Core views

In the first half of the year, Bank of Ningbo achieved “stable volume and price growth” credit investment. On the basis of market leadership in large-scale growth, interest spreads remained within a reasonable range. As a result, net interest income continued to increase in double digits, supporting steady revenue and profits. On the asset side, pricing is still under pressure, mainly for public referendums. On the debt side, integrated platforms enable scale growth, strong cost control, and optimization of deposit structures. In terms of asset quality, retail risks were revealed as scheduled, and the decline in provision coverage narrowed.

occurrences

On August 28, Bank of Ningbo released its 2024 mid-year report: 1H24 achieved operating income of 34.437 billion yuan, up 7.1% year on year (1Q24:5.8%), net interest income increased 14.7% year on year; realized net profit of 13.649 billion yuan to mother, up 5.4% year on year (1Q24:6.3%). The 2Q24 defect rate was 0.76%, which remained flat from quarter to quarter, and provision coverage decreased by 11.1pct from quarter to quarter to 420.5%.

Brief review

1. Credit investment “increased steadily in volume and price”, and net interest income showed excellent performance. 1H24 Bank of Ningbo achieved operating income of 34.437 billion yuan, an increase of 7.1% year on year. Among them, net interest income increased 14.7% year on year, supported by high scale growth and steady interest spreads, and continued to maintain the leading level among listed banks. In terms of non-interest income, net handling fee revenue was affected by various rate cuts. The decline increased by 24.9% year on year, while other non-interest income increased 2.5% year over year, which is basically the same as in the first quarter. In terms of profit, due to the relative exposure of the banking industry's overall poor performance in the second quarter, the scale of asset impairment of 1H24 Bank of Ningbo increased 8.9% year on year, and the performance growth rate fell back to 5.4%, maintaining steady growth.

In terms of performance attribution, the industry-leading scale growth rate is still the most important driver of Ningbo Bank's performance growth, with 1H24 making a positive contribution of 18.0%. However, although the narrowing of interest spreads was the main drag on performance, causing a negative impact of 8.8%, the negative impact of narrowing interest spreads has declined significantly compared to 11.8% and 10.5% in 2023 and 1Q24, benefiting from the continuous improvement in debt costs.

2. Debt costs have dropped significantly, and interest spreads have remained within the agreed range. The net interest spread (disclosed value) of the 1H24 Bank of Ningbo rose 4 bps to 1.87% from 2H23, and the 2Q24 net interest spread (estimated value) decreased by 5 bps to 1.85% from quarter to quarter. The absolute level was superior to that of peers, maintaining the agreed range.

Among them, Bank of Ningbo's interest-bearing debt cost (estimated value) fell 8 bps to 2.04% from quarter to quarter in 2Q24, thanks to continued maturing repricing of high-cost deposits and the inflow of corporate demand capital during manual interest compensation and rectification, which is the main reason for the steady performance of interest spreads. However, the yield on interest-bearing assets (estimated value) fell 14 bps from quarter to quarter against the backdrop of weak credit demand, and is still under pressure.

On the asset side, mainly for public referendums, the scale growth rate is ahead of peers. In the context of the current “asset shortage,” Bank of Ningbo relied on its asset-side capabilities and relatively strong demand in the Yangtze River Delta region. The loan scale increased by 12.5% and 20.6% compared to the beginning of the year, respectively, and ranked among the top listed banks.

Investment is still dominated by princesses. Loans for manufacturing, wholesale and retail, leasing and commercial services increased by 14.5%, 25.8%, and 24.1% respectively from the beginning of the year, which is the main driving force for scale expansion. In terms of price, the yield of 1H24's public loans fell slightly by 9 bps to 4.30% compared to 2H23, while retail loans were affected by insufficient demand for effective credit and policy factors, and the decline was significant. Compared with 2H23, it fell 25 bps to 5.93%, dragging down loan yield by 16 bps to 4.92%.

