Hong Kong. China Banks Picking the Best Under the Worst Case. OVERWEIGHT (Initiation) Sector Report 28 November 2013

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1 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Hong Kong Sector Report 28 November 2013 OVERWEIGHT (Initiation) Steven ST CHAN stevenchan@kimeng.com.hk (852) Kieran KK LUK kieranluk@kimeng.com.hk (852) China Banks Picking the Best Under the Worst Case Initiate with OVERWEIGHT rating. Even under our conservative assumptions on NPLs and provisions of H-share banks, we expect: (i) they will maintain growth in EPS and BVPS during ; (ii) ROE of Bank of China (BOC) and China Construction Bank (CCB) will remain higher than their historic trough value; and (iii) most H-share banks will sustain their dividend payout ratio without the need of equity capital replenishment in Our fundamental top picks are CCB, BOC, Agricultural Bank of China (ABC) and Huishang Bank (HUSB). Limited liquidity intervention and better loan mix. With potential slowdown in growth of foreign reserve, we expect M2 growth in China will moderate to 13% YoY in We thus expect fewer interventions from the PBOC on interbank market liquidity. We expect loan growth of H-share banks will slow to 10-16% YoY in Banks will continue to diversify into less risky SME loans, micro-finance and residential mortgages in Central and Western China as well as overseas lending. Don t worry on interest rate deregulations. We expect milder price competition on both deposits and loans even with further interest rate deregulations, mainly due to: (i) loan quota is set to individual banks; (ii) stringent capital positions of small banks; (iii) large banks have room to lose market share in deposits; and (iv) customers may still prefer wealth management products and structured deposits. We expect limited net interest margin pressure for H-share banks during 2H Adopting the worst case scenario in asset quality. We project a % YoY, 15% YoY and 12.5% YoY rise in NPLs for the manufacturing loans and wholesale & retail trade loans and a 3%, 5% and 5% new NPL formation for the LGFV loans of H-share banks in 2013, 2014 and 2015, respectively. With other conservative projections on NPLs and provisions, we expect credit cost of H-share banks during to remain well above the level in 2012 and 9M13. We also project an impairment loss of 2% and 1.5% on other shadow bankingrelated assets for 2014 and 2015, respectively. Large banks as good yield play. We expect the net profit of most H- share banks should be sufficient to support their growth in risk-weighted assets and sustain their target dividend payout ratio. This provides a good yield play for large H-share banks. Figure 1: Financial summary of China banks (Share price as of 25 Nov 2013) Bank BB SP TP Upside Net profit (CNYb) PER (x) P/B (x) ROE (%) Yield (%) name code Rating (HKD) (HKD) (%) F 2014F F 2014F F 2014F F 2014F F 2014F ABC 1288 HK BUY BOC 3988 HK BUY BOCOM 3328 HK SELL (15.5) BOCQ 1963 HK BUY CCB 939 HK BUY CMB 3968 HK SELL (18.1) CMSB 1988 HK SELL (10.7) CNCB 998 HK HOLD (4.4) CQRB 3618 HK HOLD (0.7) HUSB 3698 HK BUY ICBC 1398 HK HOLD (2.7)

2 China Banks Report Contents Three most important charts/tables... 3 Investment summary... 4 Channeling Loans to Real Output... 9 Interest rate liberalization A small bite on NIM Asset Quality Factoring in the Worst Case Capital positions No imminent concerns Valuation and Recommendations Agricultural Bank of China (1288 HK) Bank of China (3988 HK) Bank of Communications (3328 HK) Bank of Chongqing (1963 HK) China Construction Bank (939 HK) China Merchants Bank (3968 HK) China Minsheng Bank (1988 HK) China CITIC Bank (998 HK) Chongqing Rural Commercial Bank (3618 HK) Huishang Bank (3698 HK) Industrial and Commercial Bank of China (1398 HK) November 2013 Page 2 of 98

3 China Banks Report Three most important charts/tables We estimate that the loan impairment allowances of all H-share banks were sufficient to cover their overdue loans and to cover more than 60% of their total NPL and special-mention in Jun 2013 Figure 2: Provision coverage for overdue loans, special mention loans and NPLs * Figures refer to domestic RMB business Following the interest rate liberalizations in Jun-Jul 2012, most small H-share banks have increased their time and demand deposit rate to the ceiling level during 2H12-1H13. There was limited price competition on lending business. Figure 3: Change in lending yield and time deposit cost and NIM of H-share banks *Figures refer to domestic loans only Source: Company data, PBOC, Maybank Kim Eng We expect the H-share banks should be able to maintain their dividend payout ratio with the need of equity capital replenishment during Large H-share banks should be key yield play within the sector. Figure 4: Forecast CET1 CAR, dividend payout and yield of H-share banks CET1 CAR (%) Dividend payout (%) Yield (%) Dec 2013F Dec 2014F Dec 2015F 2013F 2014F 2015F 2013F 2014F 2015F ABC BOC BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC Source: Maybank Kim Eng 28 November 2013 Page 3 of 98

4 China Banks Report Investment summary Initiate China banks with OVERWEIGHT rating Share price of most H-share banks have underperformed the market in 3Q13 EPS of H-share banks will grow at a CAGR of 3-11% even under our worst case scenario Share price of most H-share banks have underperformed the MSCI China index in 3Q13, mainly due to the concerns of liquidity tightening, the removal of price floor on RMB lending rate and the stronger rise in NPLs of H-share banks. Based on our conservative assumptions on the NPLs and provisions (including both loans and other risky assets) of H-share banks, we estimate the EPS of H- share banks will still grow at a CAGR of 3-11% during In other words, there will not be any erosion of the book value of these banks in the coming years. Key earnings drivers include: (i) healthy loan growth of 10-14% pa during ; (ii) mild NIM pressure of 3-7bps during ; (iii) improvement in operating efficiency (mainly for large banks); and (iv) slower rise in loan impairment charges in due to high base for comparison in Figure 5: EPS growth forecast of H-share banks EPS (CNY) YoY % change CAGR (%) F 2014F 2015F F 2014F 2015F F ABC BOC (6.4) BOCOM (4.1) (28.5) BOCQ (10.7) (18.4) 36.5 (0.2) CCB (2.3) CMB (1.0) (0.4) CMSB (1.7) CNCB (3.3) (3.8) CQRB (1.9) HUSB (13.6) ICBC (3.6) Initiate the coverage of China banks with OVERWEIGHT rating We initiate the coverage of China banks with OVERWEIGHT rating. This is mainly due to: (i) H-share banks will maintain growth in EPS and BVPS during under our worst case scenario; (ii) ROE of some large banks such as Bank of China (BOC) and China Construction Bank (CCB) will remain higher than historical trough level under our worst case scenario; (iii) most H-share banks are trading at a 2014 P/B similar to or below their historic trough value (refer to Figure 6-7), implying limited downside risk on share price; and (iv) strong capital positions of most H-share banks help sustain dividend payout ratio during Figure 6: Trading P/B band of state-owned H-share banks Figure 7: Trading P/B band of small H-share banks 28 November 2013 Page 4 of 98

5 China Banks Report Moderate loan growth but better loan mix in 2014 We expect M2 growth in China to decelerate to 13% YoY in 2014 We expect loan growth of H-share banks to moderate in 2014 We believe H-share banks will shift towards less risky loans in the coming years Due to potential QE tapering and modest economic recovery in the US and Europe, we expect potential slowdown in accumulation of foreign reserve in China in 2014 (+USD351b YTD for 9M13). This should help moderate China s M2 growth from 14% in 2013 to about 13% YoY in We expect minimal intervention from the PBOC on interbank market liquidity next year. Meanwhile, the ratio of total loans to nominal GDP of China increased slightly from 121.3% in 2011 to an annualized of 127.2% for 9M13. To maintain a similar ratio in 2014, we estimate that the RMB loan growth (in absolute amount) of banks in 2014 will be similar to our forecast in 2013 (i.e. CNY8.75t). Hence, we expect loan growth of large H-share banks and small-to-medium sized H-share banks will moderate to 10-11% YoY and 12-16% YoY in 2014, respectively. The H-share banks have limited loan growth in photovoltaic, high energy consumption and overcapacity industries during 1H13. Besides, their exposure to real estate loans and lending to local government financing vehicles (LGFV) have declined during 1H13. Rather, they have shifted towards lending to micro-to-small enterprises (micro-finance), residential mortgages and discounted bills finance. In terms of geographical exposure, the H-share banks have shifted from Eastern and Southern China to Central and Western China as well as overseas loans. To lower their credit risk, we believe H-share banks will continue to expand less risky SME loans, micro-finance and residential mortgages in Central and Western China as well as overseas loans in the coming years. Figure 8: Loan growth and loan mix forecast of H-share banks As % of total loans Total loan growth (YoY %) Personal business loans Residential mortgage Offshore loans F 2014F F 2014F F 2014F F 2014F ABC BOC BOCOM BOCQ N/A N/A N/A CCB CMB CMSB N/A N/A N/A CNCB CQRB N/A N/A N/A HUSB N/A N/A N/A ICBC Mild NIM pressure ahead Most small H-share banks have increased their time and demand deposit rate to the ceiling level after the interest rate liberalizations We expect less severe price competition if there are further interest rate liberalizations The People s Bank of China (PBOC) raised the RMB deposit rates ceiling to 110% of its base rate in Jun 2012 and lowered the floor of RMB lending rate to 70% of its base rate in Jul It lifted the RMB lending rate floor completely and allowed banks own determination on bill discount rate in Jul Following the new rules, small H-share banks have competed aggressively for both RMB time and demand deposits. We estimate that most small H-share bank have increased their time and demand deposit rate to the ceiling level during 2H12-1H13. As such, their net interest margin (NIM) narrowed by 11-73bps during 2H12-1H13. Large H-share banks have maintained strong price bargaining power on both demand deposits and lending business. These banks saw limited narrowing in NIM in 1H13 compared with 1H12. We expect milder price competition on both deposits and loans in China even if there are further interest rate liberalizations in the coming years. This is mainly due to: (i) a loan quota is set to individual banks; (ii) small banks have stringent capital positions; (iii) large banks have much room to lose some market share in deposits; (iv) customers may prefer wealth management products (WMPs) and structured deposits to time deposits; and (v) the potential launch of new rules on repo transactions may restrain growth in balance sheet of small banks. 28 November 2013 Page 5 of 98

6 China Banks Report Figure 9: Change in deposit rates and lending yield of H-share banks 1H13 vs.1h12 Net interest margin (%) Lending yield (ppt) Demand deposit cost (ppt) Time deposit cost (ppt) 1H12 2H12 1H13 2H13F F 2014F ABC (0.54) (0.12) (0.19) BOC (0.37) (0.21) (0.05) BOCOM (0.66) (0.09) (0.12) BOCQ (0.03) CCB (0.53) (0.15) (0.11) CMB (0.59) (0.07) (0.16) CMSB (0.73) (0.11) (0.26) CNCB (0.72) (0.09) (0.25) CQRB (0.38) (0.07) (0.08) HUSB (1.74) (0.09) ICBC (0.48) (0.16) (0.07) PBOC (0.52) (0.13) (0.46) N/A N/A N/A N/A N/A N/A N/A We expect limited NIM narrowing of most H-share banks in 2H13 and 2014 All told, we expect limited rise in deposit costs of H-share banks in 2H We believe the H-share banks will also reduce their NIM pressure through a shift towards higher-yield loans and bond investment as well as raising loan spread. We expect most H-share banks to see limited NIM narrowing in 2H13 and Our conservative assumptions on asset quality H-share banks have accumulated plenty of excess loan loss provisions to cover overdue loans and special mentions Conservative assumptions on the NPLs of risky loans The provision-to-loan ratio of all H-share banks will rise to % by end Projecting an impairment loss of 2% and 1.5% on non-loan risky assets for 2014 and 2015, respectively In light of the slowdown in global economic recovery, total NPLs of China banks have resumed a slight uptrend since 1Q12. With moderate tightening of liquidity in China, the pace of increase in total NPLs of China banks has accelerated during 9M13 compared with 9M12. Meanwhile, we estimate that the H-share banks have prudently classified 7-89% of their overdue loans within 3 months as NPLs in Jun Similarly, more than 70% of their special-mention (SM) loans are non-overdue loans in Jun We estimate that the loan impairment allowances of all H-share banks were sufficient to cover their overdue loans and to cover more than 60% their total NPLs and SM loans in Jun Despite that there is recovery in PMI new orders sub-index and in the gap between PPI (output) (PPIO) and PPI (input), we project a 50% YoY, 15% YoY and 12.5% YoY rise in NPLs for the manufacturing loans of H-share banks in 2013, 2014 and 2015, respectively. Similarly, the CPI-PPIO gap in China and the LME steel spot and forward price have recovered recently. Still, we project a 100% YoY, 15% YoY and 12.5% YoY rise in NPLs for the wholesale and retail trade loans of H-share banks in 2013, 2014 and 2015, respectively. We also made similar conservative projections on the NPLs of their personal loans, real estate loans and residential mortgages for Finally, the new government policies stated in the 12 th Third Plenary Session may help lower the fiscal deficit of local governments and reduce their reliance on bank borrowings in the medium term. Still, we have conservatively projected a 3%, 5% and 5% new NPL formation for the LGFV loans of most H-share banks in 2013, 2014 and 2015, respectively. We also assume that banks will increase their collective loan impairment allowance ratio by 5bps pa during Consequently, we forecast the provision-to-loan ratio of all H-share banks will increase steadily to % at the end of We also expect their credit cost during to remain well above the level in 2012 and 9M13. Due to severe price competition for deposits, small China banks have increased their investment in risky assets (such as trust products and asset management plans and/or reverse REPO in relation to these assets) during 2Q13-3Q13. We project an impairment loss of 2% and 1.5% on these assets for 2014 and 2015, respectively. We estimate that total provisions of H-share banks in Jun 2013 covers 3-22% of their risky assets (including NPLs, SM loans, non-standardized WMPs, reverse REPO and direct investment related to trust products and asset management plans and off-balance sheet credit commitments). 28 November 2013 Page 6 of 98

7 China Banks Report Figure 10: Forecast NPL ratio, provision-to-loan ratio and other impairment charge of H-share banks NPL ratio (%) Provision-to-loan ratio (%) Impairment charges to other risky asset (CNYm) Dec-12 Dec-13F Dec-14F Dec-15F Dec-12 Dec-13F Dec-14F Dec-15F F 2014F 2015F ABC (400) (3,343) (2,675) BOC (301) BOCOM BOCQ (666) (533) CCB (1,711) (513) (411) (370) CMB (92) 0 (2,749) (2,199) CMSB (866) (433) (2,917) (2,333) CNCB (300) (450) (1,891) (1,513) CQRB (240) (24) (1,036) (829) HUSB (267) (214) ICBC (1,173) (587) (411) (287) Healthy capital positions to sustain dividend payout The CET1 CAR of most H- share banks in Jun 2013 has already met the minimum requirement for 2018 The decline in CET1 CAR in 1H13 was partly due to the inclusion of operating risk Sustainable dividend payout ratio in The CET1 CAR of most H-share banks in Jun 2013 has met the minimum requirement for Meanwhile, the tier-1 CAR and total CAR of Agricultural Bank of China (ABC), BOCOM, CMB, CMSB and China CITIC Bank (CNCB) have not met the minimum requirement for We see a chance for some of these banks to replenish their tier-1 capital next year to avoid a sharp rise in net funding cost after the US QE tapering. If we assume these banks issue preference shares to top up their tier-1 CAR to 9-10% and the net funding cost is 4%, we estimate that the annualized ROE dilution will be 20-50bps. Following the adoption of the new capital rules, the H-share banks recorded a decline in CET1 CAR of bps during 1H13. However, we believe this was partly due to the one-off change in risk-weight of some assets and the inclusion of operating risk when calculating the capital ratios. We expect a further sharp fall in CET1 CAR is unlikely to occur for H-share banks from 2014 onwards. With the exception of BOCOM and CMSB, we estimate the net profit of H-share banks in should be largely sufficient to support their growth in riskweighted assets and sustain their target dividend payout ratio. Figure 11: Forecast CAR and dividend payout ratio of H-share banks CET1 CAR (%) Tier-1 CAR (%) Total CAR (%) Dividend payout ratio (%) Dec 2013F Dec 2014F Dec 2015F Dec 2013F Dec 2014F Dec 2015F Dec 2013F Dec 2014F Dec 2015F Dec 2013F Dec 2014F Dec 2015F ABC BOC BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC CCB, BOC, ABC and HUSB as top picks CCB, BOC, ABC and HUSB are our top BUY H-share banks We initiate the coverage of CCB, BOC, ABC and Huishang Bank (HUSB) with BUY rating. We believe CCB will continue to benefit from low deposit constraint, improving cost-income ratio and strong core capital positions in Meanwhile, with relatively higher overseas exposure, we expect BOC to ride on the steepening USD yield curve to improve its NIM and achieve lower credit cost than peers. Besides, we believe BOC will actively diversify into non-interest income business to compensate for tis lower-than-market-average NIM. ABC will further improve its asset and liability mix so as to minimize its NIM pressure under interest rate deregulations. It will also explore new fee income opportunities in County area. With a higher provision-to-loan ratio than its peers, we expect its credit cost to decline in Meanwhile, we expect continued 28 November 2013 Page 7 of 98

8 China Banks Report strong loan growth from HUSB due to the government s plan to promote industrial migration to Anhui. HUSB s massive retail and SME customer base should help boost its net fees in the coming years. We also expect its CET1 CAR to stay above 10% even if it maintains a dividend payout ratio of 30% during Figure 12: Comparison of P/B vs long-term ROE assumption of H-share banks Figure 13: Key financial data of H-share banks ABC BOC BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC Pre-provisional profit (CNYm) , ,154 89,749 2, ,452 65,083 59,849 54,732 7,579 6, , F 268, ,325 97,609 3, ,586 75,611 66,620 62,523 8,675 7, , F 296, , ,044 4, ,378 85,674 76,822 69,739 9,745 8, ,821 YoY % change F F Net profit (CNYm) , ,432 58,373 1, ,179 45,273 37,563 31,032 5,361 4, , F 147, ,562 41,764 2, ,762 46,116 39,550 29,863 5,440 5, , F 168, ,759 56,207 1, ,724 52,428 44,758 34,226 5,339 5, ,624 YoY % change F 1.6 (6.4) (28.5) 20.6 (2.3) (3.8) (3.6) 2014F (18.4) (1.9) EPS (CNY) F F YoY % change 2012 (1.2) (6.9) (20.4) 7.4 (5.3) (22.5) (5.1) 2013F 1.6 (6.4) (28.5) (10.7) (2.3) (1.0) (1.7) (3.8) 1.5 (13.6) (3.6) 2014F (18.4) 19.1 (0.4) (1.9) DPS (CNY) F F YoY % change 2012 (1.2) (6.3) 99.2 (17.0) (5.9) 24.5 (21.8) (14.1) 0.8 (17.0) (2.3) 2013F (13.0) (6.4) (29.7) (2.3) (13.2) (1.7) (3.6) 2014F (18.4) (1.9) Loan growth (%) F F Net interest margin (%) F F Cost-income ratio (%) F F Credit cost (%) F F CET1 CAR (%) F F November 2013 Page 8 of 98

9 China Banks Report Channeling Loans to Real Output Liquidity tightening by the PBOC in 2013 A surge in foreign reserve, M2 growth and RMB deposits in 1Q13 Given the appreciation of RMB against US dollar (and the expected appreciation as shown in the 12-month USD/RMB NDF rate) and the increase in external trade surplus, foreign reserve in China maintained a solid growth of USD131b QoQ in 1Q13. Correspondingly, M2 growth in China surged from 13.8% YoY in Dec 2012 to 15-16% YoY during 1Q13. This was well above the target M2 growth of the People s Bank of China (PBOC) of 13% YoY for Total RMB deposits and loans also surged to CNY6.1b and CNY2.8b QoQ in 1Q13, respectively. Figure 14: USD/RMB NDF rate, external trade surplus and foreign reserve in China Figure 15: M2 growth and RMB loan and deposit growth Source: National Bureau of Statistics, Bloomberg, Maybank Kim Eng Source: PBOC, Maybank Kim Eng Aggregate social financing also rose sharply in 1Q13 Similarly, the aggregate social financing in China leaped to CNY6.2t in 1Q13. Apart from strong growth in RMB loans, this was mainly driven by a rise in entrusted loans (+CNY0.5t QoQ), trust loans (+CNY0.8t) and undiscounted bankers acceptance (+CNY0.7t QoQ). This has led to the concern of the PBOC and China Banking Regulatory Commission (CBRC) over rapid expansion of shadow banking finance in China. Figure 16: Aggregate social financing in China Figure 17: Key items of aggregate social financing Source: PBOC, Maybank Kim Eng Source: PBOC, Maybank Kim Eng 28 November 2013 Page 9 of 98

10 China Banks Report The PBOC has actively withdrawn excess liquidity from the banking system during Jan-May 2013 A surge in short-term SHIBOR to over 7.5% in mid-jun 2013 To avoid the creation of credit bubble and the over-expansion of shadow banking finance, the PBOC has actively withdrawn excess liquidity from the banking system through open market operations (i.e. the issue of short-term treasury bills to China banks) during the first five months of The PBOC reported net withdrawal of liquidity of CNY843b from the banking system during this period. As such M2 growth moderated to 14% YoY in Jun The RMB deposit and loan growth also slowed to CNY3t QoQ and CNY2.3t QoQ in 2Q13, respectively. However, the deceleration of M2 growth in 2Q13 has also penalized some small China banks which have actively engaged in interest rate arbitrage activities during 2H12-1H13. The abundant liquidity in the banking system has helped sustain short-term SHIBOR (with maturity of less than 1 month) at a low level of % during 2H12-May Some small banks have taken advantage of the low SHIBOR to borrow from large banks and invest in high-yield wealth management and shadow banking products (such as trust beneficiary rights and asset management plans). The ongoing withdrawal of liquidity from the banking system has eventually led to a surge in short-term SHIBOR to over 7.5% in mid- Jun 2013 (average of 6.8% during Jun 2013) given large banks have turned more cautious towards interbank lending business. The liquidity shortage problem was finally resolved when there was a net liquidity injection of CNY207b into the banking system towards end-jun Figure 18: RMB deposit change, PBOC liquidity management and SHIBOR The scale of liquidity injection by the PBOC turned milder in 3Q13 and the PBOC returned to a net withdrawal of liquidity in Oct 2013 We expect RMB loan growth to be CNY t for 2013 The PBOC continued to engage in reverse REPO activities to inject liquidity into the banking system during 3Q13. However, the scale of liquidity injection was not as strong as that during Jun-Oct Net liquidity injection by the PBOC only amounted to CNY218b in 3Q13. As such, the RMB deposit and loan growth remained mild at CNY2.2t each in 3Q13. However, the recovery in external trade surplus and the ongoing anticipation of RMB appreciation against the US dollar have prompted sharp rebound in foreign reserve in China. The latter surged by CNY166b in 3Q13 (+CNY54b in 2Q13). M2 growth also stayed above 14% YoY over the same period. In response to potential capital inflow, the PBOC returned to a net withdrawal of liquidity of CNY51b in Oct This helped check RMB loan growth to CNY506b over the month. Still, M2 growth remained above the PBOC target at 14.3% YoY in Oct To avoid capital inflow to speculate on RMB appreciation and the creation of asset and/or credit bubble, we believe the PBOC will continue to closely monitor overall liquidity of the banking system through open market operations. Short-term SHIBOR stayed at above 4.1% during Jul-Oct 2013, thus reducing the attractiveness of banks engaging in interest rate arbitrage activities. All told, we expect RMB loan growth will remain close to CNY500b monthly during Nov-Dec 2013, making an overall growth of CNY t for November 2013 Page 10 of 98

11 China Banks Report A shift towards less risky loans during 9M13 RMB loan growth during 9M13 was mainly driven by short-term and long-term personal loans and longterm corporate loans The RMB loan growth amounted to CNY7.3t for 9M13, slightly higher than the growth of CNY6.7t during 9M12. This was mainly driven by faster growth in personal loans (both short-term and long-term) and a recovery in long-term corporate loans. Meanwhile, the surge in SHIBOR has curbed the growth in discounted bills finance significantly during 9M13 (particularly for 3Q13). China banks also shifted from short-term corporate loans to short-term personal loans, partly reflecting continued rapid expansion of micro-finance business. Besides, we believe the faster growth in short-term personal loans was related to highyield personal consumption loans (such as credit card advances and unsecured personal loans). On the other hand, the strong property sales in primary market have triggered increased demand for residential mortgages, and hence the longterm individual loans during 9M13. Finally, the recovery in long-term corporate loans could be related to lending to the service sector (in particular for cultural, gaming and entertainment industries). In sum, China banks have shifted towards less risky personal loans during 9M13. Figure 19: QoQ loan growth and loan mix of the banking sector QoQ growth (CNYb) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Short term individual loans Long term individual loans Short term corporate loans 1, , Long term corporate loans Discount bill (300) (269) Other loans Total loan growth 2,460 2,395 1,867 1,482 2,755 2,325 2,200 Mortgage Property development loans Micro-finance Personal consumption loans Industrial loans (Medium-tolong-term) Source: Maybank Kim Eng Most large H-share banks reported slower-thanmarket-average loan growth during 9M13; the reverse was seen for small H-share banks With the exception of CCB, the state-owned China banks reported loan growth of lower than 11% YTD during 9M13, slower than the sector average of 11.6% YTD. CCB recorded loan growth of 11.5% YTD for 9M13, mainly driven by SME loans and residential mortgages. On the contrary, all small H-share banks but CMSB reported faster-than-market-average loan growth during 9M13. We believe these banks have shifted towards lending business to offset the rise in funding cost caused by liquidity tightening and price competition on deposits. Capital constraint in CMSB has dragged on its loan growth during 9M November 2013 Page 11 of 98

12 China Banks Report Figure 20: Loan growth of H-share banks By industry sectors Micro-and-small enterprise loans# Residential mortgages Discounted bills Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) ABC ,051 1, BOC* ,132 1, N/A BOCOM N/A N/A BOCQ (19.8) - CCB ,529 1, CMB (6.4) CMSB (7.6) N/A N/A CNCB N/A N/A (0.7) 0.01 CQRB HUSB* (15.8) - ICBC 1,840 1, N/A 1,341 1, N/A Manufacturing loans Wholesale & retail trade loans Real estate loans Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) ABC 1,350 1, BOC* 1,294 1, BOCOM N/A N/A N/A BOCQ CCB 1,275 1,273 (0.1) CMB (2.7) 0.58 CMSB N/A N/A (4.8) N/A CNCB (2.3) 0.09 CQRB (8.9) 1.57 HUSB ICBC 1,392 1, (1.7) 0.90 Local government financing vehicles (LGFV) Transport-related loans Total loans Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio Dec 2012 Sep 2013 % NPL ratio (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Sep 13) ABC (8.2) ,433 7, BOC*^ (6.1) ,865 7, BOCOM (5.8) N/A 2,947 3, BOCQ^ (4.5) CCB (8.3) ,512 8, CMB (4.8) (0.7) ,904 2, CMSB (15.2) (5.6) N/A 1,385 1, CNCB (8.2) ,663 1, CQRB N/A HUSB N/A 24 N/A (13.2) ICBC (7.0) ,136 1, ,804 9, *Figures refer to domestic loans only; #The NPL ratio is estimated based on the personal business loans; ^Total loans refer to figure at end-jun13 The H-share banks have reduced their exposure in manufacturing, real estate, LGFV and transportrelated loans in 1H13 In terms of loan mix, the H-share banks have been well-disciplined to limit loan growth in photovoltaic, high energy consumption and overcapacity industries. As such, most banks saw moderate growth in manufacturing loans during 1H13. We believe the H-share banks have also been cautious towards lending to exportoriented manufacturers in China. Besides, the regulators have discouraged banks to engage in real estate loans and lending to local government financing vehicles (LGFV). Exposure to these loans has declined for most H-share banks during 1H13. Weakening operating conditions for shipping industry has also led to slowdown in transport-related loans of H-share banks during 1H13. However, the growth of more risky wholesale and retail trade loans remained robust for small H-share banks during 1H13. One major risk concern over these loans was the potential exposure to steel trading activities in Eastern China. Figure 21: Loan mix of H-share banks By industry sectors As a % of Manufacturing Wholesale & retail trade Real estate LGFV Transport-related total loans Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 ABC BOC* BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB N/A ICBC *Figures refer to domestic loans only 28 November 2013 Page 12 of 98

13 China Banks Report Most H-share banks have shifted towards microfinance, residential mortgages and discounted bills finance during 1H13 H-share banks have shifted their lending exposure from Eastern China to Central and Western China as well as offshore loans Meanwhile, most H-share banks reported robust growth in lending to micro-tosmall enterprises (micro-finance), residential mortgages and discounted bills during 1H13. These loans accounted for more than 30% of their total loans in Jun The strong growth in micro-finance was mainly due to the urge from regulators to support the financing needs of micro-to-small enterprises. Besides, these loans carry a lower risk-weight of 75% under the new capital rules (100% for other corporate loans). The strong growth in residential mortgages and discounted bills finance was primarily due to their relatively lower credit risk. Most H-share banks recorded a NPL ratio of lower than 0.4% for their residential mortgages and no NPLs for their discounted bills finance business. Moreover, the risk-weight of residential mortgages remained lower than other loans at 50% under the new capital rules. However, we believe the rise in SHIBOR should have undermined the demand for discounted bills finance in 3Q13. In terms of geographical exposure, all H-share banks have reduced their proportion of loans in Eastern China given that the NPL ratio in this region remained higher than the rest of China. Rather, most H-share banks have expanded their lending business in Central and Western China in 1H13. These regions have received strong support from the government and have relatively lower loan defaults. Finally, all H-share banks recorded robust loan growth in their overseas branches. This was mainly due to strong demand for cross-border foreign currency loans as interest rates of major foreign currencies remained much lower than RMB interest rates. Besides, overseas loans have maintained the best asset quality within the loan portfolio of H-share banks (with NPL ratio of lower than 0.6% in Jun 2013). Figure 22: Loan growth and loan mix of H-share banks By geography Eastern China Central & Southern China Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) ABC 1,664 1, ,695 1, BOC 2,278 2, ,351 1, BOCOM 1,130 1, N/A N/A BOCQ N/A N/A N/A N/A N/A N/A N/A N/A CCB 1,671 1, ,288 2, CMB CMSB CNCB CQRB N/A N/A N/A N/A N/A N/A N/A N/A HUSB ICBC 1,937 2, ,431 2, Western China Northern and North eastern China Overseas Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio Dec 2012 Jun 2013 % NPL ratio (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) (CNY b) (CNY b) change (Jun 13) ABC 1,403 1, ,375 1, BOC ,272 1, ,306 1, BOCOM N/A N/A N/A BOCQ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A CCB 1,270 1, ,763 1, CMB CMSB N/A N/A N/A N/A CNCB CQRB N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A HUSB ICBC 1,524 1, ,073 2, As a % of Eastern China Central & Southern China Western China Northern & North eastern China Overseas Total loans Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 ABC BOC BOCOM CCB CMB CMSB N/A N/A CNCB HUSB ICBC November 2013 Page 13 of 98

14 China Banks Report Loan growth in 2014 Focus on quality not quantity Historical data shows that M2 growth in China moved largely in line with the change in its foreign reserve Historical data shows that M2 growth in China largely moved in line with the change in its foreign reserve. The later was affected by external trade balance and FDI in China as well as the forward RMB exchange rate. We expect a slowdown in the rise of foreign reserve in China in This was mainly due to: (i) expectation of limited appreciation of RMB against the US dollar (EIU forecast the RMB/USD exchange rate will appreciate by 0.3% and 1% in 2014 and 2015 respectively); (ii) potential US QE tapering should moderate capital inflow to China; (iii) modest economic recovery in the US and Europe should not boost external trade balance and FDI in China. Figure 23: M2 growth and change in foreign reserve of China Figure 24: Change in FDI and foreign reserve of China Source: National Bureau of Statistics, Bloomberg, Maybank Kim Eng Source: National Bureau of Statistics, Bloomberg, Maybank Kim Eng H-share banks have shifted their lending exposure from Eastern China to Central and Western China as well as offshore loans With potential slowdown in accumulation of foreign reserve, M2 growth in China should moderate in The EIU also expects M2 growth in China to reduce by 1ppt in Based on this, we expect China M2 growth will be slightly above 13% YoY in If the PBOC is to maintain the M2 growth target at 13% for 2014, we see low chance of an aggressive liquidity injection (nor significant liquidity withdrawal) into the banking system by the PBOC during Shortterm SHIBOR will likely to stay at around 4% in Figure 25: Trade balance and change in foreign reserve of China Figure 26: Appreciation of RMB vs. USD and change in foreign reserve of China Source: National Bureau of Statistics, Bloomberg, Maybank Kim Eng Source: National Bureau of Statistics, Bloomberg, Maybank Kim Eng The PBOC may set out RMB loan growth target to stabilize the loan-tonominal GDP ratio in 2014 Meanwhile, the ratio of total loans to nominal GDP of China increased slightly from 121.3% in 2012 to an annualized 127.2% for 9M13. We expect this ratio will drop to 125.6% by end-2013 based on our projected RMB loan growth of CNY8.75t and a nominal GDP growth assumption of 10% YoY (the EIU forecast) for To avoid the creation of credit bubble, we believe the PBOC will intend to stabilize this ratio (i.e. the RMB loan growth should be similar to the M2 growth) in The EIU expects nominal GDP in China to grow 10.8% YoY in With similar growth rate, we see a chance for PBOC to set out a RMB loan growth target of about CNY8t for 2014 (CNY7.5t for 2013). 28 November 2013 Page 14 of 98

