Mapping the return to 2018’s buffers
- We see pressure on FY23F-25F PPOP eroding CMB’s buffers of provisioning and NPL recognition back down to FY18’s levels (Fig 23).
- These buffers in FY22 equated to 96% of FY22 PPOP, the fourth highest of the banks we cover (Fig 15).
- As CMB’s P/Eg is a more stable valuation multiple than P/PPOPg (Fig 25), utilising these buffers can thus be critical in helping rerate CMB, in our view.
- Reiterate Add rating, TP cut to Rmb51.30 from Rmb66.20, in part due to 2- 6% lower FY23F–25F EPS forecasts.
FY23F-25F PPOP pressure from both NIM and fee income
We see pre-provisioning operating profit (PPOP) pressure to be particularly pronounced in FY23F, with FY23F PPOP falling 1% yoy, before rebounding to 6% and 10% growth in FY24F and FY25F, respectively. In addition to loan repricing pressures, we believe CMB is more vulnerable versus peers in FY23F to both fee income pressure (Fig 1-5) stemming from relatively weak (albeit starting to improve) demand for bank wealth management products and a shift in deposit mix towards higher-cost time deposits (Fig 9-11) pressuring net interest margins (NIM), in our view.
Buffers falling to FY18 levels; still well above regulatory minimum
CMB has built up buffers relating to provisioning (Fig 22) and non -performing loan (NPL) recognition (Fig 21), with these built up largely over the FY15–FY21 period. In fact, we estimate net profit growth for CMB would have been as much as 15% pts CAGR higher over this 6-year period if these buffers had not been built up (Fig 20). With 1Q23’s PPOP already down 4% yoy (see Above-trend NP growth required to lift ROE, dated 27 Apr 2023), we expect a partial unwind of these buffers back down to FY18’s level by the end of FY25F (Fig 23). We estimate that these buffers equated to 96% of CMB’s FY22 PPOP, which is the fourth highest of the banks that we cover (Fig 15).
P/E vs. g (P/Eg) or P/PPOP vs. g (P/PPOPg): P/Eg is more stable
CMB’s P/Eg multiple seems a bit more stable than its P/PPOPg multiple over the last five years (Fig 24). Hence, we think that it is more important to CMB’s share price that there is stability of EPS than stability of PPOP. It is therefore critical that these buffers are utilised to help offset PPOP pressure and thus help CMB’s rerating, in our view.
Reiterate Add rating
We reiterate Add on CMB-A given its sizable buffers of provisioning and NPL recognition that can help offset FY23F–25F PPOP pressure. Nevertheless, we cut our stress-test adjusted GGM-based TP to Rmb51.30 from Rmb66.20 (Fig 38), in part due to 2-6% lower FY23F–FY25F EPS (Fig 37), stemming from lower FY23F-25F PPOP assumptions. Potential re-rating catalysts: improving asset quality and better NIM. Key downside risks: weak fee income, consumer lending weakness (see Cautiousness persisting across the board, dated 12 Jul 2023) and regulatory risks.
Changes to our forecasts
We cut our FY23F EPS by 2.1%, our FY24F EPS by 5.4% and our FY25F EPS by 5.7%. This is primarily due to lower pre-provisioning operating profit (PPOP) assumptions over this period, stemming from both notably lower non-interest income assumptions coupled with lower net interest income assumptions (Fig 37).
Valuation and risks
In part due to our changes to FY23F–FY25F EPS forecasts, we cut our TP by 22% to Rmb51.30 from Rmb66.10. We value CMB-A using a stress-test-adjusted Gordon Growth Model (GGM), after taking into account historical A-H share valuation gaps.
Our key valuation assumptions are a beta of 0.97 (previously 0.80, with the higher beta reflection of our changed view that the outlook for retail lending, which CMB has a larger-than-peer exposure, is highly uncertain), a COE of 9.4% (previously 10.8%, with this rise due to a higher beta assumption), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 17.1% (previously 18%, with the fall due to cuts in our FY23F–25F EPS) based on FY24F ROE (unchanged), an asset quality and investor compensation valuation discount of 17% (unchanged), and policy risk valuation discount of 8% (unchanged) (Fig 38).
We thus derive a stress-test-adjusted target FY23F P/BV multiple of 1.38x (previously 1.77x), implying a sustainable ROE assumption of 13.8% (previously 14.4%), which we apply to our FY23F BVPS of Rmb36.93(previously Rmb37.06). We arrive at a target price of Rmb51.30 (previously Rmb66.10) and reiterate our Add rating, as it offers 54.5% potential upside to our target price as of 12Jul 2023.
Downside risks include a worse-than-expected economic slowdown in China. This could result in higher-than-expected asset quality pressure as well as greater than-expected loan prime rate (LPR) cuts, which could also increase pressure on net interest margins.
Another downside risk is greater policy risk, either in the form of adverse regulation or political pressure to cut loan yields or fees to help the economy.