Agricultural Bank of China hit by 15% rise in operating expenses in 1Q13

Net profit was only RMB47b.

According to Barclays, ABC reported 1Q13 net profit of RMB47bn, up 8% y/y, 2.3% lower than their forecast of RMB48.1bn. While the bank recorded strong non-interest income (+41% y/y) in 1Q13, higher operating expenses (+15% y/y) and credit charge (+16% y/y) dragged down its bottom line growth.

Here's more from Barclays:

Other key negatives included: 1) the bank’s NIM reduced by 3bps q/q to 2.78% in 1Q13 after sequential rebound in 3Q12 (+6bps q/q) and 4Q12 (+3bps q/q), and 2) Tier-1 ratio dropped to 9.27%, -40bps in 1Q13.

However, the bank announced a plan to issue no more than RMB40bn hybrid Tier-1 capital instruments subject to shareholders’ and regulators’ approvals, which could boost the Tier-1 ratio by 43bps to 9.7%, on our estimate. We believe the issuance of hybrid capital instruments could help the bank mitigate its capital pressure which could be a positive catalyst.

Lower capital ratios; proposed hybrid instruments to help
Under the new capital calculation methodology, the bank’s Tier-1 ratio/CAR was 9.27%/11.98% at end-Mar 2013, -40bps/-63bps in 1Q13.

In order to replenish its capital adequacy, ABC announced it plans to issue no more than RMB90bn eligible capital instruments with write-down feature in which the amount of hybrid Tier-1 capital instruments would not exceed RMB40bn. The plan is subject to shareholders’ and regulators’ approval. On our calculation, if the bank issues RMB40bn hybrid Tier-1 and RMB50bn hybrid Tier-2 capital, its Tier-1 ratio/CAR will increase to 9.7%/13%. Capital raising pressure from the stock market could be mitigated.

NIM decline with slow net interest income growth in 1Q13
NIM in 1Q13 was 2.78%, -3bps q/q, after sequential rebound in 3Q12 (+6bps q/q) and 4Q12 (+3bps q/q). We believe it was mainly because the bank reported faster growth on low-yield interbank related assets (+28%, vs. 7.7% total assets growth) and high-cost interbank liabilities (+16%, vs. 7.8% total liabilities growth) in 1Q13. Net interest income reached RMB89.3bn, only +4% y/y.

Strong non-interest income
Net fee income was RMB26bn, +22% y/y or 55% q/q, in 1Q13. We estimate the fee income growth could be mainly driven by agency commissions and other fiduciary service fee, while the bank did not disclose the breakdown.

Since the bank reported 1) only RMB4m net loss on financial instruments (vs. RMB2,127m net loss in 1Q12), 2) 37% y/y growth on trading gain and 3) 96% y/y growth on other operating income, its total non-interest income increased to RMB30.6bn, +41% y/y, in 1Q13.

Higher operating expense and credit charge dragged down bottom line growth
Total operating expenses increased to RMB46.7bn, +15% y/y, in 1Q13, lifting the cost to income ratio to 38.95%, +1.17ppt y/y. Since the bank kept its high credit charge, 0.75% (+1bps y/y) in 1Q13, net profit growth slowed down to 8%, lower than other big banks.

Stable loan growth, but fast deposit growth
Total loans increased 5.2% (vs. 4.7% system’s loan growth) to RMB6,770bn in 1Q13, driven by 4.1% corporate loan growth and 6.5% retail loan growth.

Total deposits soared 6.9% to RMB11,611m in 1Q13, in which demand and saving deposits lifted 4.9% and 9.4% respectively. Reported loan-to-deposit ratio was 58.30%, -0.92ppt compared to the end of 2012.

Improved asset quality reported
Total NPLs slightly reduced 0.2% to RMB85.7bn and NPL ratio dropped 7bps to 1.27% in 1Q13. Coverage rate increased to 341% at end-Mar 2013, +14.41ppt compared to end-2012.

Reserve/total loans slightly reduced by 4bps to 4.31% in 1Q13, due to faster loan growth, but it is still significantly higher than the regulatory level of 2.5%.