China Merchants Bank: Stock of the Week

Kate Lin: Investors have been looking up China Merchants Bank on Morningstar Asia’s websites, making it one of our most searched stocks. It is also one of our two top China-bank picks.

The rebound in China’s economy has allowed consumer sentiment to recover, which in turn has led to higher earnings elasticity for retail-focused banks like CMB. February’s modest rebound in short-term consumption loans is evidence of the early stages of the consumer recovery.

Additionally, we think that as negative factors caused by lockdowns and economic downturn fade, credit quality at CMB should also improve. These key macro and bank-specific improvements present buying opportunities in 2023.

Investors might worry about Banks, especially with the global banking crisis we saw in March. However, according to our analyst Iris Tan, Chinese bank exposure to overseas bond investments is minimal. Importantly, a well-diversified deposit base like CMBs, could limit the risk of bank runs.

CMB has not been without controversy, though. The unexpected vote-out of the bank’s then-president Tian Huiyu spooked the market. But our analysts think the bank has continued to show a high level of strategic consistency and a high standard of corporate governance, which eases our fears around the people at the bank. Lastly, CMB’s 5% dividend can be appealing to income seeking investors.

For Morningstar, I am Kate Lin.

 Bulls Say

1. CMB expects to add 15 million, or nearly 10% of its 160 million customer pool, over the next three years. We expect this to support its industry-leading fee income growth and funding costs in the future.
2. With monthly active users reaching over 105 million, CMB’s two mobile applications were among the most popular banking app in China.
3. CMB’s retail banking business boasts the largest retail AUM per customer, which is more than two times that of its closest competitors in China. 

 Bears Say

1. There remain plenty of uncertainties regarding how future COVID-19 infections will affect consumers' behavior after China's reopening.
2. The property market downturn and weak consumer confidence hampered CMB's home mortgage demand.
3. CMB has committed to spending no less than 3.5% of its prior-year revenue into fintech R&D. Its significant investment in fintech-related fields has weighed on its operating efficiency.