China Banks Sector. Down, but not out (yet)

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1 Asia Pacific/China Equity Research Banks Research Analysts Sanjay Jain Eric Cui Rikin Shah China Banks Sector SECTOR REVIEW Down, but not out (yet) Figure 1: Corporate cash flow projected to improve nicely Y CAGR ('04-'14) 5Y CAGR ('09-'14) E Sales (%, YoY) EBITDA (%, YoY) Net Profit (%, YoY) Source: CS China (HK listed) coverage universe ex-financials, Credit Suisse estimates for FY17E Three factors have hampered bank stocks lately... (1) An unexpected hike in interbank rates by PBOC, which has led to an increase in the cost of capital for the smaller borrowers who depend on shadow banking; (2) sudden regulatory activism against non-loan risks on the balance sheet of banks. Perhaps the government is so confident about GDP growth that it is trying to tackle the financial sector leverage and risks; (3) correction in commodity prices that risks a pullback in inflation and corporate cash flows. Falling inflation would mean rising real rates, which is not good for the economy. but loan quality improving. Nominal GDP is still expected to grow double-digit this year, far ahead of the 6.4% YoY low of 4Q15 while real GDP growth has been stable. After years of decline, corporate sector cash flows and ROIC are rising, not only in energy & materials but also in other sectors. The true underlying quality of loan book is improving, in our view. While it may not manifest in the reported earnings (in 1Q17, banks reported the same low-single digit earnings growth as they have for the last three years), the adjusted book value should be higher today than it was a year ago. Trim banks in 3Q, perhaps a turn in the tightening cycle by then? It is likely the government would relax its stance by 3Q, as GDP growth shows further signs of softening. An easing cycle would be the time to trim banks, and in any case, we are also awaiting the 5% cash dividend payment in June. We tweak our 2017 earnings by -4% to +3%, and 2018 earnings by -2% to +7% for the major banks (the range is wider for smaller city commercial banks), and introduce our 2019 earnings estimates. Our target prices change based on revised ROEs. We upgrade the beneficiaries of rising interbank rates ABC-H, ABC-A and BOC-A to OUTPERFORM (from Neutral), PSBC to NEUTRAL (from Underperform), while we downgrade CEB-H, Huishang Bank, Bank of Beijing and Bank of Nanjing to UNDERPERFORM (from Neutral), Harbin Bank and Bank of Chongqing to NEUTRAL (from Outperform). We recommend a basket of big-four banks and CMB. (Please see Figure 51 on page 25 for a complete list of the material changes made to the stocks in our coverage universe.) DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 ICBC CCB BOC ABC BCOM CMB CITIC MSB CEB PAB PSBC 9 May 2017 Focus charts and tables Figure 2: Net interest margin trend divergence of China banks in 1Q17 Figure 3: Non-standard credit asset and WMP exposure of China banks (FY16) (bp) BOC CMB CQRC ICBC ABC CCB BOCQ CITIC CEB PAB MSB BCOM NIM chg QoQ in 1Q17 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% On BS NSCAs as % of assets WMP balance as % of total asset Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research Figure 4: Stock performance of China banks H-share versus HSCEI and MSCI China Index Source: Credit Suisse estimates China Banks Sector 2

3 Down, but not out (yet) Three factors have hampered bank stocks lately Share prices of China banks rallied 15% in the first two months of the 2017, thanks to an improving macro backdrop as reflected in the sets of rebounding data such as PPI, PMI and nominal GDP growth. However, they have retreated 9% since, on the back of three factors, in our view: (1) Unexpected hike in the interbank rates by PBOC, the idea being to curb leverage in the wealth management/asset management plans and the carry trade in corporate bonds. This raises the cost of financing for smaller borrowers who depend on shadow banking, as also the cost of bonds for the select SOEs that got approval; (2) regulatory activism around the non-loan risks on the balance sheet of banks. It appears the government has become confident about GDP growth, and is therefore, trying to tackle the financial sector leverage and risks. In the past year, China has seen bubbles in real estate, commodities and corporate bonds; and (3) correction in commodity prices, which raises the risk of a pullback in corporate cash flows and inflation (we use not only CPI but also GDP deflator and PPI). If inflation comes off, it would mean a rise in the real cost of financing in the economy, which is not a positive development. but underlying loan quality improving We had become constructive on Chinese banks in November last year on the thesis of a rebound in nominal GDP, rallying commodity prices and a revival in the old economy (while the new economy keeps doing well). With 1Q17 nominal GDP accelerating to 11.8% YoY from a low of 6.4% YoY, five quarters ago, our thesis seems to be playing out. Not only at the macro level, it seems to be playing out at the micro level too, with corporate cash flows and profitability (ROIC) improving after declining for an extended phase. So the true underlying loan quality is definitely improving, in our view, although the reported asset quality numbers may not show that. Due to that, this progress may not reflect in the reported earnings but the 'adjusted' book value is clearly rising, in our view. Trim banks in 3Q, perhaps a turn in the tightening cycle by then? We have been recommending clipping the ~5% cash dividend in June, and then lightening the banks in 3Q. While the recent tightening had not been expected, we see a turn in the cycle some time in 3Q17 as its effect on the economy starts to become visible, and GDP growth starts to show further signs of softening (please note some indicators such as PMI, Industrial production, etc. are already implying the GDP momentum peaked in 1Q). If so, it is quite likely that the government policy would turn back towards easing. That would be good for bank stocks and would represent the time to book some profits. We tweak 2017 earnings by -4% to +3% and 2018 earnings by -2% to +7% for the major banks (the range is wider for smaller city commercial banks) and introduce the 2019 earnings. In terms of earnings drivers, margins have been under intense pressure that the banks have tried to offset partially by investing in securities, boosting fee income and keeping an extremely tight lid on operating costs. The regulatory scrutiny on non-loan risks creates pressure on banks' investment in non-standard credit assets as well as related fee income from wealth management. Overall, 2017 is likely to be the fourth year when banks have been forecasted to report a broadly flat earnings growth. Our target prices change based on revised ROEs. We upgrade the beneficiaries of rising interbank rates ABC-H, ABC-A and BOC-A to OUTPERFORM (from Neutral), PSBC to NEUTRAL (from Underperform), while we downgrade CEB-H, Huishang Bank, Bank of Beijing and Bank of Nanjing to UNDERPERFORM (from Neutral), Harbin Bank and Bank of Chongqing to NEUTRAL (from Outperform). We recommend a basket of big-four banks and CMB. (Please see Figure 51 on page 25 for a complete list of the material changes made to the stocks in our coverage universe.) China Banks Sector 3

4 Table of contents Focus charts and tables 2 Down, but not out (yet) 3 Valuation snapshot 5 Three factors have hampered bank stocks lately 6 but underlying loan quality improving 14 Trim banks in 3Q, perhaps a turn in the tightening cycle by then? 21 To establish a direct bank 59 A city bank in Northeast China 61 Provision pressure remains; likely benefit from interbank and regulatory tightening 63 Better asset quality trend offers more buffer for earnings growth 65 Beneficiary of interbank tightening and rural reform 67 ROE generation still lacklustre 71 Strong retail franchise well-positioned amid China s economic transformation73 Transformation to retail banking business takes time to bear fruit 75 Margin likely fell below 1.5% while poor image was hit by WMP event and Anbang holding 77 Private placement announced 79 China Banks Sector 4

5 Valuation snapshot Figure 5: China banks valuation table Ticker Rating TP (LC) Spot Upside Market cap ROE (%) PE PB Div. yield (%) Perf (%) % US$ bn W 1M YTD 2016 China banks ICBC-H 1398.HK O (1.2) (0.6) CCB-H 0939.HK O (1.4) (0.3) ABC-H 1288.HK O (1.1) (1.4) BOC-H 3988.HK O (1.3) (0.8) 7.6 (0.6) BCOM-H 3328.HK N (2.0) (1.7) State-owned banks (1.3) (0.6) CMB-H 3968.HK O (1.5) (3.0) 9.1 (0.7) CITIC-H 0998.HK N (0.6) (5.3) (1.4) (1.8) MSB-H 1988.HK N (2.8) (9.9) (11.5) 7.9 CEB-H 6818.HK U (4) (1.9) (6.1) - (6.4) PSBC 1658.HK N (2) (1.4) na Mid-sized banks (1.6) (4.3) CQRC 3618.HK O (2.6) (4.2) 14.1 (3.0) Huishang 3698.HK U (21) (2.1) (6.8) 12.5 Harbin 6138.HK N (0.4) (6.3) (2.6) (5.4) BOCQ 1963.HK N (3.3) (8.5) (6.4) (6.0) City/rural banks (1.4) (4.6) Market cap weighted average (1.4) (1.2) Code Rating TP (LC) Spot Upside Market cap ROE (%) PE PB Div. yield (%) Perf (%) % US$ bn W 1M YTD 2016 ICBC-A SS O (3.7) CCB-A SS O (1.5) 9.0 (5.9) ABC-A SS O (4.0) BOC-A SS O (1.9) 3.8 (14.2) BCOM-A SS N (3) (4.2) 3.8 (10.4) State-owned banks (0.7) 8.2 (6.7) CMB-A SS O (1.2) (0.5) 6.8 (2.2) CITIC-A SS U (20) (1.7) (13.0) (8.4) (11.2) MSB-A SS U (10) (1.4) (8.8) (14.6) (5.8) CEB-A SS U (20) (5.2) (1.3) (7.8) SPDB SS N (2.0) (7.7) (8.3) (2.4) CIB SS N (0.4) (5.8) (4.6) (5.4) HXB SS U (8) (2.0) (10.6) (6.5) (10.6) PAB SZ N (4.1) (6.8) (5.8) (8.9) Mid-sized banks (1.4) (6.6) (4.4) (5.8) BoBJ SS U (19) (3.7) (11.8) (12.0) 11.2 BoNJ SS U (9) (3.5) (16.0) (7.7) 10.2 BoNB SZ U (19) (3.3) (9.0) (0.4) 7.3 City/rural banks (15) (3.5) (12.2) (6.3) 9.5 Market cap weighted average (2.5) 4.7 (6.1) Note: Prices as of close of 8 May Source: Thomson Reuters, company data, Credit Suisse estimates China Banks Sector 5

6 Three factors have hampered bank stocks lately Share priced of China banks did quite well in the first two months of the 2017, thanks to the improving macro backdrop as reflected in the sets of rebounding data such as PPI, PMI, real and nominal GDP growth, power generation, freight transportation, etc. The sector rallied roughly by 15% at its peak in March, which was impressive as bank stocks such as CQRC/PSBC/CMB surged by even more than 20%. However, from its peak the sector has retreated by around 9% due to various reasons such as interbank tightening by PBOC, moderating recovery in the economy and various regulatory tightening measures by the China Banking Regulatory Commission (CBRC), in our view. However, despite this correction, the whole sector is still up 5% YTD, within which PSB, CQRC, ABC and CMB have offered almost double-digit returns. However, Minsheng Bank (MSB) and CITIC have delivered negative returns YTD. Figure 6: Stock performance of China banks H-share versus HSCEI and MSCI China Index Note: sector return is simple average of these 11 stocks. Source: Company data, Credit Suisse research (1) Tightening in money markets In February this year, the PBOC further lifted interest rates for its Standard Open Market Operations (OMO) by 10 bp across all three maturities, and then lifted interest rates for its Standing Lending Facility (SLF). The SLF rate sets the upper bound of PBOC s short-term interest rate corridor. The OMO guides the daily movement of the short-term interest rates within the corridor. Essentially, PBOC s move has shifted the structure of its short-term interest rate corridor higher. Our economist, Weishen Deng, had argued that the door for further monetary tightening was opened when the PBOC increased the interest rate for its Medium Term Lending Facility (MLF) just before China entered the Chinese New Year holidays. However, the pace and the scale of PBOC s further actions are still faster than he had expected. China Banks Sector 6

7 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 9 May 2017 Figure 7: The short-term interest rate corridor has been shifted up Figure 8: driving up interbank borrowing cost accordingly since December % p.a. SLF rate, 7d 7-Day Interbank Repo Rate (VWA) Excessive reserve rate Average Jan to Aug Average Sep to date SHIBOR O/N SHIBOR 1W SHIBOR 1M Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse research As a result, the interbank interest rate gauged by the Shanghai Interbank Offered Rate (SHIBOR) has increased by 63 bp for overnight, 73 bp for one month, and 108 bp for three months. A rising interbank rate significantly enhanced the wholesale funding cost of China banks, and thereby, battering the margins of those banks are heavily reliant on interbank borrowing, as well as the profitability of carry trades. In addition, interbank tightening impacted the financial market, and thereby, raising the cost of equity, and also hurt funding cost for enterprises. China's ten-year Treasury bond closed at 3.56% last Friday (05 May), which is already 51 bp above than its level at the beginning of the year. Enterprises from real economy suffered an almost similar hike in their corporate bond price. Figure 9: China's T-Bond yield has surged ~50 bp across all maturities Yield of China's government bond (%) Treasury Bond Yield - 5 year Treasury Bond Yield - 10 year Treasury Bond Yield - 20 year Source: CEIC, Credit Suisse research China Banks Sector 7

8 (2) Regulatory activism around non-loan risks In the two-week period between 28 March and 12 April, CBRC issued seven regulations to tackle various risks and violations of banks, and even local regulatory branch. Such intensive regulatory moves have not been seen after Document No.127 issued in May 2014, and have surprised the market, but are in line with Chairman Guo s address in March (link). These regulations reflect the government's intention to trim the financial sector risks and involve most aspects including wealth management products (WMPs), interbank, loans, investment, property etc. However, we note such rules point only to self-inspection of banks, but are not compulsory guidelines with which the banking players must comply. Figure 10: Seven regulations by CBRC in half a month Issued date File No. Issued unit under CBRC Target 28 Mar 2017 Doc No.45 On-site Examination Bureau Legal compliance 28 Mar 2017 Doc No.46 On-site Examination Bureau Arbitrage 6 Apr 2017 Doc No.53 Banking Innovation Supervision Dept. Improper innovation and trades 7 Apr 2017 Doc No.4 Policy Research Bureau Support economy and reform 7 Apr 2017 Doc No.5 On-site Examination Bureau Violations of banks and local CBRC 10 Apr 2017 Doc No.6 Prudential Regulation Bureau Risk prevention in 10 key areas 12 Apr 2017 Doc No.7 Prudential Regulation Bureau Regulatory outlook Source: CBRC, Credit Suisse research Banks may face pressure from further regulations amid China s de-leverage and voluntary compliance, and they need to submit examination results in the next three months. Profitability would be affected as CBRC strives to reduce arbitrage, channel business and shadow banking, while asset quality pressures appear to be abating. Figure 11: Non-standard credit asset and WMP exposure of banks (FY16) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ICBC CCB BOC ABC BCOM CMB CITIC MSB CEB PAB PSBC On BS NSCAs as % of assets WMP balance as % of total asset Source: Company data, Credit Suisse estimates China Banks Sector 8

9 Figure 12: Growth in interbank assets and investment receivables in the last few years (Rmb bn) ICBC CCB ABC BOC BCOM CMB CITIC MSB CEB PAB PSBC CQRC BOCQ Interbank assets , ,489 1, , , ,674 1, , ,527 1, Q17 1, ,506 1, As % of total assets Q % change YoY Q Times in 3.25 years (x) Investment receivables , , ,036 1, , Q ,064 1, , As % of total assets Q % change YoY Q Times in 3.25 years (x) Source: Company data, Credit Suisse estimates (3) Correction in commodity prices Commodity prices have seen some sharp corrections in the past month. The Commodity Research Bureau Index (CRB) has declined by 5% since March, and is down 8% YTD. However, the prices of most commodities are still above the levels seen in the beginning of the year, partly due to the ongoing deleveraging efforts by the government. The price of Qinhuangdao (QHD) 5,500 kcal coal, for example, still grew by 4% in the first four months, even after a 7% fall from its recent peak in 1Q17 or a 13% fall from peak in 4Q16. China Banks Sector 9

10 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 9 May 2017 Figure 13: Coal price has declined 7% from its recent peak in 1Q17 Figure 14: CRB index has also corrected 9% from its recent peak in 1Q Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 QHD5500 coal price CRB Index Source: WIND, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates China's March PPI of 7.6% was higher than Bloomberg consensus of 7.5%, despite a marginal moderation from its prior print of 7.8%. China's April PPI has not come out, but our economist expects the final figure would be above 6%.The RHS chart below shows that PPI could potentially fall since China's steel future price has collapsed more than 10% in just one month. Figure 15: Crude oil price dropped a bit recently to around US$50/barrel level (USD per barrel) Figure 16: while steel price collapse indicate PPI story may face challenge OPEC Oil price PPI China Steel Futures Price chg YoY Source: CEIC, Credit Suisse estimates Source: WIND, Credit Suisse estimates This raises the spectre of real interest rates (i.e. real cost of capital) rising in the shadow banking market and for the smaller borrowers who do not get adequate funding from banks. Please note that bank lending is based on benchmark lending rates (BMR) which have not been hiked by PBOC at all. China Banks Sector 10

11 Figure 17: Bank lending, shadow banking and corporate bonds as a % of GDP 160% 140% 145% As % of GDP Figure 18: Benchmark lending rate and one-year yield of wealth management products (%) 120% 100% 80% 60% 40% 20% 0% 54% 24% Bank loans Shadow banking Corporate bonds Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Yield of 1-yr WMP Benchmark lending rate Source: CEIC, Credit Suisse research Source: Bloomberg, CEIC, Credit Suisse research However, as far as real lending rates calculated using CPI and using GDP deflator are concerned, there is a divergence since CPI is yet to rise whereas GDP deflator has gone up on the back of PPI. Figure 19: Real benchmark lending rate using CPI and GDP deflator CN real rate using CPI CN real rate using GDP deflator Figure 20: Real seven-day interbank rate using CPI and GDP deflator 6.0 Real 7-day i/b rate using CPI Real 7-day i/b rate using GDP deflator Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Bloomberg, Credit Suisse estimates -8.0 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16 Source: Bloomberg, Credit Suisse estimates China Banks Sector 11

12 Economic momentum may have peaked, a bumpy ride ahead Our macro team believes that China s economy will likely be entering a slightly bumpier period in the coming months. The tightening in financial regulations may have a negative impact on some particular areas of the economy. In recent times, financial regulators have exhibited a hawkish stance towards leveraged and shadow banking-type operations by financial institutions. Interbank rates have also continued to climb. Meanwhile, the cyclical growth momentum appears to be moderating. In their view, the financial side of the economy will face more challenges from the recent regulatory tightening. They expect continued upward pressure on interbank short-term interest rates. Meanwhile, the financing condition through the bond markets is likely to remain tight. In addition, industrial investment and investment by smaller real-estate developers may be more vulnerable to the weaker credit environment overall. On the other hand, there is evidence to suggest that the overall funding conditions for the government-related projects continue to be relatively steady; bank lending seemed to be filling some gaps resulting from the bond market weakening. We note that China s official manufacturing PMI moderated to 51.2 for April, slightly behind the Bloomberg consensus of 51.7 and its prior of According to our Economist Weishen Deng, this set of PMI numbers suggests that room for further growth acceleration from the strong first quarter is probably limited. Though we note the April figure came just after the strongest 1Q reading in five years, when real GDP was growing at 6.9%. The moderation of the manufacturing PMI was across most of the sub-indices. The output index was down by 0.4 pp to 53.8 and new orders index was down by 1.0 pp to The only sub-index that is improving is the stock of finished goods index, up by 0.9 pp to The PMI for large-sized companies and that for medium-sized companies both declined. The index for small-sized companies continued to improve over the month. It seems to be the case that the strength seen in large-sized and medium-sized companies from past months is gradually spilling over to the smaller-sized companies. Figure 21: Official manufacturing PMI moderated in April Figure 22: the scope for further growth acceleration could be limited Source: CEIC, Credit Suisse estimates Source: WIND, Credit Suisse estimates China Banks Sector 12

13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 9 May 2017 According to our property team, China's property market may also have seen some moderation in April. The sales area of China's residential property increased by 19% YoY in the first quarter, but the growth has slowed to 15% in March from 25% in the first two months. China's central and provincial governments introduced a series of policies to cool down the housing market, which already has achieved some progress in terms of price moving pace and trading turnover. However, we have not seen any end to the ongoing tightening measures. Recently eight major banks in Beijing have moved together to raise mortgage rates (link), which is another strong signal after they halted mortgage lending to home buyers in March (link). Per the latest rules in Beijing, first-time house buyers have to pay the benchmark mortgage rate of 4.9% or above, while second-home buyers have to pay at least 20 percent above the benchmark. Figure 23: China's property sales appears to have slowed down from March (Sqm mn) 50% 40% 30% 20% 10% 0% -10% - -20% Residential house sales Growth YoY (RHS) Source: CEIC, Credit Suisse research However, our economists expect the government to be data-dependent and to strike a balance between supporting growth and taking pre-emptive steps to ward-off financial risks. Should growth data show signs of significant downswings, the government is likely to launch more measures to support the real economy. Our economists, therefore, continue to expect full-year real GDP growth to be around 6.8%, while seeing some headwinds in the coming months. China Banks Sector 13

14 Figure 24: Both PPI and GDP deflator has accelerated very nicely in China recently but underlying loan quality improving Nominal GDP growth in China has accelerated to 11.8% YoY in 1Q17 from a bottom of 6.4% YoY in 4Q15, while real GDP growth improved slightly to 6.9%. This happened on the back of producer prices turning positive for the first time in September 2016, after being in deflation for 54 months. PPI has surged since then to 7.6% recently (vs a low of -5.90% in September 2015). As a result the GDP deflator has rallied from -0.3% in 4Q15 to +4.6% in 1Q17. Both manufacturing and non-manufacturing PMI have moderated recently, and suggest that the room for further growth acceleration from the strong 1Q is probably limited. However, the overall growth picture is still holding up relatively well and our economist maintains his above-consensus forecast for China's 2017 real GDP growth at 6.8% (vs consensus forecast of 6.5%). While nominal GDP momentum may have peaked in 1Q, it should still be double-digit this year vs 7-8% in the last two years. CN CPI CN PPI CN GDP deflator Figure 25: which drove the nominal GDP rebound, while real GDP growth has remained broadly flat CN Real GDP CN Nom GDP Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan Q07 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 Source: Bloomberg, CEIC, Credit Suisse research Figure 26: CRB commodity index is up 16% since the bottom in February 2016 Source: CEIC, Credit Suisse research Commodity price reflation (CRB commodity index up 16% since the bottom in February 2016) has helped improve the corporate cash flow. At the same time in terms of fixed asset investment, the YoY growth of monthly FAI has also delivered a strong rebound since July Figure 27: FAI YoY growth also rebounded recently, including the private sector (%) 500 CRB commodity index (units) % Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Source: Thomson Reuters, Credit Suisse research 35% 30% 25% 20% 15% 10% 5% 0% -5% Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 FAI YoY growth Non-SOE FAI YoY growth Source: Wind, Credit Suisse research China Banks Sector 14

15 Is the PPI reflation sustainable? There are concerns as to whether the recent acceleration in PPI is sustainable or not. Our economist Weishen Deng believes that PPI inflation is sustainable and discusses this in detail in his report China: In a nominal sweet spot? He believes that the PPI inflation can average 5.5% this year, higher than the current consensus of 2.9%, and significantly higher than -1.3% in His preferred lead indicator shown in the chart below suggests PPI inflation is likely to stay around 6.5% YoY for most of 1H17. In the next few months PPI inflation is likely to see some moderation from the current level, but not a collapse. Figure 28: PPI is likely to stay around 6.5% in the coming months* Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan South China industrial goods index (% YoY, Leading 3 month, LHS) PPI (% YoY, RHS) Note*: South China Industry Goods Price index is weighted average of onshore future prices for industrial goods, including items such as copper, alumina, PVC, Fuel etc. Source: WIND, Credit Suisse research Several factors are likely to support domestic reflation over the coming quarters: Figure 29 shows that commodity prices have driven the bulk of the swings in China s PPI cycles historically. Improving global economic growth and the Chinese government's support for infrastructure spending are likely to support hard commodity prices if not push them higher, in our economist's view. However, the bulk of the rebound seems done, and he expects the pace of the rise to moderate. This implies a diminishing, but still positive, contribution to PPI inflation through most of the year. Figure 29: Commodities and basic materials have historically been the dominating factor in all of China s PPI deflation and reflation cycles, and remain so for the current PPI reflation cycle Contribution to PPI inflation (%) -4.0 PPI for production materials -6.0 Food PPI -8.0 PPI for other consumer goods Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: CEIC, Credit Suisse research China Banks Sector 15

16 Continued capacity reduction in the production materials sector should support production materials prices. Cuts in mining and production capacity in the basic materials sector have been a key factor supporting commodity prices and PPI inflation. Our China Basic materials team expects the net capacity reduction of coal mining to reach above 12% and net steel production capacity reduction to reach 15% in More recently, the team sees the risk of an overshoot in supply-side reform in 2017 and expects an early execution of planned capacity. Figure 30: China has undergone a significant capacity reduction in the key basic materials and more reduction is expected * Source: Credit Suisse, CEIC *Note: The chart, numbers and figures have been published in China Basic Materials Sector 2017 outlook: A sweet spot, but not for all. In his report "Reflation delight" Vincent Chan also argues that PPI reflation should be sustainable. Despite the current rise in PPI being largely driven by strong price increases in commodity sectors such as oil, coal and steel; pre-tax margins for all key sectors, irrespective of whether they are upstream or downstream, were rising in 2H16, with auto being the only exception. This means that the downstream consumer goods companies are able to digest/pass through the increase of upstream commodity prices at this stage with their margins not being squeezed, which will allow the PPI to stay stronger for longer. After the industrial output gap (defined as the difference between growth in industrial output and the trend growth in the past three years) bottomed in late 2015, real industrial investment started to pick up in late 2016, and this upward trend will likely continue throughout Given industrial investment accounted for about 40% of the total fixed asset investment, this would be an important support for commodities demand this year which could help to sustain the PPI recovery. Figure 31: Output gap closure leads pick-up in industrial investment (5) (10) Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Output Gap (LHS, %) Real Industrial Investment (RHS, 3MMA YoY % ) (10) (20) Source: CEIC, Credit Suisse research. China Banks Sector 16

17 A year ago, estimates of true underlying impairment were running at mid-teens Based on a variety of datasets, we had estimated that China's underlying NPL ratio of the corporate sector could be around 10-15% by the end of 2015, which is significantly higher than the official 1.67% NPL ratio reported by the China banks. We note that there is a sample bias in our approach, as companies in our sample for fundamental analysis (listed companies/bond issuers) tend to be of better quality (since they obtained the listing/ issuance approval) and have an easier access to funding than the rest of the economy. Figure 32: We estimated China's underlying NPL ratio to range between 10-15% by end % 18.0% Bottom-up approach implied NPL ratio: 10-15% 16.0% 15.0% 14.0% 12.0% 10.0% 9.7% 11.7% 10.9% 10.1% 8.0% 6.0% 4.0% 2.0% 1.70% 0.0% Reported NPL ratio Proxy NPL ratio Troubled bond ratio_corp Troubled bond ratio_enterprise NBS IC implied NPL ratio Top down implied NPL ratio Source: CBRC, NBS, Wind, BIS, Credit Suisse estimates Bottom-up: Proxy NPL/troubled bond ratio At the end of 2015, the proxy NPL ratio based on 2,500 non-financial listed companies was 9.7%. The proxy NPL ratio is in line with the troubled bond ratio based on 619 corporate bond issuers and 1,162 enterprises bond issuers at 11.7% and 10.9%, respectively. Figure 33: Proxy NPL ratio is usually higher than the reported NPL ratio and appears to be more volatile over time 16.0% 14.8% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 10.6% 9.7% 8.2% 8.6% 8.1% 7.1% 6.5% 6.2% 6.2% 5.6% 5.7% 5.8% 5.4% 4.6% 3.9% 4.2% 3.4% 3.5% 2.4% 1.6% 1.8% 1.6% 1.4% 1.6% 1.2% 1.3% 1.1% 1.0% 1.0% 0.9% 1.0% 1.0% 1.0% 1.1% 1.3% 1.5% 1.7% 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 Proxy NPL ratio Reported NPL ratio Note: Semi-annual proxy NPL ratio is based on Last Twelve Month (LTM) financial data. Source: CBRC, Wind, Credit Suisse estimates China Banks Sector 17

