The core advantage of endogenous growth, thanks to low debt costs and high non-interest income
Endogenous growth is China Merchants Bank's core competitive advantage that most clearly distinguishes it from its peers, and ROA has been ranked first among listed banks for a long time. The advantage of high interest spreads comes from the ultra-low cost debt structure. Demand deposits accounted for 55% at the end of 2023, leading the industry for a long time. Among them, the public business has accumulated huge corporate settlement capital through a rich product system, and the retail business has benefited from 14 trillion AUM deposits, leading the industry by a large margin of personal demand deposits. Fee revenue advantages come from leading wealth management businesses.
The last real estate upward cycle magnified China Merchants Bank's advantage to the extreme. From a macro perspective, the customer base and business direction of retail banks have benefited the most from economic recovery, increased residents' leverage, consumption upgrades, and the overall expansion of wealth management needs. Real estate has driven a sharp increase in retail credit such as mortgages, and demand for consumer finance such as credit cards has also benefited from the economic recovery cycle. In terms of wealth management business, residents' wealth is expected to benefit from the high real estate boom cycle, while the escrow real estate trust business also contributes generous processing fees.
Customer base operations, product advantages, and debt costs that go through the cycle are undervalued by the market. As the real estate cycle declines and the economic growth rate shifts, past high growth expectations will inevitably weaken. This is also a common pressure on the banking industry.
For example, the growth rate of stock bank loans has generally declined, the growth rate of customer base size has begun to slow, the overall net interest spreads in the banking sector continue to decline, and revenue and profits are facing cyclical downward pressure. However, we believe that the core competitive advantage China Merchants Bank has accumulated over a long period of time in customer base management, product systems, debt costs, wealth management, etc. is still strong, and the market underestimates this.
From a customer base management perspective, China Merchants Bank's product service advantage for public services has been underestimated for a long time. The number of corporate customers is ahead of stock banks. Star products such as the dropshipping business “Xinfutong”, the trading bank's corporate online banking, and CBS are leading in competitiveness. The traditional advantages of the retail business are strong. The decline in return on the asset side is common to the industry, but the stock of high-quality customers is highly sticky, making it difficult for banks to overtake cars, and it is also difficult for Internet finance giants from different industries to compete in the context of strict supervision. In the first quarter of 2024, China Merchants Bank's loan yield fell to 4.07%. The adjustment was quite adequate. The retail loan yield was significantly lower than that of the stock bank, and there is still room to cut interest rates on mortgages alone. At the same time, there is significant room for the deposit cost ratio. Currently, it is difficult to find deposit products of 2% or more in mobile apps and other channels, but the cost ratio for public and retail time deposits in 2023 still reached 2.67% and 2.77%.
The maximum pressure on real estate has passed. Real estate, an industry with long-term leading retail asset quality, is the main risk point in the past two years. The amount of bad new generation in 2023 is lower than in 2022, and is expected to subside further in 2024. Although it will still take time to clear out real estate risks, as policies are further strengthened, the market's expectations for risk improvement will become more clear. Retail risk is still fluctuating this year. Credit cards contribute about 60% of the amount of new bad money generated every year, and the new bad generation rate rebounded in the first quarter of 2024, reflecting a new round of pressure on residents' income and expenditure. However, data has been verified for many years in a row, and the quality of China Merchants Bank's retail customer base is superior, and the quality of credit card assets is significantly superior to that of its stock peers. Overall, China Merchants Bank currently has a non-performing rate of 0.92%, the lowest among stock banks. Judging that the net bad generation rate will gradually decline in the future. There is still a possibility that the provision coverage rate will decline, but the absolute value remains leading.
Investment advice: the dividend leader for long-term sustainable endogenous growth
We think China Merchants Bank is an excellent dividend bank stock. High ROE+low capital consumption+medium to low speed asset expansion model, forming strong dividend capacity and potential. Among large banks, they have the strongest capital adequacy ratio, the highest dividend ratio, and the strongest profitability. At the same time, they have a stable growth rate and have clear long-term advantages. The current dividend rate for A shares in 2023 is 5.80%. Considering the core competitive advantage and endogenous growth path, we believe the dividend rate should converge to the 4.0% to 4.5% range. Based on the closing price on June 7, 2024, China Merchants Bank's 2024 A share PB was 0.84X and H share PB was 0.80X. It is a long-term priority recommendation and maintains a “buy” rating.
Risk warning
1. Credit scale expansion falls short of expectations; 2. Asset quality fluctuates significantly; 3. Profit forecasting assumptions fall short of expectations.