Banks China Overweight (no change) Balance sheet … in 1H17 We cut the ‘true’ corporate NPL ratio assumption embedded in our stress test- ... We stress tested each bank’s loan

Financial Services│China│October 5, 2017

Sector Note │ Alpha series

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Banks Balance sheet-driven multiple re-rating ■ We expect balance sheet-driven P/BV multiple re-rating for the China banks, with

asset quality continuing to improve. ■ This is a reversal of the de-rating over the past seven years, since the Rmb4tr

stimulus programme in 2009 caused elevated investor concerns over asset quality. ■ The ‘true’ corporate NPL ratio peaked at 15.1% in Sep 2016 and fell to 12.3% in Jun

2017, on our estimates, which we believe indicates an improving asset quality cycle. ■ We cut the ‘true’ corporate NPL ratio assumption embedded in our stress test-

adjusted GGM by 1% pt, resulting in an average 20% rise in TPs across the board. ■ Upgrade BOCOM & MSB to Add from Hold; CITIC to Hold from Reduce on valuations.

Expect P/BV multiple re-rating, a reversal from the last 7 years From end-2009 to the present, asset quality concerns have steadily driven the P/BV multiples of China banks down. The forward P/BV multiples for the sector fell from 2.2x in Dec 2009 to a trough of 0.5x in May 2016, before rebounding to the current level of 0.7x.

Driven by investors’ view of a falling ‘true’ NPL ratio China banks’ share prices have been driven by investors’ view of the direction and magnitude of what they believe is the ‘true’ NPL ratio, rather than by the banks’ published NPL ratios, in our view. We believe this is why their P/BV started de-rating shortly after the Rmb4tr bank-loan-funded stimulus programme in 2009, not when reported NPL ratios started rising or when ROEs began falling at end-2011/early-2012. We thus expect China P/BV multiples to re-rate once investors’ start to view the ‘true’ NPL ratio as falling.

‘True’ corporate NPL ratio peaked at 15.1% in Sep and is now 12.3% This is based on 2,500 listed A-share companies to which we applied two credit-based tests: (i) leverage and (ii) debt serviceability. As at Jun 2017, 12.3% of corporates failed one or both of these tests (which we call ‘true’ corporate NPL ratio), down from a peak of 15.1% in Sep 2017. As corporate loans-to-total loan ratio in the system is 72%, we estimate ‘true’ NPL ratio for all loans at 8.9% in Jun 2017, with ‘true’ NPL ratio for the larger listed banks (better credit risk underwriting standards) slightly lower, in our view.

1st time in six years that banks are positive on asset quality outlook The most important takeaway from the 1H17 results season, in our view, was the willingness of China banks’ management to give guidance that the asset quality cycle has peaked. This is the first time in at least six years that China banks is guiding that the asset quality cycle has turned for the better. All reported asset quality metrics improved in 1H17, and we expect the improvement to continue.

Falling ‘true’ NPL ratios = higher stress test-adjusted valuations We stress tested each bank’s loan and shadow-banking/wealth management product exposures to losses, taking into account the loan mix, collateral mix, provisioning and capital levels. Investor compensation and capital raising needs are also considered in deriving stress test-adjusted asset quality valuation discounts. We estimate that a 1% pt cut in ‘true’ corporate NPL ratio assumption to 9%, coupled with an improved loan mix and reduced shadow banking exposure, results in valuations rising by 20% on average.

Upgrade ratings of BOCOM, MSB and CITIC We value the banks using stress test-adjusted GGM. The China banks’ efforts at loan book de-risking, coupled with increased confidence in the corporate credit quality outlook (we cut our ‘true’ corporate NPL ratio assumption by 1% pt), lead us raise target prices by 20% on average. As a result, we upgrade BOCOM and MSB to Add from Hold and upgrade CITIC to Hold from Reduce. (See pages 12-13 for details on valuations and risks.) Overweight sector rating maintained.

Figure 1: Our estimate of the 'true' corporate NPL ratio, based on analysis of the financials of 2,500 listed A-share companies

SOURCES: CIMB, WIND

China

Overweight (no change)

Highlighted companies

China Construction Bank ADD, TP HK$8.80, HK$6.88 close

CCB is one of our sector top picks. We like its highest-among-peers mortgage mix (31.7% of loans in 1H17) and best-in-class capital position (core tier-1 ratio of 12.7% as at end- 1H17).

ICBC ADD, TP HK$7.40, HK$6.37 close

ICBC is also one of our sector top picks. Its key strengths are a strong capital position (also 12.7% core Tier 1 ratio in 1H17), low-risk strategy and good management, with above-peer profitability ratios

Summary valuation metrics

Insert

Analyst(s)

Michael CHANG

T (852) 2539 1323 E [email protected]

P/E (x) Dec-17F Dec-18F Dec-19F

China Construction Bank 6.5 6.0 5.5

ICBC 7.2 6.7 6.0

P/BV (x) Dec-17F Dec-18F Dec-19F

China Construction Bank 0.89 0.80 0.73

ICBC 0.97 0.88 0.80

Dividend yield Dec-17F Dec-18F Dec-19F

China Construction Bank 4.6% 5.0% 5.5%

ICBC 4.3% 4.6% 5.0%

Sep-16, 15.1%

Jun-17, 12.3%

0%

5%

10%

15%

20%

25%

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Average NPL ratio (12-mth rolling)

Financial Services│China│Banks│October 5, 2017

2

Figure 2: China banks sector comparison

SOURCE: CIMB RESEARCH, COMPANY, BLOOMBERG

Company Ticker Price (HK$) Rating Target Upside/

4-Oct-17 price (HK$) Downside FY17F FY18F FY17F FY18F FY17F FY18F FY17F FY18F FY17F FY18F

ICBC 1398 HK 6.37 Add 7.40 16% 0.97 0.88 7.2 6.7 4.1 3.7 4.3% 4.6% 14.3 13.8

CCB 0939 HK 6.88 Add 8.80 28% 0.89 0.80 6.5 6.0 3.7 3.2 4.6% 5.0% 14.3 14.0

BOC 3988 HK 4.04 Add 5.20 29% 0.74 0.68 6.2 5.7 3.2 2.8 4.9% 5.3% 12.0 12.0

ABC 1288 HK 3.64 Add 5.40 48% 0.77 0.69 5.6 5.1 3.0 2.6 5.5% 6.0% 14.5 14.2

BOCOM 3328 HK 5.93 Add 7.20 21% 0.63 0.58 5.6 5.1 3.1 2.9 5.5% 6.0% 11.8 11.9

CMB 3968 HK 29.80 Hold 32.50 9% 1.47 1.30 9.5 8.0 4.1 3.5 3.1% 3.7% 16.4 17.2

CITIC 0998 HK 5.08 Hold 5.40 6% 0.59 0.53 5.1 4.5 1.8 1.5 5.0% 5.6% 11.1 11.3

MSB 1988 HK 7.38 Add 9.40 27% 0.64 0.57 4.8 4.1 2.3 2.0 4.4% 5.2% 14.2 14.6

CQRCB 3618 HK 5.14 Add 7.70 50% 0.71 0.63 4.8 4.2 2.8 2.4 4.9% 5.6% 15.9 15.9

Sector average 0.88 0.80 6.5 6.0 3.5 3.1 4.6% 5.1% 13.9 13.8

P/PPOP (x) Dividend yield ROE(%)P/BV (x) P/E (x)


3

Balance sheet-driven multiple re-rating

A reversal of the previous multi-year de-rating

We see an end to the multi-year P/BV de-rating of the China banks and expect these multiples to re-rate, driven by improvements in the quality of assets on their balance sheet. In essence, we see the reversal of the balance sheet-driven P/BV de-rating that began in Dec 2009, which saw China’s banking sector’s forward P/BV multiples fall from 2.2x to a trough of 0.56x in Feb 2016 (Figure 3). The seven-year P/BV de-rating was driven by increased asset quality concerns from investors stemming from China’s 2009 Rmb4tr stimulus, in our view.

Figure 3: China banks 12-month forward P/BV (Jul 2006-Jul 2017)

SOURCES: CIMB, Bloomberg

Specifically, we expect the current improvements in asset quality to continue due to four reasons which we list later in this report, and thus believe that investors may become less concerned about the health of China banks’ balance sheets going forward. This matters in terms of valuations, in our view, as elevated asset quality concerns are closely linked to capital raising concerns. We believe few investors want to invest in banks that may need to raise capital in the near future.

Reduced balance sheet concerns could drive China banks’ P/BV multiples to trade more in line with their ROEs, in our view, which is how other banks worldwide tend to trade.

We lower the ‘true’ corporate NPL ratio assumption embedded within our stress test-adjusted Gordon Growth Model (GGM) valuation by 1% pt, and also update the loan and off-balance sheet/shadow banking exposures in our stress test. As a result, our stress test-adjusted valuation discounts have fallen, resulting in target price increases of 20% on average for the banks in our coverage.

Figure 4: Changes to our ratings and target prices

SOURCES: CIMB ESTIMATES, BLOOMBERG

As a result of our increased target prices, we upgrade BOCOM and Minsheng (MSB) to

Add from Hold, and upgraded CITIC to Hold from Reduce. In the near term, we still prefer

the larger banks, with CCB and ICBC our preferred picks.

Big four banks' average P/BV, Oct-07,

3.57x0.76x

Mid size banks' average P/BV, Oct-07,

4.58x

Dec-09

0.84x

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

4.00x

4.50x

5.00x

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Big four banks' average P/BV Mid size banks' average P/BV

Oct-2017

Trough in May 2016 at 0.55x & 0.56x for mid size and big four banks respectively

(HK$) ICBC CCB BOC ABC BOCOM CMB CITIC MSB CQRCB

Stress test adjusted GGM 7.40 8.80 5.20 5.40 7.20 32.50 5.40 9.40 7.70

Share price as of 4th Oct

2017 6.37 6.88 4.04 3.64 5.93 29.80 5.08 7.38 5.14

Upside/ downside 16% 28% 29% 48% 21% 9% 6% 27% 50%

Rating Add Add Add Add Add Hold Hold Add Add


4

A painful 7-year de-rating period, on the cusp of a reversal

The previously mentioned Rmb4tr stimulus programme was largely funded by bank loans, with a rapid acceleration in system loan growth from 14% yoy in Jun 2008 to a peak of 35% yoy in Oct 2009. The decision to rely on banks to significantly fund the Rmb4tr stimulus programme led to a significant departure from the historically stable loan growth in China, with system Rmb loan growth since 2004 typically between 13% and 16% yoy (apart from the 2008-2010 period) (Figure 5).

