CEB Bank "defends" profit growth

The continuous decline in interest rates has led to the expected weakness in the banking sector with significant pro-cyclical characteristics.

In the first half of the year, 42 listed banks on the A-share market collectively achieved operating income of RMB 2.89 trillion and a net profit attributable to the parent company of RMB 1.09 trillion, a year-on-year decrease of 1.95% and a slight increase of 0.37%.

"Safeguarding" profit growth is a common concern.

TradeWind01 noted that 30 listed banks saw year-on-year growth in net profit, with 29 banks having net profit growth rates higher than operating income, and 5 banks maintaining positive net profit growth rates even when operating income growth rates were negative.

CEB Bank (601818.SH) is one of these 5 companies.

In the first half of the year, operating income and net profit attributable to the parent company were RMB 69.808 billion and RMB 24.487 billion, respectively, with a year-on-year decrease of 8.77% and an increase of 1.72%.

Looking back, the net profit growth under revenue pressure mainly occurred after 2021.

In 2020, which was impacted by the pandemic, CEB Bank's revenue growth rate dropped from 20.47% to 7.28%.

To address the "continuity and lag of the pandemic impact," the bank increased provisions significantly, with the net profit growth rate at that time still significantly lower than the revenue growth rate.

However, starting from the following year, revenue growth rates continued to decline for several years.

The long-standing revenue pressure may have prompted the bank to launch a "safeguarding" campaign for net profit.

After 2021, CEB Bank placed high importance on profit, rarely increased provisions, and under the influence of various factors, the net profit growth rate generally exceeded the revenue growth rate.

In 2023, the only year with increased provisions, the bank's revenue and net profit growth rates both turned negative for the first time in 13 years, sparking widespread market discussions.

Unfortunately, the tug-of-war to "safeguard" net profit continues after 2024.

In the first half of the year, when operating income decreased by 8.77% year-on-year, CEB Bank once again reduced provisions, boosting net profit growth by 1.72%.

How to "squeeze out" profits

After experiencing the "worst performance in 13 years," CEB Bank's performance saw a slight recovery.

In the first half of the year, operating income continued to decline, with the year-on-year decline expanding from 3.92% at the end of the previous year to 8.77%; however, the net profit growth rate returned to positive, increasing from -8.96% at the end of the previous year to 1.72%.

Behind this achievement, it still heavily relies on the control of provisions.

The income statement shows a decrease in three items of expenditure: taxes, management fees, and credit impairment losses.

The reduction in credit impairment losses in both value and percentage is the highest among the three types of expenditure.

Coupled with a slight increase in other asset impairment losses, CEB Bank reduced the provision for asset impairment losses by RMB 6.299 billion in the first half of the year compared to the same period last year, directly affecting the change from negative to positive in net profit growth rate.

This phenomenon is not accidental.

In recent years, CEB Bank's profits have remained strong for a long time, supported by provisions.

For example, in 2021, the provision for asset impairment losses decreased by RMB 2.137 billion year-on-year.

With a slight decrease of 0.07 percentage points in operating income year-on-year, and increases in taxes, management fees, and other cost expenditures, the net profit growth rate surged from 1.26% to 14.76% In 2022, the provision for asset impairment losses decreased by 4.186 billion yuan year-on-year.

Despite the continuous decline in revenue growth to -0.73%, and an increase in expenses such as taxes, the net profit growth rate remained at 3.23%.

The only exception was in 2023.

In the fourth quarter of that year, CEB Bank, which had long been reducing credit impairment loss provisions, unexpectedly increased the provisions by a large margin.

After losing the hedge, net profit in the fourth quarter decreased by 62.24% year-on-year, dragging down the full-year net profit by 8.96%.

Wang Zhiheng, who had been appointed as the President for just one year, stated at a performance meeting, "The main reason for the net profit decline in 2023 is the increase in credit impairment provisions by 1.677 billion yuan."

Wang Zhiheng said, "These measures do have a certain impact on short-term profitability, but they are fundamental guarantees for long-term profitability."

In May of this year, Wang Zhiheng "took over" Fu Wanjun for the second time and was reassigned as the Deputy Secretary of the Agricultural Bank Party Committee.

CEB Bank seems to be back on the path of reducing provisions.

There are various opinions in the market about the abnormal increase in provisions in the fourth quarter of last year.

One view is that this is a helpless move.

