Agricultural Bank of China:AAsset quality still a concern;downgrading to Neutral

时间:2016-07-13作者:Xiaoyan Cui来源:瑞银证券
Deposit base remains an advantage but capital levels may hinder growth ABC has the largest network (23,670 domestic branches as at end-2015) and highestexposure to rural areas among China banks, and hence more stable and less priceelasticdeposits. Demand deposits as a percentage of total deposits were relatively highamong A-share banks under our coverage, at 53% as at end-2015 (only second toChina Merchants Bank's). This should help ease the upward pressure on funding costswhen interest rates are further liberalised, in our view. ABC also has a relatively lowloan-to-deposit ratio (LDR), at 64.4% as at end-Q116. Its CET1 ratio was 10.21% atend-Q116, the lowest among the big five banks including Bank of Communications. Asset quality deterioration continued to spread to inner regions ABC reported a NPL ratio of 2.39% as at end-Q116 (flattish QoQ), although the NPLbalance rose by 4% QoQ. The bank's NPLs became more widespread in terms ofgeographical locations in 2015: NPLs from western China made up 30% of total as atend-2015, up from 24% a year ago. We expect pressure on asset quality and hencecontinued provisioning in 2016, which is likely to drag ABC's bottom-line growth. Forecasts now extended to 2020E We forecast ABC's NPAT to drop by 5% YoY in 2016 and stabilise in 2017, given theimpact of continuous asset quality deterioration (rising credit costs) and interest rateliberalisation (narrowing NIM). We believe earnings momentum is unlikely to pick upuntil 2018. Valuation: Downgrading to Sell and lowering PT to Rmb3.30 We apply 0.87x P/BV to our 2016E BVPS of Rmb3.84 to derive our price target. Ourtarget P/BV is based on a long-term sustainable ROE of 9.1%, a cost of equity of 9.7%and a long-term growth rate of 5%. ABC is trading at 0.8x 2016E P/BV with a dividendyield of 5.1%. We believe the shares are fairly valued.

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