Industrial Bank's (IB) attributable net profit decreased 17.2% YoY in 3Q23, which is lower than our expectation, against 4.9% YoY decline in 1H23. As a result, IB's attributable net profit dropped 9.5% YoY in 9M23, mainly due to negative growth in operating income and decline in NIM. Its net interest income increased slightly in 9M23, against 0.8% YoY decrease in 1H23, mainly due to weak growth in interest-earning assets and decrease in NIM. As of end-September 2023, its loans/deposits increased 6.6%/10.1% from end-2022. We noted that its net fee and commission income dropped 30.4% YoY in 9M23 amid weak investment sentiments and low investment appetites among its clients. Its asset quality remained solid as NPL ratio dropped slightly in 9M23. Valuation is undemanding. Maintain BUY rating
Key Factors for Rating
Asset quality remained solid in 9M23. We noted that its NPL ratio reached 1.07% at end-September 2023, against 1.08% at end-June 2023 and 1.09% at end-December 2022. Meanwhile, its allowance to NPLs reached 237.8% at end-September 2023, against 245.77% at end-June 2023 and 236.4% at end- December 2022. We expect its NPL ratio to stay at 1.07% in 4Q23.
Net interest income increased slightly in 9M23. Its net interest income increased 1.1% YoY in 9M23, as bank strengthened its financial support to the real economy and NIM further declined. We noted its NIM dropped 16bps in 9M23 after declining 19bps in 2022.
Net fee and commission income decreased in 9M23. Its net fee and commission income decreased 30.4% YoY in 9M23, which is lower than growths of its peers, mainly due to the sharp drop in wealth management business income. As a result, the proportion of net fee and commission income in total operating income may reach 14.1% in 9M23, against 19.2% in 9M22.
Key Risks to Rating
The bank might be under strong pressure to provide more support to the real economy if China's economy slows down significantly
Valuation
Valuation is undemanding. IB is undervalued as the bank is now trading at 0.44x 2023E P/B. We believe that the bank will further strengthened its financial support to the manufacturing sector in the future. We expect its ROAE to reach 12.2% in 2023. We revised down our target price from RMB23.78 to RMB21.96, based on about 0.65x 2023E P/B.