Directly hitting the performance meeting of China Merchants Bank: How the "King of Retail" returns to the growth channel

On November 1st, China Merchants Bank held a performance exchange meeting for the third quarter of 2024. Vice President, Chief Financial Officer, and Board Secretary Peng Jiawen, along with general managers from relevant departments such as Asset and Liability Management, Financial Accounting, and Risk Management, as well as independent directors, attended the meeting, which was hosted by the Director of the Board Office.

During the meeting, the management of China Merchants Bank responded to questions regarding the impact of policy changes on operations, the effectiveness of cost reduction and efficiency improvement, and provided an outlook on the latest situations regarding interest margins, wealth management income, and loan growth rates.

Peng Jiawen also specifically mentioned that attention should not be solely focused on the positive or negative aspects of profits, but rather more on trends. From the current situation, most banks, including China Merchants Bank, are showing a positive trend.

Five Major Measures to Respond to Policy Changes

Since late September, there have been significant changes in macro policies, which have had a major impact on the capital market and various sectors, including the banking industry.

Overall, Peng Jiawen summarized the relevant policies into three aspects: expanding domestic demand, stabilizing the market, and mitigating risks. These policies reflect three characteristics:

First, the signals are strong; the official statements are very direct, and the market has felt a clear change in policy direction from the highest levels. This strong signal has exceeded market expectations.

Second, a multi-pronged approach has been adopted, with policy measures systematically coordinated from the top level.

Third, the measures are highly targeted, closely addressing the current operational difficulties and pain points.

In his view, the impact of these policies will be profound. From the perspective of China Merchants Bank, the possible impacts include both favorable factors and some challenges. However, overall, the positive factors dominate.

The impact of positive factors is mainly reflected in the following four aspects:

First, large wealth management benefits. One of the "cornerstones" of China Merchants Bank is large wealth management, which will directly benefit from the current policies. The capital market has already shown a positive trend, and large wealth management businesses closely related to the capital market, such as retail wealth management, asset management, custody services, and non-interest income, will benefit as a result.

For example, on October 25th, the CSI A500 fund raised 20 billion on its first day of sale, with China Merchants Bank accounting for more than half of the sales, fully demonstrating the bank's advantages in large wealth management.

Second, benefits in the consumption sector. Policies aimed at stabilizing the market and expectations, and promoting consumption will help China Merchants Bank's business in the consumption sector, including consumer loans and credit card loans. As consumption rebounds, these businesses will contribute positively to loans and income.

Third, as the capital market improves, there will also be changes in customer risk preferences. The trend of fixed-term deposits may see some changes. There has been a noticeable change in demand deposits, especially in current savings deposits recently. However, it remains uncertain whether this trend will continue.

Fourth, risk management and mitigation. Policies regarding the resolution of local government debt risks and measures for the real estate market will benefit banks, including China Merchants Bank, in effectively mitigating real estate risks and risks associated with local government platforms.

Of course, there will still be some pressures and challenges at certain levels, which he summarized into three points First, the volatility of deposits may increase. On October 8th alone, a significant amount of savings deposits flowed into the stock market, while some product redemptions also led to the accumulation of demand deposits. This is a double-edged sword, as it also brings increased deposit volatility. If the capital market continues to perform well, the growth and volatility of deposits may be affected in the coming period.

The second challenge is the interest margin. Recently, interest rates have been lowered, including a 25 basis point reduction in the LPR, a unified reduction in the interest rates of existing housing mortgage loans, and a reduction in deposit rates by the central bank. These adjustments in interest rates, along with potential further reductions in the future, pose a challenge to the interest margins of commercial banks.

The third potential risk lies in the bond market. Typically, the stock market and bond market can create a seesaw effect; if the capital market is bullish, the bond market may shift from a bull market to a volatile market next year. If the bond market experiences volatility, the growth point of non-interest net income this year may disappear. Therefore, regarding the bond market next year, he believes it may form a volatile pattern that requires attention.

In response to these potential pressures and challenges, China Merchants Bank has considered several countermeasures.

