Key points:

Performance growth exceeded expectations, and the contribution of non-interest income increased

2024H1, the Bank of Nanjing's revenue growth rate and profit growth rate both exceeded expectations. The revenue growth rate reached 7.9%, up 5% from 24Q1, and the net profit growth rate reached 8.5%, up about 3% from 24Q1, and the growth rate difference between revenue and net profit decreased. The growth of non-interest income accelerated significantly. Non-interest income increased 25.5% year on year. Mainly, changes in the fair value of bond investments contributed more to revenue, and handling fee revenue increased 13.3% year over year. As interest spreads are still falling, net interest income is still growing negatively. Benefiting from the narrowing of interest spreads, the net interest income growth rate increased 3% month-on-month.

The regional economy is resilient, and the public business is expanding steadily

The Bank of Nanjing mainly operates in Jiangsu Province. As of the mid-end of 2024, the company's loan balances in Nanjing and other regions of Jiangsu accounted for 25.73% and 59.54%, respectively, and loan balances in the Yangtze River Delta region other than Jiangsu accounted for 10.29%. The economy of the Jiangsu region is relatively developed, the manufacturing system is relatively complete with high-end industries, and the regional economy where the company operates is resilient, forming a good external exhibition environment. In recent years, the Bank of Nanjing's business scale in Jiangsu Province has grown rapidly.

2024H1, the Bank of Nanjing's total assets/loans/deposits grew by 11.7%/13.5%/4.2%, respectively. Compared with the first quarter, the growth rate of total assets increased slightly in the second quarter, the growth rate of loans declined relatively, and financial investment grew faster. The debt side achieved growth by speeding up the issuance of interbank deposits and absorbing deposits. Corporate loans grew rapidly, up 12.7% from the beginning of the year. The increase in corporate loans was mainly invested in the infrastructure sector. In terms of retail credit, credit card receivables grew rapidly, up 16.2% from the beginning of the year, personal operating loan balances fell 7.2% from the beginning of the year, and consumer loans increased slightly from the beginning of the year. Among them, the loan balance of the China Southern Bank France and Pakistan Consumer Finance subsidiary increased by 39.5% compared to the beginning of the year, and the business development trend is good.

The decline in interest spreads has narrowed, and the effect of saving debt costs has become apparent

Affected by asset repricing and falling interest rates in major markets, the average return on assets in the first half of the year fell 16 BP from the beginning of the year, maintaining a downward trend. Deposit costs fell 8 BP in the first half of the year due to lower interest rate listings and regulations on manual interest payments to promote savings on deposit costs, etc., and the cost of issuing bonds declined by 7 BP in the first half of the year. As deposit interest rates continue to decline, there is still room for further reduction in debt costs in the future. Asset restructuring also helps ease the pressure on interest spreads, and the current decline in interest spreads continues to narrow.

Bad disposal efforts have been strengthened, and asset quality has remained stable

In the first half of the year, the Bank of Nanjing's bad disposal efforts increased markedly. The semi-annual loan write-off amount was close to the amount written off for the full year of the previous year, and credit impairment losses increased by 13.4%. The 2024H1 non-performing loan ratio was 0.83%, down 0.07% from the end of the previous year, and the attention rate was 1.07%. It decreased 0.1% from the end of the previous year, the overdue rate was 1.25%, and 0.06% from the end of the previous year. The corporate loan non-performing ratio was 0.58%, down 0.12 percentage points from the end of the previous year, and the personal loan non-performing ratio was 1.64%, up 0.14 percentage points from the end of the previous year. The company expedited the disposal of non-performing assets, maintained a stable overall asset quality, and still has sufficient risk compensation capabilities. The company's provision coverage rate is 345.02%, and the core Tier 1 capital adequacy ratio is 8.97%.

BNP Paribas, the majority foreign shareholder, increased its holdings in the company

2024 marks the beginning of a new round of implementation of the Bank of Nanjing's five-year strategic plan. It focuses on promoting change, improving quality and efficiency, and speeding up the transformation of “light banks”. New management teams are also in place one after another, which is conducive to the stable implementation of the strategy. In the first half of the year, BNP Paribas increased its share holdings by 0.146 billion with its own capital, accounting for 1.41% of the company's total share capital at the end of the reporting period. 2024H1, BNP Paribas holds 17.68% of the company's shares in total. It is the company's largest shareholder. It can support the company's development with advanced ideas, share resources in operation management and risk control technology, and is expected to continue to strengthen the company's business advantages.

Investment advice

The Bank of Nanjing is expanding its public business rapidly, and its asset scale is growing steadily. As debt management measures were strengthened, cost saving effects began to show. Asset restructuring relieved the pressure on interest spreads, and subsequent interest spreads declined or continued to narrow. The company takes the initiative to strengthen risk management. Under regional economic advantages, the overall quality of the company's assets remains stable, and its ability to offset risks is sufficient. The company is expected to maintain relatively steady performance and have dividend stock attributes.

The company's valuation is mainly based on the following analytical assumptions: 1. The regional economy continues to grow to support the steady expansion of bank assets; 2. The return on assets is still declining, market capital costs remain low under the easing policy, debt costs have room to decline, and the decline in interest spreads tends to narrow; 3. Asset quality remains steady and the generation of non-performing assets is slowing down; 4. Capital is mainly replenished from internal sources during the valuation period.

Net profit to mother is expected to grow at a year-on-year rate of 8.1%/7.6%/6.9% from 2024 to 2026, corresponding EPS of 1.95/2.09/2.24 yuan, and PB of 0.54/0.50/0.46 times the current price. Covered for the first time, the company was given an “increase in weight” rating.

Risk warning

Regional economic growth has fallen short of expectations, demand for credit has slowed; asset quality fluctuations have intensified.