Direct hit on the performance report meeting of China Merchants Bank: Once the dividend payout ratio is increased, there are no plans to lower it again

On March 27, China Merchants Bank (referred to as "CMB") held its 2023 performance release conference.

CMB Chairman Miao Jianmin, together with President Wang Liang, Vice President Peng Jiawen, Zhu Jiangtao and other executives, attended and responded to questions regarding operating performance, dividend rate, asset quality, interest rate trends, organizational structure adjustments, and operational pressures in the first quarter that the public is concerned about.

The entire performance report conference was information-intensive, with many key points.

Probability of Decrease in Non-performing Loan Generation in Real Estate

According to CMB's annual report, as of the end of 2023, CMB's non-performing loan balance increased compared to the previous year. However, the non-performing loan ratio is 0.95%, a decrease of 0.01 percentage points from the end of the previous year.

By industry, the non-performing loan ratios in industries such as real estate, transportation, warehousing, and postal services increased compared to the end of the previous year.

Regarding the asset quality in the real estate industry, Zhu Jiangtao stated that by the end of 2023, the non-performing rate in the real estate industry across the bank had risen compared to the beginning of the year, but showed a gradual decline compared to the peak in June of the previous year. As for the asset quality risk in the bank's real estate industry in 2024, it is preliminarily predicted that the absolute amount of non-performing loans generated in the real estate industry this year will likely decrease compared to last year. At the same time, CMB will adhere to the principles of collecting all receivables and verifying all assets, and increase efforts to dispose of existing risk assets. Overall, it is expected that the bank's asset quality will remain stable.

Zhu Jiangtao also mentioned the potential spillover risks in the construction industry and other collateral-based business types. However, based on the overall situation currently investigated, the asset quality of related enterprises is generally within a controllable range.

Zhu Jiangtao stated that in 2024, CMB will focus on two white-listed customers, key areas in first and second-tier cities, and three key areas of real estate projects for security and improvement, to meet the reasonable financing needs of related enterprises while ensuring asset quality safety.

Interest Rate Spread for this Year May be the Relative Bottom for the Next Few Years

Over the past year, narrowing interest rate spreads have been a common challenge in the banking industry. The annual report shows that in 2023, China Merchants Bank's net interest margin was 2.15%, a decrease of 25 basis points year-on-year.

Regarding the reasons for the decrease in interest rate spreads, CMB stated in the annual report that there are several main factors: on the asset side, firstly, the continuous downward adjustment of LPR (loan prime rate) and insufficient effective credit demand, leading to a year-on-year decline in the pricing of new loans and driving down the average loan yield year-on-year. Secondly, the willingness for consumer spending and home purchases still needs further recovery, with sluggish growth in credit card loans and personal housing loans with relatively higher yields. On the liability side, insufficient activation of corporate funds, limited growth in low-cost current deposits for corporate settlements, coupled with disturbances in the capital market leading to a shift in household investments towards fixed-term savings, strengthening the wealth attributes of savings deposits, a decrease in the proportion of current deposits, and an increase in liability costs Looking ahead to 2024, Peng Jiawen believes that in 2024, the net interest margin will continue to be under pressure, but there may be changes in the pace during this period.

Peng Jiawen pointed out that the repricing factor in 2023 may still be present this year. The repricing of existing mortgage loans started in September last year and will be fully released this year. The 5-year LPR rate dropped by 25 basis points in February this year, which will also be reflected this year. With several factors combined, the loan yield for this year will continue to decline. However, the decline may gradually slow down on a month-on-month basis, but it is a process of gradual convergence compared to last year.

Peng Jiawen predicts that the interest spread in the first quarter may be the most pressured throughout the year, and the interest spread for this year may be relatively at its bottom for the next few years.

First Quarter Operations Have Contingency Plans

Recently, there has been widespread attention to the statement that banks are facing pressure in the first quarter of operations. Wang Liang responded to this issue at the performance briefing.

Wang Liang stated that the overall operational pressure in the first quarter of this year has not improved compared to last year, but has further intensified. Especially in the first quarter, it will be more concentrated. For example, the rate cut on existing mortgage loans starting from September last year only had an impact on 2023 for one quarter, but it will affect the entire year this year. Furthermore, policies such as lowering insurance rates introduced in October last year under the "separation of sales and underwriting" policy will also affect the entire year this year. In addition, factors such as LPR cuts and the adjustment of fund sales rates introduced in July last year have brought multiple pressures on revenue growth and profit growth for this year.

Wang Liang mentioned that in this situation, achieving positive growth in revenue and profit in the first quarter will face significant challenges. As for the response methods, Wang Liang mainly proposed four points.

First, it is necessary to leverage the advantage of low-cost liabilities, continue to expand the sources of low-cost liability funds, and avoid the increase in liability costs.

Second, effective asset allocation should be strengthened in the asset structure. Loan disbursement will mainly focus on retail credit assets, with continued emphasis on credit card loans, small and micro loans, and consumer loans to reduce the gap caused by the overall decline in loan rates.

Third, in terms of non-interest income growth, diversify income sources, and take multiple measures in wealth management, asset custody, investment transactions, and other aspects to mitigate the impact of unfavorable policy factors such as rate cuts.

Fourth, strictly control expenses. This year, China Merchants Bank will tighten its belt and reduce costs and expenses in accordance with the requirements of the board of directors, promoting income growth through cost reduction and efficiency improvement.

