Description of the event
China Merchants Bank released its 2023 annual report. The annual revenue fell 1.6% year on year (down 1.7% in the first three quarters), net profit to mother increased 6.2% year on year (6.5% growth rate in the first three quarters), the year-end non-performing rate was 0.95%, and the provision coverage rate was 437.70%.
Incident comments
Overall performance was in line with expectations, and interest & revenue were dragging down revenue. Revenue for the year was -1.6% YoY, with net interest income -1.6% YoY (+0.1% YoY in the first three quarters), and net handling fee revenue fell 10.8% yoy, supported by other non-interest income such as investments. Net profit attributable to mother increased 6.2% year-on-year for the year. By reducing impairment charges, profits were fed back with forgiveness.
Credit growth is slowing down, and the public sector is still the main force of growth. Loans increased 7.6% for the whole year, and the impact of the external environment slowed down. Q4 loans grew 0.8% month-on-month, with an acceleration of +2.2% month-on-month growth for public transactions and +1.5% month-on-month for retail sales. The parent bank's Caliber Q4 retail products all achieved positive month-on-month growth. Mortgages, small micro, credit cards, and consumer loans increased by 1.3%, 2.0%, 1.7%, and 1.2% month-on-month respectively. Among them, Xiaowei and consumer loans increased 19.1% and 49.1% throughout the year, which is the core retail growth point. Full-year deposits increased by 8.2%, and year-end current deposits accounted for 54.9%, -0.6 pct month-on-month. The trend of regularization slowed marginally.
Net interest spreads continued to decline, and pressure on deposit costs improved marginally. Net interest spread for the whole year was 2.15%, down a cumulative total of 25BP for the whole year from -4 BP in the previous three quarters. Q4 The net interest spread for the single quarter was 2.04%, -7BP month-on-month. The main reason was that loan yield fell 16BP month-on-month, reflecting the impact of stock mortgage interest rate cuts. Deposit cost pressure improved marginally. The deposit cost rate remained flat at 1.64% month-on-month in Q4. The main deposit regularization trend+marginal foreign currency rate hikes slowed down. Net interest spreads are expected to remain under pressure in 2024, mainly due to the impact of the expected decline in interest rates on newly issued loans after mortgage repricing and LPR interest rate cuts. However, the impact of the reduction in deposit listing interest rates over the past two years is expected to gradually become apparent, easing the pressure on net interest spreads. The decline in net interest spreads is expected to narrow in 2024.
Asset quality improved month-on-month, and poor real estate declined. The year-end defect rate was 0.95%, 1BP month-on-month. From a dynamic perspective, the annual defect generation rate was 1.03%, which was the same as in the previous three quarters, and the intensity of bad write-off and disposal increased. The real estate non-performing rate continues to decline. The parent bank's non-performing real estate loan ratio at the end of the year was 5.01%, down 30BP from the end of the third quarter. It is expected that the write-off and disposal of bad stocks will accelerate, but it will still take time for the real estate risks to be fully cleared. In the retail sector, the parent bank's annual bad credit card generation rate was 4.25%, down 14BP from the previous three quarters. The bad generation rate has been declining for three consecutive quarters. The year-end provision coverage rate was 437.7%, -8pct month-on-month. In an environment where credit costs were reduced and revenue was under pressure, profits were fed back by reducing impairment.
The dividend ratio reached a record high. High ROE and low capital consumption are core advantages. The dividend ratio increased to 35% in 2023, reaching a record high, and previously remained at 33% for four consecutive years. China Merchants Bank has long regarded endogenous growth as its core advantage. With no equity financing for eight consecutive years, China Merchants Bank has the ability and conditions to increase dividends due to its high ROE+ medium to low rate of expansion and low capital consumption in the business model. The ROE for the full year of 2023 is 16.22%. It is expected to continue to be at the top of the listed banks. The core Tier 1 capital adequacy ratio at the end of the year is 13.73%. It is expected that future capital will remain abundant to ensure stable dividend capacity.
Investment advice: The dividend ratio has reached the next level, and the dividend ratio is more attractive. The full-year results are in line with expectations, and the fundamentals are still steady and strong. Revenue and net profit to mother are expected to grow at -2.2% and 5.3% in 2024. Based on the 2024/03/25 closing price, this corresponds to the A-share valuation of 0.77x2024Pb. The dividend rate is expected to be 6.29% in 2023, which is already higher than the average dividend rate of 66BP of the five major banks. We believe that high ROE and dividend rates support the bottom of medium- to long-term value and maintain a “buy” rating.
Risk warning
1. The downward pressure on the economy is increasing, and the net interest spread continues to narrow;
2. Asset quality fluctuates, and the non-performing rate has increased markedly.