2021 results in line with our expectations
　　China Merchants Bank (CMB) announced its 2021 results: Revenue grew 13.9% YoY to Rmb327.4bn and net profit rose 23.2% YoY to Rmb119.9bn, in line with preannouncement and our expectations.
　　Trends to watch
　　We believe CMB has presented in its 2021 annual report not only superior results, but also a clear path to medium- to long-term strategy implementation and a transformation of mindset. We suggest watching CMB’s medium- to long-term investment value in addition to attention to its short-term earnings.
　　Short-term perspective: Through-the-cycle operating capabilities and risk control cushioned pressure from short-term economic　downtrend. In 2021, CMB’s return on average equity (ROAE) reached 16.96% (according to CMB’s 2021 annual report), the best level since 2015, mainly thanks to increased revenue contribution from fee income and decrease in provisions. As its assets and liabilities expanded steadily, CMB maintained good control over net interest margin (NIM), which fell slightly by 1bp YoY in 2021 and remained flat QoQ in 4Q21. In terms of asset quality, CMB’s non-performing loan (NPL) ratio edged down further to 0.91% from a low level, with a provision coverage ratio of 483.9%. In addition, inclusion of the bank’s wealth management business back into the balance sheet and disclosure of risks from exposure to the real estate sector mitigated uncertainties for investors, especially amid the recent macroeconomic downtrend.
　　Medium term perspective: Increasingly clear 3.0 retail model that can　be visualized and monitored. In its 2021 annual report, CMB specified the path to implementing its 3.0 retail model consisting of wealth management business, digital operations, and open integrated organization. The growth of the firm’s retail assets under management (AUM) remained over 20%, with revenue contribution from its wealth management business at 15.9%. In particular, the growth of AUM from mass customers in 2021 surpassed that of its Sunflower VIP clients for the first time since 2018, with 52.21% of the clients trading on its mobile app being under 35 years old. This demonstrates that CMB’s efforts in operations targeting mass-market and young clients have paid off, in our view. CMB continued to ramp up its investment in technological upgrades (it leads the sector in proportion of revenue invested in technology),transform the organizational structure of its retail and corporate businesses, and facilitate inter-departmental collaboration to further improve rapid response to client requests.
　　Long-term perspective: Customer-oriented comprehensive　management of balance sheets. In its 2021 annual report, CMB indicated that the firm’s core values should override KPI and exempted some of its businesses from KPI assessment. We believe this will motivate its employees to step into customers’ shoes and create value for them.This should enable CMB to gain customer trust amid the transformation of its wealth management business from a sell-side sales institution to a buy- side investment advisory institution. Based on its customer-centered core value, the firm implemented an AUM/FPA oriented operation targeting its retail and corporate clients, and managed to expand its business portfolio from traditional lending into comprehensive balance sheet management services. We believe this will facilitate the creation of an asset-light business model that is largely immune to cyclicality, laying a solid foundation for long-term growth. We note that the firm’s AUM/FPA posted faster growth than loans; fee income from retail and corporate clients grew faster than interest income. We expect the firm’s customer-centric value to lead the firm to know-your-customer (KYC) success.
　　Financials and valuation
　　Considering the prospects of CMB’s intermediary businesses and downside for provisions, we basically maintain our 2022 and 2023 attributable net profit forecasts to growth rates of 15.5% and 15.8%. CMB A-share is trading at 1.4x 2022e P/B and 8.4x 2022e P/E. CMB H-share is trading at 1.6x 2022e P/B and 9.6x 2022e P/E. Considering the risk premium and capital market volatility, we slightly lower our A-share TP by 9.2% to Rmb82.51 (2.5x 2022e P/B and 15.0x 2022e P/E with 78.7% upside) and maintain an OUTPERFORM rating. We slightly lower our H- share TP by 10.2% to HK$98.85 (2.6x 2022e P/B and 15.5x 2022e P/E with 61.0% upside) and maintain an OUTPERFORM rating.
　　Risks
　　Disappointing organizational capabilities of intellectual capital; failure to adapt to digital and wealth management business transformation; unexpected deterioration in macroeconomic environment.