BANK OF HANGZHOU(600926)：NON-INTEREST INCOME DRIVES REVENUE GROWTH;PROVISION BOOSTS PROFIT GROWTH

　　1Q22 results beat our expectation
　　Bank of Hangzhou announced 1Q22 results: Revenue rose 15.7% YoY to Rmb8.77bn, and attributable net profit grew 31.4% YoY to Rmb3.31bn, with annualized ROAE of 16.2%. The results beat our expectation, due to rapid growth of non-interest income and improving asset quality.
　　Trends to watch
　　The firm’s revenue rapidly grew due to expanding scale and rising non-interest income.
　　1Q22 net fee income grew 20.1% YoY, due to rising fee income from wealth management (WM) business. The scale of the firm’s WM business further expanded, with end-1Q22 balance of wealth management products rising 7.0% QoQ, and retail assets under management (AUM) up 7.7% QoQ.
　　Investment income grew 109.6% YoY, fair value gains rose 40.1% YoY. According to the firm, it fine-tuned a strategy to boost portfolio returns.
　　Net interest income only rose 1% YoY due to falling net interest margin (NIM). We estimate average NIM in 1Q22 fell 1.3bp QoQ to 1.53%, as the average yields of interest-earning assets further declined. As NIM declined QoQ in 2021, we expect net interest income to improve in 2022 if NIM remains largely stable QoQ in the year. The bank may fine-tune its balance sheet structure to stabilize NIM, in our view.
　　Its scale expansion remained fast. The firm’s total assets, loans and deposits at end-1Q22 rose 15.3%, 21.4% and 18.2% YoY. Growth of loans and deposits accelerated compared with 2021. Corporate loans accounted for 68% of new loans, while corporate demand deposits took up a considerable proportion of new deposits, due to comprehensive client relationship management, in our view. The firm introduced a new brand to build scenario-based client service systems in 2021.
　　Asset quality remaining high and leading among peers. The firm’s end-1Q22 non-performing loan (NPL) ratio fell 4bp QoQ to 0.82%, the especial mentioned loan ratio remained flat at 0.38%, and net NPL formation ratio fell 3bp YoY to 0.11%. Provision coverage ratio rose 12.38ppt QoQ to 580.09%.
　　Conversion of convertible bonds needed to replenish capita. The bank’s end-1Q22 common equity tier 1 ratio was 8.17%, and we suggest watching the conversion of convertible bonds to replenish capital. The firm issued in April 2021 Rmb15bn convertible bonds, and the closing price on April 25 implies 14.6% upside compared with the callable price.
　　Financials and valuation
　　We maintain our 2022-2023 earnings forecast. The stock is trading at 1.1x 2022e and 1.0x 2023e P/B. We maintain our OUTPERFORM rating and TP of Rmb19.70 (1.5x 2022 and 1.3x 2023e P/B, with 33.6% upside).
　　Risks
　　NIM pressure heavier than expectation and weighing on revenue growth.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。