Summary in One Sentence
China Merchants Bank (CMBC), once recognized as the “number one bank stock” in the A-share market, has enjoyed the highest valuation premium across the board due to its best operational quality and faster growth compared to its peers. However, this status as the “most expensive bank” has begun to waver in the past year. The reason is not that CMBC has encountered significant operational problems, but rather its short-term growth rate has been surpassed by larger state-owned banks and high-quality city commercial banks. The logic behind investors' willingness to pay a higher price for CMBC’s “high growth” has weakened, and its valuation premium is now shifting from a growth premium to a quality premium that ensures stable returns. While CMBC will still have the highest valuation in the banking sector, it will be much harder for it to outperform its competitors as it used to.
Detailed Analysis
1. What is CMBC’s “valuation premium”?
The valuation premium is essentially the market’s recognition of CMBC as a premium-quality stock. The PB (Price-to-Book) ratio is calculated by dividing the stock price by the company’s net assets. Currently, CMBC’s PB ratio is 0.92, meaning investors are willing to pay 92% of the net asset value per share. Most state-owned banks have a PB ratio of around 0.70-0.80, indicating a higher premium for CMBC. This premium reflects three key advantages: (1) CMBC has the lowest cost of attracting deposits, offering lower interest rates to customers; (2) it has a very low rate of non-performing loans; (3) its wealth management business is outstanding, generating stable income from fees without the risk of loan losses. Investors also believed CMBC would grow faster than its peers in the future, resulting in a dual premium for both quality and growth.
2. CMBC’s strength remains intact
Despite CMBC’s profit growth rate of only 2% in the first half of this year, ranking fifth among joint-stock banks, this does not indicate a decline in its performance. Its core indicators are still among the best: the net interest margin is the highest in the industry, and its bad debt ratio is the lowest. CMBC has set aside nearly four times its expected bad debts as a safety cushion. The low profit growth is due to its deliberate decision to increase risk reserves and hold onto bonds with higher yields, even though selling them would have generated more profit. Its retail business, once its strongest, is currently facing challenges due to decreased lending activity, but its customer base and wealth management foundation remain solid.
3. Why has the premium weakened?
The premium has weakened because CMBC’s growth advantage has been surpassed by state-owned banks. The net interest margin has decreased, and state-owned banks have seen a rapid improvement in their cost of attracting deposits. Additionally, state-owned banks benefited from the bond market boom, increasing their income significantly. CMBC’s focus on long-term stability has led to slower short-term revenue growth, causing the premium to shrink.
4. The premium will change in nature
In the future, CMBC’s premium will likely shrink more gradually. Investors will no longer be paying for its growth potential but for its stability and risk-free returns. While it will still have the highest valuation in the banking sector, the difference will be smaller. Its PB ratio may only be 0.1-0.2 higher than that of state-owned banks.
5. Implications for investors
For investors, the traditional belief that CMBC is always the best no longer holds. If you prefer low risk and stable dividends, CMBC is still a safe choice. However, if you seek short-term performance improvement, state-owned banks with lower valuations and stabilizing interest margins may offer better short-term returns.