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Fundamental View
AS OF 09 Nov 2022Our credit view on AGRBK (credit ratings: A1/A/A) is based on the 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 financial metrics are a tad weaker than those of peer-group leaders ICBCAS and CCB and in line with BCHINA; however they have been on an improving trend. The Big 4 have been managed more prudently in recent years than the smaller and more aggressive 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 09 Nov 2022- AGRBK is the third-largest bank in China and is classified as a G-SIB with a capital surcharge of 1.0%.
- 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%), MOF (35%) and the Social Security Fund (7%).
- AGRBK has the second largest branch network in China after Postal Bank, with a particularly good presence in rural areas.
Risk & Catalysts
AS OF 09 Nov 2022China’s sovereign ratings (A1/A+/A+) are a key factor behind AGRBK’s credit standing.
Post the initial onset of the pandemic, asset quality has been well-managed. However, transparency is limited and credit risks in China are hard to assess as they often depend on the extent of the government’s willingness to socialise losses. The big 4 banks are under pressure to provide support to the property sector which may lead to further deterioration in their asset quality.
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 ABC’s credit standing.
CreditSights View
AS OF 09 Nov 2022We maintain our Market perform recommendation on AGRBK. AGRBK is the 3rd-largest of the Chinese state-owned commercial banks and has a strong deposit franchise especially in rural areas which gives it access to a large pool of low-cost deposits. Capital is in line with BOC though lower than ICBC and CCB. 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. Its reserve cover, although saw a significant drop in 3Q22, remains at the highest among the Big 5 banks. Strong loan growth has offset the NIM contraction to boost topline revenue growth. Spreads are relatively less attractive when compared to other Asian banks.
Recommendation Reviewed: November 01, 2022
Recommendation Changed: July 16, 2021
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