1H22 results slightly beat our expectation
China Merchants Bank (CMB) announced its 1H22 results: Revenue rose 6.1% to Rmb179.09bn and attributable net profit rose 13.5% YoY to Rmb69.42bn, slightly better than we expected, which is benefited by the save of credit cost.
Trends to watch
1H22 results review: We think the double-digit growth in attributable net profit shows the stability of CMB’s financial results, considering the pressure on the macroeconomy in 2Q22, regional COVID-19 resurgence, and sluggish demand for financial products and services. CMB’s balance sheet expanded steadily, and its net interest margin (NIM) narrowed due to falling prices for mortgages and rising exposure to term deposits. Its non-interest income growth was relatively low. In addition, CMB’s cost/revenue ratio declined, and it maintained a prudent provision policy.
Quality of real estate related assets: As of end-1H22, the total balance of the businesses related to real estate for which CMB assumed credit risks was Rmb493.71bn (-3.48% vs. early-2022); the total balance of the businesses for which CMB did not assume credit risks was Rmb316.38bn (-23.22% vs. early-2022). Off-balance-sheet risk exposure declined significantly, in our view. In addition, we see high risk resistance in CMB’s real estate related exposure considering the credit ratings of the property developers and the regional distribution of mortgaged real estate. In addition, CMB’s exposure to corporate real estate loans continued to decline, and the temporary rise in non-performing loan rate was mainly driven by proactive risk exposure and treatment. For mortgage loans, the rise in special mention loan (SML) rate was mainly driven by increasing proportion of non-overdue loans, and overall collateral was relatively sufficient.
Outlook for wealth management business: Capital market fluctuations in 1H22 weighed on the sales of financial products. CMB saw slowing growth for its assets under management (AUM) and number of clients, though the growth stayed above 15%. Looking ahead, we foresee improving synergy among various internal organizations, boding well for the development of the wealth management business. In addition, CMB is actively fostering transformation towards a buy-side model. We think that services such as the “TREE Asset Allocation System” will help enhance client loyalty, further strengthening CMB’s competitiveness in wealth management.
Valuations: We think the current valuation factors in capital market cycles, credit risk cycles, and the impacts of management reshuffles, and reflects investors’ relatively pessimistic sentiment. Its 1x 2022e P/B valuation does not reflect its high ROE of 17–18% or its leading advantages in strategies. Looking ahead, we suggest watching asset allocation value in CMB, and attention to possible turnaround in credit cost and the investment opportunities it may bring.
Financials and valuation
We maintain earnings forecast unchanged. CMB A-shares are trading at 1.0x 2022e P/B and 6.3x 2022e P/E, while H-shares are trading at 1.0x P/B 2022e and 6.5x 2022e P/E. Given rising risk premium amid economic fluctuations, we trim A-share TP 11.0% to Rmb53.7 (1.6x 2022e P/B and 10.1x 2022e P/E with 59.7% upside) and H-share TP 12.5% to HK$64.08 (1.7x 2022e P/B and 10.4x P/E with 59.6% upside). Maintain OUTPERFORM for A-shares and H-shares.
Risks
Unexpected rise in risks from real estate sector; increased downward pressure on economy.