Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Agricultural Bank Of China / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/1120" target="_blank" data-smartkarma-citation="entities:1120:1">Agricultural Bank Of China (1288 HK)</a> reported stolid numbers for 2018. A PH Score of 7.6 encapsulates positive change in variables such as Capitalisation, Asset Quality, Margin, Efficiency, and Provisioning though Profitability and Liquidity gauges slipped somewhat. The attractive valuation variable contributes to the score.Underlying top-line growth of 8%, supported by low double-digit credit growth from moderate deposit expansion, was matched by OPEX increment.The increase in Interest Income on earning Assets was relatively synchronised to the rise in Interest Expenses on interest-bearing Liabilities. We mention this as too often in China of late we have seen OPEX growth far outstripping underlying Income gains and Funding cost expansion rise well in excess of Interest Income growth.Asset Quality was quite stable. Despite lingering SMLs and a double-digit rise in substandard Loans, NPLs actually decreased YoY. The bank though boosted Loan Loss Provisions by 40% YoY and Loan Loss reserve ratios were tightened. A monumental increase in Loan recoveries generated net negative charge-offs. This shows that the bank is pulling no punches with debtors.Capitalisation ratios were fortified.A concern would be the increased exposure to CRE which accounts for 31% of the Loan portfolio. This is the greatest risk in the grand scheme of things and has generated much comment given real estate values and the pace of appreciation. (Is a 5-6x increase since the creation of a private market so elevated? Prices are still well below levels of India).<div class="content-highlight">Shares trade at an Earnings and Dividend Yield of 19% and 5.5%, at a P/Book of 0.7x, at a Franchise Valuation of 8%, and with a Total Return Ratio of 1.5x. Thus the bank can be deemed an Income opportunity.</div>

Agricultural Bank Of China (1288 HK) reported stolid numbers for 2018. A PH Score of 7.6 encapsulates positive change in variables such as Capitalisation, Asset Quality, Margin, Efficiency, and Provisioning though Profitability and Liquidity gauges slipped somewhat. The attractive valuation variable contributes to the score.Underlying top-line growth of 8%, supported by low double-digit credit growth from moderate deposit expansion, was matched by OPEX increment.The increase in Interest Income on earning Assets was relatively synchronised to the rise in Interest Expenses on interest-bearing Liabilities. We mention this as too often in China of late we have seen OPEX growth far outstripping underlying Income gains and Funding cost expansion rise well in excess of Interest Income growth.Asset Quality was quite stable. Despite lingering SMLs and a double-digit rise in substandard Loans, NPLs actually decreased YoY. The bank though boosted Loan Loss Provisions by 40% YoY and Loan Loss reserve ratios were tightened. A monumental increase in Loan recoveries generated net negative charge-offs. This shows that the bank is pulling no punches with debtors.Capitalisation ratios were fortified.A concern would be the increased exposure to CRE which accounts for 31% of the Loan portfolio. This is the greatest risk in the grand scheme of things and has generated much comment given real estate values and the pace of appreciation. (Is a 5-6x increase since the creation of a private market so elevated? Prices are still well below levels of India).Shares trade at an Earnings and Dividend Yield of 19% and 5.5%, at a P/Book of 0.7x, at a Franchise Valuation of 8%, and with a Total Return Ratio of 1.5x. Thus the bank can be deemed an Income opportunity.

Agricultural Bank of China: It Takes More than One Cold Day for a River to Freeze a Meter Deep.