Incident: China Merchants Bank announced its 2024 three-quarter report. The year-on-year revenue growth rate for the first three quarters was -2.91% (interim report was -3.09%), profit growth rate before provision was -2.66% (interim report was -4.52%), and net profit growth rate to mother was -0.62% year-on-year (-1.33%). The performance growth rate showed a gradual upward trend. Our comments are as follows:

In the third quarter of this year, China Merchants Bank's net profit growth rate in a single quarter was 0.79% year on year. The main driving factors included scale expansion and cost savings, while the year-on-year narrowing of net interest spreads dragged down profit growth.

The scale expansion is steady, roughly comparable to the M2 growth rate. China Merchants Bank's interest-bearing assets (average daily balance) increased 6.5% year-on-year in the third quarter of this year, a slight decrease of 0.4 percentage points from the Q2 growth rate. The rate of expansion of its interest-bearing assets in recent years is not much different from the M2 growth rate. Judging from the structure of new interest-bearing assets in a single quarter, there was a marked increase in new investment assets. It is expected that in Q3, as the pace of government bond issuance accelerates, CMB will increase its efforts to allocate bond assets. The new credit (average daily balance) will be -10.5 billion yuan. It is expected to be mainly bill discount assets that drastically reduce earnings.

Looking at the credit structure, the analysis was based on points at the end of the quarter. Q3 added 26.1 billion yuan in credit, which was a year-on-year decrease of 84.4 billion yuan, mainly because the discount on new notes was -24.5 billion yuan, a sharp decrease over the previous year, while general loans after excluding notes increased by 50.6 billion yuan, an increase of 15.1 billion yuan over the previous year, mainly contributing to the growth of public loans, and investment in manufacturing, electricity and heat, wholesale and retail sales. This is also in line with industry trends. Among them, small and micro credit investment has been slowing quarterly since last year; personal housing mortgage loans have improved slightly, but the net increase is not much; credit card credit growth is still low, consumer credit has maintained a steady growth trend, and there has been a slight year-on-year slowdown in Q3. Overall, the consumer sector's willingness to increase leverage is low, which shows that the overall banking industry and China Merchants Bank retail credit growth is still weakening year-on-year.

Deposits are growing well. In the third quarter of this year, China Merchants Bank added 115.6 billion yuan in deposits (average daily balance), an increase of 82.7 billion yuan over the previous year. Deposit growth for two consecutive quarters was better than the same period, and the deposit growth rate was also higher than the pace of credit expansion. At the same time, China Merchants Bank reduced relatively expensive interbank debt, and the debt structure was further optimized.

Q2 net interest margin decreased slightly by 2bps month-on-month. China Merchants Bank's Q3 net interest spread was 1.97%, down 14 bps year on year, still a drag on the growth rate of net interest income; it fell slightly by 2 bps from month to month. Specifically:

① Asset-side interest rates declined 7 bps month-on-month. The return on all interest-bearing assets continued the downward trend in the third quarter. Among them, the return on interbank assets fell 26 bps month-on-month, which is expected to be related to the lower return on newly invested assets at maturity. The decline in loan yields has slowed due to the pressure on notes that reduce yields.

② Debt-side costs decreased by 4 bps. The costs of deposits and interbank debt have all declined. Among them, there is still no change in the deposit structure regularization trend. The decline in deposit interest rates has mainly benefited from the impact of lower interest rate listings on deposits and the regulation of manual interest payments. However, the cost of bonds payable increased by 13 bps in Q3. It is expected to be mainly due to the fact that some interbank deposits have not been renewed at maturity, and the cost of long-term bonds in stock is relatively high.

③ Looking ahead to the fourth quarter, there has been no significant improvement in the degree of corporate capital activation, and as capital market expectations improve, the degree of capital activation in the residential sector is expected to gradually increase, which will help China Merchants Bank deposit costs decline; at the same time, the downward trend in asset-side interest rates is not over yet. It is expected that China Merchants Bank's net interest spread will continue to be under pressure, but the month-on-month decline may gradually slow down. The pressure is less than last year, and the factors that are dragging down the increase in net interest income will slow down.

