2021 net profit preannounced to rise 23.2% YoY, beating our expectation.
China Merchants Bank (CMB) preannounced that 4Q21 revenue and net profit may rise 15.6% and 26.8% YoY, faster than growth in 1-3Q21 and beating consensus forecast. Overall, CMB’s asset quality data continued to lead the sector, and its balance sheet remained healthy. The firm’s revenue and profit both booked double-digit growth, a first since 2018 and pointing to its strong growth potential. The improved revenue structure and profitability since the COVID-19 outbreak were sustained, and the firm’s competitive edges were strengthened thanks to its light-asset strategy. We reiterate our OUTPERFORM for CMB with A-share TP implying 16.7x 2022e P/E and 2.8x P/B.
Trends to watch
Asset quality indicators leading the sector. Non-performing loan (NPL) rate continued to decline QoQ to 0.91% in 4Q21, and provision coverage ratio stabilized at highs. We attribute the share price correction since end-October 2021 to concerns about asset quality amid downward economic pressure. We think the latest data should help mitigate market concerns to some extent.
Revenue and profit growth accelerated in 4Q21 vs. 1-3Q21; net interest margin improving. CMB’s net interest income grew much faster in 4Q21 compared with 1-3Q21, and outperformed its overall asset growth, implying QoQ expansion in net interest margin (NIM) despite sector downtrend in interest rates. This reflects CMB’s advantages in client structure and liabilities, and its strength in fine-tuning balance sheet, in our view. Its full-year revenue may rise 13.5% YoY in 2021, the first double-digit growth since 2018. Investors became increasingly concerned in 2019 and 2020 whether CMB could maintain its strong growth momentum amid high base. We think the 2021 preannouncement indicates that Retail 3.0 model could be the solution.
Weighted average ROE further improving; revenue contribution of non-interest income approaching 40%. Contribution from intermediary businesses such as wealth management increased, which we think should significantly enhance CMB’s cross-cycle resilience. In addition, we think the relatively small capital required for these businesses should enhance CMB’s valuation. Among domestic and overseas institutions, we think that CMB is one of the limited Chinese firms with improving ROE and better revenue structure than European and US peers. CMB thus deserves higher valuation and will likely have stronger growth potential, in our view.
Valuation and recommendation
We slightly raise revenue and net profit forecasts. We raise 2021-2022 forecast attributable net profit forecasts 2.7% and 2.7% to YoY growth of 22.7% and 15.1%, and introduce 2023 YoY growth forecast at 15.9%. CMB A-share is trading at 1.5x 2022e P/B and 8.8x 2022e P/E, and H-share at 1.6x 2022e P/B and 9.8x 2022e P/E. We maintain OUTPERFORM rating for CMB A-share and H-share with TP at Rmb90.91 (2.8x 2022e P/B and 16.7x P/E with 89.3% upside) and HK$110.11 (2.8x 2022e P/B and 17.4x 2022e P/E with 77.9% upside).
Risks
Unexpected deterioration in macroeconomic environment; disappointing development of wealth management business.