20130731-DBS_Group-Takeaways_from_Inner_Mongolia_14页_420kb

DBS Group Research Summary: ICBC (2013)

Core Content

This report from DBS Group Research provides an analysis of ICBC's performance and outlook, with a focus on its exposure to Inner Mongolia's economic challenges. The report maintains a BUY recommendation with a 12-month target price of HK$6.57, slightly increased from the previous target of HK$6.51. The main catalyst for the recommendation is the upcoming 2Q13 earnings results.

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Main Points

Earnings and Forecasts

• FY13-14 EPS forecasts have been slightly increased by 1-3%, with 2015 forecasts introduced.
• The report forecasts 2% y-o-y growth for 2Q13 earnings, leading to a 7% y-o-y increase for 1H13 net profit.
• ICBC's pre-provision profit is expected to grow, with loan loss provisions rising due to potential NPL increases.
• Net profit growth for FY13 is expected at 5.3%, with a cumulative growth of 7.2% for 1H13F.

Valuation Metrics

• P/BV (Price to Book Value) for FY13 is 1.13x, with a target price of HK$6.57 based on a 1.45x P/BV multiple.
• EPS (HK$) for FY13 is 0.84, with a growth of 9% from FY12.
• Dividend Yield is expected to rise to 7.3% in FY14, up from 5.7% in FY12.
• ROE (Return on Equity) is forecasted to decrease from 22.9% in FY12 to 18.8% in FY15.

Inner Mongolia Economic Outlook

• GDP growth in Inner Mongolia slowed to 9% in 1H13, down from 12% in 2012, due to challenges in the coal and property sectors.
• The coal industry is a key driver of the province's economy, contributing 60%-70% of GDP and fiscal income, but is under pressure due to economic transformation and falling coal prices.
• Overcapacity in property is a concern, especially in Ordos, which is referred to as a "ghost city."
• Local government debt is 24% of GDP, with a significant portion in Ordos, which aims to repay the debt over 3 years.

Asset Quality and NPL Risk

• NPL (Non-Performing Loan) ratios in Inner Mongolia have risen to 2.1% in June 2013, up from 1.6% at the start of the year.
• The NPL risk is concentrated in rural credit cooperatives and small loan companies, not the Big Four banks, including ICBC.
• ICBC's NPL ratio in Inner Mongolia is 0.76%, significantly lower than the national average.
• The report believes that the NPL impact on ICBC is manageable and already factored into forecasts.

ICBC's Exposure and Risk Management

• ICBC has limited exposure to Inner Mongolia's coal and property sectors, with coal-related loans at RMB135bn and property loans at RMB3.988bn.
• The bank has been proactively adjusting its loan and income structure, shifting to retail loans and non-interest income.
• ICBC's capital adequacy ratio (CAR) is strong, at 14.2% for FY13F, and the bank has large buffers to absorb potential NPLs.

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Key Information

Key Risks and Concerns

• NPL pressure is rising in Inner Mongolia, particularly in rural co-ops and small loan companies.
• Overcapacity in the property sector, especially in Ordos, is a concern.
• Local government debt is high, and expenditure cuts may affect GDP growth.

Positive Factors

• ICBC has a strong capital position and robust risk management.
• The bank has reduced exposure to high-risk sectors like property and coal.
• 2Q13 earnings results are seen as a positive catalyst.
• Dividend growth is expected, with DPS (Dividend per Share) increasing to HK$0.37 in FY14.

Peer Comparison

• ICBC is outperforming most peers in terms of capital adequacy, ROE, and dividend yield.
• The report prefers CCB and ABC among large caps due to lagging share price performance.

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Summary Table

Metric	FY12A	FY13F	FY14F	FY15F
Pre-prov. Profit (RMB m)	339,780	371,781	403,964	436,125
Pretax Profit (RMB m)	308,687	325,555	353,344	381,100
Net Profit (RMB m)	238,532	251,257	272,667	294,116
EPS (RMB)	0.68	0.72	0.78	0.84
EPS (HK$)	0.84	0.88	0.96	1.06
P/BV (x)	6.1	5.8	5.3	4.8
Div Yield (%)	5.7	6.0	6.6	7.3
CAR (%)	13.56	14.91	14.2	14.4
ROE (%)	22.9	20.8	19.8	18.8

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Conclusion

The report maintains a BUY rating for ICBC, citing its strong capital position, lower NPL exposure, and positive earnings outlook. While Inner Mongolia's economic challenges are a concern, the impact on ICBC is expected to be limited. The target price is HK$6.57, based on DDM and updated dividend and earnings forecasts. The bank's performance is expected to be reassuring in the second half of 2013, with a focus on NIM, NPL, and ROE.