Incident: Bank of Ningbo disclosed its 2024 three-quarter report. Revenue for the first three quarters of this year increased 7.45% year on year (7.13%), profit before provision increased 13.52% year on year (10.12% in the interim report), net profit to mother increased 7.02% year on year (5.42% in the interim report), and the performance growth rate rebounded marginally, slightly better than expected. Our comments are as follows:

In the third quarter of this year, the net profit of the Bank of Ningbo increased 10.25% year-on-year in a single quarter. The main driving factors include accelerated expansion of scale and a decline in the cost-revenue ratio; slowing growth in non-interest income, increased provision increases, and tax increases dragged down profit growth.

The scale is expanding at an accelerated pace. In the third quarter of this year, Bank of Ningbo's interest-bearing assets (average daily balance) increased 21.66% year on year, up 3.22 percentage points from the Q2 growth rate. Against the backdrop of a slowdown in overall banking scale growth and a continued decline in social finance growth, Bank of Ningbo still bucked the trend and maintained a relatively rapid trend of interest-bearing asset growth, which also confirmed the management's determination to forge ahead and seize market share. Judging from the structure of interest-bearing assets, credit and interbank assets are growing rapidly, while the growth rate of financial assets is gradually slowing down. It is expected that mainly due to the rapid decline in market interest rates in the third quarter, Bank of Ningbo will take the opportunity to sell some bonds and allocate them to other assets with higher yields.

In terms of loans, the Bank of Ningbo added 46.6 billion yuan in credit in the third quarter of this year, mainly contributing to the growth of general public loans. The new general public loans added in the first three quarters of this year were nearly double that of the same period last year. It is expected to mainly invest in leasing and business services, manufacturing, wholesale and retail, real estate (park properties, guaranteed housing projects), and mainly small and medium-sized enterprises. From a regional perspective, it is concentrated in Zhejiang and Jiangsu regions. In Q3, the Bank of Ningbo drastically reduced earnings on notes discounts, and retail credit recovered slightly from month to month. It is expected to mainly benefit from the acceleration of investment by Ningyin Consumer Gold Subsidiary.

Continuing to increase active debt absorption efforts shows that there is currently a strong will to expand the balance sheet. Bank of Ningbo's corporate deposit growth recovered marginally in the third quarter, and retail deposit growth was still average. The growth rate of deposits continued to be slower than credit growth. In order to make up for the debt gap, the Bank of Ningbo increased its efforts to issue payable bonds this year. It is expected that the issuance of deposit certificates will accelerate markedly, maintaining the momentum of accelerated table expansion through active debt expansion.

Net interest spreads declined slightly month-on-month and remained flat year-on-year. In the third quarter of this year, Bank of Ningbo's net interest spread for a single quarter was 1.81%, which was the same year on year. It was better than other peers, which dragged down net interest income growth significantly; it fell 4 bps month-on-month. Specifically:

① Asset-side return decreased by 9 bps month-on-month. In the third quarter of this year, Bank of Ningbo's yield on interest-bearing assets was 3.90%, continuing to decline from month to month. This is basically in line with industry trends, mainly affected by the decline in LPR in July and the relatively weak market demand.

② Debt-side costs decreased by 4 bps month-on-month. In the third quarter of this year, Bank of Ningbo's interest-bearing debt cost ratio was 2.06%. Since this year, debt costs have continued to improve. It is expected to benefit mainly from lower deposit costs and the fact that interest rates in the interbank market are still low.

③ Looking ahead, Bank of Ningbo's asset-side interest rates are still under downward pressure, and credit restructuring is expected to hedge part of it; debt-side deposit repricing is expected to gradually be realized in the future, and the net interest spread performance may be better than that of peers.

Non-interest income growth is weak. Bank of Ningbo's non-interest revenue fell 17.9% year on year in the third quarter of this year, and the decline was further expanded from Q2. Among them, net revenue from processing fees and commissions fell 41% year on year in Q3, mainly due to a marked increase in handling fee expenses in the face of declining handling fee revenue. The agency business is expected to be the main influencing factor.

