Description of the event

Bank of Communications released its 2024 semi-annual report. Revenue for the first half of the year fell 3.5% year on year (growth rate of -0.03% in the first quarter), net profit to mother fell 1.6% year on year (growth rate +1.4% in the first quarter), and net interest income increased 2.2% year on year (2.2% growth rate in the first quarter). At the end of the second quarter, the non-performing loan ratio remained flat at 1.32% month-on-month, and the provision coverage rate was 205%, up 8 pcts month-on-month.

Incident comments

Net interest income bucked the trend and maintained positive growth. Revenue declined year-on-year in the first half of the year, but net interest income increased year-on-year, benefiting from a recovery in interest spreads, and there was a drag on non-interest income. Affected by the deceleration in revenue, net profit to mother declined year-on-year, and was generally in line with expectations.

Scale expansion slowed, and retail growth accelerated in the second quarter. Loans increased 3.9% in the first half of the year and 0.8% month-on-month in the second quarter. Among them, public, bill, and retail loans increased 0.3%, -3.0%, and 2.2% month-on-month respectively. Affected by the decline in total credit volume across the country, scale growth slowed. Among the various retail products, operating loans and credit cards increased by 9.1% and 1.3% respectively compared to the beginning of the period, and the mortgage size decreased by 0.1%. Deposits increased by 1.1% in the first half of the year, and demand deposits accounted for 33.8% at the end of the second quarter, down 1.1 pct from the beginning of the period.

Net interest spreads continued to rise, and deposit costs improved significantly. The net interest spread for the first half of the year was 1.29%, up 2BP from the first quarter, continuing the steady trend in the first quarter, thanks to improved deposit costs. Loan yields in the first half of the year decreased by 22BP compared to 2023, with yields on public and retail loans falling by 18BP and 30BP respectively. Deposit costs improved dramatically. Deposit cost rates in the first half of the year decreased by 12 BP compared to the full year of 2023. Among them, the cost rate for public active and time deposit deposits decreased by 5 BP and 15 BP respectively. Benefiting from manual interest compensation regulations, the cost rate for personal time deposits decreased by 17 BP. As early high-priced deposits gradually matured and repriced, deposit interest rate reduction dividends continued to be released over the past two years. It is expected that deposit costs will continue to improve and ease the pressure on net interest spreads.

Net income from handling fees dragged down, and investment income had a high base last year. Net non-interest revenue in the first half of the year fell 12.2% year on year, net revenue from handling fees fell 14.6% year on year, and revenue from bank cards, agency business, and investment banking business fell 20%, 40%, and 22% respectively.

Other non-interest income, such as investment income, fell 10.2%, and the base figure rose due to an increase in individual equity IPO valuations in the first half of last year.

The non-performing rate remained stable, and provision coverage continued to rise. The non-performing rate remained flat month-on-month at the end of the second quarter. The net generation rate of defects before write-off in the first half of the year was 0.49%, a steady, moderate decrease of 3BP compared to the full year of 2023. Among key areas, the real estate non-performing loan ratio at the end of the second quarter decreased by 2BP to 4.97% compared to the beginning of the period, and the risk was generally manageable. The retail loan non-performing ratio at the end of the second quarter increased by 17BP to 0.98% compared to the beginning of the period. Among them, the non-performing ratio of other retail loans such as mortgages, credit cards, operating loans, and consumer loans increased by 11BP, 40BP, 9BP, and 1BP, respectively. Fluctuations in retail risk are common to the industry and are in line with expectations. At the end of the second quarter, provision coverage continued to rise month-on-month, returning above 200% for the first time since 2014, and risk offsetting capacity continued to improve.

The mid-term dividend ratio is 32%, which remains stable with the 2023 dividend ratio. It was announced that the 2024 mid-term dividend ratio is 32% (the ratio of net profit attributable to common shareholders), which is basically the same as the 2023 dividend ratio. At the same time, it was revealed in the announcement that the interim dividend dividend is expected to be paid in early 2025, which is basically in line with market expectations.

Investment advice: Continued improvement in deposit costs led to a rebound in net interest spreads. Net interest income bucked the trend, the overall decline in profit was in line with expectations, asset quality continued to improve, and provisions continued to increase. As a major state-owned bank, the Bank of Communications has high stability and certainty in its dividend distribution capacity, and its dividend ratio advantage is obvious. Revenue for the full year of 2024 is expected to grow 0.3% year on year, and net profit to mother will grow 0.6% year on year. Currently, the PB valuation for A shares in 2024 is 0.57x, the 2023 dividend rate is 5.0%, and the dividend rate for H shares is 7.1%. Institutional attention has continued to increase since the third quarter, and continued to focus on recommendations to maintain the “buy” rating.

Risk warning

1. The downward pressure on the economy increased, and net interest spreads continued to narrow; 2. Asset quality fluctuated, and the non-performing rate increased markedly.