Broker: UOB Kay Hian
Date of Report: Tuesday, 2 September 2025

China Merchants Bank 2Q25 Results: NIM Pressure and Weak Fee Income Prompt Downgrade to HOLD

Overview: In-Line Earnings Hide Underlying Challenges for China Merchants Bank

China Merchants Bank (CMB), one of China’s leading commercial banks, reported its second quarter 2025 results that broadly matched profit expectations but revealed deeper concerns regarding growth momentum, net interest margin (NIM) compression, and muted fee income. UOB Kay Hian has downgraded its rating on CMB to HOLD, lowering the target price to HK\$51.00 due to a lack of near-term catalysts and a less attractive dividend yield.

Key Highlights at a Glance

• Net profit rose 2.7% year-on-year to RMB 37.6 billion in 2Q25.
• PPOP (Pre-Provision Operating Profit) declined 1.2% YoY, mainly due to NIM compression and sluggish fee income.
• Fee income fell 1.2% YoY, with notable weakness in bank card fees.
• NIM contracted by 5bp quarter-on-quarter to 1.86%.
• Asset quality remained stable, but retail risks, especially in credit cards and consumer loans, are still elevated.
• Dividend payout ratio remains at 35%, with a dividend yield below 5%.
• CET1 ratio dropped 86bp QoQ to 14% due to dividend payout and faster risk-weighted asset growth.

Share Price and Valuation

• Current Price: HK\$47.04
• Target Price: HK\$51.00 (previous: HK\$60.00)
• Upside: +8.4%
• Market Cap: HK\$1,162,178.7 million (~US\$149.1 billion)
• Dividend Yield (2025F): 4.6%

Financial Performance: Key Tables and Metrics

NIM Compression and Fee Income Weakness: Key Drivers Behind the Downgrade

Despite CMB’s net profit bouncing back after a negative first quarter, topline results were weaker than expected. The main culprits:

• Net interest margin compression: CMB saw a 5bp qoq drop in NIM to 1.86% in 2Q25, notably steeper than the 2bp average decline among its joint-stock bank peers. This was mainly a result of a 15bp qoq drop in loan yield, partially offset by a 6bp reduction in deposit costs. Management flagged that already low deposit costs limit further reductions, while mortgage repricing and tepid retail loan demand continue to pressure loan yields.
• Fee income decline: Overall fee income dropped 1.2% YoY in 2Q25. Bank card fees — making up 36% of total gross fee income — slumped by 25% YoY due to lower transaction value. However, there was a 13.6% YoY increase in wealth management fees and a 4% rise in asset management and custody fees. Other non-interest income fell 5% YoY as the bank held back on realizing capital gains from its bond portfolio amid market volatility.

Loan and Deposit Growth: Sluggish Retail, Robust Corporate

CMB’s loan growth missed expectations, advancing just 5.5% YoY and contracting 1.1% QoQ, lagging deposit and asset growth. The main trends:

• Corporate loan growth remained robust at 11.5% YoY.
• Retail loan growth was tepid at 3.9% (2024: 6.0%), with credit card business growth almost flat (+0.5% YoY).
• Discounted bill volumes were trimmed by 20% YoY to optimize yield.
• Management expects corporate loans to grow over 10% YoY but is reliant on government consumption-boosting policies to revive retail lending.

Dividend, Capital Ratios, and Profitability

• Interim dividend payout ratio remains at 35% for 1H25.
• CET1 ratio dropped by 86bp QoQ to 14%, reflecting both dividend payout and a 5.5% QoQ surge in risk-weighted assets (RWA).
• RWA density rose 2.5ppt YoY to 58.5%, due to a shift toward more capital-intensive corporate lending, model updates, and higher bond investments.
• Return on equity (ROE) fell 1.6ppt to 13.9%, with management focused on operational improvement rather than payout ratio hikes to sustain ROE.

Asset Quality: Stable Overall, But Retail Risks Linger

CMB’s asset quality displayed resilience at the headline level, but a closer look reveals persistent pressure in retail portfolios.

• Headline NPL ratio for the group moderated 1bp to 0.92% in 2Q25, mainly due to corporate segment improvement.
• Retail NPLs, however, rose 3bp QoQ to 1.04%, led by micro-finance (+13bp) and consumer loans (+27bp), offset slightly by mortgages (-6bp).
• Special mention loans (SML) increased 7bp QoQ to 1.43%.
• Provision charges fell 7% YoY, pushing credit costs 9bp lower YoY.
• Credit card risks remain elevated, with newly formed NPLs declining YoY but other retail segments still seeing YoY increases.

Key Financials and Outlook

Outlook and Recommendation

• UOB Kay Hian has revised down its earnings forecasts for 2025-2027 by 3.2%, 2.4%, and 3.4% respectively, citing slower loan and fee income growth.
• The target price of HK\$51.00 reflects negative earnings adjustments and lower long-term ROE assumptions, implying 1.0x 2025F P/B (0.6 SD below historical mean).
• With the dividend yield forecasted to remain below 5%, CMB is less compelling than its larger yield-focused peers.
• Given the lack of immediate catalysts, the rating is downgraded to HOLD.

Conclusion: Defensive, But With Limited Upside

China Merchants Bank remains fundamentally sound, with stable asset quality and conservative management. However, the current environment of NIM compression, sluggish retail lending, and subdued fee income limits its near-term growth prospects. While corporate loan momentum and stable capital ratios provide some comfort, investors seeking higher yields or stronger growth catalysts may find better opportunities elsewhere in the Chinese banking sector.
For now, CMB is a defensive play, best suited for those willing to wait for signs of a turnaround in retail lending or policy-driven consumption demand.