ICBC Earnings: Revenue Headwinds Greater Than Peers; Credit Quality Stable

Industrial and Commercial Bank of China’s 601398 first-quarter performance was largely within expectation. Total revenue declined 1% year on year, driven by the 5% and 3% respective contractions in net interest income and fee income, while net profit was flat year on year. We leave our main assumptions and our fair value estimates of CNY 4.60 for the A-shares and HKD 5.00 for the H-shares unchanged. As with its peers, ICBC is trading at a historically low 0.4 times 2023 price/book value. However, while we think ICBC will continue to benefit from its strong deposit franchise and operating efficiency, we currently have a preference for Agricultural Bank of China and China Construction Bank, if among the state-owned banks; and for China Merchants Bank and Ping An Bank, as we anticipate fee income growth to strengthen in second-half 2023.

We believe the 33-basis-point year-on-year contraction in net interest margin, or NIM, and falling fee income growth were two major factors contributing to its weaker-than-peer top-line growth. First-quarter fee income declined 2.8% year on year, hampered by significant contraction in asset management and agency sales of mutual funds due to the reduced risk appetite of customers amid the volatile capital market. According to the Asset Management Association of China, the total amount of stock and hybrid funds distributed through ICBC declined 5% year on year. The challenges were industrywide, as first-quarter issuance of total mutual funds declined 15%, while the issuance of stock and hybrid funds contracted 52% year on year. In addition, ICBC’s bank wealth management products contracted 17% year on year in 2022, compared with the 15% and 7% respective declines for China Construction Bank and Agricultural Bank of China. We expect low-single-digit growth for ICBC’s fee income in 2023 as market confidence gradually improves in the second half.