1Q22 results in line with our expectation
Industrial and Commercial Bank of China’s (ICBC) 1Q22 revenue, pre-provision operating profit, and attributable net profit rose 6.5%, 5.2%, and 5.7% YoY, in line with our expectations.
　　Trends to watch
　　Credit lending to real economy significantly increases. The firm’s end-1Q22 balance of lending rose 10.9% YoY, ranking No.2 among China’s big-4 banks. The growth slowed 0.1ppt compared with end-2021, the mildest among the big-4 banks. New lending rose by Rmb250bn YoY, the highest on record. Its 1Q22 new lending was Rm935.7bn, up 4.5% compared with end-2021. Specifically, new lending to new technologies, manufacturing sectors, green sectors, inclusive finance, and agriculture was Rmb81.5bn, Rmb310bn, Rmb300bn, Rmb180bn, and Rmb 270bn, up 8%, 14%, 12%, 16%, and 10% compared with end-2021 and accounting for 9%, 33%, 32%, 19%, and 29% of total new lending.
　　Numerous measures to stabilize net interest margin. The firm’s 1Q22 net interest margin (NIM) was 2.10% YTD, down 1bp QoQ and 4bps YoY. Its asset yields remained stable, but liability costs faced pressure. For 2022, the firm foresees downward pressure on asset yields due to COVID-19 conditions. It thinks a reduction in deposit interest rates will help control NIM, but liability costs may remain relatively fixed. The firm expects downward pressure on full-year NIM, and plans to stabilize NIM through strengthening risk pricing of loans, optimizing loan structure and stabilizing deposit cost.
　　Asset quality remains solid. The firm’s non-performing loan (NPL) ratio in 1Q22 was 1.42%, flat with end-2021. Its NPL ratio for real estate development loans rose in 2021 by 2.47ppt YoY to 4.79%, but the proportion of real estate development loans is lower than 4% of total loans and we think overall risk was controllable in 1Q22. The NPL ratio of inclusive loans was 0.75% in 1Q22, down 0.09ppt compared with end-2021 and implying good asset quality. The firm continued optimizing its credit lending structure, with rising contribution from low-risk infrastructure loans and gradual reduction of high-risk loans to commerce sectors. We expect its asset quality to remain stable.
　　Lowers provision coverage ratio for cross-cyclical adjustment. The firm’s 1Q22 provision coverage ratio rose 4ppt QoQ to 210%, the highest level since 2017. The firm plans to lower its provision coverage ratio to what we see as an appropriate level in the future, release resources to address risks associated with COVID-19, and support the real economy.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts unchanged. H-share is trading at 0.5x 2022e and 0.4x 2023e P/B. A-share is trading at 0.5x 2022e and 0.5x 2023e P/B. For H-share we maintain OUTPERFORM and our target price of HK$6.95 (0.7x 2022e P/B and 0.6x 2023e P/B), offering 46.6% upside from the current price. For A-share we maintain OUTPERFORM and our TP of Rmb6.91 (0.8x 2022e P/B and 0.7x 2023e P/B), offering 44.6% upside from the current price.
　　Risks
　　Economic slowdown worse than we expected; real estate risks spreading.