According to our model PH Score™, Industrial Bank commands above average value-quality characteristics. The valuation variable within the model (as elsewhere in China) helps the Score but other variables are broadly benign. Adding technical factors and the low valuation, Industrial Bank ranks in the top quartile globally of our VFM (Valuation, Fundamentals, Momentum) universe.
Elsewhere in China, recent bank data show subpar or mixed fundamental momentum and trends. This is not the case with Industrial Bank. However, it would be wrong to think that the bank was not affected by general systemic asset quality challenges.
On a LTM basis, the bank’s PH Score™ of 8.5 reflects progression in Profitability, in Efficiency, in Capital Adequacy, in NIM/Spread (impressive), in headline Asset Quality, as well as the valuation variable, though Liquidity, as measured by the rising LDR, eroded and the Provisioning metric utilised by the model softened somewhat.
A FV of 9% and a PBV of 0.72x are not unattractive. These are below thresholds of 10% and 1x, respectively. An Earnings Yield of 17.0% and a Dividend Yield of 4.2% underpin the valuation thesis though China and the world have cheaper banks. We are less enthusiastic about finding the cheapest banks per se but rather more interested in capturing the combination between fundamental progression -or quantamental trends- with valuation.
Industrial Bank is focused on mainly corporate lending but also has a strong mortgage business. Given Leverage (Debt/Equity) and a more risky Funding Structure, revolving around wholesale markets and time deposits, though transaction accounts account for 41% of deposits, we see Industrial Bank as a more speculative opportunity in the Chinese Banking Space.