When reaction becomes overreaction
? We believe CMB’s H-share price fall of 16% over two days is an overreaction
based on our share price analysis of similar past events at other institutions.
? This Friday’s 1Q22 results and next Monday’s analyst briefing are great
opportunities to clear up lingering uncertainty surrounding the stock.
? We see CMB as a bank with many strengths, and believe it is capable of
continuing to outperform despite the departure of its previous president.
? Reiterate CMB as our top China bank pick. We continue to expect ROE to
rise over FY21–FY24F. Unchanged Add rating and TP of HK$84.1.
Analysing past unexpected changes in senior management
We conclude that CMB’s share price weakness is an overreaction (H-share price is -16%
in the two days after it announced its surprise change in president, Unexpected change in
president, 19 Apr 2022), based on our event study analysis of past unexpected changes
in senior management of listed mid-large China financial institutions over the last seven
years. In each of the cases of China Minsheng Bank, PICC Group and China Life, the
cumulative share price decline peaked at 5%, 2% and 1%, respectively (Fig 2), within
three days of the event. An analysis of relative underperformance versus industry peers
also suggests that relative underperformance should take place within the first two weeks
in the worst case (Fig 3).
Upcoming 1Q22 results: A great opportunity to clear up uncertainty
CMB reports its 1Q22 results after market close on Friday 22 Apr 2022, with the analyst
briefing on Monday morning 25 Apr 2022. We see this as a great opportunity for CMB to
clear up any lingering uncertainty relating to the unexpected senior management change,
which we believe should be positive for CMB’s share price.
CMB is more than one person, and has many advantages
We have faith that CMB can continue its impressive share price track record, with the
bank possessing many advantages. This includes its strength in retail banking, its leading
market position in credit cards and wealth management, its highest-of-peer demand
deposit mix which has helped its net interest margins and its leading edge in fintech
adoption. Its position as the only joint stock permitted to adopt internal rating based (IRB)
models to compute capital ratios gives it an edge in ROEs and capital ratios (Fig 18). We
have confidence that its ROE differentials to peer group can continue to widen (Fig 13),
thereby driving its P/BV premium to peers even higher (Fig 9).
Reiterate Add; 67% potential upside to unchanged TP of HK$84.1
We value CMB using a stress-test-adjusted GGM. We reiterate CMB as our top China
bank pick and like its highest-of-peer FY21 provisioning coverage ratio of 484%, and
political pressure may result in sizeable provisioning buffers being unwound. Potential rerating catalysts: improving asset quality and a better economy. Key downside risks:
worse-than-expected net interest margins (NIM) and policy risks.