Key points of investment:

Performance remains stable

The growth rates of operating income and net profit to mother in the first three quarters of 2024 were -2.9% and -0.6% respectively, up 0.2 pct and 0.7 pct from H1 in 2024, and the performance was relatively stable. Contributions are due to a narrowing in the decline in net interest income, processing fees and net commission income, and the drag is that the high contributions of other non-interest income have declined. In addition to the above factors, the reduction in cost pressure is also a driver of profit growth. As of the first three quarters, the growth rate of business and management expenses was -4.6%, down nearly 3.6 billion yuan from the same period last year.

Net interest spreads remained flat month-on-month

The cumulative net interest spread for the first three quarters of 2024 was basically the same as in the first half of the year, and the year-on-year decline was also slowing down. Looking at a single quarter, the 2024Q3 net interest spread was 1.97%, down only 2 bps from 2024Q2. Among them, loan interest rates were 3.91%, down 5 bps month-on-month, and deposit interest rates fell 4 bps at the same time, which better hedged the downward pressure on yields. Benefiting from the year-on-year decline in net interest spreads, the decline in net interest income has also narrowed.

The decline in revenue has narrowed

Benefiting from the low base effect of the second half of last year, the drag on revenue gradually decreased and showed certain structural highlights, mainly reflected in the wealth management sector: as of the third quarter of 2024, consignment wealth management revenue increased 47% year on year, mainly driven by the two factors of increase in the scale of consignment sales and product structure optimization; agency securities trading revenue increased 34% year on year, mainly due to the increase in securities trading demand from Hong Kong capital market customers.

Asset quality in the retail sector is under pressure

By the end of September 2024, the non-performing rate had remained flat, and the attention rate increased by 7 bps compared to the end of June, showing some pressure. Judging from bad generation, there was a slight increase in the non-performing loan generation rate in the third quarter. The pressure mainly comes from retail sales. The retail loan overdue rate was 1.71%, up 10 bps from the end of June. The overdue rates for personal housing mortgage loans and consumer credit businesses all increased markedly.

Profit forecasting and investment advice

Based on the three-quarter report forecast, revenue growth rates for 2024-2026 are expected to be -2.4%, 3.2%, and 7.1% (previous 2024-2026 was -0.14%, 5.37%, 5.51%), and net profit growth rates to mother are 1.1%, 2.2%, and 6.0%, respectively (previous 2024-2026 were -0.4%, 5.5%, and 5.9%).

According to the historical valuation method, the average PB valuation for the past 3 years was 1.11. As of November 5, 2024, the PB value was 0.98. We believe that the valuation is expected to recover and maintain the “buy” rating.

Risk warning

The economic downturn exceeded expectations; wealth management repairs fell short of expectations; asset quality deteriorated.