Bank of Shanghai reported in-line1Q22 results. Revenue increased 2.95% YoY to RMB 14.2bn (NII +8.6% YoY, fee & commission income +3.5% YoY). PPOP grew 2.0% YoY to RMB 11.5bn. Net profit grew 5.4% YoY to RMB 5.9bn. NPL ratio stabilized at 1.25% and NIM compressed 2 bps YoY to 1.71%. Provision indicators slightly improved. Maintain BUY on BoSH with unchanged target price of RMB8.68.

On asset quality perspective, NPL balance grew 2.6% QoQ to RMB 15.6bn, similar with loan growth of 2.7% QoQ. NPL ratio stabilized at 1.25%, SML ratio improved 5 bps QoQ to 1.60%, because of growing loan balance and declining SML balance. Provision balance grew 3.4% QoQ to RMB 47.6bn, the increasing provision balance lift 3 bps and 2.47 ppt on allowance to total loan ratio and allowance to NPL ratio. Current 303.6% provision coverage and 3.79% allowance to total loan ratio is sufficient for headwind.

Due to slowing net profit growth, annualized ROE and ROA dropped 42 bps YoY and 2 bps YoY to 12.44% and 0.87% respectively. Total asset grew 3.95% QoQ to RMB 2,757bn, driven by growing balance of loan and fixed income investment.

On loan perspective, SME loan, green loan and manufacture loan are the key drivers. At the end of 1Q22, loan balance in manufacturing industry is RMB 64.3bn, up 11.64% QoQ. SME balance is RMB 80bn, up 10.9% QoQ.Green loan balance is RMB 47.6bn, up 57.79% QoQ. In terms of new issued loan in 1Q22, new issued SME loan is RMB 21.2bn, +58.19% YoY. New issued high technology loan is RMB 25.9bn, +20.85% YoY.

About wealth management business, number of retail clients increased 1.26% QoQ to 19.7mn, and retail AUM grew 2.15% QoQ to RMB 921bn.

Stock catalyst: key catalyst is investors’ demand on safe havens. In addition, declining deposit cost will lead to a more resilient NIM in FY22.Lockdown in Shanghai may have negative impacts on banks’ fundamental, but we think extremely low valuation has already reflected the risk.

Maintain OVERWEIGHT on banking sector and BUY on BoSH (601229 CH) with unchanged target price of RMB8.68. 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).