The first is to actively embrace market changes, follow the trend, and actively promote the development of large wealth management business. China Merchants Bank is actively laying out plans, including product preparation, team and capability training, and deepening the asset allocation system. At the same time, asset management, custody, and investment banking businesses will also adapt to market changes and develop actively.

The second is the investment and financing strategy. In response to the volatility in the bond market, it will cautiously manage risks and actively seize market opportunities for wave operations. It hopes to seize opportunities even in the event of volatility while avoiding interest rate risks to generate good income.

The third is asset-liability management, specifically further improving interest margin management. The focus is on optimizing the structure. Meanwhile, on the liability side, it will follow market trends to maintain stable growth of low-cost deposits while optimizing the structure to stabilize the proportion of demand deposits, thereby reducing liability costs and maintaining a good interest margin level.

The fourth aspect is risk management. China Merchants Bank will actively promote risk management according to relevant policies, especially in resolving risks in key areas, focusing on mitigating risks in real estate and local government financing platforms, while also paying attention to the rising risks in retail credit and taking measures to keep risks controllable.

The fifth is in the area of management innovation, continuing to adhere to strict management and maintaining the main tone of integrity and innovation, strengthening internal capabilities.

Banking Trends are Positive

Regarding the overall trend of profit income, Peng Jiawen stated that he cannot provide specific figures for annual profit growth, but overall, it can maintain a judgment of stability and improvement.

According to the third-quarter report, most banks have shown this characteristic. It is important not to simply focus on the positive or negative of profits, but to pay more attention to the trend. From the current situation, most banks, including China Merchants Bank, are showing a positive trend.

For the major trends in the fourth quarter and next year, although the overall trend is positive, there are many uncertainties, which include both opportunities and pressures and challenges In terms of opportunities, the overall economic fundamentals are improving, which is an important foundation for a positive trend. Recent macro data, such as PMI data rising for two consecutive months and exceeding 50, are positive signals indicating that the trend of economic growth will continue. The capital market is expected to undergo positive changes. The resolution of key areas in real estate and local government platforms is also a positive factor. Changes in customer risk preferences will lead to changes in deposit structures, and these opportunities will continue to exist in the fourth quarter and next year.

In terms of challenges, the interest margin continues to be under pressure, competition for deposits will intensify, and the bond market may experience fluctuations.

Overall, in the face of numerous uncertainties, plans are still being formulated. However, the general idea is to maintain stability while seeking progress next year, achieving the goal of steady improvement through our own efforts.

Three Aspects to Strengthen the Retail Side

Regarding the overall approach to managing retail clients, the general manager of the Wealth Platform Department introduced that in recent years, the market has continued to fluctuate, and the client base has also undergone some changes, mainly reflected in two aspects: first, clients' risk preferences are generally not high; second, clients are more focused on stability and certainty in the market environment.

As a result, the asset allocation structure has undergone certain changes. For example, in the third quarter of this year, wealth management products accounted for 39% of AUM growth, while deposits accounted for 32%. These adjustments are made to adapt to changes in client preferences and market conditions, but this has also led to continued pressure on wealth management fee income.

In the face of these difficulties, the operational approach mainly focuses on the following three aspects:

First, return to the essence of serving clients, focusing on clients' basic needs, and continuously monitoring the growth of AUM and client groups as the foundation for retail development. In the third quarter of this year, the AUM balance increased by 1.02 trillion year-on-year, with a growth rate of 7.7%, and market share is steadily improving. The growth rate of retail clients is also around 5%. As long as clients and AUM continue to grow, there is confidence in seizing market opportunities, leveraging the professional advantages of China Merchants Bank's wealth management when the market and clients resonate in sync.

Second, expand the reach. Although a professional and outstanding retail team is the foundation of wealth management, the service radius is limited. By using financial technology and digital means to expand the service range, strengthen online operational capabilities, promote the integration of online and offline multi-channel services, and utilize big data modeling technology to enhance service radius and client experience.

Third, deepen engagement. Clients' risk preferences are not static; they change dynamically, presenting opportunities for providing professional in-depth services. We hope to help clients with asset allocation through professional services, achieving stable returns across cycles. At the same time, we insist on supporting our professional capabilities, enhancing investment research capabilities, and helping clients grasp phase-specific trending opportunities.