15 China Banks Report Figure 27: Loan-to-nominal GDP ratio of China Source: PBOC, National Bureau of Statistics, Maybank Kim Eng We forecast loan growth of H-share banks to moderate in 2014 We believe H-share banks will continue to reduce their exposure in real estate, lending to LGFV, steel trading loans and manufacturing loans for high energy consumption and overcapacity industries in 2014 Still, according to our channel checks, most H-share banks expect their loan growth (in absolute amount) in 2014 will be similar to or slightly higher than that of Even if we assume the RMB loan growth in 2014 is similar to that in 2013 (i.e. CNY8.75t based on our forecast), we estimate that the ratio of total loans to nominal GDP will remain comfortable at 127% for Overall, we forecast loan growth of large H-share banks will reduce from 10-13% YoY in 2013 to 10-11% YoY in Similarly, loan growth of small-to-medium sized H- share banks will moderate from 14-19% YoY to 12-16% YoY in In terms of loan mix, we believe H-share banks will continue to reduce their exposure in real estate, lending to LGFV, steel trading loans and manufacturing loans for high energy consumption and overcapacity industries in However, the H-share banks will keep providing finance support to quality SMEs even though they are in manufacturing and wholesale and retail trade sectors. Meanwhile, according to the guidelines on financial services to micro-to-small enterprises (MSEs) issued by the CBRC on 5 Sep 2013, China banks are urged to increase the approval rate for the application of micro-finance and to provide comprehensive financial services to MSEs. The CBRC will approve the securitization of micro-finance by banks in the near term. Besides, banks are encouraged to increase loan size of micro-finance through co-operation with guarantee companies. Hence, we believe the growth in micro-finance should remain faster than overall loan growth of H-share banks. Still, banks are unlikely to relax their underwriting standards to boost these loans as their NPL ratio is usually higher than other corporate loans. Figure 28: Forecast loan growth and loan mix of China banks Total loan growth (YoY %) Manufacturing Wholesale & retail trade Real estate Personal business Residential mortgage Offshore loans F 2014F F 2014F F 2014F F 2014F F 2014F F 2014F F 2014F ABC BOC BOCOM BOCQ N/A N/A N/A CCB CMB CMSB N/A N/A N/A CNCB CQRB N/A N/A N/A HUSB N/A N/A N/A ICBC November 2013 Page 15 of 98

16 China Banks Report We expect H-share banks will increase their exposure in SME loans, micro-finance, residential mortgages, personal unsecured lending and offshore loans On the other hand, we believe the H-share banks will maintain strong growth in residential mortgages given their lower default risk and risk weight as well as the ongoing good response on primary market property sales. In addition, banks will align with property developers (especially for borrowers) to provide primary market residential mortgages. These should help banks to monitor the cash flow and financial positions of these developers before deciding whether to renew their credit lines. The H-share banks will also expand high-yield credit card advances and unsecured personal loans to high net worth customers so as to offset some of the NIM pressure. Finally, the relatively lower interest rates of major foreign currencies (vs. RMB) should continue prompting strong demand for offshore loans, especially for large state-owned banks, which have extensive global networks. Key borrowers of these loans should be large state-owned and private enterprises, which intend to engage in overseas M&A activities and/or expand their overseas operations. Besides, the opening of new RMB clearing centres in Singapore and Taiwan as well as the Shanghai Free Trade Zone should help increase the acceptance of RMB as international trade settlement currency. This should also enhance the offshore RMB lending business of China banks, particularly for BOC and ICBC. 28 November 2013 Page 16 of 98

17 China Banks Report Interest rate liberalization A small bite on NIM Interest rate liberalization in 2013 the first since 2004 The PBOC has launched a series of measures on interest rate liberalization during Further interest rate liberalizations on both deposit and lending rate was seen in Jun-Jul 2012 The PBOC has launched a series of measures on interest rate liberalization during These include the deregulation of interbank lending/borrowing rates and interbank REPO rates, the calculation of discount rates and rediscount rates for bill finance and the lowering of the floor of lending rate to 90% of PBOC s base rate. In Jun 2012, the PBOC announced a cut in RMB savings rate and 1-year benchmark RMB time deposit rate and lending rate by 10bps, 25bps and 25bps, respectively. At the same time, it raised the deposit rates ceiling to 110% of PBOC s base rate and lowered the floor of lending rate to 80% of PBOC s base rate. The PBOC announced another cut in RMB savings rates and 1-year RMB benchmark time deposit rates and lending rates by 5bps, 25bps and 31bps in Jul 2013, respectively. It further lowered the floor of RMB lending rate to 70% of PBOC s base rate in Jul Figure 29: Change in RMB lending rate, savings rate and time deposit rate Source: PBOC, Maybank Kim Eng Most small banks have raised their deposit rates to the ceiling level but China banks were more rational on their loan pricing Immediately after the interest rate liberalization, most small banks have raised the deposit rates to the ceiling level to compete for customer deposits. This has triggered large banks to lift the deposit rates slightly (not to the ceiling level) to avoid significant loss in market share. On the other hand, China banks were more rational on their loan pricing. The proportion of new loans quoted at below the benchmark rate increased gradually from 5.4% of China banks total new loans made in May 2012 to 14.2% in Dec However, this ratio has eased to 11-13% during 1H13, implying that the price competition on lending business has softened due to rising funding cost (caused by liquidity tightening of the PBOC) of banks. 28 November 2013 Page 17 of 98

18 China Banks Report Figure 30: Change in RMB lending rate, savings rate and time deposit rate Source: PBOC, Maybank Kim Eng Large H-share banks also lifted the RMB time deposit rates to the ceiling level but they have maintained strong price bargaining power on both demand deposits and lending business The 1H13 results of H-share banks indicated that the small H-share banks have competed aggressively for both RMB time and demand deposits after the interest rate liberalization. However, their price competition in lending business was less severe during 2H12-1H13. Large H-share banks also lifted the RMB time deposit rates to the ceiling level but they have maintained strong price bargaining power on both demand deposits and lending business. As such, large H-share banks saw limited narrowing in NIM and net interest spread in 1H13 compared with 1H12. Figure 31: Change in lending yield and deposit cost of China banks 1H12 2H12 2H12 vs. 1H12 Lending Demand deposit Time deposit Lending Demand deposit Time deposit Lending Demand deposit Time deposit yield (%) cost (%) cost (%) yield (%) cost (%) cost (%) yield (ppt) cost (ppt) cost (ppt) ABC (0.24) (0.10) 0.01 BOC* (0.10) (0.20) (0.07) BOCOM 6.75 N/A N/A 6.38 N/A N/A (0.37) N/A N/A BOCQ (0.06) CCB (0.13) (0.13) (0.03) CMB (0.24) (0.03) (0.25) CMSB (0.35) (0.09) (0.12) CNCB (0.33) (0.10) (0.48) CQRB (0.04) (0.05) 0.00 HUSB (1.45) (0.03) (0.18) ICBC (0.17) (0.14) H13 1H13 vs. 2H12 1H13 vs.1h12 Net interest spread (%) Lending Demand deposit Time deposit Lending Demand deposit Time deposit Lending Demand deposit Time deposit yield (%) cost (%) cost (%) yield (ppt) cost (ppt) cost (ppt) yield (ppt) cost (ppt) cost (ppt) 1H12 1H13 ABC (0.30) (0.02) (0.20) (0.54) (0.12) (0.19) BOC* (0.27) (0.01) 0.03 (0.37) (0.21) (0.05) BOCOM 6.09 N/A N/A (0.29) N/A N/A (0.66) (0.09) (0.12) BOCQ (0.00) (0.03) CCB (0.40) (0.02) (0.09) (0.53) (0.15) (0.11) CMB (0.35) (0.04) 0.09 (0.59) (0.07) (0.16) CMSB (0.38) (0.02) (0.15) (0.73) (0.11) (0.26) CNCB (0.39) (0.72) (0.09) (0.25) CQRB (0.34) (0.02) (0.08) (0.38) (0.07) (0.08) HUSB (0.29) (0.06) 0.64 (1.74) (0.09) ICBC (0.31) (0.02) (0.13) (0.48) (0.16) (0.07) PBOC (0.52) (0.13) (0.46) *Figures refer to domestic loans only 28 November 2013 Page 18 of 98

19 China Banks Report Further interest rate liberalization the worst may not come The removal of the RMB lending rate floor in Jul 2013 has not resulted in severe price competition on China banks lending business during 3Q13 The PBOC lifted the RMB lending rate floor completely and allowed banks own determination on bill discount rates in Jul However, this has not resulted in severe price competition on China banks lending business. Rather, the proportion of new loans quoted at below the benchmark rate reduced to % during 3Q13. We believe the slow recovery in liquidity of the banking system has prompted banks to be more cautious in granting new loans during 3Q13. Still, small H-share banks suffered from rising funding costs, in particular for interbank borrowings and reported continued NIM narrowing in 3Q13 compared with 2Q13. Figure 32: Weighted average new corporate lending rate and mortgage rate Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Weighted average new corporate lending rate (%) Bill discount rate (%) Other corporate lending rate (%) Weighted average new mortgage rate (%) Source: PBOC, Maybank Kim Eng Full deregulation of RMB deposit rates is unlikely to occur in 2014 Interest rate deregulation alone may not result in severe price competition among banks Due to low loan-to-deposit ratio of Hong Kong banks, we do not see a significant increase in average funding cost of Hong Kong banks after the interest rate deregulations Despite the price competition on loans, NIM of Hong Kong banks swung within a small range of % during According to the 18 th Third Plenary Session, the PBOC is likely to accelerate the interest rate liberalization during However, the regulators are unlikely to introduce full deregulation of RMB deposit rates before the launch of deposit protection scheme and the stabilization of asset quality of China banks. Full deregulation of RMB deposit rates is unlikely to occur in 2014, according to the management of some H-share banks. Rather, we see a chance for the PBOC to lift the ceiling of RMB deposit rates gradually in the coming years. Still, we believe the NIM pressure for China banks should not be significant under this scenario. With reference to the experience of Hong Kong banks, we believe interest rate deregulation alone may not result in severe price competition among banks. Rather, there are other factors that could trigger the price competition (low loanto-deposit ratio and prolonged low deposit spread in the case of Hong Kong banks). The Hong Kong Monetary Authority (HKMA) started to remove the interest rate cap on HKD time deposits of some maturities in Oct 1994 and all HKD interest rates were liberalized in Jul 2001 (HKD lending rate has long been liberalized even before 1994). However, the interest rate deregulation in Hong Kong did not lead to severe price competition on deposits. We did not see a significant increase in average funding cost of Hong Kong banks after the interest rate deregulation. We believe this was due to the low loan-to-deposit ratio of Hong Kong banks after the Asian financial crisis in Without strong loan demand, Hong Kong banks have no incentive to compete for deposit funding. Rather, Hong Kong banks have engaged in mild price competition on lending business over the past 15 years. For example, new mortgage rate has reduced from 100bps above prime rate in 1997 to more than 300bps below prime rate since Lending spread to blue-chip companies and SMEs also reduced from bps and bps above prime rate/hibor in 1997 to 30-80bps and bps above prime rate/hibor in As the price competition on loans is on a gradual basis and there was limited price competition on deposits, NIM of Hong Kong banks swung within a small range of % most of the time during November 2013 Page 19 of 98

20 China Banks Report Figure 33: Loan-to-deposit ratio and NIM of Hong Kong banks Figure 34: HKD deposit spread Source: HKMA, Maybank Kim Eng Source: HKMA, Maybank Kim Eng Price competition on loans among Hong Kong banks only intensified during when they suffered from prolonged low deposit spread and flattened yield curve Price competition on loans among Hong Kong banks only intensified during when they suffered from prolonged low deposit spread and flattened yield curve. In other words, banks generated limited interest income from interbank lending and bond investment during this period. As such, NIM of retail banks fell sharply from 1.84% in 2008 to % during H11. Still, with gradual recovery in corporate loans and increased demand for cross-border loans, the NIM of Hong Kong banks revived steadily to 1.41% during 9M13. In sum, from the experience of Hong Kong banks, the interest rate deregulation alone should not consequentially result in price competition among banks and hence, a hit on their NIM. Rather, it is the change in economic and operating conditions that leads to the price competition among banks. We believe the price competition should lean towards deposits in China if there are full interest rate deregulations Unlike Hong Kong banks, the loan-to-deposit ratio of China banks has increased steadily from 65.1% in 2007 to 68.2% in Sep 2013, implying solid loan demand in China. Besides, the average loan-to-deposit ratio of small-to-medium sized national and city commercial banks remain higher than the regulatory requirement of 75%. Hence, if there are full interest rate deregulations in China, we believe the price competition should lean towards deposits rather than loans. Figure 35: Loan-to-deposit ratio of China banks Figure 36: Loan-to-deposit ratio of large-sized and small-tomedium sized China banks Source: PBOC, Maybank Kim Eng Source: PBOC, Maybank Kim Eng The competition for deposits during 2H12-1H13 has helped lower the average loan-to-deposit ratio of small banks to 79% in Sep 2013 Indeed, the increase in the ceiling of RMB deposit rates to 110% of PBOC s base rate in Jun 2012 has triggered small China banks to compete actively for deposits during 2H12-1H13. This has helped lower the average loan-to-deposit ratio of small-to-medium sized banks from 83.2% in Mar 2012 to 80.6% in Dec 2012 and further to 79% in Sep Based on a 75% loan-to-deposit ratio, we estimate that the deposit gap of these banks (i.e. additional deposits required to lower their loan-to-deposit ratio to 75%) has reduced from CNY2t in Mar 2012 to CNY1.3t in Sep November 2013 Page 20 of 98

21 China Banks Report We see low chance of severe price competition even if there are further interest rate liberalizations Loan-to-deposit ratio of large banks will remain healthy even if they lose market share to small banks to cover the deposit gap Still, we see low chance of severe price competition on both deposits and loans in China if there are further interest rate liberalizations (or even full interest rate deregulations) in the coming years. This was mainly due to: (i) The loan quota system: We believe China banks will continue to submit their budget loan and deposit growth to the regulators for approval before the beginning of each year. This should reduce their incentive to compete for excess loans and deposits; (ii) Tight capital constraint: We believe most small banks in China should have stringent capital positions. This should discourage them from expanding their balance sheet aggressively. (iii) Low loan-to-deposit ratio of large banks: The loan-to-deposit ratio of large state-owned banks remained healthy at 67.2% in Sep We estimate that this ratio will increase by 1.5ppt in order to cover the deposit gap of small-to-medium sized banks. Hence, we believe a slight price competition from small banks should not lead to cut-throat price competition from large banks; (iv) Depositors may still prefer wealth management products (WMPs) and structured deposits: The return on days principal-guaranteed WMPs and structured deposits stood at % in Oct 2013, much higher than the three month time deposit rate ( %). These products are classified as financial liabilities designated at fair value through profit or loss and should not affect the NIM of banks. Hence, small banks may continue to lock up deposits through the issue of these products before each quarter-end. Mild NIM pressure in 2H13 and 2014 The state-owned H-share banks saw limited NIM narrowing during 2H12-1H13 Most small H-share banks reported heavy NIM pressure during 2H12-1H13 We expect most H-share banks to see limited NIM narrowing in 2H13 compared with 1H13 Even without the interest rate liberalizations, we estimate that the asymmetric interest rate cuts during Jun-Jul 2012 should result in an annualized NIM narrowing of 6-8bps for the H-share banks. With the exception of BOC and CCB, the five state-owned H-share banks reported NIM narrowing of 5-11bps during 2H12-1H13, implying their reluctance to engage in price competition. CCB benefited from a shift toward high-yield loans and bond investment and hence, its NIM remained stable during 2H12-1H13. The active reduction of structured deposits by BOC has helped widen its NIM from 2.10% in 1H12 to 2.23% in 1H13. On the other hand, the small H-share banks reported a decline in NIM of 11-73bps during 2H12-1H13. HUSB suffered from a one-off adjustment of the term structure of assets and liabilities (reducing long-term assets and increasing midto-long-term liabilities) for liquidity management purposes. As such, its NIM narrowed 60bps YoY to 2.65% in 1H13. Meanwhile, CMSB was hit by the surge in SHIBOR in Jun 2013 and increasing price competition for its micro-finance business. Consequently, its NIM declined from 3.14% in 1H12 to 2.41% in 1H13. We estimate that most small H-share banks have increased their time deposit rate and demand deposit rate to the ceiling level during 2H12-1H13. Besides, the loan-to-deposit ratio of large H-share banks remained well below the regulatory maximum of 75% in Sep 2013 and they should not be keen to gain their market share in deposits. Hence, we expect limited rise deposit costs of H-share banks in 2H13. As aforesaid, the PBOC has refrained from aggressive liquidity injection into the banking system in recent months. This should help banks to sustain price bargaining power for their lending business in 2H13. This has also helped revive the treasury-bond yield. The 2-year Chinese government bond yield rose from 3.04% in 1H13 to 3.64% in 3Q13. All told, we expect most H-share banks to see limited NIM narrowing (1-4bps) or slight NIM widening (1-2bps) in 2H13 compared with 1H13. We expect NIM of CMB to narrow 17bps HoH to 2.72% in 28 November 2013 Page 21 of 98

22 China Banks Report 2H13 given that it suffered from migration towards time deposits and decline in reverse REPO business. We see chance for the PBOC to increase the ceiling of RMB deposit rates to 20% and 30% of the base rate in 2014 and 2015, respectively We believe most H-share banks may not engage in aggressive price competition on deposits even if there are further interest rate liberalizations in 2014 and 2015 Looking ahead, we expect the liberalization of RMB deposit rates should be on a gradual basis, similar to the experience of Hong Kong banks (It takes 7 years for the HKMA to fully deregulate the HKD deposit rates). We expect the PBOC to increase the ceiling of RMB deposit rates to 20% and 30% of the base rate in 2014 and 2015, respectively. As aforesaid, the interest rate liberalization launched in Jun-Jul 2012 has resulted in gradual improvement in the loan-todeposit ratio of small-to-medium sized banks. On the other hand, large stateowned banks were not keen to maintain their market share in deposits. We expect the loan-to-deposit ratio of most H-share banks to remain healthy and below the regulatory cap in the coming years. Hence, we believe these banks may not engage in aggressive price competition on deposits even if there are further interest rate liberalizations in 2014 and We believe the H-share banks will reduce their NIM pressure (from rising funding costs) through a shift towards higher-yield loans and bond investment and an increase in risk-adjusted return of loans. In the case of small H-share banks, they have invested in more risky assets (such as trust products and asset management plans or reverse REPO in related to these assets) to offset some of their NIM pressure during 2Q13-3Q13. This is likely to continue in the coming years. Figure 37: Forecast NIM of H-share banks 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1H12 2H12 1H13 2H13F F 2014F ABC BOC BOCOM BOCQ N/A N/A N/A N/A N/A N/A N/A CCB CMB CMSB CNCB CQRB HUSB N/A N/A N/A N/A N/A N/A N/A ICBC We forecast NIM of most H- share banks to narrow 1-6bps during 2014 That said, we forecast NIM of most H-share banks to narrow 1-6bps during We expect large H-share banks to receive fewer NIM pressure than small-tomedium sized banks as they have stronger price bargaining power on loans and a rather stable pool of demand deposits. Both BOCQ and HUSB should benefit the additional interest income of their IPO proceeds. Hence, we forecast their NIM to widen 4-5bps during On the other hand, we expect NIM of CMB to decline by 6bps in 2014, the most among peers. The loan-to-deposit ratio of CMB (the bank only) remained the highest among peers at 74.3% in Sep We thus see a higher chance for CMB to compete more aggressively in deposits on further interest rate liberalization. 28 November 2013 Page 22 of 98

23 China Banks Report Sensitivity analysis We estimate that the decline in loan pricing and rise in deposit cost should have the largest negative impact on H-share banks NIM and pre-tax profit We have conducted some sensitivity analyses to estimate the impact of key factors on NIM and pre-tax profit of H-share banks. Based on our analysis, the decline in loan pricing and rise in deposit cost should have the largest negative impact on banks NIM and pre-tax profit. Banks with relatively higher loan-todeposit ratio such as BOCOM, CMB and CNCB are expected to suffer more from a decline in loan pricing than peers. On the other hand, banks which have relied more on deposit funding such as CCB and ICBC or higher deposit costs such as BOCOM and CNCB will be mostly affected by a rise in deposit cost. In both cases, BOC will be the least affected banks as about 20% of its businesses are overseas and domestic foreign currency businesses. Figure 38: Sensitivity analysis of various factors on NIM and pre-tax profit of H-share banks A 10% decline in average lending yield A 10% increase in interbank rate A 10% increase in average deposit cost A 1ppt decline in loanto-deposit ratio A 1ppt increase in the share of time deposits Impact on Impact on Impact on Impact on Impact on Impact on 2014F pretax Impact on 2014F pre- Impact on 2014F pre- Impact on 2014F pre- Impact on 2014F pre- profit (%) NIM (bps) NIM (bps) tax profit (%) NIM (bps) tax profit (%) NIM (bps) tax profit (%) NIM (bps) tax profit (%) ABC (31) (21.4) (1) (0.4) (16) (10.9) (3) (1.9) (2) (1.7) BOC* (25) (16.2) (0) (0.0) (12) (8.0) (2) (1.1) (2) (1.1) BOCOM (39) (31.2) (4) (2.9) (18) (14.2) (2) (2.0) (2) (1.8) BOCQ (32) (27.4) (6) (5.5) (15) (12.9) (2) (2.0) (2) (1.6) CCB (34) (18.6) (0) (0.2) (17) (9.2) (3) (1.5) (2) (1.3) CMB (36) (20.3) (2) (1.1) (15) (8.3) (2) (1.2) (2) (1.1) CMSB (31) (20.1) (6) (3.9) (15) (9.6) (2) (1.5) (2) (1.1) CNCB (35) (28.1) (18) (14.6) (3) (2.2) (2) (1.7) CQRB (31) (22.5) (16) (11.6) (3) (2.1) (2) (1.3) HUSB (30) (18.3) (6) (3.5) (9) (5.5) (2) (1.0) (2) (1.2) ICBC (33) (18.6) (1) (0.6) (17) (9.3) (3) (1.5) (2) (1.3) *Figures refer to domestic RMB business only The rise in interbank rate will have limited impact on large H-share banks The change in loan-to-deposit ratio and deposit migration will have similar impact on the NIM of all H-share banks We estimate that the rise in interbank rates will have limited impact on large H- share banks as they have limited net exposure in the interbank market. Meanwhile, BOCQ, CMSB and HUSB will suffer the most from a rise in interbank rate as they have relatively more interbank borrowings than their peers. Finally, the change in loan-to-deposit ratio and the impact of deposit migration will have similar impact on the NIM of all H-share banks. We estimate that for every 1ppt decline in loan-to-deposit ratio, the H-share banks NIM will narrow by 2-3bps. Similarly, for every 1ppt increase in the share of time deposits (out of total deposits), the H-share banks NIM will narrow by 2bps, based on our estimation. The No.9 document will restrict lending and placement to banks and financial institutions The new rules will prevent mainland banks from using repo agreements to transfer some of the risky assets off their balance sheets Potential launch of No.9 documents by the CBRC According to media reports, the CBRC will launch the No.9 documents in relation to new regulations on Lending and placement to banks and financial institutions (including reverse repo agreements) in Feb Media reported that the new rules will mainly include: (i) For reverse repo or repo agreements, the borrowers will not be allowed to transfer the assets pledged to the agreements to the lenders; (ii) total amount of lending to non-bank financial institutions should not be more than 50% of the lender s equity; and (iii) total amount of lending to bank and non-bank financial institutions (including reverse repo agreements) should not be more than 25% of the lender s customer deposits. We believe one key aim of the new rules is to prevent mainland banks (especially for small banks) from using repo agreements to transfer some of their risky assets (such as trust beneficiary receipts, trust and entrusted loans, wealth management products and asset management plans) to the lenders before each 28 November 2013 Page 23 of 98

24 China Banks Report quarter-end in order to fulfill the loan-to-deposit ratio, loan quota and capital adequacy ratio requirements. Besides, the new rules also aim to reduce the reliance of small mainland banks on interbank borrowings to finance their lending business as this may enhance liquidity and maturity mismatch risks. Most H-share banks satisfy the new rules on No.9 documents We estimate the launch of the new rules will have minimal impact on banks NIM of 1-3bps Based on our estimation, without the exception of CMSB, CQRB and ICBC, the lending to non-bank financial institutions of H-share banks was lower than 50% of their respective equity in Jun Meanwhile, the lending to bank and non-bank financial institutions of all H-share banks was lower than 25% of their respective customer deposits in Jun Given the loan-to-deposit ratio of CQRB and ICBC was well below 70%, they can switch the lending to non-bank financial institutions to lending business or interbank lending. As the loan-to-deposit ratio of CMSB was high at 70.3% in Sep 2013, it may have to shift some of the lending to non-bank financial institutions into short-term treasury bills (given its CET1 CAR was low at 8.2% in Sep 2013). We conduct a scenario analysis by assuming the reverse repo and repo activities of H-share banks are replaced by interbank lending and borrowing business with 50bps decline in yield and funding cost, we estimate that the negative impact for most H-share banks will be minimal at 1-3bps. CMSB will suffer the most under this scenario with its NIM narrowed by 10bps, based on our estimation, as it has relatively more reverse repo business than peers. Figure 39: Lending to financial institutions and scenario analysis of the elimination of reverse repo and repo activities on NIM of H-share banks Lending to non-bank financial institutions (CNY m) Lending to all financial institutions* (CNY m) As a % customer deposits Reverse Repo Agreements (CNY m) Repo Agreements (CNY m) Impact on net interest income under worst case scenario# (CNY m) Impact on 2014F pretax profit (%) As a % of Equity Yield (%) Funding cost (%) Impact on NIM (bps) ABC 188, ,539, , , (3,857) (3) (1.8) BOC 161, ,174, , (551) (0.4) (0.3) BOCOM 61, , , , (246) (0.5) (0.3) BOCQ N/A N/A 24, , , (51) (2) (2.1) CCB 84, ,200, , , (1,671) (1) (0.6) CMB 45, , , , (1,468) (4) (2.1) CMSB 58, ,064, , , (3,842) (10) (6.5) CNCB 25, , , , (999) (3) (2.2) CQRB 39, , , , (46) (0.1) (0.7) HUSB , , , ICBC 389, ,103, , , (561) (0.3) (0.2) *Including banks, non-bank financial institutions and reverse REPO activities #Assume all the repo and reverse repo activities are replaced by interbank activities with 50bps decline in yield and funding cost 28 November 2013 Page 24 of 98

25 China Banks Report Asset Quality Factoring in the Worst Case A mixed picture in asset quality for 9M13 Total NPLs of China banks have resumed a slight uptrend since 1Q12 and the increase in NPLs was faster during 9M13 compared with 9M12 In light of the slowdown in global economic recovery, total NPLs of China banks have resumed a slight uptrend since 1Q12. With moderate tightening of liquidity in China, the pace of increase in total NPLs has accelerated during 9M13 compared with 9M12. Total NPLs of the banking sector increased by CNY70.7b YTD to CNY563.6b in Sep 2013 (+CNY50.9b YTD during 9M12). The weighted average NPL ratio of all China banks also crawled upward from 0.95% in Sep 2012 to 0.97% in Sep With the exception of rural commercial banks and foreign banks, all China banks saw a faster rise in total NPLs during 9M13 compared with 9M12. Figure 40: Total NPLs of H-share banks Total NPLs (CNYm) QoQ change n NPLs (CNYm) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 4Q12 1Q13 2Q13 3Q13 ABC BOC BOCOM BOCQ N/A N/A 0.3 N/A 0.3 N/A N/A N/A N/A N/A CCB CMB CMSB CNCB CQRB (0.2) (0.3) (0.0) (0.0) HUSB N/A N/A 0.9 N/A N/A N/A N/A (0.1) ICBC (0.2) All banks Figure 41: Total NPL ratio of H-share banks (%) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 ABC BOC BOCOM BOCQ N/A N/A 0.33 N/A 0.38 N/A CCB CMB CMSB CNCB CQRB HUSB N/A N/A 0.58 N/A ICBC All banks Most H-share banks reported faster rise in total NPLs during 1Q13 and 2Q13 On a QoQ basis, most H-share banks reported faster rise in total NPLs during 1Q13 and 2Q13. Only the NPLs of ABC, CMB and ICBC increased at a faster pace in 3Q13 compared with 2Q13. From a high base, CQRB saw a steady downtrend on its total NPLs during the first three quarters of In line with this trend, most H-share banks recorded a slight decline in credit cost in 3Q13 compared with 2Q13. Figure 42: Credit cost of H-share banks (%) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 9M12 9M13 ABC BOC BOCOM BOCQ N/A N/A N/A N/A N/A N/A N/A N/A N/A CCB CMB CMSB CNCB CQRB (0.06) HUSB N/A N/A N/A N/A N/A N/A N/A N/A N/A ICBC November 2013 Page 25 of 98

26 China Banks Report Meanwhile, probably due to increased approvals from regulators, the amount of NPL write-offs of H-share banks surged in 1H13 compared with 1H12 and 2H12. Some banks even indicated that they have disposed of the NPLs to state-owned asset management companies with a hair-cut of 30-40%. We believe this trend has continued in 3Q13. Figure 43: Total NPLs, write-offs and loan recoveries of H-share banks Total NPLs (CNYb) Write-offs (CNYb) Loan recoveries (CNYm) Dec-11 Jun-12 Dec-12 Jun-13 1H12 2H12 1H13 1H12 2H12 1H13 ABC BOC* BOCOM BOCQ# 0.2 N/A N/A N/A CCB CMB CMSB CNCB CQRB HUSB# 0.7 N/A N/A N/A ICBC *NPL figures refer to domestic business only #Write-offs and loan recoveries in 2H12 refer to 2012 figures We estimate the H-share banks have accumulated excess loan loss provisions of CNY1.2b-212b in Jun 2013 As such, the provision-to-loan ratio of most H-share banks have remained stable or declined slightly in 3Q13 compared with 2Q13. Still, with the exception of BOCQ, the provision-to-loan ratio of all H-share banks has exceeded 2% in Sep Compared with their NPLs in Sep 2013, we estimate that the H-share banks have accumulated excess loan loss provisions of CNY1.2b-CNY212b in Jun Figure 44: Provision coverage ratio, provision-to-loan ratio and excess loan loss provisions of H-share banks Provision coverage ratio (%) Provision-to-loan ratio (%) Excess provisions (CNY b)# Jun-12 Dec-12 Jun-13 Sep-13 Jun-12 Dec-12 Jun-13 Sep-13 Jun-13 ABC BOC* N/A BOCOM BOCQ N/A N/A N/A N/A 1.2 CCB CMB CMSB CNCB CQRB HUSB N/A N/A ICBC #Excess provisions refer to the amount of loan loss provisions exceeding the amount of NPL *Figures refer to domestic business only Overdue loans within 3 months rebounded but special mention loans declined during 1H13 Other asset quality indicators remained mixed as the overdue loans within three months of most H-share banks rebounded during 1H13 after a slight HoH decline during 2H12. We believe this has triggered the rise in total NPLs of these banks during 2Q13-3Q13. On the other hand, special mention (SM) loans of most H- share banks, in particular for medium-to-large sized banks, declined during 1H13. We believe this was mainly due to the downgrade of the SM loans to NPLs as shown in the rise in its migration ratio during 1H November 2013 Page 26 of 98

