9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 26 th March 2010. ICBC (ASIA) LIMITED ( 工銀亞洲 ) Sector : Banking Chairman : Dr. Jiang Jianqing HKSE Code : 00349 Market Price : HK$19.52 (26/03/2010) Managing Director & CEO : Mr. Chen Aiping Shares Issued : 1,318.3m Mkt. Cap. : HK$25,733.2 m 52 weeks Hi/ Lo : HK$20.20 / HK$7.75 HSI : 21,053.11 (26/03/2010) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2009 Final Results Highlights Vs FY2008 (%) Vs 30/06/2009 (%) Net interest income 3,009.2 +0.4% Non-interest income 1,181.0 +56.6% Total operating income 4,190.2 +11.7% Operating expenses (1,358.3) +8.5% Operating profit before impairment losses 2,831.8 +13.3% Impairment losses on loans and advances (385.5) -5.7% Profit before taxation 3,070.2 +188.6% Taxation (544.1) +473.8% Attributable profit to shareholders 2,526.1 +160.7% Total loans 135,734.3 +14.6% +7.7% Total deposits 163,715.6 +14.9% +1.5% Total assets 215,753.8 +10.9% -1.1% Basic EPS (HK$) 1.95 +153.2% Final DPS (HK$) 0.57 +216.7% Total DPS (HK$) 0.85 +84.8% Selected Ratios FY2009 FY2008 1H2009 Net interest margin 1.56% 1.55% 1.63% Cost-income ratio 32.4% 33.4% 34.4% Return on average assets 1.23% 0.48% 1.00% Return on average equity 16.1% 6.8% 13.0% Impaired loan ratio 1.00% 0.75% 0.73% Impaired advances coverage 65.9% 74.4% 89.5% Loan-deposit ratio 82.9% 83.1% 78.1% Capital adequacy ratio 14.9% 13.6% 14.4% Average liquidity ratio 40.2% 37.0% 38.0% FY09 results exceeded consensus ICBC (Asia) (ICBCA) reported FY09 net profit of HK$2,526m, up 160.7% y-o-y, ahead market expectation of HK$1,964.8m, attributable to the one-off equity investment disposal gain. ICBCA s loan growth and fee income growth came in stronger than expected, with revenue partly dragged by a weaker net interest margin (NIM). Dividend per share of HK$0.85 implies a payout ratio of 44% in FY09, which is lower than the historical payout of 60-65% as Management wanted to preserve capital to support ICBCA s rapid growth. Loan growth ahead peers Net interest income increased slightly by 0.4% to HK$3,009.2m, attributable to the slight improvement of overall net interest margin from 1.55% in FY08 to 1.56% in FY09. On the other hand, customer advances picked up substantially with strong growth in mortgages (+20.1% y-o-y). Overseas loans also saw 21.4% y-o-y increase, thanks to the business referrals from its parent ICBC. This report has been prepared solely for information purposes and we are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information which we consider reliable, but accuracy or completeness is not guaranteed. Opinions expressed herein are subject to change without notice. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein, while its group companies may from time to time have interests in securities of the company or companies mentioned herein.
Recovery in fee income Non-interest income jumped 56.6% y-o-y to HK$1,181m. Brokerage fee was up 54.9% y-o-y due to the recovery of local stock market. Positive results from credit card fees (up 30.3%) suggested positive progress on retail presence development. The overall non-interest income was also boosted by the fair value gains from financial assets and liabilities, totalling HK$193m (versus HK$231m losses in FY08). Improving cost-to-income ratio Operating expenses rose at 8.5% y-o-y during FY09 as the provision charges of HK$89m for Lehman Brothers Mini-bonds was included. Staff cost increased moderately by 9.5% y-o-y. With faster revenue growth, cost-to-income ratio of ICBCA fell from 33.4% in 2008 to 32.4% in 2009. Asset quality shows slight deterioration Impairment losses of HK$386m were made on loans and advances to customers as compared to HK$409m in 2009. Nevertheless, impaired loan ratio rose from 0.75% for FY08 to 1.00% for FY09. This was mainly related to its Dubai loans of US$60m and one real estate loan and one manufacturing loan in China. Lower profit contribution from China Mercantile Bank (CMB) Net profit of its wholly owned subsidiary CMB fell 58% y-o-y to HK$91m in FY09 given the global financial crisis as well as an increase in provision for doubtful loans. Total asset of CMCB amounted HK$12,830m as at 31 st December 2009, representing an increase of 23% over the end of 2008. Total customers loan and deposit balance as at 31 st December 2009 was HK$9,538m and HK$5,595m respectively, representing increases of 8% and 33% respectively y-o-y. Strengthen capital position by disposal ICBCA incurred gains of HK$782m from disposal of investment securities, including part of the equity investment in China Taiping Insurance (966 HK), as compared to the disposal losses of HK$202m in 2008. As a result, its