NIM squeezed; asset quality held up in 2019
2019 results in line; PPOP up 7% yoy
Dual pressure on sector's NIM and loan quality lingering in 2020
Maintain NEUTRAL; value play in sight; TP cut slightly to HKD5.75
2019 results in line with our expectation
ICBC's 2019 results are in line with our expectation.1） Pre-provision operating profits（PPOP）+7.03% yoy, and ordinary shareholders' net profit +5.0% yoy in2019, in line with our expectation of ～5.6%. ROA and ROE were 1.08%&13.05%.2） Personal loans grew fast at 13.3% yoy in 2019, outpaced the growth of corporate loans （5.7%）。 Balance of deposits +7.3% yoy in 2019.3） As we expected. NIM shrank from 2.30% in 2018 （2.26% in 3Q19） to 2.24% in 2019.
　　Increased average cost of deposits was a major reason for the decline of ICBC's NIM. As PBOC hopes to pursue lower effective borrowing costs, we think banking sector's average NIM might be under continuous pressure in the ST to MT.4） Overall loan quality slightly improved in 2019. NPL ratio came in at 1.43%in 2019（V.5.1.52% in 2018 & 1.44% in 3Q19）。 Provision coverage ratio of NPLs rose to 199% in 2019 from 176% at the end of 2018（198% in 3Q19）。
　　Pressure on NIM and loan quality persists in 2020ICBC made progress in controlling the quality of its manufacturing & mining loans in 2019, evidenced by reduced NPLs from manufacturing & mining sectors. Mgmt. earlier attributed the enhanced loan quality to structural changes.
　　indicating higher proportions of high-end manufacturing loans, and strengthened loan control. However, still 35.1% of domestic NPLs were within manufacturing &mining sectors as of the end of 2019（Fig.3）。 Cumulative growths of industrial enterprises' revenue & profit plummeted in 1Q20（Fig.4） because of the COVID-19 outbreak. which may aggravate pressure on ICBC's overall loan quality. On the other hand, due to potential LPR cuts and the transition of benchmark rate-based loans to LPR-based loans, large state-owned banks' NIMs might be under continuous pressure. Per our estimate, the maximum negative impact of a 5bp LPR cut on ICBC's ordinary shareholders' profit would be ～2.3%.1Maintain NEUTRAL; value play within sight ICBC is trading at ～5.2x 20E P/E, or ～0.82x 20E P/B, implying a 20E dividend yield of ～5.9%. We revised down our 20E/21E EPS estimates by ~1.5%/~5.0%and maintain NEUTRAL rating but cut our TP slightly by ～5% to HKD5.75（equivalent to ～0.68× 20E P/B. representing a ~15% discount to its average P/B multiple for the last five years）， on concems about the lingering pressure on NIM and asset quality across China's banking sector. We also note that ICBC's implied dividend yield is only ～20% below its record high in 2016, and its implied spread over 10Y government bond yield is ～30% below the record high in 2016（Figs.8-9）。 Investment value will emerge if its share price goes down further, and we might upgrade rating if its valuation becomes more attractive for LT investors.
　　Key catalysts: better-than-expected asset quality. NIM expansion; key downside
risks: worse-than-expected asset quality, NIM pressure.