27 China Banks Report Figure 45: Overdue loans and special mention loans Overdue loans within 3 months (CNY b) As a % of total loans Special mention loans (CNY b) As a % of total loans Jun-12 Dec-12 Jun-13 Jun-12 Dec-12 Jun-13 Jun-12 Dec-12 Jun-13 Jun-12 Dec-12 Jun-13 ABC BOC* BOCOM BOCQ N/A N/A N/A N/A CCB CMB CMSB CNCB CQRB HUSB N/A N/A N/A N/A ICBC *Special mention loans refer to domestic business only Figure 46: Migration ratio (%) Special mention loans Normal loans 1H H13 1H H13 ABC BOC* BOCOM BOCQ N/A N/A CCB CMB CMSB CNCB CQRB N/A N/A N/A N/A N/A N/A HUSB N/A N/A N/A N/A N/A N/A ICBC Prudent loan classification and provisioning policy H-share banks have classified 7-89% of their overdue loans within 3 months as NPLs in Jun 2013 According to the loan classification of CBRC, only loans overdue for more than 90 days are classified as NPLs. However, we believe the H-share banks have adopted a more prudent loan classification policy than the regulators. With the exception of CNCB, the NPL amount of all H-share banks was higher than the amount of their overdue loans of more than three months. We estimate that the H-share banks have classified 7-89% of their overdue loans within three months as NPLs in Jun Among them, ABC, BOCQ and CCB have adopted the most prudent loan classification policy. Figure 47: Classification of overdue and special mention loans Overdue loans within 3 months Overdue loans more than 3 months Overdue loans within 3 months classified as NPLs As a % of overdue loans within 3 months Special mention loans Non-overdue loans classified as special mention loans As a % of special mention loans (CNY b) Total NPLs ABC BOC* BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC *Data related to special mention loans refer to domestic business only 28 November 2013 Page 27 of 98

28 China Banks Report More than 70% of the SM loans of H-share banks are non-overdue loans in Jun 2013 The loan impairment allowances of all H-share banks were more than sufficient to cover their overdue loans Similarly, China banks should classify certain loans as SM loans if there are factors that may adversely affect the borrower s ability to repay. This is notwithstanding that the borrower is able to make principal and interest payments of the loans at current stage. Based on our estimation, with the exception of CMB, CMSB and CNCB, more than 70% of the SM loans of all H-share banks are nonoverdue loans in Jun We believe the H-share banks have been aggressive in booking more risky loans (such as lending to photovoltaic, high energy consumption and overcapacity industries, export-oriented manufacturers, steel traders, property developers and LGFV) as SM loans. As aforesaid, the H-share banks have raised their provision-to-loan ratio to over 2% in Sep Given that they have also adopted a prudent classification of NPL, we estimate that the loan impairment allowances of all H-share banks were sufficient to more than cover their overdue loans. The overdue loan coverage ratio of the H-share banks ranged from 118% to 440% in Jun CNCB has the lowest overdue loan coverage ratio as it has not classified any overdue loans within three months as NPLs and it has relatively lower NPL coverage ratio than its peers. Figure 48: Provision coverage of overdue and special mention loans of H-share banks Total loan loss provisons (CNYb) Total provisions as % of total overdue loans Special mention loans (CNYb) Total provisions as % of Special mention loans and NPLs Potential loan loss provisions shortfall (CNYb) Total NPL (CNYb) Total overdue loans (CNYb) As a % of PBT in 2013 ABC BOC* BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC *Figures refer to domestic business only The loan impairment allowances of the H-share banks covered more than 60% of their NPLs and SM loans in Jun 2013 On the other hand, we estimate that the loan impairment allowances of the H- share banks accounted for more than 60% of their total amount of NPLs and SM loans in Jun Probably due to a less stringent classification of SM loans, the loan loss provisions of CMB, CMSB and CNCB were more than sufficient to cover their total NPLs and SM loans. For other H-share banks, the provision shortfall for the SM loans amounted to CNY b, equivalent to % our estimated pre-tax profit forecasts for In other words, the book value of H- share banks will not be reduced even if they make 100% provision coverage for all of their NPLs and SM loans. Our conservative projections on NPLs and provisions The rise in NPLs was driven by manufacturing loans, wholesale & retail trade loans and personal unsecured lending The rise in total NPLs of H-share banks in 1H13 was mainly driven by manufacturing loans (mainly for export-oriented manufacturers as well as photovoltaic and overcapacity industries), wholesale and retail trade loans (mainly for steel trading) and personal unsecured lending (mainly for lending to MSEs) in Eastern and Southern China. Asset quality of real estate loans, LGFV loans and residential mortgages remained relatively stable during 1H13. A similar trend was seen for H-share banks in 3Q13. We believe this round of business cycle in China could be similar to that during For example, in the business cycle of China, manufacturers 28 November 2013 Page 28 of 98

29 China Banks Report The sharp fall in average PPIO-PPII gap and growth in industrial output has led to a rise in NPLs of manufacturing loans during 2009 were unable to pass on the majority of the rising production costs to wholesalers and retailers. As such, the average gap between PPIO (producer price index) and PPII (purchasing price index) was -3.7% in 2008, down significantly from an average of -1.3% in The surge in the input price of production has put enormous pressure on the gross profit margins of manufacturers. At the same time, new production orders (including new export orders) were not strong enough to offset the margin compression during this period. The growth in industrial output in China fell sharply from over 17% during 2007 to below 12% during 4Q08-1H09. As a result, most H-share banks recorded a rise in NPL of manufacturing loans of 5-22% during Figure 49: Average PPIO-PPII gap and industrial output in China Figure 50: PMI (new orders) and PMI (new export orders) subindex Source: National Bureau of Statistics, Maybank Kim Eng Source: National Bureau of Statistics, Maybank Kim Eng The plunge in PPIO-PPII gap, the slower growth in industrial output and the fall in the PMI (new export orders) has led to a rise in NPLs of manufacturing loans during H13 A recovery in PMI new export orders, the PPIO-PPII gap and growth in industrial output in recent months In light of the weak US dollar and high commodity prices, the PPIO-PPII gap plunged to an average of -3.6% during (+2.5% in 2009). In addition, the European sovereign debt crisis in late 2011 has prompted a significant slowdown in growth of industrial output in China to about 9-10% YoY during H13. The PMI (new export orders) also fell below 50 during Jun 2012-Jul 2013, implying the pessimistic sentiment on export orders of manufacturers. As such, the NPLs of manufacturing loans of most H-share banks surged by over 20% YoY during 2012 and further by 4-31% HoH in 1H13. According to Bloomberg consensus, there should be a modest recovery in Europe s real GDP in Both the PMI new orders and new export orders subindex in China has rebounded to above 50 in recent months, implying potential pick up in domestic and external demand for manufacturing products. The PPIO- PPII gap has also returned to the positive territory on gradual fall in commodity prices. This should help revive gross profit margins of China manufacturers. As aforesaid, H-share banks have actively reduced their exposure to photovoltaic, high energy consumption and overcapacity industries. Still, we conservatively project a 50% YoY, 15% YoY and 12.5% YoY rise in NPLs for the manufacturing loans of H-share banks in 2013, 2014 and 2015, respectively. Among the H-share banks, ABC, CNCB and HUSB have higher exposure to manufacturing loans and both ABC and CCB have higher NPL ratio in these loans than peers in Jun November 2013 Page 29 of 98

30 China Banks Report Figure 51: Historic change in NPLs of manufacturing loans of H-share banks ABC BOC BOCQ CCB CMB Amount YoY% Amount YoY% Amount YoY% Amount YoY% Amount YoY% (CNYb) Growth (CNYb) Growth (CNYb) Growth (CNYb) Growth (CNYb) Growth 2006 N/A N/A 34.1 N/A N/A N/A 28.8 N/A 3.1 N/A N/A 32.9 (3.7) N/A N/A 24.8 (13.7) (88.9) N/A N/A 23.8 (4.2) 2.6 (18.6) 1H09* N/A N/A 31.0 (7.7) N/A N/A (22.2) N/A N/A 21.4 (10.0) (14.9) 20.9 (20.2) 0.02 N/A (3.1) (8.6) H13* CMSB CNCB CQRB HUSB ICBC Amount YoY% Amount YoY% Amount YoY% Amount YoY% Amount YoY% (CNYb) Growth (CNYb) Growth (CNYb) Growth (CNYb) Growth (CNYb) Growth N/A 4.8 N/A N/A N/A N/A N/A 68.3 N/A (12.0) 4.1 (15.1) 1.40 N/A N/A N/A 55.8 (18.4) (21.6) (49.9) N/A N/A 45.0 (19.4) 1H09* N/A N/A N/A N/A 40.9 (9.1) (10.2) 0.51 (26.8) N/A N/A 34.6 (23.1) (24.0) 0.31 (39.2) 0.2 N/A 26.8 (22.4) 2011 N/A N/A 2.2 (24.6) 0.21 (32.5) (12.7) 2012 N/A N/A (4.2) 1H13* N/A N/A (40.8) 0.3 (41.2) *Figures refer HoH % growth A fall in CPI-PPIO gap and growth in retail sales has resulted in a rise in NPLs of wholesale & retail trade loans during 2009 Similarly, growth in China s retail sales weakened from an average of 22% in 2008 to 15% in As such, some H-share banks reported a rise in NPLs of wholesale and retail trade loans of 12-15% during Meanwhile, the CPI-PPIO gap in China reversed from an average of 5% in 2009 to -2% during M11, probably reflecting increased price competition among wholesalers and retailers. Besides, growth in China s retail sales has dropped below 15% YoY since 2Q12. Figure 52: Average CPI-PPIO gap and retail sales growth in China Source: National Bureau of Statistics, Maybank Kim Eng The surge in NPLs of wholesale & retail trade loans during H13 could also be related to steel trading activities On the other hand, most H-share banks indicated that the recent rise in NPLs of wholesale and retail trade loans was related to steel trading activities, particularly in Eastern China. The LME steel price plunged by more 80% from USD635/MT in Aug 2011 to about USD120/MT in Aug Combining these two factors, most H-share banks reported a surge in NPLs of wholesale and retail trade loans of % YoY and % HoH in 2012 and 1H13, respectively. 28 November 2013 Page 30 of 98

31 China Banks Report Figure 53: The LME steel spot price and forward price Source: Bloomberg, Maybank Kim Eng A recovery in CPI-PPIO gap and steel price in recent weeks The CPI-PPIO gap in China has recovered to over 4% in recent months. EIU also expected China s real private consumption to grow slightly faster from 7.7% in 2013 to 8.0% in Both the LME steel spot price and 15-month forward price have rebounded sharply to over USD200/MT and USD300/MT in recent weeks, respectively (Our house view projects the flat steel price and long steel price in China will decline modestly by 2% and 4% in 2014, respectively). All told, we conservatively project a 100% YoY, 15% YoY and 12.5% YoY rise in NPLs for the wholesale and retail trade loans of H-share banks in 2013, 2014 and 2015, respectively. Among the H-share banks, CMB, CNCB and HUSB have higher exposure to wholesale and retail trade loans and both CCB and CNCB have higher NPL ratio in these loans than peers in Jun Figure 54: Historic change in NPLs of wholesale and retail trade loans of H-share banks ABC BOC BOCQ CCB CMB Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth 2006 N/A N/A 22.6 N/A N/A N/A 8.2 N/A 2.5 N/A N/A 18.9 (16.2) N/A N/A 7.8 (4.3) 1.8 (26.7) (94.3) 17.4 (7.8) N/A N/A 7.7 (1.4) H09* N/A N/A 14.7 (16.0) N/A N/A (10.1) (22.4) N/A N/A 7.4 (4.1) 1.7 (9.7) (16.7) 8.8 (35.2) 0.01 N/A 5.1 (31.3) (11.5) (45.5) H13* 11.6 (0.7) CMSB CNCB CQRB HUSB ICBC Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth N/A 2.4 N/A N/A N/A N/A N/A 25.3 N/A (35.5) 0.5 N/A N/A N/A 15.9 (37.0) (64.3) 1.3 (17.7) 0.4 (17.8) N/A N/A 13.7 (14.0) 1H09* N/A N/A N/A N/A N/A N/A 13.6 (1.0) 2009 N/A N/A 1.2 (5.2) 0.1 (72.1) N/A N/A 12.1 (11.6) 2010 N/A N/A (27.5) 0.4 N/A 10.1 (16.6) 2011 N/A N/A (37.9) 0.3 (17.6) 8.2 (18.8) 2012 N/A N/A (56.9) 0.2 (23.7) H13* N/A N/A (0.5) * Figures refer to HoH % growth 28 November 2013 Page 31 of 98

32 China Banks Report The rise in NPLs of personal loans could be related to weakening asset quality of micro-finance business Similarly, some H-share banks reported a rise in NPLs of personal loans (excluding mortgages) during Asset quality of these loans weakened again during H13. The H-share banks reported a rise in NPLs of these loans of 9-71% (from a low base) during 1H13. As the regulators have encouraged banks to expand micro-finance business, most of these loans are classified as personal business loans given their small scale of operation. We believe the majority of MSEs are involved in manufacturing or wholesale and retail trade industries. Hence, the weakening in domestic and external trade conditions should have led to an increase in NPLs of these loans. Figure 55: Historic change in NPLs of personal loans (excluding mortgages) of H-share banks ABC BOC BOCQ CCB CMB Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth 2006 N/A N/A 5.5 N/A N/A N/A 4.5 N/A 0.2 N/A N/A N/A N/A 3.7 (18.3) (91.8) 5.4 (3.4) N/A N/A H09* N/A N/A 5.2 (4.4) N/A N/A (3.4) N/A N/A 3.6 (7.7) (7.0) 0.03 N/A 3.0 (18.1) 1.2 (2.7) (13.7) (17.6) H13* CMSB CNCB CQRB HUSB ICBC Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth N/A 0.3 N/A N/A N/A N/A N/A N/A N/A (61.3) N/A N/A 3.4 N/A N/A N/A N/A N/A N/A 2.8 (19.3) N/A N/A N/A N/A 1H09* N/A N/A N/A N/A N/A N/A N/A N/A 2009 N/A N/A (35.7) N/A N/A N/A N/A 2010 N/A N/A 0.6 (30.3) 1.3 (25.4) 0.1 N/A N/A N/A 2011 N/A N/A (26.1) 0.1 (26.3) N/A N/A 2012 N/A N/A (29.1) N/A N/A 1H13* N/A N/A N/A N/A N/A N/A *Figures refer to HoH % growth Most H-share banks have limited exposure in personal consumption loans (including credit card advances) The average transaction value per square metre of new residential units sold in China maintained a steady rise over the past few years Meanwhile, for credit card advances and other unsecured personal loans, we believe banks have no concrete way to check the usage of these loans. We see chance that some individuals may take these loans to speculate on the stock market and property market, trade on commodities (including steel trading) or invest in shadow banking products. These loans will likely to become NPLs when those individuals get burned in these activities. Still, most H-share banks have limited exposure in these loans (less than 10% of total loans). Hence, a drastic increase in the NPLs of these loans (from a low base) should boost the credit cost of banks. Overall, we conservatively project a 50% YoY, 15% YoY and 12.5% YoY rise in NPLs for the personal loans (excluding mortgages) of H-share banks in 2013, 2014 and 2015, respectively. Among the H-share banks, BOCQ, CMB and CMSB have higher exposure to these loans and both ABC and BOC have higher NPL ratio in these loans than peers in Jun To cool down the overheating property market in China, the government has launched various anti-speculation measures in early The government further introduced home purchase restriction in major cities and China banks also increased the down payment for second-home mortgages to 60% in 2011 (recently 70% in some cities). Still, the property market sentiment has remained optimistic over the past few years. The average transaction value per square metre of new residential units sold in China increased from CNY3,791 in Dec 2009 to CNY5,118 in Dec 2012 (or a CAGR of 10.5%). Total floor space of new residential units sold also grew by a CAGR of 5% during The average transaction value per square metre and total floor space of new residential units sold grew faster by 12.3% YTD and 24% YoY for 9M November 2013 Page 32 of 98

33 China Banks Report Figure 56: Average transaction value per square metre of new residential units sold in China Source: National Bureau of Statistics, Maybank Kim Eng A decline in growth of real estate loans for China banks With increasing concerns over the surge in property prices and the advice from regulators, China banks have actively reduced their exposure to property developers. The growth in real estate loans fell from 24.2% YoY in 2010 to 17.1% YoY in 2011 and further to 10.7% YoY in The share of these loans also reduced to 4.8% of total loans in Dec 2012 (5.0% in Dec 2011). As such, most H- share banks did not see a rise in NPLs of real estate loans in recent years. Figure 57: Growth and share of property development loans of China banks Figure 58: Growth and share of residential mortgages of China banks Source: PBOC, Maybank Kim Eng Source: PBOC, Maybank Kim Eng An increase in exposure to residential mortgages by China banks Continued strong asset quality of residential mortgages On the contrary, China banks have actively expanded the residential mortgage business. Many banks have lined up with property developers to provide mortgages for home purchases in the primary market. This does not only help boost their residential mortgage business, but also helps monitor the cash flow and financial positions of property developers and hence, reduce the credit risk of real estate loans. Total amount of residential mortgages maintained a strong growth of 17% YTD during 9M13. The share of these loans also increased to 13.5% of total loans in Sep 2013 (12.9% in Dec 2012). Indeed, the surge in property price has not weakened the asset quality of residential mortgages of China banks. We believe this could be due to: (i) the ability of mainland individuals to accumulate net wealth remained strong, with their deposit gap (total deposits total loans) maintaining a consistent uptrend in recent years (CNY26.4t in Sep 2013 vs. CNY21.2t in Dec 2011). This should provide a strong buffer for home buyers to maintain mortgage repayments; (ii) Household income in China has been increasing at a CAGR of 12.2% during , which 28 November 2013 Page 33 of 98

34 China Banks Report has helped improve affordability for home buyers; and (iii) the average loan-tovalue ratio of new mortgages remained low at below 50% in recent years. This implies that borrowers are unlikely to fall into negative equity unless there is a drastic fall in property prices. Figure 59: Deposit gap of mainland individuals Figure 60: Average loan-to-value ratio of new mortgages in China Source:PBOC, National Bureau of Statistics, Maybank Kim Eng Source: National Bureau of Statistics, Maybank Kim Eng Market has concerns over further government measures on property market which will lead to a sharp fall in property price Market concerns over further government measures on the property market means that there will be sharp fall in property prices in the near term. According to the stress test on property lending, most China banks indicated that a 30% decline in property price will result in an increase in NPL ratio of 1ppt for their property lending. However, our house view expects limited downside in China s property price in 2014 given solid personal wealth, continued strong demand for residential properties, increased urbanization and robust growth in household income. Still, we have conservatively projected a rise in NPLs of 10-15% pa and 5% pa for H-share banks real estate loans and residential mortgages during , respectively. Among them, CMSB, CNCB and CQRB have higher exposure to real estate loans and both CCB and CQRB have higher NPL ratio in these loans in Jun Figure 61: Historic change in NPLs of real estate loans of H-share banks ABC BOC BOCQ CCB CMB Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth 2006 N/A N/A 10.7 N/A N/A N/A 18.3 N/A 2.4 N/A N/A 7.0 (34.7) N/A N/A 15.4 (16.0) 1.6 (31.1) (43.3) 5.9 (16.0) N/A N/A (27.0) 1H09* N/A N/A 4.1 (29.8) N/A N/A 12.1 (21.4) (27.2) 3.6 (38.8) N/A N/A 9.3 (39.4) 1.0 (12.3) (35.2) 3.0 (16.8) 0.05 N/A 6.6 (28.9) 0.9 (14.3) (35.8) 1.9 (38.1) 0.04 (19.2) (8.0) (23.2) (23.8) 4.5 (44.3) 0.6 (22.6) 1H13* 3.1 (35.4) (99.9) 3.6 (19.1) 0.6 (4.4) CMSB CNCB CQRB HUSB ICBC Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth Amount (CNYb) YoY% Growth N/A 1.3 N/A N/A N/A N/A N/A 10.0 N/A (67.7) 2.3 N/A N/A N/A 8.6 (14.3) (42.4) N/A N/A 7.6 (11.2) 1H09* N/A N/A 0.7 (8.2) N/A N/A N/A N/A (67.9) (43.2) N/A N/A 6.3 (16.5) 2010 N/A N/A (17.9) 0.0 N/A 5.4 (15.6) 2011 N/A N/A (26.6) 0.0 (12.5) 4.8 (10.8) 2012 N/A N/A 0.4 (70.6) 0.4 (10.8) 0.0 (57.1) 4.3 (10.0) 1H13* N/A N/A 0.1 (67.4) 0.2 (43.6) 0.0 (66.7) *Figures refer to HoH % growth 28 November 2013 Page 34 of 98

35 China Banks Report Total borrowings from local governments surged to CNY10.7t in Dec 2010 The amount of LGFV loans from banks was CNY8.5t at the end of 2010 Overdue LGFV borrowings only accounted for 0.02% of total borrowings in Dec 2010 All H-share banks reported a decline in LGFV loans in 1H13 Finally, market has concerns over potential deterioration in asset quality of China banks LGFV loans. After the global financial crisis in 2008, the Chinese government launched an CNY4t economic stimulus package to support economic growth in China, focusing on public investment. This has triggered large-scale demand for lending from local governments. Total borrowings from local governments surged from CNY1.8t in Dec 2008 to CNY7.8t in Dec 2009 and further to CNY10.7t in Dec According to a report of the National Audit Office (NAO), there were 6,576 local government financial vehicles (LGFV) at the end of Total borrowings from LGFVs amounted to CNY5t at the end of However, in 1H11, the CBRC broadened the definition of LGFV loans from China banks to include borrowings from local government departments and institutions, government-subsidized organizations and public utility companies. Including these, the amount of LGFV loans from banks should be CNY8.5t (or 79% of total borrowings from local governments). The NAO indicated that total borrowings from local governments (including the government guarantees) accounted for 70.5% of the accumulated fiscal balance of all local governments in Meanwhile, some 358 LGFVs repaid their borrowings (amounting to CNY106b) through loan renewals in Overdue LGFV borrowings amounted to only CNY0.8b in Dec 2010 (equivalent to 0.02% of total LGFV borrowings). To cope with potential asset quality problems of the LGFV loans, the CBRC has requested China banks to increase the cash collateral coverage of each LGFV loans. By end-jun 2013, all H-share banks indicated that the proportion of LGFV loans with basic-to-full cash collateral coverage ratio (i.e %) was over 90% of these loans. Besides, the CBRC has requested banks to gradually lower than their exposure to LGFV loans, with growth allowed to only those loans that are classified as government-supporting areas. Indeed, all H-share banks reported a decline in LGFV loans during 1H13 and the NPL ratio of these loans remained lower than most of the other loans at % in Jun Figure 62: LGFV loans and its NPL ratio of H-share banks in Jun 2013 Source: National Bureau of Statistics, Maybank Kim Eng We believe the local government borrowings may have shifted to indirect bank borrowings The aggregate fiscal deficit of all local governments has enlarged to CNY4.6t in 2012 That said, the central government has recently requested the NAO to estimate the updated data on total borrowings from local governments. Market expects that the amount of these borrowings should have increased to CNY16-17t. This could be different from the declining trend of LGFV loans of H-share banks. We believe the local government borrowings may have shifted from direct bank borrowings to indirect bank borrowings (i.e. through banks investment in trust funds or asset management plans issued by the local governments). Meanwhile, the fiscal balance of local government has been deteriorating in recent years. The aggregate fiscal deficit of all local governments has enlarged gradually 28 November 2013 Page 35 of 98

36 China Banks Report from CNY2.1t in 2008 to CNY4.6t in As such, in the policy statement of the 12 th Third Plenary Session, the central government will in future subsidize the local governments on those projects which are under the central government plans or policies and result in financial losses to the local governments. Figure 63: Aggregate fiscal balance of central government and local governments of China Central government Local government Fiscal revenue (CNYb) Fiscal balance (CNYb) Fiscal revenue (CNYb) Fiscal balance (CNYb) (396.1) (533.1) , (676.6) , (738.0) , ,189.3 (869.9) , ,510.1 (1,005.4) , , ,830.4 (1,212.8) , , ,357.3 (1,476.7) , , ,865.0 (2,059.9) , , ,260.3 (2,844.2) , , ,061.3 (3,327.1) , , ,254.7 (4,018.7) , , ,107.8 (4,611.0) Source: National Bureau of Statistics, Maybank Kim Eng New policies in the 12 th Third Plenary Session may help lower the fiscal deficit of local governments and reduce their reliance on bank borrowings Besides, local governments will be allowed to issue bonds to finance any city development project in future. The amount of local government bonds issued was minimal at CNY b p.a. during We believe the new government policies may help lower the fiscal deficit of local government and reduce their reliance on bank borrowings in the medium term. Figure 64: Bond issuance by central government and local governments of China Source: China Central Depository & Clearing Co., Ltd, Maybank Kim Eng We expect credit cost of H- share banks during will remain well above the level in 2012 and 9M13 under our conservative projections on NPLs and provisions Still, with the exception of BOCQ, CQRB and HUSB, we have conservatively projected a 3%, 5% and 5% new NPL formation for the LGFV loans of H- share banks in 2013, 2014 and 2015, respectively. In the case of BOCQ, CQRB and HUSB, their local government loans were related to either Chongqing or Anhui municipal government. As the central government has strong support to the future development of Western and Central China, we believe the chance of loan defaults in Chongqing and Anhui should be relatively lower. We therefore project a 0.5%, 2% and 2% new NPL formation for the LGFV loans of BOCQ, CQRB and HUSB in 2013, 2014 and 2015, respectively. These three banks have higher exposure to LGFV loans among H-share banks whereas they recorded no NPLs for these loans in Jun Both ABC and ICBC have higher NPL ratio for their LGFV loans than peers in Jun Overall, based on our conservative projection on the NPLs of risky loans, we expect the NPL ratio of all H-share banks will be on a rising trend during On the other hand, we have ignored any collateral coverage of the NPLs and assume that banks will make 100% loan impairment allowances for new NPLs. 28 November 2013 Page 36 of 98

37 China Banks Report Besides, we also assume that banks will increase their collective loan impairment allowance ratio by 5bps p.a. during Consequently, we forecast the provision-to-loan ratio of all H-share banks will increase steadily to % at the end of We also expect their credit cost during to remain well above the level in 2012 and 9M13. Figure 65: Forecast NPL ratio, provision-to-loan ratio and credit cost of H-share banks NPL ratio (%) Provision-to-loan ratio (%) Credit cost (%) Dec-12 Sep-13 Dec-13F Dec-14F Dec-15F Dec-12 Sep-13 Dec-13F Dec-14F Dec-15F M F 2014F 2015F ABC BOC BOCOM BOCQ* CCB CMB CMSB CNCB CQRB HUSB* ICBC *Figures for Sep 2013 and 9M13 are replaced by figures for Jun 2013 and 1H13 We estimate that the excess loan loss provisions of most H-share banks should be sufficient to cover more than 2.3% of all risky loans We also conduct a sensitivity analysis on the impact of increase in NPLs of the risky loans (i.e. manufacturing, wholesale and retail trade, LGFV, real estate and personal unsecured loans) on the profitability of H-share banks. These loans accounted 37-72% of the H-share banks total loans in Jun We estimate that the excess loan loss provisions of most H-share banks in Jun 2013 should be sufficient to cover more than 2.3% of the risky loans of these banks (i.e. a 2.3% new NPLs for these loans). Based on our sensitivity analysis, even if we assume new NPL formation of 3.5% for the uncovered portion of these loans, the negative impact on the pre-tax profit of most H-share banks for 2013 will be 41-69%. The negative impact on the earnings of BOCOM, CMB and CNCB will be higher than peers at over 70% as they have lower provision-to-loan ratio and/or higher exposure to risky loans than peers. Figure 66: Provision coverage of risky loans in Jun 2013 and the sensitivity analysis of the increase in NPLs of risky loans on pre-tax profit of H-share banks Impact on 2013E pre-tax profit if the uncovered Manu- Wholesale & retail Real Personal unsecured Total risky As % of Excess As a % loan loss of risky Uncovered risky loans have default rate of: (CNY b) facturing trade estate LGFV loans loans total loans provisions loans risky loans 2% 3.5% 5% ABC 1, , ,293 (34.5) (60.4) (86.2) BOC* 1, , ,362 (37.6) (65.8) (94.0) BOCOM , ,153 (42.8) (74.9) (107.0) BOCQ (31.4) (54.9) (78.4) CCB 1, , ,900 (23.7) (41.6) (59.4) CMB , ,292 (42.6) (74.5) (106.4) CMSB , ,034 (39.5) (69.0) (98.6) CNCB , ,102 (55.0) (96.2) (137.4) CQRB (29.4) (51.4) (73.4) HUSB (39.2) (68.6) (97.9) ICBC 1, , ,837 (25.8) (45.1) (64.5) *Figures refer to domestic loans only 28 November 2013 Page 37 of 98

38 China Banks Report Impairment charges on other risky assets Some banks may use the proceeds of WMPs to invest in risky assets Apart from risky loans, there are other risky on-balance sheet or off-balance sheet assets held by China banks that may have potential impairment losses. For example, China banks, in particular for small banks, have been actively involved in the issue of wealth management products (WMPs) to absorb customer deposits in recent years. Total amount of WMPs outstanding surged from CNY1.7t in 2010 to CNY9.1t in Jun However, some of the WMPs are non-standardized products (especially for those non-principal guaranteed off-balance sheet WMPs). To achieve higher return for these products, banks may use the proceeds of these products to invest in risky assets such as trust loans, entrusted loans, bankers acceptance, letters of credit (LC), loan receivables, trust beneficiary receipts and asset management plans. Figure 67: Issuance of wealth management products Source: CBRC, Maybank Kim Eng Customers who have bought non-standardized WMPs may claim from the banks for any potential losses if the bank staff have not appropriately assessed the risk appetite of the customers The CBRC issued new rules in Mar 2013 to limit the outstanding balance of nonstandardized WMPs of each bank at 35% of total outstanding balance of its WMPs and 4% of its total assets at the end of previous years. Most H-share banks have lowered their non-standardized WMPs to below the limit in 2Q-3Q13. Despite that most of the non-standardized WMPs are non-principal guaranteed, customers who have bought these WMPs may claim from the banks for any potential losses if they can prove that the bank staff have not appropriately assessed their risk appetite or explained to them about the nature of these products. Figure 68: Share of non-standardized WMPs of H-share banks in Jun 2013 Wealth management products outstanding (CNY b) As % of total wealth management products in Jun 2013 As % of total assets at end-dec 2012 Non-standardized products (CNY b) ABC BOC BOCOM BOCQ CCB 1, CMB CMSB CNCB CQRB 27 N/A N/A N/A HUSB 9 N/A N/A N/A ICBC 1, November 2013 Page 38 of 98

