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Author: Tao Wenyuan

Produced by: Global Finance

The speed of A-share IPO review has slowed down again, and the listing prospects of many companies that have been waiting in line for many years have once again become uncertain.

On June 29, 2024, Guangdong Nanhai Rural Commercial Bank Co., Ltd. (hereinafter referred to as "Nanhai Rural Commercial Bank") updated its prospectus.

Looking back at the IPO history of Nanhai Rural Commercial Bank, as early as June 2019, Nanhai Rural Commercial Bank submitted an application for listing on the Shenzhen Stock Exchange's main board to the China Securities Regulatory Commission, but the review was suspended midway because the intermediary institution was investigated and implicated. In February 2023, Nanhai Rural Commercial Bank became one of the first batch of proposed listed companies to be transferred to the Shenzhen Stock Exchange under the comprehensive registration system, and restarted its IPO. So far, 5 versions of the prospectus have been updated, but no inquiries have been received. Some analysts believe that the banks that are not listed at present are mainly small and medium-sized banks, which generally have higher operating risks, shortcomings in corporate governance, complex equity structures and even disputes, so the regulatory level will be more prudent.

The slow progress of Nanhai Rural Commercial Bank's IPO is related to the overall environment of IPO, but some of its own problems cannot be ignored.

Revenue and net profit both fell, and bond investment increased significantly

In terms of performance, from 2021 to 2023 (the "reporting period"), the operating income of Nanhai Rural Commercial Bank was RMB 5.987 billion, RMB 6.986 billion, and RMB 6.861 billion, respectively. In 2023, it decreased by RMB 125 million year-on-year, a decrease of 1.79%.

The net profits in the same period were 3.043 billion yuan, 2.728 billion yuan and 2.382 billion yuan respectively. The net profits continued to decline, and the decline gradually widened, which were 10.38% and 12.66% respectively.

Among them, net interest income was 4.111 billion yuan, 4.311 billion yuan and 4.335 billion yuan, respectively, with an increase of 4.87% and 0.55%, respectively. It will continue to grow in 2023 but the increase will be smaller.

The net interest margin was 2.04%, 1.90% and 1.72% respectively, declining year by year. Data from the Financial Regulatory Administration showed that the net interest margin of commercial banks was 1.69% in 2023, of which the net interest margin of rural commercial banks was 1.90%. Nanhai Rural Commercial Bank was 0.18 percentage points lower than the average.

During the reporting period, the bank's average balance of total interest-earning assets was RMB 201.309 billion, RMB 227.249 billion and RMB 252.25 billion, with average yields of 4.17%, 3.94% and 3.72%, respectively; among them, the average balance of loans and advances was RMB 119.682 billion, RMB 133.394 billion and RMB 149.224 billion, with average yields of 4.76%, 4.63% and 4.19%, respectively. Although the yield is declining, the scale effect still enables interest income to continue to grow.

In addition, facing the dilemma of credit asset allocation, Nanhai Rural Commercial Bank has also increased its bond investment year by year. The average balances of bonds and other investments from 2021 to 2023 were 52.638 billion yuan, 64.422 billion yuan, and 71.318 billion yuan, respectively, accounting for 26.15%, 28.35% and 28.28% of interest-bearing assets, respectively, and the average yields were 3.85%, 3.29% and 3.33%, respectively.

Relevant persons in charge of the financial market departments of several rural commercial banks once said: "The rural commercial banks' efforts to buy bonds have been temporarily increased due to the situation. The limited investment scope, operating pressure and increasingly fierce competition have gradually turned bond investment into a 'habit'."

It is worth noting that the bonds invested by Nanhai Rural Commercial Bank are mainly policy bank bonds, local government bonds, treasury bonds and corporate bonds, among which municipal bonds are the main ones. The relevant risk trends need further attention.

From 2021 to 2023, the net income from fees and commissions of Nanhai Rural Commercial Bank was 313 million yuan, 294 million yuan, and 247 million yuan, respectively, declining year by year. In 2023, the fee income from wealth management products, trading, agency, bank cards, safe deposit box, settlement, acceptance and guarantee, and consulting services all decreased year-on-year.

Among other non-interest income, investment income in each period was RMB 1.313 billion, RMB 2.447 billion, and RMB 1.843 billion, respectively, a significant year-on-year decrease of 24.70% in 2023.

