EAST ASIA SECURITIES COMPANY LIMITED 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile:

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Paul Sham 31 st August CHINA CITIC BANK CORPORATION LIMITED ( 中信銀行 ) Sector : Banking Chairman : Mr. Kong Dan HKSE Code : Market Price : HK$4.67 (31/08/2009) President : Mr. Chen Xiaoxian Shares Issued : 12,401.8m (H shares) Mkt. Cap. : HK$57,916.4m (H shares) Vice Chairman : Mr. Chang Zhenming 52 weeks Hi/ Lo : HK$5.69 / HK$1.86 HSI : 19, / 11, (31/08/2009) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2009 Interim Results Highlights RMB million Vs 1H2008 (%) Vs 31/12/2008 (%) Net interest income 15, % Non-interest income 2, % Total operating income 17, Operating expenses (6,528) -15.6% Operating profit before impairment losses 10, % Impairment losses on loans and advances (1,176) -16.8% Profit before taxation 9, % Taxation (2,311) -16. Attributable profit to equity holders 7, % Total loans 988, % +48. Total deposits 1,173, % +24.4% Total assets 1,401, % +18.0% Basic EPS (RMB) % Interim DPS (RMB) 0.00 NA Selected Ratios 1H2009 1H2008 FY2008 Net interest margin % 3.33% Cost-income ratio 38.1% 38.0% 40.0% Return on average assets % 1.21% Return on average equity 14.46% 19.35% 14.86% NPL ratio % 1.36% NPL coverage ratio 150.1% 115.4% 150.0% Loan-deposit ratio 84.3% 74.6% 70.5% Capital adequacy ratio 12.0% 14.3% 14.3% 1H09 results lagged behind peers China CITIC Bank ( CNCB ) reported 1H09 net profit of RMB7,052m, down 16.3% y-o-y but up 43% h-o-h, mainly driven by a significant fall in 1H09 operating expenses and also a lower bad-debt charge. This helped offset weaker-than-expected net interest income given substantial pressure on net interest margin (NIM). Despite this, the result was still below the market consensus of RMB7,265m. Loan growth outperformed peers CNCB s loan balance as of end-1h09 expanded 48. compared to the beginning of the year. Among the RMB324bn of incremental loans in 1H09, discounted bills accounted for 45%, while infrastructure loans made up 1. With the rapid credit expansion, CNCB s loan-to-deposit ratio surged from 70.5% as of end-2008 to 84.3% as of end-1h09. NIM pressured by low-yield lending The bank s loan balance expanded 48. in the first half, but still not enough to offset the negative impact of NIM decline. CNCB s NIM of 2.4 for 1H09 was down significantly from 3.42% for 1H08, due partly to the aggressive focus on low-yield discounted bills. Its discounted bills rose by 333% h-o-h, and accounted for nearly half of total new loans granted for 1H09. This report has been prepared solely for information purposes and we are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information which we consider reliable, but accuracy or completeness is not guaranteed. Opinions expressed herein are subject to change without notice. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein.

