China Merchants Bank (3968 HK):Strong results, but can they sustain?

Maintain Neutral and HK$15.10 target price. Strong fee income growth in 1Q14 led to decent quarterly results; however, we expect momentum to fizzle in 2H14F. China Merchants Bank’s (CMB) valuation premium over peers is also curtailing the stock’s performance.

Breakneck fee income growth. CMB reported 1Q14 net profit of RMB14.9b, up 14.8% YoY driven by strong 79.4% YoY fee income growth. NIM was down 14bp QoQ and 28bp YoY to 2.65% due to lower yield from the interbank business and rising funding costs. Annualized ROE and ROA for FY13 was 21.8% and 1.42%, still resilient.

Strong balance sheet thanks to active deposit franchise. CMB’s loans and deposits grew 6.92% QoQ and 10.16% QoQ in 1Q14, much higher than the industry averages of 4.2% QoQ and 4.5% QoQ.

High credit cost did not hinder profit growth. Credit cost was 131bp in 1Q14, after having almost tripled on a YoY basis. Strong fee income growth meant CMB could absorb high credit costs without hurting the bottom line. The question of whether the bank can continue generating strong fee income growth is another matter. We are skeptical.

TBR investment surges in keeping with market practice. CMB’s receivables investment was up 39% QoQ to RMB327.5b, implying that CMB is still actively investing in trust beneficiary rights in a bid to lower its RWA weighting while generating higher returns. This would be in tune with the practice of many of the smaller banks looking for a way to save capital while circumnavigating loan quotas.