This small listed city commercial bank with a market capitalization of billions of yuan suddenly appeared in the public opinion center.

Bank of Xi'an (600928.SH) is a small listed city commercial bank. Among the 17 listed A-share peers, according to market capitalization ranking, its size of about 14 billion yuan is currently ranked fourth from the bottom (as of late June 2024); in terms of total assets, it can only rank second from the bottom.

Institutional coverage of Bank of Xi'an is relatively low, and it rarely receives individual research reports. Investment forums gathered by retail investors also have only a few discussions about Bank of Xi'an…

However, Bank of Xi'an has recently entered the public opinion center in an unexpected way.

According to reports from many media outlets including 21st Century Business Herald, on June 18, 2024, the Gaoxin Road Police Station of Xi'an City requested Bank of Xi'an's assistance in identifying a deceased person, who was later identified as the Secretary of the Party Committee and Vice President of the Bank, Di Hao. At that time, the term "Bank of Xi'an Vice President Di Hao fell to his death" became a hot topic on social media, and institutions such as "The Paper" also called the bank for verification but did not receive a response in time. Three days later, on June 21, Bank of Xi'an announced that Mr. Di Hao, the Vice President, passed away on June 18 and expressed condolences to his family.

"70s" Di Hao started as a credit officer and successively served as the head of multiple branches of Bank of Xi'an, achieving impressive performance. Publicly available reports show that during his tenure as the head of the Gaoxin Branch, the branch accumulated profits of 210 million yuan for two consecutive years. In 2012, Di Hao was awarded the first Xi'an Youth May Fourth Medal. In June 2016, he was nominated as the candidate for Vice President of Bank of Xi'an. After two sessions of board of directors replacement, he served in this position for eight years.

In 2023, Bank of Xi'an announced that Di Hao had personally invested nearly 800,000 yuan to increase his shareholding of Bank of Xi'an's stock in the secondary market, expressing confidence in the bank's development prospects.

With Di Hao gone, Bank of Xi'an's business must go on. On June 20, Bank of Xi'an held the 19th session of its sixth board of directors, which reviewed financial final accounts and budgets, cash dividends and other proposals.

The 2023 annual report and the 2024 first quarter report show that this small city commercial bank maintains good growth in revenue and assets, but also exposes problems such as poor profitability, pressure on interest rate spread, rising non-performing loan ratio, and low credit investment in the manufacturing industry.

"The fastest and slowest step of the first city commercial bank in the northwest"

Bank of Xi'an was established in 1997, and the actual controller is the Xi'an Municipal People's Government. The shareholders have diverse backgrounds, with strategic investors including large foreign banks, central enterprises, local state-owned enterprises, private enterprises, etc. According to Tianyancha data, Bank of Nova Scotia is currently the largest single shareholder of Bank of Xi'an, and China Tobacco Shaanxi Corporation, Chang'an International Trust Co., Ltd., Jinhua Investment Group, and others are also important shareholders of the bank.

On March 1, 2019, Bank of Xi'an officially launched its IPO on the Shanghai Stock Exchange, becoming the first city commercial bank stock in Northwest China. On the first day of listing, Bank of Xi'an soared by 44.02%. However, in recent years, the bank has not been as popular as it used to be.

Compared with state-owned banks and joint-stock banks, city commercial banks have smaller asset sizes and lighter scales, thus demonstrating greater performance elasticity and receiving greater attention in the secondary market. According to Eastmoney data, in 2023 the overall revenue of city commercial banks increased by 2.54% YoY, and for the first quarter of 2024, the growth rate was 5.61% YoY.

Bank of Xi'an's revenue growth in 2023 was better than its peers, but in the first quarter of 2024, it was lower than its peers. During the above two financial reporting periods, the bank's revenue increased by 9.70% YoY and 4.44% YoY, respectively.

Under the growth of revenue hides worries - in terms of profitability, Bank of Xi'an's growth rate has been consistently lower than that of its peers. In 2023, the bank's overall net income attributable to shareholders increased by 7.57% YoY, and in the first quarter of 2024, it was 7.05% YoY. Bank of Xi'an's net income growth rate was only 1.56% and 3.79% YoY, respectively.

