SECTOR: Banking HSI: 22,561 PRICE:HK$5.37

Transcription

1 Recommendation BUY Target Price: HK$6.92 (+28.9%) Industrial and Commercial Bank of China (1398.HK) 5 March 2013 SECTOR: Banking HSI: 22,561 PRICE:HK$5.37 EARNINGS (RMBm) KEY DATA For the fiscal year ended 12/10 12/11 12/12E 12/13E 12/14E Issued Capital (m Shrs) 349,322 Net interest income 303, , , , ,530 Market Cap (HK$m) 1,478, Non-interest income 72, , , , ,085 Avg. Daily Vol. (6 mths) m shrs Operating income 380, , , , ,495 High/Low 52weeks (HK$) 6.00/3.97 Operating expenses (139,480) (169,613) (195,055) (226,264) (266,991) Free Float (%) 99.1 Net Profit 165, , , , ,009 Major Shareholder SSF (11.9%) EPS (RMB) Merrill Lynch (6.87%) % Change 22.86% 26.08% 24.60% 15.19% 7.39% Temasek (6.03%) PER(X) Blackrock (5.89%) DPS (RMB) Q12 RESULTS (RMBm) 3Q11 3Q12 YoY(%) Key Ratios(%) 3Q11 3Q12 YoY(ppts) Net interest income 92, , % Net interest margin 2.60% 2.67% 0.07ppt Non-interest income 24,504 24, % Cost/ income ratio 26.58% 26.45%. (0. 13ppt) Operating income 117, , % Loan/deposit ratio 62.66% 63.20% 0.54ppt Operating expense 45,697 40, % ROE 24.70% 23.90% (0. 80ppt) Net profit 69,483 78, % ROA 1.45% 1.45% 0 EPS - basic (RMB) % NPL ratio 0.91% 0.87% (0.04ppt) Total CAR 12.51% 13.61% 1.10ppt Tier-1 CAR 10.03% 10.51% 0.48ppt Note: Differences may arise due to rounding error. SECTION 1 RESULTS BRIEFING 3Q12 results came in above expectations. ICBC reported another solid set of 3Q results, with net profit gaining 15% YoY and 1% QoQ to Rmb62.4bn, beating out market estimates. The positive earnings surprise largely came from better than expected credit costs and operating costs; growth was achieved despite a 5% QoQ drop in fee income. Stable asset quality. NPL amount and NPL ratio both declined on a QoQ basis. ICBC was the sole H-share bank to disclose a QoQ decline in overdue loans, which were down 12% in the 3Q. Higher net interest margin (NIM), stronger loan pricing power. ICBC s NIM increased by 1ppt QoQ to 2.67% in 3Q12 due to tighter control on liability costs, stronger loan pricing power, higher investment yields and also a lagged effect from the loan re-pricing. Both CARs improved. Tier-1 CAR improved by 0.48ppt YoY to 10.51% while total CAR was up 1.1ppts YoY to 13.61% in 3Q12, respectively. Platinum Broking IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 SECTION 2 COMPANY BACKGROUND Industrial and Commercial Bank of China is the largest commercial bank in China, with total assets of RMB17.4 trillion as at the end of 3Q12. ICBC has a China market share of 13% in terms of loans and 15% in terms of deposits. The bank currently has about 4.1m corporate banking customers and 282m personal banking customers, served by an extensive branch network consisting of 16,648 domestic institutions and 239 overseas institutions. ICBC was dually-listed on the Hong Kong Exchange and Shanghai Stock Exchange in October Central Huijin Bank and the Ministry of Finance (MOF) are the two key government-related shareholders of ICBC, holding 35.4% and 35.3% of total equity. SECTION 3 BUSINESS OUTLOOK 1. Recent developments Sector retracement on fears over tighter regulation. After a long bull run following a good set of 3Q results sector-wide, Chinese banking stocks corrected following PBOC-led tightening in late February where US$145bn was drained from the interbank market to tighten excess liquidity. The new government has maintained that it will keep prudent control over monetary policy to avoid a hawkish inflationary environment. However, we believe the current weakness provides a good opportunity to buy into the sector ahead of the 4Q12 results due this month, which we expect to be strong given favourable market conditions leading up to the year end. ICBC to sell up to RMB60bn of subordinate capital instruments. CBRC s new banking rules came into force on 1 st January, stipulating new capital requirements for domestic banks. China s banks are facing greater pressure to supplement their capital, and the CBRC more recently announced that subordinated debt issued by commercial banks before the end of 2012 would not be written down or converted to equity, but still can be included in regulatory capital. On 15 January of this year, ICBC announced plans to sell up to RMB 60 billion of eligible tier-2 capital instruments before the end of The issue will provide a long term buffer allowing the bank to maintain its capital ratios. Capital position to improve further despite CBRC s new banking rules. ICBC has already met the minimum capital requirements set by CBRC s new regulations (effective January 1 st 2013); in 3Q12, tier-1 CAR rose 0.48ppts YoY to 10.51%, and CAR also increased 1.10ppts YoY to 13.61%. ICBC expects that upon implementation of new risk management procedures (using the IRB approach for credit risk and standardised approach for market/operational risk), tier-1 CAR will be boosted by 14bps and total CAR by 6bps. Meanwhile, an A-IRB (advanced-irb) approach for credit, market and operational risks would result in a surge in tier-1 CAR and CAR by 143bps and 93bps respectively. Though management prefers A-IRB, the move is under review by CBRC prior to approval, and would be subject to a 3-year monitoring period. Platinum Broking 2

