Company Reports

No-moat Bank of Ningbo continued its momentum in the first quarter of 2024, delivering year-on-year growth in revenue and net profits of 5.8% and 10.1%, respectively, while most of its peers under our coverage reported declines in both metrics. The results highlight a smaller-than-expected decline in net interest margin, supported by strong growth in loans to small and midsize enterprises, and weaker-than-expected fee income, which resulted from fee reduction in sales of financial products. We thus lift our 2024 NIM forecast by 3 basis points to 1.60% and lower our fee income growth projection by 6 percentage points to negative 10%. Our outlook for full-year 2024 net profit growth remains unchanged at 9%.

We reduced our fair value estimate for Bank of Ningbo, or BONB, to CNY 27 per share from CNY 32 to reflect a more challenging credit quality outlook and fee income pressure. The pickup in fourth-quarter net interest income growth is a surprise, driven by strong loan growth in the past quarter that contributed nearly 18% of 2023 new loans. The 1-basis-point sequential decline in net interest margin, or NIM, to 1.88% also beats our expectation. The above-peer growth was achieved by BONB’s rapid loan expansion underpinned by relatively high-risk categories, including loans to property developers, retail consumption, and business service sectors, which contributed 65% of 2023 new loans. In particular, its consumer finance subsidiary contributed 17% of BONB’s 2023 new loans. As consumer finance companies typically serve smaller value borrowings for subprime borrowers, we are concerned that its increased exposure to consumption and real estate loans will weigh on its credit quality. Thus, we increased credit costs assumptions for the next three years by 8 to 12 basis points to reflect such risks. Consequently, we cut 2024-26 earnings forecasts by 5%-11%.

Bank of Ningbo, or BONB, is the fifth largest city commercial bank in China, with some of the best profitability metrics among peers and above-peers growth over the past decade thanks to a differentiated business strategy and extensive branch network in the most affluent areas in China.

Bank of China, or BOC, China Minsheng Bank, or CMBC, and Bank of Ningbo, or BONB’s cumulative nine-month net profit growths were largely in line. We maintain our fair value estimates of HKD 3.5 per H share (CNY 3.1 per A share) for BOC, HKD 3.6 per H share (CNY 3.3 per A share) for CMBC, and CNY 32 per A share for BONB. The first nine-month results reflect less net interest margin, or NIM, pressures than peers, which contracted 13, 14, and 10 basis points, respectively, for BOC, CMBC, and BONB. BOC’s NIM performance was slightly stronger than expected, only declining 3 basis points from the first half’s level. We suspect this was mainly attributable to the rising NIM trend as seen in its subsidiary, BOC Hong Kong, which reported a 36-basis-point year-on-year increase for the first nine months, with third-quarter NIM further increased 10 basis points from the second quarter. We expect BOC Hong Kong’s favorable NIM trend to continue to buffer against downward pressures in BOC’s domestic RMB business in 2023 and the first half of 2024. But the benefit should taper off from second quarter of 2024 onward on higher base, rising deposit competition, and falling rates if the Fed starts cutting rates.

We maintain our fair value estimate for Bank of Ningbo, or BONB, at CNY 32 per share following in-line first-half 2023 results. The stock is undervalued, trading at one times the 2023 price/book. BONB’s share price slumped 19% year to date on concerns about growing net interest margin pressure as retail lending faces intensifying pricing competition from state-owned banks. Investors are also worrying that the soft capital markets will weigh on revenue growth more adversely than peers as agency fees contributed 87% of total fee income at BONB. However, we believe investor concerns are overblown as the first-half results show BONB’s ability to keep average asset yields stable at first-quarter levels, and the bank’s number of retail customers and retail assets under management both experienced decent double-digit percentage pace growth. We expect BONB’s future growth will inevitably slow on capital constraints after the robust asset expansion over the past few years. However, the bank should be able to maintain above-peer return on equity thanks to its differentiated business strategy and extensive branch network in the most affluent areas in China.

Large Chinese banks will release 2023 interim results in late August. We expect that stabilized loan yields after the first-quarter loan repricing, mild consumption recovery, a favorable base effect, and a generally benign credit quality outlook supported by government policies will translate to improved second-quarter growth in both revenue and net profits compared with the first quarter. We expect second-quarter net profit growth to increase by 2 or 5 percentage points to 4% to 9% for six state-owned enterprises from the first quarter’s level, primarily driven by higher revenue growth and lower credit costs.

The Hang Seng Mainland Banks Index has declined 11% from its recent peak in early May. We attribute the decline to increasing concerns about downward pressure on banks’ net interest margins, or NIMs, and growing risks related to debts of local government financing vehicles, or LGFVs, amid a weak economic recovery and struggling land sales. We believe SOE banks have smaller exposures to LGFV debt and that their credit quality is better than peers given strong bargaining power to implement prudent borrower selection. Monetary and fiscal easing and the government’s strong support for troubled regional banks also limit systemic risks, in our view. That said, we believe the ongoing LGFV loan restructuring is likely to weigh on banks’ NIMs and the classification of restructured loans as special-mentioned loans will also increase provision expenses for banks. We maintain our fair value estimates for Chinese banks as we already factored in a NIM reduction of 10-25 basis points this year and expect credit costs to trend in line with our existing forecasts.

We are initiating coverage on Bank of Ningbo, or BONB, with a fair value estimate of CNY 32 per share. We assign BONB a no-moat rating, a High Uncertainty Rating, and a standard capital allocation rating. Thanks to its first-mover advantages in serving small and micro business, SMEs, and wealthy retail customers in China’s most affluent areas, BONB has built a strong client franchise and a good reputation for client-focused culture and market-oriented management.

Bank of Ningbo, or BONB, is the fifth largest city commercial bank in China, with some of the best profitability metrics among peers and above-peers growth over the past decade thanks to a differentiated business strategy and extensive branch network in the most affluent areas in China.