China Merchants Bank SSC Additional Discussion Issues Report

• Report date: 2026-06-04
• Issuer / Theme: China Merchants Bank Co., Ltd. / Ongoing follow-up issues identified through the SSC discussion
• Report type: additional_discussion
• Discussion scope: Earnings defence under low interest rates, retail credit risk, capital headroom, wealth management revenue, market funding and repricing risk for subordinated instruments
• Reference context: Existing issuer summary dated 2026-05-20; saved SSC discussion log dated 2026-06-04

1. Purpose and Treatment

This report is a supplementary report that organises the Q&A conducted in the saved SSC discussion so that it can be referenced in subsequent issuer summary updates and as potential reinforcement for issuer_notes.md. The additional issues discussed here consist of hypotheses raised in the discussion, items for further confirmation, and analytical perspectives derived from the existing report. This report does not, on a standalone basis, verify or establish new facts.

The existing issuer summary presents CMB as a top-tier credit among China’s joint-stock commercial banks, supported by low-cost deposits, its retail customer franchise, wealth management, high profitability, substantial provisions, and strong liquidity. At the same time, NIM compression, a decline in the CET1 ratio, loans to property developers, and credit risks in credit card loans and micro and small enterprise loans are emerging simultaneously. The direction of credit quality is therefore characterised not as improvement, but as a phase in which multiple headwinds are being absorbed by a strong franchise.

The SSC discussion took this existing view as its premise and examined under what conditions CMB’s strengths could weaken, as well as which indicators the market is most likely to react to for senior credit versus Tier 2 and AT1 instruments. Accordingly, the main role of this report is not to overwrite the conclusion, but to preserve monitoring items and warning lines that could otherwise be overlooked in the next update.

2. Analytical Read-through from the Discussion

The overall read-through from the SSC discussion is that the view of CMB as a “strong bank” remains intact, but the components of that strength need to be monitored in a more granular manner. In particular, while earnings defence is possible as long as lower deposit costs absorb NIM pressure under low interest rates, once that room narrows, asset pricing discipline, cost control, credit cost containment, RWA management, and stabilisation of the CET1 ratio will become more important.

For the retail business, it is insufficient to treat it simply as “CMB’s greatest strength.” Wealth management and retail AUM are long-term credit supports, but credit card loans and micro and small enterprise loans may also become sources of credit cost that are directly sensitive to the economy, employment, and household income. Credit card loans, in particular, could damage the assessment of CMB as a highly profitable retail bank if weak fee income and deteriorating credit indicators emerge at the same time.

On capital, the absolute level of the CET1 ratio remains high, but the important point is that no policy has been confirmed under which management would strictly defend a CET1 ratio in the 14% range. The discussion raised the hypothesis that if RWA growth exceeds retained earnings, higher credit costs coexist with the maintenance of a payout ratio above 30%, and the CET1 ratio falls to the low-13% range without recovering, the market’s assessment of Tier 2 and AT1 instruments could change even if regulatory headroom remains.

For subordinated instruments, it is necessary to distinguish between CMB-specific deterioration and a broader repricing of the Chinese banking sector. Senior credit is likely to be protected by the deposit base, liquidity, and importance within the domestic financial system. Tier 2 and AT1 instruments, however, are strongly affected not only by CMB’s standalone capital generation capacity, but also by NIM compression across the Chinese banking sector, concerns over property and local-government-related exposures, policy-driven lending requests, and investor sentiment toward capital instruments.

3. Summary of Q&A

3.1 Earnings Defence Measures under Low Interest Rates

The first question examined through which channels CMB would defend earnings and capital headroom if the low-interest-rate environment were prolonged and NIM declined further. The purpose of the question was not to assess CMB’s credit quality solely based on its current high profitability, but to identify which factors would actually serve as defences under NIM compression: fee income, cost control, loan mix, lower deposit costs, or credit cost containment.

The response concluded that, as of 1Q 2026, the most clearly effective earnings defence measure is lower deposit costs, followed by cost control, wealth-management-related fees, and adjustment of the loan mix. By contrast, credit cost containment was treated not as a confirmed defence, but rather as the next risk item to be tested, given that an increase in expected credit losses is already visible.

