Core views

In the second quarter, the Bank of Nanjing's revenue and performance both increased, exceeding our expectations.

Growth in scale and other non-interest income were the main factors in the growth of its performance. On the asset side, the focus is on physical credit investment. The scale has maintained a growth rate of more than double digits, and is quite resilient to public pricing. On the debt side, there is plenty of potential for cost improvement, and improving deposit costs is the key to narrowing the decline in interest spreads. Retail risks have been exposed, and interpreting trends requires attention. Furthermore, the board of directors has passed a bill on mid-term dividends, and the high dividend attribute has been further strengthened.

occurrences

On July 31, the Bank of Nanjing released its 2024 mid-year report: 1H24 achieved operating income of 26.216 billion yuan, a year-on-year increase of 7.9% (1Q24:2.8%); realized net profit to mother of 11.594 billion yuan, an increase of 8.5% (1Q24:5.1%). The 2Q24 defect rate was 0.83%, flat quarter-on-quarter; 2Q24 provision coverage fell 11.9pct quarter-on-quarter to 345.0%.

Brief review

1. Revenue and performance both accelerated, and performance exceeded expectations. 1H24 Bank of Nanjing's revenue and net profit to mother increased by 7.9% and 8.5%, respectively. The growth rates increased by 5.1 pct and 3.4 pct from quarter to quarter, respectively, exceeding our expectations. Among them, 1H24 Bank of Nanjing's net interest income and net handling fee revenue changed by -6.0% and 13.3%, respectively. The decline in net interest income narrowed markedly, supported by growth in scale, driving a recovery in its core revenue (net interest income+net handling fee) performance, and the decline narrowed to 3.2% from quarter to quarter. Furthermore, thanks to the relatively active performance of the bond market in the second quarter, the growth potential of the Bank of Nanjing's other non-interest income was unleashed compared to the first quarter. The growth rate increased 13.9 pcts month-on-month to 28.9%, which is a key factor in the recovery of its revenue growth rate.

In terms of performance attribution, scale-driven and other non-interest income contributed significantly to the acceleration of performance in the first half of the year. 1H24 scale growth and other non-interest income made positive contributions of 10.7% and 9.9% respectively. Among them, the contribution of other non-interest income increased 4.6% from quarter to quarter. However, the narrowing of interest spreads was still the main drag on performance growth, causing a negative impact of 14.1%, but the impact was narrower than in the first quarter. Furthermore, it should be noted that in the first half of the year, the Bank of Nanjing significantly increased its risk clearance efforts. The scale of loan impairment losses increased sharply by 21.7% year on year to 5.36 billion yuan. Against this background, the additional provision had a negative impact of 1.1% on its performance, which confirmed the sustainability of banking performance growth in Nanjing.

Looking ahead to the whole year, the current demand for retail credit is still weak, but with deep ties to the local economy in Jiangsu, it is expected that the Bank of Nanjing will still achieve double-digit large-scale growth.

Asset pricing is still under some pressure due to the disruption of credit demand and another reduction in LPR. It can be expected that interest rates on bank deposits in Nanjing will be lowered simultaneously by state-owned banks and stock banks to lower interest spreads. Furthermore, the Bank of Nanjing has excellent asset quality and a strong reserve base, which is expected to support steady growth in its annual performance.

2. Debt costs continued to improve, and the decline in interest spreads narrowed markedly in the second quarter. The net interest spread (disclosed value) of 1H24 Bank of Nanjing was 1.96%, down 8 bps from 2023, and the 1H24 net interest margin (calculated value) was 1.33%, down 10 bps from 2023. Along with the continued maturing repricing of high-cost deposits, the Bank of Nanjing 2Q24 interest-bearing debt cost (estimated value) fell 6 bps to 2.40% from quarter to quarter, improving for two consecutive quarters. Although in the current context of insufficient demand for effective credit, the Bank of Nanjing's asset pricing is still under pressure. The 2Q24 yield on interest-bearing assets (estimated value) fell 16 bps to 3.18% from quarter to quarter, but thanks to continued cost improvements, its 2Q24 net interest margin (calculated value) fell to 1.29% quarterly compared to 1Q24. After intensive repricing in the first quarter, the year-on-year decline narrowed significantly by 15 bps in the second quarter.

On the asset side, it focuses on physical credit investment and is quite resilient to public pricing. In the second quarter, due to residents' desire to recover urgently, physical sectors such as leasing and commercial services, wholesale and retail, and manufacturing remained the Bank of Nanjing's main investment. The loan size increased by 11.8%, 9.7%, and 16.2% respectively from the beginning of the year, driving a 13.5% year-on-year increase in loan size and continuing to maintain a high growth rate of more than double digits. In terms of price, although 1H24 Bank of Nanjing's retail loan price fell 25 bps to 6.63% from 2H23 against the backdrop of weak retail credit demand and concentrated repricing of LPR in the first quarter, its absolute value is still ahead of other listed banks, and its public loan price only fell slightly by 1bp to 4.27% month-on-month compared to 2H23, showing some resilience.

