Turning points in China Merchants Bank's performance: How the "Retail King" is accumulating turnaround chips

On August 30, China Merchants Bank (600036.SH) disclosed that the company's revenue and net profit attributable to shareholders for the first half of the year were RMB 172.945 billion and RMB 74.743 billion, respectively, a year-on-year decrease of 3.09% and 1.33%.

China Merchants Bank faced pressure in 2023, with revenue growth turning negative for the first time in 14 years, dropping to -1.64%.

As 2024 is halfway through, the industry is still waiting for the anticipated turning point.

In the first half of the year, revenue growth and year-on-year growth rates decreased by 2.74 and 10.45 percentage points, respectively; net interest income decreased by 4.17% year-on-year to RMB 104.449 billion, and non-interest net income decreased by 1.39% year-on-year to RMB 68.496 billion.

The "Retail King" no longer performs well, reflecting the profit dilemma faced by the banking industry due to declining interest rates and lower loan yields.

As early as the beginning of 2023, China Merchants Bank's President Wang Liang stated that the company was focusing on the income gap after the narrowing of interest spreads and proposed "incremental growth in scale, supplemented by non-interest income."

Over a year has passed, and the income gap continues to widen amid industry downturn.

In the second quarter of this year, China Merchants Bank's net interest margin decreased by 0.3 percentage points to 1.99% compared to the previous quarter.

While facing overall pressure, there are also improvements in certain indicators.

Firstly, deposit growth and optimization of liability costs; secondly, improvement in customer base, with an increase in retail and private banking clients; thirdly, other non-interest income maintained growth.

More importantly, there is no significant fluctuation in asset quality and market share.

In the long run, as the "Retail King," China Merchants Bank is quietly accumulating chips for a bottom reversal.

The continuous narrowing of the net interest margin has become a certainty, leading to limited growth in traditional asset-heavy businesses, far from the imagined potential of asset-light operations.

With expertise in retail business and a focus on wealth management for many years, China Merchants Bank has always been the "top player" in this field.

If it can stabilize customer base while the decline in interest income slows down, once the equity market warms up and high-net-worth clients reignite their enthusiasm for wealth management, China Merchants Bank is expected to be among the first-tier beneficiaries, leveraging its current accumulation to turn the tide.

Optimizing Liabilities

As one of the earliest commercial banks to value retail business, China Merchants Bank established departments such as the Savings Credit Card Department as early as 1995 to specialize in personal banking services.

Over the past nearly 30 years, China Merchants Bank has undergone three business transformations centered around retail, ultimately becoming the recognized "Retail King."

With interest rates continuously declining, China Merchants Bank initiated the "light bank" transformation ten years ago and proposed the "value bank" strategy in 2023, aiming to "strengthen heavy capital and expand light capital."

However, in the first half of 2024, both asset-heavy and asset-light businesses encountered setbacks.

Interest income was dragged down by asset yields.

In the first half of the year, the annual average yield decreased by 23 percentage points to 3.6%; the year-on-year decline in company loans, retail loans, and bill discounting rates was 0.31, 0.45, and 0.36 percentage points, respectively China Merchants Bank stated that on one hand, due to the reduction of interest rates on existing housing loans last year, the decrease in LPR (Loan Prime Rate), and insufficient effective credit demand, the average loan yield continues to decline.

On the other hand, the downward trend in interest rates has led to a continued decrease in the yield of market-based assets such as bond investments.

To cope with the ongoing narrowing interest spread, China Merchants Bank is increasing the allocation of high-yield assets and reducing the scale of low-yield assets; while optimizing the cost of liabilities.

According to the interim report, the average balance of high-yield corporate loans and retail loans has increased, while the low-yield bill discounting has declined.

In terms of liability management, China Merchants Bank stated that it will focus on the growth of low-cost core deposits, expand sources of low-cost and high-quality deposits, and promote a stable and downward trend in deposit costs.

In the interest-bearing liabilities at the end of the first half of the year, the annualized average cost rate of customer demand and time deposits decreased by 0.23 and 0.15 percentage points year-on-year; while the cost rate of retail customer demand and time deposits decreased by 0.13 and 0.03 percentage points.

