Core views:

The Bank of Qingdao released its 2023 annual report. Revenue, PPOP, and net profit to mother increased by 7.1%, 7.3%, and 15.1% year-on-year. The growth rates changed by +5.29pct, +2.65pct, and -0.06pct respectively from 23Q1 to 3. Judging from the cumulative performance driver, the expansion of the scale, and the year-on-year widening of interest spreads made a positive contribution, while factors such as the increase in effective tax rates and other income and expenditure contributed to a certain extent. 23Q4 revenue, PPOP, and net profit to mother increased by 30.8%, 24.6%, and 14.8%, respectively, in a single quarter, mainly due to the low base, the large contribution of 23Q4 non-interest income, and provision to support profit release.

Highlights: (1) Asset burden increased year-on-year. On the asset side, the company's interest-bearing assets increased 15.2% year-on-year in '23, and the incremental contributions of loans, financial investments, and interbank assets were 40%, 31%, and 25%, respectively. Loans increased 11.5% year over year. For the public sector, which focused on green loans, inclusiveness, technology, high-tech manufacturing, etc., corporate loans increased 16.4% year over year; on the retail side, actively expanding the consumer loan business, consumer loans increased 29% year over year. Financial investment increased 11.8% year-on-year in '23, and the scale of investment in public funds, financial bonds, and credit bonds increased. On the debt side, interest-bearing debt increased 16.1% year over year. Among them, deposits increased 13.1% year over year, and the trend of regularization continued, with personal time deposits accounting for 91.3% of the increase; interbank debt increased, but structural adjustments increased the scale of repurchase bonds at low cost rates, and reduced the pressure on high-cost interbank deposits. (2) Interest spreads rebounded year over year. At the end of 23, the company's net interest spread was 1.83%, down 1 bps from 23Q1 to 3, and up 7 bps year on year. The asset side was still under pressure. The loan yield was 4.85%, down 5 bp/13 bps from 23H1/22A respectively; the debt side was the main contributor to stabilizing interest spreads. The debt cost ratio in 23 years was 2.32%, which changed -1 bp/-5 bp from 23H1/22A respectively. The company reduced the average balance of bonds payable, and strictly controlled the cost ratio of deposits and payable bonds, effectively hedged the return on asset side returns.

Concern: The defect rate increased month-on-month. The 23-year defect rate was 1.18%, up 4 bps from the end of 23Q3.

By sector, the pressure was mainly on the retail side. The retail non-performing loan ratio in '23 was up 8 bp/55 bps compared to 23H1/22, focusing on consumer loans and agricultural product risk exposure; the non-performing ratio of public loans was relatively stable, falling 31 bps year on year, but the bad rate for public real estate at the end of '23 rose by 206 bp/230 bps compared to 23H1/22, so we need to pay attention to the risk situation in the future. In addition, the company's attention rate at the end of '23 was 0.54%, and the overdue rate was 1.42%, down 28 bps and 13 bp from year to year; provision coverage rate was 225.96%, bad new generation rate was 0.57%, down 26 bps year on year. All indicators were generally stable.

Profit forecast and investment advice: The net profit growth rate for 24/25 is expected to be 11.96%/9.52%, EPS is 0.64/0.71 yuan/share, BVPS is 6.14/6.72 yuan/share, the latest closing price of A-shares is 0.52X/0.48X corresponding to 24/25 PB, and 5.01X/4.55X for 24/25 PE.

The company operates with the characteristics of “interface banking”, “blue finance”, and “wealth management”. The fundamentals are stable, keeping the reasonable value of A-shares unchanged at 4.92 yuan/share, corresponding to the 24-year PB valuation of about 0.8X. According to the current AH premium ratio, the reasonable value of H shares is HK$3.16 per share, all of which have been given a “buy” rating.

Risk warning: (1) economic growth has declined beyond expectations; (2) rising deposit costs have exceeded expectations; (3) international economic and financial risks have exceeded expectations; (4) policy regulation has exceeded expectations.