Core views

The Shanghai Agricultural Commercial Bank has long been deeply involved in the suburbs of Shanghai. It has a broad network layout and a high market share. Relying on the fertile soil provided by the suburbs, its science, innovation and inclusive finance business has made great strides, and has become an important growth engine for subsequent development. The Shanghai Agricultural Commercial Bank has steady fundamentals, stable profit release, and abundant core capital. In the current context of slowing scale growth, the Shanghai Agricultural Commercial Bank has the space, strength, and will to raise its dividend level, which is an important direction for deepening its high dividend strategy. Assuming an 8% asset growth rate, if dividends increase by 5 pcts, the dividend rates in 2024-2026 will increase to 7.1%, 7.5%, and 7.9%, respectively, which is cost-effective.

summary

Since its establishment, the Shanghai Agricultural Commercial Bank has been deeply tied to the Shanghai economy. As an agricultural commercial bank formed by the overall restructuring of 234 rural credit cooperatives, the Shanghai Agricultural Commercial Bank has been deeply involved in the local market in Shanghai for more than 70 years. Naturally, it has significant advantages in supporting regional economic growth. In particular, the suburban area of Shanghai has an innate advantage of extensive network layout and a stable customer base. The suburban market has always been the main location for its business development. At the same time, the Shanghai Agricultural Commercial Bank has steady corporate governance, balanced shareholder structure, strong state-owned assets background, and strong management strength over the years, which is an important foundation for maintaining steady growth in its performance.

The suburbs of Shanghai are growing rapidly and industrially intensive, providing a fertile ground for the development of science and innovation and financial inclusion services. The Shanghai Agricultural Commercial Bank invests a lot in suburban business, personnel and resources, and has a high share of the suburban market. It is the basic market for its operations. The scale of technology-based enterprise loans and inclusive small and micro loans increased by more than 30% and 20% respectively in '23, and is becoming an important growth engine in the future.

The fundamentals are stable, capital is abundant, and there is room for improvement in dividend rates. From a fundamental perspective, the steady growth of the Shanghai Agricultural Commercial Bank is guaranteed based on location. At the same time, the advantages of low-cost deposits support interest spreads to a certain extent, and revenue is relatively resilient. Profits can be released in a stable and sustainable manner, with solid asset quality and an adequate provision plan with a provision coverage rate of nearly 400%. Meanwhile, the Shanghai Agricultural Commercial Bank has an industry-leading capital adequacy ratio. In the current context of insufficient credit demand and slowing scale growth, the Shanghai Agricultural Commercial Bank has the space, strength, and will to raise its dividend level.

According to estimates, assuming an 8% asset growth rate, the dividend rate will increase by 5 pct. The dividend rate corresponding to the current stock price will increase by 1.0 pct, 1.1 pct, and 1.1 pct to 7.1%, 7.5%, and 7.9%, respectively. At the same time, the core Tier 1 capital adequacy ratio can still be maintained at a high level of 14% or more.

Revenue growth rates for 2023-2025 are expected to be 0.0%, 2.5%, and 4.3%, respectively, and net profit growth rates to mother are 0.3%, 1.3%, and 4.5%, respectively. We believe that the fundamentals of the Shanghai Agricultural Commercial Bank are stable and the dividend rate has the potential to increase. It is an important direction for deepening the high dividend strategy. For the first time, it covers the granting of a buying rating. The target valuation is 0.70 times 24 PB, and the corresponding stock price is 8.99 yuan/share.

Risk analysis

(1) Regulation continues to guide banks to benefit the real economy, leading to a further sharp narrowing of interest spreads.

(2) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises 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.

(3) 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.

(4) 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.

(5) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.

(6) Under pessimistic expectations, if the net interest spread for 24 is lowered by 5 bps to 1.48% based on our current assumptions, and the credit cost remains unchanged, it will have a negative impact of 2.5 pct and 4.5 pct on the 2024 revenue and net profit growth rates, respectively, falling to -2.5% and -3.3%. If the net interest spread remains unchanged and the credit cost increases by 5 bps from our forecast, it will have a negative impact of 0.9% on the 2024 net profit growth rate, falling to 0.3%.