Incidents:

On April 29, the Agricultural Bank released its 2024 quarterly report. 1Q24 achieved revenue of 186 billion yuan, a year-on-year growth rate of -1.8%, and net profit to mother of 70.4 billion yuan, a year-on-year growth rate of -1.6%. The annualized weighted average return on net assets (ROAE) was 11.39%, a year-on-year decrease of 1.2 pct.

Comment:

Revenue and profit increased slightly, and net interest income improved month-on-month. Agricultural Bank's 1Q24 revenue, profit before provision, and net profit to mother grew at a year-on-year rate of -1.8%, -3.2%, and -1.6%, respectively. The growth rates decreased by 1.8, 1.4, and 5.5 pcts from 2023, respectively. The growth rates of net interest income and non-interest income during the quarter were -0.7% and -5.2% respectively, with changes of 2.3 and -22.7 pct, respectively, from 2023. Split profit growth structure: scale is the main contributor, driving the performance growth rate of 30.2 pct; judging from marginal changes, the main boosting factors include: interest spreads and operating expenses reduce the extent to which performance is being dragged down; the main drag factors include: the positive contribution of non-interest income is changing to negative, scale expansion drives performance down, and the positive contribution of provision is narrowing.

The pace of table expansion has returned to normal, and loans in key areas such as counties have maintained high growth. At the end of 1Q24, the Agricultural Bank's interest-bearing assets and loans grew by 14.7% and 12.9%, respectively. The growth rates decreased by 3.1 and 1.5 pct, respectively, from the end of the previous year.

In terms of loans, 1Q added 1.24 trillion dollars in a single quarter, a year-on-year decrease of 119.4 billion dollars, accounting for 57% of interest-bearing assets, which is basically the same as at the end of the previous year. At the structural level, public and retail sales increased by 1.4 trillion yuan and 542.8 billion dollars respectively during the quarter, with year-on-year increases of 960 billion and 184.4 billion dollars; note financing decreased by 713.4 billion dollars during the season, an increase of 373.6 billion dollars over the previous year. Credit investment was booming at the beginning of the year, and the structure continued to be optimized. At the investment level, (1) loans to key sectors of the public sector remained high. At the end of the quarter, loans in the manufacturing, green, inclusive, and private sectors increased by 12.7%, 18.9%, 23.5%, and 11.2%, respectively, compared to the beginning of the year, which were significantly higher than the 5.5%/10.9% increase in various loans/public loans. (2) Retail loan investment increased. Retail loans increased by 542.8 billion yuan during the quarter, an increase of 184.4 billion yuan over the previous year. The increase was higher than the average of 3275 billion yuan for the same period of 2021-2023. Of these, consumer loans increased by 62.6 billion yuan, an increase of 18.4% over the beginning of the year, and 6.7% higher than the increase in retail loans. (3) The county business continued to maintain a high level of prosperity. In 1Q24, county loans increased by 622.7 billion yuan, a growth rate of 16.8%, accounting for 50% of the bank's loan increase, a slight decrease of 2.7 pct from 1Q23. In terms of non-credit assets, financial investment and interbank assets increased by 1.3 trillion yuan and decreased by 422.5 billion yuan respectively during the 1Q quarter, an increase of 1.11 trillion yuan over the previous year, and a decrease of 1.63 trillion yuan. In total, they accounted for 43% of interest-bearing assets, a slight decrease of 0.1 pct from the beginning of the year. It is expected that investment in government bonds will increase during the quarter, and pressure on interbank assets will increase during the quarter.

The deposit growth rate has declined slightly, and the customer base is stable and solid. The year-on-year growth rates of agricultural bank interest payment liabilities and deposits at the end of 1Q24 were 15% and 12.2%, respectively, down 3.7 and 2.8 pcts from the end of the previous year, respectively. The 1Q quarter added 2.18 trillion dollars in deposits, a year-on-year decrease of 382.9 billion dollars, and the share of interest-paying liabilities increased by 1.2 pct to 80% compared to the end of the previous year. Looking at the term structure, fixed-term and current deposits increased by 1.46 trillion yuan and 822.6 billion yuan respectively during the quarter, a year-on-year decrease of 599.2 billion yuan, an increase of 291 billion yuan, and time deposits accounted for 55%, an increase of 0.9 pct over the end of the previous year. By customer type, 1Q personal and corporate deposits increased by 1.22 trillion yuan and 1.07 trillion yuan respectively, with year-on-year decreases of 1663 and 141.9 billion dollars respectively. Personal deposits accounted for 60%, down 0.3 pct from the end of the previous year. Among them, the average daily increase in personal deposits was the highest in the industry for 9 consecutive quarters, and the average daily increase in public deposits also ranked first in the industry. The stability of general deposits is high. In terms of market-based debt, bonds payable and interfinancial debt increased by 45.9 billion yuan and 41.1 billion respectively during the quarter, an increase of 45.2 billion yuan over the previous year, and a decrease of 344.4 billion yuan. Together, they accounted for 20% of interest-paying debt, down 1.2 pct from the beginning of the year.

