Confidence in credit card overdue trends
- CMB’s monthly credit card ABS data indicate a better-than-expected overdue loans trend in Jul, with overdue loan formation rates falling since May.
- This gives us confidence that CMB may at its upcoming 1H22 results announcement report that the worst is over for its credit card asset quality.
- With CMB’s YTD share performance at the worst since its 2006 listing, we expect new senior management to reaffirm its historically successful strategy.
- Still our top sector pick. Reiterate Add, with an unchanged TP of HK$84.1.
Credit card overdue formation rates better than expectations
CMB’s ratio of credit card loans that are less than 30 days overdue has been on an overall declining trend (Fig 1), with Jul’s ratio falling to 0.55%, better than we had expected. This was despite a weaker economy amid Covid-19 outbreaks. The ratio is based on our analysis of CMB’s credit card asset-backed securities (ABS) issued over 2018-2021. We see this metric as a good indicator of the monthly trend of CMB’s credit
card overdue formation rates.
Stable credit card quality critical for investor confidence
Stable credit card asset quality is critical for investors’ confidence on CMB, given that credit cards accounted for 15% of its loan portfolio in FY21, the second-highest among the banks we cover, after PAB’s 20% (Fig 2). While CMB’s ratio of credit card loans that are more than 60 days overdue is still rising YTD, given its lagged nature of this category (Fig 3) (note: 60 days overdue is CMB’s threshold for credit card NPL recognition), we expect management would at its upcoming 1H22 results announcement state that the small rise in its credit card NPL ratio hoh is not a concern, as its monthly data indicate that the worst is over for CMB.
YTD share price performance its worst since HK listing
CMB has experienced a ‘perfect storm’ of events involving its previous CEO being investigated for potential corruption (see When reaction becomes overreaction, dated 21 Apr 2022) and concerns over its exposure to mortgage boycotts (see Time to address misconceptions dated 14 Jul 2022). Its share price performance YTD is the worst since it listed in HK in 2006 (Fig 27) and overdone, in our view. We argue that in the current heightened environment of uncertainty, banks like CMB, which has the highest provisioning coverage ratio among the banks we cover (Fig 32), are better positioned to deliver superior net profit growth and better able to weather challenges relating to falling loan yields, wealth management income pressure and a relatively weak economy.
Reiterate Add rating; TP unchanged at HK$84.10
We value CMB using a stress-test adjusted GGM, with 105% 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.
