Incident: Bank of Ningbo disclosed its 2024 interim report. The revenue growth rate for the first half of this year was 7.13% (5.78% in the first quarter), the profit growth rate before provision was 10.12% (8.80% in the first quarter), and the net profit growth rate to mother was 5.42% (6.29% in the first quarter). The performance was steady and in line with expectations. Our comments are as follows:

In the second quarter of this year, Bank of Ningbo's net profit growth rate in a single quarter was 4.52%. The main drivers of its performance growth were scale expansion and a year-on-year decline in the cost-revenue ratio; slowing growth in non-interest income and tax increases were the main drag on performance.

The scale continued to expand at a relatively rapid pace. In the second quarter of this year, Bank of Ningbo's interest-bearing assets (average daily balance) increased 18.43% year on year, slightly up 0.35 pct from the Q1 growth rate. The advantages of scale growth are in a leading position in the banking industry. Judging from the structural perspective, the year-on-year growth rate of financial investment and interbank assets all increased slightly, and the loan growth rate slowed slightly.

In the second quarter of this year, the Bank of Ningbo added 145.5 billion yuan in total assets, a sharp increase of 71.1 billion yuan over the previous year. In an environment where the entire banking industry abandons scale complexes and slows down asset investment, the Bank of Ningbo is still expanding at an accelerated pace, mainly because the Bank of Ningbo has further increased its allocation of financial investment and interbank assets. Among them, the scale of tradable financial assets and debt investment allocations in the financial investment sector did not change much, while other debt investments (OCI accounts) increased by 77.8 billion yuan month-on-month. These assets are in the phase of declining interest rates, providing support for future investment income growth. In the sector of interbank assets, the main focus is on increasing the disbursement of capital.

In terms of credit, Bank of Ningbo added 46.6 billion yuan in loans in the second quarter of this year, a year-on-year decrease of 23.5 billion yuan. However, new loans increased by 36.4 billion yuan year-on-year in the first half of this year, and credit investment has not been weak since the beginning of the year. Public credit investment generally accelerated in the second quarter of this year, while there was a year-on-year decrease in bill discounts and retail credit. It is expected that due to rising retail credit risk, companies will take the initiative to slow down the pace of consumer credit investment in stages.

There is a strong will to increase the size of active debt and expand the balance sheet. Bank of Ningbo's asset side accelerated expansion in the second quarter of this year, reflecting its original intention to actively expand its debt structure in Q2. On the one hand, deposits grew well, and new corporate deposits were better than seasonal; on the other hand, during the period of rapid decline in market interest rates in the second quarter, Bank of Ningbo increased its efforts to issue active debt instruments such as interbank deposits. These factors drove the increase of 136.9 billion yuan in debt in the second quarter, an increase of 70.8 billion yuan over the same period last year. Most of the new liabilities were market-active debt types.

Net interest spreads declined slightly month-on-month and year-over-year. In the second quarter of this year, Bank of Ningbo's net interest spread for a single quarter was 1.85%, down only 1 bps year on year, better than other peers; it decreased by 5 bps month on month. Specifically:

① Asset-side return decreased by 11 bps month-on-month. Bank of Ningbo's return on interest-bearing assets in Q2 was 3.99%, down 11 bps from month to month. It is expected that loan yields will maintain a downward trend due to declining LPR and insufficient demand for effective credit. Among them, retail credit yields are expected to decline even more.

② The cost of debt decreased by 3 bps month-on-month. Bank of Ningbo's Q2 interest-bearing debt cost ratio was 2.10%, an improvement of 3 bps over the previous quarter. It is expected to mainly benefit from standardized manual interest payments, a marked improvement in the cost ratio for public deposits, and a downward trend in the share of public term deposits; however, retail deposit costs remain high and continue the trend of regularization.

③ Looking ahead, Bank of Ningbo's asset-side interest rates are still under downward pressure, and credit restructuring is expected to hedge part of it; debt-side deposit repricing is expected to gradually be realized this year, and the net interest spread performance may be better than that of peers.

