Model adjustment
? We adjust FY21F-23F EPS by -0.1% to +4.6%, to reflect our view of a stronger-than-expected FY21F and a weaker economy in FY22F-23F.
? Policy risk has also been better than we had previously expected and hence we cut our policy risk valuation discount from 50% to 40%.
? Upgrade to Add from Hold. TP rises to Rmb5.10 from Rmb4.10 due to valuation roll-forward and a reduced policy risk valuation discount.
Stronger-than-expected FY21F and a weaker FY22F – 23F
We forecast FY21F EPS to accelerate to 10.8% yoy, the strongest since FY12’s 14.4% yoy, mainly due to lower credit costs. We then conservatively expect FY22F EPS growth to slow to 7.4% yoy on a weaker economy, before rebounding to 9.1% yoy in FY23F.
Better-than-expected policy risk
We had previously been concerned that given the worsening economy in 2H21, EPS growth would have been more significantly impacted due to policymaker pressure to ‘surrender’ profits — the China banks had been asked to surrender Rmb1.5tr in profits back in 2020 (see Between a rock and a hard place, dated 18 Jun 2020). Policy risk has, however, been better than expected, with ICBC likely to report a nine-year-high FY21F EPS growth, in our view. We, thus, cut our policy risk valuation discount from 50% to
40%.
Upgrade to Add; TP raised to Rmb5.10 from Rmb4.10
We value ICBC using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to the ‘true’ corporate NPL ratio of 10.5% used within our stress test. However, due to the lower policy risk valuation discount and a valuation roll-forward (where we now derive our target price by applying our target P/BV multiples to FY22F BVPS), our TP rises to Rmb5.10 from Rmb4.10. We upgrade our rating from Hold to Add. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.