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Summary

  • ICBC's 2013 earnings were announced on March 27th. Net profit rose 10.2%.
  • ICBC is trading at a significant discount to its global peers. Onshore A-shares are trading at 0.95x P/B.
  • Despite high borrowing costs faced by ICBC, net interest margin remains stable.
  • Concerns over asset quality and NPL maybe exaggerated.
  • ICBC offers a 7% dividend yield.

The Industrial and Commercial Bank of China (ICBC), China's biggest lender by assets, said on Thursday, March 27th, that its net profit rose 10.2 percent last year, amid a "still complicated" global economic situation.

The bank, a symbol of the nation's financial might, reported in a filing to the Hong Kong Stock Exchange that its 2013 net profit to be 262.97 billion Yuan ($42.32 billion), compared to 238.69 billion Yuan in 2012.

Once the world's largest bank by market capitalization, now the 3rd after Wells Fargo & Co. (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM), ICBC lost its title to WFC in July 2013.

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Source: Capital IQ

Profitability remains strong for ICBC

Source: ICBC 2013 Financial

ICBC's 2013 ROA tops JPM's, is pretty close to WFC's, and has been very stable over the past 5 years.

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Source: Capital IQ

ICBC's 2013 ROE is as high as 22%, though coming down from previous highs. The ROE for the group of leading U.S. banks ranges from 11.34 % to 1.35 % (NYSE:BAC), all significantly lagging ICBC's performance.

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Source: Capital IQ

Capital Adequacy remains sound for ICBC

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Source: ICBC 2013 Financial

In a league table compiled by UK's The Bankers magazine, in which global banks are ranked by Tier 1 Capital, ICBC moves from No. 3 a year ago to No. 1 on the back of a 15% increase in capital in 2012, according to The Banker's data. Last year's winner, Bank of America, falls back to third. JPMorgan Chase remains second.

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Source: ICBC

ICBC trading at significant discount to global peers

From a valuation standpoint, ICBC is trading at a significant discount to WFC and JPM. It is trading at merely 0.95x P/B and 5x forward P/E.

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Source: Capital IQ

Cost of funds up; net interest margins stable

China experienced an unprecedented liquidity crunch in 2013. At one point in June 2013, the Chinese LIBOR (SHBOR) overnight rate hit 13%.

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Source: Bloomberg

Interest liberalization and financial innovations such as internet-based money market funds also worked in driving up the cost of funds for Chinese banks. ICBC's total cost of total borrowing is almost 150 basis points higher than WFC's.

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Source: CapitalIQ

However, thanks to the bank's high return on assets, the net interest margin is stable amid a tightened liquidity environment and spiking cost of borrowing.

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Source: CapitalIQ

Have the risks been exaggerated?

Chinese banks typically have a very different loan base than their U.S. peers; so does ICBC. Hence, it gives investors lots of reason to worry as China's GDP is indeed slowing down.

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Source: Capital IQ

Concern over the banking sector's asset quality as China undergoes a prolonged process of destocking and remove excess capacity is the main reason investors are steering clear of major Chinese Banks. ICBC's latest NPL figure is 0.94%, up 0.09% from a year ago. To me it is a very optimistic figure as the NPL are expected to rise as the economy enters into a consolidation phase and slows down.

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Source: ICBC 2013 Financials

Criticism for China's lenders began in 2008, when banks went on a lending spree to help steer the country through the global financial crisis. Investors predicted at that time that lenders will face a big jump in defaults. That prediction seemed to have come true in the third quarter, as bad loans for Chinese banks increased by the largest amount in eight years, but the number should be looked at from a wider angle - bad loans only make up less than 1% of industry-wide loans as China has made lots of efforts in the past 10 years to reduce NPL, especially within the big 5 state owned banks.

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Source: Wind

Dividend yield still attractive

At its current valuation and pay out level, ICBC offers a stunning 7% dividend yield comparing to WFC's 2.44% and JPM's 2.67%.

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Source: Capital IQ

Source: Clash Of The Titans: ICBC Vs. Wells Fargo, JPMorgan Chase, And Bank Of America