Better buy: CCB or ICBC?

PBoC’s loosening monetary policy could have a downside for China’s large commercial banks. Which of the banks’ shares will prove more resilient?

In mid-May, the Chinese central bank pledged to pursue a more prudent and flexible monetary policy to counter the economic downturn and mitigate the impact of COVID-19 while maintaining financial stability.

It will continue to lower reserve requirement ratios and lending rates as well as re-lending and re-discounting facilities to commercials banks. The forbearance period for SME loans has also been extended to March 2021. Such moves can delay and reduce the risks of corporate non-performing loans (NPL).

The implementation of these monetary tools can potentially benefit the country’s small and micro businesses. The central bank also aims to maintain the growth in both M2 money supply and total social financing (TSF) at rates significant higher than last year.

But there is a downside to the banks themselves. Chinese banks will have to reduce their profitability to a to support small businesses. It will be a test to their resilience and business continuity, especially in times of an imminent economic downturn.

This article compares China Construction Bank (CCB) (SEHK: 939) against Industrial & Commercial Bank of China (ICBC) (SEHK: 1398), two of the largest Hong Kong-listed Chinese banks (in terms of market cap). Which will be a more resilient buy?

Stock valuation

As of 8 Jun 2020, the valuation matrices based on Price to Earnings ratios (PE), Price to Book ratios (PB) and Dividend Yields are as follow:

Share Price as of 8 Jun 2020 5.16 6.29
P/E 5.37x 5.36x
P/B 0.62x 0.64x
Dividend Yield 5.69x 5.69x
Return on Equity (ROE) 11.67% 12.04%

At first glance, it seems ICBC and CCB are trading at very close valuations –ICBC only trades at a slightly cheaper price than CCB.

Before jumping into conclusion right away, we will compare the two stocks in terms of profitability, asset quality and capital adequacy based on their latest financial results.


Return on assets (ROA) 1.04% 1.05%
Net Interest Margin (NIM) 2.24% 2.26%
Cost to Income ratio 25.79 26.75
Return on Equity (ROE) 11.67% 12.04%

Based on the above indicators, the two banks share similar ROA and NIM figures. But ICBC has a slightly better cost-to-income ratio (the measure of the cost in relation to the operating income) than CCB.

However, CCB enjoys a higher Return on Equity (ROE) ratio, which can be attributed to lower common equity employed. We will look into that in the Capital Adequacy section below.

Asset Quality

A non-performing loan (NPL) is a loan on which the borrower defaulted or failed to pay the monthly principal and interest repayments for a specified period. A higher NPL ratio indicates that the bank is exposed to greater risk of credit losses.

Allowance to NPL is the provision divided by the amount of NPL. A higher Allowance to NPL indicates greater cushion for credit risks and hence the ability to absorb sudden increase in NPL without immediate material impact.

NPL ratio 1.43 1.42
Allowance to NPL 199.32 227.69
Allowance to total loans ratio 2.86 3.23

Once again, despite similar NPL ratios between ICBC and CCB, it is clear that CCB can make greater provision for potential impairment losses on loans than ICBC with a higher allowance to NPL.

Resilience against NPLs amid economic downturns may be more beneficial to a bank’s future performance as well as indicate investor confidence.

Comparison of Capital Adequacy

Capital Adequacy Ratio (CAR) is an indication of a bank’s financial strength. It is the ratio of the bank’s risk-weighted exposures to its total capital. Tier 1 capital entails quality capital that can be easily liquidated to cushion the credit losses a bank potentially bears

In the chart below, by comparing the “capital adequacy ratio” of the two banks, one can see that CCB’s financial strength proves higher than ICBC’s when comparing their capital adequacy ratios. For investors seeking a safer investment in volatile times, this means that CCB is relatively more “risk-free” than ICBC.

Common Equity Tier 1 ratio 14.27 14.68
Core Tier 1 Capital Adequacy Ratio 13.2 13.88
Capital Adequacy Ratio 16.77 17.52

Foolish Conclusion

Both ICBC and CCB have strong capital position and diversified funding business across retail and corporate segments.

From the above charts, it can be deduced that holistically, CCB may be a stronger company to hold amid an economic downturn when credit risks are high.

Aside from performing fundamental analysis on these two banks, we must also keep up with current market events as well as the evolving macro landscape to be prepared for any potential changes of the companies’ future performance.