Incidents:

On April 29, China Merchants Bank released its report for the first quarter of 2024. During the reporting period, it achieved operating income of 86.4 billion yuan, YoY -4.7%, net profit to mother of 38.1 billion yuan, and YoY -2%. The weighted average return on net assets attributable to common shareholders was 16.08%, YoY -2.35pct.

Comment:

Interest income is under pressure, dragging down revenue, and positive provision contributions have narrowed. The year-on-year growth rates of CMB 24Q1 revenue, net profit before provision, and net profit to mother decreased by 4.7%, 6.1%, and 2%, respectively. The growth rates decreased by 3, 4, and 8.2 pcts, respectively, from 2023. Dividing the year-on-year profit growth structure, scale expansion and provision were the main contributors, driving 12.2 and 5.5 pct respectively; judging from marginal changes, the driving effect of scale expansion declined slightly, negative net interest spreads and non-interest income dragged down, positive provision contributions narrowed, and income tax changed from negative drag to slight positive contributions.

The expansion remained strong, and retail loan growth was mainly driven by small, micro and consumer loans. At the end of 24Q1, the year-on-year growth rates of CMB's interest-bearing assets and loans were 10.2% and 7.6%, respectively. The growth rate of interest-bearing assets increased by 2 pct compared to the end of the previous year, and the growth rate of loans remained the same as at the end of the previous year. The first quarter added 495.1 billion dollars in interest-bearing assets, of which credit increased by 307 billion yuan, an increase of 22.4 billion yuan over the previous year; financial investment increased by 8.4 billion yuan, a year-on-year decrease of 93.4 billion dollars; and interbank assets increased by 179.7 billion yuan, an increase of 291.9 billion yuan over the previous year. In terms of the 1Q credit incremental structure, public, retail, and notes increased by 1920 billion, 62.4 billion yuan, and 52.6 billion dollars respectively, while public goods and notes increased by 14.8 billion and 21 billion dollars, respectively, and retail sales decreased by 13.3 billion dollars over the same period last year. At the end of 24Q1, the share of retail loans fell 1.5pct to 51.4% compared to the end of the previous year.

In terms of the parent bank's 1Q retail loan increase, small and micro loans (+42.7 billion yuan) and consumer loans (+52.9 billion) increased by 5.7% and 17.5%, respectively, from the beginning of the year, and were the main drivers for the steady growth of retail loans; mortgage loans decreased by 14.9 billion yuan, down 1.1% from the beginning of the year. Estimates were mainly affected by factors such as the real estate market still being adjusted and early mortgage repayment; credit card loans decreased by 19.2 billion dollars, or due to the company's active control of some high-risk credit assets.

The growth rate of deposits has been rising steadily, and the trend of deposit regularization continues. At the end of 24Q1, CMB's interest-bearing liabilities and deposits increased by 9% and 8.6%, respectively. The growth rate was 0.4 pct higher than at the end of the previous year. Looking at the debt structure, the increase in the size of deposits, bonds payable, and interbank debt in a single quarter was 284.7 billion, 135 billion yuan, and -12.7 billion yuan, respectively. Of these, deposits and interbank liabilities increased by 48.5 billion yuan and 93.3 billion yuan respectively over the same period last year, while interbank debt increased by 78.7 billion yuan over the same period last year. The average daily balance of 1Q current deposits decreased by nearly 5 pct to 52.1% compared to the previous year. Affected by factors such as low risk appetite among retail customers and insufficient activation of corporate capital, the trend of deposit regularization continues.

The 24Q1 interest spread was 13 bps narrower than the previous year to 2.02%, mainly affected by the decline in yield on interest-bearing assets. CMB's 24Q1 net interest spread was 2.02%, down 2 and 13 bps from 23Q4 and 2023, respectively, and 27 bps from 23Q1.

