Incidents:

On August 30, the Bank of Wuxi released its 2023 interim report. In the first half of the year, it achieved revenue of 2.4 billion yuan, an increase of 2.8% over the previous year, and net profit of 1.23 billion yuan, an increase of 20.7% over the previous year. The weighted average return on net assets (ROAE) was 13.4%, down 8 bps year over year.

Comment:

Revenue growth has slowed slightly, and profit growth has remained at a high level of more than 20%. In the first half of the year, the Bank of Wuxi's revenue, profit before provision, and net profit on return grew by 2.8%, 2.4%, and 20.7%, respectively. The growth rates were -0.9, 0.3, and -2.5 pct compared to 1Q, respectively. Among them, the growth rates of net interest income and non-interest income were -1.5% and 15.8%, respectively, and the growth rates were 3.4 and -12.5 pct, respectively, compared to the 1st quarter. Split the profit growth rate structure: (1) Net interest income “increases in volume are difficult to offset price drops”, the driving effect of scale on performance growth has weakened marginally, and interest spreads are reducing the drag on performance. (2) The growth rate of non-interest income declined, and its contribution to performance declined compared to 1Q. (3) The contribution of provision declined compared to 1Q, but it still constituted the main support for profit growth. Under the trend of improving asset quality, provision moderately fed back profits.

The scale of assets is steadily expanding, and the local customer base is strong. At the end of 2Q23, the Bank of Wuxi's total assets, interest-bearing assets, and loans grew at 9.1%, 9%, and 10.4%, respectively, up 0.2, 0.1, and 0.7 pct from the end of the previous quarter. The scale expansion was unabated. In terms of loans, there was an increase of 9.1 billion dollars in the first half of the year, an increase of 2.2 billion yuan over the previous year. Of these, the 2Q increased by 3.5 billion dollars in a single quarter, an increase of 1.1 billion yuan over the previous year. The share of interest-bearing assets increased by 1.3 pct to 61% compared to the end of the previous quarter. At the structural level, the 2Q quarter increased by 2.6 billion, 300 million, and 700 million dollars for the public, retail, and notes respectively, an increase of 800 million, 300 million over the previous year, continuing the “strong with the public and weak retail” pattern. Industry investment growth is still focused on manufacturing, inclusion and other fields. In the first half of the year, loans to private enterprises and manufacturing increased by 12% and 11%, respectively, compared to the beginning of the year, higher than the growth rates of various loans of 4.7 and 3.8 pct, respectively. On the retail side, operating loans, consumer loans, and mortgages increased by 0.9 billion, 900 million, and -1.8 billion respectively in the first half of the year, with year-on-year changes of -4, 700 million, and -1.8 billion. At the regional level, loans from the Wuxi region increased by 8.1 billion dollars in the first half of the year, an increase of 2.9 billion yuan over the previous year, accounting for 0.8 pct to 78% of all loans compared to the beginning of the year. The local market has a strong customer base. At the end of June, the company saved more than 5.29 million citizen cards, which basically covered 70% of the local resident population.

Deposit growth is accelerating, and the growth trend for public accounts is favorable. At the end of 2Q23, the year-on-year growth rates of Bank of Wuxi's total liabilities, interest-paying liabilities, and deposits were 7.8%, 7.5%, and 12.2%, respectively, up 0.1, -0.2, and 1.8 pct from the previous quarter. In the first half of the year, deposits increased by 14.7 billion dollars, an increase of 4.5 billion yuan over the previous year; 2Q quarterly deposits increased by 3.6 billion dollars, an increase of 3.1 billion yuan over the previous quarter, accounting for an increase of 2 pct to 93% over the previous quarter. Looking at the instalment period, 2Q fixed term and current deposits increased by 92 billion dollars, respectively, a year-on-year decrease of 300 million yuan and an increase of 3.1 billion yuan; of these, the company's current account season increased by 1 billion dollars, an increase of 3.9 billion yuan over the previous year. Investment in public loans continued to gain strength, effectively driving demand deposit generation. At the level of market-type debt, financial interbank liabilities and payable bonds increased by -4.5 billion and 200 million respectively in the 2Q quarter, a year-on-year decrease of 5.1 billion yuan and an increase of 1.6 billion yuan. Together, the two types of debt accounted for 7% of interest-bearing debt, down 2 pct from 1Q. The active debt portion with higher capital costs dropped slightly, and the debt structure continued to be optimized.

