Major economic provinces have taken the lead. Zhejiang's investment and financing growth resilience and manufacturing advantages are underestimated. The Bank of Hangzhou is deeply involved in the Yangtze River Delta region and shares the dividends of Zhejiang's economic development and investment and financing growth. In the past ten years, infrastructure investment has expanded rapidly in Hangzhou, driven by the Asian Games and G20 summit. With the end of the event cycle, it is a reasonable trend for infrastructure investment growth to decline in the short term.
However, the growth rate of investment and financing in Zhejiang Province bucked the trend, and projects such as the “Thousand Trillion Dollar” led to the expansion of credit demand in the province. From the perspective of industrial structure, Hangzhou's tertiary sector, which is centered on the digital economy, is well developed, while the manufacturing strength of other regions in Zhejiang is leading, and the resource advantages of provinces and cities complement each other. At the same time, Hangzhou itself is actively promoting manufacturing upgrading, and the growth rate of investment in manufacturing has rebounded sharply since 2021.
In terms of the real estate market, housing prices in Hangzhou have been continuously adjusted for many years to release pressure. In the first quarter of this year, the sales area of commercial housing fell 46% year on year under a high base. Subsequent declines in the base, and the decline is likely to narrow. At the same time, the growth rate of real estate development investment in Hangzhou has maintained positive growth. Recently, a new round of real estate policy easing, Hangzhou's policy is strong, and it is expected that it will provide some support for demand.
Understanding interest spreads from the perspective of customer base and asset structure, the credit business is based on urban construction. We expect Bank of Hangzhou loans to maintain a high annualized growth rate of more than 11% in 2024 and 2025. In recent years, the Bank of Hangzhou's loan growth rate in Zhejiang Province has clearly surpassed that of local Hangzhou. Currently, it accounts for 33%, and it is expected that it will continue to be the main area for credit growth in the future. Public loans are mainly high-quality urban construction enterprises, which are clearly different from local government financing platforms in the narrow sense. Urban construction enterprises in economically developed regions generally hold high-quality assets such as transportation, water, coal and electricity with stable profits, stable cash flow, and long-term market-based management capabilities. At the same time, in recent years, the expansion of small and micro finance and science and innovation finance has been accelerated, and the credit structure has been enriched.
The Bank of Hangzhou's net interest spread of 1.50% in 2023 is relatively low among comparable commercial banks. It mainly reflects strategic choices and risk appetite. The share of financial investment in the asset structure is significantly higher than that of peers. Since the yield of investment assets is lower than that of credit, it affects net interest spreads, but the resulting credit costs are also significantly lower than credit. In terms of loans, the yield of retail loans is lower than that of some peers, due to the fact that high-interest internet loans and other businesses have not been developed on a large scale. Retail is mainly self-employed, and high-quality customers who pursue low interest rates. We believe that this kind of business choice will be more stable in the future. On the one hand, there is relatively little room for interest rates to decline, and on the other hand, asset quality is safer.
Adhering to not exchanging risk for development, its strong reserve resources stand out. The Bank of Hangzhou currently has a non-performing rate of 0.76%, ranking third among listed banks, and its net bad generation rate is also significantly lower than that of its peers. In the downward phase of the economic cycle, asset quality is more important than net interest spreads, and the comparative advantage of low risk appetite will become more and more prominent. Real estate accounts for 5% of public loans. Currently, the non-performing rate is 6.36%. Considering the regional layout, it is concentrated in economically developed regions. At the same time, more than 30% of projects are low-risk guaranteed housing loans, and the total risk is expected to be manageable. Due to the excellent quality of assets, the current level of write-off and disposal and credit impairment accrual has remained at a reasonable level, which is sufficient to maintain a high provision coverage rate while supporting profit growth. In terms of financial investment, the amount of impairment reserves that have been accumulated is as high as 13.2 billion yuan, and accruals are still increasing in 2023, while some banks have already begun to release credit impairment to feed back profits. In 2024 and beyond, the Bank of Hangzhou has plenty of room to reduce non-loan credit impairment to support profit growth.
Investment advice:
We are optimistic about the long-term development prospects of the Bank of Hangzhou. The region has outstanding advantages in economic development and investment and financing needs. Conservative risk appetite forms a significant asset quality advantage. At the same time, non-credit impairment preparations strongly support leading profit growth, and ROE is on an upward trend in the medium term. The Bank of Hangzhou's 2024 revenue is predicted to grow 3.9% year on year, and net profit to mother will grow 20.8% year on year, corresponding ROE to rise to 16.45%. Based on the closing price on July 1, without considering the impact of refinancing, the 2024-2026 PB valuation is 0.74x, 0.64x, 0.55x, and the 2023 dividend rate is 3.85%. It is highly recommended and gives a “buy” rating.
Risk warning
1. Credit scale expansion falls short of expectations; 2. Asset quality fluctuates significantly; 3. Profit forecasting assumptions fall short of expectations.