China Minsheng Bank: Revenue Pressure Rises on Faltering Credit Demand and Increasing Competition

China Minsheng Banking Corp’s 600016, or CMBC’s, first-half revenue and net profits declined 3.6% and 3.5% year on year. The bank was unable to keep positive first-quarter 2023 momentum into the second quarter. Overall, we think the underlying trends were anticipated, and we retain our fair value estimate for CMBC at CNY 3.30 per A-share and HKD 3.60 per H-share. CMBC H-shares are trading at a sharp discount to A-shares as mainland China investors are anticipating a strong recovery off a low base with CMBC completing its three-year asset clean-up and restructuring in 2022, but we expect this rebound is likely to be muted as mounting industrywide challenges indicates higher-than-peer revenue pressure for CMBC. While we continue to see H-shares as undervalued, we think the below-peers asset quality and loan growth will continue to weigh on its share price in the near term.

CMBC’s first-half fee income growth of 9.8% year on year, continues to outpace peers due to a low base. However, the outlook points to slowing revenue growth. The first-half revenue decline reflects fierce pricing competition for quality loans amid anemic retail credit demand as CMBC’s corporate loans contracted 2% and retail loans merely grew 0.8% from end-2022. The bank was more negatively affected by this trend due to its weaker-than-peer customer base, in our view.

CMBC’s 17-basis-point year-on-year decline in net interest margin, or NIM, was in line with peers and also contributed to the revenue contraction. But it has showed signs of stabilizing, with first-half NIM falling just 1 basis point to 1.48% from the first-quarter level. The smaller-than-peer NIM compression was achieved by management’s efforts to avoid over-competition in the corporate lending market, but this is at the cost of slower-than-peer loan growth. We expect such headwinds to continue given the sluggish economy.