Core views

CMB's revenue and profit continued the positive trend of the first three quarters and were in line with expectations. Among them, net interest spreads were affected by the reduction in interest rates on existing mortgages, and the month-on-month decline increased slightly. Poor real estate “double declined” for two consecutive quarters, but the retail loan non-performing rate has risen slightly, and asset quality still requires continued attention. Wealth management clients have grown very steadily, reserving greater growth flexibility for the future.

Looking ahead to 24, CMB is currently still under pressure in terms of interest spreads, middle income, and retail asset quality. It is expected that revenue and profit growth in 2024 will continue to slow compared to 23, but the overall fundamental performance will still be better than that of the stock industry. Looking at the dividend rate, CMB's dividend rate in '23 increased slightly to 35%, and the dividend rate corresponding to the current stock price increased to around 6.3%, making the allocation cost effective.

occurrences

On March 25, China Merchants Bank announced its 2023 annual report. In 2023, it achieved operating income of 339.123 billion yuan, a year-on-year decrease of 1.6% (9M23: -1.7%), and net profit to mother of 146.602 billion yuan, an increase of 6.2% (9M23:6.5%). The defect rate was 0.95%, down 1bp from quarter to quarter; provision coverage rate was 437.7%, down 8.2 pct from quarter to quarter.

Brief review

1. Revenue and profit continued the positive trend of the first three quarters and were in line with expectations. China Merchants Bank achieved revenue of 339.123 billion yuan in 2023, a slight decrease of 1.6% year-on-year, which is basically the same as the decline in the previous three quarters (-1.7%). It is expected that the 2023 revenue performance will continue to lead the stock industry.

Among them, net interest income fell 1.6% year over year, mainly due to lower interest rates on stock mortgages and continued narrowing of net interest spreads when demand for retail credit was insufficient. Non-interest income fell 1.7% year on year, narrowing from the 9M23 decline, mainly improvements in other non-interest income such as investment income and changes in fair value. Meanwhile, due to the slump in the financial management market and the reduction in dropshipping insurance premiums, China Earnings fell 10.8% year over year. In terms of profit, CMB achieved net profit of 146.602 billion yuan for the whole year, an increase of 6.2% over the previous year, maintaining a steady single-digit profit release in the first three quarters. ROE continues to maintain an industry-leading level of 16.22%. In terms of performance attributions, growth in scale, low provision and other net income contributed positively to profits of 10%, 9%, and 2.3%, respectively, while the narrowing of net interest spreads and the decline in revenue contributed negatively to 11% and 2.95%, respectively.

Looking ahead to 2024, the current operating environment of stock banks is more difficult than that of peers due to insufficient demand for effective credit from physical enterprises and the need for further recovery in consumer spending and home buying intentions. Furthermore, combined with the reduction in dropshipping rates, it is difficult to say that revenue performance will improve in the short term. Under this general trend, CMB's interest spreads, middle income, and retail asset quality are under pressure. It is expected that the revenue and profit growth rate in 2024 will continue to slow compared to 23, but the overall fundamental performance will still be better than that of the stock industry.

Looking forward to an accelerated macroeconomic inflection point in the future, the benefits of recovering retail demand and clearing real estate risks first will drive CMB's fundamentals to improve first, thus driving valuation repair first.

2. Affected by the reduction in interest rates on existing mortgages, the decline in net interest spreads in the fourth quarter fell 7 bps month-on-month, in line with expectations. CMB's net interest spread in 2023 was 2.15%, down 25 bps year on year, down 4 bps from 9M23. The decline was basically stable. Among them, the return on assets decreased by 3 bps to 3.76% compared to 9M23, and the debt cost ratio increased by 1 bps to 1.73% compared to 9M23. Judging from the quarterly data, CMB's 4Q23 net interest spread was 2.04%, down 7 bps from quarter to quarter, and a relatively large drop of 2 bps compared to the 3Q23 decline (-5 bps), mainly due to the reduction in stock mortgage interest rates, which is fully in line with expectations. Among them, the return on the asset side fell 4 bps to 3.68% month-on-month, and the debt cost ratio increased by 2 bps to 1.75% month-on-month.

