Core views

CMB's 3Q24 revenue and performance continued to improve month-on-month, in line with expectations. Benefiting from lower deposit-side cost pressure, the decline in net interest spreads stabilized. In the current macro context, the quality of retail assets continues to deteriorate marginally. CMB's provision plan is steady. It is expected that with the decline in revenue gradually narrowing, profits in 2024 are expected to return to a positive growth range and stabilize market expectations. In the long run, CMB “diligently practices internal skills” in the current poor business environment. Relying on a deep retail customer base and sufficient risk resilience, it is expected that the sustainability and certainty of future performance growth will be superior to that of the stock industry. Furthermore, the core tier 1 capital adequacy ratio reached a new high. The high dividend rate of 35% is sustainable, there is no risk of refinancing diluting ROE or dividend rates, and shareholder returns are stable. It is a target with both high dividends and fundamental stability, and the allocation value is outstanding.

occurrences

On October 29, China Merchants Bank announced its 2024 three-quarter report. 9M24 achieved operating income of 252.71 billion yuan, a year-on-year decrease of 2.9% (9M24: -3.1%), and net profit to mother of 113.18 billion yuan, a year-on-year decrease of 0.6% (9M24: -1.3%). The 3Q24 defect rate was 0.94%, flat quarter-on-quarter; provision coverage fell 2.3 pct to 432.2% quarter-on-quarter.

Brief review

1. The decline in core revenue, such as net interest income and middle income, narrowed, and revenue growth continued to improve month-on-month. China Merchants Bank 9M24's revenue decreased 2.9% year over year, continuing the month-on-month improvement trend in the second quarter.

Among them, the decline in net interest income continued to narrow to 3.1%. Mainly, while the scale maintained steady growth of around 5%, the decline in interest spreads remained stable. Under the current macroeconomic environment, revenue from big wealth management continues to be under pressure. The median income fell 16.9% year on year, and the decline narrowed slightly. Following a slight improvement, the decline in CMB's core revenue narrowed by 1.4 pct to -7.1% compared to 1H24, and the trend was positive. In addition, other non-interest-bearing increases of 28.2% year over year also cushioned downward pressure on revenue to a certain extent.

The performance trend is improving. The profit growth rate in the 3Q24 single quarter was positive, and profit is expected to achieve positive growth throughout the year. CMB 9M24 achieved net profit of 113.18 billion yuan, a year-on-year decrease of 0.6%. The decline was 0.7% narrower than 1H24. The 3Q24 profit growth rate returned to a positive increase of 0.8% in a single quarter, and profits were not released mainly through provisions. The trend was positive. 9M24 CMB's ROE was 15.4%, down 2pct year on year, but it remained at the top of the industry. In terms of performance attributions, growth in scale, other net income, and low provision contributed positively to profits of 6.4%, 3.4%, and 1.8%, respectively, while the narrowing of net interest spreads and the decline in earnings contributed negatively to 8.3% and 4.4%, respectively. Currently, CMB's provision plan is very steady. It is expected that with the decline in revenue gradually narrowing, profit for the full year of 2024 is expected to return to a positive growth range and stabilize market expectations. In the long run, the operating environment for stock banks is more difficult than that of their peers in the current economic environment, but CMB relies on a deep retail customer base and sufficient ability to withstand potential asset quality risks, and it is expected that the sustainability and certainty of future performance growth will be superior to that of stock banks. 2. Deposit costs continued to drop, and the net interest spread declined steadily. CMB's 9M24 net interest spread was 1.99%, a slight decrease of 1bp from 1H24. The 3Q24 net interest spread was 1.97%, down 2 bps from quarter to quarter, and the quarterly decline in net interest spreads narrowed quarter by quarter. On both sides of the asset side, 3Q24 asset-side yield fell 7 bps to 3.49% from quarter to quarter, and debt cost ratio fell 4 bps to 1.64% from quarter to quarter. 9M24 asset-side yield fell 23 bps to 3.56% year over year, and debt-side cost ratio fell 3 bps to 1.69% year over year. Affected by the reduction in LPR and the still insufficient demand for effective credit, CMB's asset-side interest rate continued to decline sharply, but benefiting from the reduction in deposit listing interest rates, CMB's debt-side cost optimization hedged downward pressure on asset-side interest rates. The decline in net interest spreads gradually stabilized, and the decline was relatively small compared to peers.