39 China Banks Report Small banks have increased their investment in trust products and asset management plans and/or reverse REPO in related to these assets The direct investment in trust products and asset management plans as well as reverse REPO in related to these assets may have higher chance to incur impairment losses We have included an impairment loss equivalent to 2% and 1.5% on the investment of these assets of H-share banks for 2014 and 2015, respectively Similarly, there are other off-balance sheet credit commitments, such as bankers acceptance, letters of guarantees and LC, which could incur impairment losses to issuing bank as they are acting as guarantors for their customers. Meanwhile, as aforesaid, due to severe price competition for deposits, China banks, in particular for small banks have increased their investment in more risky assets (such as trust products and asset management plans and/or reverse REPO in relation to these assets) to offset some of their NIM pressure during 2Q13-3Q13. Among all risky assets mentioned above, we believe the direct investment of banks on trust products and asset management plans as well as reverse REPO related to these assets should have higher chance to incur impairment losses. We believe bank staff have paid more attention to explain to customers on the potential risk of non-standardized WMPs. Besides, the CBRC will encourage banks to launch asset management plans next year so that customers will have a better understanding on what they are investing in and hence, lower the chance of remediation to banks on potential losses. Meanwhile, with better risk management, banks should have requested for supporting external trade documents before issuing credit commitments for customers. All told, we estimate that the total provisions made by the H-share banks were sufficient to cover 3-22% of their risky assets (including NPLs, SM loans, nonstandardized WMPs, direct investment in risky assets and off-balance sheet credit commitments). We have included an impairment loss equivalent to 2% and 1.5% on the investment of H-share banks on trust products, wealth management products and asset management plans as well as reverse REPO in relation to these assets for 2014 and 2015, respectively. Figure 69: Provision coverage of risky assets in Jun 2013 and sensitivity analysis of default rate in these assets on pre-tax profit of H-share banks Credit risk amount of off balance sheet Impact on 2013E pre-tax profit if the uncovered risky assets has default rate of: Special Nonstandardized Risky As a % of Maximum Total financial mention Total all risky provision (CNY b) NPLs loans WMP assets# assets@ provisions assets shortfall 5% 10% 15% ABC ,061 (27.8) (55.6) (83.4) BOC* ,087 (30.4) (60.8) (91.1) BOCOM (54.8) (109.6) (164.4) BOCQ (78.4) (156.8) (235.1) CCB ,281 (26.2) (52.5) (78.7) CMB (48.2) (96.4) (144.7) CMSB (78.6) (157.3) (235.9) CNCB (93.2) (186.5) (279.7) CQRB^ (36.1) (72.3) (108.4) HUSB^ (31.4) (62.8) (94.2) ICBC ,322 (22.2) (44.4) (66.6) *NPLs and special mention loans refer to domestic business include acceptances, guarantee and LC #Figures refer to reverse REPO and direct investment in related to trust beneficiary rights, wealth management products, funds and asset management plans ^Amount of non-standardized WMPs was estimated based on 35% of total WMPs outstanding in Jun 2013 We estimate that a 5% default in the uncovered risky assets will reduce the 2013F pre-tax profit of most H-share banks by 22-55% We also conduct a sensitivity analysis to estimate the impact of potential default in the uncovered risky assets on earnings of H-share banks for We estimate that a 5% default in these assets will reduce our pre-tax profit forecast of most H- share banks by 22-55% for The 2013F pre-tax profit of BOCQ, CMSB and CNCB will be reduced by more than 70% on a 5% default in the risky assets, based on our estimation. We believe both BOCQ and CNCB have fewer excess provisions than peers while CMBS have relatively more direct investment in reverse REPO and other risky assets as well as off balance-sheet credit commitments. 28 November 2013 Page 39 of 98

40 China Banks Report Capital positions No imminent concerns Increasing minimum capital requirement by phases The CBRC adopted the new capital rules on 1 Jan 2013 The capital conservation buffer requirement will be implemented by phases during The CBRC also includes an additional capital surcharge of 1% for domestic SIBs The minimum CET1 CAR, tier-1 CAR and total CAR requirement for domestic SIBs will be 8.5%, 9.5% and 11.5%, respectively for 2018 Pursuant to the Capital Rules for Commercial Banks (Provisional), effective from 1 Jan 2013, commercial banks should comply with the regulatory requirements of capital adequacy ratios stipulated under the rules by the end of Under the new capital rules, the CBRC adopted a three-tier capital requirement system (i.e. CET1 CAR, tier-1 CAR and total CAR), which has replaced the two-tier system (tier-1 CAR and total CAR) adopted before The minimum requirement for common equity tier-1 (CET1) CAR, tier-1 CAR and total CAR is 5%, 6% and 8%, respectively. In addition to these minimum ratios, the CBRC has requested a 2.5% of the risk-weighted assets (RWA) capital conservation buffer. However, following the Basel III suggestion, the capital conservation buffer requirement will be implemented by phases during (i.e. 0.5% in 2013, 0.9% in 2014, 1.3% in 2015, 1.7% in 2016, 2.1% in 2017 and 2.5% in 2018). The CBRC also includes an additional capital surcharge of 1% (of the RWA) for domestic systemic-important banks (i.e. ABC, BOC, BOCOM, CCB, CMB and ICBC; SIBs). Both BOC and ICBC have been identified as global SIBs. According to the Basel III capital rules, the CBRC may require additional capital surcharge of 1-2.5% for global SIBs by 2018 (1% for US banks). Finally, the CBRC may request a national counter-cyclical capital buffer of 0-2.5% in the worst case (e.g. China is in economic recession whilst banks maintain a robust loan growth). In sum, under normal conditions, the minimum CET1 CAR, tier-1 CAR and total CAR requirement for domestic SIBs is 6.9%, 7.9% and 9.9%, respectively in 2014 and will gradually increase to 8.5%, 9.5% and 11.5%, respectively by The capital ratios requirements for other banks should be 5.9%, 6.9% and 8.9%, respectively in 2014 and will gradually increase in 7.5%, 8.5% and 10.5%, respectively by In the case of both BOC and ICBC, if the CBRC follows the US regulators and requests an additional surcharge of 1ppt, the minimum CET1 CAR, tier-1 CAR and total CAR requirement for them will be 9.5%, 10.5% and 12.5%, respectively by Figure 70: CET1 CAR, tier-1 CAR and total CAR of H-share banks CET1 CAR (%) Tier-1 CAR (%) Total CAR (%) Dec-12 Jun-13 Dec-12 Jun-13 Dec-12 Jun-13 ABC BOC BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC The CET1 CAR of H-share banks in Jun 2013 has already met the minimum requirement for 2018 The CET1 CAR, tier-1 CAR and total CAR of all H-share banks in Jun 2013 were well-above the minimum requirement of the CBRC for Even compared with the capital ratios requirement for 2018, most H-share banks (with the exception of CMB) have met the minimum requirement for CET1 CAR. Meanwhile, ABC, BOC, BOCOM, CMB, CMSB and CNCB have not met the minimum requirement for tier-1 CAR and total CAR for Still, there will be plenty of time for these banks to replenish their tier-1 capital and total capital. Besides, large H-share banks will adopt internal-rating based (IRB) approach to assess their capital positions once the regulators approve their 28 November 2013 Page 40 of 98

41 China Banks Report Large H-share banks are pending for approval to adopt IRB approach to assess their capital positions H-share banks recorded a decline in CET1 CAR of bps during 1H13 We expect the fully-loaded CET1 CAR of H-share banks in Jun 2013 should be similar to the reported figure risk assessment system. According to ICBC, the adoption of IRB will help enhance its CET1 CAR and total CAR by 32bps and 56bps, respectively. One-off negative impact on CAR under the new capital rules Following the adoption of the new capital rules, the H-share banks recorded a decline in CET1 CAR of bps during 1H13. However, we believe this was partly due to the one-off change in risk-weight of some assets and the inclusion of operating risk when calculating the capital ratios. Based on our estimation, the increase in CET1 capital of the H-share banks was similar to their net profit reported for 1H13 (as they have not declared any interim dividends in 1H13). There was some minor noise from the mark-to-market gain or loss of their investment in available-for-sale securities. Indeed, the CBRC has been more stringent than the Basel Committee in calculating the common equity as the whole amount of goodwill has been deducted from the common equity in 1H13. The Basel Committee allows the goodwill deduction by phases during Besides, China banks have made minimal investment in associated companies or joint-venture companies. Hence, we estimate that the fully-loaded CET1 CAR of H-share banks should be similar to the current level. Figure 71: Change in core capital of H-share banks in 1H13 Core capital (CNYb) Change Total capital (CNYb) Change 1H13 net profit 1H13 change in investment reserve Dec-12 Jun-13 (CNYb) Dec-12 Jun-13 (CNYb) (CNYb) (CNYb) ABC , (1.4) BOC , (3.3) BOCOM BOCQ CCB ,093 1, (1.3) CMB (0.4) CMSB (0.2) CNCB (0.4) CQRB HUSB ICBC 1,010 1, ,299 1, (1.2) Some changes in the risk weight of bank assets under the new capital rules The introduction of operating risk assets has shed the CET1 CAR of H- share banks by bps during 1H13 On the other hand, the major changes in the risk weight of bank assets under the new capital rules are as follows: (i) an increase in risk-weight of lending to LGFV loans from 20% to 100%; (ii) an increase in risk-weight of domestic interbank placement (with maturity of more than 3 months) from 20% to 25% and to 100% for reverse REPO with risky assets as collateral; (iii) a decline in the risk weight of lending to MSEs from 100% to 75%; and (iv) a reduction in the risk-weight of personal loans (excluding residential mortgages) from 100% to 75%. Meanwhile, we estimate that the introduction of the operating risk assets has resulted in an one-off decline in CET1 CAR of bps for H-share banks during 1H13. This has accounted for the majority of the fall of CET1 CAR of H- share banks during 1H13. In other words, without the inclusion of the operating risk assets, the increase in common equity capital of H-share banks should be largely sufficient to offset the rise in RWAs under the new capital rules during 1H November 2013 Page 41 of 98

42 China Banks Report Figure 72: Change in risk-weighted assets of H-share banks in 1H13 Credit and market riskweighted assets as % of total assets Impact of operating risk on CET1 CAR (ppt) Risk-weighted assets Change Credit and market riskweighted assets Operating Change risk (CNYb) Dec-12 Jun-13 (CNYb) Dec-12 Jun-13 (CNYb) Jun-13 Dec-12 Jun-13 Jun-13 ABC 7,216 8,613 1,397 7,216 7, (0.8) BOC 7,253 9,115 1,861 7,253 N/A N/A N/A 57.2 N/A N/A BOCOM 3,227 3, ,227 3, (0.6) BOCQ (0.6) CCB 7,638 9,282 1,644 7,638 8, (0.9) CMB 2,078 2, ,078 2, (0.6) CMSB 2,020 2, ,020 2, (0.5) CNCB 1,961 2, ,961 N/A N/A N/A 66.3 N/A N/A CQRB (1.2) HUSB (0.6) ICBC 9,511 11,109 1,597 9,511 10, (0.9) We expect limited fall in CET1 CAR for H-share banks from 2014 onwards We estimate that the negative impact of the new rules under No.9 documents on the CET1 CAR of H-share banks will be lower than 60bps Under the standardized approach, the estimation of operating risk assets should be related to either average total revenue or average total loans over the past three years. Hence, unless there is a drastic deterioration in asset quality of banks, the increase in operating risk assets of H-share banks should move largely in line with their RWAs and retained earnings in the coming years. Hence, we believe further sharp fall in CET1 CAR is unlikely to occur for H-share banks from 2014 onwards. Meanwhile, under the new rules of Lending to banks and other financial institutions under No.9 documents of CBRC (according to media reports), the assets pledged by mainland banks on repo agreements will be counted as on balance sheet assets. We conduct a scenario analysis to estimate the inclusion of the repo agreements as risk-weighted assets of H-share banks (100% riskweight). With the exception of CQRB and HUSB, we estimate that the negative impact of the CET1 CAR of H-share banks should be lower than 60bps under this scenario. The negative impact to the CET1 CAR of CQRB and HUSB will be 115bps and 269bps, respectively. However, we see the chance for the H-share banks to reduce their reverse repo business as well under the new rules. If the risk-weight assets of the reverse repo business of CQRB and HUSB are excluded from their balance sheet, the negative impact to their CET1 CAR should be lower than 30bps. Figure 73: Scenario analysis of the inclusion of Repo agreements as risk-weighted assets on CET1 CAR of banks Net Repo agreements (CNY m) Adjusted riskweighted assets* (CNY m) Adjusted CET1 CAR* (%) Impact on CET1 CAR (ppt) Risk-weighted assets (CNY m) CET1 CAR (%) Dec-14 Dec-14 Dec-14 Dec-14 Dec-14 Dec-14 ABC 10,200,830 14,223 10,215, (0.01) BOC 10,376,852-10,376, BOCOM 5,134, ,619 5,276, (0.24) BOCQ 134,951 11, , (0.59) CCB 11,341,403 1,177 11,342, (0.00) CMB 3,084, ,570 3,217, (0.37) CMSB 3,206,836 74,354 3,281, (0.17) CNCB 2,750,492 17,856 2,768, (0.06) CQRB 360,443 44, , (1.15) HUSB 313, , , (2.69) ICBC 12,797, ,563 13,118, (0.25) *Include the assets pledged under Repo agreement as risk-weighted assets with risk-weight of 100% Source: Maybank Kim Eng Limited impact on dividend payout ratio Market may have concerns over slower growth in net profit will prompt a fall in dividend payout ratio of H- share banks As we have adopted a conservative projections on the NPLs and provisions of H- share banks during , there may be concerns that the decline/slower growth in net profit of these banks will prompt a fall in dividend payout ratio. We therefore conduct an analysis to estimate the maximum dividend payout ratio of H-share 28 November 2013 Page 42 of 98

43 China Banks Report banks in based on our projected net profit and risk-weighted assets of these banks. The capital consumption of the increase in RWAs will be more than covered by H-share banks net profit during Even our tough projection on credit costs, the H- share banks should be able to maintain their dividend payout ratio and capital strength in the coming years Based on our estimation, the CET1 ratio of all H-share banks in Dec 2013 has already met the minimum requirement for Hence, if the capital consumption of the increase in RWAs of these banks is more than covered by their net profit during , the excess net profit could be paid by the banks as dividends. The CET1 ratio will remain unchanged under this scenario. We assume that the increase in RWAs of domestic SIBs and other banks will consume capital of 9% and 8% during , respectively. By comparing the capital consumption of these RWAs with the net profit of H-share banks, we estimate their respective maximum dividend payout ratio in 2014 and Based on our estimation, the maximum dividend payout ratio of large stateowned H-share banks (i.e. ABC, BOC, CCB and ICBC) during is close to or higher than their target dividend payout ratio of 30-35%. In other words, even under our tough projection on credit costs, these banks should be able to maintain their dividend payout ratio while maintaining their capital strength in the coming years. Figure 74: Estimation of maximum dividend payout ratio of H-share banks in Increase in total riskweighted CET1 CAR (%) assets (CNY b) Capital consumption required* (CNY b) Net profit (CNY b) Maximum dividend payout (%) Dividend payout (%) Dec 2013F 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2013F 2014F 2015F ABC 9.0 1,323 1, BOC 9.2 1,227 1, BOCOM BOCQ CCB ,672 1, CMB CMSB CNCB CQRB HUSB ICBC ,698 1, *Assume a minimum core tier-1 CAR requirement of 9% for systemic-important banks and 8% for other banks for E Potential issue of preference shares If we use a benchmark minimum of 8% for CET1 CAR, we see chance for CMSB to replenish its equity capital by CNY9b in 2014 If we use a benchmark minimum of 9-10% for Tier-1 CAR, we see chance for ABC, BOC, BOCOM, CMB, CMSB and CNCB to replenish their Tier-1 capital With the exception of CMSB, we estimate that the CET1 CAR of domestic SIBs and other banks is at or above 9% and 8% in Dec 2014, respectively. The CET1 CAR of CMSB will be 7.7% in Dec 2014, based on our estimation. Although this is slightly higher than the minimum requirement of 7.5% for 2018, there could be chance for the regulator to ask for an additional 50bps buffer for the ratio in order to prepare for potential weakening in asset quality. Based on this assumption, CMSB may need to replenish its equity capital by CNY9b in This will result in an annualized ROE dilution effect of 65bps if we assume that this additional equity capital generates a gross yield of 3%. Similarly, if we use 10% as a benchmark minimum for the Tier-1 CAR of domestic SIBs in China (9% for other banks) for 2018, we estimate that the Tier-1 CAR ABC, BOC, BOCOM, CMB, CMSB and CNCB will not meet this minimum by end If these banks decide to top up the ratio to the benchmark minimum in 2014, they may need to replenish their Tier-1 capital. 28 November 2013 Page 43 of 98

44 China Banks Report Figure 75: Estimation of capital replenishment of H-share banks CET1 CAR (%) Tier-1 CAR (%) Total CAR (%) Additional capital required in 2014E* (CNY b) Dec 2013E Dec 2014E Dec 2013E Dec 2014E Dec 2013E Dec 2014E Core capital Tier-1 capital Tier-2 capital ABC BOC BOCOM BOCQ CCB CMB CMSB CNCB CQRB HUSB ICBC *Assume a minimum core tier-1 CAR, tier-1 CAR and total CAR requirement of 9%, 10% and 12% for systemic important banks and 8%, 9% and 11% for other banks by Dec 2014E If we assume these banks issue preference shares to top up their tier-1 CAR, we estimate the potential annualized ROE dilution will be 20-50bps It is possible for H-share banks to replenish their tier-1 capital before 2018 to prevent a sharp rise in net funding cost Market believes that these banks may consider issuing preference shares, hybrid bonds (a perpetual subordinated capital securities which can be converted into preference shares after a certain period) and contigent convertibles (Cocos; a convertible bond that will be converted into preference shares or ordinary shares if the tier-1 CAR or CET1 CAR dropped to a certain trigger point). If we assume these banks issue preference shares to top up the tier-1 CAR and the net funding cost is 4% (6% dividend yield for the preference shares and 2% net return on proceeds), we estimate that the annualized ROE dilution to these banks will be 20-50bps. The replenishment of tier-1 capital will also help raise the total CAR of these banks and remove any potential shortfall on this ratio. That said, the above benchmark minimum capital ratios will only be the requirement by end H-share banks may choose not to replenish their tier-1 capital in the next 2-3 years and this should not affect their organic business growth. However, with potential QE tapering in the US next year and the global economic recovery in Europe, we believe global long-term interest rates could be on a gradual uptrend. Hence, it is possible for H-share banks to replenish their tier-1 capital before there is rise in net funding cost. 28 November 2013 Page 44 of 98

45 China Banks Report Valuation and Recommendations Some catch-up plays on small banks in recent months Share price of China banks outperformed the market during 1H13 Share price of most H- share banks have underperformed the market in 3Q13 Share price of most small banks outperformed the market after entering into 4Q13 Share price of China banking sector have outperformed the MSCI China index during 1H13. Indeed, most H-share banks have outperformed the market. We believe this could be due to: (i) market speculation on potential launch of QDII2 and the relaxation of quota on QFII; (ii) the new leaders of the Chinese government may launch stimulative policies to revive economic growth; and (iii) net earnings of most H-share banks maintained a healthy growth during 1Q13 given slow rise in NPLs and drastic rebound in net fees. However, with increasing tightening of liquidity of the banking system by the PBOC, the surge in SHIBOR in Jun 2013, the slowdown in real GDP growth (7.5% YoY in 2Q13 vs. 7.7% YoY in 1Q13), the removal of the price floor on RMB lending rate in Jul 2013 as well as continued NIM pressure and stronger rise in NPLs of H-share banks (in particular for small H-share banks) in 2Q13, the share price of most H-share banks have underperformed the market in 3Q13. Entering into 4Q13, share price of CCB and ABC has slightly underperformed the MSCI China index while the share price performance of BOCOM, CMB and CMSB has revived significantly. In the case of CCB, we believe this was due to the release of slightly lower-than-expected earnings and the slight rise in credit cost in 3Q13. Meanwhile, market still has concerns over slow loan growth and low tier-1 CAR of ABC. On the other hand, the gradual relaxation of interbank liquidity has helped revive share price performance of small H-share banks. CMB also benefited from the completion of its equity capital replenishment. Market also reacted positively to the strategic cooperation between CMSB and Alibaba (China) (including credit card, credit settlement, wealth management and other banking businesses). Figure 76: Relative performance of state-owned H-share banks against MSCI China index Figure 77: Relative performance of small H-share banks against MSCI China index Source: Bloomberg Source: Bloomberg Figure 78: Relative performance of all H-share banks against MSCI China index Source: CBRC, Maybank Kim Eng 28 November 2013 Page 45 of 98

46 China Banks Report Expecting EPS growth during even under the worst case Net profit of most H-share banks grew over 10% YoY during 9M13 We expect EPS CAGR of most H-share banks will be 3-11% during With the exception of BOCOM, all H-share banks reported a growth in net profit of over 10% YoY during 9M13. This was notwithstanding the NIM pressure and rising credit cost for most of the banks over the period. Key earnings drivers included solid loan growth, recovery in net fees growth and tight cost control. BOCOM s net profit growth was lower than peers at 9.4% YoY for 9M13, mainly due to moderate loan growth and additional expenses to enhance coverage ratio at municipal cities and develop Trinity network (i.e. e-banking, self-service banking outlets and mobile banking). As aforesaid, we have made conservative assumptions on the NPLs and provisions of H-share banks. Still we expect net profit of most banks to grow at a CAGR of 6-14% during This will be mainly driven by: (i) healthy loan growth of 10-14% p.a. during for most banks; (ii) mild NIM pressure of 3-7bps during for most banks; (iii) continued economies of scale (especially for large banks); and (iii) slower rise in loan impairment charges in given a higher base for comparison in However, the EPS CAGR of most H-share banks will be 3-11% during , mainly due to the dilution effect of the new IPO of BOCQ and HUSB and the capital replenishment of CMB and CMSB. Figure 79: Forecast net profit and ROE of H-share banks Net profit (CNYm) YoY % change CAGR (%) Net profit (CNYm) % ROE (%) F 2014F 2015F F 2014F 2015F F 9M12 9M13 change F 2014F 2015F ABC 145, , , , , , BOC 139, , , , (6.4) , , BOCOM 58,373 41,764 56,207 63, (28.5) ,508 48, BOCQ* 1,925 2,322 1,894 2, (18.4) ,111 1, CCB 193, , , , (2.3) , , CMB 45,273 46,116 52,428 60, ,786 39, CMSB 37,563 39,550 44,758 52, ,810 33, CNCB 31,032 29,863 34,226 39, (3.8) ,226 30, CQRB 5,361 5,440 5,339 6, (1.9) ,162 4, HUSB* 4,306 5,027 5,472 6, ,153 2, ICBC 238, , , , (3.6) , , *Figures for 9M12 and 9M13 are replaced by figures for 1H12 and 1H13 We doubt whether the market should rely on Bloomberg consensus forecasts to compare the financial performance of H-share banks Our target price for most H-share banks is lower than Bloomberg mean consensus forecasts We prefer to compare with the historical financial performance of H-shares and check the dividend payout ratio of H-share banks Mainly due to our conservative forecast on credit cost, our net profit forecast of all H-share banks for 2014 is lower than the Bloomberg mean consensus forecasts. However, the range of Bloomberg consensus net profit forecasts was very wide for all H-share banks. For example, the Bloomberg consensus forecasts for ABC range from CNY156b to CNY196b for This implies there are various uncertainties such as NIM pressure, credit cost and capital replenishment that have resulted in different earnings forecasts of the sell-side analysts. Hence, we doubt whether the market will rely on the Bloomberg consensus forecasts to compare the financial performance of H-share banks. In line with our earnings forecast, our target price for most H-share banks is also lower than the Bloomberg mean consensus forecasts. Again, the Bloomberg consensus target price of some H-share banks represents less than 10% upside from current share price of these banks even though there remains a buy-bias on the these stocks. All told, we see chance for some sell-side analysts to update their earnings forecasts, target price and stock rating of H-share banks in the near term. Hence, a direct comparison with Bloomberg consensus net profit forecasts and target price may not be reliable. Rather, we prefer to compare with the historical financial performance of H-shares. Another key focus is whether the H-share banks are able to maintain their dividend payout ratio without undermining their capital positions. 28 November 2013 Page 46 of 98

47 China Banks Report Figure 80: Kim Eng forecasts vs. Bloomberg consensus forecasts on H-share banks Kim Eng net profit forecasts (CNYb) Bloomberg consensus net profit forecasts (CNYb) Bloomberg consensus EPS forecasts (HKD) Kim Eng EPS forecasts (HKD) Bloomberg stock-rating (Number of) Kim Eng Target price (HKD) Bloomberg 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F BUY NEUTRAL SELL rating average Kim Eng ABC B BOC B BOCOM S BOCQ N/A N/A N/A N/A N/A N/A N/A B N/A 6.60 CCB B CMB S CMSB S CNCB H CQRB H HUSB N/A N/A N/A N/A N/A N/A N/A B N/A 4.05 ICBC H Source: Bloomberg, Maybank Kim Eng Initiate China banking sector with OVERWEIGHT rating We have taken into account the downtrend of the ROE of H-share banks during to estimate the long-term ROE We also compared the fairvalue derived from GGM with each bank s own historic ROE, P/E and P/B bands We have adopted the Gordon growth model (GGM), which captures a bank s long-term growth potential, to estimate the fair value of the H-share banks. This is based on the long-term sustainable ROE and dividend payout assumptions, which are consistent with our earnings forecasts for each bank. When estimating the long-term sustainable ROE of these banks (with the exception of the newlylisted BOCQ and HUSB), we have taken into account the downtrend of their ROE during to estimate the downward momentum of their ROE in the next 5 years. Hence, the long-term ROE assumption of all banks is lower than our forecast ROE in We use the downward momentum of CQRB to estimate the long-term ROE of BOCQ and HUSB. We have also compared the fair-value derived from the model with each bank s own historic ROE, P/E and P/B bands (during ) to check whether the target price is at reasonable trading range of each bank. As both BOCQ and HUSB are newly-listed and their business nature is similar to that of CQRB (which is not nation-wide), we thus compare their fair-value derived from GGM with the historic P/E and P/B bands of CQRB. Figure 81: Current valuation vs. historic valuation of H-share banks Share Projected price PER (x) P/B (x) ROE (%) 2013F 2014F long-term 27-Nov-13 Max Avg Min Max Avg Min Max Avg Min PER (x) P/B (x) ROE (%) PER (x) P/B (x) ROE (%) ROE (%) ABC BOC BOCOM BOCQ 5.81 N/A N/A N/A N/A N/A N/A CCB CMB CMSB CNCB CQRC HUSB 3.57 N/A N/A N/A N/A N/A N/A ICBC Source: Bloomberg, Maybank Kim Eng We expect the long-term ROE of most banks will be close to or below their historic trough ROE With the exception of BOC, CCB and CMSB, we expect the long-term ROE of H- share banks will be close to or below their historic trough ROE. This is reasonable based on our conservative assumptions on NPLs and provisions of the H-share banks during We believe both BOC and CCB will benefit from limited NIM pressure and better asset quality than peers. BOC has 28 November 2013 Page 47 of 98

48 China Banks Report established a well-diversified fee income base while CCB should be able to maintain its disciplined cost control. Meanwhile, the high ROE of CMSB was partly driven by its low CET1 CAR (8.2% in Sep 2013). We have not fully factored in potential ROE dilution effect from potential equity capital replenishment of CMSB. Meanwhile, we also note that the valuation of all H-share banks (in terms of 2014 P/E) is less expensive than all Asian banks (Figure 83). Figure 82: ROE and valuation comparison of Asian banks (based on share price on 27 Nov 2013) ROE (%) P/E (x) P/B (x) Stock code Name F 2014F F 2014F F 2014F 1288 HK ABC HK BOC HK BOCOM HK BOCQ HK CCB HK CMB HK CMSB HK CNCB HK CQRB HK HUSB HK ICBC HK HSBC HK SCB HK HSB HK BEA HK BOCHK DBS SP DBS UOB SP UOB OCBC SP OCBC TT CTBC TT Mega Financial TT First Financial May MK Maybank CIMB MK CIMB PBK MK Public Bank SCB TB Siam Commercial BBL TB Bangkok Bank CBA AU* Commonwealth Bank WBC AU* Westpac Banking JP* Mitsubishi Financial JP* Sumitomo Financial JP* Mizuho Financial KS Shinhan Financial KS KB Financial KS Hana Financial BBCA IJ Bank Central Asia BBRI IJ Bank Rakyat BMRI IJ Bank Mandiri Persero ICICIBC IN* ICICI HDFCB IN* HDFC SBIN IN* State Bank of India * Figures are adjusted to December as end of each financial year Source: Bloomberg, Factset, Maybank Kim Eng Initiate the coverage of China banking sector with OVERWEIGHT rating We initiate the coverage of China banking sector with a OVERWEIGHT rating. This was mainly due to: (i) Even under our conservative assumptions on NPLs and provisions for H-share banks, they should be able to maintain a EPS CAGR of 3-11% during In other words, there will not be any deterioration in the book value of H-share banks in the coming years. (ii) Large banks, such as BOC and CCB are able to achieve a ROE higher than the historical trough level under under the tough assumptions. (iii) Most H-share banks are trading at a 2014 P/B similar to or below their historic trough value. This implies limited downside risk for most banks valuation. (iv) We estimate that most H-share banks should be able to maintain their historic dividend payout ratio without undermining their capital strength. Overall, we prefer large H-share banks in the next 6 months. 28 November 2013 Page 48 of 98

49 China Banks Report Key risks to sector rating Key risks to our sector rating include severe price competition among China banks after full interest rate deregulations, the collapse of the shadow banking business and significant economic downturn in China which leads to serious loan defaults of local government. CCB, BOC, ABC and HUSB as our top picks CCB should benefit from healthy loan growth, lower cost-income ratio and strong CET1 CAR Among the large-to-medium-sized H-share banks, we prefer CCB, BOC and ABC and initiate the coverage of these stocks with BUY rating. Loan-to-deposit ratio of CCB remained low at 69.1% in Sep We see room for CCB to maintain healthy loan growth of 11% pa during (11.5% YTD in Sep 2013). With good track record of tight cost control, we forecast CCB s cost-income ratio to fall below 37% during CCB has higher CET1 CAR than peers at 10.9% in Sep With the shift towards less risky loans and wealth management products, we forecast its CET1 CAR will remain above 10% even maintaining a dividend payout ratio of 35% during Based on a long-term ROE assumption of 16.75% in our GGM, we derive our target price at HKD7.25, equivalent to a projected Dec 2014 P/B of 1.2x. Figure 83: Fair value and stock recommendation of H-share banks Share Target PER EPS P/B Yield ROE Stock Price* Price F 2014F 2015F CAGR (%) F 2014F 2015F 2013F F 2014F 2015F Code (HKD) (HKD) Rating (x) (x) (x) (x) F (x) (x) (x) (x) (%) (%) (%) (%) (%) ABC 1288 HK B BOC 3988 HK B BOCOM 3328 HK S BOCQ 1963 HK B (0.2) CCB 939 HK B CMB 3968 HK S CMSB 1988 HK S CNCB 998 HK H CQRB 3618 HK H HUSB 3698 HK B ICBC 1398 HK H *Share price as of 27 Nov 2013 Source: Bloomberg, Company data, Maybank Kim Eng BOC may benefit improved NIM of its foreign currency assets, robust growth in non-interest income and good asset quality of its overseas loans ABC should benefit from improvement in asset and liability management, new fee income opportunities in County area and higher provision coverage than peers capital positions The HKD and USD average interest earnings assets accounted for 20% of BOC s total assets in 1H13. We expect the QE tapering will provide opportunities for BOC to improve its NIM through lengthening the duration of its HKD and USD assets. Besides, we believe BOC will actively diversify into non-interest income business (such as agency commissions, consultancy and advisory fees and insurance business) to compensate for its lower-than-market-average NIM. We expect its non-interest income will grow faster than peers at a CAGR of 15% during BOC maintained a high provision-to-loan ratio for its domestic business at 2.63% in Sep Given its high exposure in less risky overseas loans, we forecast its credit cost will remain lower than peers at % during Based on a long-term ROE assumption of 15% in our GGM, we derive our target price at HKD4.30, equivalent to a projected Dec 2014 P/B of 0.95x. Due to the reduction in interbank borrowings and the increase in investment in long-term bonds, NIM of ABC widened 7bps QoQ to 2.77% in 3Q13. We believe ABC will continue to improve its asset and liability management to minimize its NIM pressure under interest rate deregulations. We forecast its NIM to be % in With increasing network coverage in County area, we expect ABC to explore new fee income opportunities there. We forecast ABC s overall net fees contribution to rise to 20% by 2015 (17.6% in 2012). The provision-toloan ratio of ABC remained higher than peers at 4.3% in Sep We therefore expect its credit cost to be % during , similar to 0.9% in Based on a long-term ROE assumption of 17.5% in our GGM, we derive our target price at HKD4.60, equivalent to a projected Dec 2014 P/B of 1.23x. 28 November 2013 Page 49 of 98

