Incident: On March 25, China Merchants Bank released its 2023 Annual Report. Over 23 years, it achieved cumulative revenue of 339.1 billion yuan, YoY -1.6%; net profit to mother of 146.6 billion yuan, YoY +6.2%; non-performing rate of 0.95%, and provision coverage rate of 438%.
Revenue growth has stabilized marginally. The year-on-year growth rates of cumulative revenue and net profit to mother in '23 were +0.1 pct and -0.3 pct, respectively, compared to the previous three quarters. Although the revenue growth rate is still negative, the revenue growth rate has stabilized marginally under the pressure of the 23Q4 banking insurance channel rate reduction and the adjustment of interest rates on stock mortgage loans.
Net interest income was negative year-on-year, and net interest spreads may still be under pressure. China Merchants Bank's net interest income was -1.6% year over year, of which 23Q4 was -6.6% year over year. The main influencing factor may be the implementation of the 23Q4 stock mortgage interest rate adjustment policy. The net interest spread for the 23Q4 quarter was 2.04%, down 7BP from the end of 23Q3. Looking ahead to 24 years, against the backdrop of LPR adjustments and no significant recovery in retail credit demand, net interest spreads may still be under pressure to narrow. In particular, there was still an impact of centralized repricing in the first quarter.
The strategic strength of big wealth management remains unchanged. Under the influence of factors such as declining investment risk appetite and poor capital market performance, China Merchants Bank closed -10.8% year-on-year in 2013. Although there are still pressures such as falling agency rates in the banking insurance channel in mid-year revenue, China Merchants Bank's wealth management business continued to advance, and the number of retail customers and AUM continued to grow at a high base. At the end of '23, the number of retail customers reached 197 million households, +7.1% year over year, and managed retail AUM 13.3 trillion yuan, +9.9% year over year. Other non-interest revenue in '23 was +25.0% YoY, of which Q4 was +76.2% YoY, which was the main driving force for Q4 revenue.
The defect rate remained low, and real estate risk was cleared at an accelerated pace. At the end of 23, the defect rate was 0.95% and the attention rate was 1.10%, compared to -1 BP and +9BP at the end of 23Q3, respectively. Specifically: 1) Real estate sector: Real estate risk exposure continued to decline. China Merchants Bank's real estate business balance at the end of '23 was 399 billion yuan, -13.9%; the non-performing rate of loans to public real estate at the end of '23 was 5.01%, compared to -30BP at the end of 23Q3. The absolute value of the non-performing rate was still high. One was that accelerated risk exposure, and the other was that the declining real estate risk exposure reduced the denominator of the bad rate. 2) In terms of retail credit: Under the parent bank's caliber, the retail loan non-performing rate at the end of 23 was 0.91%. Compared with +5BP at the end of 23Q3, the absolute value of the non-performing rate is still low. At the end of 23, the provision coverage rate was 438%, compared to -8pct at the end of 23Q3. On the one hand, the risk compensation capacity was solid, and on the other hand, the high provision coverage rate also fed back profit margins in the future, supporting the steady growth of the company's profits.
Investment advice: Optimistic about growth and high dividends
China Merchants Bank's revenue growth rate rebounded marginally in '23. Although net interest spreads and revenue in '24 are still under pressure, with macroeconomic recovery, demand for retail credit gradually recovers, and China Merchants Bank, which has dealt with real estate risks earlier and has more solid internal wealth management skills, is expected to gain more room for valuation repair than the sector as a whole. In addition, the company's cash dividend ratio of 35% for the year 23 (33% for 2019-2022), and the dividend rate corresponding to the closing price on March 25 was 6.29% (A share), which also has high dividend investment value. EPS is expected to be 6.06, 6.35, and 6.80 yuan respectively in 24-26, and the closing price on March 25, 2024 corresponds to 0.8 times 24-year PB, maintaining the “recommended” rating.
Risk warning: Macroeconomic growth is declining; asset quality is deteriorating; the decline in net interest spreads in the industry exceeds expectations.