ICBC:An “A”for earnings management

Event

ICBC’s 1Q16 net income (+35% QoQ / +0.6% YoY) fulfilled slightly more thanhalf of our 1H16E forecast.

Impact

Net interest income (-7% QoQ / -5% YoY) continued to weaken despiterelatively strong growth in net loans (+3.5% QoQ / +9.0% YoY). NIM on thebank’s calculation fell to 2.28% (-6bp QoQ / -18bp YoY) although the timing ofrepricing of assets (especially mortgages) on January 1 suggests that thesequential NIM decline could ease somewhat going forward.

The asset quality downtrend continues, with NPLs climbing to RMB205bn(+14% QoQ / +41% YoY) to reach 1.66% of loans (+16bp QoQ / +37bp YoY).

ICBC’s coverage ratio dipped to 141%. Like BOC, the bank’s LLR is nowbelow the 150% line; it appears that the banks are allowing NPL ratios toaccrue while protecting the bottom line via managed credit costs. Impairmentsto total assets were 46bp annualized in 1Q16 (-4bp QoQ / +2bp YoY).