50 China Banks Report We initiate HUSB with BUY due to government plan to promote economic growth in Central China, massive customer base to boost fee income and strong capital positions Among small H-share banks, our top pick is Huishang Bank (HUSB) and we initiate the stock with a BUY rating. Central government plans to advocate the sustainable economic development of Central China, including the promotion of Anhui as primary sources of industrial migration for manufacturing, high-tech industries and modern agriculture. We expect loan growth of HUSB will remain solid at 14-16% p.a. during Meanwhile, HUSB has a massive customer base in Anhui, with over 7m individual customers (25% of total urban population in Anhui) and 7,200 SME customers in Jun This should help boost its net fees by a CAGR of 35% during The recent IPO should help enhance its CET1 CAR by 3.2ppts. Even with a dividend payout ratio of 30%, we estimate HUSB s CET1 CAR will remain above 10% during BOCOM and CMB as our top SELL We initiate BOCOM with SELL due to potential investment in risky assets, rising cost-income ratio and higher lending exposure in Eastern and Northern China than peers We initiate CMB with SELL due to its weakening in asset quality, potential impairment loss on risky assets and tightening capital positions We initiate the coverage of both BOCOM and CMB with a SELL rating. In the case of BOCOM, this was mainly due to: (i) management may consider investing in more risky non-standardized wealth management products to lower its NIM pressure; (ii) its cost-income ratio will rise to above 40% during given the enhancement of coverage ratio at municipal cities and expansion of the Trinity network; and (iii) with higher lending exposure in Eastern and Northern China than peers, we forecast BOCOM s credit cost to stay high at % during Based on a long-term ROE assumption of 12.5% in our GGM, we derive our target price at HKD4.85, equivalent to a projected Dec 2014 P/B of 0.64x. On the other hand, CMB recorded a faster rise in NPLs of CNY2.2b QoQ in 3Q13 (+CNY1.9b in 2013). As its provision-to-loan ratio remained lower than regulatory minimum of 2.5% in Sep 2013 (2.21% in Sep 2013), we forecast its credit cost to stay high at % during In addition, CMB increased the amount of reverse REPO and investment receivables in 3Q13 (12.2% of its total assets). About 29% of these assets are related to trust beneficiary rights. We factor in potential impairment loss of CNY b for these assets for We estimate CMB s tier-1 CAR will drop to 8.9% during To top up the ratio to 10%, we see chance for CMB to issue preference shares of CNY33b in This will have a ROE dilution effect of 40bps if we assume a net funding cost of 4%. Based on a long-term ROE assumption of 15% in our GGM, we derive our target price at HKD13.55, equivalent to a projected Dec 2014 P/B of 0.9x. 28 November 2013 Page 50 of 98

51 Hong Kong Initiating Coverage 28 November 2013 Buy (Initiation) Share price: HKD3.98 (27 Nov 2013) Target price: HKD4.60 Steven ST CHAN (852) Stock Information Description: Agricultural Bank of China is one of the Big 4 banks in China. It provides a full range of commercial banking services nationwide. Ticker: 1288 HK Shares Issued H (m): 30,739 Shares Issued all (m) 324,794 Market Cap (USDb): mth Avg Daily Turnover (USDm): 59.0 HSI: 23,806.4 Free float (%): 20.6 Major Shareholders: % Central Huijin 40.2 MOF 39.2 Key Indicators (2014F) ROE (%): 18.5 NIM: 2.73 Cost-income ratio: 42.7 Credit cost: 0.97 Historical Chart Performance: 52-week High/Low HKD4.4/HKD2.9 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 2% 10% -1% 15% -2% Relative (%) 3% 7% 0% 5% -3% Agricultural Bank of China Expect ROE to remain above peers Making efforts to reduce NIM pressure. Net interest margin (NIM) of Agricultural Bank of China (ABC) revived from 2.7% in 2Q13 to 2.77% in 3Q13, mainly due to the reduction in interbank borrowing and the increase in investment in long-term bond securities. Besides, ABC has maintained the loan-to-deposit (L/D) ratio at 60.2% and the proportion of demand deposits at 52.2% of total deposits in Sep We believe ABC will continue to improve its asset and liability management to minimize its NIM pressure under interest rate deregulation. We forecast its NIM to be % in We estimate that for every 1ppt increase in its L/D ratio, its NIM will widen by 1-2bps. Rising net fees contribution; stable cost-income ratio. Net fees contribution rose from 18.1% in 9M12 to 19.3% in 9M13, mainly attributed to the new development of cash management, investment banking and bancassurance businesses. We see room for ABC to explore new fee income opportunities in county areas (18.1% net fees contribution in 1H13). We expect the group s overall net fees contribution to rise to 20% by Meanwhile, ABC will continue to expand its network coverage in county areas. Still, it will restrict growth in staff costs and general and administrative expenses. We forecast its cost-income ratio to remain stable at % during Stable credit cost; potential impairment charges on investment. Total NPLs increased faster by CNY1.2b QoQ to CNY87.9b (or 1.24% of total loans) in Sep 2013 (+CNY0.8b QoQ in 2Q13). Still, with a high provision-to-loan ratio (4.3% in Sep 2013), ABC s credit cost fell to 0.51% in 3Q13 (0.58% in 2Q13). We forecast its credit cost to be % during , similar to 0.9% in Meanwhile, ABC increased its investment in financial assets to CNY293b in Sep 2013 (57% of which are related to trust products in Jun 2013). We project impairment charges of CNY b for these assets during Potential issue of preference shares. Tier-1 CAR remained low at 9.4% in Sep 2013, slightly below the regulatory minimum of 9.5% for To top up the ratio to 10%, we estimate that ABC needs to issue preference shares amounting to CNY101b in We estimate this would dilute ROE by 45bps, assuming a net funding cost of 4%. Initiate with BUY rating. Despite our projection of impairment charges on investments, we expect ABC s ROE to remain higher than its peers at % in Based on a long-term ROE assumption of 17.5% in our Gordon Growth Model (GGM), we derived a target price of HKD4.60, equivalent to a projected Dec 2014 P/B of 1.23x. ABC Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 242, , , ,063 Chg (%) Net profit (CNYm) 145, , , ,990 Chg (%) EPS (HKD) Chg (%) P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 165, , ,289 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

52 Agricultural Bank of China Investment Positives Minimize NIM pressure: ABC reduced interbank borrowings and increased investment in long-term bonds in 3Q13. It also made efforts to stabilize its L/D ratio and reduce migration towards time deposits. We estimate that for every 1ppt increase in its L/D ratio, its NIM will widen by 1-2bps. Diversify into new fee income business: ABC has developed new fee income sources such as cash management, investment banking and bancassurance businesses. We expect its net fees contribution will rise to 20% by Highest provision-to-loan ratio: ABC s provision-to-loan ratio was 4.3% in Sep 2013, the highest among H-share banks. We estimate that it has accumulated excess provisions of CNY218b. This should be sufficient to cover 76% of its special-mention loans (CNY286b in Jun 2013). Investment Concerns Investment in risky assets: ABC had total investment in financial assets of CNY293b in Sep 2013, 57% of which are in trust products in Jun We project impairment charges of CNY b for these assets during A need to issue preference shares: Tier-1 CAR remained low at 9.4% in Sep To raise the ratio to 10%, we estimate that ABC needs to issue preference shares amounting to CNY101b in This will result in ROE dilution of 45bps, assuming a dividend yield of 6% and a net return on proceeds of 2%. Valuation and Recommendations We forecast ABC s net profit to grow at a CAGR of 10.5% during Key earnings drivers will be healthy loan and net fees growth, tight costs control and stable asset quality. We forecast its ROE will drop to % in (22% in 2012), but still above its peers. We applied a long-term ROE assumption of 17.5% for ABC in our GGM. This is lower than its historical trough ROE of 20.5% during We derived a target price of HKD4.60 based on the fair Dec 2014 P/B of 1.23x estimated from the GGM. This is slightly above ABC s historic trough P/B of 0.98x during but comparable to our estimated fair P/B for CCB (1.2x). We initiate coverage of ABC with a BUY rating. Key risks to our rating include significant NIM pressure and rise in the cost-income ratio for the county area business, as well as the ROE dilution from the replenishment of equity capital. Figure 84: ABC Gordon Growth Model Implied ROE 15.5% 16.5% 17.5% 18.5% 19.5% Long term dividend payout ratio (k) 30.0% Cost of Equity (CoE= Rf + Rm * B) 16.5% Long term sustainable growth (g) 12.3% Discount rate (CoE - g) 4.3% Target Price to Book Value (ROE * k) / (CoE - g) Dec14F BVPS 3.73 Target price based on 1.23x Dec14F P/B November 2013 Page 52 of 98

53 Agricultural Bank of China Figure 85: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 85,835 82,003 85,697 88,344 89,288 90,714 95, % 11.6% 253, , % Net fee income 21,270 17,659 19,181 16,734 25,991 21,606 19, % 2.6% 58,110 67, % Other operating income 364 3,781 2,171 1,925 2,342 2,057 1, % -28.5% 6,316 9, % Total Operating Income 107, , , , , , , % 9.2% 317, , % Total Operating Expenses (40,601) (43,537) (45,228) (53,436) (44,465) (45,560) (48,845) 7.2% 8.0% (129,366) (142,916) 10.5% Operating Profit 66,868 59,906 61,821 53,567 73,156 68,817 68, % 10.0% 188, , % Loan impairment loss (10,733) (12,083) (10,805) (21,007) (12,442) (10,029) (9,012) -10.1% -16.6% (33,621) (31,483) -6.4% Net non-operating income - 44 (44) N/A N/A - - N/A Tax (12,675) (10,805) (11,379) (7,937) (13,673) (13,445) (13,338) -0.8% 17.2% (34,859) (40,456) 16.1% Minority interests (6) (17) (9) (5) (40) 8 (17) N/A 88.9% (32) (49) 53.1% Net profit 43,454 37,045 39,584 25,011 47,001 45,351 45, % 15.3% 120, , % Total gross loans (CNYb) 5,889 6,080 6,245 6,433 6,770 6,946 7, % 13.8% 6,245 7, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 10,144 10,605 10,791 10,863 11,611 11,487 11, % 9.4% 10,791 11, % CET1 CAR (%) Total CAR (%) Figure 86: ABC Trading P/E band Figure 87: ABC Trading P/B band 28 November 2013 Page 53 of 98

54 Agricultural Bank of China INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 3,098,724 3,459,008 3,832,832 4,216,115 Net interest income 341, , , ,549 Investment securities 2,247,679 2,303,150 2,375,882 2,476,614 Other operating income 83,085 96, , ,286 Net loans and advances 6,153,411 6,885,939 7,653,670 8,487,549 Operating income 424, , , ,835 Fixed assets 141, , , ,157 Operating expenses (182,802) (200,939) (220,865) (242,772) Receivables 1,423,214 1,532,824 1,641,470 1,790,381 Operating profit 242, , , ,063 Other assets 179, , , ,362 Provisions for bad and doubtful debts (54,628) (76,938) (74,495) (72,478) Total assets 13,244,342 14,530,210 15,882,251 17,380,179 Operating profit after provisions 187, , , ,585 Non-operating income 393 (400) (3,343) (2,675) Customer deposits 10,862,935 12,057,858 13,263,644 14,590,008 Pre-tax profit 187, , , ,910 Borrowings 1,100,515 1,117,087 1,135,388 1,155,519 Taxation (42,796) (43,478) (49,823) (57,822) Debentures 192, , , ,639 Minorities (37) (74) (85) (98) Other liabilities 336, , , ,838 Net profit 145, , , ,990 Total liabilities 12,492,988 13,675,624 14,909,368 16,270,004 Minorities 1,539 1,613 1,698 1,796 Shareholders funds 749, , ,186 1,108,379 Total liabilities and equity 13,244,342 14,530,210 15,882,251 17,380,179 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 14.1% 12.5% 11.6% 11.2% NPL 1.33% 1.74% 1.95% 2.09% Deposits 12.9% 11.0% 10.0% 10.0% Loan to deposit 59.2% 60.0% 60.9% 61.5% Income statement CET1 CAR 9.7% 9.0% 9.0% 9.1% Net interest income 11.3% 9.0% 10.1% 9.9% Leverage Other operating income 14.5% 16.4% 11.0% 13.0% NIM 2.81% 2.74% 2.73% 2.73% Total operating income 11.9% 10.4% 10.3% 10.5% Cost to income 43.0% 42.8% 42.7% 42.5% Operating expenses 16.2% 9.9% 9.9% 9.9% ROA 1.16% 1.06% 1.11% 1.18% Pre-provision profit 8.9% 10.8% 10.6% 10.9% ROE 20.7% 18.4% 18.5% 18.8% Net profit 19.0% 1.6% 14.6% 16.1% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assaaaets 3.4% 3.4% 3.4% 3.4% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.7% 2.7% 2.7% 2.7% Cost to income ratio 43.0% 42.8% 42.7% 42.5% Other oper income/avg assets 0.7% 0.7% 0.7% 0.7% Operating expense/avg assets -1.5% -1.4% -1.5% -1.5% Operating profit/avg assets 1.9% 1.9% 2.0% 2.0% Interest expense/interest income 39.6% 40.3% 40.4% 40.5% Op profit after prov/avg assets 1.5% 1.4% 1.5% 1.5% CAR 12.6% 11.5% 11.3% 11.2% Provisions/avg assets -0.4% -0.6% -0.5% -0.4% Capital/assets 5.7% 5.9% 6.1% 6.4% Pre-tax profit/avg assets 1.5% 1.4% 1.4% 1.5% Capital/total loans 11.7% 11.8% 12.0% 12.3% Net profit/avg assets (ROA) 1.2% 1.1% 1.1% 1.2% Fixed assets/shareholders funds 18.9% 17.3% 15.8% 14.4% NII/total income 80.4% 79.4% 79.3% 78.8% Other oper income/total income 19.6% 20.6% 20.7% 21.2% FUNDING AND CREDIT QUALITY Operating profit/total income 57.0% 57.2% 57.3% 57.5% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 44.1% 40.8% 42.9% 44.9% Total deposits/total liabilities 87.0% 88.2% 89.0% 89.7% Provisions/total income 12.9% 16.4% 14.4% 12.7% LD ratio 59.2% 60.0% 60.9% 61.5% Pre-tax profit/total income 44.2% 40.7% 42.3% 44.4% (Borrowings + debentures)/deposits 11.9% 10.9% 10.0% 9.2% Net profit/total income 34.1% 31.4% 32.6% 34.3% Provision charges to avg loans 0.90% 1.13% 0.97% 0.85% ROE 20.7% 18.4% 18.5% 18.8% NPL/total loans 1.33% 1.74% 1.95% 2.09% NIM 2.81% 2.74% 2.73% 2.73% Total reserve coverage 326.1% 279.3% 268.6% 261.7% 28 November 2013 Page 54 of 98

55 Hong Kong Initiating Coverage 28 November 2013 Buy (Initiation) Share price: HKD3.74 (27 Nov 2013) Target price: HKD4.30 Steven ST CHAN (852) Stock Information Description: Bank of China is the fourth largest commercial bank in China. Ticker: 3988 HK Shares Issued H (m): 83,622.3 Shares Issued all (m) 279,148.5 Market Cap (USDb): mth Avg Daily Turnover (USDm): HSI: 23,806.4 Free float (%): 33.3 Major Shareholders: % Central Huijin 67.7 Temasek 2.1 Key Indicators (2014F) ROE (%): 16.2 NIM: 2.20 Cost-income ratio: 39.4 Credit cost: 0.63 Historical Chart Performance: 52-week High/Low HKD4.0/HKD3.0 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) -1% 7% -5% 15% 4% Relative (%) 0% 5% -5% 6% 2% Bank of China A dark horse A key beneficiary of QE tapering. Bank of China (BOC) s net interest margin (NIM) remained below its peers at 2.21% in 3Q13 (2.22% for 9M13). This was mainly due to the low-margin domestic foreign currency business (NIM: 0.94% in 1H13) and overseas business (NIM: 1.25% in 1H13). The HK dollar and US dollar average interest earnings assets accounted for 20% of group total in 1H13. We expect the QE tapering will result in a steepening US dollar yield curve with minimal interest rate volatility. This should provide opportunities for BOC to enhance its NIM through lengthening the duration of its HK dollar and US dollar assets. We estimate that for every 10bps increase in the yield of these assets, BOC s NIM will widen by 2bps. Overall, we forecast the group NIM of BOC to stay at about 2.2% during Robust non-interest income growth. Net fees grew robustly by 31.0% YoY in 1H13, mainly driven by agency commissions, bank cards as well as consultancy and advisory fees. Besides, BOC s insurance business reported strong growth in premium income of 62.4% YoY for 1H13. It also recorded client-driven net trading income growth of 10.4% YoY for precious metal products for 1H13. We believe BOC will actively diversify into non-interest income businesses to compensate for its lower-than-market-average NIM. We expect its non-interest income to grow faster than its peers at a CAGR of 15% during Lower credit cost than peers. Total NPLs increased slower by CNY2.6b QoQ to CNY72b in Sep 2013 (NPL ratio of 0.96%; +CNY3.1b QoQ in 2Q13). Still, it maintained the provision-to-loan ratio for its domestic business at 2.63% in Sep Even under our conservative assumptions on new NPLs, we forecast BOC s credit cost will remain lower than its peers at % during (0.29% in 2012). Potential issue of preference shares. We forecast BOC s tier-1 CAR will drop to 9% by end-dec 2014, below the regulatory minimum for To top up the ratio to 10%, we estimate that BOC may issue preference shares amounting to CNY100b in We expect this will result in ROE dilution of 40bps, assuming a net funding cost of 4%. Initiate with a BUY rating. With the projections of higher credit cost, we forecast BOC s ROE will drop to % in (18% in 2012). Based on a long-term ROE assumption of 15% in our Gordon Growth Model (GGM), we derived a target price of HKD4.30, equivalent to a projected Dec 2014 P/B of 0.95x. BOC Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 206, , , ,107 Chg (%) Net profit (CNYm) 139, , , ,500 Chg (%) 12.2 (6.4) EPS (HKD) Chg (%) 16.3 (6.4) P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 149, , ,058 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

56 Bank of China Investment Positives Room to improve NIM: The HK dollar and US dollar average interest earnings assets accounted for 20% of group total in 1H13. BOC could enhance its NIM by lengthening the duration of its HK dollar and US dollar assets. We estimate for every 10bps increase in the yield of these assets, BOC s NIM will widen by 2bps. Rising net fees contribution: Net fees contribution rose to 21.4% of total income in 9M13 (20% in 2012). We believe BOC will actively diversify into new fee income businesses, such as bancassurance and offshore RMB business. We forecast its net fees contribution will rise to 23-24% during Asset quality remained in good shape: Total NPLs increased slower by CNY2.6b QoQ to CNY72b in Sep BOC maintained its provision-to-loan ratio for its domestic business at 2.63% in Sep We forecast its credit cost will remain lower than peers at % during Investment Concerns Higher loan-to-deposit ratio than peers: Domestic RMB loan-to-deposit ratio edged up to 71.3% in Sep 2013 (70.2% in Jun 2013) due to slower growth in domestic RMB deposits (+0.6% QoQ in 3Q13). This may restrain its RMB loan growth in the coming years. Potential ROE dilution from capital replenishment: We forecast BOC s tier-1 CAR will drop to 9.1% in Dec BOC may need to issue preference shares amounting to CNY100b in We expect this will result in ROE dilution of 40bps, assuming a dividend yield of 6% and a net return on proceeds of 2%. Valuation and Recommendations We forecast BOC s net profit to grow at a CAGR of 7.6% during Key earnings drivers will be strong net fees growth and tight cost control. We forecast its ROE to fall % during (18% in 2012). We applied a long-term ROE assumption of 15% for BOC in our GGM. This is higher than its historic trough ROE of 14% during We derived a target price of HKD4.30 based on the fair Dec 2014 P/B of 0.95x estimated from the GGM. This is also higher than BOC s historic trough P/B of 0.72x during We initiate coverage of BOC with a BUY rating. Key risks to our rating include the narrowing in NIM of the domestic foreign currency business and ROE dilution from the potential equity capital replenishment. Figure 88: BOC Gordon Growth Model Implied ROE 13.0% 14.0% 15.0% 16.0% 17.0% Long term dividend payout ratio (k) 35.0% Cost of Equity (CoE= Rf + Rm * B) 15.3% Long term sustainable growth (g) 9.8% Discount rate (CoE - g) 5.5% Target Price to Book Value (ROE * k) / (CoE - g) Dec14E BVPS 4.52 Target price based on 0.95x Dec14E P/B Source: Company data, Bloomberg, Maybank Kim Eng 28 November 2013 Page 56 of 98

57 Bank of China Figure 89: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 60,598 63,456 65,390 67,520 66,960 70,328 70, % 8.5% 189, , % Net fee income 21,152 13,098 15,680 19,993 24,730 20,751 19, % 26.9% 49,930 65, % Other operating income 13,178 8,183 8,604 (8,012) 13,762 9,720 8, % -2.6% 29,965 31, % Total Operating Income 94,928 84,737 89,674 79, , ,799 99, % 10.6% 269, , % Total Operating Expenses (39,474) (34,187) (39,736) (29,289) (42,983) (39,226) (43,193) 10.1% 8.7% (113,397) (125,402) 10.6% Operating Profit 55,454 50,550 49,938 50,212 62,469 61,573 56, % 12.2% 155, , % Loan impairment loss (5,575) (3,643) (4,451) (5,417) (8,283) (5,600) (4,352) -22.3% -2.2% (13,669) (18,235) 33.4% Other impairment loss 102 (121) 62 (344) 22 (281) (158) -43.8% N/A 43 (417) N/A Post-provision profit 49,981 46,786 45,549 44,451 54,208 55,692 51, % 13.1% 142, , % Associate profits % 79.0% % Tax (11,629) (10,479) (9,490) (10,260) (12,804) (13,275) (10,832) -18.4% 14.1% (31,598) (36,911) 16.8% Minority Interest (1,684) (1,717) (1,655) (1,034) (1,804) (1,647) (1,654) 0.4% -0.1% (5,056) (5,105) 1.0% Net Profit 36,763 34,720 34,671 33,278 39,815 40,906 39, % 13.9% 106, , % Total gross loans (CNYb) 6,590 6,754 6,918 6,865 7,326 7,440 7, % 8.9% 6,918 7, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 9,517 9,483 9,343 8,947 9,875 9,563 10, % 7.5% 9,343 10, % CET1 CAR (%) Total CAR (%) Figure 90: BOC Trading P/E band Figure 91: BOC Trading P/B band 28 November 2013 Page 57 of 98

58 Bank of China INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 3,157,170 3,408,629 3,616,275 3,831,682 Net interest income 256, , , ,286 Investment securities 1,981,258 2,332,414 2,462,660 2,550,359 Other operating income 91, , , ,783 Net loans and advances 6,710,040 7,346,809 8,053,462 8,836,312 Operating income 348, , , ,069 Fixed assets 167, , , ,272 Operating expenses (142,686) (156,523) (171,190) (185,962) Receivables 269, , , ,643 Operating profit 206, , , ,107 Other assets 395, , , ,563 Provisions for bad and doubtful debts (19,086) (55,422) (49,689) (51,421) Total assets 12,680,615 13,973,942 15,084,918 16,243,832 Operating profit after provisions 187, , , ,687 Non-operating income Customer deposits 8,947,128 10,110,255 11,070,729 12,067,094 Pre-tax profit 187, , , ,619 Borrowings 2,257,130 2,283,218 2,304,508 2,327,015 Taxation (41,858) (42,042) (50,073) (55,856) Debentures 199, , , ,133 Minorities (6,090) (7,004) (8,054) (9,262) Other liabilities 415, , , ,167 Net profit 139, , , ,500 Total liabilities 11,819,073 13,024,079 14,029,841 15,071,410 Minorities 36,865 40,367 44,394 49,025 Shareholders funds 824, ,496 1,010,684 1,123,397 Total liabilities and equity 12,680,615 13,973,942 15,084,918 16,243,832 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 8.2% 10.0% 10.0% 10.0% NPL 0.95% 1.30% 1.52% 1.69% Deposits 3.1% 13.0% 9.5% 9.0% Loan to deposit 76.7% 74.7% 75.0% 75.7% Income statement CET1 CAR 10.5% 9.2% 9.0% 9.1% Net interest income 12.7% 8.8% 10.3% 8.7% Leverage Other operating income 6.4% 21.2% 12.7% 11.4% NIM 2.15% 2.21% 2.20% 2.19% Total operating income 11.0% 12.0% 11.0% 9.5% Cost to income 40.9% 40.0% 39.4% 39.1% Operating expenses 12.4% 9.7% 9.4% 8.6% ROA 1.14% 0.98% 1.07% 1.11% Pre-provision profit 10.0% 13.7% 12.1% 10.0% ROE 18.0% 15.1% 16.2% 16.3% Net profit 12.2% -6.4% 19.3% 11.4% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 2.8% 2.9% 3.0% 3.0% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.1% 2.1% 2.1% 2.1% Cost to income ratio 40.9% 40.0% 39.4% 39.1% Other oper income/avg assets 0.7% 0.8% 0.9% 0.9% Operating expense/avg assets -1.2% -1.2% -1.2% -1.2% Operating profit/avg assets 1.7% 1.8% 1.8% 1.8% Interest expense/interest income 49.3% 48.2% 47.9% 47.7% Op profit after prov/avg assets 1.5% 1.3% 1.5% 1.5% CAR 13.6% 12.1% 11.7% 11.7% Provisions/avg assets -0.2% -0.4% -0.3% -0.3% Capital/assets 6.5% 6.5% 6.7% 6.9% Pre-tax profit/avg assets 1.5% 1.3% 1.5% 1.5% Capital/total loans 12.0% 12.0% 12.2% 12.3% Net profit/avg assets (ROA) 1.1% 1.0% 1.1% 1.1% Fixed assets/shareholders funds 20.3% 20.1% 19.8% 19.4% NII/total income 73.7% 71.5% 71.1% 70.6% Other oper income/total income 26.3% 28.5% 28.9% 29.4% FUNDING AND CREDIT QUALITY Operating profit/total income 59.1% 60.0% 60.6% 60.9% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 53.6% 45.8% 49.1% 50.0% Total deposits/total liabilities 75.7% 77.6% 78.9% 80.1% Provisions/total income 5.5% 14.2% 11.5% 10.8% LD ratio 76.7% 74.7% 75.0% 75.7% Pre-tax profit/total income 53.7% 46.0% 49.3% 50.2% (Borrowings + debentures)/deposits 27.5% 24.6% 22.6% 20.9% Net profit/total income 40.0% 33.4% 35.9% 36.5% Provision charges to avg loans 0.29% 0.77% 0.63% 0.59% ROE 18.0% 15.1% 16.2% 16.3% NPL/total loans 0.95% 1.30% 1.52% 1.69% NIM 2.15% 2.21% 2.20% 2.19% Total reserve coverage 236.3% 209.2% 198.9% 194.0% 28 November 2013 Page 58 of 98

59 Hong Kong Initiating Coverage 28 November 2013 Sell (Initiation) Share price: HKD5.74 (27 Nov 2013) Target price: HKD4.85 Steven ST CHAN (852) Stock Information Description: BOCOM is the 5 th largest bank in China in terms of assets. HSBC owns 19% of its total share capital. Ticker: 3328 HK Shares Issued H (m): 35,011.9 Shares Issued All (m): 74,262.7 Market Cap (USDb): mth Avg Daily Turnover (USDm): 18.9 HSI: 23,806.4 Free float (%): 36.2 Major Shareholders: % PRC Ministry of Finance 26.5 HSBC 18.7 Key Indicators (2014F) ROE (%): 13.1 NIM: 2.48 Cost-income ratio: 41.4 Credit cost: 0.92 Historical Chart Performance: 52-week High/Low HKD6.7/HKD4.7 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) -1% 5% -7% 7% -2% Relative (%) -1% 0% -9% -4% -6% Bank of Communications Higher credit costs will pressure ROE Potential increase in risk appetite to reduce NIM pressure. Bank of Communications (BOCOM) s net interest margin (NIM) narrowed to 2.49% in 3Q13 (2.53% for 9M13). This was partly due to the migration towards time deposits (58.7% in Sep 2013) and the decline in the loanto-deposit ratio (72.4% in Sep 2013). To lower the funding cost, management will continue to shift from negotiated and fiscal deposits to structural deposits. BOCOM may invest in non-standardized wealth management products to improve asset yield. We forecast its NIM to stay at 2.48% in However, we have concerns over potential impairment charges on the investment in risky assets. Negative jaws in the near term. The cost-income ratio rose to 38.6% in 9M13 (38.0% in 9M12). BOCOM opened 30 new outlets and merged 43 outlets during 9M13. It aims to enhance coverage ratio in municipal cities (63% in Sep 2013) in the coming years. It will continue to expand the Trinity network (i.e. e-banking, self-service banking outlets and mobile banking). As it is still at the investment phase, we forecast its cost-income ratio to rise to 41-42% in (39.2% in 2012). Mixed picture in asset quality. Total NPLs increased by CNY0.9b QoQ to CNY32.5b (or 1.01% of total loans) in Sep 2013 (+CNY0.9b in 2Q13). BOCOM has written off and disposed of CNY4.5b and CNY4.7b of NPLs during 3Q13. As such, its credit cost surged to 0.61% in 3Q13 (0.42% in 2Q13). BOCOM deliberately reduced exposures in risky manufacturing loans (in industries with over-capacity), wholesale and retail trade loans and local government loans (CNY201b in Sep 2013) in Eastern and Northern China during 3Q13. Still, BOCOM had a track record of high credit cost in the last credit cycle during We thus forecast its credit cost to rise to % for Potential issue of preference shares. Tier-1 CAR dropped to 9.9% in Sep We estimate that the ratio will fall to 9% by end-dec 2014 if BOCOM maintains a dividend payout ratio of 30%. This will be below the regulatory minimum of 9.5% for To raise the ratio to 10%, there is a chance that BOCOM may issue preference shares amounting to CNY53b in This would dilute ROE by 50bps, assuming the preference shares have a net funding cost of 4%. Initiate with a SELL rating. With the projections of higher credit cost and negative jaws, we forecast BOCOM s ROE will fall to % in (17.9% in 2012). Based on a long-term ROE assumption of 12.5% in our Gordon Growth Model (GGM), we derived a target price of HKD4.85, equivalent to a projected Dec 2014 P/B of 0.64x. BOCOM Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 89,749 97, , ,742 Chg (%) Net profit (CNYm) 58,373 41,764 56,207 63,838 Chg (%) 15.1 (28.5) EPS (HKD) Chg (%) (0.6) (28.5) PER (x) PBV (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 62,286 65,117 69,676 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

60 Bank of Communications Investment Positives Rising net fees contribution: Net fees contribution rose to 15.8% of total income in 9M13 (14.2% in 2012), mainly driven by bank cards, investment banking and wealth management. With the strengthening of the Trinity network and product innovation, we expect the contribution to rise to 17-18% in Making efforts to reduce NIM pressure: BOCOM will shift from negotiated and fiscal deposits to structural deposits. It may invest in high-yield non-standardized wealth-management products. We forecast its NIM to stay at 2.48% in Investment Concerns Ongoing negative jaws: BOCOM will continue to enhance its coverage ratio in municipal cities and expand the Trinity network. We forecast its cost-income ratio to rise to 41-42% in (39.2% in 2012). Rising credit cost: BOCOM had a track record of high credit cost in the last credit cycle during With heavy loan exposures in Eastern China (37% of total loans in Sep 2013), we forecast its credit cost to rise to % for Potential capital replenishment: We estimate that BOCOM s tier-1 CAR will fall to 9% by end-dec 2014 if it maintains a dividend payout ratio of 30%. To raise the ratio to 10%, we see chances of BOCOM issuing preference shares amounting to CNY53b in This will result in ROE dilution of 50bps, assuming a dividend yield of 6% and a net return on proceeds of 2%. Valuation and Recommendations With the projections of rising credit cost and cost-income ratio, we forecast BOCOM s net profit to grow at a CAGR of 3% during Key earnings drivers will be healthy loan growth and increased net fees contribution. We forecast its ROE will fall to % in (17.9% in 2012). We project a long-term ROE assumption of 12.5% for BOCOM in our GGM. This is lower than its historic trough ROE of 14.1% during We derived a target price of HKD4.85 based on the fair Dec 2014 P/B of 0.64x estimated from the GGM. This is also below BOCOM s historic trough P/B of 0.8x during We initiate coverage of BOCOM with a SELL rating. Key upside risks to our rating include strong recovery in economic growth of Eastern China and improvement in operating efficiency of its Trinity network. Figure 92: BOCOM Gordon Growth Model Implied ROE 10.5% 11.5% 12.5% 13.5% 14.5% Long term dividend payout ratio (k) 30.0% Cost of Equity (CoE= Rf + Rm * B) 14.6% Long term sustainable growth (g) 8.8% Discount rate (CoE - g) 5.8% Target Price to Book Value (ROE * k) / (CoE - g) Dec14E BVPS 7.54 Target price based on 0.64x Dec14E P/B Source: Company data, Bloomberg, Maybank Kim Eng 28 November 2013 Page 60 of 98

