20141029-美银美林-Growth_strategy_changed__sharp_deleveraging_in_3Q_12页_584kb

CMB 3Q14 Financial Summary and Strategic Analysis

Core Content

China Merchants Bank (CMB) reported strong earnings for the first nine months of 2014 (9M14), with a net profit increase of 16.0% year-over-year (YoY) to RMB45.8bn. Core earnings grew by 36% YoY, despite a contraction in its balance sheet (B/S). However, CMB has been one of the worst performers in the sector year-to-date (YTD), lagging by approximately 10%.

The bank has undergone a significant shift in its growth strategy, moving from aggressive B/S expansion and trust/WMPs investment to a sharp deleveraging approach. This reversal is reflected in the 6.2% and 4.5% YoY declines in assets and deposits in 3Q14, contrasting sharply with the 14.3% and 11.9% growth seen in 2Q14. Interbank assets and liabilities dropped by 31% and 15% quarter-over-quarter (QoQ), respectively, and "receivables" also declined by 11.7% QoQ. As a result, asset/equity leverage decreased from 17.6x to 15.6x, while the Tier 1 ratio increased by 88 basis points (bp) to 10.35%.

Key Financial Metrics

Earnings Performance

• Net Interest Income: Up 2.7% QoQ and 57.8% YoY.
• Net Fee Income: Rose 57.8% YoY but dropped 12.8% QoQ.
• Total Non-Interest Income: Increased 71.9% YoY but fell 20.8% QoQ.
• Operating Income: Grew by 28.4% YoY.
• Net Profit Attributable to Shareholders: Increased 16.0% YoY to RMB45.8bn.
• EPS (RMB): Slightly decreased to 1.82.
• BVPS (RMB): Increased 17.4% YoY to 11.97.

Balance Sheet

• Total Assets (bn): Increased to RMB4,723bn in 3Q14.
• Gross Advances to Customers (bn): RMB2,446bn, up 1.0% QoQ.
• Deposits from Customers (bn): RMB3,266bn, down 4.5% QoQ.
• Tier 1 Ratio: Rose to 10.35%, indicating improved capital strength.
• Equity/Assets Ratio: At 6.4%, reflecting a lower leverage position.

Asset Quality

• Impaired Loans: Increased to RMB26,923bn, up 13.6% QoQ.
• NPL Coverage: Fell to 228.0%, down 23.3% QoQ.
• Credit Cost: Decreased to 0.93% from 1.26% in 1H14, though still high compared to peers.
• Loan Reserve Coverage: Rose slightly to 2.51% QoQ.

Valuation and Outlook

Valuation Metrics (Dec)

• P/E: 5.3x (for 2014E), down from 5.4x in 2012A.
• Dividend Yield: 5.27% for A Shares, down from 5.63% in 2012A.
• Price/Book: 0.921x, down from 1.40x in 2012A.
• Pre-exceptional PE: 5.70x, indicating potential for recovery.
• Price Objective: HK$16.96 / CNY12.68, suggesting a positive outlook.

Investment Thesis

• Rating: Buy.
• Reasoning: CMB has been a weak performer in the past 18 months, but its valuation has dropped to record lows. The bank is well-managed, with a strong track record in risk management, financial innovation, and retail banking. The report suggests a potential rebound in trading performance.

Strategic Implications

• Deleveraging: CMB's sharp deleveraging and high provisioning in 3Q14 are seen as positive steps, especially given the previous aggressive B/S expansion and trust/WMPs investment.
• Market Concerns: The volatility in CMB's growth trajectory may lead to market concerns, but clear communication on its strategic outlook could help restore investor confidence.
• Provisions and Write-offs: The bank is following the lead of MSB in aggressively writing off non-performing loans (NPLs) and increasing provisions, which is considered the right approach for long-term stability.

Key Points

• Revenue Trends: Despite strong revenue growth, the deleveraging effects may weigh on future earnings.
• Cost Management: Operating expenses have grown steadily, but the cost/income ratio has improved.
• Dividend Policy: Dividend payout ratio remains at 28.0%.
• Gearing: Assets to equity ratio dropped to 15.6x in 3Q14.

Summary

CMB has shifted from an aggressive growth strategy to a more conservative approach, marked by sharp deleveraging and increased provisioning. While the bank reported strong earnings, its performance in the sector has been lackluster, and the change in strategy has led to a contraction in assets and deposits. The bank's Tier 1 ratio improved, signaling better capital strength. However, the sharp drop in NPL coverage and the potential for future earnings pressure due to the timing of deleveraging are concerns. The report recommends a "Buy" rating, citing the bank's strong management and potential for a trading rebound.