Action
　　China Merchants Bank (CMB) on June 23 held its shareholdermeeting. Mr. TIAN Huiyu, president of CMB, elaborated on fourchallenges for traditional banking sector—— slowing economicgrowth, medium/low-interest rate environment, financialdisintermediation, and competition from internet companies.
　　However, he also sees opportunities for transformation and newgrowth momentum, such as light-asset operation and new sources ofrevenue apart from net interest margin (NIM). We lower our 2020forecast net profit growth to 6%, given the macroeconomy, liquidityconditions, COVID-19, and regulatory environment. We remainupbeat on CMB’s market share and profitability in retail financialservice and asset management businesses, and we keep our targetprice unchanged, considering CMB’s experience inmedium/long-term sector development and its increasing advantagesin business transformation.
　　Reasoning
　　We expect CMB to adopt prudent provision charges to addressrising non-performing loans (NPL); provision coverage ratio shouldfurther rise.
　　2020 NIM to decline an estimated 6bp YoY amid government effortsto promote inclusive finance and falling loan prime rate (LPR).
　　We see solid operations in CMB, and expect its businesstransformation to deepen, especially in AUM growth, fintechinvestment and comprehensive client service capabilities.
　　Earnings forecast and valuation
　　Given more prudent provision charges, we cut 2020-2021 net profitforecast 5% to Rmb98.6bn and 2% to Rmb112.4bn, implying YoYgrowth of 6% and 14%. In the medium/long term, we remain upbeaton CMB’s advantages in client base and credit quality, and its strengthin fintech and business structure. Both A-shares and H-shares arecurrently traded at 1.3x 2020e P/B. We maintain OUTPERFORMratings on CMB’s A-shares and H-shares, with target prices for theA-shares at Rmb51 (2.0x 2020e P/B with 50% upside) and for theH-shares at HK$57 (1.92x 2020e P/B with 58% upside).
　　Risks
　　Competition intensifying in retail financial market between CMB andinternet companies.