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Since launching the "economic cycle weakly sensitive asset strategy", Zhejiang Commercial Bank's recent performance has been significantly better than the industry average.

The youngest joint-stock commercial bank in the A-share market, China Zheshang Bank (601916.SH), has successively released its financial reports for the first quarter of 2023 and 2024, and its latest performance has been recognized by the market.

An article published in China Economic Times in early April pointed out that through the bank's full-year performance in 2023, we can see the "practice and results of the economic cycle-weakly sensitive asset strategy." It is believed that in the context of economic fluctuations in the past two years, Zheshang Bank has established a group of customers who can cross economic cycles, thereby smoothing the impact of the cycle on bank operations.

Guosen Securities' research report published on April 30 also evaluated the bank's first-quarter operating performance as "impressive revenue and stable non-performing assets", and mentioned that as its traditional deposit and loan businesses were negatively affected by the narrowing interest rate spread, the bank actively adjusted its asset allocation, seized trading opportunities in the financial market, and drove revenue to achieve good growth.

Compared with A-share listed joint-stock banks, China Zheshang Bank has achieved impressive growth in the past two years. However, on the road to expansion, some investors also told the company to "become stronger before becoming bigger".Why is this?

Performance is accelerating

Despite its small size, Zheshang Bank has grown rapidly in the past year and has demonstrated two major highlights.

The first highlight is that both revenue and profit recorded year-on-year growth.The bank achieved annual revenue of 63.704 billion yuan, a year-on-year increase of 4.29%; net profit attributable to shareholders was 15.048 billion yuan, a year-on-year increase of 10.50%.

Compared with the industry, it is even more obvious that the "double growth" performance of Zheshang Bank is very rare. According to Tonghuashun data, the overall revenue and profit of A-share joint-stock banks in 2023 were -3.68% and -2.96% year-on-year respectively. In this context, the double-digit year-on-year growth rate of Zheshang Bank's net profit is even more dazzling.

A look at more historical data shows that in the three years before 2023, China Zheshang Bank's profit performance was actually not as good as the industry average.2023 is the year of turning point, and the rapid momentum will continue into the first quarter of 2024.In the quarter, China Zheshang Bank's revenue was 18.407 billion yuan, a year-on-year increase of 16.65%, and its net profit was 5.913 billion yuan, a year-on-year increase of 5.12%. The growth of both indicators continued to be better than the average level of joint-stock banks.

The second highlight is the industry-wide problem of being under pressure from banks' net interest margins. In 2023, Zhejiang Commercial Bank's net interest income climbed to 47.528 billion yuan, an increase of 466 million yuan year-on-year, with a growth rate of 0.99%.The net interest margin maintained good resilience. Although it fell to 2.01% in 2023, it was still better than the industry average of 1.76% during the same period.

In that year, the non-interest net income of Zhejiang Commercial Bank was also impressive, reaching 16.176 billion yuan, an increase of 2.153 billion yuan over the previous year, a growth rate of 15.35%.

It is worth noting that behind the impressive growth data of Zheshang Bank lies the problem of a small base. Currently, the market value of Zheshang Bank is the smallest among the nine A-share listed joint-stock banks, and is also lower than that of leading city commercial banks such as Ningbo Bank (002142.SZ) and Bank of Beijing (601169.SH).

Although the total assets of Zheshang Bank have crossed the 3 trillion yuan threshold, it is still the smallest in the joint-stock banking industry and is far from the leading joint-stock banks.

In terms of asset quality, at the end of 2023, the non-performing loan ratio of Zheshang Bank decreased slightly by 1bp month-on-month and 2bp from the beginning of the year, and remained stable overall; the annualized net non-performing loan generation in the fourth quarter of 2023 was 0.74%, a decrease of 31bp from the previous quarter. At the end of the first quarter of 2024, the non-performing loan ratio of Zheshang Bank was 1.44%, the same as at the beginning of the year. The Guosen Securities research report mentioned above pointed out that the asset impairment loss of Zheshang Bank in the quarter increased significantly by 38.1% year-on-year, but the provision coverage ratio decreased by 5.1 percentage points from the beginning of the year. The analysis estimated that the company increased the provision of non-credit asset provisions to continue to consolidate asset quality.

