Overview of the Chinese Banking Sector
The Chinese banking sector has recently witnessed a strong rally, with state-owned banks leading the charge. Among the top-performing institutions are Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank, Bank of China, and China Merchants Bank. This surge can be attributed to a market rotation towards dividend-paying stocks amidst a soft macroeconomic environment and geopolitical tensions. The declining interest rates in China have further enhanced the attractiveness of high-dividend stocks. Long-term funds such as social security and pension funds have also shifted their preferences toward such investments.
Furthermore, the sector is benefiting from a valuation recovery driven by government support for stabilizing the property market and stimulating domestic consumption, as well as initiatives like the local government debt swap program.
Industrial and Commercial Bank of China (ICBC)
Investment Thesis
ICBC stands out as the largest commercial bank in China, boasting a diverse business mix and a robust balance sheet. Despite ongoing pressure on margins, which limits bottom-line growth, the bank’s stable asset quality and high non-performing loan (NPL) coverage ratio act as a buffer in an uncertain economic environment. With an attractive dividend yield and undemanding valuations, ICBC remains a compelling investment choice.
Performance Highlights
ICBC’s shares have rallied significantly, with its H-shares and A-shares up 35% and 44% year-to-date, respectively. The bank’s NPL ratio remained stable at 1.35% in 9M24, and its net interest margin (NIM) rose to 1.43% in 3Q24 due to adjustments in deposit rates. ICBC is trading at a forward price-to-book (P/B) multiple of 0.4x, which is one standard deviation below its 10-year average. The fair value estimate for ICBC has been raised to HKD 6.36, pegged at 0.55x forward P/B.
Key Financial Metrics
- Net Interest Income: CNY 655 billion (FY23), projected to decline to CNY 632.8 billion in FY24E before recovering to CNY 667.1 billion in FY25E.
- Net Profit: CNY 349 billion in FY23, with slight declines expected in FY24E (CNY 340.2 billion) and FY25E (CNY 346.5 billion).
- Return on Equity (ROE): 10.7% in FY23, expected to decrease to 9.7% in FY24E and 9.3% in FY25E.
- Dividend Per Share (DPS): CNY 0.3 from FY23 through FY25E.
ESG Updates
ICBC has made strides in green finance, talent management, and inclusive banking. Approximately 12.9% of its loan portfolio in 2021 was directed towards rural segments in China. However, the bank faced regulatory controversies in 2022, including lapses in anti-money laundering practices and reporting standards. Improvements in corporate governance, such as its majority independent board, have bolstered its ESG profile.
Recommendation
Rating: BUY – ICBC is expected to generate total returns exceeding 10% based on its current price, supported by its strong fundamentals and attractive dividend yield.
Agricultural Bank of China
Performance Analysis
Agricultural Bank of China continues to show resilience, trading at a P/E multiple of 5.4x for FY24E. The bank’s forward P/B multiple is 0.5x, with an anticipated dividend yield of 5.7% for FY24E, increasing to 5.9% in FY25E. The ROE is projected at 9.9% for FY24E, slightly declining to 9.6% in FY25E. While its valuation metrics are comparable to peers, its strong dividend yield makes it an attractive option for income-focused investors.
China Construction Bank
Performance Analysis
China Construction Bank holds a P/E multiple of 4.6x for FY24E, with a forward P/B multiple of 0.5x. Its dividend yield is projected at 6.5% for FY24E, increasing to 6.7% in FY25E. The bank’s ROE is expected to remain strong at 10.6% for FY24E and 10.1% for FY25E. These metrics position the bank as a stable performer within the sector.
Bank of China
Performance Analysis
The Bank of China is trading at a P/E multiple of 4.9x for FY24E, with a forward P/B multiple of 0.4x. Its dividend yield is forecasted at 6.4% for FY24E, rising to 6.5% in FY25E. The ROE is projected at 9.3% for FY24E, declining to 8.9% in FY25E. The bank’s stable metrics and high dividend yield make it a reliable choice for conservative investors.
China Merchants Bank
Performance Analysis
China Merchants Bank stands out with a higher P/E multiple of 6.4x for FY24E and a forward P/B multiple of 0.9x. Its dividend yield, however, is lower at 5.3% for FY24E, rising to 5.5% in FY25E. The bank’s ROE remains strong at 14.5% for FY24E, declining to 13.7% in FY25E. While the valuations are higher compared to peers, its strong profitability metrics make it a premium player in the sector.