1) On the asset side, the yield on 24Q1 interest-bearing assets was 3.65%, down 3 and 11 bps from 23Q4 and 2023, respectively; among them, the loan yield was 4.07%, down 1 and 19 bps from 23Q4 and 2023, respectively. Factors such as LPR cuts and deposit mortgage reductions, compounded by insufficient demand for effective credit, dragged down the year-on-year decline in the pricing of newly issued loans, and loan yields continued to be under pressure, in line with industry trends; 2) On the debt side, the 24Q1 interest-paying debt cost ratio was 1.75%, the same as 23Q4, and an increase of 2 bps over 2023; among them, the deposit cost ratio was 1.63%, changing -1 and 1 bps from 23Q4 and 2023, respectively. According to the cumulative effect of the continuous reduction of listed interest rates on early deposits and the cessation of “manual interest compensation” on deposits, the improvement in deposit costs will be further effective in 2024, and the deposit cost rate may decline throughout the year.

The growth rate of net non-interest income fell 2.3% year over year to $34.4 billion, mainly driven by handling fee revenue. In terms of the main components of net income of non-interest, 1) Net income from processing fees and commissions fell 19.4% year on year to 20.2 billion, mainly hampered by the reduction in fees for some products compounded by weak customer investment intentions. Among them, wealth management fees decreased 32.6% year on year to 6.14 billion yuan. In terms of main segments, ① agency insurance income of 2.52 billion yuan (YoY -50.3%) was mainly affected by the reduction in insurance agent rate after the implementation of “integrated reporting”; ② Agency wealth management revenue of 1.7 billion yuan (YoY +25.8%), mainly boosted by the increase in the scale of consignment sales; ③ proxy fund income of 10.3 billion yuan (YoY -32.7%), mainly affected by fund fee cuts and the decline in equity fund holdings and sales; 2) Net other non-interest income increased by 40.1% year on year to 14.2 billion yuan. The bullish bond market at the beginning of the year boosted investment income from bonds and funds increased by 2.93 billion yuan year on year. Profit and loss from changes in fair value, other business revenue, and exchange income increased by 520 million, 330 million, and 280 million, respectively. Non-interest income in 24Q1 accounted for 39.8%, up 3.1 pct from the previous year.

The non-performing rate decreased by 3 bps to 0.92% from the end of the previous year, and provision coverage remained high. At the end of 24Q1, CMB's non-performing loan balance increased by 1.05 billion to 62.6 billion dollars from the end of the previous year, and the non-performing loan ratio decreased by 3 bps to 0.92% from the end of the previous year; note that the loan ratio increased by 4 bps to 1.14% compared to the end of the previous year, and the overdue loan ratio increased by 5 bp to 1.31% compared to the end of the previous year. Loans overdue for 60 days or more (parent bank caliber) and 90 days or more accounted for 88.5% and 78.7% of non-performing loans respectively, up 4.5 and 4.3 pcts respectively from the end of the previous quarter.

The non-performing rate for workers decreased by 6 bps from the end of the previous year, and the retail defect rate remained flat month-on-month, but the retail attention rate and overdue rate increased by 6 and 10 bps respectively from the beginning of the year. At the end of 24Q1, CMB's non-performing ratio was 1.09%, down 6 bps from the end of the previous year; the non-performing retail balance increased by 570 million to 31.1 billion from the end of the previous year, and the non-performing rate was 0.91%, the same as at the end of the previous year.

The retail loan balance increased by 2.72 billion to $51.5 billion from the end of the previous year, and the attention rate increased by 6 bps to 1.5% from the end of the previous year; retail overdue loans increased by 4.15 billion to 51.9 billion dollars from the end of the previous year, and the overdue rate increased by 10 bp to 1.51% from the end of the previous year. From the perspective of bad generation, CMB generated 16.27 billion new defects in 24Q1, an increase of 240 million over the previous year; the negative generation rate (annualized) decreased by 6 bps to 1.03% year on year, the same as in 2023. Among them, 1) the amount of non-performing loans generated by the company was 3.08 billion, roughly the same as the previous year; 2) the amount of non-performing loans generated by retail loans (excluding credit cards) was 3.21 billion, an increase of 740 million over the previous year; and the amount of new non-performing loans generated by credit cards was 9.97 billion yuan, a decrease of 510 million over the previous year. Based on the parent bank's caliber data, the credit card defect rate, attention rate, and overdue rate increased by 3b, 18bp, and 33bp, respectively, compared to the end of the previous year. It is estimated that during the gradual recovery of the economy, the ability of some customers to repay is still recovering, which is a drag on the quality performance of retail assets. Pay attention to subsequent changes in the retail risk situation.