18 Figure 34: Private credit/gdp ratio has spiked by 95% in eight years following the global financial crisis CN private sector credit/gdp and its long-term trend (%) The discussion above was based on the bottom-up data aggregated for individual borrowers. But the bias of that sample in China happens to be that the listed equity/bond universe consists of the better quality companies. In other words, a lot of sub-par borrowers would not have got the approval to list or issue bonds, hence, the overall impairment could be worse than the conclusions from our sample. Let us cross-check the potential impairment from a top-down basis. Top down too, double-digit underlying impairment Numerous studies in the past have identified excessive credit growth as one of the most reliable indicators of future problems in the banking sector. Various financial crises have provided a vivid reminder that losses incurred in the banking sector can be extremely large when a downturn is preceded by a period of excess credit growth. These losses can destabilise the banking sector and spark a vicious circle, whereby problems in the financial system can contribute to a downturn in the real economy that then feeds back on to the banking sector. The biggest lesson from historical banking crises is that a sharp acceleration in credit injection ultimately ends up badly. BIS research has found that credit/gdp ratio rising by 40% or more in four years typically leads to problems for lenders subsequently. The other way of assessing, as per BIS is if the credit/gdp ratio surpasses its long-term trend by more than 10%. The charts below show this clearly in action in China post-gfc. However, please note that the credit-to-gdp gap has come down slightly in 3Q16, thanks to nominal GDP acceleration. Figure 35: and the gap vis-à-vis long-term trend is far ahead of the 10% level cited as risky by BIS CN Gap between credit/gdp and long-term trend (%) 230 China private sector credit/gdp (%) Trend 35 Gap between credit/gdp and long term trend Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10 Dec Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10 Dec-15 Source: Bank of International Settlement, Credit Suisse research Source: Bank of International Settlement, Credit Suisse research The charts above show that private sector credit/gdp ratio in China was 117% in 2008 and has risen to 210% by 9M16 = an increase of 94% in eight years. So the gap between credit/gdp ratio and its long-term trend has ballooned to a whopping 26%!!! This implies that 14% of the system credit is excessive. Applying a 60% potential impairment to the excess credit and an average NPL ratio post-gfc for the rest of the system, we estimate a potential NPL ratio of 9.6%. However, in the case of China there would be some shadow-banking credit which is not captured in the bank lending data, and where banks could be exposed even if it is not visible in their reported on and off-balance sheet figures as of now. If we assume 20% of the outstanding wealth management products (WMPs) to be at risk and apply a 70% probability of default, the underlying impairment from this approach would be around 11.5%. China Banks Sector 18

19 but forward looking interest coverage ratio and return on invested capital suggest a sharp mending The CS-Proxy NPL ratio in Figure 32 was calculated from a sample of 2,500 listed A-share companies. However, that data is based on actuals. To gauge how the stress in corporate China is evolving, we turned to our proprietary HOLT database that covers 1,452 A-share listed companies (44% of the listed companies as per Bloomberg) and carries projections for It is a useful reference point to gauge by how much the troubled sectors of energy, materials and real estate are getting better. The charts below show that not only interest coverage but also return on invested capital is improving. Figure 36: Interest coverage projected to improve Figure 37: and so is return on invested capital China CN '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16E Interest coverage ratio (x) '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16E '17E Source: Credit Suisse HOLT Figure 38: Share of debt with stressed companies declining sharply % of sample debt with companies having interest coverage < 1 Source: Credit Suisse HOLT The LHS chart below shows continued improvement in the stressed sectors in 2017, with the share of debt with companies with interest coverage < 1 falling to 3.4% from the peak of 9.5% in Figure 39: Fewer companies in cash flow trouble Number of companies with interest coverage < 1 and with IC between 1 and China '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17E China '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16E 235 % of sample debt with companies with IC < 1 No. of companies with IC < 1 No. of companies with 2 < IC < 1 Source: Credit Suisse HOLT Source: Credit Suisse HOLT China Banks Sector 19

20 Corporate sector cash flow improving nicely Ultimately a bank loan is paid back by the cash flow of a borrower. In China, roughly threequarters of loans are exposed to corporate borrowers; hence, this segment becomes a key for the banks. Let us examine the corporate sector s sales, EBITDA and net profit growth to begin with using the sample of non-financial Chinese companies (HK listed) covered by Credit Suisse. The chart below shows that cash flows hit the bottom in 2015, improved slightly in 2016 and are expected to improve even further this year. Figure 40: Corporate sector s sales, EBITDA and net profit growth improving Y CAGR ('04-'14) 5Y CAGR ('09-'14) E Sales (%, YoY) EBITDA (%, YoY) Net Profit (%, YoY) Source: CS China (HK listed) coverage universe ex-financials, Credit Suisse estimates China Banks Sector 20

21 Figure 41: Snapshot of China banks 1Q17 results Trim banks in 3Q, perhaps a turn in the tightening cycle by then? In line with our expectations, China banks reported low-single digit bottom-line growth YoY both for the full-year FY16 and 1Q17. The broad trends observed were softer revenue growth, good cost control leading to low-single digit pre-provision operating profit (PPOP) growth and higher loan-loss provisioning. The Big 4 reported a flattish PPOP and profit growth adjusted for BOC's Nanyang Commercial Bank (NCB) sale. On the other hand, Joint-stock banks (JSBs) reported only low-single digit profit growth, weighed down by only 1-2% profit growth at BCOM, CITIC and CEB. 1Q17 results: Slight sequential improvement The key differentiator in China banks' 1Q17 seems to be the QoQ change in margins on the back of rising interbank rates. We find the large four banks, CMB, CCB and CQRC to be the ones that benefited while the others suffered declines. While the 'investment receivables' portfolio, which is mostly opaque non-standard credit assets, expanded QoQ in most banks and supported NIMs, some joint stock banks (Minsheng, Citic) felt the squeeze despite a sharp jump in loan-deposit ratios (up 7%/6% QoQ). Revenue progression was soft, partly due to the VAT reform that was implemented from June last year, but partly also because fee income was hit by regulatory scrutiny of wealth management sales, etc. Banks controlled operating costs very tightly (distorted in some cases by insurance) leading to a positive growth in pre-provision operating profits at the large banks, allowing them to raise credit costs slightly YoY (while the credit costs, largely a management decision in China, in joint stock banks were lower YoY). On reported basis, the loan quality was stable QoQ, and we believe the underlying true asset quality is improving. 1Q17 Big 4 names Joint-stock names City banks Aggr (YoY % chg) ICBC CCB ABC BOC Aggr BCOM CMB CITIC MSB CEB PAB PSBC Aggr CQRC BOCQ Aggr Total Net interest inc 2.7% -0.9% 1.5% -1.2% 0.7% -8.3% 1.8% -8.9% -14.2% -7.4% -1.1% 0.6% -4.7% 2.4% 1.4% 2.1% -1.0% Net fee -5.8% 1.0% -11.9% 0.1% -4.1% 4.7% -6.0% -2.1% -13.0% 18.9% 9.8% 37.8% 0.5% -7.9% -12.4% -9.8% -2.5% Non-int inc -7.9% 8.8% 24.0% 16.8% 9.2% 7.3% -7.7% -2.4% -3.0% 18.7% 4.6% 80.6% 5.6% -8.8% 9.9% -0.7% 7.9% Revenue -0.5% 2.1% 7.5% 5.2% 3.3% -2.1% -2.1% -6.8% -9.7% 0.5% 0.7% 10.4% -1.3% 1.2% 3.0% 1.8% 1.8% Optg expenses -19.5% -14.3% 9.9% -3.3% -6.2% -4.4% -10.0% -19.6% -21.4% -11.5% -29.3% 3.0% -9.3% -15.4% 1.5% -11.9% -7.5% Opex excl. biz t -2.7% 5.4% 25.8% 10.9% 10.7% 7.4% 9.7% -2.8% -5.0% 10.0% -15.8% na 2.0% na na na 7.2% Pre-pr.op.pr. 7.1% 7.9% 6.1% 10.0% 7.7% -0.3% 0.8% -1.0% -4.6% 6.3% 17.6% 24.4% 3.8% 11.5% 3.5% 8.7% 6.5% Provisions 33.1% 35.4% 30.1% 39.4% 34.4% 8.8% -6.5% -1.8% -9.9% 14.6% 30.2% 114.8% 6.5% 2.7% -10.7% -4.1% 22.1% Net profit 1.4% 3.0% 1.9% 0.1% 1.7% 1.3% 8.9% 1.7% 3.6% 1.6% 2.1% 10.4% 4.6% 10.7% 10.6% 10.7% 2.6% Loans YoY 9.9% 12.4% 9.2% 9.4% 10.3% 11.7% 17.1% 10.6% 18.1% 16.4% 22.6% 19.7% 15.7% 9.5% 17.6% 12.1% 11.9% Deposits YoY 9.0% 11.3% 10.9% 12.5% 10.8% 6.4% 9.8% 1.8% 7.5% 5.5% 3.1% 15.6% 8.5% 7.3% 8.3% 7.6% 10.1% Asset YoY 8.8% 13.3% 10.4% 11.0% 10.8% 18.0% 10.5% 5.0% 23.6% 18.1% 12.1% 10.1% 13.6% 13.6% 19.1% 15.4% 11.7% Equity YoY 9.1% 9.2% 8.0% 7.7% 8.6% 17.2% 10.9% 18.0% 14.8% 13.3% 10.8% 31.6% 16.7% 12.4% 10.8% 11.9% 10.8% Loans QoQ 3.9% 3.5% 4.0% 3.9% 3.9% 5.9% 5.3% 2.5% 6.1% 5.6% 4.9% 6.0% 5.2% 4.0% 4.1% 4.0% 4.3% Deposits QoQ 4.1% 5.4% 6.1% 6.3% 5.4% 4.4% 3.4% -5.7% -1.0% 5.8% -0.5% 6.8% 2.6% 7.4% 1.2% 5.5% 4.6% Asset QoQ 3.2% 3.5% 3.9% 4.2% 3.6% 3.9% 1.0% -3.0% 1.0% 2.7% 1.8% 2.7% 1.6% 2.6% 7.1% 4.0% 3.0% Equity QoQ 3.2% 3.9% 3.4% 2.8% 3.3% 3.1% 4.5% 2.3% 4.2% 5.0% 2.8% 3.8% 3.6% 4.6% 4.1% 4.4% 3.4% Key ratios ICBC CCB ABC BOC Aggr BCOM CMB CITIC MSB CEB PAB PSBC Aggr CQRC BOCQ Aggr Total Net int.margin 2.12% 2.13% 2.22% 1.80% 2.08% 1.57% 2.43% 1.79% 1.43% 1.47% 2.53% 2.24% 1.89% 2.66% 2.22% 2.52% 2.02% QoQ chg (bp) (23) 4 (16) (23) (17) (19) na (87) 4 (9) (1) (29) Fee/revenue 24% 24% 17% 20% 22% 21% 33% 29% 35% 35% 29% 8% 25% 10% 16% 12% 23% CIR (excl. biz tax 22% 21% 37% 32% 28% 42% 24% 26% 26% 27% 25% na 29% na na na 32% NPL bal.qoq 1.6% 3.3% 2.1% 3.0% 2.4% 5.5% -1.0% 5.6% 5.7% 1.7% 4.8% 2.5% 3.5% 4.1% 25.1% 11.1% 2.7% NPL ratio 1.59% 1.52% 2.33% 1.45% 1.70% 1.52% 1.76% 1.74% 1.68% 1.54% 1.74% 0.85% 1.52% 0.96% 1.15% 1.02% 1.64% QoQ chg (bp) (4) (0) (4) (1) (2) (1) (11) 5 (1) (6) (0) (3) (3) (2) NPL coverage 142% 160% 174% 160% 159% 150% 209% 152% 156% 158% 163% 280% 176% 425% 246% 357% 165% LLR/Loans 2.2% 2.4% 4.0% 2.3% 2.7% 2.3% 3.7% 2.6% 2.6% 2.4% 2.8% 2.4% 2.7% 4.1% 2.8% 3.6% 2.7% Credit cost (bp) YoY chg (bp) (1) (36) (2) (37) (8) (9) (6) (57) (22) 10 CET 1 CAR 13.0% 13.0% 10.5% 11.2% 12.0% 10.9% 12.4% 8.9% 8.9% 8.3% 8.3% 8.9% 9.6% 9.9% 9.7% 9.9% 11.2% Source: Company data, Credit Suisse estimates China Banks Sector 21

22 CQRC PSBC ABC BOCQ BOC ICBC CCB CITIC CMB BCOM CEB MSB 9 May 2017 Margin divergence explained by net interbank positions Banks with a good deposit franchise such as Big 4, CMB and CQRC benefited from QoQ NIM expansion amid interbank tightening in 1Q. In contrast, a few small and mid-tier banks witnessed massive margin compression which is largely explained by their net interbank borrowing positions. With the interbank rates going up due to the tightening by PBOC, their net interbank borrowing cost went up quickly. MSB stood out with the highest net borrowing exposure equivalent to 18% of total assets. Figure 42: Net interest margin trend divergence Figure 43: explained by net interbank position 10 (bp) 20% 5 15% 0 10% -5 5% -10 0% % -25 BOC CMB CQRC ICBC ABC CCB BOCQ CITIC CEB PAB MSB BCOM -10% NIM chg QoQ in 1Q17 Net Interbank borrowing as % of asset, FY16 1Q17 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Banks with a relatively inferior deposit franchise saw a sequential negative deposit growth in 1Q17; with CITIC being most heavily hit (-6% QoQ) and PAB and MSB seeing 0-1% decline as well. On the other hand, Big 4, CQRC and PSBC grew deposits by more than 5% in 1Q alone. Interestingly, while most of the banks have slashed their interbank and repo businesses in 1Q, some banks have continued to expand their 'investment receivables' book likely in a bid to support margins (mostly non-standard credit assets, "NSCAs"). CMB and CITIC cut their interbank asset by 40% or so, but on the other hand PSBC and CCB increased their interbank lending by 34% and 13% in a single quarter. Figure 44: Interbank asset and investment portfolio QoQ change in 1Q17 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 34% 13% 1% 1% 0% 0% -1% -3% -11% -12% -19% -40% -41% PSBC CCB BOC CQRC ICBC BOCQ ABC BCOM PAB CEB MSB CMB CITIC Interbank asset chg QoQ 1Q17 Investment chg QoQ 1Q17 Source: Company data, Credit Suisse estimates China Banks Sector 22

23 In addition, nearly all the banks significantly increased the debt securities issuance as they had to scale back their interbank borrowing due to higher interbank rates. Large banks saw debt securities balance rising by 0-10%, JSBs by 20-50% and city commercial banks by 50-60%. Figure 45: Banks resorted to debt issuance as they scaled back interbank borrowing and some banks found it difficult to raise deposits 1Q 80 (%) CQRC PSBC BOC ABC CEB CCB BCOM ICBC CMB BOCQ PAB MSB CITIC Deposit chg QoQ 1Q17 Interbank lib chg QoQ 1Q7 Debt sec chg QoQ 1Q17 Source: Company data, Credit Suisse estimates Major banks under CS coverage expanded receivable investment by 6% in the first quarter, of which ICBC/ CMB/ PAB witnessed the highest growth of 41%/ 19%/ 12% QoQ. Taking into account other non-standard credit assets which are lying under interbank assets and investment securities, we estimate on balance sheet NSCAs accounted for <1% of total assets for Big 4, <10% for BCOM and CMB, 10-20% for other JSBs and small city commercial banks. Figure 46: NSCAs and receivables investment changes BOC ABC ICBC CCB BCOM CMB PAB PSBC CITIC MSB BOCQ CEB CQRC On B/S NSCAs as % of total assets, FY16 Receivables investment chg QoQ, 1Q17 Source: Company data, Credit Suisse estimates China Banks Sector 23

24 CMB BCOM CITIC MSB CEB CCB BOC PAB ABC CMB BOCQ PSBC CQRC Aggre CMB CCB PSBC PAB CEB ICBC MSB ABC BCOM BOC CQRC CITIC BOCQ Aggre 9 May 2017 Asset quality, on reported basis, improving Though most of the banks do not disclose new NPL formation, we believe that underlying asset quality is improving as elaborated in the previous section. NPL ratio of major banks under CS coverage fell by 2 bp to 1.64%, similar to a 2 bp improvement in NPL ratio for the system to 1.74%. Interestingly, CMB for the first time ever by a China bank reported a new NPL formation ratio in It was 2.24% in 2016 (down 102 bp) and also highlighted that the ratio was declining YoY in each of the quarter. CMB s credit cost was 2.12% (down 3 bp) for FY16, and 2.18% annualised in 1Q17 (down 36 bp YoY). Figure 47: Most banks reported lower NPL ratio Figure 48: and improvement in NPL coverage 25 (bp) 40 (bp) (2) NPL ratio chg QoQ in 1Q17 NPL cov chg QoQ 1Q17 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Despite ICBC s NPL coverage ratio improving to 142% in 1Q17 (137% in 4Q16), it was still below regulatory threshold of 150%; and BCOM and CITIC hovered around 150%. Figure 49: Banks have to maintain credit cost to bolster provision >150% (1Q17) CQRC PSBC BOCQ CMB ABC PAB BOC CCB CEB MSB CITIC BCOM ICBC NPL coverage (%) Credit cost (bp) Source: Company data, Credit Suisse estimates China Banks Sector 24

25 Earnings revision and TP change Our detailed revised 2017E forecasts are as below. Figure 50: Summary of 2017E financial forecasts for China banks FY17E Big 4 names Joint-stock names City banks Aggr (YoY % chg) ICBC CCB ABC BOC Aggr BCOM CMB CITIC MSB CEB PAB PSBC Aggr CQRC BOCQ Aggr Total Net interest inc 10.0% 11.1% 13.2% 13.6% 11.8% -1.3% 10.6% -2.7% -4.6% 1.6% -0.1% 13.6% 3.6% 12.8% 2.3% 9.8% 9.1% Net fee -5.0% 5.0% -5.0% 1.0% -1.1% 5.0% -5.0% 3.0% -5.0% 15.0% 11.0% 30.0% 3.2% -5.0% 15.0% 4.5% 0.5% Non-int inc -3.5% 7.5% 24.2% 19.7% 10.7% 10.7% -5.4% 3.0% -5.0% 15.0% 8.7% -22.1% 0.2% -5.3% 15.0% 4.1% 6.9% Revenue 6.5% 10.2% 15.6% 15.7% 11.5% 2.3% 4.9% -0.9% -4.7% 5.7% 2.5% 7.6% 2.6% 10.9% 4.9% 9.1% 8.5% Optg expenses 1.6% 6.3% 13.6% 11.0% 8.1% -4.8% 2.3% -6.8% -15.7% 5.9% -19.2% 1.9% -3.6% 5.5% -0.4% 4.1% 3.8% - Opex excl. bi 6.9% 12.1% 17.5% 14.3% 12.8% -0.1% 8.6% -0.9% -11.5% 13.0% -13.2% 3.8% 0.9% 11.1% 6.1% 10.0% 8.4% Pre-pr.op.pr. 8.5% 11.9% 16.8% 18.5% 13.2% 7.3% 6.0% 1.6% 0.9% 5.7% 11.4% 19.8% 6.6% 14.4% 6.8% 11.8% 11.1% Provisions 37.0% 36.2% 45.1% 22.0% 35.0% 20.3% 3.7% 2.7% 0.5% 10.7% 17.1% 35.3% 9.5% 34.7% 5.8% 21.0% 23.9% Net profits 1.1% 3.9% 3.2% 3.1% 2.7% 2.2% 8.0% 1.3% 1.1% 1.9% 2.5% 12.5% 4.4% 7.9% 7.0% 7.6% 3.2% Loans YoY 9.0% 12.0% 9.5% 9.0% 9.9% 11.0% 16.0% 9.0% 18.0% 16.0% 21.1% 19.0% 15.0% 10.0% 15.0% 11.7% 11.4% Deposits YoY 8.5% 12.0% 11.0% 12.5% 10.8% 7.0% 10.0% 4.0% 7.0% 6.0% 4.0% 15.0% 8.9% 7.5% 12.0% 8.9% 10.2% Asset YoY 8.5% 12.2% 10.0% 10.8% 10.3% 14.4% 10.6% 6.2% 26.6% 17.2% 13.4% 11.4% 14.0% 13.9% 9.5% 12.5% 11.5% Equity YoY 10.2% 10.9% 10.5% 8.7% 10.1% 8.0% 12.0% 8.8% 11.3% 11.2% 10.8% 11.2% 10.2% 12.8% 11.9% 12.5% 10.2% Dupont analysis ICBC CCB ABC BOC Aggr BCOM CMB CITIC MSB CEB PAB PSBC Aggr CQRC BOCQ Aggr Total Net interest inc 2.1% 2.1% 2.2% 1.8% 2.0% 1.5% 2.4% 1.7% 1.4% 1.5% 2.4% 2.0% 1.8% 2.6% 2.0% 2.4% 2.0% Net fee 0.5% 0.6% 0.4% 0.5% 0.5% 0.4% 0.9% 0.7% 0.7% 0.7% 1.0% 0.2% 0.6% 0.2% 0.6% 0.3% 0.5% Non-int inc 0.7% 0.7% 0.7% 1.0% 0.7% 0.7% 1.1% 0.8% 0.8% 0.8% 1.1% 0.3% 0.8% 0.2% 0.6% 0.3% 0.7% Revenue 2.7% 2.8% 2.9% 2.8% 2.8% 2.2% 3.5% 2.5% 2.2% 2.3% 3.5% 2.3% 2.6% 2.8% 2.6% 2.7% 2.7% Optg expenses -0.8% -0.8% -1.1% -1.0% -0.9% -0.8% -1.1% -0.7% -0.7% -0.7% -0.8% -1.5% -0.9% -1.0% -0.6% -0.9% -0.9% Pre-pr.op.pr. 1.9% 2.0% 1.8% 1.8% 1.9% 1.4% 2.5% 1.8% 1.5% 1.6% 2.7% 0.8% 1.6% 1.8% 1.9% 1.8% 1.8% Provisions -0.5% -0.6% -0.6% -0.6% -0.6% -0.4% -1.1% -0.9% -0.6% -0.6% -1.7% -0.3% -0.7% -0.4% -0.7% -0.5% -0.6% ROAA 1.1% 1.1% 0.9% 0.9% 1.0% 0.8% 1.1% 0.7% 0.7% 0.7% 0.7% 0.5% 0.7% 1.0% 1.0% 1.0% 0.9% Gearing ROAE 14.2% 14.6% 14.6% 12.4% 14.0% 11.6% 15.7% 11.7% 13.8% 13.3% 12.1% 12.2% 12.9% 15.3% 14.8% 15.2% 13.7% Key ratios ICBC CCB ABC BOC Aggr BCOM CMB CITIC MSB CEB PAB PSBC Aggr CQRC BOCQ Aggr Total Net int.margin 2.19% 2.19% 2.31% 1.90% 2.15% 1.55% 2.50% 1.76% 1.43% 1.50% 2.49% 2.28% 1.90% 2.72% 2.16% 2.54% 2.07% YoY chg (bp) 3 (1) (33) 0 (24) (44) (28) (26) 4 (22) (2) (22) (8) (5) Fee/revenue 20% 20% 15% 17% 18% 19% 26% 29% 34% 32% 28% 7% 24% 8% 22% 12% 20% CIR (excl. biz tax 28% 28% 37% 36% 32% 37% 29% 28% 29% 31% 22% 64% 36% 36% 24% 32% 33% NPL bal. YoY 3.6% 8.3% 3.6% 5.5% 5.0% 8.3% -0.6% 13.2% 12.1% 8.4% 18.8% 6.5% 8.6% 14.2% 35.6% 21.4% 6.1% NPL ratio 1.54% 1.47% 2.25% 1.42% 1.65% 1.48% 1.60% 1.75% 1.60% 1.49% 1.71% 0.78% 1.46% 0.99% 1.13% 1.04% 1.59% YoY chg (bp) (8) (5) (13) (5) (8) (4) (27) 6 (8) (10) (3) (9) (9) (8) NPL coverage 136% 155% 164% 175% 156% 151% 205% 150% 154% 157% 158% 268% 173% 436% 239% 362% 162% LLR/Loans 2.1% 2.3% 3.7% 2.5% 2.6% 2.2% 3.3% 2.6% 2.5% 2.3% 2.7% 2.1% 2.5% 4.3% 2.7% 3.8% 2.6% Credit cost (bp) YoY chg (bp) (22) (17) (28) (8) (11) (8) (11) 18 (17) 7 11 CET 1 CAR 13.1% 12.9% 10.4% 11.2% 11.9% 10.8% 12.0% 8.8% 8.7% 8.3% 8.6% 8.7% 9.6% 9.8% 9.7% 9.8% 11.1% Source: Company data, Credit Suisse estimates China Banks Sector 25

26 Summary of NPAT, target price and rating changes Following the 1Q17 results, we tweak our FY17-18 forecasts and introduce FY19 estimates. We expect the sector to deliver 3%/6%/9% bottom-line growth (before preference share dividends), among which the large banks and CMB would probably outperform. We upgrade ABC-H, ABC-A and BOC-A to OUTPERFORM (from Neutral previously) and upgrade PSBC to NEUTRAL (from Underperform previously). We also downgrade CEB-H, Huishang, BOBJ and BONJ to UNDERPERFORM (from Neutral previously) and HRB and BoCQ to NEUTRAL (from Outperform previously). Figure 51: Summary of changes of NPAT, TP and ratings Bank Ticker New NPAT (Rmb bn) NPAT chg % New Upside TP chg New Previous Rating E 2018E TP (LC) (%) (%) rating rating changes H-share ICBC-H 1398.HK (1) (2) O O CCB-H 0939.HK O O ABC-H 1288.HK O N from N BOC-H 3988.HK (4) (0) O O BCOM-H 3328.HK (2) (4) (2) N N CMB-H 3968.HK O O CITIC-H 0998.HK (6) (10) (12) N N MSB-H 1988.HK (5) (12) N N CEB-H 6818.HK (3) (12) 3.4 (4) (13) U N from N PSBC 1658.HK (2) 37 N U from U CQRC 3618.HK (5) O O Huishang 3698.HK (5) (6) 2.9 (21) (24) U N from N HRB 6138.HK (12) (20) (31) N O from O BoCQ 1963.HK (1) (1) (12) N O from O A-share ICBC-A SS (1) (2) O O CCB-A SS O O ABC-A SS O N from N BOC-A SS (4) (0) O N from N BCOM-A SS (2) (4) 5.8 (3) - N N CMB-A SS O O CITIC-A SS (6) (10) 4.7 (20) (11) U U MSB-A SS (5) 7.0 (10) (13) U U CEB-A SS (3) (12) 3.1 (20) (11) U U SPDB SS (13) (21) (20) N N CIB SS (3) N N HXB SS (6) (9) 9.3 (8) (2) U U PAB SZ (2) (11) (7) N N BoBJ SS (8) (11) 7.0 (19) (22) U N from N BoNJ SS (13) (14) 9.1 (9) (13) U N from N BoNB SZ (4) (7) 13.5 (19) (3) U U Source: Company data, Credit Suisse estimates China Banks Sector 26