3 Exhibit 1: Timetable for new CAR rules Transaction period Systematically important banks Other banks Core Tier-1 Ratio Tier-1 Total Tier-1 Core Tier-1 Ratio ratio CAR ratio Total CAR End % 7.5% 9.5% 5.5% 6.5% 8.5% End % 7.9% 9.9% 595.0% 6.9% 8.9% End % 8.3% 10.3% 6.3% 7.3% 9.3% End % 8.7% 10.7% 6.7% 7.7% 9.7% End % 9.1% 11.1% 7.1% 8.1% 10.1% End % 9.5% 11.5% 7.5% 8.5% 10.5% Sources: CBRC, Platinum research Exhibit 2: Tier 1 CAR ratios (%) of H-share Banks Exhibit 3: Tier 1 CAR and CAR ratios (%) of ICBC 14.0% 16.00% % 10.0% 8.0% 6.0% 4.0% 0.0% 10.5% 10.0% 11.6% 11.4% 10.4% 10.4% 10.0% 10.6% 8.5% 9.8% 8.1% 9.9% 9.2% 10.1% 8.1% 8.0% ICBC CCB BOC ABC BoCom CMB 3Q11 3Q12 Minsheng Citic 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 11.77% 12.33% 12.51% 13.17% 13.13% 13.38% 13.61% 9.66% 9.82% 10.03% 10.07% 10.15% 9.99% 10.51% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Tier 1 CAR CAR 2. Favourable environment for Chinese banks Loosening of monetary policy favours banking environment. In 2013 the PRC government will aim to increase social financing, as proposed in China s annual economic conference held in December The target for inflation has been set at 3.5% for the fiscal year ahead, while new loans may amount to RMB9 trillion, representing an increase of RMB bn from Further easing of monetary policy will continue to encourage gradual improvement of the macro environment and reduce NPL risks for banks. Healthy operating metrics in 3Q; solid base for loan and deposit growth in 4Q Steady loan and deposit growth to maintain NIM stability. ICBC s gross loan book grew by 2.5% QoQ, at the same pace as the Big 5 banking peers, while deposit growth outpaced peers at 3.4% QoQ. This helped the bank to control funding costs and stabilise NIM, which was slightly up by 1bp at 2.67%. Meanwhile, 3Q12 loan to deposit ratio (LDR) came in lower than that of peers, at 63.2% vs. regulatory guideline 75%, thus is not likely to be an obstacle for the bank s loan expansion. Platinum Broking 3

