Date: October 7, 2024
Broker: CGS International
Investor Confidence Buoyed by New Policies
A series of policy measures have eased investor concerns over macroeconomic uncertainties and property-related exposures, benefiting the Industrial and Commercial Bank of China (ICBC). These measures, enacted at the end of September and early October 2024, are aimed at stimulating stock market performance, driving consumption, and stabilizing the property sector, all of which are expected to contribute to a positive turnaround in sentiment among Chinese investors, consumers, and corporations.
Asset Quality and Policy Risk Reduction
The coordinated policies are expected to alleviate investors’ concerns about ICBC’s asset quality. The bank had seen an increase in its ‘stressed’ corporate non-performing loan (NPL) ratio during the first two quarters of 2024 after steady improvement throughout 2023. However, with policy interventions, CGSI anticipates stabilization of this metric, which could positively affect ICBC’s valuation. The ‘policy risk’ discount applied to the bank’s valuation has been reduced from 45% to 25%, signaling reduced concerns about regulatory pressures affecting the bank’s assets.
EPS Forecast and Profitability Adjustments
CGSI has revised its earnings forecasts for ICBC, reducing the expected earnings per share (EPS) by 1.3-4.8% for the fiscal years 2024 to 2026. This adjustment is largely attributed to reduced forecasts for non-interest income in 2024 and pressure on pre-provision operating profit (PPOP) for 2025-2026. Although net interest margins (NIM) remain under pressure due to falling rates in FY23 and the first half of FY24, the bank’s stability in EPS, coupled with a high dividend yield for FY24F, supports its positive outlook.
Target Price and Valuation
The target price for ICBC has been increased from HK$4.70 to HK$6.80. This adjustment reflects reduced concerns about policy risks, which were previously seen as a major drag on valuation. While the benefit of NIM recovery may be limited, the re-rating catalysts include improving loan demand and broader economic recovery. Key risks to this positive outlook include worse-than-expected NIM trends and any negative impacts from increased social responsibilities.
Financial Summary
- Market Cap: US$291,423 million
- Current Share Price: HK$4.83
- Target Price: HK$6.80
- EPS Forecast Changes: FY24F EPS cut by 1.3%, FY25F EPS by 2.9%, FY26F EPS by 4.8%
Dividend and Yield
The bank offers an attractive dividend yield of 7.03% for FY24, expected to slightly increase over FY25-26F, reinforcing ICBC’s appeal for income-seeking investors.
ESG Performance
In 2023, ICBC received a combined ESG score of “C” from LSEG, indicating room for improvement, particularly in the governance and social responsibility pillars. The bank has made significant efforts to integrate ESG considerations into its operations, including green finance initiatives, COVID-19 response efforts, and precision poverty alleviation loans. ICBC aims to double its renewable energy investment in the coming decade and is planning to phase out coal-related investments to align with China’s carbon neutrality goals by 2060.
Conclusion
ICBC’s valuation outlook is improving as a result of policy measures designed to support China’s banking sector and economy. Despite pressures on net interest margins and profitability, the bank’s stability, strong dividend yield, and reduced policy risks make it an attractive option for investors.
