Broker: UOB Kay Hian
Date of Report: Wednesday, 30 April 2025

China Merchants Bank Q1 2025 Earnings: Profit Decline, Resilient Margins, and Wealth Management Rebound

Overview: China Merchants Bank’s Q1 2025 Performance

China Merchants Bank (CMB), a leading Chinese financial institution, delivered its first-quarter 2025 results showing a mixed bag of performance metrics. While the bank posted a slight year-on-year decline in net profit due to weaker trading gains, it maintained resilient net interest margins and recorded a significant recovery in its wealth management segment. Despite some headwinds, analysts at UOB Kay Hian have maintained a BUY recommendation, citing solid capital strength and upside potential for shareholder returns.

Key Highlights at a Glance

• Share Price (as of report): HK\$44.50
• Target Price: HK\$49.00 (Upside: +10.1%)
• Market Cap: HK\$1,129.6 billion (US\$145.6 billion)
• Major Shareholder: China Merchants Group (29.97%)
• Sector: Financials
• Bloomberg Ticker: 3968 HK
• 52-Week Price Range: HK\$50.70 / HK\$27.95

Q1 2025 Results Summary

• Net Profit: RMB 37.3 billion (-2.1% YoY)
• Net Interest Income: RMB 53.0 billion (+1.9% YoY)
• Net Interest Margin (NIM): 1.91% (-11bp YoY, -3bp QoQ)
• Fee Income: RMB 19.7 billion (-2.5% YoY)
• Other Non-Interest Income: RMB 10.2 billion (-24.3% YoY)
• Operating Income: RMB 82.9 billion (-3.2% YoY)
• Provisions: RMB 12.8 billion (-10.0% YoY)
• Provision Coverage Ratio: 410%
• Cost-to-Income Ratio: 28.65% (+0.3ppt YoY)
• Return on Equity (ROE, annualized): 14.13% (-1.95ppt YoY)

Detailed Financial Performance

Net Interest Income and Margins

Despite the challenges from loan repricing and lower loan pricing amidst muted demand, CMB’s net interest income continued to grow, supported by an 8.7% year-on-year expansion in interest-earning assets. The NIM contraction was moderate, thanks to effective funding cost management, a 12bp QoQ increase in the CASA ratio to 50.5%, and deposit rate cuts. The YoY NIM contraction eased to 11bp in Q1 2025, signaling potential stabilization in coming quarters.

Fee and Non-Interest Income

Fee income fell 2.5% YoY, mainly due to declines in asset management fees (-16.6%), bank card fees (-7.8%), and settlement fees (-6.7%). Notably, wealth management service fees surged 10.5% YoY, driven by improved capital market sentiment, with retail customers’ assets under management (AUM) rising 4.02% QoQ to RMB 13.9 trillion.
Other non-interest income dropped sharply by 24.3% YoY, primarily due to weaker trading gains amid rising bond yields.

Loan and Deposit Growth

CMB’s total loans grew 5.2% YoY in Q1 2025, trailing the bank’s annual loan growth target of 7–8%. Growth was led by the corporate segment (+9.2% YoY) and retail segment (+4.5% YoY), partially offset by a 17.6% YoY drop in discounted bills. Within retail lending:

• Consumption loans: +18.5% YoY
• Micro-finance loans: +4.8% YoY
• Mortgage loans: +4.1% YoY
• Credit card loan balances: Flat YoY

Deposit growth remained robust at 10.4% YoY, outperforming the bank’s guidance of 7–8%.

Asset Quality: Mixed Signals

• NPL Ratio: 0.95% (down 1bp QoQ)
• NPL Formation Ratio: 1.00% (down 5bp QoQ)
• Retail NPL Ratio: Deteriorated 3bp QoQ to 1.01%
• Corporate NPL Ratio: Improved 6bp QoQ to 0.95%
• Special-Mention Loan (SML) Ratio: Rose 7bp QoQ to 1.36%

The provision coverage ratio remained stable at 410%. However, the increase in SML ratios, especially in both corporate and retail segments, raises concerns about the forward-looking asset quality.

Asset Quality by Segment (Q1 2025)

Key Financials and Ratios: 2024–2027 Outlook

Strategic Insights and Market Outlook

• Loan Growth: Below expectations, with Q1 growth lagging the annual target. Both corporate and retail loan segments grew, while discounted bills declined significantly.
• Deposit Growth: Outpaced expectations, providing funding stability and supporting resilience in margins.
• Wealth Management: Strong recovery in fee income, particularly from wealth management services, as retail AUM expanded and capital market sentiment improved.
• Asset Quality: Stable headline NPL ratios, but deterioration in retail NPLs and special-mention loans signal potential future risk, especially in the context of evolving US tariff policy.
• Capital Strength: Solid capital adequacy ratios (CET1: 14.86%, CAR: 19.06%) position CMB well for regulatory requirements and future growth opportunities.

Valuation and Recommendation

UOB Kay Hian maintains a BUY rating on China Merchants Bank, with a target price of HK\$49.00. This valuation implies 1.02x 2025F P/B, representing 0.75 standard deviations below the historical mean. The bank’s strong capital base, robust deposit growth, and rebound in wealth management are positive drivers, while slower loan growth and retail asset quality trends require close monitoring. Temporary headwinds from trading gains are expected to ease, potentially providing further upside.

Conclusion: Navigating Challenges with Resilience

China Merchants Bank’s Q1 2025 results reflect both resilience and emerging challenges. As the bank manages margin pressures, shifts its focus on high-quality deposit growth, and capitalizes on the wealth management rebound, it continues to demonstrate solid fundamentals. Investors should be mindful of the evolving asset quality landscape, but CMB’s capital strength and diversified income streams position it as a leading player amid China’s dynamic banking sector.
Disclaimer: This analysis is presented for informational purposes only and does not constitute investment advice. Please consult your financial adviser for personalized recommendations.