Core views

Bank of Hangzhou's third-quarter results were in line with expectations. Interest spreads are relatively stable. They have maintained a profit release of nearly 20% through “volume compensation” and provision of fewer “apologies with abundance,” and it is expected that they will continue to maintain the first tier among listed banks. Looking forward to the future, the current economic environment in Zhejiang leading the country is the core regional beta of the Bank of Hangzhou. Combined with demand for infrastructure and government-related projects such as smart city construction in Hangzhou, the Bank of Hangzhou is expected to maintain its current rapid credit growth and excellent asset quality, thus achieving rapid profit release and leading the ROE level of the industry.

occurrences

On October 21, the Bank of Hangzhou released its 2024 three-quarter report: 9M24 achieved operating income of 28.494 billion yuan, up 3.9% year on year (1H24:5.4%); realized net profit to mother of 13.87 billion yuan, up 18.6% year on year (1H24:20.1%). The 3Q24 defect rate was 0.76%, which remained flat quarter-on-quarter; 3Q24 provision coverage fell 1.9pct quarter-on-quarter to 543.3%. 1H24 has an interim dividend of 0.37 yuan per share, with an interim dividend rate of 21.9% (net profit margin to mother).

Brief review

1. Revenue quality continues to be optimized, and performance continues to grow at a high level. In the first three quarters, the Bank of Hangzhou achieved operating income of 28.494 billion yuan, up 3.9% year on year. Among them, the net interest income growth rate increased by 3.4 pct of 3.9% compared to the first half of the year. The recovery in growth rate was partly due to the Bank of Hangzhou's extremely strong scale growth trend, and on the other hand, due to the significant improvement in deposit costs, the net interest spread rebounded against the trend. At the same time, the Bank of Hangzhou 9M24 core revenue (net interest income+net handling fee revenue) growth rate increased by 3.2 pct to 2.0% compared to 1H24, thanks to the narrowing of the decline in revenue. In terms of other non-interest income, 9M24's growth rate declined slightly to 3.9%, which was the main reason for the decline in revenue. With steady revenue performance, excellent asset quality, and a strong reserve base, the Bank of Hangzhou still achieved growth of more than 15% in the first three quarters, and is expected to continue to maintain the first tier among listed banks.

In terms of performance attributions, low provision and scale growth are the main contributors to the Bank of Hangzhou's high performance growth rate. 9M24 contributed 14.6% and 10.1%, respectively. Although the narrowing of interest spreads caused a 7.6% drag, the drag was significantly narrower than the 9.5% in 1H24. Bank of Hangzhou is currently one of the few high-quality banks that can supplement capital through endogenous growth. Thanks to relatively strong credit demand in the region, the scale is expected to continue to grow by more than double digits. At the same time, with strong support from a very high level of provision coverage, its annual performance is expected to achieve a high growth level of 15% or more.

The Bank of Hangzhou's mid-term dividend was officially implemented. According to the 24-year mid-term profit distribution plan, 1H24 paid 0.37 yuan per share, with an interim dividend rate of 21.9% (net profit margin to mother).

2. Debt costs have improved significantly, and net interest spreads have rebounded month-on-month. Bank of Hangzhou's 9M24 net interest spread (estimated value) was 1.43%, slightly higher than the level of the first half of the year. The 3Q24 net interest spread (estimated value) was 1.46%, up 6 bps from quarter to quarter. Among them, the 3Q24 interest-bearing asset price (estimated value) fell 2 bps to 3.19% month-on-month, while the cost of interest-bearing debt (estimated value) fell 8 bps to 2.10% from quarter to quarter. Continued improvement in debt costs was the main reason why Bank of Hangzhou's net interest spread was able to recover month-on-month in the third quarter.

In terms of asset prices, due to factors such as insufficient demand for effective credit and multiple LPR cuts, the Bank of Hangzhou's asset pricing is still under some pressure. However, in terms of investment structure, while adhering to the advantages of traditional politics-related business, the Bank of Hangzhou has also increased its investment in the retail sector in recent years, accounting for 68.6% and 31.4% of the increase in public and retail sales in the third quarter, respectively. Under the joint support of the scale of public and retail loans, Bank of Hangzhou's loans and assets increased 15.9% and 12.7% year-on-year respectively in 3Q24, leading the comparable industry.

On the debt side, thanks to the decline in deposit listing interest rates and the gradual release of deposit cost improvements, the Bank of Hangzhou's debt costs were significantly optimized in the third quarter, which strongly underpinned interest spreads. Looking ahead, the Bank of Hangzhou accounts for a lower share of mortgage loans. It is expected to be less affected by the reduction in stock mortgages. At the same time, high-quality urban commercial banks represented by the Bank of Hangzhou are expected to follow suit after the deposit listing interest rate of major state-owned banks has been lowered again, compounded by the improvement in deposit structure after the stock market sentiment improved since October, which is expected to fully hedge against the downward impact of asset pricing. According to estimates, if the deposit listing interest rate adjustment is implemented, it will boost the Bank of Hangzhou's net interest spread by 6.4 bps. The total package of policies will have a negative impact of 1.5 pct and 2.1 pct on its 25-year revenue and profit, which is significantly lower than that of peers.

3. The quality of assets is excellent, and provisions remain high. In 3Q24, the Bank of Hangzhou's non-performing rate remained flat to 0.76% from quarter to quarter, and provision coverage fell 1.9 pct to 543.25% from quarter to quarter. The provision base was sufficient, laying the foundation for continued rapid profit growth. Looking at forward-looking indicators, the interest rate increased by 6 bps from quarter to quarter to 0.59%. At the same time, the 9M24 plus write-off failure rate was 0.58%, an increase of 35 bps over the previous year. It is expected to be mainly related to the deterioration in retail asset quality and the continued clearance of real estate risks. Along with the continued introduction of a package of incremental policies, the restoration of economic expectations will benefit the improvement of customers' ability to repay, and the asset quality of the Bank of Hangzhou is expected to be further consolidated.

4. Investment advice and profit forecast: Bank of Hangzhou's third quarter results were in line with expectations. Interest spreads are relatively stable. They have maintained a profit release of nearly 20% through “volume compensation” and provision of fewer “apologies with abundance,” and it is expected that they will continue to maintain the first tier among listed banks. Looking forward to the future, the current economic environment in Zhejiang leading the country is the core regional beta of the Bank of Hangzhou. Combined with demand for infrastructure and government-related projects such as smart city construction in Hangzhou, the Bank of Hangzhou is expected to maintain its current rapid credit growth and excellent asset quality, thus achieving rapid profit release and leading the ROE level of the industry. Revenue growth in 2024-2026 is expected to be 3.5%, 7.8%, 9.0%, and profit growth rates of 18.2%, 18.6%, and 19.0%. In addition, the mid-term dividend plan has been officially implemented, with a 1H24 dividend of 0.37 yuan per share, with an interim dividend rate of 21.9% (net profit margin to mother). Currently, the Bank of Hangzhou's stock price only corresponds to 0.69 times 24-year PB, maintaining the buying rating and leading position in the banking sector.

5. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some companies with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.