Figure 5: Rmb loan growth yoy in China (Jan 2004- Jul 2017) Figure 6: NPL ratio of commercial banks in China

SOURCE: CIMB RESEARCH, CEIC SOURCE: CIMB RESEARCH, CEIC

Many investors believed that such a rapid acceleration of loan growth would lead to a marked rise in bad debts as these loans ‘seasoned’ further down the track, and, hence, China banks started de-rating on a P/BV basis, well before the reported NPL ratios started to even rise from the trough of 0.90% in Sep 2011 (Figure 6) and well before ROEs started falling from 1H12 onwards (Figure 7).

Figure 7: China bank sector average ROEs (12-mth rolling) (2H08 - 1H17)

SOURCE: CIMB RESEARCH, COMPANY

Why did these asset quality concerns significantly impact the P/BV multiples of the China banks?

There were two main issues with respect to asset quality for many investors. Firstly, uncertainty as to how high NPL ratios could go and, secondly, uncertainty as to when these NPL ratios could peak.

Both were key factors that deterred investors from investing in China banks. Concerns over how high NPL ratios could reach led to uncertainty over whether the China banks would need to raise capital. In our view, concerns over NPL ratios peaking also led to uncertainty as to when the China banks could re-rate

Title:

Source:

Please fill in the values above to have them entered in your report

14%13%

16% 16%19%

31%

20%

16%15% 14% 14% 14% 13% 14%

0%

5%

10%

15%

20%

25%

30%

35%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017yt

d

Rmb loan growth yoy

The only years during the 2004 - 2017 period that bank Rmb loan growth yoy was not within the 13% - 16% yoy band were 2008, 2009 and 2010

Sep-11, 0.90%

Jun-17, 1.74%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

NPL ratio of commercial banks in China

Title:

Source:

Please fill in the values above to have them entered in your report18.7%

17.2%

19.1%20.3% 20.8% 21.2% 21.2% 20.9% 20.7% 20.3% 20.0% 19.5%

18.2%17.1%

16.1%15.0%

14.3% 14.0%

0%

5%

10%

15%

20%

25%

2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

ROEs (12 mth rolling)


5

as many investors felt that a re-rating would only take place when investors became less concerned about asset quality issues (which we believe investors typically perceive to be when NPL ratios peak).

Figure 8: Share price-implied NPL ratio of the China banking sector rose steadily in 2012-15 but has fallen since 2016

Figure 9: Comparison of current share price-implied sustainable net profit streams with current 12-month Bloomberg consensus earnings forecasts

Note: Share price-implied MPL ratio computed by taking current share prices, Bloomberg consensus forecasts for ROEs and book values, and working backwards to determine the average

share price-implied NPL ratio for the China bank sector

SOURCES: CIMB, BLOOMBERG

Note: Share price-implied sustainable net profit computed by comparing current Bloomberg consensus earnings forecasts with current share price-implied net profits, which is calculated on

GGM basis, given consensus assumptions on book value, and assuming the COE and ‘g’ used in our valuation models (see the valuation section of this report for specific COE assumptions for each

bank. We use a ‘g’ assumption of 3%).


With increased confidence in the balance sheet health of the China banks, we expect to see China banks’ P/BV multiples finally starting to trade more in line with their ROEs. Following the Rmb4tr stimulus package, China banks were trading at P/BV multiples that were increasingly disconnected with their ROEs, as investors feared that their reported book values were overinflated due to the potential need to raise capital in the future as asset quality worsened. Hence, even though ROEs rose over the 2H09 to 2H11 period, their P/BV multiples de-rated due to a lack of faith in the China banks’ book values, in our view.

This relationship between P/BV multiples and ROE is well established globally among other listed banks, and we see no reason why this relationship cannot also hold for China banks once investors become more comfortable with the balance sheet health of China banks. As Figure 10 shows, the correlation co-efficient of the banking sector’s P/BVs and their ROEs globally, excluding China, is high at 84% currently.

Figure 10: There exists a clear relationship between forward P/BV and forward ROE for banks globally


Title:

Source:


0.6%

7.2%

2.7%

6.2%

7.2%

12.0%

9.3%

7.1%

0%

2%

4%

6%

8%

10%

12%

14%

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Oct-17

Bank sector share price implied NPL ratio

(RMB m)

Share price implied

net profits

Consensus forecast

earnings

Percentage

difference

ICBC 244,680 295,586 -17%

CCB 181,951 252,719 -28%

ABC 124,724 199,082 -37%

BOC 137,744 182,224 -24%

BoCom 53,108 68,789 -23%

CMB 83,587 75,132 11%

CITIC 30,643 43,563 -30%

MSB 31,153 49,054 -36%

CQRCB 25,493 31,398 -19%

0.3

0x

0.4

6x

0.5

4x

0.6

2x

0.7

0x

0.8

0x

0.8

6x

0.8

8x

0.9

3x

1.1

3x

1.1

4x

1.1

9x 1

.47x

1.5

3x

1.5

4x

1.6

0x

1.6

5x

1.6

6x

1.6

8x

1.6

8x

1.6

9x

1.7

2x 1.9

3x

2.4

5x

2.5

8x

0%1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%17%18%19%

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

Gre

ece

Germ

any

Jap

an

Ko

rea

Chin

a

UK

Po

rtuga

l

Fra

nce

Sp

ain

Sin

ga

pore

Taiw

an

Thaila

nd

Mala

ysia

Sa

udi A

rabia

US

Sw

eden

So

uth

Afr

ica

Bra

zil

Hong K

on

g

Ph

ilippin

es

Au

str

alia

Canada

Mexic

o

Indonesia

India

12-mth rolling forward P/BV (LHS) 12-mth forward ROE (RHS)

Correlation co-efficient of PBVs and ROEs of banking sectors globally (excluding China) is 84%


6

So why are we more confident about the asset quality of China banks?

There are four principal reasons.

Firstly, insofar that many investors do not trust the asset quality metrics reported by the China banks, we have conducted our own independent assessment of what the ‘true’ corporate NPL ratio could be, based on our analysis of the financial statements of over 2,500 listed A-share corporates in China.

We then apply two main credit-analytic screens to determine whether a corporate is likely to default. The first screen is a leverage ratio test, whereby a company is assumed to be at risk of default if a company’s net debt-to-equity ratio exceeds 2x (or 3x for the utilities sector).

Our second screen is a debt serviceability test, namely that a company is assumed to be at risk of default if their interest expense exceeds their earnings before interest expense and tax (EBIT).

The proportion of companies that failed one or both of these tests was 12.3% as at the end of Jun 2017, and this is the third consecutive quarter that this ratio has fallen since it peaked at 15.1% in Sep 2016 (Figure 11).

Figure 11: Our estimate of the 'true' corporate NPL ratio, based on the analysis of the financials of 2,500 listed A-share companies

SOURCE: CIMB RESEARCH, WIND

Investors should note that this is our estimate of the ‘true’ corporate NPL ratio, and is based on all listed A-share corporates. The ‘true’ NPL ratio for all loans is lower, especially for the listed banks in our coverage. We estimate that the ‘true’ NPL ratio for all loans for the banks in the system is 8.9% at end-Jun 2017.

This is because non-corporate loans (primarily consumer) comprised 71.7% of system loans as at end-Jun 2017, and consumer loan NPL ratios tend to be low and stable (<0.50%).

Secondly, we are more confident about the current state asset quality and more importantly, the outlook for asset quality going forward. The most positive takeaway from the 1H17 China bank results season, in our view, was the willingness of the senior management of China banks to give guidance on the outlook for asset quality, with the guidance indicating that we are past the worst for asset quality.

The senior management of these banks had previously been consistently conservative in their guidance. Given that they reported their results at the end of Aug 2017 (i.e. two months into the third quarter), we believe that this also sends a positive signal on the outlook for 3Q17F and 4Q17F.

Thirdly, we believe China’s economy clearly seems to be on a much more stable footing compared to two years ago when it unexpectedly devalued its currency by 2% in Aug 2015.

Title:

Source:


Sep-16, 15.1%

Jun-17, 12.3%

0%

5%

10%

15%

20%

25%

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Average NPL ratio (12-mth rolling)


7

Figure 12: China's nominal GDP growth rate (% yoy) Figure 13: Growth of industrial profits YTD (% yoy) remains very strong despite a slowdown in GDP growth in recent months

SOURCES: CIMB, WIND SOURCES: CIMB, WIND

Many economic indicators are at or near multi-year highs and although we expect these economic indicators to soften towards the end of 2017F, we believe the extent of this economic slowdown will be mild, and still expect economic growth to be fairly robust.

For example, nominal GDP growth was 11.1% yoy in Jun 2017, a slight slowdown compared to the 11.8% yoy growth in Mar 2017. Both of these growth rates are the highest since Mar 2012.

Similarly, YTD industrial profit growth was 21.6% yoy in Aug 2017. While this was slower than Feb 2017’s 31.5% yoy, growth this year is still the highest since early 2012.

Figure 14: China’s manufacturing PMI data looks fairly stable Figure 15: The Li Keqiang Index shows an improving economy


Manufacturing PMI data, the Li Keqiang Index and the producer price index are also still at levels that are significantly higher than in recent years, even though they have slowed down in recent months. The only major economic indicator that we track that is not at relatively elevated levels is the loan demand climate index. Having said that, even that index (Sep 2017: 64.2) has improved versus its low of 55.7 in Sep 2016.

Title:

Source:


Dec-2013, 10.6%

Sep-2015, 6.6%

Mar-2017, 11.8%

Jun-2017, 11.1%

0%

5%

10%

15%

20%

25%

Mar-2008 Mar-2010 Mar-2012 Mar-2014 Mar-2016

China nominal GDP growth rate (yoy)

Title:

Source:


Feb-11, 34.3%

Dec-11, 25.4%

Feb-12, -5.2%

Feb-13, 17.2%

Jul-14, 11.7%

Feb-15, -4.2%Dec-15, -2.3%

Dec-16, 8.5%

Feb-17, 31.5%

Aug-17, 21.6%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Growth of ytd industrial profits (yoy)

Title:

Source:


Jan-2013, 52.3

51.0

52.4

46

48

50

52

54

56

58

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Caixin PMI Official PMI

Sep. 2017Title:

Source:


Apr-2010, 29.1

Feb-2012, 14.5

Aug-2013, 11.1

Sep-2015, 0.2

Feb-2017, 20.5

Jul-2017, 15.8

-10

-5

0

5

10

15

20

25

30

35

Feb-2010 Feb-2012 Feb-2014 Feb-2016

Li Keqiang index


8

Figure 16: PPI is still near multi-year highs, though we expect it to continue to soften

Figure 17: Underlying loan demand was weak, but has rebounded


Under these relatively robust economic conditions, we believe that asset quality indicators can continue to improve gradually.

