"Investor Network" Ding Yingyi

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As the only local corporate bank in Wuxi, Wuxi Bank (600908.SH) maintained overall growth in 2021, but there are also some indicators that need to be improved.

According to the annual report, the company achieved an annual operating income of 4.349 billion yuan, an increase of 11.63% over the same period last year, and a net profit of 1.58 billion yuan, an increase of 20.47% over the same period last year.

However, some problems have also surfaced. The bank's capital adequacy-related indicators declined across the board, especially the core tier one capital adequacy ratio of 8.74%, ranking at the bottom of A-share agricultural banks. In addition, there was a small increase in business income.

The core tier one capital adequacy ratio is at the bottom of the peer group.

According to the annual report, Wuxi Bank's capital adequacy ratio has declined in all three indicators, of which 8.74% of the core tier one capital adequacy ratio is close to the regulatory red line.

By the end of 2021, Wuxi Bank's capital adequacy ratio, tier one capital adequacy ratio and core tier one capital adequacy ratio were 14.35%, 10.13% and 8.74% respectively, all lower than the same period last year. According to Wind statistics, by the end of 2021, Wuxi Bank's core tier one capital adequacy ratio and tier one capital adequacy ratio ranked bottom among A-share listed agricultural banks.

Capital adequacy Index of Wuxi Bank

Capital adequacy index of A-share agricultural and commercial banks

Prior to this, Wuxi Bank has also taken measures to prepare for "replenishing blood".

In October last year, the bank issued a preliminary announcement of an additional 2 billion to replenish core tier one capital. However, after the relevant application documents were submitted to the CSRC in December last year and accepted on January 6, 2022, during the audit process, due to the investigation of the accounting firm employed, the increase was suspended for a time, and the review resumed soon after.

According to the announcement on March 8, Wuxi Bank issued a "reply to the feedback on the application documents for non-public offerings" to explain the refinancing opinions previously put forward by the CSRC. In the feedback and the reply of Wuxi Bank, the relevant indicators of capital adequacy ratio are important concerns.

According to public information, on January 30, 2018, Wuxi Bank publicly issued the above 30 million convertible corporate bonds, each with a face value of 100 yuan, with a total issue of 3 billion yuan. It will be listed on the Shanghai Stock Exchange from March 14, 2018.

It is understood that the stranded core capital adequacy ratio is insufficient, Wuxi Bank has been pinning hopes on this batch of bonds to achieve effective "tonifying blood". However, from the actual effect, the progress of the conversion did not meet expectations. According to the announcement, as of March 31, 2022, a total of 78.659 million yuan of "Wuxi convertible bonds" had been converted into company shares, with a cumulative conversion of 13.56231 million shares, accounting for only 0.73% of the total issued shares of the company before the convertible bonds were converted into shares.

Li Chen, an industry analyst, said the outstanding bonds were not an addition to Wuxi Bank, which is in urgent need of supplementary capital. With the expansion of credit and capital gap, how to efficiently "replenish blood" to lay the foundation for valuation repair and sound business operation is the "urgent need" of Wuxi Bank.

The conversion rate of 0.73% indicates that Wuxi Bank's plan to increase capital adequacy ratio through convertible debt-to-equity swap is not realistic for the time being, so the progress of the 2 billion increase is particularly important.

The performance of the indicators related to the capital adequacy ratio has something to do with its fast-growing loan business. Joint Credit mentioned in the rating report, "in recent years, with the expansion of loan business and investment assets business, Wuxi Agricultural Commercial Bank's risk-weighted assets continue to grow, resulting in further consumption of core capital."

The growth rate of intermediary business income is small.

According to public data, Wuxi Bank, formerly known as the Xishan Rural Credit Cooperative Union, was established in 1995, changed its name to Wuxi suburban Rural Credit Cooperative Union in 2000, and was restructured into a joint stock limited company-- Xizhou Rural Commercial Bank in 2005. It is the only local legal person bank in Wuxi urban area. In July 2010, Wuxi Bank changed its name to its current name. In 2016, Wuxi Bank landed on A-shares, making it the second agricultural commercial bank in China to land on the A-share market.

The network layout of the bank is concentrated in Wuxi and Suzhou, Nantong and Changzhou around Wuxi. By the end of June 2021, there were 116 outlets, of which there were 103 in Wuxi. There are four branches in Huaian, Fengxian, Yizheng and Jingjiang, and nine branches in Suzhou, Nantong and Changzhou.

