Matters:
Industrial Bank released its 2023 annual report. It achieved full year operating income of 210.8 billion yuan, a year-on-year decrease of 5.2%, and realized net profit of 77.1 billion yuan, a year-on-year decrease of 15.6%, and an annualized weighted average ROE of 10.64%. By the end of '23, total assets reached 10.2 trillion yuan, up 9.6% from the beginning of the year. Among them, loans increased 9.6% from the beginning of the year, and deposits increased 8.4% from the beginning of the year. The 2023 profit distribution plan is: 10.40 yuan (tax included) for every 10 shares, with a dividend rate of 29.64%;
Ping An's point of view:
The decline in revenue has narrowed slightly, and the increase in provision planning has increased. Societe Generale Bank's net profit in 2023 was negative by 15.6% year-on-year (-9.5%, 23Q1-3). Weak revenue growth and increased provision increases were important factors dragging down profits. In terms of revenue, annual revenue was negative by 5.2% year on year (-5.6%, 23Q1-3). The narrowing of interest spreads and the decline in residents' demand for wealth management all had a significant negative impact on revenue. Net interest income increased 0.8% year over year (+1.1%, 23Q1-3), and net income from handling fees and commissions increased 38.4% year over year (-30.4%, 23Q1-3), all of which declined to varying degrees, in line with industry trends. However, at the same time, it can be seen that the positive contribution of the bond market increased slightly in the fourth quarter. Other non-interest income for the whole year rose 16.7 percentage points to 14.1% compared to the growth rate in the previous 3 quarters. Judging from the strength of the provision increase, the company's annual credit impairment losses increased 25.8% year-on-year (+2.8%, 23Q1-3), and the increase in bad generation pressure led to an increase in accrual provisions.
The reduction in interest spreads is superior to that of peers, and the asset structure continues to be optimized. Industrial Bank's net interest spread at the end of '23 was 1.93% (1.94%, 23Q1-3). The decline was superior to the overall narrowing of stock banks, mainly hampered by asset-side pricing levels. The yield on interest-bearing assets at the end of 23 was 4.00% (4.05%, 23H1), and the loan yield was 4.57% (4.63%, 23H1). Continued interest rate cuts and the negative impact of interest rate adjustments on existing mortgage loans gradually became apparent. Cost-side pressure eased slightly. The 23-year interest-bearing debt cost ratio was 2.34% (2.35%, 23H1), and the deposit cost ratio was 2.24% (2.26%, 23H1), all falling to varying degrees from the first half of the year. At the same time, we can see the gradual release of dividends brought about by the adjustment of deposit listing interest rates. At the end of 23, the cost rate for personal time deposits and the cost ratio for corporate time deposits were 3.11%/2.94%, respectively, down 4 BP/8BP from the first half of the year.
The positive attitude in terms of scale continued. At the end of '23, the asset size increased by 9.6% (+9.2%, 23Q3), of which loans increased 9.6% year on year (+9.9%, 23Q3). Looking at the split loan structure, it is still a major contributing factor. In line with industry trends, the share of corporate loans increased 5.14 percentage points to 58.0% at the end of the year. In particular, resource investment in manufacturing gradually increased. The share of loans to public manufacturing increased 1.6 percentage points to 13.3% year on year, and the quality and efficiency of services to the real economy continued to improve . Retail loans were dragged down by mortgages and growth was slightly weak. The balance remained flat at the end of last year. Among them, personal mortgage loans had a negative year-on-year increase of 1.95%. Continued strength in inclusive finance led to a 16.2% year-on-year increase in the company's personal operating loans. The growth rate was significantly higher than the average growth rate of loans. On the debt side, deposits at the end of '23 were 8.4% (+11.2%, 23Q3), and the deposit balance in a single quarter decreased by 80.3 billion yuan in the fourth quarter. We expect this is related to the company's active pressure reduction on high-cost deposits.
Asset quality pressure is manageable, and provision levels are rising month-on-month. Industrial Bank's non-performing rate at the end of 2023 remained flat month-on-month at 1.07% at the end of the third quarter. We estimated the annualized non-performing loan generation rate of 1.29% (1.23%, 23H1), and the pressure to generate bad loans increased. We determined that it was mainly due to asset quality disturbances caused by exposure to small and micro loan risks. Looking at key areas, the non-performing ratio of loans to public real estate is 0.84% (0.81%, 23H1), and the non-performing asset ratio of local financing platforms is 2.52% (1.33%, 23H1). Asset pressure has increased, but considering the 54% year-on-year decline in the company's public real estate business in '23, the new bad debt of local government financing platforms dropped 55% compared to '22. The increase in entry thresholds and the gradual clearance of stock risk is expected to remain stable. In terms of forward-looking indicators, the attention rate at the end of '23 rose 2BP to 1.55% from the end of the 3rd quarter, and the overdue loan ratio was 1.36% (1.43%, 23H1). The decline in the overdue rate was significant. The increase in the company's bad disposal efforts and improvement in temporary collection management capabilities drove the overdue rate to continue to decline, and the overall pressure on potential assets remained stable. In terms of provision, Industrial Bank's provision coverage rate and loan coverage rate at the end of 2023 increased by 7.43 pct/8 bp compared to the end of the 3rd quarter to 245%/2.63%, and risk compensation capacity continued to be consolidated.
Investment advice: “commercial bank+investment bank” creates differentiated management, and the dividend ratio is higher than that of peers. The institutional mechanism of Societe Generale is flexible. Around the “commercial bank+investment bank” layout, it continuously promotes business transformation in the direction of light capital, light assets, and high efficiency. Currently, the company's internal and external business is developing in a balanced manner, and ROE is always at the forefront of the stock market. The company proposed that in the future, it will create three golden business cards: Green Bank, Fortune Bank, and Investment Bank. We are optimistic about the long-term development space of the relevant circuit. In particular, in '23, the company raised its dividend ratio by 1.33 percentage points to 29.64%, further highlighting the dividend value. Considering the gradual onset of pressure on bank operations since this year, we have lowered the company's 24-25 profit forecast and added a 26-year profit forecast. The company's 24-26 EPS is 3.50/3.65/3.82 yuan respectively (the original 24-25 forecast was 4.72/5.01 yuan, respectively), and the corresponding profit growth rates are -5.8%/+4.4% +4.8%, respectively (the original 24-25 forecast was 6.6%/6.1%, respectively). Currently, the stock price of Industrial Bank is 0.43x/ 0.40x/0.38x. Considering that the company's current valuation safety margin is relatively high, long-term profitability is expected to recover after short-term revenue side disturbances subside, maintaining a “highly recommended” rating.
Risk warning: 1) The macroeconomic downturn has caused the pressure on the industry's asset quality to rise more than expected. 2) As interest rates declined, industry interest spreads narrowed more than expected. 3) Increased cash flow pressure on housing enterprises has led to a rise in credit risk.