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Morningstar | ABC’s Deposit Base Remains Strong Despite Increasing Competition

The country's third-largest bank by assets, Agricultural Bank of China boasts a dominant position in county areas and sector-leading network scale that reward it with enviably low funding costs and a narrow economic moat.With over 20,000 outlets covering all county areas and a prestige brand for rural banking, ABC enjoys the largest deposit base. It also benefits from a sticky retail customer mix and offers more diversified financial services than its major competitors, Postal Savings Bank of China and rural credit corporations. Its county banking enjoys high barriers to entry, given the large capital investment to achieve comparable network scale. China's county banking business requires high levels of experience and expertise because of wide variations in economic development and demographic structure across different county areas.We believe much of ABC’s returns are driven by its success in channeling lower-cost deposits in county areas to facilitate urban lending. Its county area deposits account for more than 40% of total deposits, while only contributing one third of total lending. However, a lower loan/deposit ratio, a higher cost structure, and higher NPL ratios offset the positives of its rural businesses. Its vast network scale and customer base should provide better cross-selling opportunities and greater upside for fee income. The county areas business is expanding much faster, but we remain cautious about how ABC balances the risk and benefits from this market and improves risk control.ABC’s credit card and private bank business both grew solidly over the past few years. Credit card related service income grew 13% since 2016. The total number of credit cards issued exceeded 100 million, making it the fifth-largest credit card issuer among Chinese banks. Although ABC just started its private banking business in 2010, it was ranked among the four largest banks with assets under management exceeding CNY 1.12 trillion in 2018.