61 Bank of Communications Figure 93: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 28,813 29,581 30,707 31,025 32,031 32,977 32, % 6.3% 89,101 97, % Net fee income 5,595 5,367 4,581 5,339 6,934 6,961 5, % 22.4% 15,543 19, % Other operating income 1,941 2, ,447 2,910 2,435 1, % 30.8% 4,988 6, % Net insurance income % 109.1% % Total Operating Income 36,360 37,212 36,101 37,881 41,912 42,429 39, % 8.9% 109, , % Total Operating Expenses (12,061) (14,205) (15,401) (16,138) (13,918) (16,902) (16,959) 0.3% 10.1% (41,667) (47,779) 14.7% Operating Profit 24,299 23,007 20,700 21,743 27,994 25,527 22, % 8.0% 68,006 75, % Loan impairment loss (3,807) (3,329) (3,328) (4,073) (5,113) (3,356) (4,875) 45.3% 46.5% (10,464) (13,344) 27.5% Other income 2 (2) % 200.0% 1 11 N/A Post-provision profit 20,494 19,676 17,373 17,673 22,883 22,177 17, % 0.6% 57,543 62, % Tax (4,589) (4,440) (3,927) (3,784) (5,133) (5,009) (3,561) -28.9% -9.3% (12,956) (13,703) 5.8% Minority Interest (28) (24) (27) (24) (44) (47) (43) -8.5% 59.3% (79) (134) 69.6% Net Profit 15,877 15,212 13,419 13,865 17,706 17,121 13, % 3.4% 44,508 48, % Total gross loans (CNYb) 2,705 2,806 2,869 2,947 3,160 3,201 3, % 12.2% 2,869 3, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 3,414 3,592 3,640 3,728 3,922 3,953 4, % 11.8% 3,640 4, % CET1 CAR (%) Total CAR (%) Source: Company data Maybank Kim Eng Figure 94: BOCOM Trading P/E band Figure 95: BOCOM Trading P/B band 28 November 2013 Page 61 of 98

62 Bank of Communications INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 1,337,809 1,500,713 1,672,205 1,852,159 Net interest income 120, , , ,778 Investment securities 855, , , ,509 Other operating income 27,428 33,373 36,521 41,968 Net loans and advances 2,879,628 3,238,928 3,621,583 4,014,237 Operating income 147, , , ,746 Fixed assets 45,536 47,357 49,252 51,222 Operating expenses (57,805) (66,371) (74,249) (83,004) Receivables 30,395 56,325 56,325 56,325 Operating profit 89,749 97, , ,742 Other assets 124, , , ,666 Provisions for bad and doubtful debts (14,537) (43,743) (32,575) (32,431) Total assets 5,273,379 5,779,422 6,419,016 7,052,118 Operating profit after provisions 75,212 53,866 72,468 82,311 Non-operating income Customer deposits 3,728,412 4,250,390 4,824,192 5,403,095 Pre-tax profit 75,216 53,879 72,489 82,342 Borrowings 942, , , ,989 Taxation (16,740) (11,991) (16,133) (18,326) Debentures 79,572 79,572 79,572 79,572 Minorities (103) (124) (148) (178) Other liabilities 140,959 95, , ,298 Net profit 58,373 41,764 56,207 63,838 Total liabilities 4,891,932 5,368,616 5,968,717 6,556,954 Minorities 1,529 1,653 1,801 1,979 Shareholders funds 379, , , ,185 Total liabilities and equity 5,273,379 5,779,422 6,419,016 7,052,118 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F Balance sheet KEY PERFORMANCE RATIOS FYE Dec 2012A 2013F 2014F 2015F Gross loans 15.1% 13.6% 12.3% 11.2% NPL 0.92% 1.75% 2.07% 2.31% Deposits 13.6% 14.0% 13.5% 12.0% Loan to deposit 79.0% 78.7% 77.9% 77.4% Income statement CET1 CAR 11.2% 9.4% 9.0% 9.0% Net interest income 16.1% 8.7% 9.3% 9.1% Leverage Other operating income 15.2% 21.7% 9.4% 14.9% NIM 2.59% 2.51% 2.48% 2.47% Total operating income 15.9% 11.1% 9.3% 10.3% Cost to income 39.2% 40.5% 41.4% 42.0% Operating expenses 17.1% 14.8% 11.9% 11.8% ROA 1.18% 0.76% 0.92% 0.95% Pre-provision profit 15.2% 8.8% 7.6% 9.2% ROE 17.9% 10.6% 13.1% 13.6% Net profit 15.1% -28.5% 34.6% 13.6% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.0% 3.0% 2.9% 2.9% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.4% 2.4% 2.3% 2.3% Cost to income ratio 39.2% 40.5% 41.4% 42.0% Other oper income/avg assets 0.6% 0.6% 0.6% 0.6% Operating expense/avg assets -1.2% -1.2% -1.2% -1.2% Operating profit/avg assets 1.8% 1.8% 1.7% 1.7% Interest expense/interest income 50.1% 49.3% 49.4% 49.5% Op profit after prov/avg assets 1.2% 0.8% 0.9% 0.9% CAR 14.1% 11.6% 10.9% 10.7% Provisions/avg assets -0.3% -0.8% -0.5% -0.5% Capital/assets 7.2% 7.1% 7.0% 7.0% Pre-tax profit/avg assets 1.5% 1.0% 1.2% 1.2% Capital/total loans 12.9% 12.2% 11.9% 11.8% Net profit/avg assets (ROA) 1.2% 0.8% 0.9% 0.9% Fixed assets/shareholders funds 12.0% 11.6% 11.0% 10.4% NII/total income 81.4% 79.6% 79.6% 78.8% Other oper income/total income 18.6% 20.4% 20.4% 21.2% FUNDING AND CREDIT QUALITY Operating profit/total income 60.8% 59.5% 58.6% 58.0% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 51.0% 32.8% 40.4% 41.6% Total deposits/total liabilities 76.2% 79.2% 80.8% 82.4% Provisions/total income 9.9% 26.7% 18.2% 16.4% LD ratio 79.0% 78.7% 77.9% 77.4% Pre-tax profit/total income 51.0% 32.9% 40.4% 41.6% (Borrowings + debentures)/deposits 27.4% 24.1% 21.2% 18.9% Net profit/total income 39.6% 25.5% 31.3% 32.3% Provision charges to avg loans 0.53% 1.39% 0.92% 0.82% ROE 17.9% 10.6% 13.1% 13.6% NPL/total loans 0.92% 1.75% 2.07% 2.31% NIM 2.59% 2.51% 2.48% 2.47% Total reserve coverage 250.7% 185.2% 176.4% 172.3% 28 November 2013 Page 62 of 98

63 Hong Kong Initiating Coverage 28 November 2013 Buy (Initiation) Share price: HKD5.81 (27 Nov 2013) Target price: HKD6.60 Steven ST CHAN (852) Stock Information Description: Bank of Chongqing is one of the leading commercial banks based in Chongqing. Other than Chongqing, the bank also has presences in Sichuan Province, Shaanxi Province and Guizhou Province. Ticker: 1963 HK Shares Issued H (m): 1,141.1 Shares Issued all (m) 2,690.6 Market Cap (USDb): mth Avg Daily Turnover (USDm): 28.1 HSI: 23,806.4 Free float (%): 65.9 Major Shareholders: % Yufu 17.2 Dah Sing Bank 17.1 Chongqing Road & Bridge 6.4 Key Indicators (2014F) ROE (%): 13.8 NIM: 2.83 Cost-income ratio: 39.6 Credit cost: 1.08 Historical Chart Bank of Chongqing A preferred Chongqing play Strong net interest income growth. With the new IPO proceeds of CNY3b, we expect the CET1 CAR of Bank of Chongqing (BOCQ) will increase by 2.7ppts (8.5% in Jun 2013). We estimate that BOCQ s CET1 CAR will remain above 10% even if it maintains solid loan growth of 14-19% p.a. during BOCQ s net interest margin (NIM) widened from 2.73% in 2H12 to 2.79% in 1H13, mainly due to a slower rise in interbank borrowings and negotiated deposits. We estimate that the new IPO proceeds will help widen its NIM by an annualized rate of 4bps. Overall, we forecast its NIM will widen to 2.83% for As such, we expect BOCQ s net interest income will grow at a CAGR of 17% during Rising net fees contribution. BOCQ reported a sharp rise in net fees contribution, from 7.9% of total income in 2012 to 12.4% in 1H13, mainly driven by financial advisory and consulting, wealth management and bank card fees. The ratio was higher than that of CQRB (3.8% in 1H13), reflecting BOCQ s stronger product innovation and cross-selling capabilities. From a low base, we forecast BOCQ s net fees will grow at a CAGR of 48% during This will help raise its net fees contribution to 14-15% during F. Mixed picture in asset quality relative to CQRB. The NPL ratio and special-mention-loan ratio of BOCQ was lower than CQRB in Jun 2013 (0.38% and 1.5% vs. 0.73% and 3.1%, respectively). However, total NPLs of BOCQ has been on a rising trend whilst the reverse has been seen for CQRB over the past few years. Besides, its provision-to-loan ratio was also lower than CQRB in Jun 2013 (1.74% vs. 3.4%). BOCQ needs to increase this ratio gradually to 2.5% by Overall, with rising NPLs and low provision coverage, we forecast BOCQ s credit cost to rise to 1.08% for 2014 and 0.76% for 2015 (0.25% for 2012). Potential impairment charges on risky assets. BOCQ recorded a total of CNY33b in loans and receivables in Jun 2013 (18% of total assets). All of these assets were related to more risky trust schemes, wealth-management products and directional asset management plans. We project an impairment charge of CNY0.7b for these assets in Initiate with a BUY rating. With dilution effect of the IPO and our conservative credit-cost projections, we forecast BOCQ s ROE will fall to 13.8% in 2014 and 16.8% in 2015 (26.2% in 2012). Based on a longterm ROE assumption of 16% in our Gordon Growth Model (GGM), we derived a TP of HKD6.60, equivalent to a projected Dec 2014 P/B of 1x. Performance: 52-week High/Low HKD6.0/HKD5.8 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) N/A N/A N/A N/A N/A Relative (%) N/A N/A N/A N/A N/A BOCQ Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 2,756 3,402 4,180 4,787 Chg (%) Net profit (CNYm) 1,925 2,322 1,894 2,585 Chg (%) (18.4) 36.5 EPS (HKD) Chg (%) 34.1 (10.7) (18.4) 36.5 P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) N/A N/A N/A SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

64 Bank of Chongqing Investment Positives Potential NIM widening: With additional interest-free funds from the recent IPO and room to increase the loan-to-deposit ratio, we forecast BOCQ s NIM to widen from 2.78% in 2013 to 2.83% in Actively expanding fee-income business: Net fees surged 262.4% YoY in 1H13, reflecting BOCQ s active diversification into financial advisory and consulting, wealth management and bank card businesses. We forecast its net fees to grow from a low base at a CAGR of 48% during Capital replenishment will help sustain loan growth: After the recent IPO, we estimate that BOCQ s CET1 CAR will remain above 10% even if it maintains solid loan growth of 14-19% p.a. during Investment Concerns Low provision coverage: The total provision-to-loan ratio remained lower than the regulatory minimum at 1.74% in Jun To increase the provision coverage, we forecast BOCQ s credit cost to rise to 1.08% for 2014 and 0.76% for High exposures in risky assets: BOCQ invested a total of CNY33b in trust schemes, wealth-management products and directional asset management plans in Jun This is equivalent to 18% of its total assets. We see potential impairment charges on these indirect shadow banking assets. Valuation and Recommendations We forecast net profit of BOCQ to grow at a CAGR of 10.3% during Key earnings drivers will be solid loan and net fees growth, as well as a widening NIM. However, with the dilution effect from the recent IPO and our conservative projections on credit costs, we forecast its ROE will fall to 13.8% in 2014 and 16.8% in 2015 (26.2% in 2012). We project a long-term ROE assumption of 16% for BOCQ in our GGM. This is higher than our long-term ROE projection for CQRB (14.5%). We derived a target price of HKD6.60 based on the fair Dec 2014 P/B of 1x estimated from the GGM. This is also higher than our derived fair P/B for CQRB (0.75x). We initiate coverage of BOCQ with a BUY rating. Key risks to our rating include a drastic economic downturn in Chongqing and a sharp rise in BOCQ s cost-income ratio caused by aggressive expansion of its branch network. Figure 96: BOCQ Gordon Growth Model Implied ROE 14.0% 15.0% 16.0% 17.0% 18.0% Long term dividend payout ratio (k) 25.0% Cost of Equity (CoE= Rf + Rm * B) 16.0% Long term sustainable growth (g) 12.0% Discount rate (CoE - g) 4.0% Target Price to Book Value (ROE * k) / (CoE - g) Dec14E BVPS 6.59 Target price based on 1.0x Dec14E P/B Source: Company data, Bloomberg, Maybank Kim Eng 28 November 2013 Page 64 of 98

65 Bank of Chongqing Figure 97: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 2Q13 vs 1Q13 (%) 2Q13 vs 2Q12 (%) 1H12 1H13 1H13 vs 1H12 (%) Net interest income 3,069 3,165 3,308 (5,393) 3,640 3, % 24.9% 6,234 7, % Net fee income % 183.2% % Other operating income (32) % -58.4% % Total Operating Income 3,221 3,282 3,348 (5,194) 3,830 4, % 25.9% 6,503 7, % Total Operating Expenses (1,285) (1,301) (1,498) 2,182 (1,559) (1,701) 9.1% 30.8% (2,586) (3,261) 26.1% Operating Profit 1,936 1,981 1,850 (3,011) 2,271 2, % 22.7% 3,917 4, % Loan impairment loss (106) (132) (60) 58 (150) (310) 106.8% 135.1% (238) (460) 93.6% Other impairment loss (3) N/A N/A - (3) N/A Post-provision profit 1,830 1,849 1,790 (2,953) 2,121 2, % 14.5% 3,679 4, % Other income (0) N/A N/A 0 (0) N/A Tax (426) (443) (428) 704 (502) (517) 3.1% 16.7% (869) (1,019) 17.3% Minority Interest (3) (4) (4) 10 (3) % % (6) (2) -61.7% Net Profit 1,402 1,402 1,359 (2,238) 1,616 1, % 14.2% 2,804 3, % Total gross loans (CNYb) % 17.6% % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) (0.19) ROE (%) (45.9) ROA (%) (3.23) Total deposits (CNYb) % 25.1% % CET1 CAR (%) Total CAR (%) N/A N/A N/A N/A Source: Company data Maybank Kim Eng Figure 98: BOCQ Trading P/E band Figure 99: BOCQ Trading P/B band 28 November 2013 Page 65 of 98

66 Bank of Chongqing INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 27,476 32,102 36,917 41,775 Net interest income 4,150 4,991 5,859 6,643 Investment securities 13,314 16,239 16,726 19,604 Other operating income ,060 1,285 Net loans and advances 75,257 89, , ,282 Operating income 4,657 5,873 6,919 7,928 Fixed assets 1,471 1,529 1,591 1,654 Operating expenses (1,901) (2,471) (2,739) (3,142) Receivables 37,532 40,160 41,883 43,137 Operating profit 2,756 3,402 4,180 4,787 Other assets 1,115 1,321 1,527 1,744 Provisions for bad and doubtful debts (240) (428) (1,058) (856) Total assets 156, , , ,196 Operating profit after provisions 2,516 2,973 3,122 3,931 Non-operating income 1 3 (662) (529) Customer deposits 114, , , ,393 Pre-tax profit 2,517 2,976 2,460 3,402 Borrowings 27,659 27,659 27,659 27,659 Taxation (593) (655) (566) (816) Debentures 1,790 1,790 1,790 1,790 Minorities Other liabilities 4,413 4,857 4,182 6,013 Net profit 1,925 2,322 1,894 2,585 Total liabilities 147, , , ,855 Minorities Shareholders funds 8,258 12,982 14,402 16,341 Total liabilities and equity 156, , , ,196 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F Balance sheet KEY PERFORMANCE RATIOS FYE Dec 2012A 2013F 2014F 2015F Gross loans 19.7% 18.9% 15.9% 14.4% NPL 0.33% 0.42% 0.64% 0.52% Deposits 27.7% 17.0% 15.0% 13.0% Loan to deposit 67.2% 68.3% 68.8% 69.7% Income statement CET1 CAR 9.4% 10.9% 10.3% 10.2% Net interest income 24.9% 20.3% 17.4% 13.4% Leverage Other operating income 103.4% 73.6% 20.3% 21.2% NIM 2.85% 2.78% 2.83% 2.82% Total operating income 30.4% 26.1% 17.8% 14.6% Cost to income 40.8% 42.1% 39.6% 39.6% Operating expenses 31.1% 30.0% 10.8% 14.7% ROA 1.36% 1.38% 0.99% 1.21% Pre-provision profit 30.0% 23.4% 22.9% 14.5% ROE 26.2% 21.9% 13.8% 16.8% Net profit 29.3% 20.6% -18.4% 36.5% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.3% 3.5% 3.6% 3.7% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.9% 3.0% 3.1% 3.1% Cost to income ratio 40.8% 42.1% 39.6% 39.6% Other oper income/avg assets 0.4% 0.5% 0.6% 0.6% Operating expense/avg assets -1.3% -1.5% -1.4% -1.5% Operating profit/avg assets 1.9% 2.0% 2.2% 2.2% Interest expense/interest income 50.1% 46.3% 44.9% 44.3% Op profit after prov/avg assets 1.8% 1.8% 1.6% 1.8% CAR 12.6% 13.5% 12.7% 12.3% Provisions/avg assets -0.2% -0.3% -0.6% -0.4% Capital/assets 5.3% 7.2% 7.1% 7.3% Pre-tax profit/avg assets 1.8% 1.8% 1.3% 1.6% Capital/total loans 10.8% 14.2% 13.6% 13.5% Net profit/avg assets (ROA) 1.4% 1.4% 1.0% 1.2% Fixed assets/shareholders funds 17.8% 11.8% 11.0% 10.1% NII/total income 89.1% 85.0% 84.7% 83.8% Other oper income/total income 10.9% 15.0% 15.3% 16.2% FUNDING AND CREDIT QUALITY Operating profit/total income 59.2% 57.9% 60.4% 60.4% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 54.0% 50.6% 45.1% 49.6% Total deposits/total liabilities 77.1% 79.5% 82.0% 83.0% Provisions/total income 5.1% 7.3% 15.3% 10.8% LD ratio 67.2% 68.3% 68.8% 69.7% Pre-tax profit/total income 54.1% 50.7% 35.5% 42.9% (Borrowings + debentures)/deposits 25.8% 22.1% 19.2% 17.0% Net profit/total income 41.3% 39.5% 27.4% 32.6% Provision charges to total loans 0.34% 0.51% 1.08% 0.76% ROE 26.2% 21.9% 13.8% 16.8% NPL/total loans 0.33% 0.42% 0.64% 0.52% NIM 2.85% 2.78% 2.83% 2.82% Total reserve coverage 537.9% 457.7% 403.1% 560.9% 28 November 2013 Page 66 of 98

67 Hong Kong Initiating Coverage 28 November 2013 Buy (Initiation) Share price: HKD6.25 (27 Nov 2013) Target price: HKD7.25 Steven ST CHAN (852) Stock Information Description: China Construction Bank is the second largest commercial bank in China. Ticker: 939 HK Shares Issued H (m): 240,417.3 Shares Issued All (m): 250,011.0 Market Cap H (USDb): mth Avg Daily Turnover (USDm): HSI: 23,806.4 Free float (%): 30.4 Major Shareholders: % Central Huijin 57.0 Temasek 7.2 Key Indicators (2014F) ROE (%): 19.7 NIM: 2.66 Cost-income ratio: 36.4 Credit cost: 0.72 Historical Chart Performance: 52-week High/Low HKD6.8/HKD5.0 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 1% 3% -5% 8% -2% Relative (%) 1% -1% -7% -3% -5% China Construction Bank Solid capital base; disciplined operations Selective loan growth and slight NIM pressure. China Construction Bank (CCB) s loan growth remained healthy at 11.5% 9M13. Key drivers were SME loans, residential mortgages and overseas lending. CCB also shifted its loan growth towards less risky Central and Western China. CCB maintained its net interest margin (NIM) at 2.71% in each quarter during 9M13. However, its loan-to-deposit ratio rose to 69.1% in Sep 2013 (66.2% in Dec 2012). To regain market share in deposits and factor in potential price competition stemming from interest rate deregulation, we forecast CCB s NIM to narrow to 2.66% in Disciplined fee income development and costs control. CCB has turned cautious in selling trust products and shifted towards lowermargin standardized wealth-management products. Still, with strong growth in consultancy and advisory, bank cards and electronic banking services fees, we forecast its net fees to grow at a CAGR of 12.4% during Total expenses grew 8.7% YoY for 9M13, slower than its revenue growth. With good track record of disciplined costs control, we forecast CCB s cost-income ratio to fall below 37% during Sound asset quality. Total NPLs increased slower by CNY1.8b QoQ in 3Q13 (+CNY3.2b in 1Q13; +CNY2.5b in 2Q13). However, CCB s credit cost rose from 0.38% in 2Q13 to 0.45% in 3Q13. We believe this was due to increased NPL write-offs. Overdue loans within three months increased by CNY2.2b HoH to CNY26.9b in Jun CCB has classified 89% of its overdue loans as NPLs in Jun Under our conservative assumptions of: (i) an annual increase in NPLs of over 10% for the risky loans; (ii) new NPLs of 3-5% p.a. for its LGFV loans (CNY377b in Jun 2013); and (iii) an annual increase in collective loan impairment allowance ratio of 5bps during , we forecast a slight rise in CCB s credit cost to % in (0.55% in 2012). Strong capital positions to sustain dividend payout. Under the Basel III capital rules, CET1 CAR remained solid at 10.9% in Sep With the shift towards less risky loans and wealth-management products, we forecast CCB s CET1 CAR will remain above 10% even if maintains a dividend payout ratio of 35% during Initiate with a BUY rating. With the projections of narrowing NIM and higher credit cost, we forecast CCB s ROE will fall to 19-20% in (22% in 2012). Based on a long-term ROE assumption of 16.75% in our Gordon Growth Model (GGM), we derived a target price of HKD7.25, equivalent to a projected Dec 2014 P/B of 1.2x. CCB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 291, , , ,122 Chg (%) Net profit (CNYm) 193, , , ,874 Chg (%) 14.1 (2.3) EPS (HKD) Chg (%) 18.3 (2.3) P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 212, , ,938 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

68 China Construction Bank Investment Positives Lower cost-income ratio than peers: With proven track record of tight control on staff cost and general and administrative expenses, we forecast CCB s costincome ratio to fall below 37% during , lower than most of its peers. Selective lending business and prudent provisioning policy: CCB has shifted towards less risky loans in Central and Western China and overseas lending in recent years. It has classified 89% of the overdue loans as NPLs in Jun 2013 and its provision-to-loan ratio remained high at 2.62% in Sep Strong capital positions: CET1 CAR stayed at 10.9% in Sep 2013 under Basel III capital rules. We forecast CCB s CET1 CAR will remain above 10% even if maintains a dividend payout ratio of 35% during Investment Concerns Moderate deposit growth: Total deposits grew slower than market average at 6.8% YTD in Sep As such, its loan-to-deposit ratio rose to 69.1% in Sep We see potential NIM pressure if management intends to regain market share in deposits. Disciplined expansion in fee income business: CCB recorded a decline in agency service fees and wealth management fees of 10.6% YoY and 7.6% YoY in 1H13, mainly as it sold fewer trust products and the shift towards lower-margin standardized wealth-management products. We forecast its net fees to grow at a CAGR of 12.4% during (vs. over 20% p.a before 2012). Valuation and Recommendations We forecast CCB s net profit to grow at a CAGR of 8.4% during Key earnings drivers will be healthy loan and net fees growth, and tight costs control. We forecast its core ROE will fall to 19-20% in (22% in 2012). We project a long-term ROE assumption of 16.75% for CCB in our GGM. This is higher than its historic trough ROE of 15% during We derive our target price at HKD7.25 based on the fair Dec 2014 P/B of 1.2x estimated from the GGM. This is also slightly above CCB s historic trough P/B of 1.1x during We initiate coverage of CCB with a BUY rating. Key risks to our rating include asymmetric interest rate hikes and a hard landing in China. Figure 100: CCB Gordon Growth Model Implied ROE 14.8% 15.8% 16.8% 17.8% 18.8% Long term dividend payout ratio (k) 35.0% Cost of Equity (CoE= Rf + Rm * B) 15.8% Long term sustainable growth (g) 10.9% Discount rate (CoE - g) 4.9% Target Price to Book Value (ROE * k) / (CoE - g) Dec14 BVPS 6.05 Target price based on 1.20x Dec14F P/B November 2013 Page 68 of 98

69 China Construction Bank Figure 101: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 82,101 87,591 91,332 92,178 92,311 95,349 98, % 8.2% 261, , % Net fee income 24,302 24,941 20,678 23,586 28,894 26,630 24, % 18.8% 69,921 80, % Other operating income 3,437 5,440 2,616 4,331 4,720 4,403 3, % 20.8% 11,493 12, % Total Operating Income 109, , , , , , , % 10.4% 342, , % Total Operating Expenses (36,356) (38,214) (39,258) (57,253) (40,028) (41,039) (43,607) 6.3% 11.1% (113,828) (124,674) 9.5% Operating Profit 73,484 79,758 75,368 62,842 85,897 85,343 82, % 10.1% 228, , % Loan impairment loss (6,633) (8,093) (8,263) (15,341) (8,440) (7,627) (9,286) 21.8% 12.4% (22,989) (25,353) 10.3% Other impairment loss (53) 41 (119) (1,580) (103) 116 (293) N/A 146.2% (131) (280) 113.7% Post-provision profit 66,798 71,706 66,986 45,921 77,354 77,832 73, % 9.6% 205, , % Associate profits 11 (3) (3) 22 N/A 175.0% % Tax (15,200) (16,818) (14,969) (10,850) (17,647) (17,578) (16,507) -6.1% 10.3% (46,987) (51,732) 10.1% Minority Interest (97) (114) (117) (95) (133) (120) (132) 10.0% 12.8% (328) (385) 17.4% Net Profit 51,512 54,771 51,908 34,988 59,580 60,131 56, % 9.4% 158, , % Total gross loans (CNYb) 6,828 7,061 7,266 7,512 7,860 8,095 8, % 15.3% 7,266 8, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 10,612 10,941 11,059 11,343 12,005 12,149 12, % 9.6% 11,059 12, % CET1 CAR (%) Total CAR (%) Source: Company data Maybank Kim Eng Figure 102: CCB Trading P/E band Figure 103: CCB Trading P/B band 28 November 2013 Page 69 of 98

70 China Construction Bank INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 3,173,620 3,540,143 3,921,688 4,313,857 Net interest income 353, , , ,195 Investment securities 2,976,291 3,171,049 3,431,586 3,641,598 Other operating income 109, , , ,030 Net loans and advances 7,309,879 8,149,263 9,040,331 9,971,297 Operating income 462, , , ,226 Fixed assets 113, , , ,174 Operating expenses (171,081) (186,444) (203,129) (221,103) Receivables 287, , , ,301 Operating profit 291, , , ,122 Other assets 111, , , ,990 Provisions for bad and doubtful debts (38,330) (76,878) (64,276) (70,661) Total assets 13,972,828 15,425,615 17,013,112 18,603,217 Operating profit after provisions 253, , , ,461 Non-operating income (1,683) (499) (395) (351) Customer deposits 11,343,079 12,704,248 14,101,716 15,511,887 Pre-tax profit 251, , , ,110 Borrowings 1,106,384 1,100,339 1,100,599 1,100,884 Taxation (57,837) (54,947) (65,409) (71,575) Debentures 262, , , ,991 Minorities (423) (500) (575) (661) Other liabilities 310, , , ,509 Net profit 193, , , ,874 Total liabilities 13,023,283 14,352,280 15,792,421 17,221,271 Minorities 7,877 8,377 8,952 9,613 Shareholders funds 941,668 1,064,959 1,211,739 1,372,333 Total liabilities and equity 13,972,828 15,425,615 17,013,112 18,603,217 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 15.6% 12.1% 11.3% 10.6% NPL 0.99% 1.44% 1.64% 1.84% Deposits 13.6% 12.0% 11.0% 10.0% Loan to deposit 66.2% 66.3% 66.4% 66.8% Income statement CET1 CAR 11.3% 10.2% 10.0% 10.2% Net interest income 16.0% 9.4% 9.3% 8.7% Leverage Other operating income 15.3% 11.1% 12.0% 11.0% NIM 2.75% 2.70% 2.66% 2.63% Total operating income 15.8% 9.8% 9.9% 9.3% Cost to income 37.0% 36.7% 36.4% 36.2% Operating expenses 18.4% 9.0% 8.9% 8.8% ROA 1.47% 1.28% 1.39% 1.38% Pre-provision profit 14.4% 10.3% 10.5% 9.5% ROE 22.0% 18.8% 19.7% 19.0% Net profit 14.1% -2.3% 19.1% 9.4% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.5% 3.5% 3.4% 3.4% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.7% 2.6% 2.6% 2.6% Cost to income ratio 37.0% 36.7% 36.4% 36.2% Other oper income/avg assets 0.8% 0.8% 0.8% 0.8% Operating expense/avg assets -1.3% -1.3% -1.3% -1.2% Operating profit/avg assets 2.2% 2.2% 2.2% 2.2% Interest expense/interest income 41.4% 42.2% 42.5% 42.7% Op profit after prov/avg assets 1.9% 1.7% 1.8% 1.8% CAR 14.3% 12.8% 12.4% 12.6% Provisions/avg assets -0.3% -0.5% -0.4% -0.4% Capital/assets 6.7% 6.9% 7.1% 7.4% Pre-tax profit/avg assets 1.9% 1.7% 1.8% 1.8% Capital/total loans 12.5% 12.6% 12.9% 13.2% Net profit/avg assets (ROA) 1.5% 1.3% 1.4% 1.4% Fixed assets/shareholders funds 12.1% 11.1% 10.2% 9.3% NII/total income 76.4% 76.1% 75.6% 75.3% Other oper income/total income 23.6% 23.9% 24.4% 24.7% FUNDING AND CREDIT QUALITY Operating profit/total income 63.0% 63.3% 63.6% 63.8% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 54.7% 48.2% 52.1% 52.2% Total deposits/total liabilities 87.1% 88.5% 89.3% 90.1% Provisions/total income 8.3% 15.1% 11.5% 11.6% LD ratio 66.2% 66.3% 66.4% 66.8% Pre-tax profit/total income 54.4% 48.1% 52.1% 52.1% (Borrowings + debentures)/deposits 12.1% 10.7% 9.7% 8.8% Net profit/total income 41.8% 37.2% 40.2% 40.3% Provision charges to avg loans 0.55% 0.96% 0.72% 0.72% ROE 22.0% 18.8% 19.7% 19.0% NPL/total loans 0.99% 1.44% 1.64% 1.84% NIM 2.75% 2.70% 2.66% 2.63% Total reserve coverage 271.3% 223.8% 214.0% 206.2% 28 November 2013 Page 70 of 98

