Profit growth remained negative in Q3
Asset quality concern might linger on due to the repayment deferral policy
Maintain NEUTRAL rating and slightly raise TP to HKD4.8; Valuation undemanding
Profit growth remained negative in Q3
1) PPOP increased by 2.7% yoy, and shareholders’ net profit dropped by ~9.2% yoy in 3Q20. In Q3 alone, shareholder’s net profit dropped by ~4.7% yoy, mainly due to impairment losses on assets. Annualized ROE came in at 11.65% in 3Q20. 2) Earlier management indicated vast majority of corporate loans have completed the transition to be LPR-based, meaning reduced NIM pressure on the asset side. However, NIM might still narrow in 2H20 as management suggested it is difficult for funding cost to fall significantly in the short term. NIM slipped from 1H20’s 2.13% to 3Q20’s 2.10%, in line with management’s view. 3) Asset quality was still under pressure. Balance of total NPLs increased by ~5.7% qoq in the 3rd quarter, with NPL ratio increased to 1.55% at end-3Q20 from 1.50% at end-1H20. Allowance to NPL ratio also slightly dropped. 4) Overall, ICBC’s performance has marginally improved in Q3 vs. in Q2, but it takes more time to fully digest the impacts of COVID-19 on the Company.
Management discussion
On overall asset quality: Management suggested that, due to declined special mention ratio as well as a recovery of catering/tourism/transportation sectors (which were worst hit by the COVID-19), it is likely NPL ratios will remain stable for the rest of the year. For the next year, as it is estimated that GDP might grow by ~8% yoy, it is hopeful that overall asset quality will be stable as a result of a robust economic growth. On deferment of loan principal and interest repayment: Management revealed that the balance of such loans amounted to around RMB800 billion, or ~4.3% of total loan balance. Among the RMB800 billion, management estimated that ~RMB30 billion might turn into NPLs in Q4 and ~RMB50billion might turn into NPLs in 1H21. On NIM: Management suggested that NIM would continue to be under pressure, but the overall decline will be limited.
Maintain NEUTRAL;
Valuation undemanding ICBC is trading at ~4.67x 21E P/E, or ~0.49x 21E P/B. Maintain our NEUTRAL rating for ICBC as the repayment referral policy may continue to impact on ICBC’s financial performance. Our 20E/21E shareholders’ profits remain virtually unchanged. Slightly revised up TP from HKD4.6 to HKD4.8,equivalent to ~0.54x 21E P/B, representing a ~32% discount to its average P/B multiple for the last 5 years. Trading buy opportunities may exist as ICBC’s implied dividend yield is only ~14% below its record high in 2016, and its implied spread over 10Y government bond yield is ~30% below the record high in 2016 ). Key catalysts: better-than-expected asset quality, NIM expansion; key downside risks: worse-than-expected asset quality, NIM pressure