China's Slowing Economy And Fintech Competition Will Heighten Credit Risk

Key Takeaways

• Slowing economic growth, demographic challenges, and state intervention threaten ABC's loan expansion, deposit growth, and overall profitability.
  
• Rising competition from fintechs and high exposure to riskier rural lending will pressure margins and increase credit risks.
  
• Strong rural lending growth, digital innovation, and diversified non-interest income are driving profitability, while effective risk management and government support reinforce ABC's competitive position.

Catalysts

Provides banking products and services.

• The maturing of China's economy and the anticipated deceleration in GDP growth directly threaten the sustainability of ABC's aggressive loan expansion, especially in rural and county-level lending, causing future revenue growth to slow and pressuring earnings as the macro tailwinds dissipate.
  
• Persistent demographic headwinds, including an aging population and declining birth rates, will gradually erode demand for new loans and constrain deposit growth, weakening ABC's core retail and pension finance businesses, and setting the stage for shrinking net interest income and margin compression over time.
  
• Intensifying competition from fintechs and digital-first financial platforms continues to disintermediate ABC's traditional deposit base and lending franchises, particularly in urban and younger customer segments, which will reduce fee-based income and undermine ABC's efforts to grow its non-interest income streams.
  
• High exposure to rural, agricultural, and lower-tier city lending-even as these portfolios are rapidly scaled up-will amplify credit risk and increase future non-performing loans, compelling ABC to provision more capital and accept lower net margins, ultimately leading to volatile and potentially weaker future profitability.
  
• Ongoing state intervention, policy-driven loan mandates, and a focus on non-commercial objectives will lock in low profitability and limit ABC's operational flexibility, curbing the ability to drive meaningful improvements in return on equity, net interest margins, and long-term shareholder value creation.

Agricultural Bank of China Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Agricultural Bank of China compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Agricultural Bank of China's revenue will grow by 11.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 45.6% today to 35.7% in 3 years time.
• The bearish analysts expect earnings to reach CN¥285.2 billion (and earnings per share of CN¥0.74) by about August 2028, up from CN¥264.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 6.6x today. This future PE is lower than the current PE for the HK Banks industry at 5.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Agricultural Bank of China Future Earnings Per Share Growth

Risks

• Continued strong growth in rural and county-level lending, combined with aggressive government support for agriculture, food security, and rural revitalization, is likely to underpin robust loan demand and provide recurrent sources of revenue growth for ABC.
  
• Rapid adoption of digital banking and advanced fintech, including AI-enabled risk control, product innovation, and rural digital transformation, is driving efficiency gains and lowering operating costs, which could help sustain or even expand net margins over the long term.
  
• Asset quality metrics at ABC remain resilient, with a low and stable non-performing loan ratio and high provision coverage, suggesting that credit risks are well-managed and unlikely to threaten earnings or capital adequacy in the near future.
  
• Expanding fee-based and non-interest income-such as wealth management, green finance, insurance, and pension products-provides diversified revenue streams that are growing faster than traditional interest income, supporting overall profitability and helping to offset margin pressure.
  
• ABC's dominant positioning and scale in retail, rural, inclusive, and private enterprise lending, coupled with state support and ongoing sector consolidation, strengthens its competitive advantage and could allow for sustained earnings growth, balance sheet expansion, and improved return to shareholders.

Valuation

• The assumed bearish price target for Agricultural Bank of China is HK$3.88, which represents two standard deviations below the consensus price target of HK$5.62. This valuation is based on what can be assumed as the expectations of Agricultural Bank of China's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$7.42, and the most bearish reporting a price target of just HK$3.09.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥799.9 billion, earnings will come to CN¥285.2 billion, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 8.4%.
• Given the current share price of HK$5.46, the bearish analyst price target of HK$3.88 is 40.6% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.