Agricultural Bank of China's (ABC) attributable net profit dropped 1.6% YoY in 1Q24, below our expectation, against 3.9% YoY growth in 2023.
ABC's 1Q24 results were largely in line with banking sector's performance as large banks have further increased their financial support to the real economy. Its net interest income decreased 0.7% YoY in 1Q24, mainly due to mixed effects of steady growth in interest- earning assets and large drop in NIM against 3.1% YoY decrease in 2023. As of end-March 2024, its loans/deposits increased 5.5%/7.5% from end-2023. Its net fee and commission declined in 1Q24 mainly due to lower risk appetites of its clients. Its asset quality improved as NPL ratio declined in 1Q24. ABC maintained strict NPL recognition and its allowance to NPLs ratio might be still at the higher level among China's big banks in 1Q24. Valuation remains cheap.
Key Factors for Rating
Asset quality improved in 1Q24. Its NPL ratio was 1.32% at end-March 2024, lower than 1.33% at end-December 2023. We expect its NPL ratio to stay at 1.32% in 2024. ABC maintained strict NPL recognition as its allowance to NPL reached 303.2% at end-March 2024, against 303.9% at end-December 2023.
NIM dropped in 1Q24. As one of the largest banks in China, ABC strengthened its financial support for the real economy and rural area development. In our view, the drop in NIM in 1Q24 was mainly due to lower yield of interest-earning assets and higher funding cost. Its NIM reached 1.44% at end-March 2024, down 16bps from end-December 2023. We expect its NIM to drop 20bps in 2024.
Net fee and commission income decreased in 1Q24. Its net fee and commission income decreased 10.8% YoY in 1Q24 after dropping 1.5% YoY in 2023. Recording a negative growth in net fee and commission income amid the weak investment sentiment is in line with banking sector's performance.
Valuation
Its H shares are now trading at 0.44x 2024E P/B and its dividend yield may reach about 7.2% in 2024. Given its solid asset quality, decent ROE and attractive dividend yield, we believe the bank is undervalued. We expect its ROAE to reach 10.4% in 2024. We decreased our target price from HK$4.81 to HK$4.8, based on about 0.6x 2024E P/B. Maintain BUY rating.