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Nanjing Bank recorded "high-quality" performance growth in the first half of 2024, mainly driven by the highly uncertain "investment floating profit".

Text/Daily Financial Report Zhongyu

In the first half of 2024, Nanjing Bank's operating income increased by 7.87% year-on-year to 26.216 billion yuan, and its net profit attributable to shareholders after deducting non-recurring items increased at a higher rate than its revenue, increasing by 10.59% year-on-year to 11.477 billion yuan. It is not easy to achieve steady growth in performance under the pressure of interest rate spreads caused by macroeconomic regulation in the banking industry.

However, the increase and decrease of traditional business and non-interest business has resulted in the non-interest business accounting for more than half of Nanjing Bank's total for the first time. The significant growth pressure on core business cannot be underestimated.

The efficiency contradiction of “reducing volume”

In the first half of 2024, Nanjing Bank's net interest income decreased by 5.97% year-on-year to 12.811 billion yuan, and its proportion of total revenue fell below half for the first time (down 7.19 percentage points year-on-year to 48.87%). Overall, the narrowing of interest margins caused by cost pressure is the main factor in the decline of Nanjing Bank's traditional business.

Specifically, the average balance of interest-earning assets and interest-bearing liabilities in the first half of the year increased by 10.72% and 10.99% year-on-year respectively, with relatively matching growth rates; however, the yield on interest-earning assets fell by 0.29 percentage points to 4.06%, offsetting the growth in scale, and interest income only increased by 3.73% year-on-year to 38.87 billion yuan, while the high cost rate led to a year-on-year increase of 9.26% in interest expenses to 26.059 billion yuan.Cost expenditure was 810 million yuan higher than interest income, dragging down performance。

From the perspective of core deposit and loan businesses, the loan-to-deposit ratio in the first half of 2024 increased by 2.93 percentage points year-on-year to 85.07%:

(1) Loan side: Corporate loans increased by 16.73% year-on-year to RMB918.578 billion, which was the main growth item, and retail loans increased by 4.43% year-on-year to RMB288.129 billion. However, under the guidance of policies (giving benefits to the real economy), interest rates fell, and the average interest rate of corporate loans decreased by 0.31 percentage points year-on-year to 4.27%, resulting in a year-on-year increase of only 8.83% in interest income contributed by corporate loans (about half of the scale growth); while the average interest rate of retail loans decreased by 0.28 percentage points year-on-year to 6.63%, and the low scale growth rate resulted in a year-on-year increase of only 0.19% in interest income contributed.

Overall, the growth of loan business mainly depends on the increase in loan scale on the corporate side, while the marginal contribution of the retail side was basically zero in the first half of the year.

(2) Deposit side: The average deposit balance of Nanjing Bank in the first half of 2024 was RMB 1,404.984 billion, a year-on-year increase of 3.77%, but the structure changed significantly: corporate demand deposits, corporate time deposits and retail demand deposits decreased by 4.52%, 2.06% and 4.33% year-on-year respectively. Under the trend of fixed deposits, retail time deposits increased significantly by 24.9% year-on-year to RMB 403.824 billion. Compared with the first quarter, the data showed that only corporate time deposits recorded an increase of 7.02%, while the rest all had outflows.

Therefore, although the increase in Nanjing Bank's loan-to-deposit ratio in the first half of 2024 shows that the efficiency of its core business has improved, the loss of corporate deposits shows that Nanjing Bank's competitiveness in corporate business has declined. The "three-year doubling plan for effective customers" emphasized since 2023 still needs to ensure quality and quantity.Although the growth rate of retail time deposits is encouraging, the high cost has squeezed the marginal profit of Nanjing Bank's core business.

Pressure behind profit growth

Nanjing Bank's operating income in the first half of 2024 increased by 7.87% year-on-year to 26.216 billion yuan, mainly due to the strong growth of non-interest net income.In the first half of the year, net non-interest income increased by 25.51% year-on-year to 13.405 billion yuan, which not only offset the decline in core traditional business but also boosted the overall business performance, accounting for more than traditional business to 51.13%.

The growth of non-interest-bearing business mainly came from "gains from changes in fair value", which surged 477.9% year-on-year to 4.3 billion yuan, an increase of 3.556 billion yuan year-on-year, far exceeding the "net income from fees and commissions" of 309 million yuan.

From the asset side, trading financial assets increased by 42.714 billion yuan (yoy +9.57%) to 488.949 billion yuan, which contributed to the increase in scale. However, it was actually due to the continued rise in bond prices caused by the downward trend in macro interest rates.The "gains from changes in fair value" reflected in the income statement are not actual profits in essence. Unless Nanjing Bank sells off its assets and reallocates them, this part of the profit is just a "floating profit" on the books.

In the first half of 2024, Nanjing Bank's net profit attributable to shareholders after deducting non-recurring items increased by 10.59% year-on-year to 11.477 billion yuan. On the one hand, Nanjing Bank controlled its expenditures, with business and management fees increasing by only 0.61% year-on-year; on the other hand, with the support of investment profits, despite the 13.42% more impairment loss provision year-on-year, Nanjing Bank still managed to increase its net profit faster than its operating income.

In fact, looking at the second quarter alone, Nanjing Bank still faced growth pressure. The operating income in the second quarter of 2024 was 12.895 billion yuan, a decrease of 3.19% from the previous quarter. Among them, net interest income and non-interest net income decreased by 5.33% and 1.08% from the previous quarter respectively; while business and management expenses increased by 12.06% from the previous quarter to 3.558 billion yuan; the decline in income and increase in operating expenses were offset by the 23.06% under-provision for "credit impairment losses", which led to a 3.67% increase in net profit attributable to shareholders from non-recurring items to 5.842 billion yuan from the previous quarter.In other words, the profit growth in the second quarter was not actually due to the positive impact of operating income or cost control, but was caused by the "black box" (credit impairment losses) while the non-performing rate remained the same.

Moreover, as the growth rate of deposit scale is lower than that of loan scale, the future expansion of Nanjing Bank's business is also limited. The interim report shows that Nanjing Bank's capital adequacy ratio and tier 1 capital adequacy ratio are 12.83% and 10.79% respectively, down 0.94 and 0.79 percentage points year-on-year, and down 0.35 and 0.32 percentage points month-on-month respectively.

Conclusion

It is worth noting that the interim dividend proposed by the major shareholder was also disclosed together with the interim report, which is the second interim dividend since 2015. It is worthy of recognition to increase the sense of gain of shareholders by increasing dividends, but the premise is that the company must have steady operating growth.

Judging from the surface data, Nanjing Bank recorded "high-quality" performance growth in the first half of 2024, but in fact this was driven by the highly uncertain "investment floating profit", and it was under operating pressure in its main business such as deposit loss and high costs. The continuously declining capital adequacy ratio has also become a hindrance to future business expansion. This aspect should be taken seriously.

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