Matters:
On March 25, China Merchants Bank disclosed its 2023 annual report. For the full year of 2023, the company achieved operating income of 339.123 billion yuan, -1.64% year-on-year (-1.72% in the first three quarters); net profit to mother was 146.602 billion yuan, an increase of 6.22% over the previous three quarters (+6.52% in the first three quarters). The annual net interest spread is 2.15%, the non-performing rate is 0.95%, and the provision coverage rate is 437.7%.
Commentary:
The revenue growth rate for the full year of 2023 is still under pressure, but under the influence of last year's Q4 low base, the cumulative growth rate subsided from the negative increase in the previous three quarters, and the overall net profit growth rate remained stable. Looking at the revenue segment structure, net interest income/net handling fee/other non-interest income for the whole year were -1.63%/-10.78%/+28.25%, respectively. Among them, Q4's net interest income in a single quarter was 52.38 billion yuan, -1.7% month-on-month, which is still a drag on the narrowing of interest spreads. In the fourth quarter, under the influence of concentrated reduction in interest rates on existing mortgages, interest spreads narrowed once a month. CMB's average daily net interest spread in Q4 was 2.04%, down 7 bps from Q3, and 33 bps year-on-year. The cumulative net interest spread for the whole year was 2.15%, down 4 bps from the previous three quarters and 25 bps from the previous year. Among them, asset-side loan yield in Q4 fell 16 bps to 4.08% month-on-quarter, dragging down asset-side yield by 4 bps to 3.68% month-on-month. In addition, debt-side interest rates also increased month-on-month. Mainly, interbank debt costs increased month-on-month, and overall deposit interest payment costs stabilized at 1.64% month-on-month in Q4. In terms of non-interest income, CMB achieved net processing fee revenue of 84.108 billion yuan, or -10.78%. Among them, under the influence of “integration of reporting and banking” in the fourth quarter, the share of wealth management fee revenue fell slightly to 30.7%, revenue year-on-year (-7.9% year-on-year in the first three quarters), and revenue from agency funds/financial management/trust/insurance businesses was -21.5%/-18.4%/-19.4%/+9.4%, respectively. Apart from the positive growth rate of agency insurance income narrowing, the revenue from consignment sales of other negative financial products all increased and converged. Other non-interest income reached $9.38 billion in 23Q4, of which investment income of $4.77 billion was achieved in a single quarter. Supported by the negative year-on-year increase in handling fee revenue and the broadening growth rate of other non-interest income, the annual revenue growth rate rebounded slightly from the previous three quarters, but interest spreads were still constrained, dragging down PPOP's cumulative year-on-year growth rate of -2.1%. Furthermore, income tax expenses are expected to be collected in the fourth quarter, and the annual net profit growth rate decreased slightly by 0.3 pct to 6.22% compared to the previous three quarters. Overall, China Merchants Bank's revenue and profit performance in Q4 was in line with our expectations.
Consolidate the bastion balance sheet, overall retail demand has been growing steadily, and the parent bank's personal mortgage loans have been increasing in a single quarter. CMB's Q4 interest-bearing assets were +3.4% month-on-month, adding a total credit of 53.32 billion yuan in a single quarter, and credit +0.8% month-on-month. Looking at the parent bank's credit investment structure, Q4 generally added +711/+507/49.4 billion yuan to public/retail/notes respectively. Of these, the new investment in the public sector was mainly concentrated in manufacturing (+33.8 billion), electricity and gas (+22.1 billion yuan), and retail (+16.7 billion yuan), and loans to the real estate sector continued to drop month-on-month (-8.8 billion, -12.9% year over year). Personal housing mortgage loans grew little in the fourth quarter under the retail side. The recovery in a single quarter was rising by 17.6 billion dollars, while Xiaowie/consumer loans/credit cards were +2.0%/+1.2%/+1.7% month-on-month, respectively. Furthermore, on the basis of CMB's initiative to reduce low-yield assets such as buying, reselling, and divestment capital in the third quarter, Q4 interbank assets increased 29.5% month-on-month, and the scale of supporting interest-bearing assets expanded month-on-month. Looking at the asset structure, loans as a share of interest-bearing assets have generally stabilized at 60%, and deposits have generally stabilized at 85% of interest-bearing liabilities. Among them, demand deposits accounted for a slight decrease of 8 pct to 54.9% from the beginning of the year.
The overall non-performing rate has remained stable, and provisions have been consolidated at a high level. The balance of non-performing loans to the public real estate sector has declined, and the net generation rate of non-performing loans in the retail credit card sector has declined. For the full year of 2023, CMB's non-performing rate/ closing rate was 0.95%/437.7%, -1 bp/-8.2 pct. Overall, stable. Concerned loans accounted for +9 bps to 1.10% month-on-month, but it was still down 11 bps from the beginning of the year. We estimate that net bad generation was 0.68% in a single quarter under the Group's caliber, down from 0.71% in Q3. Net bad generation was 0.85% for the whole year, and remained low.
CMB's net bad generation rate was 1.03% for the whole year, down 12 bps year on year. The estimated annual bad generation rate was 1.02%. Among them, the net bad generation rate for corporate loans was 0.57% per quarter and is still low. The net bad generation rate for retail loans was 1.40% per quarter, which remained stable from month to month, and the net generation of bad credit cards declined to a certain extent from month to month. In particular, the real estate industry's non-performing rate fell 30bps to 5.01% month-on-month (parent bank caliber). Considering that total denominator loans are still falling, the non-performing balance of the molecular side real estate industry declined from the end of the 3rd quarter. The balance at the end of the year was 14.56 billion (15.9 billion at the end of the 3rd quarter).
The construction of the “Malik Curve” saw initial results, and the dividend rate exceeded expectations and increased to 35%. CMB continues to increase investment in technology, accounting for 4.59% of the bank's revenue throughout the year, and comprehensively promotes digital reshaping around online, digitization, intelligence, platformization, ecology, etc., to “break out of comfort zones and brave no-man's land”, gradually establish a financial services ecosystem and explore the application of artificial intelligence scenarios. In 2023, CMB plans to pay a cash dividend of 1.972 yuan per share. The total cash dividend ratio will increase to 35.01% of net profit attributable to common shareholders (33.01% in 2022), and the static dividend ratio will increase to 6.3% (corresponding to the latest total market value).
Investment advice: Faced with the two factors of stock mortgage interest rate adjustments and “integration of reporting and banking” in the fourth quarter, CMB's overall performance growth rate remained stable, and various asset quality indicators remained at an excellent level. Currently, residents' willingness to increase leverage/risk appetite is still low, but poor indicators in key risk areas have begun to improve, and it will still take some time for residents' confidence to recover. Over the long term, China Merchants Bank has solid and steady fundamentals, clear strategy execution, long-term progressive and strong; through long-term deep cultivation in the retail field, it has accumulated a number of high-quality and stable retail customer groups, and has continuously deepened its moat in the retail business field through systematic management and financial technology empowerment. CMB is highly scarce among banks and continues to be optimistic about its long-term value. Based on the company's disclosure of the annual report and the current macro environment, we adjusted the 2024E/2025E net profit growth rate to 3.2%/6.0% (previous value 4.99%/7.61%). The current stock price corresponds to 24E PB 0.77X, at the historical 0.16% quantification point, combined with the company's fundamentals and historical valuation center, and gave the 2024 target PB 0.95X, corresponding to the target price of 38.44 yuan, maintaining the “recommended” rating.
Risk warning: Economic recovery falls short of expectations. Real estate risk exposure exceeded expectations.