Key points of investment

The Bank of Nanjing's interim report exceeded expectations, and the scarce targets where fundamentals and transaction aspects resonate are key recommendations.

Revenue and profit growth exceeded expectations, and fundamentals continued to improve

(1) Revenue: The Bank of Nanjing's revenue and profit growth rate exceeded expectations. 24H1 revenue was +7.9% year-on-year, and the growth rate was 5pc higher than 24Q1; net profit to mother was +8.5% year-on-year, and the growth rate increased 3.4 pc compared to 24Q1. The main supporting factors are: ① Interest spreads have narrowed. It is estimated that the Bank of Nanjing's 24Q2 single-quarter interest spread (initial and final caliber) fell 20 bps year on year, and the year-on-year decline was 13 bps narrower than 24Q1. Among them, the 24Q2 interest spread (initial to end of period) fell 12 bps month-on-month, mainly because loan yields declined faster than debt cost ratios improved. ② Investment contributions increased. 24H1's other non-interest income grew 29% year-on-year, up 14pc from 24Q1.

(2) Risk: Bank of Nanjing's risk is basically stable, and write-off efforts are increasing. ① The poor stock index was basically stable. The defect rate and attention rate remained flat month-on-month at the end of 24Q2, increasing by 3 bps to 0.83% and 1.07%, respectively, and the overdue rate at the end of 24Q2 decreased by 6 bps to 1.25% compared to the beginning of the year. ② In terms of classification, public risk declined and retail risk increased slightly, which is basically in line with industry trends. In 24Q2, the bad loan ratio for late-sector companies fell 12 bps from the beginning of the year, and the retail loan non-performing rate increased by 14 bps from the beginning of the year; ③ The Bank of Nanjing increased bad treatment to promote stock risk mitigation. The 24H1 write-off transfer rate was 142% (24H1 write-off amount x 2/bad balance at the beginning of the period), an increase of 78 pc over the previous year.

Looking forward to the future, the Bank of Nanjing's revenue is expected to maintain a relatively rapid growth rate, and the profit growth rate is expected to continue to improve. Main considerations: ① The interest spread base was high and low last year, and the impact of interest spreads on revenue for the full year of 2024 is expected to improve further; ② The financial market has strong investment capacity, and non-interest rates are expected to maintain a high growth rate. ③ As stock risks are cleared, the drag on profit costs of risk is expected to improve in 2024.

The majority shareholder, France and Pakistan, have steadily increased their holdings, and the transaction side resonates with it

Since 2024, France and Pakistan have continued to increase their holdings in the Bank of Nanjing. At the end of 23Q4, 24Q1, and 24Q2, France and Pakistan's total share capital holdings in the Bank of Nanjing were 16.27%, 17.33%, and 17.68%, respectively. In 24Q2, France and Brazil increased their holdings by 0.35pc. Currently, there is still 2.32pc of space compared to the 20% maximum shareholding ratio. At the same time, the Bank of Nanjing's heavy fund position ratio only accounts for 1.4% of freely tradable shares, and the chip structure is excellent.

The recharge rate declined slightly from month to month, and convertible bonds have yet to be converted into shares

At the end of 24Q2, the Bank of Nanjing's core Tier 1 capital adequacy ratio was 8.97%, down 25 bps from month to month. Currently, the Bank of Nanjing's recharge rate is still 1.2pc from the bottom line of supervision. If bonds can be converted to shares, it will strongly supplement its capital and support the positive development of the business. As of the end of 24Q2, the Bank of Nanjing still had 16.6 billion debt-to-share conversion. If all shares were converted, it can supplement the core Tier 1 capital adequacy ratio of 1pc to 9.98% based on static calculation data at the end of 24Q2.

The mid-term dividend plan is now in shape and is expected to be implemented within the year

The Bank of Nanjing announced that “the specific mid-term profit distribution plan for 2024 will be implemented in due course in the form of dividends within the year”. It is expected that the 2024 mid-term dividend will be implemented before the end of 2024 after completing the necessary procedures.

Profit forecasting and valuation

The Bank of Nanjing's net profit is expected to increase 10.2%/10.2%/10.4% year-on-year in 2024-2026, corresponding to BPS of 14.81/16.28/17.91 yuan. The current price corresponds to the 2024-2026 PB valuation of 0.68/0.62/0.56 times. The target price is 13.33 yuan/share, corresponding to the 24-year PB valuation of 0.90x, and the current price space is 32%, maintaining the “buy” rating.

Risk warning: The macroeconomy has stalled, there has been a sharp outbreak of bad behavior, and business improvements have fallen short of expectations.