Frequent use of provisions to boost profits has led to the bank's provision coverage ratio falling to 175.65% at the end of the third quarter of 2023.

Among the 42 listed banks during the same period, it was only higher than three institutions: Minsheng Bank (600016.SH), Huaxia Bank (600015.SH), and Zhengzhou Bank (002936.SZ).

After reducing provisions again in the first half of the year, it has dropped to 172.45%.

This figure is 44.13 percentage points lower than the average level of joint-stock banks disclosed by the China Banking and Insurance Regulatory Commission in the second quarter, and is only higher than Minsheng Bank, Huaxia Bank, and Xi'an Bank (600928.SH) among listed banks.

Behind the continued decline in provision coverage ratio is the further narrowing of the space to boost profits by using provisions.

Reducing provisions is not a long-term solution.

How to counter the downward trend?

The root cause of CEB Bank's pressure on net profit has always been poor revenue performance.

On one hand, the net interest margin is decreasing rapidly, which is a common challenge facing the banking industry.

According to TradeWind01, from 2023 to the first half of 2024, CEB Bank's net interest margin decreased by 0.47 percentage points to 1.54%.

The decline is among the highest in joint-stock banks, second only to Ping An Bank (000001.SZ) and Huaxia Bank.

The two underlying challenges behind the higher decline in net interest margin are: rapid decline in asset returns and poor liability structure.

In the first half of the year, the cost-to-income ratio for interest-bearing liabilities decreased by 0.03 percentage points to 2.37% year-on-year; but the asset yield on interest income decreased by 0.32 percentage points to 3.83%, leading to a further narrowing of the net interest margin.

Regarding the liability structure, the "dual optimization of quantity and price" that the bank has emphasized since 2020 has had minimal effect.

Over the past four years, deposits have still been driven by high-cost time deposits, with the proportion of time deposits in customer deposits even increasing from 60.81% to 69.56% by the end of 2023.

Liu Yan, Chief Financial Officer of CEB Bank, stated at the performance meeting that the company will prudently arrange the absorption of high-cost, long-term deposits, "but the effect will take some time to show." Regarding the issue of net interest margin, Liu Yanding has set a goal to "maintain the net interest margin in the second half of the year at the same level as the first half through dual assistance in assets and liabilities."

Specifically, this will be achieved in three aspects: first, increasing the proportion of credit assets; second, agile adjustment of internal and external prices; and third, enhancing risk pricing capabilities and customer management to stabilize loan interest rates amid a declining trend.

In comparison to the previous year's data, CEB Bank has not shown a narrowing trend in net interest margin.

However, Liu Yanding revealed that the net interest margin in the second quarter has remained the same as the undisclosed data from the first quarter.

On the other hand, non-interest income has shown weak performance.

Despite considering "building a first-class wealth management bank" as a strategic vision, the non-interest business of CEB Bank has not brought the expected incremental contribution.

In the first half of the year, affected by the reduction in bank card business, the bank's net fee and commission income and business management fee net income were 10.533 billion yuan and 18.309 billion yuan, a year-on-year decrease of 21.66% and 4.11%, respectively.

The interim report states that the strategic transformation of wealth management at CEB Bank has begun to show results.

This strategy mainly drives business processes and customer operations through digital transformation, creating a "wealth+" open platform centered around mobile banking and cloud payment dual apps, and building an ecosystem chain of "wealth management-asset management-asset custody."

From the results, it is indeed evident that several scale indicators have shown growth.

Especially in the private banking sector, AUM (assets under management) increased by 16.25% compared to the end of the previous year, the number of wealth wallet accounts grew by 7.80%, and family trusts (including insurance trusts) grew by over 170%.

At the same time, the product shelf is more diverse, customer profiles have expanded to the general public, and financial products with low entry points, low risks, standardization, and easy access have been introduced.

For example, the number of customers in the online pension financial zone has reached 1.8276 million.

Despite the long-term trend of narrowing net interest income, the long-term growth in wealth management demand remains an industry consensus.

However, in the short term, with the weak performance of equity markets and the impact of reduced fees in insurance and funds, it is an undeniable fact that many banks' short-term wealth management businesses are under pressure.

Based on the above data, it can be seen that the customer base of CEB Bank still maintains a stable existence.

Once the equity market reaches a bottom reversal, there is still an opportunity to "show off" in its assisted wealth management business