Non-interest income performance is average. In the second quarter of this year, Bank of Ningbo's non-interest income fell 6.9% year on year, and the decline was further expanded from Q1. Among them, net income from handling fees and commissions fell 27.1% year on year. It was mainly dragged down by lower banking insurance agent rates, fund fee cuts, and the decline in active equity fund holdings, putting pressure on wealth management related income.

In addition, other non-interest net income increased 2% year over year. This was an average performance in an environment where bond interest rates declined sharply in the second quarter. However, considering that Bank of Ningbo's other comprehensive income reclassified into profit and loss in the second quarter increased by 1.954 billion yuan, which is roughly equivalent to the same period last year (1.947 billion yuan), it can still take the opportunity to cash out some of its bonds to achieve profit and profit in the future, thereby supporting revenue growth.

Expenses continued to be controlled, and the cost-revenue ratio decreased slightly year-on-year. In the second quarter of this year, Bank of Ningbo's cost-revenue ratio was 34.1%, down 1.9 percentage points year on year. It improved year on year for 2 consecutive quarters, mainly due to the company's comprehensive promotion of fine management, streamlining administrative expenses, rational planning of network layout, and effective control of the increase in expenses.

Bad generation is still high, and retail risks are worth paying attention to. At the end of the first quarter of this year, Bank of Ningbo had a non-performing rate of 0.76%, which was flat from month to month, but the structural differentiation was significant. The bad rate for public credit dropped by 3 bps to 0.22% from the beginning of the year, and the retail credit non-performing rate increased by 17 bps to 1.67% compared to the beginning of the year. The attention rate increased by 28 bps to 1.02% compared to Q1, and the overdue rate dropped slightly by 1 bps to 0.92% from the beginning of the year. Overall, the pressure on public credit risk is fair, but retail credit risk is moderately exposed.

Judging from the structure, the credit risk pressure on subsidiaries is greater than that of the parent bank. Since 2017, Bank of Ningbo's parent bank's overdue loan ratio has remained in a narrow range, and the data for the second quarter of this year dropped slightly by 4 bps to 0.9% from the beginning of the year, and credit risk is manageable; however, the subsidiary's overdue loan ratio has continued to rise in recent years. In particular, after merging Ningyin Consumer Finance, the subsidiary's overdue loan rate increased by 19 bps to 1.05% compared to the beginning of the year.

Bank of Ningbo's bad generation rate (annualized) in the first half of this year was 1.2%, up 38 bps year on year, and the bad generation rate remained high. The increase in its provision plan did not accelerate with loan investment. At the end of the second quarter, the loan ratio was 3.19%, down 8 bps from month to month. Among them, the loan ratio of parent banks and subsidiaries all declined, and provision coverage fell 11 pcts month-on-month to 420.55%.

Due to the speeding up of loan write-off and disposal, income tax expenses have increased, which has dragged down the profit growth rate. In the second quarter of this year, the Bank of Ningbo's income tax expenses increased by 80.2% year on year, up 10.7 percentage points from the Q1 growth rate, mainly because Bank of Ningbo had previously foreclosed credit impairment losses, but now it actually became bad debts (reflected in a significant increase in loan write-offs since this year), which led to a drastic reduction in deferred income tax assets, which in turn caused deferred income tax expenses from -0.477 billion yuan reported last year to 0.403 billion yuan of income reported in the interim report this year.

Investment advice: According to this year's interim report, the Bank of Ningbo's highlights is that net interest spreads have only declined slightly year-on-year, the scale has maintained high growth, and revenue is resilient. Furthermore, the sharp increase in other comprehensive income that will be reclassified into profit and loss in the future will further support future revenue; however, weak revenue growth in the wealth management business and a marked increase in the rate of bad generation are a drag. In particular, asset quality is still worth focusing on in the future.

Considering the sharp decline in banking sector valuations in previous years, Bank of Ningbo's valuation also hit a record low. As far as the banking sector and Bank of Ningbo are concerned, we think we should no longer be pessimistic.

The Bank of Ningbo's revenue growth rate is expected to be 6.49% in 2024, and the net profit growth rate is 4.77%. It gives a buy-A investment rating. The target price for 6 months is 26 yuan, which is equivalent to 0.85X PB in 2024.

Risk Warning: Retail Credit Risks Are Significantly Exposed