Incident: Everbright Bank released its 2023 annual report. In 2023, it achieved operating income of 145.7 billion yuan, a year-on-year decrease of 3.9%, and realized net profit of 40.8 billion yuan, a year-on-year decrease of 9.0%. In 2023, it was announced that 1.73 yuan (before tax) will be distributed for every 10 shares, with a dividend ratio of 28.41% (28.07% in 2022).

Performance: There is still pressure on the revenue side, and deposit costs are improving.

Revenue and pre-provision profit growth rates for the full year of 2023 were -3.9% and -4.4%, respectively, up 0.4 pc from the first three quarters, and up 2.3 pc respectively. Net profit growth rate to mother was -9.0%, down 12.0pc from the previous three quarters, mainly dragged down by narrowing interest spreads and increased provision increases. Specifically:

1) Net interest income: Net interest income grew at -5.4%, down 1.2pc from the previous three quarters, and the net interest spread was 1.74%, down 8 bps from 2023H1, mainly due to strong pressure on the asset side.

A. Asset side: The yield on interest-bearing assets decreased by 8 bps compared to 2023H1, and the yield on loans decreased by 12 bps to 4.75%. Among them, the yield on corporate loans decreased by 8 bps and the yield on personal loans decreased by 19 bps, mainly affected by factors such as one-time adjustments in interest rates on existing housing loans and declining interest rates on newly issued loans.

B. Debt side: The interest-bearing debt cost ratio decreased slightly by 1 bps to 2.39% compared to 2023H1, and the deposit cost ratio decreased by 3 bps to 2.32%. Among them, the cost of term deposits decreased by 5 bps, and the customer structure was optimized.

2) Non-interest income: Net revenue from processing fees and commissions grew at a rate of -11.4%, the same as in the previous three quarters. Handling fees and commission revenue declined throughout the year, mainly due to a 14.17% year-on-year decline in bank card service fee revenue and a 13.9% year-on-year decrease in credit card transaction amounts for the whole year. Other non-interest income grew at a rate of 29.1%, up 19.3pc from the previous three quarters. Other non-interest income in Q4 increased by 2.2 billion yuan year on year, of which investment income increased 1.4 billion yuan year on year. It is expected to be mainly due to the increase in investment-related income driven by declining interest rates in the Q4 bond market.

Asset quality: Public deficits improved month-on-month, and the quality of personal loan assets fluctuated.

1) At the end of December, the defect rate was 1.25%, down 10 bps from month to month, and the attention rate and overdue rate were 1.84% and 1.95%, respectively, down 2 bps and 2 bps, respectively, from the end of June last year.

2) By category, the non-performing ratio decreased by 23 bps to 1.24% from the end of June 2023, and the balance of non-performing loans decreased by 4.1 billion yuan, mainly due to an improvement in the asset quality of manufacturing loans (the non-performing balance decreased by 4 billion yuan). The personal loan non-performing ratio increased by 18 bps to 1.36% compared to the end of June 2023, and the personal non-performing balance increased by 2.7 billion yuan. It is expected to be mainly due to fluctuations in the asset quality of credit card loans.

3) In terms of dynamics, the non-performing rate was 1.48%, up 16 bps from the first half of 2023. Of these, a total of 53.7 billion yuan of non-performing loans were disposed of throughout the year, an increase of 4.7 billion yuan over last year, and a provision of 45.2 billion yuan, a decrease of 2.5 billion yuan compared to last year. Credit costs for the full year of 2023 were 0.80%, an increase of 8 bps over the previous three quarters, mainly due to the impact of the misalignment of the quarterly provision schedule. Looking at the whole year, credit costs in 2023 fell by 3 bps compared to 2022, and have maintained a downward trend for three consecutive years.

4) At the end of December, the provision coverage rate was 181.27%, up 5.6 pc from month to month, and the loan ratio decreased by 19 bps to 2.27%.

Assets and liabilities: The public sector is growing rapidly, and retail demand is still insufficient.

1) Asset side: At the end of December, total assets reached 6.77 trillion yuan (+7.5% year over year), loans reached 3.79 trillion yuan (+6.0% year over year), and Q4 had a net increase of 25.7 billion yuan. Looking at the breakdown, public loans increased by 57.4 billion dollars (+12.1% year over year) in the second half of last year, and the industry mainly invested in infrastructure and manufacturing; the size of low-yield notes fell by 9 billion yuan, and retail loans decreased by a net decrease of 5.3 billion yuan (-0.4% year over year), mainly due to weak demand for housing loans and credit cards (net decrease of 7.4 billion and 20 billion dollars, respectively) in the second half of the year.

2) Debt side: At the end of December, the deposit volume reached 4.02 trillion dollars (+4.6% compared to the beginning of the year), and the share of demand deposits (30.2%) increased by 2.2 pc compared to 28.0% at the beginning of the year.

Business: Anchoring the three North Stars and continuing to expand in key areas.

1) In terms of wealth management, the bank's retail customers reached 152 million at the end of December (+3.5% compared to the beginning of the year), and AUM increased by 12.4% to 2.73 trillion yuan. Among them, private banking customers increased 12.3% to 63,500, and private AUM increased 12.3% to 637.8 billion. Net income from personal wealth management fees fell 7.5% year-on-year for the whole year, which is expected to be mainly dragged down by the decline in fund and wealth management income. Among them, agency insurance income increased by 43.7% year on year.

2) The total amount of FPA to the public reached 5.1 trillion yuan, an increase of 5.06% over the previous year, and the interbank financial transaction volume (GMV) reached 3.94 trillion yuan, an increase of 18.14% over the previous year.

Investment advice: In the short term, Everbright Bank is still under pressure on the revenue side due to declining interest spreads and poor handling fee performance, which is in line with industry trends. However, in the medium to long term, performance is expected to show good elasticity as retail demand recovers and the wealth management business picks up in the future.

Considering that the company is still facing pressure from interest spreads in the short term and the current slow recovery in consumption, we lowered the company's net profit from 2024-2026 to 381/372/37.3 billion yuan, maintaining the previous “buy” rating.

Risk warning: macroeconomic downturn; consumption recovery falls short of expectations; wealth management recovery falls short of expectations.