Investment advice

2024 is the beginning of the Bank of Nanjing's new five-year strategy. We continue to pay attention to the regional economy of Jiangsu Province and the implementation of its new strategy, which may drive the bank's profitability to remain leading the industry and achieve an increase in valuation.

rationales

The new five-year strategic plan: from scale expansion to value creation. Over the past ten years, relying on the superior regional economic environment in Jiangsu Province, the Bank of Nanjing has achieved rapid scale and profit growth, and contributed a lot of benefits to the positive layout of financial market business. By the end of 1H24, the Bank of Nanjing had assets of 2.5 trillion yuan and total loans of 1.2 trillion yuan. Over the past 15 years, the compound annual growth rate was more than 20%. Currently, with the transformation of China's economy to high-quality development, the Bank of Nanjing has begun a new round of five-year strategic planning, which emphasizes “value creation”. It no longer simply pursues scale and speed, but also focuses more on improving customer service and operational quality and efficiency, and improving management efficiency through three types of measures: organizational simplification, management refinement, and lean operation.

The development vision is “a first-class domestic regional integrated financial service provider”. In 1H24, the Bank of Nanjing's corporate business, capital business, and personal business contributed 53%, 52%, and -5% of profit before tax, respectively. According to DuPont analysis, its industry-leading ROE mainly comes from other non-interest income. 1) Corporate finance is the basic market. At the end of 1H24, loans to public loans and public deposits accounted for 70% and 65% respectively, of which demand deposits accounted for 18%. Since 2017, the Bank of Nanjing has been committed to covering the entire transaction process of enterprises in the industrial chain through a transactional banking strategy to obtain settlement funds at the lowest possible cost. 2) The financial market sector is an important part of the Bank of Nanjing's comprehensive operation. This sector includes interbank business, capital operation business, asset custody business, and Bank of Southern Bank of China wealth management business. While generating profits, it emphasizes synergy with other businesses.

3) The Bank of Nanjing started the construction of a large retail sector in 2015. At the end of 1H24, consumer credit and credit card loans accounted for 15%, retail loan yield was 6.63%; retail AUM was 801.3 billion yuan.

Strengthen efforts to dispose of faults, and start the new five years lightly. After the risks of individual large and medium-sized private enterprises in Jiangsu Province were revealed in 2015-2018, the Bank of Nanjing's bad generation rate increased, provision coverage declined, and net profit growth slowed, reaching a low level of 0.5% in 2023. As the Bank of Nanjing actively identifies and disposes of poor stocks and actively adjusts credit investment to control additional negative pressure, we expect that the pressure on asset quality may ease. The non-performing rate at the end of 1H24 was 0.83%, the annualized non-performing generation rate after write-off was 1.31%, the share of concerned loans was 1.07%, the overdue rate was 1.25%, and the provision coverage rate was 345%.

Profit forecasting and valuation

Reviewing the Bank of Nanjing's stock price performance since its listing, we found that its elasticity was higher than that of its peers. P/B valuations mostly fluctuated within the 0.5-0.9x range, which was more related to profit growth, financing requirements, and asset quality.

The company issued 20 billion yuan convertible bonds in 2021, and the current stock price is 10.5% of the strong ransom price. 1H24 Bank of Nanjing's annualized capital margin was 14.5%, and the net profit growth rate returned to 8.5% year-on-year. We kept its 2024E/2025E 10% net profit growth forecast unchanged, and kept the profit forecast basically unchanged. Currently, Bank of Nanjing's stock price is trading at 0.69x 2024E P/B, with a 2024E dividend rate of 5.9%. We maintain our outperforming industry rating and target price of 12.11 yuan, corresponding to 0.83 x 2024E P/B, corresponding to 20% upward space.

risks

The decline in the growth rate of scale exceeded expectations, the decline in interest spreads exceeded expectations, and the quality of assets deteriorated beyond expectations.