Agricultural Bank of China's (ABC) focus on rural banking puts it at a strategic disadvantage compared to its competitors. While ABC relies heavily on low-income rural residents for funding, these accounts generate minimal revenue due to low penetration rates. Additionally, ABC branches in counties are far less productive than those in cities. Urbanization trends suggest revenue from rural economies will remain limited. To improve, ABC may need to shift its distribution model away from counties towards metropolitan areas or develop a more efficient rural banking strategy.

1. Asian Banker Research Can an agricultural bank appeal to global investors? Agricultural Bank of China’s IPO focuses attention on the profit generating capability at risk For more data and topical analytics please visit www.theasianbanker.com/bankmetrics Singapore, 23 th June 2010

2. Key discussion notes Agricultural Bank of China far behind in branch and productivity levels Despite showing no differences in the loan structure by region compared to its peers, quality and productivity is lower Current and future economic growth areas are uneven and often concentrated in metropolitan areas in the east and west putting ABC at a strategic disadvantage Rural residents have lower disposable incomes and the rural-urban income gap is widening Though residents in counties supply a cheap source of funding for Agricultural Bank of China, revenue contribution is minimal due to low loan account penetration Urbanisation trends from rural areas to cities and from smaller to bigger cities cast doubts on the bank’s ambition to generate significant amount of revenue from the rural related economies

3. Source: Asian Banker Research Operating Income per Employee and per Branch (2009) Agricultural Bank of China far behind in branch and productivity levels Our research indicates: Branches in counties lag far behind those in cities in terms of revenue generation Given the experience in other emerging markets such as Indonesia or India, maintaining rural banking infrastructure is a costly proposition ABC needs to sharpen its distribution model away from county to metropolitan areas or devise a cheaper and more productive rural network strategy.

4. Loan structure of ABC compared to ICBC and CCB (2009) Despite showing no differences in the loan structure by region compared to its peers, quality and productivity is lower Source: Asian Banker Research

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