Lastly, while investors may question the level of reported NPL ratios, we think that the trend in reported NPL ratios could indicate trends in the ‘true’ NPL ratio.

On this front, all reported asset quality metrics have turned for the better.

For the banks in our coverage, reported NPL ratios improved by 5bp qoq and 7bp hoh on average to 1.64% in 1H17. Special mention loan ratios improved by 29bp hoh on average to 3.13%. We have put in the Appendix a summary in a table format of the key ratios and their trends exhibited at the 1H17 results.

Figure 18: NPL ratios of the China banks have begun trending downward

Figure 19: Special mention loan (SML) ratios have recently begun to trend downward

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Similarly, 90 days overdue loan ratios improved by 3bp hoh on average to 1.50%. Finally, credit costs (defined as bad debts expense/average loans) seem to finally be on a downward trend, with average credit costs down 31bp qoq and down 23bp yoy to 0.74% of average loans.

Title:

Source:

Please fill in the values above to have them entered in your reportJul-2011, 7.5%

Dec-2015, -5.9%

Jan-2017, 6.9%

Feb-2017, 7.8%

Aug-2017, 6.3%

1.8%

-10%

-5%

0%

5%

10%

15%

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

PPI CPI

Title:

Source:


Dec-08, 61.9

Mar-14, 78.2

Sep-16, 55.7

Dec-16, 57.5

Mar-17, 68.0

Sep-17, 64.2

50

55

60

65

70

75

80

85

90

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Loan demand climate index

Title:

Source:


0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

Big four banks Mid-size banks Sector weighted average

Title:

Source:


1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1H

09

2H

09

1H

10

2H

10

1H

11

2H

11

1H

12

2H

12

1H

13

2H

13

1H

14

2H

14

1H

15

2H

15

1H

16

2H

16

1H

17



9

Figure 20: >90 days overdue loan ratio has peaked Figure 21: Credit costs appear to have peaked

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Less balance sheet stress = higher valuations

We thus believe that it is time to lower the ‘true’ corporate NPL ratio assumption embedded within our stress test-adjusted Gordon Growth Model (GGM) valuation. Essentially, we stress tested each bank’s balance sheets and off-balance sheet exposures for a rise in reported NPL ratios to the level of the ‘true’ NPL ratio.

After taking into account the loan mix, collateral mix, provisioning buffers, shadow banking exposures and investor compensation requirements, we were able to compute which banks needed to raise capital under a stress test (for which we then assume a 35% rights issue discount).

We then calculated the hit to each bank’s book value and return on equity (ROE). Accordingly, we were then able to use GGM to compute each bank’s asset quality stress tested valuation discounts. We believe that this stress test takes into account our view of a lack of investor faith in the book values reported by the China banks.

We previously used a ‘true’ corporate NPL ratio assumption of 10% when we first introduced this valuation methodology in our report, “The stars are slowly starting to align” dated 17 Jun 2016. As discussed earlier in this report, we believe that he worst is over in terms of asset quality outlook and have decided to cut the ‘true’ corporate NPL ratio assumption by 1% pts to 9%. We believe this is a conservative assumption, as asset quality is expected to improve, and it the ‘true’ corporate NPL ratio is likely to continue to fall. Accordingly, there could be more scope to reduce this assumption further in the future.

We have also updated this stress test to use the most recent figures for each bank’s loan exposure and off-balance sheet/shadow-banking exposures, with the stricter regulatory environment clearly driving a reduction of shadow banking exposures of mid-size banks. The rapid loan mix shift towards consumer loans and away from corporate loans has also had a positive impact on the magnitude of our computed asset-quality valuation discounts.

This results in asset quality valuation discounts ranging from 17% to 41% for the listed China banks in our coverage.

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2H

10

1H

11

2H

11

1H

12

2H

12

1H

13

2H

13

1H

14

2H

14

1H

15

2H

15

1H

16

2H

16

1H

17


0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17


https://brokingrfs.cimb.com/_A92ItG8cn5esqHGIguZ_M_Dllarcs6ALfg6BFqjan_uHws7hvkDAmq2OLdywv6IKso1.pdf



10

Figure 22: Summary of impact of stress test as of Oct. 2017

SOURCES: CIMB ESTIMATES

These newly-computed asset quality valuation discounts are generally lower than the 17-54% asset quality valuation discounts computed previously.

Figure 23: Summary of impact of previous stress test conducted on Sept 2016


We then compute an initial target 1H18F P/BV multiple using a simple Gordon Growth Model.

Figure 24: Key valuation assumptions in our 'basic' Gordon Growth Model approach (before applying asset quality discounts)


The asset quality and investor compensation valuation discount is then applied to the initial target P/BV multiple to derive a final target P/BV multiple, which we then apply to 1H18F BVPS to derive our target price in HK$, based on a Rmb/HK$ exchange rate assumption of 1.18.

ICBC CCB ABC BOC BOCOM CMB CITIC MSB CQRCB

Equity reduction from NPLs -15% -16% -6% -14% -18% -10% -17% -17% -6%

Equity reduction from non-loan

securities -1% -1% -1% -1% -2% -2% -6% -6% -6%

Equity reduction from investor

compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%

Tier 1 gap to min. regul.

reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0

Capital raising dilution 0% 0% 0% 0% 0% 0% 10% 6% 0%

Post-dilution ROE 12.1% 12.3% 13.1% 10.4% 9.8% 0.0% 9.8% 12.2% 0.0%

BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Net profit impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%

Valuation discount -28% -28% -17% -28% -37% -22% -39% -41% -24%* Net profit impact assuming NPLs are charged off over a 5-year time horizon. The valuation discount above is an asset quality and

investor compensation discount.




securities -1% -1% -1% -2% -2% -5% -11% -4% -7%


compensation -2% -1% 0% -1% -2% -5% -2% -6% -1%


reqmts. (RMB m) 0 0 0 0 0 7,723 38,927 26,444 0



BVPS dilution -19% -19% -9% -17% -22% -25% -34% -29% -15%


ROE impact* -1.8% -1.8% -1.1% -2.0% -2.6% -2.2% -2.8% -2.6% -1.7%



1H18F BVPS (Rmb)

FY19F

ROE COE ERP Risk free rate Beta g

Initial target

P/BV

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x


11

Figure 25: Key valuation assumptions in our stress test-adjusted Gordon Growth Model approach (after applying asset quality discounts)


Figure 26: Final TP-implied P/BV and sustainable ROEs


Under our stress test, only two banks under our coverage would need to raise ordinary equity capital – CITIC and MSB.

Figure 27: Only two banks under our coverage would need to raise capital, in our view – CITIC and MSB


The large banks are more than sufficiently well capitalised, and would be able to withstand asset quality shocks from a sharp rise in the corporate NPL ratio to levels above 15% before they would need to raise equity capital, in our view.

Figure 28: Estimated ‘True’ NPL ratio level that would require equity capital raising


This stress test was originally introduced in our report titled “The stars are slowly starting to align” dated 17 Jun 2016, and further refined in our report titled “Next stop: breaking out of the band” dated 14 Sep 2016.

For more details on this stress test and the sensitivities of the results to changes in key assumptions, see the Appendix.

Initial target P/BV

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)

Stress test adjusted

P/BV

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$) Final TP implied P/BV

Final TP implied sustainable

ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%

ICBC CCB BOC ABC BOCOM CMB CITIC MSB CQRCB

Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%

Hit to core T1 ratio -1.9% -2.0% -0.8% -0.3% -2.0% -1.5% -1.8% -2.0% -1.3%

Core T1 ratio- after 11.4% 11.3% 10.3% 10.0% 9.4% 9.7% 6.6% 7.0% 8.6%

Core T1 capital shortfall (Rmb m) 0 0 0 0 0 0 38,307 21,587 0


Level of the 'true' corporate NPL

ratio required to trigger a capital

raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%



https://brokingrfs.cimb.com/E5JRX4r7ZTx0-0Uscbw3S0q56Fq1U5KrFua6aR266yGsVdF-jCWKqqBdyBN8mrViGe01.pdf

https://brokingrfs.cimb.com/E5JRX4r7ZTx0-0Uscbw3S0q56Fq1U5KrFua6aR266yGsVdF-jCWKqqBdyBN8mrViGe01.pdf


12

Valuation and risks

There are no changes to our FY17-19F earnings estimates. However, as a result of the changes in our computed asset quality stress test valuation discounts, there are changes to our ratings and target prices. We upgrade BOCOM and MSB to Add from Hold, and CITIC to Hold from Reduce. Our target prices have changed by an average of 20%.

Figure 29: Changes to our ratings and target prices

SOURCES: CIMB ESTIMATES, BLOOMBERG

We maintain our Overweight rating on China banks, as their current valuations still look inexpensive, in our view, given that the average forward P/BV multiple for the China bank sector is currently at 0.75x, still more than 1 s.d. below its historical mean (computed over the period from 2006 to the present).

Figure 30: China banks sector comparison

SOURCE: CIMB RESEARCH, COMPANY, BLOOMBERG

The big four banks currently trade at an average of 0.75x 12-month rolling forward P/BV, which is 1.0 s.d. below their historical mean of 1.40x.

Similarly, the mid-size banks are currently trading at an average of 0.83x 12-month forward P/BV, which is 0.7 s.d. below their historical mean of 1.45x.

These historical means were computed over the period of 2006 to the present.