The follow-up question asked whether wealth management fees would really become the next pillar after the room for lowering deposit costs is exhausted. The response concluded that it would be risky to view wealth management fees as the sole main defence. Instead, earnings defence should be assessed as a combination of asset-liability management, cost control, broader non-interest income, credit cost containment, and RWA management. Wealth management is a differentiating factor for CMB, but large parts of it, including fund sales, trust product sales, and securities brokerage, are market-sensitive. Its scale and stability have not yet been confirmed to be sufficient to offset a decline in net interest income on a standalone basis.

The credit-analysis implication from this exchange is that CMB’s earnings defence should not be viewed as secure merely because it has a record of lowering deposit costs. In future updates, it will be necessary to confirm, once the decline in customer deposit costs slows, whether net interest income growth is being sustained merely by balance-sheet growth and whether CMB is able to absorb lower loan yields and higher credit costs at the same time. Unconfirmed items include room for deposit repricing, the demand deposit ratio, shifts into time deposits, loan pricing discipline, and management’s NIM outlook.

3.2 Simultaneous Deterioration in Property, Mortgages, Credit Card Loans, and Micro and Small Enterprise Loans

The second question examined which asset class would first erode earnings absorption capacity and capital headroom if credit deterioration in loans to property developers, mortgages, credit card loans, and micro and small enterprise loans were to proceed simultaneously. The focus of the question was not only the level of the NPL ratio, but also the distinction between known problems and new deterioration triggers.

The response concluded that credit card loans are the most likely to erode earnings absorption capacity first. This is because credit card loans have a large balance, are highly unsecured, tend to show noticeable increases in special-mention and delinquency ratios, and are directly connected to CMB’s highly profitable retail model. Loans to property developers have a high NPL ratio, but their share of total loans is limited and they were treated as a “known problem” already being managed as a high-risk area. However, the potential for further deterioration by individual developer, region, and collateral or security status remains unconfirmed.

For mortgages, the response noted that the NPL ratio is relatively low and LTV is also low, but because the balance is large, the impact of income and employment deterioration, falling home prices, prepayments, and lower collateral values cannot be dismissed. As a loss path, the hypothesis presented was that deterioration would likely appear first as an increase in special-mention loans and delinquencies, rather than directly through lower collateral values. Micro and small enterprise loans were described as an area that is easy to expand for policy reasons, but if balance growth and an increase in the special-mention loan ratio occur simultaneously in a weak economy, they could become a medium-term source of credit cost.

The follow-up question asked whether CMB would maintain the credit card loan business as a core component of its highly profitable retail model, or whether it was entering a phase of tightening to control credit costs. The response concluded that it has not been confirmed that CMB is withdrawing from credit card loans, but it is likely no longer in a phase of unconditional expansion as a high-growth, high-profit core business in the way it was previously. Instead, it may be entering a phase of maintenance or restraint while strengthening risk selection. Because card-related fees are declining and credit indicators are deteriorating at the same time, the view presented was that credit card loans are shifting from an area that demonstrates retail superiority to an area that tests risk-selection capability.

The implication from this exchange is that CMB’s credit deterioration risk should not be viewed solely through the property lens. Loans to property developers are already an area that the market is alert to, but if special-mention loans and delinquencies in credit card loans, mortgages, and micro and small enterprise loans deteriorate simultaneously, confidence in CMB’s retail model itself could decline. In particular, if the credit card loan balance is maintained or re-expanded while the special-mention loan ratio, delinquency ratio, and NPL ratio rise at the same time, this should be closely monitored as a downward pressure on retained earnings and the CET1 ratio.

3.3 Capital Headroom, RWA Growth, and Dividend Policy

The third question examined what level of capital headroom management intends to maintain while the CET1 ratio is on a declining trend. The purpose of the question was to determine whether the decline in the CET1 ratio reflects temporary RWA growth and denominator expansion, or a structural decline accompanied by weaker earnings retention capacity.

The response concluded that the current decline in the CET1 ratio should reasonably be viewed not as a structural decline caused by a collapse in earnings retention capacity, but as a decline resulting from the combined effects of RWA growth, dividends, and other comprehensive income. However, because profit growth is weak and credit costs are rising, there is a possibility that future declines may no longer be explainable solely by temporary denominator expansion. The capital management plan indicates targets of maintaining a CET1 ratio of at least 10.0%, a Tier 1 ratio of at least 11.0%, and a total capital adequacy ratio of at least 13.0%. It has not been confirmed that management intends to strictly defend a CET1 ratio in the 14% range.

