Bank of Ningbo: Initiating Coverage With CNY 32 Fair Value, No-Moat Rating

We are initiating coverage on Bank of Ningbo 002142, 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.

Trading at a 2023 price/book ratio of 1.0 times versus the 10-year average of 1.6 times, the stock is currently undervalued, in our view. BONB’s favorable market positioning, sound corporate governance, fast growth, and high profitability and provision coverage should justify a valuation premium against peers despite the near-term challenges.

We believe market concerns of weakening foreign trade activities in the Yangtze River Delta and rising competition from large banks in the retail lending segment are overly discounted in the current share price. BONB’s strong bond with SME customers via intensive offline operations and comprehensive service offerings, and the economic strength in BONB’s key operating markets should continue to generate solid growth for BONB in 2023.

BONB’s retail loan yield faces significant downward pressure during a falling rate cycle. We expect BONB’s net interest margin, or NIM, will bottom out in 2023 and stabilize afterward, as the negative impact of declining retail loan yields was offset by a rebound in retail credit demand on improved consumer confidence. Besides, we believe BONB’s NIM will benefit from its ability to manage downside risks by targeting more “underserved” retail customers, thanks to its deep knowledge of local customers from its heavy offline operation and a sound track record of prudent risk management.