Matters:

China Merchants Bank released its report for the third quarter of 2024. The company achieved operating income of 252.7 billion yuan in the first three quarters, a year-on-year decrease of 2.91%, and realized net profit to mother of 113.2 billion yuan, a year-on-year decrease of 0.62%. By the end of the third quarter of 2024, the company's total assets reached 11.7 trillion yuan, up 9.25% year on year, loan size increased 4.70% year on year, and deposit size increased 9.43% year on year.

Ping An's point of view:

Profit decline has narrowed, and cost control has been strengthened. China Merchants Bank's net profit for the first three quarters of 2024 fell 0.62% year on year (-1.3%, 24H1). Among them, revenue fell 2.91% (-3.1%, 24H1) year on year. The growth rate decline was 0.7 and 0.2 percentage points narrower than in the first half of the year, respectively. Looking at the breakdown, net interest income fell 3.07% year on year (-4.2%, 24H1), and net interest income improved from the first half of the year; non-interest income fell 2.6% year on year, and the decline was 1.2 percentage points wider than in the first half of the year, mainly affected by some product fee cuts compounded by weak customer investment intentions. Among them, the year-on-year decline in income narrowed 1.7 percentage points to negative procedures increased 16.9%. Among them, the year-on-year decline in wealth management fees and commission income narrowed 4.9 percentage points from the first half of the year to negative and increased 27.6%. On the cost side, the company's business and management expenses fell 4.56% (-0.85%, 24H1) year on year in the first three quarters, and the decline was greater than revenue. By improving the efficiency of cost input and output and increasing cost-side control, the cost to revenue ratio fell 0.5 percentage points to 29.58% year on year, driving down fee reduction and efficiency.

Interest spreads remained stable, and capital burdens expanded steadily. The company's net interest spread at the end of the third quarter of '24 was 1.99% (2.00%, 24H1). The net interest spread for the 24Q3 quarter was 1.97%, down 2BP from 24Q2, and the overall interest spread remained stable. Specifically, interest rates on both the asset and negative sides declined. The yield on the loan side narrowed 5BP to 3.91% month-on-month at the end of the third quarter, while interest rates on the deposit side fell 4BP to 1.54% month-on-quarter. Looking ahead, the company's interest rate level is still under pressure due to the reduction in interest rates on stock mortgages and the continued reduction in LPR. Looking at the asset structure, CMB's total assets increased 9.25% (7.8%, 24H1) year on year at the end of the third quarter. Among them, loans increased 4.70% (6.2%, 24H1) year on year. The growth rate remained steady, and the structure mainly relied on retail side and bill discounts. Retail loans grew 3.6% year over year, and the growth rate remained stable. General public loans fell 1.7% year on year, and note discounts increased by 42.9% year on year, accounting for an increase of 5 percentage points to 11% compared to the first half of the year. As a result, physical credit is still weak.

Deposit volume increased 9.43% (7.9%, 24H1) year-on-year at the end of the third quarter. The growth rate was 1.5 percentage points wider than in the first half of the year, but from a structural point of view, the share of time deposits is still on an upward channel (51.3%)

The defect rate declined month-on-month, and attention was paid to fluctuations in retail risk. China Merchants Bank's non-performing rate declined by 2BP to 0.92% month-on-month at the end of the third quarter, and the annualized non-performing loan generation rate in a single quarter was 1.02%, down 0.01 percentage points from the previous year, and remained stable overall. Specifically, the quality of assets in the public sector continued to improve. The non-performing rate decreased by 8BP to 1.05% compared to the first half of the year. Among them, the real estate defect rate fell 32BP to 4.80%, and the overall risk is manageable. However, judging from the forward-looking indicators, the company is concerned about a month-on-month increase of 6BP to 1.30%. It is expected to be mainly related to fluctuations in retail asset quality. The retail loan non-performing ratio at the end of the third quarter increased by 4BP to 0.94% compared to the first half of the year. Looking back, we still need to pay attention to changes in retail asset quality. In terms of provision, the company's provision coverage rate and loan ratio fell 2.3 pct/2bp month-on-month to 432 pct/ 4.06% at the end of the third quarter, and the absolute level is still high.

Investment advice: Short-term pressure will not change business resilience, and wait for retail inflection points. The company's revenue and asset quality have been greatly disturbed by the macro environment, but its competitive advantage from a long-term perspective is still stable, the absolute level of revenue capacity is still in a leading position in the industry, and long-term value can still be expected, focusing on the inflection point of residents' demand. We maintain the company's 24-26 profit forecast. We expect the company's 24-26 EPS to be 6.08/6.39/6.83 yuan, respectively, with corresponding profit growth rates of 4.5%/5.2%/6.9%, respectively. Corresponding to the October 29 closing price 24-26 PB is 0.96x/0.87x/0.79x, respectively. With excellent profitability and asset quality assurance, we are optimistic about CMB's competitive advantage in the retail sector, especially in wealth management, and maintain a “highly recommended” rating.

Risk warning: 1) The economic downturn has led to a rise in pressure on the asset quality of the industry that exceeds expectations. 2) As interest rates declined, industry interest spreads narrowed beyond expectations. 3) Increased pressure on housing companies' cash flow has led to an increase in credit risk.