Core views:

Everbright Bank released its 2024 quarterly report. Our comments are as follows: In 24Q1, revenue, PPOP, and net profit to mother changed by -9.6%, -11.2%, and 0.4%, respectively. The growth rate changed by -5.7pct, -6.7pct, and +9.4pct, respectively, compared with the 23A growth rate. Driven by cumulative performance, growth in scale, provision back-up, and effective tax rates have contributed positively. Factors such as narrowing net interest spreads and declining net handling fee revenue have contributed to a certain extent.

Highlights: (1) Performance returned to positive growth. According to the 23 annual report disclosed by the company earlier, due to the company's 23Q4 large accrual provisions, profit unexpectedly grew negatively for the full year of '23, which attracted market attention. The Q24 quarterly report was released, and the 24Q1 profit growth rate returned to positive growth, indicating that the obvious pressure on the performance of the provision plan was one-time and helped ease market concerns. (2) The rate of defective production has decreased. At the end of the first quarter of '24, the company's non-performing loan ratio was 1.25%, the same as at the end of the previous year; the provision coverage rate was 185.10%, up 3.83 percentage points from the end of the previous year. Although the 24Q1 company's provision schedule declined year-on-year, the non-performing rate was stable and the provision coverage rate increased, indicating a decrease in the company's negative generation pressure. We estimate that the 24Q1 company's annualized non-performing loan generation rate was 0.76%, a year-on-year decrease of 0.49pct. (3) The growth rate of scale has slowed, and the capacity for endogenous capital growth has increased. At the end of 24Q1, the company's expansion slowed further, and the risk-weighted asset growth rate continued to be lower than ROE* (1-dividend rate). A moderate slowdown in scale growth helped consolidate the quality of the company's operations and improve the sustainability of the company's endogenous capital. At the end of 24Q1, the capital adequacy ratio of companies at all levels increased significantly compared to the end of 23.

Concern: (1) Interest spreads continue to narrow. We estimate that the 24Q1 company's net interest spread was 1.55%, and the net interest spread continued to decline by about 13 BP from the 23Q4 single quarter. Mainly due to a decline in asset-side returns, the interest-bearing debt cost ratio remained flat month-on-month. It is expected that the pressure on interest spreads will ease somewhat as the effects of lower deposit interest rates are reflected in the future. (2) Handling fees have declined a lot. In 24Q1, the company's net handling fee fell 24.8% year on year. The decline was significant, which clearly dragged down revenue growth.

Profit forecast and investment advice: After experiencing an unexpected decline in the company's profit in the 23rd annual report, the 24Q1 profit growth rate returned to positive growth, which helped ease market concerns. Although the company's interest spreads and handling fees are still under pressure, the base effect has subsided. It is expected that the subsequent decline in revenue will gradually narrow, and the profit growth rate will remain stable. The company's net profit growth rate in 24/25 is expected to be +1.2%/+1.6%, EPS is 0.62/0.63 yuan/share, respectively. The current stock price is 5.1X/5.0X for 24/25 PE and 0.39X/0.37X for 24/25 PB, respectively. Taking into account the central and fundamental conditions of the company's historical PB (LF) valuation, maintaining the company's reasonable value of 5.38 yuan per share, corresponding to the 24-year PB valuation ratio, the reasonable value of H shares 4.07 HKD/share, all with a “buy” rating.

Risk warning: (1) the quality of retail assets deteriorated due to a decline in economic growth exceeding expectations; (2) deposit costs rose more than expected; (3) policy regulation exceeded expectations.