Description of the event

The Bank of Chengdu released its 2024 three-quarter report. The revenue growth rate for the first three quarters was 3.2% (4.3% in the first half of the year), and net profit to mother grew 10.8% (10.6% in the first half of the year). Net interest income grew 1.8% (1.9% in the first half of the year). Assets remained stable and excellent. At the end of the third quarter, the non-performing rate remained flat at 0.66% month-on-month, and provision coverage increased by 1 pct to 497% month-on-month.

Incident comments

Performance: Performance is in line with expectations, and the growth rate remains stable. The revenue growth rate for the first three quarters was 3.2%, and the net interest income growth rate remained positive at 1.8%. The decline in growth is expected to be affected by the decline in net interest spreads. Net non-interest income grew by 9.0% (13.9% in the first half of the year), with investment and other non-interest income growing at a rate of 7.8% (10.5% in the first half of the year). Thanks to excellent asset quality, the amount of credit impairment losses decreased by 13.8% year on year, and income tax expenses decreased by 8.2% year on year to ensure a stable profit growth rate.

Scale: Credit continues to expand rapidly, and the government business sector has outstanding advantages. Total loans at the end of the third quarter increased 15.5% from the beginning of the period and 2.1% month-on-month. Public loans (including notes) increased 17.4% from the beginning of the period and 1.6% month-on-quarter. This year's credit expansion was still dominated by government business. Leasing and business service loans increased 31% from the beginning of the second quarter, and the share of government infrastructure loans rose to 57% at the end of the second quarter, with outstanding resource advantages in related fields; retail loans increased 7.6% from the beginning of the third quarter and 4.2% month-on-quarter. The growth rate of mortgage loans is expected to pick up. Deposits at the end of the third quarter increased by 11.9% compared to the beginning of the period, and the current share decreased by 2.7 pct to 29.2% month-on-month. The trend of regularization is still obvious.

Interest spreads: There is still downward pressure, and debt costs are expected to gradually improve in the future. Net interest income maintained positive growth in the first three quarters, mainly driven by rapid expansion in asset size, and net interest spreads are still under pressure. The net interest spread for the first half of the year decreased by 15BP to 1.66% compared to the full year of 2023. The decline was large, and the cost of major liabilities in the industry did not drop significantly. Among them, the deposit interest rate fell slightly by 2BP to 2.21%, reflecting a significant impact on the regularization of deposit structures. Bank of Chengdu account for a relatively high share of time deposits (68% in 2024/09), benefiting even more from interest rate cuts. Interest rates on fixed term and personal time deposits were still 2.56% and 3.04% in the first half of the year. There is still room for significant decline in deposit interest rates. It is expected that the gradual decline in deposit interest rates in the future will support net interest spreads. Loan yields are expected to continue to decline. Loan yields in the first half of the year fell 20BP to 4.41% compared to the full year of 2023. Affected by LPR cuts and stock mortgage interest rate cuts, loan yields are expected to remain under downward pressure in the fourth quarter and next year.

Asset quality: Remain excellent, leading the industry in all indicators. The non-performing rate remained low at the end of the third quarter. The attention rate fell by 1BP to 0.43% month-on-month. The net generation rate of non-performing goods was only 0.31% before write-off in the first half of the year. The credit structure, which mainly focuses on government infrastructure businesses, guarantees excellent and stable asset quality, leading the industry in various asset quality indicators. There was a slight increase in the retail defect rate in the first half of the year compared to the beginning of the period. Bank of Chengdu's retail loans accounted for relatively low, which had little impact on overall asset quality; the real estate non-performing loan ratio fell 122BP to 1.82% compared to the beginning of the period, which is mainly due to aggressive write-offs. Loan write-off amounts increased 0.49 billion to 0.53 billion year-on-year in the first half of the year. The provision coverage rate increased slightly by 1 pct from month to month, and the absolute level remained high.

Investment advice: Rapid scale expansion, stable and excellent asset quality. The Bank of Chengdu has long benefited from the economic construction cycle of the Chengdu and Chongqing region. The scale of credit expansion is outstanding, the government has strong infrastructure business resource endowments, excellent asset quality, and maintains industry leadership in various indicators. Revenue is expected to grow by 3.2% for the full year of 2024, and net profit to mother at a rate of 10.1%. The current valuation is 0.80x2024PB. The stock price is 2.1% away from the room for strong redemption of convertible bonds, and the dividend rate for 2023 is 5.8%, maintaining a “buy” rating.

Risk warning

1. The economic development of the Chengdu and Chongqing region falls short of expectations;

2. The net interest spread narrowed rapidly, and the profit growth rate was impaired.