Summary

-Based on the 3Q2015 earnings result reported by China Merchants Bank (CMB / Group), CMB's profit growth slowed down. As of Sep 2015, net profit attributable to shareholders increased by 5.9% to RMB48.50 billion, equivalent to the EPS of RMB1.92;

-The asset size of CMB maintained the stable growth. As of 3Q2015, the total assets of the Group greatly grew by 10.37% from 2014 to RMB5.22 trillion. During the period, shareholders` net assets reached RMB348.962 billion, equivalent to the BVPS of RMB13.84, representing a 10.99% increase from 2014;

-The asset quality of the bank continued to go down. As of Sep 2015, NPL ratio of the Group jumped by 0.49ppts from 2014 to 1.6%, which was higher than our previous expectation. However, NPL allowance coverage ratio dropped by 37.95ppts to 195.47%;

-The capital adequacy ratio of CMB has been persistently lower than its peers, which means it still faces relatively higher fund-raising pressure. As of Sep, the core Tier 1 capital adequacy ratio and capital adequacy ratio of CMB rose by 0.45ppts and 0.40ppts from 2014 to 10.05% and 12.14% respectively. We expect that CMB will have higher funding needs in future;

-Overall speaking, CMB's profit growth slowed down, its asset quality and capital adequacy will continue to be the major operating risks in future. However, recently the regulators announced several good news, e.g. the expansion of ABS business, and we believe it has the positive impact on the bank's performance in future. Considering the low level of the price and valuation, we give the target price to HKD22.00. It is higher than the latest closing price by 38% and equivalent to a prospective 2016 P/E of 7.8x and P/B of 1.2x. We maintain a “BUY” rating. (Closing price as at 14 Mar 2016)

Risk

Surge in NPL volume, worse than expected deterioration in asset quality;

Slower than expected growth in Interest and non-interest income;

Sharp share price correction amid volatile market in the short run.

FINANCIALS

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