The 1H24 results were in line with our expectations.

The company's 1H24 net profit/pre-provision profit/operating income was +2.0% /flat/ +0.3% year-on-year, and the performance was in line with our expectations.

Development trends

Revenue achieved positive growth. The year-on-year growth rate of 1H24 company's net profit/net profit before provision was +3.8pp/+3.2pp/+2.1ppt compared to 1Q24, respectively, leading the market in terms of revenue and profit growth. The revenue growth rate was mainly contributed by the faster asset growth rate and other non-interest income. 1H24's net interest income, net handling fee income, and other non-interest income were +0.1%/-7.9%/+18.9% year-on-year, respectively. The growth rate was +0.9pp/+2.9pp/ +7.8ppt compared to 1Q24, respectively. 1H24 asset impairment losses decreased by 1.3% year on year, contributing to the net profit growth rate of 2.0ppt.

Interest spreads improved month-on-month. 1H24's net interest spread was 1.45%, down 21 bps from the previous quarter, and up 1 bps from the first quarter. We speculate that the improvement in interest spreads mainly comes from debt cost savings contributions after cleaning up manual interest payments, with a view to calculating the average value at the beginning of the end of the year. 2Q24's debt costs decreased by 10 bps over 1Q24, contributing to an increase in interest spread performance.

The rate of table expansion has been steady, and the share of loans in the county area has increased. The company's 1H24 loans increased 11.9% year-on-year, and the growth rate decreased by 1ppt compared to 1Q24. The company's county loans continued to grow rapidly. At the end of the second quarter, the proportion of county loans in domestic loans increased to 40.1%. Loans related to the grain sector, rural industry, and rural construction increased by 17.8%, 22.8%, and 13.6% respectively from the beginning of the year. The growth rate was faster than the bank's loan growth rate, and the county strategy continued to advance.

The level of provision is adequate. At the end of the second quarter, the company's non-performing loan ratio was 1.32%, the same as at the end of the first quarter. The target loan ratio was 1.42%, the same as at the end of 2023. The overdue loan ratio was 1.07%, down 1 bps from the end of 2023, and the quality of book assets was stable. The annualized bad generation rate of 1H24 Company was 0.59%, a year-on-year decrease of 7 bps, and bad generation remained stable. At the end of the second quarter, the company's provision coverage rate was 303.9%, up 0.72ppt from the end of the first quarter, 4.0%, and down 0.01ppt from the end of the first quarter. They all remained at the highest level among major banks, and the level of provision was sufficient.

The level of capital is sufficient, and the medium-term dividend plan was announced. 1H24's core Tier 1 capital adequacy ratio was 11.13%, down 0.24ppt from the end of the first quarter and higher than the regulatory requirement of 2.63ppt. The company announced a mid-term dividend plan. It plans to pay a cash dividend of 0.1,164 yuan (before tax) per share. The dividend rate is 30% based on net profit attributable to mother, and the annualized dividend rate is about 5.2%, which has dividend investment value.

Profit forecasting and valuation

Profit forecast for 2024/2025 was slightly raised. Considering the improvement in the company's credit costs, we raised the company's 2024E net profit by 3.1% to 276.4 billion yuan, and the company's 2025E net profit by 3.1% to 281.2 billion yuan. The current A share price corresponds to 2024/2025 0.6 times/0.6 times P/B, and the H share price corresponds to 2024/2025 0.4 times/0.4 times P/B. Keeping the target price of A shares unchanged at 5.14 yuan, corresponding to 0.7 times the 2024 P/B and 0.6 times the 2025 P/B, there is 13.7% upside compared to the current stock price, maintaining the industry rating. Keeping the target price of H shares unchanged at HK$4.40, corresponding to 0.5 times the 2024 P/B and 0.5 times the 2025 P/B, there is 27.4% upside compared to the current share price, maintaining an outperforming industry rating.

risks

Economic recovery falls short of expectations, and real estate and local financing platforms are at risk.