Incident: On April 26, China Merchants Bank disclosed its quarterly report of '23. China Merchants Bank achieved operating income of 90,636 billion yuan in 1Q23, a year-on-year decrease of 1.47%; Guimu's net profit was 38,839 billion yuan, an increase of 7.82% over the previous year; and the annualized weighted average ROE was 18.43%, a decrease of 0.81 percentage points over the previous year. As of the end of March '23, the total assets were $10.51 trillion, the non-performing loan ratio was 0.95%, and the provision coverage rate was 448.32%.

Performance growth is slowing down. The revenue growth rate in 1Q23 was -1.5%. The main reason was the narrowing of interest spreads, the reduction in customer risk appetite, and the decline in handling fees and commission income. The growth rate of net fees and commission revenue was -12.6%. Guimu's net profit grew 7.8%, down 7.3 percentage points from '22.

ROE declined slightly year over year. The annualized weighted average ROE for 1Q23 was 18.4%, down 0.81 percentage points from the previous year, but it remained high and profitability was good.

Interest spreads are under pressure. The net interest spread for 1Q23 was 2.29%, down 11BP from '22. Mainly due to multiple LPR cuts in 2022 and a downward shift in market interest rate centers, the return on interest-bearing assets declined; the rise in customer deposit costs drove up the cost of interest-bearing debt.

Asset quality has improved. As of the end of March '22, CMB's non-performing loan ratio was 0.95%, the loan ratio was 1.12%, and the overdue loan ratio was 1.23%, down 1BP, 9BP, and 6BP respectively from the end of the previous year. The generation rate of non-performing loans in 1Q23 was 1.09%, down 0.07 percentage points from the previous year. The main reason was the year-on-year slowdown in the pace of non-performing loans in the real estate sector.

Wealth management revenues have declined. 1Q23 CMB's wealth management revenue was 13.89 billion yuan, a ratio of 15.3% to operating income. Among them, wealth management fees and commission income fell 13.25% year on year due to low customer investment sentiment; asset management fees and commission income increased 2.65% year on year, which is an increase in the subsidiary CMB International management fee revenue; income from custodian fees, bank card fees, settlement and clearing fees all declined year-on-year. By the end of March '23, CMB's retail AUM reached $12.54 trillion, an increase of 3.40% over the end of the previous year.

Maintain a “Highly Recommended” investment rating. CMB is a benchmark retail bank with high ROE. Interest spreads in 23 years have been under pressure. We maintain the “Highly Recommended” rating, with a target price of 40.5-44.2 yuan/share. Subsequent stock price performance is expected to benefit from the fall in US bond yields, which will bring about a new net inflow of capital from the North, a recovery in real estate sales, and an improvement in wealth management business.

Risk warning: financial concessions, narrowing interest spreads; wealth management development falls short of expectations, etc.