Description of the event
Bank of Xiamen released its 2023 Annual Report and 2024 Quarterly Report. Revenue growth rates for the first quarter of 2023 and 2024 were -5.0% and 3.7% respectively, while net profit growth rates to mother were 6.3% and 4.4% respectively. The non-performing loan ratios at the end of 2023 and the end of the first quarter of 2024 were 0.76% and 0.74%, respectively, and provision coverage rates were 413% and 412%, respectively.
Incident comments
Investment income in the first quarter drove the revenue growth rate to positive, and depreciation was fully calculated. The revenue growth rate for the first quarter of 2024 was 3.7%, with net interest income growing at -12.6%, reflecting a decline in scale and a drag on net interest spreads; non-interest income grew 63%, with processing fees growing at 8.9%, which was superior to the industry. Other non-interest income, such as investment income, benefited from a sharp increase of 84% in the bond market, driving the revenue growth rate to positive. PPOP increased 6.0% year on year in the first quarter, with some savings in cost to revenue ratio, but credit impairment amounts increased 169% year over year, and did not follow the example of the interbank industry to support profit growth by reducing credit impairment. Net profit to mother grew at a rate of 4.4%, further consolidating risk offsetting capacity while guaranteeing a steady increase in profit.
Scale growth remains restrained, adhering to a prudent risk appetite. The company abandoned the complex of scale during the economic downturn and firmly maintained a prudent and restrained loan investment plan. Loans increased by 3.4% in 2023. Among them, loans to public loans increased by 4.5%, retail loans increased by 0.2%, and notes increased by 9.1%. Retail loans were mainly driven by personal operating loans to specialty businesses, and mortgage loans and consumer loans contracted. Loans in the first quarter of 2024 increased by only 0.3% compared to the beginning of the period, pressure on major notes fell 15.8%, while loans to public loans increased by 4.0%, and retail loans declined slightly by 0.4%. Credit restructuring is conducive to increasing earnings. Deposits in the first quarter fell 6.7% from the beginning of the period, which is expected to reduce the pressure on some high-cost deposits, which is beneficial to improving deposit costs in the long run.
Net interest spreads are still declining, and debt costs are expected to improve this year. Net interest spread for the full year of 2023 was 1.28%, down 6BP from 2023H1, down 25BP year on year, but the decline narrowed in the second half of the year. Loan yields for the full year of 2023 fell 5BP compared to 2023H1. It is expected that there will still be downward pressure in the first quarter of this year, reflecting the impact of repricing and LPR cuts. The deposit cost ratio for the full year of 2023 increased by 2BP compared to 2023H1, which is expected to reflect the impact of savings regularization. However, with the gradual maturity and repricing of high-cost deposits in the early stages, it is expected that the effects of lowering deposit costs will gradually become apparent this year. Since time deposits account for a relatively high share and are expected to benefit more from the continued impact of lower listed interest rates, we judge that future net interest spreads are expected to bottom out and stabilize before the industry.
The non-performing rate reached a new low and a double drop, ranking second highest among listed banks. At the end of the first quarter of 2024, the non-performing rate was 0.74%, falling another 2BP month-on-month. On the basis of no rapid expansion, the non-performing rate continued to decrease, and the non-performing balance also declined month-on-month, showing that the quality of high-value assets was clear. The net bad generation rate for the full year of 2023 was 0.51%, down 15BP from 2023H1. In key risk areas, the non-performing ratio of real estate to public loans at the end of 2023 was 4.70%, a decrease of 52 BP from the end of June, and the loan ratio was only 4.0%, and the project area distribution was good, judging that the overall risk was manageable. At the end of 2023, provision coverage increased significantly to 413% month-on-month, stabilized at 412% at the end of the first quarter, and did not release profits through consumption provisions.
Investment advice: A high-quality dividend-stable asset that is significantly undervalued. We believe that in the economic downturn, the quality of bank assets is more important than growth in scale. After the asset quality is cleared, if the economy enters a recovery cycle, it will help to accelerate inventory expansion again, and performance potential is high. The Bank of Xiamen adheres to risk appetite. The non-performing rate has reached new lows in recent years, and at the same time has the characteristics of a high dividend rate. It is a scarce stable and safe dividend asset. Revenue growth is expected to be 0.9% in 2024 and net profit growth rate 2.9%. Based on the closing price on April 30, the corresponding valuation is 0.57x2024PB and 5.9x2024PE. The 2023 dividend ratio will remain 32%, the dividend ratio will reach 5.6%, the allocation value is outstanding, and the “buy” rating will be maintained.
Risk warning
1. Demand for social financing continues to be sluggish, and credit growth is under pressure; 2. The downward pressure on the economy has increased, and asset quality has deteriorated markedly.