China Merchants research newspaper said, "the region where Wuxi Bank is located has developed economy and maintained steady GDP growth." The per capita GDP of Wuxi is significantly higher than the national level. In 2020, Wuxi's per capita GDP is 2.3 times of the national average. In 2021, Wuxi's GDP exceeded 1.4 trillion yuan, ranking third in the province, only lower than Suzhou and Nanjing. "

Everbright Securities Research News believes that based in Wuxi, the location advantage is obvious, Wuxi Bank enjoys a strong dividend in banking and political business cooperation. By the end of 2021, the loan balance of Wuxi Bank was 117.81 billion yuan, an increase of 18.17% over the beginning of the year, and the loan scale increased rapidly.

From the perspective of loan orientation, by the end of 2021, the bank's loan balance in Wuxi was 89.4 billion yuan, accounting for 75.89% of the loan, which was slightly lower than at the end of last year. Accordingly, the bank invested 28.4 billion yuan in loans to other areas in Jiangsu Province (except Wuxi), accounting for a slight increase from the end of last year to 24.11%.

The continuous development and expansion of Wuxi Bank's loan business has helped to improve the bank's performance, but it has also led to increased capital consumption in recent years.

According to the annual report, the bank's main business includes interest income, fees and commissions, investment income and other income, including exchange earnings, fair value changes and so on.

Composition of main business of Wuxi Bank

It is not difficult to see that the bank's handling fee and commission income accounts for a relatively small proportion, while the handling fee and commission income represents its intermediary business income, which is regarded as an important embodiment of the competitiveness of banks.

Wen Bin, chief researcher of China Minsheng Banking Corp in China, said banks are paying more and more attention to intermediary business income. However, Wuxi Bank's fee and commission income in 2021 is 237 million yuan, which is basically at a level compared with 228 million yuan in 2020, and the proportion has dropped 0.23 percent to 2.72 percent from 2.95 percent in 2020. This proportion ranks relatively low among A-share agricultural banks.

Proportion of fee and commission income of A-share agricultural banks in 2021

The provision coverage rate has greatly increased, attracting attention.

While the capital is under pressure, the provision coverage of Wuxi Bank has increased significantly. According to the annual report, by the end of 2021, the non-performing loan ratio of Wuxi Bank was 0.93%, down 0.17 percentage points from the beginning of the year, and the provision coverage ratio of non-performing loans was 477.19%, up 121.31 percentage points from the beginning of the year.

In general, the higher the provision coverage ratio, the stronger the ability of banks to resist risks. It is worth noting that on April 15, Wang Chaodi, chief prosecutor, director of the General Office and spokesman for the CBIC, said, "large banks with higher provisions and other high-quality listed banks are encouraged to gradually return the actual provision coverage to a reasonable level."

So how much is the "reasonable level" of provision coverage?

According to the Circular on adjusting the Regulatory requirements for loan loss reserves of Commercial Banks issued by the former CBRC in March 2018, the regulatory requirements for provision coverage will be adjusted from 150% to 120%. 150%. During the epidemic in 2020, the Bancassurance Regulatory Commission also issued a notice on the regulatory requirements for loan loss preparation of small and medium-sized commercial banks, which adjusted the regulatory requirements for loan loss preparation of small and medium-sized commercial banks in stages. The regulatory requirements for bank provision coverage were adjusted from 120% to 100%.

Dong Ximiao, chief researcher of China Merchants Financial Co., Ltd., believes that from a positive point of view, the higher provision coverage rate is a relatively thick safety cushion, which will help to enhance the robustness of the bank's future development. However, provisions can sometimes be used as a means of adjusting profits. For example, provisions can be made more when profits are not expected to grow too fast; when profits do not perform well, they can be increased and provisions can be reduced. In theory, the provision itself can "make up for an apology with abundance".

"in theory, as long as the defective rate of banks is real and the provision coverage rate reaches 100%, the risk can basically be covered, but there are also regulatory indicators, which are currently required to be no less than 150%, and no less than 120% for small and medium-sized banks such as the Agricultural and Commercial Bank of China." Zeng Gang, director of the Shanghai Finance and Development Laboratory, said.

Zeng Gang said that returning to a reasonable level means that some banks with excessive provision coverage can be reduced to a level of more than 150%. But he also stressed that the banking sector is still divided and that there is little room for downward adjustment for banks that barely meet regulatory requirements.

Wu Hongjun, a banking analyst, told Investor Network: "the provision is to hide profits on the one hand and reflect potential adverse disposal pressure on the other." In September 2019, the Ministry of Finance proposed in the Financial rules for Financial Enterprises (draft for soliciting opinions) that the basic standard of provision coverage required by regulators is 150%, which is more than twice the regulatory requirements, and there may be a tendency to hide profits. "

Everbright Securities Research report said, "the further consolidation of the provision coverage of (Wuxi Bank) has greatly expanded the space for profit adjustment."

According to Wuxi Bank's quarterly report in 2022, its provision coverage rose to 520% at the end of the first quarter, further widening the gap between it and the "reasonable level". (produced by thinking Finance) ■