3Q19 results in line; PPOP up 9.1% yoy through 3Q19
Overall loan quality solid despite a declining GDP growth
Maintain BUY; TP: HKD6.3
3Q19 resultsin linewith expectation
PPOP increased by 9.1% yoy, and shareholders’ net profit roseby 5.0% yoyin 3Q19, in line with our expectation. Total loans increased by ~8.1% from the end of 2018, and total deposits grew faster by ~9.2% from the end of 2018in 3Q19.Annualized ROE came in at14.12%.
Loan quality enhanced due to structuraladjustments and strengthened control
NPL ratio was 1.44% at the end of 3Q19, improved from 1.52% at the end of 2018 and 1.48% in 1H19. The allowance to NPL ratio rose to 198.09% for 3Q19 from 192.02% for 1H19. Overall loan quality was solid in 3Q19 despite China’s declining GDP growth. Management attributed its enhanced loan quality to: 1） structural improvement in loan distribution, meaning higher percentages of high-end manufacturing loans and personal mortgage loans and a lower percentage of low-end manufacturing loans; 2） strengthened loan control due to the application of big-data technology and optimized credit standard.
NIMunder pressure, in line with the sector’s trend
NIM was under pressure in the third quarter, which came in at ~2.26% in 3Q19, lower than that of 2.29% in 1H19, in line with the sector’s trend. On the liabilities side, ICBC’s declined NIM was partly due to the structural change of its deposits （time deposits account for 51.2% of total deposit in 1H19, vs. 50.2% in 1H19 and 49.4% in 2018）， which has increased average cost of funds. On the asset side, as PBOC hopes to pursue lower effective borrowing costs, management expects that banking sector’s average NIM may continue to be under pressure. Currently ~20% of ICBC’s total loans are LPR-based, and ~50% of newly issued loans were LPR-based in the third quarter. Over the long term, the transition of benchmark-based loans to LPR-based loans might slightly trim ICBC’s NIM.
Valuation and risks
ICBC is trading at ~5.8x 2019E P/E, or ~0.72x 2019E P/B, implying a 2019E dividend yield of ~5.3%. We maintain our BUY rating for ICBC on its solid loan quality. Despite current relatively weak loan demand, management indicated that ICBC has adequate corporate loan agreements in place to support corporate loan business for at least the next two quarters. We applied a P/B valuation multiple and maintain TP at HKD6.3, equivalent to ~0.83x 2019E P/B, 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.