Incident: The Bank of Nanjing revealed its 2024 mid-year report. 1H24 achieved revenue of 26.2 billion yuan, a year-on-year increase of 7.9%, and realized net profit to mother of 11.6 billion yuan, an increase of 8.5% over the previous year. The 2Q24 non-performing rate remained flat at 0.83% from quarter to quarter, and provision coverage fell 11.9 pct to 345 percent from quarter to quarter. Revenue exceeded expectations, and asset quality was in line with expectations.

With a high increase in non-interest revenue, revenue exceeded expectations, and profit growth accelerated month-on-month: 1H24 Bank of Nanjing's revenue increased 7.9% year on year (2.8% in 1Q24), exceeding our forward-looking expectations (3%), and the improvement in revenue also drove net profit growth to 8.5% (5.1% in 1Q24, 6.1% in the forward-looking forecast). Judging from the driving factors, ① The surplus of transactional financial assets supports the acceleration of revenue. 1H24's non-interest revenue increased 26% year over year, contributing to revenue growth rate of 11.2 pct. From a structural point of view, it was basically all contributed by fair value change earnings (1H24 fair value change revenue increased by about 3.6 billion year over year, accounting for about 130% increase in non-interest income over year). ② The narrowing of interest spreads has dragged down revenue, but the margin has narrowed somewhat. Net income from 1H24 interest fell 6% year on year, dragging down revenue growth rate of 3.3 pct. Among them, interest spreads narrowed by 23 bps year on year, dragging down revenue growth by 8.2 pct (1Q24 dragged down 9.3 pcts). ③ Increase credit costs and change the contribution of provisions to profit growth from positive to negative. The 1H24 provision dragged down profit growth by 1 pct (1Q24 contributed 4.8 pcts).

Interim Report Focus: ① Mid-term dividends are expected to be implemented within the year. Zijin Investment, the majority shareholder, proposed to implement the mid-term profit distribution plan in due course during the year. The proposal has now been approved by the board of directors. ② Loans supported by public investment continued to grow rapidly in the first half of the year. New loans in 1H24 reached 70% last year, the main increase in public contribution; however, judging from the regional structure, the Shanghai branch, the Beijing branch, and the northern Jiangsu branch contributed nearly 90%. On the basis that the goal of adding 100 new outlets in three years has basically been completed, the 2024-2028 five-year strategic plan focuses on expanding the network and achieving the results of boosting the customer base of regional entities. ③ Thanks to improvements in debt costs, although interest spreads continued to narrow year over year, it is estimated that there was a month-on-month recovery. The 1H24 interest spread is estimated to have decreased by 23 bps to 1.34% year over year, but it rebounded 4 bps compared to 2H23, of which the reduction in deposit costs by 11 bps was the main contribution. On August 1, the Bank of Nanjing completed a new round of deposit price cuts. There is still room for stable interest spread performance due to cost improvements. ④ Bad generation has increased due to poor retail exposure, but the overall defect rate has remained low and stable on the basis of actively increasing disposal efforts and at the same time carefully controlling incremental sales. In 2Q24, the Bank of Nanjing's non-performing rate remained flat at 0.83% month-on-month. Among them, the non-performing rate for public finance decreased by 12 bps to 0.58% from the beginning of the year, and the retail defect rate increased by 14 bps to 1.64%.

Public support loans achieved relatively rapid growth in the first half of the year, while the debt side focused on optimizing deposit structures and actively slowing deposit growth. Thanks to the improvement in debt costs, although interest spreads continued to decline year over year, they have narrowed, and have rebounded from month to month.

1) Credit investment in the first half of the year was mainly focused on public infrastructure, platforms, and manufacturing. The retail side actively reduced investment in consumer loans, operating loans, etc. Bank of Nanjing loans increased 13.8% year on year in 2Q24 (14.7% in 1Q24). New loans of 107.6 billion yuan were added in the first half of the year. The year-on-year increase was basically the same. The increase in the first half of the year accounted for nearly 70% of the full year of last year. In terms of structure, new loans contributed nearly 90% to the public sector in the first half of the year (with infrastructure, leasing and commercial services, and manufacturing accounting for more than 80%); retail loans only added 4.2 billion yuan. On the one hand, it is related to retail demand that has yet to be repaired, and on the other hand, it is also expected to be related to active management of incremental investment (1H24 retail consumer loans increased 3.7 billion yuan, an increase of 9.3 billion yuan over the previous year; retail operating loans decreased by 2 billion yuan, a year-on-year increase of 0.1 billion yuan).