Next Year's Loan Growth Will Also Outperform This Year

Regarding interest margins and loans, the general manager of the Asset and Liability Management Department introduced that in the first three quarters of this year, the net interest margin was 1.99%, a decrease of about 20 basis points compared to the same period last year, but still maintaining a relatively leading position among peers.

The main factor affecting the interest margin is the continuous decline in asset-side yields, which is influenced by policy factors, such as the reduction of LPR and the lowering of existing mortgage rates, as well as the overall weak credit demand Looking ahead, a series of new policies released after September 24 will have a certain impact on my business structure and interest margins. Overall, the impact of these new policies on this year's interest margins is expected to be neutral.

For next year's outlook, due to the high proportion of existing housing loans, the continued impact of LPR reductions, and the recovery process of credit demand, loan pricing may face downward pressure, which in turn will affect overall interest margins.

In response to these issues, we will strive to maintain relative stability in interest margins through proactive asset-liability management measures.

On one hand, we need to maintain a certain stable growth in asset scale. This year, the overall market for credit demand is relatively weak, especially in retail loans, where housing loans are significantly affected by the real estate market, and credit card loans are also impacted due to a decline in transaction consumption. The public loan market has seen relatively good incremental growth.

With the implementation of new policies, there have been positive changes in loan demand, such as a rebound in resident consumption transaction volume, which has a positive impact on credit cards and small loans. The continued policies in the real estate market have also had a positive effect, leading to marginal changes in housing loan business. A series of new policies have also played a certain role in boosting public loans, such as stock repurchase value-added loans and equipment renewal loans. Therefore, despite significant market impacts this year, under the continuous influence of a series of policies, the overall trend of credit growth next year is positive.

On the other hand, in terms of asset-liability management, next year will focus on structural adjustments.

For example, we will optimize the allocation of major asset categories, maintain the growth of high-quality assets, and increase the growth of higher-yield assets. This includes adjusting the loan structure, appropriately controlling the growth of bill business, and ensuring the growth of general loans; vigorously promoting the growth of retail loans while maintaining public loans that align with national guidance, especially in specific industry sectors.

At the same time, we will strengthen the control of liability costs on the liability side. This year, we successfully optimized liability costs, thanks to policy factors and our ongoing commitment to expanding high-quality, low-cost settlement deposits. Next year, we will continue to enhance the optimization of the liability structure. Additionally, we will take advantage of the opportunities presented by the easing trend brought about by the stock market to gradually increase the proportion of demand deposits.

Peng Jiawen also added comments on the growth rate of loans. This year, the loan growth rate of China Merchants Bank has shown a decline, similar to the overall trend in society, and is slightly below expectations. This aligns with the current economic situation, where economic growth is more solid under the backdrop of preventing circular trading, arbitrage, and squeezing out economic excess.

Based on this situation, he expects that next year's loan growth for China Merchants Bank will remain consistent with the broader environment. Overall, he judges that the growth rates of social financing and loans next year will outperform this year.

Although the plans for China Merchants Bank are still being formulated, the preliminary judgment is that next year's loan growth will also outperform this year.

Moreover, one thing remains unchanged: the continuous increase in the proportion of retail loans, which is a structural optimization goal. Therefore, next year we will still be committed to maintaining a good growth momentum in retail loans.

Cost Reduction and Efficiency Improvement Will Not Affect Employee Experience

Peng Jiawen introduced that in the context of low interest rates and low interest margins, the experience of internationally advanced commercial banks indicates that strengthening the refined management of costs is crucial. China Merchants Bank has conducted research and investigations on this and found many practices from foreign peers worth learning. Therefore, this year will focus on how to strengthen the refined management of costs and respond to income pressure through cost reduction and efficiency improvement To this end, China Merchants Bank established a cost reduction and efficiency enhancement working group, led by Peng Jiawen, to promote this initiative across the bank, with initial data showing positive results.

From the data of the first three quarters, expenses decreased by 4.56%. Particularly in the third quarter, the reduction in expenses was significant, reflecting the effectiveness of cost management and the cost reduction and efficiency enhancement efforts.

