Agricultural Bank of China Limited:Strong 1H17results with notable improvement in fundamentals;maintain BUY

Earningscapacity is resuming.Agricultural Bank of China (ABC)’s 1H17net profit was reported at RMB108,670mn, up 3.35%YoY, equivalentto 56.6% of our full-year forecast. Such earningsgrowthwas higher thanthat in 2016 when net profitwas up 1.86% YoY. Operating income grew 6.41%YoYin 1H17,of which NII rose 6.22% YoY.NIM has been on the rise from 2.19% in 4Q16 to 2.25% in 2Q17-we expect decent loan growth (1H17: +7.27%HoH)and decisive balance sheet managementwill lead to a better NIM in 2H17.Meanwhile, net fee income was down 16.91%YoY -more specifically, agency commissionsfell27.8%YoYunder a tighter regulatoryenvironment; in contrast, bank card fees grew steadilyby 10.9% YoY in 1H17.Monetization ofABC’s online banking platformcontinues, with E-banking fee income surging by 22.7%YoYin 1H17.

NIM to turn more positive in 2H17.NIM pressure has been easingin 1H17. ABC’s NIM narrowed by only 7bps YoY in 1H17(2016: -41bps YoY) to 2.24%; on a quarterly basis, NIMwas up by 2bpsin 1Q17 and 4bps in 2Q17.In line with the improvementinthe system average loan yield in 1H17, decline in the Bank’s average loan yield narrowed by31bps YoY (2016: -114bpsYoY).Hence, loan-depositspread contractedonly by 14bps YoY in 1H17 (2016: -80bps YoY)to 287bps. In addition, the Bank’s interbankasset-liabilityspread widened from 55bps in 2016 to 68bps in 1H17. Balance sheet mixwas optimizedfurtherin 1H17with reduced exposure in interbankmarketand increased asset allocation to investments.

Dedication toasset quality management. ABC’s dedication toasset qualitymanagementhas been evident. As of June2017, ABC’s NPL ratiowas 2.19%,down 18bpsHoH.Meanwhile,special mention loan ratio fell 29bps HoH in 1H17to 3.62%and overdue loan ratio was down 20bps HoH to 2.6% in June2017. We believe, with the increasing use of securitizationtools, the establishmentof the asset management company,and consistent cautious attitude in risk management,ABC’s NPL ratioisretreating to a level similar to that of its big bankpeers.Also notable are the provisioning ratio and provision coverage ratio reported at 3.99% and 181.8%. The Bank’s risk bufferremainedthe strongest among the big banks-a major attributethat renders it one of our recommended picks.