Higher credit charges help depress ABC’s net profit

Agricultural Bank of China reported net profit of RMB 145.1bn for FY12.

This was in line with Bloomberg’s forecast of RMB 145.5bn, but 2% below its consensus of RMB 148.7bn, which was up 19% y/y.
The major variance to Bloomberg’s forecast was lower fee income and higher credit charge, but they were offset by lower-than-expected operating expenses.

Key positives included: 1) sequential rebound on NIM (up 3bps q/q to 2.81%) in 4Q12, and 2) stable asset quality – NPL ratio reduced 1bps q/q to 1.33%. Key negatives were: 1) high credit charge to erode its profits (1.32% in 4Q12, up 62bps q/q) and 2) lower-than-peer tier-1 ratio of 9.67% (down 9bps q/q).

ABC still faces capital raising pressure going forward, in our view. Management explained that the high credit charge was due to prudent risk management, but it would come down going forward. We maintain our EW rating on the bank.

ABC’s NIM, according to our calculation, increased by 3bps q/q to 2.81% in 4Q12 (vs. 2.72% in 2Q 2.78% in 3Q). We believe the sequential improvement was mainly due to 1) faster deposit re-pricing after the rate cuts in 2H12; 2) increased low-cost demand deposits, which accounted for 54.6% of total deposits at end-2012 (up from 53.4% at end-June 2012); and 3) good control on deposit rate – according to management, only 1.6% of the bank’s clients can have 1.1x benchmark deposit rates at this moment.

Management advised that the NIM in 1H13 could decline because 34% of its loans (vs only 13-14% of deposits) would be repriced in 1H13. In particular, mortgages all re-priced on Jan 1. NIM would likely be stable in 2H13 if no significant change on monetary policy and interest rate deregulation.

Net fee income increased 9% y/y to RMB 74.8bn, mainly driven by agency commission (up 57.5% y/y), and custodian & other fiduciary services (up 49%), while credit commitment fee (down 22%) and advisory fees (down 17.8%) reduced due to regulatory tightening on fee charges as well as less pricing power than before.