Incident: Rui Fung Bank disclosed its 2024 mid-year report. 1H24 achieved revenue of 2.17 billion yuan, a year-on-year increase of 14.9%, and realized net profit to mother of 0.84 billion yuan, an increase of 15.4% over the previous year. The 2Q24 non-performing rate remained flat at 0.97% month-on-month, and provision coverage increased by 19pct to 323.8% quarter-on-quarter. Revenue performance exceeded expectations, and the increase in provisions exceeded expectations.

The performance growth rate is in the first tier of the industry, and outstanding revenue added further color to the excellent performance: 1H24 Rui Fung Bank's revenue increased 14.9% year on year (15.3% in 1Q24, 13.1% in the forward-looking forecast), and net profit to mother increased 15.4% year on year (14.7% in 1Q24, 14.9% in the forward-looking forecast). Judging from the driving factors, ① Non-interest income supports high revenue growth. 1H24's non-interest revenue increased 94% year-on-year, contributing to a revenue growth rate of 16.9pct. ② Interest spreads continued to narrow, and the growth rate of net interest income turned negative due to a slowdown in scale growth. Net income from 1H24 interest fell 2.4% year on year, dragging down the revenue growth rate by 2 pcts. Among them, the decline in interest spreads dragged down 14.2 pcts, and the increase in scale contributed 12.2 pcts (1Q24 contributed 16 pcts). ③ Reduce costs and increase efficiency, and optimize management, and feed back profits compared to declining costs and revenues. 1H24's cost-revenue ratio fell 4.6pct year-on-year to 27.2%, contributing 8.9pct to profit growth. ④ Actively increase provisions to save energy for sustainable performance growth and provide a negative contribution profit growth rate of 16 pct.

The focus of the interim report: ① Investment income supported revenue performance in the first half of the year, and revenue growth throughout the year was also strongly supported. In the first half of the year, the subsidy revenue reflecting last year's inclusive incremental loans was only about 24 million yuan (including other income); considering the addition of 10 billion yuan of inclusive loans in 2023 (including 9.4 billion yuan for 1H23, corresponding subsidy ratio of 2%), other income of 0.17 billion yuan will also be confirmed in the second half of the year (boosting 2H24's revenue growth rate of nearly 9 pcts). ② The results of the “one base, four arrows” regional layout have begun to show. With Keqiao base camp as “one base”, Yuecheng, Yiwu, Binhai, and Shengzhou implemented a horse racing assessment mechanism in the first half of the year. In the first half of the year, “Four Arrows” contributed more than 44% of new loans. ③ The pace of credit investment in the first half of the year was in line with expectations. The slowdown in growth was mainly due to active structural adjustments and bill pressure drop. Loan growth slowed to 8.9% in 2Q24, with a net decrease of 0.8 billion yuan in loans in a single quarter (including a drop in bill pressure of more than 2 billion yuan). ④ Interest spreads continue to narrow. As the pressure drop on high-yield assets in the previous period comes to an end, compounded by improvements in deposit costs, the decline in interest spreads is expected to narrow. The 1H24 spread was 1.54%, down 7 bps from 2H23; the 2Q24 spread was estimated to be 1.48%, down 12 bps from quarter to quarter. ⑤ Asset quality continues to be steady, moderate and positive, and provision has been greatly improved. The 2Q24 defect rate remained flat at 0.97% month-on-month, and provision coverage increased by 19pct to 323.8% month-on-month.

