Key points of investment
A large urban commercial bank with an undervalued high dividend is expected to drive a return to valuation due to improved real risks.
Revenue performance is expected to improve
Looking back, the Bank of Shanghai's net profit for 24Q1 increased 1.8% year on year, up 0.6 pc from 23A; revenue fell 0.9% year over year, and the decline was 3.9 pc narrower than 23A. The Bank of Shanghai's revenue and profit growth rate rebounded, mainly due to an increase in the growth rate of other non-interest income. Specifically, let's look at the main drivers:
(1) Interest spreads are under pressure. The 24Q1 Bank of Shanghai interest spread (earlier-end caliber, same below) fell 2 bp to 1.17% month-on-month, mainly affected by the decline in return on assets. ① The return on assets fell 10bps to 3.42% month-on-month in 24Q1. It was determined that it was mainly affected by factors such as heavy pricing and market competition, and loan yields were still declining. ② The 24Q1 interest-paying debt cost ratio fell 6 bps to 2.19% month-on-month. Judging from the favorable release of deposit interest rate cuts, it can be seen that the deposit cost ratio in 2023 has improved compared to 23H1. The deposit cost ratio disclosed in 2023 decreased by 2bps to 2.08% compared to 23H1. Looking ahead to the whole year, the Bank of Shanghai's interest rate spread decline is expected to be narrower than in 2023. At the same time, considering the high and low interest spread base in 2023, the impact of interest spreads on revenue is expected to improve.
(2) The growth rate of other non-interest income increased. Bank of Shanghai's other non-interest income increased 58% year-on-year in 24Q1. The growth rate was 36pc higher than in 2023. The increase in growth was due to a sharp increase in investment income.
(3) Marginal decline in impairment contributions. 24Q1 impairment losses fell 23% year over year, and the decline was 7pc narrower than 23A.
Looking ahead to the whole year, the Bank of Shanghai's revenue growth rate is expected to improve. Mainly considering interest spreads, the drag on revenue is expected to narrow. At the same time, the Bank of Shanghai lays out key national economic zones and has the ability to maintain or even increase the rate of table expansion; the Bank of Shanghai's profits are expected to maintain positive growth, and there is still room for backlash, mainly considering provisions.
Vigorously promote asset disposal
(1) Judging from poor stock indicators: The Bank of Shanghai is poor and stable, and there are certain fluctuations in concerns and overdue dates. The Bank of Shanghai's non-performing rate and attention rate at the end of 24Q1 was 1.21% and 2.19%, which were flat month-on-month, rising 12 bps to 2.19%, respectively; the overdue rate at the end of 23Q4 was 1.71%, up 3 bps from the end of 23Q2. Concerns, overdue fluctuations, judgments are mainly due to fluctuations in the quality of retail assets, and stock real estate projects are classified according to prudential principles. Furthermore, in response to real estate risks, the Bank of Shanghai pointed out in the 2023 results conference that the current loan ratio for existing real estate loans is 10%, which is about 7 pc higher than the bank's average provision, and the stock real estate provision plan is sufficient.
(2) Looking at generation and disposal: ① There was a decline in new non-performing assets. The Bank of Shanghai disclosed at the performance conference that the non-performing asset generation rates in 2021, 2022, and 2023 were 1.05%, 0.75%, and 0.51%, respectively. 24Q1 is still in the downward channel. ② Risk management scale. The Bank of Shanghai disclosed that the stock risk mitigation scale in 2022 and 2023 was above 20 billion, and will continue to maintain this level in 2024.
Looking forward to the future, the Bank of Shanghai's real risk level is expected to improve as stock risk is cleared at an accelerated pace.
High dividends and undervalued targets
The Bank of Shanghai's current price corresponds to a dividend rate of up to 6% + in 2023. The Bank of Shanghai's 2023 dividend rate increased by 3pc to 30% compared to 2022. The current price corresponds to the 2023 dividend rate of 6.2%. In addition, the Bank of Shanghai also proposed a mid-term dividend plan to respond positively to investors' demands. ② As of May 12, 2024, the Bank of Shanghai's PB (lf) was 0.47x, lower than the industry average valuation. As the Bank of Shanghai's stock risk is gradually resolved, improvements in asset quality are expected to drive its valuation back to the industry average.
Profit forecasting and valuation
The Bank of Shanghai's net profit is expected to increase 1.4%/2.3%/3.5% year-on-year in 2024-2026, corresponding to BPS 16.95/16.99/17.04 yuan/share. The current price corresponds to 0.44/0.44/0.43 times the 2024-2026 PB valuation. The target price is 9.37 yuan/share, corresponding to 0.55 times the 24-year PB. The current price space is 26%, maintaining the “buy” rating.
Risk warning
The macroeconomy has stalled, and there has been a sharp outbreak of bad behavior.