Incidents:

On October 29, China Merchants Bank released its report for the third quarter of 2024. 1-3Q achieved operating income of 252.7 billion, YoY -2.9%, net profit of 113.2 billion yuan, and YoY -0.6%. Weighted average return on net assets 15.38% (YoY -2pct).

Comment:

The year-on-year decline in revenue and profit both narrowed quarter-on-quarter, and fundamentals were resilient. CMB's 1-3Q revenue, PPOP, and net profit to mother decreased by 2.9%, 2.7%, and 0.6%, respectively. The declines were 0.2, 1.9, and 0.7 pcts narrower than 24H1, respectively. The main components of revenue: (1) net interest income fell 3.1% year on year, and the decline was 1.1 pct narrower than 24H1, mainly boosted by two factors: steady increase in table expansion rate and quarter-on-month narrowing of interest spreads; (2) non-interest income fell 2.6% year over year, and the decline was 1.2 pct higher than 24H1, mainly dragged down by a 6.6 pct year-on-year growth rate of net other non-interest income compared to 24H1, and the decline in handling fee revenue narrowed slightly by 1.7 pcts compared to 24H1.

Dividing the year-on-year profit growth structure, scale expansion and provision are still the main contributors, driving performance growth rates of 11.8 and 3.1 pct respectively; judging from marginal changes, the main boosting factors include: the driving effect of scale expansion remains high, the negative impact of interest spreads narrows, and operating expenses turn into a small positive contribution; the main drag on non-interest income is slightly widening, and positive provision contributions are narrowing.

The rate of table expansion increased by 2.4 pct month-on-month, and the credit structure was optimized. At the end of 24Q3, the year-on-year growth rates of CMB's interest-bearing assets and loans were 9.6% and 4.7%, respectively. The growth rates changed by 2.4 and -1.5 pct respectively from the end of the previous quarter. The share of loans in interest-bearing assets decreased by 0.8 pct to 61.2% from the end of the previous quarter. The 1-3Q interest-bearing assets increased by 630.6 billion, an increase of 182.6 billion over the previous year; 3Q interest-bearing assets increased by 151.6 billion, of which loans, financial investments, and interbank assets increased by 10.3 billion, 95.8 billion, and 45.5 billion, respectively. The increases were mainly contributed by non-credit assets. In terms of the new credit structure, 1-3Q loans to public and retail loans increased by 174.1 billion and 136 billion, respectively, and bill discounts decreased by 60.9 billion yuan; of these, 3Q loans to public and retail loans increased by 2.2 billion yuan, 32.7 billion, and notes decreased by 24.5 billion yuan, respectively. The optimization of the credit structure is mainly reflected in: (1) The increase in credit in 3Q was mainly contributed by retail, and the share of retail loans at the end of the quarter increased 0.4 pct to 52.9% compared to the end of 2Q. By the end of the 3Q period, due to insufficient effective market demand, credit card and mortgage balances declined slightly by 0.9% and 0.4% respectively from the beginning of the year. The company responded by strengthening the organizational strength of consumer loans and small and micro loans. Consumer loans and small and micro loans increased by 29.8% and 8.5% respectively from the beginning of the year; (2) Pressure reduction on low-yield notes helped boost the overall return on assets.

3Q deposits contributed more than 80% to debt growth, and the trend of deposit fixed-term deposits continued. At the end of 24Q3, CMB's interest-bearing liabilities and deposits increased by 8.8% and 9.4%, respectively. The growth rate increased by 1.7 and 1.5 pct, respectively, from the end of the previous quarter. Deposits accounted for 86.3% of interest-bearing liabilities, the same as at the end of the previous quarter. 1-3Q interest-bearing debt increased by 510.3 billion, an increase of 56.5 billion over the previous year; 3Q interest-bearing debt increased by 83.8 billion, of which deposits increased 69.8 billion, accounting for 83% of the incremental contribution. At the end of 24Q3, retail and public deposits increased by 14.3% and 5.9%, respectively; retail deposits accounted for 44%, a slight increase of 0.1 pct from the end of the previous quarter. In terms of term structure, the average daily balance of 1-3Q current deposits accounted for 50.6% of the average daily balance of customer deposits, down 6.5 pct from 2023, and the trend of regular deposit payments continued.

The 1-3Q net spread narrowed by 1bp to 1.99% compared to 24H1; the 3Q quarterly net spread was 1.97%, down 2bps from 2Q. 1) Asset-side returns continued to decline. The yield on 1-3Q interest-bearing assets decreased by 4 bp to 3.56% compared to 24H1. The yield on 3Q single-quarter interest-bearing assets and loans was 3.49% and 3.91%, respectively, and decreased 7 and 5 bps from 2Q, respectively. 2) Debt costs continue to improve, and deposit listing interest rates are once again conducive to stabilizing interest spreads. The 1-3Q interest-bearing debt cost ratio decreased by 3 bps to 1.69% compared to 24H1. Interest rates on 3Q interest-bearing liabilities and deposits for a single quarter were 1.64% and 1.54%, respectively, down 4 bps from 2Q. On October 18, CMB and the six major banks announced the second round of deposit listing rate cuts during the year. Among them, demand deposits were cut by 5 bps, 1D and 7D notification deposits were cut by 5 bps and 25 bps, respectively, agreement deposits were drastically reduced by 40 bps, and regular full deposit and zero deposit and zero deposit and deposit and interest periods were lowered by 25 bps. According to static estimates, this will boost CMB's 2024 net interest spread by 5.6 bps.

