Both revenue and profit growth rates rose marginally, and other non-interest performance was outstanding

1-3Q24 Agricultural Bank's revenue and net profit to mother increased by +1.29% and +3.38% year-on-year respectively. Compared with the 1H24 growth rates, the growth rates were both marginally higher. The revenue growth rate ranked second among major state-owned banks, and the net profit growth rate ranked first among major state-owned banks. Net interest income was +0.96% YoY, a marginal increase of 0.81 pct from the 1H24 growth rate, mainly due to the slowdown in interest expenditure growth. Net interest revenue as a share of revenue increased by 1.75pct to 81% compared to 1H24. Net revenue for mid-year revenue was -7.65%, and the year-on-year growth rate decline was 0.22pct narrower than 1H24. Other non-interest income was +23.65% year over year, further increasing its contribution to revenue. Among them, net investment income continued the 1H24 high trend and increased +25.12% year over year. The Agricultural Bank adjusted its portfolio positions flexibly in line with market trends during the period of fluctuating and declining yields in the bond market, and the profit level of financial investment continued to rise. The cost-revenue ratio was 28.94%, up 1.5 pcts from 1H24, but there was still a 4.92 pcts decrease from the level at the beginning of the year. Overall, the results of agricultural bank fee control and cost reduction and efficiency were good.

Table expansion is accelerating, and retail loans and county finance are starting points to improve quality and efficiency

3Q24 Agricultural Bank's total assets, loans, and financial investment increased by +12.55%, +10.68%, and +26.61%, respectively, and the expansion accelerated (vs. 1H24 +10.39%, +12.07%, and +27.66%, respectively). Among them, the loan growth rate slowed slightly compared to the 1H24 season, and the scale of financial investment maintained a high upward trend, supporting other non-interest income. Looking at the loan structure, loans to public and personal loans and discount scales increased by +11.52%, +8.26%, and +22.85%, respectively. Among them, personal loans showed impressive growth performance. The net increase in personal loans of the Agricultural Bank of 1-3Q was 675.1 billion yuan, accounting for 35% of the country's net increase in personal loans. The advantages of major retail banks continued to be consolidated. The net increase in individual loans in the 3Q24 quarter was 82.7 billion yuan, which was 16.5 billion yuan higher than the net increase in the 2Q24 quarter. There is a certain end-of-season impulse phenomenon due to the high increase in discounts. County finance was the main driver of the expansion. The Agricultural Bank's 3Q24 county loan balance remained at 9.73 trillion yuan, accounting for more than 40% of domestic loans; the net increase in county loans was 956.3 billion yuan, up 10.9% from the end of the previous year, up 10.9% from the end of the previous year, higher than the bank's 1.73 pcts. Among retail loans, investment in farmers' loans, mainly “Huinong e-Loan” products, continued to increase. The balance of “Huinong e-Loan” was 1.47 trillion yuan, an increase of 35.5% over the end of the previous year. 3Q24 Agricultural Bank's total debt and deposit size increased by +13.01% and +3.51%, respectively (vs 1H24 +10.24% and 4.81%, respectively). The trend of “dismediating” deposits continued under low interest rates. The decline in deposit growth rate was mainly due to the decline in the size of current deposits to public banks.

Net interest spreads have stabilized, and debt-side cost control supports interest spreads

Agricultural Bank's net interest spread for 3Q24 was 1.45%, the same as 1H24 month-on-month. It is expected that asset-side returns will decline further due mainly to factors such as lower interest rates on personal housing mortgages and increased competition among financial institutions, which will offset the simultaneous downward effects of debt-side cost ratios due to factors such as “manual interest compensation” on deposits and cost control. A new round of housing mortgage interest rate cuts in September and an LPR decline of 25 bps in October put downward pressure on interest spreads. The Agricultural Bank responded by actively adjusting the debt-side structure and deposit listing interest rates. On October 18, interest rates on agricultural bank deposits were lowered to 0.1%; interest rates on current accounts were lowered by 25 bps for three-month, half-year, one-year, two-year, three-year, and five-year terms, respectively, by 0.80%, 1.00%, 1.10%, 1.20%, 1.50%, and 1.55%, respectively. The impact of debt-side interest rate adjustments lags behind that on the asset side in the short term. Agricultural Bank accounts for a relatively high share of debt-side personal deposits, and the medium- to long-term contribution to interest spreads is expected to be better than that of peers.

The quality of assets is stable and excellent, and the level of provision remains stable

In 3Q24, Agricultural Bank's non-performing ratio was 1.32%, which remained flat for 3 consecutive quarters, and asset quality remained stable. The provision coverage rate was 302.96%, a slight decrease of 1.58pct from 1H24 month-on-month, and risk offsetting capacity remained at a good level. 1-3Q24 accrued credit impairment losses of 131.046 billion yuan, an increase of 1.47 billion yuan over the previous year. Both preparation accruals and bad write-offs remained stable. 1H24 Agricultural Bank's county financial non-performing rate is 1.12%, provision coverage rate is 381.12%, and the yield on loans invested in the county area is 3.66% (the average yield of the entire bank loan is 3.56%). The asset quality of the county area is better than the average of the entire bank, and the risk-adjusted yield is higher than the bank's yield level. Asset quality is gradually improving with the continuous development of county finance.

Investment advice

As the urbanization process slows down, the county's economic base is low and the growth rate is high. Banks that are deeply involved in the county area are expected to benefit from the accelerated development of urban-rural integration in terms of customer base and scale. In the past three years, the difference in average loan growth between Anhui Province in the central region and Sichuan Province in the western region has gradually widened. The industry has developed rapidly and regional attractiveness has increased, driving high financial demand. Agricultural Bank is deeply involved in Sannong Finance and the Midwest region. The number of branches is the highest among the four major state-owned banks. The share of branches in the central and western regions is leading the industry, and the average network production capacity has nearly doubled in 5 years. Scale growth is ahead of major state-owned banks and peers. The debt side has a low cost advantage. Asset quality indicators are steady, moderate and positive, and the defect rate, attention rate, and overdue rate are constantly improving. The improvement in the non-performing ratio of loans in the county area and its absolute value are better than the non-performing loan rate of the entire bank. In the first three quarters of 2024, both revenue and profit growth accelerated, ranking among leading state-owned banks. Interest spreads stabilized and asset quality remained stable. We maintain the profit forecast assumption. The company's 2024-2026 revenue is expected to increase by 1.4%/-0.98%/1.39% year on year, respectively, and net profit to mother will increase by 1.53%/-2.62%/0.33% year on year, respectively, maintaining the “buy” rating.

Risk warning

Interest rate risk: Market interest rates continue to decline, competition for high-quality assets intensifies, and interest spreads narrow.

Market risk: The sharp decline in macro and regional economies has led to a deterioration in asset quality and a sharp increase in defects.

Business risk: Economic growth falls short of expectations, and a sharp drop in financing demand is dragging down credit growth.