71 Hong Kong Initiating Coverage 28 November 2013 Sell (Initiation) Share price: HKD16.54 (27 Nov 2013) Target price: HKD13.55 Steven ST CHAN (852) Stock Information Description: China Merchants Bank is the sixth largest commercial bank in China. It run its Hong Kong business under its subsidiary Wing Lung Bank Ticker: 3968 HK Shares Issued H (m): 4,590.9 Shares Issued All (m): 25,219.9 Market Cap H (USDm): mth Avg Daily Turnover (USDm) 44.4 HSI: 23,806.4 Free float (%): 62.5 Major Shareholders: % China Merchants Group 18.0 China Mer. Steam Nav COSCO 6.0 Guangzhou Maritime Trans. 3.0 Key Indicators (2014F) ROE (%): 18.3 NIM: 2.75 Cost-income ratio: 41.9 Credit cost: 0.61 Historical Chart Performance: 52-week High/Low HKD18.6/HKD mth 3-mth 6-mth 1-yr YTD Absolute (%) 4% 13% -2% 18% -4% Relative (%) 4% 9% -3% 7% -8% China Merchants Bank Potential issue of preference shares Potential NIM recovery. China Merchants Bank (CMB) saw a QoQ downtrend in its net interest margin (NIM) during 9M13. Its NIM narrowed from 2.97% in 4Q12 to 2.71% in 3Q13 (2.83% for 9M13). We believe CMB suffered from residual negative impact of interest rate cuts and rising interbank borrowing costs during 9M13. However, CMB completed the right issues in Sep 2013, raising equity capital of CNY33.7b. This should help widen its NIM by an annualized rate of 4bps. We forecast its NIM to rebound to 2.75% during 4Q Rising net fees contribution and tight costs control. Net fees surged by 48.1% YoY in 9M13 given CMB s strong niche in bank cards, wealth management and custodian business. Net fees contribution rose from 17.4% of total income in 2012 to 22.3% in 9M13. CMB will explore new business opportunities from its credit card holders and small-andmicro enterprise customers. We forecast its net fees contribution will rise to 25-27% for With a more moderate pace of outlet expansion, CMB maintained disciplined costs control during We forecast its cost-income ratio to fall to below 42% during Weakening asset quality. CMB s credit cost rose from 0.57% in 2Q13 to 0.6% in 3Q13, partly due to a faster rise in its NPLs by CNY2.2b QoQ in 3Q13 (+CNY1.9b in 2Q13). It also raised its provision-to-loan ratio (excluding Wing Lung Bank) to 2.31% in Sep 2013 (2.25% in Jun 2013). With potential weakening in the quality of risky loans and LGFV loans, we forecast its credit cost to remain high at % during CMB also increased the amount of reverse REPO and investment receivables in 3Q13. These assets accounted for 12.2% of its total assets in Sep However, 29% of these assets are collateralized by trust beneficiary rights in Jun We factor in potential impairment loss of CNY b on these assets for Capital positions remain tight. CMB s tier-1 CAR was 9.4% in Sep We estimate that its tier-1 CAR will drop to 8.9% during We see a chance for CMB to issue preference shares of CNY33b to increase tier-1 CAR to 10% in This would dilute ROE by 40bps if we assume a net funding cost of 4%. Initiate with a SELL rating. With the projections of higher credit cost, we forecast CMB s ROE will fall to 18-19% in (24.8% in 2012). Based on a long-term ROE assumption of 15% in our Gordon Growth Model (GGM), we derived a target price of HKD13.55, equivalent to a projected Dec 2014 P/B of 0.9x. CMB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 65,083 75,611 85,674 96,183 Chg (%) Net profit (CNYm) 45,273 46,116 52,428 60,590 Chg (%) EPS (HKD) Chg (%) 29.9 (1.0) (0.4) 15.6 PER (x) PBV (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 49,292 54,910 61,282 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

72 China Merchants Bank Investment Positives Strong niche in fee-income business: CMB has a strong niche in the creditcard business among the small banks. It has diversified towards the small-andmicro enterprise banking business. We see room for CMB to expand its cash management and settlement businesses. We forecast its net fees contribution to rise to 25-27% of total income during Disciplined cost control: CMB will continue to moderate the number of branches it opens each year to and enhance cross-selling within branches. With a proven track record of disciplined costs control in , we forecast its cost-income ratio to fall below 42% during Investment Concerns Weakening asset quality: CMB saw a faster rise in NPLs of CNY2.2b QoQ in 3Q13. With potential weakening in the quality of risky loans and LGFV loans, we forecast its credit cost to remain high at % during We have concerns over CMB s increasing indirect exposures to trust beneficiary rights. Potential capital replenishment: We forecast CMB s tier-1 CAR will drop to 8.9% during As a systemic-important bank in China, we see a chance for CMB to issue preference shares to replenish its tier-1 capital in the coming years (minimum requirement of 9.5% by 2018). To top up the tier-1 CAR to 10%, we estimate that CMB needs to issue preference shares amounting to CNY33b in This would dilute ROE by 40bps assuming the preference shares have a dividend yield of 6% and a net return on proceeds of 2%. Valuation and Recommendations With new equity capital, we forecast CMB s net profit to grow at a CAGR of 10.2% during Key earnings drivers will be healthy loan and net fees growth, and tight costs control. We forecast its ROE will fall to 18-19% in (22% in 2012). We applied a long-term ROE assumption of 15% for CMB in our GGM. This is lower than its historic trough ROE of 21% during We derived a target price of HKD13.55 based on the fair Dec 2014 P/B of 0.9x estimated from the GGM. This is also below CMB s historic trough P/B of 1.1x during We initiate coverage of CMB with a SELL rating. Key upside risks to our rating include limited deterioration in the quality of CMB s investment assets and a stronger rebound in NIM. Figure 104: CMB Gordon Growth Model Implied ROE 13.0% 14.0% 15.0% 16.0% 17.0% Long term dividend payout ratio (k) 30.0% Cost of Equity (CoE= Rf + Rm * B) 15.5% Long term sustainable growth (g) 10.5% Discount rate (CoE - g) 5.0% Target Price to Book Value (ROE * k) / (CoE - g) Dec 14F BVPS Target price based on 0.9x Dec 14F P/B November 2013 Page 72 of 98

73 China Merchants Bank Figure 105: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 21,548 22,093 22,149 22,584 23,044 24,397 25, % 13.5% 65,790 72, % Net fee income 4,840 4,892 4,920 5,087 6,473 7,691 7, % 53.3% 14,652 21, % Other operating income 1,921 1, ,246 1, % -21.8% 4,506 2, % Total Operating Income 28,309 28,660 27,979 28,380 30,763 33,127 33, % 19.3% 84,948 97, % Total Operating Expenses (10,917) (11,229) (11,616) (14,588) (11,625) (12,613) (12,785) 1.4% 10.1% (33,762) (37,023) 9.7% Operating Profit 17,392 17,431 16,363 13,792 19,138 20,514 20, % 25.9% 51,186 60, % Impairment loss on assets (1,982) (2,163) (1,334) (13) (2,062) (2,897) (3,203) 10.6% 140.2% (5,478) (8,162) 49.0% Net non-operating income (260) % 87.8% % Tax (3,845) (3,602) (3,708) (3,132) (4,187) (4,395) (4,341) -1.2% 17.1% (11,155) (12,923) 15.8% Minority interest (5) % N/A % Net profit 11,643 11,732 11,412 10,382 13,021 13,250 13, % 15.9% 34,786 39, % Total gross loans (CNYb) 1,704 1,784 1,836 1,904 1,991 2,098 2, % 18.4% 1,836 2, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 2,259 2,456 2,413 2,532 2,729 2,798 2, % 16.2% 2,413 2, % CET1 CAR (%) Total CAR (%) Source: Company data Maybank Kim Eng Figure 106: CMB Trading P/E band Figure 107: CMB Trading P/B band 28 November 2013 Page 73 of 98

74 China Merchants Bank INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 962,670 1,077,794 1,201,695 1,334,010 Net interest income 88,374 98, , ,024 Investment securities 488, , , ,773 Other operating income 25,059 32,461 39,333 46,669 Net loans and advances 1,863,325 2,112,444 2,370,841 2,636,012 Operating income 113, , , ,693 Fixed assets 22,030 22,911 23,828 24,781 Operating expenses (48,350) (55,336) (61,810) (68,510) Receivables 45,230 51,478 57,923 64,537 Operating profit 65,083 75,611 85,674 96,183 Other assets 26,739 28,650 30,622 32,645 Provisions for bad and doubtful debts (5,491) (14,995) (14,010) (14,337) Total assets 3,408,219 3,825,448 4,240,496 4,678,758 Operating profit after provisions 59,592 60,616 71,664 81,846 Non-operating income (28) 58 (2,686) (2,130) Customer deposits 2,532,444 2,886,986 3,262,294 3,653,770 Pre-tax profit 59,564 60,674 68,978 79,716 Borrowings 539, , , ,780 Taxation (14,287) (14,553) (16,545) (19,121) Debentures 64,098 64,098 64,098 64,098 Minorities (4) (4) (5) (5) Other liabilities 71,697 65,814 67,435 70,250 Net profit 45,273 46,116 52,428 60,590 Total liabilities 3,207,712 3,557,672 3,936,033 4,331,898 Minorities Shareholders funds 200, , , ,787 Total liabilities and equity 3,408,219 3,825,448 4,240,496 4,678,758 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 16.0% 13.8% 12.5% 11.4% NPL 0.61% 0.87% 1.04% 1.16% Deposits 14.1% 14.0% 13.0% 12.0% Loan to deposit 75.2% 75.1% 74.8% 74.4% Income statement CET1 CAR 8.5% 9.2% 8.9% 8.9% Net interest income 15.8% 11.4% 9.8% 9.1% Leverage Other operating income 25.4% 29.5% 21.2% 18.7% NIM 3.03% 2.81% 2.75% 2.73% Total operating income 17.8% 15.4% 12.6% 11.7% Cost to income 42.6% 42.3% 41.9% 41.6% Operating expenses 18.2% 14.4% 11.7% 10.8% ROA 1.46% 1.28% 1.30% 1.36% Pre-provision profit 17.5% 16.2% 13.3% 12.3% ROE 24.8% 19.7% 18.3% 18.6% Net profit 25.3% 1.9% 13.7% 15.6% PER SHARE DATA FYE Dec (HKD) 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.7% 3.6% 3.7% 3.7% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.8% 2.7% 2.7% 2.6% Cost to income ratio 42.6% 42.3% 41.9% 41.6% Other oper income/avg assets 0.8% 0.9% 1.0% 1.0% Operating expense/avg assets -1.6% -1.5% -1.5% -1.5% Operating profit/avg assets 2.1% 2.1% 2.1% 2.2% Interest expense/interest income 41.1% 43.3% 43.5% 43.5% Op profit after prov/avg assets 1.9% 1.7% 1.8% 1.8% CAR 12.1% 11.9% 11.2% 10.9% Provisions/avg assets -0.2% -0.4% -0.3% -0.3% Capital/assets 5.9% 7.0% 7.2% 7.4% Pre-tax profit/avg assets 1.9% 1.7% 1.7% 1.8% Capital/total loans 10.5% 12.4% 12.5% 12.8% Net profit/avg assets (ROA) 1.5% 1.3% 1.3% 1.4% Fixed assets/shareholders funds 11.0% 8.6% 7.8% 7.1% NII/total income 77.9% 75.2% 73.3% 71.7% Other oper income/total income 22.1% 24.8% 26.7% 28.3% FUNDING AND CREDIT QUALITY Operating profit/total income 57.4% 57.7% 58.1% 58.4% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 52.5% 46.3% 48.6% 49.7% Total deposits/total liabilities 78.9% 81.1% 82.9% 84.3% Provisions/total income 4.8% 11.5% 9.5% 8.7% LD ratio 75.2% 75.1% 74.8% 74.4% Pre-tax profit/total income 52.5% 46.3% 46.8% 48.4% (Borrowings + debentures)/deposits 23.8% 21.0% 18.6% 16.6% Net profit/total income 39.9% 35.2% 35.5% 36.8% Provision charges to avg loans 0.31% 0.74% 0.61% 0.56% ROE 24.8% 19.7% 18.3% 18.6% NPL/total loans 0.61% 0.87% 1.04% 1.16% NIM 3.03% 2.81% 2.75% 2.73% Total reserve coverage 351.8% 291.8% 269.4% 257.8% 28 November 2013 Page 74 of 98

75 Hong Kong Initiating Coverage 28 November 2013 Sell (Initiation) Share price: HKD9.13 (27 Nov 2013) Target price: HKD8.15 Steven ST CHAN (852) Stock Information Description: China Minsheng Bank was primarily founded by non-state owned enterprises. It is the ninth-largest bank in China, carrying out commercial banking business. Ticker: 1988 HK Shares Issued H (m): 5,778.0 Shares Issued all (m) 28,366.2 Market Cap (USDb): mth Avg Daily Turnover (USDm): 69.8 HSI: 23,806.4 Free float (%): 86.2 Major Shareholders: % New Hope Group 6.7 China Life Insurance 4.1 Key Indicators (2014F) ROE (%): 19.4 NIM: 2.35 Cost-income ratio: 41.3 Credit cost: 0.86 Historical Chart Performance: 52-week High/Low HKD12.3/HKD6.9 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) -2% 1% -10% 27% 1% Relative (%) -3% -4% -12% 16% -3% China Minsheng Bank Potential capital replenishment in 2014 Moderate revenue growth. China Minsheng Bank (CMSB) s net interest margin (NIM) narrowed further to 2.32% in 3Q13 (2.41% in 1H13). We believe this was due to the reduction in reverse REPO and only a modest rebound in lending yield of new micro-to-small-enterprise (MSE) loans. We forecast its NM to remain low at 2.35% in Net fees growth moderated to 19.7% YoY in 3Q13 (+61.7% YoY in 1H13), probably due to a slowdown in trust and fiduciary as well as settlement business. Investment income remained weak at CNY341m in 3Q13 (CNY585m in 3Q12). The rise in SHIBOR has undermined the bills spread income. Overall, we forecast CMSB s total income will grow at a CAGR of 12.9% during (CAGR of 34.7% during ). Disciplined costs control. CMSB has maintained tight expense growth of 5.3% YoY during 9M13. As such, its cost-income ratio fell to 37.5% for 9M13 (39.5% for 9M12). CMSB has a proven track record of disciplined costs control over the past five years. We expect its costincome ratio to maintain a slight downtrend in the coming years. Concerns over risky non-loan assets. CMSB held CNY676b of reverse REPO and CNY44b of investment receivables in Sep 2013, accounting for 21.7% of total assets. About 16.3% of the reverse REPO and 81% of the investment receivables were related to more risky trust beneficiary rights and specific asset management schemes. We project impairment charges of CNY2.9b and CNY2.3b for these assets in 2014 and 2015, respectively. Tight capital constraint. Although CMSB shrank its total assets by CNY97b QoQ in 3Q13, its CET1 CAR remained low at 8.1% in Sep We forecast its CET1 CAR to fall to 7.7% by end-dec To revive the ratio to 9%, we estimate that CMSB needs to replenish its equity capital by CNY42b in This will result in annualized ROE dilution of 2.6ppts, based on our estimation. Initiate with a SELL rating. With moderate revenue growth and impairment charges for risky non-loan assets, we forecast CMSB s ROE will fall to % in (25.7% in 2012). Based on a long-term ROE assumption of 16.5% in our Gordon Growth Model (GGM), we derived a target price of HKD8.15, equivalent to a projected Dec 2014 P/B of 0.8x. CMSB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 59,849 66,620 76,822 87,289 Chg (%) Net profit (CNYm) 37,563 39,550 44,758 52,236 Chg (%) EPS (HKD) Chg (%) 31.4 (1.7) P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 41,743 46,431 53,405 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

76 China Minsheng Banking Investment Positives Cost-income ratio on a steady downtrend: CMSB had a good track record of tight costs control over the past five years. We forecast its cost-income ratio to decline slightly from 41.7% in 2012 to % during Sound loan quality: Total NPLs increased slower by CNY0.4b QoQ to CNY11.9b (or 0.78% of total loans) in Sep CMSB maintained its niche in small-size MSE loans (26.4% of total loans in Sep 2013). Besides, CMSB has limited exposures in local government loans (5% of total loans in Jun 2013). Still, under our conservative provision assumption for risky loans, we forecast its credit cost to remain at % during (0.78% for 9M13). Investment Concerns Continued NIM pressure: NIM narrowed to 2.32% in 3Q13 (2.38% for 9M13) due to reduction in high-yield assets. With increasing price competition from interest rate deregulations, we forecast its NIM will drop to 2.35% in Potential impairment charges on non-loan assets: CMSB s reverse REPO and investment receivables accounted for 21.7% of total assets in Sep More than 20% of these assets were related to trust beneficiary rights and specific asset management schemes. We project impairment charges of CNY2.9b and CNY2.3b in 2014, respectively. Potential replenishment of equity capital: We forecast CET1 CAR will drop to 7.7% by end-dec To restore the ratio to 9%, we estimate that CMSB needs to replenish its equity capital by CNY42b in This will result in annualized ROE dilution of 2.6ppts. Valuation and Recommendations With additional non-loan impairment charges and moderate revenue growth, we forecast CMSB s net profit to grow at a CAGR of 11.6% during Key earnings drivers will be healthy loan and net fees growth, and tight costs control. We forecast its ROE will fall to % in (25.7% in 2012). We applied a long-term ROE assumption of 16.5% for CMB in our GGM. This is slightly higher its historic trough ROE of 15% during We derived a target price of HKD8.15 based on the fair Dec 2014 P/B of 0.8x estimated from the GGM. This is also slightly above CMSB s historic trough P/B of 0.76x during We initiate coverage of CMSB with a SELL rating. Key upside risks to our rating include limited deterioration in the quality of CMSB s investment assets and a sharp rebound in lending spreads. Figure 108: CMSB Gordon Growth Model Implied ROE 14.5% 15.5% 16.5% 17.5% 18.5% Long term dividend payout ratio (k) 22.5% Cost of Equity (CoE= Rf + Rm * B) 17.5% Long term sustainable growth (g) 12.8% Discount rate (CoE - g) 4.7% Target P/B: (ROE * k) / (CoE - g) Dec14F BVPS Target price based on 0.8x Dec14F P/B November 2013 Page 76 of 98

77 China Minsheng Banking Figure 109: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 18,970 18,901 19,447 19,835 20,114 20,450 20, % 3.0% 57,318 60, % Net fee income 5,138 4,892 5,651 4,842 7,200 9,022 6, % 19.7% 15,681 22, % Other operating income 927 2,628 1, ,563 (60) 896 N/A -19.2% 4,664 2, % Total Operating Income 25,035 26,421 26,207 25,075 28,877 29,412 27, % 5.6% 77,663 85, % Total Operating Expenses (9,105) (10,378) (11,168) (12,238) (9,755) (10,830) (11,677) 7.8% 4.6% (30,651) (32,262) 5.3% Operating Profit 15,930 16,043 15,039 12,837 19,122 18,582 16, % 6.4% 47,012 53, % Impairment loss on assets (3,335) (2,761) (1,831) (404) (4,017) (2,755) (1,950) -29.2% 6.5% (7,927) (8,722) 10.0% Net non-operating income (296) 118 (45) (643) (185) % N/A (223) 91 N/A Tax (2,963) (3,328) (3,202) (2,851) (3,635) (3,865) (3,473) -10.1% 8.5% (9,493) (10,973) 15.6% Minority interests (164) (191) (204) (186) (270) (279) (246) -11.8% 20.6% (559) (795) 42.2% Net profit 9,172 9,881 9,757 8,753 11,015 11,930 10, % 6.3% 28,810 33, % Total gross loans (CNYb) 1,248 1,303 1,346 1,385 1,436 1,485 1, % 14.0% 1,346 1, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 1,690 1,811 1,856 1,926 2,098 2,175 2, % 17.5% 1,856 2, % CET1 CAR (%) Total CAR (%) N/A N/A N/A Source: Company data Maybank Kim Eng Figure 110: CMSB Trading P/E band Figure 111: CMSB Trading P/B band 28 November 2013 Page 77 of 98

78 China Minsheng Banking INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Net interest income 77,153 81,169 89,789 98,440 Cash & equivalent 1,469,323 1,528,182 1,590,487 1,655,477 Other operating income 25,585 32,775 41,051 49,539 Investment securities 228, , , ,410 Operating income 102, , , ,978 Net loans and advances 1,351,512 1,528,909 1,716,216 1,913,826 Operating expenses (42,889) (47,325) (54,019) (60,689) Fixed assets 13,631 14,176 14,743 15,333 Operating profit 59,849 66,620 76,822 87,289 Receivables 89, , , ,621 Provisions for bad and doubtful debts (8,331) (13,758) (14,607) (15,829) Other assets 59,206 66,764 74,736 83,148 Operating profit after provisions 51,518 52,862 62,215 71,460 Total assets 3,212,001 3,545,686 3,881,386 4,236,815 Non-operating income (866) (433) (2,917) (2,333) Pre-tax profit 50,652 52,429 59,298 69,127 Customer deposits 1,926,194 2,195,861 2,481,323 2,779,082 Taxation (12,344) (12,059) (13,639) (15,899) Borrowings 982, ,735 1,010,401 1,026,535 Minorities (745) (820) (901) (992) Debentures 74,969 74,969 74,969 74,969 Net profit 37,563 39,550 44,758 52,236 Other liabilities 59,562 59,168 59,219 59,363 Total liabilities 3,043,457 3,325,732 3,625,913 3,939,949 Minorities 5,467 6,287 7,188 8,180 GROWTH RATE IN KEY FINANCIALS Shareholders funds 163, , , ,285 FYE Dec 2012A 2013F 2014F 2015F Total liabilities and equity 3,212,001 3,545,686 3,881,386 4,236,815 Balance sheet Gross loans 14.9% 13.6% 12.6% 11.8% Deposits 17.1% 14.0% 13.0% 12.0% Income statement Net interest income 19.0% 5.2% 10.6% 9.6% KEY PERFORMANCE RATIOS Other operating income 47.3% 28.1% 25.3% 20.7% Total operating income 25.0% 10.9% 14.8% 13.1% FYE Dec 2012A 2013F 2014F 2015F Operating expenses 17.0% 10.3% 14.1% 12.3% NPL 0.76% 0.96% 1.13% 1.26% Pre-provision profit 31.4% 11.3% 15.3% 13.6% Loan to deposit 71.9% 71.6% 71.4% 71.3% Net profit 34.5% 5.3% 13.2% 16.7% CET 1 CAR 8.1% 8.0% 7.7% 7.7% Leverage PROFITABILITY RATIOS NIM 2.94% 2.37% 2.35% 2.34% FYE Dec 2012A 2013F 2014F 2015F Cost to income 41.7% 41.5% 41.3% 41.0% Total income/avg assets 3.8% 3.4% 3.5% 3.6% ROA 1.38% 1.17% 1.21% 1.29% NII/avg assets 2.8% 2.4% 2.4% 2.4% ROE 25.7% 21.0% 19.4% 19.5% Other oper income/avg assets 0.9% 1.0% 1.1% 1.2% Operating profit/avg assets 2.2% 2.0% 2.1% 2.2% Op profit after prov/avg assets 1.9% 1.6% 1.7% 1.8% Provisions/avg assets -0.3% -0.4% -0.4% -0.4% Pre-tax profit/avg assets 1.9% 1.6% 1.6% 1.7% PER SHARE DATA Net profit/avg assets (ROA) 1.4% 1.2% 1.2% 1.3% FYE Dec 2012A 2013F 2014F 2015F NII/total income 75.1% 71.2% 68.6% 66.5% EPS (HKD) Other oper income/total income 24.9% 28.8% 31.4% 33.5% EPS (CNY) Operating profit/total income 58.3% 58.5% 58.7% 59.0% DPS (HKD) Op profit after prov/total income 50.1% 46.4% 47.6% 48.3% DPS (CNY) Provisions/total income 8.1% 12.1% 11.2% 10.7% BVPS (HKD) Pre-tax profit/total income 49.3% 46.0% 45.3% 46.7% BVPS (CNY) Net profit/total income 36.6% 34.7% 34.2% 35.3% ROE 25.7% 21.0% 19.4% 19.5% NIM 2.94% 2.37% 2.35% 2.34% OPERATING RATIOS AND CAPITAL STRUCTURE FYE Dec 2012A 2013F 2014F 2015F FUNDING AND CREDIT QUALITY FYE Dec 2012A 2013F 2014F 2015F Cost to income ratio 41.7% 41.5% 41.3% 41.0% Total deposits/total liabilities 63.3% 66.0% 68.4% 70.5% Operating expense/avg assets -1.6% -1.4% -1.5% -1.5% LD ratio 71.9% 71.6% 71.4% 71.3% Interest expense/interest income 49.2% 55.9% 55.4% 55.2% (Borrowings + debentures)/deposits 54.9% 48.8% 43.7% 39.6% CAR 10.8% 10.2% 9.7% 9.6% Provision charges to avg loans 0.64% 0.93% 0.87% 0.84% Capital/assets 5.1% 6.0% 6.4% 6.8% NPL/total loans 0.76% 0.96% 1.13% 1.26% Capital/total loans 11.8% 13.6% 14.0% 14.6% Total reserve coverage 314.5% 293.1% 278.5% 273.2% Fixed assets/shareholders funds 8.4% 6.6% 5.9% 5.3% 28 November 2013 Page 78 of 98

79 Hong Kong Initiating Coverage 28 November 2013 Hold (Initiation) Share price: Target price: HKD4.50 HKD4.30 Steven ST CHAN (852) Stock Information Description: China CITIC Bank is the 6 th largest bank in China, providing commercial banking business. Ticker: 998 HK Shares Issued H (m): 14,882.2 Shares Issued All (m): 46,787.3 Market Cap H (USDb): mth Avg Daily Turnover (USDm): 20.7 HSI: 23,806.4 Free float (%): 23.1 Major Shareholders: % CITIC Group 67.0 BBVA 9.9 Key Indicators (2014F) ROE (%): 14.7 NIM: 2.57 Cost-income ratio: 40.7 Credit cost: 1.03 Historical Chart China CITIC Bank Cheap for various reasons Improving asset and liability management. China CITIC Bank (CNCB) maintained strong deposit growth of 16.7% during 9M13 (+14.6% YoY in 2012), due to its rapid expansion of new outlets and the shift towards modern service industry business. As such, its loan-todeposit ratio fell to 71.5% in Sep 2013 (73.7% in Dec 2012). Its NIM widened from 2.53% in 2Q13 to 2.62% in 3Q13, mainly due to the reduction in interbank borrowings and the shift towards investment receivables. To reflect potential price competition from interest rate liberalization, we forecast its NIM to be % for Rising cost-income ratio. Net fees continued to grow strongly, by 51.9% YoY in 9M13, mainly driven by bank cards, consulting and advisory and wealth-management fees. CNCB will diversify into factoring, bills and asset custody business in the coming years. We forecast its net fees to grow at a CAGR of 33% during However, management aims to increase its distribution outlets to 3,000 within the next 3-5 years (957 in Sep 2013). We see it as difficult for CNCB to improve operating efficiency in the near term. We forecast its cost-income ratio to rise from 39% in 2012 to 40-41% during Mixed picture in asset quality. Total NPLs increased slower by CNY0.6b QoQ to CNY17.0b (or 0.9% of total loans) in Sep Although CNBC raised the provision-to-loan ratio to 2.09% in Sep 2013, it is still 41bps below the regulatory minimum. Overall, we forecast its credit cost to stay high at % during (0.83% in 2012). The amount of investment receivables more than tripled during 9M13 to CNY197b in Sep 2013 (5.7% of total assets). Of which, 72% was related to trust and special asset management plans. We project impairment loss of CNY b for these assets during Increasing capital constraint. Tier-1 CAR remained low at 9.2% in Sep We forecast CNCB s tier-1 CAR to drop to 8.9% by end-dec To increase the tier-1 CAR to above 9%, CNCB may need to issue preference shares amounting to CNY7b. This will result in ROE dilution of 20bps, assuming a net funding cost of 4%. Initiate with a HOLD rating. With a higher credit cost and cost-income ratio, we forecast CNCB s ROE to fall to % during (16.6% in 2012). Based on a long-term ROE assumption of 13% in our Gordon Growth Model (GGM), we derived a target price of HKD4.30, equivalent to a projected Dec 2014 P/B of 0.65x. Performance: 52-week High/Low HKD5.5/HKD3.4 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 3% 12% -2% 13% -5% Relative (%) 2% 8% -3% 2% -8% CNCB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 54,732 62,523 69,739 77,874 Chg (%) Net profit (CNYm) 31,032 29,863 34,226 39,491 Chg (%) 0.7 (3.8) EPS (HKD) Chg (%) (3.3) (3.8) PER (x) PBV (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 34,453 37,513 40,848 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

80 China CITIC Bank Investment Positives Making efforts to minimize NIM pressure: CNCB has lowered its loan-todeposit ratio to 71.5% in Sep To offset this negative impact on NIM, it has lowered the balance of interbank borrowings and shifted towards high-yield investment receivables. We forecast its NIM to be % for (2.6% for 9M13). Diversifying fee income business: Net fees grew 51.9% YoY in 9M13, mainly driven by bank cards, consulting and advisory and wealth management fees. CNCB will diversify into factoring, bills and asset custody businesses. We forecast its net fees to grow at a CAGR of 33% during Investment Concerns Rising cost-income ratio: To increase stability of customer deposits, CNCB aims to increase its distribution outlets to 3,000 within the next 3-5 years (957 in Sep 2013). We forecast its cost-income ratio to rise from 39% in 2012 to 40-41% during A need to increase provision-to-loan ratio: CNBC raised the provision-to-loan ratio to 2.09% in Sep CNCB needs to increase the ratio to 2.5% by Hence, we forecast its credit cost to remain high at % during Potential replenishment of tier-1 capital: We forecast CNCB s tier-1 CAR to drop to 8.9% by end-dec To increase the ratio to above 9%, CNCB may need to issue preference shares of CNY7b. This would lead to ROE dilution of 20bps assuming a dividend yield of 6% and a net return of proceeds of 2%. Valuation and Recommendations After factoring in a higher cost-income ratio and credit cost, and impairment charge for its risky investment receivables, we forecast CNCB s net profit to grow at a CAGR of 8.4% during We expect its ROE will fall from 16.6% in 2012 to % during We applied a long-term ROE assumption of 13% for CNCB in our GGM. This is slightly above its historical trough ROE of 12.9% during We derived a target price of HKD4.30 based on the fair Dec 2014 P/B of 0.65x estimated from the GGM. This is also slightly higher than CNCB s historic average P/B of 0.6x during We initiate coverage of CNCB with a HOLD rating. Key risks to our rating include asymmetric interest rate movements and potential replenishment of new equity capital. Figure 112: CNCB Gordon Growth Model Implied ROE 11.0% 12.0% 13.0% 14.0% 15.0% Long term dividend payout ratio (k) 25.0% Cost of Equity (CoE= Rf + Rm * B) 14.7% Long term sustainable growth (g) 9.8% Discount rate (CoE - g) 5.0% Target P/B: (ROE * k) / (CoE - g) Dec14F BVPS 6.68 Target price based on 0.65x Dec14F P/B November 2013 Page 80 of 98

81 China CITIC Bank Figure 113: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 18,310 18,619 18,789 19,768 19,912 20,763 22, % 17.8% 55,718 62, % Net fee income 2,627 2,778 2,753 3,052 3,599 4,378 4, % 60.3% 8,158 12, % Other operating income 786 1, % -68.7% 2,552 1, % Total Operating Income 21,723 22,520 22,185 23,283 24,153 25,921 26, % 20.5% 66,428 76, % Total Operating Expenses (7,883) (7,975) (7,507) (11,614) (9,259) (8,681) (9,787) 12.7% 30.4% (23,365) (27,727) 18.7% Operating Profit 13,840 14,545 14,678 11,669 14,894 17,240 16, % 15.5% 43,063 49, % Loan impairment loss (2,216) (231) (4,007) (6,350) (2,389) (2,330) (2,897) 24.3% -27.7% (6,454) (7,616) 18.0% Other impairment loss (10) (67) (91) (132) (128) (42) (133) 216.7% 46.2% (168) (303) 80.4% Post-provision profit 11,614 14,247 10,580 5,187 12,377 14,868 13, % 31.6% 36,441 41, % Other income % % % Associate profits (8) (12) (10) (29) (10) % N/A (30) 17 N/A Tax (2,933) (3,358) (2,612) (1,321) (3,035) (3,565) (3,350) -6.0% 28.3% (8,903) (9,950) 11.8% Minority Interest (110) (102) (106) (35) (114) (138) (127) -8.0% 19.8% (318) (379) 19.2% Net Profit 8,563 10,810 7,853 3,806 9,218 11,173 10, % 33.3% 27,226 30, % Total gross loans (CNYb) 1,477 1,535 1,602 1,663 1,756 1,825 1, % 17.6% 1,602 1, % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) 2,042 2,189 2,237 2,255 2,457 2,614 2, % 17.7% 2,237 2, % CET1 CAR (%) Total CAR (%) Source: Company data Maybank Kim Eng Figure 114: CNCB Trading P/E band Figure 115: CNCB Trading P/B band 28 November 2013 Page 81 of 98