On the asset side, the credit investment structure continues to be optimized, and loan interest rates are being dragged down by insufficient demand for credit loans and stock mortgage interest rate adjustments. Structurally, CMB continued to reduce the pressure on low-yield assets such as interbank assets in 2023, while increasing the allocation of investment assets with steady and rising yields. In 2023, the average daily volume of CMB loans and investments increased by 7.7% and 23.7%, respectively, while the average daily size of interbank assets fell sharply by 8% year on year. Loan investment has increased, and the overall pressure on CMB's 2023 note discount scale has been adjusted flexibly on both the public and retail sides according to demand conditions, and the negative impact of the continuing decline in interest rates on new loans was hedged through optimization of the credit structure. Under the parent bank's perspective, credit to the public and retail sectors increased by 10.7% and 8.5% year-on-year respectively in 2023, accounting for 50% and 59% of the increases respectively.

Note discounting, on the other hand, dropped 8.3% year over year. Looking at the 4Q23 single quarter, credit to public and retail sectors increased by 3.2% and 1.5%, respectively, over the quarter, accounting for 98% and 70% of increases respectively. Since the economy was still recovering slowly in the fourth quarter of '23, the overall CPI was in a negative range. There was no significant improvement in residents' income levels and spending capacity, and retail credit demand was still weak. It is expected that while reducing the size of notes, CMB will appropriately increase investment in public loans to ease downward pressure on interest rates. In terms of price, 4Q23 loan yield fell 16 bps to 4.08% from quarter to quarter, and return on investment assets increased 3 bps to 3.21% quarter over quarter. The expected decline in loan yields is mainly related to the negative impact of the reduction in stock mortgage interest rates in the fourth quarter. Furthermore, due to insufficient demand for effective retail credit compounded by the continued decline in LPR, there is a clear downward trend in pricing for some consumer loan products, and interest rates on new loans are also under some downward pressure.

On the debt side, deposit costs are relatively rigid, and the trend of deposit periodization has eased slightly. Structurally, the average daily balance of CMB demand deposits in 2023 was 57.08% under the daily average, down 0.95 pct from quarter to quarter, down 4.55 pct year on year. The quarter-on-month decline narrowed compared to 3Q23 (-1.03pct).

Under the parent bank's perspective, the share of 4Q23 current accounts fell 0.6 pct to 54.9% from quarter to quarter, which was significantly narrower than the 3-quarter decline (-3 pct). Among them, company current and retail demand deposit balances increased 1.2% and 0.9%, respectively. However, time deposits rose 3.6% from quarter to quarter, with retail time deposits continuing to rise sharply by 7.2% from quarter to quarter. Overall, there is still a trend of deposit regularization, but it is expected that CMB will guide the revitalization of some long-term deposits through term structure management and comprehensive financial service capabilities, reducing the degree of regularization to a certain extent. In terms of price, due to the gradual release of deposit listing interest rate dividends, the pressure of deposit regularization was hedged to a certain extent. In 4Q23, deposit costs for CMB customers remained slightly flat at 1.64% month-on-month.

Net interest spreads are expected to continue to be under pressure in 2024, but the decline may narrow slightly. In terms of scale growth, it is expected that CMB's credit investment will still be dominated by retail loans. Judging from the current good start, the current income level of residents has not improved significantly, the effective demand for consumer credit is still insufficient, and loan investment has basically remained stable.

Based on the relatively high base in '23, CMB's credit investment growth and growth rate is expected to drop slightly year-on-year in '24. On the price side, due to the current lack of confidence among enterprises and residents to increase leverage, the policy side continues to guide social financing costs downward, and the asset-side interest rate center is still showing a downward trend. CMB's own asset-side pricing is more “follow the market”, compounding the stock factors of stock mortgage interest rate cuts and LPR repricing, making it difficult to improve asset-side pressure in the short term. On the debt side, the current social risk appetite is extremely low, and the trend of deposit regularization still exists, but as dividends from lower interest rates on deposit listings continue to be released, the cost of debt can remain stable. Therefore, it is expected that CMB's net interest spread will continue to be under pressure in 2024, but the decline may be slightly better than in 23.

