Core views
The second series with undervalued values and changing targets: Bank of Suzhou upgraded its strategic direction, from “small for beauty” to “moving towards reality”. At the same time, it optimized the organizational structure, and adjusted the business division system to an integrated overall distribution system. With serving locally operating state-owned enterprises as an important starting point, the Bank of Suzhou has a clear path of scale expansion and is expected to enter the trillion-dollar urban commercial banking sequence by 2026. After interest spreads stabilize, revenue flexibility can be expected, asset quality is excellent, and profits will remain at the first tier of 20%.
summary
Strategic upgrading: From “small for beauty” to “moving towards reality”, using operating state-owned enterprises as growth points to support scale expansion and acceleration of quality. Previously, under the strategic direction of “small is beautiful,” the Bank of Suzhou guaranteed pricing and risk control by transferring a certain scale of growth. The scale was lower than that of commercial banks in listed cities, and the growth rate lagged behind the Suzhou branch of other banks, which did not match the volume and development speed of the local economy in Suzhou. After the Bank of Suzhou's strategy was upgraded to “move towards reality,” it began to fully integrate into Suzhou's booming real economy and increase support for local operating state-owned enterprises. It is expected that under the premise of ensuring asset quality, scale expansion will accelerate markedly. If Bank of Suzhou increases its loan size growth rate to around 20% in 2024-2026, it will achieve its goal of becoming a “trillion city commercial bank” in 2026, and its market share is expected to increase to 5% in 2026.
Organizational structure optimization: The organizational structure was upgraded again, and the division system was adjusted to integrated management with a total distribution system.
Unlike the flexible division model, which focuses on serving small and medium-sized enterprises, which focus on operating state-owned enterprises, the Bank of Suzhou adjusted its organizational structure in the second half of 2023, adjusted the division structure to a general branch system, strengthened collaboration with public retail, and comprehensively served customers, so as to better obtain service premiums and higher current deposit retention.
Once interest spreads stabilize, the Bank of Suzhou's revenue flexibility can be expected: According to estimates, while maintaining the current large-scale growth rate, if the 25-year net interest margin decline narrows to -2bps, the revenue and profit growth rates can increase by 1.4 pct and 2.1 pct, respectively, and ROE by 0.2 pct. If the net interest spread remains basically the same as in 24, the revenue and profit growth rates will increase by 2.5 pct and 3.8 pct, respectively, and ROE will rise to 15%. If the Bank of Suzhou successfully increases its loan size growth rate to 20% in the next three years, and the decline in net interest spreads narrows to -2bps in 2025, then the revenue growth rate will increase to more than double digits, and ROE will rise to around 16%, officially entering the top ranking of high-quality urban commercial banks.
Excellent asset quality, high profit growth of the Bank of Suzhou: the Suzhou region has a well-developed economy, excellent business conditions, and the quality of credit assets is significantly better than the national average. Supported by Suzhou's rapidly developing economy, the Bank of Suzhou has a high “floor” of asset quality, which can guarantee long-term sustainable profit release. Under the trend of steady volume and price growth and excellent asset quality, Bank of Suzhou's ROE improvement path is already very clear.
The Bank of Suzhou's strategy has been upgraded, focusing on expanding the scale and improving the quality of operating state-owned enterprises. After interest spreads stabilize, revenue flexibility can be expected, asset quality is excellent, and profits are expected to maintain a rapid growth rate of more than 20%. The current stock price corresponds to 0.56 times 24-year PB, which is in line with undervaluation and changing targets. We expect net profit growth rates of 20.1%, 20.5%, and 20.5% for 2023-2025, respectively, and revenue growth rates of 1.8%, 1.5%, and 5.7%, respectively. According to the relative valuation method, the Bank of Suzhou's valuation center is around 0.8 times PB, corresponding to a target price of 8.75 yuan/share, giving it a purchase rating for the first time.