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Stability amid macroeconomic stress

  • We continue to expect ABC to deliver relatively stable FY21F net profits.
  • Its largest-of-big-four-banks provisioning coverage ratio in 3Q21 helps it reduce earnings volatility amid a weaker macroeconomic environment.
  • Downgrade to Hold from Add. TP cut to Rmb2.7 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5% pts to 10.5%.

Elevated investor concerns over asset quality & policy risks

We think rising asset quality pressures are manageable from an EPS point of view for Agricultural Bank of China (ABC), given its sizeable provisioning buffers and conservative non-performing loan (NPL) recognition ratios. Nevertheless, we think bank share prices could struggle to perform as we think both property sector’s stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.

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Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns about the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% (vs. 9% previously).

Downgrade to Hold from Add; TP cut to Rmb2.70

We value ABC-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to our FY21F-23F EPS estimates. However, due to a 1.5%-pt higher corporate NPL ratio assumption used within our stress test, our TP is cut to Rmb2.70 from Rmb3.70. Given the lower target price, we thus downgrade to Hold due to valuation reasons. Key upside/downside risks: a better-than-/worse-than expected economy and greater/ lesser social responsibilities.