27 CS estimates vs consensus We see a downside risk to the current consensus estimates, and our estimates are largely behind consensus for most of the banks. Figure 52: Summary of CS estimated EPS and NPAT versus consensus Bank Ticker CS NPAT (Rmb bn) CS NPAT vs Consensus CS NPAT growth (%) CS EPS (Rmb bn) CS EPS vs Consensus H-share ICBC-H 1398.HK (2) (2) (4) (1) (2) (1) CCB-H 0939.HK (0) ABC-H 1288.HK (1) BOC-H 3988.HK (4) (4) (0) (1) 0 BCOM-H 3328.HK (1) 1 2 (1) (2) 2 5 CMB-H 3968.HK (1) (1) (2) (1) 0 2 CITIC-H 0998.HK (4) (6) (11) (2) (4) (6) (12) MSB-H 1988.HK (1) (6) (4) (4) CEB-H 6818.HK (4) (11) (11) 0 (4) (2) (12) (9) PSBC 1658.HK (0) CQRC 3618.HK (0) (1) (7) (4) Huishang 3698.HK (3) (3) (5) (4) (4) 0 HRB 6138.HK (11) (21) (29) (10) (21) (28) BoCQ 1963.HK (2) (3) (6) (0) 0 7 A-share ICBC-A SS (2) (2) (3) (2) (2) 2 CCB-A SS ABC-A SS (1) 2 7 BOC-A SS (3) (0) (4) (0) 3 BCOM-A SS (1) 1 6 (1) (2) 1 4 CMB-A SS (2) (0) (0) 2 CITIC-A SS (4) (3) (2) (4) (4) (5) MSB-A SS (4) (1) (5) (5) CEB-A SS (5) (13) (11) 0 (4) (5) (12) (10) SPDB SS (5) (7) (5) (5) (5) (4) CIB SS (2) (4) (8) HXB SS (10) (14) na (4) (10) (14) na PAB SZ (7) (8) (5) (1) (6) (8) (7) BoBJ SS (11) (15) (20) (2) (11) (15) (6) BoNJ SS (10) (11) na 7 15 na na (11) (10) na BoNB SZ (5) (7) na (13) (5) (4) na Source: Company data, Credit Suisse estimates China Banks Sector 27

28 Key trends in earning drivers Loan growth for the banks in our sample is likely to remain around low teens. In addition, there may be some movement for most banks in terms of receivables and/or interbank assets that distort the picture. Banks will gradually allocate more to traditional loans than before, thanks to continuous regulatory tightening. Figure 53: China banks historic loan growth and forecast (%) Q E 2018E 2019E Loan YoY growth ICBC 18.5% 14.7% 13.0% 12.7% 11.1% 8.2% 9.4% 9.9% 9.0% 9.0% 9.0% CCB 17.6% 14.6% 15.6% 14.3% 10.3% 10.7% 12.1% 12.4% 12.0% 12.0% 12.0% ABC 19.8% 13.6% 14.3% 12.3% 12.1% 10.0% 9.1% 9.2% 9.5% 9.5% 9.5% BOC 15.3% 12.1% 8.2% 10.8% 11.5% 7.7% 9.2% 9.4% 9.0% 9.0% 9.0% Big % 13.8% 12.8% 12.6% 11.2% 9.1% 10.0% 10.3% 9.9% 9.9% 9.9% BCOM 21.6% 14.5% 15.1% 10.8% 5.1% 8.5% 10.2% 11.7% 11.0% 11.0% 11.0% CMB 20.7% 14.6% 16.0% 15.4% 14.4% 12.3% 15.5% 17.1% 16.0% 15.0% 14.0% CITIC 18.6% 13.4% 16.0% 16.7% 12.7% 15.6% 13.8% 10.6% 9.0% 10.0% 11.0% MSB 19.8% 14.0% 14.9% 13.7% 15.1% 13.0% 20.2% 18.1% 18.0% 18.0% 18.0% CEB 20.2% 14.3% 15.0% 14.0% 11.4% 16.5% 18.6% 16.4% 16.0% 15.0% 15.0% PAB 13.3% 52.3% 16.1% 17.6% 20.9% 18.7% 21.4% 22.6% 21.1% 20.1% 19.0% PSBC n.a. 23.6% 16.8% 21.2% 25.7% 31.8% 21.8% 19.7% 19.0% 19.0% 19.0% JSB 34.2% 17.2% 15.6% 14.8% 13.3% 15.4% 16.3% 15.7% 15.0% 14.9% 14.9% CQRC 20.0% 18.2% 20.2% 18.3% 18.0% 10.9% 11.9% 9.5% 10.0% 11.0% 12.0% BOCQ 25.4% 20.9% 19.7% 18.1% 17.6% 17.2% 21.0% 17.6% 15.0% 12.0% 12.0% City banks n.a. 19.0% 20.1% 18.2% 17.9% 12.8% 14.8% 12.1% 11.7% 11.3% 12.0% Total n.a. 14.7% 13.6% 13.2% 11.8% 10.9% 11.8% 11.9% 11.4% 11.5% 11.5% Source: Company data, Credit Suisse estimates Net interest margins peaked recently in 2014 in this rate cycle and have since fallen by nearly 50 bp. They have now stabilised at around 2.1% and should remain above 2% level for a while, unless the PBOC adjusts the benchmark interest rates. Figure 54: China banks historic net interest margin and forecast (%) Q E 2018E 2019E NIM ICBC 2.44% 2.75% 2.66% 2.57% 2.66% 2.47% 2.16% 2.12% 2.19% 2.29% 2.36% CCB 2.49% 2.70% 2.75% 2.74% 2.80% 2.63% 2.20% 2.13% 2.19% 2.25% 2.30% ABC 2.57% 2.85% 2.81% 2.79% 2.92% 2.66% 2.25% 2.22% 2.31% 2.36% 2.40% BOC 2.07% 2.12% 2.15% 2.24% 2.25% 2.12% 1.83% 1.80% 1.90% 2.02% 2.09% Big % 2.60% 2.60% 2.59% 2.66% 2.48% 2.12% 2.08% 2.15% 2.23% 2.29% BCOM 2.46% 2.59% 2.59% 2.52% 2.36% 2.22% 1.88% 1.57% 1.55% 1.50% 1.47% CMB 2.65% 3.06% 3.03% 2.82% 2.64% 2.77% 2.50% 2.43% 2.50% 2.58% 2.65% CITIC 2.63% 3.00% 2.81% 2.60% 2.40% 2.31% 2.00% 1.79% 1.76% 1.78% 1.77% MSB 2.94% 3.14% 2.94% 2.49% 2.59% 2.26% 1.86% 1.43% 1.43% 1.35% 1.32% CEB 2.17% 2.49% 2.54% 2.16% 2.30% 2.25% 1.78% 1.47% 1.50% 1.46% 1.43% PAB 2.49% 2.23% 2.37% 2.31% 2.57% 2.81% 2.75% 2.53% 2.49% 2.48% 2.44% PSBC 0.00% 0.00% 2.70% 2.67% 2.92% 2.78% 2.24% 2.24% 2.28% 2.38% 2.41% JSB 3.22% 3.57% 2.73% 2.55% 2.56% 2.48% 2.11% 1.89% 1.90% 1.89% 1.87% CQRC 3.07% 3.36% 3.50% 3.41% 3.37% 3.20% 2.74% 2.66% 2.72% 2.77% 2.83% BOCQ 2.78% 2.92% 2.85% 2.81% 2.81% 2.52% 2.38% 2.22% 2.16% 2.12% 2.14% City banks 2.99% 3.24% 3.32% 3.24% 3.21% 2.99% 2.62% 2.52% 2.54% 2.57% 2.63% Total 2.58% 2.82% 2.64% 2.59% 2.64% 2.48% 2.12% 2.02% 2.07% 2.12% 2.15% Source: Company data, Credit Suisse estimates China Banks Sector 28

29 Big banks' fee income stream lost momentum after 2011, while the joint stock banks and city banks continued until last year. Some banks, especially city commercial banks, may be able to maintain a strong fee business growth going forward on a relatively low base. Figure 55: China banks historic net fee income growth and forecast (%) Q E 2018E 2019E Net fee income YoY growth ICBC 32.1% 39.4% 4.4% 15.3% 8.3% 8.2% 1.1% -5.8% -5.0% 0.0% 5.0% CCB 37.6% 31.5% 7.5% 11.5% 4.1% 4.6% 4.4% 1.0% 5.0% 5.0% 5.0% ABC 29.4% 49.0% 8.9% 11.1% -3.7% 3.0% 10.2% -11.9% -5.0% 0.0% 5.0% BOC 18.4% 18.7% 8.1% 17.4% 11.1% 1.3% -4.1% 0.1% 1.0% 0.0% 0.0% Big % 34.4% 7.0% 13.8% 5.2% 4.7% 2.6% -4.1% -1.1% 1.4% 4.0% BCOM 27.0% 28.9% 11.9% 24.4% 14.0% 18.3% 5.0% 4.7% 5.0% 5.0% 5.0% CMB 41.7% 37.9% 26.3% 47.8% 35.3% 34.2% 14.8% -6.0% -5.0% 0.0% 10.0% CITIC 35.0% 55.1% 26.9% 50.0% 50.6% 40.9% 18.5% -2.1% 3.0% 5.0% 10.0% MSB 77.7% 82.2% 35.9% 46.0% 27.7% 33.9% 2.1% -13.0% -5.0% 0.0% 5.0% CEB 49.2% 48.1% 35.9% 57.7% 28.1% 37.3% 6.9% 18.9% 15.0% 10.0% 10.0% PAB 34.2% 131.2% 56.1% 82.8% 66.2% 38.6% 15.7% 9.8% 11.0% 12.0% 20.0% PSBC n.a. 35.3% 1.0% 17.2% 8.6% 33.8% 32.6% 37.8% 30.0% 25.0% 20.0% JSB 52.7% 48.4% 25.4% 43.9% 31.8% 33.2% 11.0% 0.5% 3.2% 5.5% 10.3% CQRC 109.0% 122.3% -31.4% 56.0% 57.4% 39.8% 41.7% -7.9% -5.0% 0.0% 0.0% BOCQ 51.5% 46.1% 27.0% 75.1% 41.0% 66.4% 27.4% -12.4% 15.0% 15.0% 15.0% City banks n.a. 91.1% -13.1% 64.8% 49.4% 52.0% 34.5% -9.8% 4.5% 7.9% 8.4% Total n.a. 36.9% 10.3% 20.3% 12.1% 13.4% 5.7% -2.5% 0.5% 3.0% 6.5% Source: Company data, Credit Suisse estimates However, banks are managing non-interest income growth by other methods. Figure 56: China banks historic non-interest income growth and forecast (%) Q E 2018E 2019E Non-interest income YoY growth ICBC 21.1% 40.0% 3.8% 21.2% 4.3% 13.8% 5.6% -7.9% -3.5% 0.8% 5.0% CCB 29.3% 27.7% 15.3% 11.2% -1.9% 8.0% 10.2% 8.8% 7.5% 5.9% 6.0% ABC 19.3% 44.8% 14.5% 7.8% 5.2% 11.1% 7.0% 24.0% 24.2% 30.3% 33.8% BOC 12.0% 21.4% 9.0% 13.5% 9.1% 7.4% 6.1% 16.8% 19.7% 5.1% 2.7% Big % 32.2% 10.1% 13.8% 4.1% 10.1% 7.1% 9.2% 10.7% 9.7% 12.0% BCOM 32.4% 23.1% 15.5% 22.6% 27.2% 15.0% 17.5% 7.3% 10.7% 11.1% 11.6% CMB 27.3% 38.9% 25.0% 34.4% 44.1% 31.4% 16.7% -7.7% -5.4% 0.0% 10.0% CITIC 64.5% 45.8% 18.7% 34.4% 57.4% 36.6% 16.8% -2.4% 3.0% 5.0% 10.0% MSB -10.2% 97.6% 46.4% 30.0% 29.6% 38.7% -0.2% -3.0% -5.0% 0.0% 5.0% CEB 13.9% 27.4% 45.1% 49.5% 39.9% 31.2% 8.1% 18.7% 15.0% 10.0% 10.0% PAB 1.5% 103.2% 54.2% 71.3% 77.0% 36.1% 13.0% 4.6% 8.7% 11.4% 19.1% PSBC n.a. 27.9% 0.7% 15.3% -3.2% 87.7% 181.5% 80.6% -22.1% -17.1% 18.1% JSB n.a. 43.5% 27.2% 33.1% 39.0% 32.3% 18.7% 5.6% 0.2% 3.8% 11.0% CQRC 20.0% 152.6% -8.5% 9.2% 137.3% 18.5% 29.9% -8.8% -5.3% 0.3% 0.3% BOCQ 44.9% 8.3% 103.4% 37.1% 79.8% 27.1% 21.1% 9.9% 15.0% 15.0% 15.0% City banks 31.0% 82.4% 23.9% 22.4% 106.7% 22.5% 25.6% -0.7% 4.1% 7.8% 8.3% Total n.a. 34.3% 13.5% 18.0% 12.9% 16.8% 11.1% 7.9% 6.9% 7.7% 11.7% Source: Company data, Credit Suisse estimates Banks have controlled operating costs very tightly (distorted in some cases by insurance) amid faltering revenue, leading to a positive growth in pre-prov op profits at the large banks. PAB, CITIC and MSB saw the best cost discipline among the banks under our coverage. China Banks Sector 29

30 Figure 57: China banks historic opex growth and forecast (%) Q E 2018E 2019E Opex YoY growth ICBC 15.4% 21.6% 12.0% 7.5% 7.1% 1.0% -12.6% -19.5% 1.6% 12.6% 10.5% CCB 15.4% 19.1% 18.4% 10.0% 4.1% -0.6% -12.0% -14.3% 6.3% 11.8% 11.6% ABC 16.9% 22.8% 16.2% 8.6% 12.7% 0.9% -12.7% 9.9% 13.6% 16.6% 17.5% BOC 14.1% 15.0% 13.6% 7.7% 3.2% 4.3% -5.6% -3.3% 11.0% 14.1% 9.8% Big % 19.7% 15.0% 8.4% 7.0% 1.3% -10.9% -6.2% 8.1% 13.9% 12.6% BCOM 32.9% 17.2% 17.2% 14.2% 9.8% 11.1% -2.4% -4.4% -4.8% 10.4% 11.3% CMB 23.9% 25.2% 18.2% 11.9% 12.7% 10.7% -4.1% -10.0% 2.3% 9.8% 12.5% CITIC 18.3% 25.4% 23.2% 15.6% 15.7% 8.1% -6.6% -19.6% -6.8% 8.3% 9.3% MSB 24.3% 39.9% 16.3% 7.8% 17.7% 7.6% -9.9% -21.4% -15.7% 13.0% 17.6% CEB 33.0% 20.9% 24.0% 16.7% 13.4% 7.8% -6.5% -11.5% 5.9% 11.7% 13.5% PAB 17.7% 65.4% 32.8% 32.9% 26.9% 14.4% -14.6% -29.3% -19.2% 8.0% 11.0% PSBC n.a % 17.3% 17.2% 15.1% 8.6% -1.3% 3.0% -3.0% 4.3% 9.3% JSB 76.1% 10.6% 19.5% 15.0% 14.8% 9.7% -5.6% -9.3% -5.4% 9.2% 11.9% CQRC 22.5% 22.1% 27.2% 18.7% 16.6% 8.0% -6.9% -15.4% 5.5% 14.7% 15.1% BOCQ 22.9% 30.9% 31.1% 20.1% 22.9% 13.7% -20.5% 1.5% -0.4% 9.0% 11.0% City banks n.a. 24.0% 28.1% 19.0% 18.1% 9.5% -10.4% -11.9% 4.1% 13.4% 14.2% Total n.a. 17.2% 16.3% 10.4% 9.3% 3.9% -9.2% -7.5% 3.6% 12.4% 12.4% Source: Company data, Credit Suisse estimates The table below shows the operating cost growth excluding business taxes. It was distorted in some cases (notably ABC) by insurance related expenses. Figure 58: China banks historic Opex (excl. biz taxes) growth and forecast (%) Q E 2018E 2019E Opex (excl. biz taxes) YoY growth ICBC 14.9% 19.3% 10.0% 7.6% 6.4% 0.7% -1.5% -2.7% 6.9% 12.6% 10.5% CCB 15.5% 16.8% 17.1% 11.1% 2.9% -1.5% -2.8% 5.4% 12.1% 11.8% 11.6% ABC 16.1% 20.9% 15.7% 8.9% 13.8% 0.9% -5.7% 25.8% 17.5% 16.6% 17.5% BOC 12.9% 13.2% 12.2% 8.2% 2.2% 4.7% 4.2% 10.9% 14.3% 14.1% 9.8% Big % 17.6% 13.6% 8.9% 6.5% 1.1% -1.7% 10.7% 12.8% 13.9% 12.6% BCOM 34.4% 14.0% 15.5% 15.3% 10.3% 11.5% 9.1% 7.4% -0.1% 10.4% 11.3% CMB 22.7% 20.8% 18.4% 11.6% 11.1% 9.9% 4.9% 9.7% 8.6% 9.8% 12.5% CITIC 15.8% 21.6% 23.0% 16.3% 15.2% 6.8% 5.5% -2.8% -0.9% 8.3% 9.3% MSB 22.4% 36.5% 14.0% 9.1% 18.8% 6.9% -0.3% -5.0% -11.5% 13.1% 17.7% CEB 11.6% 16.9% 22.2% 15.1% 13.3% 6.8% 8.4% 10.0% 13.0% 11.7% 13.5% PAB 16.6% 61.1% 32.1% 35.8% 25.3% 12.9% -7.1% -15.8% -13.2% 7.9% 10.8% PSBC n.a % 16.1% 16.7% 13.1% 10.3% 5.2% n.a. 0.4% 4.1% 9.1% JSB n.a. 3.9% 18.3% 15.5% 14.3% 9.5% 4.3% n.a. -0.2% 9.1% 11.9% CQRC 23.1% 18.5% 26.3% 19.4% 15.2% 7.3% 2.6% n.a. 11.1% 14.7% 15.1% BOCQ 23.0% 29.6% 29.8% 19.7% 22.1% 13.6% -13.6% n.a. 6.1% 9.0% 11.0% City banks 23.1% 20.9% 27.1% 19.5% 16.8% 8.8% -1.6% n.a. 10.0% 13.4% 14.2% Total n.a. 13.6% 15.0% 10.8% 8.8% 3.7% 0.2% n.a. 8.4% 12.5% 12.4% Source: Company data, Credit Suisse estimates From the cost-income-ratios, we can see China banks have been optimising their cost gradually after 2010, when the sector saw the highest CIR of 37% (31% in FY16). China Banks Sector 30

31 Figure 59: China banks historic cost-income ratio (CIR) and forecast Rmb mn Q E 2018E 2019E Cost-to-income ratio (excl. bix taxes) ICBC 31% 30% 29% 29% 28% 27% 27% 22% 28% 28% 28% CCB 32% 30% 30% 31% 29% 27% 28% 21% 28% 28% 28% ABC 39% 36% 37% 37% 37% 36% 36% 37% 37% 37% 37% BOC 39% 37% 37% 36% 33% 33% 36% 32% 36% 36% 36% Big 4 35% 33% 33% 33% 32% 31% 31% 28% 32% 32% 32% BCOM 34% 32% 32% 33% 34% 35% 38% 42% 37% 37% 37% CMB 40% 36% 36% 35% 31% 28% 28% 24% 29% 29% 29% CITIC 34% 30% 32% 31% 30% 28% 28% 26% 28% 28% 28% MSB 41% 37% 34% 33% 33% 31% 31% 26% 29% 30% 30% CEB 36% 32% 30% 32% 30% 27% 29% 27% 31% 31% 31% PAB 41% 40% 39% 41% 36% 31% 26% 25% 22% 22% 21% PSBC 76% 33% 33% 34% 32% 32% 34% n.a. 32% 29% 28% JSB 44% 34% 33% 34% 32% 31% 31% n.a. 30% 30% 30% CQRC 44% 37% 38% 38% 36% 35% 36% n.a. 36% 36% 36% BOCQ 34% 34% 34% 32% 31% 31% 24% n.a. 24% 24% 24% City banks 42% 36% 37% 36% 34% 34% 32% n.a. 32% 33% 33% Total 37% 33% 33% 33% 32% 31% 31% n.a. 31% 31% 31% Source: Company data, Credit Suisse estimates Credit costs rose in 2014 when commodity prices crashed and corporate cash flow suffered a blow. Still, banks in our sample have managed to contain the costs to around 100 bp on an average, especially if we exclude a couple of outliers such as CMB and PAB. However, in the future when banks have more revenue under good operational environment, the credit cost could go up to reflect the "true underlying" non-performing asset. Figure 60: China banks historic credit cost and forecast (%) Q E 2018E 2019E Credit cost ICBC 0.45% 0.44% 0.39% 0.41% 0.54% 0.75% 0.69% 0.94% 0.87% 1.02% 1.12% CCB 0.49% 0.53% 0.55% 0.53% 0.66% 0.93% 0.81% 1.18% 0.99% 1.10% 1.13% ABC 0.96% 1.17% 0.91% 0.76% 0.85% 0.96% 0.85% 0.91% 1.19% 1.46% 1.76% BOC 0.29% 0.32% 0.29% 0.32% 0.58% 0.63% 0.91% 0.85% 1.02% 1.10% 1.12% Big % 0.59% 0.52% 0.50% 0.65% 0.82% 0.80% 0.98% 1.00% 1.15% 1.26% BCOM 0.60% 0.52% 0.53% 0.59% 0.61% 0.76% 0.73% 0.70% 0.79% 0.87% 0.92% CMB 0.43% 0.53% 0.31% 0.50% 1.33% 2.15% 2.12% 2.18% 1.90% 1.76% 1.69% CITIC 0.36% 0.43% 0.83% 0.63% 1.07% 1.49% 1.69% 1.64% 1.52% 1.56% 1.58% MSB 0.55% 0.70% 0.64% 0.88% 1.18% 1.71% 1.83% 1.41% 1.54% 1.59% 1.71% CEB 0.46% 0.41% 0.59% 0.40% 0.81% 1.40% 1.34% 1.19% 1.25% 1.33% 1.42% PAB 0.38% 0.42% 0.45% 0.85% 1.56% 2.67% 3.38% 3.21% 3.27% 3.11% 3.06% PSBC 1.10% 0.68% 0.48% 0.59% 1.06% 1.07% 0.74% 0.59% 0.66% 0.70% 0.73% JSB 0.53% 0.53% 0.55% 0.62% 1.02% 1.48% 1.52% 1.41% 1.41% 1.42% 1.46% CQRC 0.00% 0.42% 0.17% 0.51% 0.82% 1.17% 0.83% 0.76% 1.01% 1.25% 1.49% BOCQ 0.53% 0.31% 0.34% 0.64% 0.74% 0.88% 1.36% 0.94% 1.20% 1.09% 0.98% City banks 0.16% 0.39% 0.22% 0.55% 0.80% 1.08% 1.01% 0.82% 1.08% 1.19% 1.31% Total 0.53% 0.57% 0.52% 0.53% 0.75% 1.00% 1.01% 1.11% 1.13% 1.24% 1.32% Source: Company data, Credit Suisse estimates The NPL ratio of China banks, on a reported basis, seems to have peaked in 2016, although they have been trying hard to write-off a large amount of NPLs in the past years. Anyway, the overall NPL ratio will probably drop gradually this year and the downtrend may continue during China Banks Sector 31

32 Figure 61: China banks historic NPL ratio and forecast (%) Q E 2018E 2019E NPL ratio ICBC 1.08% 0.94% 0.85% 0.94% 1.13% 1.50% 1.62% 1.59% 1.54% 1.52% 1.54% CCB 1.14% 1.17% 0.99% 0.99% 1.19% 1.58% 1.52% 1.52% 1.47% 1.39% 1.38% ABC 2.03% 1.55% 1.33% 1.22% 1.54% 2.39% 2.37% 2.33% 2.25% 2.21% 2.20% BOC 1.10% 1.00% 0.95% 0.96% 1.18% 1.43% 1.46% 1.45% 1.42% 1.43% 1.39% Big % 1.14% 1.01% 1.02% 1.25% 1.70% 1.72% 1.70% 1.65% 1.62% 1.60% BCOM 1.12% 0.86% 0.92% 1.05% 1.25% 1.51% 1.52% 1.52% 1.48% 1.48% 1.48% CMB 0.68% 0.56% 0.61% 0.83% 1.11% 1.68% 1.87% 1.76% 1.60% 1.64% 1.62% CITIC 0.67% 0.60% 0.74% 1.03% 1.30% 1.43% 1.69% 1.74% 1.75% 1.75% 1.73% MSB 0.69% 0.63% 0.76% 0.85% 1.17% 1.60% 1.68% 1.68% 1.60% 1.56% 1.55% CEB 0.75% 0.64% 0.74% 0.86% 1.19% 1.61% 1.60% 1.54% 1.49% 1.49% 1.50% PAB 0.58% 0.53% 0.95% 0.89% 1.02% 1.45% 1.74% 1.74% 1.71% 1.66% 1.58% PSBC 0.16% 0.22% 0.36% 0.51% 0.64% 0.80% 0.87% 0.85% 0.78% 0.70% 0.66% JSB 0.75% 0.62% 0.74% 0.89% 1.12% 1.44% 1.55% 1.52% 1.46% 1.44% 1.41% CQRC 2.38% 1.44% 0.98% 0.80% 0.78% 0.98% 0.96% 0.96% 0.99% 0.98% 0.94% BOCQ 0.36% 0.35% 0.33% 0.39% 0.69% 0.97% 0.96% 1.15% 1.13% 1.10% 1.08% City banks 1.77% 1.11% 0.78% 0.68% 0.75% 0.98% 0.96% 1.02% 1.04% 1.02% 0.99% Total 1.16% 1.01% 0.94% 0.98% 1.21% 1.62% 1.67% 1.64% 1.59% 1.56% 1.54% Source: Company data, Credit Suisse estimates Bank sector earnings have been broadly flat for three years now, and we expect similar trends for 2017E as well. CMB and PSBC are major outliers, who should be able to report a bottom-line growth much higher than the sector. Figure 62: China banks historic NPAT growth and forecast (%) Q E 2018E 2019E NPAT YoY growth ICBC 28.4% 26.1% 15.0% 9.6% 5.0% 0.5% 0.4% 1.4% 1.1% 3.8% 6.4% CCB 26.3% 25.5% 14.1% 11.1% 6.1% 0.1% 1.5% 3.0% 3.9% 6.5% 9.9% ABC 46.0% 28.5% 19.0% 14.6% 7.9% 0.6% 1.9% 1.9% 3.2% 6.6% 8.5% BOC 29.2% 18.9% 12.3% 12.5% 8.1% 0.7% -3.7% 0.1% 3.1% 7.2% 9.2% Big % 24.9% 15.0% 11.6% 6.5% 0.5% 0.2% 1.7% 2.7% 5.8% 8.4% BCOM 29.6% 29.9% 15.0% 6.7% 5.7% 1.0% 1.0% 1.3% 2.2% 5.6% 8.5% CMB 41.3% 40.2% 25.3% 14.3% 8.1% 3.2% 7.6% 8.9% 8.0% 12.1% 14.3% CITIC 50.2% 43.3% 0.7% 26.2% 3.9% 1.1% 1.1% 1.7% 1.3% 3.3% 5.0% MSB 45.2% 58.8% 34.5% 12.6% 5.4% 3.5% 3.8% 3.6% 1.1% 2.7% 4.8% CEB 67.4% 41.4% 30.6% 13.3% 8.0% 2.2% 2.7% 1.6% 1.9% 4.8% 6.9% PAB 24.2% 64.5% 30.4% 13.6% 30.0% 10.4% 3.4% 2.1% 2.5% 5.1% 7.6% PSBC n.a % 22.9% 4.6% 9.8% 7.0% 14.2% 10.4% 12.5% 14.0% 17.1% JSB 53.7% 46.6% 20.6% 12.4% 7.9% 3.3% 4.6% 4.6% 4.4% 7.3% 9.8% CQRC 62.1% 38.8% 26.2% 11.7% 14.0% 5.8% 10.0% 10.7% 7.9% 7.9% 8.3% BOCQ 25.8% 35.1% 29.3% 21.0% 21.4% 12.1% 10.5% 10.6% 7.0% 10.6% 13.9% City banks n.a. 37.8% 27.0% 14.2% 16.1% 7.6% 10.1% 10.7% 7.6% 8.7% 10.0% Total n.a. 29.6% 16.4% 11.8% 6.9% 1.2% 1.4% 2.6% 3.2% 6.2% 8.8% Source: Company data, Credit Suisse estimates China Banks Sector 32

