Key points of investment

Societe Generale Bank's profit momentum recovered significantly in 24Q1, making a good start to achieving stable revenue and stable profit throughout the year 2024. Optimistic about the investment opportunities of Societe Generale Bank's “next major bank”. High dividends+undervaluation+low holdings+index composition. Fundamental bottom-up repair drives up valuation.

Revenue growth bucked the trend and turned positive

The 24Q1 revenue growth rate increased sharply by 9pc to 4.2% compared to 23A, and the performance greatly exceeded expectations. (1) Net interest income increased 5% year-on-year, and is expected to outperform national banks significantly. Mainly due to the strong resilience of interest spreads, the drag on revenue has improved. Since the impact of the February LPR interest rate cut is still unseen, the growth rate of net interest income is expected to decline. (2) Non-interest income increased 3% year over year. Among them: ① Other non-interest income increased 16% year over year, in line with expectations. The balance of FVPL+FVOCI at the end of 24Q1 decreased by 4.5% compared to the beginning of the year. Investment returns may weaken marginally in subsequent quarters, mainly considering that the People's Bank of China indicated that nominal interest rates should be kept at a reasonable level, and the bond market may slow down starting in Q2. ② Handling fee revenue fell 19% year over year, mainly due to the impact of financial management in 2023 on the one-time revenue base, which is expected to gradually decline in subsequent quarters. Looking ahead to the next quarter, the revenue growth rate may gradually decline, and it is still expected to reach around 0% throughout the year.

The decline in profit narrowed significantly

Net profit from 24Q1 fell slightly by 3.1% year on year, and the decline narrowed sharply by 13pc from month to month. Under the premise of relatively rapid revenue growth in 24Q1, Industrial Bank took the initiative to increase its provision plan, and depreciation increased 46% year over year, laying a solid foundation for future business development. Specifically: ① Inventory indicators, the defect rate was 1.07% at the end of 24Q1, the same; the attention rate was 1.70%, up 15 bps from month to month; the provision coverage rate was 246%, a slight increase of 0.3 pc from month to month, and the level of non-credit provision increased at the same time. ② According to the traffic index, the defect generation rate was 1.03%, up year-on-year but slower than in 2023. It is estimated that real estate defects fluctuated slightly, while taking the initiative to implement risks and downgrade some unoverdue projects.

As the peak of bad credit card generation passes and asset quality consolidates, the drag on profits from depreciation throughout 2024 is expected to improve, and profit growth is expected to recover to around 0%, strengthening the logic of high dividends.

Interest spreads are more resilient than expected

The 24Q1 single-quarter interest spread (average daily caliber) was 1.87%, down only 2 bps from month to month. The cost of attributable debt improved significantly, hedging the downward impact of asset-side returns. (1) The 24Q1 asset-side return (early to end of period) fell 13 bps to 3.86% month-on-month, judging the impact of repricing of LPR attributable to the industry, as well as the downward impact of loans and market interest rates.

(2) The 24Q1 debt-side cost ratio (at the beginning and end of the period) decreased by 6 bps to 2.26% month-on-month, thanks to effective control of deposit costs. The interest rate for 24Q1 Industrial Bank deposits was 2.12%, a significant improvement of 12bp compared to 23a. Looking ahead, Industrial Bank's interest rate spreads are still under downward pressure due to the delayed impact of the February LPR interest rate cut; however, the pressure is expected to be better than that of peers, mainly benefiting from manual interest rate compensation management and lower cost pressure on high-interest deposits.

Profit forecasting and valuation

Industrial Bank's net profit is expected to increase by 0.03%/5.62%/7.50% year-on-year in 2024-2026, corresponding to BPS 36.72/39.40/42.32 yuan. The current price corresponds to 0.44/0.41/0.38 times PB. Maintain a target price of 20.62 yuan/share, corresponding to 0.56x PB in 2024, current price space of 28%, and maintain a “buy” rating.

Risk warning: The macroeconomic economy has stalled, and the bad situation has been greatly exposed.