Key points of investment
Fundamentals and transactions resonate. If the conversion of bonds to shares adds momentum, the Bank of Nanjing is expected to return to the head of the commercial bank in the city.
Market concerns: Bank of Nanjing's valuation repair is only driven by a high dividend market. Subsequent operations are insufficient to support trending improvements in fundamentals, so there is little room for valuation repair. We believe that the Bank of Nanjing's fundamental trends are clear and sustainable. The value creation concept+regional development Dongfeng+inventory payment+ new management cycle shows confidence that the majority shareholders increase their holdings. If bonds are converted to shares, they will continue to add momentum, helping Bank of China to return to the head of the city's commercial bank.
Fundamentals: Good times, places, people, and resonance
(1) Tianshi: Bank of China Southern Bank's strategy is in line with the high-quality development orientation of the industry. Multiple recent policy signals suggest that in the future, banks will abandon the idea of putting scale first and shift to a new balance of volume and price and high-quality growth. At the May 2024 results conference, Mr. Xie Ning, Chairman of the Bank of Nanjing, emphasized that future development should focus on value creation, “weaken demand for scale, create value for customers, create value for themselves, and create value for society”.
We believe that after the Bank of Nanjing's total assets stabilizes at 2 trillion dollars and becomes a systemically important bank in 2023, the future will focus on management and operation optimization and move towards high-quality development.
(2) Geographic advantage: Excellent endowments and clear risks lay the foundation for development. ① Excellent endowments: Good local economy+spending money to make the whole country. The Bank of Nanjing mainly operates in Jiangsu, Shanghai, Beijing, and Zhejiang (according to the asset size of the Bank of Nanjing Division). They are all regions with the most resilient and dynamic development in China, and credit demand is resilient. As of 24Q1, the Bank of Nanjing's branch expansion campaign had achieved remarkable results. The number of branches reached 286, and the branch expansion layout was basically completed. Increased channel coverage is expected to contribute to new business momentum. At the same time, the Bank of Nanjing has obtained a consumer banking subsidiary license, which can exhibit business nationwide, opening up room for scale and profit growth. ② Risk clearance: Bank of Nanjing's non-performing asset burden is gradually being digested. Referring to the Bank of Nanjing's interactive feedback on the Shanghai Stock Exchange, the company fully calculated impairment preparations for tripartite debt in accordance with the principles of prudence and prudence; at the same time, Bank of South China's non-performing ratio and attention rate decreased by 6 bps, 12 bps to 0.83% and 1.04% month-on-month in 24Q1.
(3) People and peace: In the new management cycle, the leadership team is full of energy. ① The Bank of Nanjing has ushered in a new management cycle. The qualification of the chairman has been approved, and it has also formed a regular and six deputy governor positions. ② The new leadership team is full of energy. The new chairman, Mr. Xie Ning, is a cadre trained by the central bank system. He is familiar with the country's financial policy guidelines. He is a strong and active and promising person (born 1976); the governor, Mr. Zhu Gang, is a cadre who grew up in the bank and is very familiar with the Bank of Nanjing situation. A strong combination of the two is expected to drive the improvement of the Bank of Nanjing's operations.
Looking ahead to the next quarter of 2024, the Bank of Nanjing's revenue and profit growth rate is expected to continue to show a gradual improvement trend.
Looking at the main drivers: (1) Volume: Bank of Nanjing's short-term credit growth has benefited from better credit demand in Jiangsu Province. Medium- to long-term credit growth has benefited from the release of production capacity at new outlets. Bank of Nanjing loans are expected to maintain a growth rate of about 15% over the next 2-3 years. (2) Price: ① The Bank of Nanjing's interest rate spread is expected to narrow for the full year of 2024, mainly due to the expected improvement in deposit costs. In 2023, the Bank of Nanjing's deposit cost ratio was 2.44%, which is 12 bps higher than the average of commercial banks in the city. There is room for improvement in deposit costs. Bank of Nanjing deposit costs are expected to improve as deposit interest rates are lowered and deposit structures are optimized. ② Considering the recovery in financial management growth in the market, it is determined that the Bank of Nanjing's mid-term income for the full year of 2024 is expected to continue its rapid growth trend in Q1. ③ The financial market business is the traditional strength of the Bank of Nanjing. It is expected that other non-interest income will continue to grow rapidly throughout the year. (3) Quality: As stock risk is gradually cleared, the Bank of Nanjing's risk cost is expected to improve year-on-year in 2024.
Trading side: Shareholders' increased holdings showed confidence
BNP Paribas increased its holdings of the Bank of Nanjing by 79.87 million shares from February 2024 to March 2024, demonstrating the majority shareholders' confidence in the Bank of Nanjing's operations. Meanwhile, the deputy governor of the Bank of Nanjing, where BNP Paribas is based, said at the results conference that France and Pakistan will continue to provide shareholder-level support. As of the end of 24Q1, BNP Paribas held a total of 180 million shares of the Bank of Nanjing, accounting for 17.3% of the Bank of Nanjing's total share capital. There is still 2.7 pc of room compared to the 20% limit.
Convertible bonds: if equity conversion drives a positive cycle
The Bank of Nanjing has converted 20 billion bonds, and currently the amount of shares to be converted is 16.6 billion. Based on static estimates at the end of 24Q1, if all bonds are converted to shares, the core Tier 1 capital adequacy ratio can be added to 1pc to 10.26%. Future capital replenishment will strongly support the expansion and business development of the Bank of Nanjing, and help promote a positive cycle of operations.
Valuation benchmarking analysis
Looking at the review, Bank of Nanjing's PB valuation went hand in hand with Bank of Ningbo, and both were leading banks in the City Commercial Bank; and as the profit gap between the two widened, the valuation difference between Bank of Nanjing and Bank of Ningbo widened: ① Before 2016, Bank of Nanjing and Bank of Ningbo's PB valuations were basically on the same line, and the valuation difference was small; ② In 2016-2021, Bank of Ningbo's profit indicators were higher than Bank of Nanjing's PB valuation advantages over Bank of Nanjing; ③ Since 2022, the gap between Bank of Ningbo and Bank of Nanjing's various profit indicators has narrowed, and the PB valuation gap between Bank of China and Bank of Nanjing has narrowed, and the PB valuation difference has narrowed Gradually shrink. With the gradual improvement of the Bank of Nanjing's operations, the Bank of Nanjing's PB valuation is expected to move closer to the leading commercial bank, Bank of Ningbo. As of May 27, 2024, the Bank of Ningbo's current price corresponds to the 24-year PB valuation of 0.83x, and our target PB valuation is 0.90x; for reference, we give the Bank of Nanjing a 24-year PB valuation of 0.90x.
Profit forecasting and valuation
The Bank of Nanjing's net profit is expected to increase 10.1%/10.3%/10.7% year-on-year in 2024-2026, corresponding to BPS of 14.91/16.41/18.09 yuan. The current price corresponds to the 2024-2026 PB valuation 0.69/0.63/0.57 times. The target price is 13.42 yuan/share, corresponding to the 24-year PB valuation of 0.90x, and the current price space is 30%, maintaining the “buy” rating.
Risk warning
The macroeconomic economy has stalled, bad things have broken out sharply, and business improvements have fallen short of expectations.