China Merchants Bank: NIM Trend in Line but Wealth Management Business Under Pressure

H shares of China Merchants Bank 600036, or CMB, dropped 5.2% in Hong Kong trading April 27 with the market likely disappointed by a 12.6% year-on-year contraction in first-quarter fee income. Wealth management and credit card service income both declined 13% and 6%, respectively, on weak market sentiment and falling credit card consumption from a relatively high base in the year-ago period. We believe the challenges are industrywide rather than company specific. As revenue and net profit performance were within our expectation, and given our view that margins would still be sluggish in first-half 2023, we leave our major assumptions unchanged and retain our fair value estimate for CMB at CNY 55 per A share and HKD 64 per H share. H-shares remain undervalued. We believe current revenue headwinds are largely priced in.

We believe CMB’s competitive strength in the retail banking business is intact, as evidenced by the steady 6% and 11% respective growth in the number of retail customers and retail assets under management, or AUM. CMB’s retail AUM accounted for 120% of its total assets—such a proportion far exceeds peers of below 60%, and we believe this will continue to support its asset-light business model and industry-leading return on equity. We expect recovery in short-term consumption and business activities to continue into coming quarters, which should gradually drive recovery in consumption for large-ticket consumer goods. The recovery in sales of bank wealth management products and mutual funds in March and April, together with a further deposit rate cut in mid-April, should support a rise in wealth management demand, in our view.