1H24 revenue and profit met our expectations; 2Q24 profit slightly exceeded our expectations

Industrial Bank announced 1H24 results. The company's revenue for the first half of the year increased 1.8% year on year, of which 2Q24 revenue decreased 0.6% year on year; net profit to mother increased 0.9% year on year in the first half of the year, and profit growth rate changed from negative to positive. Among them, 2Q24 net profit to mother increased 6.5% year on year, slightly exceeding our expectations, mainly due to a decrease in depreciation loss pressure on accrued assets.

Development trends

Net interest income increased 4.2% year-on-year in the first half of the year, and liabilities improved markedly. The company's net interest spread for the first half of the year was 1.86%. It was only 1 bps lower than 1Q24 and 9 bps lower than the previous year, and the decline gradually narrowed. We believe that the resilience of the company's interest spreads is mainly due to improvements on the cost side of debt: 1H24 Industrial Bank's interest-paying debt and deposit cost ratios were 2.25% and 2.06% respectively, which was a rapid reduction of 9 bps and 18 bps compared to 2023. Among them, corporate and personal deposit costs were reduced by 22 bps and 6 bps respectively. On the asset side, the yield on 1H24 interest-bearing assets and loans decreased by 16 bps and 25 bps to 3.84% and 4.32% compared to last year. Looking ahead, as some high-cost long-term deposits expire and retail/demand deposit pricing declines, we expect the company's deposit costs to continue to improve. Furthermore, in August-September, the company will replace 50 billion yuan of second-tier capital bonds with a cost of about 4.15%. The price of newly issued second-tier capital bonds is 2.50%, which is also conducive to improving debt costs. At the 2023 shareholders' meeting, the company indicated that the 2024 net interest spread is expected to be better than the 1.8% target. On the scale side, the company's total assets/loans/deposits in the first half of the year increased by 1.9%/3.8%/4.8% compared to the beginning of the year, and the loan-to-deposit ratio decreased by 3.4 pct to 105.3% month-on-month; loan growth was concentrated on corporate loans.

Other non-interest income earners positive contributions. 1H24's other non-interest income increased 8.7% year over year. We think it was mainly due to the continued decline in interest rates in the bond market, which contributed to capital gains; 2Q24's other non-interest growth rate was 0.4%, or due to a high base. At the end of the year, FVTPL accounts accounted for 28% of the company's financial investments. Looking ahead, as debt continues, we expect a higher share of transactional financial assets to help other non-interest-bearing financial assets maintain high growth performance. The net handling fee for 2Q24 decreased by 19.8% year-on-year, which is basically in line with the decline in the first quarter. We believe it was mainly affected by factors such as fee reduction policies, capital market fluctuations, and the rectification of old financial management.

Asset quality is stable, and the net bad generation rate is reduced. By the end of 2Q24, the company's loan default rate and attention rate were 1.08% and 1.73% respectively, up 1 bps and 3 bps from the previous quarter, respectively; the loan overdue rate increased by 9 bps to 1.45% from the beginning of the year. In terms of new non-performing loans, 1H24's net generation rate of non-performing loans decreased by 8 bps to 1.18% year on year and 17 bps compared to 2023. We expect the risk of new credit card and other loans to be generated will drop. In terms of risk offsetting capacity, at the end of 2Q24, provision coverage decreased by 7.7 pct to 237.8% month-on-month, and loan coverage decreased by 7 bps to 2.56% month-on-month. In terms of real estate, the current total loan ratio for public real estate financing is 4.95%, an increase of about 0.5 pct compared to the beginning of the year. Overall, it is quite adequate.

Profit forecasting and valuation

We keep our profit forecast unchanged. The company's A shares are currently traded at 0.5x/0.4x 2024E/2025EP/B. We maintain the target price of 19.74 yuan unchanged, corresponding to 0.5x/0.5x 2024E/2025E P/B and 17.4% upward space, and maintain an outperforming industry rating.

risks

The macroeconomic recovery fell short of expectations, and real estate/CITI/credit card risk exposure exceeded expectations.