BUY. Upgrading forecasts on improved core income outlook. China Banking Corporation TUE 09 JAN 2018

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1 China Banking Corporation Upgrading forecasts on improved core income outlook Steady growth in core income to continue. CHIB is expecting steady growth in its core income to continue going forward. Net interest income, which has been growing at double digit growth rates since 2016, should be sustained on the back of higher volume and slight improvement in margins. According to the bank, it expects loans to expand mid-teens moving forward. This will be driven by growth across all segments, with consumer leading the growth because of the low base. We think this pace can be sustained given the bank s healthy capital position and maturing branch network. As of end-september, CET1 ratio and CAR stood at 13.9% and 14.7%, respectively, well above the regulatory requirements. Meanwhile, CHIB also expects margins to be slightly higher in 2018 amidst improvement in the bank s CASA ratio as more branches continue to mature. The bank also said that more than half of its loan portfolio is subject to re-pricing, providing further upside risk on margins should BSP adjust policy rates. Note that economists are forecasting the BSP to hike policy rates by 50 basis points within With our loan growth assumption of 16% as well as flattish margins, we expect net interest income to grow by 15% in 2017 and 16% in Additionally, the bank also expects fee income to grow mid-teens, driven by the growth in its auxiliary businesses such as investment banking fees and bancassurance commissions. Overall, we expect fees in 2017 and 2018 to grow by 14% and 15%, respectively. Recent drag in earnings expected to ease up. Since the bank s acquisition of Planters Development Bank in 2013 as well as recent aggressive branch expansion, earnings have been dragged by the large growth in operating expenses. (Note that total branches have increased from 316 in 2012 to 561 as of end 9M17.) Indeed, cost-to-income ratio increased from 55.2% in 2011 to 61.2% in 9M17. However, we believe thegrowth in operating expenses should normalize in 2018 as its branch network start to mature. According to the CHIB, it takes 3 years on average for a branch to breakeven. This means that some of the branches have only started to bear fruit. In addition, based on our discussions with the bank, the aggressive branch expansion will end in 2018 and will taper down going forward. Upgrading earnings forecasts; maintain BUY rating. In light of these factors, we are upgrading our earnings forecasts by 14% in 2017 and 10% in The upward revision is driven by higher net interest income and fees, partially offset by higher operating expenses. Our new earnings forecasts imply growth rates of 14% in 2017 and 15% in With the increase in our forecasts, we also raise our FV estimate by 3% to Php42.00/sh based on 1.25x 2018E P/B. We continue to like China Bank because of the acceleration of the growth of its lending income.we believe this can be sustained given its healthy balance sheet and capital position. Efforts to increase its fee income in the recent years with the launch of its credit card, investment banking, and stock brokerage subsidiary have also started to bear fruit as evidenced by the strong growth of its non-interest income. (see exhibit 1) FORECAST SUMMARY Year to December 31 (Php Mil) E 2018E 2019E Net Interest Income 14,089 15,085 16,694 19,136 22,230 25,608 %change y/y Non-Interest Income 4,759 4,487 5,095 6,065 6,118 6,805 %change y/y Income Before Tax 6,678 6,413 7,588 8,909 10,279 12,088 %change y/y Net Income 5,116 5,607 6,458 7,391 8,528 10,029 %change y/y EPS (in Php) %change y/y RELATIVE VALUE P/E(X) P/BV(X) ROE(%) Dividend Yield (%) *Source: COL estimates BUY TICKER: CHIB FAIR VALUE: CURRENT PRICE: UPSIDE: SHARE PRICE MOVEMENT Oct-17 9-Nov-17 9-Dec-17 9-Jan-18 CHIB PSEi ABSOLUTE PERFORMANCE 1M 3M YTD CHIB PSEi MARKET DATA Market Cap 89,402.90Mil Outstanding Shares 2,684.77Mil 52 Wk Range Mo Ave Daily T/O 8.66Mil CHARLES WILLIAM ANG, CFA DEPUTY HEAD OF RESEARCH charles.ang@colfinancial.com JOHN MARTIN LUCIANO RESEARCH ANALYST john.luciano@colfinancial.com Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations.

2 Exhibit 1: Earnings Revisions Old New Change Old New Change Net interest income 17,846 19, ,272 22, Non-interest income 5,201 6, ,636 6, Provisions 1, , Operating expenses 13,917 15, ,117 17, Net income 6,484 7, ,725 8, source: COL estimates COL Financial Group, Inc. 2

