Both revenue and profit remained strong, continuing a good start. 1H24 Rui Fung Bank's revenue and net profit to mother were +14.9% and +15.48%, respectively, compared to 1Q24, -0.42 and +0.79pct, respectively. 2Q24's quarterly revenue and net profit to mother were 1.119 and 0.445 billion yuan, respectively. Revenue for a single quarter increased by 64 million yuan from 1Q24 and 0.141 billion yuan from 2Q23, which was strong compared to the previous period and the same period last year, continuing the trend of good start. It is expected that credit sentiment will rise marginally and financial investment income will contribute to revenue resilience. 1H24's net non-operating income was 75 million yuan, of which 70 million yuan was confirmed in 2Q24. We expect that mainly due to Rui Fung Bank's investment in Cangnan Agricultural Commercial Bank, purchasing shares at a discount using the accounting method for Yongkang Agricultural Commercial Bank's equity investment. The difference will boost non-operating income. Net profit for a single quarter increased by 47 million yuan compared to 1Q24 and 61 million yuan more than 2Q23. Profitability increased marginally, and the weighted ROE level increased 0.42pct to 9.84% compared to 1Q24.
The growth rate of deposit and loan scale is expected to slow slightly, mainly due to structural adjustment factors, 1H24 Ruifeng Bank's total assets, loans, and deposit size increased by +10.79%, +8.93%, and +11.52%, respectively, slightly slower than the 1Q24 growth rate (vs 1Q24 +13.76%, +12.47%, +12.34%). The expected slowdown in scale growth will have little impact on interest income, mainly due to structural adjustments at both ends of deposit and loan. On the asset side, on the one hand, the project financing demand for medium and large enterprises declined in the second quarter, and the financing demand for small and micro enterprises gradually picked up. On the other hand, pressure reduction on low-yield note assets brought about an improvement in the asset-side structure. On the debt side, rectification policies such as prohibiting manual interest payments since April have driven some public deposits to small and medium-sized banks that are deeply involved in the local community. The increase in low-cost debt has improved the debt structure.
Asset quality is stable, moderate and improving, and risk compensation capacity has improved marginally
1H24 Ruifeng Bank's non-performing ratio was 0.97%, which remained flat for 3 consecutive quarters, and asset quality was stable, moderate and positive. The provision coverage rate was 323.79%, up 18.95pcts from 1Q24. The absolute value of provision coverage was at a moderate level among comparable peers, but the marginal increase in provision was significant, and still took into account the strong growth in performance. Mainly due to years of deep local knowledge of the textile industry, small and micro, and retail customer groups, Ruifeng Bank's “small but scattered” customer base, represented by the wholesale and retail industry, was exposed and cleared faster than its peers. For details, please refer to our in-depth report “Ruifeng Bank: Zhejiang Agricultural Credit Benchmark Bank: Zhejiang Agricultural Credit Benchmark Bank, Expanding Internal and External Growth”, which is expected to generate less pressure than market expectations.
Investment advice
Ruifeng Bank has the highest coverage rate in Keqiao District of Shaoxing, leading the market share of deposits and loans all year round. Offsite operations have achieved remarkable results in the past three years, and the share of Yuecheng and Yiwu markets has steadily increased. In the medium to long term, under the transformation of the economic structure, the gap between urban and rural areas has been further narrowed, and the incremental financial market in the county area is broad. The formation of the pioneering layout advantages, risk resilience, and incentive mechanism advantages of Ruifeng Bank and Zhejiang Bank is not a one-day success; they have built a strong moat. In the short term, benefiting from strong economic growth in Keqiao, Shaoxing, the strengthening of the industrial agglomeration effect, credit prosperity is expected to take the lead. Ruifeng Bank has stable asset quality and focuses on small and micro retail customers. The risk exposure caused by macroeconomic disturbances is expected to be cleared up first. If the credit boom recovers beyond expectations, net interest spreads are also expected to improve markedly during the year. The capital adequacy ratio is in the first tier of listed banks. By taking a stake in Zhejiang Nongxin Brothers Bank, profits and capital have been further increased, and it has entered an endogenous growth cycle. The company's 2024-2026 revenue is predicted to increase 8.43%/8.23%/7.96% year on year, respectively, and net profit to mother will increase 12.45%/10.44%/10.47% year on year, respectively. According to the comparable valuation method, we gave the company a reasonable valuation of 0.65 times for the 2024 PB and 0.51 times for the closing price on July 17, 2024, maintaining the “buy” rating.
Risk warning
Interest rate risk: Market interest rates continue to decline, competition for high-quality assets intensifies, and interest spreads narrow.
Market risk: The sharp decline in macro and regional economies has led to a deterioration in asset quality and a sharp increase in defects.
Business risk: Economic growth falls short of expectations, and a sharp drop in financing demand is dragging down credit growth.