Incidents:

On October 24, Changshu Bank released its 2024 three-quarter report. The first three quarters achieved revenue of 8.37 billion yuan, an increase of 11.3% over the previous year, and net profit of 2.98 billion yuan, an increase of 18.2% over the previous year. The weighted average return on net assets (ROAE) was 14.96%, up 0.8 pct year over year.

Comment:

Revenue and profit remained stable and high in double digits. The year-on-year growth rates of Changshu Bank's revenue, profit before provision, and net profit to mother in the first three quarters were 11.3%, 18.5%, and 18.2%, respectively. The growth rates decreased by 0.7, 4.3, and 1.4 pct, respectively, from 1H24. Revenue and profit growth showed strong resilience. Among them, the growth rates of net interest income and non-interest income were 6.2% and 44.2% respectively, with changes of +0.1 and -12.4 pcts from the first half of the year. Split the 1-3Q24 profit growth structure: scale and non-interest rate are still the main contributors, driving performance growth rates of 31.7 and 15.9pct respectively; judging from marginal changes, narrowing interest spreads and slowing provision increases have reduced the negative impact on performance; slowing scale expansion and declining non-interest growth have weakened the profit-driving effect.

The pace of table expansion has slowed slightly, and the asset structure continues to be optimized. At the end of 3Q24, Changshu Bank's total assets, interest-bearing assets, and loans grew by 10.4%, 11.6%, and 9.7%, respectively. The growth rates decreased by 5.1, 1.8, and 1.6 pct respectively from the end of 2Q, and the pace of table expansion slowed down. In terms of loans, 1-3Q added 17.2 billion, a year-on-year decrease of 7.8 billion; 3Q added 0.8 billion in a single quarter, a year-on-year decrease of 3.1 billion, accounting for 69% of interest-bearing assets, which remained roughly the same in the same year. In the context of an industry where demand for effective financing is weakening, corporate credit investment has slowed since 2Q based on the high growth rate in the previous period. At the structural level, public, retail, and notes were added by 0.5, -1.6, and 1.9 billion dollars respectively during the 3Q quarter, up 0.1 billion, 4.6 billion less, and 1.4 billion more. Notes provided strong support for credit growth. In a situation where employment and income expectations are weak, residents' balance sheets need to be repaired, and retail loan growth is under relative pressure. In terms of non-credit assets, financial investment and interbank assets added 2.4 billion and -1.5 billion dollars during the 3Q quarter, an increase of 1.3 billion and a decrease of 2.9 billion yuan over the same period last year. Together, the two accounted for 31% of interest-bearing assets, which remained roughly the same in the same year.

Deposits have maintained rapid growth, and the trend of regularization has improved. At the end of 3Q24, the year-on-year growth rates of Changshu Bank's interest-paying liabilities and deposits were 11% and 17%, respectively. Compared with the end of 2Q, changes of -4.5 and +0.3 pct, respectively, the share of deposits in interest-paying liabilities increased by 1.6 pct to 89% over the middle of the year. 1-3Q deposits increased by 36.7 billion, an increase of 6.9 billion over the previous year; of these, 3Q added 1.8 billion in a single quarter, an increase of 0.8 billion over the previous year. By customer type, corporate and personal deposits increased by 0.6 billion yuan and 0.9 billion respectively during the 3Q quarter, with a year-on-year increase of 2.2 billion and a decrease of 1.3 billion yuan. At the end of the quarter, personal deposits accounted for 71%, which remained the same in the same year. Investment in public loans increased during the quarter or led to a derivative increase in deposits. Looking at term types, current and term deposits both increased by 0.7 billion yuan during the quarter, an increase of 3 billion yuan and an increase of 4 billion, respectively; of these, the public active period added 1.1 billion, an increase of 3.8 billion over the previous year; term deposits at the end of the quarter accounted for 72%, a slight decrease of 0.2 pct from the year.

In terms of market debt, 3Q bonds payable and interfinancial debt decreased by 2.3 billion and 3.2 billion, respectively, a year-on-year decrease of 0.4 billion and a decrease of 13 billion, respectively. The share of market debt in interest-bearing debt decreased by 1.6 pct to 10.9% from the end of the previous quarter. During the quarter, the company simultaneously reduced market-type liabilities with high interest payment costs and optimized the debt-side capital structure.

