Not many surprises; strengthened capital and accelerated NPL recognition
Agricultural Bank of China (ABC) released FY15 results with net profitattributable to shareholders of Rmb178bn, down 0.7% yoy and in line with ourforecast. PPOP growth was 4.9% yoy-relatively weak vs. its major peers. Thiswas because of its weaker NIM (down 26bps yoy) and slower fee incomegrowth (up 3% yoy). Nevertheless, we note two positives: 1) strengthening ofcapital position, with tier-1 reaching nearly 11% (vs. 12-13.5% for major peers);and 2) accelerated NPL recognition, with strict NPL classification maintained.
Key trends of FY15 and 4Q15 results
Dividend payout ratio: fell slightly to 30%, from 33% in 2014, translatinginto a dividend yield of c.7%.
NIM dropped by 26bps yoy, to 2.66% in 2015, owing mainly to a low LDRand a higher portion of large corporate customers. 4Q15 NIM was 2.55%,down 3bps qoq and 42bps yoy.
Net fee income resumed growth (+3% yoy) in 2015, after a 3.7%contraction in 2014. Looking closer, agency fees and electronic bankingservices delivered decent growth, of 25% yoy and 22% yoy, respectively,offset by declines in settlement fees (-16% yoy) and advisory services(-19% yoy).
Reflecting tighter cost control, opex nudged up just 0.9% yoy, leading toan improved CIR of 41.8% (-1% yoy).
ABC accelerated NPL recognition in 4Q15, with total NPLs up 19% qoq –accounting for 2.39% of total loans (3Q15: 2.02%) – faster than the otherbig-four banks. Adding back NPL write-offs of Rmb26bn, we estimate thatABC’s gross NPL formation rate in 2H15 accelerated to 180bps (1H15:119bps). The overdue loans beyond 90 days and SML rose 24% and 4%hoh, respectively, in 2H15, accounting for 2.03% and 4.20% of loans. Withhigher credit costs of 121bps charged for 4Q15, NPL coverage dropped to189% (down 29% qoq), with higher gross coverage of 4.53% as of end-2015.
Capital position: this strengthened in 4Q15, with CET-1, tier-1 and totalCAR up 52bps, 53bps and 19bps qoq, respectively, to 10.24%, 10.96% and13.40%, as of end-2015.
Non-standardised assets declined by 12% hoh, to 1.3% of total assets.Valuation and risks
We value ABC using a three-stage GGM (PV= (ROE-g)/(COE-g)). Key downsiderisks: weaker asset quality and weaker NIM.