In a Good Position For The Rising Rate Environment
ABC should realise a sustained margin expansion in the rising yield cycle,thanks to its solid deposit base and optimised loan mix. Above peer LLCimplies a greater buffer to reduce credit costs and boost earnings. Theupcoming equity placement should ease the bank's long-standing capitaloverhang, despite a modest ROE dilution. Stable payout ratio suggests anattractive FY18F dividend yield of 5.4%. Maintain BUY with a GGM-basedTP of HKD5.80 （32% upside）。
Earnings smoothened by heavy provisions. Agricultural Bank of China（ABC） reported its full FY17 results on 26 Mar. Net profit rose by 4.9% toCNY193bn, in line with the preliminary data released on 12 Mar. 4Q17 revenuewas up 7% YoY, driven by robust NII growth of 17.7% YoY, yet offset bylacklustre fee income. CIR retreated 3.4ppts YoY, suggesting improving costefficiency. With a decent PIOP growth of 16.9%, the bank boosted provisioncharges by 22% YoY.
Margin expansion on track. NIM rose by 2bps in 4Q17 and by 3bps on a fullyearbasis. This was largely attributed to the bank's solid deposit base, of whichfunding cost is relatively stable during liquidity tightening. Moreover, theproportion of demand deposit increased by 2.2ppts YoY to 58.4%. On the flipside, loan mix further shifted to the retail segment, where the bank could enjoybetter pricing power. Retail loans grew by 19.7% in FY17, outpacing 5.4%growth for corporate loans. As such, ABC should achieve a sustained NIMexpansion in the rising rate environment.
Rising LLC with falling NPLs. NPL balance declined by 7.5% and NPL ratioslid 16bps to 1.81% in 4Q17, the third QoQ "double-decline". Other leadingindicators for asset quality, ie overdue and special mention loans, were also onthe downward trajectory. LLC was buffered up 14ppts to 208% – the highestamong Big-4 banks – as ABC implemented a countercyclical provisioningstrategy.
Stable dividend payout. CET1 and total capital adequacy ratio （CAR） edgedup 5bps and 34bps QoQ to 10.63% and 13.74% respectively. The proposedequity placement would likely be completed in 2H18, boosting CAR by another72bps despite a 24bps ROE dilution. Management maintained a dividendpayout at 30%. This points to an attractive FY18F dividend yield of 5.4%, thehighest in the sector.
Maintain BUY. We keep our earnings forecasts and valuations unchanged. OurGGM-derived TP of HKD5.80 is based on FY18F P/BV of 1.1x. ABC is currentlytrading at a 19% discount to the Industrial and Commercial Bank of China（ICBC） and China Construction Bank （CCB）， although their ROEs arecomparable. We believe ABC could realise a greater earnings upside, given itsupbeat margin outlook and solid provision buffer.