Description of the event

Qilu Bank released its 2024 semi-annual report. Operating revenue for the first half of the year increased 5.5% year on year (5.5% year-on-year growth rate in the first quarter), and net profit to mother increased 17.0% year on year (16.0% year-on-year growth rate in the first quarter). At the end of the second quarter, the non-performing loan ratio was 1.24%, down 1BP month-on-month, and the provision coverage rate was 309%, up 4.4 pcts month-on-month.

Incident comments

Revenue growth is steady, and profits are growing at an accelerated pace. With a higher base in the second quarter of last year, the revenue growth rate for the first half of the year remained stable compared to the first quarter. Among them, net interest income grew -2.2% year on year (0.5% growth rate in the first quarter). Net non-interest income increased 27.5% year over year. Among them, net income from handling fees increased 11.7% year on year, and growth accelerated at a low base. The bond market benefiting from investment income and other non-interest income increased 38.4% year on year, supporting revenue. Credit costs declined year on year, driving net profit to mother to accelerate growth.

Institutional expansion has led to rapid credit expansion. The Heze branch officially opened in the first half of the year, and 3 new branches reached 191. It is expected that the Zibo branch will also be opened in the second half of the year, continuing to increase the coverage of the province and counties. The steady expansion of branches led to rapid scale expansion. Total loans at the end of the second quarter increased by 8.8% compared to the beginning of the second quarter and 2.8% month-on-month in the second quarter. Among them, inclusive loans increased 9.4% compared to the beginning of the period, and the share continued to rise. From a regional perspective, offsite loans increased 11% at the end of the second quarter compared to the beginning of the period, and the market share is expected to continue to increase; county finance is developing rapidly, and the share of county deposits and loans at the end of the second quarter increased further. It is expected that the increase in loan size over the next two years will continue to expand revenue branches and sink in county outlets. Total deposits at the end of the second quarter increased by 6.3% compared to the beginning of the second quarter, and demand deposits at the end of the second quarter accounted for 30.6%, down 1.6 pct from the beginning of the period.

The lower net interest spread is due to conservative risk appetite, and deposit costs continue to improve. The net interest spread for the first half of the year was 1.54%, down 20 BP from the full year of 2023 and 32 BP year on year. Among them, the yield on loans for the first half of the year decreased by 28 BP and 41 BP respectively. Among them, the yield on public and retail loans decreased by 28 BP and 41 BP respectively. Qilu Bank's risk appetite was low, and the lower loan yield guaranteed stable asset quality. Interest rates on deposits continued to improve. Interest rates on deposits decreased by 4 BP in the first half of the year of 2023. Among them, interest rates for fixed term and personal time deposits decreased by 18 BP and 21 BP respectively. Since there is no manual interest compensation or other operation as an urban commercial bank, there is little marginal change in the comprehensive deposit cost ratio. It is expected that as early high-cost deposits are gradually matured and repriced, there is still room for deposit interest rates to continue to decline in the future, easing the pressure on net interest spreads as loan yields continue to decline.

Asset quality indicators have been improved in all aspects. The non-performing rate continued to decline month-on-month at the end of the second quarter. The interest rate fell 18 BP month-on-month. The overdue loan rate and 90-day overdue loan ratio decreased by 1 BP and 19 BP, respectively, from the beginning of the period, and the deviation between 90 days+ and non-performing loans decreased by 15 pcts. From a dynamic perspective, the net bad generation rate in the first half of the year decreased by 5BP to 0.76% compared to the full year of 2023. Currently, the absolute level of bad generation rate is also relatively low among peers. The manufacturing loan non-performing ratio at the end of the second quarter was 5.54%, down 13BP from the beginning of the period; at the end of the second quarter, real estate loans accounted for only 1.3%, and the non-performing rate was relatively stable at 1.38%. At the end of the second quarter, the personal loan non-performing ratio increased by 14BP to 1.32% compared to the beginning of the period. Fluctuations in retail risk are common to the industry. At the end of the second quarter, provision coverage increased by 4 pcts month-on-month, and risk compensation capacity was further strengthened. It is expected that the trend of improving asset quality will continue.

Investment advice: Profit growth accelerated in the first half of the year, and asset quality continued to improve. From a fundamental perspective, the expansion of branches across the province and counties, rapid credit expansion, and continuous improvement in asset quality driving the reduction of credit costs are core highlights. The growth rate of interim reports is leading, and profits are growing at an accelerated pace. Revenue and net profit to mother are expected to increase by 3.0% and 14.6% year-on-year for the full year of 2024. The current valuation is 0.58x2024PB. The impact of the reduction in holdings by previous shareholder Chongqing Huayu is gradually being digested, with key recommendations to maintain the “buy” rating.

Risk warning

1. The credit scale expansion fell short of expectations; 2. Asset quality fluctuated markedly.