Main points of investment: the revenue and net profit of the youth agricultural bank keep growing, the non-performing rate decreases compared with the previous month, the capital adequacy ratio is expected to increase, and the coverage for the first time is better than the big city rating.
Revenue and net profit continued to grow. The net profit of 1-3Q20 is 2.473 billion yuan, a year-on-year increase of 4.91%, an increase of 0.10% compared with 1H20; operating income of 7.066 billion yuan, a year-on-year growth rate of 7.39%, a decrease of 10.07% compared with 1H20; and a year-on-year increase of 6.28% in pre-provision profit, a decrease of 14.40pct compared with 1H20. Growth was dragged down by net interest margin falling 7bp to 2.50 per cent and cost-income rising 2.24pct to 26.38 per cent from the previous month.
We will fully implement the financial rescue policy. 1-3Q20 net interest margin 2.5%, lower 7bp than 1H20, due to the company's full implementation of financial rescue policies, such as phased principal and interest repayment, credit support program, and so on. By the end of September, the company had used 5.3 billion yuan in small loans to support agriculture. The balance of inclusive small and micro loans was 29.2 billion yuan, an increase of 4.6 billion yuan, or 18.76 percent, over the beginning of the year, which was 0.42 percentage points higher than the total amount of loans and advances issued.
The defect rate decreased month-on-month. The defective rate of 3Q20 was 1.46%, the month-on-month decline of 3bp, the estimated cost of credit decreased by 0.48pct to 1.63%, and the asset quality maintained an overall stable pattern under the impact of the epidemic.
Focus on the loan rate of 5.77%, which is higher than 2Q20 by 15bp. The rate of bad production increased to 1.19% by 0.21pct from the previous month. The provision coverage rate was 298.23%, a month-on-month decrease of 19.77pct.
The capital adequacy ratio is expected to increase. The Youth Agricultural Bank has successfully issued 2 billion yuan of secondary capital bonds and 5 billion yuan of convertible bonds, which will increase the capital adequacy ratio to support the continued expansion of the scale.
Profit forecast and investment rating. We estimate that the growth rate of the company's homing net profit from 2020 to 2022 is-0.86%, 18.86% and 14.81% respectively. According to the three-stage DDM model, the corresponding reasonable value is 5.16 yuan. The bank is at the bottom of the valuation, considering the economic recovery, the sector will face valuation repair in the future, so it is cautious to give a higher valuation level than the current average, valuing the company 2020E PB at 1.05x (0.90x for comparable companies) according to the PB-ROE model, and the corresponding reasonable value is 4.99RMB. Combining the two valuation methods, the reasonable price range of the company is 4.99-5.16 yuan, corresponding to 2020E PB valuation is 1.05-1.09 times, 2020E PE valuation is 9.9-10.2 times, the first coverage is better than the big city rating.
Risk hints: the solvency of enterprises has declined, asset quality has deteriorated significantly, and major changes have taken place in financial regulatory policies.