Friday, July 11th, 2025

China Merchants Bank (CMB): OVERWEIGHT

Banking Sector in China

Recommendation: OVERWEIGHT
Top Pick: China Merchants Bank (CMB) (3968 HK)
CMB Share Price: HK$29.65
Target Price: HK$42.00
Upside: +41.7%

The Chinese banking sector faces a challenging environment due to macroeconomic pressures, regulatory actions, and mortgage repricing:

  • Earnings Performance: Combined net profit for six state-owned banks and 10 joint-stock banks reached RMB 960.7 billion, a 0.5% decline year-on-year. The drop in profitability was driven by lower net interest margins (NIM) and sluggish fee income (-12.4% year-on-year), though trading income from bonds provided some support. NIM compression averaged 19 basis points, and fee income cuts were particularly pronounced for bancassurance and mutual funds.
  • Loan Growth: Loan growth slowed to 8.8%, a decrease from 10.1% in 1Q24, with retail loan growth particularly weak. Early mortgage repayments also affected retail loan growth, while corporate lending remained strong. Deposit growth decelerated to 6.1%, partly due to regulatory curbs on financial arbitrage.
  • Non-Performing Loans (NPLs): NPL ratios remained stable at 1.21%, supported by write-offs in corporate loans. However, retail NPLs rose slightly due to increasing defaults in credit card and consumption loans.
  • Mortgage Repricing: Regulators are considering reducing mortgage rates by 80 basis points, which could hit banks’ earnings. The impact of this repricing is expected to reduce NIM by 6.5 basis points and net profits by 9.2% in 2025. The risk of mortgage repricing is higher for banks like Postal Savings Bank of China (PSBC), with a higher mortgage exposure.
  • Valuation/Recommendation:
    • Maintain OVERWEIGHT on the sector, with China Merchants Bank (CMB) as the top pick. CMB has a strong balance sheet and superior ROE compared to its peers, with a solid dividend yield of 7.2%. Despite its mortgage exposure, its overall financial metrics are robust, with potential for long-term growth.

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