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In-line results
• In-line result but net interest margin headwind is likely to persist
• Improving asset quality
• Valuation is not demanding but lack of catalysts

Investment thesis

ICBC’s diversified business mix, strong balance sheet and high profitability makes it a quality bank within the sector that is more resilient to China’s moderating economic growth.

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Investment summary

• In-line result but net interest margin headwind is likely to persist – ICBC reported an in-line 2Q21 result with net profit and pre-provisions operating profit (PPOP) rose 21% and 9% y/y respectively. Having said that, its net profit growth lagged behind its peers. Also, its PPOP growth was mainly driven by strong trading gain, which surged by 2.2x y/y to CNY6.5bn in 2Q21, primarily boosted by derivatives trading gain and is subject to higher volatility. Net interest margin (NIM) and fee income were under pressure with NIM edged
down 3bps q/q to 2.1% in 2Q21due to lower asset yield. Fee income fell 0.5% y/y in 2Q21 (vs. +1.3% y/y in 1Q21) and was the lowest among its peers. The sluggish growth in fee income was mainly dragged by weakness in bank card business, offsetting the strength in agency and custody services.

• Improving asset quality – Non-performing loans (NPL) ratio declined 4bps q/q to 1.54% in 2Q21, which was driven by the drop NPL ratios in retail and wholesale, construction and mining sectors. NPL coverage increased 8.5ppt q/q to 192%. While Common Equity Tier 1 (CET1) ratio dropped 39bps to 12.9%, capital position remained resilient.

• Valuation is not demanding but lack of catalysts – Looking forward, it is expected asset yields to remain under pressure as regulator is promoting lower
borrowing cost for the real economy while deposits are likely to face competition. Management is aiming to improve asset mix and develop its wealth management ecosystem so as to maintain its NIM at a level better than its peers. Despite that ICBC posted an improvement in asset quality, the notable upticks in NPL ratio for the property sector (+197bps h/h in 1H21) warrants a close monitor in the 2H. The stock is trading at 0.42x forward Price-to-Book, which is at -2 s.d. to historical averages and is offering about 8% forward dividend yield. While valuation is not demanding, we believe positive catalysts are limited. We continue to prefer retail-focused banks within the Chinese banks sector, such as China Merchants Bank, and among the Big-4 banks, CCB remains as the preferred pick. We fine-tune our Fair Value estimate to HKD6.0 by rolling over our estimates and applying an updated valuation multiple of 0.55x forward Price-to-Book, which is set at -1 s.d. to historical average.