33 In our 28 November 2016 report on APAC Financials' 2017 outlook, we opined in favour of China banks for the first half of 2017, and recommended booking profits in 3Q after clipping ~5% cash dividend in June. No earnings growth While the street is forecasting a nice rebound in the earnings growth this year in most of the markets (save for TH, PH and PK banks), it remains subdued in China at 4% YoY vs other banking sectors in Asia-ex-Japan. Figure 63: 2017E earnings growth for China likely to be relatively slower than other banking sectors in AxJ Y CAGR ('05-'15) 2016 YoY 2017E YoY CN IN KR TW ID TH MY PH SG HK PK AxJ AU JP APAC Source: Datastream, MSCI consensus EPS estimates, Credit Suisse research Since 2014, China banks have reported a flat bottom line, and have managed to offset the severe pressures on margins and asset quality through various mechanisms such as investment in risky assets (interbank, receivables, wealth management products), aggressively growing fee income, keeping a tight lid on operating costs, etc. In 2017, we believe Chinese banks will behave the same way and will keep setting aside the current level of provisioning, i.e., profit growth would be low-single digit. Figure 64: China banks profit growth likely to remain low-single digit (MSCI bank index EPS growth) MSCI China banks EPS growth (YoY, %) '06 '07 '08 '09 '10 '11 '12 '13 '14 ' E 18E Source: Datastream, MSCI consensus EPS estimates, Credit Suisse research China Banks Sector 33

34 Figure 65: CN banks cheap for ROEs they deliver Asian banks P/B (x) vs ROE (%) but valuation multiple expansion possible The China banks seem cheap for the levels of ROAs and ROEs they generate vis-à-vis other regional banking sectors. On paper, the banks are still reporting mid-teen ROEs despite above-average credit costs of 100+ bp. The current valuation multiples suggest the investors are applying a discount for their perceived level of true NPLs by adjusting the book value. Figure 66: and also for ROAs they generate Asian banks Mkt cap/assets (x) vs. ROA (%) 3.00 P/B'17E IN-P IN 2.25 ID 2.00 AU 1.75 PH PK 1.50 MY 1.25 TW SG TH 1.00 IN-G CN JP KR ROE '17E-18E % 7% 9% 11% 13% 15% 17% 19% 35.0 Mkt cap / Assets '17E 30.0 IN-P ID PH IN 15.0 MY THPK AU 10.0 IN-G TW SG 5.0 JP KR CN ROA '17E-18E IN-P: Indian private sector banks; IN-G: Indian government banks. Source: Credit Suisse estimates (Aggr for CS coverage universe) IN-P: Indian private sector banks; IN-G: Indian government banks. Source: Credit Suisse estimates (Aggr for CS coverage universe) While reported earnings may not change much, the improvement would be visible through valuation multiples, in our view. Whatever you thought was the underlying NPLs six months ago; they should be lower now, thanks to the improving corporate cash flow (more on this later). Consequently, it can be argued that the required adjustment to the book value should also be lower, and thus, valuation multiples these stocks command should improve. Figure 67: China banks P/B vs ROE 5.0 CN banks P/B (x) CN banks ROE (RHS, %) Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan Jan-17 Figure 68: MSCI China banks 12-month forward P/E 24 MSCI 12-month forward China banks' P/E Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research China Banks Sector 34

35 Rating OUTPERFORM Price (08-May-17, HK$) 5.01 Target price (HK$) (from 6.30) 6.40 Upside/downside (%) 27.7 Mkt cap (HK$/US$ mn) 1,924,328/ 247,216 Number of shares (mn) 356,406 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Asia Pacific/China Regional Banks Industrial & Commercial Bank of China (1398.HK / 1398 HK) INCREASE TARGET PRICE Provision pressure remains; likely benefit from interbank and regulatory tightening The largest bank. ICBC is the largest bank in China by assets (Rmb24 tn), occupying 10% of the sector at end-fy16. It has a strong retail deposit franchise and has a reputation for superior IT infrastructure compared to peers. The bank owned 12% of market share in both of China s loan deposit and deposit space. In addition, ICBC was the No.1 asset management bank with bank wealth management products (WMP) balance of Rmb2.7 tn and market share of 9% in By end of 2016, ICBC had 17,200 outlets and 462,000 employees. The bank points to potential improvement in asset quality and margin. ICBC s results offered little surprise with flattish bottom-line growth, mainly driven by narrowing net interest margin, slower non-interest income growth and dropping impairment. Management was confident with the asset quality trend and margin performance this year. However, NPL ratio of manufacturing and retail/ wholesale trading industries (56% of NPL balance) still went up by 86 bp/268 bp YoY to 4.29%/9.28% in Looking forward. As a conservative large bank, we expect ICBC to be little or not at all impacted by ongoing regulatory tightening. Now, already for five consecutive quarters, ICBC has reported non-performing loan coverage ratio below the minimum requirement of 150%. If the regulators do not officially relax the rules on non-performing loan coverage ratio, we believe the bank would probably again report close-to-zero bottom-line growth for FY17. Valuation and risks. We have an OUTPERFORM rating on the stock and derive our new target price of HK$6.40 (from HK$6.30) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision Op profit (Rmb 448, , , ,847.9 mn) Pre-tax profit (Rmb mn) 363, , , ,178.3 Net attributable profit (Rmb mn) 273, , , ,845.5 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (1.3) (1.6) - Consensus EPS (Rmb) n.a EPS growth (%) (0.5) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 35

36 Industrial & Commercial Bank of China (1398.HK / 1398 HK) Price (08 May 2017): HK$5.01; Rating: OUTPERFORM; Target Price: (from HK$6.30) HK$6.40; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 791, , ,336 1,054,753 Interest expense 319, , , ,238 Net interest income 471, , , ,515 Fee and commission income 144, , , ,611 Trading income Insurance income (& premiums) Other income 24,541 25,764 27,033 28,363 Total non-interest income 169, , , ,391 Total income 641, , , ,907 Personal expense 113, , , ,865 Other expenses 79,758 79, , ,194 Total expenses 193, , , ,059 Pre-provision profit 448, , , ,848 Loan loss provisions 87, , , ,684 Operating profit 360, , , ,164 Associates/JV Other non-operating inc./(exp.) 2,604 2,734 2,871 3,014 Pre-tax profit 363, , , ,178 Taxes 84,173 86,751 90,197 96,157 Net profit before minorities 279, , , ,021 Minority interests 857 1,200 1,680 2,352 Preferred dividends 4,450 4,824 4,824 4,824 Exceptionals/extraordinaries Reported net profit 273, , , ,846 Analyst adjustments Net profit (Credit Suisse) 273, , , ,846 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 13,056,846 14,231,962 15,512,839 16,908,994 Risk provisions 289, , , ,852 Net customer loans 12,767,334 13,933,806 15,172,260 16,496,142 Interbank loans 1,553,100 1,553,100 1,553,100 1,553,100 Investment & securities 5,291,843 5,821,027 6,403,130 7,043,443 Cash & cash equivalents 3,350,788 3,635,605 3,944,631 4,279,925 Fixed assets Intangibles Other assets 1,174,200 1,236,520 1,219,780 1,212,163 Total assets 24,137,265 26,180,058 28,292,902 30,584,774 Liabilities Interbank deposits 2,606,650 2,684,860 2,765,418 2,848,392 Customer deposits 17,825,302 19,340,453 20,984,391 22,768,064 Total deposits 20,431,952 22,025,313 23,749,809 25,616,457 Other liabilities 1,724,150 1,980,140 2,165,067 2,371,383 Total liabilities 22,156,102 24,005,453 25,914,875 27,987,839 Shareholders' equity 1,883,700 2,076,572 2,279,394 2,497,672 Minority interests 11,412 11,983 12,582 13,211 Preferred stock 86,051 86,051 86,051 86,051 Total liabilities & equity 24,137,265 26,180,058 28,292,902 30,584,774 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 356, , , ,407 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.5) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (4.0) Operating expense (12.6) Pre-provision profit Net profit (0.4) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 36

37 Asia Pacific/China Regional Banks Rating OUTPERFORM Price (08-May-17, HK$) 6.21 Target price (HK$) (from 7.90) 8.10 Upside/downside (%) 30.4 Mkt cap (HK$/US$ mn) 1,557,133/ 200,043 Number of shares (mn) 250,011 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Construction Bank (0939.HK / 939 HK) INCREASE TARGET PRICE FOCUS LIST STOCK Better asset quality trend offering more buffer for earnings growth. Safer balance sheet amid challenging environment. CCB is the second largest lender in China, with 11% market share at end Besides a strong retail deposit franchise as other big banks, the bank has built a strong position in the mortgage and infrastructure lending business, which has been chased by its banking peers. In addition, CCB was the No.3 asset management bank with bank wealth management products (WMP) balance of Rmb2.1 tn and market share of 7% in By end of 2016, the bank had 14,985 outlets and 362,000 employees. Conservative growth (mortgage) and investment (government bonds). For the first time, corporate loans became slightly less than half of CCB s total in Retail banking was driven by the mortgage business (balance +29% YoY), contributing 36% to revenue and 44% to pre-tax profit. Mortgage accounted for 64% of new loans in 2016 and 30% of total loans. Net interest margins (NIM) narrowed gradually in the past quarters, likely due to larger investment in government bonds and higher exposure to mortgage loans. Looking forward. Real estate tightening may affect mortgage growth this year, but CCB and large peers would have shifted their lending focus to tier 3/tier 4 cities. Hence, mortgage growth should be manageable. CCB is one of the first banks that holds a sanguine view of its own asset quality trend, and two major sources accounting for three-fifth of bad loans (manufacturing and retail/wholesale trading), were shrunk by 3% and 1% in 2016, with NPL ratios of 5.92% (+4 bp) and 9.01% (-65 bp), respectively. Valuation and risks. We have an OUTPERFORM rating on the stock and it is our top pick among China banks. We derive our new TP of HK$8.10 (from Hk$7.90) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 388, , , ,049.8 Pre-tax profit (Rmb mn) 295, , , ,107.4 Net attributable profit (Rmb mn) 230, , , ,105.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 Ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 37

38 China Construction Bank (0939.HK / 939 HK) Price (08 May 2017): HK$6.21; Rating: OUTPERFORM; Target Price: (from HK$7.90) HK$8.10; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 696, , , ,704 Interest expense 269, , , ,601 Net interest income 417, , , ,103 Fee and commission income 118, , , ,189 Trading income 3,533 4,239 4,663 5,130 Insurance income (& premiums) Other income 20,019 24,023 26,425 29,068 Total non-interest income 142, , , ,386 Total income 559, , , ,490 Personal expense 92,847 95, , ,435 Other expenses 78,668 86, , ,005 Total expenses 171, , , ,440 Pre-provision profit 388, , , ,050 Loan loss provisions 93, , , ,022 Operating profit 295, , , ,028 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 295, , , ,107 Taxes 62,821 66,135 70,475 77,423 Net profit before minorities 232, , , ,684 Minority interests 929 1,022 1,124 1,236 Preferred dividends 1,067 1,067 4,342 4,342 Exceptionals/extraordinaries Reported net profit 230, , , ,106 Analyst adjustments Net profit (Credit Suisse) 230, , , ,106 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 11,757,032 13,167,876 14,748,021 16,517,783 Risk provisions 268, , , ,593 Net customer loans 11,488,355 12,867,039 14,399,422 16,094,190 Interbank loans 858, , , ,762 Investment & securities 5,068,584 5,828,872 6,703,202 7,507,587 Cash & cash equivalents 2,849,261 3,202,353 3,586,636 4,017,032 Fixed assets Intangibles 4,243 4,328 4,414 4,503 Other assets 703, , ,175 1,037,568 Total assets 20,963,705 23,520,782 26,306,559 29,426,636 Liabilities Interbank deposits 2,565,460 2,865,940 3,152,534 3,467,787 Customer deposits 15,402,915 17,251,265 19,321,417 21,639,987 Total deposits 17,968,375 20,117,205 22,473,950 25,107,774 Other liabilities 1,405,676 1,581,732 1,828,859 2,111,373 Total liabilities 19,374,051 21,698,937 24,302,810 27,219,147 Shareholders' equity 1,556,841 1,726,718 1,906,354 2,107,483 Minority interests 13,154 15,127 17,396 20,006 Preferred stock 19,659 80,000 80,000 80,000 Total liabilities & equity 20,963,705 23,520,782 26,306,559 29,426,636 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 250, , , ,011 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (4.6) Operating expense (12.0) Pre-provision profit (0.9) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Credit Suisse, Thomson Reuters China Banks Sector 38

39 Asia Pacific/China Regional Banks Rating (from NEUTRAL) OUTPERFORM Price (08-May-17, HK$) 3.52 Target price (HK$) (from 3.90) 4.30 Upside/downside (%) 22.2 Mkt cap (HK$/US$ mn) 1,225,478/ 157,435 Number of shares (mn) 324,794 Free float (%) wk price range ADTO-6M (US$ mn) 56.2 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Agricultural Bank of China (1288.HK / 1288 HK) UPGRADE RATING Beneficiary of interbank tightening and rural land reform The large bank with leading position in rural areas. Agricultural Bank of China (ABC) is one of China s biggest four (Big 4) state-owned banks, with total asset of Rmb19.6 tn and loan book of Rmb9.7 tn at end-fy16, both accounting for 8% each of the whole sector. Compared to other three big banks, ABC has more strength in the rural areas, with deposit market share of around 40% in By end of 2016, the bank had 23,695 outlets and 497,000 employees. Profit growth pick-up and beneficiary of interbank tightening. ABC's bottom line seems to have recovered from 0.8% YoY in 9M16, versus 8.8% for 4Q16 and 1.9% in 1Q17, which seems better than other big banks. Revenue weakness was offset by discipline cost control, but the bank actually maintained stable employee cost (+1% in FY16) and cut more in admin expense and etc. Thanks to its better funding positon (less exposed to wholesale market) and investment portfolio, PBOC s tightening seems to boost its margins (+3 bp QoQ in 1Q17), therefore the bank can report betterthan-peers net interest income. Looking forward. Based on potential margin expansion, we expect ABC to report decent (vs large peers) earnings growth in FY17. In addition, the government has been encouraging the circulation of land use rights in the open market and activation of idle farmland usage. This not only stimulates the development of rural areas, but also provides more reliable collateral for bank lending. ABC will definitely benefit from it, though only in the long term. Valuation and risks. We upgrade ABC to OUTPERFORM (from Neutral) and derive our new TP of HK$4.30 (from HK$3.90) based on a two-stage Gordon growth model. Our upgrade is based on potential upside implied by a new TP and better margin outlook. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 313, , , ,987.2 Pre-tax profit (Rmb mn) 226, , , ,638.8 Net attributable profit (Rmb mn) 179, , , ,919.9 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 39

40 Agricultural Bank of China (1288.HK / 1288 HK) Price (08 May 2017): HK$3.52; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from HK$3.90) HK$4.30; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 657, , , ,996 Interest expense 259, , , ,018 Net interest income 398, , , ,979 Fee and commission income 90,935 86,388 86,388 90,708 Trading income 0 7,908 14,235 22,776 Insurance income (& premiums) Other income 21,089 44,814 80, ,065 Total non-interest income 112, , , ,548 Total income 510, , , ,527 Personal expense 111, , , ,363 Other expenses 85, , , ,177 Total expenses 197, , , ,540 Pre-provision profit 313, , , ,987 Loan loss provisions 86, , , ,338 Operating profit 226, , , ,649 Associates/JV Other non-operating inc./(exp.) (9) (9) (10) (10) Pre-tax profit 226, , , ,639 Taxes 42,564 50,480 57,109 61,961 Net profit before minorities 184, , , ,678 Minority interests Preferred dividends 4,600 4,600 4,600 4,600 Exceptionals/extraordinaries Reported net profit 179, , , ,920 Analyst adjustments Net profit (Credit Suisse) 179, , , ,920 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 9,719,639 10,643,005 11,654,090 12,761,229 Risk provisions 400, , , ,440 Net customer loans 9,319,364 10,251,431 11,224,805 12,251,788 Interbank loans 1,526,665 1,450,332 1,450,332 1,450,332 Investment & securities 5,333,535 6,133,565 6,869,593 7,693,944 Cash & cash equivalents 2,811,653 3,120,935 3,464,238 3,845,304 Fixed assets Intangibles 26,647 26,647 26,647 26,647 Other assets 605, , , ,371 Total assets 19,570,061 21,525,881 23,675,262 26,039,092 Liabilities Interbank deposits 1,954,949 1,846,770 1,916,622 2,000,445 Customer deposits 15,038,001 16,692,181 18,528,321 20,566,436 Total deposits 16,992,950 18,538,951 20,444,943 22,566,882 Other liabilities 1,255,520 1,534,366 1,635,705 1,721,832 Total liabilities 18,248,470 20,073,317 22,080,649 24,288,714 Shareholders' equity 1,238,294 1,368,247 1,508,972 1,663,014 Minority interests 3,398 4,417 5,743 7,465 Preferred stock 79,899 79,899 79,899 79,899 Total liabilities & equity 19,570,061 21,525,881 23,675,262 26,039,092 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse Estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 324, , , ,794 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (5.7) Operating expense (12.7) Pre-provision profit (0.6) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 40

41 Asia Pacific/China Regional Banks Bank of China Ltd (3988.HK / 3988 HK) Rating OUTPERFORM Price (08-May-17, HK$) 3.70 INCREASE TARGET PRICE Target price (HK$) (from 4.40) 4.60 Upside/downside (%) 24.3 Mkt cap (HK$/US$ mn) 1,157,744/ 148,734 Number of shares (mn) 294,388 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Best beneficiary of Fed rate hike and OBOR Most globalised bank among Big 4. Bank of China (BOC) is one of China s biggest four (Big 4) state-owned banks, with total assets of Rmb18.1 tn and loan book of Rmb9.9 tn by end of Compared to its other three big peers, BOC is most internationalised, with overseas loans expanding by 11% YoY (domestic 9%) in 2016, accounting for 22% of total loans. By end of 2016, the bank had 11,556 outlets and 309,000 employees. Margins may see better performance than peers. BOC delivered zero bottom-line growth in 1Q17, and net profit of Rmb30 bn was slightly behind consensus. Insurance business and forex trading boosted non-interest income, while fee income was flattish. Net interest margin (NIM) widened by 5 bp QoQ to 1.80%, as the bank benefited from rising rates overseas and in China's interbank market. In addition, BOC acquired stakes in 15 village banks from China Development Bank recently (price Rmb1 bn) and is negotiating with other shareholders to expand holdings, in order to strengthen services in the country, but such steps may incur new bad assets in future. Looking forward. Overseas business and domestic forex business together accounts for 26% of total interest earnings assets, with the spread at ~1.5%, compared to pre-global Financial Crisis level of ~2.9%, indicating further upside room here. BOC is likely the largest beneficiary of the Federal Reserve rate cycle. In addition, We expect BOC to benefit from China's strategy of "One Belt One Road" (OBOR) and reap some credit demand and fees, by its leading overseas franchise among China banks. Valuation and risks. We have an OUTPERFORM rating on the stock and derive our new TP of HK$4.60 (from HK$4.40 previously) based on a twostage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 285, , , ,180.0 Pre-tax profit (Rmb mn) 222, , , ,775.9 Net attributable profit (Rmb mn) 157, , , ,859.6 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (3.6) (0.2) - Consensus EPS (Rmb) n.a EPS growth (%) (5.0) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 41

42 Bank of China Ltd (3988.HK / 3988 HK) Price (08 May 2017): HK$3.70; Rating: OUTPERFORM; Target Price: (from HK$4.40) HK$4.60; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 566, , , ,559 Interest expense 260, , , ,215 Net interest income 306, , , ,344 Fee and commission income 88,664 89,551 89,551 89,551 Trading income 0 16,132 17,745 18,632 Insurance income (& premiums) Other income 65,444 78,762 86,638 90,970 Total non-interest income 154, , , ,153 Total income 460, , , ,497 Personal expense 81,080 82,702 84,356 86,043 Other expenses 93, , , ,274 Total expenses 175, , , ,317 Pre-provision profit 285, , , ,180 Loan loss provisions 89, , , ,598 Operating profit 196, , , ,582 Associates/JV Other non-operating inc./(exp.) 26, ,085 1,194 Pre-tax profit 222, , , ,776 Taxes 38,361 39,142 45,089 49,280 Net profit before minorities 184, , , ,496 Minority interests 19,473 21,420 23,562 25,919 Preferred dividends 6,718 6,718 6,718 6,718 Exceptionals/extraordinaries Reported net profit 157, , , ,860 Analyst adjustments Net profit (Credit Suisse) 157, , , ,860 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 9,973,362 10,870,965 11,849,351 12,915,793 Risk provisions 237, , , ,062 Net customer loans 9,735,646 10,601,489 11,533,242 12,547,731 Interbank loans 1,176,482 1,529,427 1,835,312 2,110,609 Investment & securities 3,972,884 4,409,901 4,850,891 5,335,981 Cash & cash equivalents 2,349,188 2,642,837 2,959,977 3,315,174 Fixed assets Intangibles 16,303 16,629 16,962 17,301 Other assets 930, ,486 1,115,532 1,395,941 Total assets 18,148,889 20,106,510 22,277,992 24,688,135 Liabilities Interbank deposits 2,590,413 2,677,122 2,772,503 2,877,421 Customer deposits 12,939,748 14,557,217 16,304,082 18,260,572 Total deposits 15,530,161 17,234,339 19,076,585 21,137,993 Other liabilities 1,131,636 1,260,256 1,452,415 1,649,197 Total liabilities 16,661,797 18,494,595 20,529,000 22,787,190 Shareholders' equity 1,311,968 1,425,480 1,549,548 1,686,542 Minority interests 75,410 86,722 99, ,689 Preferred stock 99,714 99,714 99,714 99,714 Total liabilities & equity 18,148,889 20,106,510 22,277,992 24,688,135 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 294, , , ,388 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (5.0) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (2.9) Operating expense (5.6) Pre-provision profit (1.2) Net profit (4.8) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 42

43 Asia Pacific/China Multinational Banks Rating NEUTRAL Price (08-May-17, HK$) 5.81 DECREASE TARGET PRICE Target price (HK$) (from 6.50) 6.40 Upside/downside (%) 10.2 Mkt cap (HK$/US$ mn) 468,500/ 60,188 Number of shares (mn) 74,263 Free float (%) wk price range ADTO-6M (US$ mn) 20.1 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Bank of Communications (3328.HK / 3328 HK) ROE generation still lacklustre Fundamentals continue to be weak. BCOM is the largest joint-stock bank in China with total assets close to Rmb8.4 tn (3.6% of market share) at the end of The bank's ROE has been on the low-end among peers, mainly due to weaker top-line profitability and conservative gearing. The bank was the first to announce hybrid ownership reform, however its progress has lagged market expectation. By end of 2016, the bank had 3,285 outlets and 92,000 employees. Margins contracted sharply as a large bank. 1Q17 net interest margin (NIM) dropped 23 bp QoQ to 1.57% (1.88% in FY16), due to an adverse interbank borrowing position (13% of asset) and a rising market rate. BCOM's bottom line expanded 1.3% YoY, in-line with consensus, thanks to a lower income tax rate as its pre-tax profit dropped by 3%. However, BCOM's investment strategy remains prudent. The bank invested <10% of WMP (wealth management product) proceeds into non-standard credit assets, while credit bond also contributed to <10% of total bond portfolio, per management during the 1Q17 results briefing. Looking forward. The 1Q17 NIM of 1.57% may be only superior to MSB and likely CEB, and would further narrow due to continuous interbank tightening. NPL coverage ratio was 150% by end-1q17, touching the regulatory floor. Due to relatively weak top-line profitability, its net profit growth is likely under pressure in order to comply with the NPL coverage ratio rule. In addition, the revenue growth this year may be driven by credit card and other non-interest business, such as precious metal and leasing. Valuation and risks. We have a NEUTRAL rating on the stock and derive our new TP of HK$6.40 (from HK$6.50 previously) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 114, , , ,961.6 Pre-tax profit (Rmb mn) 86, , , ,887.5 Net attributable profit (Rmb mn) 66, , , ,716.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (1.7) (3.7) - Consensus EPS (Rmb) n.a EPS growth (%) (0.3) (1.0) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 43

44 Bank of Communications (3328.HK / 3328 HK) Price (08 May 2017): HK$5.81; Rating: NEUTRAL; Target Price: (from HK$6.50) HK$6.40; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 289, , , ,177 Interest expense 154, , , ,692 Net interest income 134, , , ,751 Fee and commission income 36,795 38,635 40,566 42,595 Trading income 0 4,014 4,817 5,780 Insurance income (& premiums) Other income 22,300 22,746 27,295 32,754 Total non-interest income 59,095 65,395 72,678 81,129 Total income 193, , , ,880 Personal expense 26,040 27,342 28,709 30,145 Other expenses 53,432 48,281 54,761 62,774 Total expenses 79,472 75,623 83,470 92,918 Pre-provision profit 114, , , ,962 Loan loss provisions 28,480 34,256 41,927 49,185 Operating profit 86,014 88,606 93, ,776 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 86,110 88,707 93, ,888 Taxes 18,459 19,515 20,634 22,415 Net profit before minorities 67,651 69,191 73,156 79,472 Minority interests Preferred dividends 884 2,994 2,994 2,994 Exceptionals/extraordinaries Reported net profit 66,326 65,668 69,528 75,716 Analyst adjustments Net profit (Credit Suisse) 66,326 65,668 69,528 75,716 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 4,102,959 4,554,284 5,055,256 5,611,334 Risk provisions 93, , , ,408 Net customer loans 4,009,046 4,452,517 4,938,800 5,475,926 Interbank loans 715, , ,786 1,086,565 Investment & securities 2,351,668 2,939,585 3,674,481 4,409,378 Cash & cash equivalents 991,435 1,032,156 1,125,050 1,248,806 Fixed assets Intangibles 2,410 2,458 2,507 2,558 Other assets 337, , , ,297 Total assets 8,403,166 9,614,286 11,004,308 12,600,413 Liabilities Interbank deposits 1,787,463 2,234,329 2,792,911 3,491,139 Customer deposits 4,728,589 5,059,590 5,514,953 6,121,598 Total deposits 6,516,052 7,293,919 8,307,864 9,612,737 Other liabilities 1,254,707 1,642,454 1,968,964 2,205,616 Total liabilities 7,770,759 8,936,373 10,276,829 11,818,353 Shareholders' equity 569, , , ,919 Minority interests 3,265 3,265 3,265 3,265 Preferred stock 59,876 59,876 59,876 59,876 Total liabilities & equity 8,403,166 9,614,286 11,004,308 12,600,413 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suissee estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 74,263 74,263 74,263 74,263 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.3) (1.0) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (0.3) Operating expense (2.4) (4.8) Pre-provision profit Net profit (0.3) (1.0) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 44

45 Asia Pacific/China Regional Banks Rating OUTPERFORM Price (08-May-17, HK$) Target price (HK$) (from 25.00) Upside/downside (%) 38.1 Mkt cap (HK$/US$ mn) 528,108/ 67,845 Number of shares (mn) 25,220 Free float (%) wk price range ADTO-6M (US$ mn) 40.4 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Merchants Bank Co Ltd (3968.HK / 3968 HK) INCREASE TARGET PRICE Strong retail franchise well-positioned amid China s economic transformation High-quality retail bank. CMB has a leading retail franchise among peers, with retail loans/deposits accounting for 47%/33% of the total by 2016, noticeably higher than other joint-stock banks. In 2016, the bank had 91 mn retail customers, and 1.9 mn of Sunflower-level and above customers who actually contributed 82% of all retail AUM. The bank's well-established wealthy household customer base has also helped it build one of the leading private bank and wealth management franchises in the industry. By end of 2016, the bank had 1,819 outlets and 70,000 employees. Asset quality to improve after reporting NPL formation for the first time. CMB reported NPL formation of 2.24% in 2016 (down 102 bp) and indicated each quarter saw a declining rate YoY. And the asset quality, on reported basis, seemed to further improve in 1Q17 with NPL ratio falling 11 bp QoQ to 1.76%, allowing credit cost of 218 bp annualised (-10 bp QoQ and -36 bp YoY). In addition, net interest margin climbed 4 bp QoQ to 2.43%, better than jointstock peers and the tone during FY16 results briefing. Looking forward. An improving macro environment should help CMB, whose provision has stayed high in recent quarters mainly due to private SME borrowers. We view its retail banking-based strategy as less risky and more capital-efficient, which should position the bank well amid China's transformation to a consumption-led economy. In addition, CMB had Rmb2.4 tn of wealth management products (almost all are off-b/s) as of the year end, accounting for 40% of total assets, but most were allocated in 'safer assets' such as high-grade bonds, deposits and money market instruments. Valuation and risks. We have an OUTPERFORM rating on the stock and it is one of our top picks. We derive our new TP of HK$27.40 (from HK$25 previously) based on a two-stage Gordon growth model. Worse-thanexpected economic recovery is the main risk, which would lead to narrower margin due to monetary easing. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 144, , , ,661.0 Pre-tax profit (Rmb mn) 78, , , ,285.7 Net attributable profit (Rmb mn) 62, , , ,081.0 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 45

