Incident: Bank of Communications disclosed its 2024 mid-year report. 1H24 achieved revenue of 132.35 billion yuan, a year-on-year decrease of 3.5%, and realized net profit to mother of 45.29 billion yuan, a year-on-year decrease of 1.6%. The 2Q24 non-performing rate remained flat at 1.32% quarter-on-quarter, and provision coverage increased 7.8pct to 205% quarter-on-quarter, exceeding expectations.

Driven by non-interest, revenue and performance growth turned negative, lower than expected: 1H24 revenue fell 3.5% year on year (1Q24:0%), affecting net profit to mother fell 1.6% year on year (1Q24: +1.4%), all lower than the forward-looking forecast (revenue 0.1%, net profit 2.0%). Judging from the driving factors, ① Interest spreads have steadily rebounded, the negative contribution to revenue (-1.2pct) is weaker than 1Q24 (-3.7pct), superimposed scale growth is contributing 2.5 pct (1Q24:5.0 pct), and net interest income is contributing 1.3 pct (1Q24: +1.4pct) to revenue growth. ② Affected by the base figure, non-interest income dragged down revenue performance: 1H24 Other non-interest income fell 10.2% year on year, contributing a negative 2.2 pct to performance. Among them, investment income fell 11.6% year on year, mainly due to higher valuations and higher base after individual equity IPOs last year, and subsidiary equity investment income declined a lot. Revenue from 1H24 fell 14.6% year on year, negative contribution to performance (-2.6 pct) increased compared to 1Q24 (-1.2 pct), and revenue from agency business and bank card business decreased 39.5% and 19.8% year over year. ③ The provision continued to make a positive contribution to performance: benefiting from less non-credit impairment losses compared to the same period, the provision contributed 2.3 pct (1Q24: +3.4 pct) to the performance in the first half of the year, and the combined income tax contributed 2.4 pct (tax exemption for treasury bonds and local bonds), driving the net profit growth rate to increase from -6.3% before provision to -1.6%.

The focus of the interim report: ① The first major bank's mid-term dividend plan was implemented, with a mid-term dividend rate of over 32%: it is planned to distribute 13.5 billion yuan (0.182 yuan per share) in the first half of the year, accounting for 32.36% of 1H24's net profit. A-shares are expected to be implemented in January 2025. ② Low 2Q24 interest spreads rebounded month-on-month: 1H24 interest spreads increased by 1 bps to 1.29% compared to 2023. It is estimated that 2Q24 increased 6 bps month-on-month. It is expected to benefit from improved deposit costs, and 1H24 deposit costs decreased by 12 bps compared to 2023. ③ Under the pressure of interest spreads, more attention was paid to loan structure adjustment: 2Q24 loans increased 6.1% year on year (1Q24:6.8%), and 1H24 added a total of 310.6 billion yuan (47% for the whole of 2023), of which the bill pressure dropped by nearly 44 billion yuan. ④ Asset quality is stable, and provision coverage has increased beyond expectations. Against the backdrop of steady generation of defects, 1H24 increased its write-off and disposal efforts (write-off of 16.4 billion, an increase of 38% over the previous year), increasing the 2Q24 provision coverage rate by 8 pcts to 205% month-on-month.

Retail credit has continued its quarterly recovery trend since this year, slowing down the structure of public credit. 2Q24 loans increased 6.1% year over year (1Q24:6.8%). Structurally, 1) retail credit investment was better than expected: 2Q24 retail loans added 54 billion (1Q24:28.7 billion), an increase of 25.9 billion over the previous year. Among them, non-mortgage retail sales increased by 23.7 billion, 14.1 billion, and 13.3 billion in the quarter for consumer loans and others, credit cards, and personal business loans, respectively; mortgages added 3.1 billion, which was better than 1Q24 (decrease of 4.7 billion yuan). 2) Investment in public credit slowed, and the pressure on notes continued to drop: 2Q24 added 18.4 billion yuan to the public sector (excluding notes), a year-on-year decrease of about 36.2 billion yuan; the pressure on notes continued to drop, with 1Q24 and 2Q24 falling by 36 billion yuan and 7.9 billion respectively.

