Incidents:

On April 26, the Bank of Changsha released the 2023 Annual Report and the 2024 First Quarter Report:

1) In 2023, we achieved operating income of 24.8 billion yuan, an increase of 8.5% over the previous year, and achieved net profit of 7.46 billion yuan, an increase of 9.6% over the previous year. The weighted average return on net assets in 2023 was 12.5%, down 0.07pct; 2) 24Q1 achieved operating income of 6.56 billion yuan, up 7.9% year on year, and realized net profit of 2.09 billion yuan, up 5.8% year on year. The 24Q1 annualized weighted average return on net assets was 13.68%, a year-on-year decrease of 0.68pct.

Comment:

The revenue growth rate remained relatively stable, and non-interest income improved significantly. The year-on-year growth rates of the company's 2023/24Q1 revenue, profit before provision, and net profit to mother were 8.5/7.9%, 9.1/ 7.1%, and 9.6/5.8%, respectively, with changes of 0/-0.6pct, -0.9/-2pct, and 0.4/-3.8pct, respectively, from quarter to quarter. Among them, the year-on-year growth rates of net interest income and non-interest income were 11.5/3.9% and -2.6/22.9%, respectively, with quarter-month-on-quarter changes of -3.1/-7.5 pct and 8.4/25.4 pct. Dividing the 24Q1 profit year-on-year growth structure, scale expansion and non-interest rate were the main contributors, driving performance growth rates of 26.3 and 13.2 pct respectively; judging from marginal changes, the boosting factors were mainly the shift from non-interest contributions to positive contributions; the main drag factors were narrowing in scale contribution and widening the negative net interest margin.

Due to the high base, table expansion has slowed, and loans have increased slightly over the same period last year. In 24Q1, 32.9 billion new interest-bearing assets were invested in a single quarter, a year-on-year decrease of 11.4 billion dollars; the balance of interest-bearing assets grew 10.9% year-on-year, down 2 pcts from the beginning of the year. The company's 24Q1 expansion slowdown was mainly affected by the high base for the same period last year. The average amount of new interest-bearing assets added by the company from 17Q1 to 22Q1 was around 11.4 billion. After excluding the base effect, the intensity of the company's 1Q expansion was still significantly higher than the historical average.

1) Looking at the investment structure of interest-bearing assets, the increase in loans, financial investment (excluding transactional financial assets, same below), and interbank assets in a single quarter was 33.9 billion, 6.9 billion yuan, and -8 billion yuan, respectively. Among them, loans increased 2.8 billion yuan year-on-year, and financial investment and interbank assets decreased by 8.1 billion and 6.2 billion, respectively.

2) Judging from the credit investment structure, 1Q credit resources are mainly invested in the public sector. Credit users are mainly political and credit customers with relatively high prices; the retail credit business is in the off-season, and residents' overall willingness to increase leverage is weak. Coupled with early mortgage loan payments, the growth trend of retail consumption and loans was poor in the beginning of the year, and the incremental contribution mainly came from operating loans. The company announced at the end of March that it plans to implement a capital increase for Changyin 58 Consumer Finance to solve the problem of insufficient capital. Along with asset-side expansion restrictions, it is expected to support retail credit expansion.

Incremental deposit-to-loan ratios are under pressure, and NCD issuance is increasing. In 24Q1, 35.3 billion new interest-paying liabilities were added in a single quarter, up 11 billion dollars year-on-year, and the balance grew 11.1% year-on-year, down 2 pcts from the beginning of the year. Judging from the new interest-paying debt structure, the size of new deposits and market liabilities in a single quarter was 17.6 billion and 17.8 billion yuan respectively, with year-on-year decreases of 8 billion and 3 billion dollars respectively. Among them, NCD's net financing was 28.9 billion yuan, an increase of 10.1 billion dollars over the previous year; the 1Q incremental deposit-to-loan ratio was 193%, an increase of 71.5 pct over the same period last year.

The 24Q1 interest spread is estimated to have decreased by 13 bps to 2.18% compared to 2023, mainly dragged down by the asset side. The 2023 and 24Q1 interest spreads were estimated to be 2.32% and 2.18%, respectively, narrowing by 3 bps and 13 bps from quarter to quarter, respectively. Among them, the yield on interest-bearing assets was 4.64% and 4.43%, respectively, down 2 bps and 21 bps from quarter to quarter; interest-bearing debt cost ratios were 2.25% and 2.17%, respectively, with changes of 0 bps and -8 bps from quarter to quarter, respectively. From the asset side, loan pricing is under pressure due to factors such as lower interest rates on stock mortgages and rolling repricing of stock loans; from the debt side, the dividends of lower interest rates on early deposit listings have been released, and the company itself continues to reduce pressure on high-interest liabilities such as agreements and agreements, driving a marked improvement in debt costs.