On the debt side, integrated platforms enable scale growth, and deposit structure optimization is beneficial to cost improvement. As the manual interest rate compensation rectification work continued to advance in the second quarter, the Bank of Ningbo fully grasped market opportunities and actively launched a mining plan to empower customers with personalized products such as Five Guan Erbao and Kunpeng Treasury to attract the inflow of low-cost deposit funds. The deposit size increased by 17.6% compared to the beginning of the year, far ahead of commercial banks in other cities. The share of corporate deposits rose to 71%, and the deposit structure was significantly optimized, fully reflecting the advantages of its integrated services. Furthermore, Bank of Ningbo is expected to reprice 22% of deposits due in the third quarter, and there is great potential for cost improvement. In terms of costs, thanks to several cuts in deposit listing interest rates since last year, 1H24's public and retail deposit costs fell by 14 bps and 5 bps to 1.84% and 2.31%, respectively, compared to 2H23, and total deposit costs fell to 1.96%, underpinning interest spreads. Meanwhile, the Bank of Ningbo completed the reduction in deposit listing interest rates on August 1, which will partially hedge the impact of the LPR reduction and support interest spreads to continue to maintain a reasonable range.

3. Retail risks were revealed as scheduled, and the decline in provision coverage narrowed. In 2Q24, Bank of Ningbo's non-performing rate remained flat at 0.76% quarter-on-quarter. Facing current macroeconomic pressure, individuals are less resilient to risk, and retail loan risks have been exposed. The 1H24 non-performing rate is expected to rise to 3.04% and 1.56%, respectively, mainly operating loans and consumer loans. The non-performing rate of retail loans rose 17 bps to 1.67% from the beginning of the year. 1H24 plus write-off failure generation rate (estimated value) increased 24 bps from month to month 2H23, 36 bps to 101 bps year over year, and 1H24 credit cost increased to 0.5%. However, considering the Bank of Ningbo's long-standing attitude towards strict risk control and an extremely adequate level of provision, related risks are still within a manageable range.

In terms of forward-looking indicators, the 1H24 Bank of Ningbo overdue rate decreased by 1 bps to 0.92% from the beginning of the year, and the attention rate increased by 37 bps to 1.02% from the beginning of the year. Potential risks are relatively exposed, and subsequent trends require attention. Furthermore, the size of Bank of Ningbo's 1H24 restructuring loans increased 38% to 1.656 billion yuan from the beginning of the year, accounting for an increase of 2 bps to 0.12% compared to the beginning of the year.

The 2Q24 provision coverage rate fell 11.1 pct from quarter to quarter to 420.6%. The decline narrowed markedly, and remained at a high level of more than 400%. Since the fourth quarter of last year, subsidiaries such as Ningyin Consumer Finance and Yongying Financial Leasing have become the absolute mainstay of the Bank of Ningbo's credit investment. However, due to various factors, the pace and intensity of the provision of the parent bank and the subsidiary did not match, which is the main reason why provision coverage continued to decline from month to month. As the pace of the Group's provision planning gradually matches, the decline in provision coverage is expected to continue to narrow.

4. Investment advice and profit forecast: In the first half of the year, Bank of Ningbo achieved “stable volume and price growth” credit investment. On the basis of market leadership in large-scale growth, interest spreads remained within a reasonable range. As a result, net interest income continued to increase in double digits, supporting steady revenue and profits. On the asset side, pricing is still under pressure, mainly for public referendums. On the debt side, integrated platforms enable scale growth, strong cost control, and optimization of deposit structures. In terms of asset quality, retail risks were revealed as scheduled, and the decline in provision coverage narrowed. Net profit growth rates for 2024-2026 are expected to be 5.3%, 7.7%, and 9.8%, respectively, and revenue growth rates of 6.4%, 8.8%, and 10.7%, respectively. Currently, Bank of Ningbo's stock price is only 0.68 times 24-year PB. The valuation is severely suppressed by factors such as insufficient expectations for economic recovery and pessimistic market sentiment. The cost performance ratio is outstanding, and the purchase rating is maintained.

5. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some companies with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.