3. Asset quality remains stable and overall in line with expectations; however, retail credit asset quality requires continued attention. In 4Q23, CMB's defect rate was 0.95%, which remained flat from quarter to quarter. The provision coverage rate declined slightly by 8.2 pct from quarter to quarter to 437.7%. Looking at forward-looking indicators, CMB Group's attention rate increased by 9 bps to 1.10% compared to 3Q23, and the overdue rate rose 1 bps month-on-month to 1.26% compared to 3Q23, mainly due to deterioration in retail credit quality. From the perspective of bad generation, the bad generation rate in 2023 was 1.03%, which is the same as 9M23. The 3Q23 defect generation rate (estimated value) was 1.01%, a slight increase of 2 bps from quarter to quarter. The amount of bad money generated was 15.5 billion yuan, of which 3.9 billion yuan, 2.6 billion yuan was generated for public, retail, and credit cards, respectively. There was a 26% year-on-year decline in non-performing loans for the whole year, mainly the year-on-year decline in the amount of non-performing real estate. However, the generation of retail sales and bad credit cards increased slightly by 10% and 5%, respectively. It is estimated that this is mainly due to the lack of improvement in residents' income levels and willingness to repay during the economic downturn. In terms of bad disposal, a total of 58.1 billion yuan of defects were disposed of throughout the year, the same as the previous year. Among them, bad write-off and bad ABS disposal both accounted for 39%.

Defective real estate has “double declined” for two consecutive quarters. The high point of bad generation has passed, and “reveal first, clear first” has been achieved. Under the parent bank's caliber, the 4q23 CMB non-performing rate for public real estate fell sharply by 30bps to 5.01% from quarter to quarter, and the real estate non-performing loan balance fell 8.4% to 146 million yuan quarterly.

Not only did public real estate continue to reduce both the non-performing rate and non-performing loan balance, but the declines both increased compared to 3Q23. In addition, exposure to public real estate in the table continued to decline by 3.8% month-on-quarter to $399 billion, of which loans fell 2.9% quarterly to $290.7 billion, bond investment and non-standard quarterly fell 6% to 108.2 billion yuan, and off-balance sheet real estate exposure fell 2.9% month-on-quarter to $249.4 billion. CMB's overall real estate exposure has declined markedly. Currently, CMB's progress in dealing with poor public real estate is clearly superior to that of other stock banks, and it is expected that the trend of continuous clearance will continue in the future.

Even when revenue is under pressure, the credit cost advantage of “reveal first, clear first” can ensure that CMB's profit release continues to outperform the market and maintain its leading edge over peers.

The non-performing rate of all types of retail loans increased month-on-month, and the quality of retail assets requires continued attention. Under the parent bank's caliber, CMB's 4Q23 retail loan non-performing rate increased by 5 bps quarterly to 0.91%. Among them, the non-performing rates of credit cards, consumer loans, small and micro loans, and mortgage loans increased by 6 bps, 12 bps, 6 bps, and 1 bps, respectively, from quarter to quarter. Looking at forward-looking indicators, the attention rate and overdue rate for retail loans increased by 12 bps, 6 bps to 1.08%, and 1.19%, respectively. Among them, the attention rate for credit cards, consumer loans, small and micro loans, and mortgage loans increased 34 bps, 12 bps, 1 bps, and 10 bps, respectively. The overdue rate increased by 33 bps, 18 bps, 6 bps, and 4 bps, respectively. It is expected that CMB has increased its exposure to negative retail sales to a certain extent, and there may still be some negative trends in the future, such as small micro, consumer credit, and continued attention is needed.

