CHANGSHU RURAL COMMERCIAL BANK(601128)：CONTINUED EXPANSION OF MICRO LOAN BUSINESS IN RURAL AREAS

　　1H22 results in line with our forecast
　　Changshu Rural Commercial Bank (Changshu Bank) announced 1H22 results. Revenue and net profit rose 18.9% and 20.0% YoY in 1H22, in line with the preannouncement and our forecast, and grew 18.4% and 16.0% YoY in 2Q22.
　　Trends to watch
　　Rapid business expansion. At end-2Q22, Changshu Bank’s total assets, loans, and deposits increased 11.5%, 13.8%, and 13.1% compared with start-2022 and 2.3%, 7.0%, and 1.8% compared with end-1Q22. The bank was not significantly affected by the COVID-19 resurgence in China this year. We attribute this to the bank’s efforts to step up client acquisition in cities in Jiangsu province other than Changshu by expanding its micro loan business in lower-tier and rural markets. In 1H22, 25% of the bank’s revenue came from Changshu, 58% from other cities in Jiangsu, and 16% from regions outside Jiangsu, and shares of these regions in the bank’s deposits reached 59%, 29%, and 12%. Individual business loans per client dropped from Rmb0.34mn at end-2021 to Rmb0.33mn, while the proportion of credit loans in total loans rose from 21% to 25%.
　　NIM more resilient than in 2020. In 1H22, net interest margin (NIM) came in at 3.09%, largely flat with 1Q22 and up 3.06% compared with 2021. Specifically, interest-bearing asset return picked up 6bp to 5.31% and interest-bearing debt costs increased 4bpt to 2.34%. The proportions of medium-sized enterprise loans, individual business loans, and individual consumer loans in the bank’s newly granted loans in 1H22 reached 40%, 28%, and 14%. Thanks to its strategy adjustments, we believe the bank’s NIM is more resilient than in 2020.
　　First external acquisition completed. At end-1H22, Changshu Bank’s subsidiary Xingfu Village Bank saw total assets rise 11.9% compared with start-2022 to Rmb42.2bn (15% of Changshu Bank’s total), revenue grow 33.0% (22% of Changshu Bank’s total), and net profit increase 22.7% YoY, with the non-performing loan (NPL) ratio reaching 0.99%. Changshu Bank in 1H22 gained regulatory approval for its acquisition of 30% of Zhuhai Nanping Village Bank, which we think will strengthen the bank’s village bank business.
　　Solid asset quality sustained. By end-1H22, Changshu Bank’s NPL ratio, overdue rate, and provision coverage rate stood at 0.80%, 0.94%, and 536%. By region, the NPL ratio of village banks outside Jiangsu rose from 0.97% at start-2022 to 1.07%, while the NPL ratio of individual business loans in Changshu edged up but we believe it remains manageable. In 1H22, proportions of corporate real estate loans and mortgage loans reached 0.9% and 7.9%, which we see as relatively low.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 1.0x 2022e and 0.9x 2023e P/B. We maintain OUTPERFORM and our target price of Rmb9.93 (1.2x 2022e and 1.1x 2023e P/B), offering 30.3% upside from the current price.
　　Risks
　　Continued decline of loan pricing leads to lower-than-expected NIM; economic downturn leads to disappointing asset quality.
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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。