Pioneering ground and becoming the largest commercial bank in Shandong Province
Qilu Bank is currently a scarce bank among the leading commercial banks in major provinces and cities, and is still continuing to add offsite branches. With Jinan as its headquarters, branches cover 12 of the 16 prefecture-level cities in Shandong Province. At the same time, it is indirectly covered by Jining Bank through a strategic shareholding. Heze, Zibo, and Zaozhuang are all in the future coverage plans. Qilu Bank has been deeply involved in the county market for a long time and has continued to set up outlets. The scale and share of deposits and loans in the county area has increased rapidly in recent years, and it is expected to achieve 100% coverage of counties in the province in the future (currently 59%). This means that Qilu Bank's path of expansion and growth has distinct characteristics and differentiated competitive advantages.
From a regional development perspective, we believe that the resilience of Shandong's economic growth is underestimated by the market. The market has long focused on regions such as the Yangtze River Delta, the Greater Bay Area, and the Cheng-Chongqing Economic Zone, but in reality, Shandong is China's largest agricultural province, a province with a large population, and a strong industrial province. It has a strong economic resource base, and is also the only province in the country with 41 major industrial categories. The economic growth rate has led the country in the past two years. The target GDP growth rate for 2024 is over 5%. At the same time, it is planned that the value added of the “four new” economies will account for 40% of GDP in 2025. Currently, the total loan growth rate in Shandong is leading the country, and the quality of regional assets continues to improve, which is conducive to the accelerated development of Qilu Bank.
Expand the growth cycle, and the debt cost advantage is outstanding
Qilu Bank has maintained a high growth rate of 15% to 25% over the years, and has both high growth rate and stability. It achieved a loan growth rate of 17% in 2023, and is expected to maintain a growth rate of more than 15% from 2024 to 2025. The loan-to-deposit ratio has continued to rise to 75% in recent years (only 59% in 2016), but it is still lower than its peers, and credit expansion is supported by sufficient deposits. In terms of the distribution of the loan industry, the total share of the general infrastructure industry has risen to 39% in recent years, but compared with most urban commercial banks that clearly rely on government platform assets, the share is not high. The share of real estate continues to fall to 2%, which is conducive to stable asset quality. The total share of manufacturing and wholesale and retail sales reached 19%, and another 9% of other retail loans were mainly personal business loans, reflecting the competitiveness of inclusive finance. At the end of June 2023, the amount of inclusive small and micro loans was 55.3 billion yuan, ranking first among urban commercial banks in Shandong Province, accounting for 20%. Judging that the share will continue to increase in the next three years.
Net interest spreads are relatively stable compared to the average trend in the industry. Looking at both assets and liabilities, the yield on loans is not high. The yield on personal and public loans has been adjusted quite sufficiently, and the future will be affected by interest rate cuts in the same way as the industry. The debt-side deposit cost ratio continues to decline and has advantages, reflecting strict control over deposit pricing and the differentiated advantages of deepening the county market.
Improved asset quality to support a recovery in profitability
Since 2015, Qilu Bank has accelerated its absorption of historical burdens. The non-performing rate has been declining for many years, falling to 1.26% at the end of 2023. Due to strict asset quality control of newly issued loans, the net generation rate of dynamic non-performing loans fell to a good level of 0.85% in the first half of 2023. More importantly, the criteria for determining bad are very strict. The deviation for loans overdue for 90 days or more has long been lower than that of peers, and the overall deviation for overdue loans is currently as low as 83%. In the process of digesting the burdens of history in recent years, the credit cost ratio was higher than that of peers, and it still reached 1.74% in the first half of 2023. In the future, as asset quality improves dynamically, improvements in credit cost ratios will free up room for profit growth while driving provision coverage to continue to rise.
Investment advice: urban commercial banks with clear growth paths and distinctive characteristics
Qilu Bank's growth path is clear, loans have maintained rapid expansion, the county's financial advantages are outstanding, net interest spreads are relatively stable, and future improvements in credit costs will drive up profitability. In 2024, revenue is forecast to grow 6.3% year on year, and net profit to mother will grow 16.2% year on year.
Based on the closing price on April 25, 2024, Qilu Bank's 2023 and 2024 PB valuations were 0.65X and 0.59X, respectively, and PE valuations were 5.5X and 4.8X, respectively. A “buy” rating is given based on long-term growth space and performance growth advantages.
Risk warning
1. Credit scale expansion falls short of expectations; 2. Asset quality fluctuates significantly; 3. Profit forecasting assumptions fall short of expectations.