ICBC 1H 2024 Results: 7% Dividend Yielder, Likely Further Upside

ICBC has announced its 1H2024 results. Profits has decreased to a small degree but not alarming enough to warrant a scare. The main reason for decrease is due to a fall in net interest margin which I will explain in the next section

Lower Interest Rates Means Lower Profits for Banks

Banks thrive on net interest income for their main operations--> Meaning taking in deposits and then giving loans at a much higher rate. Naturally the higher the interest of the loans disbursed, the more profits the banks make. In times of lowered interest rates, bank tend to report a lower net interest margin which lowers their profit

In China, its prime interest rate set by the China (federal) bank has been decreasing due to economic woes. As shown by the banks loan/asset profile, interest rates for Corporate Loans and China T bills have fallen.

In fact, overseas loan gave better interest because of the hike in interest rates outside of China. ICBC operates mostly in China so as seen the decrease in loan rates hurt the company very badly (3.95% decrease to 3.52%)

Investors should be aware this too is applicable to Singapore banks, with our interest rates about to fall, the net interest margin of our banks too will fall. For ICBC case, its net interest income is expected to fall further.

NPL Ratio- Up to Us To Believe

The accounting of non performing loans (i.e. loans where creditors are not servicing the debt promptly) is an art not a science. Banks can classify loans on NPL or otherwise based on their own standards. So I do not delve too much on it. For ICBC, it says NPL ratio has drop.

I won't comment much on ICBC's accounting intrepretation of its loan book portoflio but I do not believe a NPL ratio for property loan of 5.35% says the truth. No doubt ICBC's clientile are individuals who take housing loans, but given how property prices have fallen and news of China Citizens refusing to service their loans, the NPL provided by ICBC is a low estimate. Transport is another segment I seriously doubt the NPL ratio too. The high speed rail project in China has been known to be a zombie project with losses incured at large scale. It is well known that the corporates are only paying the interest with no real plans to repay the debt amount. All in all, I feel ICBC is valuing their NPL allowance too lightly. 

Of course, a reduced NPL helps ICBC to report lower allowances and it mitigates the impact of a lower net interest margin on its P&L. However, 30% of its loan book is indeed up for questioning. However, ICBC being the China national bank, questions can be answered about their balance sheet but replies by them can be mum since minority investors are not of their main concern.

Minority Investors - Think of Dividend

Ignore the noise on its financial results, loan portfolio or that of its balance sheet, I do not think ICBC will run into financial troubles. This is because it is the de facto bank for China and no matter how glossed up its results are, the government will prop it as a lender of last resort.

What investors should focus on is its dividends. ICBC maintains a 30% payout ratio for dividends. So if earnings remain flattish or slightly lower, dividends will follow suit. This happened for 1H2024. 

ICBC has now switched to a bi-annual dividend scheme. For 1H2024, dividend is HKD 0.158. For investors, given the decreasing interest rates in HK, i do think 2H2024 will give about HKD 0.155. At its current share price of HKD4.49, this means a dividend yield of 7%.

Comparatively to DBS, ICBC's yield is still high. Given the political backing and financial stability of ICBC, I do not think a 7% yield justifies. In line with DBS etc, ICBC should be a 6% dividend yielder. Hence I expect it to move to around HKD$5 for its fair value.

In terms of loan size/market cap, ICBC is many times larger than DBS. Both banks are the de facto leading bank of their country and rightly their dividend yield should follow the same. P/B ratio might not be an accurate guage given the questionable NPL allowance of ICBC's loan book portfolio.

I do not think the market's current valuation of ICBC is fair. It should be HKD$5, hence one can expect a 10-15% price upside from its current pricing.