46 China Merchants Bank Co Ltd (3968.HK / 3968 HK) Price (08 May 2017): HK$19.84; Rating: OUTPERFORM; Target Price: (from HK$25.00) HK$27.40; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 215, , , ,234 Interest expense 80,886 76,168 85,697 95,664 Net interest income 134, , , ,571 Fee and commission income 60,865 57,822 57,822 63,604 Trading income 0 2,021 2,021 2,223 Insurance income (& premiums) Other income 14,489 11,454 11,454 12,599 Total non-interest income 75,354 71,297 71,297 78,426 Total income 209, , , ,997 Personal expense 32,811 34,452 36,519 38,710 Other expenses 32,337 32,188 36,646 43,626 Total expenses 65,148 66,639 73,164 82,336 Pre-provision profit 144, , , ,661 Loan loss provisions 66,159 68,589 73,362 80,863 Operating profit 78,642 84,915 95, ,798 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 78,963 85,284 95, ,286 Taxes 16,583 17,910 20,075 22,950 Net profit before minorities 62,380 67,375 75,521 86,336 Minority interests Preferred dividends 0 0 1, Exceptionals/extraordinaries Reported net profit 62,081 67,031 74,026 85,081 Analyst adjustments Net profit (Credit Suisse) 62,081 67,031 74,026 85,081 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 3,261,681 3,783,550 4,351,082 4,960,234 Risk provisions 110, , , ,125 Net customer loans 3,151,649 3,659,131 4,203,722 4,791,109 Interbank loans 581, , , ,421 Investment & securities 1,450,922 1,566,996 1,645,346 1,727,613 Cash & cash equivalents 597, , , ,311 Fixed assets Intangibles Other assets 160, , , ,308 Total assets 5,942,311 6,572,175 7,167,059 7,827,763 Liabilities Interbank deposits 1,297,533 1,347,049 1,441,955 1,560,588 Customer deposits 3,802,049 4,182,254 4,600,479 5,060,527 Total deposits 5,099,582 5,529,303 6,042,435 6,621,115 Other liabilities 439, , , ,793 Total liabilities 5,538,949 6,092,844 6,641,200 7,238,908 Shareholders' equity 402, , , ,508 Minority interests 1,012 1,113 1,225 1,347 Preferred stock 0 27,500 20,000 20,000 Total liabilities & equity 5,942,311 6,572,175 7,167,059 7,827,763 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 25,220 25,220 25,220 25,220 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (4.1) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 46

47 Asia Pacific/China Regional Banks Rating NEUTRAL Price (08-May-17, HK$) 4.86 Target price (HK$) (from 5.90) 5.20 Upside/downside (%) 7.0 Mkt cap (HK$/US$ mn) 396,188/ 50,898 Number of shares (mn) 63,817 Free float (%) wk price range ADTO-6M (US$ mn) 39.8 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Citic Bank (0998.HK / 998 HK) DECREASE TARGET PRICE Transformation to retail banking business takes time to bear fruit Pivoting to retail business by leveraging bank card franchise: CITIC Bank is a large nationwide commercial bank in China with total assets of Rmb5.9 tn and Rmb2.9 tn, accounting for ~3% of the whole sector as of The bank has been traditionally focusing on serving corporate clients, with corporate loans accounting for 67% of its loan book by However, in recent years the bank has been trying to pivot to retail banking business under the leadership of new management, partly by leveraging its bank card franchise, which generated 43% of the bank s gross fee income in FY16. By end of 2016, the bank had 1,424 outlets and 58,000 employees. Margins remained under pressure. 1Q17 net profit grew 1.7% YoY, slightly behind consensus, and accounted for only 24% of FY17 forecast. Net interest margin (NIM) narrowed 16 bp QoQ to 1.79% in 1Q, likely due to funding cost hike amid interbank tightening and asset yield drop from more mortgage and safer bond mix. Interbank and other non-deposit accounted for 35% of its average funding balance in FY16, whilst debt securities balance surged by 20% in 1Q. The bank tried to counter some of that pressure by aggressively jacking up loan-to-deposit ratio (up 7 pp QoQ to 86%). Looking forward. The bank applied for the qualification to use internal based method (IRB) for risk-weighted assets calculation in the beginning of If the bank obtains approval from the regulator, it would boost up its capital ratio and alleviate some capital pressure. However, currently the timetable for approval and implementation remains unclear. In addition, the bank s retail franchise still trails some other peers such as CMB, and we believe it will take time for its retail transformation to bear fruit. Valuation and risks. We have a NEUTRAL rating on CITIC Bank and derive our new TP of HK$5.20 (from HK$5.90 previously) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision Op profit (Rmb 106, , , ,605.6 mn) Pre-tax profit (Rmb mn) 54, , , ,654.1 Net attributable profit (Rmb mn) 41, , , ,448.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (6.2) (10.0) - Consensus EPS (Rmb) n.a EPS growth (%) (3.3) (1.9) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 Ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 47

48 China Citic Bank (0998.HK / 998 HK) Price (08 May 2017): HK$4.86; Rating: NEUTRAL; Target Price: (from HK$5.90) HK$5.20; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 213, , , ,494 Interest expense 107, , , ,860 Net interest income 106, , , ,634 Fee and commission income 42,280 43,548 45,726 50,298 Trading income ,024 Insurance income (& premiums) Other income 5,741 5,026 5,278 5,805 Total non-interest income 48,021 49,462 51,935 57,128 Total income 154, , , ,762 Personal expense 24,418 26,860 30,083 33,693 Other expenses 22,854 17,202 17,628 18,464 Total expenses 47,272 44,062 47,711 52,157 Pre-provision profit 106, , , ,606 Loan loss provisions 52,288 53,678 60,843 68,960 Operating profit 54,599 54,967 56,800 59,645 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 54,608 54,976 56,809 59,654 Taxes 12,822 12,644 13,066 13,720 Net profit before minorities 41,786 42,331 43,743 45,934 Minority interests Preferred dividends 0 1,328 1,328 1,328 Exceptionals/extraordinaries Reported net profit 41,629 40,846 42,258 44,448 Analyst adjustments Net profit (Credit Suisse) 41,629 40,846 42,258 44,448 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,877,927 3,136,940 3,450,634 3,830,204 Risk provisions 75,543 82,684 90,339 99,990 Net customer loans 2,802,384 3,054,257 3,360,295 3,730,214 Interbank loans 546, , , ,819 Investment & securities 1,852,670 2,037,937 2,241,731 2,465,904 Cash & cash equivalents 553, , , ,062 Fixed assets Intangibles 2,181 2,224 2,269 2,314 Other assets 178, , , ,324 Total assets 5,931,050 6,297,913 6,844,702 7,537,009 Liabilities Interbank deposits 1,369,561 1,306,225 1,271,308 1,268,595 Customer deposits 3,639,290 3,784,862 3,974,105 4,212,551 Total deposits 5,008,851 5,091,087 5,245,413 5,481,146 Other liabilities 537, ,479 1,151,314 1,573,366 Total liabilities 5,546,554 5,882,565 6,396,728 7,054,513 Shareholders' equity 344, , , ,524 Minority interests 5,272 5,799 6,379 7,017 Preferred stock 34,955 34,955 34,955 34,955 Total liabilities & equity 5,931,050 6,297,913 6,844,702 7,537,009 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 48,935 48,935 48,935 48,935 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (3.3) (1.9) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue 5.9 (0.9) Operating expense (6.6) (6.8) Pre-provision profit Net profit 1.1 (1.9) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 48

49 Rating NEUTRAL Price (08-May-17, HK$) 7.34 Target price (HK$) (from 8.90) 7.80 Upside/downside (%) 6.3 Mkt cap (HK$/US$ mn) 309,111/ 39,711 Number of shares (mn) 36,485 Free float (%) wk price range ADTO-6M (US$ mn) 26.5 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Minsheng Banking Co Ltd (1988.HK / 1988 HK) DECREASE TARGET PRICE Asia Pacific/China Regional Banks Margin likely fall below 1.5% while poor image was hit by WMP event and Anbang holding A joint-stock bank serving small and micro enterprise (SME). Founded in 1996, China Minsheng Bank (MSB) is one nationwide commercial bank with total assets of Rmb5.9 tn and loan book of 2.9 tn at end MSB has more experience and a better customer base than peers in serving small businesses, on which the bank managed higher-than-sector profit growth after At its peak in 2013, loans to SMEs reached Rmb410 bn, accounting for 26% of total loans for the bank, versus 14% in By end- 2016, the bank had 3,003 outlets and 59,000 employees. Margins under pressure and likely below 1.5%. Net interest margin, as per our estimate, narrowed by 23 bp QoQ in 1Q17, mainly due to interbank tightening. The bank allocated more sources to high yield loans and receivable investment (nearly all are NSCAs in the year end), under the strict MPA system and amid a regulatory storm. In addition, MSB also has to aggressively issue debt securities to fund growth when the market lacks cheap deposits and regulators are cracking down on interbank operations. Looking forward. 71% of incremental NPLs in 2016 came from the retail side (gross loan balance +24%), which should be mostly attributed to lending to micro and small enterprises, in our view. We believe MSB's exposure to SME lending is still taking its toll on the bank's asset quality and the outlook may remain challenging. The total amount involved in the recent bank WMP event would range from Rmb1.7-3 bn, per management in 1Q17 results briefing, but such a case indicates flaws in the bank's internal risk control. Valuation and risks. We have a NEUTRAL rating on the stock and derive our new TP of HK$7.80 (from HK$8.90 previously) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 101, , , ,142.3 Pre-tax profit (Rmb mn) 60, , , ,822.0 Net attributable profit (Rmb mn) 47, , , ,527.3 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. 1.2 (5.2) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 49

50 China Minsheng Banking Co Ltd (1988.HK / 1988 HK) Price (08 May 2017): HK$7.34; Rating: NEUTRAL; Target Price: (from HK$8.90) HK$7.80; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 203, , , ,091 Interest expense 109, , , ,424 Net interest income 94,684 90, , ,667 Fee and commission income 52,261 49,648 49,648 52,130 Trading income 1,633 1,013 1,013 1,063 Insurance income (& premiums) Other income 5,473 5,738 5,738 6,025 Total non-interest income 59,367 56,399 56,399 59,219 Total income 154, , , ,886 Personal expense 25,082 26,587 28,182 30,437 Other expenses 27,342 17,585 21,749 28,307 Total expenses 52,424 44,172 49,931 58,743 Pre-provision profit 101, , , ,142 Loan loss provisions 41,378 41,567 50,488 64,320 Operating profit 60,249 61,013 62,755 65,822 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 60,249 61,013 62,755 65,822 Taxes 11,471 11,592 11,923 12,506 Net profit before minorities 48,778 49,420 50,831 53,316 Minority interests 935 1,029 1,131 1,244 Preferred dividends Exceptionals/extraordinaries Reported net profit 47,843 47,848 49,156 51,527 Analyst adjustments Net profit (Credit Suisse) 47,843 47,848 49,156 51,527 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,461,586 2,904,671 3,427,512 4,044,465 Risk provisions 64,394 71,478 85, ,283 Net customer loans 2,397,192 2,833,194 3,341,822 3,936,181 Interbank loans 461, , , ,421 Investment & securities 2,206,909 3,420,709 4,788,993 6,465,140 Cash & cash equivalents 524, , , ,055 Fixed assets Intangibles 5,112 5,112 5,112 5,112 Other assets 310, , , ,570 Total assets 5,895,877 7,463,897 9,477,005 11,838,256 Liabilities Interbank deposits 1,836,712 2,628,893 3,576,355 4,572,926 Customer deposits 3,082,242 3,297,999 3,561,839 3,846,786 Total deposits 4,918,954 5,926,892 7,138,194 8,419,712 Other liabilities 624,896 1,146,376 1,908,178 2,945,710 Total liabilities 5,543,850 7,073,267 9,046,372 11,365,422 Shareholders' equity 332, , , ,381 Minority interests 9,437 10,381 11,419 12,561 Preferred stock 9,892 9,892 9,892 9,892 Total liabilities & equity 5,895,877 7,463,897 9,477,005 11,838,256 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 36,485 36,485 36,485 36,485 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue 0.2 (4.7) Operating expense (9.9) (15.7) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 50

51 Asia Pacific/China Regional Banks Rating (from Neutral) UNDERPERFORM Price (08-May-17, HK$) 3.53 DOWNGRADE RATING Target price (HK$) (from 3.90) 3.40 Upside/downside (%) -3.7 Mkt cap (HK$/US$ mn) 197,677/ 25,395 Number of shares (mn) 46,719 Free float (%) wk price range ADTO-6M (US$ mn) 4.6 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Everbright Bank (6818.HK / 6818 HK) Private placement announced A wealth management bank. Founded in 1992, China Everbright Bank (CEB) is one major joint-stock bank with a nationwide presence. Controlled by China Everbright Group, the bank has loans of Rmb1.8 tn and deposits of Rmb2.1 tn, occupying 1.7% and 1.4% of the whole market by end However, the bank's wealth management product (WMP) balance has reached Rmb1.4 tn (+12% YoY), or 4.7% of bank WMP sector. By end of 2016, the bank has 1,122 outlets and 42,000 of employees. Shrunk margins with capital pressure. CEB reported a 2% bottom-line growth and falling margins. Possibly to comply with regulatory tightening, the bank cut interbank borrowing by 26% and interbank assets by 12%, bringing its net position as 8% of total asset in 1Q17. In addition, the bank aggressively issued debt securities (balance up Rmb174 bn or 47% QoQ), including a large amount of interbank negotiable certificate of deposits, Rmb28 bn of Tier 2 Capital bond and Rmb30 bn convertible bond issuance. Moreover, the bank planned Rmb50 bn of preference this year. Looking forward. According to the regulations, Everbright Group cannot sell ITS stake at <1x P/B, which means that from a management perspective, the valuation of CEB, the key component of the Group, cannot drop significantly lower than 1x P/B. In addition, CEB announced a private placement of no more than 6,569 mn H-shares to the Group and Overseas Chinese Town Enterprises, which may serve as 116bp of CET1 capital. The placement price was HK$5.33 (BVPS at end-fy16) and was subject to regulators' approvals. Valuation and risks. We downgrade CEB to UNDERPERFORM from Neutral and derive our new TP of HK$3.40 (from HK$3.90 previously) based on a two-stage Gordon growth model. Our downgrade is based on potential downside implied by the new TP and worse margin outlook. Worse-thanexpected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 64, , , ,931.5 Pre-tax profit (Rmb mn) 40, , , ,218.3 Net attributable profit (Rmb mn) 29, , , ,360.1 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (3.0) (11.9) - Consensus EPS (Rmb) n.a EPS growth (%) (0.9) 0.1 (4.0) 7.9 P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 51

52 China Everbright Bank (6818.HK / 6818 HK) Price (08 May 2017): HK$3.53; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from HK$3.90) HK$3.40; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 143, , , ,794 Interest expense 78,162 97, , ,699 Net interest income 65,288 66,352 74,727 86,095 Fee and commission income 28,112 32,329 35,562 39,118 Trading income Insurance income (& premiums) Other income 965 1,110 1,221 1,343 Total non-interest income 29,077 33,439 36,782 40,461 Total income 94,365 99, , ,556 Personal expense 15,171 16,385 18,023 19,825 Other expenses 15,083 15,648 17,771 20,799 Total expenses 30,254 32,033 35,794 40,624 Pre-provision profit 64,111 67,758 75,715 85,932 Loan loss provisions 23,931 26,486 32,467 39,713 Operating profit 40,180 41,272 43,248 46,218 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 40,180 41,272 43,248 46,218 Taxes 9,792 10,318 10,812 11,555 Net profit before minorities 30,388 30,954 32,436 34,664 Minority interests Preferred dividends 1,060 1,590 4,245 4,245 Exceptionals/extraordinaries Reported net profit 29,269 29,305 28,132 30,360 Analyst adjustments Net profit (Credit Suisse) 29,269 29,305 28,132 30,360 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 1,795,278 2,082,522 2,394,901 2,754,136 Risk provisions 43,634 48,799 58,825 74,601 Net customer loans 1,751,644 2,033,723 2,336,076 2,679,535 Interbank loans 425, , , ,007 Investment & securities 1,318,143 1,753,130 2,191,413 2,739,266 Cash & cash equivalents 381, , , ,639 Fixed assets Intangibles 1,281 1,307 1,333 1,359 Other assets 143, , , ,632 Total assets 4,020,042 4,712,673 5,448,228 6,495,720 Liabilities Interbank deposits 1,154,050 1,210,150 1,270,925 1,331,700 Customer deposits 2,120,887 2,248,140 2,383,029 2,526,010 Total deposits 3,274,937 3,458,290 3,653,954 3,857,710 Other liabilities 494, ,523 1,444,795 2,262,492 Total liabilities 3,768,974 4,386,813 5,098,749 6,120,203 Shareholders' equity 250, , , ,701 Minority interests Preferred stock Total liabilities & equity 4,020,042 4,712,673 5,448,228 6,495,720 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 46,679 46,679 46,679 46,679 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.9) 0.1 (4.0) 7.9 P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (6.5) Pre-provision profit Net profit (0.9) 0.1 (4.0) 7.9 Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 52

53 Rating (from UNDERPERFORM) NEUTRAL [V] Price (08-May-17, HK$) 4.91 Target price (HK$) (from 3.50) 4.80 Upside/downside (%) -2.2 Mkt cap (HK$/US$ mn) 396,286/ 50,910 Number of shares (mn) 80,710 Free float (%) wk price range ADTO-6M (US$ mn) 13.4 Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Asia Pacific/China Regional Banks Postal Savings Bank of China Co., Ltd. (1658.HK / 1658 HK) UPGRADE RATING To-be large retail bank, though unique agency outlet model is dragging the profitability Sixth-largest commercial bank in China with a unique business model: Established in 2007, Postal Savings Bank of China (PSBC) was the sixthlargest commercial bank in China by assets as of the end of 2016, with total assets reaching Rmb8.2 tn. The bank has a unique business model where in addition to its proprietary outlets, it also conducts the retail banking business through agency outlets, which are post offices owned by China Post Group, helping the bank's distribution network to be the biggest in the country. By end of 2016, the bank has 170,000 employees. PSBC pays back most of what it earns from agency outlets. The bank has 39,927 outlets of which 79% (31,764) are post offices. The agency outlets are allowed to take deposits and deal in retail banking fee products, but are not allowed to extend loans. In return, PSBC has to pay approximately 1.4% on the deposits and pass through the fee income generated by the agency outlets to the parent. Looking forward. Our pro-forma DuPont analysis suggests PSBC could be more profitable without the agency outlets. However, the surplus deposits from agency outlets are invested in lower-risk securities/interbank, which raises the gearing for the overall bank (to 25x vs Big 4's 14x), boosting ROEs on a reported basis. Thanks to rising interbank rate in China, the return on such exposure is rising, therefore improving margins. In addition, the bank aimed to boost its loan-to-deposit ratio to 50% by 2019 (41% in FY16), when capital may act as a constraint. Valuation and risks: We upgrade PSBC to NEUTRAL from Underperform and derive our new TP of HK$4.80 (from HK$3.50) based on a two-stage Gordon growth model. Our upgrade is based on potential upside implied by new TP and the better margin outlook. We believe the current valuation of 0.9x 2017E P/B (versus sector average of 0.75x) is unjustified by the bank s lower-than-peers 2017E ROE of 12% (versus 14.0% sector average). Major upside risk would be if the bank can negotiate rates on agency deposit fees paid to China Post Group. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 59, , , ,699.1 Pre-tax profit (Rmb mn) 42, , , ,650.4 Net attributable profit (Rmb mn) 39, , , ,790.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) (8.9) (0.3) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 53

54 Postal Savings Bank of China Co., Ltd. (1658.HK / 1658 HK) Price (08 May 2017): HK$4.91; Rating: (from UNDERPERFORM) NEUTRAL [V]; Target Price: (from HK$3.50) HK$4.80; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 278, , , ,274 Interest expense 120, , , ,704 Net interest income 157, , , ,569 Fee and commission income 11,498 14,947 18,684 22,421 Trading income 128, , , ,254 Insurance income (& premiums) Other income (107,638) (127,984) (152,081) (176,254) Total non-interest income 32,016 24,947 20,684 24,421 Total income 189, , , ,990 Personal expense 36,579 36,579 38,408 42,249 Other expenses 93,193 95, , ,043 Total expenses 129, , , ,291 Pre-provision profit 59,830 71,704 84, ,699 Loan loss provisions 16,902 22,864 28,666 36,049 Operating profit 42,928 48,840 56,274 66,650 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 42,928 48,840 56,274 66,650 Taxes 3,152 4,074 5,257 6,893 Net profit before minorities 39,776 44,765 51,016 59,757 Minority interests (25) (28) (30) (33) Preferred dividends 0 0 2,000 2,000 Exceptionals/extraordinaries Reported net profit 39,801 44,793 49,047 57,790 Analyst adjustments Net profit (Credit Suisse) 39,801 44,793 49,047 57,790 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 3,010,648 3,582,671 4,263,379 5,073,421 Risk provisions 71,431 75,065 80,213 89,322 Net customer loans 2,939,217 3,507,606 4,183,166 4,984,099 Interbank loans 442, , , ,542 Investment & securities 3,463,841 3,810,225 4,191,248 4,610,372 Cash & cash equivalents 1,310,273 1,395,242 1,540,870 1,685,016 Fixed assets Intangibles Other assets 110, , , ,458 Total assets 8,265,622 9,205,242 10,499,664 11,906,487 Liabilities Interbank deposits 425, , , ,690 Customer deposits 7,286,311 8,379,258 9,552,354 10,794,160 Total deposits 7,711,945 8,506,948 9,680,044 10,921,850 Other liabilities 206, , , ,985 Total liabilities 7,918,734 8,769,480 10,021,514 11,377,835 Shareholders' equity 346, , , ,107 Minority interests Preferred stock 0 50,000 50,000 50,000 Total liabilities & equity 8,265,622 9,205,242 10,499,664 11,906,487 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 71,810 81,031 81,031 81,031 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (8.9) (0.3) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (0.5) Operating expense Pre-provision profit (10.7) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 54

55 (3618.HK / 3618 HK) Rating OUTPERFORM Price (08-May-17, HK$) 5.19 DECREASE TARGET PRICE Target price (HK$) (from 6.60) 6.30 Upside/downside (%) 21.4 Mkt cap (HK$/US$ mn) 48,267/ 6,201 Number of shares (mn) 9,300 Free float (%) wk price range ADTO-6M (US$ mn) 5.6 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Chongqing Rural Commercial Bank Asia Pacific/China Regional Banks A leading city commercial bank in West China A leading CB in Western China. Headquartered in Chongqing, CQRC is a leading city commercial bank in Western China, with total assets of ~Rmb800 bn and loan book of ~Rmb300 bn in the year end (0.3% of market share). CQRC debuted in the HK stock market in 2010, after which it generated superior returns for shareholders with ROE of 17% on an average. Chongqing's GDP grew by 10.7% in 2016 and 10.5% in 1Q17, around 4 pp higher than the overall country, which gives CQRC a locational advantage. By end of 2016, the bank had 1,777 outlets and 16,000 employees. Margin improved with optimised balance sheet. Net interest margin widened 4 bp QoQ to 2.66%, likely benefiting from interbank tightening. The bank optimised its funding structure by reducing interbank borrowing (-34% QoQ), but it is not clear why it aggressively issued debt securities (+60% QoQ). 1Q total deposit expanded by 7.4% QoQ, higher than the pace of gross loans (+4.0% QoQ) and pushing down loan-to-deposit ratio by 2 pp to 56%. NPL ratio remained at 0.96%, flattish for three quarters, with NPL coverage at 425%. Looking forward. CQRC has announced private placement of not more than 700 mn shares (=7.5% of current) at a price of Rmb5.66 per share (=HK$6.3 per share = NAV of 31 December 2016), ~12% premium to close price of the trading day before. It will add 74 bp to CET1 of 9.85%, per our rough estimate. Such placement should be attributed to a possible delay of its A- share listing, which was announced in April 2016 and has already obtained approval from local CBRC in September The issuance in Shanghai Stock Exchange would be no more than 1,357 mn shares. Valuation and risks. We maintain our OUTPERFORM rating on the stock and derive our new TP of HK$6.30 (vs HK$6.60) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 13, , , ,957.4 Pre-tax profit (Rmb mn) 10, , , ,442.5 Net attributable profit (Rmb mn) 7, , , ,016.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 55

56 Chongqing Rural Commercial Bank (3618.HK / 3618 HK) Price (08 May 2017): HK$5.19; Rating: OUTPERFORM; Target Price: (from HK$6.60) HK$6.30; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 32,065 35,490 41,802 49,178 Interest expense 12,628 13,576 16,365 19,579 Net interest income 19,425 21,914 25,437 29,599 Fee and commission income 2,118 2,012 2,012 2,012 Trading income (198) (50) (50) (50) Insurance income (& premiums) Other income Total non-interest income 2,237 2,119 2,125 2,130 Total income 21,662 24,034 27,562 31,729 Personal expense 5,296 6,038 6,460 6,913 Other expenses 3,155 2,879 3,765 4,859 Total expenses 8,451 8,916 10,225 11,771 Pre-provision profit 13,211 15,117 17,336 19,957 Loan loss provisions 2,677 3,606 4,920 6,515 Operating profit 10,534 11,511 12,416 13,442 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 10,534 11,511 12,416 13,442 Taxes 2,644 2,878 3,104 3,361 Net profit before minorities 7,891 8,634 9,312 10,082 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 7,834 8,574 9,249 10,016 Analyst adjustments Net profit (Credit Suisse) 7,834 8,574 9,249 10,016 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 300, , , ,832 Risk provisions 12,305 14,313 17,320 21,631 Net customer loans 288, , , ,201 Interbank loans 150, , , ,372 Investment & securities 263, , , ,599 Cash & cash equivalents 85,836 93, , ,520 Fixed assets Intangibles Other assets 15,205 16,273 21,732 31,728 Total assets 803, ,807 1,041,668 1,185,878 Liabilities Interbank deposits 113, ,923 96,827 91,986 Customer deposits 518, , , ,759 Total deposits 631, , , ,745 Other liabilities 117, , , ,884 Total liabilities 748, , ,359 1,109,629 Shareholders' equity 52,593 59,307 66,549 74,400 Minority interests 1,597 1,676 1,760 1,848 Preferred stock Total liabilities & equity 803, ,807 1,041,668 1,185,878 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 9,300 9,300 9,300 9,300 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (1.0) Operating expense (6.9) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 56

