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Since entering 2020, Hengfeng Bank's performance has improved, but it also faces growth pressure.

Text/Daily Financial Report Zhang Heng

On July 5, the State Financial Regulatory Administration issued an administrative approval, approving the qualifications of Bi Guoqi and Fang Yi as deputy presidents of Hengfeng Bank.

This is the official implementation of the two deputy presidents positions that Hengfeng Bank will appoint from December 2023. At the same time, this is another important personnel change in Hengfeng Bank after Bai Yushi took over as acting president in May this year. The importance of this to the bank's future strategic and operational development is self-evident.

We know that Hengfeng Bank once had poor performance due to internal control and other issues. Later, it began to gradually improve through methods such as "stripping off bad assets and introducing strategic investors". In this regard, Zhou Liang, vice chairman of the China Banking and Insurance Regulatory Commission, also said in April 2020 that "Hengfeng Bank has changed from a 'bad' bank to a 'good' bank."

As the dust settles on the two deputy presidents, Hengfeng Bank's future operating performance has also attracted widespread attention from the outside world.

Continuous changes in senior management

Younger and more professional become new trends

Judging from their resumes, the two new deputy presidents were both born in the 1970s, and have previously held important positions in various departments and branches of Hengfeng Bank, having been promoted step by step.

According to the bank's previously disclosed 2023 annual report information, Bi Guoqi was born in 1978 and has been the bank's proposed deputy president since December 2023. He graduated from Shandong University in his early years with a master's degree in business administration. He holds the titles of senior economist, certified public accountant, and internationally certified internal auditor.

Bi Guoqi joined Hengfeng Bank in February 2008. He has served as assistant general manager of the Planning and Finance Department, deputy general manager and financial director of AM&PB, temporary head of the Planning and Finance Department, deputy general manager (in charge of work), general manager, and general manager of the Capital Operations Center.

Another vice president, Fang Yi, was born in 1971. He graduated from Shandong University of Finance and Economics and later obtained a master's degree in business administration for senior executives from Fudan University. In his early years, he worked in the Lixia Branch and Heping Branch of the Construction Bank in Jinan. It was not until November 2005 that Fang Yi officially joined Hengfeng Bank. He served as a member of the Party Committee and vice president of the Jinan Branch, deputy secretary of the Party Committee and vice president (in charge of work) of the Chengdu Branch, secretary of the Party Committee and president of the Chengdu Branch, and secretary of the Party Committee and president of the Hangzhou Branch.

The same date as Bi Guoqi's proposed appointment, Fang Yi will also serve as a member of the Party Committee from December 2023, and is the proposed candidate for the bank's deputy president. At that time, the relevant qualifications of the two are still subject to review by the regulatory authorities.

Now, with the two people's qualifications officially approved after half a year, the number of vice presidents of Hengfeng Bank has officially increased from 3 to 5. The other personnel are Nie Dazhi, Zheng Xianzhong and Bai Yushi.

Among them, Nie Dazhi and Zheng Xianzhong are both "post-60s", born in 1964 and 1967 respectively, while Bai Yushi is the youngest vice president of Hengfeng Bank, born in 1982, a true "post-80s".

It is worth mentioning that on May 14 this year, Bai Yushi attended an event as a member of the Party Committee and Vice President of Hengfeng Bank (performing the duties of the President on behalf of the Bank). As the position of President of Hengfeng Bank has been vacant for a long time, this has triggered speculation from all walks of life that the position of the bank's acting president may have been changed.

It should be noted that in August 2022, Wang Xifeng, the former president of Hengfeng Bank, resigned due to job changes. Since then, the position of president has been vacant and urgently needs to be filled. It was not until May 2023 that Zheng Xianzhong, then vice president, began to serve as acting president.

Xin Shuren, who is currently the chairman of Hengfeng Bank, was born in 1966. He worked in the Jinan Branch of the People's Bank of China for 12 years, rising from deputy director of the Statistics Research Department to member of the Party Committee and secretary of the Discipline Inspection Commission. Then in January 2012, he served as president and party secretary of the Qingdao Central Branch of the People's Bank of China and director of the Qingdao Branch of the State Administration of Foreign Exchange. In June 2020, he served as secretary of the Party Leadership Group and director of the Shandong Provincial Bureau of Statistics. He will serve as secretary of the Party Committee and chairman of Hengfeng Bank until January 2023.

