Description of the event

Ruifeng Bank's revenue for the first half of 2024 increased 14.9% year on year (15.3% year-on-year growth rate in the first quarter), and net profit to mother increased 15.4% year on year (14.7% year-on-year growth rate in the first quarter). The non-performing loan ratio at the end of the second quarter remained flat at 0.97% month-on-month, with a provision coverage rate of 324%, a significant increase of 19 pcts month-on-month, and asset quality continued to improve.

Incident comments

Small and micro loans have maintained a good growth rate, and the scale has been steadily expanding. Demand for credit is weak in the current macroeconomic environment. Shaoxing and Yiwu, where the company is located, have relatively stable economies. Loans in the first half of the year increased 7.3% from the beginning of the period, down 0.7% in the second quarter, discounts on major notes contracted 21.3% month-on-month, and public loans and personal loans increased 1.4% and 0.8%, respectively. Regulatory inclusive small and micro loans increased by 7.4% compared to the beginning of the period, reflected in an 8.0% increase in personal operating loans and a 22.5% increase in wholesale and retail loans to the public. However, mortgage loans fell 9.8% from the beginning of the period and have been shrinking continuously since 2022, reflecting factors such as weak new demand and early stock repayment. In terms of public loans, loans for water conservancy, electricity, leasing, and business services involving government infrastructure increased by a total of 22.7% compared to the beginning of the period, supporting the scale of credit. The company is generally maintaining a steady trend of market expansion, and is expected to maintain a credit growth rate of around 10% throughout the year. Deposits increased 5.7% month-on-month in the second quarter, up 10.4% from the beginning of the period.

Net interest spreads and loan interest rates declined, and deposit cost ratios improved. Net interest spread for the first half of the year was 1.54%, down 6BP from the first quarter and 19BP from the full year of 2023, resulting in a 2.5% year-on-year decline in net interest income for the first half of the year. The expansion in the size of assets (a sharp increase in the scale of financial investment) mitigated the downward impact of some net interest spreads. At the same time, other earnings, mainly small subsidies from the central bank, reached 24.09 million yuan in the first half of the year, an increase of 47% over the previous year, feeding back revenue. Loan yields decreased by 39 BP compared to the full year of 2023, with yields on public and personal loans falling by 31 BP and 50 BP, respectively. The deposit cost ratio fell by 4BP in the first half of the year. The cost ratios for time deposits and savings time deposits of major enterprises fell by 10BP and 9BP respectively, and debt costs entered an improvement cycle.

The revenue growth rate driven by other non-interest income this year is a common characteristic of small and medium-sized banks. The total investment income plus fair value profit and loss increased 88% year-on-year, benefiting from the bond market. At the same time, the company's characteristic equity investment income also maintained considerable growth.

Asset quality remains stable, and provision coverage is increasing at an accelerated pace. The retail asset quality index in the banking sector fluctuated this year. The quality of the company's customer base was stable. In the first half of the year, the negative net generation rate with write-offs dropped slightly to 0.60% over the same period last year, and the stability was superior to that of retail banking peers. Strengthen credit cost accrual efforts to accelerate the increase in provision coverage to 324%. The non-performing rate of personal loans increased by 28BP to 1.77% from the beginning of the period, and the quality of public loans is very stable. It is expected that after retail risk stabilizes, asset quality indicators will maintain a trend of continuous optimization, and there is still room for further improvement in future provision coverage.

Strategic investment in small and medium banks is progressing steadily, and ROE continues to rise. This year, the shares in Cangnan Agricultural Commercial Bank were further increased by 2.58%, and the total shareholding ratio rose to 7.58%. The one-time capital gain constituted 79.1 million yuan of non-operating income. The investment matters of the Zhuji Agricultural Commercial Bank, which were announced at the end of last year, are also expected to be implemented within this year. Strategic equity investment is expected to continue to contribute to investment income and capital gains in the future. It is expected that more projects will continue to advance and increase ROE.

Investment advice: The company is Xiaowei Dark Horse Bank. The performance growth rate is excellent and asset quality continues to improve. It invests in shares in high-quality agricultural and commercial banks in Zhejiang, and does not rely on the economic cycle to increase ROE. The ban was lifted after three years of listing in June of this year. It is expected that small and medium shareholders are willing to hold shares for a long time, and there is no pressure to reduce their holdings after the ban is lifted. In 2024, revenue is expected to grow 10.0% year on year, and net profit to mother will grow 12.6% year on year, ranking among the highest in the industry, and the future growth path is clear. Currently, the valuation is only 0.50x2024PB. The valuation is low and clearly undervalued. It is highly recommended and maintains a “buy” rating.

Risk warning

1. Investment and shareholding progress fell short of expectations; 2. Net interest spreads exceeded expectations and declined sharply.