3Q24 results are basically in line with our expectations

Chongqing Agricultural Commercial Bank announced third-quarter results: 1-3Q24 revenue -1.8% YoY, net profit to mother +3.5% YoY; 3Q24 revenue -2.7% YoY, net profit to mother -0.6% YoY. The results are basically in line with our expectations.

Development trends

The scale expansion was steady, and interest spreads narrowed slightly from month to month, in line with expectations. 3Q24 assets, loans, and deposits were +4.8%, +5.3%, and +3.5%, respectively, and +0.5%, +1.2% quarter-on-quarter. We calculated that the average net interest spread, return on interest-bearing assets, and interest-paying debt cost ratio at the beginning and end of the 3Q24 period were 1.49%, 3.10%, and 1.78%, respectively, +2bp, -3bp, and -7bp quarter-on-quarter.

Other non-interest income did not increase significantly from last year's low base, which we believe is the main reason why net profit for a single quarter fell short of expectations. Other non-interest income in 3Q24 increased 19% year on year and fell 47% month on month. There was no significant increase from the lower base in the same period last year. Regulations placed more restrictions and requirements on agricultural and commercial banks' own investment.

The cost-to-revenue ratio continues to decline. 3Q24 operating expenses decreased 2.2% year on year, and the cost to revenue ratio remained relatively stable year on year. The company is committed to improving the level of refined management, distinguishing basic insurance categories, driver drivers, and management drivers around expenses, carrying out cost operation analysis according to business lines, and taking more measures to reduce costs and increase efficiency.

Asset quality and provision estimates are in line with expectations. At the end of 3Q24, the defect rate decreased by 2 bps to 1.17%. We estimate that the bad generation rate after write-off was 0.86%, up 17 bps year on year, but down from 2Q24, asset impairment losses decreased 12% year on year, and provision coverage decreased by 1.7 ppt to 358.6% quarter over quarter.

Looking forward to the future, we are still optimistic about the corporate investment value brought by Chongqing's regional growth potential and local competitive advantage. 1) In October, we went to the county branch of the Chongqing Agricultural Commercial Bank to conduct research. We estimated that the loan share of 22% and deposit share of 34% 1 at the end of 2023. The higher market share came from its extensive network layout, the “Chongqing Agricultural Management” digital intelligence system for rural collective economic organizations, the “Chongqing Agricultural Bank” system for the government and large and medium-sized enterprises, the “Chongqing Express Payment” merchant payment system for merchants, etc.; 2) Chongqing Agriculture is also committed to “the construction of the two cities of Chengdu and Chongqing”, the “New Land and Sea Channel in the West”, “336” 18 Building a Modern Manufacturing Cluster System”, “Three Attacks and One “Revitalize” to open up new business opportunities.

Profit forecasting and valuation

Keep profit forecasts unchanged. Currently, A shares correspond to 0.5 times and 0.5 times 2024E and 2025E net market ratios, with dividend rates of 5.2% and 5.5%, respectively; H shares correspond to 0.3 times and 0.3 times net market ratios, with dividend ratios of 7.9% and 8.6%, respectively, and there is more room for H shares to rise. Maintaining an outperforming industry rating, considering Chongqing's economic growth potential and debt conversion expectations to improve asset quality, keep the target price of A shares unchanged at 6.37 yuan, raise the target price of H shares by 20.4% to HK$5.76; A shares correspond to 0.56 and 0.52 times the 2024E and 2025E net market ratios; H shares correspond to 0.46 times the 2024E net market ratio and 0.43 times the 2025E net market ratio, respectively. There is room for improvement of 9.8% and 34.9% of the current stock price, respectively.

risks

Regional economic performance fell short of expectations, and the decline in net interest spreads exceeded expectations.