4 Exhibit 4: Deposit growth of H-share banks (3Q11 vs 3Q12) Exhibit 5: Average loan balance and yield (1H11 vs 1H12) 4.0% 3.0% 1.0% 0.0% -1.0% % ICBC CCB BOC ABC BoCom CMB Minsheng Citic 3Q11 3Q12 3Q11 Industry Avgerage 3Q12 Industry Avgerage 6,000 5,000 4,000 3,000 2,000 1,000 0 Corporate loans 1H11 Average balance 1H11 average yield Discounted bills Personal loans Overseas and others % 8.0% 6.0% 4.0% 0.0% 1H12 Average balance 1H12 Average yield Time deposits could be repriced to lower ICBC s deposit cost in 2H13 NIM to come under pressure in 1Q13, but remain stable in 2H13. 3Q s asymmetric re-pricing of loans to reflect rate cuts may put pressure on NIMs in 4Q12; only 40% of loans were re-priced vs. 70% of deposits. Ongoing repricing in the 4Q may temporarily put downward pressure on NIMs into 1H13, but we expect full recovery in the 2H on greater pricing power from strong deposit growth, particularly fixed term bonds. Exhibit 6: Net interest income growth of H-share Banks (3Q11 vs 3Q12) % 10.0% 8.0% 6.0% 4.0% 0.0% 3.9% 6.0% 4.4% 3.9% 4.3% 4.5% 3.8% 3.0% 0.7% 8.4% 0.3% 6.3% 2.9% 0.9% ICBC CCB BOC ABC BoCom CMB Minsheng Citic 3Q11 3Q12 3Q11 Industry avgerage 3Q12 Industry avgerage Greater market liquidity will help to ease quality concerns and reduce credit risk Loan asset quality likely to improve. During the 3Q, the bank s NPLs trended downwards once more (NPL balance -0.5% QoQ, NPL ratio -2bps QoQ). Impaired loans declined 35.9% QoQ, resulting in a lower credit cost of 27bps from 43bps. Looser monetary policy this year implies that market liquidity will increase; we anticipate that these measures will help private enterprises not only to repay their maturing loans, but also boost overall private sector growth and help with new loan repayment, i.e. reduce the risk of loanbook quality deterioration for banks. The bank s loan loss provision is currently less than 2.5% of the regulatory level. Platinum Broking 4

5 Exhibit 7: NPL ratios (%) of H-share Banks (3Q11 vs 3Q12) 3. Long term outlook Pace of international expansion to speed up. At the end of 2011, ICBC s Middle Eastern unit recorded a net profit increase of 21.4% YoY to US$5.27 million. The bank is accelerating the rapid growth of trade and investment between the Middle East and China, focusing in particular on the United Arab Emirates and Qatar. The bank is also expanding into Latin America, Eastern Europe and Africa, aiming to target regions that have a significant number of Chinese businesses in operation already, given the rising volume of trade and investment between the overseas market and China. Recent transactions include the US$600 million purchase of a 60% equity of Standard Bank London ( SBL ), which owned by South Africa's Standard Bank; ICBC may increase its holding to 80% in the next few years. The expansion opens up further opportunities e.g. overseas investment channels or innovative global wealth management products. ICBC is also ready to broaden to investment banking and funding to regional clients exploring investment opportunities in China. High-end investment banking business under development. Through its wholly owned subsidiary ICBC International (ICBCI), the Bank is actively seeking out opportunities to aid its ongoing evolution into a top-tier global investment bank. Last year, ICBC again ranked first in China for underwriting corporate bonds. Leveraging on its parent company s strong brand and resources, ICBCI is gradually expanding its product offerings to cater for the growing financial needs of Chinese corporations. In 2013 the Bank will accelerate the development of its investment banking business focusing on product innovation and development strategy. Platinum Broking 5

