Incident: Sunon Bank disclosed its 2024 three-quarter report. 9M24 achieved revenue of 3.2 billion yuan, a year-on-year increase of 4.8%, and achieved net profit of 1.6 billion yuan to mother, an increase of 12.2% over the previous year. The 3Q24 non-performing rate remained flat at 0.91% from quarter to quarter, and provision coverage fell 13 pct to 430% from quarter to quarter. Performance and asset quality are in line with expectations.

Non-interest contributions declined, and revenue slowed down, and performance remained in double digits: 9M24 Sunong Bank's revenue increased 4.8% year on year (1H24:8.6%), and net profit to mother increased 12.2% year on year (1H24:15.6%). Judging from the drivers, ① Other non-interest reversals have declined, and the slowdown in revenue is in line with expectations. 9M24's non-interest revenue increased 31% year over year (1H24:52%), supporting a revenue growth rate of 8.3 pct (1H24:13.8 pct), with investment-related non-interest growth slowing to 35.6% (1H24:

62.6%). The positive contribution was 6.3pct to 8.7pct narrower than 1H24, and the mid-income growth continued to be negative, dragging down 0.4 pcts. ② The decline in net interest income narrowed. 9M24's net interest income fell 4.8% year on year (1H24: -7.0%), dragging down 3.5 pct. The decline in interest spreads narrowed (negative contribution 8.6 pct), and scale expansion was moderately hedged (positive contribution of 5.0 pct). ③ Provision is being made to support performance growth and is contributing to profit growth of 4.7 pct (1H24: -8.5 pct).

The focus of the third quarterly report: ① “Entering urban areas” continues to materialize, and the short-term slowdown in growth is mainly due to one-time structural adjustments. 3Q24 loans increased 4.8% year over year (2Q24:8.8%), and loan balances fell 3.9 billion in the third quarter (net decrease of 4 billion against the public sector), mainly due to pressure pressure falling on large political and credit exposure; in the first three quarters, Suzhou (excluding Wujiang) contributed 70% of new loans, increasing its share of total loans to 23.5%. ② Interest spreads have stabilized margins thanks to continuous cost improvements. Calculate 9M24 interest spread 1.49% (1H24:1.51%), 3Q24 interest spread 1.45%. Based on early and final calculations, the 3Q24 loan yield decreased by 3 bps to 3.38% month-on-month, and the debt cost ratio decreased by 7 bps to 3.38% month-on-month. ③ Asset quality maintained outstanding performance, and provision coverage remained high. The 3Q24 defect rate/concern rate was about 0.91%/1.19%, all flat month-on-month; provision coverage decreased by 13pct to 430% month-on-month.

Credit decelerated under the active optimization structure, and the strategy of “entering the city” had remarkable results: 3Q24 Sunong Bank loans increased 4.8% year on year (2Q24:8.8%), adding 4.7 billion new loans in the first three quarters, a year-on-year decrease of 7.4 billion, of which the loan balance in the single third quarter dropped 3.9 billion (4 billion yuan net drop to the public end), mainly due to active pressure reduction of large political and credit exposures under structural optimization. If the scale of the pressure drop is 3-4 billion, the credit growth rate for the next three quarters will be approximately 7.3%-8.1%, actually still stable. Regionally, Suzhou (excluding Wujiang) added about 3.36 billion yuan in loans in the first three quarters of this year, accounting for more than 70% of the total loan increase, driving Suzhou's share of total loans increased by 10.8 pcts to 23.5% compared to the beginning of the year to “enter Suzhou.”

As the strategy continues to be implemented, it is expected that the large-scale expansion, which has been booming in the medium term, will continue.

Interest spreads were generally stable, and the improvement in debt costs was the biggest benefit: the 9M24 Sunon Bank interest spread was estimated to be 1.49%, a slight decrease of 2 bps compared to 1H24. Of these, the 3Q24 interest spread was 1.45%, which was the same as in the second quarter. At the end of the scale estimates, the yield on 3Q24 loans fell 3 bps to 3.38% month-on-month, but there was a more obvious improvement in the cost of benefiting from debt (3Q24 fell 7 bps to 3.38% month-on-month, with a cumulative decrease of 23 bps since this year). Along with the successive maturing of long-term deposits in the fourth quarter and the results of the reduction in listed interest rates, debt cost optimization will continue to support a relatively stable trend of interest spreads in the short term.

Asset quality has remained excellent, the defect rate and the generation of defects are stable, and the provision coverage rate is still high. A solid provision foundation is also a support for stable and sustainable performance growth: 3Q24 Sunong Bank's non-performing rate/attention rate was stable at about 0.91%/1.19% month-on-month, and 9M24 added back the bad generation rate of 0.51% after write-off (1H24:0.59%). In terms of balanced performance, the phased increase and decrease in value was reduced. The 3Q24 provision coverage rate decreased by 13 pcts month-on-month, but the absolute level remained at a high level of 430%.

Investment analysis opinion: Sunong Bank's three-quarter report continued its excellent double-digit performance. Although investment in the short-term optimization structure has decelerated, under the premise of ensuring safety, with Wujiang as its base and Suzhou city as the growth pole, it can still achieve better growth performance than the industry and maintain a “buy” rating. From a prudent perspective, credit costs were raised and profit growth forecasts were lowered. The net profit growth rate for 2024-2026 is expected to be 12.3%/12.8%/13.2% year-on-year, respectively (the original forecast was 15.5%/15.3%/15.7%). The current stock price corresponds to 2024 PB 0.53 times, maintaining the “buy” rating.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; retail risks exceeded expectations; physical demand was weak for a long time, and the pace of economic recovery was lower than expected.