Key investment points:

Revenue from the retail finance business remains resilient: The growth rate of retail loans is basically the same as the growth rate of total loans, and the share remains stable. In recent years, small and micro loans have grown rapidly, and their share of retail loans has risen. The overall price of retail loans is lower than the stock bank average, and the pricing gap continues to narrow. Retail deposits surpassed retail loans, and net income from internal interest became positive, supporting the net income from retail financial services. However, AUM for retail customers continued to grow steadily, and the sales scale of retail financial wealth management-related businesses showed an upward trend, which is expected to help the net income from fees related to retail wealth management gradually stabilize.

The attention rate and overdue rate of some loans on the retail side are still rising, and overall loan provisions remain high:

The asset quality of retail loans fluctuates, and the attention rate and overdue rate of some loans are still rising. The non-performing ratio of public loans continues to decline. The overall loan non-performing rate has remained stable. Both China Merchants Bank's provision coverage rate and loan provision rate remain high. Since 2022, the banking sector's overall provision schedule has been declining, which has provided some support for current profits. Judging from China Merchants Bank's current level of provision, there is still some room for release.

The deposit demand ratio is at a high level of listed banks, and the deposit cost advantage is obvious: in recent years, banking deposits have shown a trend of fixed-term deposits, and the share of time deposits has continued to rise. In the same period, the demand ratio of China Merchants Bank's deposits continued to decline, but it was still at a high level among listed banks. Looking at the changing trends in retail deposits and corporate deposit costs in China Merchants Bank in recent years, the cost of retail deposits has risen by a certain margin. The cost of public deposits is relatively stable, and the control effect is relatively good. Taken together, China Merchants Bank's overall deposit cost advantage is still strong.

Profit prediction and investment advice: Considering the general development environment of the banking industry, combined with China Merchants Bank's own characteristics, we believe that China Merchants Bank's deposit cost advantage is still expected to help stabilize performance, while its strong capital strength will help the steady expansion of future asset size. Asset quality is relatively excellent, and retail loan risks may fluctuate in the short term. Furthermore, China Merchants Bank's retail finance business is highly resilient. Under the condition that the sales scale of wealth management-related businesses gradually picks up in the future, net income from processing fees related to retail wealth management may gradually stabilize. Coupled with the power of fintech, we believe the overall operating efficiency of China Merchants Bank may be expected to improve steadily. We estimate that the company's revenue growth rate from 2024 to 2026 was -3.33%/5.2% and 4.67% year over year, and net profit growth rates were 1.35%/5.85% and 5.54% year over year. The corresponding EPS is 5.89 yuan, 6.24 yuan, and 6.58 yuan, respectively.

The company's shareholding rating is maintained by comprehensively considering factors such as the company's business development situation and valuation. According to the closing price of 36.91 yuan/share on December 5, the corresponding PB valuation of China Merchants Bank for 2024 to 2026 was 0.93 times/0.84 times/0.77 times, respectively.

Risk factors: The banking industry as a whole is greatly affected by macroeconomic, monetary and regulatory policies. Changes in the economy and related policies will have an important impact on bank operations. This includes changes in net interest spreads, asset quality expectations, etc.