The long-term advantage stems from a highly market-based governance mechanism+persistent strategic direction Bank of Ningbo's core management has been stable for a long time, and has established a complete talent training hierarchy, and the governance mechanism is highly market-based. The long-term strategic plan is clear. Over the years, it has been deeply cultivated around core development concepts such as “big banks can't do well, small banks can't do it”, “211 project”, and “123 customer coverage”. The business system does not bet too much on a single track. Currently, the number of profit centers (including subsidiaries) has reached 13. Compared with peers, the loan structure and revenue structure are clearly more scattered, and profit sources are diversified.

The regional layout has a first-mover advantage. It has already covered the most economically developed regions in depth, and has taken the lead in completing comprehensive coverage of mainland cities in Zhejiang Province, core cities in the Yangtze River Delta, Beijing, and Shenzhen. In recent years, supervision and approval of offsite branches of urban and agricultural commercial banks has been completely tightened. The Bank of Ningbo will enjoy the dividends of the institutional layout for a long time and has the advantage of sustainable growth. From the perspective of offsite market loan market share, there is still room for the company's market share in regions other than Ningbo to increase further in the future.

The traditional deposit and loan business is developing efficiently, with excellent wealth management & investment transaction capabilities. Deposits insist on low-cost placement, and competitive advantages are significantly underestimated. Through continuous iteration of core products such as “Five Pipes and Two Treasures,” the basic customer base has been expanded, and a large amount of low-cost settlement capital has been accumulated. Currently, the deposit cost ratio is the lowest among comparable commercial banks in the city, and the strategic direction is expected to form a long-term moat advantage on the debt side in the future. Loans have outstanding advantages in public manufacturing, excellent pricing and risk management capabilities, and are relatively low dependent on traditional urban investment infrastructure assets. Retail loans are mainly consumer loans. The loan yield has a clear advantage. The acquisition of consumer finance companies was completed in 2022 to achieve a nationwide retail loan exhibition. In 2023, personal consumer loans increased sharply by 32%, and consumer finance companies contributed a 45% increase, driving the overall credit growth rate. Currently, banks are generally under pressure from asset shortages, and the economic growth structure has been shifting to manufacturing, small and micro, and consumption over a long period of time. It is expected that the core advantages of Bank of Ningbo's asset side will become more prominent in the future. Thanks to the advantages of retail loan yields and deposit costs, net interest spreads currently have an advantage over peers, and 2024Q1 net interest spreads bucked the trend and rebounded.

Wealth management ability and investment transaction ability are ahead of peers, and the contribution of investment income to revenue has long been higher than that of peers. Revenue related to investment income in 2024Q1 accounted for 25% of revenue. In the context of the bullish bond market, investment income was not significantly realized. As a result, the balance of other comprehensive income from net assets increased markedly, leaving room for the release of future investment income.

Asset quality has been excellent for a long time, the risk control system is solid, and the negative generation rate is real. Bank of Ningbo's non-performing rate has remained low for a long time, and the net bad generation rate has remained excellent historically. The independent credit approval mechanism is the core of safeguarding asset quality, and the head office has insisted on implementing a unified credit and vertical approval system for a long time. The net bad generation rate has risen since 2023. The real dynamics reflect the impact of macroeconomic environmental fluctuations on the quality of retail assets. Compared with the banking industry, it is expected that the bad generation rate will take the lead in entering a downward phase in the future. The negative impact on public loans is mainly concentrated in the manufacturing industry, which accounts for a high proportion of loans, and real estate risks are very limited.

The provision coverage rate was previously at the leading level of listed banks for a long time, and has declined from a high level since 2022, mainly reflecting the influence of consumer finance companies, which have accumulated a low level of historical provision.

Investment advice: An underestimated advantage of long-term sustainable growth

We believe that Bank of Ningbo has the advantage of long-term sustainable growth, has a clear view of asset quality, is currently undervalued after continuous valuation adjustments since 2023, and can provide a stable rate of return in the future. From the perspective of performance growth, the deceleration rate after a long period of high growth is in line with objective rules, but profitability such as ROE is still leading the industry. We forecast a net profit growth rate of 7.6%, 10.3%, and 10.2% from 2024 to 2026. As a leading commercial bank with outstanding core competitiveness, the stock price is fully adjusted. Based on the closing price of August 24, 2024, it corresponds to a PB valuation of 0.69X and PE valuation of 5.3X in 2024, maintaining a “buy” rating.

Risk warning

1. Credit scale expansion falls short of expectations; 2. Asset quality fluctuates markedly: 3. Profit forecasting assumptions fall short of expectations.