Key points of investment

Incident: Bank of Ningbo released its report for the first quarter of 2024. Q1 achieved operating income of 17.509 billion yuan (+5.78%, YoY) and net profit attributable to common shareholders of the parent company of 7.013 billion yuan (+6.29%, YoY). At the end of Q1, the company's total assets were 2.89 trillion yuan (+14.35%, YoY), the non-performing loan ratio was 0.76% (flat, QoQ), and the non-performing loan provision coverage rate was 431.63% (-29.41pct, QoQ). Bank of Ningbo's net interest spread in Q1 was 1.90%, down 10 bps year on year.

The expansion of the table remained strong, and the new loan structure reflected the fragmentation of demand. At the end of Q1, the company's total assets increased 14.35% year-on-year to 2.89 trillion yuan. Among them, the total loan amount (excluding accrued interest) increased 24.18% year over year to 1.36 trillion yuan, faster than expected.

Structurally, public loans, note discounts, and personal loans all maintained strong growth, with year-on-year increases of 22.43%, 21.48%, and 27.31%, respectively. On the marginal side, benefiting from good regional economic demand and its own active investment strategy, the growth in the scale of public loans and notes discounts has accelerated. Q1 added 87.1 billion yuan to public loans, an increase of 41.9 billion yuan over the previous year, and 8.5 billion yuan in bill discounts, an increase of 20.8 billion yuan over the previous year. Affected by the slowdown in residents' demand for housing and consumption, the growth in the scale of personal loans has slowed. Q1 personal loans increased by 13.743 billion yuan, a year-on-year decrease of 4.2 billion yuan. Compared with the strong growth momentum on the loan side, the growth rate of deposit absorption has slowed. At the end of Q1, the company's deposit absorption scale (excluding accrued interest) increased 14.77% year-on-year to 1.82 trillion yuan, and the growth rate slowed by about 6 pct compared to 2023q4. The growth rate of deposits has been slowing for two consecutive quarters or is related to the pace of savings collection. In Q3 of 2023, the reserve collection effort was clearly strong to ease the pressure on savings collection, and the deposit growth rate returned to the center in the past two quarters.

The decline in interest spreads narrowed, pressure on the debt side eased somewhat, and the asset side reflected the impact of repricing. Bank of Ningbo's net interest spread for the Q1 quarter was 1.90%, down 10 bps year on year. It is estimated that the decline was about 15 bps narrower than in Q4 in 2023. On a month-on-month basis, Q1 interest spreads rebounded 5 bps from Q4 in 2023, and rebounded for two consecutive quarters. Bank of Ningbo's net interest rate pressure relief may mainly stem from the debt side. It is estimated that the average cost ratio for Q1 interest-paying debt was 2.11%, down 8 bps from month to month. On the one hand, interbank debt and bond issuance cost ratios benefited from the decline in Q1 capital interest rates, and on the other hand, Q1 entered the peak repricing season, and the upward pressure on deposit cost rates faced since the second half of last year has slowed. On the asset side, the estimated average yield on interest-bearing assets in Q1 was 4.11%, down 6bp from Q4 in 2023. On the one hand, the increase in the share of public loans with lower yields (compared to personal loans) in total loans is due to the aforementioned new loan structure, which tends to lower the overall yield; on the other hand, the impact of loan repricing is evident. Judging from the decline, the decline in the interest rate in Q2 matches the decline we obtained by repricing with reference to the LPR reduction, which may mean that the additional reduction in interest rates on newly issued loans issued by Bank of Ningbo compared to LPR is not obvious, and it is also better than previously anticipated.

The advantages of investment transactions are once again reflected, and intermediary business revenue is still under pressure due to market influence. In Q1, the company's investment income+fair value change profit and loss increased 13.30% year-on-year to 4.650 billion yuan, the highest level in a single quarter since Q3 2022. Considering the 11.75% year-on-year decline in the size of transactional financial assets at the end of Q1, the rapid increase in investment income or mainly due to the company's better grasp of the bond market situation during the same period, the return on holding of transactional financial assets and the return obtained from disposal of other debt instruments were relatively good. In Q1, the company achieved net revenue from processing fees and commissions of 1,436 billion yuan, a year-on-year decrease of 21.49%, continuing the pressure trend. It is expected that revenue from the wealth management business will decline mainly due to capital market fluctuations.

Benefiting from an excellent regional economic base and risk control capabilities, the quality of the company's assets remains excellent. At the end of Q1, Bank of Ningbo's non-performing loan ratio remained extremely low at 0.76%. The share of concerned loans fluctuated slightly, in line with industry trends: the share of concerned loans at the end of Q1 was 0.74%, up 9 bps from the end of 2023q4, rising for two consecutive quarters, reflecting the impact of the macroeconomic slowdown.

The non-performing loan provision coverage rate was 431.63%, down 29.41 percentage points from Q4 in 2024. Mainly due to more bad confirmations, the balance of non-performing loans increased by 831 million yuan month-on-month to 10.330 billion yuan at the end of Q1, the highest increase in a single quarter in recent years.

The effect of fee control is obvious, and the calculation of asset impairment losses and bad write-offs remains prudent. 2024Q1, the company's operating expenses were 9.620 billion yuan, an increase of 1.96% over the previous year. Among them, operating and management expenses amounted to $5,521 billion, a year-on-year decrease of 1.16%, the first decline in many years. This phenomenon is consistent with industry trends. Listed banks generally reduce costs and increase efficiency by controlling employee expenses and management expenses. Affected by this, the Q1 cost-to-revenue ratio fell to 31.53%, the lowest level in a single quarter in recent years. Asset impairment losses were $3,907 million, up 5.51% year over year. It is estimated that loans in the statement, other assets in the statement, and assets outside the statement amount to 32.22, 2.92 billion yuan, and 393 million yuan, respectively. Compared with 2023 Q3-Q4, the three accruals increased to varying degrees, and credit costs rebounded to 0.30% (VS 2023 Q3 and Q4 were 0.13% and 0.07%, respectively). In view of improvements in interest income and investment returns in Q1, the recovery in credit costs reflects to a certain extent the weakening of provisions to feed back profits. In terms of bad disposal, the company stepped up its write-off efforts. The write-off amount was 3.181 billion yuan, which is much higher than the same period in recent years, reflecting the continuity of the company's prudent non-performing loan disposal policy.

Profit forecast and investment advice: Q1 Company's growth in size, interest pressure, and investment income were better than expected. We slightly adjusted the profit forecast accordingly. Operating revenue for 2024-2026 was 659.99 billion yuan, 719.70 billion yuan, and 78.865 billion yuan respectively (the original forecast was 650.29, 706.21, 78.603 billion yuan), and net profit to mother was 27.975 billion yuan, 306.94 billion yuan, and 34.614 billion yuan, respectively (the original forecast was 278.24 billion yuan, 305.13 billion yuan, 33.758 billion yuan). The estimated net assets per common share in 2024-2026 will be 30.18, 33.64, and 37.55 yuan, corresponding to the closing price of 22.93 yuan on April 30, PB 0.76, 0.68, and 0.61 times. At the industry level, risk mitigation in key areas such as financing platforms and real estate continues to advance, the macroeconomic bottom is rising, and interest rate cuts on deposits are strong, and the pressure on banking operations is expected to ease. At the company level, Bank of Ningbo has obvious regional economic advantages, outstanding professional management capabilities, and the current relative valuation of the company is low. Based on the above, the company's “buy” investment rating is maintained.

Risk warning: The regional economy has clearly weakened, the risks of inclusiveness and consumer loans have been exposed, and net interest spreads have narrowed sharply due to asymmetric interest rate cuts.