1H24 results are basically in line with our expectations

Chongqing Agricultural Commercial Bank announced 1H24 results: 1H24 revenue, profit before provision, and net profit to mother were -1.3%, +6.8%, and +5.3%, respectively; 2Q24 single-quarter revenue, pre-provision profit, and net profit to mother were +0.2%, +8.0%, and +26.3%, respectively. The results were basically in line with our expectations.

We expect the Chongqing Agricultural Commercial Bank to still achieve a net profit increase of about 5% in the next two years. The ROA level is relatively good. Currently, A shares are trading at 0.47x 2024E P/B, with a dividend rate of 5.9%, and H shares are trading at 0.32x 2024EP/B, with a dividend ratio of 8.5%. There is room for improvement in the valuation level. Further, if the regional economy of Chongqing continues to improve steadily, it will provide space and opportunities for bank development.

Development trends

The 2Q24 revenue growth rate achieved positive growth, mainly due to a 47% year-on-year increase in other non-interest income. The company's 2Q24 net interest income grew -7% year-on-year, and net handling fee revenue was -20% year-on-year (net handling fee revenue accounted for only 5% of revenue, and agricultural and commercial banks generally did not account for a high share of processing fee revenue). The company's scale expansion accelerated in the second quarter. At the end of 2Q24, assets increased 5.0% year on year, faster than 4.1% in 1Q24, and loans and deposits increased 4.9% and 4.3% year on year respectively at the end of 2Q24. The average daily net interest spread for 1H24 was 1.63%, a year-on-year decrease of 16 bps; we estimated that 2Q24 net interest spread was 1.47%, down 18 bps and 3 bps from quarter to quarter, respectively.

Fee control led to a relatively rapid increase in profit before provision. 2Q24 business and management expenses decreased 21% year on year, cost revenue ratio decreased 7ppt year on year. Cost control led to an 8.0% year-on-year increase in profit before provision for 2Q24.

Asset quality remains stable. The 1H24 non-performing generation rate increased slightly by 10 bps to 0.84% year on year. The share of concerned loans increased by 27 bps to 1.41% compared to the end of last year, and overdue loans increased by 10 bps to 1.52% compared to the end of last year.

Asset impairment losses decreased 35% year over year in 2Q24 (1H24 increased 33% year over year), and provision coverage decreased by 7ppt to 360% quarter over quarter.

The capital adequacy ratio remains high. At the end of 2Q24, the core Tier 1 capital adequacy ratio was 13.83%, which is at a high level. It is proposed to implement mid-term dividends. Details have not yet been disclosed. 1H24 annualized ROA 1.03%, annualized ROE 12.2%.

Profit forecasting and valuation

Keep profit forecasts unchanged. Currently, A shares correspond to 0.5 times the 2024E net market ratio and 0.4 times the 2025E net market ratio, and H shares correspond to 0.3 times the 2024E net market ratio and 0.3 times the 2025E net market ratio. Maintaining an outperforming industry rating, due to increased scale growth and strong cost control, the target price for A shares was raised by 11.6% to HK$6.37, the target price for H shares was raised by 7.9% to HK$4.78, A shares correspond to 0.6 times the 2024E net market ratio and 0.5 times the 2025E net market ratio, and H shares correspond to 0.4 times the 2024E net market ratio and 0.3 times the 2025E net market ratio, respectively.

risks

Regional economic performance fell short of expectations, and the decline in net interest spreads exceeded expectations.