Core views

The Bank of Hangzhou's 1Q24 revenue growth was in line with expectations, and profits maintained a high increase of more than 20% above expectations. Net interest spreads continued to be pressured under the general trend of falling asset-side interest rates, while continued optimization of deposit costs mitigated downward pressure to a certain extent. Combined with the Bank of Hangzhou's high credit investment boom, net interest income under quantitative price compensation is resilient. In terms of asset quality, risk exposure to public real estate is concentrated, but the impact on overall asset quality is limited. The non-performing rate continues to be low, provision coverage continues to be high, and there is plenty of room for profit release. Looking ahead to 2024, the first quarter is expected to be the period of greatest revenue pressure. In the future, as the economic recovery trend gradually improves, it is expected to maintain small single-digit revenue growth and high profit growth of around 20% throughout the year.

occurrences

On April 19, the Bank of Hangzhou released its 2023 annual report and 2024 quarterly report: in 2023, it achieved operating income of 35.016 billion yuan, an increase of 6.3% over the previous year, and net profit to mother of 14.383 billion yuan, an increase of 23.2% over the previous year. 1Q24 achieved operating income of 9.761 billion yuan, an increase of 3.5% year on year, and net profit to mother of 5.133 billion yuan, an increase of 21.1% year on year.

In 2023 and 1Q24, the non-performing rate remained flat at 0.76%, and 4Q23 provision coverage fell 8.1pct quarter-on-quarter to 561.4%. The 1Q24 provision coverage rate fell 10.2pct quarter-on-quarter to 551.23%. The 2023 cash dividend rate was 22.52%, up 0.7 pct year over year.

Brief review

1. Revenue continued to slow in the first quarter, in line with expectations due to the narrowing of interest spreads and the decline in mid-term earnings.

Bank of Hangzhou's 2023 revenue increased 6.3% year over year, and 1Q24 revenue increased 3.5% year over year. Specifically, due to common factors in the industry, such as declining LPR and reduction in consignment rates, net interest income and middle income all continued to be under pressure, and other non-interest income such as investment income contributed mainly to revenue. In terms of net interest income, due to loan repricing factors in the first quarter, interest spreads were under strong downward pressure. Bank of Hangzhou's net interest income growth changed from positive to negative, but benefiting from Zhejiang's obvious location advantage, credit scale maintained a high growth rate. Under quantitative compensation, 1Q24 net interest income fell only 1.9% year on year. In terms of non-interest income, due to various rate cuts, 1Q24 revenue decreased 16.4% year over year, and continued to expand from 2023 (-13.5%) decline. However, benefiting from excellent proprietary trading capabilities and the continued strengthening of the bond market, Bank of Hangzhou's other non-interest income continued to grow at a high rate. In 2023 and 1Q24, they increased 39.6% and 36.4% year-on-year respectively, strongly supporting revenue.

Profits maintained a high increase of more than 20%, exceeding expectations. Bank of Hangzhou's net profit to mother increased by 23.2% year on year in 2023, and net profit from return to mother increased 21.1% year on year in 1Q24. It is expected that the performance performance of the Bank of Hangzhou will remain in the first tier of listed banks. In terms of 1Q24 performance attributions, scale expansion, provision, and other net income contributed positively to profit of 13.0%, 13.0%, and 7.1%, respectively, while narrowing interest spreads and net revenue from handling fees contributed negatively to 14.3% and 2.4%, respectively.

Looking ahead to 2024, the first quarter is expected to be the period of greatest revenue pressure. In the future, as the economic recovery trend gradually improves, it is expected to maintain small single-digit revenue growth and high profit growth of around 20% throughout the year. On the one hand, the Bank of Hangzhou has a high level of credit investment, and net interest income under quantitative price compensation is resilient. However, under the guidance of the recent policy of smoothing credit growth, interest rates on new loans have gradually stabilized, and deposit-side interest rates have continued to reduce the burden on banks. It is expected that the decline in interest spreads of the Bank of Hangzhou in 24 may be better than in 23 years. In terms of non-interest income, due to the reduction in handling rates for consignment insurance, funds, etc., it is expected that the final income will decline year on year, and it is necessary to observe the “quantitative compensation” situation. However, other non-interest income, such as investment income from trading markets, is still expected to provide some support.

