Industrial and Commercial Bank of China (ICBC)

The Industrial and Commercial Bank of China (ICBC) stands out as the largest commercial bank in China, boasting a diversified business mix and a robust balance sheet. ICBC’s stable asset quality and high non-performing loan (NPL) coverage ratio position it as a resilient player in the sector, even amidst an uncertain economic landscape.

Investment Thesis

ICBC’s recent performance has been marked by notable share price rallies. The ICBC-H shares surged by 7% this week, with a 35% year-to-date (YTD) gain, while ICBC-A shares rose by 5% this week, achieving a 44% YTD increase. This outperformance is linked to a market rotation favoring stable dividend-paying assets, especially as interest rates in China decline. Investors are drawn to the bank’s attractive dividend yields and undemanding valuations.

Key Financial Metrics

• Net Interest Income: CNY 655.0 billion in FY23, projected at CNY 632.8 billion for FY24E and CNY 667.1 billion for FY25E.
• Net Profit: CNY 349.0 billion in FY23, expected to slightly dip to CNY 340.2 billion in FY24E and recover to CNY 346.5 billion in FY25E.
• Key Ratios: Return on Assets (ROA) is expected to decline from 0.9% in FY23 to 0.7% by FY25E. Similarly, Return on Equity (ROE) is projected to drop from 10.7% in FY23 to 9.3% in FY25E.
• NPL Ratio: Expected to remain stable at 1.3% for FY24E and FY25E.

Valuation and Recommendation

ICBC-H is trading at a consensus 12-month forward price-to-book (P/B) multiple of 0.4x, which is approximately one standard deviation below its 10-year average. With a revised fair value estimate of HKD 6.36 (up from HKD 5.50), the stock is pegged at 0.55x forward P/B. The report assigns a “BUY” rating to ICBC, highlighting its potential for valuation recovery and stable dividend payouts.

ESG and Governance

ICBC has demonstrated a strong focus on green finance, inclusive banking, and corporate governance. Key achievements include:

• A three-year average attrition rate of 1.7%, well below the industry average of 10.3%.
• Allocation of 12.9% of its loan portfolio to rural segments in 2021.
• Notable improvements in underwriting sustainability-linked bonds and conducting climate risk stress tests.

However, the bank faced allegations of regulatory violations in 2022, including lapses in reporting and anti-money laundering practices.

Agricultural Bank of China (ABC)

The Agricultural Bank of China remains a key player in the Chinese banking sector. Its financial metrics highlight steady performance and a focus on maintaining competitive returns for shareholders.

Key Financial Metrics

• Price-to-Earnings (P/E): 5.4 (FY24E) and 5.3 (FY25E).
• Price-to-Book (P/B): 0.5 for both FY24E and FY25E.
• Dividend Yield: 5.7% (FY24E) and 5.9% (FY25E).
• Return on Equity (ROE): 9.9% (FY24E) and 9.6% (FY25E).

China Construction Bank (CCB)

China Construction Bank continues to be a significant contributor to the sector’s overall growth. The bank’s resilience is evident in its financial metrics and dividend payouts.

Key Financial Metrics

• Price-to-Earnings (P/E): 4.6 (FY24E) and 4.5 (FY25E).
• Price-to-Book (P/B): 0.5 (FY24E) and 0.4 (FY25E).
• Dividend Yield: 6.5% (FY24E) and 6.7% (FY25E).
• Return on Equity (ROE): 10.6% (FY24E) and 10.1% (FY25E).

Bank of China (BOC)

As one of the “big six” banks, Bank of China continues to maintain its market position through strategic financial management and dividend consistency.

Key Financial Metrics

• Price-to-Earnings (P/E): 4.9 (FY24E) and 4.8 (FY25E).
• Price-to-Book (P/B): 0.4 for both FY24E and FY25E.
• Dividend Yield: 6.4% (FY24E) and 6.5% (FY25E).
• Return on Equity (ROE): 9.3% (FY24E) and 8.9% (FY25E).

China Merchants Bank (CMB)

China Merchants Bank demonstrates a strong profitability profile, supported by higher price multiples and a robust return on equity.

Key Financial Metrics

• Price-to-Earnings (P/E): 6.4 (FY24E) and 6.2 (FY25E).
• Price-to-Book (P/B): 0.9 (FY24E) and 0.8 (FY25E).
• Dividend Yield: 5.3% (FY24E) and 5.5% (FY25E).
• Return on Equity (ROE): 14.5% (FY24E) and 13.7% (FY25E).

Conclusion

The Industrial and Commercial Bank of China and its peers have demonstrated resilience in a challenging economic environment. With stable asset quality, attractive dividends, and undemanding valuations, these banks provide substantial opportunities for investors. The “BUY” recommendation for ICBC by OCBC Investment Research reinforces its potential for growth and valuation recovery over the medium term.