Matters:
Industrial Bank recently revealed the 2024 “Improve Quality, Increase Efficiency, and Focus on Return” action plan. At the same time, after more than a year of balance sheet restructuring, the effects of the transformation are gradually showing, in line with economic and social development.
Commentary:
The balance sheet restructuring is in line with economic and social development, and the results of the transformation are gradually showing. In its 2022 annual report, Industrial Bank's forward-looking plan proposed “three business cards,” “digital development,” and “five new tracks,” which are highly compatible with the “five major articles” proposed at the Central Financial Work Conference last year. After several years of development, the transformation results are gradually showing: 1) Asset side: More in line with the transformation direction of the real economy. In the basic market, loans in new real estate sectors such as housing leasing, urban renewal, and industrial parks increased 84.65% year on year in 2023, the People's Bank of China green loans increased 26.99% year on year, and manufacturing loans increased 24.43% year on year. In the new track, loans in the fields of science and innovation, inclusion, energy, automobiles, and parks increased by 31.88%, 23.95%, 16.16%, 26.14%, and 27.40%, respectively; 2) Debt side: promoting the growth of low-cost deposits and reducing pressure on high-cost liabilities. In 2023, with treasury management, supply chain finance, and scenario ecosystem platforms as a starting point, the average daily balance of enterprise fund low-cost deposits increased by 12.92% year-on-year, and settlement deposits in the retail delivery and receipt business increased 12.6% year-on-year. At a time when market liquidity was relatively easy, 50 billion yuan of green finance bonds and 25 billion yuan of small and micro financial bonds were issued at lower interest rates; pressure was cut on high-cost agreement deposits and social savings, and interest rates on deposit listings were lowered, and interest rates on domestic RMB deposits dropped 11 bps over the same period last year.
1Q24 revenue exceeded expectations and improved, and performance was consolidated. 1) Industrial Bank's 2023/1Q24 revenue growth rates were -5.2%/+4.22%, respectively. Among them, the negative revenue growth rate in 2023 was mainly affected by the increase in the one-time revenue confirmation base for old wealth management products in 2022. After excluding this factor, revenue remained basically the same year on year. The 1Q24 revenue growth rate changed from negative to positive, mainly due to the narrowing of interest spreads and the scale maintained rapid growth after asset liability restructuring. Net interest income achieved a positive increase of 5.1% year-on-year, while other non-interest income also had a boosting effect; 2) 2023/1Q24 net profit growth rates were -15.6%/-3.1%, respectively. In addition to the positive contribution of the revenue side, the improvement in performance also had cost saving factors. 1Q24 cost revenue fell 6.2 pct to 23.5% month-on-month.
Due to forward-looking increases in provision planning efforts, the 1Q24 provision contributed negatively to net profit, but the net bad generation rate declined sequentially, asset quality improved marginally, and the contribution of subsequent provisions to profit is expected to increase.
The decline in interest spreads narrowed, thanks to improvements in debt-side costs. The net interest spread disclosed in 1Q24 was 1.87% (adjusted for interest-paying liabilities and interest expenses corresponding to the cargo base and debt-based investment business), down 2 bps month-on-month and 10 bps year-on-year (17 bps year-on-year decrease in 2023), and the decline narrowed somewhat. 1) Asset side: Increased support for the real economy. The average interest rate for new loans invested in 1Q24 was 4.1%, down 47 bps from the average yield of loans in 2023; 2) Debt side: 1Q24 achieved a decrease of 12BP to 2.12% compared to the end of 2023 on the basis of maintaining a stable deposit size of 5.1 trillion yuan.
Asset quality remains stable, provision and planning efforts are increased, risks are handled ahead of time, and the foundation of performance is consolidated. In 1Q24, Industrial Bank's non-performing rate/approval rate was 1.07%/245.5%, flat month-on-month (+0.3 pct), and overall remained stable. The attention rate fluctuated, from +15 bps to 1.7% month-on-month. On the one hand, it was affected by factors such as macroeconomic structural transformation and real estate market adjustments. On the other hand, the company took the initiative to downgrade some outstanding projects and had hidden risks, and urged management institutions to step up their efforts to dispose of risky projects. It is noted that credit card risk has been mitigated. The credit card defect rate was 3.93% in 2023, down 1 bps from 1H23. Under the catalytic process of debt conversion and policies to support real estate, real estate risk and risk pressure on local government financing platforms are expected to gradually ease. In 2023, the number of new defects in public real estate/local government financing platform business decreased by 54%/55% year-on-year. The asset defect ratio of existing real estate/local government financing platforms increased by 6 bp/1.29pct to 1.53%/2.52% from the end of the previous year, and overall asset quality remained stable.
In 2024, the “Improve Quality, Increase Efficiency, and Heavy Return” plan was released, which proposes to maintain the stability of stock prices, promote valuation repair, maintain sustainable development and predictability of dividends, and the valuation is expected to rise steadily. 1) In terms of “improving quality and efficiency”, in 2024, the company will focus on improving the five core competencies of “strategy execution, customer service, investment transactions, comprehensive risk, management promotion”, and solidly write the “five major articles” to help develop new quality productivity and continuously improve the compatibility between business structure and economic structure; 2) In terms of “heavy return”, one is maintaining stock price stability and promoting valuation repair; the second is to maintain sustainable development and dividend predictability. The dividend rate for 2018-2023 has steadily increased from 24.24% to 29.64% since listing in 2007. The dividend of 193.67 billion yuan is far higher than the 83,535 billion yuan financing through common stock, giving investors a good return.
Investment advice: Societe Generale Bank's balance sheet restructuring is progressing smoothly. The asset-side size has maintained relatively rapid growth, debt-side costs have effectively been reduced, and the 2023 performance may be low. As asset quality improves, provisions are expected to feed back profits. Currently, Industrial Bank has the attributes of high dividends (TTM of more than 6.6% dividend rate on June 10), undervaluation, and low expectations, and still has good investment value. Based on the company's disclosure of the quarterly report and the current macro environment, we expect the 2024E/2025E/2026E net profit growth rate to be 0.3%/2.9%/5.6%, and the current stock price corresponds to 24E PB 0.47X. Combined with the company's fundamentals and historical valuation center, considering the current overall valuation situation of the banking industry, we will give the 2024 target PB 0.6X, corresponding to the target price of 22.24 yuan, and maintain the “recommended” rating.
Risk warning: Economic recovery fell short of expectations, and real estate risk exposure exceeded expectations.