Introduction to this report:
The 24Q3 revenue and net profit growth rate of the Bank of Communications slightly exceeded expectations. Interest spread management was effective, and asset quality was stable, moderate and improving. The target price was raised to 8.4 yuan to maintain an increase in holdings rating.
Key points of investment:
Investment advice: Since 2024, the Bank of Communications will emphasize high-quality development, focusing on “quantity” over “quality”.
Compared to large-scale expansion, more attention is paid to stable interest spreads. At the same time, asset quality has entered a “post-investment management year” after three years of “asset quality attack” and “asset quality consolidation year”, and the core indicators continue to improve. Based on the performance of the three quarterly reports and the repricing of future deposits and loans after interest rate cuts, the adjusted net profit growth forecast for 2024-2026 is 0.4%, 0.5%, and 2.2%, and the corresponding BVPS is 12.97 (-0.11), 13.93 (+0.03), and 14.74 (-0.03) yuan/share. Considering the intensive introduction of a package of economic stabilization policies, it is beneficial to bank risk mitigation and credit demand recovery, and boosts sector valuations. The target price was raised to 8.4 yuan, corresponding to 0.66 times PB in 2024, and maintained an increase in holdings rating.
The 24Q3 revenue and net profit growth rate slightly exceeded expectations. It is expected that the full year's revenue will decline slightly year-on-year and net profit will increase slightly, with growth rates around zero. 24Q3 revenue increased 3.3% year on year, a significant improvement over the first half of the year. Mainly due to the high non-interest income base in the first half of 2023, the impact of the high base gradually subsided and the decline narrowed in the second half of the year, but the increase is still expected to be negative for the whole year. The net interest income growth rate was basically stable. The 24Q3 growth rate slowed slightly by 0.2 pct to 2%. Among them, the Q3 net interest spread fell 5 bps to 1.26% month-on-month, and the year-on-year decline was only 2 bps. Interest spread control was quite effective. Although it is inevitable that interest spreads will narrow in the future, the decline is expected to continue to be smaller than that of peers. On the profit side, Q3 costs dropped slightly, and business and management expenses and credit impairment charges decreased by 0.4% and 0.9%, respectively, over the same period last year, increasing profit margins. Within depreciation, loan impairment charges accounted for 93%, a year-on-year decrease of 16.7%, and pressure on asset quality was gradually reduced.
The year-on-year growth rate of 24Q3 deposits and loans increased slightly to 1.0% and 6.8%, and both achieved year-on-year increases.
The share of the deposit side fell to 64.9% due to an optimized structure and slower growth rate than debt. The trend of regularization continues, and corporate deposit growth is still weak. On the loan side, the share of total assets increased by 1.2pct to 59.5% at the end of 24Q3. The share of incremental loans to public, bills, and retail was 47%, 11%, and 42%, respectively. In particular, retail loans have increased year over year and month over month, and residents' demand for credit is beginning to show signs of recovery.
In 24Q3, asset quality was steady, moderate and improving, and structural public relations were further improved, and retail sales were still under pressure.
The defect rate remained flat at 1.32% at the end of Q3. The attention rate and overdue rate decreased by 8 bps, 6 bp to 1.58% and 1.39%, respectively, and the provision coverage rate dropped slightly by 1 pct to 204 percent, and remained steady.
Risk warning: Retail credit risk exposure exceeded expectations, and the downward pace of interest spreads exceeded expectations.