There are three reasons for the decrease in expenses. First, the effectiveness of cost management; second, the alignment of cost expenditures with income, where expenses decrease correspondingly when income is under pressure; third, the differences in the timing of expense recognition, as expenditures are not evenly distributed across different quarters. However, the overall goal remains to maintain stability or a decrease in the expense-to-income ratio for the entire year.

He also emphasized that cost management will not sacrifice two important experiences: first, customer experience, which will not be affected by cost reductions; second, employee experience, which will not allow employees to feel negative impacts. The measures for cost reduction and efficiency enhancement will not affect business development or the employees' (compensation incentive) mechanisms.

Consumer Loans Will Rebound

Regarding credit card loans, the general manager of the credit card center introduced that, first, in terms of asset quality. Under the guidance of establishing a fortress-like risk system across the bank, the overall asset quality of credit cards remains stable.

More concerning is the dynamic leading indicator of the non-performing loan generation rate, which at the end of the third quarter has decreased by nearly 10 basis points compared to the same period in the previous two years, indicating stable asset quality in line with expectations.

In terms of early risks, the ratio of overdue loans under close watch has increased compared to the end of last year and the end of June, mainly due to the credit card center's stricter risk identification. Considering the complexity of external risk conditions, the risk in the credit card industry remains high, and internal early warning measures have been strengthened, leading to stricter classifications of assets and overdue stages for certain customers, resulting in an increase in early indicators. Excluding prudent factors, the early substantive risk of credit cards remains stable, and it is expected that the non-performing loan ratio and non-performing loan generation rate will decrease year-on-year by the end of the year.

Second, in terms of operational development. Affected by insufficient growth in credit demand, the incremental credit card loans decreased at the end of March compared to the beginning of the year, but improved gradually over the three quarters. Although overall loans showed negative growth, the structure of installment assets increased, while transaction-type assets decreased due to external consumption fluctuations, with the decline being better than the industry average.

Looking ahead, the effects of consumption stimulus policies are positive, and it is expected that transaction consumer loans will rebound driven by favorable measures such as trade-in programs, consumption promotion, stabilizing housing, and stabilizing the stock market. In October, credit card loans have already achieved cumulative positive growth.

In terms of credit card strategy, the focus will continue to be on optimizing customer group structure and building a reasonable asset portfolio. The bank will persist in acquiring valuable customers, adjusting the customer group structure, and improving the efficiency of acquiring quality customers. It will support the growth of medium to low-risk quality assets and enhance credit efficiency. In post-loan management, the bank will strengthen digital operations, improve post-loan operational efficiency, and ensure balanced development in quality, efficiency, scale, and structure, prioritizing quality and stability, and promoting development on this basis.

Support Provided for Stock Buybacks for 6 Companies

In the capital market, Peng Jiawen introduced that regarding stock buyback support, President Pan announced relevant policies on September 24, and China Merchants Bank responded quickly and placed high importance on this policy. This is also a characteristic of China Merchants Bank, which is to provide a full-process service system around listed companies As of October 20, 23 listed companies in Shanghai and Shenzhen have expressed support, and China Merchants Bank has successfully provided funding support to 6 of these companies, including both those affiliated with and not affiliated with China Merchants.

Currently, the progress of this business is good. Due to a rapid response, the demand at that time exceeded 100 billion, and several loans have already been successfully disbursed, with significant business growth potential expected in the future.

Regarding wealth management, China Merchants Bank has always regarded large wealth management capability as its core and fundamental ability, and has placed great emphasis on it.

In capability building, the aspects related to the capital market are particularly important, including product selection, organizational capability, and the professional capability of the team, all of which have a certain foundation.

If the trend in the capital market is positive, it is believed that it will contribute positively to the growth of the customer base, the growth of assets under management (AUM), and the growth of non-interest income.

In addition, the impact of the capital market is also reflected in other areas, such as custody business. In the recent two batches of 500 A-share funds for custody, China Merchants Bank is the bank with the highest number of custodial accounts, reflecting the construction of its custody capability.

Overall, China Merchants Bank has a high degree of correlation with the capital market, and if the market trend establishes an upward trajectory, it will benefit significantly.

