ICBC has achieved solid performance so far in 2019
Dual pressure on sector’s NIM and loan quality lingers
Downgrade to NEUTRAL; TP: HKD6.1
Latest performancereview
ICBC’s NIM was under pressure in the third quarter, which came in at ~2.26% through 3Q19, lower than that of 2.29% through 1H19, in line with the sector’s trend. NPL ratio was 1.44% at the end of 3Q19, improved from 1.52% at the end of 2018 and 1.48% at the end of 1H19. The allowance to NPL ratio rose to 198.09% for 3Q19 from 192.02% for 1H19. Overall loan quality was steady in 3Q19, thanks to 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
Pressure on NIMand loanquality persistsacross the sector PBOC unveiled a plan to reform and improve the LPR mechanism back in August and subsequently lowered 1Y LPR in September and November, and 5Y LPR in November. Large banks’ aggregate NIM has been mainly driven by the asset side since 2016. Per our research, weighted average loan rates led large banks’ aggregate NIM by approximately six months. As PBOC hopes to pursue lower effective borrowing costs, large banks’ aggregate NIM might be trimmed in the short to medium-term. On the other hand, banks’ loan quality is under pressure given: 1） deteriorating performance of industrial enterprises; the cumulative growth of industrial enterprises’ revenue/profits, which in the past had a notable negative correlation with NPL formation ratios of major banks, dropped in general since July 2019; 2） a high level of household debt in China, limiting households’ ability to repay debts.
Re-rating, valuation and risks ICBC is trading at ~5.4x 2020E P/E, or ~0.66x 2020E P/B, implying a 2020E dividend yield of ~5.7%. We revised down 2020E/2021E EPS by ~2%/~2% for ICBC on concerns about its NIM. We downgrade our rating from “BUY” to “NEUTRAL” for ICBC, given our concerns about the lingering pressure on NIM and asset quality across the sector. Currently ~20% of ICBC’s total loans are LPR-based, and ~50% of newly issued loans were LPR-based in the third quarter of 2019. The transition of existing benchmark-based loans to being LPR-based might trim ICBC’s NIM. Thus we applied a lower P/B valuation multiple and revised down TP by ~3% to HKD6.1, equivalent to ~0.72x 2020E P/B （~0.75x previously applied）， reflecting a ~10% discount to 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.