Industrial and Commercial Bank of China's (ICBC) attributable net profit dropped 2.8% YoY in 1Q24, below our expectation. As one of the biggest banks in China, its scale increased steadily. As of end-March 2024, its loans/deposits increased 4.9%/4.5% from end-2023. Its net interest income decreased 4.2% YoY in 1Q24, mainly due to the mixed effects of steady growth in interest-earning assets and decrease in NIM. Its NPL ratio was unchanged in 1Q24 as asset quality remained solid. ICBC maintained strict NPL recognition and its allowance to NPLs ratio increased slightly in 1Q24. Its H shares are now trading at below 0.4x 2023E P/B, which, in our view, is undervalued. Looking ahead, we believe ICBC will report positive growth in earnings with solid asset quality in 2024. Maintained BUY rating.

Key Factors for Rating

Asset quality was solid in 1Q24. Its NPL ratio stood at 1.36% at end-March 2024, unchanged from 1.36% at end-December 2023. We expect its NPL ratio to drop to 1.35% in 2024. ICBC maintained strict NPL recognition policy in 1Q24. Its allowance to NPLs reached 216.3% at end-March 2024, against 214% at end-December 2023.

Net interest margin (NIM) dropped in 1Q24. As ICBC strengthened its financial support to the real economy and small and medium sized enterprises, its NIM declined in 1Q24. Its NIM of interest-earning assets was 1.48% in 1Q24, down 13bps from 2023. We expect its NIM to drop 18bps in 2024.

Fee and commission income dropped in 1Q24. Its net fee and commission income decreased 2.8% YoY in 1Q24, against negative YoY growth of 7.7% in 2023, 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 0.38x 2024E P/B. Considering its solid asset quality, decent ROAE and around 7.9% dividend yield, we believe the bank is undervalued. We decreased our target price from HK$6.28 to HK$6.26, based on about 0.55x 2024E P/B.