57 Asia Pacific/China Regional Banks Rating (from OUTPERFORM) NEUTRAL Price (08-May-17, HK$) 6.15 Target price (HK$) (from 7.70) 6.80 Upside/downside (%) 10.6 Mkt cap (HK$/US$ mn) 19,231/ 2,471 Number of shares (mn) 3,127 Free float (%) wk price range ADTO-6M (US$ mn) 0.6 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Bank of Chong Qing (1963.HK / 1963 HK) DOWNGRADE RATING Riding on Chongqing, but facing regulatory pressure A high-growing CB in Western China. Headquartered in Chongqing, Bank of Chongqing (BOCQ) is a city commercial bank (CB) in Western China, with total assets of around Rmb400 bn. Investment in local consumer finance company. BOCQ is involved in the establishment of Chongqing Mashang Consumer Finance Company (18% stake), which would bring earnings in the long run. Moreover, management of the bank continued to purchase the stock in the secondary market, which offers A buffer to the stock price. Exposure in Guizhou could pose some risks. Compared to CQRC, which mainly focuses on the Chongqing business, BOCQ has some exposure in the coal and mining sector in the Guizhou Branch and may face asset quality deterioration amid supply side reforms. Valuations. We revise our FY earnings forecast and introduce 2019 financials. We downgrade the stock to NEUTRAL (from Outperform previously) and derive our TP of HK$6.80 (HK$7.70 previously) based on a two-stage Gordon growth model. Our downgrade is based on the potential upside implied by new TP and the uninspiring margin outlook. Worse-thanexpected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 7, , , ,119.4 Pre-tax profit (Rmb mn) 4, , , ,294.1 Net attributable profit (Rmb mn) 3, , , ,720.6 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (0.8) (1.3) - Consensus EPS (Rmb) n.a EPS growth (%) (4.1) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 57

58 Bank of Chong Qing (1963.HK / 1963 HK) Price (08 May 2017): HK$6.15; Rating: (from OUTPERFORM) NEUTRAL; Target Price: (from HK$7.70) HK$6.80; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 16,087 17,797 20,030 22,403 Interest expense 8,549 9,941 11,604 13,156 Net interest income 7,677 7,856 8,426 9,247 Fee and commission income 1,926 2,215 2,547 2,929 Trading income Insurance income (& premiums) Other income (0) (5) (6) (7) Total non-interest income 1,926 2,215 2,547 2,929 Total income 9,603 10,070 10,973 12,175 Personal expense 1,162 1,255 1,381 1,519 Other expenses 1,375 1,272 1,373 1,537 Total expenses 2,537 2,528 2,754 3,056 Pre-provision profit 7,066 7,543 8,219 9,119 Loan loss provisions 2,411 2,552 2,699 2,829 Operating profit 4,655 4,991 5,520 6,290 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 4,659 4,995 5,524 6,294 Taxes 1,156 1,249 1,381 1,574 Net profit before minorities 3,502 3,746 4,143 4,721 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 3,502 3,746 4,143 4,721 Analyst adjustments Net profit (Credit Suisse) 3,502 3,746 4,143 4,721 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 151, , , ,856 Risk provisions 4,232 4,671 4,618 4,405 Net customer loans 146, , , ,451 Interbank loans 55,706 58,492 61,416 64,487 Investment & securities 120, , , ,277 Cash & cash equivalents 42,813 46,686 51,355 56,490 Fixed assets Intangibles Other assets 7,482 8,175 15,773 23,876 Total assets 373, , , ,581 Liabilities Interbank deposits 58,394 45,263 38,474 32,703 Customer deposits 229, , , ,146 Total deposits 287, , , ,848 Other liabilities 61,304 79,626 99, ,271 Total liabilities 349, , , ,119 Shareholders' equity 23,812 26,648 29,818 33,462 Minority interests Preferred stock Total liabilities & equity 373, , , ,581 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 3,127 3,127 3,127 3,127 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (4.1) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (20.5) (0.4) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 58

59 Asia Pacific/China Regional Banks Huishang Bank (3698.HK / 3698 HK) Rating (from NEUTRAL) UNDERPERFORM Price (08-May-17, HK$) 3.68 DOWNGRADE RATING Target price (HK$) (from 3.80) 2.90 Upside/downside (%) To establish a direct bank Mkt cap (HK$/US$ mn) 40,663/ 5,224 Number of shares (mn) 11,050 Free float (%) 44.7 Company background. Huishang Bank (Huishang) is a city commercial 52-wk price range bank headquartered in Hefei, Anhui Province. Founded in 1996, the bank has ADTO-6M (US$ mn) 0.8 been operating mainly in Anhui, with gross loans contribution of more than Target price is for 12 months. 90%. Huishang is the largest commercial bank in Central China, in terms of Research Analysts deposit/loan and total asset. Sanjay Jain sanjay.jain@credit-suisse.com Share price performance Eric Cui eric.cui@credit-suisse.com The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Operates in a locationally good, under-developed region. Huishang Bank has good location advantage, on the background that China has speeding up the development of Central provinces. In addition, central provinces, including Anhui, are still under-developed for the banking industry. Establishing a direct bank. Huishang Bank just announced it planned to establish a direct bank, which may boost its retail client base and deposits in the future. Valuation. We revise our FY17-18 earnings forecast and introduce 2019 financials. We downgrade the stock to UNDERPERFORM (from Neutral previously) and derive our TP of HK$2.90 (HK$3.80 previously) based on a two-stage Gordon growth model. Our downgrade is based on potential upside implied by new TP and the uninspiring outlook. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 15, , , ,743.6 Pre-tax profit (Rmb mn) 8, , , ,283.6 Net attributable profit (Rmb mn) 6, , , ,502.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (4.8) (6.5) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 59

60 Huishang Bank (3698.HK / 3698 HK) Price (08 May 2017): HK$3.68; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from HK$3.80) HK$2.90; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 32,702 34,591 38,753 43,114 Interest expense 14,362 15,499 18,390 21,331 Net interest income 18,340 19,092 20,363 21,783 Fee and commission income 2,491 2,989 3,438 3,953 Trading income Insurance income (& premiums) Other income Total non-interest income 2,579 3,077 3,530 4,050 Total income 20,918 22,169 23,893 25,833 Personal expense 2,804 3,365 3,870 4,450 Other expenses 2,959 2,719 2,687 2,639 Total expenses 5,763 6,084 6,557 7,090 Pre-provision profit 15,155 16,085 17,336 18,744 Loan loss provisions 6,487 6,914 7,376 7,604 Operating profit 8,668 9,171 9,960 11,140 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 8,813 9,315 10,104 11,284 Taxes 1,816 1,920 2,082 2,326 Net profit before minorities 6,996 7,395 8,021 8,958 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 6,870 6,940 7,566 8,503 Analyst adjustments Net profit (Credit Suisse) 6,870 6,940 7,566 8,503 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 277, , , ,249 Risk provisions 8,035 10,185 12,190 14,483 Net customer loans 269, , , ,766 Interbank loans 30,797 32,336 33,953 35,651 Investment & securities 338, , , ,076 Cash & cash equivalents 88, , , ,582 Fixed assets Intangibles Other assets 28,433 24,711 37,080 49,235 Total assets 754, , ,401 1,020,311 Liabilities Interbank deposits 131, , , ,871 Customer deposits 462, , , ,833 Total deposits 593, , , ,704 Other liabilities 108, , , ,475 Total liabilities 701, , , ,179 Shareholders' equity 45,881 51,055 56,838 63,396 Minority interests 1,312 1,443 1,587 1,746 Preferred stock 5,990 5,990 5,990 5,990 Total liabilities & equity 754, , ,401 1,020,311 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 11,050 11,050 11,050 11,050 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 60

61 Asia Pacific/China Regional Banks Harbin Bank (6138.HK / 6138 HK) Rating (from OUTPERFORM) NEUTRAL Price (08-May-17, HK$) 2.23 DOWNGRADE RATING Target price (HK$) (from 3.60) 2.50 Upside/downside (%) 12.1 A city bank in Northeast China Mkt cap (HK$/US$ mn) 24,520/ 3,150 Number of shares (mn) 10,996 Free float (%) 54.6 Microcredit business is key growth driver of HRBB, which accounted for 52-wk price range % of the bank's total loan book and saw 29% balance growth. With the ADTO-6M (US$ mn) 0.2 goal of being an international leading microcredit bank with distinct features, Target price is for 12 months. HRBB's consumer and small enterprise finance would grow at a fast pace in Research Analysts future. Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com Modern agriculture finance business is another highlight of HRBB's, which has been prompted by national policy on modern agriculture development. Agriculture related exposure was 21% of loans, which will enable HRBB to benefit from China's rural land reform initiatives. Valuation. We revise- our FY17-18 earnings forecast and introduce 2019 financials. We downgrade the stock to NEUTRAL (from Outperform previously) and derive our TP of HK$2.50 (from HK$3.60 previously) based on a two-stage Gordon growth model. Risks. Our downgrade is based on potential upside implied by new TP and the uninspiring outlook. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6, on 08/05/17. On 08/05/17 the spot exchange rate was HK$7.78/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 9, , , ,751.0 Pre-tax profit (Rmb mn) 6, , , ,196.4 Net attributable profit (Rmb mn) 4, , , ,520.0 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (12.0) (19.5) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 61

62 Harbin Bank (6138.HK / 6138 HK) Price (08 May 2017): HK$2.23; Rating: (from OUTPERFORM) NEUTRAL; Target Price: (from HK$3.60) HK$2.50; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 22,603 24,760 27,667 31,679 Interest expense 11,029 12,549 14,694 16,948 Net interest income 11,573 12,211 12,973 14,731 Fee and commission income 2,393 2,752 3,165 3,640 Trading income Insurance income (& premiums) Other income Total non-interest income 2,599 2,999 3,448 3,966 Total income 14,172 15,210 16,421 18,696 Personal expense 2,015 2,115 2,284 2,513 Other expenses 2,508 2,722 2,938 3,433 Total expenses 4,522 4,837 5,222 5,945 Pre-provision profit 9,650 10,373 11,199 12,751 Loan loss provisions 3,295 3,783 4,383 5,555 Operating profit 6,355 6,591 6,817 7,196 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 6,355 6,591 6,817 7,196 Taxes 1,483 1,539 1,593 1,683 Net profit before minorities 4,872 5,052 5,224 5,513 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 4,877 5,057 5,230 5,520 Analyst adjustments Net profit (Credit Suisse) 4,877 5,057 5,230 5,520 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 201, , , ,210 Risk provisions 5,140 6,277 7,588 9,408 Net customer loans 196, , , ,803 Interbank loans 48,539 33,977 30,579 33,637 Investment & securities 193, , , ,675 Cash & cash equivalents 67,010 76,458 84,104 92,514 Fixed assets 8,718 9,822 10,788 11,849 Intangibles Other assets 24,265 47,630 41,943 15,116 Total assets 539, , , ,593 Liabilities Interbank deposits 107, , , ,097 Customer deposits 343, , , ,734 Total deposits 450, , , ,831 Other liabilities 51,433 72,303 90, ,977 Total liabilities 501, , , ,808 Shareholders' equity 36,508 41,565 45,596 49,958 Minority interests Preferred stock 0 8,000 8,000 8,000 Total liabilities & equity 539, , , ,593 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 10,996 10,996 10,996 10,996 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (4.5) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 62

63 Rating OUTPERFORM Price (08-May-17, Rmb) 4.90 Target price (Rmb) (from 5.60) 5.70 Upside/downside (%) 16.3 Mkt cap (Rmb/US$ mn) 1,706,779/ 247,216 Number of shares (mn) 356,406 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Asia Pacific/China Regional Banks Industrial & Commercial Bank of China ( SS) INCREASE TARGET PRICE Provision pressure remains; likely benefit from interbank and regulatory tightening The largest bank. ICBC is the largest bank in China by assets (Rmb24 tn), occupying 10% of the sector at end-fy16. It has a strong retail deposit franchise and has a reputation for superior IT infrastructure compared to peers. The bank owned 12% of market share in both of China s loan deposit space. In addition, ICBC was the No.1 asset management bank with bank WMP balance of Rmb2.7 tn and market share of 9% in By end of 2016, ICBC had 17,200 outlets and 462,000 employees. The bank points to potential improvement in asset quality and margin. ICBC s results offered little surprise with flattish bottom-line growth, mainly driven by narrowing net interest margin, slower non-interest income growth and dropping impairment. Management was confident with the asset quality trend and margin performance this year. However, NPL ratio of manufacturing and retail/ wholesale trading industries (56% of NPL balance) still went up by 86 bp/268 bp YoY to 4.29%/9.28% in Looking forward. As a conservative large bank, we expect ICBC to be little or not at all impacted by ongoing regulatory tightening. How, already for five consecutive quarters, ICBC has reported non-performing loan coverage ratio below the minimum requirement of 150%. If the banking regulator does not officially relax the rules on non-performing loan coverage ratio, we believe the bank would probably again report close-to-zero bottom-line growth for FY17. Valuation and risks. We have an OUTPERFORM rating on the stock and derive our new TP of Rmb5.70 (vs Rmb5.60) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 448, , , ,847.9 Pre-tax profit (Rmb mn) 363, , , ,178.3 Net attributable profit (Rmb mn) 273, , , ,845.5 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (1.3) (1.6) - Consensus EPS (Rmb) n.a EPS growth (%) (0.5) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 63

64 Industrial & Commercial Bank of China ( SS) Price (08 May 2017): Rmb4.90; Rating: OUTPERFORM; Target Price: (from Rmb5.6) Rmb5.7; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 791, , ,336 1,054,753 Interest expense 319, , , ,238 Net interest income 471, , , ,515 Fee and commission income 144, , , ,611 Trading income Insurance income (& premiums) Other income 24,541 25,764 27,033 28,363 Total non-interest income 169, , , ,391 Total income 641, , , ,907 Personal expense 113, , , ,865 Other expenses 79,758 79, , ,194 Total expenses 193, , , ,059 Pre-provision profit 448, , , ,848 Loan loss provisions 87, , , ,684 Operating profit 360, , , ,164 Associates/JV Other non-operating inc./(exp.) 2,604 2,734 2,871 3,014 Pre-tax profit 363, , , ,178 Taxes 84,173 86,751 90,197 96,157 Net profit before minorities 279, , , ,021 Minority interests 857 1,200 1,680 2,352 Preferred dividends 4,450 4,824 4,824 4,824 Exceptionals/extraordinaries Reported net profit 273, , , ,846 Analyst adjustments Net profit (Credit Suisse) 273, , , ,846 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 13,056,846 14,231,962 15,512,839 16,908,994 Risk provisions 289, , , ,852 Net customer loans 12,767,334 13,933,806 15,172,260 16,496,142 Interbank loans 1,553,100 1,553,100 1,553,100 1,553,100 Investment & securities 5,291,843 5,821,027 6,403,130 7,043,443 Cash & cash equivalents 3,350,788 3,635,605 3,944,631 4,279,925 Fixed assets Intangibles Other assets 1,174,200 1,236,520 1,219,780 1,212,163 Total assets 24,137,265 26,180,058 28,292,902 30,584,774 Liabilities Interbank deposits 2,606,650 2,684,860 2,765,418 2,848,392 Customer deposits 17,825,302 19,340,453 20,984,391 22,768,064 Total deposits 20,431,952 22,025,313 23,749,809 25,616,457 Other liabilities 1,724,150 1,980,140 2,165,067 2,371,383 Total liabilities 22,156,102 24,005,453 25,914,875 27,987,839 Shareholders' equity 1,883,700 2,076,572 2,279,394 2,497,672 Minority interests 11,412 11,983 12,582 13,211 Preferred stock 86,051 86,051 86,051 86,051 Total liabilities & equity 24,137,265 26,180,058 28,292,902 30,584,774 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 356, , , ,407 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.5) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (4.0) Operating expense (12.6) Pre-provision profit Net profit (0.4) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 64

65 Asia Pacific/China Regional Banks Rating OUTPERFORM Price (08-May-17, Rmb) 5.93 Target price (Rmb) (from 7.10) 7.30 Upside/downside (%) 23.1 Mkt cap (Rmb/US$ mn) 1,381,096/ 200,043 Number of shares (mn) 250,011 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Construction Bank ( SS) INCREASE TARGET PRICE Better asset quality trend offers more buffer for earnings growth Safer balance sheet amid challenging environment. CCB is the second largest lender in China, with 11% market share at end Besides a strong retail deposit franchise as other big banks, CCB has built up a strong position in the mortgage and infrastructure lending business, which has been chased by its banking peers. In addition, CCB was the No.3 asset management bank with bank WMP balance of Rmb2.1 tn and market share of 7% in By end of 2016, the bank has 14,985 outlets and 362,000 employees. Conservative growth (mortgage) and investment (government bonds). For the first time, corporate loans became slightly less than half of CCB s total in Retail banking was driven by the mortgage business (balance +29% YoY), contributing 36% to revenue and 44% to pre-tax profit. Mortgage accounted for 64% of new loans in 2016 and 30% of total loans. Net interest margins (NIM) narrowed gradually in the past quarters, likely due to larger investment in government bonds and higher exposure to mortgage loans. Looking forward. Real estate tightening may affect mortgage growth this year, but CCB and large peers would have shifted their lending focus to tier 3/tier 4 cities. Hence, mortgage growth should be manageable. CCB is one of the first banks to hold a sanguine view of its own asset quality trend, and two major sources accounting for three-fifth of bad loans (manufacturing and retail/wholesale trading), were shrunk by 3% and 1% in 2016, with NPL ratios of 5.92% (+4 bp) and 9.01% (-65 bp), respectively. Valuation and risks. We have an OUTPERFORM rating on the stock and it is our top pick among China banks. We derive our new TP of Rmb7.30 (from Rmb7.10) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 388, , , ,049.8 Pre-tax profit (Rmb mn) 295, , , ,107.4 Net attributable profit (Rmb mn) 230, , , ,105.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 65

66 China Construction Bank ( SS) Price (08 May 2017): Rmb5.93; Rating: OUTPERFORM; Target Price: (from Rmb7.10) Rmb7.30; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 696, , , ,704 Interest expense 269, , , ,601 Net interest income 417, , , ,103 Fee and commission income 118, , , ,189 Trading income 3,533 4,239 4,663 5,130 Insurance income (& premiums) Other income 20,019 24,023 26,425 29,068 Total non-interest income 142, , , ,386 Total income 559, , , ,490 Personal expense 92,847 95, , ,435 Other expenses 78,668 86, , ,005 Total expenses 171, , , ,440 Pre-provision profit 388, , , ,050 Loan loss provisions 93, , , ,022 Operating profit 295, , , ,028 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 295, , , ,107 Taxes 62,821 66,135 70,475 77,423 Net profit before minorities 232, , , ,684 Minority interests 929 1,022 1,124 1,236 Preferred dividends 1,067 1,067 4,342 4,342 Exceptionals/extraordinaries Reported net profit 230, , , ,106 Analyst adjustments Net profit (Credit Suisse) 230, , , ,106 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 11,757,032 13,167,876 14,748,021 16,517,783 Risk provisions 268, , , ,593 Net customer loans 11,488,355 12,867,039 14,399,422 16,094,190 Interbank loans 858, , , ,762 Investment & securities 5,068,584 5,828,872 6,703,202 7,507,587 Cash & cash equivalents 2,849,261 3,202,353 3,586,636 4,017,032 Fixed assets Intangibles 4,243 4,328 4,414 4,503 Other assets 703, , ,175 1,037,568 Total assets 20,963,705 23,520,782 26,306,559 29,426,636 Liabilities Interbank deposits 2,565,460 2,865,940 3,152,534 3,467,787 Customer deposits 15,402,915 17,251,265 19,321,417 21,639,987 Total deposits 17,968,375 20,117,205 22,473,950 25,107,774 Other liabilities 1,405,676 1,581,732 1,828,859 2,111,373 Total liabilities 19,374,051 21,698,937 24,302,810 27,219,147 Shareholders' equity 1,556,841 1,726,718 1,906,354 2,107,483 Minority interests 13,154 15,127 17,396 20,006 Preferred stock 19,659 80,000 80,000 80,000 Total liabilities & equity 20,963,705 23,520,782 26,306,559 29,426,636 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 250, , , ,011 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (4.6) Operating expense (12.0) Pre-provision profit (0.9) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 66

67 Asia Pacific/China Regional Banks Rating (from NEUTRAL) OUTPERFORM Price (08-May-17, Rmb) 3.37 UPGRADE RATING Target price (Rmb) (from 3.50) 3.90 Upside/downside (%) 15.7 Mkt cap (Rmb/US$ mn) 1,086,935/ 157,435 Number of shares (mn) 324,794 Free float (%) wk price range ADTO-6M (US$ mn) 56.2 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Agricultural Bank of China ( SS) Beneficiary of interbank tightening and rural reform The large bank with leading position in rural areas. Agricultural Bank of China (ABC) is one of China s biggest four (Big 4) state-owned banks, with total assets of Rmb19.6 tn and loan book of Rmb9.7 tn at end-fy16, both accounting for 8% each of the whole sector. Compared to the other three big banks, ABC has more strength in rural areas, with deposit market share of around 40% in By end of 2016, the bank had 23,695 outlets and 497,000 employees. Profit growth pick-up and beneficiary of interbank tightening. ABC's bottom line seems to have recovered from 0.8% YoY in 9M16, versus 8.8% for 4Q16 and 2% in 1Q17, which seems better than other big banks. Revenue weakness was offset by disciplined cost control, but the bank actually maintained stable employee cost (+1% in FY16) and cut more in admin expenses, etc. Thanks to its better funding positon (less exposed to wholesale market) and investment portfolio, PBOC s tightening seems to boost its margins (+3 bp QoQ in 1Q17), therefore the bank can report betterthan-peers net interest income. Looking forward. Based on potential margin expansion, we expect ABC to report significant (vs large peers) earnings growth in FY17. In addition, the government has been encouraging the circulation of land use rights in the open market and activation of idle farmland usage. This not only stimulates the development of rural areas, but also provides more reliable collateral for bank lending. ABC will definitely benefit from it, though only in the long term. Valuation and risks. We upgrade our rating to OUTPERFORM from Neutral and derive our TP of Rmb3.90 (vs Rmb3.50) based on a two-stage Gordon growth model. Our upgrade is based on potential upside implied by new TP and the better margin outlook. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 313, , , ,987.2 Pre-tax profit (Rmb mn) 226, , , ,638.8 Net attributable profit (Rmb mn) 179, , , ,919.9 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 67

68 Agricultural Bank of China ( SS) Price (08 May 2017): Rmb3.37; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from Rmb3.5) Rmb3.9; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 657, , , ,996 Interest expense 259, , , ,018 Net interest income 398, , , ,979 Fee and commission income 90,935 86,388 86,388 90,708 Trading income 0 7,908 14,235 22,776 Insurance income (& premiums) Other income 21,089 44,814 80, ,065 Total non-interest income 112, , , ,548 Total income 510, , , ,527 Personal expense 111, , , ,363 Other expenses 85, , , ,177 Total expenses 197, , , ,540 Pre-provision profit 313, , , ,987 Loan loss provisions 86, , , ,338 Operating profit 226, , , ,649 Associates/JV Other non-operating inc./(exp.) (9) (9) (10) (10) Pre-tax profit 226, , , ,639 Taxes 42,564 50,480 57,109 61,961 Net profit before minorities 184, , , ,678 Minority interests Preferred dividends 4,600 4,600 4,600 4,600 Exceptionals/extraordinaries Reported net profit 179, , , ,920 Analyst adjustments Net profit (Credit Suisse) 179, , , ,920 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 9,719,639 10,643,005 11,654,090 12,761,229 Risk provisions 400, , , ,440 Net customer loans 9,319,364 10,251,431 11,224,805 12,251,788 Interbank loans 1,526,665 1,450,332 1,450,332 1,450,332 Investment & securities 5,333,535 6,133,565 6,869,593 7,693,944 Cash & cash equivalents 2,811,653 3,120,935 3,464,238 3,845,304 Fixed assets Intangibles 26,647 26,647 26,647 26,647 Other assets 605, , , ,371 Total assets 19,570,061 21,525,881 23,675,262 26,039,092 Liabilities Interbank deposits 1,954,949 1,846,770 1,916,622 2,000,445 Customer deposits 15,038,001 16,692,181 18,528,321 20,566,436 Total deposits 16,992,950 18,538,951 20,444,943 22,566,882 Other liabilities 1,255,520 1,534,366 1,635,705 1,721,832 Total liabilities 18,248,470 20,073,317 22,080,649 24,288,714 Shareholders' equity 1,238,294 1,368,247 1,508,972 1,663,014 Minority interests 3,398 4,417 5,743 7,465 Preferred stock 79,899 79,899 79,899 79,899 Total liabilities & equity 19,570,061 21,525,881 23,675,262 26,039,092 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 324, , , ,794 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (5.7) Operating expense (12.7) Pre-provision profit (0.6) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 68

69 Asia Pacific/China Regional Banks Rating (from NEUTRAL) OUTPERFORM Price (08-May-17, Rmb) 3.57 UPGRADE RATING Target price (Rmb) (from 3.90) 4.10 Upside/downside (%) 14.8 Mkt cap (Rmb/US$ mn) 1,026,858/ 148,734 Number of shares (mn) 294,388 Free float (%) wk price range ADTO-6M (US$ mn) Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Bank of China Ltd ( SS) Best beneficiary of Fed rate hike and OBOR Most globalised bank among Big 4. Bank of China (BOC) is one of China s biggest four (Big 4) state-owned banks, with total assets of Rmb18.1 tn and loan book of Rmb9.9 tn by end of Compared to the other three big peers, BOC is the most internationalised, with overseas loans expanding by 11% YoY (domestic 9%) in 2016, accounting for 22% of total loans. By end of 2016, the bank had 11,556 outlets and 309,000 employees. Margins may see better performance than peers. BOC delivered zero bottom-line growth in 1Q17, and net profit of Rmb30 bn was slightly behind consensus. The insurance business and forex trading boosted non-interest income, while fee income was flattish. Net interest margin (NIM) widened by 5 bp QoQ to 1.80%, as the bank benefited from rising rates overseas and in China's interbank market. In addition, BOC acquired stakes in 15 village banks from China Development Bank recently (price Rmb1 bn) and is negotiating with other shareholders to expand holdings, in order to strengthen services in the country, but such steps may incur new bad assets in future. Looking forward. Overseas business and domestic FX business together accounted for 26% of total interest earnings assets, with the spread at ~1.5%, compared to the pre-global Financial Crisis level of ~2.9%, indicating further upside room here. BOC is likely the largest beneficiary of the Federal Reserve rate cycle. In addition, We expect BOC to benefit from China's strategy of "One Belt One Road" (OBOR) and reap some credit demand and fees, by its leading overseas franchise among China banks. Valuation and risks. We upgrade our rating to OUTPERFORM from Neutral and derive our TP of Rmb4.10 (vs Rmb3.90) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 285, , , ,180.0 Pre-tax profit (Rmb mn) 222, , , ,775.9 Net attributable profit (Rmb mn) 157, , , ,859.6 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (3.6) (0.2) - Consensus EPS (Rmb) n.a EPS growth (%) (5.0) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 69

70 Bank of China Ltd ( SS) Price (08 May 2017): Rmb3.57; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from Rmb3.9) Rmb4.1; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 566, , , ,559 Interest expense 260, , , ,215 Net interest income 306, , , ,344 Fee and commission income 88,664 89,551 89,551 89,551 Trading income 0 16,132 17,745 18,632 Insurance income (& premiums) Other income 65,444 78,762 86,638 90,970 Total non-interest income 154, , , ,153 Total income 460, , , ,497 Personal expense 81,080 82,702 84,356 86,043 Other expenses 93, , , ,274 Total expenses 175, , , ,317 Pre-provision profit 285, , , ,180 Loan loss provisions 89, , , ,598 Operating profit 196, , , ,582 Associates/JV Other non-operating inc./(exp.) 26, ,085 1,194 Pre-tax profit 222, , , ,776 Taxes 38,361 39,142 45,089 49,280 Net profit before minorities 184, , , ,496 Minority interests 19,473 21,420 23,562 25,919 Preferred dividends 6,718 6,718 6,718 6,718 Exceptionals/extraordinaries Reported net profit 157, , , ,860 Analyst adjustments Net profit (Credit Suisse) 157, , , ,860 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 9,973,362 10,870,965 11,849,351 12,915,793 Risk provisions 237, , , ,062 Net customer loans 9,735,646 10,601,489 11,533,242 12,547,731 Interbank loans 1,176,482 1,529,427 1,835,312 2,110,609 Investment & securities 3,972,884 4,409,901 4,850,891 5,335,981 Cash & cash equivalents 2,349,188 2,642,837 2,959,977 3,315,174 Fixed assets Intangibles 16,303 16,629 16,962 17,301 Other assets 930, ,486 1,115,532 1,395,941 Total assets 18,148,889 20,106,510 22,277,992 24,688,135 Liabilities Interbank deposits 2,590,413 2,677,122 2,772,503 2,877,421 Customer deposits 12,939,748 14,557,217 16,304,082 18,260,572 Total deposits 15,530,161 17,234,339 19,076,585 21,137,993 Other liabilities 1,131,636 1,260,256 1,452,415 1,649,197 Total liabilities 16,661,797 18,494,595 20,529,000 22,787,190 Shareholders' equity 1,311,968 1,425,480 1,549,548 1,686,542 Minority interests 75,410 86,722 99, ,689 Preferred stock 99,714 99,714 99,714 99,714 Total liabilities & equity 18,148,889 20,106,510 22,277,992 24,688,135 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 294, , , ,388 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (5.0) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (2.9) Operating expense (5.6) Pre-provision profit (1.2) Net profit (4.8) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 70

