Higher bond investment yield drives ICBC NIM up to 2.62% in 2Q14

Despite higher deposit cost.

The management of the Industrial & Commercial Bank of China (ICBC) has noted that the bank's NIM increased by 2bps to 2.62% in 2Q14 (vs. +1bps q/q in 1Q14), mainly due to higher bond investment yield, despite higher deposit cost.

According to a research note from Barclays, on an h/h basis, NIM increased by 2bps h/h to 2.62% in 1H14. The bank’s loan pricing slightly weakened by 4bps h/h in 1H14 (vs. +3bps h/h in 2H13), mainly driven by lower corporate loan yield (-5bps h/h), despite rising overseas loan yield (+28bps h/h).

Personal loan yield remained relatively stable, up only 1bps h/h. Thanks to higher interbank yield (+44bps h/h) and slightly higher investment yield (+3bps h/h), total asset yield increased by 5bps h/h to 4.55% in 1H14.

Meanwhile, on the funding side, deposit cost continued to increase by 4bps h/h (+5bps h/h in 2H13), mainly due to higher corporate time deposit cost (+7bps h/h) and personal time deposit cost (+4bps h/h).

As a result, total funding cost increased by 4bps to 2.12% in 1H14. Further, the bank's management expects that NIM could stabilize at the current level in 2H, as deposit cost has slightly declined recently.

Here's more from Barclays:

Total deposits at end-1H14 amounted to RMB 15.7tn, +3.7% in 2Q14 (vs. +3.7% in 1Q14) or +7.6% in 1H14, mainly driven by demand deposits (+5.3% in 2Q14 or 7.4% in 1H14), while time deposits growth slows (+2.4% in 2Q14 or +7.2% in 1H14).

Total loans grew by 7.3% in 1H14 or 2.6% in 2Q14 (vs. +4.5% in 1Q14) to RMB 10.6tn, mainly driven by mortgage loans (+11.6% in 1H14), overseas loans (+18.4% in 1H14), and manufacturing sector (+5.6% in 1H14).

Regarding the developer loans, management mentioned that the bank granted RMB 96.4bn on accumulative basis in 1H14; however, net developer loan balance declined by 1.4% in 1H14.

According to the management, ICBC has accumulatively extended RMB 4.48tn loans in 1H14, with turnover rate of 0.84x, in an effort to increase the efficiency of the bank’s existing loan stock.

The bank will continue to support first home mortgage demand, and currently 95% of the bank’s mortgages were extended to first home buyers.

Net fee income reached RMB 73.2bn in 1H14, +8.7% y/y (or +7.1% y/y in 2Q14), mainly driven by bank card fees (+18.1% y/y in 1H14), investment banking fees (+15.3% y/y) and settlement fees (+6.8% y/y). Net fee income as percentage of total revenue was 23.1% in 1H14 (vs. 21.1% in 2013).

According to management, the bank has cut 19 kinds of MSE-financing related fees recently, in-line with central government’s guidance on lowering the funding cost for MSEs. We believe the fee income growth for banking sector should further slow in 2H.

According to management, the bank issued WMPs outstanding balance was RMB 1.7tn as of end-1H14 (+RMB370bn or +27.6% in 1H14). The WMP-related fee income grew by only 2.5% y/y in 1H14, mainly due to the rising yield offering to the WMP investors (+0.9ppts y/y to 5% in 1H14).

In terms of the underlying investments as of end-1H14, 57% of non-principal guaranteed WMPs were in project-related investment, 31% in bonds, 7.2% in deposits and 4.1% in the capital market.