Events:
On April 22, 2022, China Merchants Bank disclosed that 1Q22 realized operating income of 91.99 billion yuan, an increase of 8.5% over the same period last year, and net profit of 36.022 billion yuan, an increase of 12.5% over the same period last year. Revenue growth exceeded our expectations, while profit growth was slightly lower than expected. The 1Q22 defective rate rose to 0.94% from the quarter-on-quarter 3bps to 0.94%. The provision coverage rate of 1Q22 decreased to 463% from the previous quarter-on-quarter 21pct. The quality of assets is slightly lower than expected.
Brief comments:
1. Revenue exceeded expectations, and net interest income maintained double-digit growth.
China Merchants Bank reported revenue that exceeded expectations in the first quarter. 1Q22 revenue, net interest income and non-interest income increased by 8.5%, 10.5% and 6.5% respectively compared with the same period last year. In terms of profit contribution, scale contributes the most to profits (10.3%), with 4.5% negative impact on interest spreads, while handling fees, other non-interest, costs and provisions make a slight positive contribution to profits.
Looking forward to this year, under the effective control of both sides of the asset burden, China Merchants Bank's interest rate spread is expected to remain stable; the policy of stable growth and the policy margin of the real estate market will be relaxed and gradually landed; the demand for public and consumer credit is expected to improve, and the medium-and long-term net profit growth center of about 15% is highly deterministic.
2. Under the sharp adjustment of the equity market in the first quarter, the performance of big wealth management exceeded expectations, and AUM, wealth management income and retail customers were very resilient.
On the income side, income from big wealth management remains basically stable. 1Q22, big wealth management income of 15.3 billion, only slightly decreased 1% from the same period last year, accounting for 53% of the middle income. Of this total, asset management, wealth management and trusteeship contributed 32,104 and 1.6 billion income respectively, representing year-on-year changes of 48%,-11% and 11% respectively. Although the income from commission funds and trust fees grew negatively compared with the same period last year, the income from financial management and insurance strongly supported the income of great wealth.
On the client side, the number of retail customers is growing steadily. 1Q22, China Merchants Bank retail customers reached 176 million, an increase of 9.3% over the same period last year. Among them, basic customers, sunflower and above customers, and private customers continued to maintain steady growth, up 9.1%, 17.5% and 17.1% respectively over the same period last year. The market performance was weak in the first quarter, but China Merchants Bank's outstanding retail business and customer service capabilities still stood out, driving a steady increase in customer growth.
In terms of AUM, the AUM of both basic customers and private accounts have been improved. The total retail AUM of 1Q22 and China Merchants Bank reached 11.3 trillion, an increase of 18.2% over the same period last year. Among them, the year-on-year growth rates of AUM for basic customers, sunflower and private customers were 21.5%, 17.5% and 17.3%, respectively. The basic customers were further consolidated, and the AUM growth rate of basic customers accelerated quarter by quarter, with the per capita AUM of basic customers reaching 12100 yuan, an increase of 11.3% over the same period last year.
After decades of retail strategy, China Merchants Bank retail customer base, organizational structure, personnel base is solid, business inertia is very strong. We expect that with the emergence of the new president, China Merchants Bank's long-term strategy, organizational structure, and personnel will remain stable.
3. The net interest margin increases slightly, and the price control at both ends of the asset negative is strong.
1Q22 net interest margin 2.51%, quarter-on-quarter increase in 3bps, compared with 2021 up 3bps. On the asset side, the yield on loans and interbank assets rose 4bps and 3bps respectively on a quarter-on-quarter basis, while the central bank of investment and deposits dropped 5bps and 3bps on a quarter-on-quarter basis. The rebound in lending rates effectively hedged the weak impact of lending in the first quarter, and the overall yield on interest-bearing assets remained stable at 3.97 per cent on a quarter-on-quarter basis. On the debt side, deposit costs rose 2bps to 1.46 per cent quarter-on-quarter, while overall debt costs fell 2bps to 1.58 per cent on a quarter-on-quarter basis. First, due to the strong deposit growth in the first quarter, due to fluctuations in the equity market, some AUM has shifted from funds to low-risk time deposit products, the proportion of retail time deposits has increased by 1.1pct on a quarter-on-quarter basis, and the average daily balance of deposits in total liabilities has increased to 80.8% from the previous quarter, effectively hedging the impact of rising deposit costs. Second, the cost of active debt decreased, with interbank liabilities, bonds payable and borrowing costs from the central bank falling 2bps, 8bps and 32bps, respectively.