In addition to the asset-side adjustment structure, significant improvements in debt-side costs are a core variable in stabilizing interest spreads. The 1H24 spread was 1.29%, down 2 bps year over year, up 1 bps from 2023. Judging from the factors affecting interest spreads: ① On the debt side, deposit costs higher than those in the industry are the main drag on payment interest spreads lagging behind other major state-owned banks, but 1H24 deposit costs fell 12 bps to 2.21% compared to 2023, driving debt costs down 9 bps, which is also the main factor in stabilizing the low interest rate spread of 1H24. Considering that the 2Q24 deposit growth rate fell 1.6 percentage points to 0.6% from quarter to quarter, it is expected that the reduction in deposit listing interest rates and manual interest compensation regulations will drive improvements in deposit costs. ② On the asset side, 1H24 yield declined by 11 bps to 3.48% from 2023, hedging downward pressure on asset pricing through credit restructuring (increased retail sales, reduced bill pressure) and non-credit asset investment (1H24 interbank assets increased 28 bps compared to 2023).

In the next stage, considering that interest rates on emerging loans are still under downward pressure under weak economic recovery, the key to stabilizing interest spreads is debt-side cost control. At the same time, an increase in the share of relatively high-yield retail loans is also expected to boost asset-side pricing performance.

Retail risks are still worth paying attention to. The impact indicators fluctuated slightly, but the Bank of Communications has proactively stepped up write-off and disposal efforts and consolidated the foundation of provisions. The 2Q24 defect rate remained flat at 1.32% quarter-on-quarter, and the estimated 1H24 annualized bad generation rate was 0.43% (2023:

0.43%). Looking at the breakdown, the retail loan non-performing rate increased by 8 bps to 0.98%, and the credit card, mortgage, and personal business loan non-performing rate increased by 13 bps, 5 bps, and 8 bps to 2.32%, 0.48%, and 0.88%, respectively; the overall line of public finance, the corresponding bad credit rate decreased by 11 bps to 1.54% and 4 bps month-on-month compared to the beginning of the year, and the real estate loan non-performing rate decreased slightly by 2 bps to 4.97% from the beginning of the year. Looking at forward-looking indicators, the 2Q24 attention rate and overdue rate increased by 13 bps and 6 bps to 1.66% and 1.45%, respectively. Mainly due to the decline in the ability of the retail customer base to repay, the forward-looking indicators for credit cards, mortgages, and personal operating loans all increased to varying degrees. In response to potential retail and real estate risks, the Bank of Commerce has stepped up its write-off and disposal efforts. The 1H24 write-off scale reached 16.4 billion, an increase of 38% over the previous year, driving the 2Q24 provision coverage rate to increase by 8 pcts to 205% month-on-month.

Investment analysis opinion: Bank of Communications's interim revenue and performance was slightly lower than expected, but under active credit restructuring and strengthened debt cost control, interest spreads rose steadily and slightly, and forwardly considered potential retail risks to increase write-off and disposal efforts, and asset quality remained steady.

Based on careful considerations, non-interest income was lowered, credit costs were raised, and the profit growth forecast for 2024-2026 was lowered to -0.7%, 1.1%, and 1.7% (the original forecast was 0.3%, 3.1%, 4.2%). The current stock price is 0.60 times the 2024 PB. The current dividend rate corresponding to the stock price of the Stock Exchange is 4.7%, and it has become the first major bank to announce a mid-term dividend plan. Under the high dividend strategy, it is expected to still be favored by capital and maintain an “increase in wealth” rating.

Risk warning: The economic recovery fell short of expectations, and interest spreads continued to be pressured; the decline in retail asset quality exceeded expectations; and demand-side recovery in the real economy was significantly lower than expected.