2Q24 results were better than our expectations

Bank of Nanjing announced 1H24 results: 1H24 revenue increased 7.9% year on year, net profit to mother increased 8.5% year on year; 2Q24 revenue increased 13.6% year on year, and net profit to mother increased 12.0% year on year. 2Q24's results were better than our expectations, mainly due to the positive contribution of other non-interest income. After the new management was in place, it was proposed to focus on “value creation”, implement a three-year effective customer multiplication plan, and promote the implementation of the “1+10+N” reform; use refined management as a starting point to promote quality and efficiency; we recommend focusing on the implementation progress of the new five-year strategic plan goals in the second half of the year.

Development trends

The recovery in revenue growth was mainly driven by other non-interest income. Bank of Nanjing's 2Q24 revenue growth rate rebounded to 13.6% year on year. Among them, net interest income and net handling fee revenue both declined year on year. The increase was mainly driven by other non-interest income (up 45.7% year on year).

Interest spreads were under pressure, and net interest income fell 2.6% year-on-year in a single quarter. 1) Bank of Nanjing's total assets at the end of 1H24 increased 11.7% year on year, total loans increased 13.5% year on year, total deposits increased 12.4% year on year, and the scale growth rate was steady. The net increase in loans in the first half of the year was mainly invested in the public sector, with leasing business service loans accounting for 39% of the increase. 2) The company disclosed a cumulative net interest spread of 1.96% for 1H24, down 8 bps from 2023; we estimate that the net interest spread for 2Q24 fell 20 bp/12 bps year over month to 1.28%, mainly due to the decline in yield on interest-bearing assets. The company disclosed that the return on 1H24 cumulative interest-bearing assets decreased by 16 bps compared to 2023, of which the retail loan yield fell 27 bps. We expect it to be mainly affected by weak demand for personal consumer loans; the interest-paying debt cost ratio decreased by 7 bps compared to 2023, of which the deposit cost ratio decreased by 8 bps.

Profit and loss from changes in fair value support other non-interest growth. Non-interest revenue for the 2Q24 quarter increased 34.5% year on year, with net handling fee revenue falling 1.8% year on year, mainly due to a 20% year-on-year decrease in bond underwriting revenue; other non-interest income increased 45.7% year on year, mainly due to profit and loss due to changes in the fair value of transactional financial assets, and the share of transactional financial assets in total assets increased 0.3ppt to 19.7%.

The cost-to-revenue ratio is declining. 1H24's cumulative cost-revenue ratio was 25.7%, a year-on-year decrease of 1.8ppt. Looking ahead, we expect that after the company has basically achieved full coverage of the district and county outlets in Jiangsu Province, the overall cost to revenue ratio will continue to decline along with the gradual reduction in marginal costs of newly established outlets and the gradual release of production capacity.

Strengthen efforts to dispose of bad write-offs. At the end of 2Q24, the non-performing loan ratio remained flat at 0.83% month-on-month. The share of concerned loans increased by 3 bps to 1.07% month-on-month, and the overdue rate decreased by 6 bps to 1.25% from the end of 2023; credit costs in a single quarter fell 26 bps month-on-month; and provision coverage fell 11.9ppt to 345.0% month-on-month. We estimate a quarterly non-performing rate of +11bp to 1.32% month-on-month in 2Q24. We expect the parent company's bad performance rate to rise by 14bp/13bp/5bp to 1.64%/0.29%/0.88%, respectively, from the end of 2023.

Profit forecasting and valuation

Considering that other non-interest revenue contributions were higher than expected, we raised 2024E/2025E profit by 3.9%/7.6% to 20.4 billion yuan/22.5 billion yuan. The current stock price corresponds to 0.69x/0.63x 2024E/2025E P/B. Maintaining an outperforming industry rating, the target price was raised by 16.4% to 12.11 yuan as performance growth expectations continued to improve, corresponding to 0.83x/0.75x 2024E/ 2025E P/B, corresponding to 20.0% upward space.

risks

Interest spreads declined more than expected, and other non-interest income fluctuations exceeded expectations.