tier 1 ratio was improved to 9.0% (from 7.3% in FY08), and total CAR rose to 14.9% (from 13.6% in FY08). Although the ratios are still low compared to peers, there is no imminent equity-raising pressure as the HKMA should be lenient towards CAR requirements for ICBCA because of its strong parent. Outlook & Prospects Support from parent ICBC group ICBCA can keep receiving loan referrals from ICBC, offering sources of its loan growth. It also began collaborating with the ICBC Shenzhen branch in September to allow each other's retail customers to open cross border bank and securities brokerage accounts. We expect similar agreements with other ICBC branches to continue providing ICBCA with a steady source of new customers across China over time. Strong branding among Mainland Chinese Mainland Chinese have currently emerged as the largest source of new customers in the saturated Hong Kong banking market, and ICBC Asia is one of the best positioned to capture this growth potential. The bank's retail banking business benefits from instant brand recognition among mainland visitors or immigrants to Hong Kong by offering residential mortgages and securities brokerage services. Shifting focus to retail business Being distinctive to other local banks which focused on expanding non-interest income in the previous years, ICBCA did not participate much on brokerage services and other retail products. Nevertheless, ICBCA began to spend more effort in 2009 on broadening its client base in retail business. The positive results from credit card fees and securities brokerage fees in FY09 could suggest some positive progress on its retail presence development. We expect fee income will become one of the key earning drivers for ICBCA going forward. Attractive valuations Compared with its HK peers, ICBCA looks inexpensive at 1.38x FY10E P/B and 11.2x FY10E P/E. We believe ICBCA s loan growth would be sustainable by leveraging its business-tie with its parent, ICBC. The key downside risk is that ICBCA may issues new equity which would dilute its earnings per share. Nevertheless, we continue to believe ICBCA, as a beneficiary of cross-border capital flows between Mainland and Hong Kong, can continue to expand its operation by outgrowing its peers. We accordingly recommend a Buy rating for the counter. Recommendation: Buy 2
Appendix I I. Impairment allowances, overdue and rescheduled advances of ICBC (Asia) As % of total customer advances Individual allowance Portfolio Non-performing allowance loans Overdue and rescheduled advances As of 31/12/2009 0.33% 0.33% 1.00% 0.47% As of 30/6/2009 0.34% 0.31% 0.73% 0.53% As of 31/12/2008 0.24% 0.32% 0.75% 0.38% II. Comparison of ICBC (Asia) s loan book: 31/12/2009 vs 31/12/2008 Loans-by industry 31 st Dec, 2009 Up/(down) 31 st Dec, 2008 Property related 30,219.0 +6.3% 28,422.8 Financial concerns 8,315.0 +19.9% 6,932.2 Wholesale & retail trade 6,100.3 +17.8% 5,180.5 Manufacturing 3,814.1-4.8% 4,006.0 Transport & transport equipment 9,224.8 +13.9% 8,102.2 Residential mortgages, HOS/PSPS 14,650.3 +20.1% 12,197.1 Credit card 94.2 +8.3% 87.0 Others 11,596.0 +13.1% 10,253.6 Trade finance 3,846.7-7.4% 4,153.8 Stockbrokers 429.4 +7809.9% 5.4 Loans outside HK 47,444.5 +21.4% 39,087.7 135,734.3 +14.6% 118,428.2 III. Comparison of ICBC (Asia) s loan book: 31/12/2009 vs 30/06/2009 Loans-by industry 31 st Dec, 2009 Up/(down) 30 th Jun, 2009 Property related 30,219.0-7.4% 32,637.1 Financial concerns 8,315.0 +4.7% 7,945.0 Wholesale & retail trade 6,100.3 +8.6% 5,615.5 Manufacturing 3,814.1-4.1% 3,975.9 Transport & transport equipment 9,224.8 +13.1% 8,156.5 Residential mortgages, HOS/PSPS 14,650.3 +16.0% 12,634.4 Credit card 94.2 +17.5% 80.1 Others 11,596.0 +19.7% 9,687.7 Trade finance 3,846.7 +20.7% 3,185.8 Stockbrokers 429.4-89.6% 4,114.4 Loans outside HK 47,444.5 +24.9% 37,972.1 135,734.3 +7.7% 126,004.5 3
Appendix II Breakdown of loan book of ICBC (Asia) Breakdown of Loan Book as of 31/12/2009 Total customer advances: HK$135,734.3 million Loans outside HK 35.0% Property related 22.3% Financial concerns 6.1% Stockbrokers 0.3% Trade finance 2.8% Others 8.5% Credit card 0.1% Residential mortgages, HOS/PSPS/TPS 10.8% Whoelsale & retail trade 4.5% Manufacturing 2.8% Transport and transport equipment 6.8% Breakdown of Loan Book as of 31/12/2008 Total customer advances: HK$118,428.2 million Loans outside HK 33.0% Property related 24.0% Financial concerns 5.9% Stockbrokers 0.0% Trade finance 3.5% Others 8.7% Residential Credit card 0.1% mortgages, HOS/PSPS/TPS 10.3% Whoelsale & retail trade 4.4% Manufacturing 3.4% Transport and transport equipment 6.8% 4
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