Established Retail Customer Group Department Shows Significant Operational Effectiveness

In January this year, China Merchants Bank adjusted its retail banking organizational structure.

In this adjustment, China Merchants Bank established a new Retail Customer Group Department, specifically serving various types of retail customers other than private banking clients. At the same time, China Merchants Bank also made appropriate adjustments to the responsibilities of the Retail Finance Headquarters, Wealth Platform Department, and Private Banking Department.

Wang Liang stated that the main purpose of this adjustment is to better implement a customer-centric business philosophy and optimize the responsibilities of each department Wang Liang pointed out that the current retail customer base of China Merchants Bank (CMB) is continuously increasing, with a total of 197 million accounts. Among them, there were 12 million new customers added just last year, and it is expected that the number of retail customers at the bank will continue to grow to the level of tens of millions this year. In the past, CMB did not have a department specifically responsible for serving retail customers, and its functions were scattered among various departments, which may have been somewhat difficult. In the future, the key service approach of the retail customer segment will be to better reach customers and meet their service needs through online and intelligent service methods.

Wang Liang stated that this adjustment to the retail line structure is just a minor optimization. After operating for several months, the current effects are quite significant.

Digital Transformation "Saves" 17,000 Manpower

In recent years, China Merchants Bank has embraced the digital trend and has been advancing digital transformation along the paths of online, data-driven, intelligent, platform-based, and ecological development.

The annual report shows that in 2023, CMB's annual information technology investment reached 14.126 billion yuan, accounting for 4.59% of the bank's total operating income.

Wang Liang mentioned that in terms of digital transformation and artificial intelligence, with strong support from the board of directors, CMB has established a dedicated financial technology fund, increasing technology investment every year. For several consecutive years, the bank has invested over 14 billion yuan annually, with the investment amount each year not less than 4.5% of the bank's revenue.

Wang Liang revealed that in terms of reducing the cost of serving customers, CMB has achieved very good results. According to statistics from the bank's IT department, in 2023, the equivalent of 17,000 manpower was saved, and in 2022, the equivalent of 12,000 manpower was saved.

Regarding Dividend Payout Ratio: Once Increased, No Intention to Decrease Again

In terms of dividends, in 2023, CMB plans to distribute a cash dividend of 1.972 yuan per share (including tax), with a dividend payout ratio of 35.01%, an increase of 2 percentage points from the previous year.

Regarding the increase in the dividend payout ratio this time, Miao Jianmin stated that CMB aims to build a value bank, and distributing higher cash dividends to shareholders is an important part of creating value for shareholders. Most of CMB's shareholders did not earn much or did not earn money in capital gains last year, so increasing dividend payouts can enhance the overall return for shareholders. With a 35% dividend payout, the dividend yield for A-shares is 6% and for H-shares is 7%. Therefore, CMB is a value bank with low valuation and high dividends.

"We have increased the dividend payout ratio, and once it is raised, we do not intend to lower it again. However, it is not necessary to increase it by 1-2 percentage points every year. It is important to balance the relationship between cash dividends and medium to long-term capital accumulation." Miao Jianmin expressed the hope that in the future, there will be no equity financing, but at the same time, the bank can maintain a strong ability for internal capital growth, maintain a reasonable and relatively high dividend payout ratio, and coordinate the relationship among the three.

ROE Target: Better Than the Market, Better Than Peers

By the end of 2023, CMB's total assets reached a new level of 11 trillion yuan. The annual operating income was 339.123 billion yuan, with a net profit attributable to the bank's shareholders of 146.602 billion yuan. The ROA and ROE were 1.39% and 16.22%, respectively Regarding how to maintain ROE and ROA in a sustainable range in the medium to long term, Miao Jianmin stated that ROE and ROA are cyclical and follow the banking business cycle. Currently, the ROE and ROA of China Merchants Bank (CMB) are relatively high compared to other domestic banks.

Miao Jianmin emphasized the hope that when the banking sector enters a downturn cycle, CMB's ROE and ROA can remain stable with less decline, aiming to outperform the broader market, surpass peers continuously, and always maintain a competitive edge within the industry. When the banking sector enters an upturn cycle, CMB's ROE and ROA should improve, ensuring a consistently strong competitive position within the industry and slightly better performance than others, providing investors with slightly higher returns.

Attracting Overseas Investors: Enhancing Value is Key, Communication is Crucial

Over the past two years, overseas investors' participation in the Chinese banking system, including CMB, has declined. How can CMB continue to enhance investors' interest?

In response, Miao Jianmin believes there are two main methods.

Firstly, building a value-oriented bank to create value for all parties, including investors. Since capital seeks profit, if investing in CMB can generate returns, overseas investors are likely not concerned about the specific market. Therefore, enhancing CMB's value is the fundamental approach and the key to success.

Secondly, strengthening communication. Miao Jianmin pointed out that the decrease in overseas investors has various reasons, including misunderstandings. Particularly in the past few years due to pandemic prevention measures, relevant personnel were unable to travel, resulting in fewer overseas investors and reduced communication. This lack of communication led to insufficient understanding of many situations. Therefore, after the pandemic control measures were relaxed last year, CMB proactively organized teams to different markets, including the United States, for roadshows and communication with investors, which had a positive effect.

"Because buying stocks is essentially buying the future, not the present, enhancing investors' confidence is crucial. Confidence is built through communication, especially with overseas investors, considering the significant geographical distance from the mainland market. Understanding accurate information about the mainland market requires face-to-face communication," Miao Jianmin stated