Figure 31: China banks 12-month forward P/BV in the past decade


As highlighted earlier, we use a stress test-adjusted Gordon Growth Model (GGM) to value the China banks. This stress test-adjusted GGM valuation approach compares favourably to a simple GGM to derive a target P/BV multiple, in our view. We believe that using only a simple GGM for valuation purposes leaves the target prices too sensitive to the sustainable ROE assumption, but is

(HK$) ICBC CCB BOC ABC BOCOM CMB CITIC MSB CQRCB

Stress test adjusted GGM 7.40 8.80 5.20 5.40 7.20 32.50 5.40 9.40 7.70

Share price as of 4th Oct

2017 6.37 6.88 4.04 3.64 5.93 29.80 5.08 7.38 5.14

Upside/ downside 16% 28% 29% 48% 21% 9% 6% 27% 50%

Rating Add Add Add Add Add Hold Hold Add Add

Company Ticker Price (HK$) Rating Target Upside/

4-Oct-17 price (HK$) Downside FY17F FY18F FY17F FY18F FY17F FY18F FY17F FY18F FY17F FY18F

ICBC 1398 HK 6.37 Add 7.40 16% 0.97 0.88 7.2 6.7 4.1 3.7 4.3% 4.6% 14.3 13.8

CCB 0939 HK 6.88 Add 8.80 28% 0.89 0.80 6.5 6.0 3.7 3.2 4.6% 5.0% 14.3 14.0

BOC 3988 HK 4.04 Add 5.20 29% 0.74 0.68 6.2 5.7 3.2 2.8 4.9% 5.3% 12.0 12.0

ABC 1288 HK 3.64 Add 5.40 48% 0.77 0.69 5.6 5.1 3.0 2.6 5.5% 6.0% 14.5 14.2

BOCOM 3328 HK 5.93 Add 7.20 21% 0.63 0.58 5.6 5.1 3.1 2.9 5.5% 6.0% 11.8 11.9

CMB 3968 HK 29.80 Hold 32.50 9% 1.47 1.30 9.5 8.0 4.1 3.5 3.1% 3.7% 16.4 17.2

CITIC 0998 HK 5.08 Hold 5.40 6% 0.59 0.53 5.1 4.5 1.8 1.5 5.0% 5.6% 11.1 11.3

MSB 1988 HK 7.38 Add 9.40 27% 0.64 0.57 4.8 4.1 2.3 2.0 4.4% 5.2% 14.2 14.6

CQRCB 3618 HK 5.14 Add 7.70 50% 0.71 0.63 4.8 4.2 2.8 2.4 4.9% 5.6% 15.9 15.9

Sector average 0.88 0.80 6.5 6.0 3.5 3.1 4.6% 5.1% 13.9 13.8

P/PPOP (x) Dividend yield ROE(%)P/BV (x) P/E (x)

Big four banks' average P/BV, Oct-07,

3.57x0.76x

Mid size banks' average P/BV, Oct-07,

4.58x

Dec-09

0.84x

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

4.00x

4.50x

5.00x

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Big four banks' average P/BV Mid size banks' average P/BV

Oct-2017

Trough in May 2016 at 0.55x & 0.56x for mid size and big four banks respectively


13

also highly discretionary as there traditionally has been little visibility on what the right sustainable ROE level should be.

We list below the key valuation assumptions of our Gordon Growth methodology, as well as the key risks for each bank in our coverage universe.

Figure 32: Summary of valuation methodology and risks

SOURCES: CIMB

Company Ticker TP (HK$) Rating Valuation methodology Risks

ICBC 1398.HK 7.40 Add Stress-test-adjusted GGM, assuming COE of 10.7% and a 'g' of 3%,

which implies a target P/BV of 1.02x and a sustainable ROE of 10.9%

Lower-than-expected change in NIM, worse-than-

expected asset quality

CCB 939.HK 8.80 Add Stress-test-adjusted GGM, assuming COE of 10.7% and a 'g' of 3%,


Lower-than-expected change in NIM, worse-than-


BOC 3988.HK 5.20 Add Stress-test-adjusted GGM, assuming COE of 10.7% and a 'g' of 3%,


Slower-than-expected US rate rises; Risks with One Belt

One Road

ABC 1288.HK 5.40 Add Stress-test-adjusted GGM, assuming COE of 12.3% and a 'g' of 3%,


Worse-than-expected asset quality, especially in the

county areas; Downward NIM pressure

BoCom 3328.HK 7.20 Add Stress-test-adjusted GGM, assuming COE of 11.1% and a 'g' of 3%,


Better/ worse-than-expected progress with SOE reform,

better/ worse-than-expected asset quality

CMB 3968.HK 32.50 Hold Stress-test-adjusted GGM, assuming COE of 11.5% and a 'g' of 3%,


Better/ worse-than-expected change in NIM, better/ worse-

than-expected asset quality

CITIC 998.HK 5.40 Hold Stress-test-adjusted GGM, assuming COE of 12.7% and a 'g' of 3%,


Better-than-expected change in NIM, better-than-


MSB 1988.HK 9.40 Add Stress-test-adjusted GGM, assuming COE of 12.6% and a 'g' of 3%,


Better/ worse-than-expected asset quality; Unexpected

change in strategy under new management and major

shareholder

CQRCB 3618.HK 7.70 Add Stress-test-adjusted GGM, assuming COE of 13.8% and a 'g' of 3%,


Lower-than-expected change in NIM, Worse-than-

expected slowdown of Chongqing's economic growth

leading to worse asset quality


14

Figure 33: Summary of our key estimates

SOURCES: CIMB, COMPANY REPORTS

ICBC 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F

NIM (%) 2.66 2.47 2.16 2.16 2.26 2.36 8bps -19bps -31bps 0bps 10bps 10bps

Net fee growth (%) 8.3 8.2 1.1 8.0 10.0 10.0 -7.0% pts -0.1% pts -7.1% pts 6.9% pts 2.0% pts 0.0% pts

Cost/Income (%) 34.4 33.0 30.1 28.6 28.6 28.9 -0.8% pts -1.4% pts -2.9% pts -1.5% pts 0.0% pts 0.3% pts

Credit cost (%) 0.54 0.75 0.69 0.86 0.96 0.96 13bps 21bps -6bps 17bps 10bps 0bps

NPL ratio (%) 1.13 1.50 1.62 1.61 1.60 1.59 18bps 38bps 12bps -1bps -1bps -1bps

Net profits (Rmb bn) 275.8 277.1 273.8 282.7 302.6 334.2 5% 0% -1% 3% 7% 10%

EPS (Rmb) 0.78 0.77 0.77 0.79 0.85 0.94 5% -2% 0% 3% 7% 10%

BPS (Rmb) 4.23 4.80 5.29 5.84 6.45 7.13 17% 13% 10% 11% 10% 11%

ROAE (%) 20.0 17.1 15.2 14.3 13.8 13.8 -2.0% pts -2.9% pts -1.9% pts -1.0% pts -0.4% pts 0.0% pts

ROAA (%) 1.40 1.30 1.18 1.13 1.14 1.19 -4bps -10bps -12bps -5bps 1bps 5bps

Core Tier 1 ratio (%) 11.9 12.9 12.9 13.3 13.9 14.5 1.4% pts 1.0% pts 0.0% pts 0.5% pts 0.6% pts 0.6% pts

RWA growth (%) 4.1 5.9 10.2 6.8 5.8 5.9 -21.9% pts 1.8% pts 4.3% pts -3.4% pts -0.9% pts 0.1% pts

CCB 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F

NIM (%) 2.80 2.63 2.20 2.10 2.20 2.30 6bps -16bps -43bps -10bps 10bps 10bps

Net fee growth (%) 4.1 4.6 4.4 5.0 10.0 10.0 -7.5% pts 0.6% pts -0.2% pts 0.6% pts 5.0% pts 0.0% pts



NPL ratio (%) 1.19 1.58 1.52 1.52 1.51 1.50 20bps 39bps -6bps 0bps -1bps -1bps

Net profits (Rmb bn) 227.8 228.1 230.4 235.3 253.4 280.7 6% 0% 1% 2% 8% 11%

EPS (Rmb) 0.91 0.91 0.92 0.94 1.01 1.12 6% 0% 1% 2% 8% 11%

BPS (Rmb) 4.97 5.66 6.23 6.89 7.62 8.44 16% 14% 10% 11% 11% 11%


ROAA (%) 1.42 1.30 1.17 1.07 1.06 1.08 -5bps -12bps -13bps -10bps -1bps 2bps

Core Tier 1 ratio (%) 12.1 13.1 13.0 13.2 13.3 13.5 1.4% pts 1.0% pts -0.2% pts 0.2% pts 0.1% pts 0.1% pts

RWA growth (%) 3.4 5.1 11.3 8.9 9.8 9.5 -25.9% pts 1.7% pts 6.3% pts -2.4% pts 0.9% pts -0.3% pts

BOC 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F


Net fee growth (%) 11.1 1.3 -4.1 6.0 10.0 10.0 -6.3% pts -9.9% pts -5.3% pts 10.1% pts 4.0% pts 0.0% pts

Cost/Income (%) 39.0 39.1 36.0 35.0 35.4 35.7 -3.3% pts 0.2% pts -3.1% pts -1.0% pts 0.4% pts 0.4% pts

Credit cost (%) 0.58 0.63 0.93 0.98 1.08 1.13 26bps 5bps 30bps 5bps 10bps 5bps

NPL ratio (%) 1.18 1.43 1.46 1.48 1.49 1.49 22bps 25bps 3bps 2bps 1bps 1bps


EPS (Rmb) 0.61 0.56 0.54 0.58 0.63 0.71 8% -7% -5% 9% 9% 12%

BPS (Rmb) 3.70 4.09 4.46 4.86 5.29 5.78 12% 11% 9% 9% 9% 9%

ROAE (%) 17.3 14.5 12.5 12.0 12.0 12.4 -0.8% pts -2.8% pts -2.0% pts -0.5% pts 0.0% pts 0.3% pts



RWA growth (%) 5.5 7.2 5.8 4.9 7.6 7.7 -24.4% pts 1.8% pts -1.5% pts -0.8% pts 2.7% pts 0.1% pts

ABC 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F


Net fee growth (%) -3.7 3.0 10.2 9.0 9.0 9.0 -14.8% pts 6.7% pts 7.1% pts -1.2% pts 0.0% pts 0.0% pts

Cost/Income (%) 42.7 41.8 38.6 36.1 36.5 36.9 0.1% pts -1.0% pts -3.1% pts -2.5% pts 0.4% pts 0.4% pts