Other non-interest net income fell 5.3% year on year. However, the growth rate of Bank of Ningbo's other non-interest net income was still slower than that of other comparable peers. Bank of Ningbo's other comprehensive income for the first three quarters of this year was 4.572 billion yuan, up about 200% year on year. Other comprehensive income for Q3 this year was also significantly higher than the same period last year. In the future, if Bank of Ningbo gradually disposed of bonds included in the OCI category, it will realize the benefits, which will support Bank of Ningbo's future revenue growth.

Expenses continued to be controlled, and the cost-revenue ratio declined markedly year over year. In the third quarter of this year, the cost to revenue ratio of Bank of Ningbo was 34.8%, down 7.5 percentage points year on year, and business and management expenses fell 11% year on year. The main reason was that the company comprehensively promoted refined management, streamlined administrative expenses, rationally planned network layout, and effectively controlled the increase in expenses. At the same time, the increase in employee expenses was also clearly slow. It is expected to be mainly due to controlling employee remuneration. This is also currently being done by the entire banking industry and even the financial industry to reduce costs and increase efficiency.

Bad spawning slows down. At the end of the third quarter of this year, Bank of Ningbo's non-performing rate remained flat month-on-month, and the increase in attention rate was significantly slower than in Q2; the bad generation rate (annualized) in the first three quarters was 1.16%, an increase of 34 bps over the previous year, but since the first quarter of this year, the rate of bad generation has slowed down from quarter to quarter.

Although the quality of Q3 assets has fluctuated, there has been no significant deterioration, and it is expected that the main benefits are: on the one hand, Q3 retail loan investment has accelerated and the denominator has expanded, but the bad effects have not yet been revealed; on the other hand, the “Notice on Accomplishing Loan Renewal Efforts to Improve the Level of Financial Services for Small and Micro Enterprises” issued by the regulatory authorities on September 24 allows all small and micro enterprises, small and micro business owners, individual businesses and farmers to renew operating loans, etc., and optimizes loan risk classification criteria.

Looking forward to the future, the income and cash flow expectations of the residential sector have not improved significantly. The perception of micro operations is weak. The quality of retail credit assets is expected to continue to show an upward trend, and retail credit risk still needs to be focused on.

Income tax expenses have increased due to faster loan write-off and disposal. In the third quarter of this year, Bank of Ningbo's income tax expenses increased 59.7% year on year, down 20.6 percentage points from the Q2 growth rate. The increase in income tax expenses was mainly due to the fact that Bank of Ningbo previously withheld credit impairment losses, but now it has actually become bad debts (reflected in a sharp increase in loan write-offs since this year, Q1 write-off transfers increased 61% year on year, Q2 increased 131% year on year, and Q3 increased 74% year on year), which led to a sharp increase in deferred tax assets, which in turn led to a sharp rise in deferred income tax expenses. Income tax expenses have been increased, causing a drag on profits.

Investment advice: According to this year's three-quarter report, the Bank of Ningbo's revenue and profit growth rate all showed an improving trend. The highlights were that the net interest spread pressure eased slightly, cost control showed slight results, and bad generation slowed down; the downside is that the drag on processing fees is still obvious. Looking ahead, Bank of Ningbo's fundamentals are expected to bottom up marginally, and we need to pay attention to retail credit risk exposure trends.

There is a clear shift in macroeconomic policy. Fiscal policy supports the economy and underpins risks. Economic expectations will gradually improve, and the performance and valuation of the Bank of Ningbo is expected to benefit. Bank of Ningbo's revenue growth rate is expected to be 7.77% in 2024, and net profit growth rate to mother is 7.72%. The investment rating is Buy-A. The target price for 6 months is 30.39 yuan, which is equivalent to 1.0XPB in 2024.

Risk Warning: Retail Credit Risks Are Significantly Exposed