Incidents:

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

1) In 2023, we achieved revenue of 11.9 billion yuan, an increase of 0.9% over the previous year, and achieved net profit of 4.6 billion yuan, an increase of 17.4% over the previous year. The unweighted average return on net assets in 2023 was 12%, up 0.5pct year on year; 2) 24Q1 achieved operating income of 3.23 billion yuan, an increase of 2.1% year on year, and realized net profit of 1.46 billion yuan, an increase of 12.3% year on year. The 24Q1 annualized unweighted average return on net assets was 13.3%, an increase of 0.5 pct over the previous year.

Comment:

Revenue growth increased month-on-month, and profits maintained double-digit growth. Bank of Suzhou's 2023/1Q24 revenue, profit before provision, and net profit to mother grew by 0.9%/2.1%, -3.8%/-1.8%, and 17.4%/12.3%, respectively. The growth rates changed by -0.9/1.2, -2.6/2, and -3.9/-5.1 pct, respectively, from quarter to quarter. Among them, the growth rates of net interest income and non-interest income were 1.7%/-0.8% and -1.1%/8.3%, respectively, with quarterly changes of -2.3/-2.5 and 1.8/9.4 pct. Split the 1Q24 profit growth structure: scale and provision are still the main contributors, driving the performance growth rate of 25.7 and 17.7 pct respectively; judging from marginal changes, the main boosting factors were the acceleration of non-interest income growth and the negative drag on operating expenses. The cost and revenue ratio of 1Q24 companies narrowed by 33.3%, an increase of 1.5 pct over the previous year; the main drag factors were provision and positive scale contributions. The narrowing was 9.4 and 3.3 pct, respectively. The pressure to narrow interest spreads increased, and the negative drag on performance growth widened slightly from 2023.

Table expansion accelerated, and the “good start” credit growth rate was nearly 20%. At the end of 1Q24, the Bank of Suzhou's total assets, interest-bearing assets, and loans grew at a year-on-year rate of 16.8%, 16.7%, and 19.8%, respectively. Compared with the end of the previous year, changes of 2.1, -2.2, and 2.8 pct respectively, the high increase in “good start” credit investment provided strong support for scale expansion. In terms of loans, an increase of 42.8 billion yuan was added in the full year of 2023, an increase of 5.4 billion yuan over the previous year; 1Q24 added 28.5 billion yuan in a single quarter, an increase of 10.5 billion yuan over the previous year, accounting for an increase of 1.8 pct to 55% compared to the end of the previous year. At the structural level, for the full year of 2023, retail sales increased by 35.9 billion yuan and 6.9 billion yuan respectively, with year-on-year increases of 12.5 billion dollars and a decrease of 7.1 billion dollars respectively; 1Q single-quarter sales (including discounts) and retail sales increased by 273 billion and 1.2 billion dollars respectively, increasing by 13.5 billion dollars and decreasing by 3.1 billion, respectively, continuing the pattern of “strong against the public and weak retail”. At the industry investment level, credit investment for the full year of 2023 was concentrated in the manufacturing industry and the commercial service sector. Credit growth rates reached 19% and 39% respectively, accounting for 18% and 13% of loans, up 0.2 and 2.1 pcts from the end of 2022.

At the same time, green and inclusive small and micro loans maintained a high level of prosperity. The growth rates reached 69% and 13% respectively in 2023, accounting for more than 10% and 20% of various loans respectively. It is expected that 1Q24 will continue to see a boom in loan investment in key public sectors. In terms of non-credit assets, financial investment and interbank assets added -5.5 billion and 8.4 billion dollars during the 1Q quarter, a year-on-year decrease of 28.3 billion dollars and an increase of 11.5 billion dollars. Together, the share of interest-bearing assets decreased by 1.9 pct to 39.4% from the end of the previous year.

High credit growth is driving deposit growth to accelerate, and the base of the public customer base continues to be consolidated. At the end of 1Q24, the Bank of Suzhou's interest-paying liabilities and deposits grew by 16.8% and 16.4%, respectively, with changes of 2.2 and 1.4 pct, respectively, from the end of the previous year. In the first quarter, deposits increased by 47.3 billion yuan, an increase of 10.5 billion dollars over the previous year. The share of interest-bearing debt increased by 2.9 pct to 70.3% compared to the end of the previous year. Looking at customer types, public and personal deposits increased by 210 billion and 26.3 billion dollars respectively during the quarter, with increases of 8.7 billion and 1.8 billion dollars respectively over the previous year. The intensity of investment in public loans in 1Q was high, driving the acceleration of deposit derivation. In terms of market liabilities, 1Q bonds payable and interfinancial liabilities increased by -51 billion and 2.6 billion respectively, a year-on-year decrease of 8.3 billion dollars and a decrease of 3.4 billion dollars. The share of market debt in interest-bearing debt decreased by 2.9 pct to 30% compared to the end of the previous year.

The pressure on NIM to narrow has increased. The company's NIM in 2023 was 1.68%, down 3 bps from 1-3Q23 and 19 bps from 2022. Among them, the loan yield and deposit cost ratio were 4.29% and 2.21% respectively, down 41 bps and 1 bps from 2022, respectively. Under the influence of factors such as LPR cuts several times during the year, interest rate cuts on stock mortgages, and local urban investment bonds, loan pricing continued to be under pressure. At the same time, the trend of deposit periodization continued, and debt costs showed a certain degree of rigidity. The 1Q24 company interest spread was 1.52%, down 16 bps from 2023, and the decline was 6 bps wider than the same period in 1Q23. According to the calculation results, the company's return on 1Q24 interest-bearing assets was 3.72%, down 26 bps from 2023. It is expected to be mainly affected by factors such as the reduction in stock mortgage interest rates and the rolling repricing of stock loans at the beginning of the year. The 1Q interest-paying debt cost ratio was 2.25%, down 6bps from 2023. The company lowered the listing interest rate for personal and public deposits in December 2023. The margin for each period ranged from 5-25 bps. After multiple deposit cuts, the cost improvement effect will gradually be released as stock deposits are repriced at maturity.