The main drivers of liability growth are low-cost deposits and borrowing from the central bank, while the scale of high-cost bonds and interbank liabilities has decreased year-on-year.

Proactively Reducing Fees

In terms of transformation path, wealth management has always been the future focus of China Merchants Bank.

In June, when publicly responding to investor inquiries, the bank stated that wealth management is one of the key strategic focuses of the company's "value bank" strategy, and will continue to advance with a customer-centric approach in the future.

Wang Liang publicly stated that the company has used technology as a key element to solve the "impossible triangle" of "massive customer base - ultimate experience - limited cost" in wealth management.

However, in recent years, with the weak performance of equity markets and the continued effect of fee reductions in insurance and funds, the scale and sales volume of equity funds have declined, putting pressure on the wealth management business of many banks.

The "king of retail" is also facing challenges.

In the first half of the year, non-interest net income decreased by 1.39% year-on-year to 68.496 billion yuan, with a fee and commission income decrease of 18.61%.

Except for a slight increase of 0.74% in settlement and clearing fees, all other income items decreased.

Fee and commission income from wealth management decreased by 32.51% to 11.437 billion yuan year-on-year.

Due to the continued effect of fee reductions from the integration of reporting and banking, agency insurance decreased by 57.34% year-on-year; agency funds decreased by 25.35% due to fee reductions and the decline in scale and sales volume of equity funds; and agency trust plans decreased by 37.52% due to the decrease in scale.

However, some fee reduction measures are also proactive actions taken by China Merchants Bank.

On July 18th, Wang Liang announced at the "2024 Wealth Partner Forum" that China Merchants Bank will implement a comprehensive one-tenth reduction in the fund purchase fee rate, covering all channels online and offline, all types of funds, and subscription and redemption.

Wang Liang stated that the company believes that wealth management and asset management are important directions for the transformation of the financial industry with huge potential.

This move is also understood by the market as a way to defend market share by reducing income.

According to the China Securities Investment Fund Association, in the fourth quarter of 2023, China Merchants Bank's non-monetary market public fund holdings remained the second largest in the industry, reaching 773.5 billion yuan Just a slight decline compared to the third quarter of the same year.

Currently, China Merchants Bank's market position remains stable, with a sales volume of non-monetary public offering funds of 289.028 billion in the first half of the year, a year-on-year increase of 89.39%.

Apart from wealth management, other non-interest net income performances are improving.

The "bond bull" drove investment income to grow by 57.21% year-on-year to 19.499 billion yuan; the increase in fair value of bond investments and non-monetary fund investments pushed fair value change gains to grow by 26.02% to 2.286 billion yuan.

Accumulating "Chips"

In a downward macro environment, fluctuating performance is often unavoidable.

However, there are still many details that may become crucial "winning hands" for the future.

TradeWind01 noted that in the first half of 2024, China Merchants Bank saw growth in the total number of retail customers and AUM (assets under management for retail customers), with increases of 2.54% and 6.62% compared to the end of the previous year.

The number of private banking clients with average daily assets of 10 million yuan or more increased by 6.44%.

This means that in the downturn of wealth management business, the number of China Merchants Bank customers is growing against the trend.

China Merchants Bank stated that adhering to customers, asset quality, and market share are the three fundamental pillars for building a "long-term positive foundation".

From this statement, China Merchants Bank's strategy during industry downturns is gradually becoming clear - if unable to reverse the environment, it is better to adopt a more forward-looking long-term approach.

First, optimize the capital structure to mitigate the negative impact of narrowing net interest margins.

Second, stabilize the customer base size and asset quality, firmly believing that there is still untapped potential in wealth management business.

For example, expanding businesses that can bring stable income, with 6.68 million individual pension accounts opened in the first half of the year, a 24.72% increase from the end of the previous year.

These measures and details may become China Merchants Bank's move to attract funds while waiting for the industry to recover.

By maintaining customer numbers during industry downturns, once the equity market reaches a bottom reversal and investment demand reignites, China Merchants Bank still has the potential to be among the first-tier beneficiaries, leveraging its accumulated "chips" to turn the tide