In 2022, Bank of Xi'an experienced a year-on-year decline in both revenue and net income attributable to shareholders, which recovered in the following year. However, in the financial statements, the item of "operating profit" has continued to shrink year-on-year from 2020 to the first quarter of 2024, and the downward trend has reached the fifth year.

Bank of Xi'an has not exceeded the industry average in terms of asset-side growth rate. As of the end of 2023, Xi'an Bank's total assets increased to 432.201 billion yuan, a growth of 6.50% over the previous year. Various loans were 202.922 billion yuan, an increase of 6.98% over the previous year. The above 6.5% asset growth rate is lower than the 11.71% overall growth rate of city commercial banks that year. This momentum continued into the first quarter of 2024, with the overall asset growth rates of Xi'an Bank and city commercial banks being 6.00% and 11.65%, respectively, year-on-year.

The expansion of the liability side is consistent with the asset side. In 2023, Xi'an Bank's total liabilities amounted to 401.275 billion yuan, a year-on-year increase of 6.55%, slightly higher than the asset side growth rate, indicating that the liability side can support the growth of assets. It is worth noting that in the liabilities, the growth rate of the total amount of deposits is only 4.79%, which is lower than the total growth rate of liabilities, and the company's deposit has declined by 1.4%. But fortunately, personal deposits increased by 9.72% year-on-year, which drove the growth of total liabilities.

There is significant pressure on the interest rate spread.

Xi'an Bank's weak profitability can be directly observed through the core indicator of the banking industry, net interest margin. The indicator fell from 1.66% in 2023 to 1.37%, a year-on-year drop of 0.29 percentage points.

According to data released by the China Banking Regulatory Commission, in 2023, the net interest margin of city commercial banks was 1.57%. Compared with this, the pressure on the narrowing interest rate spread that Xi'an Bank is facing is greater than the industry average. What is the problem?

In 2023, Xi'an Bank achieved net interest income of 5.308 billion yuan, a year-on-year decrease of 3.63%. Among them, by expanding assets, interest income was 15.383 billion yuan, achieving a year-on-year growth of 10.90%. However, the interest expense for the period was 10.075 billion yuan, a year-on-year increase of as much as 20.48%.

Based on the financial report, it can be seen that the highest average interest rate, that is, the most profitable "loan and advance payments" only increased their interest income by 2.7%, while those that were relatively less profitable, such as "financial investments" and "deposits placed with the central bank" had a relatively faster year-on-year growth.

Compared with Changsha Bank (600577.SH), which has a net interest margin as high as 2.31%, the interest income from "loan and advance payments" of Changsha Bank increased by 13.19% year-on-year, effectively driving the year-on-year growth of net interest income by 11.47% in 2023.

Interest expense has shown a significant increase. In 2023, Xi'an Bank's interest expense for "absorbing deposits" increased from 6.596 billion yuan to 7.788 billion yuan, an increase of 18.06%. The average interest rate for this item was 2.72%, and the interest rate for individual clients' deposits was even higher at 3.28%.

Faced with such a situation of earning assets and paying liabilities, Xi'an Bank wrote in its financial report that the company has taken positive measures to continuously optimize the asset-liability structure, focusing on improving the efficiency of fund utilization and striving to promote the continuous growth of low-cost core deposits.

Compared to the bleak interest income, the non-interest net income of Xi'an Bank, which is not large in size, has an impressive growth rate, but it is also worthy of further exploration. The non-interest net income for the period was 1.897 billion yuan, a significant year-on-year growth of 79.01%. According to the company's financial report, this growth is mainly due to the increase in investment income and fair value changes. It is worth noting that a low base may also be a reason for high growth. In 2022, Xi'an Bank's non-interest net income was 1.06 billion yuan, a year-on-year decrease of 12.43%; among which, fair value changes resulted in a net loss of 0.118 billion yuan, which turned from profit to loss year-on-year.

The non-performing loan ratio of Xi'an Bank has been rising year by year under the fluctuating performance.

The non-performing loan ratio is also a hidden danger under the performance waves.

At the end of 2023, Xi'an Bank's non-performing loan ratio was recorded at 1.35%, and the provision coverage ratio was 197.07%. The latter indicator is often regarded as a "safety cushion" for bank operations. Compared with city commercial banks, Xi'an Bank's "safety cushion" is not thick enough.

