Bank of Shanghai reported in-line FY21 results. Operating income increased 10.8% YoY to RMB 56.2bn (NII +11.1% YoY, fee & commission income +61.3% YoY).PPOP grew 7.0% YoY to RMB 45.3bn. Net profit grew 5.54% YoY to RMB 22bn.Slowing down in profit growth is primarily due to more operating expense in 2021.NPL ratio increased 3bps YoY to 1.25% and NIM compressed 8 bps YoY to 1.78%. Maintain BUY on BoSH and trim target price from RMB9.04 to RMB8.68 as we roll over valuation basis to 2022.

Results positives. 1) Deposit cost declined 8 bps YoY to 2.07% in FY21. In 2021, the bank optimized its deposit strategy, cut 21 bps on corporate term deposit cost and improved current to total deposit ratio from 36.82% to 38.00%. The increasing balance of current deposit and declining cost on corporate term deposit are the two drivers on deposit cost optimization. 2) 61.3% YoY growth on fee & commission income driven by growing fund distribution business. In FY21, distribution income grew 126% YoY, because of growing WMP distribution and fund distribution. 3) Asset quality in retail business is improving. Retail loan NPL ratio declined 35 bps YoY to 0.77%.In breakdown, NPL ratio of consumer loan, mortgage, retail SME and credit card loan dropped 41 bps, 5 bps, 24 bps and 9 bps respectively.

Results negatives. 1) NIM compressed. In 2021, because of LPR drop and regulators’ guidance on support real economy, lending rate dropped 34 bps.More specifically, corporate lending rate dropped 25 bps to support real economy and retail lending rate dropped 65 bps due to cautious issuance of consumer loan. 2) 2.59 ppt increase on CIR due to fast growing operating expense. In FY21, operating expense grew 25.9% YoY while revenue only grew 10.8% YoY. The fast growing expense is caused by low base in FY20 and increasing administration cost. 3) NPL ratio increased 3 bps YoY to 1.25%. The increasing NPL ratio is caused by 24 bps increased NPL ratio of corporate loan, primarily due to property defaults.

Stock catalyst: key catalyst is investors’ demand on safe havens. In addition, declining deposit cost will lead to a more resilient NIM in FY22.

Maintain OVERWEIGHT on banking sector and BUY on BoSH (601229　CH). We roll over valuation basis to YE22 and trim target price from RMB 9.04 to RMB 8.68 accordingly. Our TP implies 0.60x 2022E and 0.55x 2023E P/B. The stock is trading at 0.45x/0.41x FY22/23E P/B, almost equivalent to -2SD of 3-yr historical mean (0.60x P/B).