Key points of investment

24Q1-3 CMB's revenue and profit decline narrowed by 0.2, 0.7 pc to 2.9% and 0.6%, improving profit momentum.

Overview of the data

China Merchants Bank 24Q1-3 net profit decreased 0.6% year over year, with a decrease of 0.7 pc month-on-month; revenue fell 2.9% year over year, a slight improvement of 0.2 pc compared to 24H1. China Merchants Bank's defect rate at the end of 24Q3 was 0.94%, flat month-on-month; provision coverage rate was 432%, down 2pc from month to month.

Profit momentum recovery

China Merchants Bank 24Q1-3 net profit fell 0.6% year on year, improving 0.7 pc month on month; revenue fell 2.9% year on year, slightly improving 0.2 pc from 24H1. Looking at the main drivers: improving interest spreads, declining business costs, and weakening impairment support. ① Interest spread level: 24Q3 single-quarter interest spread (average daily) fell 2 bps to 1.97% month-on-month, benefiting from the low base support in the same period in 2023, and the improvement in the impact of interest spreads on profits; ② Business costs:

24Q1-3 business and management expenses decreased 4.6% year on year, and the decline increased by 4 pc month-on-month; ③ Impairment loss: 24Q1-3 impairment loss decreased 8.9% year over year, and the decline narrowed by 5 pc month-on-month, weakening support for profit. Looking ahead, due to interest rate cuts on existing mortgages and LPR interest rate cuts, it is expected that CMB's revenue will still face narrowing pressure in the future.

Interest spreads declined slightly

China Merchants Bank's 24Q3 single-quarter interest spread (daily average, same below) fell slightly by 2 bps to 1.97%.

(1) Asset-side returns fell 7 bps to 3.49% month-on-month, due to declining loan interest rates and market interest rates.

Interest rates on 24Q3 loans, financial investments, and interbank assets fell 6 bps, 6 bps, and 26 bps, respectively.

(2) The debt-side cost ratio improved by 4 bps to 1.64% month-on-month, due to reduced deposit cost pressure and improved debt structure.

① Looking at interest rates, 24Q3 deposit interest rates fell 3 bps month-on-month to 1.54%. ② In terms of structure, average daily deposits increased 1.4% month-on-month in 24Q3, and the growth rate was 1.5pc faster than interest-paying debt.

Bad retail fluctuations

Looking at the stock index, China Merchants Bank's defect rate, attention rate, and overdue rate at the end of 24Q3 were 0.94%, 1.30%, and 1.36%, respectively. They remained flat, +7 bps, and -6 bps, respectively. The concern indicators fluctuated. Looking at the generation indicators, China Merchants Bank's real bad TTM generation rate increased 7 bps month-on-month to 1.18% at the end of 24Q3.

The main pressure point remains retail. The 24Q3 retail defect generation rate was 1.61%, up 21 bps year on year. Among them, credit card and other retail defects generation rates were 4.23% and 0.67% respectively, up 13 bps and 30 bps, respectively. Other retailers are concerned that the upward pressure on mortgage risk is high. At the end of 24Q3, the non-performing rate, attention rate, and overdue rate of mortgage loans increased by 6 bps, 12 bps, and 12 bps, respectively. Looking ahead, considering that the pressure generated by poor retail sales is related to economic momentum, it is expected that CMB's poor retail sales will still have upward pressure in the short term, and we will continue to observe in the future.

Profit forecasting and valuation

China Merchants Bank's net profit is expected to increase by -0.28%/0.34%/3.70% year-on-year in 2024-2026, corresponding to BPS40.94/44.61/48.49 yuan. The current price corresponds to 0.94/0.87/0.80 times PB. The target valuation is PB1.09x in 2024, corresponding to the target price of 44.61 yuan/share, with a current price space of 16%, maintaining the “buy” rating.

Risk warning: The macroeconomy has stalled, and bad effects have been greatly exposed.