Incident: Bank of Ningbo released its report for the third quarter of 2024: the company achieved revenue of 50.75 billion yuan (YOY +7.4%) and net profit of 20.71 billion yuan (YOY +7.0%); annualized ROE for the first three quarters was 14.51%, down 1.43pct year on year; at the end of September, the company had a defect rate of 0.76% and provision coverage of 404.1%.

Comment:

In 3Q24, both revenue and profit growth increased month-on-month. The revenue and profit growth rates of 24Q3 in a single quarter were 8.1% and 10.2% respectively, up from 1H24, which is not easy in the current banking environment. Looking at further disassembly, part of the reason is that the 23Q3 revenue base was low in a single quarter. Another reason was that the company continued to strengthen credit investment and optimize financial leverage, maintain steady revenue growth with stable volume and price stability, and at the same time actively strengthened cost control to drive a year-on-year decline in the cost-revenue ratio.

1. Contrary to the trend, stabilized prices, and net interest income increased 16.9% year-on-year.

In the current business environment where credit demand is weak, the company took the initiative to increase credit investment. In the first three quarters, loans maintained a 19.6% year-on-year increase, and the yield level was not low. We estimated the yield on interest-bearing assets in a single quarter of 4.01% in 24Q3, an increase of 3 bps over Q2, showing the company's strong ability to expand the credit market. On the debt side, we estimated the Q3 interest-bearing debt cost ratio of 2.05%, a slight increase of 1 bps over the previous month, which is relatively stable.

Judging from the net interest spread index, the net interest spread disclosed for the first three quarters was 1.85%, down 2 bps from month to month. The decline narrowed, and the net interest spread stabilized. We expect that along with the subsequent reduction in interest rates on deposit listings to drive cost improvements and the recovery in interest rates on new loans to increase the return on assets, the company's net interest spread is expected to rise steadily. The asset period is short and the pricing capacity is strong, and the net interest spread may improve ahead of comparable peers.

2. Earnings and other non-interest performance continued to fall short of expectations.

The 3Q24 company's revenue fell 30.3% year over year, mainly due to the decline in agency business revenue, which accounts for nearly 80% of the middle revenue. In other non-interest terms, investment income, exchange gains and losses, and changes in fair value combined increased 0.3% year over year. Compared to comparable peers, under the overall bullish bond market in the first three quarters, the contribution of bond investment income was relatively small. Overall, non-interest revenue accounts for about 30% of revenue. Considering the low Q4 base last year, there is little chance that the growth rate of non-interest income will decline further. Follow-up performance remains to be observed in bond market performance and changes in capital market-related consignment revenue.

3. Under cost control, the cost-revenue ratio decreased.

Expense control was the main factor driving the 21.7% year-on-year increase in Q3 profit before provision in a single quarter. The 11% year-on-year decline in Q3 expenses led to a year-on-year decline in the cost-revenue ratio in the first three quarters to 33.4%, a year-on-year decrease of 3.8 pcts.

4. The non-performing rate continues to be low, and the provision coverage rate and loan ratio have declined.

At the end of the third quarter, the defect rate remained stable at a low level of 0.76%. Note that the loan ratio continued to rise month-on-month, rising 6 bps to 1.08% at the end of the third quarter, and has been rising for 4 consecutive quarters. We expect this to be linked to a rise in retail non-performing loan generation rates. According to the disclosure, the non-performing rates of personal consumer loans and personal operating loans were 1.56% and 3.04% respectively at the end of June. The phased rise in retail failure is in line with industry trends, and further observation is needed.

We anticipate that the risk of adverse retail sales is expected to strengthen and improve as the economy stabilizes. The company currently has thick safety pads, and its ability to offset risks is still strong. At the end of the third quarter, the provision coverage rate was 404.8%, down 15.7 pct from month to month, 3.08% from loan, down 11 bps from month to month.

Investment advice: The improvement in the profit growth rate before the preparation of the company's third quarterly report exceeded expectations, mainly driven by its strong credit investment capacity and cost control capabilities. What was slightly lower than expected was that the growth rate of non-interest income was slightly slow, the loan ratio continued to rise, and the provision coverage rate continued to decline. We believe that Bank of Ningbo's large-scale expansion is expected to be maintained, net interest spreads are expected to take the lead in stabilizing, there is little probability that non-interest income will decline further under the low base effect of last year's Q4, and the risk of bad retail sales will rise or be phased. The net profit growth rates of 2024-2026 are expected to be 10.2%, 11.3%, and 12.2%, respectively. The corresponding BVPS is 30.28, 34.25, and 38.70 yuan/share, respectively. The closing price on October 31, 2024 was 25.54 yuan/share, corresponding to 0.84 times 24 PB.

We continue to be optimistic about the company's high growth: First, Bank of Ningbo is deeply involved in the Yangtze River Delta region and is expected to continue to benefit from regional economic development. Second, the company's institutional mechanism has a high degree of marketization, strong strategic execution, and a solid foundation for high-quality business expansion. Historical data shows that the company has continuous forward-looking quantitative and price control capabilities, prudent risk control capabilities, and the ability to diversify its business. Third, the diversified profit center is gradually being consolidated, which is expected to maintain steady and rapid growth in revenue and profit, give 1.0 times the target PB for 24 years, and maintain a “highly recommended” rating.

Risk warning: Economic recovery and physical demand recovery fell short of expectations, and the speed of table expansion, level of net interest spreads, and asset quality were impacted.