2) The goal of adding 100 new outlets in three years has basically been achieved. The next stage will focus on the expansion of outlets to achieve results in boosting the customer base of regional entities. At the end of June 2024, the number of Bank of Nanjing branches reached 287, an increase of 86 over the end of 2020. However, looking at the regional structure of new credit added in the first half of the year (here, changes in the asset size of each branch office are measured approximately), the first half of the year was mainly added in the Beijing branch, Shanghai branch, and branches in northern Jiangsu (Yancheng, Suqian, Lianyungang, Xuzhou, and Huai'an), adding assets of 28.3 billion yuan, 20 billion yuan, and 38.7 billion yuan respectively, accounting for 89% of the total increase in each branch. Considering that nearly 60% of the Bank of Nanjing's branch expansion is concentrated in southern Jiangsu and central Jiangsu to increase regional coverage and improve the efficiency of credit investment for physical enterprises such as the manufacturing industry, the focus is on implementing the effects of credit restructuring during the implementation of the new five-year strategic plan for 2024-2028.

3) The debt side actively slows down deposit growth and focuses on structural adjustment. Bank of Nanjing deposits increased by only 4% year on year in 2Q24 (2.9% in 1Q24), adding 49 billion yuan in deposits in the first half of the year, a sharp decrease of 74.8 billion yuan over the previous year. On the one hand, it is related to a decrease in demand deposits (a net decrease of more than 17 billion yuan for active periods), and on the other hand, it is expected to be related to active pressure reduction of high-interest deposits (the total decrease in time deposits increased by more than 53 billion yuan over the same period last year).

4) Interest spreads continued to decline but the decline narrowed. Thanks to cost improvements, interest spreads rebounded month-on-month. It is estimated that the 1H24 interest spread fell 23 bps year on year to 1.34% (1Q24 was 28 bps year over year decrease), but it rebounded 4 bps from 2H23. Among them, due to interest rate cuts and the slowdown in the growth of high-yield assets such as retail consumption, the decline in loan pricing continued to drag down interest spreads (1H24 loan interest rate 4.84%, down 36 bps year on year, and 12 bps from 2H23), but debt costs improved to feed back interest spreads (1H24 deposit costs 2.37%, down 5 bps year on year, down 11 bps from 2H23). According to the Bank of Nanjing's official website, implementation of new deposit quotes began on August 1. Among them, interest rates on current deposits were reduced by 5 bps, interest rates on deposits of 1 year and below were reduced by 10 bps, and interest rates on deposits of 2 years and above were reduced by 20 bps. Considering that the current deposit costs of banks in Nanjing are still nearly 20 bps higher than the average of listed urban agricultural commercial banks in the Yangtze River Delta, subsequent cost improvements are expected to support continued stabilization of interest spreads.

Bad retail sales have increased, risk management efforts have been stepped up, and overall asset quality is stable: in 2Q24, the Bank of Nanjing's non-performing rate remained flat at 0.83% month-on-month, and provision coverage fell 11.9 pct to 345% quarterly. It is estimated that the rate of bad generation after 1H24 annualization plus write-off and recycling increased by 51 bps to 1.12% over the same period last year, which is expected to be related to a rise in defects in retail and consumer products. The 2Q24 defect rate decreased by 12 bps to 0.58% from the beginning of the year, and the retail defect rate increased by 14 bps to 1.64% from the beginning of the year. Considering that the Bank of Nanjing took the initiative to step up disposal efforts (1 H24 write-off of 7 billion yuan, close to 90% of the full year of 2023), and that the attention rate and overdue rate of forward-looking indicators decreased by 10 bps and 6 bps to 1.07% and 1.25%, respectively, from the beginning of the year, it is expected that the overall asset quality will remain stable.

Investment analysis opinion: The first interim report of the banking industry in Nanjing achieved good results of exceeding expectations in revenue and speeding up performance. On the basis of the new chairman in place and the vigorous promotion of the new five-year plan for 2024-2028, I am optimistic that the Bank of Nanjing will achieve sustainable profit improvement and maintain a “buy” rating. The profit forecast for 2024 was lowered, the interest spread judgment was added, and the 2025-2026 forecast was added. The net profit growth rate for 2024-26 is 9.1%, 9.8%, and 10.2% year-on-year, respectively (the original forecast for 2024 was 23.8%). The current stock price corresponds to 0.68 times the 2024 PB. Taking into account the Bank of Nanjing's own continuous improvement in profit performance and clear future growth space, the 2024 target valuation was given 0.82 times to maintain the “buy” rating.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; retail risks exceeded expectations; physical demand was weak for a long time, and the pace of economic recovery was lower than expected.