Taken together, due to heavy pricing factors, the first quarter is expected to be the period of greatest revenue pressure, and the annual growth rate is still expected to maintain the current small single-digit growth rate of around 5%. With excellent asset quality assurance, profit growth of more than 20% can continue to be achieved in 24 years.

2. Credit investment continues to be booming, and debt costs are depressed to underpin interest spreads. Bank of Hangzhou's net interest spread in 2023 was 1.50%, down 19 bps year on year, down only 1 bps from 9M23, 4Q23 net interest spread (estimated value) was 1.43%, down 3 bps from quarter to quarter. Due to heavy pricing in 1Q24, net interest spreads (estimated value) fell 5 bps to 1.38% quarter-on-quarter. On both sides of the asset side, due to the reduction in stock mortgage interest rates and the decline in LPR, the Bank of Hangzhou's 2H23 yield continued to drop sharply by 11 bps to 3.82% compared to 1H23, while the cost of interest-bearing debt fell 5 bps to 2.26% from 1H23 due to the dual effects of lower deposit listing interest rates and the Bank of Hangzhou's active optimization of the debt structure, 2H23 fell 5 bps to 2.26% month-on-month compared to 1H23, strongly supporting interest spreads. According to the average value calculated at the beginning and end of the period, the Bank of Hangzhou's return on interest-bearing assets and interest-bearing debt cost ratio both declined by 6 bps from quarter to quarter in 1Q24.

The asset-side structure has been optimized, and the scale of credit continues to rise, slightly hedging downward pressure on interest rates. Benefiting from the significantly stronger economic vitality of the Zhejiang region, Bank of Hangzhou's credit investment continued its previous high growth, with year-on-year increases of 14.9% and 16.1% in 2023 and 1Q24, respectively. Among them, credit growth in 1Q24 reached 63.68 billion yuan, continuing to increase by 15.55 billion yuan from last year's high base, demonstrating the boom in credit investment by the Bank of Hangzhou. In terms of credit investment, the Bank of Hangzhou continues to take advantage of the obvious advantages of its local commercial banks in politics-related business. It has clear and sustainable credit needs in the fields of urban renewal, industrial parks, and urban transportation around the “1000 trillion project” promoted by Hangzhou year by year. In 2023, loans in the major infrastructure sector, leasing and business services increased by 28% and 36.9%, respectively, above the average growth rate of overall loans, and remained at a high level of 31% and 14% in total loans. Furthermore, the Bank of Hangzhou continues to make efforts in emerging fields such as green finance and science and innovation finance. In '23, green loans and financing for science and innovation enterprises increased by 26.2% and 28.4%, respectively, and served 12,600 science and innovation enterprise customers. Furthermore, on the basis of high credit growth, the Bank of Hangzhou continues to increase the size of investment assets and continues to optimize its asset structure. Investment assets increased 16.9% and 16.2% year-on-year respectively in 2023 and 1Q24, and the share of loans+financial assets has increased to 93%, which can slightly hedge against downward pressure on interest rates. In terms of price, Bank of Hangzhou's 2H23 loan yield fell sharply by 20bps to 4.5% month-on-month compared to 1H23. It is expected that interest rates for emerging companies will continue to decline in interest rates due to declining LPR and intensifying price wars. Furthermore, the negative effects of the reduction in stock mortgage interest rates will begin to show in the second half of the year. The return on 2H23 financial investment fell 10bps to 3.53% month-on-month, mainly because bond interest rates began to decline continuously in the second half of '23.

On the debt side, Bank of Hangzhou enterprises account for a high share of demand deposits. Benefiting from declining interest rates on deposit listings, deposit costs have dropped markedly. The Bank of Hangzhou relies on its strong advantages in public sector and politics-related business, and has built up a solid foundation of public deposits through settlement, financial deposits, etc. In 1Q24, demand deposits increased 7.4% year on year, and the share remained at a high level of 42.8%, with demand deposits accounting for nearly 48% in total. Against the backdrop of an obvious trend of deposit regularization, the advantages of Bank of Hangzhou's deposit structure are quite obvious compared to peers. Benefiting from the decline in stock listing interest rates, the Bank of Hangzhou's 2H23 deposit interest rate fell 8 bps to 2.15% month-on-month compared to 1H23, strongly hedging the downward pressure on asset-side interest rates.

