How to understand the negative profit growth of China Merchants Bank?

On the evening of April 29, China Merchants Bank, known as the "King of Retail," disclosed its Q1 2025 report.

Although the bank achieved a relatively valuable positive growth of 1.92% year-on-year in the most important net interest income, the revenue, pre-provision profit, and net profit attributable to shareholders all saw year-on-year declines of 3.1%, 4.0%, and 2.1%, respectively, which were below market expectations.

On the 29th, China Merchants Securities released a research report stating that the main reason for the negative profit growth is the adjustment in the bond market leading to a decline in non-interest income, as well as the lagging impact of U.S. tariff policies that may require provisions to address. Nevertheless, excluding the impact of one-time bond market adjustments, China Merchants Bank's revenue still maintained a growth trend.

The report believes that the negative profit growth in the first quarter does not represent the trend for the entire year, and the effective implementation of macro policies will help the performance of China Merchants Bank rebound, maintaining a "strongly recommended" rating for the bank.

Four Main Reasons for Profit Decline in Q1

First, the fluctuations in bond market interest rates in Q1 2025 became the main drag. The growth rate of other non-interest income for China Merchants Bank shifted from +34% in 2024 to -22%, dragging down revenue growth by about 9 percentage points. This impact is short-term, and with the bond market warming in Q2, the related negative effects are expected to significantly diminish. Notably, excluding other non-interest impacts, the bank's net interest income has achieved a positive growth of 1.9%; although net fee income in Q1 was still negative, the decline was narrower than in 2024. The wealth management segment's fee income growth rate was 10.5%, returning to double-digit growth.

Second, the U.S. began to ramp up tariff policies in April, and its lagging impact on the economy and bank asset quality has not yet fully manifested. The bank chooses to retain sufficient provisions to cope with potential uncertainties, which is a prudent move. If future risks do not materialize, the release of provisions will support profit recovery; if risks do occur, the current negative growth reflects proactive risk management.

Additionally, the bank's release of profit pressure helps objectively assess the economic situation. As the "mother of all industries," the operating conditions of banks reflect the macroeconomic reality. If banks excessively use provisions to support profits, it may obscure the real economic pressures, which could hinder timely adjustments to macro policies. The objective reflection of profit pressure by banks can help promote the introduction of effective policies, ultimately benefiting the banking operating environment in the long run.

Finally, bank dividends are an annual concept, and negative profit growth in Q1 does not imply negative growth for the entire year. Negative growth in Q1 does not equate to negative growth for the entire year. The banking industry also experienced a profit curve of first negative and then positive in 2024. The key moving forward is whether macro policies can be effectively implemented and whether nominal economic recovery can be sustained. The decline in bank profits in Q1 may instead prompt fiscal policies to be introduced earlier and with greater intensity, ultimately expected to drive a recovery in annual performance.

Core Indicators Remain Stable, Fundamentals Solid

The bank stated that although profits are under short-term pressure, China Merchants Bank's core operating indicators remain robust:

• Asset quality stable: Non-performing loan ratio at 0.94%, provision coverage ratio maintained at a high level of 410%
• Capital adequacy: Core Tier 1 capital adequacy ratio at 14.86%, total capital adequacy ratio at 19.06%
• Strong AUM growth: Retail AUM increased by 12.35% year-on-year
• Continuous expansion: Loans increased by 4.54% year-on-year, deposits increased by 10.22% year-on-year
• Signs of interest margin recovery: Net interest income increased by 1.92% year-on-year, showing significant improvement compared to -1.58% in 2024