71 Asia Pacific/China Multinational Banks Rating NEUTRAL Price (08-May-17, Rmb) 5.99 FORECAST DECREASE Target price (Rmb) 5.80 Upside/downside (%) -3.2 Mkt cap (Rmb/US$ mn) 415,535/ 60,188 Number of shares (mn) 74,263 Free float (%) wk price range ADTO-6M (US$ mn) 20.1 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Bank of Communications ( SS) ROE generation still lacklustre Fundamentals continue to be weak. BCOM is the largest joint-stock bank in China with total assets close to Rmb8.4 tn (3.6% of market share) at the end of The bank's ROE has been on the low-end among peers, mainly due to weaker top-line profitability and conservative gearing. The bank was the first to announce hybrid ownership reform, but the progress of which has lagged market expectation. By end of 2016, the bank had 3,285 outlets and 92,000 employees. Margins contracted sharply as a large bank. 1Q17 net interest margin (NIM) dropped 23 bp QoQ to 1.57% (1.88% in FY16), due to an adverse interbank borrowing position (13% of asset) and a rising market rate. BCOM's bottom line expanded 1.3% YoY, in-line with consensus, thanks to a lower income tax rate as its pre-tax profit dropped by 3%. However, BCOM's investment strategy remains prudent. The bank invested <10% of WMP (wealth management product) proceeds into non-standard credit assets, while credit bond also contributed to <10% of total bond portfolio, per the management during 1Q17 results briefing. Looking forward. The 1Q17 NIM of 1.57% may be only superior to MSB and likely CEB, and would further narrow due to continuous interbank tightening. NPL coverage ratio was 150% by end-1q17, touching the regulatory floor. Due to relatively weak top-line profitability, its net profit growth is likely under pressure in order to comply with the NPL coverage ratio rule. In addition, the revenue growth this year may be driven by credit card and other non-interest business, such as precious metal and leasing. Valuation and risks. We have a NEUTRAL rating on the stock and derive our TP of Rmb5.80 based on a two-stage Gordon growth model. Worse-thanexpected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision Op profit (Rmb 114, , , ,961.6 mn) Pre-tax profit (Rmb mn) 86, , , ,887.5 Net attributable profit (Rmb mn) 66, , , ,716.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (1.7) (3.7) - Consensus EPS (Rmb) n.a EPS growth (%) (0.3) (1.0) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 Ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 71

72 Bank of Communications ( SS) Price (08 May 2017): Rmb5.99; Rating: NEUTRAL; Target Price: Rmb5.80; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 289, , , ,177 Interest expense 154, , , ,692 Net interest income 134, , , ,751 Fee and commission income 36,795 38,635 40,566 42,595 Trading income 0 4,014 4,817 5,780 Insurance income (& premiums) Other income 22,300 22,746 27,295 32,754 Total non-interest income 59,095 65,395 72,678 81,129 Total income 193, , , ,880 Personal expense 26,040 27,342 28,709 30,145 Other expenses 53,432 48,281 54,761 62,774 Total expenses 79,472 75,623 83,470 92,918 Pre-provision profit 114, , , ,962 Loan loss provisions 28,480 34,256 41,927 49,185 Operating profit 86,014 88,606 93, ,776 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 86,110 88,707 93, ,887 Taxes 18,459 19,515 20,634 22,415 Net profit before minorities 67,651 69,191 73,156 79,472 Minority interests Preferred dividends 884 2,994 2,994 2,994 Exceptionals/extraordinaries Reported net profit 66,326 65,668 69,528 75,716 Analyst adjustments Net profit (Credit Suisse) 66,326 65,668 69,528 75,716 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 4,102,959 4,554,284 5,055,256 5,611,334 Risk provisions 93, , , ,408 Net customer loans 4,009,046 4,452,517 4,938,800 5,475,926 Interbank loans 715, , ,786 1,086,565 Investment & securities 2,351,668 2,939,585 3,674,481 4,409,378 Cash & cash equivalents 991,435 1,032,156 1,125,050 1,248,806 Fixed assets Intangibles 2,410 2,458 2,507 2,558 Other assets 337, , , ,297 Total assets 8,403,166 9,614,286 11,004,308 12,600,413 Liabilities Interbank deposits 1,787,463 2,234,329 2,792,911 3,491,139 Customer deposits 4,728,589 5,059,590 5,514,953 6,121,598 Total deposits 6,516,052 7,293,919 8,307,864 9,612,737 Other liabilities 1,254,707 1,642,454 1,968,964 2,205,616 Total liabilities 7,770,759 8,936,373 10,276,829 11,818,353 Shareholders' equity 569, , , ,919 Minority interests 3,265 3,265 3,265 3,265 Preferred stock 59,876 59,876 59,876 59,876 Total liabilities & equity 8,403,166 9,614,286 11,004,308 12,600,413 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 74,263 74,263 74,263 74,263 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.3) (1.0) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue (0.3) Operating expense (2.4) (4.8) Pre-provision profit Net profit (0.3) (1.0) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 72

73 Asia Pacific/China Regional Banks Rating OUTPERFORM Price (08-May-17, Rmb) Target price (Rmb) (from 22.40) Upside/downside (%) 31.5 Mkt cap (Rmb/US$ mn) 468,404/ 67,845 Number of shares (mn) 25,220 Free float (%) wk price range ADTO-6M (US$ mn) 40.4 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Merchants Bank Co Ltd ( SS) INCREASE TARGET PRICE Strong retail franchise well-positioned amid China s economic transformation High-quality retail bank. CMB has a leading retail franchise among peers, with retail loans/deposits accounting for 47%/33% of the total by 2016, noticeably higher than other joint-stock banks. In 2016, the bank has 91 mn retail customers, and 1.9 mn of Sunflower-level and above customers who actually contributed 82% of all retail AUM. The bank's well-established wealthy household customer base has also helped it build one of the leading private bank and wealth management franchises in the industry. By end of 2016, the bank had 1,819 outlets and 70,000 employees. Asset quality to improve after reporting NPL formation for the first time. CMB reported NPL formation of 2.24% in 2016 (down 102 bp) and indicated each quarter saw a declining rate YoY. And the asset quality, on reported basis, seemed to further improve in 1Q17 with NPL ratio falling 11 bp QoQ to 1.76%, allowing credit cost of 218 bp annualised (-10 bp QoQ and -36 bp YoY). In addition, net interest margin climbed 4 bp QoQ to 2.43%, better than joint-stock peers and the tone during FY16 results briefing. Looking forward. An improving macro environment should help CMB, whose provision has stayed high in recent quarters mainly due to private SME borrowers. We view its retail banking-based strategy as less risky and more capital-efficient, which should position the bank well amid China's transformation to a consumption-led economy. In addition, CMB had Rmb2.4 tn of wealth management products (almost all are off-b/s) as of the year end, accounting for 40% of total assets, but most were allocated in 'safer assets' such as high-grade bonds, deposits and money market instruments. Valuation and risks. We maintain an OUTPERFORM rating on the stock and it is our top pick among China banks. We derive our new TP of Rmb24.70 (from Rmb22.40) based on a two-stage Gordon growth model. Worse-than-expected economic deceleration is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision Op profit (Rmb 144, , , ,661.0 mn) Pre-tax profit (Rmb mn) 78, , , ,285.7 Net attributable profit (Rmb mn) 62, , , ,081.0 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 Ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 73

74 China Merchants Bank Co Ltd ( SS) Price (08 May 2017): Rmb18.79; Rating: OUTPERFORM; Target Price: (from Rmb22.40) Rmb24.70; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 215, , , ,234 Interest expense 80,886 76,168 85,697 95,664 Net interest income 134, , , ,571 Fee and commission income 60,865 57,822 57,822 63,604 Trading income 0 2,021 2,021 2,223 Insurance income (& premiums) Other income 14,489 11,454 11,454 12,599 Total non-interest income 75,354 71,297 71,297 78,426 Total income 209, , , ,997 Personal expense 32,811 34,452 36,519 38,710 Other expenses 32,337 32,188 36,646 43,626 Total expenses 65,148 66,639 73,164 82,336 Pre-provision profit 144, , , ,661 Loan loss provisions 66,159 68,589 73,362 80,863 Operating profit 78,642 84,915 95, ,798 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 78,963 85,284 95, ,286 Taxes 16,583 17,910 20,075 22,950 Net profit before minorities 62,380 67,375 75,521 86,336 Minority interests Preferred dividends 0 0 1, Exceptionals/extraordinaries Reported net profit 62,081 67,031 74,026 85,081 Analyst adjustments Net profit (Credit Suisse) 62,081 67,031 74,026 85,081 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 3,261,681 3,783,550 4,351,082 4,960,234 Risk provisions 110, , , ,125 Net customer loans 3,151,649 3,659,131 4,203,722 4,791,109 Interbank loans 581, , , ,421 Investment & securities 1,450,922 1,566,996 1,645,346 1,727,613 Cash & cash equivalents 597, , , ,311 Fixed assets Intangibles Other assets 160, , , ,308 Total assets 5,942,311 6,572,175 7,167,059 7,827,763 Liabilities Interbank deposits 1,297,533 1,347,049 1,441,955 1,560,588 Customer deposits 3,802,049 4,182,254 4,600,479 5,060,527 Total deposits 5,099,582 5,529,303 6,042,435 6,621,115 Other liabilities 439, , , ,793 Total liabilities 5,538,949 6,092,844 6,641,200 7,238,908 Shareholders' equity 402, , , ,508 Minority interests 1,012 1,113 1,225 1,347 Preferred stock 0 27,500 20,000 20,000 Total liabilities & equity 5,942,311 6,572,175 7,167,059 7,827,763 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 25,220 25,220 25,220 25,220 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (4.1) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 74

75 Asia Pacific/China Regional Banks Rating UNDERPERFORM Price (08-May-17, Rmb) 5.87 Target price (Rmb) (from 5.30) 4.70 Upside/downside (%) Mkt cap (Rmb/US$ mn) 351,398/ 50,898 Number of shares (mn) 63,817 Free float (%) wk price range ADTO-6M (US$ mn) 39.8 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Citic Bank ( SS) DECREASE TARGET PRICE Transformation to retail banking business takes time to bear fruit Pivoting to retail business by leveraging bank card franchise. CITIC Bank is a large nationwide commercial bank in China with total assets of Rmb5.9 tn and Rmb2.9 tn, accounting for ~3% of the whole sector as of The bank has been traditionally focusing on serving corporate clients, with corporate loans accounting for 67% of its loan book by However, in recent years the bank has been trying to pivot to retail banking business under the leadership of new management, partly by leveraging its bank card franchise, which generated 43% of the bank s gross fee income in FY16. By end of 2016, the bank had 1,424 outlets and 58,000 employees. Margins remained under pressure. 1Q17 net profit grew 1.7% YoY, slightly behind consensus, and accounted for only 24% of FY17E forecast. Net interest margin (NIM) narrowed 16 bp QoQ to 1.79% in 1Q, likely due to funding cost hike amid interbank tightening and asset yield drop from more mortgage and safer bond mix. Interbank and other non-deposit accounted for 35% of its average funding balance in FY16, whilst debt securities balance surged by 20% in 1Q. The bank tried to counter some of that pressure by aggressively jacking up loan/deposit ratio (up 7 pp QoQ to 86%). Looking forward. The bank applied for the qualification to use internal based method (IRB) for risk-weighted assets calculation in the end of If the bank obtains approval from the regulator, it would boost up its capital ratio and alleviate some capital pressure. However, currently the timetable for approval and implementation remains unclear. In addition, the bank s retail franchise still trails some of its other peers such as CMB, and we believe it will take time for its retail transformation to bear fruit. Valuation and risks. We retain our UNDERPERFORM rating on the stock and derive our new TP of Rmb4.70 (from Rmb5.30) based on a two-stage Gordon growth model. Worse-than-expected economic deceleration is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 106, , , ,605.6 Pre-tax profit (Rmb mn) 54, , , ,654.1 Net attributable profit (Rmb mn) 41, , , ,448.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (6.2) (10.0) - Consensus EPS (Rmb) n.a EPS growth (%) (3.3) (1.9) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 75

76 China Citic Bank ( SS) Price (08 May 2017): Rmb5.87; Rating: UNDERPERFORM; Target Price: (from Rmb5.30) Rmb4.70; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 213, , , ,494 Interest expense 107, , , ,860 Net interest income 106, , , ,634 Fee and commission income 42,280 43,548 45,726 50,298 Trading income ,024 Insurance income (& premiums) Other income 5,741 5,026 5,278 5,805 Total non-interest income 48,021 49,462 51,935 57,128 Total income 154, , , ,762 Personal expense 24,418 26,860 30,083 33,693 Other expenses 22,854 17,202 17,628 18,464 Total expenses 47,272 44,062 47,711 52,157 Pre-provision profit 106, , , ,606 Loan loss provisions 52,288 53,678 60,843 68,960 Operating profit 54,599 54,967 56,800 59,645 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 54,608 54,976 56,809 59,654 Taxes 12,822 12,644 13,066 13,720 Net profit before minorities 41,786 42,331 43,743 45,934 Minority interests Preferred dividends 0 1,328 1,328 1,328 Exceptionals/extraordinaries Reported net profit 41,629 40,846 42,258 44,448 Analyst adjustments Net profit (Credit Suisse) 41,629 40,846 42,258 44,448 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,877,927 3,136,940 3,450,634 3,830,204 Risk provisions 75,543 82,684 90,339 99,990 Net customer loans 2,802,384 3,054,257 3,360,295 3,730,214 Interbank loans 546, , , ,819 Investment & securities 1,852,670 2,037,937 2,241,731 2,465,904 Cash & cash equivalents 553, , , ,062 Fixed assets Intangibles 2,181 2,224 2,269 2,314 Other assets 178, , , ,324 Total assets 5,931,050 6,297,913 6,844,702 7,537,009 Liabilities Interbank deposits 1,369,561 1,306,225 1,271,308 1,268,595 Customer deposits 3,639,290 3,784,862 3,974,105 4,212,551 Total deposits 5,008,851 5,091,087 5,245,413 5,481,146 Other liabilities 537, ,479 1,151,314 1,573,366 Total liabilities 5,546,554 5,882,565 6,396,728 7,054,513 Shareholders' equity 344, , , ,524 Minority interests 5,272 5,799 6,379 7,017 Preferred stock 34,955 34,955 34,955 34,955 Total liabilities & equity 5,931,050 6,297,913 6,844,702 7,537,009 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 48,935 48,935 48,935 48,935 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (3.3) (1.9) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue 5.9 (0.9) Operating expense (6.6) (6.8) Pre-provision profit Net profit 1.1 (1.9) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 76

77 Asia Pacific/China Regional Banks Rating UNDERPERFORM Price (08-May-17, Rmb) 7.75 Target price (Rmb) (from 8.00) 7.00 Upside/downside (%) -9.7 Mkt cap (Rmb/US$ mn) 274,165/ 39,711 Number of shares (mn) 36,485 Free float (%) wk price range ADTO-6M (US$ mn) 26.5 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) China Minsheng Banking Co Ltd ( SS) DECREASE TARGET PRICE Margin likely fell below 1.5% while poor image was hit by WMP event and Anbang holding A joint-stock bank serving small and micro enterprise (SME). Founded in 1996, China Minsheng Bank (MSB) is one of the nationwide commercial banks with total assets of Rmb5.9 tn and loan book of 2.9 tn end MSB has more experience and a better customer base than peers in serving small businesses, on which the bank managed higher-than-sector profit growth after At its peak in 2013, loans to SMEs reached Rmb410 bn, accounting for 26% of total loans for the bank, versus 14% in By end- 2016, the bank had 3,003 outlets and 59,000 employees. Margins under pressure and likely below 1.5%. Net interest margin, as per our estimate, narrowed by 23 bp QoQ in 1Q17, mainly due to interbank tightening. The bank allocated more sources to high yield loans and receivable investment (nearly all are NSCAs in the year end), under the strict MPA system and amid a regulatory storm. In addition, MSB also has to aggressively issue debt securities to fund growth when the market lacks cheap deposits and regulators are cracking down on interbank operations. Looking forward. 71% of incremental NPLs in 2016 came from the retail side (gross loan balance +24%), which should be mostly attributed to lending to micro and small enterprises, in our view. We believe MSB's exposure to SME lending is still taking its toll on the bank's asset quality and the outlook may remain challenging. The total amount involved in the recent bank WMP event would range from Rmb1.7-3 bn, per management in the 1Q17 results briefing, but such a case indicates flaws in the bank's internal risk control. Valuation and risks. We maintain our UNDERPERFORM rating on the stock and derive our new TP of Rmb7.00 (vs Rmb8.00) based on a two-stage Gordon growth model. Worse-than-expected economic deceleration is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 101, , , ,142.3 Pre-tax profit (Rmb mn) 60, , , ,822.0 Net attributable profit (Rmb mn) 47, , , ,527.3 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. 1.2 (5.2) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 77

78 China Minsheng Banking Co Ltd ( SS) Price (08 May 2017): Rmb7.75; Rating: UNDERPERFORM; Target Price: (from Rmb8.00) Rmb7.00; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 203, , , ,091 Interest expense 109, , , ,424 Net interest income 94,684 90, , ,667 Fee and commission income 52,261 49,648 49,648 52,130 Trading income 1,633 1,013 1,013 1,063 Insurance income (& premiums) Other income 5,473 5,738 5,738 6,025 Total non-interest income 59,367 56,399 56,399 59,219 Total income 154, , , ,886 Personal expense 25,082 26,587 28,182 30,437 Other expenses 27,342 17,585 21,749 28,307 Total expenses 52,424 44,172 49,931 58,743 Pre-provision profit 101, , , ,142 Loan loss provisions 41,378 41,567 50,488 64,320 Operating profit 60,249 61,013 62,755 65,822 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 60,249 61,013 62,755 65,822 Taxes 11,471 11,592 11,923 12,506 Net profit before minorities 48,778 49,420 50,831 53,316 Minority interests 935 1,029 1,131 1,244 Preferred dividends Exceptionals/extraordinaries Reported net profit 47,843 47,848 49,156 51,527 Analyst adjustments Net profit (Credit Suisse) 47,843 47,848 49,156 51,527 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,461,586 2,904,671 3,427,512 4,044,465 Risk provisions 64,394 71,478 85, ,283 Net customer loans 2,397,192 2,833,194 3,341,822 3,936,181 Interbank loans 461, , , ,421 Investment & securities 2,206,909 3,420,709 4,788,993 6,465,140 Cash & cash equivalents 524, , , ,055 Fixed assets Intangibles 5,112 5,112 5,112 5,112 Other assets 310, , , ,570 Total assets 5,895,877 7,463,897 9,477,005 11,838,256 Liabilities Interbank deposits 1,836,712 2,628,893 3,576,355 4,572,926 Customer deposits 3,082,242 3,297,999 3,561,839 3,846,786 Total deposits 4,918,954 5,926,892 7,138,194 8,419,712 Other liabilities 624,896 1,146,376 1,908,178 2,945,710 Total liabilities 5,543,850 7,073,267 9,046,372 11,365,422 Shareholders' equity 332, , , ,381 Minority interests 9,437 10,381 11,419 12,561 Preferred stock 9,892 9,892 9,892 9,892 Total liabilities & equity 5,895,877 7,463,897 9,477,005 11,838,256 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 36,485 36,485 36,485 36,485 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue 0.2 (4.7) Operating expense (9.9) (15.7) Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 78

79 Asia Pacific/China Regional Banks China Everbright Bank ( SS) Rating UNDERPERFORM Price (08-May-17, Rmb) 3.86 DECREASE TARGET PRICE Target price (Rmb) (from 3.50) 3.10 Upside/downside (%) Mkt cap (Rmb/US$ mn) 175,329/ 25,395 Number of shares (mn) 46,719 Free float (%) wk price range ADTO-6M (US$ mn) 4.6 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Private placement announced A wealth management bank: Founded in 1992, China Everbright Bank (CEB) is a major joint-stock bank with a nationwide presence. Controlled by China Everbright Group, the bank has loans of Rmb1.8 tn and deposits of Rmb2.1 tn, occupying 1.7% and 1.4% of the whole market by end However, the bank's wealth management product (WMP) balance has reached Rmb1.4 tn (+12% YoY), or 4.7% of the bank WMP sector. By end of 2016, the bank had 1,122 outlets and 42,000 employees. Shrunk margins with capital pressure. CEB reported a 2% bottom-line growth and falling margins. Possibly to comply with regulatory tightening, the bank cut interbank borrowing by 26% and interbank assets by 12%, bringing its net position to 8% of total asset in 1Q17. In addition, the bank aggressively issued debt securities (balance up Rmb174 bn or 47% QoQ), including a large amount of interbank negotiable certificate of deposits, Rmb28 bn of Tier 2 Capital bond and Rmb30 bn convertible bond issuance. Moreover, the bank planned Rmb50 bn of preference this year. Looking forward. According to the regulations, Everbright Group cannot sell its stake at <1x P/B, which means that from a management perspective, the valuation of CEB, the key component of the Group, cannot drop significantly lower than 1x P/B. In addition, CEB announced a private placement of no more than 6,569 mn H-shares to the Group and Overseas Chinese Town Enterprises, which may serve as 116bp of CET1 capital. The placement price was HK$5.33 (BVPS at end-fy16) and was subject to regulators' approvals. Valuation and risks. We maintain our UNDERPERFORM rating on the stock and derive our new TP of Rmb3.10 (vs Rmb3.50) based on a two-stage Gordon growth model. Worse-than-expected economic deceleration is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 64, , , ,931.5 Pre-tax profit (Rmb mn) 40, , , ,218.3 Net attributable profit (Rmb mn) 29, , , ,360.1 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (3.0) (11.9) - Consensus EPS (Rmb) n.a EPS growth (%) (0.9) 0.1 (4.0) 7.9 P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 79

80 China Everbright Bank ( SS) Price (08 May 2017): Rmb3.86; Rating: UNDERPERFORM; Target Price: (from Rmb3.50) Rmb3.10; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 143, , , ,794 Interest expense 78,162 97, , ,699 Net interest income 65,288 66,352 74,727 86,095 Fee and commission income 28,112 32,329 35,562 39,118 Trading income Insurance income (& premiums) Other income 965 1,110 1,221 1,343 Total non-interest income 29,077 33,439 36,782 40,461 Total income 94,365 99, , ,556 Personal expense 15,171 16,385 18,023 19,825 Other expenses 15,083 15,648 17,771 20,799 Total expenses 30,254 32,033 35,794 40,624 Pre-provision profit 64,111 67,758 75,715 85,932 Loan loss provisions 23,931 26,486 32,467 39,713 Operating profit 40,180 41,272 43,248 46,218 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 40,180 41,272 43,248 46,218 Taxes 9,792 10,318 10,812 11,555 Net profit before minorities 30,388 30,954 32,436 34,664 Minority interests Preferred dividends 1,060 1,590 4,245 4,245 Exceptionals/extraordinaries Reported net profit 29,269 29,305 28,132 30,360 Analyst adjustments Net profit (Credit Suisse) 29,269 29,305 28,132 30,360 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 1,795,278 2,082,522 2,394,901 2,754,136 Risk provisions 43,634 48,799 58,825 74,601 Net customer loans 1,751,644 2,033,723 2,336,076 2,679,535 Interbank loans 425, , , ,007 Investment & securities 1,318,143 1,753,130 2,191,413 2,739,266 Cash & cash equivalents 381, , , ,639 Fixed assets Intangibles 1,281 1,307 1,333 1,359 Other assets 143, , , ,632 Total assets 4,020,042 4,712,673 5,448,228 6,495,720 Liabilities Interbank deposits 1,154,050 1,210,150 1,270,925 1,331,700 Customer deposits 2,120,887 2,248,140 2,383,029 2,526,010 Total deposits 3,274,937 3,458,290 3,653,954 3,857,710 Other liabilities 494, ,523 1,444,795 2,262,492 Total liabilities 3,768,974 4,386,813 5,098,749 6,120,203 Shareholders' equity 250, , , ,701 Minority interests Preferred stock Total liabilities & equity 4,020,042 4,712,673 5,448,228 6,495,720 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source:, Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 46,679 46,679 46,679 46,679 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.9) 0.1 (4.0) 7.9 P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (6.5) Pre-provision profit Net profit (0.9) 0.1 (4.0) 7.9 Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 80

81 ( SS / CH) Rating NEUTRAL Price (08-May-17, Rmb) DECREASE TARGET PRICE Target price (Rmb) (from 18.90) Upside/downside (%) 2.3 Mkt cap (Rmb/US$ mn) 321,248/ 46,531 Number of shares (mn) 21,618 Free float (%) wk price range ADTO-6M (US$ mn) 46.7 Target price is for 12 months. Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com Asia Pacific/China Regional Banks Shanghai Pudong Development Bank Earnings revision post results A JSB based in Shanghai Founded in 1993, Shanghai Pudong Development Bank (SPDB) is one of the major joint-stock banks (JSB) with total asset of Rmb6 tn in SPDB has a very diversified loan breakdown by geography and Shanghai alone occupied 17%. However, Shanghai is still a major part for the bank, accounting for around 40% of revenue and 60% of operating profit respectively. Shanghai financial platform for State-Owned Enterprise (SOE) reforms. We are positive in the long run that SPDB will become the financial platform for SOE reforms in Shanghai. SPDB s already established banking business could potentially generate synergy with other financial services. Valuation. We revised our FY17-18E earning forecast and introduced We have a NEUTRAL rating on the stock and derive our TP of Rmb15.20 (from Rmb18.90 previously) based on a two-stage Gordon growth model. Risks. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 118, , , ,611.6 Pre-tax profit (Rmb mn) 69, , , ,329.1 Net attributable profit (Rmb mn) 51, , , ,671.2 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (20.5) (27.8) - Consensus EPS (Rmb) n.a EPS growth (%) (0.7) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 81

