20131113-大和证券-Well-balanced_growth_profile_11页_468kb

ICBC Summary

Core Content

ICBC, the largest commercial bank in China by total assets, loans, and deposits, is highlighted for its well-balanced growth profile and strong financial fundamentals. The report outlines a positive outlook for the bank, with revised earnings forecasts and a raised target price.

Main Points

• Operational Stability: Recent visits to ICBC indicate that key operational trends remain stable. The bank maintains a prudent lending approach and a strong deposit franchise, which help mitigate net interest margin (NIM) and asset quality pressures.

• Fee Income Growth: ICBC is increasing its fee income contribution, aiming for 30% of operating income over the next decade. This growth is expected to help the bank withstand potential earnings pressures from rate deregulation.

• NIM and Asset Quality: Despite a slight increase in the NPL ratio during 3Q13 and 9M13, ICBC's higher NPL increases are not a cause for concern. The bank recognizes NPLs more stringently (after 30 days of overdue) compared to other banks (which recognize after 90 days). This suggests that the NPL increase is a result of stricter standards, not deteriorating asset quality.

• Target Price and Valuation: The target price for ICBC has been raised to HKD7.45, implying a 1.5x 2014E PBR. This is higher than the current PBR of 1.0x and the sector average of 0.9x. The bank is viewed as one of the most balanced and well-capitalized domestic banks, justifying the premium valuation.

• Earnings Forecasts: The 2013–2015 EPS forecasts have been revised upwards by approximately 2% each year, reflecting more resilient fee income. ICBC is expected to deliver 8–10% YoY EPS growth over this period.

• Loan Growth and Strategy: ICBC is on track to meet its loan growth targets for 2013 and is targeting 9–10% YoY loan growth for 2014. The bank continues to focus on restricting loans to overcapacity sectors and LGFVs, with LGFV loans accounting for 6% of total loans at the end of 3Q13.

• Mortgage Loans: While mortgage loan growth was 26% in 9M13, the average loan size is low (CNY240,000) and more than 97% are first-home mortgages. The mortgage NPL ratio was only 0.25%, significantly lower than the overall NPL ratio, indicating strong mortgage asset quality.

• WMPs and Risk Exposure: ICBC's WMPs are mostly invested in low-risk assets, with only one-third of WMPs carrying credit risk. This reduces the reputation risk associated with its wealth management products.

• International Expansion: A downside risk is aggressive international expansion, as ICBC has shown interest in expanding its presence abroad, particularly in Latin America. This could lead to potential overpayment for acquisitions.

• Capital Adequacy Ratio (CAR): ICBC estimates that adopting the AIRB approach would lift its core and total CAR by 32bp and 56bp, respectively. With potential preferred share issuance approved, the risk of further common equity raising is limited.

Key Information

• Target Price: HKD7.45 (from HKD6.70), implying a 1.5x 2014E PBR.
• Upside: 44.3% from the current price of HKD5.16.
• Dividend Yield: Expected to rise to 7.7% in 2015.
• EPS Growth: Expected to be 8–10% YoY from 2013 to 2015.
• Fee Income Contribution: Targeting 30% of operating income by the next decade.
• Lending Practices: 48% of new loans in 9M13 were priced at a premium, with 36% of outstanding loans also at a premium.
• NPL Ratio: 0.91% at the end of 9M13, with a 17% cumulative increase, but not indicative of asset quality stress.
• Capital Adequacy: ICBC is expected to see a significant increase in CAR if it adopts the AIRB approach.
• Loan Growth: 9% YoY for 9M13 and targeted at 9–10% for 2014.
• International Expansion: A potential risk, especially with peers like CCB expanding into Brazil.

Summary Table

Risks and Outlook

• Downside Risk: Aggressive international expansion could lead to overpayment for acquisitions.
• Upside Potential: The bank's strong fee income and balanced growth profile support a higher valuation.
• Outlook: ICBC is expected to maintain a stable NIM and asset quality, with sustainable earnings growth over the next few years.