Introduction to this report:

Minsheng Bank's revenue and net profit growth rate in 2023 showed a recovery trend. The size of small and micro loans increased further and the non-performing rate declined, deposit costs improved marginally, and asset quality was stable, moderate and positive, and maintained an increase rating.

Summary:

The investment proposal takes into account the 2023 financial report and 2024 credit volume and price trend forecast, and adjusts Minsheng Bank's 2024-2026 net profit growth forecast to 0.28%/1.22%/2.69%, corresponding to EPS0.72 (-0.13) /0.73 (-0.23) /0.75 (new) yuan. Maintain the target price of HK$3.96, corresponding to 0.29 times PB in 2024, and maintain an increase in holdings rating.

Performance is recovering, and the characteristics of small and micro loans are distinct. Revenue in 2023 fell 1.2% year on year. The decline was 14.4 percentage points narrower than in 2022, 0.9 percentage points narrower than the previous three quarters, other non-interest income increased 29.9% year over year, and surged 159.6% year on year in Q4, which was the main supporting factor for revenue. Net profit increased 1.6% year over year, and profitability was generally stable. The balance and liability scale grew steadily. Among them, the scale of small and micro loans was close to 800 billion yuan, an increase of 15.8%, and the balance of inclusive small and micro enterprise loans was 612.27 billion yuan, an increase of 11.51%. The number of inclusive small and micro enterprise loan customers increased by 110,300 compared to 2022, and the non-performing rate decreased by 56 bps to 1.14%, and the depth and breadth of service to small and micro customers increased markedly.

Net interest spreads are under pressure, and deposit costs have improved marginally. The net interest spread for the full year of 2023 was 1.46%, down 2 bps from the first half of the year. The decline narrowed. The yield on interest-bearing assets continued to decline due to LPR cuts and stock mortgage interest rate cuts, etc., but the cost ratio of interest-bearing debt decreased by 1 bps compared to the first half of the year, mainly due to corporate time deposits. Looking ahead, considering factors such as repricing, the return on assets may continue to decline, while the cost of debt is relatively rigid, and Minsheng Bank's interest spreads are still under pressure.

Asset quality continues to improve. The non-performing rate decreased by 7 bps to 1.48% from the end of Q3. The non-performing rate and non-performing balance have both declined for five consecutive quarters, and the provision coverage rate increased by 0.5 pc to 149.69% from the end of September. It has rebounded for six consecutive quarters, and risk offsetting capacity has continued to increase. Compared with the end of June, the non-performing ratio of public loans decreased by 22 bps to 1.46%, the non-performing ratio in the manufacturing, real estate and mining industries declined markedly, and the retail non-performing loan ratio increased by 11 bps to 1.52% due to credit cards.

The attention rate increased by 3 bps from the end of June, the overdue rate remained flat, and the forward-looking indicators were generally stable. The “three-year plan” for clearance and disposal was successfully completed. In 2023, 78.76 billion yuan of non-performing assets were collected and disposed of, and 10.11 billion yuan of write-off assets were recovered, an increase of 22.44% over the previous year, and the burden of non-performing goods was significantly reduced.

Risk Warning: Demand recovery fell short of expectations; retail loan risk exposure exceeded expectations.