Main points of investment:
Bank of Chongqing was founded in 1996, is the first "Abach" listed city firm in the west: 1) deeply ploughing Chongqing local, three off-site branches: as of 2Q20, Chongqing Bank has 143branches covering all districts and counties of Chongqing, and has set up branches in Chengdu, Guiyang and Xi'an. 2) the ownership structure is diversified and senior executives have rich experience in stability: the main shareholders of the Bank of Chongqing include local state-owned assets, Hong Kong-funded banks and local private enterprises, among which Chongqing Yufu Group is an enterprise under the Chongqing State-owned assets Supervision and Administration Commission with a strong shareholder background. the advantage of local resources is obvious.
Attach great importance to the important development opportunities of financial institutions under the major national regional strategy: the state has set the tone to build the Chengdu-Chongqing region to become "an important growth pole and new power source for the country's high-quality development". The extremely high positioning reveals the characteristics of the strategy, such as high specification, long continuous cycle, large investment scale and wide range of influence. It is expected that after the introduction of the top-level design at the national level, Sichuan and Chongqing will further accelerate project construction, and local financial institutions are expected to take advantage of the wind of development to fully support local economic development, accompanied by rapid expansion of assets in infrastructure investment. achieve low-risk scale-driven growth.
The A-share listing vigorously strengthens the capital, along with the development of the Chengdu-Chongqing economic circle on a low-risk scale-driven road: the net amount of funds raised by the A-share listing of the Bank of Chongqing is 3.7 billion yuan, and static estimates will increase the 2Q20 core tier one capital adequacy ratio 92bps to 9.44%.
With the strong improvement of capital strength, the Bank of Chongqing is expected to follow the local government to actively invest in large-volume and high-quality projects, which will become an important basis for the release of performance in the medium-term dimension in the future.
Net interest margin repair and better cost control drive a rebound in profitability: the ROE of 1H20 Bank of Chongqing is 15.5%, which is higher than the average level of commercial banks in listed cities. On the income side, Chongqing Bank has benefited from a relatively loose liquidity environment since 2019, and the repair of interest spreads of the Bank of Chongqing has driven a better growth in net interest income. The impact of new regulations on asset management and fluctuations in the bond market has put pressure on the growth of non-interest income, which has stabilized. On the cost side, Chongqing Bank has outstanding ability to manage and control management expenses, which has made a great contribution to profits in recent years. at the same time, the asset quality has been improved and the provision has remained stable.
On the debt side, there is still room for optimization, and the asset side has strong pricing power: on the debt side, Chongqing bank deposits account for about 60%, and the broad sense of interbank liabilities is about 30%. The degree of dependence on interbank liabilities is higher than that of Chengdu Bank and Chongqing Agricultural Bank, and the current level of deposits is lower.
On the asset side, Chongqing Bank continues to increase the proportion of loans in recent years, especially the proportion of consumer loans in retail loans, so the loan yield is significantly higher than that of Chengdu Bank and Yu Nong Commercial Bank.
With Chongqing's economic recovery and continuous improvement in asset quality, the provision coverage rate has reached more than 300%: as of 3Q20, the non-performing rate of the Bank of Chongqing has dropped to 1.23%, and the provision coverage rate has increased to 325%. Although the concern rate and overdue rate are still higher than those of comparable peers, the trend of continuous improvement continues to be interpreted, and the credit cost of Chongqing Bank is expected to remain stable.
Profit forecast and investment suggestions: the Bank of Chongqing is based in Sichuan and Chongqing and has great potential for development under the national regional strategy; there is still room for structural optimization to stabilize the level of asset income, reduce the cost of liabilities and help the net interest margin to rise steadily; the asset quality of regional construction projects is good, bad generation is expected to remain low, and asset quality is expected to continue to improve. The company's net profit from 2020 to 2022 is expected to grow by 5.1%, 11.3%, 14.3% from a year earlier, valuing the target of 1.1x 21 PB, and the current share price corresponds to 0.98X 21 PB, covering the company's A shares for the first time, giving it an "overweight" rating.
Risk tips: the epidemic situation is repeated over and over again; the sharp economic downturn leads to adverse risks in the industry; and the scale expansion rate is lower than expected.