Industrial & Commercial Bank of China - Buy: Raising Estimates, Inexpensive and Laggard

Raising estimates and target – We raise FY09E/10E earnings 12% to reflect lower credit costs/higher loan growth. Our new estimates are 14%/18% above FY09E/10E consensus. ICBC remains attractive on: (1) inexpensive valuations currently on FY09/10E PEs of 11.6x/9.9x with 5% FY10E yield; and (2) likely upward revisions to consensus earnings. ICBC has been a laggard YTD. Our new target of HK$6.30 reflects our earnings revision and valuation roll-forward to mid-FY10E. At our target, ICBC would be on FY10E 11.9x PE / 2.4x P/B.

Benign NPLs, improving macro / property – We lower FY09E/10E credit cost to 60bps of average loans (from 85-95bps previously) as we believe NPLs are likely to continue the gradual downtrend evidenced in 1Q09. We believe NPLs/credit cost is supported by an improving physical economy, recovering property market and ICBC's somewhat high provision coverage (1Q09 132%).

Raising loan growth assumptions – System loan growth in May was robust, with Rmb665bn of new lending, bringing loan growth to 30.6% yoy / 19.3% YTD. Loan growth this year will likely reach Rmb8-9 trillion, or 27-31% growth yoy. We raise our FY09E loan growth assumption to 24%, from 19% previously.

New estimates still conservative – Despite being significantly above consensus, we believe our new estimates are still conservative as our FY10E estimate assumes no NIM recovery while loan growth decreases to 14%. Should NPLs continue to decline, we see further downward risk to credit cost assumptions.

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