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　　Stock prices of China Merchants Bank (CMB) A-shares and H-shares have fallen 18% and 23% since April 15, 2022, partly due to the short-term impact of economic pressure on the firm’s revenue. However, we believe the plunge is mainly due to the uncertainties of CMB’s medium- and long-term strategy amid the ousting of the company’s president that triggered investors’ concerns. CMB announced on May 19 that approval has been granted for the appointment of Mr. WANG Liang as the president of CMB. The tenure will begin on the date when the China Banking Regulatory Commission (CBRC) approves his qualifications as president.
　　Comments
　　We think confirmation of new president will help allay market concern on uncertainties of the firm’s future strategies. CMB H-shares have fallen by 24% since early 2022, including a drop of 23% since April 15. We attribute the stock price volatility to management changes that resulted in investors’ concern about the firm’s medium- and long-term strategies. However, it only took about 1 month for CMB to announce its new president on May 19. We believe the efficient process of appointing presidents will help avoid fluctuations in strategies and reduce investors’ concerns.
　　Clear development path under the 3.0 strategy model; wealth management business showing healthy growth. CMB elaborated its 3.0 strategy model in its 2021 annual report. It plans to provide all-around services to customers via a combination of wealth management business, a digital-based operation model, and an open, highly integrated internal system. In 1Q22, assets under management (AUM) of CMB’s customers rose 18% YoY to Rmb11.34trn, outpacing that of overall asset management products. We think this demonstrates CMB’s advantage in customer operation. As the firm improves its customer service capabilities, we expect CMB to further consolidate its advantages in client operation. This should help boost revenue contribution from intermediary business, and advance the implementation of the firm’s asset-light operation model.
　　Solid control over asset quality; no need to be overly concerned about real estate exposure. CMB’s NPL ratio was 0.96% in 1Q22 and provision coverage ratio reached 462.68%, which are leading levels among listed banks. CMB’s NPL ratio related to the real estate sector edged up in 1Q22. However, we do not expect the fluctuations in real-estate asset quality to have a notable impact on the stability of its operations as the firm remains prudent in customer screening and its provision-to-loan ratio exceeds 10% for real estate assets. Meanwhile, we think CMB will steadily defuse risks of real-estate assets via M&A.
　　We expect CMB to benefit from divergence in earnings and valuations. We think the wealth management business, asset management business, financing demand of long-tail corporate and individual customers, and digitalization of corporate services will likely bring new growth opportunities for China’s financial industry in the next 5-10 years. On the one hand, we think financial institutions could strengthen their growth and enhance their bargaining power; on the other hand, however, we think these are also pain points and difficulties of China’s financial industry during economic restructuring and upgrading. We expect CMB to seize opportunities by leveraging its advantage in existing resources and efficient corporate governance. We think the firm’s revenue structure and profitability will continue to improve. For details, please refer to our previous report WM and light-model bank to reshape valuation system.
　　Financials and valuation
　　We maintain our earnings forecasts. CMB A-shares are trading at 1.2x 2022e P/B and 7.4x 2022e P/E, and CMB H-shares are trading at 1.3x 2022e P/B and 7.8x 2022e P/E. Considering the impact of economic fluctuations on the firm’s short-term revenue, we cut our target price by 18.2% to Rmb60.3 for A-shares (1.8x 2022e P/B and 11.1x 2022e P/E), offering 50.9% upside. Maintain OUTPERFORM. We cut our target price by 18.2% to HK$73.23 for H-shares (1.8x 2022e P/B and 11.5x 2022e P/E), offering 49.1% upside. We think pressure from economic slowdown and the capital market will likely affect the firm’s revenue in 2Q22. However, we maintain OUTPERFORM considering the firm’s stable asset quality and that we believe the confirmation of a new president will likely help the firm maintain its strategic advantages.
　　Risks
　　Rising NPL ratio due to ineffective control over real estate exposure; increasing pressure from economic slowdown.