Incident: The Shanghai Agricultural Commercial Bank revealed its 2024 mid-year report. 1H24 achieved revenue of 13.9 billion yuan, a year-on-year increase of 0.2%, and achieved net profit of 6.97 billion yuan to mother, an increase of 0.6% over the previous year. The 2Q24 non-performing rate fell 2bps to 0.97% quarter-on-quarter, and provision coverage fell 9.4pct to 372% quarter-on-quarter. Performance and asset quality performance are generally in line with expectations.

Weak demand and one-time non-interest income have affected the revenue growth rate to slow down, and provision has been made to support positive growth in performance under excellent asset quality:

1H24's revenue increased 0.2% (1Q24: +3.7%), and net profit to mother increased 0.6% year over year (1Q24: +1.5%).

Judging from the driving factors, ① scale and provision are the core support for achieving positive profit growth, and stabilized interest spreads have weakened the drag on revenue. The increase in the scale of 1H24 and the reduction in provision contributed positively to the performance of 5.0 pct and 4.9 pct respectively. In particular, the 2Q24 provision plan scale decreased by 77.5% year-on-year, and the contribution to the performance changed from negative (1Q24: -7.2 pct). The negative interest spread contribution of 6.9 pct (1Q24: -8.0 pct) is still the biggest drag on performance. ② The positive contribution of non-interest income to performance declined, but the negative contribution of mid-income revenue narrowed. 1H24's non-interest revenue increased 8.9% year over year (1Q24: +21.0%), contributing to a revenue growth rate of 2.2 pct. Among them, revenue fell 17.4% year on year (1Q24: -23.7%), dragging down 1.9 pcts of revenue (1Q24:

-2.9pct); Other non-interest income increased 29.4% year over year, contributing 4.1pct (1Q24: +8.1pct). However, it should be noted that of non-interest income in the first half of the year, asset disposal contributed 0.543 billion non-interest income (1Q24 contributed 0.528 billion), and the positive contribution to revenue will weaken quarterly. ③ Joined Hangzhou United Agricultural Commercial Bank in the same period last year. The net book value exceeds the investment cost, partially confirming non-operating income. 1H23's non-operating income increased by 0.46 billion yuan over the same period last year, and the pressure on the base figure will gradually dissipate.

The focus of the interim report: ① The mid-term dividend plan and the executive holdings increase plan go hand in hand to catalyze short-term or stock price performance. The plan is to distribute a cash dividend of 2.39 yuan for every 10 shares, for a total of 2.305 billion yuan, with a dividend ratio of 33.07% for the mid-term 2024; in addition, 12 executives, directors, etc. will increase their holdings of the company by no less than 5.5 million yuan within 6 months from August 19. ② Interest spreads rebounded steadily in the second quarter, and improvements in debt-side costs were the main reason. The 1H24 net interest spread was 1.56%, a year-on-year decrease of 16 bps (1q24 was a decrease of 18 bps), and the estimated 2Q24 interest spread increased 6 bps to 1.58% month-on-month. The significant improvement in debt costs is expected to be the main contribution. The 1H24 debt cost ratio and deposit cost ratio decreased by 7 bps and 12 bps, respectively, compared to 2023. ③ Pay attention to trends in demand for effective financing for public stability and weak retail sales. A total of about 24.4 billion dollars were added in the first half of the year, accounting for 60% of the increase in 2023. Among them, public loans and bill discounts increased by 12.4 billion and 16.5 billion, respectively, and retail loans decreased by 4.5 billion yuan (mortgage fell 3.2 billion). ④ The low defect rate improved, and the bad generation rate decreased month-on-month. The 2Q24 defect rate decreased by 2 bps to 0.97% month-on-month, and the annualized defective generation rate after write-off and recycling in 2Q24 was 0.51% (0.82% in 1Q24).

