Incident: Industrial Bank disclosed the 2024 interim report. The revenue growth rate for the first half of 2024 was 1.80%, up 5.95pct year on year; profit growth rate before provision was 3.74%, up 10.22pct year on year; net profit growth rate to mother was 0.86%, up 5.78 pct year on year. The performance was in line with expectations. Our comments are as follows:

Societe Generale Bank's net profit growth rate for the second quarter of 2024 was 6.54% year-on-year. Specifically, performance growth was driven by provision release, scale growth, and cost pressure drop; factors such as tax increases, falling non-interest income, and narrowing net interest spreads dragged down performance growth.

Volume: The pace of scale expansion is slowing down, supporting the referendum

① Asset side: At the end of the second quarter of 2024, Industrial Bank's total assets increased 4.65% year on year. The growth rate increased slightly by 0.27 pct from the first quarter and decreased by 5.43 pct year on year. The slowdown in corporate scale expansion is mainly due to the fact that demand for public loans was generally less affected by macroeconomics than in the same period last year, while the scale of financial investment declined. At the end of the first half of the year, the average balance of the company's interest-bearing assets expanded 7.82% year on year, and the growth rate decreased by 1.96 pct year on year; the loan size increased by 8.55% year on year, and the growth rate increased by 0.64 pct month on month, down 0.80 pct year on year. Specifically, in the second quarter, Industrial Bank contributed 53.32% of the increase in total asset size to public loans (excluding discounts), accounting for an increase of 0.23 pct to 33.51% month-on-month, while the share of retail loans fell 0.18 pct to 18.98% month-on-month.

Optimize the layout for public loan investment. In the second quarter of 2024, Industrial Bank added 49.5 billion yuan to public loans (excluding discounts) in a single quarter, a year-on-year decrease of 71.6 billion yuan; the scale expanded 14.84% year on year, and the growth rate decreased by 6.79 pct year on year due to poor physical demand. Looking at investment trends, Societe Generale Bank's loans to the public sector are mainly concentrated in manufacturing, leasing and business services, and real estate. At the end of the first half of 2024, the three together accounted for 56.84% of public loans. During the reporting period, Industrial Bank increased its investment in key areas. The growth rate of corporate loan balances in the green, technology, and inclusive sectors all exceeded the growth rate of public loans (excluding discounts). The increase of the three accounts for 45.41% of the increase in current loans (excluding notes).

Retail loan investment is weak. At the end of the first half of 2024, the retail loan volume of Industrial Bank decreased by 0.81% year on year, and decreased by 3.1 billion yuan in a single quarter in the second quarter, an increase of 4.1 billion yuan over the same period last year. In terms of credit card business, Industrial Bank focused on improving the quality of its customer base, and the size of individual loans decreased by 11.00% year on year. Mortgage loans, on the other hand, were affected by the sluggish recovery of the real estate market, which fell 1.89% year over year. The personal business loan portion increased by 12.44% year over year, partially offsetting the impact of the decline in mortgage and credit card loans.

② Debt side: At the end of the first half of 2024, Industrial Bank's deposit size increased 4.86% year on year, which is basically in line with the pace of loan expansion. From a structural point of view, Industrial Bank's share of current deposits increased by 0.16 pct year on year to 37.07%, and the pressure to fix deposits eased slightly.

Price: Improved asset structure+lower debt costs support a narrowing in interest spreads

We estimate that Societe Generale Bank's net interest spread for the second quarter of 2024 was 1.85%, down 8 bps from year to month and 2 bps, respectively. The month-on-month decline was 2 bps and 1 bps narrower than the first quarter, respectively.

① Asset-side returns continue to be under pressure, but the structure has improved. Industrial Bank's yield on interest-bearing assets continues to decline due to factors such as lower LPR, weak demand for financing, and market fluctuations. However, from a structural perspective, by the end of the first half of 2024, the share of loan assets with high interest rates among Industrial Bank's interest-bearing assets increased 0.77pct month-on-month to 55.36%, and the asset structure continued to be optimized.

We estimate that in the second quarter of 2024, Industrial Bank's interest rate on interest-bearing assets was 3.85%, down 28 bps and 15 bps, respectively, from the same period last month.

② The cost ratio of interest-bearing debt fell rapidly. Societe Generale Bank's deposit scale stabilized while achieving a sharp drop in costs. The interest payment rate in the first half of 2024 fell 20bps to 2.06% year on year, falling to the middle level of stock banks. Among them, interest rates for public deposits and retail deposits decreased by 25 bps and 4 bps, respectively. In addition to price improvements, the average daily balance of corporate funds and retail low-cost deposits at the end of the first half of the year increased by 5.61% and 7.95%, respectively, compared to the end of the previous year. The optimization of both sides of the deposit structure and price is the main reason for the narrowing of interest spreads.

The decline in interest spreads is expected to narrow throughout the year. On the debt side, Industrial Bank will continue to expand services such as dropshipping, receipt, and supply chain finance, promote the replacement of high-cost maturing deposits, manage “manual interest payments”, and continue to reduce deposit costs; on the asset side, the company will increase credit investment in key areas and continuously optimize its asset structure. In summary, it is expected that the decline in interest spreads for the whole year will narrow year over year.

Non-interest income performance is average. In the second quarter of 2024, Industrial Bank's net non-interest income fell 8.20% year on year and 13.97% month on month. Among them, other non-interest income, mainly investment income, fell 22.47% month-on-month, which was a major drag on non-interest income; while CCIC achieved 5.63% month-on-month growth with the support of financial management and trading business. At the end of the first half of 2024, the average daily size of Societe Generale Wealth Management increased 4.92% compared to the end of the previous year.

Asset quality remains stable. ① Non-performing rate and attention rate: At the end of the second quarter of 2024, Industrial Bank's non-performing loan ratio was 1.08%, a slight increase of 1 bp over the previous month, maintaining steady operation. Specifically, in the first half of 2024, Industrial Bank's write-off efforts declined slightly year on year, and the bad generation rate (annualized) fell 8 bps year on year to 1.15% year on year. Affected by factors such as macroeconomic structural transformation, real estate market adjustments, and strict determination of retail cross-default contracts, the attention rate increased by 3 bps to 1.73% month-on-month at the end of the second quarter. At the end of the first half of 2024, Industrial Bank's provision coverage rate fell 7.69 pcts month-on-month to 237.82%, and the loan ratio was 2.56%, a slight decrease of 0.07 pcts month-on-month, and is still within the agreed range.

Costs and revenues decreased month-on-month. In the second quarter of 2024, Industrial Bank's cost-revenue ratio decreased by 0.48 pct year on year and increased by 3.58 pct from month to month, making a positive contribution of 0.77 pct to the performance growth rate.

Investment advice: As debt-side cost reduction efforts continue to advance, the interest rate payment rate of Societe Generale Bank will continue to decline. It is expected that the decline in interest spreads will narrow throughout the year, and the pressure on performance will ease. On the asset side, Industrial Bank will continue to optimize its asset structure and increase its investment in green, technology, and inclusiveness, which will be the main reliance on stabilizing the scale. We expect Industrial Bank's revenue to increase 0.25% year-on-year in 2024 and profit growth rate of 1.04%. For a buy-A investment rating, the target price for 6 months is 20.53 yuan, which is equivalent to 0.55X PB in 2024.

Risk warning: Asset quality deteriorated beyond expectations; macroeconomic recovery fell short of expectations.