Core views

Bank of Suzhou's 1Q24 performance was in line with expectations. Net interest spreads continue to be pressured under the general trend of declining asset-side interest rates, but as the “move towards reality” strategic transformation continues to deepen, the Bank of Suzhou has begun to fully integrate into Suzhou's booming real economy, providing a broad space for scale expansion and speeding up quality, and the logic of volume compensation works smoothly. We look forward to the upward elasticity of revenue brought about by the improvement in net interest spreads and the stabilization of middle income under the future economic recovery trend. Supported by Suzhou's rapidly developing economy, the Bank of Suzhou has a high “floor” of asset quality, which can guarantee long-term sustainable profit release. According to the 23 year dividend calculation of 0.39 yuan per share, the Bank of Suzhou's dividend rate increased slightly by 0.2 pct to 31.1%, corresponding to a dividend rate of 5.5%.

occurrences

On April 26, the Bank of Suzhou released its 2023 annual report and 2024 quarterly report: in 2023, it achieved operating income of 11.866 billion yuan, an increase of 0.9% over the previous year, and net profit to mother of 4.601 billion yuan, an increase of 17.4% over the previous year. 1Q24 achieved operating income of 3.225 billion yuan, an increase of 2.1% year on year, and net profit to mother of 1,455 billion yuan, an increase of 12.3% year on year. The 2023 and 1Q24 non-performing rates were flat at 0.84% month-on-month, the 1Q24 provision coverage rate fell 31.1 pct to 491.66% quarter-on-month, and the 2023 cash dividend rate was 31.1%, up 0.2 pcts year over year.

Brief review

1. First-quarter debt boosted investment returns and strongly supported revenue growth. Bank of Suzhou's 2023 revenue increased 0.9% year over year, and 1Q24 revenue increased 2.1% year over year. The slight improvement in the 1Q24 revenue growth rate compared to 23 was mainly due to the bullish bond market in the first quarter, and other non-interest income such as investment income was high. However, against the backdrop of continued narrowing of interest spreads and reduction in consignment rates, Bank of Suzhou's 1Q24 net interest income+net handling fee revenue core revenue fell 6.9% year on year (2023:0.7%), and continued to decline sharply from '23. Among them, net interest income in the first quarter fell slightly by 0.8% year on year. Mainly, net interest spreads continued to narrow due to declining LPR and loan repricing, but scale expansion continued to accelerate under the strategic transformation of “moving towards reality”, relieving the pressure on net interest income to a certain extent. In terms of non-interest income, due to the reduction in consignment premiums, 1Q24 revenue fell sharply by 29.5% year on year, a significant increase from the decline in 2023 (-6%), while other non-interest income surged 57% year over year, supported by the bullish bond market in the first quarter, which strongly supported revenue growth.

Profit maintained steady double-digit growth, in line with expectations. Bank of Suzhou's net profit to mother increased 17.4% year on year in 2023, and net profit from return to mother increased 12.3% year on year in 1Q24. It is ranked 7th among banks that have disclosed quarterly reports so far, and is in the first tier of high-quality urban agricultural commercial banks. In terms of 1Q24 performance attributions, scale expansion, provision, and other net income contributed positively to profit of 15.5%, 14.6%, and 8.1%, respectively, while narrowing interest spreads, falling revenue, and rising cost-to-revenue ratios contributed negatively to 16.0%, 5.4%, and 3.9%, respectively.

Under the strategic transformation of “moving towards reality”, the Bank of Suzhou gradually accelerated its scale expansion, and the logic of supplementing prices with volume worked smoothly. We look forward to the upward elasticity of revenue brought about by the improvement in net interest spreads and the stabilization of middle income under the future economic recovery trend. Looking at it now, under the influence of negative industry factors such as declining LPR, lower interest rates on stock mortgages, and rate cuts, the performance of banks in Suzhou is slowing down along with the overall banking industry trend. However, with the Bank of Suzhou's “moving towards reality” strategy transformation, it began to be fully integrated into Suzhou's booming real economy. The huge economic size and vigorous economic vitality of the Suzhou region provided a broad space for the Bank of Suzhou to expand in scale and speed up in quality, and can hedge the revenue pressure brought about by declining interest spreads to a certain extent. In the future, as demand for credit gradually improves as the economy recovers, the asset-side pricing war weakens, and continued growth in scale growth and an improvement in net interest spreads will increase the Bank of Suzhou's revenue to a certain extent. Bank of Suzhou is expected to continue to maintain small revenue growth and profit release of more than 10% in 2012.

2. Net interest spreads continue to be under pressure due to the continued decline in asset-side returns and the regularization of debt-side deposits. Bank of Suzhou's net interest spread in 2023 was 1.68%, down 19 bps year on year, down 3 bps from 9M23. Affected by loan repricing, 1Q24 net interest spread continued to drop 6 bps to 1.52% from quarter to quarter, down 16 bps from the end of 23. The decline was basically at a comparable peer average. Looking at both sides of the asset side, Bank of Suzhou's 2H23 yield on interest-bearing assets continued to drop sharply by 11bps to 3.96% compared to 1H23, while the interest-bearing debt cost of 2H23 increased by 5 bps to 2.30% month-on-month. The continued decline in asset-side interest rates and the structural factors of the regularization of debt-side deposits all dragged down interest spreads to a certain extent. According to the average value calculated at the beginning and end of the period, the yield on interest-bearing assets of Bank of Suzhou dropped sharply by 12 bps from quarter to quarter, and the interest-bearing debt cost ratio decreased by 8 bps from quarter to quarter.

