Description of the event
Bank of Communications released its 2024 quarterly report. 2024Q1 revenue grew at a year-on-year rate of -0.03% (growth rate of 0.3% for the full year of 2023), net profit growth rate of 1.4% (0.7% growth rate for the full year of 2023), and a non-performing rate of 1.32% at the end of the period, down 1BP month-on-month, with provision coverage of 197%.
Incident comments
Revenue growth has exceeded expectations, and interest income is growing. 2024Q1 revenue grew -0.03% year on year, and the Hong Kong stock earnings report revenue grew 0.05% year on year. Previously, the market generally expected major state-owned banks to have strong downward pressure on their revenue in the first quarter, and Bank of Communications's revenue resilience exceeded expectations. Among them, net interest income grew 2.2% year on year (-3.4% growth rate for the full year of 2023), net handling fee income fell 6.4% year on year due to fee cuts in agency funds and agency insurance, and other non-interest income such as investment income declined slightly from a high base last year. Net profit from 2024Q1 grew by 1.4%, business management expenses decreased year on year, cost to revenue ratio decreased slightly year on year. At the same time, asset quality was stable, and credit impairment loss accruals were reduced, supporting profit growth.
Loans have been growing steadily, and the share of term deposits has stabilized. Loans at the end of 2024Q1 increased by 3.1% compared to the beginning of the period, and the pace of expansion followed a slowdown in the macroeconomic environment. Among them, public loans increased by 4.9%, note size pressure dropped by 11.8%, and retail loans increased by 1.2%.
Among retail loans, operating loans and other loans (mainly consumer loans) grew relatively well. Mortgage and credit cards grew negatively, while real estate sales and residents' willingness to spend with leverage remained sluggish. The total deposit amount (including interest) at the end of Q1 increased by 1.5% compared to the beginning of the period. The growth rate of public and personal deposits was -0.5% and 4.7% respectively. It is expected that the pressure drop on some high-cost deposits will drop. Demand deposits at the end of the period (including interest) account for 34.4%, up 0.1 pct from month to month, reflecting the gradual stabilization of the share of time deposits.
The month-on-month recovery in net interest spreads is a core highlight, and it is expected that the cost of benefiting from debt will improve. The 2024Q1 net spread was 1.27%, and the net interest spread rebounded 5BP month-on-month in a single quarter, down only 1BP from the full year of 2023. Net interest spreads are resilient, leading to positive growth in net interest income in the first quarter, which is expected mainly due to improvements in deposit costs. The deposit cost ratio for the full year of 2023 was 2.33%, down 2BP from 2023H1. Benefiting from marginal improvements in deposit interest rate reduction policies, the improvement trend is expected to continue in the first quarter. The return on assets is expected to continue to decline due to heavy pricing and LPR cuts. However, due to the low share of mortgages among major banks (17.8% at the end of 2024Q1), it is relatively less affected by heavy pricing. At the same time, due to the relatively high share of credit cards, retail loan yields were fully adjusted in the early stages, and the downward pressure on loan yields is expected to decrease marginally this year. Looking ahead to the whole year, it is expected that there will still be some pressure on net interest spreads, but the trend of improving deposit costs is expected to continue, easing the downward pressure on net interest spreads. The net interest spread pressure is expected to be less than that of peers.
The non-performing rate declined month-on-month, and improvements in asset quality were realized. The 2024Q1 final defect rate was 1.32%, down 1BP month-on-month, reaching the best level in recent years. The net generation rate of defects before write-off in 2023 was 0.53%, up 2BP from 2023H1, and a year-on-year decrease of 21BP. Real estate is still a key risk area. At the end of 2023, the non-performing rate of real estate loans to public loans was 4.99%, up 160 BP from the interim report. Since the business is focused on developed regions such as the Yangtze River Delta, real estate development projects are relatively high quality, and the overall risk is expected to be manageable, but it will still take time to fully absorb the risks. The retail loan non-performing rate fluctuated slightly. The non-performing rate at the end of 2024Q1 was 0.90%, up 9BP month-on-month, and the credit card non-performing rate rose. Currently, the economy is still in the early stages of recovery, so follow up on the risk situation in the retail sector. The 2024Q1 provision coverage rate at the end of the year was 197%, an increase of 2 pcts over the previous month, continuing to consolidate provisions and enhance risk resilience.
Investment advice: Major banks with high dividends, undervaluation, and stable dividends that have been ignored for a long time. Revenue is expected to grow by 1% for the full year of 2024 and net profit to mother of 2%, corresponding to the valuation of A shares of 0.52x2024PB, a dividend rate of 5.5% in 2023, a valuation of 0.41x2024PB of H shares, and a dividend rate of 7.0% in 2023. Currently, the A-share PB valuation is still the lowest among major banks. It is expected that net interest spreads will bottom out first in the future, and ROE will converge to the average value of the major banks, which will drive further valuation repair and maintain the “buy” rating.
Risk warning
1. The credit scale expansion fell short of expectations; 2. Asset quality fluctuated markedly.