2 To widen the NIM in 2H09, CNCB plans to shift its focus from discounted bills to high-yield loans and lower the funding cost. Fee income growth offset by trading losses Non-interest income was flat at RMB2,141m, up only 0.4% y-o-y. Net fees rose by 20.1% y-o-y for 1H09, driven mainly by guarantee (+61. y-o-y), bankcard (+40.3%) and agency fees (101.4%). Nevertheless, the net losses of RMB69m from investment debt securities, a reversal of the investment gains of RMB88m in 1H08, offset the net-fee income growth. Staff cost significantly reduced Operating expenses dropped by 15.6% y-o-y in 1H09, as 1H09 staff cost was able to contract by a significant 33.8% y-o-y given that CNCB made excess provisions in 2007/08. With decline in total operating income (-15. y-o-y) matching the drop in operating expenses, cost-to-income ratio maintained at 38.1% in 1H09, slightly up from 38.0% a year earlier. Credit costs are not a near-term threat but may pose risk in the medium to long term Although the NPL ratio of CNCB decreased from 1.36% as of end-2008 to 0.9 as of end-1h09, the NPL balance increased by RMB746m y-o-y because of aggressive lending in the first half of 2009, whereas peers all reported declines in NPL volume. As of 30 th June 2009, the NPL coverage ratio was 150.1%, above the regulator s guideline of 150%. CAR lowered by aggressive loan growth Strong loan growth lowered its total CAR from 14.3% for 2008 to 12.0% for 1H09. The current ratio is still regarded as an adequate level but Management expected that the acquisition of CITIC Ka Wah Bank would reduce its CAR to 10% in 2H09. Outlook & Prospects CNCB s NIM may recover slowly We expect CNCB s NIM will recover slower than peers because the bank s loan-to-deposit ratio has already reached 83% June 2009 and CNCB needs to attract more deposits, probably at high costs. Also, its low-cost demand deposits represented 39.6% of average deposit balance in 1H09, lower than the 45% in FY08. Moreover, CNCB s discounted bill balance grew by 333% during 1H09, and was responsible for 45% of the new loans in 1H09. These low-yield bills made up 19.1% of loan book at June 2009, compared with 6.5% at December As a result, CNCB s will take more time to shift its loan portfolio from low-yield bills to high yield lending. Non-interest income catching up CNCB's heavy reliance on net interest income (mainly from corporate loans) has always been the market s concern but improvement was seen continuously. Its fee income amounted RMB1,658m in 1H09, contributing 9. of total operating income, higher than the 6.8% in 1H08. We think it is a good sign for CNCB s to transit into a more-diversified player. Acquisition of CIFH CNCB has announced acquisition of 70.32% stake in CIFH (CITIC International Financial Holdings formerly; stock code: 0183.HK) from parent CITIC Group in May China CITIC Bank will pay HK$13,563m, representing 1.43x FY08 book value. Compared to previous M&A deals on Hong Kong banks since 1998 at x book and recent 3.1x P/B for Wing Lung Bank, the acquisition P/B paid by CNCB is reasonable. Like many other Chinese bank peers, CNCB acquired CIFH, a Hong Kong bank, to tap the potential for greater economic integration between HK SAR and mainland China. Parental support CNCB s parent, CITIC Group, is the leading diversified financial services group in China, with affiliates operating in banking, securities, trust, fund management, insurance and futures businesses. We believe CNCB can benefit from the diversified financial services platform of CITIC Group, especially in form of customer referrals. The continuous improvement of CNCB s loan quality in recent year could be partly attributable to its high exposure to high-quality state-owned enterprises through business referrals from its parent CITIC. Attractive on valuations Trading at 1.55x FY09E P/B and 11.6x FY09E P/E, CNCB is the cheapest H-share bank in terms of P/E and P/B. The valuations look attractive given its mid-teen ROE and the bank s long-term growth potential given its established corporate franchise and unique CITIC group platform. We are also happy to see the gradual improvement on CNCB s revenue mix, with larger portion of non-interest income. As such, we recommend an Outperform rating for the counter Recommendation: Outperform China CITIC Bank Corporation Limited 2

3 Appendix I I. Comparison of China CITIC Bank s loan book (by sectors): 30/06/2009 vs 31/12/2008 Loans-by industry 30 th Jun, 2009 Up/(down) 31 st Dec, 2008 RMB million RMB million Corporate loans Manufacturing 200, % 163,164 Transportation and logistics 84, % 62,938 Power generation & supplies 69, % 57,199 Real estate 41, % 42,225 Wholesale and retail 65, % 48,855 Water, environment & public utility mgt 65, % 36,592 Leasing and commercial services 38, % 31,396 Other corporate loans 136, % 91,253 Personal loans 98, ,763 Discounted bills 188, % 43, , ,924 II. Comparison of China CITIC Bank s loan book (by geographies): 30/06/2009 vs 31/12/2008 Loans-by geographies Breakdown 30 th Jun, st Dec, 2008 y-o-y (%) 30 th Jun, st Dec, 2008 Yangtze River Delta 285, , % Bohai Rim 308, , % 28.3% Pearl River Delta & West Strait 138, , % 15.1% Central Region 121,939 74, % 12.3% 11.2% Western region 98,649 72, % 10.8% Northeastern region 35,271 23, % 3.5% Hong Kong % 0.0% 0.1% Total 988, , % % China CITIC Bank Corporation Limited 3

4 Appendix II Breakdown of loan book of China CITIC Bank by sectors Breakdown of Loan Book as of 30/06/2009 Total customer advances: RMB988,748 million Discounted bills 1 Manufacturing 1 Transportation and logistics Personal loans 10% Other corporate loans 14% Leasing and commercial services 4% Water, environment & public utility mgt Wholesale and retail Pow er generation & supplies Real estate 4% Breakdown of Loan Book as of 31/12/2008 Total customer advances: RMB664,924 million Personal loans 13% Discounted bills Manufacturing 24% Other corporate loans 14% Leasing and commercial services 5% Water, environment & public utility mgt 6% Wholesale and retail Real estate 6% Pow er generation & supplies Transportation and logistics China CITIC Bank Corporation Limited 4

5 Important Disclosure / Analyst Certification / Disclaimer This document is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited (BEA). The research analyst primarily responsible for the content of this report, in part or in whole certifies that the views on the companies and their securities mentioned in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. Information and opinions expressed herein reflect a judgment as of the date of this document and are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is not to be taken in substitution for the exercise of judgment by respective readers of this report, who should obtain separate legal or financial advice. East Asia Securities Company Limited and / or The BEA Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein the report, while BEA along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its associates, its directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company or companies mentioned in the report. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. China CITIC Bank Corporation Limited 5