China Merchants Bank’s Q4 Net Interest Margin Improves

While China Merchants Bank’s 600036 2022 revenue and net profit growth of 4% and 15% year on year, respectively, were in line with its preliminary results, its results are nonetheless mixed. On positive notes, net interest margin and cost efficiency improved, and CMB’s return on equity expanded to an industry-leading level of 17.06%. However, in the fourth quarter, CMB’s fee income contracted 1% year on year, lagging the 2.5% and 20% growth of peers China Citic Bank and Ping An Bank, respectively. Overdue loan and special-mentioned loan balances reported larger-than-peer increases from 2021 levels.

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, trading at a 38% discount to our valuation and 0.9 times 2023 price/book ratio. Growth in dividend per share was in line with net profit growth, increasing 14% to CNY 1.738 per share. We believe its 5% dividend yield is attractive given our expectations for an average of 13% net profit growth during our forecast period that should also support increasing dividends.

Our top China bank picks remain CMB and Ping An Bank as we expect these retail-focused banks to benefit from higher earnings elasticity when consumer sentiment recovers in 2023. We believe CMB’s weaker credit quality was primarily due to one-off factors including COVID-19 lockdowns and the subsequent infection peaks, regulatory reclassification of personal auto loans, and the debt restructuring of several major corporate customers. We expect credit quality will gradually improve.

Fourth-quarter 2022 net interest margin edged up 1 basis point to 2.37% from the third quarter of 2022, beating our expectations for a modest quarter-on-quarter decline. Cost/income ratio contracted 24 basis points to 32.88% in 2022 from 2021 levels, indicating stronger-than-expected improvement in operating efficiency.