Profit and loss from changes in fair value supported the strengthening of non-interest income, and the share of non-interest income increased by 3 pcts to 23.7% compared to the same period last year. The company's 24Q1 non-interest revenue increased 23% year-on-year to 1.56 billion, an increase of 25.4 pcts compared to 2023. Among them, net processing fees and commission revenue fell 25% year on year to 410 million, the growth rate decreased by 41.1 pct from 2023. The scale of financial management and insurance surrogacy decreased in 1Q, and the reduction in insurance premiums had a certain impact on counterparty renewal income; net other non-interest income increased 60% year over year to 1.14 billion, and the growth rate increased significantly by 69.3 pct compared to 2023, mainly supported by profit and loss from fair value changes. 1Q achieved 400 million yuan in fair value change profit and loss. Interest rates in the 1Q bond market declined rapidly, driving an increase in bond trading and valuation earnings.

The ratio of non-performing loans has remained stable, and the amount of provision has been increased. At the end of 2023, Bank of Changsha's non-performing loan balance was 5.6 billion yuan, down 63 million from the end of 23Q3; the non-performing loan ratio was 1.15%, down 1 bps from the end of 23Q3, and the bad indicators achieved a “double drop”; the attention rate was 1.82%, up 18 bps from the end of 23Q3; the total bad + concern loan ratio was 2.96%, up 17 bps from the end of 23Q3. The company implemented the requirements of the new asset classification regulations, and the attention rate fluctuated to a certain extent. In terms of provision, the company accrued impairment losses of 1.92 billion yuan in 23Q4, an increase of 0.75 million over the previous year; 23H2 disposed of 3.2 billion non-performing loans, an increase of 650 million over the previous year; the provision coverage rate was 314.2%, up 3 pcts from the end of 23Q3. The loan ratio was 3.6%, down 1 bps from the end of 23Q3.

Judging from the 24Q1 situation, non-performing loans increased by 390 million to 6 billion dollars from the beginning of the year, and the non-performing loan ratio was 1.15% compared to the beginning of the year; the total non-performing loan ratio was 1.99%, up 17 bps from the beginning of the year; the total non-performing loan ratio was 3.13%, up 17 bps from the beginning of the year. Although the company's bad exposure increased, loans continued to grow rapidly, and the non-performing loan ratio was generally stable. In terms of provision, the company accrued credit impairment losses of 2.12 billion yuan in 24Q1, an increase of 250 million dollars over the previous year, and credit impairment loss/operating income increased 1.5 pct to 32.4% year over year, and the strength of the provision increase was increased; the provision balance was 18.75 billion yuan, an increase of 1.17 billion dollars from the beginning of the year. The provision coverage rate was 313.3%, a slight decrease of 1 pct from the beginning of the year, and the loan ratio was 3.59%, down 1 bps from the beginning of the year.

The growth rate of RWA has clearly slowed, and capital adequacy ratios at all levels have increased. At the end of 24Q1, the company's core Tier 1, Tier 1, and capital adequacy ratios were 9.7%/10.66%/13.09%, respectively, up 11/9/5 bps from the beginning of the year; RWA grew 7% year on year, down 5.2 pcts from the beginning of the year. The capital adequacy ratio of companies at all levels has increased, mainly due to the slowdown in RWA growth.

Profit forecasting, valuation and ratings. In recent years, Bank of Changsha has maintained a high credit growth rate. In 2023, it achieved its annual credit investment target ahead of schedule, and is actively preparing for a “good start” in 2024. Credit investment is expected to maintain a high boom this year; in terms of pricing, the expansion of the county market is expected to further open up the company's business space in the sinking market, and asset-side pricing is expected to maintain good resilience. The company plans to pay a dividend of 0.38 yuan per share in 2023, with a corresponding dividend ratio of 21.4%, which is basically the same as in 2022. The dividend rate corresponding to the current stock price is 4.8%. The company's ROE in 2023 was 12.5%, which is significantly higher than the 24Q1 RWA growth rate of 7%. Considering that the company's CET1 safety margin is sufficient, it is not ruled out that the dividend ratio may increase further in 2024. Since the NIM banking system is still facing significant narrowing pressure in 2024, the company lowered its 2024/2025 EPS forecast to 1.98 (-4.3%) /2.13 (-6.2%) yuan, and added the 2026 EPS forecast to 2.26 yuan. The current stock price corresponds to the 2024-2026 PB valuation by 0.47/0.43/0.39 times, respectively, maintaining the “buy” rating.

Risk warning: If the macroeconomic economy declines more than expected, it may increase the potential risk of exposure to large amounts of risk.