EUR 850.00 For Business Accounts Only

Morningstar | Increasing China Merchants Bank’s FVE to Reflect Higher Loan Growth Assumption, Time Value of Money

Narrow-moat China Merchants Bank reported net profit growth of 14.8% in its 2018 preliminary results, slightly above our expectation of 13% growth. Given the lack of detail, we suspect this was primarily attributable to its higher-than-expected growth in net interest income due to accelerating loan growth and lower funding costs, boosted by the central bank’s liquidity injection. To reflect our assumption for higher interest-earning assets growth in the near term and an increase in the time value of money, we increase our fair value estimate slightly to CNY 28 from CNY 26 per share for A shares, and HKD 32 from HKD 30 per share for H shares. The bank's deposit base further strengthened despite intensified competition, with deposit growth accelerating to 10.3% from 9.3% in the year-ago period. Deposit share increased by 110 basis points to 71% of total liabilities. Growth in interest income and noninterest income picked up to 13% and 16%, respectively, versus 5.3% and 1.2% in 2017, indicating the negative impacts of regulatory tightening largely mitigated in the second half of 2018.

We suspect the 16% growth in noninterest income was attributable to fast-growing credit card installment fees thanks to the rapid growth of e-commerce and consumer finance. As the largest bank in terms of credit card consumption amount and the second-largest credit card loans lender, China Merchants Bank clearly benefits from this trend. Besides, it is one of a few Chinese banks that witnessed a rebound in return on equity by 3 basis points to 16.57%. Its H shares are fairly valued. Our fair value estimate implies 1.3 times forward PB. We believe the bank deserves a valuation premium against peers, as supported by its industry-leading return on equity and leadership in retail banking transformation.

Revenue growth increased to 12.6% in 2018, versus 5.3% and 4.1%, respectively, in 2017 and 2016 when top-line growth was hindered by tightened asset management regulations and interest rate cuts. While fourth-quarter net interest income growth remained strong at 11% thanks to lower funding costs and higher loan growth, non-fee income growth slowed to 5% from 10% in the third quarter. We suspect this was related to slowing growth in wealth management related fee income as interest rates fell in the past quarter. Bad debt ratio declined 6 basis points to 1.36% of total loans. This was attributable to the bank's increased provisioning in the final quarter of the year, in our view. With bad debt reserve covering 326% of bad debts, we expect China Merchants Bank to maintain industry-leading levels.