EUR 850.00 For Business Accounts Only

Morningstar | CMB's Provision Coverage Further Improved to Industry-Leading Level in the 3Q

Narrow-moat China Merchants Bank's, or CMB's, third-quarter results showed accelerating growth in revenue and net profits to 16.3% and 15.7%, respectively, from the year-ago period, leading to 13% and 15% growth for the first three quarters. This strong growth was achieved during a tough period when CMB’s financial assets were in contraction to comply with new asset management rules. We retain our CNY 26 fair value estimate for A shares and HKD 30 for H shares given the results were largely in line with our expectation and represented 83% of our full-year net profit forecast in 2018, making it on track to deliver our 16% net profit growth projection. The results reaffirmed our view that CMB's deposit advantage remained largely intact, despite rising competition and pace of new customer acquisition showed signs of acceleration, fueled by increasing technology adoption. Boosted by mild expansion in net interest margin, or NIM, and a rebound in fee income growth, CMB's ROE and ROA have steadily improved since mid-2017. ROE has expanded to industry-leading levels of 18.6%. Its H-shares are fairly valued and CMB has been trading at valuation premium against large banks including ICBC and CCB, thanks to its faster-than-peer growth in shareholders' equity growth. Book value per share rose 10.2% from 2017, and we now expect full-year growth at around 12%, higher than the 7%-10% range for the big four banks. Leveraging its premium customer base, CMB will continue to lead the industry in asset quality improvement and transformation in retail banking but we believe the upsides are factored in.

The results highlighted strong growth in net interest income, fee income, and pre-provision operating profits PPOP. The 10% net interest income growth was driven by a 12-basis-point increase in NIM to 2.54%. Noninterest income grew 19%, driven by 7% and 81% growth in fee income and investment income. Operating efficiency witnessed the first improvement since mid-2016 when the bank started to beef up its fintech strategy. Cost/income dropped 27 basis points to 27.6% from the year-ago period. Credit quality was stable, with its bad debt ratio declining 1 basis point to 1.42%. Its bad debt formation ratio stayed in downward trend since 2017. Credit costs was reduced to 1.59% from 1.70% in the year-ago period. Since provision coverage ratio rose to 326%, the highest level among peers, we expect full-year credit costs at about 20 basis point lower than 2017’s level.