Asset side structure optimization, scale expansion and quality acceleration. With the shift in strategic direction from “small for beauty” to “implementing reality”, the Bank of Suzhou relied on the advantages of local legal entities and began to use local operating state-owned enterprises in Suzhou as the main starting point, vigorously improving its ability to serve the current real economy, which strongly supported the rapid expansion of its credit scale. Bank of Suzhou's loan growth rates in the first quarter of 2023 and 2024 were 17.1% and 19.8% respectively. The 1Q24 credit growth rate is second only to the Bank of Chengdu among listed banks that have disclosed their annual reports so far, and credit investment is booming. The loan size as a share of total assets increased by 2 pct to 50% compared to the same period last year, and the asset structure continued to be optimized. Looking at specific credit investment, the Bank of Suzhou's credit to public credit surged 39% year on year, up 14% from the beginning of the year. The increase in public credit in the first quarter reached 27.3 billion yuan, a record high. This is nearly double the increase in public credit in the same period last year, accounting for 96% of total credit in the first quarter. Among them, leasing, business services, and manufacturing are the main credit investments. Credit increases in 2023 accounted for 26% and 19% respectively, accounting for nearly 50%, with remarkable results. In terms of price, Bank of Suzhou's 2H23 loan yield fell sharply by 15 bps to 4.22% month-on-month. Among them, interest rates on public loans fell 11 bps to 3.98% month-on-month compared to 1H23, mainly due to the downward trend in LPR. The price war within the region was relatively intense, leading to a decline in interest rates for new loans issued. However, retail loan interest rates were affected by the reduction in stock mortgage interest rates, which fell 20bps to 4.69% from 2H23.

Debt-side deposit costs are relatively rigid. It is expected that listing interest rates will continue to be lowered in the future, and there is still room for debt-side costs to drop. In the context of the accelerated expansion of the asset-side scale, the Bank of Suzhou's demand for savings collection increased accordingly. The 1Q24 deposit size increased 16.4% year-on-year, accounting for an increase of 3 pct to 69% compared to the end of 23.

However, due to the weak economic recovery trend, residents' risk aversion is heavy, and the trend of deposit regularization is quite obvious. Bank of Suzhou's retail time deposits grew by 35% in '23, accounting for 82% of deposit growth in '23, and retail time deposits accounted for 41% of total deposits. In addition, the degree of activation of public accounts has also declined, and the share of public interest deposits decreased by 3.5 pct to 20% over the same period last year. Due to structural factors that have greatly increased the share of time deposits, Bank of Suzhou 2H23 deposit costs continued to increase by 6 bps to 2.24% compared to 1H23. However, judging from the trend, the cost ratio of 2H23 retail time deposits has dropped 4 bps to 3.09% month-on-month due to the reduction in deposit listing interest rates. At the same time, with the strengthening of ties with local governments and operating state-owned enterprises, the scale of public deposits at lower costs increased accordingly, and the cost ratio for public term deposits dropped sharply by 40 bps to 2.51% month-on-month. It is expected that with the steady improvement of the future economic environment and the easing of regular structural pressure, there is still room for further reduction in interest rates on superimposed deposits, and there will still be room for debt-side costs to drop.

3. The non-performing rate remains stable and the asset quality is excellent. Bank of Suzhou's non-performing rate remained flat at 0.84% quarter-on-quarter in 1Q24. The 1Q24 provision coverage rate fell 31 pct to 491.66% quarterly. The decline in provision coverage was mainly due to the addition of 245 million yuan in non-performing loans in the first quarter, and the non-performing loan balance increased 15.9% year on year. It is expected that the Bank of Suzhou will further strictly determine bad standards, treat potential adverse risks carefully, and further consolidate asset quality. Even under the premise of strict certification of non-performing loans, 1Q24 plus write-off failure generation rate (estimated value) still declined by 35 bps to 0.1% from quarter to quarter. In terms of forward-looking indicators, Bank of Suzhou 1Q24 is concerned that the loan ratio fell 4 bps to 0.77% from the beginning of the year, and the overdue rate in 2023 fell slightly by 1 bps to 0.72% compared to 1H23. The overall asset quality is very clean. The Suzhou region has a well-developed economy, excellent business conditions, and the quality of credit assets is significantly better than the national average. Supported by Suzhou's rapidly developing economy, the Bank of Suzhou has a high “floor” of asset quality, which can guarantee long-term sustainable profit release.

4. Investment advice and profit forecast: Bank of Suzhou's 1Q24 performance is in line with expectations. Net interest spreads continue to be pressured under the general trend of declining asset-side interest rates, but as the “move towards reality” strategic transformation continues to deepen, the Bank of Suzhou has begun to fully integrate into Suzhou's booming real economy, providing a broad space for scale expansion and speeding up quality, and the logic of volume compensation works smoothly. We look forward to the upward elasticity of revenue brought about by the improvement in net interest spreads and the stabilization of middle income under the future economic recovery trend. Underpinned by Suzhou's rapidly developing economy, the Bank of Suzhou has a high “floor” of asset quality, which can guarantee long-term sustainable profit release. According to the 2023 dividend estimate of 0.39 yuan per share, the dividend rate of the Bank of Suzhou increased slightly by 0.2 pct to 31.1%, corresponding to a dividend rate of 5.5%, which is close to the level of major banks. Revenue growth in 2024, 2025, and 2026 is expected to be 2.5%, 5.4%, 9.1%, and profit growth rates of 10.4%, 10.5%, and 10.5%. Currently, Bank of Suzhou's stock price is only 0.53 times 24-year PB, maintaining a buying rating.

5. Risk warning: (1) Economic recovery is falling short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, thus triggering the risk of poor bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on banks' asset quality and greatly reduced banks' profitability. (3) The credit leniency policy is not as strong as expected, and the rapid economic development of the region where the company operates is unsustainable, thus greatly adversely affecting the company's credit investment. (4) The retail transformation effect fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.