Quality data for housing-related assets at the end of 24Q1:

1) The risk exposure in the table remained generally flat, with actual and contingent real estate-related credit, proprietary bond investments, and proprietary non-standard investments, etc., bearing credit risk balances of 417.3 billion yuan, up 4.6% from the end of the previous year; among them, the real estate loan balance was 310.9 billion yuan, an increase of 20.2 billion dollars from the end of the previous year, accounting for 4.83% of the total loan amount, an increase of 0.12 pct compared to the end of the previous year; the real estate non-performing rate decreased by 19 bp to 4.82% compared to the end of the previous year.

2) The pressure on foreign housing assets continued to drop, and the balance of businesses that did not bear credit risk was 244.6 billion dollars, such as financial capital investment, entrustment loans, management of consignment trusts and funds by cooperative agencies, and underwriting debt financing instruments, etc., down 1.9% from the previous year.

Asset quality stabilizes, moderates and improves, mitigates the pressure to accrue depreciation, and the depth of provision remains high. In 24Q1, China Merchants Bank accrued credit impairment losses of 14.27 billion yuan, a year-on-year decrease of 13.1%; of these, loan impairment losses were 13.27 billion yuan, a year-on-year decrease of 3.28 billion; other credit impairment losses totaled nearly 1 billion yuan, an increase of 1.13 billion yuan over the previous year, mainly due to an increase in the scale of business such as buy-back sales and credit commitments. At the end of 24Q1, provision coverage fell slightly by 0.9 pct to 436.8% from the end of the previous quarter, and loan coverage decreased by 13 bps to 4.01% compared to the end of the previous quarter, and risk offsetting capacity remained at a high level.

With the implementation of the new capital regulations, capital adequacy ratios at all levels have increased. At the end of 24Q1, the growth rate of weighted risk assets decreased by 5 pct to 8.1% compared to the end of the previous year, or mainly benefited from the positive impact of the implementation of “new capital regulations”. At the end of 24Q1, CMB's core Tier 1 capital adequacy ratio, and capital adequacy ratio were 14.07%, 16.3%, and 18.2% respectively under Higher Law, up 34, 29, and 32 bps from the end of the previous year, respectively.

Profit forecasting, valuation and ratings. CMB's strategic goal is to “build a value bank,” and the retail business has a deep moat. This moat lies in a truly customer-centered service spirit, the pursuit of the ultimate customer experience, and greater customer stickiness brought about by this. At this stage, although the retail business is being dragged down by factors such as insufficient willingness of residents to expand and low risk appetite, the company is not simply pursuing loan scale expansion, but is paying more attention to maximizing the comprehensive value contribution of customers. Meanwhile, at the end of 24Q1, the number of CMB retail customers increased 1.02% from the end of the previous year to 199 million, and retail AUM increased 4.02% from the end of the previous year to nearly 13.86 trillion yuan. The number of retail customers and AUM continued to grow, further consolidating the foundation for future major retail business development. Maintaining the company's 2024-25 EPS forecast of 6.05/6.38/6.78 yuan, the current stock price corresponds to the PB valuation of 0.84/0.76/0.69 times, respectively. From the perspective of 1Q financial stock holdings, CMB was the bank stock with the highest increase in public fund positions, with positions increasing by 0.15 pct to 0.59%. At the same time, it was also the target with the largest inflow of capital to individual shares of northbound capital, increasing its holdings by 3.37 billion yuan. CMB's current stock price corresponds to a dividend rate of 5.7%, which has a good dividend return. Maintain a “buy” rating.

Risk warning: 1) The economic recovery momentum falls short of expectations, which may have an impact on residents' employment, income, etc., and affect the company's retail credit and wealth management needs; 2) The release of real estate risks has exceeded expectations and dragged down asset quality.