There is still some narrowing pressure on NIM. The 1Q24 company's NIM was 1.44%, down 16 bps from 2023, and the decline was 4 bps narrower than in the same period in 1Q23. The calculation results show that on the asset side, the yield on 1Q interest-bearing assets was 3.19%, down 11 bps from 2023. Due to factors such as lower stock mortgage interest rates, rolling repricing of stock loans, and insufficient effective demand, loan pricing declined significantly. On the debt side, the debt cost ratio for 1Q interest payments was 1.93%, which is basically the same as in 2023. Among them, the interest rate for domestic RMB deposits was 1.64%, down 6 bps from 2023. The absolute value and marginal changes were the best in the industry. Since April 2022, the China Stock Bank has lowered deposit listing interest rates four times. As repricing of stock products progresses one after another, subsequent cost improvement dividends will be gradually released.

Negative growth in handling fees dragged down revenue, accounting for 22% of revenue. Agricultural Bank's 1Q non-interest revenue was 41.5 billion yuan (YoY -5.2%), accounting for an increase of 4.6 pct to 22.3% compared to 2023. Among them, (1) net revenue from processing fees and commissions was 29 billion yuan (YoY -10.8%), accounting for an increase of 5 pct to 70% of non-interest income compared to 2023. In the context of regulations such as public offering fee reduction and insurance “integration of reporting and banking”, the revenue growth of the agency sales business is expected to be under relative pressure. At the end of 1Q, the AUM for individual customers of the Agricultural Bank reached 21.4 trillion yuan, adding 1.1 trillion dollars. The balance and increase were among the highest in the industry, and the wealth management business may continue to expand. (2) Net other non-interest income of $12.45 billion (YoY +11%), including investment income of $3.66 billion (YoY -20.5%), fair value change income of $4.2 billion (YoY +52%), and net exchange income of $2.67 billion (YoY +21%), mainly affected by factors such as declining interest rates and exchange rate fluctuations in the bond market during the quarter.

Operation with a low defect rate and strong risk compensation capacity. At the end of 1Q24, Agricultural Bank's non-performing loan ratio was 1.32%, down 1 bps from the end of the previous year, continuing the downward trend. At the same time, the risk outlook indicators were improving, and indicators such as the overdue rate were declining steadily. The balance of non-performing loans at the end of the quarter was $315.3 billion, an increase of $14.6 billion during the quarter, and the increase decreased by $2.27 billion year on year. 1Q credit impairment losses were $55.6 billion, a year-on-year decrease of 900 million, and credit impairment loss/revenue was 30%, which was basically the same as the previous year. The overall quality of assets is stable, and there has been a slight decline in reserve planning efforts, reducing the drag on performance. The loan ratio at the end of the quarter was 4.02%, down 3 bps from the end of the previous year; the provision coverage rate was 303.2%, a slight decrease of 0.7 pct from the end of the previous year, maintaining strong risk offsetting capacity.

The margin of capital safety has been increased, and capital replenishment tools are abundant. At the end of 1Q24, the Agricultural Bank's core level/tier 1/ capital adequacy ratios were 11.4%, 13.8%, and 18.4%, respectively, up 0.7, 0.9, and 1.3 pct from the end of the previous year. On the one hand, the pace of company expansion has slowed down; on the other hand, the implementation of the “new capital regulations” is beneficial to the measurement of the company's capital adequacy ratio at all levels. Benefiting from parameter adjustments and optimization of the scope of internal evaluation, the RWA growth rate has declined, and capital adequacy ratios at all levels have increased to a certain extent. Meanwhile, during the 1Q quarter, the company successively issued 70 billion Tier 2 bonds and 40 billion perpetual bonds to effectively supplement Tier 2 capital and other Tier 1 capital. The company recently announced the formulation of an interim profit distribution arrangement for 2024, which will implement mid-year dividends for 2024 based on current performance. The mid-year dividend ratio is not higher than 30%. As of the close of trading on April 29, the company's dividend rate was 5.24%, which is at the upper middle level of listed banks.

Profit forecasting, valuation and ratings. Agricultural Bank's financial business in the county area is developing well, and it has the advantage of expanding stable and low-cost deposits. Later, along with the integration and collaboration of online+offline channels, the development of county business is expected to drive the expansion of corporate loan accounts. Against the backdrop of rising uncertainty about economic recovery and the need for effective credit yet to be boosted, the company's asset side has been steadily expanding, credit investment in key areas has maintained a high level of prosperity, the “three rural” businesses in the county have grown steadily, and revenue contribution continues to increase. We maintain the company's 2024-26 EPS forecast of 0.78, 0.81, and 0.84 yuan. The current stock price corresponds to PB valuations of 0.59, 0.55, and 0.51 times, respectively, and the corresponding PE valuations are 5.61, 5.43, and 5.23 times, respectively. Looking back, along with the recovery in macroeconomic sentiment, demand for effective financing continues to recover, and the superimposed balance and liability structure continues to be adjusted. The company's volume, price, and insurance are expected to be rebalanced. There is still strong room for revenue and profit growth, and it has been raised to a “buy” rating.

Risk warning: Economic recovery falls short of expectations, and downward pressure on loan interest rates is increasing; NIM may continue to be under pressure due to factors such as repricing of stock mortgages and urban investment bonds.