As the saying goes, "get rid of the old and bring in the new", judging from the current senior management composition of Hengfeng Bank, the characteristics of youth, specialization and supervision are very distinct, which will be of great benefit to the bank in resolving its previous internal control problems. At the same time, rejuvenation will not only inject fresh "blood" into Hengfeng Bank and make the senior management team more vibrant, but will also prompt the bank to make new changes in its business logic and business model, laying the foundation for the implementation of internal business management strategies in the future.

Mixed operating results

Narrowing the gap is still the key to development

In fact, since entering 2020, Hengfeng Bank's performance has improved, but it also faces certain growth pressure.

Why do we say this? Let's take a longer timeline. According to the statistics of the Daily Financial Report, from 2019 to 2023, Hengfeng Bank's operating income will be 13.763 billion yuan, 21.028 billion yuan, 23.879 billion yuan, 25.120 billion yuan and 25.275 billion yuan, respectively, with year-on-year growth of -14.17%, 52.79%, 13.56%, 5.2% and 0.62% respectively; the net profit attributable to the parent company in the same period will be 661 million yuan, 5.310 billion yuan, 6.381 billion yuan, 6.748 billion yuan and 5.146 billion yuan, respectively, with year-on-year growth of 23.55%, 703.33%, 20.17%, 5.75% and -23.74% respectively.

It can be seen that although Hengfeng Bank's revenue and profits are on an upward trend, the growth rate is declining year by year. In this regard, Hengfeng Bank explained in its 2023 annual report: "The increase in total profit and the decrease in net profit are mainly due to the one-time transfer back of deferred tax assets in accordance with enterprise accounting standards. After restoring this factor, the net profit increased by 4.80% year-on-year on the same basis."

After the vertical comparison by timeline, let's substitute Hengfeng Bank's operating performance into the horizontal comparison of the 12 joint-stock banks. In terms of revenue, Hengfeng Bank's revenue is the only one of the 12 joint-stock banks that is growing year-on-year in 2023, but its overall size is only higher than Bohai Bank, ranking second from the bottom.

Entering 2024, Hengfeng Bank saw "increased revenue but not increased profits" in the first quarter. Data showed that by the end of the first quarter of this year, the bank's operating income was 6.311 billion yuan, a slight increase of 0.8% year-on-year, mainly due to the growth of investment income; while net profit attributable to the parent company fell by 19.9% ​​year-on-year to 1.156 billion yuan due to the increase in credit impairment losses.

Of course, in addition to the mixed performance and operating data, Hengfeng Bank's profitability also needs to be strengthened.

Let's first look at the core indicator that reflects the profitability of banks - net interest margin. We know that in the past two years, affected by macroeconomic factors such as concessions to the real economy, the overall net interest margin of my country's commercial banks has generally narrowed and declined. According to industry data, at the end of 2023, the overall net interest margin of my country's commercial banks was 1.69%, a year-on-year decrease of 22BP.

At the same time, that is, by the end of 2023, Hengfeng Bank's net interest margin was 1.59%, a year-on-year decrease of 9 basis points, and 10 basis points lower than the industry average of 1.69%.

The reason why Hengfeng Bank's net interest margin is under downward pressure is mainly related to the decline in both the yield on its interest-earning assets and the interest payment cost.

According to the 2023 financial report data, the average yield of Hengfeng Bank's interest-bearing assets was 3.94% last year, down 13 basis points from 4.07% in 2022. In the past year, Hengfeng Bank continued to strengthen liability cost control, reduce deposit cost rate, and optimize liability structure. The average cost rate of the bank's interest-bearing liabilities was 2.43%, down 1 basis point year-on-year.

It can be seen that the decline in Hengfeng Bank's income from interest-bearing assets in 2023 is significantly higher than the decline in the cost of interest-bearing liabilities. It is not surprising that the net interest margin has declined, which has also put certain constraints on the bank's profitability.

Steady growth of assets

Asset quality has improved but still needs to be improved

After a series of risk mitigation and reform measures such as "divesting bad assets and introducing strategic investors", Hengfeng Bank's assets and bad assets have attracted much attention from the market.

From the perspective of assets, Hengfeng Bank has made remarkable progress. According to its latest disclosed unaudited financial statements, as of the end of the first quarter of 2024, its total assets exceeded 1.45 trillion yuan, an increase of 1.05% from the beginning of the year; total liabilities in the same period were 1.32 trillion yuan, an increase of 1.04% from the beginning of the year. The total amount of loans and advances issued was 833.971 billion yuan, an increase of 5.65%; the total amount of deposits absorbed was 781.852 billion yuan, a decrease of 0.14% from the beginning of the year.

