Incident: Bank of Ningbo disclosed its 2024 three-quarter report. 9M24 achieved revenue of 50.8 billion yuan, a year-on-year increase of 7.4%, and achieved net profit of 20.7 billion yuan to mother, an increase of 7.0% over the previous year. The 3Q24 non-performing rate remained flat at 0.76% month-on-month, and provision coverage fell 15.7pct to 405% quarter-on-quarter. Performance was better than expected, and asset quality was in line with expectations.

The acceleration in net interest revenue drove outstanding revenue performance. Performance growth was better than expected: 9M24 Bank of Ningbo's revenue increased 7.4% year on year (1H24 was 7.1%, forecast 6.5% in the forward-looking forecast), and net profit to mother increased 7% year on year (5.4% for 1H24, 6% in the forward-looking forecast). Judging from the driving factors, ① the steady increase in volume and price increases driven by high net interest income is the main contribution to better-than-expected revenue. 9M24's net interest revenue increased 16.9% year-on-year, with a quarterly growth rate of more than 20%, contributing 10.8pct to revenue growth. Of these, scale growth contributed 12.2pct, and interest spreads dragged down 1.4pct. ② The results of reducing costs and increasing efficiency have been shown. The decline in the cost-revenue ratio is the main support for the acceleration of the three-quarter report's performance. 9M24's cost-revenue ratio decreased 3.7 pct to 33.6% year on year, contributing 6.2 pct to profit growth rate (1H24 contributed 3.1 pct). ③ Earnings continued to decline, while non-interest income contributed negatively to revenue growth under investment income; unrealized surpluses in financial assets also caused phased increases in actual tax rates to drag down profits, and this portion is expected to feed back profits as earnings are realized. 9M24's non-interest income fell 9% year over year, with revenue falling by 30%, dragging down revenue growth by 3.4 pct; other investment-related non-interest income tax liabilities increased by only 0.3%, and the increase in the book value of financial assets caused an increase in deferred income tax liabilities (offsetting for deferred income tax assets), and an increase in actual tax rates dragged down the profit growth rate by 4.9 pct (this part will once again benefit the actual tax rate decline as deferred income tax assets increase after earnings are realized and offset). ④ Actively increase the risk of provision disposal, and provision dragged down profit growth by 1.6 pct.

The focus of the third quarterly report: ① Retail efforts help optimize the structure, and more flexible asset allocation is also a direct reflection of the Bank of Ningbo's ability to actively acquire assets. The 3Q24 loan growth rate was about 20%, and new retail loans were added in a single quarter, accounting for nearly 50% of the new loans. On this basis, the pressure on relatively low-yield notes dropped by nearly 15 billion yuan in a single quarter. ② Actively adjusting the structural interest spread trend is also better than that of peers.

9M24 Bank of Ningbo's interest spread was 1.85%, down only 4 bps year on year (1H24 listed banks fell by an average of 20 bps year on year).

③ Effective verification of retail risk control capabilities will be the core of re-establishing a growth premium in the next stage. In the short term, affected by the risk exposure of some long-tail customer groups, Bank of Ningbo also showed an upward trend in bad generation. The 9M24 bad generation rate was close to 1% (0.7% in 2023). The relatively solid provision base enabled performance to make up for good and stabilize the low bad rate. In a context where the economy is bottoming out and the recovery trend has yet to be verified, achieving a smooth peak in bad generation as soon as possible is the core of verifying that Bank of Ningbo's risk control ability can cross the cycle and re-establish a growth premium.

Credit investment continues to be booming with public retail sales, and active structural adjustments help to stabilize interest spreads: Bank of Ningbo loans increased 19.6% year-on-year in 3Q24 (20.6% in 2Q24), adding a total of 203 billion yuan in loans in the first three quarters, with an increase close to the full year of 2023. Among them, 46.4 billion yuan was added in loans in the third quarter. Judging from the structure, 38 billion yuan was added to the public sector and 22.8 billion yuan to retail sales. More effective growth in general loans also gave room for structural adjustment. The net pressure drop in notes in the third quarter was close to 15 billion yuan. In terms of price, thanks to structural optimization, the 9M24 interest spread was 1.85%, a year-on-year decrease of only 4 bps, and a decrease of 2 bps compared to 1H24. Based on the average calculation at the end of the early stages, the 3Q24 yield on interest-bearing assets rose slightly by 1 bp to 3.91% from quarter to quarter, and the interest-paying debt cost ratio remained basically flat at 2.05% from quarter to quarter.

The defect rate is low and stable under active measures to dispose of defects, while provision coverage continues to decline, focusing on the trend of retail risk generation:

In 3Q24, the Bank of Ningbo's non-performing rate remained flat at 0.76%. According to the 9M24 annualization, write-back, and recycling rate of defects of 0.97% (about 0.7% in 2023), the attention rate for forward-looking indicators increased by 6 bps to 1.08% from quarter to quarter, which is expected to be related to retail risk generation and consumption subsidiary stock risk digestion. Since this year, Bank of Ningbo's write-offs have basically remained above 3 billion in a single quarter. The cumulative write-offs in the first three quarters exceeded 10.2 billion yuan, an increase of more than 20% over the full year of 2023. Stock reserves are the core of maintaining stable asset quality.

However, the 3Q24 provision coverage rate continued to drop by more than 15 pcts to 405% from quarter to quarter. The cumulative decline in provision coverage since 2022 is close to 120 pcts, which objectively reflects that the short-term asset quality of Bank of Ningbo is also facing challenges. “Low risk, high premium” is the growth label given to the Bank of Ningbo by the market. Achieving a steady peak in bad generation as soon as possible and conveying a stable and predictable performance growth trend is the core of Bank of Ningbo regaining the valuation growth premium.

Investment analysis opinion: Active acquisition of assets and flexible structures to steadily support the Bank of Ningbo's high-quality revenue growth acceleration. We expect Bank of Ningbo to overcome the current economic cycle earlier and reproduce the alpha growth attributes of improved performance. Maintaining the profit growth forecast, net profit to mother is expected to grow at a year-on-year rate of 5.3%, 6.6%, and 9.3% in 2024-2026, respectively. The current stock price corresponds to 2024 PB 0.86 times, maintaining a “buy” rating.

Risk warning: Retailing risks such as retail were exposed, asset quality deteriorated beyond expectations; economic recovery fell short of expectations, and interest spreads continued to be under pressure.