Share Price HK$14.80
Target Price HK$15.60
Key Takeaways From NDR; Second Strategic Transformation On Track With Capital Concerns Removed
We recently hosted a NDR with CMB for investors generally interested in the bank’s Second Strategic Transformation, capital adequacy and asset quality outlook. In our view, the bank is likely to deliver faster growth after the capital constraint is removed with an increasing mix in the MSE business. That said, we maintain HOLD as our target price of HK$15.60 implies only a 5% upside from the current price. Entry price: HK$14.00.
• We recently hosted a NDR with China Merchants Bank (CMB) and investors were generally interested in the capital adequacy, asset quality outlook and CMB’s longer-term strategy going forward.
• Second Strategic Transformation remains the key focus. CMB will continue to implement its core strategy of a Second Strategic Transformation, which targets to increase: a) capital efficiency, b) risk management level, c) operating efficiency, and d) risk-based pricing. As part of the strategy, further strengthening the retail banking business is one of the most important steps as this could help transform the bank into a more capital-efficient growth model. Note that currently two-thirds of its non-interest income (ie minimal capital consumption) is contributed by the retail banking business.
• In addition, CMB will continue to grow the micro and small enterprise (MSE) segment as it is likely to maintain higher pricing power. As at 1H13, MSE loans accounted for 35% of its total retail loans.
• Sufficient capital post rights issue. With the H+A rights issue to be fully completed in early-October, CMB believes it will be able to meet the new capital requirement by 2018 (tier-1 ratio: 8.5%; CAR: 10.5%). In our view, we do not expect further capital needs in the medium term as: a) we expect the tier-1 ratio to reach 9.4% after the rights issue, and b) the increasing focus on retail banking is likely to preserve more capital going forward.
• Net interest margin likely to be stable. Assuming no new interest rate liberalisation measure in 2H13, NIM trend is likely to remain stable on the back of: a) almost all loans have been repriced as at 1H13 after the interest rate cut last year, b) the bank continues to see stable loan pricing power, and c) the strategy to increase MSE loan mix is likely to support NIM. Note that the bank on average could price MSE loans at 20-30% above the benchmark rate.
• Manageable asset quality risk. While CMB maintains one of the lowest NPL ratios (1H13: 0.71%) in the sector, it expects to see more NPL pressure in 2H13 but at manageable levels. Notably, the NPL ratio of its MSE loans is still lower than the group’s NPL ratio as at 1H13. In addition, CMB continues to control its LGFV loan exposure with an outstanding balance of only Rmb80b, or 4% of total loans. Some 96% of the LGFVs are fully or mostly covered by sufficient cash flow, according to the bank.
• Financial innovations were widely discussed but initial impact is expected to be small. Financial innovations such as asset securitisation (ie ABS) were one of the hot topics during the NDR. However, CMB expects progress to be slow and approval is expected to be obtained on a case-by-case basis. In addition, the bank has no plans to sell existing NPL to AMC in the near term.
• Maintain HOLD on valuation. With the capital replenishment, we reiterate our view that the bank is likely to see faster growth after the removal of capital constraint and management will also able to fully focus on growing the business in the future. In addition, we expect the Second Strategic Transformation could help the bank to develop a more capitalefficient and sustainable growth model in the future. That said, we maintain HOLD as our target price implies only a 5.4% upside from current share price. Entry price is HK$14.00.
• Risks to our target price include worse-than-expected NPL formation, and the ongoing European sovereign debt concern.