Incident: Changshu Bank disclosed its 2024 three-quarter report. 9M24 achieved revenue of 8.4 billion yuan, a year-on-year increase of 11.3%, and realized net profit to mother of 3 billion yuan, an increase of 18.2% over the previous year. The 3Q24 non-performing rate rose 1bp to 0.77% quarter-on-quarter, and provision coverage fell 10.4pct to 528% quarter-on-quarter. Performance and asset quality are in line with expectations.

Behind the double-digit increase in revenue, there is not only the contribution of non-interest income, but also stemming from the steady performance of net interest income. High performance growth once again validates excellent performance attributes. 9M24 Changshu Bank's revenue increased 11.3% year over year (1H24 was 12%), and net profit to mother increased 18.2% year over year (1H24 was 19.6%). Judging from the driving factors, ① net interest income performance was stable, establishing a solid revenue base. 9M24's net interest revenue increased 6.2% year over year, contributing to the revenue growth rate of 5.3 pcts, of which the increase in scale contributed 11.1 pcts, and interest spreads dragged down 5.8 pcts (1H24 dragged down 6.7 pcts). ② Investment income is driving a high increase in non-interest rates, but the magnitude is expected to weaken. 9M24's non-interest revenue increased 44% year over year (57% for 1H24), contributing to a revenue growth rate of 6pct (1H24 was 6.6pct). ③ Unlike other banks, Changshu Bank has achieved faster profit growth through cost reduction and efficiency, and reserves still have a negative contribution to profit performance. 9M24's cost-revenue ratio decreased by 4.1 pct to 35.2% year on year, contributing to profit growth rate of 7.5 pct, while provisions contributed to negative profit growth rate of 1.4 pct.

The focus of the third quarterly report: ① The weakening contribution of non-interest income is already expected. The next stage will focus on the trend of recovering net interest income.

Since this year, Changshu Bank's net interest income growth rate has ranked second among agricultural commercial banks, and it is also the only bank with positive net interest income growth among agricultural commercial banks. Behind this is its ability to allocate assets and liabilities better than its peers. This is also the key to verifying its growth attributes and achieving strong revenue and excellent performance in the context of generally increasing operating pressure on the industry. ② The phased replenishment of notes and the recovery of effective retail demand are the keys to boosting credit investment. Loan growth slowed to 9.7% in 3Q24. New loans were added by only 0.8 billion yuan in a single quarter (3.8 billion yuan during the same period), including 1.9 billion yuan in notes and a decrease of 1.6 billion yuan in retail loans. ③ It is estimated that the reduction in interest spreads is narrowing, and asset pricing is stabilizing under the controlled investment structure or the main reason. The 9M24 interest spread was estimated to be 2.73%, down 2 bps from 1H24. Of these, the estimated 3Q24 interest spread increased by 1 bp to 2.71% from quarter to quarter. ④ An increase in bad generation is expected due to the concentrated pressure of the small and micro customer base. A solid provision base ensures that the quality of assets is safe. Although bad news generation and attention rates have increased, it is more reflected in a phased reflection of pressure from small and micro customer groups rather than a shift in the nature of credit policies.

On the basis of unused stock reserves, Changshu Bank still achieved a low and stable non-performing ratio, and a solid level of provision in the first tier of the industry also ensures a smooth transition in asset quality.

Asset-side investment is actively slowing down, and the phased replenishment of notes makes up for the downward pressure on retail sales. The recovery in effective retail demand is the key to boosting credit investment: Changshu Bank loans increased 9.7% year-on-year in 3Q24 (11.3% in 2Q24), adding 17.2 billion yuan in new loans in the first three quarters, a year-on-year decrease of nearly 8 billion yuan. Among them, new loans were added by about 0.8 billion yuan in the third quarter, a year-on-year decrease of about 3 billion yuan. From a structural perspective, the decline in loans in the third quarter was dragged down by the retail side. The net decrease in retail loans in a single quarter was 1.6 billion yuan. On this basis, 0.5 billion yuan and 1.9 billion yuan were added to public and notes respectively. It is expected that, on the one hand, it reflects the objective situation where demand from small to medium customer groups in small and medium-sized entities such as Xiaowei is weak, and is also related to Changshu Bank's active management and investment pace.

The decline in interest spreads has subsided, and asset pricing is stabilizing under controlled investment. The improvement in debt costs will continue to underpin interest spread performance in the next stage, but the core of stabilizing interest spreads is still the restoration of small effective demand: the 9M24 Changshu Bank interest spread is 2.73% (calculated as “net interest income/average daily income assets”), down 19 bps year over year (1H24 is a decrease of 22 bps), a decrease of 2 bps from 1H24. Among them, the 3Q24 interest spread was estimated to be 2.71%, up 1 bp from quarter to quarter. According to the average balance estimate at the end of the beginning, the 3Q24 yield on interest-bearing assets rebounded 3 bps to 4.81% from quarter to quarter, and the interest-bearing debt cost ratio increased 7 bps to 2.35% from quarter to quarter.

The increase in bad generation is in line with expectations, but the key is whether there are sufficient resources to deal with it in a timely and adequate manner to maintain a low and stable level of defect rate under write-off efforts: it is estimated that 9M24 annualized bad generation rate after write-off and recycling was 0.86% (0.63% in 2023), and the attention rate increased by 16 bps to 1.52% from quarter to quarter. It is expected that, on the one hand, it is related to the risk exposure of some Xiaowei customer groups after the expiration of the pre-term deferred debt payment policy. On the other hand, it also reflects a phased increase in the operating pressure of the Xiaowei customer group. However, on this basis, Changshu Bank fully and promptly mitigated risk, and achieved full digestion without using stock provision resources and relying only on incremental calculation. The 3Q24 defect rate stabilized at a low level of about 0.77%, only a slight increase of 1 bp from quarter to quarter, and the provision coverage rate remained close to 530%. At the same time, a solid provision base also ensured a smooth transition in asset quality.

Investment analysis opinion: Even in the context of increased operating pressure on the industry, Changshu Bank has achieved a benchmark report card of high-quality banks with strong revenue and excellent performance. It is optimistic that Changshu Bank will continue to achieve steady and leading profit performance in the process of physical demand recovery, driving valuation to the first tier of the industry. Maintaining the profit growth forecast, net profit to mother is expected to grow at a year-on-year rate of 17.3%, 15.1%, and 15.3% in 2024-2026, respectively. The current stock price corresponds to 2024 PB 0.76 times, maintaining a “buy” rating.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; downside risks such as small, medium, micro, etc. were exposed, and asset quality deteriorated beyond expectations.