Everyone who has been to Hangzhou likely has a memory that surpasses the Ten Scenes of West Lake.

It's the West Lake Vinegar Fish.

This dish can leave those who love West Lake, vinegar, and fish speechless.

If you inadvertently let it swim into your mouth, it will make you instantly understand what is meant by unforgettable.

West Lake Vinegar Fish is deeply ingrained in Hangzhou's fabric, much like the Hangzhou Bank, which is just four kilometers away from West Lake, and has positioned itself as the West Lake Vinegar Fish of the banking industry.

With rapid growth and excellent stock performance, it has become a favorite among star fund managers, appearing incredibly delicious at first glance.

Advertisement

However, if you pierce the surface with chopsticks and delve into its core, you will find that its performance, risk indicators, and internal control are as "sour and refreshing" as West Lake Vinegar Fish.

Not to mention, its major shareholder China Life has recently expressed its intention to completely sell off its shares.

But in fact, this sour and refreshing West Lake Vinegar Fish has an extraordinary trend significance.

Its current predicament reflects a signal that may herald the transformation and growing pains of city commercial banks, which may not be far off.

From a distance, Hangzhou Bank looks magnificent.

From 2021 to 2023, Hangzhou Bank has achieved a profit growth rate of over 20% for three consecutive years.

Such growth not only stands out in the banking industry but is also remarkable compared to many industries with strong growth potential.

Consequently, Hangzhou Bank has become one of the few bank stocks that have been heavily held by several star fund managers to this day.

At the end of the second quarter this year, including ICBC Credit Suisse's Du Yang, Guangfa Fund's Wang Minxu and Tang Xiaobin, and Huaxia Fund's Wang Junzheng, all heavily held shares in Hangzhou Bank, which is a testament to its popularity.

Hangzhou Bank has not disappointed the market either; in the first half of this year, it achieved a revenue of 19.34 billion yuan and a net profit attributable to the parent company of 9.996 billion yuan, increasing by 5.36% and 20.06% year-on-year, respectively.

The increase in net profit is four times that of revenue growth.

In the current economic climate where macroeconomic growth is slowing down and the net interest margin of banks is continuously narrowing, such growth is simply excellent.

However, a closer look at Hangzhou Bank's performance reveals some issues.

First, where does the increase in revenue come from?

Looking at the business categories, the net income from fees and commissions has actually decreased by nearly 10% year-on-year, a significant drop.

In contrast, the net interest income for the first half of the year was 11.967 billion yuan, a slight increase of 0.45%, which is clearly not enough to turn total revenue growth positive.

However, another item has shown a significant increase—investment income.

In the first half of the year, Hangzhou Bank achieved an investment income of 4.622 billion yuan, a year-on-year increase of 55.41%.

Upon breaking it down, it is not difficult to find that the increase in investment income is mainly contributed by the growth of "investment income from associated enterprises" and "gain or loss on disposal of assets".

But in reality, the growth of these two items is hard to sustain.

First, Hangzhou Bank's associated enterprises mainly include seven rural banks.

Against the backdrop of increased risk pressure on small and medium-sized banks in the first half of this year, with a noticeable decline in net profit and loan loss coverage ratio, and the non-performing loan ratio rising from 1.59% last year to 1.75%, the pressure they face is unimaginable.

Moreover, rural banks have always been a "hotspot" for internal control violations.

The recently released public penalty information form (Zhejiang Jin Penalty Decision No.

28, 2024) by the National Financial Regulatory Administration shows that Zhejiang Xiaoshan Hunan Rural Bank Co., Ltd. was fined 800,000 yuan for improper conduct such as abnormal fund dealings between employees and customers.

As for the increase in gain or loss on disposal of assets, Hangzhou Bank explained it as "increased disposal income from leased assets," which is inherently a non-recurring gain or loss.

Secondly, where does the significant increase in net profit come from?

This is due to the reduction in "credit impairment losses."

In the first half of this year, Hangzhou Bank provided for credit impairment losses of nearly 3 billion yuan, a year-on-year decrease of 1.055 billion yuan, a drop of nearly 26%.

In accounting, credit impairment losses are a contra account for potential bad debts, and the provision is often made following a prudent principle.

