1Q22: Results In Line; Expect Substantial Volatility Before New President Is Appointed
CMB’s net profit climbed 12.5% yoy, with NIM continuing to be affected by the macro
environment. Although the NPL ratio climbed 3bp, the impact from the property sector
was lessened as CMB’s property sector exposure decreased by 3bp qoq of total assets.
There will not be any changes for now as the interim president will not make any
changes. Maintain BUY on CMB with a target price of HK$82.90.
RESULTS
• Results in line, net interest income maintained double-digit growth. China Merchants
Bank’s (CMB) revenue, net interest income, and non-interest income increased 8.5%
yoy, 10.5% yoy, and 6.5% yoy respectively in 1Q22. Total wealth management revenue was
Rmb15.3b, a slight 1% yoy drop and accounting for 53% of the intermediary income. Asset
management, wealth management and custody business contributed Rmb3.2b, Rmb10.4b
and Rmb1.6b respectively, with yoy changes of 48%, -11% and 11% respectively.
• Net interest margin affected by macro environment. 1Q22 net interest margin was
2.51%, down 1bp yoy mainly due to the decreasing trend in market interest rates, which
resulted in lower yields on interest-earning assets. CMB raised the proportion of customer
deposits to interest-bearing liabilities, which has offset the impact of lower interest rates on
interest-earning assets.
• Asset quality remained stable, within 1% threshold. CMB’s non-performing loans (NPL)
ratio increased by 3bp qoq to 0.94% in 1Q22, remaining within the 1% threshold. Provision
coverage ratio decreased by 21bp qoq to 463%, still significantly higher than the industry
average. The provision coverage ratio decreased from a high level, as expected, due to the
government encouraging high-quality listed banks to reduce provision coverage. CMB’s nonperforming corporate loans increased by 2bp qoq to 1.33% due to the real estate industry’s
NPL ratio climbing 1.18ppt qoq to 2.57%, while the NPL ratios in the majority of other
industries remained low or decreased. NPL ratios in leasing and commercial services,
wholesale both decreased by 37bp while that of retail had also reduced by 52bp.
• Exposure to the property sector. CMB’s on balance sheet businesses related to the real
estate sector with credit risk (such as actual and contingent credit, proprietary bond
investments, and proprietary investment of non-standardised assets) totalled Rmb 517.5b
and the proportion of real estate sector to total assets had declined by 3bp qoq to 5.50%.
CMB’s corporate real estate loan portfolio was Rmb365.3b, declining 4bp qoq and
accounting for 6.74% of total loans. Without taking into consideration credit risk, off-balance
sheet real estate exposure totalled Rmb378.4b, down 8.2% yoy. CMB maintains a strict real
estate whitelist, with 83% of its customers possessing good credit ratings.
STOCK IMPACT
• CMB’s business strategy remains unchanged despite change of president. According
to management, the bank has an effective corporate governance mechanism in place and
has structured a president responsibility system, with its president under the leadership of
the board of directors in order to make prudent judgments and choices to maintain the
bank’s stability and continuity. The current state of operations and management are normal.
In 2021, a new five-year development plan was developed. The business model for wealth
management, digital operation model, and an open and integrated management model are
the core of the CMB 3.0 model. In conclusion, CMB will stick to its plan and implement it as
scheduled.
• 2022 business plan. Given China’s sluggish economy, management shared CMB’s
development strategy to maintain the company’s solid growth in 2022. This includes: a)
accelerating the development of low-cost core deposits while maintaining the advantage of
liabilities; b) adverse impact from the housing loan business on the retail segment in 1Q22 ?
as of today, defaults in the real estate sector appear stable, and apart from the first-hand
housing industry, CMB will expand its footprint in the secondary housing market; c)
aggressive promotion of consumer and auto finance loans given the gradual increase in
consumption of credit card loans; d) insurance and fixed income products as the
breakthrough points in the wealth management business; e) new growth opportunities in
asset management and custody, public REITs, and third-pillar pension insurance.
EARNINGS REVISION/RISK
• We maintain our earnings forecasts for 2022 and 2023. The key risks are: a) macro
systemic risks surrounding the domestic economy, and b) a change in business strategy
following the appointment of CMB’s new president.
VALUATION/RECOMMENDATION
• Maintain BUY with target price of HK$82.90. CMB’s share price dipped last week due to
the unexpected change in its president. According to CMB’s announcement, Mr Wang Liang,
CMB’s CFO, will be appointed as the new interim president. He has worked in CMB for over
27 years. The rest of the senior management remains unchanged. We do not anticipate any
immediate impact on CMB’s business. Hence, we maintain BUY. Based on the Gordon
Growth Model, we derive our target price of HK$82.90, which implies 1.90x 2022F P/B.
During the last three years, CMB has been trading at 1.46x 1-year forward P/B, and is
currently trading at 1.31x 1-year forward P/B, slightly above -1SD of historical mean
• However, we expect substantial volatility in CMB in the near term as the market seeks more
clarity on the unprecedented rearrangement. We view this as a good chance to purchase
CMB given its attractive valuation. If the successor is someone familiar with CMB’s business
and culture, CMB is highly likely to continue riding on its industry-leading client base.