Incident: China Merchants Bank disclosed its 2024 three-quarter report. 9M24 achieved revenue of 252.7 billion yuan, a year-on-year decrease of 2.9%, and realized net profit to mother of 113.2 billion yuan, a year-on-year decrease of 0.6%. The 3Q24 non-performing rate remained flat at 0.94% month-on-month, and provision coverage fell 2.3 pct to 432% quarter-on-quarter. Performance and asset quality are in line with expectations.

Revenue was dragged down by volume difficulties, but the margin narrowed, and the profit decline was in line with expectations: 9M24 China Merchants Bank's revenue fell 2.9% year on year (1H24 fell 3.1%), and net profit to mother fell 0.6% year on year (1H24 fell 1.3%) year on year. Judging from the driving factors, ① the decline in interest spreads led to a narrowing of the negative contribution to net interest income. 9M24's net interest revenue fell 3.1% year on year (1H24 was down 4.2%), dragging down the revenue growth rate by 1.9 pct. Among them, scale growth contributed 3.7 pcts, and interest spreads dragged down 5.6 pcts (1H24 dragged down 6.2 pcts). ② The decline in revenue is still the main drag on revenue. Other non-interest-bearing parts made up for it, but contributions have subsided. 9M24's non-interest revenue fell 2.6% year on year, with a negative revenue growth rate of 1 pct. Among them, the middle income fell 17%, dragging down 4.4 pcts, while other non-interest income growth of 28% (1H24 increased 35%) contributed 3.4 pcts.

③ Provisions continue to feed back profits and are contributing to a profit growth rate of 1.8 pct. Of these, loan provisions fed back 2.7 pcts (1.3 pct for 1H24), while non-credit provisions dragged down 0.9 pcts, mainly due to the impact of the higher reimbursement base in the same period last year.

The focus of the third quarterly report: ① Continued steady growth in retail sales is better than that of peers, while the public sector continues to increase pressure on real estate and politics-related categories. 3Q24 loans increased by 26.1 billion yuan, of which retail sales increased by 35.9 billion yuan; additional 14.8 billion yuan was added to the public sector (including the combined pressure drop of more than 22 billion yuan for real estate, rental services, and infrastructure), and continued to depreciate notes by 24.5 billion yuan. ② There is still downward pressure on asset pricing. Thanks to continued cost improvements, interest spreads stabilized month-on-month. The 9M24 interest spread was 1.99%, a slight decrease of 1 bps from 1H24. Among them, the 3Q24 interest spread was 1.97%, down 2 bps from quarter to quarter, with loan yield falling 5 bps month-on-month and deposit cost ratio falling 4 bps month-on-month. ③ The non-performing rate continues to perform steadily, and high provisions ensure that asset quality does not fall far short of expectations; however, the short-term negative pressure still lies in retail, so pay attention to the trend of poor retail generation. The 3Q24 defect rate remained flat month-on-month. Among them, the bad generation rate for public and retail sales (excluding credit cards) continued to be low, while the bad credit card generation rate still exceeded 4.2%; at the same time, forward-looking indicators such as the concern rate increased by 8 bps month-on-month, mainly due to the upward impact of retail attention.

Since this year, CMB retail loans have continued to grow steadily, while focusing on public sector restructuring, including continuing to increase pressure reduction on real estate, government-related, and relatively low-yield notes: China Merchants Bank loans increased 4.7% year-on-year in 3Q24 (6.2% in 2Q24), and the parent bank added 255.4 billion yuan in loans in the first three quarters, a year-on-year decrease of nearly 120 billion yuan. Among them, 26.1 billion yuan was added in loans in the third quarter. From a structural point of view, ① retail loans continued to grow steadily, adding 35.9 billion yuan in a single quarter, of which consumer loans, credit cards, mortgages, and small and micro added 136/7.6/8/7.3 billion yuan respectively. ② The public sector focused on structural adjustments, adding 14.8 billion yuan in a single quarter (2Q24 was a pressure drop of 14 billion yuan). The main increase came from the manufacturing industry (31.9 billion yuan), while the total pressure drop in real estate, rental services, and infrastructure reached 22.1 billion yuan. Furthermore, notes continued to reduce earnings in the third quarter, with a net decrease of 24.5 billion yuan in a single quarter.

There is still downward pressure on asset pricing, but thanks to structural optimization to moderately hedge the downward impact of interest rates, compounded by continuous improvement in debt costs, interest spreads stabilized month-on-month: 9M24 China Merchants Bank's interest spread was 1.99%, a slight decrease of 1 bps compared to 1H24, of which the 3Q24 interest spread was 1.97%, and the quarter-on-quarter decline was 2 bps. Judging from deposit and loan performance, the 3Q24 loan yield fell 5 bps to 3.91% from quarter to quarter, but the decline subsided (2Q24 was a 10 bps month-on-month decrease); the deposit cost ratio declined further by 4 bps quarterly, and has declined by 10 bps since this year.

Asset quality continues to perform steadily, and high provisions ensure that the risk side does not fluctuate significantly, but the short-term negative generation pressure still comes from retail sales. Focus on the trend of bad retail generation: 3Q24, the parent bank China Merchants Bank's non-performing rate was basically flat at 0.92% month-on-month. Among them, the non-performing ratio for public sector fell by 2 bps to 1.05%, and the retail defect rate increased by 2 bps to 0.94%. ① Judging from the bad generation trend, the 9M24 annualized bad generation rate is 1.02%, which is basically the same as in 2023. Among them, the bad generation rate for public and retail (excluding credit cards) remained stable at about 0.43% and 0.57%, respectively; the credit card defect generation rate is still over 4.2%. ② Looking at forward-looking indicators, 3Q24's attention rate increased by 8 bps to 1.27% from quarter to quarter, and the rise in retail loan attention rate was the main drag (13 bps to 1.71%).

③ In terms of risk offsetting capacity, the 3Q24 China Merchants Bank Group has stabilized at over 430%, and the loan ratio remains at a high level of over 4%. As the only bank in the country with a “non-performing rate of less than 1% and a loan ratio of more than 4%”, the high provision also ensures a smooth transition in asset quality without major ups and downs.

Investment analysis opinion: Actively slow down expansion and adjust the credit structure, diligently develop domestic skills and forward-looking retail to prepare for a recovery in demand, steadily mitigate risks, maintain excellent asset quality and performance, and maintain a “buy” rating. Maintaining the profit growth forecast, net profit to mother is expected to grow at a year-on-year rate of -0.8%, 3.1%, and 6.3% in 2024-2026, respectively. The current stock price corresponds to 2024 PB 0.96 times, maintaining a “buy” rating.

Risk warning: Economic recovery fell short of expectations, and interest spreads continued to be pressured; tail risks such as retail were exposed, and asset quality deteriorated beyond expectations.