Exchange scale and provisions for growth

In 2023, Zhejiang Commercial Bank's assets and liabilities maintained synchronous and high-speed growth, with both increasing by 20% year-on-year, and the year-on-year growth rate of total liabilities was slightly higher than that of total assets. This is generally interpreted by institutions as total liabilities can support the expansion of total assets.

On the asset side, Zheshang Bank maintained a stable supply in 2023, with credit supply showing a decreasing rhythm month by month. In 2023, interest-bearing assets increased by 19.9% ​​year-on-year, of which total loans increased by 12.5% ​​year-on-year. The high year-on-year growth of bond investment drove the growth of the asset side. New loans for the whole year were 191.2 billion yuan, an increase of 13.4 billion yuan over 2022, and credit supply was stable.

One point that deserves special attention is that Zheshang Bank's financial investment has grown rapidly.According to the 2023 annual report, financial investment exceeded the trillion yuan mark and recorded 1.00 trillion yuan, a significant increase of 248.788 billion yuan from the end of last year, with a year-on-year growth rate of 33.09%. Among them, bond investment increased significantly from 546.824 billion yuan in 2022 to 760.103 billion yuan in 2023.

On the liability side, there is also a marginal upward trend in deposit growth, especially interbank liabilities maintain high growth. In 2023, interest-bearing liabilities increased by 19.8% year-on-year, of which total deposits increased by 10.9% year-on-year, a lower growth rate than the overall liability side. Therefore, the proportion of deposits to interest-bearing liabilities also decreased by 1.8 percentage points month-on-month to 64.3%.

Marginal changes on the liability side occurred in the fourth quarter of 2023.Zhongtai Securities' research report published on March 31, 2024 pointed out that the net deposit of Zheshang Bank increased by 70.2 billion yuan in the quarter, reversing the year-on-year decline in the third quarter. In addition, interbank liabilities have maintained a high growth rate, and the proportion of interest-bearing liabilities has also increased to 21.9%.

The two main factors that enabled Zheshang Bank to achieve rapid growth in performance are scale expansion and provision release.The above-mentioned Zhongtai Securities research report conducted a quantitative analysis and believed that the scale expansion will contribute 17.3 points to the performance of Zheshang Bank in 2023; followed by the release of provisions, which contributed 10.2 points to the performance. At the end of 2023, the provision coverage ratio of Zheshang Bank decreased by 0.35% quarter-on-quarter to 182.59%, which was still 0.4% higher than the beginning of the year and remained stable overall. In addition, net other non-interest income contributed 2.76 points.

The factors that dragged down the performance were primarily the net interest margin, which dragged down the performance by 16.29 percentage points, followed by the drag of costs.Fortunately, the growth rate of Zhejiang Commercial Bank's expenses showed a slowing trend, with business and management expenses increasing by 13.8% year-on-year at the end of 2023, a slower growth rate than 14.2% in the first three quarters.

Overall, Zheshang Bank is one of the few banks in the industry that has successfully achieved "trading scale for growth" in 2023.

What is the current situation of banks that “favor real estate developers the most”?

In recent years, the development of China Zheshang Bank has always been accompanied by such titles as "the bank that loves real estate enterprises the most" and "the bank that loves real estate developers the most". In the current environment, this is probably not a good thing. What is the risk exposure of China Zheshang Bank to the real estate industry in recent years?

In terms of absolute quantity, the 2023 annual report shows that the bank's corporate loans and advances to the real estate industry are not the highest in the industry, at 177.749 billion yuan. During the same period, the same indicator for Bank of China was as high as 1.47 trillion yuan.

Still, markets are very sensitive to this exposure for four reasons.

First, while various banks have been cutting loans and advances to the real estate industry, Zheshang Bank's credit to the industry has increased instead of decreased., increasing from 166.827 billion yuan in 2022 to the above 177.749 billion yuan; the proportion decreased slightly from 10.99% to 10.41%.

By comparison, it can be found that the investment of Zheshang Bank in the real estate industry is still relatively high. According to the 2023 annual report of Bank of Beijing, another bank with total assets of 3 trillion yuan, the bank's loan balance to the real estate industry is 119.458 billion yuan, which is not only less, but also has a 5.93% share that is significantly lower than that of Zheshang Bank.

Second, Zheshang Bank’s major customers are concentrated in the real estate industry.Among the top ten borrowers in 2023, the first, third, fifth, sixth and tenth customers are all from the real estate industry. The loan balance of the largest single borrower is 6.378 billion yuan, accounting for 2.69% of the net capital of Zhejiang Commercial Bank.

