Asset quality is improving, and scale continues to grow
Bank of Communications's net profit, operating income, and PPOP for the first quarter of 2024 were +1.4%, flat, and +0.3%, respectively. The growth rate was +0.8pct, -0.3pct, and +2.1pct compared to 2023. The marginal improvement in profit growth is mainly related to the stabilization of net interest income, optimization of cost to income ratio, and decline in credit costs. We forecast an EPS of 1.27/1.29/1.31 yuan for 24-26, and a BVPS of 13.19 yuan for 24-26. A/H corresponds to 0.52/0.38 times PB. A/H shares are comparable to the 24-year wind, which is expected to be 0.56/0.38 times. As a major wealth management company, the company has shown strategic results and should enjoy a valuation premium. We gave A/H shares a 24-year target PB0.63/0.50 times, and A/H shares had a target price of 8.31 yuan/7.13 HKD, maintaining an increase holding/purchase rating.
Credit is being distributed smoothly, and interest spread resilience is highlighted
The growth rates of total assets, loans, and deposits at the end of March were +4.3%, +6.8%, and +2.1% respectively. Compared with -4.0pct, -2.3pct, and -5.4pct at the end of 23, the scale continued to grow but the growth rate slowed down. The January-March net interest spread was 1.27%, or -1 bps compared to 2023. The decline was small, and the resilience of interest spreads was prominent. The marginal decline in interest spreads is mainly due to factors such as repricing of existing loans, adjustments in mortgage interest rates, and another reduction in LPR with a term of 5 years or more. At the same time, debt costs are more rigid. Demand deposits at the end of March accounted for 34.41%, up 0.08pct from the end of the previous year. Net income from 24Q1 interest was +2.2% year-on-year, and the growth rate was +5.6pct compared to 2023.
Mid-income growth is under pressure, and other non-intermittent fluctuations
Intermediate business revenue in the first quarter was -6.4% year-on-year, and the growth rate was 2.2 pct at the end of 23. Mainly due to the combined reporting of banking insurance fees and a reduction in the final commission rate for equity fund products, etc., agent insurance and consignment fund business revenue declined year-on-year. At the same time, fluctuations in the volume of interbank settlement business have reduced interbank fee revenue. Other non-interest income in 24Q1 was -0.9% year-on-year, and the growth rate was -20.9pct compared to '23, mainly due to changes in fair value, net income of -46% YoY. The 2024Q1 cost-revenue ratio was -0.6pct to 29.3% year over year, improving operational efficiency.
Asset quality is improving, and credit costs are declining
The non-performing loan ratio and provision coverage ratio at the end of March were 1.32% and 197%, respectively. Compared with -1 bp and +2 pct at the end of March, asset quality was stable, moderate and positive. The non-performing ratio for public and retail sales was -7 bps and +9 bps at the end of 23, optimizing the quality of public loan assets. The increase in the retail loan non-performing rate is mainly due to fluctuations in the quality of credit card assets. The attention rate at the end of March was +2bp to 1.53% compared to the end of 23. The annualized credit cost in Q1 was 0.72%, -0.11pct; the Q1 annualized bad generation rate was +0.32pct to 0.64% month-on-month compared to 23Q4. The capital adequacy ratio at the end of March and the core Tier 1 capital adequacy ratio were 16.09% and 10.44% respectively, which was +0.82pct and +0.21pct at the end of 23, consolidating the capital level.
Risk warning: Economic recovery fell short of expectations, and the deterioration in asset quality exceeded expectations.