The growth rate of non-interest income changed from negative to positive, and its share of revenue rose to 34%. 1Q24 Bank of Suzhou's non-interest revenue was 1.1 billion yuan (YoY +8.3%), accounting for an increase of 5.8pct to 34% of revenue compared to 2023. Among them, (1) Net transaction fee and commission revenue of 410 million (YoY -30%) continued the negative growth trend, accounting for 37% of non-interest income, which is basically the same as in 2023. In the context of policies such as public fund reform and the “integration of bank reporting” insurance, bank agency business revenue may be under relative pressure, causing a certain drag on the growth of income revenue. (2) Net other non-interest income of 700 million (YoY +57%), of which investment income and fair value change income were $4.8 billion and 210 million, respectively, with year-on-year growth rates of 84% and 27%. Interest rates in the bond market have declined since the beginning of the year, and the combined valuation of some bond transactions increased the growth rate of other non-interest income.

Operation with a low defect rate and strong risk compensation capacity. At the end of 2023, the Bank of Suzhou's non-performing rate and concern rate were 0.84% and 0.81% respectively, changing -4 and 6 bps from the end of 2022, respectively. During the year, the number of new non-performing products and the scale of write-offs was 790 million and 540 million respectively, with year-on-year increases of 680 million and 260 million respectively. The pressure to generate bad defects and the intensity of write-offs increased. By industry, the non-performing ratio at the end of the year was 0.76%, down 0.26pct from the beginning of the year. Among them, the real estate and manufacturing non-performing rates were 2.6% and 0.89%, down 1.95 and 0.35pct respectively from the beginning of the year. Risk reduction in related fields drove improvements in the quality of enterprise assets. The retail defect rate was 1.02%, up 0.34pct from the beginning of the year. Among them, the non-performing rates for personal operating loans and consumer loans increased by 0.55 and 0.5 pct to 1.51% and 1.44% respectively from the beginning of the year, and retail risk exposure increased.

At the end of 1Q24, the company's defect rate was 0.84%, the same as at the beginning of the same year, maintaining a historically low level; the attention rate was 0.77%, down 4 bps from the beginning of the year. The non-performing balance at the end of the quarter was 2.7 billion yuan, an increase of 250 million over the beginning of the year, an increase of 120 million dollars; the net generation rate of non-performing goods was 0.48%, an increase of 27 bps over the previous year, and the intensity of write-off was unabated. Credit impairment losses during the 1Q quarter were 270 million, a year-on-year decrease of 240 million. Credit impairment loss/revenue accounted for 8.4%, a year-on-year decrease of 7.8 pcts. The loan ratio and provision coverage rate at the end of the quarter decreased by 0.26, 31 pct to 4.13% and 492%, respectively, from the beginning of the year. The company's ability to offset risks remained strong, and provisions fed back abundant profit margins.

The margin of capital safety is high, and 5 billion convertible bonds are yet to be converted into shares. At the end of 1Q24, the company's core Level 1/Tier 1/capital adequacy ratios were 9.4%, 10.8%, and 13.9%, respectively, with changes of 1, -4, and -11 bps respectively from the beginning of the year. The risk-weighted asset growth rate was 13.3%, down 1.7 pct from the beginning of the year. Currently, the company's 5 billion convertible debt-to-share ratio is low. The latest conversion price is 6.78 yuan/share, strong ransom price is 8.81 yuan/share, and the current stock price is 7.13 yuan/share. The company's profit has maintained double-digit growth, and the ability to replenish endogenous capital is strong. At the same time, during the debt-to-share conversion period, the current stock price has a probability of driving stock conversion, and strong capital replenishment capabilities guarantee the company's subsequent scale expansion and performance growth. The company's cash dividend rate has stabilized at around 30% in recent years. As of the close of trading on April 26, the company's dividend rate was 5.47%, which is at the upper middle level of agricultural commercial banks in listed cities.

Profit forecasting, valuation and ratings. The Bank of Suzhou adheres to the development concept of “being beautiful and moving towards reality”. The company's development resonates with the local economy at the same frequency, the pace of scale expansion is fast, and there is plenty of room for future exhibition. It has clear advantages for public business platforms, and resources are skewed towards physical fields such as manufacturing and science and innovation; retail relies on the financial ecosystem and has a huge potential wealth customer base. The company has obtained public fund and escrow licenses in recent years. It can be expected that financial management sub-licenses can be obtained, and there is room for growth in income. Furthermore, the company's stock risk continues to drop, new risks are manageable, asset quality reduces the drag on performance, and the margin of capital safety is thick. Taken together, the Bank of Suzhou's future expansion in scale, growth in revenue, and stable and improved asset quality guarantee the sustainability of development. However, considering the downward pressure on loan interest rates in the industry, interest spreads are still relatively under pressure. We adjusted the 2024-25 EPS to 1.45/1.63 yuan (previous value 1.58/1.93 yuan) and added 1.80 yuan for 2026. The current stock price corresponds to PB valuations of 0.6, 0.54, and 0.49 times, respectively, and the corresponding PE valuations are 4.93, 4.38, and 3.96 times, respectively, maintaining the “buy” rating.

Risk warning: Economic recovery and credit expansion fell short of expectations, and the downward pressure on interest rates on small and micro loans increased.