On the asset side, retail credit investment improved slightly, and the loan structure was optimized. The downward pressure on interest rates remains, and the decline has narrowed somewhat. The 3Q24 CMB loan size increased slightly by 0.2% from quarter to quarter, maintained steady growth of 4.7% year on year, and remained stable at 58% as a share of total assets. Bond investment and interbank assets increased by 0.6% and 2%, respectively, and the allocation of major asset classes remained stable. Loans were invested upward, and the main increase in 3Q24 loans was retail loans.

Furthermore, the pressure on the scale of bill discounts has been reduced, and the loan structure has been optimized. Under the parent bank's caliber, CMB's 3Q24 retail loans increased 5.6% year over year, with a slight increase of 1.0% quarter over quarter. Demand for credit cards and mortgage loans is expected to remain relatively weak, mainly due to an increase in small, micro and operating loans. Public loans increased 11.1% year over year, but there was only a slight increase of 0.6% from quarter to quarter. Most public loans were invested ahead of schedule in the first half of the year, and credit reserves were low in the third quarter. The bill discount scale fell sharply by 21.2% year on year, down 5.6% from quarter to quarter, and the loan structure was clearly optimized. Looking at the 3Q24 increase, retail sales and public loans increased by 137% and 57% respectively. In terms of price, CMB's 3Q24 loan yield continued to decline by 5 bps to 3.91% from quarter to quarter. However, the decline in loan interest rates was narrower than in 2Q24. It is expected that, on the one hand, it is related to reducing the discount scale of notes and optimization of the credit structure. On the other hand, interest rates on loans such as consumer loans have fallen to historically low levels, and there is little room for further decline. Among other types of assets, the return on 3Q24 investment assets fell 6 bps to 3.06% from quarter to quarter, basically following the market trend. Looking forward to the future, current monetary policy continues to strongly support the recovery of the real economy, and bank asset-side interest rates may continue to decline for a long period of time. CMB itself accounts for a relatively high share of mortgage loans, which is greatly affected by the reduction in stock mortgage interest rates and LPR repricing. According to estimates, reducing the stock mortgage interest rate by 50 bps+mortgage repricing by 35 bps will collectively drag down CMB's 25-year net interest spread by about 8.5 bps. Furthermore, a 25 bps interest rate cut will affect the 25-year net interest spread of about 10 bps, and there will still be some pressure on CMB's asset-side interest rate.

On the debt side, the trend of regularization continues, but the benefits of lower listed interest rates continue to be released, and deposit costs have dropped somewhat. Structurally, the trend of deposit fixed-term deposits is still very obvious. Public term deposits increased 21% year over year, 11% quarter-on-quarter, retail time deposits increased 33% year over year, and 4% quarter-on-quarter. The sharp increase in official time deposits may be related to the transfer of public deposits after the ban on manual interest payments in the second quarter. At the same time, CMB expanded part of its market share through comprehensive service capabilities. In terms of current deposits, public current accounts and retail current deposits decreased by 7.8% and 2.1%, respectively, from quarter to quarter. Looking at the incremental structure, public and retail deposits accounted for 40% and 60% respectively, of which the increases in fixed term and retail demand deposits accounted for 342% and 115%, respectively. Under the daily average, the average daily balance of 9M24 demand deposits fell to 50.6%, a sharp drop of 6.5 pct from '23, but still maintained a high level compared to peers. Currently, structural negative factors of regularization still exist, but due to the continued release of favorable interest rate cuts on deposit listings, the pressure of deposit regularization has been hedged to a certain extent. In 3Q24, deposit costs for CMB customers fell 4 bps to 1.54% from quarter to quarter, and are already at an absolute low level among listed banks. According to estimates, the sharp reduction in deposit listing interest rates in October is expected to boost the 25-year net interest spread by about 8 bps, and narrow the impact of interest rate cuts and stock mortgage interest rate cuts on 25-year interest spreads to around 10 bps. It is expected that CMB's deposit costs will maintain the current positive trend of steady decline. The deposit-side cost moat has a significant advantage, which strongly supports interest spreads.