The follow-up question asked what practical warning line would cause the market to start changing its view of CMB’s capital headroom. The response indicated that the warning line would not be a decline in the CET1 ratio to the low-13% range in itself, but rather a combination of: the ratio not recovering for two to three quarters; RWA growth continuously exceeding net profit growth; higher credit costs slowing earnings retention; capital ratios continuing to decline while the payout ratio is maintained at 30% or higher; and external capital raising or RWA restraint becoming recognised as a response to capital ratios.

The implication from this exchange is that CMB’s capital risk should not be assessed solely by its distance from regulatory minimums. For senior credit, current capital headroom is sufficient. For Tier 2 and AT1 instruments, however, the market may react to a phase in which the premium attached to CMB as a high-profitability, highly capitalised bank weakens, even if regulatory headroom remains large. Unconfirmed items include the CET1 ratio range that management actually considers comfortable, the dividend adjustment policy in the event of a decline in capital ratios, the priority between RWA restraint and external capital raising, and the asset-level breakdown of RWA growth.

3.4 Stability of Wealth Management Revenue and Reputational Risk

The fourth question examined whether the wealth management business and retail AUM base represent stable revenue that can offset NIM compression, or cyclical revenue affected by market conditions, investment product sales, and customers’ risk appetite. The purpose of the question was to distinguish whether CMB’s differentiating factor should be viewed as a structural improvement in credit quality, or merely as a temporary buffer in favourable market conditions.

The response concluded that CMB’s wealth management and retail AUM are long-term credit strengths, but it would be risky to view them as hard, stable revenue sources that can consistently offset NIM compression. The customer base, AUM, wealth management products, asset management, and custody are structural supports, but fund sales, trust product sales, securities brokerage, and part of insurance sales are susceptible to market conditions, customer risk appetite, regulation, and fee rates. Therefore, growth in wealth management fees should not be interpreted directly as a structural improvement in earnings defence capacity.

The follow-up question asked whether, in a market downturn, wealth management would remain an earnings buffer or instead amplify credit risk through fee declines, product sales problems, and lower customer confidence. The response concluded that while it may remain a partial buffer, a market downturn could lead to lower fees from fund sales, securities brokerage, and trust product sales; lower sales fee rates; complaints and suitability issues related to non-principal-guaranteed wealth management products and trust products; and spillover into the retail brand.

The response also noted that the return of funds from investment products to deposits has both positive and negative sides. If customer funds remain within CMB and move into demand deposits or low-cost deposits, this is positive for funding. If funds move to other banks, securities accounts, or high-cost time deposits, however, the NIM defence effect is limited. The quality of these fund flows cannot be confirmed from public information alone.

The implication from this exchange is that wealth management should not be overestimated as a source of “stable capital generation.” No major product sales problems have been confirmed, but in phases when fund sales and trust product sales grow substantially, the location of product risk, customer risk disclosure, sales suitability, complaint risk, and compensation risk need to be confirmed in parallel. Trust products are particularly important as a potential source of damage to CMB’s retail brand when asset content is opaque and linked to property, local-government-related assets, or low-liquidity assets.

3.5 Market Funding, Subordinated Instruments, and Sector-wide Repricing

The fifth question examined under what conditions investors’ views on market funding, capital instruments, and foreign-currency funding could deteriorate, even assuming a strong liquidity position, deposit base, and importance within the domestic financial system. The purpose of the question was to distinguish the strength of the issuer credit from the stability of market prices for Tier 2 and AT1 instruments.

The response concluded that CMB is not at a stage where short-term liquidity stress or inability to refinance should be viewed as the main risk. The deposit base, LCR, NSFR, and importance within the domestic financial system are strong supports for senior credit. For Tier 2 and AT1 instruments, however, the primary sensitivities are capital ratios, credit costs, RWA growth, retained earnings, regulatory discretion, and investor sentiment rather than liquidity. In other words, issuer credit and liquidity are more relevant for senior bonds, while capital generation capacity and sector-wide risk premiums have a stronger impact on subordinated instruments.

The follow-up question asked how to distinguish between CMB-specific deterioration and a broader repricing of the Chinese banking sector. The response identified CMB-specific risks as a phase in which the decline in the CET1 ratio, NIM compression, deterioration in credit card and micro and small enterprise loans, higher credit costs, slower wealth management fees, and a decline in the provision coverage ratio become more pronounced than peers. Sector-wide repricing risks identified included NIM compression across Chinese banks, property and local-government-related concerns, policy-driven lending requests, an increase in capital instrument issuance, broad-based selling of peer AT1 and Tier 2 instruments, and regulatory uncertainty over capital instruments, loss absorption, and call approvals.

