not vested
China Merchants Bank: Why BNP Paribas Sees 80% Upside By Shuli Ren
China Merchants Bank (3968.Hong Kong) has risen only 6.9% this year, underperforming Chinese banks such as China Construction Bank (939.Hong Kong) because its dividend yield is not as generous and it is perceived to be less safe.
China Merchants Bank, or CMB, offers 4.2% dividend yield and trades at around 1 time forward book. By comparison, China Construction Bank, which has advanced 14.3% this year, generates a handsome 5.4% dividend yield on 0.8 times book.
BNP Paribas started its coverage of CMB today, with a super bullish view. Its price target of 35 Hong Kong dollars implies another 80% upside.
In his report, analyst Victor Wang did not talk about dividend yields, but rather focused on improving earnings growth at CMB. “We think high earnings power, NIM stabilization and credit cost decline will drive strong profit growth of 6%, 30% and 23% in 2016-18. Our EPS forecasts are 2%, 23% and 39% above the Bloomberg consensus,” wrote Wang.
BNP sees CMB as a retail banking play. It lifted its retail banking profit contribution from 13% a decade ago to 46% in 2015. “We see CMB as a well-positioned Chinese bank that can deliver high and sustainable risk-adjusted returns with relatively low asset quality cyclicality,” wrote Wang.
One issue with CMB is its high credit cost, because the bank has been building a cushion against rising non-performing loans. However, as China’s macro economy stabilizes and since CMB has large exposure to the safer retail segment, BNP reckons its credit cost will peak this year, to 2.33%, and fall back to 1.96% and 1.77% in 2017 and 2018.
In the last two years, CMB’s credit costs ran at 1.33% and 2.15%, well above 10-year industry average of 0.67%. BNP estimates every 10 basis points lower credit cost can lift their 2017 profit forecast by 2.9%.
In 2015, CMB’s profit margin was 2.61%, a 10-year high. BNP expects its margin to grow further as credit cost declines.
The HK$35 price target implies 1.89 times the bank’s 2016 book estimate, on the back of 14% long-term return-on-equity. In 2015, CMB’s return on equity came in at 17.1%.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... 80-upside/
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