We expect China Merchants Bank’s (CMB) attributable net profit to grow 9.1% YoY in 3Q22, against YoY growths of 14.6% in 2Q22 and 12.5% in 1Q22. As a result, its attributable net profit may increase 12% YoY in 9M22, against 13.5% YoY growth in 1H22. We expect its operating income to increase 5.5% YoY in 9M22, against YoY growths of 6.6% in 1H22 and 8.6% in 1Q22. In our view, its asset quality will remain outstanding as NPL ratio may increase slightly in 3Q22. CMB will maintain its strong competitiveness in retail business market and its premium clients continued to grow in 9M22. Its pretax profit from retail business is set to increase about 14% YoY and account for about 55% of its total pretax profit in 9M22. We believe CMB will maintain the highest ROAE among its peers this year. Maintain BUY rating.
　　Key Factors for Rating
　　NPL ratio may increase slightly in 3Q22 mainly due to declining asset quality of real estate sector loan. We expect Its NPL ratio to reach 0.96% at end September 2022, higher than 0.95% at end June 2022 and 0.94% at end March 2022. Meanwhile, we expect its allowance to NPLs to reach 452% at end September 2022, lower than 454% at end June 2022.
　　NIM may drop in 3Q22. As China’s economy may still face some complexities and uncertainties, we expect its NIM to reach 2.41% in 3Q22, down 3bps from 2Q22. Its net interest income may increase 5% YoY in 3Q22 on growing interest-earning assets and declining NIM, against YoY growths of 6.8% in 2Q22 and 10.0% in 1Q22.
　　Fee and commission income growth slowed in 9M22 mainly due to the rising volatility in equity markets. Its net fee and commission income may drop 1% YoY in 3Q22, against -1.4% YoY in 2Q22, which was mainly due to the decrease in wealth management business amid poor performance in equity markets. We expect its net fee and commission income to increase 0.8% YoY in 2022, down from our previous assumption of 3% YoY growth.
　　Valuation
　　In our view, CMB deserves to trade at a premium to its peers thanks to its outstanding asset quality, stricter NPL recognition, strong competitiveness in retail business and its leading position in fintech and higher ROE. We expect its ROAE to reach 16.6% in 2022, the highest among its peers. Looking ahead, as CMB will strengthen its financial support to the real economy, its earnings growth may be lower than our expectation. The change of top management may result in some uncertainties, which will negatively affect investors’ risk appetites. We revised down our target price from HK$69.74 to HK$63.37, based on about 1.7x 2022E P/B, against pervious target of 1.8x 2022E P/B.