The triple hurdle of Industrial Bank is over, and the inflection point of operation is approaching. Varieties with high dividends and undervaluation are optimistic about valuation restoration.
The first hurdle: reform is difficult - the reform has already paid off
(1) In terms of management, the management team is settled. Chairman Lu Jiajin joined Industrial Bank in 2021. In October 2023, Mr. Chen Xinjian officially became the governor. Currently, Industrial Bank's “one positive and four deputy” management pattern has been formed, and the management team is stabilized; (2) Institutionally, institutional reforms are progressing. In 2023, Industrial Bank continued to push forward institutional mechanism reform and strengthen talent team building. The pace of reform continued to advance; (3) In terms of style of play, investment in technology was effective. Industrial Bank increased its investment in technology in 2023, and the share of technology investment in revenue increased by 1.6 pc to 4.0% compared to 2020. Investment in technology has achieved remarkable results. Since 2022, mobile banking MAU has increased by 44%, and all five major online platforms have achieved rapid growth.
The second hurdle: revenue difficulties -- building a solid foundation and looking forward to a recovery
(1) Looking back at 2023: Societe Generale Bank's revenue in 2023 fell 5.2% year on year, and the growth rate improved 0.4 pc from month to month 23Q1-3. The negative increase in revenue was mainly due to a sharp negative 38% year-on-year increase in revenue in 2023 due to the high financial management base in 2022. Excluding the impact of the base figure, Industrial Bank's revenue momentum has actually stabilized, and Societe Generale Bank's net interest income bucked the trend and achieved a positive 1% increase in 2023.
(2) Looking ahead to 2024: Industrial Bank's revenue is expected to bottom up and improve. Main considerations: ① There is plenty of room for debt optimization. 23Q4 Industrial Bank's debt cost ratio for a single quarter was 2.32%, 7 bps higher than the average for standard banks. The debt cost gap was mainly due to high deposit costs. 23A Industrial Bank's deposit cost ratio is 2.24%, which is 19 bps higher than the average for standard banks, and there is plenty of room for improvement in a downward interest rate environment. ② Asset investment momentum is good. Industrial Bank's loans in 2023 achieved a rapid increase of 10% year over year; among them, public loans achieved a 16% increase year over year, ranking first among stock banks currently disclosed in the data. ③ The financial market has advantages. Industrial Bank's gold market has outstanding characteristics and is expected to benefit from the bullish debt market since 2023H2. Financial investment accounts for 33% of total assets, which is 3pc higher than the average of stock banks that disclose financial reports; 23A's other non-interest income accounts for 17.3% of revenue, which is 4.1pc higher than the average of stock banks that disclose financial reports.
The third hurdle: Impairment is difficult - pressure is expected to improve
(1) Looking back at 2023: rising depreciation is dragging down profits. In 2023, Societe Generale Bank's net profit decreased 15.6% year on year, and the growth rate decreased 6.1 pc from 23Q1-3, mainly due to rising bad generation pressure, leading to an increase in impairment losses. 23A impairment loss increased 25.8% year on year, and the growth rate increased 23 pc month over month; in 2023, the actual bad generation rate (bad+attention) increased by 23 bps to 1.56% year on year.
(2) Looking ahead to 2024: Depreciation pressure is expected to improve. Industrial Bank's current real estate and urban investment risk pressure has abated. At the same time, it is expected that the peak of credit card risk exposure has passed, and the pressure on asset quality is expected to improve in the future. ① CITIC Real Estate: In 2023, Industrial Bank's new defects in public real estate fell 54% year on year, and new defects on local financing platforms fell 55% year over year. ② Credit card: The credit card defect rate at the end of 2023 was 3.93%, down 1 bps from the end of 2023H1. The upward trend in credit card failure rates is slowing down, and it is expected that the peak of risk exposure and impairment has passed.
Profit forecasting and valuation
Societe Generale Bank's current institutional holdings are low, market expectations are low, and valuation level is low. At the end of 23Q4, active public offerings plus shares held 4.8% of freely tradable shares; as of the end of March 28, 2024, PB 0.44x.
Index component+high dividend+operating bottom is expected to support the recovery of Societe Generale's valuation. As a constituent stock of important indices such as the Shanghai Stock Exchange 50, Industrial Bank is expected to benefit from ETF capital inflows. As of the end of March 28, 2024, Industrial Bank's 2023 dividend rate was 6.4%.
Net profit to mother is expected to increase by 0.26%/4.27%/6.38% year-on-year in 2024-2026, corresponding to BPS 36.68/39.31/42.15 yuan. The current price corresponds to 0.44 times the 2024 PB valuation. The target price is 20.33 yuan/share, corresponding to 0.55 times the 2024 PB, and the current price space is 25%, maintaining the “buy” rating.
Risk warning: The macroeconomic economy has stalled, and the bad situation has been greatly exposed.