Morning Bulletin
What’s New.
3Q14 earnings slightly above consensus. Net profit was CNY72.4b for 3Q14,up 7.7% YoY (vs consensus forecast of CNY71.8b). Key discrepancies camefrom higher NIM and lower expenses.
NIM widened but weak non-interest income. We estimate ICBC’s NIMwidened to 2.65% in 3Q14 from 2.62% in 2Q14. This was mainly driven byhigher LDR and a shift from interbank lending to bond securities. However,ICBC continued to report an increase in net expenses paid in structureddeposits (CNY2.9b in 3Q14; CNY5b in 1H14), implying it still paid a highreturn to these depositors. Besides, due to further cut in certain feecharges to SMEs and micro-enterprises, its net fees fell 1.7% YoY in 3Q14.
Overall, we raise our NIM forecast to 2.60-2.63% for 2014-15 from 2.59-2.62%. We cut our forecast for non-interest income (including net fees)CAGR to 5.3% during 2013-16 from 10.4%.
Continued utilization of excess provisions. We estimate ICBC’s new NPLformation rate continued to rise to 1.53% in 3Q14 from 1.25% in 2Q14.
However, it reported a decline in credit cost of 8bps QoQ to 0.31% in 3Q14.
We believe ICBC continued to release some of its excess provisions throughwrite-offs and/or disposals of its NPLs. We estimate its excess provisionshave reduced to CNY77b in Sep 2014 (even lower than that of CCB: CNY95bin Sep 2014) from CNY93b in Jun 2014. This only accounted for 0.71% oftotal loans in Sep 2014. We thus maintain our conservative credit costprojection of 0.74-0.81% for 2014-15.
Dividend payout sustainable. Despite the increase in ICBC’s risk appetite,its CET1 CAR rose to 11.8% in Sep 2014. We estimate its CET1 CAR will stayabove 11% (regulatory minimum is 10% by end-Dec 2018) even if itmaintains the dividend payout ratio at 35% during 2014-16.
What’s Our View。
Downgrade to HOLD. We trim our EPS forecast by 4.4% for 2015 and lowerthe ROE assumption to 15.75% in our GGM. We derive a new TP ofHKD5.45, based on a 2015F P/BV of 0.95x.