Introduction to this report:

The Bank of Chongqing's 2022 report was in line with expectations, and revenue and net profit growth rates were low. Net interest spreads have narrowed markedly, but time deposit costs have performed brilliantly. Both core asset quality and forward-looking indicators need to be improved.

Key points of investment:

Investment advice: Considering the rising negative pressure from the Bank of Chongqing, adjust the 2023-2025 net profit growth forecast to 6.37% (-5.63 pc)/6.21% (-3.91pc)/7.66% (new), corresponding to EPS 1.49 (-0.16) /1.58 (-0.24) /1.70 (new) yuan. Maintain the target price of 12.41 yuan, corresponding to 0.79 times PB in 2023, and maintain the holdings growth rating.

Revenue and profit performance need to be fixed. Revenue in 2022 was -7.2% year-on-year, -1.9% compared to the first three quarters, and net profit returned to the mother +4.4% year-on-year, mainly dependent on provision for backfeeding. Among them, the scale of interest-bearing assets grew steadily, mainly hampered by narrowing interest spreads. The year-on-year decline in China's income narrowed, revenue from the financial management business bucked the trend, and the decline in valuations of transactional financial assets led to a significant decline in other non-interest income.

Time deposit costs have improved, but net interest spreads have narrowed markedly. The net interest spread in 2022 was 1.74%, -32 bps year over year, and -39 bps month-on-quarter, mainly dragged down by interest-bearing assets. Affected by the decline in LPR and capital market fluctuations, the returns on loan and securities investment were -45 bps and -24 bps respectively. The cost ratio of interest-bearing debt is 9 bps. The main driving factor is lower interbank debt and bond costs. Furthermore, time deposit costs have bucked the trend, and the rapid growth of time deposits in the Q4 industry is not easy.

Asset quality indicators need to be improved. The defect rate was 1.38%, and there was a significant increase over the previous year.

There is an upward trend in the attention rate, overdue rate, and bad generation rate of forward-looking indicators. Structurally, it is relatively stable to the public sector. The retail non-performing rate is +40 bps over the same period, mainly affected by consumer loans and credit cards.

Provision of backfeeding profits led to -62.8% of provision coverage compared to the same period last year, and risk offsetting capacity declined.

Risk warning: The economic downturn exceeded expectations; net interest spreads and asset quality exceeded expectations.