China Merchants Bank Co Ltd – Strong profitability and stable asset quality July 1, 2019

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:

  • CMB reported 1Q19 net profits of RMB25bn, up 92% QoQ and 11% YoY, supported by Net Interest Margin (NIM) expansion of 6bps QoQ to 2.72%.
  • Nonperforming Loan (NPL) ratio dropped by 1bp to 1.35% and NPL coverage ratio increased by 499bps QoQ to 363.2% at 1Q19.
  • Core Tier 1 (CET 1) ratio went up by 14bps QoQ to 11.92%. There were also improvements in tier 1 ratio (10bps QoQ) and total Capital Adequacy Ratio (CAR) (18bps QoQ).
  • Although deposits growth was only up 1% QoQ, a positive sign is that lower cost demand deposits went up by 3.4ppt QoQ to 64.4%.
  • Overall, we are positive on CMB. Mainly because of the company’s strong profitability and stable asset quality.

 

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.

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