Key investment points: The company's debt costs improved markedly in 2020, driving profit growth along with scale expansion, giving it a “better than the market” rating.
Interest spreads widened and scale expanded. The annual net profit of the Bank of Chongqing increased 5.1% year on year in 2020, and Q4 increased 8.8% year on year, up from 3.8% in Q3. Revenue for the full year increased 9.2% year over year, and Q4 fell 0.4% year over year.
Widening interest spreads and scale expansion are the main driving forces driving revenue growth. Other non-interest income (investment income+exchange gain+loss from changes in fair value) was dragged down by a decline of 48.7% over the previous year. The decline in other non-interest income is mainly due to exchange gains and losses and fair value gains and losses changing from positive to negative year over year. We think this is a one-off decline, and the impact will subside in 2021.
Debt costs have improved, and interest spreads have increased year over year. Net interest spread in 2020 was 2.27%, up 9BP from 2019. Although asset-side returns declined due to the decline in LPR, they fell 13BP year-on-year. However, benefiting from a reduction in interbank debt costs, debt costs fell by 21BP. Furthermore, the deposit cost ratio also began to decline in the second half of the year, falling by 6BP, accelerating the improvement of debt costs. We expect interest spreads to remain stable this year as asset-side interest rates recover.
The loan structure is mainly stable. Judging from the loan structure, the share of individual loans declined slightly throughout the year. At the end of 2020, it fell by 2.8 pct from the beginning of the year, to 34.1%. The structure of individual loans was adjusted to mortgages throughout the year. At the end of 2020, the share of mortgages increased 1.7 pct compared to the beginning of the year, and the share of consumer loans decreased by 5.7 pct. At the same time, credit cards and consumer loans continued to maintain low default rates of 1.02% and 0.96% respectively. We think this shows that the company is better at controlling risk in consumer loans and is more stable after the pandemic.
The overdue and attention indicators improved markedly compared to the middle of the year. The non-performing rate at the end of 2020 was 1.27%, up 2BP from the middle of the year, the same as at the end of 2019. Although the non-performing rate remained flat, there was a marked improvement in overdue and interest indicators. The overdue rate fell 65 BP to 2.37% from the middle of the year, and the interest loan ratio fell 13 BP from the middle of the year. In addition, the company stepped up its provision planning efforts. The provision coverage rate increased by 6.96 pct over the middle of the year, with a cumulative increase of 29.30 pct throughout the year.
Investment advice. The company drove profitability growth through steady asset expansion and improved interbank debt costs in 2020, and maintained a prudent provision accounting policy, and the provision coverage rate returned to above 300%.
We forecast EPS of 1.36, 1.54, 1.72 yuan in 2021-2023, and net profit growth rates of 12.98%, 12.18%, and 11.48%. According to the DDM model (see Table 2), we obtained a reasonable value of 13.79 yuan; according to the PB-ROE model, the 2021E PB valuation for the company was 1.00 times (0.87 times for comparable companies), and the corresponding reasonable value was 13.02 yuan. Therefore, a reasonable value range of 13.02-13.79 yuan (corresponding to 2021 PE is 9.56-10.12 times, corresponding PE for interbank companies is 7.76 times), giving a “superior market” rating.
Risk warning: The solvency of enterprises has declined, and asset quality has deteriorated drastically; major changes have occurred in financial supervision policies.