On the debt side, deposit costs are declining, and there is great potential for improvement. On the cost side, thanks to multiple cuts in deposit listing interest rates, Bank of Nanjing's 1H24 corporate and personal deposit costs all fell 12 bps month-on-month compared to 2H23, to 2.16% and 2.80% respectively, driving total deposit costs down 11 bps to 2.37% month-on-month compared to 2H23, which is the main factor in the month-on-month improvement in debt costs. In terms of deposit size, the Bank of Nanjing's deposit size decreased by 0.1% from quarter to quarter, mainly due to the withdrawal of some high-cost deposits, which was another major reason for the improvement in its debt costs. Furthermore, it is important to note that the Bank of Nanjing's debt structure still has great potential for improvement. According to our estimates, it accounted for 18.0% of maturing deposits in the third quarter, which is the highest among banks in the same industry. Considering that the current reduction of deposit interest rates at state-owned banks and stock banks has been completed, it is expected that the Chengnong Commercial Bank, represented by the Bank of Nanjing, will gradually follow up. Along with maturing repricing of high-cost deposits, the Bank of Nanjing has a lot of room for optimization of debt costs.

3. Retail risks have been exposed, and interpreting trends requires attention. In 2Q24, the Bank of Nanjing's non-performing rate remained flat at 0.83% from quarter to quarter, which was significantly lower than that of peers.

2Q24 plus write-off bad generation rate (estimated value) decreased by 13 bps to 1.05% from quarter to quarter, credit costs (estimated value) decreased by 3 bps to 0.22% from quarter to quarter, and the pressure of bad generation declined somewhat. In terms of retail risk, the 1H24 Bank of Nanjing retail loan non-performing rate (parent bank caliber) rose slightly by 14 bps to 1.64% at the end of 23. Among them, the bad credit card rate declined, while the bad rate for mortgages, consumer loans, and personal business loans increased against the backdrop of declining residents' expected income. Retail risk was exposed, but it is a common industry issue, and subsequent interpretation trends still need attention.

In terms of forward-looking indicators, the Bank of Nanjing's overdue rate and attention rate decreased by 6 bps and 10 bps to 1.25% and 1.07% respectively from the beginning of the year, and potential risks continued to be mitigated. In 2Q24, the Bank of Nanjing's provision coverage rate declined slightly from quarter to quarter by 11.9pct to 345.02%. The reserve base is still strong, which is an important guarantee for maintaining steady growth in its performance.

4. The retail strategy continues to advance, and the customer base structure has been optimized. 1H24 Bank of Nanjing's private AUM increased by 16.33% compared to the beginning of the year, which contributed to a 13.3% year-on-year increase in revenue. This is an important factor for its revenue to continue to grow against the trend against the backdrop of lower rates. From the perspective of the customer base, the number of 1H24 wealth customers increased by 7.91% compared to the beginning of the year, the number of private bank customers increased by 13.76% compared to the beginning of the year, and the customer base structure was optimized. In the current context of relatively insufficient retail demand, the Bank of Nanjing still adheres to the retail transformation strategy, using the license advantages of Bank of China Southern Wealth Management and Xinyuan Fund to drive revenue growth beyond expectations for two consecutive quarters. We believe that with continued policy stimulus, the Bank of Nanjing is expected to benefit from its long-term adherence to the retail strategy and achieve an upward recovery in performance earlier than its peers after the inflection point of economic recovery is officially established.

5. Investment advice and profit forecast: In the second quarter, the Bank of Nanjing's revenue and performance growth both increased, exceeding our expectations. Growth in scale and other non-interest income were the main factors in the growth of its performance. On the asset side, the focus is on physical credit investment. The scale has maintained a growth rate of more than double digits, and is quite resilient to public pricing. On the debt side, there is plenty of potential for cost improvement, and improving deposit costs is the key to narrowing the decline in interest spreads. Retail risk remains manageable, and asset quality remains excellent. At the same time, the retail strategy is progressing steadily, and the wealth management business has achieved “volume compensation.” Revenue growth in 2024, 2025, and 2026 is expected to be 6.5%, 6.7%, 7.2%, and profit growth rates of 7.5%, 8.3%, and 8.9%. Furthermore, the board of directors of the Bank of Nanjing deliberated and passed a bill on mid-term dividends, and the high dividend attribute was further strengthened. Currently, the Bank of Nanjing's stock price is only 0.67 times 24-year PB. The valuation is severely suppressed by factors such as insufficient expectations for economic recovery and pessimistic market sentiment, and the cost performance ratio is outstanding. 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 companies 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.