China Merchants Bank (CMB) reported lower-than-expected 1Q24 results as the bank continued to provide more financial support to the real economy, which is in line with industry trend. Attributable net profit declined 2% YoY in 1Q24, mainly due to lower operating income and NIM. Meanwhile, CMB maintained outstanding asset quality as NPL ratio decreased and allowance to NPLs remained at higher level in 1Q24. CMB maintained its strong competitiveness in retail business market and its premium clients continued to grow in 1Q24. CMB's exposure to real estate development sector rebounded in 1Q24. As of end-March 2024, CMB's total balance of real estate related businesses, which were subject to credit risks, increased by 4.6% compared with end-December 2023. Maintain BUY rating.
Key Factors for Rating
Asset quality remained outstanding in 1Q24. CMB's NPL ratio dropped from 0.95% at end-December 2023 to 0.92% at end-March 2024, which might be still at the low-end level among peers. Meanwhile, its allowance to NPLs reached 436.8% at end-March 2024, against 437.7% at end-December 2023.
CMB's NIM dropped in 1Q24. Net interest income decreased 6.2% YoY in 1Q24 amid growing interest-earning assets and declining NIM. After dropping 25bps in 2022, its NIM was 2.02% in 1Q24, down another 13bps from 2023, mainly due to declining yield of IEA and rising funding cost. We expect its NIM to drop 19bps in 2024.
Fee and commission income declined in 1Q24. Its net fee and commission income declined 19.4% YoY in 1Q24 after dropping 10.8% YoY in 2023. Its net fee and commission income from wealth management, which accounted for 30.4% of total fee and commission income, decreased 32.6% YoY in 1Q24 mainly due to lower risk appetites and investment sentiments among its clients.
Meanwhile, income from agency distribution of funds dropped 32.7% YoY in 1Q24 due to decline in sales of equity funds.
Valuation
Valuation is attractive. We believe the bank is undervalued as its H shares are now trading at about 0.79x 2024E P/B. In our view, CMB deserves to trade at a premium to its peers thanks to its outstanding asset quality, stricter NPL recognition, strong competitiveness in retail business and higher ROE.
Meanwhile, CMB could benefit more from expected consumption recovery. We expect its ROAE to reach 15.2% in 2024, the highest among its peers. We revised down our target price from HK$45.71 to HK$45.44 based on about 1.0x 2024E P/B.