Description of the event

Bank of Xiamen released its 2024 mid-year report. Revenue for the first half of the year grew at a year-on-year rate of -2.2% (+3.7% in the first quarter), net profit growth rate of -15.0% (growth rate of +4.4% in the first quarter), and net interest income -10.6% year-on-year (year-on-year growth rate of -12.6%). The non-performing loan ratio at the end of the second quarter was 0.76%, up 2BP month-on-month. It was the same as at the beginning of the period. The provision coverage rate was 396%, down 16 pcts month-on-month.

Incident comments

Interest & accruals dragged down revenue, and increased impairment accruals led to a decline in profits. Revenue for the first half of the year fell 2.2% year on year. Among them, net interest income fell 10.6% year on year. There was a drag. The main net interest spread continued to decline and the expansion of interest rate scale slowed. Net non-interest income increased 23.8% year over year, with net handling fee revenue falling 8.1% year over year, and the main agency business declined year on year due to falling rates; other non-interest income, such as investment income, increased 36% year on year to support revenue. Due to the large year-on-year increase in loan impairment amounts, the amount of credit impairment losses in the income statement increased 144% year-on-year, leading to a decline in net profit.

Scale expansion remains conservative, driving credit growth to the public. Loans in the first half of the year increased by 1.7% compared to the beginning of the period and 1.4% month-on-month in the second quarter. The scale expansion was still quite restrained. At the end of the second quarter, the size of public, retail, and notes was +7.1%, -1.7%, and -13.8%, respectively, compared to the beginning of the period. For the public sector, leasing, business services, and manufacturing were the main growth points. Demand for retail sales was weak due to the external environment, and the scale contracted in the first half of the year. Among them, operating loans increased by 1.4% compared to the beginning of the period, while mortgage loans and consumer loans were -7.9% and -1.7% respectively compared to the beginning of the period. The pressure to repay mortgages early is still heavy. The size of deposits fell 1.1% in the first half of the year, and demand deposits accounted for 24.8% at the end of the second quarter, down 3.6 pct from the beginning of the period. The pressure for regularization is still quite obvious.

Net interest spreads continue to be pressured, and conservative risk appetite has led to long-term low loan yields. The net interest spread for the first half of the year was 1.14%, down 14BP from the full year of 2023. The net interest spread is still under pressure. Asset-side loan yields continued to decline. Loan yields in the first half of the year fell 26BP to 4.10% compared to the full year of 2023. Due to conservative risk appetite and intense competition in loans in Xiamen, loan yields were low for a long time. Deposit costs began to improve. The deposit cost rate in the first half of the year fell by 3BP to 2.44% compared to the full year of 2023. As early high-cost deposits were gradually repriced, the impact of the reduction in deposit listed interest rates gradually became apparent. However, due to the increase in the share of regular accounts and changes in deposit structure, deposit costs improved less than in the same industry. However, the share of higher time deposits is expected to benefit more fully from deposit interest rate cuts in the future.

Asset quality is generally stable, and credit costs are rising year over year. The non-performing rate rose 2BP to 0.76% month-on-month at the end of the second quarter, but the absolute level was still excellent. At the end of the second quarter, the share of concerned loans and overdue loans increased 85BP and 42BP from the beginning of the year, and the net generation rate of non-performing loans before write-off in the first half of the year was 0.77%, up 26 BP from the full year of 2023, mainly reflecting fluctuations in retail risk, which is common to the industry. In addition, the relatively low growth rate of denominator side loans also had an impact. The non-performing personal loan ratio at the end of the second quarter was 0.99%, up 48BP from the beginning of the year. It was mainly affected by the external environment. The risk of personal business loans fluctuated, and the decline in the size of retail loans on the denominator side had a certain impact in the first half of the year. Regarding the quality and safety of public loan assets, the non-performing ratio for public loans was 0.73% at the end of the second quarter, down 36 BP from the beginning of the year. Loan impairment loss provisions increased by 0.17 billion year over year, and higher credit costs led to a decline in profits. At the end of the second quarter, the provision coverage rate fell 16 pcts month-on-month to 396%, but the absolute level was high.

Investment advice: The decline in revenue in the first half of the year mainly reflects pressure on net interest spreads. The return on assets was low for a long time due to prudent risk appetite, profits declined due to increased credit impairment accruals, and short-term performance was under pressure. The non-performing rate rose month-on-month but was still at a low level in the industry, but overall asset quality indicators were excellent. The revenue growth rate for the full year of 2024 is expected to be -1.1%, and the net profit growth rate to mother is -5.3%. The current valuation is 0.50x2024PB, and the 2023 dividend rate is 6.4%, maintaining the “buy” rating.

Risk warning

1. Demand for social financing continues to be sluggish, and credit growth is under pressure; 2. The downward pressure on the economy has increased, and the quality of bank assets has deteriorated markedly.