Time to address misconceptions
- CMB-A’s>7% share price fall creates a buying opportunity. We think investors are focused on the wrong metrics in assessing impact of mortgage defaults.
- We estimate a negligible (1.8%) impact of projected mortgage defaults on FY22F net profit, even before the offsetting via sizable provisioning buffers.
- This is based on what we see as a worst-case assumption (20%) of defaults by both developers and mortgagees and assumes no government support.
- We also take comfort from low long-term mortgage loss rates across Asiapac. CMB remains our top pick with an Add call and unchanged Rmb71.5 TP.
CMB-A’s >7% share price fall: An overreaction and an opportunity
We see CMB’s A-share price fall of >7% on 13-14 Jul as an overreaction to CMB’s mortgage exposure, and therefore an opportunity for investors to buy. This follows newsflow about mortgage holders choosing to delay repayments, given that the new and uncompleted properties they bought are facing delays to completion for various reasons (Covid-19 outbreak and property developer defaults). We believe investors are wrongly focused on CMB’s entire mortgage portfolio (25% of 1Q21 group loan mix) in estimating losses. We see only mortgages relating to new & uncompleted domestic properties as relevant, with this making up only 6% of 1Q22 group loans.
Negligible impact to net profits in FY22F or even FY23F in our view
We see a negligible impact to FY22F-23F net profits of only 1.8% after applying worst case assumptions to defaults by developer and relevant mortgage holders of 20%, and reasonable loss-given default rates of 25% (Fig 1). We stress that unlike corporate loans, mortgages are of long duration, with high quality collateral and high recovery rates, as well as historically much lower default rates. After offsetting this impact with CMB’s sizable provisioning buffers, which we estimate was Rmb139bn post-tax in 1Q22 (Fig 1), we see basically no impact to FY22F-23F reported net profits. This also conservatively assumes no government support, or loan deferral or restructuring programmes to help manage delinquencies, which we think is unrealistic, given China and global experiences.
This conclusion is in line with disclosures by other China banks
Multiple Chinese banks have disclosed their current overdue exposures to such mortgage holders as less than 0.01% of their 1Q22 loans (Fig 19). CMB’s disclosed Rmb12m of overdue loans to these mortgage holders makes up only 0.0002% of its 1Q22 loans. We also note mortgages historically have low default rates across the Asia Pacific region (see How much stress can China banks take?, dated 8 Nov 2019).
Reiterate Add rating; TP unchanged at HK$71.5
We value CMB-A using a stress-test adjusted GGM, with 96% potential upside. We see this year’s de-rating as a buying opportunity (see CBIRC’s CEO approval: key positive signal, dated 15 Jun 2022). Potential re-rating catalysts: improving asset quality and a better economy. Key downside risks: worse-than-expected NIM and policy risks.