Incident: Bank of Suzhou disclosed its 2024 three-quarter report. 9M24 achieved revenue of 9.3 billion yuan, a year-on-year increase of 1.1%, and realized net profit of 4.2 billion yuan to mother, an increase of 11.1% over the previous year. The 3Q24 non-performing rate remained flat at 0.84% month-on-month, and provision coverage fell 13.1 pct to 474% quarter-on-quarter. Performance and asset quality are in line with expectations.

Revenue was in line with expectations, and maintaining double-digit growth highlighted excellent performance stability: 9M24 Bank of Suzhou's revenue increased 1.1% year on year (1.9% for 1H24), and net profit to mother increased 11.1% year on year (1H24 was 12.1%). Judging from the driving factors, ① the slowdown in net interest income is a major drag on revenue. 9M24's net interest revenue fell 6.5% year on year (1H24 fell 2.3%), dragging down the revenue growth rate by 4.5 pcts. Among them, scale growth contributed 7.7 pcts, and narrowing interest spreads dragged down 12.2 pcts. ② Investment returns were realized, and non-interest income growth accelerated and revenue performance was stable. 9M24's non-interest revenue increased 19% year over year (1H24 was 11%), contributing to the revenue growth rate of 5.6 pct. Among them, other non-interest income related to investment income increased 41% year over year and contributed 7.6 pcts year over year.

③ High provisions help continue to release performance, and provision to feed back profit growth of 14pct.

The focus of the third quarterly report: ① Public credit continues to grow. Retail credit has not yet surfaced, or is related to the active drop in operating loan pressure. 3Q24 loans were 14.1% year-on-year, with additional loans of 5.2 billion yuan added in the third quarter, of which 8 billion yuan contributed to the public sector and 2.8 billion yuan in retail sales (a cumulative decrease of 5.4 billion yuan in the first three quarters). ② According to estimates, interest spreads declined significantly from month to month, and stabilizing interest spreads still needs to be effectively boosted. The 9M24 interest spread was 1.41%, down 30 bps year on year and 7 bps from 1H24. Of these, the 3Q24 interest spread was estimated to be 1.26%, and the quarter-on-month decrease was 19 bps. ③ Bad disposal efforts were stepped up in the third quarter, and high provisions were made to ensure that the quality of assets was safe. The estimated annualized defect generation rate of 0.7% in 3Q24 (about 0.38% in 1H24) is mainly related to centralized write-off disposal (write-off in a single quarter exceeded 0.5 billion yuan, accounting for nearly 60% of the first three quarters). In the third quarter, the Bank of Suzhou's provision coverage rate remained at 474%, and the loan ratio remained at a leading level of about 4% in the same industry.

Since this year, the Bank of Suzhou's credit boom has grown. The retail side has focused on structural adjustments and actively reduced operating loans; due to structural factors that are weak in retail growth, interest spreads have continued to decline: Bank of Suzhou loans in 3Q24 were 14.1% year-on-year (14.5% in 2Q24), adding a total of 36.9 billion yuan in loans in the first three quarters, of which 5.2 billion yuan was added in the first three quarters. In terms of structure, 8 billion yuan was added to the public sector in the third quarter, while retail sales declined by 2.8 billion yuan (cumulative decrease of 5.4 billion yuan in the first three quarters), which is expected to be related to the drop in operating loan pressure (cumulative pressure drop of more than 5 billion yuan in the first half of the year). In terms of price, the 9M24 interest spread was 1.41%, down 7 bps from 1H24 and 30 bps from year on year (1H24 was 26 bps down year on year). Among them, the 3Q24 interest spread was estimated to be 1.26%, down 19 bps from quarter to quarter. Looking forward to the average caliber estimate at the end of the early stages, the 3Q24 yield on interest-bearing assets fell 7 bps to 3.7% from quarter to quarter, and the interest-bearing debt cost ratio rebounded 6 bps to 2.2% from the quarter, but fell by more than 10 bps from the beginning of the year.

In the third quarter, the low level of non-performing assets was written off and disposal increased, but high provision was made to ensure that the asset quality was safe: the 3Q24 Bank of Suzhou had a flat rate of 0.84% from quarter to quarter, and the 9M24 defect generation rate was calculated to be 0.5% (0.23% in 2023). Among these, the 3Q24 bad generation rate was estimated to be 0.7%, or related to intensive write-off efforts (over 0.5 billion yuan in a single quarter, accounting for nearly 60% in the first three quarters). Thanks to strong downward risk handling, the 3Q24 forward-looking indicator attention rate declined by 5 bps from quarter to quarter to 0.83%. In terms of risk offsetting capacity, the 3Q24 provision coverage rate decreased by 13pct to 474% from quarter to quarter, and the loan ratio remained at a leading level of nearly 4% in the industry. High provision ensures a smooth transition in asset quality.

Investment analysis opinion: Active risk management ensures stable performance. “Low defects and high provisions” have a starting point to ensure stable performance. At the mid-term level, the Bank of Suzhou continues to be optimistic about implementing the ROE improvement path of steadily increasing leverage and reducing costs. In the short term, it focuses on the effectiveness of stabilizing interest spreads and revenue trends. Maintaining the profit growth forecast, net profit to mother is expected to grow at a year-on-year rate of 10.3%, 10.4%, and 10.7% in 2024-2026, respectively. The current stock price corresponds to 2024 PB 0.68 times, maintaining a “buy” rating.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; retail and other tail risks were exposed, and asset quality deteriorated beyond expectations; follow up on the company's “Notice on Litigation Matters” in October.