Core views

The southwest region's financial debt is nearing its end, and the impact on the Bank of Chengdu's politics-related business is minimal.

With significant location advantages, the Bank of Chengdu has plenty of room for development in both the government and physical sectors, and the scale is high and sustainable. At the same time, under the guarantee of strong credit demand, there is no need for excessive price sacrifices for large-scale growth. It is expected that the decline in interest spreads will gradually slow down and reach bottom. Under the “volume increase and price advantage” trend and excellent asset quality, the Bank of Chengdu has managed to maintain the leading industry's revenue, profit growth rate, and ROE levels. In addition, the Bank of Chengdu's annual dividend rate of 30% is included in the regulations, and the high dividend characteristics are highly deterministic. Even considering the forced redemption of convertible bonds and shares, the dividend rate in 23 was still close to 5%, and rapidly increased to 5.3%, 6.1%, and 7% in 24-26. The Bank of Chengdu has both individual stock alpha and high dividend advantages, and is a typical type of offense and defense. Previously, the valuation ceiling was suppressed by the sector's overall negative beta. With the optimization of real estate policies and the improvement of economic expectations, banks with such distinctive alpha characteristics have more flexibility and room for valuations, reaffirming that the sector is being promoted first.

occurrences

On May 18, the Chengdu Investment Promotion Conference was successfully held. The list of investment opportunities in the Chengdu metropolitan area was released, and 232 projects were launched, with a proposed investment amount of more than 840 billion yuan; the total investment amount for major projects signed centrally reached 132.93 billion yuan.

Brief review

1. The Bank of Chengdu maintains revenue growth in leading industries and “easy” double-digit profit release, and ROE is expected to remain above 15% for a long time.

The Bank of Chengdu currently maintains a relatively industry-leading level of revenue and profit growth.

The combined year-on-year growth rate of the two core revenue of 1Q24 net interest income plus net handling fee revenue reached 8.3%, ranking third among 42 listed banks, and the revenue quality and efficiency was very solid. Furthermore, in terms of non-interest income, the Bank of Chengdu accurately judged market opportunities in 4Q23 and 1Q24 and grabbed some bond-like assets. In the future, there is still some potential room for release in terms of investment income and other non-interest income such as OCI surges through high-frequency transactions and mismatched terms. Bank of Chengdu is expected to maintain revenue growth of more than 5% and profit growth of more than 10% in 24 years.

Looking at the medium to long term, the Chengdu-Chongqing Economic Zone is the fourth pole in the country's development. The economic development is relatively rapid, and the demand for credit is high. The Bank of Chengdu has a remarkable location advantage. Both physical and government-related businesses have plenty of room for development, and a credit increase of more than 20% is expected to be maintained. At the same time, with strong demand for credit, large-scale growth does not require excessive price sacrifices. Combined with the continuous optimization of debt-side costs, the reduction in net interest spreads will gradually stabilize and reach bottom, the quantitative price compensation effect will be better, and the revenue growth rate will remain at the leading level in the industry. Under the quality assurance of high-quality assets, Bank of Chengdu has maintained double-digit profit releases for a long time and an ROE level of 15% or more that is sustainable for a long time.

2. In the context of the construction of the Chengdu-Chongqing Shuangcheng Economic Zone, credit demand and structural conditions are better than those of the whole country. The Bank of Chengdu is expected to achieve both political and physical growth, and maintain a good trend of “excellent volume and price growth” for a long time.

The southwest region's debt is nearing its end, and the impact of interest rate cuts is minimal. With infrastructure demand still very strong in the Chengdu and Chongqing region, the Bank of Chengdu's long-term advantages on both the volume and price of government-related business will not change. With the supervisory authorities putting forward the policy direction of “guiding financial institutions to rationally use methods such as debt restructuring and replacement in accordance with the principles of marketization and rule of law, to classify and adopt measures to mitigate the risk of existing debt on financing platforms,” the debt conversion process for 12 key provincial and municipal local government platforms has gradually unfolded over the past 23 years. Judging from the current debt conversion situation in Chongqing, about 2/3 of the bank's existing local government platform debt has basically been replaced. Furthermore, the overall requirement for debt conversion is to reduce the high cost liabilities of urban investment platforms. Banks generally replace their own stock loans and non-standard ones. A small number of non-standard debts from other financial institutions or syndicated loans led by policy banks and major state-owned banks are accepted. Looking at the pace of debt conversion, banks and platform companies basically adhere to the “one household, one discussion” friendly negotiation model after the debt matures, and there has been no one-time drastic reduction in interest rates as previously anticipated by the market. In terms of interest rate cuts, since the Chongqing region is still undertaking major development tasks, there is a high demand for government financial projects, and negotiations on interest rate cuts also adhere more to the principle of relative commercial sustainability. The interest rate cut for government-related loans in Chongqing is expected to be between 30-40 bps, far lower than the rate cut previously anticipated by the market.

