Event: On March 28, Industrial Bank released its 2023 Annual Report. Over 23 years, it achieved cumulative revenue of 210.8 billion yuan, YoY -5.2%; net profit to mother of 77.1 billion yuan, YoY -15.6%; non-performing rate of 1.07%, and provision coverage rate of 245%.
Performance may be at the bottom of construction. Industrial Bank's revenue and net profit to mother grew at a year-on-year rate of +0.4 pct and -6.1 pct in the previous three quarters, respectively. The company's 23-year performance may be bottoming out. The analysis is as follows: 1) Supported by strong interest spreads and a high rate of credit expansion, net interest income in '23 was +0.8% YoY. 2) The year-on-year revenue in '23 was -38.4%. The biggest decline was partly affected by the increase in the one-time income confirmation base for old financial management products in '22. The impact of this high base may subside in '24. 3) Other non-interest income was +14.1% year-on-year in '23. The company is expected to continue to take advantage of the financial market and improve investment returns. 4) The company increased its impairment accrual efforts in 23 to consolidate asset quality. In 23Q4, asset impairment losses were +142% year-on-year, thus dragging down the net profit growth rate. However, as negative pressure on new generation decreases, impairment accrual is also expected to decrease, thus bringing room for profit release.
Interest spreads have been strong, and credit has been expanding steadily and at a high rate. Industrial Bank's net interest spread at the end of 23 was 1.93%, a slight decrease of 1BP from the end of 23Q3. On the asset side, the total amount of loans at the end of '23 was +9.6% year-on-year. The increase during the year was mainly due to contributions to public loans. In '23, an additional 533.4 billion yuan was generally invested in public loans, and the average interest rate for public loans was 4.30%, achieving excellent both volume and price. Among them, the company's active deployment of the “five major tracks” achieved remarkable results. At the end of '23, the balance of loans in science and innovation finance, inclusive small and micro, PBOC green loans, enterprise finance auto finance, and park finance were +31.9%, +24.0%, +27.1%, +26.1%, and +27.4%, respectively, all higher than the total loan size.
On the debt side, the debt cost ratio for interest payments at the end of '23 was 2.34%, down 1BP from the end of 23H1. The effect of replacing high-cost deposits was remarkable. The interest rate on domestic RMB deposits dropped by 11BP year-on-year for the full year of '23.
Asset quality is stable, and risk mitigation in key areas is effective. Industrial Bank's non-performing rate at the end of 23 was 1.07%, the same as at the end of 23Q3; the attention rate rose slightly by 2BP to 1.55% from the end of 23Q3. Among them, it is effective for risk management and control areas, and subsequent impairment calculation pressure is expected to ease. 1) Real estate urban investment risk mitigation. New defects in public real estate business and local government financing platform debt were 54% and -55%, respectively. The risk exposure period may have passed. 2) The credit card defect rate continued to fall from a high level. At the end of 23, the non-performing loan ratio was 3.93%, compared to -1BP at the end of 23H1.
Investment advice: stable interest spread performance, excellent asset quality
Societe Generale Bank's revenue growth rate rebounded marginally in '23. Stable interest spreads and rapid expansion brought positive net interest income growth. Although current mitigation of stock risks has brought about depreciation and accrual pressure, the negative generation of urban investment has declined, and the bad credit card rate has declined from a high level. Subsequent asset quality is expected to improve, thus freeing up room for profit growth. Furthermore, the company's cash dividend ratio has steadily increased by 1 pct per year since 2019, to 28% in 23. EPS is expected to be 3.75, 3.85, and 4.03 yuan respectively in 24-26, and the closing price on March 29, 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.