Large commercial banks’ profit growth rate rebounded at end- 2020; competition environment improved in the short term
Asset quality is expected to remain stable, but there are still risks
Valuation undemanding; Trading opportunities exist; Upgrade to ‘BUY’
　　‘BUY’
　　Large banks’ profit growth rate rebounded at end-2020; competition environment improved for large banks
　　Per CBIRC data, the cumulative net profit of large commercial banks grew by 3.0% yoy at end-2020, vs. down 8.5% yoy in 3Q20. The improved growth rate might be attributed to decreased impairment losses in the fourth quarter of 2020.
　　There is also reduced pressure on NIMs for large banks in the short term: 1） The chairman of the CBIRC recently stated that loan interest rates are expected to climb, consistent with the overall interest rate trend in the markets; 2） In the first quarter of 2021, The PBOC adjusted macro-prudential assessment and restricted local banks from absorbing cross-region deposits, which improves the deposit competition environment for leading banks.
　　Stable asset quality expected, but there are still risks
　　As management earlier suggested that, due to declined special mention ratio and recovery of catering/tourism/transportation sectors （which were worst hit by COVID-19）， coupled with estimated 2021 GDP growth of ~8% yoy, overall asset quality will hopefully be stable. But there are still some risks including: 1） Together with increasing neutral tone of monetary policy （Fig. 3）， the growth rate of aggregate social financing decreased （Fig. 1） and the credit risk of banks might increase; 2） The flexible loan repayment policy （~4.3% of total existing RMB loans for ICBC） may affect the overall loan quality when the policy expires at end-Mar. Also, the chairman of the CBIRC recently indicated that the disposal of NPLs in 2021 might exceed that in 2020.
　　Valuation undemanding; Trading opportunities exist; Upgrade to ‘BUY’
　　ICBC is trading at ~4.78x 21E P/E, or ~0.55x 21E P/B. Trading opportunities might exist for ICBC given its undemanding valuation as well as price discount of H share to A share （Fig. 7）， especially when technology stocks retreat. We revised up 20E/21E shareholders’ profits （Fig. 4） and adjusted exchange rate assumption. Upgrade to BUY for ICBC on valuation and improved profitability.
　　Raise TP by 19% to HKD 6.00, equivalent to ~0.62x 21E P/B （previously 0.57x applied）， representing a ~15% discount to its average P/B multiple for the past 5 years. Key catalysts: better-than-expected asset quality, NIM expansion; key downside risks: worse-than-expected asset quality, NIM pressure.