NIM narrowed to 1.66%. Bank of Wuxi's net interest spread in the first half of the year was 1.66%, 15 bps narrower than the full year of 2022, and 19 bps narrower than 1H22. On the asset side, the loan yield was 4.53%, down 10 bps from 2022. In a context where demand for effective financing has not recovered, downward pressure on loan pricing still exists. On the debt side, the deposit cost ratio is 2.33%, up 3 bps from 2022. The trend of regularization continues, and deposit costs remain somewhat rigid. According to the company's official website, interest rates for some products were lowered again in June, and debt cost control dividends are expected to gradually be released. Looking ahead to the whole year, the industry trend of declining loan interest rates is difficult to change, and interest spreads are still facing some downward pressure during the year; however, as the company increases credit accounts in manufacturing, small and micro, etc., moderately promotes credit sinking, and continues to improve debt-side deposit pricing management, the reduction in interest spreads is expected to narrow marginally.

Non-interest income is growing steadily. 1H23 Bank of Wuxi's non-interest revenue was 670 million dollars, a year-on-year growth rate of 15.8%, down 12 pct from 1Q, accounting for a decline of 4 pct to 28% of revenue compared to 1Q. Among them, processing fees and commission revenue was 120 million yuan (YoY -24%), continuing the negative growth trend. Net other non-interest income was 560 million dollars (YoY +30%), accounting for 83% of non-interest income, which constituted the main part of non-interest income in the first half of the year. Among them, fair value change profit and loss (YoY +48%) achieved a significant year-on-year increase on a lower basis, which constituted the main driving force for net other non-interest growth, or mainly benefited from the strengthening of the bond market in the first half of the year.

The defect rate continues to decline, and the provision coverage rate remains high. At the end of 2Q, Bank of Wuxi's non-performing rate was 0.77%, down 1 bps from the end of the 1st quarter, maintaining a record low; the attention rate was 0.31%, the same as at the end of the previous quarter; the overdue rate was 0.68%, down 8 bps from the end of the previous year, and the leading asset quality index was steady and improving. The 2Q non-performing balance increased by 200 million dollars, which is basically the same as the previous year, and the steady trend of asset quality is improving. In the first half of the year, there was an increase of 170 million dollars in provisions, a year-on-year decrease of 330 million yuan. Under stable asset quality, bad accounting and write-off efforts have slowed slightly. Annualized credit costs were 0.35% in the first half of the year, down 0.7 pct from the previous year, continuing the trend of continuous pressure drop. At the end of 2Q, the provision coverage rate was 554%, a slight decrease of 0.9 pct from the previous quarter. It is expected that it will still rank among the top listed banks; compared to the end of the previous quarter, loan disbursements fell slightly by 5 bps to 4.29%. The ability to offset risks is strong, and there is plenty of profit margin to provide for backfeed.

The capital adequacy ratio has increased marginally, and endogenous capital replenishment capacity is strong. At the end of 2Q, the company's core level/level/capital adequacy ratios were 11.6%, 12.9%, and 14.7%, respectively, up about 0.5, 0.5, and 0.5 pct from the end of 1Q. Risk-weighted assets grew by 3.5%, up 0.2 pct from the previous quarter. The company's performance has increased steadily, its ability to supplement endogenous capital is strong, and capital has been effectively increased. Furthermore, the current conversion ratio of the company's 3 billion convertible bonds to shares is low. The latest conversion price is 5.43 yuan/share, the forcible ransom price is 7.06 yuan/share, and the current stock price is 5.37 yuan/share, which has not yet hit the conversion price. The company's profit growth rate has stabilized at a high level of more than 20%, and the ability to supplement internal capital is strong. At the same time, convertible bonds have entered the stock conversion period. The external extension channels are relatively smooth, and the strong capital replenishment capacity guarantees the company's subsequent scale expansion and performance growth.

Profit forecasting, valuation and ratings. The Bank of Wuxi is deeply involved in the rural small and micro markets in Jiangsu Province and continues to benefit from the dividends of regional economic development. In 2023, the company entered a new three-year development planning stage. The core ideas still focus on big retail, digital transformation, and the three sub-strategies of human resources, agricultural support and small support, and scientific and technological innovation. It plays a “ballast stone” role in public business, focusing on small and micro private enterprises, manufacturing, and leasing commercial services; the retail business favors high-yield loans such as mortgages and consumer loans, and uses social security card exchanges as an opportunity to expand the customer base and cover diversified financial needs of people's livelihood. At the same time, the company's asset quality advantages are clear, the share of priority loans is relatively low, there is sufficient surplus food reserves, and there is plenty of room for performance release. Following the macroeconomic recovery, market expectations have been revised, and the transformation of major retail and digital strategies has shown results. The company's asset-side pricing is expected to gradually stabilize, public and retail loans are steadily expanding, and there is room for performance growth. We maintain the company's EPS forecast for 2023-25 at 1.14, 1.34, and 1.55 yuan. The current stock price corresponding to the PB valuation is 0.6, 0.53, and 0.48 times, respectively, and the corresponding PE valuation is 4.71, 4.01, and 3.47 times, respectively, maintaining the “buy” rating.

Risk warning: The economic recovery process has fallen short of expectations, the decline in large state-owned tourist groups has intensified, and interest rates on small and micro loans have declined more than expected.