China Merchant Bank: Preliminary Results Show Resilient Earnings Growth Despite NIM Pressures

Narrow-moat China Merchants Bank’s preliminary 2023 net profit of CNY 146,602 million, up 6.22% year on year, was slightly better than expected, driven mainly by lower provision and operating cost-savings. The results are commendable given persistent revenue challenges resulting from mortgage repricing and regulatory commission rate cuts in bancassurance and mutual fund sales. However, we expect these headwinds to continue in 2024, leading to a low-single-digit contraction in total revenue growth. We cut our 2024 net interest margin projection by 6 basis points to 1.90% and fee income by 15% to CNY 74 billion. Consequently, we lower our fair value estimates for CMB to CNY 45 per A share and HKD 48 per H share, from CNY 50 and HKD 54, respectively. Trading at a dividend yield of over 7% and 2024 forward P/B ratio of 0.6 times currently, CMB’s H-shares are significantly undervalued, but we think the upside may be capped in the near term as it is more vulnerable to sluggish consumption demand and fluctuations in wealth management-related fee income. With no major consumer sentiment recovery in sight, we continue to prefer quality and defensive state-owned banks that we cover in China, with the Agricultural Bank of China and China Construction Bank as our top picks.