China Merchants Bank Earnings Review: Risk Management Further Optimized, Business Growth Gradually Slowing

China Merchants Bank disclosed its 2021 interim report:

(1) The interim report recorded operating revenue of RMB 168.749 billion, up 13.75% year over year.

(2) Net profit attributable to shareholders reached RMB 61.15 billion, up 22.82% year over year;

(3) Net interest income reached RMB 99.341 billion, up 9.32% year over year;

(4) Net non-interest income reached RMB 69.408 billion, up 20.75% year over year;

(5) In the first half of 2021, China Merchants Bank's net interest margin stood at 2.49%, down one basis point year over year but unchanged from the full-year level of the previous year.

On the day before the earnings report was released, China Merchants Bank's share price rose 0.77%, closing at HK$65.45 per share.

I. From a risk control perspective

China Merchants Bank reported non-performing loan (NPL) balances of RMB 54.542 billion, up RMB 927 million from year-end last year; its NPL ratio stood at 1.01%, down 6 basis points from year-end; its loan loss reserve coverage ratio was 439.46%, an increase of 1.78 percentage points; and its loan loss provision ratio was 4.45%, a decline of 22 basis points. In the interim report, impairment losses totaled RMB 41.8 billion, up RMB 1.8 billion year over year. While in 2020, amid the pandemic's impact on the macroeconomy, market expectations had anticipated a further rise in the likelihood of NPLs and a sustained increase in the overall NPL ratio, the bank's financial data over the past five years show a steady decline in its NPL ratio, reflecting increasingly sound asset quality.

The 2021 interim report explained: "Last year, the pandemic prompted a more aggressive provisioning stance; as the situation eased, the quality of loan assets has stabilized." This also indicates that, amid the broader macroeconomic recovery, the banking sector's asset-quality outlook has improved.

At present, China Merchants Bank's loan loss reserve coverage ratio has exceeded 400%, so there is no further room for increasing it. As market expectations adjust, a phased reduction in the level of loan loss provisions will help unlock earnings in the period ahead.

From the perspective of capital adequacy ratios, the core Tier 1 capital ratio, the Tier 1 capital ratio, and the total capital ratio stood at 11.89%, 13.47%, and 16.01%, respectively—down 0.40, 0.51, and 0.53 percentage points from year-end last year. Despite these declines, the overall levels remain near the median of the past five years.

In summary, from a risk-management perspective, absent policy guidance to further raise the loan-loss-provision coverage ratio, China Merchants Bank is expected to prioritize profit release over increasing its provision coverage.

II. Profit Growth Potential

(1) Retail Business

As a benchmark for retail banking, China Merchants Bank's operating data has long been closely watched by the market. In its latest interim report, the bank disclosed steady growth in its retail customer base, with 165 million retail customers (including both debit and credit card holders), up 4.43% from year-end last year. Among them, there were 3.44 million "Golden Sunflower" and higher-tier clients, an increase of 10.79% compared with year-end last year. Meanwhile, its private banking business has expanded rapidly, serving 111,900 private banking clients, up 11.97% from year-end last year, with total assets under management reaching RMB 3.13 trillion, a rise of 12.78% from year-end last year.

However, despite China Merchants Bank's sustained efforts, its online business has hit a growth bottleneck in terms of traffic, as evidenced by the interim report:The China Merchants Bank app recorded a peak of 17.4706 million daily active users, with 3.776 billion logins and an average of 10.94 logins per user per month, compared to last year's…It has decreased to 11.98 times., the number of monthly active users at the end of the period was 61.4069 million., an increase of only 150,000 households compared to the end of last year.。

Moreover, according to the 2021 interim report, all key user-engagement metrics for the Shou Zhang Sheng Huo app posted year-over-year declines, with monthly active users…The number stands at 43.47 million households, down 2.56 million from the end of last year. As a result, China Merchants Bank's online business has entered a bottleneck phase that calls for new growth strategies; however, the bulk of its revenue still derives from deposit and loan operations.

(2) Deposit and Loan Services

In the first half of 2021, China Merchants Bank's net interest margin stood at 2.41%, up 0.01 percentage points from the end of 2020. As adjustments to deposit and loan rates were not synchronized, the overall rise in interest rates has helped boost the bank's net interest margin; however, the broader interest-rate environment has yet to return to its 2019 peak.

The bank loan-to-deposit ratio is calculated as the total amount of loans divided by the total amount of deposits. From a profitability standpoint, a higher ratio is generally preferable, since deposits incur interest expenses—what is known as the cost of funds. If a bank has large deposits but relatively few loans, its funding costs will be high while its income remains low, resulting in weaker profitability. As commercial banks are profit-oriented, they seek to increase their loan-to-deposit ratios. In June 2015, the draft amendment to the Commercial Bank Law was approved by the State Council, introducing a provision that the ratio of outstanding loans to deposit balances must not exceed 75%. Consequently, the banking sector as a whole experienced a period of robust growth.

From the perspective of the loan-deposit ratio, China Merchants Bank currently derives a greater share of its profits from its ability to attract bank deposits.

Overall, as the pandemic comes under gradual control, China Merchants Bank's asset quality has steadily improved. Absent further policy-driven guidance to raise its loan-loss reserve coverage ratio, the bank is expected to release more earnings. However, with no significant breakthroughs yet in its online-banking and deposit-and-loan businesses, it is likely to focus on capturing industry-wide gains instead.

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