China Merchants Bank:Strong 2Q18but we looked for weak 2H

Event

Preliminary result for 1H18. The result was a beat to our estimate but in linewith the consensus. Net profit reached Rmb44.75bn or Rmb1.77/share in1H18. Despite a lack of detail, we estimate its PPoP growth reboundedstrongly to 17% yoy (or 5% qoq); however, we still believe its PPoP growth willcontract by 3% yoy in 2H18 because its NIM will fall further due to risingdeposit costs while the impact of WMP reform starts to kick in.

Impact

NIM declined in 2Q18. Net interest income grew by 1% qoq (or 10% yoy) andNIM declined qoq, as management guided during our Greater Chinaconference (note). Although its loan growth rose to 14% yoy (or 9% qoq, webelieve most growth happened in June due to the guidance by the PBoC thatmonth (note). Thus, despite rapid interest-earning asset growth (5% qoq; 5%yoy), we estimate its NIM declined by only 4-5bps in 2Q18 (vs. 2.55% in1Q18). As its loan-to-deposit rose rapidly to 91% in 2Q18 from 87% in 1Q18,we believe it will be under pressure to take more deposits, especially timedeposits and structured deposits, to maintain its LCR.

Non-interest income was particularly strong. Non-interest income rose35% yoy (or 16% qoq), but management indicated it’s mainly due to theadoption of IFRS9 (i.e. likely realized gains). However, they also witnessedstrong distribution fees for mutual funds and trust products, realized gains fromsecuritization of credit card loans, and FX exchange gains. We believe theWMP fee rose qoq because the AUM of WMPs were not capped until 30thApril, while the funding costs of WMPs also declined onward.

Provisions still fell in 1H18. If we assume the growth rate of operating costswas the same as in 1Q18 (i.e. 17% yoy), we estimate that provision costs roseby 14% qoq (10% yoy) but still declined by 3% yoy in 1H18. Unlike its peers,which should report higher NPL ratios in 2Q18 due to reclassification of 90-dayoverdue loans, CMB’s NPL ratio declined again to 1.43% in 2Q18 from 1.48%in 1Q18, though it’s the first time that absolute amount of NPLs reboundedsince 4Q16.

Action and recommendation

Reiterate UP. Though NIM declined by 4-5bps qoq, we believe it was alreadywell expected due to the guidance by the management. However, if feeincome, especially WMP fees, contract as we forecast in 2H18, we believe themarket will react very negatively. For more details, please refer to our sectornote China Banks - Time to buy; Upgrading CITIC and BoCom.