Core views
Zheshang Bank benefited from the outstanding performance of the financial market business in the first quarter, and the revenue growth rate significantly exceeded expectations. The performance growth rate declined, mainly due to the year-on-year increase in asset impairment losses due to the low base effect, but it is still expected to be at the top of the stock market. Looking ahead to 2024, considering the calculation pace of asset impairment losses of Zheshang Bank last year, it is expected that its annual performance will benefit from the completion of poor financial management disposal, the growth rate will recover upward, and continue to maintain the leading level in the stock bank.
occurrences
On April 29, Zheshang Bank announced its 2024 quarterly report. 1Q24 achieved operating income of 18.407 billion yuan, a year-on-year increase of 16.6% (2023:4.3%), and realized net profit to mother of 5.913 billion yuan, an increase of 5.1% (2023:10.5%). The 1Q24 defect rate was 1.44%, which remained flat quarter-on-quarter; the 1Q24 provision coverage rate fell 5.1 pcts quarter-on-quarter to 177.5%.
Brief review
1. The revenue growth rate led the industry. Financial market business performed well, and the share of non-interest income increased significantly. Zheshang Bank achieved revenue of 18.407 billion yuan in 1Q24, a sharp increase of 16.6% over the previous year, leading the industry in growth rate. Among them, financial market business performance was outstanding. Investment income in the first quarter increased by 135.7% year on year, driving other non-interest income to increase sharply by 104.7% year on year.
With CSA customer service volume as the core indicator, Zheshang Bank's revenue showed strong resilience compared to its peers. 1Q24 was only a slight decrease of 3.4% year-on-year, and the decline is expected to be lower than that of its peers. Driven by both bond investment income and income, Zheshang Bank's share of non-interest income rose significantly, up 10.4 pcts to 35.80% from 2023. At the same time, thanks to the long-term construction of assets that are weakly sensitive to economic cycles and extremely strong credit demand in Zhejiang Province, Zheshang Bank's credit investment achieved a “steady increase in price” in the first quarter. Net interest income increased slightly by 0.6% year-on-year, and the growth rate remained steady.
Impairment losses increased year-on-year due to the low base effect, and the performance growth rate declined slightly. Zheshang Bank achieved net profit of 5.913 billion yuan in 1Q24, an increase of 5.1% over the previous year. In terms of performance attribution, growth in scale and other non-interest income were the most important contributing factors, contributing 17.6% and 16.5%, respectively, while narrowing interest spreads and increased provision had a negative impact of 17.1% and 11.0% on profits, respectively, and dragged down performance growth. The slight decline in the performance growth rate of Zheshang Bank in the first quarter was mainly due to the year-on-year increase in asset impairment losses due to the low base effect in the same period last year, but the scale of impairment losses has decreased significantly from the fourth quarter of the previous year. Considering the pace of calculation of asset impairment losses of Zheshang Bank throughout last year, it is expected that its 2024 full-year results will benefit from the completion of poor financial management disposal, and the growth rate has recovered upward, and continues to maintain the leading level in the stock bank.
2. Policies in key areas are frequent, risks are continuously mitigated, and asset quality remains steady. Zheshang Bank's 1Q24 non-performing rate remained flat at 1.44% month-on-month, and the post-write-off defect generation rate (estimated value) was 0.84%, up 60 bps from quarter to quarter. In terms of key risk areas, along with the formal construction of real estate financing platforms and the gradual relaxation of real estate purchase restrictions in various regions, improvements on the operating side of real estate enterprises may improve or favor the recovery in the quality of bank-to-public real estate loan assets, and the real estate defect rate may be further reduced. On the retail side, due to the decline in residents' expected income and the official withdrawal of the epidemic support policy, the overall retail risk in the banking industry is in the midst of exposure. It is expected to be the main source of exposure to risks related to Zheshang Bank. In terms of risk offsetting capacity, Zheshang Bank's provision coverage rate decreased by 5.1 pct to 177.5% from quarter to quarter, and the provision level remained relatively stable.
3. The recovery cycle is weak for sensitive assets, the decline in asset pricing has narrowed, and debt costs have remained stable. Zheshang Bank's 1Q24 net interest spread (estimated value) was 1.63%. It was only a slight decrease of 1 bps from quarter to quarter, and the decline narrowed significantly from month to month. On the asset side, through long-term construction of assets that are weakly sensitive to economic cycles, Zheshang Bank's asset pricing showed strong resilience. The return on 1Q24 interest-bearing assets (estimated value) fell only slightly by 3 bps from quarter to quarter, and the month-on-month decline narrowed markedly, which was the main factor in stabilizing interest spreads. In terms of scale, Zheshang Bank's 1Q24 loan size increased 11.0% year on year and 3.1% quarter over quarter, accounting for an increase of 1.6 pct to 56.0% compared to the beginning of the year, and the asset structure improved markedly. On the debt side, Zheshang Bank's 1Q24 deposit size increased 15.1% year-on-year, 1.3% quarter-on-quarter, higher than the overall debt growth rate, accounting for an increase of 0.5 pct to 63.8% compared to the beginning of the year. It is expected mainly due to the continuation of the trend of regularization of residents' deposits, but benefiting from multiple cuts in deposit listing interest rates, the cost of 1Q24 interest-bearing debt (estimated value) remained relatively stable quarterly.
4. Investment advice and profit forecast: Zheshang Bank benefited from the outstanding performance of the financial market business in the first quarter, and the revenue growth rate significantly exceeded expectations. The performance growth rate declined, mainly due to the year-on-year increase in asset impairment losses due to the low base effect, but it is still expected to be at the top of the stock market. Looking ahead to 2024, considering the calculation pace of asset impairment losses of Zheshang Bank last year, it is expected that its full performance for 2024 will benefit from the completion of the disposal of poor financial management, the growth rate will recover upward, and continue to maintain the leading level in the stock market. Revenue growth is expected to be 6.7%, 7.3%, and 8.0% in 2024, 2025, and 2026, and profit growth rates of 8.4%, 9.1%, and 11.5%. Currently, Zheshang Bank's stock price only corresponds to 0.47 times 24-year PB, while the dividend rate corresponding to the 23-year dividend is 5.6%. The characteristics of high dividends and undervaluation are obvious. It is relatively cost-effective, and maintains a buying rating.
5. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.