Saturday, December 21, 2013

Agricultural Bank of China : Better asset quality and clarity on capital (CIMB)

Agricultural Bank of China
Current HK$3.96
Target HK$4.66
Better asset quality and clarity on capital

Asset quality is likely to remain a key theme for ABC. Beyond that, we like its strong funding franchise and robust growth in higher-margin retail banking.

Catalysts for unlocking value include greater clarity on the pace and impact of China’s economic reforms, improving macro data and possible positive surprises in asset quality. Under our new rating structure, our call for ABC changes to Add from Outperform. We maintain our GGM-based HK$4.66 target price (1.19x FY14 P/BV).


Investment view
1) ABC continues to deliver an excellent performance on asset quality. NPLs are stationary as ABC benefits from recoveries. Loan growth means its NPL ratio (1.24% in 3Q13, highest in the sector) continues to fall while those of its peers are increasing. It has high defences with a 4.3% LLR to total loans ratio (highest in the sector) and 347.6% coverage (second-highest). So far, management has been unwilling to support earnings by cutting loan-impairment charges (51bp in 3Q13, highest among state-owned banks) but we think there remains scope for them to do so. 2) ABC has a relatively weak capital position. However, the CBRC’s recent clarification on the phased implementation of Basel III (systemically important banks will be given six years to meet the new 9.5% minimum core tier-1 ratio) will give ABC adequate time to build its relatively low core tier-1 ratio (9.35% at end-3Q13). We think 14% RWA growth and 35% payouts are sustainable without capital-raising. 3) ABC has the strongest funding franchise among peers (60.2% LDR, with a 52.2% low-cost funding ratio), alongside CQRCB. This should allow it to comfortably fund loan growth and insulate it from deposit-rate marketisation. 4)ABC is growing strongly in higher-margin retail lending (28.5% of total loans in 3Q13, +7.9% pts since FY09). 5) In spite of a high NIM, ABC has a low ROA (1.27% in 3Q13). This reflects its relatively inefficient operations (41.8% CI ratio in 3Q13). The bank’s main challenge is to translate its advantages into higher asset profitability.

Valuation
ABC is trading at 1.0x FY14 P/BV for a 20.5% ROE and 5.2x FY14 P/E for 9.5% EPS growth.



Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date:11/12/13

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