As far as the Bank of Chengdu is concerned, the exchange of urban investment debt in the Chongqing region has also basically been completed, and the Sichuan region itself is not among the 12 key provinces. Bank of Chengdu's politics-related business customers are also concentrated in the top 30% of local high-quality platforms at the municipal or district and county levels, and interest rate cuts are very limited. With the basic completion of the financial debt process in the Chengdu and Chongqing region, demand for infrastructure investment is still very strong. As of 1Q24, the scale of fixed asset investment in new infrastructure in Chengdu increased by 39.3% year-on-year, providing broad space for the Bank of Chengdu's government-related business. In the current situation where construction of infrastructure projects in the Chengdu and Chongqing region is very active, and the city investment platform hopes to maintain long-term sustainable cooperation with local legal entities, it is expected that the scale of the Bank of Chengdu's government-related business will maintain a steady and high growth rate in the future, while interest rate cuts may only be around 10-20 bps. The “moat” advantage that the Bank of Chengdu has built over a long period of time in politics-related business is still very remarkable.

In terms of physical business, the real economy in Chengdu and Chongqing is currently booming. Relying on the advantages of local legal entities, the Bank of Chengdu is gradually becoming an entity, and there is still plenty of potential for the future. Chengdu will continue to implement 900 key projects in '24, with an annual planned investment of 302.78 billion yuan. As of 1Q24, fixed asset investment in Chengdu increased 6.8% year-on-year, significantly faster than the national level. Among them, high-tech manufacturing and high-tech services grew by 27.6% and 17.7% respectively. Furthermore, at the Chengdu Investment Promotion Conference held on May 18, Chengdu City, Deyang City, Meishan City, and Ziyang City jointly released a list of investment opportunities in the Chengdu metropolitan area. The proposed investment amount exceeds 840 billion yuan. Currently, the investment amount for signed projects has reached 132.93 billion yuan, bringing new growth points to the development of the Bank of Chengdu's physical business. In the context of strong demand for physical credit, the Bank of Chengdu is focusing on expanding and strengthening the physical customer base through a “white list” system and strengthening physical business assessment indicators, etc., to lay the foundation for the sustainable high growth of physical business in the future. It is expected that the share of the Bank of Chengdu's physical credit investment in new loans will gradually increase. In terms of price, the Bank of Chengdu takes advantage of the “short decision-making chain and close links with the government” of local legal entities to conduct hierarchical and accurate marketing for different customers and accurately price according to customer needs and characteristics, which is superior to other national bank branches. At the same time, the banking industry in Chengdu increases the comprehensive benefits of physical business through settlement and treasury management systems, etc., which strongly supports overall revenue growth that is better than that of peers.

The decline in net interest spreads is expected to gradually narrow as debt-side cost pressure falls. On the asset side, the decline in the Bank of Chengdu's government-related business was clearly better than market expectations. At the same time, physical loan projects have sufficient reserves, and can lock in some interest income by investing ahead of time. However, considering the continued decline in LPR and the general context of reducing financing costs for the real economy, the Bank of Chengdu's asset-side interest rate is still under some downward pressure. However, on the debt side, Bank of Chengdu's savings and loan growth has now stabilized at around 50%, and the impact of structural factors will weaken compared to last year; combined with the continued reduction in interest rates on deposit listings, there is still plenty of room for pressure reduction in bank deposit costs in Chengdu. With interest rates on both negative and negative sides declining at the same time, it is expected that the decline in the net interest spread of the Bank of Chengdu will gradually narrow and continue to maintain a relatively superior trend compared to peers.

3. The quality of assets is very solid, which is conducive to the long-term stable release of performance. As of 1Q24, the non-performing ratio of the Bank of Chengdu was only 0.66%, which is the absolute low of listed banks. The non-performing loan balance and non-performing loan generation rate continue to decline. It is expected that the non-performing ratio of the Bank of Chengdu will basically stabilize at the current level in the next few quarters. In the process of transformation to physical business, the Bank of Chengdu relies on the advantages of local legal entities to carry out physical business in close cooperation with the government, so it can select the top 25% or even the top 15% of large-scale projects from high-quality leading companies, and the possibility of credit risk exposure is relatively small. Under the basic and stable guarantee of bad write-offs, the Bank of Chengdu's provision coverage rate is expected to remain at an excellent level of around 500%, which is conducive to the long-term stable release of performance.