In other words, for assets that may become bad debts, "it's better to be safe than sorry."

With a quarter reduction, what is the basis for Hangzhou Bank?

Is it the stable and improving asset quality?

The non-performing loan ratio of Hangzhou Bank in the first half of the year was 0.76%, which seems to be the same as at the end of last year.

But in fact, the ratio of overdue loans to non-performing loans has increased by 9.85% and 11.39% respectively compared to the end of last year.

Is it a stable improvement in historical baggage?

The real estate non-performing loan ratio of Hangzhou Bank in the first half of the year was 7.07%, a significant increase from 6.36% at the end of last year.

Is it the obvious potential for asset improvement?

The migration rates of the bank's watch list loans and substandard loans in the first half of the year were 52.27% and 56.49%, respectively, up 7.67 and 35.64 percentage points year-on-year.

In summary, Hangzhou Bank's reduction in provisions may be because it is particularly confident in its future performance!

The financial report only reveals a corner of Hangzhou Bank's operational issues, and its performance in internal control is even more "spotty."

On August 15, the Zhejiang Regulatory Bureau of the Financial Regulatory Administration disclosed that Hangzhou Bank was fined 1.1 million yuan for three violations, with several employees from the department heads of the head office to the branch customer managers being warned.

The amount is not particularly large, but the matters are quite embarrassing.

Especially the item "submitting incorrect data to regulatory authorities," the fact that data submission can have errors shows how careless Hangzhou Bank's internal control is.

If you extend the timeline, since the beginning of this year, Hangzhou Bank has received so many penalty notices that it's become "numb."

In January 2024, Hangzhou Bank was fined 2.1 million yuan for inadequate risk control in bond underwriting business, and the then general manager of the investment banking department of the Nanjing branch was warned; in March, a financing lease business of Zhoushan branch was exposed as being managed imprudently, and was fined 1 million yuan, with the handling customer manager being warned.

According to statistics from Securities Star, Hangzhou Bank has been fined more than 4 million yuan in total for various penalty notices.

Do you think receiving penalty notices is the end of it?

In terms of regulatory penalties, Hangzhou Bank has also created a new pattern.

On August 21, the inter-bank announcement disclosed that the previously elected independent director Ding Wei, who is suspected of serious disciplinary and legal violations, is under investigation by the disciplinary inspection committee and the supervisory committee.

Note that at this time, Director Ding had not officially taken office.

Being investigated before even sitting down is rare in the banking industry.

Hangzhou Bank itself is quite calm, stating that it will not affect the company's operations and long-term development, trying to give confidence to the market and shareholders.

However, the effect is quite limited.

Because in August, one of Hangzhou Bank's major shareholders, China Life, announced that it will "sell off" all its Hangzhou Bank shares within the next three months.

Since 2017, China Life has been reducing its holdings in Hangzhou Bank, and this time it's a direct sell-off, causing a lot of discussion in the market.

Although China Life stated in the announcement that this is due to "asset allocation needs," it is hard not to associate it with concerns about Hangzhou Bank's future risk management, after all, not everyone can accept West Lake Vinegar Fish.

This can be seen from the market reaction.

On August 21, Hangzhou Bank's stock price fell by nearly 4%.

But the stock price drop is just the appetizer, as China Life gradually exits, the challenges faced by Hangzhou Bank will become increasingly severe.

That is the capital structure.

For a long time, Hangzhou Bank has been very dependent on corporate business.

In the first half of this year, out of 901.333 billion yuan in loans, corporate loans were 604.35 billion yuan, accounting for 67%.

This development model is related to Hangzhou Bank's shareholder background.

Hangzhou Bank's largest shareholder is Hangzhou Financial Investment Group, which is actually controlled by the Hangzhou Municipal Finance Bureau.

The third and fifth largest shareholders are Hangzhou Urban Construction Investment Group and Hangzhou Transportation Investment, with the actual controllers being the Hangzhou Municipal Government and Hangzhou State-owned Assets Supervision and Administration Commission, respectively.

This means that Hangzhou Bank is more likely to obtain infrastructure and state-owned enterprise-related projects in Hangzhou, and the active economy of Hangzhou and Zhejiang, especially the hosting of major projects such as the Asian Games and G20 meetings in the past few years, has also created opportunities for Hangzhou Bank's rapid expansion.

