China Merchants Bank's net profit surged 13.5% to RMB39.5b

Thanks to strong fee income growth.

According to CCB International, 3Q13 earnings slightly higher than expectations. China Merchants Bank (CMB) posted 9M13 net profit of RMB39.5b, up 13.5% YoY, driven by strong fee income growth of 48% YoY. ROE was 24.28%, still impressive given the dilution effect caused by the recent RMB33.8b rights issue.

Here's more:

NIM contracted in 3Q13, but will stabilize as re-pricing of deposits and loans comes to an end. 9M13 NIM was 2.83%, down from 2.89% in 1H13.

NPLs grew quickly, driving up credit costs significantly. CMB’s NPL ratio rose 8bp QoQ to 0.79% by end 3Q13, while the NPL balance grew 14.6% QoQ. Credit costs were up 12bp YoY to 54bp in 9M13, indicating that CMB is under more asset quality pressure than the SOE banks.

Catching up with Minsheng in micro-lending. Small- and micro-loans grew 46.6% and 67.3% YoY to RMB293.8b and RMB296.3b, respectively. We believe CMB is moving in the right direction in tackling the challenges brought by interest rate liberalization.

Interbank business structure adjusted. CMB’s financial assets under resale agreement shrunk RMB117b QoQ while its investment receivables rose RMB76.9b QoQ. The changes were mainly related to trust beneficiary rights (TBR).

We understand that CMB adjusted its interbank business structure after the liquidity squeeze in June as a way to mitigate the hidden risks of TBR.