Core views

The Bank of Hangzhou's revenue growth rate improved month-on-month in the second quarter. We expect the scale to continue to grow rapidly and the year-on-year decline in interest spreads to narrow, which is the main reason. The overall quality of assets was stable, provision was made for a small release, “making up for profit” to feed back profits, and performance maintained a growth rate of more than 20%. Although the banking industry as a whole faces operating pressure from the macro level, as a high-quality regional commercial bank, its steady business style has established solid asset quality, and deep reserves have enabled the Bank of Hangzhou to maintain a high level of performance.

occurrences

On July 25, the Bank of Hangzhou released the 1H24 performance report: 1H24 achieved operating income of 19.34 billion yuan, a year-on-year increase of 5.4% (1Q24:3.5%); realized net profit to mother of 9.996 billion yuan, an increase of 20.1% year-on-year (1Q24:21.1%). The 2Q24 defect rate was 0.76%, the same quarter-on-quarter; the 2Q24 provision coverage rate fell 6.1pct quarter-on-quarter to 545.2%.

Brief review

1. The revenue growth rate improved month-on-month, the reserve base was deep, and the performance remained above 20%.

1H24 Hangzhou achieved revenue of 19.34 billion yuan, a year-on-year increase of 5.4% and a quarter-on-quarter increase of 1.9 pcts. In terms of scale, the Bank of Hangzhou maintained its double-digit expansion trend in the first quarter. On the price side, the Bank of Hangzhou's net interest spread is already in the bottom range. The year-on-year decline is expected to narrow, supporting an improvement in the growth rate of net interest income. In terms of non-interest income, interest rates on ten-year treasury bonds remained in a downward range in the second quarter, and bond investment income is expected to remain an important source of non-interest income.

1H24 Bank of Hangzhou maintained a high profit increase of more than 20% and is expected to continue to be in a leading position among listed banks. The Bank of Hangzhou adheres to a prudent and prudent business style. The overall asset quality is stable, the defects are manageable, and the financial resources are very deep. In the current context where the industry's revenue growth is under pressure, the Bank of Hangzhou maintains rapid profit growth through the provision of generous compensation, strongly endogenously supplements capital, and supports business development.

2. The scale maintained double-digit growth, and manual interest payments had limited impact on its deposit growth. On the asset side, Bank of Hangzhou's total assets increased 13.8% year on year in 2Q24, loans increased 16.5% year on year, and the growth rate increased 0.4 pct from quarter to quarter. It is expected that public loans will be the main investment in the first half of the year, and retail demand still needs to be further stimulated. On the debt side, Bank of Hangzhou's total debt increased 13.2% year on year in 2Q24, deposits increased 13.7% year on year, and 3.4% quarter over quarter. Some bank deposit growth was weak or even declined slightly due to the rectification of manual interest payments on deposits in the second quarter. However, the Bank of Hangzhou was affected limited, and deposits maintained their growth momentum in the first quarter.

3. Interest spreads are in the bottom range, and the year-on-year decline is expected to narrow. 1Q24 Bank of Hangzhou's net interest margin fell 5 bps from quarter to quarter and 21 bps to 1.38% year on year (estimated value). Due to the peak of repricing in the first quarter, the Bank of Hangzhou's net interest margin is expected to narrow month-on-month in 2Q24. The year-on-year decline will be significantly less than 21 bps in the first quarter, which will reduce the drag on net interest income to support an improvement in revenue compared to the first quarter. Looking ahead to the second half of the year, LPR will be further lowered, and credit demand is still awaiting further activation by policies. We judge that the Bank of Hangzhou's asset-side pricing is still under pressure. However, debt-side deposits followed a reduction in listed interest rates, which is beneficial for maintaining stable interest spreads. Interest rates on deposits listed in major state-owned banks were first lowered in July. Among them, the active period was reduced by 5 bps, within a one-year period, 10 bps, and 20 bps over two years. It is expected that stock banks and urban agricultural commercial banks will follow suit as soon as possible.

4. The quality of assets is stable, and the provision base is solid. In 2Q24, the Bank of Hangzhou's non-performing rate remained flat at 0.76% quarter-on-quarter, and provision coverage fell 6.1pct to 545.17%. It is expected to remain at the leading level among listed banks. Deep provisions are also an important foundation for maintaining a high profit increase with forgiveness and apology.

5. Investment advice and profit forecast: The Bank of Hangzhou's revenue growth rate improved month-on-month in the second quarter. We expect the scale to maintain rapid growth and the year-on-year decline in interest spreads to narrow as the main reason. The overall quality of assets was stable, provision was made to release a small amount to feed back profits, and performance maintained a growth rate of more than 20%. Although the banking industry as a whole faces operating pressure from the macro level, as a high-quality regional commercial bank, its steady business style has established solid asset quality, and deep reserves have enabled the Bank of Hangzhou to maintain a high level of performance. Revenue growth in 2024, 2025, and 2026 is expected to be 4.0%, 9.1%, 10.4%, and profit growth rates of 20.5%, 20.6%, and 21.0%. Currently, the Bank of Hangzhou's stock price only corresponds to 0.68 times 24-year PB, maintaining the buying rating and leading position in the banking sector.

6. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.