Matters:

On the evening of August 27, Rui Fung Bank disclosed its 2024 semi-annual results report. In the first half of the year, the company achieved operating income of 2.174 billion yuan, up 14.9% year on year, down 0.4 pct from 1Q24; operating profit of 0.745 billion yuan, up 6.16% year on year, down 8.1 pct year on year from 1Q24; net profit attributable to shareholders of listed companies was 0.843 billion yuan, up 15.4% year on year, up 0.7 pct year on year. The defect rate remained flat at 0.97% month-on-month, and the provision coverage rate was +19pct to 323.8% month-on-month.

Commentary:

Affected by the slowdown in scale and the narrowing of interest spreads, the revenue growth rate declined slightly. It is expected to remain at a high level of the same industry, and net profit to mother will maintain a 15% increase due to cost savings. 1) 2Q24's single-quarter revenue increased 14.4% year over year, and the growth rate fell 0.9 pct month-on-month, mainly due to the slowdown in scale growth in the second quarter (loan growth rate fell 3.7 pct to 8.9% month-on-month) and the effects of narrowing interest spreads (1H24 net interest spread fell 6 bps to 1.54% compared to 1Q24), 2Q24 net interest income fell 9.4% year on year, and the growth rate decreased 15 pcts from 1Q24. Due to good bond investment returns in the second quarter, other non-interest income continued to grow at a high rate, rising 151.4% year on year in 2Q24; 2) Net profit to mother in the first half of the year increased 15.4% year on year, up 0.7 pct year on year from 1Q24. Mainly due to cost savings, 2Q24 cost revenue decreased by 6.3 pct to 24.2% compared to 1Q24.

The textile industry's financing season is low, demand for credit weakens, and the growth rate is expected to pick up during the next peak season. At the end of Q2, interest-bearing assets increased 10.9% year on year, and the growth rate decreased by 2.8 pct month on month; total loans increased 8.9% year over year, and the growth rate decreased 3.7 pct month on month. Among them, new loans in Q1 and Q2 were 9.109 and -0.795 billion yuan respectively. The negative increase in loans in the second quarter is, on the one hand, from an overall perspective, physical credit demand was weak. Combined with the second quarter being a low season for textile credit demand, the third quarter was the time for winter clothing sales, and credit demand is expected to pick up; on the other hand, judging from the loan structure, the growth rate of public loans has slowed down, and early mortgage repayments are still hampering retail loans. Corporate loan/retail loan/note discounts increased 15.2%, 0.1%, and 30.9%, respectively.

Demand for credit is weak, loan pricing continues to decline, and interest spreads are still under pressure. The 2Q24 interest spread (earlier-end caliber) narrowed by 5 bps to 1.51% month-on-month, mainly because asset-side pricing continued to decline and debt-side costs remained stable. 1) Asset side: The yield on 1H24 loans fell 39 bps to 4.34% from the end of 23, with interest rates on public/retail loans falling 31 bps and 50 bps to 4.32% and 4.84%, respectively, from the end of 23. Under loan maturity and repricing, asset-side returns continued to decline. 2Q24 yield on interest-bearing assets fell 4 bps to 3.63% month-on-month; 2) debt-side: the 1H24 deposit cost ratio fell 4 bps to 2.24% from the end of 23, and the 2Q24 interest-bearing debt cost ratio remained flat at 2.27% month-on-month, and there is still room for further pressure drop in the future.

Asset quality remained stable, and provision coverage increased month-on-month. The 2Q24 non-performing loan ratio remained flat at 0.97% month-on-month. The net generation rate of non-performing loans in a single quarter increased by 30 bps, 19 bps to 0.88% and 1.56%, respectively, or due to slight pressure on the repayment ability of small and micro enterprises and sole proprietors in some traditional industries. In response, the company stepped up its efforts to improve bad write-offs and provisions. The provision coverage rate was +19pct to 323.8% month-on-month, and the loan ratio was +19bp to 3.15% month-on-month. Due to the active private economy in the Shaoxing region, the micro-finance business is quickly exposed and quickly disposed of, which has little impact on overall asset quality, and asset quality is expected to remain stable.

Investment advice: Ruifeng Bank's revenue and profit growth rate continued to grow at a high rate in the second quarter. It is expected to remain at the leading level in the industry. Asset quality is stable and improving, and the annual performance is expected to continue to grow by more than 10%. In the context of breaking down the “complex of scale” in the banking industry as a whole and focusing on “excellent quantity and quality”, Ruifeng Bank's volume and price are still at an excellent level. In the future, it is still expected to benefit from: 1) the rapidly growing export economy in Keqiao District and Yuecheng District of Shaoxing City, where credit demand is still strong; 2) loan structure optimization, the impact of early mortgage repayment has gradually subsided, and the consumer loan business has maintained relatively rapid growth; 3) Offsite interbank equity investment, which has already invested in Yongkang and Cangnan Agricultural Commercial Bank to increase other non-interest income Increase ROE.

Due to the low and high growth rate of other non-interest income last year, the growth rate of other non-interest income may slow down after rising in the first quarter. Combined with the current macroeconomic environment, we maintain our previous forecast. Combined with the current macroeconomic environment, we expect the company's 2024-2026 revenue growth rate to be 6.71%/10.57%/14.48%, and the net profit growth rate for 2024-2026 is 11.07%/11.36%/13.46%. The current valuation is only 0.53x24pb. We maintain a 24-year target PB of 0.72X, a corresponding target price of 6.6 yuan, and maintain a “recommended” rating.

Risk warning: Bank interest spreads are under further pressure due to insufficient economic growth momentum. Bank credit investment fell short of expectations.