From 2011 to 2020, Hangzhou Bank's compound annual growth rate of assets was 20.6%, which gradually declined from 2021 to 2023, but was still above 10%.

The result is that Hangzhou Bank's loans are more concentrated in state-owned enterprises and infrastructure-related fields.

In 2023, the water conservancy, environmental and public facility management industry, and the leasing and business services industry accounted for 40% of Hangzhou Bank's loans, and in the first half of this year, there was a slight increase on this basis.

But this is a double-edged sword.

On the one hand, infrastructure and state-owned enterprise-related projects have relatively low risk and can improve the overall asset quality of Hangzhou Bank.

With a real estate non-performing loan ratio of over 7%, the overall non-performing loan ratio can still be maintained at below 1%, which is enough to illustrate this point.

On the other hand, the adverse effects of high concentration are also quite significant.

First, Hangzhou Bank's net interest margin has always been relatively low.

It should be noted that the credit status of state-owned enterprises and infrastructure projects is, in most cases, better than other projects.

And the loan pricing of banks usually refers to credit status.

The worse the credit, the higher the pricing, and the greater the profit.

In other words, when Hangzhou Bank does these projects, the pricing is likely not too high, which means that the net interest margin is inherently at a relatively low level.

In recent years, as the net interest margin of banks continues to narrow, other banks may be able to hold on, but for Hangzhou Bank, which is not very abundant, it is like "adding insult to injury."

In the first half of the year, Hangzhou Bank's net interest margin was 1.42%, down 0.14 percentage points year-on-year.

The same region's Ningbo Bank was 1.87%, and Nanjing Bank was 1.96%.

Not only can't it compete with its neighbors, but it is also far from the industry average of 1.69%.

Second, the biased development model requires Hangzhou Bank to continuously replenish its capital.The overemphasis on public business is actually consuming Hangzhou Bank's capital adequacy ratio.

Over the past few years, Hangzhou Bank has supplemented its capital through various financing methods such as IPOs, private placements, issuance of preferred shares, and convertible bonds, but it still cannot keep up with the declining speed of the capital adequacy ratio.

At the end of 2023, Hangzhou Bank's capital adequacy ratio, tier-one capital adequacy ratio, and core tier-one capital adequacy ratio were 12.51%, 9.64%, and 8.16%, respectively, while the industry averages were 15.06%, 12.12%, and 10.54%, respectively.

Although in April of this year, Hangzhou Bank's private placement plan was approved by the National Financial Regulatory Administration, the subsequent clearance by China Life has added more uncertainty to whether Hangzhou Bank can find suitable strategic investors to support its capital structure.

The predicament of Hangzhou Bank is actually a microcosm of two macro shifts.

Firstly, there is a shift in asset preference.

Banks used to be one of the favorite assets for insurance funds.

However, Hangzhou Bank's "abandonment" is not an isolated case; recently, nearly 10% of the shares of Harbin Rural Commercial Bank were also put on the shelf by Yongcheng Property Insurance.

This shift in preference may have a profound impact on bank management, industry patterns, and even the capital market.

Secondly, with the reduction in fixed asset investment, city commercial banks are facing, or are about to face, the pain of development transformation.

The equity structure of city commercial banks is mostly similar to that of Hangzhou Bank, dominated by local state-owned assets supervision and administration commissions and local governments.

Therefore, their main development model in the past has also largely depended on major infrastructure projects within the region.

However, in recent years, local fiscal investment has significantly shrunk.

From 2011 to 2020, Hangzhou's fixed asset investment grew at a double-digit rate almost every year, and the asset scale of Hangzhou Bank also surged rapidly.

But from 2021 to 2023, the growth rates of fixed asset investment were 10.8%, 9.1%, and 2.8%, respectively, significantly slowing down, and the expansion speed of Hangzhou Bank has also slowed down.

This means that the main engine that Hangzhou Bank once relied on for rapid development is gradually shutting down.

And it's not just Hangzhou Bank; most city commercial banks are closely following the changes in local fixed asset investment.

When local finances turn to austerity, what will be the next growth pole for city commercial banks?

It remains to be considered.