China Chengxin International Credit Rating Co., Ltd. recently released a tracking rating report, confirming DRCB's (09889) issuer credit rating at AAA with a stable outlook, while maintaining AAA ratings for five outstanding bonds including "23 Dongguan Rural Commercial Small Micro Bond 01."

The report noted that while the bank maintains its leading position in the local market, it faces challenges of "profitability requiring improvement and loan quality under certain pressure."

**Profitability Under Pressure**

In 2024, the bank's net interest margin narrowed to 1.35%, a cumulative decline of 57 basis points from 1.92% in 2022, directly leading to a 13.2% year-on-year decrease in net interest income. Within non-interest income, fee and commission income declined due to reduced rates on insurance agency sales and wealth management products.

Meanwhile, due to participation in Puning Rural Commercial Bank's special bond capital supplementation work, the bank must bear the discounted present value of future cash flows from special bond funds minus the gap between underlying beneficial rights' corresponding asset value and underlying share value. This estimated loss reached 258 million yuan in 2024, an increase of 22 million yuan from the previous year. Despite growth in bond investment income, annual net operating revenue still declined 7.2% year-on-year to 12.33 billion yuan, with net profit falling for the third consecutive year to 4.86 billion yuan.

**Deteriorating Asset Quality**

The report revealed that the bank's non-performing loan balance increased dramatically by 3.59 billion yuan to 6.98 billion yuan in 2024, with the NPL ratio climbing to 1.84%, up 0.61 percentage points from end-2023.

New non-performing loans were mainly concentrated in wholesale/retail and manufacturing sectors, with 7.84 billion yuan in newly generated NPLs for the year.

More concerning is that the bank's loan extensions, refinancing, and revolving credit facilities for certain clients totaled 21.19 billion yuan (solo basis), accounting for 6% of total loans, including 2.47 billion yuan classified as "special mention" and 1.65 billion yuan as non-performing. China Chengxin International explicitly noted that "such loans are prone to turning non-performing during periods of economic slowdown."

**Weakened Risk Coverage Capacity**

Against the backdrop of surging non-performing loans, the bank's provision coverage ratio dropped significantly from 373.83% in 2022 to 207.72%.

Additionally, non-credit asset risk exposure emerged: some corporate bonds and underlying bonds in asset management plans from previous years' financial investments defaulted. As of end-2024, financial investments in the third stage of the credit loss model had a book value of 750 million yuan, with underlying assets mainly comprising credit asset beneficial rights and private enterprise bonds that defaulted in public markets in recent years.

**Regional and Industry Risk Concentration**

DRCB faces significant regional and industry risk concentration challenges. According to the China Chengxin International report, the bank's real estate, construction, and individual mortgage loans combined account for 21.7% of total loans (with individual mortgages at 10.7%). Given uncertainties in real estate industry credit risk, the rating agency explicitly highlighted the need for continued attention to related risks.

Simultaneously, the bank's corporate loans are highly dependent on local manufacturing - a sector that is both its primary lending industry and the main source of new NPLs in 2024. Of the 7.84 billion yuan in newly generated NPLs for the year, manufacturing and wholesale/retail became the hardest-hit areas.

Regarding the regional operating environment, Dongguan hosts over 40 banking financial institutions. Although the bank maintains local leadership with 17.7% deposit market share and 18.4% loan market share, China Chengxin International noted that intense competition continues to squeeze pricing power, further exacerbating profitability pressure.

**Positive Factors Supporting the Rating**

In terms of capital strength, DRCB's core Tier 1 capital adequacy ratio rose to 14.34%, with relatively adequate capital. Deposit stability is outstanding, with individual deposits exceeding 60% and time deposits accounting for 58.7%.

For external support, Dongguan municipal government provided non-performing asset disposal support during restructuring. After management rights transfer in 2022, the government holds significant decision-making power over key executive appointments. China Chengxin International believes Dongguan municipal government has strong willingness and capability to provide support when needed.

The report's conclusion emphasized that despite operating pressures, considering the bank's importance in the local financial system, good deposit stability, and relatively adequate capital among other credit advantages, the AAA rating is maintained.

However, future attention is needed for three major risk factors: narrowing interest margins, downward pressure on asset quality, and uncertainties in capital market business income.