Key points of investment:

Deeply cultivate the “three rural areas in the county area”, and have distinctive characteristics of “inclusive” small and micro enterprises, giving them a strong credit grip and a solid retail deposit base. By the end of 2023, the number of agricultural bank outlets exceeded 22,000, of which the proportion of county outlets increased to 56.4%, and the township coverage rate of Huinongtong service points reached 95%.

Relying on an excellent county financial system, the Agricultural Bank's county and inclusive small and micro loans increased 19.8%/39.0% year on year respectively in 2023, supporting a better credit boom than peers. 4Q23 loans increased 14.4% year on year, and the growth rate has remained the highest among major banks since 2023. Looking ahead to the next stage, along with the continuous advancement of the rural revitalization strategy and the foundation of county penetration, we believe that the Agricultural Bank is still expected to maintain a credit boom superior to that of its peers at the Sannong and Inclusive Small and Micro Circuit. At the same time, relying on an extensive sales network and a huge retail customer base (the total number of individual customers reached 867 million at the end of 2023), 4Q23 retail deposits accounted for more than 60% of total deposits, the highest among comparable major banks (average of 53%), and retail current accounts for 54.6% of current accounts, and the average of the four leading banks exceeded 7 pct.

The high credit boom supported the growth rate of performance to maintain the leading position among major banks. 2023 revenue increased 0.0% year over year (9M 23: -0.5%), net profit to mother increased by 3.9% year on year (9M 23:5.0%), and the performance won the lead. Judging from the driving factors, ① the narrowing of interest spreads is still a major drag on revenue, but with active credit investment, revenue is at a superior level for major banks. Net interest revenue in 2023 fell 3.1% year on year, dragging down revenue growth of 2.6 pct. Although narrowing interest spreads dragged down 13.7 pcts of revenue, the scale expansion moderately hedged and positively contributed 11.1 pcts of revenue. ② Non-interest income contributes more to performance. Non-interest income in 2023 increased 17.4% year on year, contributing to revenue growth rate of 2.6 pct. With net revenue from handling fees falling 1.5% year on year, it mainly benefited from the correction of investment income and exchange gains and losses. ③ Provisions continue to feed back performance, but their strength has weakened. Asset impairment losses in 2023 decreased by 6.5% year-on-year, and the positive contribution to performance decreased by 1.9 pct to 2.2 pct compared to 9M23.

The county has a solid deposit base. Deposit costs are the lowest among the four major banks, and asset-side concessions and repricing hamper interest spread performance. The 2023 net interest spread was 1.60%, behind the average of the four major banks by 3 bps. Among them, a solid deposit base gave the Agricultural Bank a lower deposit cost (2023:1.78%). Although it has increased due to regularization (up 8 bps year on year in 2023), it is still lower than the average of the four major banks of about 10 bps. In the context of regulation leading to declining entity costs compounded by generous concessions, the agricultural bank loan pricing decline was higher than that of peers (the 2023 loan yield was 72 bps cumulative decline compared to 2019, higher than the average of 10 bps of the four major banks). In 2023, agricultural bank loan pricing fell to a historic low of 3.79%, with an average of about 6 bps behind the four major banks. Looking ahead, the industry will still face the test of interest spreads in 2024, and the Agricultural Bank is no exception. In particular, the 1Q24 pressure on repricing mortgages was even more significant. Positively, the reduction in 3- and 5-year deposit quotes will help improve deposit costs. Our estimates take into account the reduction in deposit listing interest rates and the trend of deposit regularization, and are expected to contribute nearly 7 bps to the agricultural bank's interest spread performance in 2024.

The provision coverage rate remains at the optimal level of the four major banks, and follow-up attention is paid to potential risks to asset quality in the inclusive sector. Under strict non-performing criteria (“overdue loans/non-performing loans” was less than 1 after 2019, the 2023 ratio was 81.3%), the 4Q23 non-performing rate fell 2 bps quarterly to 1.33%, while provision coverage (4Q23:304%) remained at the leading level of the four major banks. Judging from the negative generation trend, the negative generation rate after write-off in 2023 was 79 bps, an increase of 34 bps compared to 2022; the annual bad generation rate in 4Q23 was 1.94%, with an increase of 169 bpss/168 bps, respectively. The marginal increase in the negative generation rate is expected to be affected by faster confirmation and disposal of real estate stock risks and increased marginal pressure to generate poor consumption and operating loans. Among them, the 4Q23 real estate defect rate declined by 6 bps from the beginning of the year and 37 bps from 2Q23; 2H23 controlled credit card risk exposure, corresponding to a decrease of 20 bps to 1.40% in 4Q23 compared to 2Q23; and the consumer and operating loan non-performing rate increased 16 bps to 0.84% compared to 2Q23. Looking ahead to 2024, we believe that bad generation or marginal acceleration is on the one hand. On the one hand, real estate is still in the inventory risk clearance stage; on the other hand, we still need to pay attention to the risk exposure of slight delays in inclusiveness after the slight deferral of debt service policies.

Investment analysis opinion: Agricultural Bank is deeply involved in county finance. With the three agricultural benefits as a starting point, the credit growth rate is the top of the bank, and the 2023 performance growth rate won the lead. In the context of the “Five New Chapters” of supervision and guidance, the Agricultural Bank, which pioneered the development of an inclusive small and micro circuit, is still expected to show outstanding performance in the new economic cycle. In the long run, there is direction and provision for expansion, which is expected to ensure that the Agricultural Bank continues to achieve the performance of leading banks. In the short term, if the macroeconomy is relatively tight, under a high dividend strategy, the Agricultural Bank's steady dividend advantage is still prominent, and absolute returns can be reaped. Net profit to mother is expected to grow at 2.5%, 3.1%, and 4.9% year-on-year respectively in 2024-2026. The current stock price corresponds to 0.59 times 24-year PB, and the dividend rate is 5.3%, which is covered for the first time with a “buy” rating.

Risk warning: 1) A lower than expected recovery in physical demand affects the pace of credit investment; 2) asset quality deteriorates due to excessive risk exposure in real estate and inclusiveness; 3) LPR fell beyond expectations, and interest spreads continued to be pressured.