Industrial &Commercial Bank of China A:NPL ratio down,but provision requirement under short-term pressure
NPAT grew by 1% yoy in H116.
ICBC’s NPAT in H116 grew by 1% yoy to Rmb150bn, tracking 58%/56% ofUBSe/consensus estimates respectively. We calculate ICBC’s Q216 earnings ofRmb75.5bn, up 1% yoy (+1% qoq). PPoP in Q216 slightly declined by 1% yoy with (1)net interest income declined by 9% yoy, (2) loan up 9% yoy (+3% qoq) with NIMcontracting by 13bp qoq, (3) fee income dropped by 4% yoy, (4) annualized credit costimproved by 7bp yoy/10bp qoq to 0.66%, (5) cost-income ratio was well contained at26.7%. Mortgage lending was one of the major growth drivers (+27% yoy) of the loangrowth. Loan to deposit ratio slightly grew by 0.5ppt qoq to 73%.
NPL balance & ratio down, but provision requirement under pressure.
At end-H1, NPL balance declined by 4% qoq while NPL ratio improved by 11bp qoq to1.55%. However, coverage remained low at 143% in Q216, lower than minimumrequirement. Special mention loan balance grew by 20% HoH; >90 days overdue loanincreased by 17% HoH. Reserve to loan ratio dropped by 13bp qoq to 2.21%. Thoughboth NPL ratio and balance saw improvement qoq, we still have concern aboutpotential bad debt provision requirement to lift up its coverage ratio in the short term.
Capital strength remains stable.
At end-H1, ICBC’s CET1 ratio was 12.54%, higher than industry average of 10.7%. T1CAR and total CAR stood at 13.11% and 14.26% respectively, indicating the bank’scapital strength remains stable. As banks’ ROE continues to fall, their PB ratio couldcome under pressure, hurting their ability to raise funds in the secondary market.
Therefore, we remain positive on banks with better capital positions, such as ICBC.
Valuation: Maintain price target of Rmb5.40 and Buy rating.
We apply 1.02x target P/BV to our 2016 BVPS estimate of Rmb5.30 to derive our pricetarget. Our target P/BV is based on a long-term sustainable ROE of 9.4%, a cost ofequity of 9.3% and a long-term growth rate of 5%. The stock is trading at 0.85x our2016 P/B estimate, which we view as attractive. We maintain our Buy rating.