Introduction to this report:

Both revenue and net profit of the Shanghai Agricultural Commercial Bank achieved positive growth in the first half of the year, slightly exceeding expectations, and asset quality remained steady.

The mid-term dividend was implemented for the first time, and the dividend rate was increased. The target price was raised to 7.85 yuan, and the holdings increase rating was maintained.

Key points of investment:

Investment advice: Nearly 95% of the loans of the Shanghai Agricultural Commercial Bank are located in the Shanghai region, and the asset quality is generally stable. The company's network is deeply cultivated in the suburbs, and has built a differentiated advantage in the fields of science and innovation, inclusion, and retail finance to compete misplaced with peers. In 2024, the mid-term dividend was implemented for the first time, and the dividend rate was raised from 30% to 33%; based on the company's core Tier 1 capital adequacy ratio of 14.68%, it is expected that the dividend ratio will be maintained throughout the year, and the corresponding dividend ratio will increase by 0.6 pct to 6.3%. According to the interim report, the adjusted net profit growth forecast for 2024-2026 is 2.6%, 4.0%, and 6.2%, and the corresponding BVPS is 12.60 (-0.12), 13.76 (-0.17), and 14.74 (new) yuan/share. Considering the valuation shift and dividend rate increase, the target price was raised to 7.85 yuan, corresponding to 0.62 times PB in 2024, maintaining an increase in holdings rating.

The 24Q2 revenue and net profit growth rate turned negative, but the cumulative increase remained positive in the first half of the year, and the growth rate is expected to pick up in the second half of the year. 24Q2 revenue declined 3.1% year over year, mainly affected by a 3.2% decline in net interest income. Specifically, the Q2 scale growth rate slowed slightly, and due to weak demand, the company weakened the scale assessment and carried out steady implementation. Net interest spreads remained flat month-on-month and fell 16 bps year-on-year, mainly due to a faster decline in loan pricing, a decrease in the share of retail loans with relatively high returns, and the continuation of the trend of deposit regularization. However, 24H1 improved significantly compared to 23H2 deposit costs by 11 bps, and the year-on-year decline in interest spreads is expected to subside in the second half of the year. Q2 Net income from handling fees continued to decline due to lower bank premium rates, but the impact will gradually subside in the second half of the year. On the profit side, due to the 23Q2 company's large one-time non-operating income of 0.48 billion yuan, net profit in 24Q2 fell 0.2% despite lower credit impairment compared to the same period last year. Excluding this effect, 24Q2 net profit growth rate was close to 13%.

The growth rate of loans slowed in 24Q2 but the incremental structure improved, and the deposit growth rate increased by 0.7 pct to 6.9%.

The company's demand for effective credit was sluggish. The growth rate of Q2 loans fell 0.3 pct to 6.2% compared to Q1, but the share of public, notes, and retail in the incremental structure improved from 55%, 93%, and -48% to 47%, 43%, and 9%. On the deposit side, compared to the 2.5 billion new deposit in Q1, Q2 increased by 27 billion, but demand deposits fell 3.1 pct to 29.5% compared to the beginning of the year, and the trend of regularization continued.

Asset quality has improved marginally, and retail and real estate are still under pressure. The defect rate and attention rate at the end of 24Q2 compared to -2bp and -4bp at the end of Q1 to 0.97% and 1.23%, respectively, the same as at the beginning of the year. Defects in public real estate have both declined, but it will still take time to absorb stock risks, and the retail defect rate is +20bp to 1.32% compared to the beginning of the year, putting pressure on the industry. The provision coverage rate at the end of Q2 was 372%, which is fully accrued.

Risk warning: Structural risk exposure exceeds expectations, credit demand continues to weaken