Event: On March 27, Everbright Bank released its 2023 Annual Report. Over 23 years, it achieved cumulative revenue of 145.7 billion yuan, YoY -3.9%; net profit to mother of 40.8 billion yuan, YoY -9.0%; non-performing ratio of 1.25%, and provision coverage rate of 181%.

Performance growth is under pressure. In '23, Everbright Bank's revenue and net profit to mother were -3.9% and -9.0%, respectively. The gap in revenue and profit growth mainly stemmed from the company's implementation of asset quality control and increased calculation efforts in 23Q4. Asset impairment losses were +67.9% year-on-year in 23Q4. What is behind our judgment is that the asset quality of credit cards and consumer loans is still under pressure.

On the revenue side, net interest income performance was weak, and non-interest income increased slightly. Net interest income in '23 was -5.4% year-on-year, mainly due to the continued narrowing of net interest spreads. The net interest spread at the end of '23 was 1.74%, down 27BP from the end of '22, mainly affected by lower retail loan yields. Mid-year revenue was -11.4% year-on-year, with revenue in all categories falling. Other non-interest income was +29.1% year-on-year, mainly due to an increase in the fair value of transactional financial assets under a low base.

Credit investment supports entities, and transformation strategies are being actively promoted. Everbright Bank's total assets, loans, and deposit sizes in '23 were +7.5%, +6.0%, and +4.5%, respectively. Against the backdrop of insufficient demand, on the one hand, credit investment focused on key areas of the national economy. The scale of green, science and innovation, manufacturing, and inclusive small and micro loans in '23 was +57%, 51%, 25%, and 24%, respectively. On the other hand, the focus is on improving comprehensive financial service capabilities. Retail finance, corporate finance, and gold market businesses respectively anchor the three major North Star indicators of AUM, FPA, and GMV, which are expected to drive an increase in the share of light capital income and facilitate the accumulation of source and low-cost deposits.

Increased capital strength. At the same time as the scale was steadily expanding, Everbright Bank's core Tier 1 capital adequacy ratio at the end of '23 was 9.18%, a significant increase of 46 BP over the end of '22. Consider two reasons: First, 23Q1 companies had a high proportion of debt-for-equity swaps. Second, Fortune Bank's strategic transformation was more effective and may save venture capital usage. At the end of '23, RWA was +5.3% year-on-year, and the growth rate has been declining for 5 consecutive quarters.

The quality of assets has improved, and the level of provision has been raised. At the end of 23, Everbright Bank's non-performing rate was 1.25%, down 10BP from the end of 23Q3, and the same as at the end of '22. The company significantly increased its write-off efforts in 23Q4, and the balance of non-performing loans declined, which partly supported a 5.6pct increase of 5.6pct to 181% at the end of 23Q3.

Investment advice: Strong wealth management characteristics, consolidating the asset quality foundation, Everbright Bank actively serves the real economy, investing in key areas, and steadily expanding asset scale; the three major Polaris indicators are growing well, continuing to lead business restructuring, which is conducive to capital savings and the accumulation of high-quality deposits, and is expected to bring about performance flexibility; although revenue and profit growth are under pressure in the short term, the company strictly controls asset quality, and related indicators are running steadily. EPS is expected to be 0.72, 0.76, and 0.81 yuan respectively in 24-26, and the closing price on March 28, 2024 corresponds to 0.4 times 24-year PB, maintaining the “recommended” rating.

Risk warning: Macroeconomic growth is declining; asset quality is deteriorating; the decline in net interest spreads in the industry exceeds expectations.