Incident description

Bank of Communications's revenue growth rate for the first three quarters of 2024 was -1.4% (growth rate of -3.5% in the first half of the year, +3.3% growth rate in the single quarter), and net profit growth rate of -0.7% (growth rate of -1.6% in the first half of the year, +1.2% in the single quarter). Net interest income growth rate +2.2% (growth rate +2.2% in the first half of the year).

At the end of the third quarter, the non-performing rate remained flat at 1.32% month-on-month, with provision coverage of 204%, -1 pct month-on-month, and +9 pct compared to the beginning of the period.

Incident Reviews

Performance: Revenue and profit for the single quarter were positive year on year, and the net interest income growth rate was stable. The decline in revenue for the first three quarters was narrower than in the first half of the year. Among them, the net interest income growth rate remained steady and positive, the main interest spread was relatively stable, while the scale growth rate accelerated in the third quarter. Affected by the narrowing of the decline in revenue, the profit decline narrowed, and profit in the single quarter was positive year on year. Income tax expenses decreased year on year in the first three quarters, the amount of credit impairment losses decreased year on year, and the cost to revenue ratio remained stable.

Scale: Retail loans grew at an accelerated month-on-month pace, driving a recovery in credit growth. Total loans at the end of the third quarter were +6.1% compared to the beginning of the period and +2.1% month-on-month, and the growth rate rebounded. Public loans were +6.8% compared to the beginning of the term, +1.5% month-on-quarter; notes were +7.0% month-on-month. Retail loans were +6.3% at the beginning of the period, +2.9% month-on-quarter, consumer loans and other loans were +51% month-on-month, and +21% month-on-quarter, with impressive growth. Operating loans and credit cards were +4.3% and +2.3% month-on-month respectively, and the mortgage size was basically the same. Total deposits at the end of the third quarter were +2.1% compared to the beginning of the quarter, +0.9% month-on-month. This year's deposit growth rate was low, and the size of public deposits declined mainly in the first half of the year. Demand deposits (including accrued interest) at the end of the third quarter accounted for 33.4%, which was basically stable from month to month.

Interest spreads: Loan yields are expected to remain under pressure, and deposit costs continue to improve. The net interest spread for the first three quarters was 1.28%, a slight decrease of 1BP from the first half of the year. The estimated yield on interest-bearing assets fell 4BP to 3.44% from the first half of the year, which is expected to be mainly due to the continued decline in loan yields. The marked improvement in deposit costs is the core of stabilizing interest spreads since this year. The deposit cost rate in the first half of the year fell 12BP from the full year of 2023. It is expected to continue to improve in the third quarter, and is expected to continue to decline in the future. Bank of Communications time deposits account for relatively high accounts and is expected to benefit more from deposit interest rate cuts in the future. The cost ratio for fixed term and personal time deposits in the first half of this year was still 2.91% and 2.93%, which is significantly higher than the current deposit listing interest rate level, and there is room for significant improvement.

Non-interest: Other non-interest declines, such as investment income, have narrowed, and revenue continues to drag down. Net non-interest revenue grew at -7.3% in the first three quarters (-12.2% growth rate in the first half of the year), with net handling fee revenue growing at -14.0% (growth rate of -14.6% in the first half of the year). Handling fee revenue from major bank cards and agency services is expected to decrease year-on-year. Due to the high share of net revenue from handling fees among major banks, the drag on revenue is even more obvious. Investment and other non-interest income grew at a rate of -1.7% (-10.2% in the first half of the year), and the base figure declined in the third quarter of last year.

Asset quality: The non-performing rate remains stable, and retail risk indicators are still fluctuating. At the end of the third quarter, the attention rate and overdue rate declined from -9BP and -6BP month-on-month, mainly on indicators related to public loans, but retail risk still fluctuated. At the end of the third quarter, the personal loan non-performing ratio was +11BP month-on-month. The non-performing ratio of mortgages, credit cards, and operating loans increased by 11BP, 7BP, and 15BP, respectively. At the same time, personal loan overdue rate indicators were still fluctuating. Bank of Communications credit cards account for a high proportion of major banks. This year, we will focus on changing risks in the retail sector. The provision coverage rate declined slightly from month to month at the end of the third quarter, but increased compared to the beginning of the period, and risk offsetting capacity remained stable.

Investment advice: Asset quality remains stable and dividend rates are attractive. The overall results of the three-quarter report were in line with expectations. The year-on-year growth rate of revenue and profit for the single quarter was positive, and asset quality remained stable. Currently, A shares are valued at 0.55x2024PB, the 2023 dividend rate is 5.2%, and the H share discount rate is 25%. At the end of the third quarter, the core Tier 1 capital adequacy ratio was 10.3%, which was stable from month to month. Starting next year, regulatory requirements will increase by 0.25pct to 8.50%. Follow up on the dilution of dividend rates due to fiscal injection and maintain the “buy” rating.

Risk Alerts

1. The downward pressure on the economy increased, and net interest spreads continued to narrow; 2. Asset quality fluctuated, and the non-performing rate increased markedly.