Share price: HKD5.55
Target price: HKD5.40
More challenges ahead
Minimal NIM pressure, albeit moderate loan growth. Industrial & Commercial Bank of China (ICBC)’s net interest margin (NIM) remained at 2.56% in 3Q13 (2.57% for 9M13). ICBC may lengthen the duration of its investments and adjust its asset mix in 2014 to minimize the impact of price competition for loans and deposits. We forecast its NIM to be 2.54% in 2014. Loan growth was lower than the market average at 9.6% for 9M13 as ICBC has tight approval control over LGFV loans and lending to industries with over-capacity. We forecast its loan growth to remain moderate at 10-11% p.a. during 2013-14.
Limited economies of scale. ICBC’s non-interest income plunged 74% QoQ in 3Q13, partly due to the mark-to-market loss of its structured deposits (these deposits amounted to CNY452b in Sep 2013). We estimate that for every 25bps increase in the deposit rate of these deposits, ICBC’s pre-tax profit will fall by 0.3%. With a gradual shift from non-guaranteed wealth-management products to structured deposits, we expect a limited rebound in ICBC’s non-interest income in the near term. Hence, despite tight costs control, we forecast ICBC’s cost-income ratio to stay at 35.5-35.7% during 2013-15 (35.9% in 2012).
Weakening asset quality. Total NPLs increased faster by CNY5.6b QoQ to CNY87.4b (or 0.91% of total loans) in Sep 2013 (+CNY1.5b QoQ in 2Q13). Management indicated that it has tightened the loan classification to include some overdue loans of less than 90 days as NPLs. Still, we are unsure whether these loans will return to normal in 4Q13. Besides, ICBC lowered its provision-to-loan ratio to 2.44% in Sep 2013 (2.5% in Jun 2012). Overall, we conservatively project a rise in its credit cost to 0.73-0.81% for 2013-14 (0.39% in 2012).
High dividend payout to be sustained. CET1 CAR increased to 10.6% in Sep 2013. Management indicated that adoption of the internal-rating based approach will improve its CET1 CAR by 32bps. Even without that, we forecast ICBC’s CET1 CAR will stay at above 10% even if it maintains a dividend payout ratio of 35% during 2013-15.
Initiate with a HOLD rating. With higher credit cost and moderate loan growth, we forecast ICBC’s ROE to fall to 19% during 2014-15 (22.9% in 2012). Based on a long-term ROE assumption of 16.25% in our Gordon Growth Model (GGM), we derived a target price of HKD5.40, equivalent to a projected Dec 2014 P/B of 1.05x.
Recovery in net fees: ICBC’s net fees growth recovered to 19.8% YoY for 9M13, mainly attributed to bank cards, investment banking and corporate wealth management fees. As it has a massive customer base and strong product innovation capability, we forecast its net fees to grow at a CAGR of 16% during 2012-15.
Strong capital position: CET1 CAR increased to 10.6% in Sep 2013. We estimate that ICBC’s CET1 CAR will remain above 10% even if it maintains a dividend payout ratio of 35% during 2013-15.
Sharp fall in non-interest income: ICBC’s non-interest income fell sharply by 74% QoQ in 3Q13, partly due to the mark-to-market loss of its structured deposits. With gradual shift from non-guaranteed wealth management products to structured deposits, we expect limited recovery in this income during 2014-15.
Weakening asset quality: Total NPLs increased faster by CNY5.6b QoQ to CNY87.4b in Sep 2013. ICBC also lowered its provision-to-loan ratio to 2.44% in Sep 2013. We forecast its credit cost to rise to 0.73-0.81% for 2013-14.
Valuation and Recommendations
We forecast ICBC’s net profit to grow at a CAGR of 7.1% during 2012-15. Key earnings drivers will be healthy loan and net fees growth and tight costs control. We forecast its ROE will fall to 19% in 2014-15 (22.9% in 2012).
We applied a long-term ROE assumption of 16.25% for ICBC in our GGM. This is close to its historic trough ROE of 16.2% during 2016-12. We derived a target price of HKD5.40 based on the fair Dec 2014 P/B of 1.05x estimated from the GGM. This is close to ICBC’s historic trough P/B of 1.02x during 2005-12. We initiate coverage of ICBC with a HOLD rating. Key risks to our rating include severe price competition on deposits after full deregulation and strong recovery in asset quality.
Publish date: 28/11/13