Agricultural Bank of China (1288 HK) : Rural banking more a blessing than a curse

FY13 net profit in line with consensus. Agricultural Bank ofChina (ABC) reported FY13 net profit of RMB166.3b, up14.6% YoY. Stable NIM and lower credit cost drove earningsgrowth. Annualized ROE and ROA were 20.9% and 1.2%.

NIM more stable than its big-4 peers. ABC reported FY13NIM of 2.79%, only 2bp lower than 2012 thanks to cheapfunding from county area banking, which contributed 42% ofthe bank’s deposits and 32.5% of its loans. Depositors inrural areas still prefer traditional deposits rather than WMPs,which curb the funding cost of banks.

Asset quality trend better than peers; credit costnormalized. ABC’s NPL ratio declined 11bp to 1.22% in2013, likely because ABC recognized its NPLs before beinglisted. In addition, the bank’s credit costs fell from 90bp and117bp in 2012 and 2011 to 76bp. We think the process ofnormalizing the bank’s credit costs will continue andcontribute to bottom-line growth.

Preference shares to boost capital ratio. Tier-1 CARended FY13 at 9.25%, lower than the regulatory requirementof 9.50% to be met before the end of 2018. ABC is likely tobe among the first of the banks to issue preference sharesnow that the CSRC has issued a framework for doing so. Ingeneral, investors have welcomed this move.

Action. Rural area banking, which for years had been aburden to ABC, has become a blessing as it now providesabundant and cheap funding along with higher priced loans.

ABC’s NPL situation is also better than its peers due tosufficient recognition at the time ABC was listed on the A+Hmarket. We maintain our Outperform rating on the sharesand lower our target price from HK$4.20 to HK$4.00,equivalent to 1.05x 2014F P/B.