Incident: On March 24, China Merchants Bank announced its 2023 annual report, achieving full year revenue, profit before provision, and net profit of 339.12 billion yuan, 224.37 billion, and 146.60 billion, compared with -1.6%, -1.8%, and +6.2%, respectively. The annualized weighted average ROE was 16.22%, a year-on-year decrease of 0.84pct. The reviews are as follows:
The decline in revenue narrowed month-on-month, and provisions fed back profits by 6.2%.
Revenue side: With other non-interest income growing rapidly, the decline in revenue narrowed month-on-month. China Merchants Bank's revenue in 2023 was -1.6% year-on-year, and the decline was 0.1 pct narrower than the previous three quarters. Specifically: ① As interest spreads continue to narrow and credit growth decelerates, net interest income grew negatively year over year. Net interest income in 2023 was -1.6% YoY, down 1.7 pct from the previous three quarters. ② Earnings continued to be under pressure, and other non-interest income performed well. Net non-interest revenue in 2023 was -1.7% YoY, 2.9 pct narrower than the previous three quarters. Among them, against the backdrop of capital market turbulence and shrinking credit card transactions, agency business, asset management business, escrow business, and credit card revenue all declined to varying degrees; net revenue from handling fees and commissions was -10.8% year-on-year, and the decline narrowed 0.7 pct month-on-month. Other non-interest net income was +25.01% year-on-year, and the main contributions came from bond investment income, foreign currency transaction income, and CMB Leasing business revenue growth.
Cost side: Refined control of expenses, provision and backfeed, net profit is growing. The company continues to allocate financial resources in a refined manner. In 2023, management expenses were -1.4% year-on-year, and the cost-revenue ratio was 33%, which remained relatively stable. Credit impairment losses were -28% year-on-year, and the year-end provision coverage rate was 437.7%, a year-on-year decrease of 13 pcts. Backed by provisions, net profit increased 6.2% year on year, and the growth rate decreased 0.3 pct from the previous three quarters.
The overall growth rate of scale has slowed, and investment in small, micro, and consumer loans has increased.
At the end of 2023, China Merchants Bank's loan balance was +7.6% year-on-year, and the growth rate was 0.1 pct slower than at the end of September. Judging from the annual credit increase, 457.4 billion new loans were added in 2023, accounting for 49% and 60.4% respectively; the share of public and retail loans at the end of the year was 39.9% and 52.8% respectively, an increase of 0.69 and 0.57 pct over the previous year. Among them, public loans were mainly invested in manufacturing and infrastructure-related industries, accounting for an increase of 24.3% and 16.5% respectively, and a net decrease of 49.3 billion yuan in public real estate loans. The main incremental contribution of retail loans came from small and micro loans, consumer loans and others, accounting for 26.3% and 23.6% respectively.
In 2023, against the backdrop of pressure on the retail business of the banking industry, CMB's retail customer base continued to consolidate and achieve steady growth under a high base. At the end of the year, retail customers, sunflower customers and above, and private sector customers reached 197 million, 4.641 million, and 148,800 households respectively, up 7.07%, 12%, and 10.42% year-on-year respectively.
Retail AUM reached $13.32 trillion, up 9.88% year on year; Golden Sunflower customers and above AUM was 10.82 trillion yuan, up 9.66% year on year.
Interest spreads have narrowed in line with expectations and are expected to remain under pressure in '24.
The 2023 net interest spread was 2.15%, down 4BP from the previous three quarters and 25BP year-on-year. The Q4 net interest spread for the single quarter was 2.04%, down 7BP from Q3, in line with expectations. Among them, ① asset side: Under the adjustment of stock mortgage interest rates, loan yield declined significantly (Q4 -16BP), and yield on interest-bearing assets fell 4 BP month-on-month. ② Debt side: Due to continued regularization of deposits and slow repricing, the interest rate on Q4 deposits remained flat month-on-month; however, the cost of issuing bonds and interbank capital increased by 2 BP month-on-month.
Looking ahead, there is still downward pressure on asset-side returns in 2024, but considering that debt-side deposit cost reduction dividends will gradually be released, the narrowing of interest spreads is expected to decrease.
Asset quality is generally stable, with fluctuations on the retail side
Asset quality book indicators remained good. By the end of 2023, the company's non-performing loan ratio was 0.95%, down 1BP month-on-month and year-on-year; the share of concerned loans was 1.1%, down 11BP year on year. On a dynamic basis, bad generation has remained stable. New non-performing loans of 61 billion dollars were generated throughout the year (over 60% from credit cards), a year-on-year decrease of 1,978 billion dollars; the non-performing loan generation rate was 1.03%, down 12BP from the previous year.
Judging from the quality of segmented loan assets: ① The general public sector is stable, real estate risks are being released smoothly, and risk exposure continues to shrink. At the end of 2023, the corporate loan non-performing ratio was 1.19%, a year-on-year decrease of 7BP. Among them, the non-performing balance of public real estate increased by 1,835 billion yuan year on year, and the non-performing rate increased by 1.18 pct year on year to 5.26%.
Risk exposure continued to shrink, and the balance of real estate-related real estate-related real estate-related actual and contingent credit, proprietary bond investments, and proprietary non-standard investments to bear credit risks fell 13.9% year-on-year. ② The retail loan defect rate is stable, and the generation of bad credit cards is high. At the end of 2023, the retail loan non-performing ratio was 0.89%, the same as the previous year.
Among them, the credit card defect rate was relatively high. The year-end defect rate was 1.75%, a year-on-year decrease of 2BP; the estimated net generation rate of bad cards was 4.38%.
The dividend ratio was raised to 35%, and the current dividend ratio is 6.1%.
In 2023, the company plans to pay a cash dividend of 1.972 yuan per share, with a dividend ratio of 35%; this is a further increase from the company's average dividend ratio of 32.45% in the past five years. CMB's dividend ratio has been stable at over 30% for a long time, and has continued to increase in recent years. We believe that with sufficient capital, stable profits, and the 30% dividend ratio included in the company's articles of association, the company can expect a stable high percentage of cash dividends. As of the close of trading on March 27, the company's dividend rate was 6.1%, and the allocation value was outstanding.
Investment advice: We judge that the growth rate of China Merchants Bank loans may remain stable in 2024. Interest spreads are still under pressure, but the decline is narrowing; non-interest income has recovered steadily, and revenue is expected to remain under pressure. However, considering the overall stability of asset quality and sufficient provisions, net profit is expected to be released smoothly under the demand for sustainable support to the real economy. Net profit is expected to increase by 1.4%, 3.2%, and 5.6% year-on-year in 2024-2026, corresponding to BVPS of 42.67, 48.81, and 55.31 yuan/share, respectively. The closing price on March 27, 2024 was 32.3 yuan/share, corresponding to the 2024 net market ratio of 0.76 times. At this stage, CMB insists on the dynamic and balanced development of “quality, efficiency, and scale”. The balanced and collaborative development of the four major sectors is expected to better support the superior retail business to the next level, and is optimistic about the company's mature management mechanism and leading retail advantages. Maintain a “Highly Recommended” rating.
Risk warning: Economic recovery and physical demand have fallen short of expectations, and the speed of statement expansion, net interest spread levels, and asset quality have been impacted.