Incident: On April 19, the Bank of Hangzhou released its 2023 annual report (previously issued a performance forecast) and a report for the first quarter of 2024. The company's 23Y and 1Q24 achieved revenue of 35.02 billion yuan and 9.76 billion yuan respectively, up 6.3% and 3.5% year on year; net profit to mother was 14.38 billion yuan and 5.13 billion yuan, up 23.2% and 21.2% year on year.
Comment:
Judging that the company's 1Q24 profit growth rate remains at the leading level in the industry, showing high growth attributes. The company's profit growth rate in 2023 was over 20%, leading the industry. The main drivers were high scale growth, provision for backfeed, and non-interest support. The 1Q24 profit growth rate remained above 20%, exceeding expectations, and also significantly higher than the company management's business plan forecast for the full year 2024 (24E net profit growth rate of about 10%). Judging from the 1Q24 profit attribution breakdown, net interest spreads narrowed negatively and dragged down 16.5 pcts, while size, provision backfeed, and non-interest continued to contribute positively to profits of about 14.6 pcts, 13.0 pcts, and 5.4 pcts. Looking at marginal changes, the scale and provision contribution decreased slightly compared to 23Y, and the non-interest business contribution increased. The company's 1Q24 performance basically reflects the volume and price pressure that the industry generally faces from slowing scale expansion and further narrowing of net interest spreads.
Judging from the company's own situation, the 1Q24 net interest spread changed steadily from month to month (we estimate the 1Q24 net interest spread to be 1.50%), and the scale can still maintain a growth of more than 10%. High investment business income and provision levels maintain strong support for profits. We believe that the profit growth rate of Bank of Hangzhou is expected to remain high and industry-leading in 2024-2025. Against the backdrop of widespread pressure on the industry, its high growth attributes are even more prominent.
Scale growth has slowed slightly, and investment in public credit may be better than that of peers. The company's 23Y interest-bearing assets increased 13.8% from the beginning of the year. Among them, credit increased by 14.9% and investment assets increased by 16.9%, reflecting an industry environment where demand for credit is still weak. Looking at 1Q24, the growth of the company's interest-bearing assets continued to slow. 1Q24 interest-bearing assets increased 12.9% year on year, but credit growth was high, with a year-on-year increase of 16.1%, in line with the company's seasonal pattern of increasing credit investment and investing early returns early in the first quarter. Judging from the new structure of 23Y and 1Q24 credit, the characteristics of strong public retail sales are quite obvious. Public credit increased 19.1% and 18.1%, respectively, while retail loans increased 7.8% and 12.1% year on year, respectively, which is in line with the overall situation of the industry.
Looking at the new public loan industry, loans related to corporate infrastructure (water environment and public facilities, leasing and business services, transportation and warehousing, and postal services) are growing rapidly, and the growth rate is higher than the growth rate of public loans. We believe that the company's infrastructure loans are growing well, reflecting its good government-related business foundation, which helps support the rapid expansion of the scale in the current context of weak demand for credit, especially the overall weak demand for retail credit.
Asset quality continues to be excellent, and provision coverage is high. The 1Q24 defect rate was 0.76%, stable month-on-month, and has remained stable for 5 consecutive quarters. 1Q24 was concerned that the loan ratio increased by 12BP month-on-month, but the absolute level was low, only 0.52%. Asset quality continues to be excellent. Judging from the level of provision, the 1Q24 provision coverage rate and loan ratio were 551.2% and 4.2% respectively. They remained stable at a high level, the safety cushion was thick, and there was plenty of room for profit release.
Investment advice: The company's 1Q24 profit growth exceeded expectations, mainly to provide backfeed and increase profits in the investment business. Judging from the main variables such as quantity, price and quality, the company's net interest spread is already low and stable month-on-month, and it is expected that there is limited room for further narrowing; the scale has benefited from the rapid growth of public loans and the steady growth of public loans; and the quality of assets remains excellent. Considering that the company has sufficient provisions and large countervailing profit margin, we expect net profit growth rates of 19.1%, 16.3%, and 15.0% respectively in 2024-2026, with corresponding BVPS of 18.41, 21.63, and 25.34 yuan/share, respectively. The closing price on April 22, 2024 was 12.54 yuan/share, corresponding to 0.68 times the 2024 PB. We continue to be optimistic about the growth space brought about by the company's location advantage and solid political business base, and maintain the “Highly Recommended” rating.
Risk warning: Economic recovery and physical demand have fallen short of expectations, and the speed of statement expansion, net interest spread levels, and asset quality have been impacted.