Slowing Chinese Growth And Geopolitical Frictions Will Constrain Banking

Key Takeaways

• Challenges from slowing domestic growth, demographic shifts, and high-risk lending exposure threaten asset quality, earnings resilience, and future profitability.
  
• Rising global tensions, digital competition, and regulatory shifts undermine overseas growth, fee income diversification, and cross-border banking expansion.
  
• Digital innovation, global expansion, and diversified financial services are supporting ICBC's operational resilience, earnings stability, and strong shareholder value amid evolving market conditions.

Catalysts

Provides banking products and services in the People's Republic of China and internationally.

• Slowing economic growth and mounting demographic challenges in China, such as an aging population and shrinking workforce, are expected to dampen long-term credit demand and increase default risk, which will weigh on ICBC's loan growth and put sustained downward pressure on asset quality and net margins.
  
• Intensifying global geopolitical tensions, particularly deteriorating US-China relations, are likely to create heightened regulatory barriers, sanctions risks, and disruptions to international banking business, undermining ICBC's overseas expansion strategy and curbing growth in cross-border financing and foreign exchange services, negatively impacting future revenue streams.
  
• Ongoing digital disruption from agile fintech and non-bank digital payment platforms threatens to erode ICBC's traditional banking market share, especially among younger, tech-savvy clients, which could diminish future fee income and slow the bank's diversification away from interest income.
  
• Continued high exposure to state-directed lending, particularly to sectors with rising credit risk such as real estate, local government financing vehicles, and state-owned enterprises, could result in persistently elevated non-performing loan ratios, increasing provisioning needs and reducing long-term earnings resilience.
  
• Structural industry-wide compression of net interest margins, due to pressure from financial liberalization, increased competition, and regulatory caps on lending rates, is projected to be a multi-year headwind for profitability, limiting ICBC's ability to sustain current levels of earnings and dividend payouts.

Industrial and Commercial Bank of China Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Industrial and Commercial Bank of China compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Industrial and Commercial Bank of China's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 52.4% today to 41.5% in 3 years time.
• The bearish analysts expect earnings to reach CN¥365.2 billion (and earnings per share of CN¥0.99) by about September 2028, up from CN¥348.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from 5.6x today. This future PE is lower than the current PE for the HK Banks industry at 6.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Industrial and Commercial Bank of China Future Earnings Per Share Growth

Risks

• Ongoing digital transformation, strategic investments in AI, and leading mobile banking engagement are likely to support ICBC's long-term cost efficiency, operational resilience, and growth of non-interest income, potentially boosting net margins and earnings.
  
• Steady asset growth across loans, deposits, and bond investments, combined with industry-leading risk controls and provision coverage, indicate structurally sound fundamentals, which may help maintain or increase future revenue and shareholder returns.
  
• Strong internationalization and diversification, including expansion into 69 countries and robust cross-border RMB business, position ICBC to benefit from China's global economic influence and facilitate sustainable growth in operating income.
  
• Leading positions in emerging financial segments-such as green finance, sci-tech loans, wealth management, and inclusive banking-diversify revenue sources and help cushion against traditional NIM compression, supporting stable long-term earnings.
  
• Consistent capital strength, attractive dividend yields, and a clear commitment to stable or rising payout ratios provide shareholder appeal and support share price stability, underpinned by high profitability and sustainable financial performance.

Valuation

• The assumed bearish price target for Industrial and Commercial Bank of China is HK$5.29, which represents two standard deviations below the consensus price target of HK$7.02. This valuation is based on what can be assumed as the expectations of Industrial and Commercial Bank of China's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$8.3, and the most bearish reporting a price target of just HK$5.09.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥880.0 billion, earnings will come to CN¥365.2 billion, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 8.6%.
• Given the current share price of HK$6.0, the bearish analyst price target of HK$5.29 is 13.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.