Core ideas:

In the “Banking Industry 2025 Investment Strategy: From Asset Shortage to Recovery Trading” report released earlier, we proposed that the bank stock investment logic in 2025 will shift from dividend logic to recovery logic, and that recovery-related varieties that are more sensitive to economic influence, represented by China Merchants Bank, will once again prevail. The core recommendation logic is as follows:

First, consumption is picking up, and retail demand is being released. With the promotion and implementation of a series of policies to expand domestic demand, stabilize the market, and mitigate risks, CMB's related business in the retail consumer sector is expected to stabilize and improve, and retail credit investment will return to strong again. At the same time, China Merchants Bank is promoting development strategies in key regions to improve the operating efficiency of key branches in the Yangtze River Delta, Pearl River Delta, Chengdu and Chongqing, and Haixi regions. The pace of economic recovery in key regions is faster, and the momentum for performance recovery is stronger.

The second is deposit activation, and interest spreads are even more beneficial. Economic recovery has led to a rebound in market risk appetite. Deposit activation will drive a significant improvement in cost rates. CMB has built a deep deposit moat, and demand deposits account for a high proportion of demand deposits, and the improvement is expected to be even greater. According to static estimates, it is assumed that China Merchants Bank's share of demand deposits increased by 5 pct, bringing a 25-year interest spread with a positive contribution of 7.9 bps, boosting revenue growth of 2.8 pcts.

Third, the capital market is improving, and revenue has bottomed out and rebounded. Over the past 23 years, due to multiple factors such as reduced insurance fees and the downturn in the capital market, the company's revenue growth has been under pressure, mainly due to a sharp decline in revenue from escrow insurance and consignment funds, which has dragged down performance. Looking ahead to 2025, considering the decline in the base effect compounded by the recovery in the capital market, wealth income is expected to achieve restorative growth. The basic market of the company's large wealth management business is stable, and it is expected that there will be more room for recovery, boosting performance.

Fourth, the resilience of other industries is better than that of peers. Benefiting from the bullish debt market since 23Q4, banks have achieved considerable investment returns. Some banks have cashed in on floating profits and maintained steady performance growth, but considering that other positive non-interest contributions are at the cost of further falling interest spreads in the future, as interest rates fall low and finances begin to gain strength, it is difficult to expect this source of profit to be sustainable. However, China Merchants Bank's financial investment was dominated by AC and OCI. There were not many floating profits in the first three quarters, and other comprehensive income growth was better than that of peers. It is expected that next year's other non-interest performance will be more resilient, with less disturbance to revenue than comparable peers.

Fifth, real estate has stopped falling and stabilized, retail risks have been mitigated, and asset quality continues to be stable. As real estate declines and stabilizes, the quality of China Merchants Bank's public loans is expected to continue to improve. At the same time, retail loan risks are expected to be mitigated in the context of macroeconomic restart, collaborative improvements to public retail sales, and asset quality will continue to be steady.

Profit forecast and investment advice: Although company fundamentals are under pressure during the economic downturn, the fundamentals of debt, income, and asset quality remain stable. Economic recovery favors the banking sector, and CMB is expected to take the lead again. The company's 24/25 net profit growth rate is expected to be 0.32%/1.95%, EPS is 5.65/5.76 yuan/share, BVPS is 40.5/44.5 yuan/share, the 24/25 PB corresponding to the latest A-share closing price is 0.96X/0.87X, and the corresponding 24/25 PE is 6.9X/6.7X. The reasonable value of A-shares remained unchanged at $55.63 per share, corresponding to the 24-year PB valuation of about 1.4X. According to the current AH premium ratio, the reasonable value of H shares was HK$54.91 per share, all of which were given a “buy” rating.

Increased risk: macroeconomic decline, asset quality deteriorated sharply; fiscal policy fell short of expectations; interest rate fluctuations exceeded expectations; international economic and financial risks exceeded expectations.