From the perspective of industry classification, the top five industries to which Hengfeng Bank issued the most loans in 2023 are: leasing and business services; water conservancy, environment and public facilities management; construction; real estate, and manufacturing, with loan amounts of 213.753 billion yuan, 135.372 billion yuan, 69.597 billion yuan, 62.525 billion yuan and 60.063 billion yuan, respectively, accounting for 26.31%, 16.67%, 8.57%, 7.7% and 7.39% of the total loans, respectively.

In terms of non-performing loans, Hengfeng Bank's asset quality is clearly improving. According to previous financial reports, from 2019 to 2023, Hengfeng Bank's non-performing loan ratio was 3.38%, 2.67%, 2.12%, 1.81% and 1.72% respectively, showing a downward trend year by year.

However, if Hengfeng Bank's non-performing loan ratio is placed among the 12 joint-stock banks, it does not have an advantage. It is only slightly better than Bohai Bank (1.78%). Compared with other joint-stock banks, the bank's non-performing loan ratio is relatively high.

Public data shows that at the end of 2023, the industry average of non-performing loan ratio of my country's commercial banks was 1.59%, and the national average of joint-stock banks was 1.34%. In comparison, Hengfeng Bank's non-performing loan ratio is 13 basis points higher than the overall level of commercial banks in the same period, and still needs to be reduced in the later stage.

Frequent issuance of bonds to supplement capital adequacy ratio

In addition to the need to improve performance, Hengfeng Bank's capital adequacy ratio has also declined.

As shown in the figure below, it is obvious that Hengfeng Bank's capital adequacy ratios are not stable. Among them, the core tier 1 capital adequacy ratio has dropped from 9.68% at the end of 2019 to 8.62% at the end of 2023; it faces certain supplementary pressure.

At the end of the first quarter of this year, Hengfeng Bank's core tier 1 capital adequacy ratio continued to be under downward pressure, falling to 8.44%, down 0.18 percentage points from the end of last year; the tier 1 capital adequacy ratio was 10.97%, down 0.3 percentage points from the end of last year; but the capital adequacy ratio rebounded to 12.48%, up 0.56 percentage points from the end of last year.

However, compared with the industry average, Hengfeng Bank still has a big gap. According to the official website of the State Financial Supervision and Administration Bureau, at the end of the first quarter of 2024, the core tier 1 capital adequacy ratio of my country's commercial banks was 10.77%; the tier 1 capital adequacy ratio was 12.35%; and the capital adequacy ratio was 15.43%.

Of course, in order to further improve its capital adequacy level, Hengfeng Bank has also made a lot of efforts. For example, in May 2022, Hengfeng Bank's 2022 perpetual capital bonds were successfully booked and filed in the interbank market. The issuance scale of this issue is 5 billion yuan, the coupon rate is 4.55%, and the term is 5+N. It is reported that this bond is another successful issuance of the bank on the basis of the cumulative issuance of 23 billion yuan of perpetual bonds since 2020. The funds raised will be used to supplement capital and support loan issuance.

On August 5, 2022, Hengfeng Bank successfully issued the second phase of financial bonds in 2022 in the national interbank bond market. The issuance scale of this bond was 5 billion yuan, the face interest rate was 2.60%, the term was 3 years, and the issuance was completed on August 9 of the same year.

Thanks to the continuous implementation of bond issuance to "replenish blood" measures, Hengfeng Bank's capital adequacy level has been effectively supplemented during this period, but the good times did not last long. With the continued development of its business in recent years, capital consumption has increased, and the bank is facing pressure to replenish capital.

Entering 2024, Hengfeng Bank has issued two bonds to "recover" so far. In February this year, it issued 7 billion yuan of secondary capital bonds "24 Hengfeng Bank Secondary Capital Bond 01"; then on July 9, Hengfeng Bank issued another 5 billion yuan of secondary capital bonds "24 Hengfeng Bank Secondary Capital Bond 02", with a term of 10 years and an interest rate of 2.32%.

In general, with the continuous improvement and deployment of senior management personnel, we also expect Hengfeng Bank to stabilize its internal management basics as soon as possible and complete its innovation and transformation, so that it can focus all its energy on improving operating performance and digesting indigestion and usher in a new stage of development.

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