Incident: Bank of Communications released its 2024 mid-year report. During the reporting period, the company achieved operating income of 132.347 billion yuan, -3.51% year over year; realized net profit to mother of 45.287 billion yuan, -1.63% year over year; and annualized weighted ROE was 9.29%, -0.87pct year on year. Mid-term dividend of 0.182 yuan/share, dividend payout ratio of 29.85%.

Net interest income grew steadily, and non-interest net income was a major drag on revenue. The company's net interest income during the reporting period was 84.234 billion yuan, +2.24%; in terms of spin-off, changes in the average balance of assets led to net interest income of +7.925 billion yuan, and changes in annualized average yield and annualized average cost ratio led to net interest income of 6.078 billion yuan. Net non-interest income during the reporting period was 48.113 billion yuan, -12.15%; the average revenue was 21 billion yuan, -14.56% YoY, mainly under pressure from agency, investment banking and bank card business income; investment income+fair value change income was 16.022 billion yuan, -9.38% YoY, mainly affected by the high base of valuations brought about by the increase in valuations after individual equity IPOs last year.

The loan structure was optimized, and interest spreads rebounded month-on-month. The balance of corporate loans at the end of the reporting period was 8.27 trillion yuan, +3.90% compared to the end of the previous year; corporate loans, personal loans, and notes accounted for 65.94%, 30.91%, and 3.15% respectively, and +0.85pct, -0.17pct, and -0.68pct respectively at the end of the previous year. The share of notes dropped significantly. The company's net interest spread during the reporting period was 1.29%, -2bp year-on-year, and 24Q1 +2bp month-on-month; of these, return on interest-bearing assets and interest rate on interest-bearing liabilities were 3.48% and 2.36%, respectively, -16 bps and -9 bps, respectively.

The defect rate has declined, and the forward-looking indicators have fluctuated. The company's defect rate, attention rate, and overdue rate at the end of the reporting period were 1.32%, 1.66%, and 1.45%, respectively, compared with -1 bp, +15 bps, and +7 bp at the end of the previous year, respectively. Fluctuations in forward-looking indicators mainly stem from the retail side. The personal loan attention/overdue rate at the end of the reporting period was +23/+29 bps compared to the end of the previous year. At the end of the reporting period, the company's provision coverage rate and provision rate were 204.82% and 2.70%, respectively. Compared with the end of the previous year, they were +9.61 pct and +0.11 pct, respectively, and +7.77 pct and +0.10 pct month-on-month in 24Q1, respectively.

Investment advice: Bank of Communications's loan structure has been optimized, and interest spreads have rebounded month-on-month; despite fluctuations in forward-looking indicators, provision levels have continued to rise, and risk resilience is sufficient. The company's revenue for 2024-2026 is estimated to be 255.065, 260.405, 269.338 billion yuan, net profit due to mother of 91.496, 93.806, 97.289 billion yuan, and net assets per share of 15.43, 16.66, and 17.94 yuan. The PB valuation corresponding to the closing price on September 6 is 0.44, 0.41, 0.38 times. Upgraded to “Buy” rating.

Risk warning: macroeconomic downside risk, risk of interest spreads continuing to narrow, risk of significant deterioration in asset quality