Description of the event

The Bank of Hangzhou released a quick performance report for the first half of 2024. Operating income increased 5.4% year on year, and net profit to mother increased 20.1% year on year.

The non-performing loan ratio remained flat at 0.76% month-on-month, and the provision coverage rate declined slightly to 545.17% month-on-month. The weighted average annualized return on net assets was 19.48%, an increase of 0.82pct over the previous year.

Incident comments

Loans are growing rapidly, and the advantages of regional investment and financing demand are outstanding. The loan balance at the end of June increased 11.7% from the beginning of the period, and increased 3.5% month-on-month in the second quarter. It is expected to be an important growth point for public loans. Deposits increased 10.2% from the beginning of the period and 3.4% month-on-month in the second quarter. Under the development direction of major domestic economic provinces leading the way, Zhejiang has outstanding long-term growth advantages. Although short-term infrastructure investment in Hangzhou has declined, demand for credit in Zhejiang Province is still booming. With the support of policies such as the “Thousand Trillion” project, the regional credit growth rate will remain leading, and market expectations are insufficient. Bank of Hangzhou is expected to maintain a high annualized double-digit growth rate of loans in 2024 and 2025.

The net interest spread reflects the characteristics of the asset structure, and the adjustments are relatively adequate. The net interest spread in 2023 is 1.50%, which is relatively low among comparable commercial banks. The main reason is that financial investment accounts for significantly higher than that of peers, while the yield on investment assets is generally lower than credit, which affects the return on interest-bearing assets and net interest spreads, but the resulting credit costs are also significantly lower than credit. The Bank of Hangzhou's total loan yield is lower than that of some peers. The difference in yield on major retail loans is obvious. This is because the Bank of Hangzhou does not carry out many high-interest internet loans and other businesses. Retail is mainly self-operated, and high-quality customers who pursue low interest rates. We believe that this kind of business choice will be more stable in the future. On the one hand, there is relatively little room for interest rates to decline, and on the other hand, asset quality is safer.

Asset quality is excellent, and provision continues to lead listed banks. The non-performing loan ratio remained flat at 0.76% at the end of June, and the net generation rate of non-performing loans in 2023 was also significantly lower than that of the interbank sector. In the downward phase of the economic cycle, the bad generation rate is more important than the net interest spread, and the comparative advantage of low risk appetite is outstanding. At the same time, asset quality certification is very strict. At the end of March, the proportion of concerned loans was as low as 0.52%, and the deviation rate of loans overdue for 90 days or more continued to be lower than that of peers. The provision coverage rate at the end of June was 545.17%, a slight decrease of 6.06 pct from month to month, supporting profit growth. Furthermore, the Bank of Hangzhou is very well-prepared for non-loan credit impairment, and there is room for less improvement in the future. Since banking revenue decelerated in 2022, some banks have fed back the profit growth rate by reducing or releasing the impairment of non-loan credit accumulated earlier. There are differences in the non-loan impairment preparation balance and calculation pace of different banks. At the end of 2023, the Bank of Hangzhou's debt depreciation balance was 13.2 billion yuan, excluding the impairment portion corresponding to Phase 3, accounting for 2.69% of the principal amount, which is much higher than other high-quality commercial banks, and there is room for future profit release.

Investment advice: We are optimistic about the company's long-term development prospects, and the advantages in asset quality and performance growth rate in the medium term are remarkable.

Core investment logic: 1) The advantages of regional economic development and investment and financing needs are outstanding. Under the development direction of major domestic economic provinces, although short-term infrastructure investment in Hangzhou has declined, credit demand in Zhejiang Province is still booming; 2) Conservative risk appetite has formed a significant asset quality advantage. In the current macro context of retail risk fluctuations, the asset quality of low-interest retail loans is safer than that of peers. Public loans are mainly for high-quality urban construction enterprises, and there is a clear difference from local government financing platforms in the narrow sense. ; 3) Non-credit impairment preparations strongly support leading profit growth. The asset quality of bank loans and financial investments in Hangzhou is excellent, and there is room for less credit impairment in the future. The Bank of Hangzhou is expected to grow 5.3% in 2024 in revenue and 20.7% in net profit to mother. Based on the closing price on July 26, without considering the impact of refinancing, the 2024 PB valuation is 0.71x. The key recommendation is to maintain the “buy” rating.

Risk warning

1. The credit scale expansion fell short of expectations; 2. Asset quality fluctuated markedly.