2Q24 revenue was higher than our expectations, and profit was lower than our expectations

Bank of Ningbo announced 2Q24 results: 1H24 revenue increased 7.1% year on year, net profit up 5.4% year on year; 2Q24 revenue increased 8.6% year on year, net profit up 4.5% year on year; revenue and pre-provision profit growth rate was higher than our expectations, mainly due to rapid scale growth and profit growth rate slightly lower than our expectations, mainly due to increased loan write-off affecting income tax expenses. The company provides customers with comprehensive scenario-based financial services through “professional+technology”. Its operation and profitability are differentiated and competitive. It is recommended to focus on potential valuation flexibility and investment opportunities after the economy reaches an inflection point.

Development trends

The interest-bearing business drives faster revenue and pre-provision profit growth. 2Q24 revenue increased 9% year on year, and profit before provision increased 12% year on year, mainly due to a 17% increase in net interest income. Bank of Ningbo's differentiated competitive advantage in financial services and products kept the scale expansion relatively rapid.

Scale expansion continues to lead the industry. At the end of 1H24, total assets increased 17% year over year, loans increased 21% year over year, and deposits increased 19% year over year, all of which remained high. The increase in 1H24 loans was mainly due to the leasing business service industry, wholesale and retail industry, and manufacturing. The share of increases in personal consumption/personal business/mortgage loans declined year-on-year, with consumer loans accounting for 13ppt year-on-year decline.

The net interest spread declined slightly. The average daily net interest spread for 1H24 decreased by 1 bps to 1.87% compared to 2023; the company disclosed that the adjusted net interest spread after excluding interest-paying liabilities corresponding to transactional financial assets fell 14 bps to 2.17% year over year. We estimate that the average daily net interest spread for 2Q24 fell by 5 bps to 1.85% month-on-month. We expect asset-side returns to decline due to declining retail credit demand and a longer period of faster asset repricing. The company actively expanded the sources of settlement deposits, refined control of debt costs, and reduced debt costs by 9 bps month-on-month in a single quarter, which played a certain hedging role.

Other non-interest income grew steadily. Net revenue from 2Q24 fees fell 27% year on year, and we expect the main reason for the continued decline in agency business revenue (1H24 agency revenue decreased 20% year over year). 2Q24's other non-interest income was +2% year-on-year, with investment income +2% year-on-year, and fair value decreased 6% year over year; investment income from 1H24 disposal financial instruments accounted for 8% of revenue, up 3ppt from 2023.

Increase provisions and increase write-off efforts at the same time. At the end of 2Q24, the non-performing rate remained flat at 0.76% month-on-month. The share of concerned loans rose 27bp to 1.02% month-on-month, and loans overdue for 90 days or more rose 2bP to 0.58% compared to the end of 4q23. The increase in non-performing balances was mainly due to personal loans. The non-performing ratio of personal loans rose 17 bps to 1.67% at the end of 4Q23. The company disclosed that the non-performing rates for personal consumer loans, personal business loans, and housing mortgage loans were 1.56%/3.04%/0.60%, respectively. 2Q24 loan impairment losses increased 7% year on year, objectively reflecting the current pressure of bad retail sales; at the same time, bad write-off efforts increased, the 1H24 non-performing generation rate increased by 40 bps to 1.28% year on year, and provision coverage decreased by 11.1ppt to 420.6% from quarter to quarter.

Profit forecasting and valuation

We keep our current profit forecast unchanged. The current stock price corresponds to 0.68 times the 2024E net market ratio and 0.61 times the 2025E net market ratio. Maintaining the outperforming industry rating and target price of 28.44 yuan unchanged, corresponding to 0.95 times the 2024E net market ratio and 0.84 times the 2025E net market ratio, there is 38.7% upside compared to the current stock price.

risks

Asset quality deteriorated beyond expectations, and interest spreads declined more than expected.