It is located in a major economic province, and the scale of assets is expected to continue to expand at a high level. Judging from the external environment, 1) There is broad credit space: Shandong Province's economy ranks among the highest in the country, bringing a better economic environment for banks to expand; at the same time, with the support of policies such as the conversion of old and new kinetic energy, demand for high-quality credit may be stronger. 2) There is relatively broad room for expansion of commercial banks in Shandong City: First, when compared with Zhejiang, the overall asset size of commercial banks in Shandong Province is relatively low in line with the economic volume of the province; second, there is also some room for improvement in the size of Qilu Bank against Zhejiang's two listed commercial banks that have reached the trillion yuan level. Judging from internal development, Qilu Bank has maintained a high rate of scale expansion in recent years, and is expected to continue. 1) The scale expansion was driven by Qilu Bank's infrastructure-related loans accounting for 31.3% of total loans at the end of 2023, ranking among commercial banks in listed cities. At the same time, policies such as metropolitan areas and world-class port construction within the region are expected to continue to bring about infrastructure financing needs. 2) Capital is relatively abundant, and there is a foundation for scale expansion: Qilu Bank's core Tier 1 capital adequacy ratio was 10.23% at the end of 24Q1, and the company still had 6.6 billion yuan of convertible bonds that had not been converted into shares, so it can effectively supplement capital.

The net interest spread is expected to fully benefit from the reduction in deposit listing interest rates. On the asset side, loan pricing as a whole is still facing downward pressure from the industry. However, the debt-side cost advantage is remarkable, and is expected to continue: 1) The debt structure and pricing are good. The average balance of deposits absorbed by Qilu Bank in 2023 reached 77.7% of interest-bearing debt, and the deposit cost ratio was 2.11%, which contributed to its 2023 debt cost ratio ranking third lowest among commercial banks in listed cities. 2) The high share of time deposits is expected to benefit even more from the reduction in deposit listing prices. Qilu Bank's term deposits at the end of 2023 accounted for 67.8% of total deposits. Among them, personal time deposits accounted for 40.4% of total deposits, that is, the scope of benefiting from the reduction in deposit listing interest rates is relatively large.

The burden of bad history has basically been lifted; currently, the determination of bad behavior is quite strict. At present, the historical pressure on Qilu Bank's asset quality has been gradually resolved. Although the current defect rate of 1.25% at the end of 24Q1 is still relatively high among comparable peers, the criteria for determining bad performance are quite strict, with 90+/ 65% overdue at the end of 2023. According to static estimates, if Qilu Bank is 90+/ bad at the end of 2023 and the average value of commercial banks in 16 other listed cities, the corresponding defect rate is 1.04%. Even if it maintains a provision coverage level of 304%, the corresponding loan impairment provision can be reduced by 1.98 billion yuan; if the overdue 90+/ defective is 100%, the defect rate is 0.83% (the estimate is for comparative reference only and does not represent the company's asset quality management strategy).

Investment advice: steady expansion of scale and improvement of asset quality

Based in a major economic province, Qilu Bank has an outstanding location advantage. Currently, due to multiple policies in Shandong Province, demand for high-quality credit may be stronger to support the company's credit growth, and the company's asset scale expansion is expected to continue at a high rate; moreover, the high share of debt-side time deposits is expected to benefit more fully from deposit listing price adjustments, net interest spread performance or more stable performance, and steady volume increases to support continued revenue growth. At the same time, the quality of the company's assets continues to improve, and the determination of bad performance is more strict. There is still potential for decline in subsequent defects, thus supporting profit growth. Qilu Bank's 2024-2026 EPS is expected to be 1.00, 1.13, and 1.28 yuan respectively. The closing price on June 28, 2024 corresponds to 0.6 times 24 PB for the first time, covered for the first time, giving it a “recommended” rating.

Risk warning: macroeconomic fluctuations exceeded expectations; regional credit risk exposure; changes in the local financial competition pattern exceeded expectations.