Industrial and Commercial Bank of China’s 2022 Results Weaker Than Peers, but Credit Quality Stable

Industrial and Commercial Bank of China’s 601398, or ICBC’s, net profit growth for full-year 2022 came in at 3.5%, decelerating from the 5.6% growth in the first nine months and weaker than we expected. Revenue growth for full-year 2022 was weaker than peers and contracted 2.6% from the 2021 level. We believe the 19-basis-point year-on-year contraction in net interest margin, or NIM, was the major factor contributing to its weaker-than-peer top-line growth. H-shares fell 2.11% on March 31 as investors are disappointed about its larger-than-peer NIM contraction. But we believe such risks are more than priced in as we believe the NIM contraction was mainly driven by a deposit-concentrated funding and unfavorable deposit mix change. We expect a potential deposit rate cut and the improving business sentiment to gradually reverse the migration to term deposits in 2023, and this should ease ICBC’s funding costs more so than peers. As such, we leave our main assumptions unchanged and retain our fair value estimates of CNY 4.60 for the A shares and HKD 5 for the H shares. The stock is undervalued, trading at a historically low 0.4 times 2023 price/book value.

Average loan rate and asset yield declined 11 and 2 basis points, respectively, from 2021, in line with peers. But the average deposit rate and funding cost respectively rose 18 and 13 basis points, indicating higher cost pressures when compared with the sub-10-basis-point decline for peers. As ICBC’s funding base is more reliant on deposits and corporate deposits in particular, lower demand deposits and rising precautionary savings in the corporate sector resulted in higher funding costs for ICBC than peers.

Credit quality looks stable. The nonperforming loans, or NPL, balance increased 9%, while the NPL ratio declined 4 basis points to 1.38% from 2021, with the improvement in line with peers.