2Q24 revenue was higher than our expectations, and profit was slightly lower than our expectations. The Bank of Beijing announced 2Q24 results: 1H24 revenue increased 6.4% year on year, net profit to mother increased 2.4% year on year; 2Q24 revenue increased 5.0% year on year, and net profit to mother decreased 0.4% year on year. The 2Q24 revenue growth rate was higher than our expectations, mainly due to the increase in other non-interest income; the profit growth rate was slightly lower than our expectations, mainly due to increased operating expenses and provisions. The company is guided by the “Digital Beijing Bank” strategic system to create characteristic business systems such as “child-friendly banks,” “banks that specialize in the entire life cycle of enterprises,” and “commercial banks driven by artificial intelligence.”

Development trends

The scale has maintained steady growth. At the end of 1H24, total assets increased 8.6% year on year, loans increased 9.6% year on year, deposits increased 12.9% year on year, and scale growth was steady. The net increase in 1H24 loans came mainly from manufacturing, leasing business services, scientific research and technical services. The company increased “specialized, special and new” enterprise customer development, and technology finance/green/manufacturing loans increased 30%/26%/20% compared to the beginning of the year. Regional restructuring and optimization focused on Beijing while increasing loan investment in the Yangtze River Delta region. The net increase in loans in the Beijing/Zhejiang region in 1H24 was 48%/21%, respectively.

The decline in interest spreads narrowed month-on-month. The average daily net interest spread for 1H24 fell 7 bps year over year, down 7 bps from 2023 to 1.47%, mainly due to the decline in yield on interest-bearing assets. Net interest income for 2Q24 increased 5.8% year over year, and we estimate that the net interest spread for the single quarter decreased by 3 bps month-on-month to 1.33%. We believe that the main contribution to the narrowing of the month-on-month decline in interest spreads comes from the 14-bp month-on-month decline in the interest-paying debt cost ratio. The company took “interest spread protection” as its main task, improved the public pricing management system, and strengthened debt cost control. At the end of 1H24, public/personal deposit costs were reduced by 12 bp/3 bps, respectively, compared to the end of 2023.

Other non-interest income grew faster than expected. 2Q24's non-interest revenue increased 2.8% year over year, with net handling fee revenue falling 17.9% year over year. We expect mainly due to a year-on-year decrease in agency and commission business revenue; 1H24 agency revenue decreased 17% year over year, and fee revenue related to financial management business decreased 16% year over year. 2Q24 Other non-interest income continued to grow 8.9% year over year against the backdrop of a high base for the same period last year, with investment income up 16% year over year. We expect it mainly to come from transactional financial assets.

The cost-revenue ratio increased year over year. 2Q24 operating expenses increased 16.3% year on year, and the cost to revenue ratio was +2.4ppt to 24.9% year on year. The company continues to promote digital transformation, strengthen investment in strategic key businesses and fintech, and optimize the professional talent team.

Strengthen efforts to clear bad write-offs. At the end of 2Q24, the non-performing ratio remained flat at 1.31% month-on-month. The share of concerned loans rose 9 bps to 1.87% at the end of 4Q23, and the share of overdue loans rose 10 bps to 1.82% month-on-month. We expect the negative pressure to be generated mainly from retail loans. The bank's retail loan non-performing ratio rose by 20 bps to 1.35% at the end of 4Q23; credit costs rose 31 bps month-on-month to 1.06% at the end of 2Q24.

At the same time, the company stepped up efforts to clean up bad disposal. The cumulative pressure drop in 1H24 focused on business exposure of 12.4 billion yuan. After write-off, the cumulative bad generation rate rose by 19 bps to 0.98% compared to the end of 2023, and the provision coverage rate decreased by 5ppt to 208.2% month-on-month.

Profit forecasting and valuation

The current profit forecast remains essentially unchanged. The current stock price corresponds to 0.41 times the 2024E net market ratio and 0.39 times the 2025E net market ratio. Maintaining an industry rating and target price unchanged, corresponding to 0.50 times the 2024E net market ratio and 0.47 times the 2025E net market ratio, there is 21.1% upside compared to the current stock price.

risks

Other non-interest income fluctuations exceeded expectations, and asset quality deteriorated beyond expectations.