NPL ratio (%) 1.54 2.39 2.37 2.39 2.36 2.31 33bps 85bps -1bps 2bps -4bps -5bps


EPS (Rmb) 0.55 0.55 0.02 0.02 0.02 0.71 7% -1% -96% -3% 2% 2912%

BPS (Rmb) 3.05 3.48 3.81 4.22 4.68 5.19 18% 14% 10% 11% 11% 11%




RWA growth (%) 19.7 1.2 7.9 6.9 8.8 9.0 -5.9% pts -18.5% pts 6.7% pts -1.0% pts 2.0% pts 0.2% pts

BOCOM 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F

NIM (%) 2.36 2.22 1.88 1.85 1.90 1.95 -16bps -14bps -34bps -3bps 5bps 5bps


Cost/Income (%) 40.2 40.5 38.1 37.1 37.5 37.8 0.2% pts 0.3% pts -2.4% pts -1.0% pts 0.4% pts 0.4% pts

Credit cost (%) 0.61 0.76 0.73 0.84 0.82 0.82 2bps 15bps -3bps 11bps -1bps -1bps

NPL ratio (%) 1.25 1.51 1.52 1.51 1.50 1.50 20bps 26bps 1bps -1bps -1bps 0bps


EPS (Rmb) 0.89 0.90 0.02 0.02 0.02 1.14 6% 1% -98% -3% 2% 5758%

BPS (Rmb) 6.34 7.00 7.67 8.34 9.09 9.92 12% 10% 9% 9% 9% 9%



Core Tier 1 ratio (%) 11.3 11.1 11.0 11.4 11.6 11.7 1.5% pts -0.2% pts -0.1% pts 0.4% pts 0.2% pts 0.2% pts

RWA growth (%) -2.6 11.7 10.9 5.1 7.5 7.6 -34.4% pts 14.3% pts -0.8% pts -5.8% pts 2.4% pts 0.1% pts

yoy growth


15

Figure 34: Summary of our key estimates (cont’d)

SOURCES: CIMB, COMPANY REPORTS

CMB 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F

NIM (%) 2.64 2.77 2.50 2.39 2.49 2.59 -18bps 13bps -27bps -11bps 10bps 10bps

Net fee growth (%) 35.3 34.2 14.8 22.0 20.0 20.0 -12.5% pts -1.1% pts -19.4% pts 7.2% pts -2.0% pts 0.0% pts

Cost/Income (%) 36.8 33.5 30.9 29.6 29.4 29.1 -4.0% pts -3.3% pts -2.6% pts -1.3% pts -0.3% pts -0.3% pts

Credit cost (%) 1.33 2.15 2.12 2.07 2.15 2.12 83bps 83bps -3bps -6bps 8bps -3bps



EPS (Rmb) 2.22 2.29 2.46 2.78 3.31 4.10 -4% 3% 8% 13% 19% 24%

BPS (Rmb) 12.47 14.31 15.95 17.99 20.47 23.57 18% 15% 12% 13% 14% 15%

ROAE (%) 19.3 17.1 16.3 16.4 17.2 18.6 -2.9% pts -2.2% pts -0.8% pts 0.1% pts 0.8% pts 1.4% pts

ROAA (%) 1.28 1.13 1.09 1.09 1.14 1.25 -11bps -15bps -4bps 0bps 5bps 12bps

Core Tier 1 ratio (%) 9.6 10.8 11.5 11.2 11.3 11.5 0.3% pts 1.2% pts 0.7% pts -0.4% pts 0.1% pts 0.2% pts

RWA growth (%) 14.6 2.0 5.0 16.7 12.5 13.0 -17.5% pts -12.7% pts 3.1% pts 11.7% pts -4.1% pts 0.4% pts

CITIC 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F


Net fee growth (%) 50.6 40.9 18.5 19.0 18.0 18.0 0.6% pts -9.6% pts -22.4% pts 0.5% pts -1.0% pts 0.0% pts


Credit cost (%) 1.07 1.49 1.69 1.92 1.96 1.93 44bps 42bps 20bps 23bps 4bps -3bps

NPL ratio (%) 1.30 1.43 1.69 1.79 1.79 1.74 27bps 13bps 26bps 11bps 0bps -5bps


EPS (Rmb) 0.87 0.88 0.02 0.02 0.02 1.16 4% 1% -98% -2% 1% 5467%

BPS (Rmb) 5.55 6.49 7.04 7.72 8.49 9.39 15% 17% 8% 10% 10% 11%


ROAA (%) 1.05 0.89 0.75 0.69 0.69 0.70 -14bps -16bps -14bps -6bps -1bps 2bps

Core Tier 1 ratio (%) 8.9 9.1 8.6 8.4 8.2 8.0 0.1% pts 0.2% pts -0.5% pts -0.2% pts -0.2% pts -0.2% pts

RWA growth (%) 13.1 17.9 14.3 12.7 12.9 13.1 -20.3% pts 4.8% pts -3.6% pts -1.6% pts 0.2% pts 0.2% pts

MSB 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F



Cost/Income (%) 40.3 37.8 34.0 34.9 34.0 34.0 1.6% pts -2.4% pts -3.8% pts 0.9% pts -1.0% pts 0.0% pts

Credit cost (%) 1.18 1.71 1.83 1.63 1.68 1.69 30bps 53bps 12bps -20bps 6bps 1bps



EPS (Rmb) 1.31 1.30 0.02 0.02 0.02 1.83 -12% -1% -98% -2% 1% 8823%

BPS (Rmb) 7.03 8.26 9.12 10.21 11.50 12.99 1% 17% 10% 12% 13% 13%



Core Tier 1 ratio (%) 8.6 9.2 8.9 9.0 9.0 9.1 -0.1% pts 0.6% pts -0.2% pts 0.1% pts 0.0% pts 0.0% pts

RWA growth (%) 23.1 16.9 13.1 11.2 12.3 12.5 8.0% pts -6.2% pts -3.7% pts -2.0% pts 1.1% pts 0.2% pts

CQRCB 2014 2015 2016 2017F 2018F 2019F 2014 2015 2016 2017F 2018F 2019F


Net fee growth (%) 57.4 39.8 41.7 20.0 20.0 20.0 1.4% pts -17.6% pts 1.9% pts -21.7% pts 0.0% pts 0.0% pts



NPL ratio (%) 0.78 0.98 0.96 1.00 0.99 0.97 -2bps 20bps -2bps 5bps -1bps -2bps


EPS (Rmb) 0.73 0.78 0.03 0.03 0.03 1.29 14% 6% -96% -2% 1% 4309%

BPS (Rmb) 4.45 5.03 5.66 6.41 7.28 8.31 14% 13% 12% 13% 14% 14%


ROAA (%) 1.22 1.08 1.05 1.04 1.05 1.09 -6bps -14bps -3bps 0bps 1bps 4bps

Core Tier 1 ratio (%) 10.1 9.9 9.9 9.9 9.9 9.9 -1.7% pts -0.2% pts 0.0% pts 0.1% pts 0.0% pts 0.0% pts

RWA growth (%) 35.0 15.2 12.4 12.7 13.3 14.0 13.1% pts -19.8% pts -2.9% pts 0.3% pts 0.6% pts 0.7% pts

yoy growth


16

Appendix

As mentioned earlier in this report, we employ a stress test-adjusted GGM to value the China banks. Details on our key assumptions of this stress test are below.

Our stress test assumes a rise in the reported NPL ratios to a “true” NPL ratio of 9%. We then compute the losses that each of the banks in our coverage would take, after considering the loan mix, investment portfolio mix, collateral mix, provisioning buffers, as well as investor compensation given the defaults on wealth management products.

If, as a result of these losses, a given bank’s capital ratio falls below regulatory minimum levels, we assume a rights issue at a 35% discount in order to replenish its capital to meet regulatory requirements.

Other key assumptions that underpin our stress test are as follows:

1. A “true” NPL ratio for the corporate loan portfolio of 9%, and a “true” mortgage NPL ratio of 3.3%. This is only applied to the domestic loan portfolio.

2. A slightly lower “true” NPL ratio for the corporate bond portfolio of 7.9%, which reflects the slightly lower risk than the corporate loans of banks.

3. Loss given defaults which differ by loan type and the extent to which the loans of each bank are covered by collateral versus guarantees versus unsecured.

4. Investor compensation will have to be paid on defaulting wealth management products.

5. Existing provisioning buffers are first drawn down to absorb the hit of higher NPLs, before additional P&L provisioning expenses are required. For the purposes of this analysis, we assumed a minimum provisioning level of 2.5% of loans, and ignored any provisioning coverage ratio regulatory requirements. This is because we do not think it is realistic to expect banks to have a provisioning level of 150% of non-performing loans (NPL), if their corporate NPL ratios are 9%.

6. A rights issue discount of 35% to current share prices, if equity capital needs to be raised.

Figure 35: Key assumptions used in our stress test based on exposures as disclosed by the banks in 1H17

Note: Non-standard assets (NSA), non-standard credit assets (NSCA), non-performing assets (NPA), loss-given-default (LGD),

wealth management products (WMP)


Current system NPL ratio for commercial banks 1.75%

Estimated system mortgage NPL ratio 0.30%

Estimated system non-mortgage NPL ratio 2.11%

Assume 'true' corporate NPL ratio of 9.0%

Assume 'true' mortgage NPL ratio of 3.3%

Our stress test is based on 1H17 disclosed loan and off-balance sheet exposures of the banks

NPA formation LGD ratios Charge-off loss

Loans

Collateralised corporate loans 6.9% 30% 2.1%

Corporate guarantee loans

Large Med ent guaranteed loans 6.9% 50% 3.4%

Small/micro enterprise guaranteed loans 6.9% 70% 4.8%

Corporate unsecured loans

Large & medium enterprise unsecured loans 6.9% 80% 5.5%

Small/micro enterprise unsecured loans 6.9% 80% 5.5%

Mortgages 2.8% 10% 0.28%

Unsecured personal loans 6.9% 80% 5.5%

Investments

Financial Institutions 0.0% 10% 0.0%

Corporates 5.2% 50% 2.6%

Investment in 3rd party SPVs 5.2% 50% 2.6%

Interbank assets

NSA under reverse repo 6.9% 50% 3.4%

Off-balance sheet

Off-balance sheet investment in non standard credit assets 6.9% 50% 3.4%

NSCA of total WMP investment 30%

Capital raising discount 35%


17

The stress test enables us to compute the impact on each bank’s book values as well as each bank’s ROEs. With these two inputs, we are therefore able to use a Gordon Growth Model (GGM) to derive a valuation impact of this stress test, which we call an asset quality valuation and investor compensation discount.

