year difference of -3.03%/-6.91%, respectively; the non-performing loan ratio increased 0.08pct to 1.84% from the end of the previous year.

The decline in revenue and profit narrowed at the same time. Bohai Bank's 2023H1 operating income is -3.03% year-on-year (-9.35% year-on-year in 2022), net profit is -6.91% year-on-year (-29.23% in 2022). On the profit factor breakdown: 1) On the revenue side, the company's 2023H1 net interest income/non-interest income is -17.83%/+75.52% year-on-year respectively. The slowdown in net interest-side growth is mainly affected by the decline in interest-bearing asset size and interest spreads; non-interest investment business revenue growth is impressive. 2) On the expenditure side, the company's 2023H1 cost/revenue ratio was 38.69%, +4.84pct year-on-year, and the company's expenses increased. 3) On the provision side, the company's 2023H1 calculated asset impairment losses of -16.11% year-on-year, of which loan credit impairment losses were -2247 billion yuan, and investment credit impairment losses were +1,482 billion yuan.

The scale of assets and liabilities is growing steadily. 1) The scale of assets and liabilities increased steadily: At the end of 2023H1, the company's total assets and total liabilities were +1.87%/+1.73% compared to the end of the previous year (+5.01%/+5.18% at the end of the previous year), of which loans and deposits were -0.23%/+6.98% compared to the end of the previous year (+3.33%/+4.73% at the end of the previous year, respectively). Although loan growth slowed, rapid development of financial investment led to asset size growth, and deposit growth remained optimistic. 2022H1 2022H1 2) Interest spreads followed the decline of the industry: The net interest spread of 2023H1 companies was 1.21%, -34 bps year over year. Among them, the yield on interest-bearing assets and the cost ratio of interest-bearing debt were -12bps/ +13 bps, respectively.

Fee income grew well, and the investment business performed well. 1) Fee revenue increased well: The company's 2023H1 fee and commission net revenue was +23.72% year-on-year, of which agency business fees were +56.64%, contributing more than 92% to the increase in fee revenue, mainly due to the company's vigorous development of wealth management business, especially the sharp increase in revenue from the contract sales insurance business of 178.61% year on year. 2) The investment business performance was impressive: the company's 2023H1 “transaction benefits+financial investment net income” totaled +190.69% year-on-year. The company's capital business and bond business developed well in the first half of the year, steadily increasing the benefits of investment business.

Asset quality is solid, and risk compensation capacity is stable. 1) Consolidated asset quality: The company's non-performing loan ratio and interest loan ratio at the end of 2023H1 were 1.84%/2.84%, respectively, and +0.08pct/-0.05pct respectively compared to the end of the previous year. The company followed the principles of prudence and fully exposed risks to ensure that internal risk control requirements were implemented. 2) Stable risk compensation capacity: On the credit side, the company's provision coverage rate at the end of 2023H1 was 144.42%, which remained stable compared to -6.53pcts at the end of the previous year; on the financial investment side, the company followed the principles of prudence, timeliness, effectiveness, and objectivity to prepare for impairment of financial assets included in the impairment calculation. As of the end of 2023H1, the total balance of the company's financial asset impairment reserves was 37.840 billion yuan, an increase of 1,468 billion yuan over the end of the previous year.

Risk factors: The macroeconomic growth rate fell short of expectations, and asset quality deteriorated sharply; the level of net interest spreads fell short of expectations; the implementation of stable real estate policies fell short of expectations; and industry regulatory policy adjustments.

Investment advice: Promote transformation and prudently deal with risks. In the first half of 2023, Bohai Bank steadily promoted strategic transformation, continuously adjusted its business structure, optimized its business layout, handled risks carefully, and its overall business performance improved steadily. Considering that the market pricing environment has been under pressure since 2023 and the impact of next year's repricing, we adjusted the company's 2023/24 EPS forecast to 0.26 yuan/0.26 yuan (the original forecast was 0.35 yuan/0.37 yuan), and added the 2025 EPS forecast to 0.28 yuan. The current H-share price corresponds to 2023 0.22xPb.