Q3 The growth rate of non-interest income slowed slightly. CMB's Q3 non-interest revenue fell 5.7% year on year, down 5.2 percentage points from the Q2 growth rate. Among them, net processing fees and commission revenue fell 12.9% year on year, and the decline narrowed slightly. Wealth management, custodian business, and bank card businesses all showed signs of recovery. The sharp increase in wealth management revenue this year clearly supported wealth management. As the base effect weakens in Q4, the revenue growth rate of agency insurance business is also expected to improve.

Other non-interest net income increased 11% year over year, down 19.5 percentage points from the Q2 growth rate. This is basically in line with CMB management's outlook at the interim results conference. Market interest rate fluctuations increased in the second half of the year, and the growth rate of income related to bond investment gradually declined.

The cost-to-revenue ratio continues to decline. Q3 CMB's cost-revenue ratio in a single quarter was 29.2%, down 3.1 percentage points year on year, mainly benefiting from a drop in employee expenses and operating expenses. These two expenses fell 4.64% and 4.4% year on year respectively in the first three quarters of this year. This year, from the government, institutions to enterprises, they are all “too tight”, demanding revenue from expenses. Expense control and cost savings contributed significantly to CMB's profit growth.

Asset quality is stable. At the end of the third quarter, China Merchants Bank (Group Caliber)'s non-performing rate remained flat month-on-month. The attention rate and overdue rate increased by 6 bps and decreased by 6 bps, respectively. The provision coverage rate and loan ratio were relatively stable. Overall, asset quality remained stable and excellent.

From the perspective of credit segments (the following uses China Merchants Bank's caliber data):

① The quality indicators of the enterprise sector continue to improve. In Q3, CMB generally continued to decline in public credit bad rates and overdue rates, with a slight increase of 1 bps month-on-month. This trend has continued since 2020, indicating that current credit risk for public credit is relatively manageable; ② Retail credit risk is still moderately recovering.

The retail credit bad rate, attention rate, and overdue rate increased by 2 bps, 13 bps, and 10 bps respectively. Among them, the risk of small WeChat, credit cards, and housing mortgages all increased, and the quality of consumer credit assets was relatively stable, mainly because the overall growth of retail credit was weak, and the risk was on the rise. ③ In Q3, the rate of bad generation increased slightly in a single season. In the third quarter of this year, China Merchants Bank's net bad generation rate (annualized) was 1.01%. The year-on-year and month-on-month increases slightly by 2 bps and 3 bps, respectively. Mainly, the rate of bad generation of small, micro, and mortgage loans accelerated slightly. There has been a slowdown in the generation of bad credit cards and public credit.

Overall, China Merchants Bank did not drive short-term profit growth through credit provision releases; instead, it increased efforts to accrue credit impairment losses, maintained a high level of provision, and was more resilient to risk. Retail credit risk is expected to continue to rise in the future, and further attention is needed to its impact on financial statements.

The retail business is growing steadily. Although the current retail business development is in a headwind stage, the number of retail customers and retail AUM growth rate of China Merchants Bank has maintained a relatively steady trend. Some core indicators have maintained double-digit growth. Considering that China Merchants Bank's retail business is already very large, it can be seen that its retail business still has a strong core competitive advantage. Looking forward to the future, CMB's retail business is expected to gradually pick up as trading activity in the stock market increases and fund sales pick up.

Investment advice: The highlights of China Merchants Bank's three-quarter report are that the rate of bad generation is steady, profit growth continues to improve, and retail business has achieved steady growth; retail asset quality risks are still rising, which is a potential concern.

Looking ahead, with the gradual implementation of incremental fiscal policies, the economy is expected to bottom out, and the decline in bank net interest spreads will also narrow. At the stage of improving the stock market and gradually recovering the economy, China Merchants Bank's fundamentals and valuation center are also expected to pick up. Combined with its high dividend characteristics, it is relatively cost-effective to invest. China Merchants Bank's revenue growth rate is expected to be -2.62% in 2024, and the net profit growth rate is 0.2%. It gives a buy-A investment rating. The target price for 6 months is 49.19 yuan, which is equivalent to 1.2X PB in 2024.

Risk warning: The quality of retail assets has deteriorated dramatically, and real estate risks are spreading on a large scale.