Description of the event

Bank of Qingdao 2024H1 revenue grew 12.0% year on year (19.3% in the first quarter), net interest income grew 6.0% year on year (7.7% in the first quarter), and net profit to mother grew 13.1% year on year (18.7% in the first quarter). At the end of the second quarter, the defect rate was 1.17%, down 1BP from month to month, provision coverage rate was 234%, up 2 pcts month-on-month, and up 8 pcts from the beginning of the period. Furthermore, a previous board resolution was announced, agreeing to elect Mr. Jing Zailun as the chairman of the 9th board of directors and appoint Mr. Wu Xianming as the president. The term of office is the same as that of the 9th board of directors.

Incident comments

Loan investment pursues efficiency and stability, and tightens retail risk appetite. The Bank of Qingdao's new strategic plan emphasizes the priority of efficiency and does not simply pursue scale expansion, which is fully reflected in credit growth in the first half of the year. The growth rate of loans was 8.1% compared to the beginning of the period, ranking in the middle of urban commercial banks, but the growth rate of core public loans reached 12.2%, and key sectors such as private sector, manufacturing, and inclusiveness all maintained steady growth. Retail loans fell 1.4% from the beginning of the period, with consumer loans falling 7.0%, which is the core affecting the growth rate of total loans. It mainly adjusts the structure and volume of internet loans and tightens credit card risk strategies. In the current environment, there are certain risk fluctuations in the retail credit industry. Proactively managing related risk exposures in advance is a timely and effective measure. Deposits increased by 6.6% compared to the beginning of the period. Since 2023, the debt structure has been significantly optimized, and the share of deposits has increased markedly to stabilize net interest spreads.

Net interest spreads continued to be strong, and net interest income bucked the trend. The net interest spread for the first half of the year was 1.77%, the same as the first quarter, and only 6BP down from the full year of 2023. The advantage among comparable commercial banks is already very clear. The effects of optimizing the balance and liability structure continue to be reflected. The share of deposits in interest-bearing liabilities remains at a high level of 70%, driving net interest income to maintain a relatively rapid and positive growth rate, leading the way among listed banks. The decline in debt costs is still the core influencing factor. The deposit cost ratio in the first half of the year fell by 10BP to 2.13% compared to the full year of 2023. Among them, corporate activity, corporate fixed term, and regular resident period decreased by 12BP, 23BP, and 22BP respectively. The decline was quite significant among listed banks. The trend of interest rate cuts on the loan side continues. The yield on public loans fell 18BP to 4.82% compared to the full year of 2023, and is still higher than that of some peers. Retail loans fell 38BP to 5.01%, reflecting the impact of risk appetite adjustments, which are more stable from an asset quality perspective. In terms of non-interest income, net transaction fee revenue declined slightly year-on-year. The main agency insurance business declined due to policies, but handling fee revenue from investment banking and transaction banking businesses all continued to grow, leveraging the advantages of comprehensive financial licenses to hedge the impact of the decline in agency business. At the same time, revenue from financial management business increased slightly by 2.4% year on year. Investment income is the core driving the high growth of total revenue, and other non-interest income increased 54.8% year over year.

The trend of improving asset quality is clear, and the net bad generation rate continues to decline. The negative net generation rate of Bank of Qingdao plus write-off in the first half of 2024 has been reduced to 0.50%. It has continued to decline by 7BP from the full year of 2023, and has continued to improve since 2020. Currently, the absolute value is at the leading level of commercial banks in the city. At the end of the second quarter, the share of concerned loans rose slightly by 9BP to 0.58% month-on-month. The absolute level is still very low among peers. At the same time, asset quality certification standards are strict, and all loans overdue for 60 days or more are included in bad caliber. We estimate that the credit cost ratio for loans in the first half of the year was about 0.88%, up from 2023, to drive the continued increase in provision coverage (which has been rising continuously since 2020) and consolidate risk offsetting capabilities. The amount accrued for non-loan credit impairment decreased year-on-year, supporting net profit to maintain a relatively rapid growth rate.

Investment advice: Bank of Qingdao has entered a new cycle of improving efficiency and rising profits, thanks to the management's clear new three-year strategic plan. Maintaining performance growth and ROE trends has a comparative advantage in the industry by optimizing the balance and liability structure, stabilizing net interest spreads, continuously improving asset quality, and declining credit costs. Based on the closing price on September 5, 2024, the 2024 PB valuation is only 0.51X, which has not fully reflected fundamental changes. It focuses on recommending and maintaining a “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.