1H19 results in line; PPOP increased by 9.9% YoY in 1H19
Overall loan quality solid in 1H19
Upgrade to BUY; TP: HK$6.3
1H19 profitin line
PPOP increased by 9.9% YoY, and shareholders’ net profit roseby 4.7% YoYin 1H19, in line with our expectation. Total loansincreased by ~5.5% HoH,and total deposits grew faster by8.0% HoH in 1H19.Annualized ROA and ROE were 1.17% and 14.41%, respectively.
NIMslightly declined
NIM was ~2.29% in 2Q19, lower than that of 2.31% in 1Q19 （and ~2.31% in 4Q18）， in line with the sector’s trend. ICBC’s personal time deposits grew fast in 1H19 （26% of total deposit in 1H19 vs. 24% in 2018） with rising average interest rate, which is a major reason for its declined NIM. As PBOC hopes to pursue lower effective borrowing costs, banking sector’s average NIM might be under pressure in the short to medium-term.
Overall loan quality solid in 1H19
NPL ratio was 1.48% in 1H19, improved from 1.52% at the end of 2018 and 1.51% in 1Q19. Provision coverage ratio of NPLs rose to 192.02% in 1H19 from 175.76% at the end of 2018. NPL formation ratio was ~0.62% in 1H19, vs. ~0.81% in 2H18. Overall loan quality was solid in 1H19.
Likely tobenefit from industrial enterprises’ performance
~16% of total corporate loans and ~45% of total corporate NPLs of ICBC were distributed in the manufacturing and mining sectors in 1H19. Cumulative growth of industrial enterprises’ revenue in China rebounded in July （4.9% YoY vs. 4.7% YoY in June）。 If such growth continues to improve in coming months （meaning improving business conditions for industrial enterprises）， ICBC might benefit.
Valuation and risks
ICBC is trading at ~5.1x 2019E P/E, or ~0.64x 2019E P/B, close to its historical low valuation of ~0.59x P/B, implying a 2019E dividend yield of ~6.0%. If the cumulative growth of industrial enterprises’ revenue continues to improve in coming months （meaning that banks’ average NPL formation ratio might decline）， we may upgrade our rating of the banking sector. We upgrade our rating for ICBC from NEUTRAL to BUY on its low current valuation, solid loan quality, and potential upgrade of sector’s outlook. We applied a P/B valuation multiple and revised down TP from HK$6.8 to HK$ 6.3 mainly due to RMB’s depreciation, equivalent to ~0.83x 2019E P/B （0.84x was previously applied）， its average P/B of the last 5 years. Key catalysts: upward asset quality trend, NIM expansion. Key downside risks: downward asset quality trend, NIM pressure