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Safety in (provisioning) numbers

  • We like CMB-A due its strength in management quality, largest-among-peers provisioning buffers, and strong consumer lending focus.
  • Given its best-in-class 3Q21 provisioning coverage ratios and strong capital ratios, we are confident it is well placed to handle an economic slowdown.
  • Reiterate Add. TP cut to Rmb61.30 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5% pts to 10.5%.

Elevated investor concerns over asset quality and policy risks

We think China Merchants Bank’s (CMB) rising asset quality pressures are manageable, from an EPS point of view, given its sizeable provisioning buffers and conservative nonperforming loan (NPL) recognition ratios. Nevertheless, we think banking stocks could struggle to perform near term as we think both property sector’s stress and macroeconomic indicators are unlikely to materially improve over the next few months. As such, investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) could remain elevated, making it difficult for banking stocks to materially re-rate in the near term.

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Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns over the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. The corporate NPL ratio assumption we now use in this stress test is 10.5% (vs. 9% previously).

Reiterate Add rating; TP cut to Rmb61.30

We value CMB-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to our FY21F-23F EPS estimates. However, due to a 1.5%-pt higher corporate NPL ratio assumption used in our stress test, our TP is cut to Rmb61.30 from Rmb64.20. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.