Description of the event

Ruifeng Bank released a quick performance report for the first half of 2024. Operating revenue increased 14.9% year over year, and net profit to mother increased 15.5% year over year. The non-performing loan ratio remained flat at 0.97%, and the provision coverage rate increased to 323.79%. The weighted average annualized return on net assets was 9.84%, an increase of 0.3 pct over the previous year. Excellent overall performance.

Incident comments

Loans declined slightly month-on-month, and are expected to be dragged down by mortgages, credit cards, etc., and small investment is good. The total amount of loans in the first half of the year increased by 7.3% compared to the beginning of the period, and fell 0.7 pct month-on-month in the second quarter. Regulatory regulations had an indirect impact on loans. Structurally, it is expected that small and micro loans will be well invested. Early mortgage repayment and a drop in credit card loan pressure may be the main drag factors. Deposits in the first half of the year increased by 10.4% compared to the beginning of the period, and increased 5.7% month-on-month in the second quarter. Looking ahead to the whole year, it is expected that small and micro will continue to be the driving force of credit, and total loans are expected to continue to grow by double digits.

The net interest spread has been fully adjusted, and there will be less marginal pressure in the future. Net interest spread for the first quarter decreased by 13BP to 1.60% compared to the full year of last year, but net interest income bucked the trend and increased by 5.6%. Growth resilience stemmed from the fact that net interest spreads for the first quarter of last year had already begun to be fully adjusted, and the base was low. Looking ahead to the whole year, although net interest spreads are still under pressure to narrow, it is expected that the narrowing will be lower than last year. There is room for significant improvement in deposit cost ratios. Interest rate cuts on deposits across the market are more beneficial to banks that account for a high share of retail deposits, such as Ruifeng Bank. In terms of small and micro subsidies, other revenue categories in 2023 were 0.147 billion yuan, which strongly supported revenue growth. This year, incentive funds will continue to be returned to make up for the downward impact of net interest spreads.

Investment equity gains are expected to be realized gradually, supporting revenue and ROE. In December 2022, Ruifeng Bank acquired 5.16% of Yongkang Agricultural Commercial Bank's shares, became the largest shareholder, and assigned directors. In June 2023, it continued to increase 1.80% of its shares. In December 2023, the company acquired 5.0009% of Cangnan Agricultural Commercial Bank's shares through an auction of transferred shares, and continued to increase 2.58% of the shares in June 2024. Currently, the shareholding ratio has risen to 7.58%, making it the largest shareholder of Cangnan Agricultural Commercial Bank. Ruifeng Bank's acquisition methods include agreed transfers and judicial auctions. The investment cost is low, and the investment cost is less than the income generated from the fair value of the identifiable net assets of the subject of the acquisition at the time the investment was obtained. It can be immediately recognized as an initial profit and included in non-operating income. Furthermore, the annual net profit of the subject of the acquisition is included in the company's investment income according to the shareholding ratio. If other acquisitions are not taken into account, the total investment income for 24 years is expected to be 0.18 billion yuan, driving a revenue growth rate of 4.73 pct.

The quality of assets is stable, moderate and improving, and provisions continue to improve. At the end of June, the defect rate remained flat at 0.97% month-on-month, and the provision coverage rate increased 18.95pct month-on-month to 323.79%, maintaining the upward trend. As an excellent small and micro bank, Ruifeng Bank's risk control model emphasizes not simply based on apparent indicators such as collateral and debt ratios, etc., but rather requires going deep within the enterprise to obtain relevant water, electricity, coal, operating rates, transaction data, etc., to determine substantial risks. It is expected that asset quality will continue to be stable, moderate and positive. The positive contribution of income tax to net profit in the first half of the year is expected to be due mainly to the tax exemption effect of allocating government bonds and fund dividends.

Investment advice: Rui Fung Bank's performance continued to grow at a high rate in the first half of the year. At the same time, its holdings are still low. The long-term development logic is clear and has distinctive characteristics. It is a small dark horse that cannot be underestimated. Investing in shares in high-quality small banks in Zhejiang in recent years is an effective way to increase ROE in the long term. On June 25, the ban on restricted shares was lifted after three years of listing. It is expected that shareholders will generally focus on long-term investments, and there is no obvious pressure to lift the ban. Revenue in 2024 and net profit to mother are expected to increase by 7.9% and 13.3% year-on-year respectively. Based on the closing price on July 17, 2024, the 2024 PB valuation is only 0.50X. As a high-growth small and micro bank with prominent market-based genes, there is considerable room for improvement in valuation. Key recommendations are recommended, and the “buy” rating is maintained.

Risk warning

1. Investment and shareholding progress fell short of expectations; 2. Net interest spreads exceeded expectations and declined sharply.