At the same time, affected by the sharp increase in credit impairment losses, Nanhai Rural Commercial Bank's operating expenses increased year by year, reaching 2.471 billion yuan, 2.963 billion yuan and 4.155 billion yuan respectively, which ultimately led to a decrease in net profit.

Bad write-offs surge

In terms of asset quality, as of December 31, 2023, the bank's total assets were 305.182 billion yuan, and the net amount of loans and advances issued was 149.393 billion yuan, with an average annual compound growth rate of 10.96% from 2021 to 2023.

As of December 31, 2023, the non-performing loan ratio was 1.49%, lower than the national average of 1.59% for commercial banks, but higher than the average of 1.05% for A-share listed rural commercial banks.

At the end of 2023, among the five levels of loans of Nanhai Rural Commercial Bank, the loan balances at each level were 146.78 billion yuan, 5.355 billion yuan, 682 million yuan, 1.259 billion yuan, and 353 million yuan, respectively, an increase of 8.08%, 38.52%, 76.70%, 43.34%, and 6.21% year-on-year, respectively; the proportions of loans in the watch list, sub-standard, and doubtful categories were 3.47%, 0.44%, and 0.82%, respectively, an increase of 0.73, 0.17, and 0.20 percentage points year-on-year, respectively; the proportion of loss loans was 0.23%, a slight decrease of 0.01 percentage point year-on-year.

The migration rates of normal, special mention, substandard and doubtful loans were 2.60%, 41.14%, 92.69% and 79.07%, up 0.80, 27.07, 61.54 and 47.27 percentage points year-on-year, respectively. Subsequent non-performing loans, especially loss loans, may increase further.

From 2021 to 2023, the provision coverage ratio of Nanhai Rural Commercial Bank was 296.79%, 288.81% and 230.55% respectively, declining year by year, and the provision consumption was relatively fast.

According to the supervisory and inspection opinions of the regulatory authorities, Nanhai Rural Commercial Bank has problems such as deviation from its positioning and insufficient efforts in handling non-performing assets. It can be inferred that some individual data may be somewhat inflated, such as the provision coverage ratio. If the non-performing asset handling efforts meet regulatory requirements, the level of the provision coverage ratio is still unknown.

In 2022, Nanhai Rural Commercial Bank received supervision and inspection opinions from an agency dispatched by the State Financial Supervision and Administration Administration (formerly the China Banking and Insurance Regulatory Commission). The opinions included that the bank's asset quality deterioration pressure increased, and the disposal of non-performing assets was insufficient; the inclusive finance indicators were not up to standard, the proportion of large loans was not up to standard and increased compared with the beginning of the year; the growth rate of bill business exceeded the warning value of 30%; the operating leverage ratio of capital business exceeded 1.5 times the regulatory requirement; the scale of cash management wealth management products awaiting rectification increased instead of decreased; the proportion of investment in non-financial corporate bonds outside the province was 82.08%, and the risk was relatively high.

In 2023, the bank received supervisory and inspection opinions again. Many of the above-mentioned problems still exist in the first quarter of 2023, including insufficient disposal of non-performing assets, continued capital business risks, substandard inclusive finance monitoring indicators, and continued growth in the balance of non-local loans. Nanhai Rural Commercial Bank stated in its prospectus that by the end of 2023, most of the above-mentioned problems had been rectified.

According to the bank's data, the write-off data in the past three years varied greatly, with 79.164 million yuan, 381 million yuan, and 1.162 billion yuan in 2021-2023 respectively. Whether the surge in 2023 was a surge after rectification under regulatory supervision is unknown to the outside world.

At the same time, as of the end of each period of the reporting period, the bank's loan and advance impairment provisions also continued to increase, reaching 4.013 billion yuan, 4.611 billion yuan and 5.391 billion yuan respectively. The loan-to-provision ratio was 3.21%, 3.26% and 3.42% respectively.

At the same time, the "On-site Inspection Opinion" issued by the Guangdong Regulatory Bureau of the State Financial Supervision and Administration Bureau found that the bank had failed to implement financial service policies for private small and micro enterprises, inaccurately classified enterprise scales, and inflated the scale of loans to small and micro enterprises; its real estate loan management was inadequate, with fixed asset loans indirectly used for land reserves, personal housing mortgage loans issued without completing mortgage registration, and inadequate review of the source of down payment funds for personal housing loans.

