Agricultural Bank of China Limited (601288.SS)

Equity
China
Financial Services

RISK

RETURN

Key risk factors

Low price volatility

Resilient to price shocks

Fair trading liquidity

Key return factors

Undervalued vs peers

Solid dividends

Average growth

Company profileAgricultural Bank of China Limited provides corporate and retail banking products and services. The company operates through Corporate Banking, Personal Banking, and Treasury Operations segments. It offers demand, personal call, foreign currency time, foreign currency call, time or demand optional, foreign exchange demand, foreign exchange call, foreign exchange time, certificates of deposit, savings, agreed-term, and negotiated deposits; and loans comprise housing, consumer, business, fixed asset, working capital, real estate, and entrusted syndicated loans, as well as trade finances, guarantees and commitments, and loans with custody of export rebates accounts. The company also provides credit card, debit card, payment and settlement, private banking, cash management, investment banking, custody, financial market, and financial institution services, as well as trading and wealth management services; and personal fund collection and automatic transfer services. In addition, it offers agro-related personal and corporate banking products and services; personal and online, telephone, mobile, self-service, television, and SMS banking services; financial leasing services; fund management services; assets custodian services; debt-to-equity swap and related services; and life, health, and accident insurance, as well as reinsurance products. As of December 31, 2021, the company had 22,807 domestic branches, including three specialized institutions, 4 training institutes, 37 tier-1 branches, 402 tier-2 branches, 3,348 tier-1 sub-branches, 18,961 foundation-level branch outlets and 50 other establishments; and 13 overseas branches in Hong Kong, Singapore, Seoul, New York, Dubai International Financial Centre, Tokyo, Frankfurt, Sydney, Luxemburg, Dubai, London, Macao, and Hanoi; and four overseas representative offices in Vancouver, Taipei, Sao Paulo, and Dushanbe. Agricultural Bank of China Limited was founded in 1951 and is based in Beijing, the People's Republic of China.

Valuation: Undervalued

Multiple

TTM

NTM

P/E

5.70

5.80

PEG

0.20

P/B

0.60

0.50

P/CR

0.30

P/RIBPT

0.50

P/IBPT

0.70

Considering past and projected metrics, the stock is 'cheap' compared to its peers. In particular, the stock is undepriced on P/E, Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 9ppts and its growth decelerated by 4ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Neutral

The average target price is 4.5 and suggests 2% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 5.8. This translates into 32% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 2.4. This is equivalent to 46% downside potential in the worst case.

Profitability: Average

RoE

Agricultural Bank of China Limited reported a return on equity (RoE) of 9.8% in the last 12 months, up from 9.7% in FY23. The market consensus projects a RoE of 9.2% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.7% in the last 12 months, a decrease from 0.7% in FY23. The market analysts predict that RoA will be 0.7% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) grew to 53.6%, below the peers. The consensus estimate for FY24 for CI is 53.2%, again below the peers.

Growth: Average

EPS

Core revenue

IBPT

RIBPT

601288.SS reported revenue of CNY 647 259mn in the last 12 months, down 1% from FY23. The institution earned CNY 303 703 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), a decline of 1% from FY23 The dynamics of more stable income, as measure by recurring income before provisioning and taxes (RIBPT), were rather similar. EPS fell 0% from FY23 to CNY 0.77. Market expects EPS to reach CNY 0.76 in FY24.The core revenue has been declining slowly over the last several years (negative), while IBPT growth has been weak. This all contributed to very fast EPS growth (strongly positive). The RIBPT trend is falling, a notch worse than of IBPT. We emphasize the highly volatile dynamics of EPS. On the positive side, core revenue dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are somewhat mixed. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded most of its peers. On average, the company pays dividends annually.

Default risk: Moderate

The solvency (credit quality) of 601288.SS is good. The credit profile rests on (a) a very weak capital position, (b) weak asset quality, (с) a robust corporate governance framework, (d) below average earnings power and cost efficiency, and (e) its slightly weak liquidity profile. We draw special attention to the rather low capital adequacy, fairly low asset quality driven by low loss absorption capacity.

Volatility: Low

In normal market circumstances, 601288.SS is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible. Finally, it may be affected by inherently volatile sector.

Stress-test: Resilient

In highly turbulent market conditions, 601288.SS is not overly volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low. At the same time, due to inherently volatile sector, its maximum losses could be low.

Selling difficulty: Small

601288.SS has above average trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.