ABC goes against the trend to expand its balance sheet: continuously "planting seeds" in county-level finance

Behind some current performance expressions often lies the accumulation of the past few years.

On October 30, Agricultural Bank of China (601288.SH) disclosed that the company achieved operating income and net profit attributable to shareholders of 540.7 billion yuan and 214.372 billion yuan in the first three quarters, with year-on-year growth of 1.29% and 3.38%.

This growth rate may not match that of expanding joint-stock banks and urban rural commercial banks, but it is quite prominent among state-owned large banks.

In the first three quarters, the overall growth rate of revenue and net profit for the six major state-owned banks was -1.19% and 0.79%, with only Agricultural Bank of China maintaining both growth rates above 1%.

The continuously growing revenue is contributed by both interest and investment income.

Looking back at the first half of the year, the increase in investment income was mainly driven by the "bull market" in bonds, benefiting state-owned large banks with bond-based asset allocation; additionally, the growth in Agricultural Bank of China's revenue outperformed its peers due to net interest income from balance sheet expansion.

In the third quarter, Agricultural Bank of China accelerated its balance sheet expansion.

Total assets and total liabilities in the first three quarters grew by 9.23% and 9.65% respectively compared to the beginning of the year, with growth rates similar to Postal Savings Bank and higher than the other four state-owned banks.

As the net interest margin gradually stabilizes, the "volume compensating for price" from balance sheet expansion achieved a 0.96% increase in net interest income.

Some breakthroughs in this regard may stem from its deep-rooted contributions to "county-level finance" over the years.

At the performance release conference, the head of the credit management department of Agricultural Bank of China revealed that the company's "three rural" and county-level businesses are growing steadily, with continuous improvement in service precision and coverage.

As of the end of the third quarter, county-level loans accounted for over 40% of domestic loans.

The official stated, "We will deeply explore the financial needs of counties and maintain rapid growth in county and agricultural loans."

"Planting Seeds" in Counties

Agricultural Bank of China's "counter-cyclical growth" has a long history.

According to Wind data, since 2022, the speed of balance sheet expansion at Agricultural Bank of China has begun to significantly exceed that of its peers.

In 2021, the bank's asset and liability expansion rate remained at 6%, ranking fifth among the six major banks; the following year, the expansion rate "soared" by nearly 10 percentage points, and has since maintained above 10%.

The direction of asset expansion mainly targets macro policy areas such as "three rural" issues, small and micro enterprises, and personal loans.

In February 2022, the "No. 1 Central Document" of that year was released, emphasizing financial services for rural revitalization.

Subsequently, the central bank and various regulatory agencies issued documents emphasizing increased credit investment in key agricultural and rural areas and strengthening bank-enterprise connections.

The annual report of Agricultural Bank of China recorded changes in its "county-level financial business."

By the end of 2022, county-level loans at Agricultural Bank of China grew by 17.85% year-on-year, exceeding the overall growth rate of the bank by 2.8 percentage points; this drove county-level financial revenue to 317.52 billion yuan, accounting for 43.8% of total revenue With high growth in scale, Agricultural Bank of China (ABC) is also accelerating the pace of expanding its "capillary" network in county areas.

At that time, President Fu Wanjun revealed at a performance meeting that 65% of the new and relocated branches in 2022 were distributed in county areas, urban-rural junctions, and townships, with a coverage rate of 94% for "Huinong Tong" service points in townships.

"County business is 迎来新机遇 under the policy," Fu Wanjun stated, "We need to improve the empowerment of county branches, tilt policy resources, and manage risks and compliance meticulously. In 2023, we aim to add over 1 trillion yuan in county loans."

Looking back, 2022 was a key moment for intensifying county business.

On one hand, in an environment of continuously narrowing net interest margins, businesses such as "three rural issues," small and micro enterprises, and personal loans can provide income and stabilize revenue for ABC; on the other hand, ABC's long-term layout of "county finance" gives it a first-mover advantage in this new track.

