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Industrial & Commercial Bank of China Ltd. ADS (IDCBY.PK) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. CapitalCube's analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Industrial & Commercial Bank of China's analysis versus peers uses the following peer-set: Wells Fargo & Co. (NYSE:WFC), HSBC Holdings PLC ADS (HBC), China Construction Bank Corp. (939), Bank of China Ltd. (OTCPK:BACHF), Citigroup Inc. (NYSE:C), Commonwealth Bank Of Australia Sponsored ADR (OTCPK:CMWAY), Bank of Communications Co. Ltd. (3328), Itau Unibanco Holding S/A ADS (NYSE:ITUB), China Merchants Bank Co. Ltd 'H' (3968) and China CITIC Bank Corp. Ltd. (998). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-06-30 2012-03-31 2011-12-31 2011-09-30 2011-06-30
Revenues 21,261.5 20,947.4 19,578.7 18,634.7 18,576.0
Revenue Growth % 1.5 7.0 5.1 0.3 7.7
Net Income 9,744.9 9,735.7 7,004.5 8,493.6 8,597.5
Net Income Growth % 0.1 39.0 (17.5) (1.2) 5.1
Net Margin % 45.8 46.5 35.8 45.6 46.3
ROE % (Annualized) 24.3 24.9 19.2 24.9 25.9
ROA % (Annualized) 1.5 1.5 1.2 1.5 1.5

Valuation Drivers

Industrial & Commercial Bank of China Ltd. ADS trades at a lower Price/Book multiple (0.3) than its peer median (1.0). The market expects IDCBY-US to grow at about the same rate as its chosen peers (PE of 5.8 compared to peer median of 5.8) and to maintain the peer median return (ROE of 24.0%) it currently generates.

The company's capital efficiency (capital turns i.e.revenue/equity of 0.6x) and net profit margins of 43.5% are both median for its peer group. IDCBY-US's net margin is similar to last year's high of 43.6%, which compares to a low of 31.5% in 2007.

Economic Moat

The company's year-on-year change in revenue of 30.3% is better than the peer median but it has not resulted in the same quality of annual earnings growth (32.2% compared to the peer median of 28.4%). This suggests that IDCBY-US's current relative cost structure needs to improve to move to a leading position among its peers. IDCBY-US is currently converting every 1% of change in revenue into 1.1% change in annual reported earnings.

IDCBY-US's return on equity currently is around the peer median (24.0% vs. peer median 20.0%) -- similar to its returns over the past five years (20.3% vs. peer median 18.1%). This performance suggests that the company has no specific competitive advantages relative to its peers.

The company's net interest income (net interest income/total revenues) of 76.9% is around the peer median suggesting that IDCBY-US's lending operations do not benefit from any differentiating pricing advantage. In addition, IDCBY-US's pre-tax margin of 56.4% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth And Investment Strategy

IDCBY-US's revenues have grown at about the same rate as its peers (18.0% vs. 18.4% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 5.8. The historical performance and long-term growth expectations for the company are largely in sync.

IDCBY-US's annualized rate of change in equity capital of 19.7% over the past three years is around its peer median of 23.9%. This median investment has likewise generated a peer median return on equity of 21.8% averaged over the same three years. This median return on investment implies that the company is investing appropriately.

Earnings Quality

IDCBY-US's net income margin for the last 12 months is around the peer median (43.5% vs. peer median of 37.5%). This average margin combined with a level of accruals that is around peer median (37.9% vs. peer median of 37.9%) suggests there possibly isn't too much accrual movement flowing into the company's reported earnings.

IDCBY-US's accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Company Profile

Industrial & Commercial Bank of China Ltd. engages in commercial banking and financial services. It operates its business through the following segments: Corporate Banking, Personal Banking, Treasury Operations, and Others. The Corporate Banking segment offers corporate loans, trade financing, deposit-taking and custody activities, corporate wealth management, and corporate intermediary services. The Personal Banking segment deals with financial products and services to individual customers. The Treasury Operations segment includes money market transactions, investment securities, foreign exchange transactions, and the holding of derivative positions. The Others segment represents the assets, liabilities, income, and expenses that are not directly related or cannot be allocated to a segment. The company was founded on January 1, 1984 and is headquartered in Beijing, China.


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Source: Earnings Analysis For Industrial & Commercial Bank Of China