Core views:

The Bank of Nanjing released its 2024 semi-annual report. 24H1 revenue, PPOP, and profit to mother grew by 7.9%, 10.4%, and 8.5%, respectively; 24Q2 revenue, PPOP, and net profit to mother increased 13.6%, 17.2%, and 12.0% year-on-year, respectively. Driven by cumulative performance in the first half of the year, growth in scale, high increase in non-interest income, and decline in the cost-to-revenue ratio were the main positive contributions, while interest spreads and provision accruals were the main negative contributions.

Highlights: (1) Credit has maintained a high growth rate. 24H1 loans increased 13.5% year on year. Structurally, they were mainly public loans. 24H1 loans to public loans increased 16.6% year on year, and infrastructure and manufacturing loans grew by 34.3% and 26.3% year on year, respectively. Demand for personal loans was weak. 24H1 loans increased 4.4% year on year. Consumer loans alone were increasing, up 9.4% year over year. (2) Other non-interest income remained high. 24H1's other non-interest-bearing revenue increased 25.5% year over year, up 1.62 pct from 24Q1, or mainly due to the fluctuating profits of traders under the bullish debt market, and profit and loss from changes in fair value increased dramatically. (3) Revenue growth is steady. Net revenue from 24H1 fees and commissions increased 13.3% year-on-year, and was relatively steady. Mainly, businesses such as agency consulting and guarantee commitments maintained high growth, and bond underwriting commission revenue growth was still weak.

Concern: (1) Interest spreads continue to narrow. The 24H1 net spread was 1.96%, down 8 bps from the beginning of the year.

The yield on interest-bearing assets was 4.06%, down 16 bps from the beginning of the year. On the one hand, loan yields are expected to fall 23 bps from the beginning of the year due to heavy pricing, LPR cuts, and weak credit demand; on the other hand, the decline in market interest rates led the return on investment assets to fall 24 bps in the first half of the year. (2) The impact of manual interest payments and rectification. The year-on-year growth rate of 24H1 deposits was only 4.2%, and the quarterly contraction of 24Q2 deposit slips was 1.7 billion yuan, mainly due to the reduction of manual interest payments by 41.8 billion yuan. However, the corresponding deposit cost rate fell by 8 bps in the first half of the year, which effectively relieved the downward pressure on interest spreads. Currently, a new round of deposit listing interest rate cuts has been implemented, compounded by previous rounds of cuts. It is expected that deposit cost rates will continue to improve in the second half of the year. (3) The retail loan non-performing ratio rose 14 bps from the beginning of the year.

At the end of 24H1, the defect rate was 0.83%; the provision coverage rate was 345.02%, down 11.93pct from 24Q1; the attention rate was 1.07%, up 3 bps from the end of 24Q1; and the overdue rate was 1.25%, down 6 bps from the end of 23, and all indicators remained stable. The estimated 24H1 bad generation rate was 1.31%, up 51 bp/10 bp from 23H1/24Q1, respectively. The negative generation pressure may be mainly on the retail side. The retail loan defect rate at the end of 24H1 rose 14 bps to 1.64% from the beginning of the year.

Profit forecast and investment advice: The company's net profit growth rate for 24/25 is expected to be 8.0%/6.7%, EPS is 1.82/1.95 yuan/share, respectively. The current stock price corresponds to the 24/25 PE of 5.53X/5.16X, respectively, and the corresponding 24/25 PB is 0.69X/0.62X, respectively. Taking into account the company's historical PB (LF) valuation center and fundamentals, maintain the company's reasonable value of 14.79 yuan per share, corresponding to the 24-year PB valuation of about 1.0X, and maintain a “buy” rating.

Risk warning: (1) economic growth has declined beyond expectations; (2) rising deposit costs have exceeded expectations; (3) international economic and financial risks have exceeded expectations; (4) policy regulation has exceeded expectations.