Incidents:

China Merchants Bank released financial results for the 3rd quarter of '24. As of the third quarter of '24, the company achieved revenue of about 252.7 billion yuan, net profit to mother of 113.2 billion yuan, YoY -0.62%; a non-performing ratio of 0.94%, and a non-performing provision coverage rate of 432.15%.

Review summary:

Revenue continued to improve and repair performance. As of the first three quarters of 2024, China Merchants Bank achieved cumulative revenue of about 252.7 billion yuan (YoY -2.91%), including net interest income of 157.3 billion yuan (YoY -3.07%).

Net non-interest income was $95.4 billion, down 2.63% year over year. The overall profit performance before provision was in line with the trend of changes in operating income. The growth rates of PPOP24Q1, 24H1, and 24Q1-3 were -6.08%, -4.52%, and -2.66%.

In terms of interest spreads: Improved debt cost ratios support stabilizing interest spreads. The specific performance is as follows: 1. 24Q1-3 companies' net interest spreads were pressured to 1.99%, down from 2.00% in mid-2024, but the downward trend slowed sharply compared to Q1 from 2023 to this year; 2. Earnings side: In the first three quarters of 2024, due to the central bank's policy of lowering LPR and mortgage interest rates, China Merchants Bank's yield on interest-bearing assets was 3.56%, -4 bps month-on-month. 3. Cost side: Improved debt cost ratio. After interest rates on listed deposits were lowered, China Merchants Bank's interest-bearing debt cost ratio for the first three quarters of 24 was 1.69%, freeing up about 6 bps and 3 bps of space compared to 24Q1 and 24H1, which became the main support for stabilizing interest spreads.

Since entering 2024, China Merchants Bank's revenue and profitability have continued to recover upward. China Merchants Bank's net profit to mother in 24Q1-3 was -0.62% year-on-year, recovering 18 bps from mid-year.

Asset side: As of 24Q3, China Merchants Bank's total interest-bearing assets were $1,1293.1 billion, up 77.6 billion yuan from 24H1 (+ 0.7% month-on-month). Structurally, the size of loans, financial investments, interbank, and central bank balances changed by +0.2, +0.6, +2.0, and 5.0 pct from month to month compared to 24H1.

Debt side: 2024Q3 China Merchants Bank's interest-bearing debt balance was 9945.5 billion yuan, an increase of 54.2 billion yuan over 24H1 (+0.5% month-on-month). In terms of the debt structure, deposits, existing bonds, interbank liabilities, and loans to the central bank changed by +0.8, -14.5, -1.7%, and +16.5% month-on-month compared to 24H1 balances.

Asset quality is steady, and provisions remain high. At the end of 24Q3, the non-performing loan ratio of 0.94% was the same as the previous quarter, with an overdue rate of 1.36% (an improvement of 6 bps over the previous quarter); the non-performing provision coverage rate was 432.2%.

Profit Forecast and Valuation:

China Merchants Bank 24Q3's corporate profitability is resilient, interest spreads are stable, and asset quality is stable. We forecast a year-on-year increase of 2.25%, 3.79%, and 3.19% in 2024-2026, corresponding to current BPS prices: 41.38, 45.21, and 49.64 yuan. We used the dividend discount model to calculate the target price of 43.02 yuan, corresponding to 1.04x PB in 24 years, 15% of the current price space, and adjusted to an “gain” rating.

Risk warning: macroeconomic shocks, sharp exposure of non-performing assets, high pressure on interest spreads