The year-on-year decline in 1-3Q net non-interest income widened to 2.6%, and the net other non-interest growth rate fell 6.6pct month-on-month.

CMB's 1-3Q non-interest revenue fell 2.6% year over year to 95.4 billion, 1.2 pct wider than in the medium term. Non-interest revenue in the first three quarters accounted for 37.8%, a decrease of 1.9 pct compared to 24H1. In terms of the composition of non-interest income: (1) Net income from processing fees and commissions decreased 16.9% year on year to 55.7 billion, mainly due to fee cuts for some products combined with weak customer willingness to invest. Among them, wealth management fees and commission income fell 27.6% year on year to 17.4 billion yuan. In terms of the main composition of wealth management fees, proxy wealth management revenue of 5.9 billion (YoY +47.4%), the year-on-year increase was mainly boosted by the two factors of growth in the scale of consignment sales and optimization of the product structure; proxy insurance income of 5.7 billion (YoY -54.6%), agency fund income of 3 billion (YoY -26.5%), and proxy trust plans 1.7 billion (YoY -31.4%) continued the year-on-year pressure trend; (2) Net other non-interest income increased 28.2% year-on-year to 39.7 billion, mainly due to increased investment income from bonds and funds, but due to factors such as poor yield in the bond market towards the end of the 3rd quarter, the growth rate decreased by 6.6 pct compared to 24H1.

The defect rate is flat at 0.94%, and the risk compensation capacity is strong. By the end of 3Q, CMB had a non-performing balance of 63.6 billion yuan, an increase of nearly 2 billion over the beginning of the year. The non-performing loan ratio was 0.94%, the same as at the end of the previous quarter. 1-3Q companies generated 48.2 billion new bad dollars, an increase of 2.7 billion over the previous year, and the non-performing loan generation rate (annualized) was 1.02%, a decrease of 1 bps over the previous year.

Among them, the amount of bad loans generated was 7.75 billion, a year-on-year decrease of 1.46 billion; the amount of non-performing loans generated by retail loans (excluding credit cards) was 10.71 billion, an increase of 4.14 billion; and the amount of non-performing loans generated by credit cards was 29.75 billion, a slight increase of 0.03 billion over the previous year. The pressure for bad generation mainly came from the retail business. At the end of 24Q3, the attention rate increased by 6 bps to 1.3% compared to the end of 2Q; the overdue rate decreased by 6 bps to 1.36% from the end of 2Q.

1-3Q accrued credit impairment losses of 36.3 billion, a year-on-year decrease of 8.6%. Among them, loan impairment losses amounted to 36.3 billion, a year-on-year decrease of 5.2 billion. Credit impairment loss/average total assets (annualized) for the first three quarters was 0.43%, down 5 bps from the first half of the year. By the end of the 3rd quarter, the provision coverage rate decreased slightly by 2.3 pct to 432.2% from the end of 2Q, the loan ratio was 4.06%, and a slight decrease of 2 bps from the end of 2Q.

Strong ability to supplement endogenous capital combined with a month-on-month decline in capital consumption intensity, and capital adequacy ratios at all levels increased.

The year-on-year growth rate of CMB's 3Q risk-weighted assets fell 3.8 pct to 2.7% from the end of the previous quarter. As capital consumption intensity declined, as of the end of 24Q3, CMB's core level 1, level 1, capital adequacy ratios were 14.73%, 16.99%, and 18.67%, respectively, up 87, 90 and 72 bps from the end of the previous quarter.

Profit forecasting, valuation and ratings. CMB's strategic goal is to “build a value bank,” and the retail business has a deep moat. This moat lies in a truly customer-centered service spirit, the pursuit of the ultimate customer experience, and greater customer stickiness brought about by this. Based on the disclosure of the three-quarter report, the company's 2024-26 EPS forecast was lowered to 5.82/6.05/6.33 yuan, down 3.8%, 5.2%, and 6.7% from the previous forecast, respectively. The current stock price corresponds to the PB valuation of 0.95/0.86/0.79 times, respectively. Currently, residents' activity in buying and spending houses is low, risk appetite is relatively cautious, and leverage claims are weak. However, the company's 3Q still achieved retail credit growth of more than 32 billion, which shows strong asset organization capabilities. At the same time, the number of retail customers and AUM continued to grow. By the end of 3Q, the number of retail customers increased 4.6% from the beginning of the year to 0.206 billion, and retail AUM increased 7.7% from the beginning of the year to 14.3 trillion, further consolidating the foundation for the development of the big retail business. Maintain a “buy” rating.

Risk warning: 1) The economic recovery momentum falls short of expectations, which may have an impact on residents' employment, income, etc., and affect the company's retail credit and wealth management needs; 2) The release of real estate risks has exceeded expectations and dragged down asset quality.