In terms of the sensitivities of our target prices to key assumption changes, the variable that our target prices are most sensitive to is changes is the ‘true’ corporate NPL ratio assumption.

Figure 36: Sensitivity of our target prices to changes in key assumptions in the stress test, based on exposures disclosed in 1H17


We list the domestic exposures of each of the banks that were used to compute stress test-adjusted asset quality valuation discounts in Figure 37.


Sensitivity to changes in the "true" NPL ratio

True NPL ratio -1%

% change in target price 4.2% 4.3% 4.5% 3.9% 7.1% 4.5% 10.8% 9.8% 4.8%

True NPL ratio -2%


True NPL ratio -5%


True NPL ratio -6.5%


True NPL ratio +1%

% change in target price -4.2% -4.3% -4.5% -3.9% -7.1% -4.5% -10.1% -8.9% -4.8%

Sensitivity to changes in the rights issue discount

Rights issue discount -5%


Rights issue discount -10%


Rights issue discount 5%

% change in target price 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -1.4% -0.9% 0.0%

Rights issue discount 10%

% change in target price 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -3.0% -1.8% 0.0%

Sensitivity to changes in the LLR ratio requirement

LLR ratio requirement -25bp






LLR ratio requirement +25bp

% change in target price 0.0% 0.0% 0.0% -2.3% 0.0% -2.0% -2.2% -2.6% -1.6%





Sensitivity to changes in minimum capital requriements

Minimum core Tier 1 ratio -1%






Minimum core Tier 1 ratio 1%

% change in target price 0.0% 0.0% 0.0% 0.0% -0.8% 0.0% -5.7% -5.4% 0.0%


% change in target price 0.0% 0.0% -1.4% -3.0% -8.3% 0.0% -9.8% -9.3% -8.7%


% change in target price -5.6% -9.0% -13.9% -14.1% -20.9% 1.3% -17.2% -16.3% -24.1%


18

Figure 37: At-risk domestic exposure mix as of 1H17 (based on our estimates)

SOURCES: CIMB ESTIMATES, COMPANY REPORTS

The key loss-given-default (LGD) assumptions of the corporate loan portfolio are listed below.

Figure 38: Key loss-given-default (LGD) assumptions used in our stress test (1H17)


The bulk of the charge-offs are from loans.

Figure 39: Mix of charge-offs by asset type produced under our stress test, based on exposures disclosed by the banks as of 1H17


(Rmb m) ICBC CCB ABC BOC BOCOM CMB CITIC MSB CQRCB

Mid-large corporate 6,055,740 5,381,249 5,017,013 3,017,490 1,957,065 1,180,873 1,752,845 1,245,928 110,038

of which

- Collateralised/ pledged 1,706,684 1,324,468 2,012,769 250,104 483,206 509,946 1,166,414 810,497 42,663

- Guaranteed 1,277,451 1,557,695 988,458 1,215,290 592,777 293,410 480,866 485,763 53,953

- Unsecured 3,071,606 2,499,086 2,015,786 1,552,096 881,081 377,517 105,565 -50,332 13,422

Small and micro enterprise 2,103,465 1,388,927 1,402,133 1,375,800 811,126 744,775 121,286 346,348 133,542

of which:

- Collateralised/ pledged 1,533,872 984,247 1,033,159 963,060 589,165 608,118 121,286 187,921 94,063

- Guaranteed 569,593 404,679 368,973 412,740 221,961 136,657 0 158,427 39,479

- Unsecured 0 0 0 0 0 0 0 0 0

Mortgages

- Collateralised/ pledged 3,221,381 3,584,411 2,738,414 2,551,780 766,810 784,788 468,021 350,320 45,835

Other retail loans

- Collateralised/ pledged

- Guaranteed

- Unsecured 650,225 798,419 622,694 700,126 347,821 579,643 480,163 660,160 21,657

Corporate investment securities 408,316 520,999 428,034 440,930 152,235 63,799 107,215 146,947 187,237

Investment in 3rd party SPVs 102,116 55,653 274,341 276,314 276,061 560,394 841,359 911,403 66,395

Interbank assets under reverse repo 0 0 0 920 0 36 0 373 438

Non-std assets under WMP 1,234,817 600,374 355,859 330,135 378,945 638,431 297,934 407,360 31,067

Total 13,776,060 12,330,031 10,838,488 8,693,495 4,690,063 4,552,739 4,068,823 4,068,838 596,210

Domestic exposures/ total exposure ratio 91% 92% 95% 100% 92% 98% 94% 100% 100%

% mix

Mid-large corporate 44% 44% 46% 35% 42% 26% 43% 31% 18%

of which

- Collateralised/ pledged 12% 11% 19% 3% 10% 11% 29% 20% 7%

- Guaranteed 9% 13% 9% 14% 13% 6% 12% 12% 9%

- Unsecured 22% 20% 19% 18% 19% 8% 3% -1% 2%

Small and micro enterprise 15% 11% 13% 16% 17% 16% 3% 9% 22%

of which:


- Guaranteed 4% 3% 3% 5% 5% 3% 0% 4% 7%

- Unsecured 0% 0% 0% 0% 0% 0% 0% 0% 0%

Mortgages


Other retail loans


- Guaranteed 0% 0% 0% 0% 0% 0% 0% 0% 0%

- Unsecured 5% 6% 6% 8% 7% 13% 12% 16% 4%

Corporate investment securities 3% 4% 4% 5% 3% 1% 3% 4% 31%

Investment in 3rd party SPVs 1% 0% 3% 3% 6% 12% 21% 22% 11%

Interbank assets under reverse repo 0% 0% 0% 0% 0% 0% 0% 0% 0%

Non-std assets under WMP 9% 5% 3% 4% 8% 14% 7% 10% 5%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100%


Average corporate loan portfolio LGD 51% 55% 48% 56% 52% 44% 41% 30% 40%

Average mid-large corporate loan LGD 55% 58% 50% 61% 56% 49% 41% 21% 38%

Average small micro enterprise loan LGD 40% 41% 40% 42% 41% 37% 34% 48% 41%


Loans 85% 90% 88% 86% 82% 66% 63% 66% 55%

Investments 4% 5% 7% 8% 9% 17% 30% 14% 36%

Interbank 0% 0% 0% 0% 0% 1% 0% 0% 4%

Investor compensation on defaulting WMP 10% 5% 4% 5% 9% 16% 7% 20% 5%


19

1H17 China banks results summarised in tables

Figure 40: 1H17 P&L statement

Note: State-owned-enterprise (SOE) banks


Figure 41: 2Q17 P&L statement

Note: State-owned-enterprise (SOE) banks


(Rmb bn) ICBC CCB BOC ABC BOCOM CMB CITIC Minsheng CQRCB

Big 4

banks

Mid-size

banks

SOE

banks

Joint-stock

banks

All

banks

Net interest income 250.9 217.9 165.0 211.3 62.7 70.9 49.5 41.1 10.3 845.1 224.2 907.8 161.5 1,079.6

Non interest income 85.8 85.3 83.3 68.0 31.3 41.6 27.2 28.8 1.2 322.4 129.0 353.7 97.6 452.5

-- net fee income 76.7 68.1 49.2 42.5 21.3 34.8 22.8 24.5 1.2 236.4 103.2 257.7 82.0 340.8

-- net trading income 3.5 2.2 6.4 (0.5) 2.8 - 4.2 3.1 0.0 11.7 10.2 14.5 7.3 21.9

-- other operating income 5.6 15.0 27.7 26.0 7.2 6.9 0.3 1.2 (0.0) 74.3 15.5 81.6 8.3 89.9

Total operating income 336.7 303.1 248.4 279.3 94.0 112.5 76.7 69.9 11.4 1,167.6 353.2 1,261.6 259.1 1,532.2

Operating expense (80.3) (70.5) (81.7) (101.4) (32.1) (30.3) (21.2) (18.3) (3.7) (333.9) (101.9) (366.0) (69.8) (439.5)

Pre-prov profit 256.5 232.6 166.7 177.9 62.0 82.2 55.6 51.6 7.8 833.7 251.3 895.6 189.3 1,092.7

Impairment loss on assets (61.3) (60.5) (27.0) (44.7) (14.6) (32.6) (24.4) (17.1) (1.6) (193.5) (88.8) (208.2) (74.2) (284.0)

-- loan loss provision (61.0) (59.7) (26.6) (41.5) (14.6) (33.1) (21.5) (16.3) (1.3) (188.8) (85.6) (203.4) (70.9) (275.6)

-- other provision (0.3) (0.8) (0.4) (3.2) - 0.5 (2.9) (0.8) (0.4) (4.7) (3.3) (4.7) (3.3) (8.4)

Operating profit 195.1 172.1 139.7 133.2 47.3 49.5 31.1 34.5 6.1 640.2 162.4 687.5 115.1 808.7

Share of associates/JV 1.4 0.0 0.6 0.0 0.1 0.4 (0.0) - - 2.0 0.4 2.1 0.4 2.5

Pretax profit 196.5 172.1 140.4 133.2 47.4 49.9 31.1 34.5 6.1 642.2 162.9 689.5 115.5 811.2

Tax (42.8) (33.1) (29.8) (24.5) (8.1) (10.5) (7.0) (5.8) (1.5) (130.3) (31.4) (138.4) (23.3) (163.2)

Minority interests (0.7) (0.7) (6.9) (0.1) (0.2) (0.2) (0.2) (0.5) (0.0) (8.3) (1.1) (8.5) (0.9) (9.5)

Net profit 153.0 138.3 103.7 108.6 39.0 39.3 24.0 28.1 4.6 503.6 130.3 542.6 91.4 638.5

Preference dividends - - (1.5) (2.2) (2.7) - - - - (3.7) (2.7) (6.4) - (6.4)

Net profit to common equityholders 153.0 138.3 102.2 106.4 36.3 39.3 24.0 28.1 4.6 499.9 127.6 536.2 91.4 632.1

EPS, Rmb 0.43 0.55 0.35 0.33 0.49 1.56 0.49 0.77 0.49

BVPS, Rmb 5.42 6.43 4.59 3.93 7.86 16.63 7.20 9.71 5.97

(Rmb bn) ICBC CCB BOC ABC BOCOM CMB CITIC Minsheng CQRCB

Big 4

banks

Mid-size

banks

SOE

banks

Joint-stock

banks

All

banks

Net interest income 129.0 110.9 86.4 108.1 31.5 36.0 24.4 20.4 5.2 434 112 466 81 552

