J.P. Morgan: China Merchants Bank’s third-quarter revenue beats expectations: Higher provisions mask operating improvement as retail asset quality comes under pressure

Why was operating performance better than expected when net profit growth was steady?

China Merchants Bank’s net profit for the third quarter of 2026 was 40 billion yuan, up 3% year on year and broadly in line with JPMorgan’s expectations. Revenue and pre-provision operating profit rose 7% and 9% year on year, respectively, accelerating from the previous quarter and both exceeding the bank’s expectations by 2 percentage points.
The operating improvement did not translate into an equivalent gain in net profit, mainly because impairment charges increased 44% year on year. The non-performing loan provision coverage ratio rose approximately 4 percentage points quarter on quarter to 389%, providing a thicker buffer for future profits.

The net interest margin was unchanged quarter on quarter at 1.82% in the third quarter: a 2 basis-point decline in asset yields was offset by a 2 basis-point decline in average funding costs. Net interest income rose 6% year on year to 57.4 billion yuan, but was 1% below JPMorgan’s expectation.
Non-fee income rose 31% year on year to 7.7 billion yuan, exceeding the bank’s expectation by 28% and supporting total revenue growth. Management attributed this to higher valuation gains on bond and non-money-market fund investments.
Net fee income rose 1% year on year to 18.8 billion yuan. Settlement and clearing income and custody income increased 15% and 19% respectively, while bank card fees fell 7% and remained a structural drag.

Third-quarter wealth management fees fell 7% year on year, compared with growth of 27% in the first half; income from distributing insurance and funds fell 28% and 10%, respectively. Retail assets under management rose 12.7% year on year to 18.7 trillion yuan, slower than the 15.0% growth recorded in the second quarter.
The group’s non-performing loan ratio was unchanged quarter on quarter at 0.94%, but its special-mention loan ratio rose 6 basis points to 1.59%; the share of retail loans classified as special mention rose 11 basis points, and the overdue ratio rose 4 basis points. The third-quarter non-performing loan formation rate was 1.09%, above 1.06% in the first half.

At the end of the third quarter, real estate exposure bearing risk stood at 378 billion yuan, up 5% quarter on quarter and accounting for 2.75% of total assets. Domestic real estate development loans rose 6.8% quarter on quarter to 317 billion yuan, with new lending mainly directed toward higher-quality projects in first- and second-tier cities; the non-performing ratio for development loans fell 8 basis points quarter on quarter to 3.89%.
JPMorgan rates China Merchants Bank’s H shares Overweight, with a target price of 63 Hong Kong dollars for December 2027. The bank expects its 2026 revenue forecast may be raised by a low-single-digit percentage, with a smaller adjustment to its earnings-per-share forecast; it expects the share price to rise after the results but possibly continue to underperform the big four banks.