EUR 850.00 For Business Accounts Only

Morningstar | ABC Delivered Higher Than Peer PPOP Growth in the 3Q

Narrow-moat Agricultural Bank of China's, or ABC's, preprovisioning operating profit PPOP growth continued to lead large peers at 18% over the past three quarters. Third-quarter PPOP growth further accelerated to 21% from the year-ago period, underpinned by its 19.5% growth in fee income, over 250% surge in investment return and significant improvement in operating efficiency. ABC's improving trend in operating efficiency was contrary to most peers which saw difficulties in reducing the cost/income ratio as a result of slowing top line growth and rising technology investment. Growth in total revenue and net profit picked up to 12% and 7.4%, versus 10.6% and 6.6% respectively in the first half. First nine month net profit represented 84% of our full-year forecast, in line to deliver our full-year forecast which implies a 8.5% growth. We retain our fair value estimate for A shares at CNY 4.20 per share and HKD 4.80 for H-shares. We believe the bank's H-shares are undervalued, trading at 28% discount to our fair value estimate and 0.68 times 2018 price/book. ABC’s valuation level is lower than CCB and ICBC, given the market's renewed credit quality concerns amid climbing default risks and trade war fears. However, we've seen steady credit quality improvement and ABC has industry-leading provision level. The results confirmed our view that ABC will continue to outperform large peers in NIM expansion and operating efficiency in the near term, underpinned by its strong deposit franchise and growth momentum.

Credit quality remained stable, with bad debt ratio further falling 2 basis points to 1.6%. Bad debt balance after adding back accumulated write-off grew merely 5% from 2017, lower than the 11% growth in the year-ago period. Bad debt formation rate continued its downward trend to 0.27%. Despite improving trend, ABC prudently increased credit costs to 1.38% versus 1.02% in the year-ago period, leading to a 255% provision coverage ratio at the industry-leading level. We expect credit costs will remain at current high level for the next three years.