Agriculture Bank of China's solid 1H14 net profit surges 12.6% to RMB 104bn

Growth possibly highest among big 4 banks.

Agriculture Bank of China's (ABC) net profit amounted to RMB 104bn in 1H14, up by 12.6% y/y (higher than BOC’s 11.2% y/y in 1H14), and is likely to be the highest among the big 4 banks.

According to a research note from Barclays, the bank’s pre-provision operating profit grew strongly by 15.9% y/y, mainly driven by solid net interest income (+16.4%) and efficient cost control (where its operating expenses only grew by 9.9% y/y).

The bank’s cost to income ratio was lowered by 1.3ppts y/y to 38.6% in 1H14.

Meanwhile, according to management, its NIM was down by 4bp q/q to 2.92% in 2Q14, after continued expansion in previous quarters (+4bps in 1Q14, +11bps in 4Q13 and +16bps in 3Q13).

Here's more from Barclays:

The q/q drop was mainly due to:

1) a lower interbank asset yield amid loosening liquidity conditions in 2Q; and

2) higher deposit cost.

On an h/h basis, the bank’s NIM improved by 6bps h/h to 2.93% in 1H14 from 2.87% in 2H13. In 1H14, loan pricing was stable at 6.01% (-1bp h/h in 1H14 vs. +1bp h/h in 2H13), where higher personal loan yield (+7bps h/h in 1H14 vs. -4bps h/h in 2H13) and overseas loan yield (+85bps h/h in 1H14 vs. -124bps h/h in 2H13) was offset by dropping corporate loan yield (-9bps h/h in 1H14 vs. +15bps h/h in 2H13).

Interbank asset yield saw an 83bps h/h increase, to 5.26% in 1H14 (vs. +55bps h/h in 2H13).

On the funding side, deposit cost increased by 6bps h/h to 1.81% in 1H14 (vs. +1bp in 2H13), mainly due to rising costs in personal time deposits (+3bps h/h in 1H14 vs. +3bps h/h in 2H13) and personal demand deposits (+2bps h/h in 1H14 vs. -4bps h/h in 2H13), despite the falling costs in corporate time deposits (-81bps h/h in 1H14 vs. +110bps h/h in 2H13) and corporate demand deposits (-8bps h/h in 1H14 vs. +11bps h/h in 2H13).

The average interbank funding cost continued to decline, -16bps h/h to 3.23% in 1H14 (vs. -2bps h/h in 2H13), implying a strong liquidity position at ABC, in our view.

Going forward, the bank expects its NIM to be under downward pressure in 2H, mainly due to:

1) ABC, as a net lender in the interbank market, being negatively affected by the lower interbank lending yields in 2H, as the government targets stabilizing the market rates;

2) continued rising funding cost amid intensifying deposit competition among peers.