A journey of a thousand miles begins with a single step.

As early as 2008, ABC had fully promoted the "Three Rural Financial Business Department System" reform across the bank, setting up specialized institutions at the branch and sub-branch levels to strengthen county financial operational capabilities.

By 2010, ABC had 2,048 county-level branches and 22 secondary branch business departments.

In the early market phase where various institutions were "seizing the beach" in first- and second-tier cities, county finance was not favored by everyone. However, with adjustments in the economic environment and policy direction, the "gold content" of this business has gradually become apparent.

For example, in 2023, amidst a general decline in net interest income for state-owned banks, ABC's decline of 3.07% was slightly better than its peers, mainly due to a 3.8% increase in net interest income from county financial business that year.

In the first half of 2024, the yield on county financial loans at ABC was 0.12 percentage points higher than the overall yield, and the deposit interest rate was 0.11 percentage points lower; net interest income grew by 2.5% year-on-year, exceeding the overall growth rate by 2.4 percentage points, accounting for 55.09% of total net interest income.

Expectations for Capital Injection Rise

Although the third quarterly report did not disclose specific data on county finance, a comprehensive review of the semi-annual report and management statements indicates that expansion is still ongoing.

On one hand, ABC is still increasing the allocation of resources to county areas.

The interim report revealed that in the future, priority will be given to ensuring the credit demand in county areas, with separate county credit plans issued, separate economic capital allocated for county areas, and separate performance assessment methods for the Three Rural Financial Business Department.

On the other hand, the "capillaries" are still being expanded.

In the current context of overall contraction of bank branch institutions, ABC's new and relocated 70% of its branches in the first half of the year were located in county areas, urban-rural junctions, and key townships; at the same time, it is strengthening talent training and tilting compensation resources towards the front line of rural revitalization.

It is undeniable that during the rapid expansion of the balance sheet, the market is prone to concerns about quality risks.

From the current data, ABC's county financial non-performing loan ratio is 1.12%, which is 0.21 percentage points lower than the overall bank level.

At the same time, ABC's overall asset quality and capital indicators show different changes.

In terms of asset quality, as of the end of the third quarter, the non-performing loan ratio decreased by 0.01 percentage points from the beginning of the year to 1.32%, while the provision coverage ratio also decreased by 1.51 percentage points to 302.36% In terms of capital replenishment levels, the capital adequacy ratio, tier 1 capital adequacy ratio, and core tier 1 capital adequacy ratio decreased by 0.4 percentage points, 0.28 percentage points, and increased by 0.29 percentage points, respectively, compared to the previous quarter.

Among them, core capital is expected to be further solidified in the future.

At the earnings release conference, a relevant person in charge of Agricultural Bank of China stated regarding the "capital injection of the six major banks" that they will coordinate arrangements according to the requirements of regulatory agencies and shareholders to promote the implementation of capital replenishment-related work.

The person in charge mentioned, "We are currently actively communicating with relevant departments to study and demonstrate the core tier 1 capital replenishment plan."

A good capital adequacy ratio can support the dividend expectations of commercial banks.

Previously, some investors expressed concerns about the dilution of dividend returns due to refinancing at the earnings conference.

At the end of August, the bank announced its 2024 interim profit distribution plan, proposing to distribute a cash dividend of 0.12 yuan per share (including tax), with a dividend payout ratio of 30%.

"The bank has maintained a dividend payout ratio of 30% or above while considering long-term development," the relevant person in charge of Agricultural Bank of China candidly stated at the earnings conference, "We will complete the relevant work before the Spring Festival to allow shareholders to receive dividend returns as soon as possible."

Regarding the refinancing issue, the person in charge stated, "In the short term, this is indeed the case. In the long term, after refinancing, the foundation for our bank's development will be further solidified, providing shareholders with richer, long-term, and stable investment returns."