The most important risk scenario to monitor is one in which CMB-specific deterioration overlaps with broader sector weakness. Specifically, this would be a phase in which NIM compression and property and local-government-related concerns intensify across the Chinese banking sector, while CMB itself also experiences deterioration in special-mention loan ratios for credit card loans, micro and small enterprise loans, and mortgages; the CET1 ratio declines to the low-13% range; and RWA growth exceeds retained earnings. In this case, CMB’s AT1 and Tier 2 instruments would be more likely to be repriced not simply as capital instruments of a strong bank, but as Chinese bank capital instruments whose high-quality premium is declining.

The implication from this exchange is that holding decisions and sector risk allocation should be separated. If CMB-specific indicators deteriorate relative to peers, the holding size for CMB itself needs to be reviewed. If peer bank capital instruments are broadly sold off while CMB’s indicators remain relatively strong, the main issue becomes adjustment of aggregate exposure to Chinese bank capital instruments. If both occur at the same time, senior bonds and subordinated instruments need to be reassessed separately, and the situation should be treated as a decline in CMB’s high-quality premium.

4. Potential Entries for issuer_notes.md

The following are candidate items for transfer to the “Follow-up on management strategy, investment plan, and financial policy” section of issuer_notes.md in subsequent issuer summary updates. At this stage, all are ongoing confirmation items extracted from the discussion and include unconfirmed matters.

5. Items to Confirm in the Next Update

In the next issuer summary update, confirming the following items in order would make it easier to connect the issues raised in the SSC discussion to the existing view.

1. Confirm whether, after the room for lower deposit costs narrows, growth in net interest income is not dependent solely on asset balance growth.
2. Review the balance, special-mention loans, delinquencies, and fee income of credit card loans together, and confirm whether the business is shifting from an earnings source to a credit cost source.
3. Confirm simultaneous deterioration in retail credit, including not only loans to property developers, but also mortgages, micro and small enterprise loans, and consumer loans.
4. Review the CET1 ratio, RWA growth rate, retained earnings, and payout ratio together, and judge whether the decline in the capital ratio reflects temporary denominator expansion or weaker capital generation capacity.
5. For wealth management fees, separate balance-based fees from sales fees and market-sensitive revenue from recurring revenue, and confirm product sales and reputational risks.
6. For Tier 2 and AT1 instruments, monitor separately repricing caused by CMB-specific deterioration and broader weakness caused by an expansion in risk premiums across the Chinese banking sector.

6. Unconfirmed Items

This report only organises the SSC discussion log and existing issuer materials, and does not re-verify external primary sources. Therefore, the following remain unconfirmed items.

• Room for deposit repricing, the demand deposit ratio, the time deposit ratio, and the sustainability of lower deposit costs.
• Whether CMB can maintain loan pricing discipline in an environment where loan yields continue to decline.
• Whether the decline in the credit card loan balance is due to weak demand or tightening of underwriting by the bank.
• Delinquencies and recoveries for credit card loans, micro and small enterprise loans, and mortgages by customer segment, region, and vintage.
• Potential deterioration in loans to property developers by individual developer, region, and collateral/security status.
• The CET1 ratio range that management views as comfortable in practice, and the priority between dividend adjustment, RWA restraint, and external capital raising when capital ratios decline.
• The split of wealth management fees between stable balance-based fees and one-off sales fees.
• Complaints, compensation, litigation, administrative penalties, and sales suitability issues related to non-principal-guaranteed wealth management products, trust products, and fund sales.
• Tier 2 and AT1 spreads of CMB and peer Chinese banks, market sensitivity by issuing currency, and call and loss-absorption terms of individual bonds.
• Foreign-currency funding, foreign-currency liquidity, market access for foreign-currency subordinated instruments, and swap costs.

7. Reference Context

This report was prepared by referring to the saved SSC discussion log dated 2026-06-04 and the existing issuer summary dated 2026-05-20. The SSC discussion is recorded as having referred to public issuer pages, company disclosures, domestic rating materials, and news reports, but this report has not re-verified those external materials.

The central view in the existing issuer summary is that CMB is a leading joint-stock commercial bank in China with a strong retail and deposit franchise, while NIM compression, retail credit, property, and the decline in capital ratios should continue to be monitored. This report does not change that central view, but organises candidate issues to be carried forward in the next update.