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Morningstar | ICBC’s 1Q Recorded Stronger-than-Peer Top Line Growth and Operating Efficiency Improvement

Despite Industrial and Commercial Bank of China's solid results, we retain our CNY 6.50 per share fair value estimate for the China A-shares, and HKD 7.50 for H-shares as results were largely in line. Net profit increased 4.1% from 2017. The results stood out with a better-than-peer performance in net interest margin and strong improvement in operating efficiency. Boosted by the 19% revenue growth and a 304 basis point improvement in cost/income ratio, growth in preprovision operating profits accelerated to 13% from 9% in 2018. Cost/income ratio fell to 16%, well below the 20% to 30% of other listed Chinese banks in our coverage. Its continuous improvement in operating efficiency since 2017 was impressive, helped by its solid top line growth and effective cost control. The bank also recorded an industry-leading growth in deposit at 12% year on year, despite its enormous deposit base. We believe this is reflective of its strong customer base in both retail and corporate banking business.

With H-shares trading at 0.7 times 2019 price/book and a 20% discount to our fair value estimate, which implies 0.9 times forward P/B, the stock is undervalued and we believe it’s an attractive entry point for long-term investors. The past results reaffirmed our long-term thesis that ICBC’s strong customer base and leading position in wealth management enable it to stand out. ICBC is one of our top picks for Chinese banks and we expect the bank’s prudent management should translate to steady growth in shareholders’ equity in the long run.

ICBC’s credit quality was stable. Bad debt ratio fell slightly by one basis point to 1.51%, while bad debt balance rebounded 2% as the first quarter typically saw increase in overdue loans given the occurrence of week-long new year celebration. Regarding the regulator’s potential launch of stricter bad debt classification rules which require loans overdue more than 60 days to classify as bad debts, management believe the bank is well prepared and the change won’t impact ICBC’s current provision level and bad debt ratio.