NIM is 4 bps narrower than 1H24 to 2.75%. 1-3Q Changshu Bank's NIM was 2.75%, 11 and 4 bps narrower than in 2023 and 1H24, respectively. Interest spreads are still under pressure to narrow against the backdrop of insufficient effective demand. The calculation results showed that the company's 1-3Q yield on interest-bearing assets was 4.87%, which was basically the same as in the first half of the year. Against the backdrop of declining loan interest rates, the company maintained stable asset-side pricing through structural adjustments. The 1-3Q interest-paying debt cost ratio was 2.34%, up 2 bps from the first half of the year, and the fixed deposit payment rate was a drag. Since the beginning of the year, the company has lowered the deposit listing interest rate twice. The cumulative reduction in interest rate on term deposits for residents of various terms ranges from 30-55 bps, and the reduction in interest rates for official periods ranges from 20-45 bp. The cost improvement effect will gradually become apparent as stock products expire and repricing. Looking back, asset-side pricing is still under relative pressure in 4Q and next year as the effects of the reduction in stock mortgage interest rates are compounded by LPR interest rate cuts. Meanwhile, state-owned banks have recently begun a new round of deposit listing interest rate cuts. It is estimated that Changshu Bank will follow up the adjustments, and the control of debt-side costs will be strengthened, which can partially ease the pressure on interest spreads to narrow.

Non-interest revenue grew at a rate of 44%, and its contribution to revenue continued to increase. 1-3Q Changshu Bank's non-interest revenue was 1.47 billion yuan (YoY +44%), accounting for an increase of 1.1 pct to 17.5% over the first half of the year. Among them, (1) net transaction fee and commission revenue was 0.07 billion yuan, an increase of 0.05 billion over the previous year, accounting for 4.4% of non-interest income, a slight increase over 1H24. (2) Net other non-interest income of 1.4 billion (YoY +40%) is still the main driver of revenue growth.

Among them, the investment income was 1.34 billion (YoY +93%), and the liquidation of floating profits in bond transactions boosted revenue growth.

Profit and loss from changes in fair value - -0.11 billion, a year-on-year decrease of 0.47 billion, or due to fluctuations in the market value of traded bond investment due to the impact of the volatile adjustment in the bond market at the end of the 3Q period.

Defects, interest rates fluctuate, and risk compensation capacity remains high. At the end of the 3Q, Changshu Bank's non-performing rate and concern rate were 0.77% and 1.52% respectively, up 1 bps and 16 bps respectively from mid-year. The risk situation for small and micro business loans was affected by changes in the economic environment. During the 3Q quarter, the company's non-performing balance increased by 0.03 billion, which was basically the same; during the quarter, credit impairment losses were 0.3 billion yuan, a year-on-year decrease of 0.015 billion; 3Q credit impairment and revenue were 10.5%, down 1.6 pct year on year. The loan ratio and provision coverage rate at the end of the quarter were 4.09% and 528.4% respectively, down 2 bps and 10.4 pct respectively from the end of 2Q. The increase in provision planning decreased, reducing the drag on performance, and risk offsetting capacity remained high.

Capital adequacy ratios at all levels have increased at the margin of safety. At the end of the 3rd quarter, the company's core level 1, level 1, and capital adequacy ratios were 10.6%, 10.6%, and 14%, respectively, up 0.7 pct from the end of the 2nd quarter. The risk-weighted asset growth rate was 8.5%, down 5 pct from the end of 2Q, and capital consumption weakened. Currently, the company still has 6 billion convertible bonds to be converted into shares. The conversion ratio is low. The conversion price is 6.89 yuan/share, the strong ransom price is 8.96 yuan/share. The current stock price is 7.17 yuan/share, which has already touched the conversion price, and there is still 25% room until the strong redemption price. The company's profit growth rate remains high, the ability to supplement endogenous capital is strong, there is still room for additional capital, and an ample margin of capital safety also provides strong support for subsequent scale expansion.

Profit forecasting, valuation and ratings. As a high-quality agricultural commercial bank in Jiangsu and Zhejiang, Changshu Bank adheres to the development direction of “downward, biased, small, and credit”. The unique MCP mobile credit exhibition model+solid credit risk management and control basis+offsite exhibition license advantages have jointly built a moat for the company's small and micro business. In recent years, “inclusive finance+big retail transformation” has gone hand in hand, and small retail businesses have strong growth momentum. Against the backdrop of insufficient demand for effective financing, the company still maintains a high momentum of expansion. At the same time, the “small and diversify” development position has established a strong pricing advantage, and NIM has shown strong resilience. We maintain the company's 2024-26 EPS forecast of 1.29, 1.49, and 1.68 yuan. The current stock price corresponds to PB valuations of 0.74, 0.66, and 0.58 times, respectively, and the corresponding PE valuations are 5.6, 4.8, and 4.3 times, respectively, maintaining a “buy” rating.

Risk warning: Economic recovery and recovery in financing demand fell short of expectations, the decline in the customer base of major banks intensified, and interest rates on small and micro loans continued to decline.