A slight slowdown in credit growth has been anticipated. The increase in 1H24 notes contributed more than half, making steady gains to the public sector while retail credit is still weak. 2Q24 loans increased 5.7% year over year (1Q24:6.1%), adding 24.4 billion new loans in the first half of the year, of which 12.5 billion new credits were added in 2Q24. It is important to note: 1) The new loans added in the first half of the year mainly depended on public credit+ notes (28.9 billion yuan added), especially the 16.5 billion increase in notes. We believe, on the one hand, that discount interest rates on notes declined in the first half of the year, and banks made profit on price differences; on the other hand, it also reflected weak demand for credit. 2) The balance of 1H24 retail loans declined, and the 2Q24 incremental correction: net retail sales decreased by 4.5 billion in the first half of the year, with mortgages, operating loans, and credit cards falling by nearly 3.2 billion, 1.1 billion, and 0.7 billion, respectively. However, retail loans of 1.2 billion yuan (1Q24: -5.7 billion) were added in 2Q24, which is expected to benefit mainly from the continued strength of consumer loans and a marginal recovery in mortgage demand under active real estate policies.

Improved debt-side deposit costs drove 2Q24 interest spreads to stabilize month-on-month, but loan pricing is still under downward pressure due to weak credit demand. The 1H24 interest spread decreased by 11 bps compared to 2023, but interest spreads have steadily rebounded in a single quarter. We estimate that the 2Q24 interest spread is 1.58%, increasing 6 bps from quarter to quarter (1Q24 falling 2 bps month-on-month, down 17 bps year-on-year in 2023). It is expected to mainly benefit from the excellent debt-side pricing and structure:

1) Against the backdrop of lower deposit prices and declining market capital interest rates, the cost of 1H24 debt decreased by 7 bps compared to 2023. The cost ratio of 1H24 deposits decreased by 12 bps to 1.83% compared to 2023 (down 6 bps in 2023), and improvements in deposit costs and debt structure fully hedge the impact of deposit periodization. 2Q24 deposits increased 6.9% year over year (1Q24:6.2%), corresponding to an increase of 31 billion in 1H24 deposits, of which time deposits increased 47.3 billion.

2) Asset-side returns are still in a downward channel, and the restoration of effective credit demand is the key. The return on 1H24 assets and loan returns decreased by 18 bps and 31 bps respectively from 2023 (18 bps and 29 bps, respectively) compared to 2023. Among them, credit to public and retail sectors decreased by 31 bps and 8 bps, respectively, compared to 2023. Considering the reduction in LPR during the year and weak demand for credit, it is expected that loan yields will still be under downward pressure. We estimate that the impact of the 5-year LPR reduction of 35 bps on 2025 interest spreads will reach 3.9 bps.

The real estate defect rate has declined markedly due to active disposal and clearance, but retail risks have increased. The 2Q24 defect rate decreased by 2 bps to 0.97% month-on-month. According to estimates, the annualized defective generation rate after write-off and recycling in 2Q24 was 0.51%, down 30 bps from 1Q24. On the basis of excellent asset quality, 2Q24 provided less provision to feed back performance, causing the provision coverage rate to drop 9.4pct to 372% from quarter to quarter.

By industry, public credit in 2Q24 fell 7 bps to 1.03% compared to the end of 2023, mainly due to the real estate defect rate, which fell 46 bps to 1.73%, and is expected to speed up the disposal and clearance of individual households. However, due to the uneven recovery of the economy and the risk exposure of individual high-value companies, bad rates in the retail, construction, transportation, warehousing, and postal services have increased. The 2Q24 retail defect rate increased by 20 bps to 1.32% from the end of 2023, or related to the increase in bad rates for credit cards and consumer loans. The company has taken the initiative to control credit exposure.

Investment analysis opinion: The mid-term dividend plan and executive holdings increase plan have both been implemented, and both the mid-term dividend plan and the executive holdings increase plan have been implemented, which may provide positive support to stock prices in the short term. However, we believe that the trend in effective credit demand, revenue and profit growth rates throughout the year will be the core of sustainable valuation repair. We look forward to consolidating growth potential and maintaining buying ratings based on high dividend advantages. Based on the principle of prudence, interest spreads were lowered, credit costs were raised, and the net profit growth rate of 2024-2026 was reduced to 1.1%, 4.8%, and 5.2% year-on-year (previously 5.8%, 6.9%, and 8.0%). The current stock price corresponds to 0.52 times 2024 PB. Considering that the company's current stock price corresponds to a dividend rate of 5.8% for 2024, and that the 2024 mid-term dividend has been announced, it still has an attractive allocation and maintains a buying rating under a high dividend advantage strategy.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; retail risks exceeded expectations; physical demand was weak for a long time, and the pace of economic recovery was lower than expected.