China Merchants Bank Co., Ltd. (CMB) operates as a commercial bank. The Company provides deposits, loans, wealth management, asset custody, finance leasing, investment banking, and other banking services. China Merchants Bank conducts businesses domestically and internationally.
Key Ratios:
Why we like CMB:
NIM improved by 6bps q/q to 2.72%: NIM expansion benefit from improving asset and liabilities structure. Note that demand deposits in total deposits increased by 3.4ppt QoQ to 64.4% at end 1Q19. This is a key driver keeping overall funding costs low and thus NIM expansion. Also, that loan growth (+5% q/q) is ahead of asset growth (+1% q/q). 1Q19 NIM is 9bps higher than 2018 NIM.
Stable asset quality and provision level: NPL ratio dropped by 1bp to 1.35% and NPL coverage ratio increased by 499bps QoQ to 363.2% at 1Q19. The higher provision level provides a buffer to future earnings.
Improvement in capital ratios: CET 1 ratio went up by 14bps QoQ to 11.92%, and we noted an improvement in tier 1 and total CAR ratio. Risk-weighted assets growth (+4% QoQ) was faster than asset growth (+1% QoQ) and the jump in profits (92% QoQ) were the key drivers for the capital ratio expansion in 1Q19.
Some Concerns we have:
Deposits growth only went up by 1% QoQ: CMB‘s deposits growth slower than industry growth of 3.5% QoQ. Corporate deposits growth was flat QoQ, and retail deposits growth was ~2% q/q. The positive sign is that demand deposits went up by 3.4ppt QoQ to 64.4% at 1Q19. A rise in corporate demand deposits mainly drove this.
Recommendation
Overall, we are positive on CMB. Mainly because of the company’s strong profitability and stable asset quality.
Technicals:
Red line = 200 periods moving average
Blue line = 50 periods moving average
Green line = 22 periods moving average
Relative Strength Index
Black Line = 14 Periods
Overbought line = above 60
Oversold Line = below 40
Support 1: 35.51 Resistance 1: 38.45
Support 2: 24.68
China Merchant Bank’s bullish streak has been making new heights when prices broke past 35.51 and subsequently reached a new high of 38.45. In this aspect, we believe that the stock may continue to rally further, but with the recent formation of a rising wedge, the stock will be entering into a bearish correction base on the RSI flat top and the upward high shown in the chart. This may not be a strong bearish divergence signal, but it signifies that the momentum is waning, thus giving way to a market correction.
Should the correction occurs, the best entry price will be at 29.77, which is 61.8% of the Fibonacci retracement level.
Should price falls and close below the 61.8% level, then the price may head into the 25.00 price level at support level 2.
