Matters:
The Bank of Shanghai released an annual report for 2023 and a quarterly report for 2024. In 23 and 24Q1, it achieved operating income of 50.6 billion yuan and 13.1 billion yuan, respectively, corresponding year-on-year growth rates of -4.8%/-0.9%, respectively. Net profit attributable to mother was 22.5 billion yuan and 6.15 billion yuan respectively in '23 and 24Q1, corresponding year-on-year growth rates of 1.2%/1.8%, respectively. The weighted average ROE attributable to common shareholders of the parent company in '23 was 10.36%, down 0.64 percentage points from the previous year. At the end of 2023, total assets reached 3.09 trillion yuan, a year-on-year growth rate of 7.19%. At the end of the 1st quarter of '24, total assets reached 3.15 trillion yuan, an increase of 2.24% over the beginning of the year. The 2023 profit distribution plan is: 4.60 yuan (tax included) for every 10 shares, with a dividend ratio of 30.06%.
Ping An's point of view:
Non-interest led to negative revenue growth and the narrowing of the gap, and profit levels remained stable. Net profit due to mother increased 1.8% year-on-year (+1.2%, 23A) in the first quarter of '24, and provision backlash became an important factor in smoothing the company's profit fluctuations. First, in terms of revenue, the company's revenue growth rate in the first quarter increased 3.88 percentage points to -0.9% compared to the full year of '23. The increase in non-interest revenue contribution led to the closure of the negative growth gap. Non-interest revenue in the first quarter increased 23.0% (+1.9%, 23A) year on year. The spread business was still significantly dragged down by narrowing interest spreads. The negative net interest income gap for the first quarter widened 4.5 percentage points to -12.0% compared to the full year of '23. Overall, the company's overall revenue pressure trend in the first quarter was slightly improved by indirect support. Subsequent recovery in demand release in the Yangtze River Delta region is expected to increase the company's operating flexibility.
The level of interest spreads continues to be under pressure, and the expansion of credit burdens remains steady. The company's net interest spread at the end of 23 was 1.34% (1.40%, 23H1). According to the balance at the beginning and end of the period, the company's 24Q1 net interest spread fell 2BP to 1.04% month-on-month. Overall, the downward trend continued, and the drag on the asset side was even more obvious.
Loan interest rates fell 17BP to 4.27% year on year in '23. Continued implementation of interest rate cuts and increased competition in the context of an “asset shortage” dragged down the room for loan interest rates to rise. However, debt-side costs improved slightly. The company's deposit costs at the end of the year 23 fell 2BP to 2.08% compared to the end of half a year, and the average interest rates for the company's personal deposits and corporate deposits at the end of 23 fell 16 BP/1BP to 2.29%/1.98% year on year, respectively. The effects of deposit pricing and structural management gradually became apparent. In terms of size, the company's total assets increased 6.2% (+7.2%, 23A) year over year at the end of the first quarter. Among them, loans at the end of the first quarter increased by 5.4% (+5.6%, 23A) year on year, and deposits at the end of the first quarter increased 2.3% (+4.4%, 23A) year on year, and the rate of table expansion remained stable.
The quality of assets remains stable, and the level of provision remains stable. As of the end of the first quarter of 2024, the Bank of Shanghai's non-performing rate remained flat at 1.21% at the end of the year 23. We estimate that the bad generation rate at the end of 23 was 1.12% (1.00%, 23H1). The level of bad generation increased slightly due to fluctuations in asset quality in the small and micro assets and credit card business, but the overall level of bad generation was manageable.
In terms of forward-looking indicators, the attention rate at the end of the first quarter rose 12BP to 2.19% compared to the end of '23. The company's overdue rate at the end of '23 was 1.71% (1.68%, 23H1). The direction of fluctuation was in line with industry trends, and asset quality remained stable. In terms of provision, the company's provision coverage rate and loan ratio at the end of the first quarter decreased by 0.53 pct/1bp to 272%/3.29%, respectively, from the end of 23. The level of provision decreased slightly, and risk offsetting capacity remained stable.
Investment advice: The valuation has a margin of safety, and focus on the value of the company's dividends. The Bank of Shanghai continues to be deeply involved in key regions such as the Yangtze River Delta, Guangdong, Hong Kong, Macao, and Beijing-Tianjin-Hebei. The good credit environment covering the region also provides a stable source of revenue for the company. At the same time, the Bank of Shanghai strives to create a differentiated competitive advantage, focusing on the three main lines of consumer finance, wealth management, and pension finance, and has always maintained the number one position in the number of pension customers in Shanghai. In particular, the company raised its dividend ratio by 3.31 percentage points to 30.06% in '23, and the dividend rate reached 6.50% based on the closing price on April 25, further increasing the dividend value. Considering the impact of the continued decline in interest rates and increased competition on the banking side since this year, we lowered the company's 24-25 profit forecast and added a 26-year profit forecast. The company's 24-26 EPS is estimated to be 1.62/1.70/1.79 yuan respectively (the original forecast was 1.79/1.93 yuan, respectively), and the corresponding profit growth rate is 2.2%/5.0%/5.3% (the original 24-25 forecast was 7.8%/8.0%, respectively). Currently, the company's stock price corresponds to the 24-26 PB of 0.44x/ 0.41x/0.38x. The company's current valuation level is still at the bottom of the historical quantile. The margin of safety is sufficient, and the “recommended” rating is maintained.
Risk warning: 1) The macroeconomic downturn has caused the pressure on the industry's asset quality to rise more than expected. 2) As interest rates declined, industry interest spreads narrowed more than expected. 3) Increased cash flow pressure on housing enterprises has led to a rise in credit risk.