Deeply cultivate the county area, and the advantages are obvious. As a state-owned holding bank, Agricultural Bank has a high concentration of shares, strong financial strength, and strong resilience to risks. With the theme of high-quality development, the company highlights the two major positions of “a leading bank serving rural revitalization and a major bank serving the real economy”, and fully implements the three major strategies of “three rural areas”, green finance, and digital management. Under the position of “leading bank serving rural revitalization”, the company has been deeply involved in the county all year round and has outstanding advantages:
1) County financial policies are friendly and have great market potential: ① China has issued the Central Committee Document No. 1 for many years to promote rural reform and development, and has taken more measures and introduced various policies to support the agricultural bank's three agricultural operations; ② the county area is large, accounts for more than half of the resident population, and the county's finance continues to expand, and there is great potential for development.
2) Agricultural Bank County has outstanding financial advantages, and revenue contributions continue to increase. ① The company is rich in channel resources, with a total of 12,700 outlets in the county area, accounting for 56% of the bank's outlets, and the township coverage rate of Huinongtong service points exceeds 94%; ② The company has a solid customer base, and its total number of individual customers ranks first in the industry, and the number of individual customers in the county accounts for 63% of the entire bank. ③ The company's share of county revenue and profit gradually increased to 49% and 56.6% of 2023H1, and its contribution to the head office continued to increase.
3) The quantity, price, and quality of county loans are excellent, in line with the country's development orientation: ① In terms of credit scale, the Agricultural Bank continued to expand its investment in county loans, and the increase in 2023H1 county loans exceeded trillion yuan, an increase higher than the bank's credit increase of 3.6 pct; ② in terms of yield, the average yield of county financial loans was 3.99%, higher than the total loan yield of the Agricultural Bank; ③ In terms of asset quality, the non-performing loan ratio for county loans was 1.27%, lower than the bank's non-performing loan rate of 8bp; the provision coverage rate was 355.15%, which is higher than the bank's non-performing loan coverage level of 50.48pct.
④ Invest in credit, focus on key agricultural sectors, issue Sannong credit policy guidelines, guide effective credit investment, and help consolidate and enhance the position of a leading bank serving rural revitalization.
4) Establish a strong deposit base and create capital cost advantages: Thanks to the strong sales network of county finance and the customer base accumulated over a long period of time, the debt side of the Agricultural Bank is mainly deposits, accounting for about 80%.
Among them, personal deposits and demand deposits account for a high proportion of total deposits, have a stable deposit structure and low cost, and rank at the competitive level of the industry. In recent years, the share of county deposits has been stable and the cost rate has always been lower than the bank's average. It is a major contributor to the bank's capital cost advantage, and sufficient county deposits also guarantee the Agricultural Bank's internal financial transactions.
Continuously injecting fresh water into the real economy: Under the position of “the main bank serving the real economy,” the Agricultural Bank has worked hard in parallel in the three major sectors of key economic areas, consumer consumption, and comprehensive financial services, with remarkable results. Among them, the Agricultural Bank actively lays out advanced manufacturing and emerging industries, gives full play to the agricultural bank group's coordination advantages, strengthens the cultivation of industrial clusters, and builds a comprehensive financial service system for science and innovation enterprises integrating “investment, loan, and service”. It has large reserves for potential customers. This may become a focus point for its future development.
Fundamentals: Stable balance between asset quality and value creation
1) Performance has been rising steadily, and the scale of assets has expanded strongly: Agricultural Bank's revenue and net profit to mother in the past three years have ranked third among major state-owned banks. 2023H1's revenue increased by 0.83% year on year, and net profit to mother increased by 3.48% year on year. Total asset growth and growth rate ranked first among major state-owned banks. It is worth noting that although the Agricultural Bank's loan structure is still mainly based on public loans, its personal loans maintained an increase of 0.43 trillion yuan under complex economic circumstances, ranking first among major state-owned banks, and the increase surpassed the average increase of 2.1 pct for major state-owned banks.
2) Interest spread pressure is expected to be manageable, and intermediate business is optimized and transformed. 2023H1 Agricultural Bank's net interest spread was 1.66%, down 24 bps from 2022. Currently, commercial banks' net interest spreads are at a historically low level. The central bank clearly stated in the 2023Q2 monetary policy implementation report column that commercial banks need to maintain reasonable profit and net interest spreads. We believe that in the future, with policies such as lowering deposit interest rates, the pressure on banks' net interest spreads is expected to be manageable. The company actively seeks the optimization and transformation of intermediary business and continuously improves comprehensive service capabilities. For example, revenue from syndicated loan processing fees is driving an increase in revenue.
3) Improved asset quality and excellent provision level: As of the end of June 2023, the Agricultural Bank's non-performing rate, attention rate, and overdue loan ratio had all fallen to the best level since 2014. Loans overdue for 90 days or more and overdue loans accounted for only 43.15% and 72.95% of non-performing loans, all ranking at the lowest level of major state-owned banks. This indicates that the Agricultural Bank's criteria for determining non-performing loans are strict, and the asset quality is solid.
At the same time, the company's provision coverage rate is second among major state-owned banks, and its ability to offset risks is strong.
4) Strengthen fintech: Using the financial advantages of major state-owned banks, the Agricultural Bank continues to increase its support for fintech. The scale of fintech investment and number of technical personnel rank among all commercial banks, and continuously use technological innovation to empower financial services.
Profit prediction and investment rating: Agricultural Bank has solid fundamentals, is deeply involved in the county area, and actively lays out three rural areas, green and digital finance. In the future, as county finance continues to increase and expand, the company is expected to become a leading bank serving rural revitalization and the main bank serving the real economy. We are optimistic about the company's future development prospects. We expect the company's net profit to be increased by 5.09%, 5.39%, and 5.53% year-on-year in 2023-2025, corresponding to the 2024 BVPS of 7.48 yuan and 0.49 times PB at the closing price on December 27, 2023. The Agricultural Bank has solid fundamentals, broad development prospects, and unique advantages in county finance. The valuation is expected to be repaired in the future as the economy recovers, and we give it an “increase in holdings” rating.
Risk factors: Macroeconomics falls short of expectations, slow progress in policy introduction and implementation, and concentrated risk exposure.