82 China CITIC Bank INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Net interest income 75,486 85,043 94, ,436 Other operating income 14,225 18,989 23,282 27,924 Cash & equivalent 816, , ,122 1,089,043 Operating income 89, , , ,360 Investment securities 417, , , ,035 Operating expenses (34,979) (41,509) (47,834) (54,485) Net loans and advances 1,627,576 1,848,129 2,081,457 2,320,123 Operating profit 54,732 62,523 69,739 77,874 Fixed assets 11,853 12,446 13,068 13,721 Loan Impairment Loss (12,804) (22,001) (21,945) (23,430) Receivables 69,475 80,055 91, ,699 Other Impairment loss (300) (450) (1,891) (1,513) Other assets 17,084 17,854 18,702 19,634 Operating profit after provisions 41,628 40,071 45,902 52,932 Total assets 2,959,939 3,389,723 3,765,169 4,161,255 Non-operating income (19) Pre-tax profit 41,609 40,106 45,942 52,978 Customer deposits 2,255,141 2,661,066 3,007,005 3,367,846 Taxation (10,224) (9,855) (11,289) (13,018) Borrowings 399, , , ,781 Minorities (353) (388) (427) (470) Debentures 56,402 56,402 56,402 56,402 Net profit 31,032 29,863 34,226 39,491 Other liabilities 45,576 45,099 48,923 53,455 Total liabilities 2,756,853 3,163,240 3,514,016 3,880,483 GROWTH RATES IN KEY FINANICALS Minorities 4,730 4,730 4,730 4,730 FYE Dec 2012A 2013F 2014F 2015F Shareholders funds 198, , , ,041 Balance sheet Total liabilities and equity 2,959,939 3,388,723 3,765,169 4,161,255 Gross loans 16.0% 14.5% 13.3% 12.1% Deposits 14.6% 18.0% 13.0% 12.0% Income statement Net interest income 15.9% 12.7% 10.9% 10.8% KEY PERFORMANCE RATIOS Other operating income 18.7% 33.5% 22.6% 19.9% Total operating income 16.4% 16.0% 13.0% 12.6% FYE Dec 2012A 2013F 2014F 2015F Operating expenses 23.2% 18.7% 15.2% 13.9% Pre-provision profit 12.4% 14.2% 11.5% 11.7% NPL 0.74% 1.25% 1.59% 1.84% Net profit 0.7% -3.8% 14.6% 15.4% Loan to deposit 73.7% 71.6% 71.8% 71.8% CET1 CAR 9.9% 9.0% 8.9% 8.9% PROFITABILITY RATIOS Leverage FYE Dec 2012A 2013F 2014F 2015F NIM 2.81% 2.59% 2.57% 2.55% Total income/avg assets 3.1% 3.3% 3.3% 3.3% Cost to income 39.0% 39.9% 40.7% 41.2% NII/avg assets 2.6% 2.7% 2.6% 2.6% ROA 1.08% 0.94% 0.96% 1.00% Other oper income/avg assets 0.5% 0.6% 0.7% 0.7% ROE 16.6% 14.3% 14.7% 15.1% Operating profit/avg assets 1.9% 2.0% 1.9% 2.0% Op profit after prov/avg assets 1.5% 1.3% 1.3% 1.3% Provisions/avg assets -0.4% -0.7% -0.6% -0.6% Pre-tax profit/avg assets 1.5% 1.3% 1.3% 1.3% PER SHARE DATA Net profit/avg assets (ROA) 1.1% 0.9% 1.0% 1.0% FYE Dec 2012A 2013F 2014F 2015F NII/total income 84.1% 81.7% 80.2% 78.9% EPS (HKD) Other oper income/total income 15.9% 18.3% 19.8% 21.1% EPS (CNY) Operating profit/total income 61.0% 60.1% 59.3% 58.8% DPS (HKD) Op profit after prov/total income 46.4% 38.5% 39.0% 40.0% DPS (CNY) Provisions/total income 14.3% 21.1% 18.7% 17.7% BVPS (HKD) Pre-tax profit/total income 46.4% 38.6% 39.1% 40.0% BVPS (CNY) Net profit/total income 34.6% 28.7% 29.1% 29.8% ROE 16.6% 14.3% 14.7% 15.1% NIM 2.81% 2.59% 2.57% 2.55% OPERATING RATIOS AND CAPITAL STRUCTURE FYE Dec 2012A 2013F 2014F 2015F FUNDING AND CREDIT QUALITY FYE Dec 2012A 2013F 2014F 2015F Cost to income ratio 39.0% 39.9% 40.7% 41.2% Total deposits/total liabilities 81.8% 84.1% 85.6% 86.8% Operating expense/avg assets -1.2% -1.3% -1.3% -1.4% LD ratio 73.7% 71.6% 71.8% 71.8% Interest expense/interest income 45.6% 47.1% 47.5% 47.6% (Borrowings + debentures)/deposits 20.2% 17.2% 15.2% 13.6% CAR 13.4% 11.8% 11.5% 11.3% Provision charges to avg loans 0.83% 1.23% 1.08% 1.02% Capital/assets 6.7% 6.5% 6.5% 6.6% NPL/total loans 0.74% 1.25% 1.59% 1.84% Capital/total loans 11.9% 11.6% 11.4% 11.4% Total reserve coverage 288.2% 236.1% 225.4% 223.1% Fixed assets/shareholders funds 6.0% 5.6% 5.3% 5.0% 28 November 2013 Page 82 of 98

83 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Hong Kong Initiating Coverage 28 November 2013 Hold (Initiation) Share price: HKD4.03 (27 Nov 2013) Target price: HKD4.00 Steven ST CHAN stevenchan@kimeng.com.hk (852) Stock Information Description: CQRB is a rural commercial bank established in Western China. It has an extensive distribution network in Chongqing. Ticker: 3618 HK Shares Issued H (m): 2,513.3 Shares Issued all (m) 9,300.0 Market Cap (USDb): mth Avg Daily Turnover (USDm): 6.8 HSI: 23,803.4 Free float (%): 82.0 Major Shareholders: % Chongqing Yufu Assets Management 6.8 Chongqing City Construction Investment 6.7 Loncin Holdings 6.1 Key Indicators (2014F) ROE (%): 14.2 NIM: 3.37 Cost-income ratio: 47.0 Credit cost: 0.75 Historical Chart Performance: 52-week High/Low HKD5.1/HKD3.0 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 1% 11% -1% 18% -5% Relative (%) 0% 7% -3% 7% -9% Chongqing Rural Commercial Bank Potential impairment loss on investment Strong loan growth with uncertainty on NIM direction. Chongqing Rural Commercial Bank (CQRB) s loan growth was solid at 14.5% for 9M13, mainly in manufacturing loans, residential mortgages and personal business loans. With a low loan-to-deposit ratio (57.3% in Sep 2013), we expect CQRB s loan growth will be 14-17% p.a. during Net interest margin (NIM) widened from 3.31% in 1Q13 to 3.47% in 2Q13 and narrowed to 3.40% in 3Q13. We believe the NIM contraction in 3Q13 could be due to migration towards time deposits. Still, with potential price competition in the lending business after full deregulation of the lending rate, we forecast its NIM to narrow to 3.37% in Limited improvement in operating efficiency. CQRB has actively diversified into fee-income activities, such as bank cards, consultancy and advisory, and wealth management. We forecast its net fees contribution to rise to 4-5% of total income during (3.2% in 2012). However, CQRB has a poor track record in terms of costs control, especially for staff costs and general & administrative expenses; we expect its cost-income ratio to remain high at 46-47% for Sound asset quality and capital positions. Total NPLs maintained a downtrend during 9M13. Still, CQRB raised the provision-to-loan ratio to 3.43% in Sep 2013 (3.4% in Jun 2013) to prepare for potential downgrading of its special-mention loans (3.1% of total loans in Jun 2013). We forecast its credit cost to be % for CET1 CAR remained firm at 11.3% in Sep 2013, higher than most of its peers. We forecast CQRB s CET1 CAR to remain above 10% even if it maintains the dividend payout ratio at 30% for Potential impairment loss on reverse REPO. CQRB reported impairment loss of CNY293m and CNY240m for its investment in wealth-management products in 2011 and 2012, respectively. It also recorded a net trading loss of CNY108m in 3Q13. CQRB increased the balance of reverse REPO by CNY5.9b QoQ to CNY69.6b in 3Q13, in pursuit of a higher return. However, about 74% of these assets were collateralized by risky trust beneficial rights in Jun We factor in potential impairment loss of CNY0.8-1b on these assets in Initiate with a HOLD rating. With slight NIM pressure and higher credit cost, we forecast CQRB s ROE will fall to % in (17.9% in 2012). Based on a long-term ROE assumption of 14.5% in our Gordon Growth Model (GGM), we derived a target price of HKD4.00, equivalent to a projected Dec 2014 P/B of 0.75x. CQRB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 7,579 8,675 9,745 10,919 Chg (%) Net profit (CNYm) 5,361 5,440 5,339 6,372 Chg (%) (1.9) 19.3 EPS (HKD) Chg (%) (1.9) 19.3 P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 6,054 6,707 7,697

84 Chongqing Rural Commercial Bank Investment Positives Limited deposit constraint: CQRB s loan-to-deposit ratio remained lower than its peers at 57.3% in Sep This should give it substantial room for expanding its lending business. We forecast its loan growth will remain solid at 14-17% p.a. during Strong capital position: CET1 CAR remained firm at 11.3% in Sep We estimate its CET1 CAR will stay above 10% even if CQRB maintains a dividend payout ratio of 30%. Investment Concerns Poor track record of costs control: CQRB s cost-income ratio remained at 43-45% during , similar to the levels when it listed in CQRB has a poor track record of controlling staff costs and general & administrative expenses. We forecast its cost-income ratio will rise to 46-47% during Potential impairment loss on treasury business: CQRB recorded impairment loss on its investment in wealth-management products during and trading loss on its bond investment in 3Q13. Its balance on financial assets under REPO surged to CNY69.6b in Sep We expect potential impairment loss on these assets as most of them were collateralized by trust beneficial rights. Valuation and Recommendations We forecast CQRB s net profit to grow at a CAGR of 6% during Key earnings drivers will be strong loan growth and net fees growth. We forecast its ROE will fall to % in (17.9% in 2012). We project a long-term ROE assumption of 14.5% for CQRB in our GGM. This is slightly lower than its historic trough ROE of 16.9% during We derived a target price of HKD4.00 based on the fair Dec 2014 P/B of 0.75x estimated from the GGM. This is close to CQRB s historic trough P/B of 0.62x during We initiate coverage of CQRB with a HOLD rating. Key risks to our rating include economic slowdown in Chongqing and change in agriculture-related policy in China. Figure 116: CQRB Gordon Growth Model Implied ROE 12.5% 13.5% 14.5% 15.5% 16.5% Long term dividend payout ratio (k) 30.0% Cost of Equity (CoE= Rf + Rm * B) 15.9% Long term sustainable growth (g) 10.2% Discount rate (CoE - g) 5.8% Target P/B: (ROE * k) / (CoE - g) Dec14F BVPS 5.31 Target price based on 0.75x Dec14F P/B November 2013 Page 84 of 98

85 Chongqing Rural Commercial Bank Figure 117: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q13 vs 2Q13 (%) 3Q13 vs 3Q12 (%) 1Q12-3Q12 1Q13-3Q13 9M13 vs 9M12 (%) Net interest income 3,069 3,165 3,308 3,550 3,640 3,952 3, % 20.6% 9,542 11, % Net fee income % 177.3% % Other operating income (32) (105) N/A 228.3% 58 (37) N/A Total Operating Income 3,221 3,282 3,348 3,802 3,830 4,133 4, % 22.0% 9,851 12, % Total Operating Expenses (1,285) (1,301) (1,498) (1,991) (1,559) (1,701) (1,787) 5.0% 19.3% (4,084) (5,048) 23.6% Operating Profit 1,936 1,981 1,850 1,812 2,271 2,432 2, % 24.2% 5,767 7, % Loan impairment loss (106) (132) (60) 26 (150) (310) (227) -26.8% 280.2% (297) (687) 131.1% Other impairment loss (240) - (3) - N/A N/A - (3) N/A Post-provision profit 1,830 1,849 1,790 1,598 2,121 2,118 2, % 15.6% 5,470 6, % Other income (0) 0 N/A N/A % Tax (426) (443) (428) (393) (502) (517) (526) 1.6% 22.9% (1,297) (1,545) 19.1% Minority Interest (3) (4) (4) (6) (3) 1 (13) N/A 235.0% (10) (15) 50.7% Net Profit 1,402 1,402 1,359 1,199 1,616 1,601 1, % 12.7% 4,162 4, % Total gross loans (CNYb) % 18.1% % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) (0.06) ROE (%) ROA (%) Total deposits (CNYb) % 23.5% % CET1 CAR (%) Total CAR (%) Source: Company data Maybank Kim Eng Figure 118: CQRB Trading P/E band Figure 119: CQRB Trading P/B band 28 November 2013 Page 85 of 98

86 Chongqing Rural Commercial Bank INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 100, , , ,602 Net interest income 13,092 15,547 17,492 19,571 Investment securities 72,260 77,934 75,946 78,170 Other operating income ,152 Net loans and advances 167, , , ,225 Operating income 13,653 16,185 18,379 20,723 Fixed assets 3,154 3,280 3,411 3,548 Operating expenses (6,075) (7,510) (8,634) (9,804) Receivables 84,379 94, , ,789 Operating profit 7,579 8,675 9,745 10,919 Other assets 5,443 6,270 7,096 7,926 Provisions for bad and doubtful debts (271) (1,476) (1,661) (1,679) Total assets 433, , , ,260 Operating profit after provisions 7,307 7,200 8,084 9,240 Non-operating income (240) (24) (1,036) (829) Customer deposits 294, , , ,076 Pre-tax profit 7,068 7,176 7,048 8,411 Borrowings 91,843 95, , ,847 Taxation (1,690) (1,716) (1,685) (2,011) Debentures 2,300 7,300 5,000 5,000 Minorities (16) (19) (23) (28) Other liabilities 12,958 12,115 10,980 12,115 Net profit 5,361 5,440 5,339 6,372 Total liabilities 401, , , ,038 Minorities Shareholders funds 31,907 35,715 39,453 43,913 Total liabilities and equity 433, , , ,260 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 20.2% 16.9% 14.4% 12.6% NPL 0.98% 1.02% 1.21% 1.35% Deposits 19.7% 16.5% 14.0% 12.0% Loan to deposit 58.9% 59.1% 59.3% 59.7% Income statement CET1 CAR 12.0% 10.9% 10.5% 10.4% Net interest income 24.6% 18.7% 12.5% 11.9% Leverage Other operating income -8.5% 13.7% 38.9% 30.0% NIM 3.50% 3.40% 3.37% 3.35% Total operating income 22.8% 18.5% 13.6% 12.8% Cost to income 44.5% 46.4% 47.0% 47.3% Operating expenses 27.2% 23.6% 15.0% 13.6% ROA 1.38% 1.17% 1.02% 1.11% Pre-provision profit 19.5% 14.5% 12.3% 12.0% ROE 17.9% 16.1% 14.2% 15.3% Net profit 26.3% 1.5% -1.9% 19.3% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.5% 3.5% 3.5% 3.6% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 3.4% 3.3% 3.4% 3.4% Cost to income ratio 44.5% 46.4% 47.0% 47.3% Other oper income/avg assets 0.1% 0.1% 0.2% 0.2% Operating expense/avg assets -1.6% -1.6% -1.7% -1.7% Operating profit/avg assets 1.9% 1.9% 1.9% 1.9% Interest expense/interest income 41.4% 39.7% 40.3% 40.1% Op profit after prov/avg assets 1.9% 1.6% 1.6% 1.6% CAR 12.9% 14.4% 13.2% 13.1% Provisions/avg assets -0.1% -0.3% -0.3% -0.3% Capital/assets 7.4% 7.2% 7.2% 7.3% Pre-tax profit/avg assets 1.8% 1.5% 1.4% 1.5% Capital/total loans 18.4% 17.6% 17.0% 16.8% Net profit/avg assets (ROA) 1.4% 1.2% 1.0% 1.1% Fixed assets/shareholders funds 9.9% 9.2% 8.6% 8.1% NII/total income 95.9% 96.1% 95.2% 94.4% Other oper income/total income 4.1% 3.9% 4.8% 5.6% FUNDING AND CREDIT QUALITY Operating profit/total income 55.5% 53.6% 53.0% 52.7% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 53.5% 44.5% 44.0% 44.6% Total deposits/total liabilities 73.3% 74.8% 77.0% 78.1% Provisions/total income 2.0% 9.1% 9.0% 8.1% LD ratio 58.9% 59.1% 59.3% 59.7% Pre-tax profit/total income 51.8% 44.3% 38.3% 40.6% (Borrowings + debentures)/deposits 32.0% 30.1% 27.0% 25.3% Net profit/total income 39.3% 33.6% 29.1% 30.7% Provision charges to avg loans 0.17% 0.78% 0.76% 0.68% ROE 17.9% 16.1% 14.2% 15.3% NPL/total loans 0.98% 1.02% 1.21% 1.35% NIM 3.50% 3.40% 3.37% 3.35% Total reserve coverage 350.6% 364.8% 334.4% 318.4% 28 November 2013 Page 86 of 98

87 Hong Kong Initiating Coverage 28 November 2013 Buy (Initiation) Share price: HKD3.57 (27 Nov 2013) Target price: HKD4.05 Steven ST CHAN (852) Stock Information Description: Huishang Bank was established in 2005 through the merger of all city commercial banks and urban credit cooperatives in Anhui. It is the largest city commercial bank in Central China. Ticker: 3698 HK Shares Issued H (m): 2,750.0 Shares Issued all (m) 10,674.8 Market Cap (USDm): mth Avg Daily Turnover (USDm): 55.6 HSI: 23,806.4 Free float (%): 86.6 Major Shareholders: % Vanke Property 8.3 Anhui Guoyuan Holding 7.5 Anhui Energy Group 7.2 Anhui Credit Guaranty Group 7.1 Key Indicators (2014F) ROE (%): 16.3 NIM: 2.68 Cost-income ratio: 30.3 Credit cost: 0.72 Historical Chart Performance: 52-week High/Low HKD3.6/HKD3.5 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) N/A N/A N/A N/A N/A Relative (%) N/A N/A N/A N/A N/A Huishang Bank Riding on the rapid development of Anhui Government policies to support loan growth. The central government plans to promote the sustainable economic development of Central China by leveraging its geographical advantages, low labour cost and rising consumer market. Under the Plan for the Wanjiang City Belt Industrial Relocation Model Zone, Jiangsu Zhejiang and Shanghai will become Anhui s primary sources of industrial migration for manufacturing, high-tech industries and modern agriculture. The Anhui government will introduce new measures to bolster the development of large competitive enterprises for automobile, equipment manufacturing, home appliance and food processing industries. Hence, we expect the loan growth of HUSB to remain solid at 14-16% p.a. during Widening NIM and room to boost net fees. HUSB s net interest margin (NIM) narrowed from 2.81% in 2H12 to 2.65% in 1H13, mainly due to a one-off adjustment of the term structure of assets and liabilities for liquidity management purpose. We forecast HUSB s NIM will widen to 2.68% in 2014, mainly due to additional interest free funds from its recent IPO (CNY7.8b). HUSB has a massive client base in Anhui, with over 7m individual customers (25% of total urban population in Anhui) and 7,200 SME customers in Jun Besides, it is the cash management bank for various divisions of several local Anhui governments. This, coupled with its diversified fee income base, should help boost its net fees by a CAGR of 35% during Mixed picture in asset quality. HUSB s total NPLs have been on a rising trend since Besides, its provision-to-loan ratio remained lower than the regulatory minimum at 2.29% in Jun Meanwhile, its special-mention loan ratio remained low at 2% in Jun It has also classified 58% of the overdue loans within 90 days as NPLs in Jun 2013, reflecting its prudent loan classification system. Overall, with rising NPLs and moderate provision coverage, we forecast HUSB s credit cost to rise to above 0.7% for (0.49% for 1H13). Solid capital positions. We estimate that the recent IPO should help enhance the CET1 CAR of HUSB by 3.2ppts (9.2% in Jun 2013). Even with a dividend payout ratio of 30%, we estimate that HUSB s CET1 CAR will remain well above 10% during Initiate with a BUY rating. With the IPO dilution effect, we forecast HUSB s ROE will fall to 16-17% during Based on a long-term ROE assumption of 16% in our Gordon Growth Model (GGM), we derived a TP of HKD4.05, equivalent to a projected Dec 2014 P/B of 1x. HUSB Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 6,103 7,879 8,944 10,310 Chg (%) Net profit (CNYm) 4,306 5,027 5,472 6,453 Chg (%) EPS (HKD) Chg (%) 27.8 (13.6) P/E (x) P/B (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) N/A N/A N/A SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

88 Huishang Bank Investment Positives Strong net interest income growth: With government policies to accelerate GDP growth and support industrial migration to Central China, we expect strong loan growth of 14-16% p.a. during With additional interest-free funds from the recent IPO, we expect HUSB s NIM to widen to 2.68% in Overall, we forecast its net interest income will grow at a CAGR of 16% during Room to expand net fees: HUSB has a massive customer base in both retail and SME customers in Anhui. With a well-diversified fee income base, we forecast its net fees to grow at a CAGR of 35% during Sustainable high dividend payout: After the IPO, we expect HUSB s CET1 CAR will stay above 10% even if it has a dividend payout ratio of 30% in Investment Concerns A need to increase provision coverage: Total NPLs have been on a rising trend since HUSB s provision-to-loan ratio was lower than the regulatory minimum at 2.29% in Jun To top up the ratio to 2.5%, we forecast its credit cost to rise to above 0.7% during Potential impairment loss on investment: HUSB reported financial investment in wealth management products and asset management schemes of CNY13.4b. We project impairment charges of CNY b for these assets in Valuation and Recommendations We forecast HUSB s net profit to grow at a CAGR of 14.4% during , mainly driven by strong loan and net fees growth and a widening NIM. With the IPO dilution effect, we forecast its ROE will fall to 16-17% in (22.9% in 2012). We applied a long-term ROE assumption of 16% for HUSB in our GGM. This is higher than our long-term ROE projection for CQRB (14.5%). We derived a target price of HKD4.05 based on the fair Dec 2014 P/B of 1x estimated from the GGM. This is also higher than our derived fair P/B for CQRB (0.75x). We initiate coverage of HSUB with a BUY rating. Key risks to our rating include drastic economic downturn and severe price competition among banks in Anhui. Figure 120: HUSB Gordon Growth Model Implied ROE 14.0% 15.0% 16.0% 17.0% 18.0% Long term dividend payout ratio (k) 30.0% Cost of Equity (CoE= Rf + Rm * B) 16.0% Long term sustainable growth (g) 11.2% Discount rate (CoE - g) 4.8% Target P/B: (ROE * k) / (CoE - g) Dec14F BVPS 4.02 Target price based on 1.01x Dec14F P/B November 2013 Page 88 of 98

89 Huishang Bank Figure 121: Quarterly income statement and key financial indicators (CNYm) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 2Q13 vs 1Q13 (%) 2Q13 vs 2Q12 (%) 1H12 1H13 1H13 vs 1H12 (%) Net interest income 3,069 3,165 3,308 (974) 3,640 3, % 24.9% 6,234 7, % Net fee income % 183.2% % Other operating income (32) % -58.4% % Total Operating Income 3,221 3,282 3,348 (616) 3,830 4, % 25.9% 6,503 7, % Total Operating Expenses (1,285) (1,301) (1,498) 952 (1,559) (1,701) 9.1% 30.8% (2,586) (3,261) 26.1% Operating Profit 1,936 1,981 1, ,271 2, % 22.7% 3,917 4, % Loan impairment loss (106) (132) (60) (170) (150) (310) 106.8% 135.1% (238) (460) 93.6% Other impairment loss (3) N/A N/A - (3) N/A Post-provision profit 1,830 1,849 1, ,121 2, % 14.5% 3,679 4, % Other income (0) N/A N/A 0 (0) N/A Tax (426) (443) (428) (77) (502) (517) 3.1% 16.7% (869) (1,019) 17.3% Minority Interest (3) (4) (4) 10 (3) % % (6) (2) -61.7% Net Profit 1,402 1,402 1, ,616 1, % 14.2% 2,804 3, % Total gross loans (CNYb) % 17.6% % NIM (%) Cost-income ratio (%) NPL ratio (%) Provision coverage (%) Credit cost (% of total loans) ROE (%) ROA (%) Total deposits (CNYb) % 25.1% % CET1 CAR (%) Total CAR (%) N/A N/A N/A N/A Source: Company data Maybank Kim Eng Figure 122: HUSB Trading P/E band Figure 123: HUSB Trading P/B band 28 November 2013 Page 89 of 98

90 Huishang Bank INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012A 2013F 2014F 2015F FYE Dec (CNYm) 2012A 2013F 2014F 2015F Cash & equivalent 64,296 75,094 86,358 98,536 Net interest income 8,569 10,553 11,753 13,363 Investment securities 55,242 68,947 74,394 80,883 Other operating income ,049 1,236 Net loans and advances 159, , , ,009 Operating income 9,235 11,455 12,803 14,598 Fixed assets 1,404 1,461 1,519 1,580 Operating expenses (3,132) (3,577) (3,859) (4,288) Receivables 40,012 46,324 53,083 60,340 Operating profit 6,103 7,879 8,944 10,310 Other assets 3,328 3,834 4,379 4,965 Provisions for bad and doubtful debts (467) (1,400) (1,584) (1,733) Total assets 324, , , ,311 Operating profit after provisions 5,635 6,478 7,359 8,577 Non-operating income (207) (141) Customer deposits 239, , , ,428 Pre-tax profit 5,680 6,528 7,152 8,436 Borrowings 54,747 59,535 64,802 70,596 Taxation (1,374) (1,502) (1,681) (1,982) Debentures 3,992 3,992 3,992 3,992 Minorities Other liabilities 5,462 5,499 5,682 6,198 Net profit 4,306 5,027 5,472 6,453 Total liabilities 303, , , ,214 Minorities Shareholders funds 20,481 31,750 35,580 40,097 Total liabilities and equity 324, , , ,311 GROWTH RATES IN KEY FINANCIALS FYE Dec 2012A 2013F 2014F 2015F KEY PERFORMANCE RATIOS Balance sheet FYE Dec 2012A 2013F 2014F 2015F Gross loans 19.2% 16.3% 15.1% 14.1% NPL 0.58% 1.05% 1.26% 1.41% Deposits 17.7% 17.0% 15.0% 14.0% Loan to deposit 68.4% 68.0% 68.0% 68.1% Income statement Tier 1 CAR 10.3% 11.8% 11.1% 10.7% Net interest income 20.9% 23.2% 11.4% 13.7% Leverage Other operating income 18.4% 35.5% 16.2% 17.8% NIM 3.03% 2.64% 2.68% 2.67% Total operating income 20.7% 24.0% 11.8% 14.0% Cost to income 33.9% 31.2% 30.1% 29.4% Operating expenses 25.3% 14.2% 7.9% 11.1% ROA 1.48% 1.43% 1.35% 1.40% Pre-provision profit 18.5% 29.1% 13.5% 15.3% ROE 22.9% 19.2% 16.3% 17.1% Net profit 23.3% 16.7% 8.8% 17.9% PER SHARE DATA FYE Dec 2012A 2013F 2014F 2015F EPS (HKD) EPS (CNY) DPS (HKD) DPS (CNY) BVPS (HKD) PROFITABILITY RATIOS BVPS (CNY) FYE Dec 2012A 2013F 2014F 2015F OPERATING RATIOS AND CAPITAL STRUCTURE Total income/avg assets 3.2% 3.2% 3.1% 3.2% FYE Dec 2012A 2013F 2014F 2015F NII/avg assets 2.9% 3.0% 2.9% 2.9% Cost to income ratio 33.9% 31.2% 30.1% 29.4% Other oper income/avg assets 0.2% 0.3% 0.3% 0.3% Operating expense/avg assets -1.1% -1.0% -0.9% -0.9% Operating profit/avg assets 2.1% 2.2% 2.2% 2.2% Interest expense/interest income 43.5% 40.1% 40.6% 40.4% Op profit after prov/avg assets 1.9% 1.8% 1.8% 1.9% CAR 13.5% 14.3% 13.3% 12.8% Provisions/avg assets -0.2% -0.4% -0.4% -0.4% Capital/assets 6.3% 8.3% 8.2% 8.2% Pre-tax profit/avg assets 2.0% 1.9% 1.8% 1.8% Capital/total loans 12.5% 16.7% 16.2% 16.0% Net profit/avg assets (ROA) 1.5% 1.4% 1.3% 1.4% Fixed assets/shareholders funds 6.9% 4.6% 4.3% 3.9% NII/total income 92.8% 92.1% 91.8% 91.5% Other oper income/total income 7.2% 7.9% 8.2% 8.5% FUNDING AND CREDIT QUALITY Operating profit/total income 66.1% 68.8% 69.9% 70.6% FYE Dec 2012A 2013F 2014F 2015F Op profit after prov/total income 61.0% 56.6% 57.5% 58.8% Total deposits/total liabilities 78.9% 80.2% 81.2% 82.0% Provisions/total income 5.1% 12.2% 12.4% 11.9% LD ratio 68.4% 68.0% 68.0% 68.1% Pre-tax profit/total income 61.5% 57.0% 55.9% 57.8% (Borrowings + debentures)/deposits 24.5% 22.7% 21.3% 20.3% Net profit/total income 46.6% 43.9% 42.7% 44.2% Provision charges to avg loans 0.31% 0.79% 0.77% 0.74% ROE 22.9% 19.2% 16.3% 17.1% NPL/total loans 0.58% 1.05% 1.26% 1.41% NIM 3.03% 2.64% 2.68% 2.67% Total reserve coverage 406.0% 256.0% 237.5% 229.7% 28 November 2013 Page 90 of 98

91 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Hong Kong Initiating Coverage 28 November 2013 Hold (Initiation) Share price: Target price: HKD5.55 HKD5.40 Steven ST CHAN stevenchan@kimeng.com.hk (852) Stock Information Description: ICBC is the largest bank in China in terms of total assets. The bank has presence in six continents. Ticker: 1398 HK Shares Issued H (m): 86,794.0 Shares Issued All (m): 350,571.2 Market Cap H (USDb): mth Avg Daily Turnover (USDm): HSI: 23,806.4 Free Float (%): 29.2 Major Shareholders: % Central Huijin 35.5 PRC Ministry of Finance 35.3 Key Indicators (2014F) ROE (%): 19.2 NIM: 2.54 Cost-income ratio: 35.6 Credit cost: 0.73 Historical Chart Performance: 52-week High/Low HKD6.0/HKD4.4 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 1% 3% -2% 9% -1% Relative (%) 0% -1% -4% -2% -4% Industrial and Commercial Bank of China More challenges ahead Minimal NIM pressure, albeit moderate loan growth. Industrial & Commercial Bank of China (ICBC) s net interest margin (NIM) remained at 2.56% in 3Q13 (2.57% for 9M13). ICBC may lengthen the duration of its investments and adjust its asset mix in 2014 to minimize the impact of price competition for loans and deposits. We forecast its NIM to be 2.54% in Loan growth was lower than the market average at 9.6% for 9M13 as ICBC has tight approval control over LGFV loans and lending to industries with over-capacity. We forecast its loan growth to remain moderate at 10-11% p.a. during Limited economies of scale. ICBC s non-interest income plunged 74% QoQ in 3Q13, partly due to the mark-to-market loss of its structured deposits (these deposits amounted to CNY452b in Sep 2013). We estimate that for every 25bps increase in the deposit rate of these deposits, ICBC s pre-tax profit will fall by 0.3%. With a gradual shift from non-guaranteed wealth-management products to structured deposits, we expect a limited rebound in ICBC s non-interest income in the near term. Hence, despite tight costs control, we forecast ICBC s cost-income ratio to stay at % during (35.9% in 2012). Weakening asset quality. Total NPLs increased faster by CNY5.6b QoQ to CNY87.4b (or 0.91% of total loans) in Sep 2013 (+CNY1.5b QoQ in 2Q13). Management indicated that it has tightened the loan classification to include some overdue loans of less than 90 days as NPLs. Still, we are unsure whether these loans will return to normal in 4Q13. Besides, ICBC lowered its provision-to-loan ratio to 2.44% in Sep 2013 (2.5% in Jun 2012). Overall, we conservatively project a rise in its credit cost to % for (0.39% in 2012). High dividend payout to be sustained. CET1 CAR increased to 10.6% in Sep Management indicated that adoption of the internal-rating based approach will improve its CET1 CAR by 32bps. Even without that, we forecast ICBC s CET1 CAR will stay at above 10% even if it maintains a dividend payout ratio of 35% during Initiate with a HOLD rating. With higher credit cost and moderate loan growth, we forecast ICBC s ROE to fall to 19% during (22.9% in 2012). Based on a long-term ROE assumption of 16.25% in our Gordon Growth Model (GGM), we derived a target price of HKD5.40, equivalent to a projected Dec 2014 P/B of 1.05x. ICBC Summary Earnings Table FYE Dec 2012A 2013F 2014F 2015F Operating profit (CNYm) 339, , , ,003 Chg (%) Net profit (CNYm) 238, , , ,279 Chg (%) 14.5 (3.6) EPS (HKD) Chg (%) 18.5 (3.6) P/E (x) P/BV (x) ROE (%) DPS (HKD) Yield (%) Consensus net profit (CNYm) 259, , ,356