Depositors ‘flight to safety’ to benefit China Merchants Bank

Focus on wealth and deposits over loans has boosted its liquidity.

China Merchants Bank (CMB) holds a strong retail brand that is likely to benefit from depositors’ flight-to-safety in times of stress, according to S&P Global Ratings.

Total deposits grew 19% in 2022, driven by a 36% retail deposit growth, the ratings agency noted in a ratings report, where it upgraded CMB and its subsidiaries to A- citing the bank's improved liquidity.

The bank’s strength lies in its depositor base, which S&P estimates has more affluent and sticky retail depositors than most joint stock banks in China. 

“As one of the most market-oriented banks in China, CMB's corporate governance and information disclosures are stronger than the average for the sector, in our view,” S&P Global Ratings reported.

CMB's key liquidity metrics are reportedly now in line with or better than those of China's big four banks. As of end-December 2023, CMB's ratio of broad liquid assets to short-term wholesale funding was 3.4x, much higher than the 2.1x-2.9x range of the Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB), the Bank of China (BoC), and the Agricultural Bank of China (ABC).

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Strong liquidity 
CMB notably has boosted its liquidity thanks to its 2021-2025 five year plan and its renewed focus on wealth management over loan growth.

“CMB's solid market position, especially in retail banking and asset management, will help the bank maintain its strong liquidity, in our view,” S&P said in a report.

The bank is further expected to keep its loan growth below its deposit growth over the next two years, especially given China’s uneven economic recovery.
CMB's deposit growth has surpassed loan growth over the past four years, lowering the loan-to-deposit ratio every year, to 79.8% at end-2023 from 92.7% at end-2019.

CMB has also reduced its reliance on short-term wholesale funding, from 18% of its funding base in 2021 to just 10.8% by end-2023. This is lower than the big four banks’ average of 16%.

The risk-adjusted capital ratio will stay between 8.3% and 8.5% over 2024-2026. 

Capital levels have improved thanks to a decline in property development loan exposure and a Chinese renminbi 30 billion perpetual bond issuance.

Return on average assets is expected to be about 1.3% over 2024-2026, about double the sector average.

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Asset quality 'better'
CMB's asset quality should remain better than peers' amid strains from the property market downturn, S&P said, supported by the bank's sound risk management, well-diversified loan portfolio, and strong provision buffer.

“Risks from the property sector are manageable, in our view. CMB's property development loan exposure declined to 5% of total loans as of end-2023, from 6.2% at the end of 2022,” the ratings agency noted. 

CMB’s nonperforming loan ratio for property development loans has also reportedly moderated to 5.26% at end-2023, after peaking at 5.52% in mid-2023.

CMB’s non performing asset ratio will also remain lower than the sector average, at 3.5% over 2024-2026 versus 5.7% for the sector.  

“We anticipate that the bank's asset quality will remain resilient to a deceleration in China's economic growth to an average of 4.7% over this period,” S&P said.