Non interest income 39.6 33.2 32.4 21.7 15.2 19.6 14.5 13.2 0.6 127 62 142 47 190

-- net fee income 35.7 29.3 23.4 17.0 10.0 16.1 12.0 11.8 0.6 105 50 115 40 156

-- net trading income 2.2 0.1 (1.6) (2.6) 2.0 - 2.4 1.0 0.0 (2) 5 0 3 4

-- other operating income 1.7 3.7 10.6 7.3 3.2 3.5 0.2 0.4 (0.0) 23 7 26 4 30

Total operating income 168.6 144.1 118.8 129.8 46.7 55.5 38.9 33.7 5.8 561 175 608 128 742

Operating expense (41.7) (35.5) (38.7) (44.5) (16.2) (15.9) (10.9) (8.7) (1.9) (160) (52) (177) (36) (214)

Pre-prov profit 126.8 108.6 80.2 85.3 30.5 39.6 27.9 25.0 3.9 401 123 432 93 528

Impairment loss on assets (29.8) (24.3) (4.7) (21.1) (7.2) (15.3) (11.6) (8.1) (1.0) (80) (42) (87) (35) (123)

-- loan loss provision (29.6) (24.4) (4.3) (18.9) (7.2) (15.8) (9.5) (7.3) (0.7) (77) (40) (84) (33) (118)

-- other provision (0.3) 0.1 (0.4) (2.1) - 0.5 (2.1) (0.8) (0.4) (3) (2) (3) (2) (6)

Operating profit 97.0 84.3 75.5 64.3 23.3 24.3 16.3 16.9 2.9 321 81 344 57 405

Share of associates/JV 0.7 0.0 0.3 - 0.0 0.2 (0.0) - - 1 0 1 0 1

Pretax profit 97.7 84.3 75.7 64.3 23.3 24.4 16.3 16.9 2.9 322 81 345 58 406

Tax (20.0) (15.5) (15.5) (11.4) (3.6) (5.1) (3.5) (2.8) (0.7) (62) (15) (66) (11) (78)

Minority interests (0.5) (0.5) (3.2) (0.0) (0.1) (0.1) (0.2) (0.2) (0.0) (4) (1) (4) (0) (5)

Net profit 77.2 68.3 57.0 52.9 19.7 19.3 12.6 13.9 2.2 255 65 275 46 323

Preference dividends - - - (2.2) (2.7) - - - - (2) (3) (5) - (5)

Net profit to common equityholders 77.2 68.3 57.0 50.7 17.0 19.3 12.6 13.9 2.2 253 63 270 46 318

EPS, Rmb 0.22 0.27 0.20 0.17 0.23 0.77 0.26 0.38 0.23

BVPS, Rmb 5.42 6.43 4.59 3.93 7.86 16.63 7.20 9.71 5.97


20

Figure 42: 1H17 key ratios & growth rates


SOE banks = state-owned-enterprise banks

Growth yoy ICBC CCB BOC ABC BOCOM CMB CITIC Minsheng CQRCB

Big 4

banks

Mid-

size

banks

SOE

banks

Joint-

stock

banks

All

banks

Net profit to common equityholders 1.8% 3.7% 11.6% 3.3% -1.3% 11.4% 1.7% 3.2% 10.0% 4.6% 3.9% 4.1% 6.2% 4.5%

Net profit before minorities and pref div. 2.0% 3.8% 3.0% 3.4% 3.4% 11.7% 2.1% 3.3% 10.2% 3.0% 5.5% 3.0% 6.4% 3.6%

Pre-prov profit 0.6% 1.2% 8.2% 1.3% -2.4% 9.3% -0.6% -2.1% 8.6% 2.5% 1.3% 2.2% 2.9% 2.3%

Net interest income 7.1% 3.3% 6.6% 6.2% -8.0% 5.1% -7.4% -13.3% 4.9% 5.8% -5.2% 4.7% -4.1% 3.3%

Non interest income -9.4% 0.7% -22.7% 7.0% 14.9% -8.8% 9.2% -3.9% -10.5% -8.1% 0.9% -6.4% -2.9% -5.7%

Net fee income -6.2% 1.3% 2.8% -16.9% 1.4% -8.0% 6.9% -12.8% -1.9% -4.6% -4.5% -4.1% -5.9% -4.6%

Total operating income 2.4% 2.5% -5.4% 6.4% -1.4% -0.5% -2.1% -9.7% 3.1% 1.5% -3.1% 1.3% -3.6% 0.5%

Operating expense -11.4% -10.8% -2.3% 7.5% -0.2% -4.0% -8.7% -14.6% -10.9% -3.9% -6.0% -3.6% -8.4% -4.5%

Impairment loss on assets 38.1% 29.8% -46.0% 21.7% -1.1% -9.7% 2.2% -17.5% 24.0% 8.9% -7.1% 8.1% -8.2% 3.4%

Net interest margin 2.16% 2.14% 1.82% 2.24% 1.57% 2.43% 1.77% 1.40% 2.59% 2.10% 1.78% 2.05% 1.88% 2.03%

y-o-y change -5bp -18bp -8bp -7bp -40bp -15bp -28bp -61bp -26bp -10bp -36bp -12bp -34bp -16bp

Cost-income ratio 23.8% 23.3% 32.9% 36.3% 34.1% 27.0% 27.6% 26.2% 32.2% 28.7% 29.3% 29.2% 26.9% 28.8%

y-o-y change -3.7ppt -3.5ppt 1.1ppt 0.4ppt 0.4ppt -1.0ppt -2.0ppt -1.5ppt -5.1ppt -1.6ppt -0.8ppt -1.4ppt -1.5ppt -1.4ppt

Credit cost (annualised) 0.90% 0.99% 0.52% 0.83% 0.70% 1.97% 1.45% 1.27% 0.81% 0.82% 1.28% 0.81% 1.57% 0.93%

y-o-y change 18bp 12bp -53bp 6bp -8bp -46bp -6bp -66bp -4bp -2bp -29bp -2bp -38bp -8bp

NPL ratio 1.57% 1.51% 1.38% 2.19% 1.51% 1.71% 1.65% 1.69% 0.97% 1.66% 1.63% 1.64% 1.68% 1.64%

y-o-y change 2bp -12bp -9bp -20bp -3bp -12bp 25bp 1bp -2bp -9bp 2bp -9bp 5bp -7bp

Net NPL formation rate (estimated) 1.43% 1.77% 0.29% 1.18% 1.16% 3.54% 2.06% 2.18% 1.93% 1.20% 2.13% 1.20% 2.62% 1.42%


NPL/ non-mortgages ratio 2.12% 2.21% 1.88% 3.02% 1.87% 2.21% 1.97% 1.94% 1.13% 2.30% 1.98% 2.26% 2.04% 2.22%

y-o-y change 12bp -9bp -5bp -13bp 0bp -8bp 33bp 11bp -3bp -3bp 8bp -2bp 12bp 0bp

h-o-h change -4bp 1bp -10bp -20bp -1bp -20bp -2bp 2bp 1bp -8bp -5bp -7bp -6bp -7bp

Special mention loans ratio 3.90% 2.84% 2.77% 3.62% 2.89% 1.72% 2.30% 3.68% 2.78% 3.32% 2.66% 3.28% 2.55% 3.16%

y-o-y change -100bp -22bp -7bp -55bp -18bp -76bp -31bp -33bp 21bp -50bp -37bp -47bp -47bp -46bp

h-o-h change -57bp -3bp -34bp -26bp -12bp -37bp -35bp -7bp 8bp -31bp -22bp -29bp -28bp -28bp

>90 days overdue loan ratio 1.42% 1.04% 1.25% 1.86% 1.90% 1.37% 2.11% 2.46% 1.14% 1.39% 1.94% 1.44% 1.96% 1.52%

y-o-y change -8bp -31bp 5bp -32bp -25bp -34bp 22bp -27bp -9bp -17bp -17bp -17bp -13bp -17bp

h-o-h change -8bp 1bp 13bp -15bp -22bp -10bp 10bp -9bp 23bp -3bp -10bp -5bp -4bp -5bp

NPL recognition ratio 110.5% 144.8% 109.9% 118.1% 79.5% 124.8% 78.4% 68.6% 84.9% 120.7% 87.5% 116.9% 91.5% 112.7%

y-o-y change 7.2ppt 24.4ppt -11.7ppt 8.0ppt 7.7ppt 18.1ppt 4.4ppt 7.1ppt 4.5ppt 7.5ppt 9.4ppt 7.4ppt 10.5ppt 7.9ppt

h-o-h change 194bp -175bp -1949bp -24bp 763bp -292bp -579bp 255bp -2034bp -436bp 145bp -329bp -121bp -288bp

Provisioning coverage ratio 145.8% 160.2% 153.0% 181.8% 151.0% 224.7% 153.0% 153.3% 425.1% 159.5% 169.1% 158.7% 178.3% 163.7%

y-o-y change 2.8ppt 8.5ppt -2.8ppt 4.1ppt 0.6ppt 35.6ppt -4.0ppt 0.8ppt 16.0ppt 3.3ppt 7.9ppt 3.1ppt 11.9ppt 4.5ppt

Loan loss reserve ratio 2.3% 2.4% 2.1% 4.0% 2.3% 3.8% 2.5% 2.6% 4.1% 2.7% 2.8% 2.6% 3.0% 2.7%

y-o-y change 7bp -6bp -17bp -27bp -4bp 39bp 33bp 3bp 6bp -10bp 16bp -9bp 27bp -3bp

Effective tax rate 21.8% 19.2% 21.2% 18.4% 17.2% 21.0% 22.3% 16.9% 24.6% 20.2% 19.1% 20.0% 20.1% 20.0%

y-o-y change -98bp -195bp 404bp -167bp -463bp -136bp -197bp -432bp -108bp -28bp -327bp -68bp -257bp -98bp

ROAE (annualised) 16.2% 17.3% 15.5% 17.1% 13.1% 19.1% 13.9% 16.2% 17.1% 16.5% 15.3% 16.2% 16.5% 16.2%

y-o-y change -115bp -85bp 47bp -88bp -102bp 4bp -79bp -143bp -37bp -65bp -79bp -69bp -63bp -68bp

