High non-interest growth in the first quarter supported a correction in revenue growth. Significant accrual of asset impairment losses consolidated provisions, and profit growth slowed down. 1Q24 revenue increased 3.7% year over year (2023: -5%), and net profit to mother increased 4.4% year over year (2023:6.3%). Looking at the driving factors, ① the narrowing of interest spreads is still the biggest drag on revenue, and the slowdown in scale expansion cannot be hedged. The year-on-year decline in 1Q24 net interest income increased by 3 pct to 12.6% compared to 2023. Interest spreads continued to narrow, and negative contribution revenue growth rate was 13.2 pct. Against the backdrop of a focus on structural optimization, asset expansion further slowed, supporting only 3.3 pcts (2023:5.6 pct). ② High non-interest rate increases associated with investments are at the core of improving revenue. 1Q24's non-interest revenue increased 63.2% year on year (2023:15.4%), benefiting from the outstanding performance of the capital market business. Investment-related non-interest income increased 84% year over year, contributing to the revenue growth rate of 13 pct, and the middle income growth rate was corrected (1Q24 increased 8.9% year on year, down 4.1% in 2023), contributing 0.5 pct. ③ Based on impressive revenue performance, the first quarter actively increased provision to reserve space for future performance. Asset impairment losses increased 169% year-on-year in 1Q24, dragging down the performance growth rate by 9.7 pcts (positive contribution of 19.8 pcts in 2023).
Looking ahead to the 2024 interim report questionnaire, we expect that the Bank of Xiamen's revenue and net profit will continue to grow steadily and positively, mainly based on: ① Although interest income is expected to be under pressure, non-interest income is expected to continue to grow rapidly and support revenue performance. Against the backdrop of slow expansion in scale (focusing on optimizing the structure in the short term, not deliberately pursuing scale) and interest spreads continue to be under pressure, net interest income is expected to increase negatively; however, considering the continued decline in long-term interest rates in the second quarter (10-year treasury bond yield at the end of June was only 2.21%, down 9 bps from the end of March), the non-interest side is expected to maintain rapid growth to fill the interest income gap. ② Risk pressure is low, and there are plenty of supporters. The month-on-month decline in credit costs will support the steady release of performance. The Bank of Xiamen had a non-performing rate of only 0.74% at the end of the first quarter (the second lowest for listed banks), and its risk exposure was extremely limited (public real estate loans accounted for only 4% of total loans at the end of 2023, the non-performing rate fell by more than 50 bps from mid-year; consumer loans also accounted for only 3% of total loans, and the overall retail non-performing rate was only 0.51%), and the provision base is solid; in terms of pace, it is expected that credit costs in the second quarter will decline month-on-month, contributing positively to performance.
Standing at the starting point of a new round of three-year planning, it is expected that high-quality and steady development will be the main line of the Bank of Xiamen in the next phase. Compared with large-scale blind expansion, it is expected that steady and continuous performance release and stable ROE performance may be a more promising direction.
The short-term focus is on structural optimization, and loan investment has slowed down; the direction of pressure reduction on high-interest deposits has not changed, and the deposit size has declined slightly. Bank of Xiamen loans increased 3.9% year on year in 1Q24 (4Q23:4.6%), and new loans in 1Q24 were only 0.6 billion yuan, a year-on-year decrease of about 1.4 billion (mainly due to a net decrease of 3.5 billion yuan in note discounts in the first quarter due to pressure drop on notes). Structurally, 4.5 billion dollars were added to the public order quarter. Investment is still expected to be mainly in key areas such as manufacturing, inclusive, green, and science and technology innovation (accounting for 186% of the total increase in 2023), and the Taiwan business is also booming (in 2023, the number of **** enterprise customers increased 34% year over year, and the number of credit grantees increased by 41% year on year); the retail side continued to be under pressure, and the balance fell 0.3 billion yuan in the first quarter. Weak demand for mortgages and consumer loans is still the main disruptor (down 6.2 billion yuan in total in 2023). In addition, deposits in the first quarter fell 2.9% year on year, and the scale decreased by 14 billion compared to the end of the previous year, mainly due to active pressure reducing the company's deposit book pledge business and high-cost foreign currency deposits.
