Incidents:

Bank of Communications released its 24-year financial report. The company achieved revenue of 132.3 billion yuan in the first half of the year, YoY -3.5%; a non-performing ratio of 1.32%, and a non-performing provision coverage rate of 205%.

Review summary:

Interest income increased by 2.24%, and operations were steady. 24H1's revenue was 132.3 billion yuan, YoY -3.5%; net profit to mother was 45.3 billion yuan, YoY -1.6%. The year-on-year growth rate turned negative for the first time in the past two years. In the business split, it was found that the net interest income of the enterprise achieved a year-on-year increase of 2.24%, or about 84.2 billion yuan, in a low interest rate environment; the non-interest revenue side did not perform well, YOY -12.15%.

In terms of interest spreads, it is shown that cost control effectively supports the rise in interest spreads. The specific performance is as follows: 1. 24H1 corporate net interest spreads bucked the trend and rose slightly by 2 bps from 24Q1 to 1.29%; 2. On the asset return side, the average return on 24H1 interest-bearing assets was 3.48%, 11 bps narrower than in 2023. Among them, although there was an increase in the size of the credit base, loan interest income was 150.7 billion yuan (YOY -1.7%) due to the decline in yield, accounting for less than 0.5 pct of total interest income compared to the beginning of the year. 3. On the debt cost side, effective cost management freed up some space to ease the pressure on interest spreads. The 24H1 interest-bearing debt cost ratio was 2.36%, down 9 bps from the end of 23. Among them, the deposit cost ratio was 2.21%, a decrease of 12 bps compared to 2023.

Asset return side: Loan support is expanded, and capital flows to the public sector. 24H1 asset structure: loans, financial investments, interbank transactions, and divestments account for 59%, 29.4%, and 6.2% of interest-bearing assets, respectively. Interest-bearing assets totaled $13,675.1 billion, up 0.3% from 2023. Credit situation: 24Q2 loans to public loans increased by 5.2% compared to the beginning of the year, mainly benefiting from loan investment in the construction and infrastructure sectors (up 20.2% and 5.1% from the end of 23; accounting for 12.3% and 33.4% of loans). Interest-bearing debt side: restructuring of retail and public deposits, and the overall share of deposits rebounded. The 24H1 corporate interest-bearing debt balance was 11352.8 billion yuan, down 0.6% from the end of 23. Deposit Status:

24Q2 retail and public absorption balances were +6.9% and -2.7%, respectively, compared to the beginning of the year, showing slight structural adjustments.

In terms of non-performing loans: The non-performing rate has stabilized, and the margin of safety of provision has been raised. In the first half of 2024, the Bank of Communications had a bad balance of 109 billion yuan, accounting for 1.32%, a slight decrease of 1 bps over the previous month. The loan provision rate and non-performing provision coverage rate for the first half of 2024 were 2.7% and 204.8%, respectively, up 0.11 percentage points and 9.6 percentage points from the end of last year, respectively.

Changes in the top ten shareholders: Hong Kong Central Clearing (Agent) Co., Ltd., the fourth largest shareholder, increased its holdings by 0.01pct to 10.39%; the sixth largest shareholder, Hong Kong Central Clearing Limited, reduced its holdings by 0.14%.

Profit Forecast and Valuation:

The basic interest income of the Bank of Communications 24H1 remains stable and positive. The results in managing debt costs are remarkable, and the quality of assets is improving. We forecast a year-on-year increase of 1.07%, 2.13%, and 2.03% in 2024-2026, corresponding to current BPS prices: 13.70, 14.87, and 16.03 yuan. Using the dividend discount model, the estimated target price was 8.84 yuan, corresponding to 0.65x PB in 24 years, which was raised to a “buy” rating.

Risk warning: Macroeconomic shocks, sharp exposure of non-performing assets, and high pressure on interest spreads.