The regional layout strategy is beginning to pay off. Affected by active pressure on notes, loan growth has slowed down. Rui Fung Bank's loan growth rate in 2Q24 was 8.9% (12.6% in 1Q24), adding a cumulative total of 8.3 billion yuan in loans in the first half of the year, accounting for an increase of about 55% of the target of 15 billion yuan for the whole year. Among them, the net decrease in loan balance in a single quarter was 0.8 billion yuan, mainly related to the drop in bill pressure exceeding 2 billion yuan. Judging from the investment structure in the first half of the year, credit growth was supported by the public manufacturing industry. 1H24 added a total of 4.2 billion yuan to public manufacturing, accounting for 60% of the new loans to the public sector. Retail operating loans have shown excellent growth. The phenomenon of early mortgage repayment still exists, but the pace has stabilized, and credit card pressure has dropped or is nearing its end. The 1H24 operating loan increased by 2.4 billion yuan, accounting for nearly 30% of the new loans; the net mortgage decreased by 1.1 billion yuan, and the average monthly decline was basically stable at about 0.2 billion yuan; due to the drop in pressure on offsite credit card car installment loans, the 1H24 credit card balance decreased by 0.7 billion yuan. Furthermore, in the first half of the year, Ruifeng Bank continued to focus on implementing a horse racing assessment mechanism for Yuecheng, Yiwu, Binhai, and Shengzhou. The total contribution of the four major regions of 1H24 increased by nearly 4 billion yuan in loans, accounting for more than 44% of new loans; the stock share increased by 0.5 pct to 36.6% compared to the beginning of the year.

Interest spreads continued to narrow, but as the pressure drop on high-yield assets in the previous period came to an end, and the combined deposit cost improvements were realized, the decline in interest spreads is expected to stabilize: 1H24 Rui Fung Bank's interest spread is 1.54%, down 7 bps from 2H23. Of these, the 2Q24 interest spread is estimated to be 1.48%, down 12 bps from quarter to quarter. 1) The decline in loan yields is mainly due to the narrowing of interest spreads. The yield on 1H24 loans fell by nearly 20 bps to 4.34% compared to 2H23. On the one hand, it is related to interest rate cuts and weakening effective physical demand, and on the other hand, it is also related to pressure drops in off-site microfinance, car installment credit cards, etc. Considering that the latter is nearing its end, the impact on the decline in asset pricing will also tend to decline. 2) The results of the reduction in deposit costs have begun to be reflected. The cost of 1H24 deposits decreased by 3 bps to 2.24% compared to 2H23, driving down debt costs by 2 bps to 2.20%.

Asset quality continued to be stable, moderate, and provision coverage increased sharply from month to month: Rui Fung Bank's non-performing rate remained flat at 0.97% month-on-quarter in 2Q24, and it is estimated that the bad generation rate after 1H24 annualization plus write-back and recycling was only 0.5%, which is in line with our expectations. Looking at forward-looking indicators, 2q24's attention rate increased by 19 bps to 1.56% from quarter to quarter, which is expected to be related to an increase in the number of overdue customers (2Q24 overdue rate fell 7 bps from the high level at the beginning of the year but still reached 1.77%, and about 1% at the end of 2022). However, with strict identification of stock assets and full exposure of risks (only 84% of loans/non-performing loans overdue for 60 days or more), combined with forward-looking active provision increases (2Q24 provision coverage increased by 19pct to 323.8% month-on-month), it is expected that overall asset quality will remain stable and excellent.

Investment analysis opinion: The impressive revenue performance of Ruifeng Bank has laid the foundation for leading the industry in annual performance, while continuing to be optimistic about the implementation of the medium- to long-term growth logic guided by efficient use of leverage to achieve steady rise in ROE driven by stock expansion and share subscriptions. Currently, Rui Fung Bank's valuation is lower than the average of peers, and the boot to lift the ban has been implemented. I am optimistic that the valuation will be repaired upward under the growth logic, and maintain a “buy” rating. Maintaining the 2024 profit growth forecast, based on careful consideration of lowering the 2025-2026 profit growth forecast, and lowering interest spreads and non-interest income judgments, the net profit growth rates for 2024-2026 are expected to be 15.2%, 11.7%, and 12.3%, respectively (the original forecast for 2025-2026 was 15.5% and 15.6%). The current stock price is only 0.52 times the 2024 PB, maintaining a “buy” rating.

Risk warning: Economic recovery falls short of expectations, and interest spreads continue to be under pressure; there is uncertainty about the implementation of share subscriptions; demand-side improvements such as small and micro retail are significantly lower than expected.