ABC A/H Shares Rating Upgraded to Overweight, Strong 1Q26 Results Drive End of Underperformance
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ABC A/H Shares Rating Upgraded to Overweight, Strong 1Q26 Results Drive End of Underperformance
J.P. Morgan believes ABC-A/H's underperformance relative to state-owned banks since the start of the year may be nearing an end, as 1Q26 revenue, profit, NIM, fee income, and asset quality all show improvement.
- ABC-A/H have underperformed state-owned banks by 8pp/4pp respectively since the start of the year, but the report considers the relative underperformance may be ending.
- 1Q26 revenue grew YoY by 11%, profit grew YoY by 5%, with the highest profit growth rate among covered state-owned banks; revenue was 10% above J.P. Morgan estimates.
- NIM improved sequentially to 1.26%, up 5bps from last quarter, 7bps above J.P. Morgan estimates; net interest income grew YoY 8% to Rmb151.2bn, non-fee income grew YoY 37%.
- Loans and deposits grew YoY by 9%/8% respectively, both highest among state-owned bank peers; management stated 1Q26 profit growth momentum is expected to continue into FY26.
- Capital supplement may bring dilution risk; if rights issue priced at April 29 A-share closing price, 2026 EPS/DPS may be diluted by approx 4%/7%, but the report considers the risk sufficiently disclosed.
Report interpretation
Overview
This report is J.P. Morgan's earnings commentary and rating adjustment on Agricultural Bank of China A/H shares. The core conclusion is: ABC delivered better-than-expected performance in 1Q26, with profit growth speed, loan and deposit growth, sequential NIM improvement, fee and investment income momentum, and asset quality all supporting its growth potential in a cyclical recovery, hence upgrading ABC-A/H from Neutral to Overweight.
Core views
The report believes ABC possesses higher profit growth potential among state-owned banks. Supporting factors include: faster loan and deposit growth, stabilizing NIM, high proportion of OCI reserves to revenue bringing upside potential for investment income, and high NPL coverage around 293% reducing pressure on rebuilding provision buffers in the future. Negative factors include dilution caused by capital supplement, dividend yield lower than peers, and CET1 weaker relative to the four big banks.
Analysis framework
The report starts with 1Q26 actual performance and management communication, comparing ABC with BOC, CCB, ICBC, PSBC, BoComm etc. state-owned banks' revenue, profit, NPL coverage and dividend yield, and updates 2026-2028 earnings forecasts. Valuation adopts DDM model, A-share target price based on 10.7% equity cost, 9.7% normalized ROE and Dec 31, 2028 terminal date; H-share first derives A-share fair value, then applies 25% H-share discount.
Methodology notes
Dividend Discount Model
Report uses DDM to calculate Dec-26 target price, key assumptions include 10.7% equity cost, 9.7% normalized ROE, 4.5% long-term growth rate and 0.83x terminal P/BV.
Horizontal Comparison of State-Owned Banks
Through comparing 1Q26 revenue growth, profit growth, NPL coverage, dividend yield and OCI reserve to revenue ratio, evaluate ABC's growth and quality advantage relative to state-owned bank peers.
Capital Supplement Dilution Calculation
Assuming new share price equals April 29 A-share closing price, calculate ABC 2026 EPS diluted approx 4.1%, DPS diluted approx 7.0%, ROCE declined approx 55bps.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Agricultural Bank of China- A (601288.SS; 601288 CH)Core covered security, A-share rating upgraded to Overweight
- Strengths
- Strong 1Q26 performance, leading profit and revenue growth rates, NIM recovery, asset quality improvement, high NPL coverage.
- Weaknesses
- CET1 weaker relative to the four big banks, high RWA growth, A-share dividend yield lower than some state-owned banks.
- Comparison
- A-share target price Rmb8.10, current price Rmb6.94; 2026E dividend yield approx 3.9%, lower than some A-share state-owned bank peers.
- Risks
- Capital supplement causes EPS/DPS dilution; if fee growth, NIM expansion or asset quality falls below expectations, it will suppress ratings and target prices.
- Agricultural Bank of China- H (1288.HK; 1288 HK)Core covered security, H-share rating upgraded to Overweight
- Strengths
- Also benefits from 1Q26 strong performance, positive management guidance and high provision coverage; H-share valuation uses A-share fair value with 25% discount.
- Weaknesses
- H-share still affected by A/H discount, market risk appetite and capital supplement dilution expectations.
- Comparison
- H-share target price HK$7.20, current price HK$6.17; 2026E dividend yield approx 5.0%, slightly lower than some H-share state-owned banks.
- Risks
- Widening H-share discount, weak macro expectations, NIM or fee growth falling below expectations.
- SOE banks peersPeer comparison benchmark
- Strengths
- Used to verify ABC's relative advantages in 1Q26 profit growth, loan/deposit growth and NPL coverage.
- Weaknesses
- Some peers have higher dividend yields or more robust capital conditions.
- Comparison
- ABC 1Q26 profit growth approx 4.5% is highest among peers, NPL coverage approx 293% significantly higher than CCB, PSBC, ICBC, BOC and BoComm.
- Risks
- If peers NIM or profit repair faster, ABC relative advantage may narrow.
Key data
- 1Q26 Revenue GrowthYoY +11%Higher than state-owned bank peers, and about 10% above J.P. Morgan estimates.
- 1Q26 Profit GrowthYoY +5%Highest among covered state-owned banks.
- 1Q26 NIM1.26%, Seq +5bps7bps above J.P. Morgan estimates; management expects sequential NIM outlook stable.
- 1Q26 Net Interest IncomeRmb151.2bn, YoY +8%Supported by NIM recovery and business volume growth.
- Loan/Deposit GrowthYoY +9%/+8%Both are highest among state-owned bank peers.
- Non-Fee IncomeYoY +37%Reflects improvement in investment and non-interest income.
- Credit Card IncomeYoY +12.4%Management guidance shows strong fee income momentum, custodian income also achieved double-digit growth.
- NPL Coverage RatioApprox 293%Highest among covered state-owned banks, supports future earnings buffer.
- A-Share Target PriceRmb8.10, Previous Rmb7.30Rating upgraded to Overweight, current price Rmb6.94.
- H-Share Target PriceHK$7.20, Previous HK$6.25Rating upgraded to Overweight, current price HK$6.17.
- Earnings Forecast Adjustment2026-2028E Profit Up 1.8%/4.0%/6.1%Model updated based on 1Q26 actual performance.
Impact & implications
The report's investment implication is that ABC's prior underperformance relative to peers may be repaired due to 1Q26 performance realization and positive management guidance. Although capital supplement may dilute per-share metrics and dividend yield is lower than some peers, stronger growth momentum, higher provision coverage and lower overseas risk exposure make it more attractive in a cyclical recovery.
Risks
- Falling below expectations on fee growth.
- NIM expansion falling below expectations or stability cannot be maintained.
- Deterioration of asset quality.
- Dilution of EPS, DPS and ROCE caused by capital supplement.
- Weaker than expected macro growth affecting loan demand, asset quality and valuation.
What to watch
- ABC and ICBC capital supplement plans and pricing premiums expected to be finalized in May or June 2026.
- Whether sequential NIM can maintain stability or improve in subsequent quarters, especially changes in newly issued loan rates relative to 4Q25.
- Momentum of fee income, including whether credit card income and custodian income continue to grow.
- Contribution of Domestic Business and Three-Rural Loans to loan growth.
- Whether SML ratio, overdue loan ratio and NPL formation rate continue to improve.
- Pace of OCI reserves being released to investment income.
- Extent of repair in A/H shares' relative performance against state-owned bank peers.