82 Shanghai Pudong Development Bank ( SS / CH) Price (08 May 2017): Rmb14.86; Rating: NEUTRAL; Target Price: (from Rmb18.90) Rmb15.20; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 214, , , ,692 Interest expense 106, , , ,568 Net interest income 108, , , ,124 Fee and commission income 40,692 48,830 53,713 59,085 Trading income 0 2,156 2,372 2,609 Insurance income (& premiums) Other income 11,980 12,220 13,442 14,786 Total non-interest income 52,672 63,206 69,527 76,480 Total income 160, , , ,603 Personal expense 21,410 24,193 26,855 29,809 Other expenses 20,618 22,711 25,038 28,183 Total expenses 42,028 46,905 51,892 57,992 Pre-provision profit 118, , , ,612 Loan loss provisions 49,104 55,801 61,173 65,597 Operating profit 69,660 72,311 77,016 85,014 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 69,975 72,626 77,331 85,329 Taxes 16,297 17,067 18,173 20,052 Net profit before minorities 53,678 55,559 59,158 65,277 Minority interests Preferred dividends 1,725 1,725 1,725 1,725 Exceptionals/extraordinaries Reported net profit 51,374 53,168 56,667 62,671 Analyst adjustments Net profit (Credit Suisse) 51,374 53,168 56,667 62,671 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,762,806 3,315,367 3,812,672 4,384,573 Risk provisions 88,249 97, , ,983 Net customer loans 2,674,557 3,218,334 3,706,573 4,274,590 Interbank loans 356, , , ,116 Investment & securities 2,135,088 2,135,088 2,241,842 2,353,935 Cash & cash equivalents 517, , , ,444 Fixed assets Intangibles 10,377 10,585 10,796 11,012 Other assets 184, , , ,143 Total assets 5,857,263 6,449,375 7,045,179 7,672,215 Liabilities Interbank deposits 1,679,917 1,771,294 1,867,978 1,970,308 Customer deposits 3,002,015 3,122,096 3,278,200 3,442,110 Total deposits 4,681,932 4,893,390 5,146,178 5,412,418 Other liabilities 802,397 1,133,708 1,423,978 1,726,255 Total liabilities 5,484,329 6,027,098 6,570,156 7,138,673 Shareholders' equity 338, , , ,985 Minority interests 4,987 5,486 6,034 6,638 Preferred stock 29,920 29,920 29,920 29,920 Total liabilities & equity 5,857,263 6,449,375 7,045,179 7,672,215 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 21,368 21,618 21,618 21,618 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (0.7) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 82

83 Asia Pacific/China Regional Banks China Industrial Bank ( SS / CH) Rating NEUTRAL Price (08-May-17, Rmb) INCREASE TARGET PRICE Target price (Rmb) (from 16.20) Upside/downside (%) 9.1 Earnings revision post results Mkt cap (Rmb/US$ mn) 319,923/ 46,339 Number of shares (mn) 20,774 Free float (%) 64.3 A JSB based in Fuzhou. Founded in 1988, China Industrial Bank (CIB) is 52-wk price range one of the major joint-stock banks (JSB) with total assets of Rmb6 tn and ADTO-6M (US$ mn) loan book of Rmb2 tn in Though headquartered in Fuzhou, Fujian Target price is for 12 months. Province, CIB has become quite diversified geographically such that Fujian + Research Analysts headquarter only accounted for 18% of loan book. Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com Strong bank-to-bank platform likely to be spun off. CIB announced that it would set up an "Industrial Digital Financial Information Service Co., Ltd" last year with Rmb500 mn registered capital in Shanghai. We view this as the first step to spin off its bank-to-bank platform. The potential spin-off and listing would improve the valuation of CIB to some extent. Valuation. We revised our FY17-18E earning forecast and introduced We have a NEUTRAL rating on the stock and derive our TP of Rmb16.80 (Rmb16.20 previously) based on a two-stage Gordon growth model. Risks. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 114, , , ,108.5 Pre-tax profit (Rmb mn) 63, , , ,240.9 Net attributable profit (Rmb mn) 52, , , ,312.2 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. 1.3 (3.2) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 83

84 China Industrial Bank ( SS / CH) Price (08 May 2017): Rmb15.40; Rating: NEUTRAL; Target Price: (from Rmb16.20) Rmb16.80; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 261, , , ,927 Interest expense 123, , , ,009 Net interest income 112, , , ,918 Fee and commission income 36,552 40,207 44,228 48,651 Trading income 0 1,413 1,624 1,868 Insurance income (& premiums) Other income 8,189 8,005 9,205 10,586 Total non-interest income 44,741 49,625 55,058 61,105 Total income 157, , , ,023 Personal expense 22,517 24,318 27,480 31,052 Other expenses 19,885 19,339 19,203 19,862 Total expenses 42,402 43,657 46,683 50,915 Pre-provision profit 114, , , ,108 Loan loss provisions 51,276 48,403 50,037 53,590 Operating profit 63,382 66,119 69,411 73,518 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 63,925 66,717 70,068 74,241 Taxes 9,598 10,017 10,520 11,147 Net profit before minorities 54,327 56,699 59,548 63,094 Minority interests Preferred dividends 1,147 1,147 1,147 1,147 Exceptionals/extraordinaries Reported net profit 52,703 55,028 57,824 61,312 Analyst adjustments Net profit (Credit Suisse) 52,703 55,028 57,824 61,312 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 2,079,814 2,391,786 2,678,800 3,000,256 Risk provisions 72,448 80,060 82,251 84,538 Net customer loans 2,007,366 2,311,726 2,596,549 2,915,719 Interbank loans 100, , , ,346 Investment & securities 3,292,074 3,292,074 3,456,678 3,629,512 Cash & cash equivalents 457, , , ,211 Fixed assets Intangibles Other assets 228, , , ,132 Total assets 6,085,895 6,567,235 7,118,832 7,636,355 Liabilities Interbank deposits 2,216,489 2,216,489 2,327,313 2,443,679 Customer deposits 2,694,751 2,829,489 2,970,963 3,119,511 Total deposits 4,911,240 5,045,978 5,298,276 5,563,190 Other liabilities 820,245 1,124,064 1,378,274 1,582,930 Total liabilities 5,731,485 6,170,041 6,676,550 7,146,121 Shareholders' equity 324, , , ,631 Minority interests 4,281 4,709 5,180 5,698 Preferred stock 25,905 25,905 25,905 25,905 Total liabilities & equity 6,085,895 6,567,235 7,118,832 7,636,355 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 19,052 19,052 19,052 19,052 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (8.4) Pre-provision profit 6.1 (0.1) Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 84

85 Asia Pacific/China Regional Banks Huaxia Bank ( SS / CH) Rating UNDERPERFORM Price (08-May-17, Rmb) DECREASE TARGET PRICE Target price (Rmb) (from 9.50) 9.30 Upside/downside (%) -8.4 A joint-stock bank with high corporate exposure Mkt cap (Rmb/US$ mn) 108,459/ 15,710 Number of shares (mn) 10,686 Free float (%) 64.3 A joint-stock bank with high corporate exposure. Founded in 1992, 52-wk price range HuaXia Bank (HXB) was listed in 2003 and has a well-balanced shareholder ADTO-6M (US$ mn) 50.2 structure: Shougang 20.28%, PICC 19.99%, State Grid 18.24% and some Target price is for 12 months. long-term private capital investors. Compared to peers banks, HXB focuses Research Analysts more on the corporate side, with corporate loan contribution of 70% in Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com Shareholder change approved. Hua Xia Bank announced that it has received approval from the China Banking Regulatory Commission that PICC will take over 19.99% of the bank s ordinary shares from Deutsche Bank. We expect that the new shareholder will help it on the capital and business side, as capital appears to be one of the constraints for the bank. Valuation. We revised our FY17-18E earning forecast and introduced We have UNDERPERFORM rating on the stock and derive our TP of Rmb9.30 (from (Rmb9.50 previously) based on a two-stage Gordon Growth model. Risks. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 39, , , ,995.1 Pre-tax profit (Rmb mn) 26, , , ,972.6 Net attributable profit (Rmb mn) 19, , , ,670.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (5.9) (8.9) - Consensus EPS (Rmb) n.a EPS growth (%) 4.2 (3.8) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 85

86 Huaxia Bank ( SS / CH) Price (08 May 2017): Rmb10.15; Rating: UNDERPERFORM; Target Price: (from Rmb9.50) Rmb9.30; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 88,242 97, , ,615 Interest expense 39,253 44,735 54,412 63,685 Net interest income 48,989 52,373 53,775 56,930 Fee and commission income 14,656 16,854 19,383 22,290 Trading income Insurance income (& premiums) Other income Total non-interest income 15,036 17,234 19,801 22,750 Total income 64,025 69,607 73,575 79,680 Personal expense 13,260 13,923 15,037 16,541 Other expenses 10,781 11,832 11,818 12,144 Total expenses 24,041 25,755 26,855 28,685 Pre-provision profit 39,984 43,853 46,720 50,995 Loan loss provisions 13,865 17,346 19,384 22,146 Operating profit 26,119 26,506 27,337 28,849 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 26,243 26,630 27,461 28,973 Taxes 6,487 6,524 6,728 7,098 Net profit before minorities 19,756 20,106 20,733 21,874 Minority interests Preferred dividends 0 1,099 1,099 1,099 Exceptionals/extraordinaries Reported net profit 19,677 18,920 19,539 20,670 Analyst adjustments Net profit (Credit Suisse) 19,677 18,920 19,539 20,670 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 1,216,654 1,374,819 1,526,049 1,693,915 Risk provisions 32,299 39,294 46,473 55,000 Net customer loans 1,184,355 1,335,525 1,479,576 1,638,915 Interbank loans 271, , , ,606 Investment & securities 646, , , ,871 Cash & cash equivalents 222, , , ,479 Fixed assets Intangibles Other assets 31,432 66, , ,400 Total assets 2,356,235 2,583,972 2,874,527 3,169,270 Liabilities Interbank deposits 512, , , ,497 Customer deposits 1,368,300 1,368,300 1,409,349 1,451,629 Total deposits 1,881,264 1,886,664 1,953,631 2,023,126 Other liabilities 321, , , ,561 Total liabilities 2,203,262 2,413,934 2,686,756 2,962,687 Shareholders' equity 132, , , ,555 Minority interests ,050 Preferred stock 19,978 19,978 19,978 19,978 Total liabilities & equity 2,356,235 2,583,972 2,874,527 3,169,270 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 10,686 10,686 10,686 10,686 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) 4.2 (3.8) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (3.6) Pre-provision profit Net profit 4.2 (3.8) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 86

87 Asia Pacific/China Regional Banks Rating NEUTRAL Price (08-May-17, Rmb) 8.57 Target price (Rmb) (from 9.20) 8.60 Upside/downside (%) 0.4 Mkt cap (Rmb/US$ mn) 147,150/ 21,314 Number of shares (mn) 17,170 Free float (%) wk price range ADTO-6M (US$ mn) 73.9 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain Eric Cui The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Ping An Bank ( SZ / CH) DECREASE TARGET PRICE Capital level under pressure while retail transformation is undergoing A high-growth bank in transformation. PAB has delivered one of the fastest paces of expansion in the past few years, with loan CAGR of 24% during versus 15% for joint-stock banks aggregate. Its bank loans were mainly issued to medium-to-small enterprise (MSE) borrowers before, who have particularly suffered amid China's economic slowdown and contributed to the bank's asset quality pressure. By end of 2016, the bank had 1,072 outlets and 37,000 employees. Asset quality remains challenging. 1Q17 net profit of PAB increased 2.1% YoY to Rmb6 bn, slightly behind consensus, and accounting for 27% of FY17 forecast. Pre-provision operating profit (PPOP) grew by 18% YoY mainly on discipline cost control (cost-to-income ratio dropped 4.8 pp), but offset by even higher provisions (+30% YoY). NPL and Special-mentioned loans ratio came out flattish QoQ at 1.74%/ 4.12% in 1Q, and NPL coverage improved 8 pp to 163%. But 1Q credit cost remained elevated at 321 bp annualised (338 bp for FY16) and NPL/>90d overdue ratio was only 0.63x in Looking forward. The bank made considerable effort on the retail front in 1Q17, with more loan allocation (61% of new loans versus 38% in 2016). The good trend should be able to continue, given high asset quality pressure, low capital and new management team led by President Mr XIE. CET1 ratio fell only 8 bp to 8.28% in 1Q17 (33 bp in 1Q16), likely helped by "retail transformation" strategy, but the overall capital level remained low. Potential equity raising would likely be an overhang for investors. Valuation and risks. We retain our NEUTRAL rating on the stock and derive our TP of Rmb8.60 (from Rmb9.20) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 76, , , ,921.5 Pre-tax profit (Rmb mn) 29, , , ,709.1 Net attributable profit (Rmb mn) 22, , , ,331.2 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (2.4) (10.6) (14.2) Consensus EPS (Rmb) n.a EPS growth (%) (15.4) (1.3) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 87

88 Ping An Bank ( SZ / CH) Price (08 May 2017): Rmb8.57; Rating: NEUTRAL; Target Price: (from Rmb9.20) Rmb8.60; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 131, , , ,357 Interest expense 54,708 61,445 76,760 96,138 Net interest income 76,411 76,371 84,026 93,219 Fee and commission income 27,859 30,923 34,634 41,561 Trading income Total non-interest income 31,304 34,024 37,890 45,142 Total income 107, , , ,361 Personal expense 12,700 14,605 16,358 17,993 Other expenses 18,718 10,786 11,074 12,446 Total expenses 31,418 25,391 27,431 30,439 Pre-provision profit 76,297 85,004 94, ,921 Loan loss provisions 46,518 54,463 62,370 73,368 Operating profit 29,779 30,541 32,116 34,553 Other non-operating inc./(exp.) Pre-tax profit 29,935 30,697 32,272 34,709 Taxes 7,336 7,523 7,909 8,506 Net profit before minorities 22,599 23,174 24,363 26,203 Reported net profit 22,599 22,302 23,491 25,331 Net profit (Credit Suisse) 22,599 22,302 23,491 25,331 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Gross customer loans 1,475,801 1,786,771 2,145,389 2,553,041 Risk provisions 39,932 48,321 55,324 62,399 Net customer loans 1,435,869 1,738,450 2,090,066 2,490,642 Interbank loans 273, , , ,593 Investment & securities 759, , ,920 1,010,812 Cash & cash equivalents 311, , , ,574 Fixed assets Other assets 181, , , ,035 Total assets 2,953,434 3,350,327 3,799,737 4,376,625 Total deposits 2,404,850 2,682,584 2,994,572 3,399,603 Other liabilities 346, , , ,937 Total liabilities 2,751,263 3,128,567 3,557,163 4,111,540 Shareholders' equity 202, , , ,085 Total liabilities & equity 2,953,434 3,350,327 3,799,737 4,376,625 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 17,170 17,170 17,170 17,170 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (14.6) (19.2) Pre-provision profit Net profit 3.4 (1.3) Deposit Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (15.4) (1.3) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Profitability & margins (%) 12/16A 12/17E 12/18E 12/19E ROE stated ROE - CS adj ROA - CS adj Gearing (x) Source: Company data, Thomson Reuters, Credit Suisse estimates Company Background PAB is a commercial bank that operates its business through corporate banking business, personal banking business as well as capital business, including financial market business and investment banking business. Blue/Grey Sky Scenario Our Blue Sky Scenario (Rmb) (from 13.80) Our blue sky scenario assumes the margin trend and asset quality are higher than expected. Our Grey Sky Scenario (Rmb) (from 7.36) 6.88 Our grey sky scenario assumes that China's GDP growth slumps to 0-2%, when the bank saw lower NIM and worse asset quality. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08-May-2017 On 08-May-2017 the spot exchange rate was Rmb6.9/US$1 China Banks Sector 88

89 Asia Pacific/China Regional Banks Rating (from NEUTRAL) UNDERPERFORM Price (08-May-17, Rmb) 8.59 DOWNGRADE RATING Target price (Rmb) (from 9.00) 7.00 Upside/downside (%) Mkt cap (Rmb/US$ mn) 130,625/ 18,920 Number of shares (mn) 15,207 Free float (%) wk price range ADTO-6M (US$ mn) 42.7 Target price is for 12 months. Research Analysts Sanjay Jain Eric Cui Bank of Beijing ( SS / CH) Earnings revision post 1Q17 results A city commercial bank with nationwide operation. Bank of Beijing (BOBJ) is the largest city commercial bank (CB), with total assets of Rmb2.2 tn and loan book of 0.9 tn in Although based in Beijing, the bank has expanded its presence out of the city, with Beijing's gross loans declining to around half of the total in 2016 from around 90% in SMEs (small-tomedium enterprises) contributed 32% of loan. Initiatives in internet finance and direct bank. In 2014, BOBJ introduced Jingyitong project, in co-operation with Tencent. By the end of 1H16, the accumulative number of cards has reached ~6 mn for this project. BOBJ also signed a co-operation agreement with Sesame Credit in Tightening rules may affect growth. China' banking regulators are tightening rules on various arbitrages, which may hurt the bank's high growth in the future. While the borrowing exposure to interbank mart may hurt with rising interbank rate. Valuation. We revised our FY17-18E earning forecast and introduced We downgrade the stock to UNDERPERFORM (from Neutral previously) and derive our TP of Rmb7.00 (from Rmb9.00 previously) based on a two-stage Gordon growth model. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 33, , , ,266.0 Pre-tax profit (Rmb mn) 22, , , ,449.8 Net attributable profit (Rmb mn) 17, , , ,487.0 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (23.0) (26.2) - Consensus EPS (Rmb) n.a EPS growth (%) (11.9) (2.1) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 89

90 Bank of Beijing ( SS / CH) Price (08 May 2017): Rmb8.59; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from Rmb9.00) Rmb7.00; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 76,446 84,233 94, ,044 Interest expense 38,921 43,389 51,309 59,645 Net interest income 37,525 40,844 43,430 46,399 Fee and commission income 9,599 11,519 13,247 15,234 Trading income Insurance income (& premiums) Other income Total non-interest income 9,931 11,884 13,648 15,676 Total income 47,456 52,728 57,078 62,075 Personal expense 6,140 6,754 7,429 8,172 Other expenses 7,528 8,695 9,580 10,636 Total expenses 13,668 15,449 17,009 18,809 Pre-provision profit 33,788 37,279 40,069 43,266 Loan loss provisions 11,547 14,494 16,238 17,816 Operating profit 22,241 22,785 23,830 25,450 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 22,241 22,785 23,830 25,450 Taxes 4,375 4,557 4,766 5,090 Net profit before minorities 17,866 18,228 19,064 20,360 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 17,745 17,365 18,191 19,487 Analyst adjustments Net profit (Credit Suisse) 17,745 17,365 18,191 19,487 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 899,907 1,034,893 1,169,429 1,321,455 Risk provisions 31,952 37,679 44,822 51,800 Net customer loans 867, ,214 1,124,608 1,269,655 Interbank loans 365, , , ,642 Investment & securities 676, , , ,191 Cash & cash equivalents 166, , , ,907 Fixed assets Intangibles Other assets 39,591 82, , ,381 Total assets 2,116,339 2,370,577 2,628,497 2,889,775 Liabilities Interbank deposits 475, , , ,157 Customer deposits 1,150,904 1,277,503 1,392,479 1,517,802 Total deposits 1,625,943 1,735,244 1,834,430 1,964,959 Other liabilities 346, , , ,556 Total liabilities 1,972,560 2,209,267 2,452,287 2,697,515 Shareholders' equity 142, , , ,052 Minority interests 1,659 1,825 2,007 2,208 Preferred stock Total liabilities & equity 2,116,339 2,370,577 2,628,497 2,889,775 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Credit Suisse Estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 15,206 15,206 15,206 15,206 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) (11.9) (2.1) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense (1.2) Pre-provision profit Net profit 5.7 (2.1) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Credit Suisse, Thomson Reuters China Banks Sector 90

91 Asia Pacific/China Regional Banks Bank of Nanjing ( SS / CH) Rating (from NEUTRAL) UNDERPERFORM Price (08-May-17, Rmb) DOWNGRADE RATING Target price (Rmb) (from 10.50) 9.10 Upside/downside (%) -9.1 Earnings revision post results Mkt cap (Rmb/US$ mn) 60,648/ 8,784 Number of shares (mn) 6,059 Free float (%) 82.4 A city bank based in Nanjing. Founded in 1996, Bank of Nanjing (BONJ) is 52-wk price range a large city commercial bank (CB), with total assets of Rmb1.0 tn and loan ADTO-6M (US$ mn) 69.7 book of Rmb0.3 tn in Headquartered in Nanjing, the bank has Target price is for 12 months. expanded its presence out of the city, indicated by the proportion of gross Research Analysts loans contributed by Nanjing that dropped to 30% in 2016 from 96% in Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com Tightening rules may hurt high growth. China' banking regulators are tightening rules on various arbitrages, which may hurt the bank's high growth in the future. While the borrowing exposure to interbank mart may hurt with rising interbank rate. Valuation. We revised our FY17-18E earning forecast and introduced We downgrade the stock to UNDERPERFORM (from Neutral previously) and derive our TP of Rmb9.10 (from Rmb10.50 previously) based on a two-stage Gordon growth model. Risks. Our downgrade is based on potential upside implied by new TP and the uninspiring margin outlook. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision op profit (Rmb mn) 18, , , ,637.4 Pre-tax profit (Rmb mn) 10, , , ,359.3 Net attributable profit (Rmb mn) 8, , , ,556.1 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (12.9) (14.1) - Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 91

92 Bank of Nanjing ( SS / CH) Price (08 May 2017): Rmb10.01; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from Rmb10.50) Rmb9.10; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E In force premiums (APE) New business premium (APE) Value of 1yr new business (VNB) VNB margin (%) Number of agents Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 42,867 48,332 54,574 61,934 Interest expense 21,679 25,927 30,057 33,715 Net interest income 21,230 22,405 24,517 28,219 Fee and commission income 3,823 4,396 5,055 5,814 Trading income Insurance income (& premiums) Other income 1,568 1,400 1,610 1,851 Total non-interest income 5,391 6,043 6,949 7,992 Total income 26,621 28,448 31,466 36,211 Personal expense 3,930 4,834 5,800 6,960 Other expenses 3,723 3,473 3,388 3,613 Total expenses 7,653 8,307 9,188 10,574 Pre-provision profit 18,968 20,141 22,278 25,637 Loan loss provisions 8,456 8,547 9,049 10,280 Operating profit 10,512 11,593 13,229 15,358 Associates/JV Other non-operating inc./(exp.) Pre-tax profit 10,513 11,595 13,231 15,359 Taxes 2,167 2,377 2,712 3,149 Net profit before minorities 8,346 9,218 10,518 12,211 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 8,037 8,583 9,874 11,556 Analyst adjustments Net profit (Credit Suisse) 8,037 8,583 9,874 11,556 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 331, , , ,543 Risk provisions 13,242 17,049 20,966 25,157 Net customer loans 318, , , ,386 Interbank loans 105, , , ,838 Investment & securities 521, , , ,234 Cash & cash equivalents 93, , , ,195 Fixed assets Intangibles Other assets 25,576 74,652 65,650 53,254 Total assets 1,063,900 1,201,106 1,322,470 1,456,580 Liabilities Interbank deposits 151, , , ,000 Customer deposits 655, , , ,787 Total deposits 806, , ,291 1,078,787 Other liabilities 195, , , ,594 Total liabilities 1,001,522 1,131,720 1,244,892 1,369,381 Shareholders' equity 61,922 68,929 77,121 86,742 Minority interests Preferred stock Total liabilities & equity 1,063,900 1,201,106 1,322,470 1,456,580 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Company data, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 6,059 6,059 6,059 6,059 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense Pre-provision profit Net profit Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Thomson Reuters, Credit Suisse research China Banks Sector 92

93 Asia Pacific/China Regional Banks Bank of Ningbo ( SZ / CH) Rating UNDERPERFORM Price (08-May-17, Rmb) DECREASE TARGET PRICE Target price (Rmb) (from 13.90) Upside/downside (%) Mkt cap (Rmb/US$ mn) 64,659/ 9,365 Number of shares (mn) 3,900 Free float (%) wk price range ADTO-6M (US$ mn) 44.9 Target price is for 12 months. Share price performance Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Eric Cui eric.cui@credit-suisse.com The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 3, on 08/05/17. On 08/05/17 the spot exchange rate was Rmb6.9/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Earnings revision post 1Q17 results A city bank with good shareholding structure. Bank of Ningbo (BONB) is a city commercial bank headquartered in Ningbo, Zhejiang Province, China. Founded in 1997, the bank has expanded its business from Ningbo to other areas, indicated by the proportion of gross loans contributed by Ningbo which dropped to 47% in 20 from 96% in BONB has a well-balanced shareholding structure, including local SOE (20%), foreign capital OCBC (20%), and private capital (25%). Tightening rules to hurt growth. China' banking regulators are tightening rules on various arbitrages, which may hurt the bank's high growth in the future. While the borrowing exposure to interbank mart may hurt with rising interbank rate. Valuation. We revised our FY17-18E earning forecast and introduced We have UNDERPERFORM rating on the stock and derive our TP of Rmb13.50 (from Rmb13.90 previously) based on a two-stage Gordon Growth model. Risks. Worse-than-expected economic recovery is the main risk, which would lead to narrower margin due to monetary easing as well as rising credit cost. Regulatory uncertainty is another risk. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Pre-provision Op profit (Rmb mn) 17, , , ,892.1 Pre-tax profit (Rmb mn) 11, , , ,839.5 Net attributable profit (Rmb mn) 9, , , ,216.5 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. (4.5) (6.9) - Consensus EPS (Rmb) n.a EPS growth (%) 18.1 (13.0) P/E (x) Dividend yield (%) BVPS (CS adj.) (Rmb) P/B (x) ROE (%) ROA (%) Tier 1 Ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates China Banks Sector 93

94 Bank of Ningbo ( SZ / CH) Price (08 May 2017): Rmb16.58; Rating: UNDERPERFORM; Target Price: (from Rmb13.90) Rmb13.50; Analyst: Sanjay Jain Earnings Drivers 12/16A 12/17E 12/18E 12/19E Margin (%) Loan growth (%) Fee growth (%) Credit cost (bp) CIR (%) Income Statement (Rmb mn) 12/16A 12/17E 12/18E 12/19E Interest income 31,631 34,204 38,172 42,987 Interest expense 16,693 18,288 21,843 25,550 Net interest income 19,183 18,356 19,135 20,664 Fee and commission income 6,047 7,256 9,433 12,263 Trading income Insurance income (& premiums) Other income Total non-interest income 6,585 7,848 10,084 12,979 Total income 25,767 26,204 29,219 33,643 Personal expense 4,725 5,670 6,804 8,165 Other expenses 3,946 3,943 4,124 4,585 Total expenses 8,671 9,613 10,928 12,751 Pre-provision profit 17,097 16,591 18,291 20,892 Loan loss provisions 5,321 5,926 6,299 7,051 Operating profit 11,776 10,665 11,992 13,841 Associates/JV Other non-operating inc./(exp.) (1) (1) (1) (1) Pre-tax profit 11,774 10,664 11,991 13,839 Taxes 1,829 2,021 2,273 2,623 Net profit before minorities 9,945 8,643 9,718 11,216 Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 9,933 8,643 9,718 11,216 Analyst adjustments Net profit (Credit Suisse) 9,933 8,643 9,718 11,216 Balance Sheet (Rmb mn) 12/16A 12/17E 12/18E 12/19E Assets Gross customer loans 302, , , ,039 Risk provisions 9,718 12,836 16,160 19,990 Net customer loans 292, , , ,050 Interbank loans 43,462 43,462 45,635 47,917 Investment & securities 427, , , ,622 Cash & cash equivalents 93, , , ,528 Fixed assets Intangibles Other assets 27,618 93, , ,173 Total assets 885,020 1,008,935 1,150,135 1,311,290 Liabilities Interbank deposits 167, , , ,410 Customer deposits 511, , , ,608 Total deposits 679, , , ,017 Other liabilities 155, , , ,530 Total liabilities 834, ,483 1,084,691 1,236,547 Shareholders' equity 45,453 52,508 60,488 69,774 Minority interests Preferred stock 4,825 4,825 4,825 4,825 Total liabilities & equity 885,020 1,008,935 1,150,135 1,311,290 Asset quality & Capital 12/16A 12/17E 12/18E 12/19E Asset Quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Source: Credit Suisse Estimates Per share 12/16A 12/17E 12/18E 12/19E Shares (wtd avg.) (mn) 3,900 3,900 3,900 3,900 EPS (Credit Suisse) (Rmb) BVPS (Rmb) Tangible BVPS (Rmb) DPS (Rmb) Valuation 12/16A 12/17E 12/18E 12/19E EPS growth (%) 18.1 (13.0) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Earnings 12/16A 12/17E 12/18E 12/19E Growth (%) Revenue Operating expense Pre-provision profit 25.1 (3.0) Net profit 18.1 (13.0) Deposit Profitability & margins 12/16A 12/17E 12/18E 12/19E (%) ROE stated ROE - CS adj ROA - CS adj Gearing (x) MF P/E multiple 12MF P/B multiple Source: Credit Suisse, Thomson Reuters China Banks Sector 94