Incident: Changshu Bank disclosed its 2024 mid-year report. 1H24 achieved revenue of 5.5 billion yuan, a year-on-year increase of 12.0%, and realized a net profit of 1.73 billion yuan to mother, an increase of 19.6% over the previous year. The 2Q24 non-performing rate remained flat at 0.76% from quarter to quarter, and provision coverage fell 0.4 pct to 539% quarter over quarter. Performance was better than expected, and asset quality was in line with expectations.

The decline in interest spreads narrowed and was compounded by non-interest support. Changshu Bank continued to hand over excellent questionnaires leading in revenue and high profit growth, once again verifying its excellent performance attributes: 1H24 Changshu Bank's revenue increased 12% year on year (10% in the forecast, 12% in 1Q24), and net profit to mother increased 19.6% year on year (18.2% in the forecast, 19.8% in 1Q24). Judging from the driving factors, ① Interest spreads have declined but the decline has narrowed to ensure a stable revenue base with volume compensation. 1H24's net interest revenue increased 6% year over year, contributing to revenue growth of 5.4 pcts. Among them, narrowing interest spreads dragged down 6.7 pcts (1Q24 dragged down 7.5 pcts), and scale growth contributed 12 pcts. ② Investment returns drive high non-interest growth. 1H24's non-interest income increased 57% year-on-year (of which investment income nearly doubled), contributing to revenue growth of 6.6pct. On the one hand, it benefited from price spread income from disposal of financial assets (contributing more than 70% of investment income), and on the other hand, it was also related to confirmation of income from inclusive subsidies (Changshu Bank's confirmation of income from inclusive incremental loan swap rates is included in investment income). ③ Unlike other banks, Changshu Bank does not feed back profits through provision and release, but instead relies on increasing per capita production capacity and reducing the cost-to-revenue ratio to achieve high-quality profit growth. 1h24 Changshu Bank's cost-revenue ratio decreased by nearly 6 pct to 35% year on year, and operating expenses fell 3.6% year on year, contributing to a profit growth rate of 11 pct. Actively increase provision to help dynamically resolve risks, and provide 4 pct for negative contribution profit growth rate.

The focus of the interim report: ① Under the objective constraints of weak retail demand, the pace of credit expansion is moderately slowing down, and flexible public support is provided to support credit growth. Loan growth in 2Q24 decelerated to 11.3% (15% in 1Q24), contributing nearly 70% of new loans to the public in the first half of the year; the average contribution of loans above 10 million per household increased by about 56% (about 24%/35% in 2022/2023, respectively).

② Deposit growth is excellent in both volume and price, and vigorously promotes structural optimization to reduce debt costs. The 2Q24 deposit growth rate was nearly 17%, and continued to be significantly faster than loans. At the same time, structurally, the share of deposits with a term of three years or more dropped by nearly 2 pct compared to the beginning of the year. The cost of 1H24 deposits decreased by 6 bps compared to 2023. Among them, the cost of savings deposits with a term of 3 years or more has decreased by 24 bps compared to 2023. ③ Interest spreads continued to narrow month-on-month, and the core of stabilizing interest spreads is still on the asset side. It is estimated that 2Q24 interest spreads narrowed by 11 bps to 2.7% month-on-quarter. Reducing deposit costs is a more direct and manageable measure to slow the narrowing of interest spreads in the short term, and there is still plenty of room. However, considering the large interest spread (over 230 bps) between public and small retail credit, stabilizing interest spreads still requires a restoration of credit prosperity as effective support. ④ The increase in bad generation is expected, and more attention should be paid to whether sufficient resources are disposed of in a timely and adequate manner. Despite an increase in bad generation (estimated at 1H24 about 0.9%; about 0.6% in 2023), we expect that the reflection behind this is not a shift in credit policies, but rather a concentrated reflection of the operating pressure of the small and micro customer groups (the former is a problem with strategic positioning, while the latter is more of a phased impact). On this basis, Changshu Bank has achieved full digestion without using stock reserves and relying only on incremental provisions to ensure a smooth transition in asset quality.

The optimization of deposit structures has been vigorously promoted to help narrow the reduction in interest spreads, but the core of stabilizing interest spreads is still the restoration of small and micro demand: the 1H24 interest spread was estimated to be 2.75%, a year-on-year decrease of 22 bps (1Q24 was a 25-bps year-on-year decrease), of which the 2Q24 interest spread was estimated to be 2.7%, and the quarterly narrowing was 10 bps.