Looking ahead to this year, the net interest margin is expected to remain basically stable. The asset side expects that lending rates are still under downward pressure, but the marginal improvement in lending in the second half of the year is expected to lead to an improvement in asset structure. The upward pressure on the cost of deposits on the debt side is still there, but China Merchants Bank's strong retail business and customer base make the pressure on low-cost deposits significantly lower than that of other peers, and the overall cost of debt is expected to remain stable.
4. The bad performance in the first quarter fluctuates slightly within the expectation, the scale is small, and the overall control is controllable. it is expected that the bad bath rate is unlikely to increase slightly quarter-on-quarter, and the provision coverage rate is high. The defect rate of 1Q22 and China Merchants Bank rose 3bps to 0.94% on a quarter-on-quarter basis, still less than 1%; the write-off defect generation rate (annualized, measured) was 70bps, which fluctuated at a low level; the provision coverage rate decreased to 463% on a quarter-on-quarter basis, which is still much better than the industry average. The provision coverage rate fell at a high level in the context of regulatory encouragement for high-quality listed banks to reduce the provision coverage rate.
Based on the changes in the macro and economic environment, the 1Q22 concern and overdue rate have increased, the 1Q22 concern rate has increased to 0.93% from the previous month, and the overdue rate has increased to 4bps to 1.10% from the previous month. At the same time, China Merchants Bank actively exposed the risk, which significantly increased the strictness of the identification of non-performing loans, and the ratio of 1Q22 overdue loans to non-performing loans decreased significantly from the previous month to 58.5%.
The normal exposure to the bad plan of public real estate, the overall risk can be controlled, and the exposure is further reduced. 1Q22 and China Merchants Bank's mother bank increased their non-performing loans by 2bps to 1.33% quarter-on-quarter, mainly because the non-performing rate of real estate loans increased to 2.57% quarter-on-quarter, while the non-performing rate of most other industries remained low and fell further. Among them, the non-performing rates of leasing and business services and wholesale and retail industries decreased by 37bps and 52bps respectively. From the perspective of real estate exposure, the scale of real estate business that bears credit risk on the balance sheet amounts to 517.5 billion yuan, accounting for 5.50% of the total assets in the quarter-on-quarter comparison. The loan size of the parent bank to the public real estate loan is 365.3 billion yuan, accounting for 6.74% of the total loan in the quarter-on-quarter. Off-balance sheet real estate exposure that does not bear credit risk totaled 378.4 billion yuan, down 8.2% on the quarter. China Merchants Bank real estate whitelist is strict, high credit rating customers account for 83% of Prida's balance. We think that China Merchants Bank 1Q22 is a normal exposure to public real estate in the plan, which is small in scale and controllable as a whole.
China Merchants Bank asset quality foundation is very solid, bad bath space is not large, it is expected that management changes will not bring bad bath, and the new president has a high probability of internal emergence, China Merchants Bank is expected to maintain the current sound fundamental trend.
5. Profit forecast and investment suggestions
China Merchants Bank's quarterly revenue exceeded our expectations, and although profits were slightly lower than expected, the performance growth center of about 15 per cent was highly deterministic under the support of strong spread control, great wealth management potential, gradual pick-up in credit demand and quality of high-quality assets. We believe that there is a high probability of the emergence of the new president China Merchants Bank, which will help to stabilize short-term market sentiment, maintain sound fundamental trends, and ensure the same long-term strategic direction. We expect China Merchants Bank's net profit to grow by 15.3%, 15.5% and 15.7% respectively from 2022 to 2024, and the current share price corresponds to 1.30 times 22-year PB, maintaining the buy rating and the recommended combination of the banking sector.
6. Risk hint
The company is mainly faced with the following risks: 1) a sharp macroeconomic downturn, leading to adverse bank risks; 2) a higher-than-expected rebound in the global epidemic and changes in domestic and foreign policies; and 3) the promotion of large wealth management business is not as expected.