Industrial and Commercial Bank of China's (ICBC) attributable net profit dropped 1.9% YoY in 1H24, largely in line with our expectation, against negative growth of 2.8% YoY in 1Q24. As one of the biggest banks in China, its scale increased steadily. As of end June 2024, its loans/deposits increased 6.7%/1.7% from end 2023. Its net interest income decreased 6.8% YoY in 1H24, mainly due to mixed effects of steady growth in interest-earning assets and decrease in NIM. Its NPL ratio dropped in 1H24, as asset quality remained solid. ICBC maintained strict NPL recognition and its allowance to NPLs ratio increased in 1H24. ICBC announced an interim dividend of RMB0.1434 per share, which should bode well for shareholders' returns. Its H shares are now trading at below 0.4x 2024E P/B, which, in our view, is undervalued. Looking ahead, we believe ICBC will report positive growth in earnings amid solid asset quality in 2024. Maintain BUY rating.
Key Factors for Rating
Asset quality was solid in 1H24. Its NPL ratio reached 1.35% at end June 2024, lower than 1.36% at end March 2024 and 1.36% at end December 2023. ICBC maintained strict NPL recognition policy in 1H24. Its allowance to NPLs reached 218.4% at end June 2024, against 216.3% at end March 2024 and 214% at end December 2023. We expect its NPL to stay at 1.35% in 2024.
Net interest margin (NIM) dropped in 1H24. As ICBC strengthened its financial support to the real economy and small and medium sized enterprises, its NIM declined in 1H24. Its NIM reached 1.43% in 1H24 and 1.48% in 1Q24, down 18bps and 13bps from 2023. We expect its NIM to drop 21bps in 2024.
Fee and commission income dropped in 1H24. Its net fee and commission income decreased 8.2% YoY in 1H24, against negative YoY growth of 2.8% in 1Q24, mainly due to volatile equity markets.
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
We expect its ROAE to reach 9.9% in 2024. Its H shares are now trading at 0.4x 2024E P/B. Considering its solid asset quality, decent ROAE and around 7.5% dividend yield, we believe the bank is undervalued. We decreased our target price from HK$6.26 to HK$6.25, based on about 0.55x 2024E P/B.