3. The rate of bad generation has increased slightly, mainly in the current macro context, where the quality of retail assets is still deteriorating marginally. CMB's non-performing rate remained flat at 0.94% quarter-on-quarter in 3Q24. The provision coverage rate decreased by 2.3 pct from quarter to quarter to 432.2%, and the provision coverage trend was stable. From the perspective of bad generation, the cumulative bad generation rate of 9M24 remained flat at 1.02%; the 3Q24 bad generation rate was 1.01%, up 3 bps from quarter to quarter. The amount of bad money generated in the third quarter was 16.2 billion yuan, of which 2.2, 4.3, and 9.7 billion yuan were bad for public, retail, and credit cards, respectively. Bad generation of public and credit cards decreased by 8% and 3%, respectively, from quarter to quarter.

The decline in the generation of bad jobs should benefit from the continued clearance of bad real estate. However, the generation of poor retail loans increased sharply by 33% from quarter to quarter. It is expected to be mainly due to poor residents' ability to repay during the economic downturn. In terms of bad disposal, a total of 15.5 billion yuan of defects were disposed of in 3Q24, an increase of 2% over the quarter. The pace of bad disposal was very stable. Among them, bad write-off and disposal accounted for 47% and 11%, respectively. Looking at forward-looking indicators, CMB's parent bank's attention rate increased by 9 bps to 1.27% from quarter to quarter, mainly due to continued marginal deterioration in retail credit quality. The overdue rate decreased slightly by 1 bp to 1.32% from quarter to quarter. Mainly, the overdue rate for public loans fell sharply by 20 bps to 0.99%, while the retail loan overdue rate still increased by 10 bps from quarter to quarter.

Real estate risk exposure and bad balances all continue to fall. Under the parent bank's caliber, CMB's non-performing loan balance to public real estate fell sharply by 11.2% year on year in 3Q24, down 2.8% from quarter to quarter to 0.141 billion yuan, and the non-performing balance continued to drop. However, due to the 3.2% month-on-quarter decline in the overall size of real estate loans to the public sector, the faster decline in the denominator side led to a slight increase of 2 bps to 4.8% quarterly, and still a sharp drop of 51 bps over the previous year. The bad real estate balance has been declining for five consecutive quarters since its peak in 2Q23, and the peak of real estate risk is over. In terms of risk exposure, exposure to public real estate in the table fell 4% to 387.9 billion yuan quarterly, with loans falling 3% quarterly to 294.2 billion yuan, and bond investment and non-standard quarterly falling 6.5% to 93.7 billion yuan. Real estate exposures that do not bear credit risk fell 3.3% from quarter to quarter to $233.9 billion.

The retail loan defect rate, attention rate, and overdue rate indicators all increased month-on-month, and the quality of retail assets requires continued attention. Under the parent bank's caliber, CMB's 3Q24 retail loan non-performing rate increased slightly by 2 bps to 0.94% from quarter to quarter. Among them, the bad rates for credit cards and consumer loans decreased by 1 bps, 5 bps to 1.77%, and 0.99%, respectively, from quarter to quarter, but the bad rate for mortgages and small and micro loans increased 6 bps, 2 bps to 0.46%, and 0.65%, respectively. The non-performing loan ratio for mortgage loans has been rising for five consecutive quarters, which is related to the continuous downward trend in housing prices in the past two years, but overall it is still within a manageable range. Looking at forward-looking indicators, the attention rate and overdue rate of retail loans increased sharply by 13 bps and 10 bps from quarter to quarter to 1.71% and 1.71%, respectively, and are already at high levels in recent years. Credit card forward-looking indicators increased the most. Attention rate and overdue rate increased by 27 bps, 17 bps to 3.91%, and 3.86%, respectively; the interest rate and overdue rate for small and micro loans all increased 6 bps to 0.49% and 0.84% month-on-month, respectively. Consumer loan attention increased 4 bps to 0.58% quarter over quarter, and overdue rate decreased by 2 bps to 1.31% quarter over quarter. Mortgage loan attention rate and overdue rate also increased by 11 bps and 12 bps, respectively. Under the current trend of weak economic recovery, residents' and self-employed households are slightly insufficient in terms of their ability to repay and their willingness to repay. Subsequent credit cards and consumer loans may still have some negative generation trends, and continued attention is needed. Small and micro loans may benefit from the optimization of debt service deferral policies for micro, small and medium-sized enterprises, and the pressure on asset quality has eased slightly.

