Description of the event
China Merchants Bank released its 2023 quarterly report. Operating revenue for the first quarter fell 1.5% year on year, net profit of the mother increased 7.8% year on year, the non-performing rate at the end of March was 0.95%, and the provision coverage rate was 448.32%. The performance was basically in line with expectations.
Overall performance: The decline in revenue was in line with expectations, asset quality stabilized, supporting profit growth. Revenue declined year on year in the first quarter, in line with stock bank peers. Among them, net interest income increased 1.7% year on year. The decline in growth rate reflected the impact of the narrowing of net interest spreads; the year-on-year decline in non-interest payers continued to drag down. Asset quality is stabilizing, bad real estate generation has declined, credit card risk still has post-band effects, and the amount of credit impairment has decreased year-on-year, supporting profit growth. Performance is expected to be low throughout the year in the first quarter. Assets & liabilities: There has been a sharp increase in public sector demand, and retail demand is still recovering. Loans in the first quarter increased 4.7% compared to the beginning of the period. Among them, public loans increased 7.5%, a sharp year-on-year increase. Retail growth was 2.4%, and demand has yet to recover. According to the Bank's perspective, the main growth point for public loans is the manufacturing industry; among retail loans, microfinance and consumer loans grew at 7.7% and 22.4%, showing strong performance. Mortgages and credit cards declined. It is expected that mortgages and credit cards will gradually pick up from the second quarter, and credit cards are expected to surface in the short term. Deposits increased 3.1% in the first quarter, and the share of current accounts declined, reflecting the continuing impact of capital market shocks and declining risk appetite among customers.
Net interest spreads: Drastic narrowing, and the impact of heavy mortgage pricing & rising deposit costs was obvious. Net interest spread in the first quarter was 2.29%, down 11BP from the full year of 2022, down 8BP.1 from the previous quarter) Heavy mortgage pricing was the dominant factor and was also in line with market expectations. Loan yield in the first quarter fell 13BP compared to the full year of 2022 and fell 5BP month-on-month. At the same time, it also had an impact on public growth stronger than retail sales. 2) The cost ratio of debt increased by 7 BP compared to the full year of 2022, an increase of 6 BP over the previous month, and the cost ratio of major deposits increased by 4 BP to 1.59% month-on-month. It is expected to be mainly affected by the increase in the regular share. Furthermore, the cost of interbank debt has also risen markedly. Net interest spreads are expected to remain under pressure to narrow throughout the year, but the range is slowing down. Among them, asset-side prices continue to decline, and debt costs are expected to gradually improve.
Non-interest: Revenue falls, and the median income continues to be dragged down. Non-interest income fell 6.1% year on year. Among them, the high middle income base fell 12.6% year on year. Major wealth management income was affected by the market environment and fell 13.3% year on year. Revenue from consignment funds, insurance, trusts, and wealth management is expected to decline year over year. Other non-interest payers, such as investment income, were relatively stable, maintaining a 14.9% year-on-year growth rate
Asset quality: Overall improvement, and the bad generation rate declined. The non-performing rate at the end of March was 0.95%, down 1BP month-on-month, the reserve coverage rate was 448.32%, down 2.47pct from the previous quarter, and the new bad generation rate was 1.09%, down 6BP from the full year of 2022. Among them (Bank's perspective): 1) New non-performing amounts generated by public loans were 3.07 billion yuan, lower than the previous quarters, reflecting a slowdown in the pace of non-performing real estate generation at the end of the period. The non-performing value rate of real estate loans was 4.55%, up 56BP.2) New bad credit cards generated in retail loans reached 10.49 billion yuan, and the new bad generation rate rose to 4.75%, as high as 4.75%. In every quarter of last year, we previously emphasized that credit card risk will still be reflected later in the first quarter. This is in line with retail risk patterns, and is expected to improve from the second quarter.
Investment advice: The performance of the first quarter was basically in line with business rules, and the market had already fully anticipated it. The highlight is that although the real estate non-performing rate is still rising, the generation of bad actors has declined, and it is expected that it will gradually spread to a decline in the non-performing rate (gradual write-off) starting in the second half of the year. Annual performance is expected to be low in the first quarter. In the future, as net interest spreads gradually stabilize and retail risk improves, fundamentals are expected to pick up. It is expected that the annual operating income will increase 5.0% year on year and the net profit of the mother will increase 12.3% year on year. The current valuation of A-shares is 0.91X2023PB, which fully reflects pessimistic expectations. Long-term value is stable, and the “buy” rating will be maintained.
1. The downward pressure on the economy is increasing, and retail credit continues to be sluggish:
2. Real estate and credit card risks have risen sharply, and the quality of bank assets has deteriorated markedly