Qilu Bank has outstanding business location advantages, and the retail transformation strategy and county business layout are being actively promoted. The deepening of strategic transformation is expected to bring growth momentum to the company's revenue. Under the influence of positive macro and micro factors, the quality of the company's book assets has improved dramatically, and risk compensation capabilities have continued to be consolidated. Currently, the company's valuation is still at the bottom, so active allocation is recommended.

Company Overview: A high-quality urban commercial bank deeply involved in Jinan and based in Shandong. Qilu Bank consists of the merger of the original 16 urban credit cooperatives in Jinan and 1 city credit union. It is the first urban commercial bank established in Shandong Province. 1) Shareholding structure:

The equity structure is high-quality and diverse, empowering the company to develop. The majority shareholders include state-owned platforms, overseas investors, and private enterprises. 2) Location layout: Rooted in Jinan and based in Shandong. The total economy of Shandong Province is large, and Jinan City has strong development momentum, providing a good economic foundation and external environment for the company to be rooted in Jinan and based in Shandong's strategic goals. Currently, branches have expanded to 12 prefecture-level cities in Shandong, and Jinan is still its foundation. In recent years, it has focused on expanding to other regions in the province. 3) Performance Overview: The performance growth rate is leading in the industry. The company's revenue growth rate has continued to be at the forefront of commercial banks in listed cities since 2019. Currently, the revenue side is still on a rapid growth path.

Financial analysis: The cost advantage of debt is remarkable, and there is plenty of room for revenue growth. 1) Net interest spread: Continued above the industry average. The net interest spread has narrowed under industry trends, but it has remained above the industry average and is in a stable position in the middle and upper reaches of comparable peers. 2) Debt side: High deposit ratio is compounded by low deposit costs, and the debt cost advantage is remarkable. The average interest rate of Qilu Bank's interest-bearing debt ranked 4th among commercial banks in listed cities. The cost advantage of debt was outstanding. The ratio of deposits to interest-bearing debt ranked 3rd among commercial banks in listed cities, and the deposit cost ratio ranked 6th among commercial banks in listed cities. 3) Asset side: The asset structure continues to improve. In recent years, the yield of various interest-bearing assets has declined under industry trends, but the share of loans has continued to rise, and asset structure optimization has cushioned the decline in yield. In the future, the “retail+county” strategic transformation is expected to bring the company a breakthrough in return on assets.

Business highlights: Retail transformation is being actively promoted, and county finance is unique. 1) The “big retail” strategy is being actively promoted: the retail market location is broad, and the transformation results are initially reflected. The total population of Shandong Province is large, the population of Jinan is growing rapidly, and the retail business space is vast. The company established a “big retail” transformation strategy as early as 2013. With the active promotion of strategic transformation, the transformation results have been initially reflected, and competitive advantages have gradually been formed. 2) County finance is unique: Lay out the blue ocean of the county area to support rural revitalization. The county area in Shandong Province has a well-developed economy, and the retail business market space in the county area is vast. In 2017, the company incorporated county finance into the bank's overall strategy, strived to guide high-quality resources within the industry to county regions with weak financial resources, continued to promote the layout and institutional construction of county outlets, and vigorously developed a characteristic and diversified product system.

Asset quality: The quality of book assets has been greatly improved, and the potential risks of financing platforms are manageable. 1) Book asset quality:

Asset quality has improved significantly. Currently, Qilu Bank's asset quality is already in the middle and upper reaches of commercial banks in listed cities, and all risk indicators are superior to the industry average. Under the influence of both macro and micro factors, the company's asset quality is in a period of rapid recovery. In recent years, risk indicators have changed ahead of peers, the generation rate of non-performing loans has continued to improve, and risk compensation capabilities have continued to be consolidated. 2) Local government financing platform risk: The customer qualification is superior, and the overall risk is manageable. The overall debt risk of financing platforms in Shandong Province is manageable, and the risk in high-quality regions is extremely low. As a commercial bank in the capital city of the province, Qilu Bank has a steady credit investment style, and credit standards for financing platform customers are relatively strict. Loans are mainly invested in high-quality regions within the province, as well as to entities with higher levels and ratings. The credit risk of financing platforms is relatively low among comparable peers.

Risk factors: The macroeconomic growth rate has declined sharply; the level of net interest spreads has declined more than expected; regional economic sentiment has fluctuated greatly; competition among regional peers has intensified; and the pressure on regional industrial transformation has increased, leading to a sharp deterioration in asset quality.

Investment advice: operational improvement, active allocation. Bank of Qilu has outstanding business location advantages, and the continuous deepening of strategic transformation has brought momentum to revenue-side growth. The quality of the company's book assets has been greatly improved, and the ability to offset risk continues to be strengthened. We predict that the company's 2023/24/25 EPS will be 0.84/0.96/1.12 yuan. The current A-share price corresponds to 0.55x PB in 2023. Combining the three-stage dividend discount model (DDM) and comparable listed bank valuations, we gave the company a target valuation of 0.73 x PB for 2023, corresponding to the target price of 5.13 yuan, covering the first time, giving it an “increase in holdings” rating.