4. “Develop internal skills diligently”, and the retail customer base is growing steadily, laying a solid foundation for the future. Currently, capital market earnings are still relatively sluggish. Combined with drastic cuts in consignment funds and insurance premiums, CMB's wealth management business is still under significant pressure in the short term. CMB 9M24's wealth management revenue was 29.2 billion yuan, a year-on-year decrease of 21%. Among them, asset management, wealth management and escrow revenue decreased by 6.2%, 27.6%, and 10.7%, respectively, year-on-year. In the dropshipping business, due to the drastic reduction in consignment rates, compounded by 23 years of high base effects, consignment insurance revenue dropped sharply by 54.6% year on year. However, the downward trend has narrowed somewhat. In addition, revenue from consignment funds and consignment trusts fell sharply by 26.5% and 31.4%, respectively, over the same period last year, significantly dragging down revenue. However, on the other hand, with the gradual recovery in the scale of financial management, CMB achieved a high increase of 47.4% compared to the same period last year. Despite a brief period of pressure on CMB's revenue, its customer growth has been very solid, reserving greater upward growth flexibility for the future. Currently, CMB has 0.206 billion retail customers, up 6.2% year on year, and the growth rate is very stable. Among them, the number of basic customers was 0.201 billion, up 6.1% year over year. Golden Sunflower customers and above were 5.066 million, up 11.8% year on year, and private sector customers were 0.1596 million, up 9.2% year over year. In terms of AUM, total retail AUM reached 14.35 percent, up 9.7% year over year. Among them, AUM for customers above Golden Sunflower reached 11.7 percent, an increase of 9.7% over the previous year. Based on a solid, solid and steadily growing customer base, the leading edge of the light capital business will remain a moat for CMB to lead the industry in the medium to long term. If market sentiment and economic conditions improve in the future, CMB's revenue performance will have greater upward elasticity.

5. The core Tier 1 capital adequacy ratio has risen sharply to about 15%. Endogenous growth capacity is strong, and high dividends are sustainable. 3Q24 CMB's core Tier 1 capital adequacy ratio increased by 0.9 pct to 14.73% quarterly, and the capital adequacy ratio is at the leading level in the industry. Combined with the current situation where “supply exceeds demand” of credit, CMB's scale growth is basically in a stable range. There is little pressure to maintain a good core level of capital adequacy through endogenous growth, and the risk of refinancing is low.

As a result, the high dividend rate of 35% is sustainable, and shareholder returns are stable.

6. Investment advice and profit forecast: CMB's 3Q24 revenue and performance continued to improve month-on-month, in line with expectations. Benefiting from lower deposit-side cost pressure, the decline in CMB's net interest spread stabilized, leading to a narrowing of the decline in net interest income. In the current macroeconomic context, the quality of retail assets continues to deteriorate marginally.

Currently, CMB's provision plan is very steady. It is expected that with the decline in revenue gradually narrowing, profit for the full year of 2024 is expected to return to a positive growth range and stabilize market expectations. In the long run, in the current poor business environment, CMB is “diligently working on internal skills”. Relying on a deep retail customer base and sufficient potential asset quality risk resilience, it is expected that the sustainability and certainty of future performance growth will be superior to that of stock banks. Looking forward to an accelerated macroeconomic inflection point in the future, the benefits of recovering retail demand and clearing real estate risks first will drive CMB's fundamentals one step ahead. Furthermore, the core Tier 1 capital adequacy ratio reached a new high. The high dividend rate of 35% is sustainable, there is no risk of refinancing diluting ROE or dividend rates, and shareholder returns are stable. The current stock price corresponds to a dividend of 5.1%, a target with both high dividends and fundamental stability, and the allocation value is outstanding. Revenue growth in 2024-2026 is expected to be -2.0%, 3.2%, 4.4%, and profit growth rates of 0.3%, 5.0%, and 5.2%. The current CMB stock price corresponds to 0.94 times 24-year PB. Maintaining the buying rating and leading position in the banking sector.

7. Risk warning: (1) Economic recovery has fallen short of expectations, corporate solvency is weakening, and some enterprises with poor credit levels may be at risk of default, leading to the risk of bad bank exposure and a sharp decline in asset quality. (2) The concentrated exposure of risks in key areas such as real estate and local financing platform debt has had a major impact on the quality of banks' assets and greatly weakens banks' profitability. (3) The strength of the credit leniency policy falls short of expectations, and the rapid economic development in the region where the company operates is unsustainable, thus having a significant adverse impact on the company's credit investment. (4) The effects of retail transformation fell short of expectations, and large-scale fluctuations in the equity market affected the company's wealth management business.