At the end of each year from 2021 to 2023, the corporate loans of Nanhai Rural Commercial Bank to the real estate industry were RMB 10.987 billion, RMB 12.338 billion and RMB 13.256 billion, accounting for 8.79%, 8.73% and 8.58% of the total loans and advances of the bank, respectively, and the non-performing loan ratio was 5.08%, 4.20% and 4.92%, respectively. The non-performing loan ratio of corporate loans to the real estate industry is higher than the average non-performing loan ratio of loans and advances.

Nanhai Rural Commercial Bank stated in its prospectus that as of December 31, 2023, the bank's non-performing loan ratio in the real estate industry had increased, mainly due to the poor performance of a large real estate enterprise client. Out of prudence, its loan risk classification was downgraded from special mention to non-performing.

During the same period, the balance of personal housing loans issued to individuals was RMB 17.511 billion, RMB 19.627 billion and RMB 18.899 billion, respectively, accounting for 14.00%, 13.89% and 12.24% of the bank's total loans and advances, respectively, and the non-performing loan ratio was 0.47%, 0.61% and 0.63%, respectively.

Highly dispersed equity

Nanhai Rural Commercial Bank was established in 2011 and was formerly known as Nanhai Rural Credit Cooperative. On December 28, 2010, the People's Government of Guangdong Province approved the start of the relevant work of the transformation of Nanhai Rural Credit Cooperative into a rural commercial bank.

In August 2011, 37 corporate legal persons and 11,079 natural person sponsors of Nanhai Rural Commercial Bank signed the "Sponsor Agreement of Guangdong Nanhai Rural Commercial Bank Co., Ltd.", confirming their investment in all 2.489 billion shares of Nanhai Rural Commercial Bank.

In December 2011, Nanhai Rural Commercial Bank was officially established.

Due to this history, Nanhai Rural Commercial Bank has a large number of shareholders and its equity is very dispersed.

At present, there are four shareholders holding more than 5% of the shares of Nanhai Rural Commercial Bank: Foshan Nanhai Chengye Investment Development Management Co., Ltd. controlled by Foshan Nanhai District State-owned Assets Supervision and Administration Bureau, Nengxing Holding Group Co., Ltd., Guangdong Hengji Industrial Investment Development Co., Ltd., and Guangdong Changxin Investment Holding Group Co., Ltd., with shareholding ratios of 6.03%, 5.29%, 5.16%, and 5.05% respectively. In addition, there are 51 other legal person shareholders and 10,861 natural person shareholders, but no controlling shareholder or actual controller. The risk of equity change is relatively high.

Previously, shares of Nanhai Rural Commercial Bank were often put up for auction.

In the 12 months before the first declaration, that is, from May 28, 2018 to May 27, 2019, the bank had 67 transfers, with a total of 7,168,924 shares transferred. A total of 49 natural persons and 1 legal person became new shareholders of the bank through share transfers.

In addition, as of December 31, 2023, the number of shares pledged by the bank is 345 million shares, accounting for 8.74% of the total share capital before issuance, and the number of shares frozen by judicial means is 212 million shares, accounting for 5.3816% of the total share capital before issuance. Among them, the second largest shareholder, Nengxing Holding Group Co., Ltd., pledged 93.8705 million shares of the 209 million shares it held, and all 209 million shares were frozen by judicial means, accounting for 5.2874% of the total share capital before issuance.

In addition to equity, the executive team of Nanhai Rural Commercial Bank also underwent a change of leadership in 2023.

In February 2023, the former chairman Li Yixin resigned due to work adjustments, and the board of directors of Nanhai Rural Commercial Bank elected Xiao Guang as the chairman of the third board of directors. Li Yixin took up the position of chairman of Shunde Rural Commercial Bank, which is also in the IPO period.

Xiao Guang joined Nanhai Rural Commercial Bank in December 2018. He has served as the bank's employee director, president, party secretary, and executive director. He took over the duties of chairman in February 2023 and officially became the bank's chairman after his qualifications were approved in August 2023.

From February to July 2023, Deputy President Yu Zhihai performed the duties of President on behalf of the President, but the position of President was eventually taken over by Yang Fuming, the former General Manager of the Finance and Accounting Department of China Huarong Asset Management Co., Ltd. Yu Zhihai served as Executive Director and continued to serve as Deputy President from January 2024.

Global Finance will continue to pay attention to whether the new leadership team can lead Nanhai Rural Commercial Bank to solve problems such as declining performance, deviation from its inclusive positioning, and insufficient efforts in handling non-performing assets, and successfully go public.

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