Incident: On March 27, ICBC released its 2023 Annual Report. Over 23 years, we have achieved cumulative revenue of 843.1 billion yuan, YoY -3.7%; net profit to mother of 364 billion yuan, YoY +0.8%; non-performing rate of 1.36%, and provision coverage of 214%.
Net profit attributable to mother increased year-on-year. ICBC's revenue in '23 was -3.7% YoY, up 0.2 pct from the previous three quarters. The calculation of asset impairment losses slowed. Asset impairment losses were -17.4% year-on-year for the whole year, and net profit back to mother was +0.8% year-on-year. The growth rate was the same as in the previous three quarters.
The scale is steadily expanding to a high level, actively helping the entity. ICBC's total assets and loans were +12.8% and 12.4% year-on-year, with growth rates of +0.4 pct and -0.1 pct respectively at the end of 23Q3. The company's asset scale maintained a high rate of expansion in every quarter of '23, and continued to increase capital supply to the real economy. At the end of '23, the balance of manufacturing, strategic emerging industries, and inclusive small and micro loans was +27.3%, +54.1%, and +43.7%, respectively. Looking ahead to the year 24, the first is that the central bank's certification standards for inclusive small and micro businesses have been relaxed, and there may be more room for use; second, the government work report suggests “plans to issue ultra-long-term special treasury bonds for several years in a row,” which is expected to drive demand for supporting credit in infrastructure and other fields, thus driving credit investment by major banks.
Interest spreads are still under pressure, and deposit costs have declined somewhat. ICBC's net interest spread at the end of '23 was 1.61%, down 6BP from the end of 23Q3. On the asset side, loan yield at the end of 23 was 3.81%, down 14BP from the end of 23H1. It is expected that there will still be downward pressure on the pricing of new loans, and stock mortgage interest rate adjustments and local government bonds will also have a negative impact on interest spreads. On the debt side, the 23-year deposit cost ratio was 1.89%, down 1BP from the end of 23H1. The subsequent stabilization of interest spreads may require attention to the adjustment of the debt-side structure. The current trend of deposit regularization continues. The share of ICBC term deposits at the end of 23 was 57.7%, +0.4 pct compared to the end of 23Q3. However, the favorable effects of the reduction in deposit listing interest rates are expected to gradually show in 24 years.
Asset quality remains stable. ICBC's non-performing rate at the end of 23 was 1.36%, the same as at the end of 23Q3. Looking at key areas: 1) The non-performing rate of loans to public real estate was 5.37% at the end of '23. On the one hand, combined with the small increase in real estate loans to public real estate, related adverse exposures are currently or are being increased to deal with stock risks; on the other hand, the non-performing rate has dropped significantly from the peak of 6.68% at the end of '22. 2) The idea of “exchanging time for space” for local government bonds is quite clear, so although it may put some pressure on interest spreads, it may not cause significant fluctuations in asset quality. 23 At the end of the year, the provision coverage rate was 214%, and the loan ratio was 2.90%, and there is still strong risk compensation capacity.
Investment advice: High rate of expansion and stable asset quality
First, the fundamentals are solid. Net profit from the mother grew steadily in '23. Although interest spreads are still bottoming out, assets have continued to expand rapidly; real estate risk continues to drop, and overall asset quality is stable. Second, it has a high dividend investment value, and the cash dividend ratio is stable at 31.3% in '23. Third, in the context of macroeconomic recovery, the overall restoration of bank sector valuations, and catalysing the “China Special Valuation” concept, are expected to drive further restoration of company valuations. EPS is expected to be 1.02, 1.06, and 1.10 yuan respectively in 24-26, and the closing price on March 28, 2024 corresponds to 0.5 times 24-year PB, maintaining the “recommended” rating.
Risk warning: Macroeconomic growth is declining; asset quality is deteriorating; the decline in net interest spreads in the industry exceeds expectations.