Future Risks of Housing Loans Are Basically Controllable

Regarding the risk clearance situation in the real estate sector, the management of China Merchants Bank introduced that real estate issues are indeed the focus of attention for investors both nationally and globally. China Merchants Bank remains vigilant about the real estate market and has early and fully exposed related risks. Since the second half of 2021, it has orderly exposed and dealt with some real estate risks, strengthened provisions, and ensured the overall stability of asset quality.

As of the end of September, the non-performing rate in real estate has slightly fluctuated compared to the previous quarter mainly due to a slight decrease in loan scale. Moreover, the year-on-year generation of real estate non-performing loans has also decreased.

It is expected that under the influence of a combination of policies, future risks will be basically controllable. The provision level for real estate is about 2.5 times higher than that for corporate loans, indicating sufficient provisions.

It has been observed that policies are being implemented simultaneously from both the supply and demand sides, especially on the demand side, which is the core of the sustainable development of the real estate industry in the future. Continuous strengthening of industry and regional assessments, and timely adjustments to related policies.

Strategies include refining and adhering to a risk-based approach, reasonably distinguishing between the debt risks of real estate companies and the operational risks of project companies;

Focusing on high-quality clients, paying attention to key areas in first- and second-tier cities, as well as the guarantee and improvement of real estate business types; strengthening gateway management: controlling the concentration risk of major clients, implementing closed management throughout the entire lifecycle of projects to ensure the safety of creditor rights; formulating targeted strategies for risk clients and projects, adopting a one-client-one-policy and one-project-one-policy approach, seizing effective rights and interests in assets and projects, revitalizing projects, reducing risk exposure, and minimizing future risk losses.

NIM Decline Is Better Than This Year

The general manager of the Asset and Liability Management Department responded to the net interest margin (NIM), stating that in recent years, to support the continuous development of the real economy, banks have lowered LPR rates under regulatory guidance, including the reduction of existing mortgage rates, which has indeed had a certain impact on the bank's net interest margin Especially since the implementation of the 924 new policy, the LPR has been further lowered, and the interest rates on existing housing loans have also been reduced again. At the same time, measures such as lowering the reserve requirement ratio and deposit rates have been taken, which to some extent offset each other. Therefore, the impact of the new policy on the interest margin for this year is basically neutral, meaning the effects can offset each other.

Looking ahead to next year, the continued reduction of the LPR and the further lowering of existing housing loan interest rates will continue to have an impact. This will exert downward pressure on the yield of loans, thereby affecting the interest margin, which will still face downward pressure.

From the overall trend next year, if we conduct a static analysis based on the current policy measures, the interest margin next year may further decline, but the extent of the decline may be narrower than this year. If no further measures are introduced, it is expected that the interest margin may gradually bottom out and stabilize next year. Dynamically, this also depends on whether there will be further incremental measures at the macro level next year.

Peng Jiawen added that, in the absence of significant policy changes, it is expected that the interest margin will likely bottom out next year. However, some significant policy changes have occurred, such as the reduction of new existing housing mortgage loan interest rates and the extent of the LPR reduction, it is expected that the interest margin will continue to be under pressure next year, but the decline will be better than this year.

The trend of further narrowing the decline in wealth management income is established

Regarding the analysis of China Merchants Bank's wealth management business in the third quarter, management introduced that although the wealth management business has expanded compared to the first half of the year, it has actually narrowed in the third quarter.

Structurally, this is mainly due to the reduction in insurance fees, which led to a high base in the same period last year, resulting in a significant year-on-year decline this year.

Looking ahead to the fourth quarter, the impact of last year's fee reduction will gradually weaken, and there is confidence that the analysis of the wealth management business will further improve.

At the same time, challenges are also noted. Especially in September, under the trend of lowering expected insurance rates, there has been a significant release of insurance demand. Against the backdrop of pressure on the wealth management business, China Merchants Bank has increased its efforts in asset allocation and customer base expansion, achieving significant year-on-year growth in both insurance and wealth management sales, and its market share has also increased, posing certain challenges for the growth of the wealth management business next year.

