China Merchants Bank: Lowering Valuation as Fee Income and Margin Pressure Dampen Outlook

We lower our fair value estimate on China Merchants Bank 600036, or CMB, to HKD 54 from HKD 64 per H-share and CNY 50 from CNY 55 per A-share after we reduce our 2023 net interest margin, or NIM, forecasts by 3 basis points and 2023 fee income growth by 7 percentage points. We push back our original assumptions for consumption growth to stabilize in China in second-half 2023 and incorporate a less optimistic outlook for recovery in consumer credits and the wealth management business as property developer credit risks rise.

CMB’s H-shares are undervalued, trading at historical trough 0.8 times 2023 price/book ratio, and we think most risks are reflected. However, near-term performance may remain subdued given macroeconomic concerns. We still like CMB’s longer-term prospects, and we note that the bank is financially strong. Risk management during the quarter remains solid and provisions released helped boost profit. Hence, net profit was in line with our expectation, so our changed assumptions are due mainly to a disappointing fee income growth outlook alongside higher NIM pressure.

Though we believe CMB’s strength in retail banking remains intact as evidenced by solid growth in deposits, the number of retail customers, and retail assets under management, the weakening consumer confidence as a result of prolonged property downturn is likely to have more adverse effects on retail-heavy banks such as CMB and Ping An Bank.