3 China Banking Coporation (CHIB) COMPANY BACKGROUND China Bank (CHIB) was incorporated on July 20, 1920 and commenced business as the first privately owned local commercial bank. CHIB was listed on the local stock exchange in 1947 and acquired its universal banking license in As of end March 2017, The bank had total resources of Php620Mil and deposits of Php531Mil. Meanwhile, the bank s total loans stood at Php371Mil. In terms of size, China Bank is 7th largest in total assets and 6th largest in both loans and deposits. LOAN BREAKDOWN 21% 16% 63% Corporate Middle Market Consumer INCOME STATEMENT FY14 FY15 FY16 FY17E FY18E FY19E Net Interest Income 14,089 15,085 16,694 19,136 22,230 25,608 % Growth 41.8% 7.1% 10.7% 14.6% 16.2% 15.2% Non-Interest Income 4,759 4,487 5,095 6,065 6,118 6,805 % Growth -7.8% -5.7% 13.5% 19.0% 0.9% 11.2% Provisions ,145 % Growth 6.5% 119.2% -12.0% 0.0% 16.0% 16.0% Net Income 5,116 5,607 6,458 7,391 8,528 10,029 % Growth 0.3% 9.6% 15.2% 14.4% 15.4% 17.6% EPS % Growth -7.5% 6.7% 15.2% -2.5% 9.1% 17.6% BALANCE SHEET FY14 FY15 FY16 FY17E FY18E FY19E Cash & Reserve Assets 95, , , , , ,539 Investment Securities 59,027 71,210 98, , , ,084 Loans and Receivables 290, , , , , ,586 Other Assets 25,532 26,916 28,629 30,177 31,974 34,053 Total Assets 470, , , , , ,261 Deposits 399, , , , , ,917 Bills Payable/ Subordinated Debt 7,951 20,669 18,823 10,550 13,422 15,039 Other Liabilities 7,121 7,721 9,406 9,406 9,406 9,406 Total Equity 56,566 59,171 63,386 83,795 90,182 97,900 Total Liabilities & Equity 470, , , , , ,261 KEY RATIOS FY14 FY15 FY16 FY17E FY18E FY19E Loan Growth (%) 31.7% 6.7% 24.9% 16.1% 16.1% 16.0% Interest Earning Asset Growth (%) 12.0% 12.2% 20.9% 16.4% 15.7% 15.6% Deposit Growth (%) 12.7% 10.0% 23.3% 16.3% 16.3% 16.4% Loan to Deposit Ratio (%) 72.7% 70.5% 71.4% 71.3% 71.2% 71.0% Nonperforming Loan Ratio (%) 2.2% 2.5% 1.9% 1.8% 1.7% 1.6% Coverage Ratio (%) 101.3% 87.3% 91.0% 91.0% 91.0% 91.0% Average Asset Yield (%) 4.4% 4.1% 4.0% 4.0% 3.9% 3.9% Average Funding Cost (%) 1.1% 1.0% 1.0% 1.1% 1.1% 1.1% Net Interest Margin (%) 3.3% 3.2% 3.0% 2.9% 2.9% 2.9% Cost to Income Ratio (%) 62.2% 62.3% 61.3% 61.3% 60.3% 59.2% Credit Costs (%) 0.2% 0.3% 0.2% 0.2% 0.2% 0.2% ROAE (%) 10.0% 9.7% 10.5% 10.0% 9.8% 10.7% ROAA (%) 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% CET 1 Ratio (%) 13.9% 12.6% 11.3% 12.9% 11.9% 11.0% Total CAR (%) 14.9% 13.5% 12.2% 13.7% 12.6% 11.7% COL Financial Group, Inc. 3

4 INVESTMENT THESIS: Taking on a slew of initiatives The bank has been taking steps to increase its fee income in recent years. Note that in 2015, the bank incorporated China Bank Capital investment banking subsidiary and launched China Bank credit cards. In addition, its stock brokerage business began in 2016 following the acquisition of ATC Securities. CHIB continues to actively grow fee income as it considers this segment less risky and more stable. MAJOR CORPORATE DEVELOPMENTS (5-YEARS) Raised Php15Bil through SRO priced at Php31.00/sh with an entitlement ratio of 1: /11/2017 Acquired 100% outstandng shares of ATC Securities 5/19/2016 Raised Php8Bil through SRO priced at Php49.50/sh with an entitlement ratio of 1:8.83 4/16/2014 Bought Planters Development Bank by paying Php1.9Bil to all related parties 1/16/2014 Healthy Capital Position China Bank ended 2016 with a CET1 of 11.3% and a total CAR or 12.21%. Following its Php15Bil stock rights offering, we believe the bank s CET1 ratio and CAR should improve to 13.9% and 14.8%, respectively. We believe that this should be enough to support CHIB s growth for at least the next two to three years. COL Financial Group, Inc. 4

5 Valuation RELATIVE VALUATION Methodology P/BV ROE 2017E 2018E 2017E 2018E BDO % 10.5% BPI % 13.9% EW % 14.2% MBT % 10.8% PNB % 7.9% RCB* % 6.9% SECB % 11.3% UBP % 15.5% CHIB % 10.5% Average ex-chib % 11.4% Median ex-chib % 11.0% VALUATION ASSUMPTIONS Intrinsic P/BV multiple Normalized ROE 13.4% Risk-Free Rate 5.0% Cost of Equity 11.5% Long-Term Growth 4.1% Justified Multiple E BV Fair Value Estimate COL Financial Group, Inc. 5

6 IMPORTANT RATING DEFINITIONS BUY Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to 12 months. HOLD Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve months. SELL We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months. IMPORTANT DISCLAIMER Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/ or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade them in ways different from those discussed in this report. COL RESEARCH TEAM APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH april.tan@colfinancial.com CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com KYLE JEMMRIC VELASCO RESEARCH ANALYST kyle.velasco@colfinancial.com JOHN MARTIN LUCIANO RESEARCH ANALYST john.luciano@colfinancial.com COL FINANCIAL GROUP, INC D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE, EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY PHILIPPINES 1605 TEL NO FAX NO WEBSITE: COL Financial Group, Inc. 6