Industrial and Commercial Bank of China’s （ICBC） attributable net profit grew 2.5% YoY in 2Q23 and 1.2% YoY in 1H23, against 0.02% YoY growth in 1Q23. As one of the biggest banks in China, its scale increased steadily. As of end-June 2023, its loans/deposits increased 9.0%/11.7% from end-2022. Its net interest income decreased 3.9% YoY in 1H23, mainly due to mixed effects of steady growth in interest- earning assets and decrease in NIM, against 4.8% YoY decline in 1Q23. Its NPL ratio dropped in 1H23 as asset quality improved. ICBC maintained strict NPL recognition and its allowance to NPLs ratio increased in 1H23. Its H shares are now trading at below 0.4x 2023E P/B, which, in our view, is undervalued. Looking ahead, we believe ICBC will report positive growth in earnings amid solid asset quality in 2H23. Maintain BUY rating.
　　Key Factors for Rating
　　Asset quality improved in 1H23. Its NPL ratio reached 1.36% at end-June 2023, down from 1.38% at end-March 2023 and 1.38% at end-December 2022. ICBC maintained strict NPL recognition policy in 1H23. Its allowance to NPLs reached 218.6% at end-June 2023, higher than 213.6% at end-March 2023 and 209.5% at end-December 2022. We expect its NPL to stay at 1.36% in 2H23.
　　Net interest margin （NIM） dropped in 1H23. As ICBC strengthened its financial support to the real economy and small and medium sized enterprises, its NIM declined in 1H23. Its NIM of interest-earning assets reached 1.72% in 1H23, down 5bps from 1Q23 and 21bps from 2022. We expect its NIM to drop another 4bps in 2H23.
　　Fee and commission income dropped in 1H23. Its net fee and commission income decreased 3.4% YoY in 1H23, against negative YoY growth of 2.9% in 1Q23. We expect its net fee and commission income to drop about 1% YoY in 2023.
　　Key Risks to Rating
　　The bank might be under strong pressure to provide more support to the real economy if China’s economy slows down significantly
　　Valuation
　　We expect its ROAE to reach 10.7% in 2023. Its H shares are now trading at 0.35x 2023E P/B. Considering its solid asset quality, decent ROAE and around 9.2% dividend yield, we believe the bank is undervalued. We reduced our target price from HK$6.35 to HK$6.14 amid RMB fluctuation based on about 0.6x 2023E P/B.