Company Reports

We increased our fair value estimate for Industrial Bank, or CIB, to CNY 19 per share from CNY 18.10 following better-than-expected interim profit that showed well-contained costs. While our estimates price CIB at 0.5 times 2024 price/book and 6% dividend yield, which is undemanding on a regional basis, we note that most China banks are trading in this range, and we believe the bank is fairly valued. CIB’s share price has underperformed major joint-stock bank peers year to date as investors remain concerned about its credit quality, in light of relatively greater property exposure and debt investments. We believe the credit risk is factored in, but upward rerating requires an improved credit quality outlook.

As part of its 2021-26 strategy, Industrial Bank, or CIB, has a strategic focus on green banking, investment banking, and wealth management, which we think are its key strengths. In addition, the bank aims to reduce funding costs and strengthen its retail banking business, which have been major weaknesses in the past. We expect CIB’s near-term earnings growth to be supported by its funding cost reduction, but it will be challenging to achieve its goal of transforming the retail business, given current fragile consumer confidence.

Driven by improved investor sentiment for China banks with stable dividend payments and a historic property rescue package introduced in May, the Hang Seng Mainland Banks Index rallied over 20% in the second quarter. But it pulled back sharply on profit-taking and investors’ concerns that the easing measures were not sufficient to turn around struggling property sales. H-shares of most China banks remain undervalued, with 2024 price/book modestly increasing to 0.2-0.5 times. Dividend yields remain attractive at 6%-8%. With A-share counterparts trading at a 35% premium to H-shares on average, we expect the regulators’ push for higher and more regular dividend payouts, as well as the expansion of eligible exchange-traded funds on Stock Connect, should gradually narrow the valuation gap for Chinese dual-listed banks. Amid sluggish economic growth in China with no major recovery in property sales and consumer spending anticipated in 2024, we prefer defensive state-owned banks, including China Construction Bank, or CCB, and Industrial and Commercial Bank of China, or ICBC, and leading retail-focused bank China Merchants Bank for stable dividends, strong capital returns, and better earnings visibility.

We initiate coverage on Industrial Bank, or CIB, with a fair value estimate of CNY 18.10 per share, implying a 0.48 times 2024 price/book ratio. This is lower than the 0.56 times average implied valuation of Chinese joint-stock banks we cover, which we think is due to the lower earnings growth projections for CIB in our forecast period versus its peers. The stock is fairly valued, trading at 2% below our fair value estimate and a 5.8% dividend yield, slightly higher than the 5.5% average yield of Chinese banks we cover. Though we expect CIB’s revenue growth will lead joint-stock bank peers in 2024 thanks to resilient loan pricing and normalized fee income, net profit growth is still under pressure given growing credit risks in its higher-than-peer property loan exposure.

Industrial Bank, or CIB, has a strategic focus on green banking, investment banking, and wealth management businesses as a part of its 2021-26 strategy, which we think are the key strengths of CIB. In addition, the bank also aims to reduce funding costs and strengthen its retail banking business, which have been major weaknesses in the past. We expect CIB’s near-term earnings growth to be supported by its funding cost reduction, but it will be challenging to achieve its goal of transforming the retail business given current fragile consumer confidence.