EUR 850.00 For Business Accounts Only

Morningstar | Industrial and Commercial Bank of China Saw Accelerated Growth in Third Quarter and Is Undervalued

With growth in revenue and net profit accelerating to 7.7% and 5.1%, respectively, from the year-ago period, narrow-moat Industrial and Commercial Bank of China delivered another set of strong results in the first three quarters. Given the results representing 80% of our projected full-year net profit, the bank is well on track to deliver our forecast 5.8% net profit growth in 2018. The results highlighted its faster-than-peer deposit growth, steady credit quality, and improving operating efficiency. This indicated the bank’s strong customer base and good progress in its technology-driven strategy. We retain our CNY 6.50 per share fair value estimate for the A shares and HKD 7.50 for H shares. With H shares trading at 0.8 times 2018 price/book and a 29% discount to our fair value estimate, the stock is undervalued on the market’s renewed concerns about banks’ credit quality as economic reform deepens amid escalated trade war tension. Current stock prices imply about 14% bad debt ratios for the bank, and we believe the market concerns are overblown. Its loan portfolio has been optimized toward retail loans and lower-risk corporate loans in service and new industries. In light of its strong capital position and profitability, we believe the bank is able to absorb the loan losses in the future years.

The 10.3% growth in net interest income and the 5.7% growth in fee income stood at the high end among the bank's Big Four peers, boosted by its steady net interest margin expansion and fast-growing fee income from credit card and settlement services. Net interest margin stayed flat at 2.30%, up 13 basis points from the year-ago period. Importantly, the bank’s deposit base further strengthened despite intensifying deposit competition. Deposits grew 8.9% from 2017, which is the highest level among Big Four banks. This was attributable to its good efforts in retail and corporate customer expansion. We expect the bank's NIM trend should fare better than peers thanks to its strong funding cost advantage and ongoing loan optimization.

Credit quality slightly improved over the quarter, with bad debt ratio dropping 1 basis point to 1.53%. Management noted that most leading indicators of credit quality continued to improve. Special-mentioned loans balance fell 16% from 2017, declining consecutively over the past nine quarters. Overdue loans balance dropped 5% from 2017, and bad debt formation rate continued its downward trend. Despite the improvement, credit costs further increased to 1.06% versus 0.88% previously. We prudently forecast credit costs will stay at current high level for the next three years.