6 SECTION 4 VALUATION Exhibit 8: Relative valuation of H-share Banks Companies Ticker FY11 Total Asset Last Price 52-wk H/L Mkt Cap 6m avg daily vol FY10 PER FY11 PER FY12E PER FY13E PER FY10 PBR FY11 PBR FY12E PBR FY13E PBR FY10 ROA FY11 ROA FY12E ROA FY13E ROA FY10 ROE FY11 ROE FY12E ROE FY13E ROE (RMB$m) (HK$) (HK$) (RMB$m) (m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (%) (%) (%) (%) 1 ICBC 1398 HK 15,476, /3.97 1,477, CCB 939 HK 12,281, /4.71 1,264, ABC 1288 HK 11,677, / , BoC 3988 HK 11,830, / , BoCom 3328 HK 4,611, / , CMB 3968 HK 2,794, / , CITIC 998 HK 2,765, / , Minsheng 1988 HK 2,229, / , Simple avg Mkt cap wtd avg Note1: Based on 3Q12 financial statements Note2: PRC H-share banks' mkt cap includes both A-shares and H-shares; share price and mkt cap as at close of 01-Mar-2012; and exchange rate is HK$1=RMB0.802 Note3: Yield figures exclude special dividends Sources: Company data, IBES, Bloomberg, Platinum estimates Bullish on Chinese banking shares. We expect ICBC to post strong profit growth for 2012E backed by sequentially stable NIMs and steady credit charges. Moreover, ICBC continues to speed up its international expansion, with potential to become a major global investment bank. Currently trading at a P/B of 1.4x vs the peer group average of 1.3x; a larger market cap justifies this valuation premium. Given the short term benefits of the new capital requirements and stable asset quality in China, we believe the sector has potential to re-rate upwards over the coming 12 months. Three factors separate ICBC from Chinese banking peers: (1) rapid deposit growth; (2) stronger capital management; and (3) improving asset quality. We believe this has laid a good foundation for ICBC s business growth to outpace its peer group in Valuing ICBC at a FY13E PBR of 1.6x, in line with the current premium, we obtain a target price of HK$6.92, implying 28.9% upside. Platinum Broking 6

7 Exhibit 9:ICBC: 2-year Price Daily ICBC 3/7/2011-3/5/2013 (GMT) Price HKD Line, ICBC, Trade Price(Last) 3/6/2013, SMA, ICBC, Trade Price(Last), 50 3/6/2013, SMA, ICBC, Trade Price(Last), 100 3/6/2013, SMA, ICBC, Trade Price(Last), 200 3/6/2013, Vol, ICBC, Trade Price 3/6/2013, M Volume M 600M Q Q Q Q Q Q Q Q Q M 200M.1234 Source: Reuters Platinum Broking 7

8 IMPORTANT HONG KONG REGULATORY DISCLOSURES ON HONG KONG LISTED COMPANIES OF WHICH WE HAVE COMMENTED ON. Research Certification. No part of the compensation of the analyst(s) who are primarily responsible for producing this report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research. Market Making. This firm does not make a market in securities of the companies covered in this report. Conflicts of Interest. This firm does not own 1% or more of the common class of securities of the companies covered in this report. The analysts involved in the preparation of this report do not have financial interests in the common class of securities of the companies covered in this report. Investment Banking. Within the past 12 months a company controlled by the holding company of this firm has provided investment banking services to, and received compensation from, one of the companies covered in this report; namely Midas Holdings Limited. Relevant relationships. This firm and individuals employed by or associated with the firm are not officers of the companies covered in this report. GENERAL DISCLOSURES. This report is for distribution only under such circumstances and in such jurisdictions as may be permitted by applicable law. This report is not intended to offer or solicit purchase or sale of any financial instrument in any jurisdiction where such an offer or solicitation would be illegal, including but not limited to the United States of America and the United Kingdom and the rest of Europe. It does not take into account the specific investment objectives, financial situation or needs of any specific recipient. While reasonable effort has been made to ensure the information contained herein is not untrue or misleading at the time of publication, its correctness and completeness are not guaranteed, and they are subject to change without notice. Neither Platinum Broking Company Limited, nor any of its holding or affiliated companies, nor any of its or their directors or employees, represent or warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which may be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents thereof. Use of any information herein shall be at the sole discretion and risk of the user. Investors are expected to make their own investment decisions without relying on this publication. This report is produced by Platinum Broking Company Limited Hong Kong Office: 21/F LHT Tower, 31 Queen s Road Central, Hong Kong Telephone: Fax: Shanghai Office: Platinum Holdings Company Ltd (Shanghai Representative Office), 11B Jin Ming Building, Block 2, 8 South Zun Yi Road, Shanghai Tel: Fax: Singapore Office: Platinum Securities Company Ltd, 1 Scotts Road, #23-06 Shaw Centre, Singapore Tel: Fax: Platinum Broking Company Limited. All rights reserved. This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Platinum Broking Company Limited. Platinum Broking 8