4. The big wealth management business is still under pressure in the short term, but solid customer growth is in line with expectations, reserving greater growth flexibility for the future, and waiting for spring to blossom. The overall pessimism and poor returns in the capital market in 2023, and the decline in revenue from wealth management businesses such as escrow and financial management is a common trend in the industry. CMB's wealth management revenue in 2023 was 45.3 billion yuan, down 8% year on year. Among them, asset management, wealth management, and escrow contributed 11.5 billion, and 5.3 billion dollars in revenue, respectively, with year-on-year decreases of 7.9%, 7.9%, and 8%, respectively. In the wealth management business, the revenue performance of the escrow insurance business was the best, with a sharp increase of 9.3% over the previous year, which strongly supports the revenue of the wealth management business. Meanwhile, revenue from consignment wealth management, fund, and trust businesses decreased by 18.4%, 21.5%, and 19.4%, respectively.

Despite a brief period of pressure on CMB's revenue, its customer growth has been very solid, reserving greater growth flexibility for the future. Currently, CMB has 197 million retail customers, an increase of 7.1% over the previous year. Among them, the number of basic customers was 192 million, an increase of 7.0% year over year. There were 4.641 million customers of Golden Sunflower and above, up 12.0% year on year, and 148,800 private customers, up 10.4% year on year. Customer growth was also faster than in the previous three quarters, and customers in key areas such as Golden Sunflower grew significantly faster. In terms of AUM, the total retail AUM reached 13.32 trillion yuan, an increase of 9.9% over the previous year. Among them, AUM for customers above Golden Sunflower increased 9.7% year over year.

Looking ahead to 2024, the reduction in consignment insurance premiums will have a major impact on CMB's revenue performance. Combined with the current performance of the capital market, which is still unsatisfactory, it is unlikely that income from dropshipping funds, financial management, etc. will improve significantly. Considering that CMB's current wealth management revenue base is already high, and residents' risk aversion is heavy, there is limited room for “quantitative compensation” to boost revenue. Although wealth management is under pressure in the short term, CMB's leading edge in the light capital business will continue to be a moat leading the industry in the medium to long term under CMB's solid and steady growth customer base. Moreover, CMB itself has a good AUM structure, accounting for about 75% of non-deposit AUM. If market sentiment and economic conditions improve in the future, CMB's revenue performance will have greater upward elasticity.

5. The dividend rate was slightly raised to 35%, and the dividend rate was raised to around 6.3%, which is outstanding in terms of cost performance. According to CMB's 2023 profit distribution plan, CMB's cash dividend per share was raised to 1.97 yuan/share in 2023, and the corresponding cash dividend ratio (accounting for net profit attributable to common shareholders) increased slightly by 2 pct to 35% compared to 2022. Based on the current stock price of 31.35 yuan/share, the dividend rate level has increased to around 6.3%, which is already higher than that of major banks, and the cost performance ratio is outstanding.

6. Investment advice and profit forecast: CMB's revenue and profit continued the positive trend of the previous three quarters and were in line with expectations. Among them, net interest spreads were affected by the reduction in interest rates on existing mortgages, and the month-on-month decline increased slightly. Bad real estate “double declined” for two consecutive quarters, and it is expected that the high point of bad generation has passed. However, the non-performing ratio of all types of retail loans has risen slightly, and asset quality still requires continued attention. Client growth in the wealth management business is still very solid, reserving greater growth flexibility for the future. Looking ahead to 2024, the current operating environment of stock banks is more difficult than that of the same industry, as the demand for effective credit from physical enterprises is insufficient and residents' income levels need to recover. Under this general trend, CMB's interest spreads, middle income, and retail asset quality are under pressure. It is expected that the revenue and profit growth rate in 2024 will continue to slow compared to 23, but the overall fundamental performance will still be better than that of the stock industry. Looking forward to the recovery in retail demand in the future and the advantages of being cleared of real estate risks to advance the improvement of CMB's fundamentals ahead of the industry, CMB, which represents the beta direction of the banking sector, is expected to be the first to usher in valuation repair. Looking at the dividend rate, CMB's dividend rate in '23 increased slightly to 35%, and the dividend rate corresponding to the current stock price increased to around 6.3%, making the allocation cost effective. Revenue growth in 2024-2026 is expected to be -5.3%, 7.8%, 8.1%, and profit growth rates of 4.2%, 6.1%, and 7.2%. The current CMB stock price is only 0.76 times 24-year PB. Maintaining the buying rating and leading position in the banking sector.

6. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.