ICBC resilient against pandemic drawbacks: analysis

But it may have a hard time sustaining its 2019 net profit growth.

The Industrial and Commercial Bank of China is expected to weather the headwinds caused by COVID-19 and may even benefit from a flight to quality, but it may be difficult to sustain its net profit growth, according to a S&P Global Ratings report.

As China’s largest lender by total assets, ICBC is more resilient to economic volatility and will benefit from an eventual recovery, anchored by a strong business position, above average funding and robust liquidity.

However, the lender might have a hard time maintaining its 2019 net profit growth of 5% this year due to problems in asset quality and net interest margin (NIM). An increase in overdue payments from SME clients is also likely, particularly inclusive finance type clients which bear higher credit risks, the report said.

“We expect the deteriorating asset quality to have some impact on ICBC's 2020 profit and loss, but the impact is manageable even with credit costs rising from 2019's Chinese renminbi (RMB) 179 billion, due to a greater tolerance regarding the classification of nonperforming loans, in line with regulatory guidance to provide special consideration and forbearance to certain borrowers,” the report added.

Lower loan yields and higher deposit composition will also weigh on NIMs regardless of lower wholesale funding costs and relaxed monetary policies. Whilst ICBC maintained a stable NIM until H1 2019, average loan yield dipped 5bp in H2 the same year. The downward trend will continue amidst regulators’ plans to assist economic recovery, S&P said.

ICBC’s capital buffer is enough to absorb credit cost pressures as it is subject to higher capitalisation requirements. Its Tier 1 ratio stood at 14.27% at end-2019, and rose 97bp in the Q3 2019 after a $21.1b (RMB150b) issuance of perpetual hybrids and preference shares into the domestic market, the report concluded.