Looking ahead to 2024, in terms of scale growth, with the strong geographical advantage of the Zhejiang region, credit demand is expected to take the lead in improving as the economic recovery trend becomes clear. Moreover, medium- to long-term loans to the public sector, such as infrastructure and high-end manufacturing, are still the main source of credit demand, and the Bank of Hangzhou has sufficient credit reserves. Furthermore, the Bank of Hangzhou has already replenished capital through external sources. After the 8 billion fixed increase was implemented, the Bank of Hangzhou's capital strength was further strengthened. It is expected that the increase will continue to increase throughout '24. In terms of interest rates, as regulatory guidance and economic recovery trends improve, disorderly competition in loan interest rates weakens, and there is very limited room for interest rates on new loans to continue to fall sharply based on the decline in LPR. It is expected that the downward pressure on asset-side interest rates will ease somewhat. The dividend of the 23-year deposit listing interest rate reduction will be further evident in '24. It is expected that the decline in interest spreads may gradually stabilize in the second half of the year, and the decline for the whole year should be better than in '23.

3. The quality of assets is very clean, which strongly supports the stable release of profits. The Bank of Hangzhou's non-performing rate remained flat at 0.76% quarter-on-quarter in 1Q24. 1Q24 plus write-off failure generation rate (estimated value) decreased by 68 bps to -0.08% from quarter to quarter, and the negative balance pressure continued to drop. The 1Q24 provision coverage rate fell 10.2 pcts quarterly to 551.23%. In a situation where asset quality is excellent for a long time, the Bank of Hangzhou used provisions to reasonably make up profits. It is expected that provision coverage will remain stable at the first level of listed banks. In terms of forward-looking indicators, the Bank of Hangzhou's 2023 attention rate decreased by 4 bps to 0.4% compared to 1H23, and the overdue rate increased slightly by 3 bps to 0.62% compared to 1H23. The overall asset quality was very clean.

Due to the principle of prudential calculation, the Bank of Hangzhou will centrally expose public real estate risk exposure, with limited impact on overall asset quality. In terms of risk in key areas, the Bank of Hangzhou's non-performing ratio for public real estate loans rose sharply by 291 bps to 6.36% year on year in 2023. Mainly, some housing enterprise customers were affected by the market situation and their ability to repay loans was under pressure. The Bank of Hangzhou downgraded the corresponding asset risk classification based on a prudential perspective, resulting in a sharp increase of 9.746 billion yuan in non-performing loans to public real estate. Overall, the Bank of Hangzhou accounts for a relatively small share of public real estate. As of the end of '23, it is close to 5%, and the Bank of Hangzhou has sufficient provisions and strong ability to write off and dispose of non-performing assets. Concentrated exposure to poor public real estate will not have a big impact on the quality of the company's assets, and it is also conducive to clearing future risk exposures as soon as possible.

4. Investment advice and profit forecast: Bank of Hangzhou's 1Q24 revenue growth was in line with expectations, and profits maintained a high increase of more than 20% above expectations. Net interest spreads continue to be pressured under the general trend of falling asset-side interest rates, but continued optimization of deposit costs has relieved some of the downward pressure. Combined with the Bank of Hangzhou's credit investment boom, net interest income under quantitative price compensation is resilient. In terms of asset quality, public real estate risk exposure is concentrated, but the impact on overall asset quality is limited. The non-performing rate continues to be low, provision coverage is expected to remain at the top level of listed banks, and there is plenty of room for profit release. Looking ahead to 2024, the first quarter is expected to be the period of greatest revenue pressure. In the future, as the economic recovery trend gradually improves, it is expected to maintain small single-digit revenue growth and high profit growth of around 20% throughout the year. Revenue growth in 2024, 2025, and 2026 is expected to be 4.0%, 9.1%, 10.4%, and profit growth rates of 20.5%, 20.6%, and 21.0%.

Currently, the Bank of Hangzhou's stock price only corresponds to 0.63 times 24 PB, and the dividend ratio in 2023 increased slightly to 22.5%. The current stock price corresponds to a 24E dividend rate of 4.8%. The valuation is severely suppressed by factors such as insufficient expectations for economic recovery and pessimistic market sentiment, and the cost performance ratio is outstanding. Maintaining the buying rating and leading position in the banking sector.

5. Risk warning: (1) Economic recovery is falling short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, thus triggering the risk of poor 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 banks' asset quality and greatly reduced banks' profitability. (3) The credit leniency policy is not as strong as expected, and the rapid economic development of the region where the company operates is unsustainable, thus greatly adversely affecting the company's credit investment. (4) The retail transformation effect fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.