Incident: China Merchants Bank disclosed its 2024 quarterly report. 1Q24 revenue fell 4.7% year on year (2023: -1.6%), and net profit to mother fell 2.0% year on year (2023:6.2%). The 1Q24 defect rate decreased by 3 bps to 0.92% month-on-month, and provision coverage decreased slightly by 0.9 pct to 437% month-on-month.

Performance was slightly lower than expected, with narrowing interest spreads and a year-on-year decline in handling fee revenue dragged down revenue performance: 1Q24 revenue fell 4.7% year on year, up 3.1 pct from the 2023 decline; net profit growth rate changed from positive to negative, down 2.0% year on year. Judging from the driving factors, ① Net interest income declined year on year, mainly due to the narrowing of interest spreads year over year. Net interest revenue for 1Q24 fell 6.2% year on year (2023:1.6%), dragging down revenue growth by 3.8 pcts. Among them, the narrowing of interest spreads by 27 bps year on year dragged down 7.4 pcts. ② Negative contribution of non-interest income 0.9 pct: In 1Q24, non-interest income fell 2.3% year on year (2023: -1.7%). Among them, the decline of nearly 19.4% in middle income, mainly wealth management, was the main reason why non-interest income was under pressure (dragging down revenue growth rate 5.4 pct); other investment-related non-interest income increased by 40.1% year on year and contributed 4.5 pct. ③ The provision continues to contribute positively to performance, but its contribution has declined. Provision was made to back the profit growth rate of 2.5 pct (2023:9.0 pct). Among them, impairment losses of loans accrued in 1Q24 were 13.3 billion yuan, a year-on-year decrease of 3.3 billion yuan; non-credit asset impairment losses were 1 billion yuan, an increase of 1.1 billion yuan over the previous year.

The focus of the first quarterly report: ① The growth rate of 1Q24 loans remained flat month-on-month, and the target growth rate of 8% for the whole year can be expected: the growth rate of 1Q24 loans was 7.6% at the same level as 4Q23, and the contribution to the public of new loans in a single quarter was over 60%. In the 2023 annual report, management gave 2024 loans a growth rate target of about 8%, corresponding to a credit increase of about 520 billion dollars in 2024 (1Q24 credit growth accounts for about 59% of this value). We believe that active investment in the public sector, repair retail demand, or catalyze a marginal increase in loan growth. ② Interest spreads narrowed by 2 bps quarterly, and the decline slowed. The 1Q24 interest spread fell 2 bps to 2.02% from quarter to quarter, mainly due to a 3 bps decline in asset-side returns, focusing on the recovery in retail demand and the improvement in deposit costs to stabilize interest spreads. ③ The decline in the non-performing rate exceeded expectations, and the non-performing rate continued. In the context of increasing bad write-off and disposal, the 1Q24 defect rate fell 3 bps to 0.92% month-on-month, and has been declining for 2 consecutive quarters, reflecting CMB's risk management and control approach of “early identification and early disposal”. Among them, the counterfeit rate (parent line caliber) decreased by 6 bps to 1.09%, and the retail defect rate (parent line caliber) remained flat at 0.91% month-on-month.

The growth rate of credit was steady, and retail sales maintained a recovery trend: 1Q24 loans increased by nearly 307 billion yuan, an increase of 22.4 billion yuan over the previous year, and an increase of 67% in credit investment in 2023: ① Credit investment to the public (excluding notes) increased by 1920 billion yuan, an increase of 14.8 billion yuan over the previous year. In the 1Q24 credit incremental structure (parent bank caliber), infrastructure and manufacturing loans accounted for about 39%; the real estate+construction sector increased by 45.7 billion yuan, accounting for about 17% of new loans. ② The 1Q24 retail repair continued, adding 62.4 billion dollars. The increase was mainly concentrated in Xiaowei and consumer loans, adding 42.7 billion and 52.9 billion dollars (parent bank caliber), respectively, but mortgage and credit card loan balances decreased by 14.9 billion and 19.2 billion dollars (parent bank caliber) from the end of the previous year, mainly because the real estate market is still in the process of adjustment and transformation, and the company actively controls credit card related risks.

The month-on-month decline in interest spreads narrowed. Focus on the inflection point of interest spreads stabilizing: the 1Q24 net interest spread was 2.02%, the year-on-year decrease was 27 bps, the month-on-month decrease was 2 bps, and the month-on-month decline slowed (4Q23 fell 7 bps month-on-month). Among them, the asset-side yield narrowed by 3 bps quarterly. In addition to the quarterly decline in loan interest rates, the return on interbank assets and financial investment declined by 14 bps and 4 bps, respectively, against the backdrop of a decline in market capital interest rates; the debt cost ratio remained flat at 1.75% month-on-month, and the deposit cost ratio decreased by 1 bps month-on-month.

The real estate defect rate has declined for 3 consecutive quarters since 2023, continuing to verify that the peak real estate risk has passed; the retail loan non-performing rate has remained flat month-on-month, and overall in line with expectations: the 1Q24 non-performing rate was 0.92%, down 3 bps from quarter to quarter. 1Q24 stepped up efforts to dispose of non-performing assets and disposed of 15.3 billion non-performing loans (1Q23:13.7 billion; 2023:58.1 billion). We estimate that the annualized non-performing generation rate of 1Q24 plus write-off disposal was 0.78% (2023:0.67%); the corresponding provision coverage rate was 437%, with a slight decrease of 0.9 pct from quarter to quarter. Looking at it in detail (parent bank caliber), the non-performing rate for public loans fell 6 bps to 1.09% month-on-month, and the non-performing rate for real estate fell 19 bps to 4.82% month-on-month; the retail loan non-performing rate remained flat at 0.91%, credit cards and mortgages increased by 3 bp/1 bps month-on-month, and the non-performing ratio for small and micro loans decreased by 1 bp/6 bps, respectively.

Investment analysis opinion: Although CMB's performance in the first quarter was slightly lower than expected, it was positive to see that the decline in interest spreads in the first quarter slowed down, credit still showed an advantage over the public, and maintained excellent asset quality based on steady table expansion. We also expect CMB to revive the high quality performance of the fundamental benchmark bank in the process of economic recovery and retail recovery. Maintain the 2024-2026 net profit forecast of 3.2%, 5.0%, and 8.3% year-on-year growth. The current stock price corresponds to 2024 PB 0.86 times, and the corresponding dividend rate is 5.7%, maintaining the “buy” rating.

Risk warning: Economic recovery fell short of expectations, asset quality deteriorated beyond expectations; improvements on the retail demand side fell significantly short of expectations, and interest spreads continued to be under pressure.