Matters:
On the evening of April 26, Bank of Communications disclosed its 2024 quarterly report. 1Q24 achieved operating income of 67.059 billion yuan, -0.03% year-on-year, and net profit to mother of 24.988 billion yuan, +1.44% year-on-year. The 1Q24 defect rate decreased by 1 bp to 1.32% month-on-month, and provision coverage increased by 1.8 pct to 197.05% month-on-month.
Commentary:
The slight negative increase in Q1 revenue was mainly a drag on non-interest income, and the net interest income performance was better than expected. 1) 1Q24's revenue was -0.03% year over year, with net interest income of 41.56 billion yuan in a single quarter, +2.24% year over year, contributing 62% to revenue. Judging from interest spread performance, our estimated annualized net interest spread of 1.26% for a single quarter, up 3 bps from Q4, mainly due to a month-on-month decline in debt-side costs. Asset-side earnings are still under some pressure under the influence of stock mortgage interest rate adjustments and a further reduction in 5-year LPR. 2) The performance of non-interest income was relatively weak. Net processing fee revenue/other non-interest income was -6.35%/-3.55%, respectively. The main reason was that since the fourth quarter of last year, the “integrated reporting” of banking insurance fees and the final commission rate for equity fund products declined, and agency insurance and consignment fund business revenue declined year on year. At the same time, fluctuations in interbank settlement business volume reduced interbank fee revenue, and the overall revenue of the bank card business declined year on year. Other non-interest income was dragged down by fluctuations in fair value and net exchange losses. 3) Net profit from 1Q24 increased 1.44% year on year, mainly due to reduced provision and superimposed cost savings, -1.99% year-on-year business management expenses, and a decrease of 0.5 pct to 31.5% year-on-year.
Reduced debt-side costs led to an increase of 3 bps month-on-month in 1Q24 interest spreads. According to our time point calculation, the 1q24 annualized single-quarter net interest spread increased by 3 bps to 1.26% month-on-month, mainly due to a reduction in debt interest rates. 1) Asset side:
The yield on interest-bearing assets in 1Q24 decreased by 7 bps to 3.46% compared to 4Q23. It is expected to be affected by stock repricing, mortgage interest rate adjustments, and a further reduction in interest rates for loans with a term of 5 years or more. 2) Debt side: The 1Q24 interest-bearing debt cost ratio decreased by 9 bps to 2.32% month-on-month. It is expected that despite the increasing trend of deposit periodization, the overall ratio of low interest payment deposits to total debt will increase, replacing some active liabilities with high interest rates.
Q1 Retail credit growth is weak, and the new loan structure is good. 1Q24 added 246.1 billion dollars in loans in a single quarter (386.4 billion yuan in Q1 in 2023). From a structural perspective, public/retail/notes generally increased by 253.44/286.6/-35.96 billion yuan respectively. The increase in Q1 loans was weak compared to the same period last year, mainly due to a drop in bill pressure.
The quality of assets remains stable, and the ability to offset risks continues to increase. In 1Q24, the Bank of Communications's non-performing rate continued to drop by 1bp to 1.32% month-on-month, and the provision coverage rate increased by 1.8 pct to 197% month-on-month. The attention rate and overdue rate for forward-looking risk indicators rose by 2 bps, 1 bp to 1.53%, and 1.39% respectively at the beginning of the year. Mainly, there was a certain increase in retail loan related indicators. Housing mortgage/credit card/personal business loans accounted for 0.76%/4.15%/0.34%, respectively. It is expected that the ability of individuals to repay is mainly affected in the current macroeconomic environment. The overall net bad generation ratio is still being optimized, and net bad generation declined to 0.5% month-on-month in a single quarter.
The core tier 1 capital adequacy ratio increased sequentially. 1Q24 Bank of Communications's core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and capital adequacy ratio were 10.44%, 12.40%, and 16.09% respectively, up 0.21pct, 0.18pct, and 0.82pct, respectively.
Investment advice: As the only state-owned bank headquartered in Shanghai, the bank deeply covers the Yangtze River Delta region, where the Chinese economy is more developed, and has been developing retail business in recent years. Retail loans and wealth management businesses are growing well. In terms of internationalization, strategic cooperation with HSBC helps companies “go global”, and overseas revenue contributions are expected to increase. Based on the company's quarterly report and the current macroeconomic situation, considering the further decline in LPR in February, we expect Bank of Communications to grow at -0.9%/2.8%/4.7% (previous value -1.7%/2.3%/3.6%), respectively; net profit growth rate to mother will be 1.3%/3.4%/4.1% (previous value 1.5%/3.4%/4.1%), respectively. The current stock price corresponds to 2024E PB at 0.52X. Considering the Bank of Communications's historical average PB of 0.66X in the past 10 years, combined with financial data and macroeconomic environment conditions, the company was given a 2024E target PB of 0.6X, corresponding to a target price of 7.88 yuan, maintaining a “recommended” rating.
Risk warning: Bank interest spreads are under further pressure due to insufficient economic growth momentum, and credit investment falls short of expectations.