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Fundamental View
AS OF 02 Dec 2024- Our credit view on AGRBK (credit ratings: A1(neg)/A(stb)/A(neg)) is based on a strong likelihood of state support, given its large size, systemic importance and majority state ownership. This is enhanced by AGRBK’s extensive presence in rural areas.
- AGRBK’s capital standing is weaker than those of peer-group leaders ICBCAS and CCB; however it has peer-leading reserve coverage ratio. The Big 4 have been managed more prudently in recent years than the non-Merchants joint stock banks.
- We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size, and systemic importance that assure it of state support if needed.
Business Description
AS OF 02 Dec 2024- AGRBK has surpassed CCB to become the second-largest bank in China in terms of total assets and has been moved from bucket 1 to bucket 2 in the G-SIB list with a capital surcharge of 1.5%.
- It was founded in 1951 as the Agricultural Cooperative Bank, merged with the central bank and spun out as AGRBK in 1979, charged with financing the rural and agricultural sectors. It was recapitalised in 1999 and again in 2007 by special MOF bonds. It also received $19 bn in equity capital from Huijin, funded by China's FX reserves.
- Due to its poorer asset quality and weaker profitability, AGRBK was the last of the Big 4 banks to be listed in 2010.
- The Chinese government is a majority shareholder of AGRBK via Central Huijin (40.14%), MOF (35.29%) and the Social Security Fund (6.72%).
- AGRBK has the second largest branch network in China after Postal Bank, with a strong presence in rural areas.
Risk & Catalysts
AS OF 02 Dec 2024- China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) are a key factor behind AGRBK’s credit standing.
- AGRBK’s loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks. It was promoted to a Bucket 2 G-SIB in Nov-23 and currently has a substantial TLAC shortfall to meet by 1 January 2028, whereas meeting the 1 January 2025 requirement appears manageable, on the back of its domestic TLAC issue plan and the upcoming government equity injection.
- AGRBK is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. However, we do not see it as a clear credit negative, as these actions reflect close state links that underpin AGRBK’s credit standing.
Key Metric
AS OF 02 Dec 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | 9M24 |
|---|---|---|---|---|---|
| PPP ROA | 1.65% | 1.64% | 1.43% | 1.20% | 1.19% |
| Reported ROA | 0.83% | 0.86% | 0.82% | 0.73% | 0.69% |
| Reported ROE | 11.4% | 11.6% | 11.3% | 10.9% | 10.8% |
| Total Equity/Total Assets | 8.1% | 8.3% | 7.9% | 7.2% | 6.9% |
| CET1 Ratio | 11.0% | 11.4% | 11.2% | 10.7% | 11.4% |
| NPL Ratio | 1.56% | 1.43% | 1.37% | 1.33% | 1.32% |
| Credit Costs | 1.16% | 1.03% | 0.79% | 0.64% | 0.74% |
| Loan-Deposit Ratio | 74% | 78% | 79% | 78% | 83% |
CreditSight View Comment
AS OF 01 Nov 2024AGRBK is the 2nd-largest Chinese banks by assets and has a strong presence in rural areas, which gives it access to a large pool of low-cost deposits. We view it as a strong credit due to its structural profitability, robust balance sheet metrics, large size and systemic importance that assure it of state support. Its loan growth has led peers for many years, which has put its capital ratios under pressure, with some distance vs. the other Big 4 banks. Reserve cover is a strength at ~300%. AGRBK managed to report pre-provision profit growth in 9M24, due to stronger loan growth. But its capital ratios were behind the other Big 4 banks. We have moved AGRBK from Underperform to Market perform on the back of fair $ FRN notes trading levels and the upcoming state capital injection.
Recommendation Reviewed: November 01, 2024
Recommendation Changed: September 26, 2024
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