Industrial and Commercial Bank of China (1398 HK) : The elephant can still dance, albeit slowly

Maintain Outperform rating and HK$6.00 target price. The recent slowdown in Industrial and Commercial Bank of China’s (ICBC) earnings growth is due to its high base. With net interest margin narrowing, we expect the bank to pull out all the stops to boost non-interest income. The defensive nature of the bank should appeal to investors given rising uncertainty within China’s banking industry. Our target price is equivalent to 1.1x 2014F P/B.

Slower 1Q14 earnings but still above consensus. ICBC’s reported 1Q14 net profit was RMB73.3b, up 6.6% YoY. Consensus had expected RMB71b. The bank’s balance sheet expansion slowed (high base effect) and is now insufficient to compensate for the fall in NIM and fee income growth. Domestic renminbi loans increased a mere 2.97% QoQ versus the industry average of 4.20%. Annualized ROE and ROA were 22.30% and 1.52%, still satisfactory.

Strong capital base and moderate rise in NPL ratio should reassure investors. Core Tier-1 capital ratio reached 10.88% in 1Q14, well above the 9.50% regulatory requirement. ICBC’s NPL ratio was up 3bp QoQ, a reasonable increase. The bank continues to demonstrate its defensive characteristics in the current difficult environment.

Buyout of Tekstilbank. ICBC proposed the purchase of a 75.5% interest in Turkey’s Tekstilbank (specializing in SME financing and retail banking) for a consideration of US$316m. China is Turkey’s third-largest trading partner. The Tekstilbank deal could bring the two countries even closer.