Bank of Nanjing (BONJ)'s attributable net profit increased 12% in 2Q24 and 8.5% in 1H24, exceeding our expectations and higher than the 5.2% YoY growth in 1Q24, mainly thanks to decent growth in non-interest income and steady expansion in scale. It maintained an excellent assets quality as its NPL is at the low-end level among peers. We noted that its NPL ratio was 0.83% in 1H24, against 0.83% in 1Q24 and 0.9% in 2023. The risk for LGFV was quite low thanks to the solid financial position of Jiangsu provincial government and local governments. As of end-June 2024, its loans/deposits increased 10.1%/3.6% from end- 2023. Its ROAE remained at the high-end level among peers in 1H24. BONJ is now trading at 0.69x 2024E P/B, which, in our view, is undervalued. Maintain BUY rating.

Key Factors for Rating

BONJ maintained excellent assets quality in 1H24. We noted that its NPL ratios were 0.83%/0.83% in 1H24/1Q24, against 0.9% in 2023. We expect its NPL ratio to stay at 0.83% in 2H24, still at the low-end level among peers. Its special mention ratio dropped from 1.17% in 2023 to 1.07% in 1H24. Meanwhile, its allowance to NPLs reached 345.02% at end-June 2024, down from 360.58% at end-December 2023.

Operating income increased decently in 1H24. Its non-interest income increased 25.5% YoY in 1H24 and 34.5% in 2Q24, higher than the 17.7% YoY growth in 1Q24. Its fee and commission income increased 13.3% YoY in 1H24, against 28.8% YoY growth in 1Q24.

NIM continued to drop in 1H24. BONJ's NIM decreased 8bps YoY to 1.96% in 1H24 mainly due to weak demand of loans and declining deposits rates. As BONJ will further strengthen its financial support to the real economy, its NIM may drop another 3bps in 2H24.

Valuation

We expect its ROAE to reach 12.8% in 2024. In our view, given its solid fundamentals, BONJ should trade at a high-end valuation among its joint-stock bank and city commercial bank peers. We raised our target price from RMB11.76 to RMB12.51, based on 0.85x 2024E P/B. Maintain BUY rating.