After the new policy was introduced in September, a series of policies brought good opportunities for the wealth management business. For example, the recovery of investor risk appetite will drive the growth of equity product sales. Since the beginning of this year, the sales performance of equity products at China Merchants Bank has shown strong resilience, the market share of equity fund products has increased by nearly 40 basis points, reaching even higher levels in the third quarter, exceeding 7% share.

In response to the new policy, the established strategy of retail wealth management will still be adhered to, on one hand, increasing customer allocation, and on the other hand, focusing on the growth of high-value customers. In addition, this year, AUM has also achieved good results. Therefore, there is confidence in facing challenges, and steady growth in the wealth management business is expected next year, striving to contribute better value.

Peng Jiawen added that regarding wealth management income, the overall income decline in the first three quarters of this year was mainly affected by two factors: first, the decline in insurance commission income, and second, the decline in fund management fees. The declines in both are mainly influenced by policy factors, and these policies were mainly introduced after September last year Therefore, by the fourth quarter, the impact of these factors may have been largely digested. This year, measures have been taken to compensate for price with volume, helping to continuously narrow the decline in revenue.

Looking ahead, the decline is expected to further narrow, and this trend is certain, with the narrowing possibly being significant. As for whether revenue can turn positive, it is still difficult to judge, as it depends on multiple factors, including whether the capital market can establish an upward trend, market layout, and whether new fee reduction policies will be introduced. However, it can be confirmed that the trend of further narrowing the revenue decline is established.

Dividends and Buybacks Still Under Study

Management introduced that as of the end of the third quarter this year, the balance of risk-weighted assets was approximately 6.6 trillion, an increase of about 50 billion compared to the beginning of the year, with a growth rate that has decreased by about 10 percentage points compared to the same period last year. At the same time, compared to the end of the first half of the year, risk-weighted assets have also decreased, reducing by about 110 billion.

The main reasons for this year-on-year and month-on-month change include:

First, the low year-on-year growth rate is mainly due to the impact of new capital regulations. Under the new rules, there is no need to add back a large amount of assets as in the transition period, which has a significant impact on the year-on-year growth rate.

Changes in business structure are also a contributing factor. This year, due to the overall social environment, loan growth has slowed, leading to relatively low consumption of risk assets. In addition, off-balance-sheet risk assets have decreased, especially in the bill business, where low yields have strengthened control.

Third, further refined management of capital has been strengthened. According to the new regulations, risk assets must also be allocated for unused credit limits on retail loans, which has been managed more precisely, enhancing the utilization of credit limits.

Fourth, under the new capital regulations, capital measurement has become more refined, with higher requirements for measurement parameters, strengthening the cleaning of underlying data and improving asset quality, achieving a certain capital-saving effect.

Thanks to the slowdown in the growth of risk assets, the overall capital adequacy ratio, including the core capital adequacy ratio, tier 1 capital adequacy ratio, and total capital adequacy ratio, has continued to improve.

Looking ahead, dividends, including the dividend payout ratio or interim dividends, are also of great concern. Research is actively ongoing. The dividend payout ratio has maintained the highest level among listed banks. China Merchants Bank believes that maintaining a continuous and stable dividend is more important than an absolute level.

Management stated that they will consider investor opinions, market changes, business development, and capital adequacy, continuously studying these hot issues and flexibly considering relevant factors based on market changes.

Peng Jiawen also mentioned that stock buybacks are an important measure to promote the development of the capital market. In recent years, many people have been inquiring about China Merchants Bank's stock buyback situation. It has been said that it is under study, and here "study means that there is an internal agreement with this measure, believing it can be promoted. However, the reason for the study is that, as a listed bank, there is an essential difference from general listed companies.

When considering issues, listed companies may base their decisions more on commercial principles, while banks are constrained by regulations and need to meet capital adequacy ratios and other related factors. So far, it seems that there has been no precedent for stock buybacks among domestic listed banks, which may be due to some common considerations From the perspective of capital adequacy ratio, it is capable of implementing stock repurchases. Whether it is increasing the dividend payout ratio or raising the frequency of dividends, the capital level can support these measures. However, due to various factors, research is still ongoing