4Q23 Revenue and profit growth were lower than our expectations
Chongqing Agricultural Commercial Bank announced its 2023 results: annual revenue and net profit to mother were -4% and +6% year-on-year; 4Q23 was -6% and -8% year-on-quarter, lower than our expectations, mainly due to the growth rate of scale and the decline in interest spreads falling short of expectations. Looking ahead, we focus on “New Chongqing” bringing business opportunities and focusing on “digital empowerment” bringing core competitiveness. We expect the company's net profit to maintain steady growth of around 6% in 2024.
Development trends
Interest spreads are unavoidable, and falling credit costs drive profit growth. 1) Asset size growth rate was steady. At the end of 4Q23, total assets, loans, and deposits were +7%, +7%, +9%, and -0.4%, and -1.3% quarter-on-quarter. 2) Interest spreads were under pressure. The annual interest rate spread fell 24 bps to 1.73% year on year, the average daily return on assets fell 30 bps to 3.67% year on year, and the average daily debt cost ratio fell 10 bps to 2.03% year on year. We estimate a net interest spread of 1.54% for 4Q23, down 10 bps from quarter to quarter. This is still due to a significant decline in return on assets, which fell 15 bps to 3.36% month-on-month. 3) Asset quality continues to show an improvement trend. The non-performing rate decreased by 1bp to 1.19% quarterly. We estimate that the non-performing rate remained low at 0.6% month-on-month, falling sharply year-on-year, and credit costs fell 9bps to 0.72% year over year; the share of concerned loans and overdue loans remained flat at 1.1% and 1.4% at the end of 1H23; provision coverage increased by 13ppt to 367% month-on-month. 4) The core Tier 1 capital adequacy ratio rose to 13.53%, and the dividend ratio remained at 30%.
Focus on the business opportunities brought by “New Chongqing”. We continue to monitor the progress of the “new Chongqing” construction, including the construction of two cities in Chengdu and Chongqing, the new land and sea corridors in the west, the construction of a “33618” modern manufacturing cluster, and a package of urban investment bonds. Chongqing has set a GDP growth target of 6% and an industrial investment growth target of 14.0% in 2024. If the construction of the “new Chongqing” progresses well, we expect that the Chongqing Agricultural Commercial Bank will clearly benefit as a regional bank with a high local market share.
Focus on “digital empowerment” to bring core competitiveness. The Chairman of the Annual Report mentioned in his speech that he will continue to promote the “retail launch, technology promotion, and talent enforcement” strategy and the “all-in-one four-wheel drive” development system, use all efforts to accelerate digital transformation, and win future competition through organizational structure changes, management process changes, and business model changes. Organizational structure transformation: Integrate the “customer-centered” concept into the organizational system to achieve integrated customer value design, one-stop service for business headquarters, one-stop branch office connection, and all-round optimization of the fintech system; management process transformation: comprehensively sort out functional responsibilities and work processes through digitalization, necessity, compliance, and global assessment, “subtract” at process nodes and “multiply” in terms of enabling support; Business model transformation: make good use of the empirical advantages of serving the county, the data advantages of the retail customer base, and the basic advantages of the future financial ecosystem Service model.
Profit forecasting and valuation
As net interest spreads fell short of expectations, profit forecasts for 2024E and 25E were lowered by 2.4% and 2.6% to $11.568 billion and $12.259 billion. The current A share price corresponds to 0.4 times, 0.4 times 2024E, 25E P/B, H shares 0.3 times, 0.2 times 2024E, 25E P/B. Maintain the outperforming industry rating and the target price of HK$5.71/4.43 for A/H shares. A shares correspond to 0.5 times, 0.4 times 2024E, 25E P/B, and H shares correspond to 0.4 times 2024E and 25E P/B. There is 22.8% and 36.7% upside compared to the current stock price.
risks
Net interest spreads declined due to CITIC chemical bonds, and the quality of assets exposed to retail and overcapacity weakened.