Third, the non-performing loan ratio of the real estate industry of Zheshang Bank is obviously high., reaching 2.48% in 2023, a significant increase from 1.66% in 2022, and higher than the non-performing loan rate of other industries.

Fourth, China Zheshang Bank’s business dealings with large real estate companies such as Evergrande continue to attract attention from investors and the market.In 2021, when the banking sector plummeted, China Zheshang Bank responded that the credit amount to Evergrande Group at that time was 3.8 billion yuan, with sufficient collateral and controllable risks. In October 2023, China Zheshang Bank again revealed on the interactive platform that the credit balance to Evergrande was more than 2 billion yuan.

Investors’ message: “Become strong before becoming big”

Combining the above analysis, it can be found that although Zheshang Bank has outperformed the industry in terms of revenue and profit growth, there are factors such as a small base, and risk control issues have always attracted the attention of the market.

An investor sent a message to Zheshang Bank on the interactive platform:It is not easy to make money. I hope the company will become strong before becoming bigger, and never try to become big first and then patch up the leaks.”

In terms of future development direction, China Zheshang Bank has given a relatively clear plan. In particular, the "economic cycle weakly sensitive asset strategy" that the market praised at the beginning of this article is also the business idea of ​​China Zheshang Bank itself.

What exactly is the “economic cycle weakly sensitive asset strategy”?In its financial report, China Zheshang Bank explained that the operation of the banking industry is highly dependent on the economic cycle, and if it wants to break this dependence, allocating assets that are less sensitive to cycles will be an entry point.

What kind of assets are weakly sensitive to cycles? Zheshang Bank believes that there are three types, namely small-amount dispersed assets, weak-cycle industry assets and CSA (total customer service). To elaborate, small-amount dispersed assets focus on customers mainly in retail and small and micro businesses, so that these assets with the natural characteristics of "small-amount dispersed" can help cross the cycle; weak-cycle industry assets are from the perspective of the industry, and are invested in industries that are weakly correlated with the economic cycle, related to the national economy and people's livelihood, and rigidly necessary, such as education and medical care, warehousing and logistics, electricity, water, gas, etc.; CSA covers six major financial services, including AUM wealth management scale and FPA corporate services.

In the 2023 annual report, China Zheshang Bank also revealed the progress of implementing the "weakly sensitive assets to economic cycles" strategy, saying that 56% of the bank's annual credit growth was invested in small and diversified assets, and the revenue growth rate of "weakly sensitive assets" far exceeded the average revenue growth rate of the bank.

Such a strategy is ideal, but it will still face many challenges in reality.Ping An Securities' research report published on April 30th commented that in the first quarter of 2024, China Zheshang Bank's net interest income benefited from the deepening of its strategy for assets that are weakly sensitive to the economic cycle and the resilience of interest rates on the asset side. Net interest income increased by 0.6% year-on-year. It is not easy to maintain growth when the industry's interest rate spread business is generally under pressure.Despite its impressive revenue performance, Zhejiang Commercial Bank's profit growth slowed down in the quarter.Especially in terms of non-interest income business, the negative impact of the reduction in bank insurance premium rates on the industry continued to manifest, with net income from fees and commissions in the quarter shrinking by 3.4% year-on-year.

Given that China Zheshang Bank is the only joint-stock bank headquartered in the affluent Zhejiang region, its business ideas of "deepening its roots in Zhejiang" and cross-regional layout have laid a foundation for the future development of its corporate and retail businesses, and the asset quality of China Zheshang Bank has entered an improvement cycle since 2022. Therefore, Ping An Securities is still optimistic that with the continuous clearing of historical burdens and the continuous deepening of strategic implementation, China Zheshang Bank's future earnings quality is expected to improve.

In terms of risk warnings, institutions generally mentioned three major issues: the economic downturn has led to an unexpected increase in industry asset quality pressure, the downward interest rate continues to squeeze the industry's interest margin, and the increased cash flow pressure on real estate companies has led to an increase in credit risk. How will Zheshang Bank, which has shown a "chaser" attitude, maintain its positive momentum in the future, optimize its own asset quality, and continuously release regional dividends? This "adverse situation" will continue.

Author: Han