Key points of investment:
The majority shareholder is Shanghai's state-owned capital, and management changes have completed the opening of a new situation
The head office of SPD Bank is located in Shanghai, and the total assets at the end of 2024Q1 exceeded 9 trillion yuan. The company's largest shareholder is Shanghai's state-owned assets, and Shanghai state-owned assets have also provided a lot of support for its development.
In the fourth quarter of 2023, the company completed management changes. Zhang Weizhong, the current chairman of the company, has rich management experience in the fields of public business and inclusive finance business. After taking office, he led the company to launch actions such as “One Hundred Day Attack” and “Spring Attack”, focusing on “one investment and three income”, increasing asset investment efforts, and actively reducing risk pressure. The overall business development of the company showed a steady and positive trend.
Risk mitigation has been effective, and profit flexibility is expected to be unleashed
The company's defect rate rose rapidly in 2015-2017, consolidated at a high level in 2017-2019, and continued to improve after 2020. In response to the problem of stock risk pressure drop, SPD Bank has maintained a high level of bad disposal efforts in recent years. In 2019-2023, the company's annual write-off amount and write-off transfer rate remained at a high level of 55 billion yuan or more, at least 75%. Since 2020, the amount of non-performing loans and the ratio of non-performing loans have achieved “double reduction” for four consecutive years. At the end of 2024Q1, the company's non-performing loan ratio was 1.45%, down 60 bps from the end of 2019, and the stock risk was close to being cleared.
The company continues to strengthen the control of potential incremental risks, and the non-performing loan generation rate has shown a downward trend since 2021. 2024Q1, the company's non-performing loan generation rate (annualized) is 1.03%, which has reached the lowest level in nearly 10 years. In comparison with peers, its non-performing loan generation rate has dropped to the median level of listed stock banks.
Asset quality issues were once the main reason suppressing company valuations. As stock risks are gradually cleared and new generation of defects remains stable, the reduction in risk cost consumption is expected to make a positive contribution to the company's profit growth. With 2024Q1, the pressure on the company's depreciation calculation was reduced, and the year-on-year growth rate of net profit to mother rebounded markedly.
It has significant advantages in public business, developing the “five major tracks”, and SPD Bank in key regions has traditional advantages for public business. The company pushes the entire bank to adjust the structure and resource allocation, and is deeply involved in the “five major tracks” of technology finance, supply chain finance, inclusive finance, cross-border finance, and financial finance, forming new strategic breakthroughs and revenue growth points. The share of general loans to the public has increased by nearly 10 percentage points to 56.6% in the past 5 years, and the share of public loans is significantly higher than the average of listed stock banks.
Starting from Shanghai, SPD Bank is deeply involved in the Yangtze River Delta, covering the whole country. It has a perfect network layout and a good business foundation in the Yangtze River Delta region, and its location advantage is obvious. The company has increased its credit investment in key regions, and its share of loans in key regions such as the Yangtze River Delta and Pearl River Delta has increased year by year. The balance of deposits and loans in the Yangtze River Delta region ranks first in the joint-stock industry.
The future trend of net interest spreads is expected to be superior to comparable peers
SPD Bank's net interest spread has followed the narrowing of the industry since 2022 and fell to 1.52% in 2023, the second lowest among listed stock banks. Looking back, there is limited room for the company's net interest spread to decline, and the decline is expected to narrow.
From an industry perspective, stabilizing interest spreads has gradually become the consensus of regulators and banks. Recently, supervisory authorities have reduced bank debt costs and protected banks' net interest spreads by lowering interest rates on deposits and prohibiting manual interest payments.
From the company's own perspective, SPD Bank has increased its credit investment on the asset side to increase the acquisition of high-yield assets; on the debt side, it has increased the share of low-cost deposits and reduced the pressure on high-cost liabilities. The company takes a two-pronged approach of structural and pricing optimization on both negative sides of the capital, and the net interest spread trend is expected to be superior to comparable peers.
Profit forecasting and investment advice
SPD Bank is currently in a phase where the predicament is being reversed:
In terms of asset quality, the company insists on “controlling the new and reducing the old”. Defective stocks are close to being cleared, the bad generation rate continues to decline, credit costs have improved marginally, and profit flexibility is expected to be released.
In terms of asset investment, the company has traditional advantages in public business. It is located in a position with strong economic momentum, and the new management team is full of energy. Since the fourth quarter of last year, it has continuously launched actions such as the “100 Day Attack” and “Spring Attack” to increase asset investment efforts. Increased momentum in credit asset investment is expected to drive up revenue growth.
In terms of net interest spreads, the company is taking the initiative and working together on the structure and pricing at both ends of the asset balance. The decline in net interest spreads is expected to narrow, and the trend is expected to be superior to comparable peers.
We forecast the company's revenue growth rates for 2024, 2025, and 2026 to be 0.01%, 4.54%, and 5.45%, respectively, and net profit growth rates to mother of 6.30%, 4.89%, and 5.27%, corresponding ROE of 6.23%, 6.25%, and 6.29%. Using the comparable company valuation method, the current average PB multiplier for comparable companies is 0.5 times. Considering that the company's stock risk is close to being cleared, credit investment is increasing, and the refined management and control of net interest spreads is beginning to show results, growth momentum is expected to increase significantly. We gave the company a target PB of 0.5 times for 2024, corresponding to a target price of 10.9 yuan. For the first time, coverage was given a “buy” rating.
Risk warning
Asset quality was repeated; credit investment was not sustainable; net interest spreads fell beyond expectations.