Agricultural Bank of China Earnings: Asset Growth Continues To Lead; Remains Our Preferred SOE Bank

Agricultural Bank of China’s 601288 first-quarter results were largely within our expectation. We continue to like ABC and China Construction Bank among the state-owned banks, and are heartened that loans and fee income growth remain relatively robust for these two banks while net interest margin trend is in line with peers. ABC’s total loans increased 7% from end-2022, outpacing the 3%-6% growths of its peers in our coverage. We keep our fair value estimate at CNY 3.30 per A-share and HKD 3.50 per H-share. The stock is undervalued, trading at a historically low 0.4 times 2023 price/book value and an over 8% dividend yield. Notably, NIM contracted 39 basis points year on year but only dropped 3 basis points quarter on quarter. We expect pressure on ABC’s NIM to subside as the base gets lower in the remaining quarters of 2023. This should help boost its profitability in the second half.

The strong loan growth was driven by a 10% growth in rural loans, and double-digit growth in lending to emerging strategic sectors including manufacturing, green industry and microfinance. We believe this reflects ABC’s inherent advantage in rural financing and policy tailwinds on the government’s rural revitalization initiative—retail loans grew nearly 5% from end-2022, compared with the zero to 4% growths of peers. We suspect this was mainly driven by the personal operating loans in the underserved rural markets. Another positive of the results is resilient fee income growth, at 2.8% year on year. According to the Asset Management Association of China, the total amount of stock and hybrid funds distributed through ABC increased 64% as of end-March from end-2022, surpassing the low- to mid-single-digit declines of its state-owned enterprise peers.