Looking back over the past five years, Xi'an Bank's non-performing loan ratio has fluctuated upwards, from 1.18% in 2020 to a significant increase to 1.32% in 2021, although it fell slightly to 1.25% in 2022, it rose again to 1.35% in 2023. This upward trend continued into the first quarter of 2024, reaching a historical high of 1.43%. Fortunately, in terms of absolute values, such non-performing loan ratios are still slightly lower than the industry average.

Is Xi'an Bank relaxing its recognition standards for non-performing loans? In the bank's five-level classification system for loans, "substandard," "doubtful," and "loss" are collectively referred to as non-performing loans, and "watch" is another category that is often used by investors to observe whether the bank is relaxing its recognition standards for non-performing loans. In 2023, the proportion of Xi'an Bank's "watch" loans increased from 2.43% to 4.37%.

Regarding credit impairment losses, Xi'an Bank stated in 2023 that it followed regulatory requirements to solidify its asset quality, increase write-offs of non-performing loans, and provision for credit impairment losses of 2.742 billion yuan, a year-on-year increase of 30.67%.

Divided by industry, as of the end of 2023, Xi'an Bank's loans were mainly invested in leasing and commercial services, water conservancy, environmental and public facilities management, and construction. The outstanding balances of the above three industries all accounted for more than 10% of total loans, among which banking loans to leasing and commercial services have recently been interpreted as having some connection with local debt. Loans in the more closely watched real estate industry ranked fourth, accounting for only 5.03%, a low proportion, but it still increased from 4.86% in 2022 to 10.217 billion yuan in 2023.

Bank of Xi'an has a low proportion of investment in manufacturing, with only 4.67% at the end of 2023. Major city commercial banks like Bank of Ningbo (002142.SZ) generally have a loan investment in manufacturing of more than 10%.

Dividends shrink and 'overdue service' is supervised.

As regulators strongly advocate the return of real money and silver to investors, Bank of Xi'an's dividend shrank in 2023, with a proposed cash dividend of 0.249 billion yuan for ordinary shares, accounting for only 10.11% of its net income attributable to shareholders. In previous years, Bank of Xi'an's dividend rate could still be maintained at over 30%.

Regarding the related situation of the dividend reduction, Liang Banghai, proposed chairman and incumbent president, responded at the performance conference on April 30, 2024, stating that the 'shrinkage' mainly considered three factors: the increase in uncertain factors faced by small and medium-sized banks in operation, the bank will further strengthen the internal capital reserve, and we need to consider the capital needs of business development and strategic transformation in a coordinated manner.

Just a short time ago on May 15, Bank of Xi'an was also fined by the China Securities Regulatory Commission Shaanxi Regulatory Bureau for two independent directors serving 'overdue'. According to China Business News, the regulator pointed out that independence directors Jin Guoyu and Liao Zhisheng had served for more than six years, but Jin Guoyu had not completed the independent director election after submitting a resignation report, and Liao Zhisheng continued to serve and receive allowances without submitting a written resignation report to the board of directors.

As a regional small and medium-sized city commercial bank, Bank of Xi'an still faces multiple operating risks. As the bank analyzed in the financial report, as a local deposit-taking bank, it may face risks mainly from market risk overflow, regional economic development status, and the operating status of small and micro enterprises.

Fortunately, in the context of finance vigorously empowering the real economy, Bank of Xi'an also does not lack opportunities for development. As a financial institution rooted in the front line of local economy, Bank of Xi'an has advantages in inclusive finance and is expected to be deeply involved in regional economic transformation and development. The 2023 annual report shows that in that year, Bank of Xi'an had already supported more than 8.8 billion yuan of funds, investing in key projects in areas such as infrastructure and providing support for credit to key enterprises. Through incremental and price reduction, the annual report of Bank of Xi'an shows that the support for inclusive finance has increased by 22.08% compared to the end of the previous year.

Digital and intelligent transformation is also a key point for Bank of Xi'an to seek breakthroughs, because such transformation is expected to achieve a synergistic effect of 'one stone, multiple birds', not only can empower the development of retail, public and other products, but also can improve data governance, enhance operational efficiency and provide operational support. The banking industry is facing a test of headwind and will still be under pressure in the future, but as long as Bank of Xi'an can keep up with the pace of national and regional strategic layout, it can cross the stormy period and reproduce the charm of 'the first city commercial bank in Northwest China'.

Author: Han