Industrial & Commercial Bank of China Ltd. (601398.SS)

Equity
China
Financial Services

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Key risk factors

Low price volatility

Good trading liquidity

Resilient to price shocks

Key return factors

Solid dividends

Slightly undervalued vs peers

Somewhat favourable analyst view

Corporate actions & dividendsDividend of CNY 0.306 with an ex-date of 16 Jul 2024.

Company profileIndustrial and Commercial Bank of China Limited, together with its subsidiaries, provides banking products and services in the People's Republic of China and internationally. It operates through Corporate Banking, Personal Banking, and Treasury Operations segments. The Corporate Banking segment offers financial products and services to corporations, government agencies, and financial institutions. Its products and services include corporate loans, trade financing, deposit taking activities, corporate wealth management services, custody activities, and various corporate intermediary services. The Personal Banking segment provides financial products and services to individual customers. This segment's products and services comprise personal loans and cards, deposits, and personal wealth management and intermediary services. The Treasury Operations segment is involved in the money market transactions, investment securities, and foreign exchange transactions businesses, as well as in the holding of derivative positions. It also offers e-banking services, investment banking, financial leasing, and insurance services. The company was founded in 1984 and is based in Beijing, the People's Republic of China.

Valuation: Slightly undervalued

Multiple

TTM

NTM

P/E

4.10

4.90

PEG

3.90

P/B

0.40

0.50

P/CR

0.30

P/RIBPT

0.50

P/IBPT

From a historical and forecasted perspective, the stock is moderately underpriced compared to similar stocks. In particular, the stock is undepriced on P/E, , trading at neutral levels on P/RIBPT. Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Decent

Over the past six months, the stock has consistently climbed, resulting in 24% total increase. When compared to its international counterparts in the same sector and industry (as shown above), the stock has exceeded their performances, leading by 20ppts in total. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is mildly favourable.

Analyst view: Somewhat favourable

The average target price is 4.9 and suggests 13% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 6.3. This translates into 44% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 3.9. This is equivalent to 11% downside potential in the worst case.

Profitability: Modest

RoE

Industrial & Commercial Bank of China Ltd. reported a return on equity (RoE) of 9.4% in the last 12 months, down from 10.0% in FY23. The market consensus projects a RoE of 11.0% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.8% in the last 12 months, a decrease from 0.9% in FY23. The market analysts predict that RoA will be 0.9% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) grew to 53.0%, above the peers. The consensus estimate for FY24 for CI is 66.7%, again above of the peers.

Growth: Average

EPS

Core revenue

IBPT

RIBPT

1398.HK reported revenue of CNY 766 215mn in the last 12 months, down 1% from FY23. The institution earned CNY 562 778 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), a decline of 2% from FY23 At the same time, the dynamics of a more stable income, as measured by recurring income before provisioning and taxes (RIBPT), were drastically different. EPS fell 1% from FY23 to CNY 0.95. Market expects EPS to reach CNY 1.06 in FY24.The core revenue has been declining slowly over the last several years (negative), while Declining core revenue trend and insufficient control over costs resulted in visible fall of IBPT in the recent years (negative). This all contributed to very fast EPS growth (strongly positive). Free cash flow naturally followed the falling IBPT trend. We emphasize the highly volatile dynamics of EPS. On the positive side, core revenue and IBPT dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company pays dividends most of the time. It has paid dividends in almost every one of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded most of its peers. On average, the company pays dividends annually.

Default risk: Moderate

The solvency (credit quality) of 601398.SS is good. The credit profile rests on (a) a substandard capital position, (b) weak asset quality, (с) a robust corporate governance framework, (d) below average earnings power and cost efficiency, and (e) its weak liquidity profile. We draw special attention to the rather low capital adequacy, fairly low asset quality driven by low loss absorption capacity, fairly weak liquidity position, which could instantly become a critical factor in the case of an unexpected bank run.

Volatility: Low

In normal market circumstances, 601398.SS is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible. Finally, it may be affected by inherently volatile sector.

Stress-test: Resilient

In highly turbulent market conditions, 601398.SS is not overly volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low. At the same time, due to inherently volatile sector, its maximum losses could be low.

Selling difficulty: Low

601398.SS boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.