It has outstanding resource endowments, excellent governance mechanisms, and a complete financial license. The Bank of Qingdao is close to achieving full coverage of prefecture-level cities in Shandong. The number of branches has continued to expand in recent years. Although there are currently no branches outside the province, its Qingyin Financial Leasing (51% shareholding ratio) license is qualified to exhibit the business nationwide. At the same time, it also has core financial business licenses such as financial leasing, financial management subsidiaries, fund custodians, and lead bond underwriters, which is beneficial for the long term to develop capital-light businesses and generate handling fee income. In the future, the approval of financial licenses will be tightened in a trend, and the advantages of licensed institutions will become more prominent.

The company has an excellent mixed ownership shareholding structure+market-based governance mechanism. Qingdao Guoxin Industrial, the largest local state-owned shareholder, does not account for a high share, and executive selection follows the principles of marketization and specialization. The new management, which has been in office since 2022, formulates a new three-year plan (2023-2025), prioritizes efficiency, and does not advocate blind expansion of asset size. We believe that the new strategic direction is more in line with the current macroeconomic environment and more in line with the direction of high-quality development.

The efficiency is superior to the new cycle, and the stability of interest spreads is clearly superior to that of peers and urban commercial banks. Bank of Qingdao's loan growth rate has slowed since 2022, and is expected to achieve a year-on-year increase in growth in 2024, but it is emphasized that the growth rate of performance is leading the growth rate of scale. At the same time, it is expected that the loan-to-deposit ratio and the ratio of loans to total assets will continue to rise in the future, supporting asset-side returns. The loan industry is very diversified and does not rely on traditional infrastructure. Currently, wholesale and retail are the largest industries for public loans, accounting for a significantly higher share than peers. At the same time, manufacturing, construction, and infrastructure-related industries are evenly distributed.

Retail loans use personal consumer loans as the main growth point, supporting loan yields.

As the only listed bank with a strong recovery in net interest spreads in 2023, improving the debt structure is a core highlight, reducing the pressure on high-cost interbank deposits, bonds, etc., and reducing cost ratios. This also clearly reflects the core idea of “putting efficiency first”. The yield on public loans is currently higher than that of commercial bank peers in some cities. Benefiting from a diverse credit structure and business orientation focusing on lower back enterprises and small and medium-sized enterprises, it is expected that more emphasis will be placed on price control in terms of credit investment assessment mechanisms. The yield on home loans in personal loans will still decline, but the high growth in consumer loans will support the yield.

The burden of history has been cleared, and the inflection point in asset quality is driving profitability back up. Bank of Qingdao is the urban commercial bank with the most significant decline in the bad net generation rate in recent years. It has dropped to an excellent level of 0.57% in 2023.

The historical risks of 2020 have been cleared, and branch credit approval authority has been fully transferred to the head office. Currently entering a new cycle of asset quality improvement, it is expected that in the future, the non-performing rate will also converge with commercial banks in high-quality cities in the Yangtze River Delta.

The convergence of credit impairment measures for loans since 2020 is the key to improving ROE. At the same time, referring to industry experience, if the net bad generation rate continues to be low, provision coverage will enter a stage of accelerated upward growth as write-off and disposal progresses. Furthermore, in terms of non-loan credit impairment, 2023 is still at the stage of increasing accrual and deduction over the same period last year, while some commercial banks in urban areas have already begun to recoup profits. If the calculation is reduced in the future, it will also release room for profit growth.

Investment advice: clear asset quality, upward cycle of efficiency

We believe that there is a clear upward trend in the fundamentals of the Bank of Qingdao. The new development cycle emphasizes that efficiency is prioritized over scale, and at the same time, asset quality continues to improve after the historical burden is cleared, driving a recovery in profitability. It is predicted that in 2024, revenue will grow 11.5% year on year, and net profit to mother will grow 14.4% year on year. Based on the closing price on July 30, 2024, Bank of Qingdao's 2023 and 2024 PB valuations were 0.58X and 0.53X, respectively, and PE valuations were 5.76X and 4.99X, respectively. The valuation was lower than that of comparable commercial banks in the city. Consider the improvement in operating efficiency and asset quality in the new development cycle, focus on recommendations, and give a “buy” rating.

Risk warning

1. Credit scale expansion falls short of expectations; 2. Asset quality fluctuates significantly; 3. Profit forecasting assumptions fall short of expectations.