Interest spreads continue to narrow due to pragmatic risk appetite combined with pricing, but deposit costs have improved and are expected to support the bottom of interest spreads to stabilize in the future. According to estimates, the net interest spread of the Bank of Xiamen in 1Q24 was only about 1.14%, down 23/6 bps from year to month, respectively. The absolute level is already the lowest for listed banks. Looking at the breakdown, the return on assets in 1Q24 fell 8 bps to 3.38% quarterly due to heavy pricing and one's own prudent risk appetite, but the debt cost ratio fell 4 bps to 2.44% quarterly due to improvements in the deposit structure. Currently, the deposit cost ratio of the Bank of Xiamen is still higher than that of its peers (2.49% in 2023, higher than the average of 24 bps in listed commercial banks). The direction of continuing to optimize deposit costs in the next phase is clear. Structural optimization will achieve results along with the reduction in deposit listing interest rates, and debt costs are expected to continue to improve and stabilize interest spread performance
The defect rate reached a new low, and the provision coverage rate remained high at over 410%. The 1Q24 Bank of Xiamen's non-performing rate fell 2 bps to 0.74% from quarter to quarter, the second lowest among listed banks. The estimated bad generation rate of 0.56% (2023:0.35%) after annualized write-off in 1Q24 was calculated.
In terms of forward-looking indicators, the 2023 overdue rate decreased by 40 bps to 1.10% compared to 1H23, while the attention rate fluctuated (1Q24 attention rate increased 14 bps to 1.57% from the beginning of the year, and a cumulative increase of 35 bps over 3Q23). It is also expected to be affected by strict identification and risk exposure of small, micro, and retail customer groups after the implementation of the new risk classification regulations. By industry, the quality of public assets continues to improve in 2023. The quality of retail assets remains stable, and the key areas are expected to be risk-free under prudent risk control: at the end of 2023, the non-performing rate for public real estate decreased by 9 bps to 1.09% compared to 1H23, the non-performing rate for public real estate decreased by 52 bps to 4.7%, and the share of public real estate in total loans was only 4.0%, with limited risk exposure; the retail defect rate rose slightly by 1 bps to 0.51% compared to 1H23, which is at a low level among peers (average of listed banks: 0.9%), considering 2023 At the end of the year, relatively high-risk assets, such as consumer loans, accounted for only 3.3% of total loans, and subsequent risk exposure pressure was limited. The Bank of Xiamen's provision coverage rate stabilized at a high level of about 412% in 1Q24. A clean asset quality base and strong provision base are also a strong guarantee for the stable release of performance in the next stage.
Investment analysis opinion: Entering a new three-year planning period, the Bank of Xiamen insists on “taking the lead in stabilizing the character” and is focusing on optimizing the balance and liability structure.
At a time when economic recovery is still slow and the industry may be facing a new round of unfavorable differentiation, Bank of Xiamen is better able to guarantee stable and sustainable performance with its clean asset quality, prudent risk appetite, and a solid foundation of provision. At the same time, the dividend rate is about 6%, which is also in line with the main “high dividend” dividend stock selection approach in the market. Interest spreads and credit cost forecasts for 2024 were lowered, and the 2025-2026 forecast was added. The net profit growth rate for 2024-2026 is expected to be 5.1%, 10.5%, and 11.7% (the original 2024 forecast was 18.8%). The current stock price corresponds to 0.54 times 24-year PB, with a discount of nearly 20% compared to comparable peers. Taking into account the Bank of Xiamen's own steady fundamentals and “high dividend” attributes, the 2024 target valuation was given 0.62 times the 2024 target valuation.
Risk warning: The economic recovery was significantly lower than expected, and the pace of demand recovery was lagging behind; the interest spread improvement process was significantly lower than expected; negative risks at the end were revealed beyond expectations.