1H23 Results Preview: Expect Modest Improvement
CMB expects its loan growth to have moderated in 1H23 as its retail loan growth momentum in 2Q23 is below their expectations. NIM compression remains but management expects the downward pressure to ease in the coming few quarters. Fee income growth may fall below expectations but credit cost has stabilised given the resilient asset quality. We lower our 2023 EPS estimate by 3.6% to Rmb5.92. Maintain
BUY with a lower target price of HK$53.50.
WHAT’S NEW
• Loan growth under pressure in 1H23 as economic recovery slows down. To recap, China Merchants Bank (CMB) recorded Rmb96.4b of new loans in 1Q23, indicating a growth of 10.0% yoy and 4.7% qoq. However, the weaker-than-expected credit data in April and May may lead to lower loan growth for CMB in 1H23. The company indicates that the retail loan growth momentum in 2Q23 is below their expectations, primarily due to the sluggish demand recovery in mortgage borrowings which was only partially offset by robust growth in consumer loans and SME loans. We maintain our positive outlook on the company’s loan growth in 2023 as CMB may stand to benefit from the recent LPR cut and potential fiscal stimulus given its prominent position in retail business.
• NIM takes time to bottom out but downward pressure moderated. CMB ended 1Q23 with a historical low NIM of 2.29%, down 22bp yoy and 8bp qoq, attributed to the lower asset yield and increasing deposit cost. Based on our recent discussion with management, they still remain cautious on the short-term NIM performance due to the unfavourable shift in loan mix, but expect the downward pressure on NIM to ease in the coming few quarters. It is in tandem with our projections as we see few turning points ahead: a) corporate loan pricing rate is bottoming out, b) there is a steady recovery in higher-yield loans such as consumer loans and credit loans, and c) the recent deposit rate cut via self-discipline mechanism may gradually improve CMB’s funding cost.
• Recovery in wealth management product sales has limited impact on non-interest income growth. Although wealth management product (WMP) sales and AUM growth momentum have improved in 2023, these have limited impact on fee and commission income growth due to the shift in product mix towards low-risk products such as money market funds and fixed income funds, resulting from customers’ lower risk preference. We revise our estimate on net fee income growth in 2023 to 9.2% (previously projected at +15%) due to a more conservative outlook on the future growth of wealth management fee income.
• Asset quality remains resilient with positive signals in leading indicators. CMB reiterated that it has observed significant improvement in several leading indicators such as special loan ratio, delinquent loan ratio, and net NPL formation ratio across different loan segments. For real estate loan quality, the net NPL formation ratio of the entire real estate sector has experienced a significant yoy decline. However, due to the lagging impact of NPL disposals, the overall NPL ratio in the real estate sector is expected to moderately increase in 2023. Given the resilient asset quality and high provision coverage ratio, we foresee CMB’s credit cost stabilising in 2023, which may cushion the negative impact of NIM
compression and lower net fee income growth on net profit.
STOCK IMPACT
• We trim down our 2023 loan growth assumption by 0.7ppt to reflect soften retail loan growth momentum in 2Q23.
• We have also adjusted our 2023 NIM estimates to 2.31%, down 8bp from our previous projection to reflect the longer-than-expected period for NIM to bottom.
EARNINGS REVISION
• We cut our 2023 EPS forecast by 3.6% to Rmb5.92, primarily factoring in: a) NIM compression in future, and b) lower-than-expected loan and fee income growth.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$53.50, to reflect the earnings adjustment. Our target price is derived from the Gordon Growth model with the assumption of 16.6% long-term ROE, 14.0% cost of equity and 4.0% sustainable growth, implying 1.29x 2023F P/B. The company is currently trading at 0.82x 2023F P/B, 2.0 SD below its five-year historical mean of 1.22x, which is attractive in our point of view with a ROE of 17.1% and dividend yield of 5.7%.