4. Real estate policy optimization helps improve the big beta in the banking sector. The valuation repair logic of high-quality banks with leading performance and significant fundamental advantages, such as Bank of Chengdu, is more straightforward. After the liberalization of purchase restrictions in the Chengdu region in early May, real estate sales in Chengdu's main urban area and second-hand housing have all improved markedly. Given the short time frame for policy liberalization, the continuation of the policy remains to be seen. Looking at it now, on May 17, the central bank lifted the lower interest rate limit on mortgage loans at the national level, lowered the down payment ratio for the first home and the second home to the lowest level in history, and introduced a series of real estate policy packages such as establishing 300 billion yuan of affordable housing reloans to support local state-owned enterprises to buy existing housing stock. The market's confidence in economic recovery and procyclical logic has increased. It is hoped that in the future, the pressure on the real estate sales side may be further mitigated by promoting the further improvement and implementation of local state-owned enterprise collection and storage policies. As real estate optimization policies continue to be introduced, the big beta in the banking sector is expected to continue to improve as the procyclical logic of the market is strengthened. However, high-quality banks with significant fundamental advantages, such as Bank of Chengdu, were suppressed by weak industry beta in a weak economic cycle, and previous valuation premiums brought about by performance advantages did not fully respond. Currently, with the improvement of the banking sector's big beta in a processional period, the Bank of Chengdu's valuation repair logic will be more straightforward.

5. Forced redemption of convertible bonds is imminent, and the pressure on capital adequacy ratios is expected to ease. Combined with the Bank of Chengdu's 30% annual dividend rate, the characteristics of high dividends are highly deterministic. As of May 17, the closing price of the Bank of Chengdu was 16.03 yuan/share, only 6% of the increase required from the price line for strong redemption of convertible bonds. If all of the remaining 5.2 billion yuan of convertible bonds are converted into shares, about 400 million share capital can be added, and static estimates can increase the Bank of Chengdu's core Tier 1 capital adequacy ratio by 0.69 pct. Combined with the Bank of Chengdu's high performance growth, it is expected that the Bank of Chengdu will achieve endogenous capital replenishment in the next 2-3 years, and the ROE will stabilize above 15% for a long time. In terms of dividend rates, the Bank of Chengdu is the only listed bank other than CMB that has included maintaining a dividend rate of no less than 30% each year in its regulations. The high dividend characteristics are highly deterministic. Even considering the strong redemption of convertible bonds for shares, the 23-year dividend rate was only diluted from 5.3% to 4.8%, and rapidly raised to 5.3%, 6.1%, and 7% in 24-26. The dilution effect was very small.

6. Investment advice and profit forecast: The southwest region's financial debt is nearing its end, and the impact on the politics-related business of the Bank of Chengdu is minimal. With significant location advantages, the Bank of Chengdu has plenty of room for development in both the government and physical sectors, and the scale is high and sustainable. At the same time, under the guarantee of strong credit demand, there is no need for excessive price sacrifices for large-scale growth. It is expected that the decline in interest spreads will gradually slow down and reach bottom. Under the “volume increase and price advantage” trend and excellent asset quality, the Bank of Chengdu has managed to maintain the leading industry's revenue, profit growth rate, and ROE levels. In addition, the Bank of Chengdu's annual dividend rate of 30% is included in the regulations, and the high dividend characteristics are highly deterministic. Even considering the strong redemption of convertible bonds and shares, the dividend rate in 23 was still close to 5%, and rapidly increased to 5.3%, 6.1%, and 7% in 24-26. The Bank of Chengdu has both individual stock alpha and high dividend advantages, and is a typical type of offense and defense. Previously, the valuation ceiling was suppressed by the sector's overall negative beta. With the optimization of real estate policies and the improvement of economic expectations, banks with such distinctive alpha characteristics have more flexibility and room for valuations, reaffirming that the sector is being promoted first. Revenue growth in 2024, 2025, and 2026 is expected to be 5.4%, 10.4%, 10.8%, and profit growth rates of 10.2%, 15.2%, and 15.4%. The current stock price of the Bank of Chengdu corresponds to 0.82 times 24-year PB, and the dividend rate corresponding to the 23-year dividend is 5.6%. Maintaining the buying rating and leading position in the banking sector.

7. 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, leading to the risk of bad 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 the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.