Steady earnings growth recovery. ICBC’s FY18 net profit rose 4.1% YoY （vs2.8% in FY17） to RMB 298bn, in line with CMBI and consensus estimates. Strong net interest income （+9.7% YoY）， modest fee growth （+4.1% YoY）， and afalling CIR （-0.8ppt YoY） contributed to a decent PPoP （+8.5% YoY）。 However,bottom-line earnings growth was mitigated by 26.5% YoY surge in impairmentcharges, as the Bank strived to build up provision buffer against macrouncertainties. ICBC declared a FY18 DPS of RMB 0.25, implying a payout ratio of30%, same as FY17.
Stable margin with downside pressure ahead. ICBC’s full-year NIMexpanded 8bps in FY18, underpinned by robust interest income and a milderAIEA growth （+6.0% YoY）。 4Q18 NIM inched up 1bp to 2.31%, by our estimate,better than 6/12bps QoQ contraction for PSBC （1658 HK, NR） and CCB （939 HK,BUY）。 During results briefing, management mentioned that asset yields facesdownside risks in FY19, given falling market rates and weakening creditdemand. However, ICBC has secured a rich pipeline of loan projects andrefrains from growing lower-yield discounted bills. Meanwhile, the Bank hasbeen shortening the liability duration and strictly controlling the scale ofhigher-interest bearing certificate of deposit.
Asset quality kept improving. NPL balance was largely stable with slightlylower formation rate in 4Q18. NPL ratio slid another 1bps to 1.52%, the eighthconsecutive quarterly decline since 1Q17. The leading asset quality indicators,SML and overdue loan ratio, were also on the downward trend. Provisioncoverage climbed 3.5ppts to 176%, yet still relatively low vs large banks’ average of 220%.
Multi-channel capital replenishments on the way. Thanks to its stronginternal capital generation ability, ICBC’s CET-1/Tier-1/total CAR rose50bps/51bps/41bps to 13.0%/13.4%/15.2% in 4Q18. The Bank has proposeda series of capital raising plans, including RMB 100bn preference shares, RMB80bn perpetual bonds, and RMB 110bn Tier-2 capital bonds, which all togethercould boost CAR by 170bps.
Maintain BUY and HK$ 7.60 TP. Despite slower profit growth and thinnerprovisions, ICBC’s 4Q18 NIM trend was superior compared to large bank peers.Management’s effective control on operating expense and funding cost is likelyfavored by investors. ICBC is currently trading at 0.72x FY19E P/B, 29% belowhistorical mean of 1.02x （since listing in 2006）。 Our HK$ 7.60 TP is based on0.95x target P/B and FY19E BPS of RMB 6.91.