Incident: Industrial Bank disclosed its 2023 annual report. The revenue growth rate of Societe Generale Bank in 2023 was -5.19% (first three quarters of 2023: -5.59%), profit growth rate before provision was -6.03% (first three quarters of 2023: -7.67%), and net profit growth rate to mother was -15.61% (first three quarters of 2023: -9.53%). The revenue performance was in line with expectations, and the profit growth rate was lower than expected. Our review is as follows:
Industrial Bank's net profit growth rate in the fourth quarter of 2023 was -37.91%. The main drivers of performance growth were the increase in the size of interest-bearing assets, a drop in cost pressure, and a decrease in the income tax ratio; the narrowing of net interest spreads and increased pressure on provision plans clearly dragged down performance.
Volume: The scale of support for public credit is expanding, and retail credit is growing weakly
① On the asset side, Industrial Bank's total assets at the end of 2023 increased 9.62% year on year. The growth rate was 0.44pct higher than in the first three quarters of 2023, and the total scale exceeded 10 trillion yuan. From a structural point of view, the increase is mainly due to increased credit investment. At the end of 2023, Industrial Bank's total loans accounted for 53.76% of total assets, up 0.21pct from the first three quarters of 2023. At the end of 2023, the total amount of Industrial Bank loans increased 9.59% year over year, and effective credit after discounting grew 11.64% year over year.
Public credit supports the expansion of assets. At the end of 2023, the company's public loan balance (excluding discounts) grew by 20.27% year on year, down 2.70 pct from the first three quarters of 2023; the fourth quarter of 2023 added 82.6 billion yuan, a year-on-year decrease of 42.4 billion, mainly due to the concentrated investment of general public projects in the first half of the year. From a structural point of view, manufacturing, leasing, and business services accounted for the highest share of public loans, at 23.01% and 20.01%, respectively. During the reporting period, the company actively responded to the complex internal and external economic situation and took the initiative to increase the layout of the “five new tracks” of science and innovation, inclusion, energy, automobiles, and parks. All fields achieved double-digit growth compared to the previous year, with year-on-year growth rates of 31.88%, 23.95%, 16.16%, 26.14%, and 27.40%, respectively.
Retail loans continued to grow slowly. Affected by the weak economic recovery, individual consumer demand is weak, and retail loan investment by Industrial Bank is weak. The retail loan balance at the end of 2023 grew by 0.12% year on year, basically the same growth rate as the previous quarter; in the fourth quarter of 2023, an increase of 19.4 billion yuan, a year-on-year decrease of 200 million yuan. From a structural perspective, the company reduced the concentration of mortgage and credit card loans. The balance of personal operating loans and consumer loans increased by 16.22% and 20.57% year-on-year respectively at the end of 2023.
② Debt-side aspect. Deposit balances at the end of 2023 increased 8.45% year over year, and the share of total debt fell 2.22pct to 54.94% from the first three quarters of 2023. The company's deposit structure continued to improve during the reporting period. Retail deposits at the end of 2023 accounted for 26.40%, up 2.17pct from the first half of 2023; the share of time deposits was 54.67%, down 1.99pct from the first three quarters of 2023.
Price: 23Q4 The net interest spread for a single quarter decreased by 2 bps month-on-month. The cumulative decline in annual interest spreads narrowed the company's net interest spread (cumulative) by 1.93% in 2023, down 17 bps year-on-year, and the decline narrowed by 2 bps year-on-year.
We estimate that Societe Generale Bank's net interest spread for the 23Q4 quarter was 1.90%, down 20 bps from year to month and 2 bps, respectively, mainly due to a marked decline in yield and a small decline in cost ratio.
Due to weak credit demand and continued decline in LPR, we estimate that Industrial Bank's yield on interest-bearing assets in the 23Q4 quarter was 4.54%, down 18 bps from year to month, down 3 bps from year to month, respectively. In the future, the company will continue to optimize its balance and liability structure, make up prices by volume, and strive to stabilize interest spreads.
Non-interest income declined year-on-year, supporting investment income. Industrial Bank's net non-interest revenue for the fourth quarter of 2023 decreased by 14.49% year-on-year, mainly due to a 59.72% year-on-year decline in net revenue from handling fees and commissions due to a drop in the scale of old financial management products and capital market fluctuations. Other non-interest income increased by 302.05% year-on-year, partly because of the low base effect in the fourth quarter of 2022, and second, investment income increased due to fluctuations in market interest rates.
Costs and expenses fell year over year. In the fourth quarter of 2023, Industrial Bank's cost-revenue ratio was 36.46%, a year-on-year decrease of 3.37pct. By reducing administrative expenses, Industrial Bank achieved a 11.98% year-on-year decrease in business management expenses in the fourth quarter of 2023, which provided some support for profit before provision against the backdrop of a year-on-year decline in revenue in a single quarter.
Asset quality is maintained at an excellent level. At the end of 2023, Industrial Bank's non-performing rate and attention rate were 1.07% and 1.55% respectively, the same as in the first three quarters of 2023, and an increase of 2 bps, respectively. From a structural point of view, ① Generally, the non-performing ratio of loans to public loans was 0.96%, down 1 bps from the end of the first half of 2023. Mainly due to a year-on-year decrease of 0.77pct in the wholesale and retail industry's non-performing ratio (wholesale and retail loans account for 8.95% of public loans). Defect rates in leasing and business services and water conservancy, environmental and public facilities management have risen, creating a major drag. ② The retail credit non-performing rate was 1.42%, up 3 bps from the end of the first half of 2023. Mainly due to a 5 bps increase in the non-performing mortgage rate and an 18 bps increase in the non-performing ratio for personal operating loans in the second half of 2023. At the end of 2023, Industrial Bank's provision coverage rate was 245.21%, up 8.77pct from the end of 2022.
Investment advice: We expect the company's revenue growth rate to be -4.31% in 2024, and the net profit growth rate to be -7.92%. We give it a buy-A investment rating. The target price for 6 months is 22.25 yuan, which is equivalent to 0.6X PB in 2024.
Risk warning: The downward pressure on the economy has increased; asset quality has deteriorated beyond expectations.