Matters:

Industrial Bank released its 2024 semi-annual report. In the first half of 2024, it achieved operating income of 113 billion yuan, a year-on-year increase of 1.80%, and realized net profit to mother of 43.049 billion yuan, an increase of 0.86% over the previous year, and an annualized weighted average return on net assets of 11.1%. By the end of the year 2024, the company's total assets reached 10.4 trillion yuan, up 1.89% from the beginning of the year. Among them, the loan balance increased by 3.81% from the beginning of the year, and the deposit balance increased 4.85% from the beginning of the year.

Ping An's point of view:

Provision was made to support a return in profit growth and a slight decline in revenue growth. Societe Generale Bank's net profit for the first half year of 2024 increased by 0.86% (-3.1%, 24Q1). It is expected that it is still mainly due to backfeed provisions. Credit impairment losses increased 10.2% year-on-year (+46.1%, 24Q1) in the first half of the year. The semi-annual revenue growth rate fell 2.4 percentage points from the first quarter to a year-on-year increase of 1.80%. It was mainly dragged down by fluctuations in the bond market. The growth rate of other non-interest income fell 7.5 percentage points from the first quarter to an increase of 8.7% year on year. However, the company's spread business is still resilient. The net interest income growth rate reached 4.22% (+5.1%, 24Q1) at the end of the half year. When the industry as a whole faced downward pressure on asset-side pricing, debt-side flexibility supported the stability of the company's spread business revenue. Furthermore, regulatory fee cuts and residents' demand for wealth management suppressed the growth of the company's revenue collection business, and net revenue from semi-annual fees and commissions fell 19.42% year-on-year (-19.0%, 24Q1). Looking at the whole year, the normalization of reserves is expected to support the restoration of profitability.

Interest spreads have stabilized marginally, and cost dividends have gradually been released. Societe Generale Bank's net interest spread at the end of the year 2024 fell 1BP to 1.86% from the end of the first quarter. We believe that mainly due to the release of cost-side dividends, the cost ratio of interest-bearing debt at the end of the year decreased by 9BP to 2.25% compared to the beginning of the year. Among them, the deposit cost ratio fell 18BP to 2.06% from the beginning of the year. In particular, interest rates on current accounts fell 22BP to 1.03% from the beginning of the year. The positive impact of “manual interest compensation” was significant. In addition, interest rates on IB's term and personal time deposits fell by 23 BP/17 BP to 2.71%/2.94%, respectively, from the beginning of the year. The share of current deposits also increased 1.11 percentage points to 37.1% from the beginning of the year. Interest rate and structural adjustments are expected to continue to support the release of the company's future deposit cost dividends in the future. Asset-side interest rates continue to be under pressure, which is basically in line with industry trends. The yield on interest-bearing assets at the end of the year fell 16BP to 3.84% from the beginning of the year. Among them, loan yield fell 25BP to 4.32% from the beginning of the year. Asset-side pricing pressure still exists in the context of insufficient demand and large fee cuts and concessions.

In terms of size, the asset size at the end of the year was 4.65% (+4.38%, 24Q1), and the loan balance at the end of the half year increased 8.6% (+7.9%, 24Q1). Overall, the company's personal loan balance fell 0.2% from the end of the first quarter. In terms of split, mortgage loans and credit card loan balances fell 1.0%/8.2%, respectively, from the beginning of the year due to cyclical fluctuations in real estate and insufficient effective demand from residents. On the debt side, deposits increased 4.9% year-on-year (+4.2%, 24Q1) at the end of the year and remained stable.

Asset quality pressure is manageable, and provision levels have declined slightly. Industrial Bank's non-performing rate at the end of the half year rose 1BP to 1.08% from the end of the first quarter. It is expected to be mainly affected by factors such as real estate market adjustments and strict retail cross-default determination. The company's bad rate for public real estate loans at the end of the half year increased 62 BP to 3.65% compared to the end of the previous year, and the non-performing rate for personal operating loans and personal consumer loans increased by 1 BP/8BP to 0.80%/1.78%, respectively, from the end of the previous year. In terms of forward-looking indicators, the attention rate at the end of the half year increased 3BP to 1.73% from the end of the first quarter, and the overdue rate increased 9BP to 1.45% month-on-month compared to the beginning of the year. The risk quality of retail assets due to insufficient effective demand still needs to be continuously observed. In terms of provision, the company's provision coverage rate and loan coverage rate at the end of the half year decreased by 7.69 pct/7bp compared to the end of the first quarter to 238%/2.56%. Although the absolute level has declined, it is still quite sufficient, and the risk compensation capacity remains stable.

Investment advice: “commercial bank+investment bank” creates differentiated management, and the dividend ratio is higher than that of peers. Societe Generale's institutional mechanism is flexible. Around the “commercial bank+investment bank” layout, it continuously promotes business transformation in the direction of light capital, light assets, and high efficiency. Currently, the company's internal and external business is developing in a balanced manner. In the past, ROE has always been at the forefront of the stock bank. The company proposed that in the future, it will create three golden business cards: Green Bank, Fortune Bank, and Investment Bank. We are optimistic about the long-term development space of the relevant circuit. In particular, in '23, the company raised its dividend ratio by 1.33 percentage points to 29.64%. Currently, the company's dividend ratio has reached 6.18%, further highlighting the dividend value. We maintain the company's 24-26 profit forecast. We expect the company's 24-26 EPS to be 3.76/3.97/4.28 yuan, respectively, and the corresponding profit growth rates are +1.4%/+5.5%/+7.8%, respectively. Currently, Industrial Bank's stock price corresponding to 24-26 PB is 0.46x/0.43x/0.39x, respectively. Considering the current relatively high safety margin of the company's valuation, long-term profitability is expected to recover after short-term revenue side disturbances subside, and maintain the “Highly Recommended” rating.

Risk warning: 1) The macroeconomic downturn has led to a rise in pressure on industry asset quality that exceeds expectations. 2) As interest rates declined, industry interest spreads narrowed beyond expectations. 3) Increased pressure on housing companies' cash flow has led to an increase in credit risk.