Demand deposit/ total deposits 50.2% 54.6% 48.0% 56.6% 49.9% 62.4% 54.0% 42.9% 40.0% 52.3% 52.2% 52.1% 53.3% 52.2%

y-o-y change 14bp 281bp 158bp 264bp 83bp 14bp 719bp 618bp -142bp 171bp 328bp 163bp 453bp 205bp

h-o-h change -29bp 15bp 75bp 18bp -192bp -52bp 115bp 43bp -193bp 13bp -30bp -6bp 55bp 1bp

Residential mortgage loan mix 26.1% 31.7% 26.9% 27.4% 19.1% 22.8% 16.0% 12.9% 14.2% 28.0% 18.0% 27.1% 17.4% 25.5%


h-o-h change 125bp 82bp 43bp 109bp 36bp 49bp 98bp 92bp -36bp 90bp 77bp 85bp 93bp 93bp

Loan-deposit ratio 72.9% 76.9% 77.6% 64.7% 88.5% 85.5% 89.5% 89.5% 56.8% 73.0% 88.2% 74.4% 88.1% 76.4%

y-o-y change -9bp 96bp 6bp -4bp 435bp 350bp 994bp 1201bp -48bp 21bp 706bp 62bp 837bp 179bp

Core tier 1 capital ratio (after deductions) 12.7% 12.7% 10.9% 10.6% 10.6% 12.4% 8.6% 9.2% 9.8% 11.8% 10.3% 11.7% 10.1% 11.4%

y-o-y change 13bp -38bp -11bp 52bp -30bp 32bp -28bp -16bp -12bp 3bp -8bp 0bp 2bp 1bp

Tier 1 capital ratio (after deductions) 13.2% 12.8% 11.8% 11.2% 11.7% 12.4% 9.6% 9.5% 9.7% 12.3% 10.9% 12.3% 10.5% 12.0%

y-o-y change 9bp -40bp -18bp 50bp 49bp 32bp 66bp 10bp -20bp 0bp 44bp 4bp 40bp 10bp

Total capital ratio (after deductions) 14.5% 14.5% 13.4% 13.2% 13.9% 14.6% 11.8% 11.9% 12.4% 13.9% 13.2% 13.9% 12.8% 13.7%

y-o-y change 20bp -59bp -51bp 35bp 68bp 70bp 49bp 38bp 36bp -12bp 62bp -5bp 57bp 6bp

Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.6% 0.0% 0.0% 3.4% 0.0% 5.1% 0.8%

y-o-y change 0bp 0bp 0bp 0bp 0bp 0bp 0bp 25bp 0bp 0bp 8bp 0bp 19bp 2bp

Assets (Rmb bn) 25,514 21,692 19,426 20,574 8,931 6,200 5,651 5,767 855 87,206 26,549 96,137 17,618 114,610

y-o-y growth 8.5% 9.8% 10.4% 10.1% 12.2% 12.0% 0.8% 9.8% 10.8% 9.6% 9.0% 9.8% 7.5% 9.5%

Loans (Rmb bn) 13,866 12,507 10,651 10,412 4,370 3,540 3,091 2,706 324 47,436 13,707 51,806 9,337 61,467

y-o-y growth 9.4% 12.3% 9.5% 10.8% 9.7% 17.0% 12.4% 19.0% 8.3% 10.5% 13.9% 10.4% 16.0% 11.2%

Deposits (Rmb bn) 19,021 16,274 13,732 16,105 4,939 4,142 3,453 3,023 570 65,133 15,558 70,071 10,619 81,260

y-o-y growth 9.5% 10.9% 9.4% 10.9% 4.3% 12.2% 0.0% 3.0% 9.2% 10.2% 5.0% 9.7% 5.3% 9.1%


21

Figure 43: 2H16 key ratios & growth rates




Big 4

banks

Mid-

size

banks

SOE

banks

Joint-

stock

banks

All

banks

Net profit to common equityholders -1.7% 0.8% -11.6% 3.4% 1.2% 8.6% -2.9% 6.7% 13.0% -2.1% 3.5% -1.8% 4.6% -0.9%

Net profit before minorities and pref div. 0.1% 1.9% -9.1% 3.7% 1.4% 8.8% -3.5% 6.7% 14.7% -0.7% 3.5% -0.6% 4.5% 0.2%

Pre-prov profit -0.5% -3.0% -13.0% -1.1% -0.4% 5.1% -6.7% -0.7% 12.1% -3.9% -0.3% -3.7% -0.3% -3.1%

Net interest income -7.1% -11.3% -8.5% -8.1% -8.7% -5.5% -3.6% -0.1% -7.5% -8.7% -5.0% -8.7% -3.4% -7.9%

Non interest income -1.4% 2.9% 3.0% 1.2% -2.2% 10.2% 10.3% -1.5% 8.0% 1.3% 3.9% 1.0% 5.7% 2.0%

Net fee income -4.5% 2.9% -3.6% 14.1% 1.2% 3.7% 15.3% -7.1% 16.0% 0.9% 2.4% 1.0% 2.6% 1.4%

Total operating income -5.8% -8.5% -5.1% -6.4% -7.2% -1.2% 0.2% -0.6% -6.1% -6.5% -2.4% -6.6% -0.6% -5.5%

Operating expense -14.1% -14.0% -6.8% -16.8% -11.0% -7.5% -11.8% -3.5% -12.5% -13.2% -8.5% -13.0% -7.4% -12.1%

Impairment loss on assets -3.5% -11.1% 27.5% 10.8% -12.9% -0.4% 21.7% 4.2% -31.0% 3.4% 4.2% 2.1% 7.9% 3.4%




y-o-y change -3.2ppt -2.2ppt -0.7ppt -5.2ppt -1.8ppt -2.3ppt -4.3ppt -1.2ppt -3.0ppt -2.9ppt -2.3ppt -2.8ppt -2.5ppt -2.7ppt



NPL ratio 1.62% 1.52% 1.46% 2.37% 1.52% 1.87% 1.69% 1.68% 0.96% 1.74% 1.68% 1.72% 1.75% 1.72%

y-o-y change 12bp -6bp 3bp -1bp 1bp 20bp 26bp 8bp -2bp 2bp 12bp 2bp 18bp 4bp



NPL/ non-mortgages ratio 2.16% 2.20% 1.98% 3.22% 1.87% 2.41% 1.99% 1.91% 1.12% 2.38% 2.03% 2.33% 2.10% 2.29%


h-o-h change 16bp -10bp 5bp 8bp 1bp 12bp 35bp 8bp -4bp 5bp 13bp 5bp 18bp 7bp

Special mention loans ratio 4.47% 2.87% 3.11% 3.88% 3.02% 2.09% 2.65% 3.75% 2.70% 3.63% 2.89% 3.57% 2.83% 3.45%

y-o-y change 11bp -2bp 61bp -32bp -16bp -52bp -93bp 6bp 44bp 8bp -35bp 6bp -43bp -2bp

h-o-h change -43bp -19bp 27bp -29bp -5bp -39bp 4bp -26bp 13bp -19bp -14bp -18bp -19bp -18bp

>90 days overdue loan ratio 1.49% 1.04% 1.13% 2.01% 2.12% 1.47% 2.01% 2.55% 0.91% 1.42% 2.04% 1.48% 2.01% 1.56%

y-o-y change 13bp 6bp -4bp -2bp -34bp -12bp 51bp 17bp -6bp 3bp 3bp 1bp 21bp 4bp

h-o-h change 0bp -32bp -8bp -17bp -3bp -24bp 11bp -17bp -33bp -14bp -7bp -13bp -9bp -12bp

NPL recognition ratio 108.6% 146.6% 129.4% 118.3% 71.9% 127.7% 84.2% 66.1% 105.2% 125.1% 86.0% 120.2% 92.7% 115.6%

y-o-y change -1.7ppt -15.1ppt 7.2ppt 0.7ppt 10.4ppt 22.3ppt -10.9ppt -1.3ppt 4.1ppt -2.1ppt 4.8ppt -1.3ppt 2.2ppt -1.0ppt

h-o-h change 5.2ppt 26.2ppt 7.7ppt 8.2ppt 0.0ppt 21.0ppt 10.2ppt 4.6ppt 24.8ppt 11.8ppt 8.0ppt 10.7ppt 11.7ppt 10.8ppt


y-o-y change -19.6ppt -0.6ppt 9.5ppt -16.0ppt -5.1ppt 1.1ppt -12.3ppt 1.8ppt 8.3ppt -7.6ppt -4.3ppt -7.4ppt -3.9ppt -6.7ppt


y-o-y change -13bp -10bp 19bp -41bp -6bp 37bp 23bp 15bp -2bp -12bp 14bp -12bp 24bp -6bp



ROAE (annualised) 13.4% 12.5% 10.2% 12.6% 10.6% 13.7% 10.6% 12.6% 14.7% 12.3% 11.8% 12.1% 12.3% 12.2%



y-o-y change 194bp 317bp 269bp 347bp 654bp 687bp 992bp 722bp 256bp 282bp 712bp 314bp 739bp 380bp

h-o-h change 43bp 266bp 83bp 246bp 275bp 66bp 605bp 575bp 52bp 158bp 358bp 169bp 398bp 204bp



h-o-h change 225bp 205bp 218bp 252bp 151bp 201bp 51bp 345bp -2bp 227bp 176bp 220bp 190bp 208bp


y-o-y change -4bp -38bp -81bp -118bp 378bp 671bp -37bp 491bp 86bp -55bp 366bp -10bp 361bp 53bp


y-o-y change 0bp -15bp 27bp 15bp -14bp 71bp -48bp -23bp -3bp 7bp -7bp 4bp -4bp 1bp


y-o-y change -5bp -17bp 22bp 9bp 70bp 71bp 48bp 4bp -3bp 2bp 47bp 7bp 37bp 10bp


y-o-y change -62bp -45bp 22bp -35bp 53bp 76bp 11bp 24bp 61bp -32bp 40bp -25bp 34bp -17bp

Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 29.2% 0.0% 0.0% 6.6% 0.0% 9.7% 1.6%

y-o-y change 0bp 0bp 0bp 0bp 0bp 0bp 0bp -100bp 0bp 0bp 45bp 0bp 66bp 18bp

Assets (Rmb bn) 24,137 20,964 18,149 19,570 8,403 5,942 5,931 5,896 803 82,820 26,172 91,223 17,769 109,795

y-o-y growth 8.7% 14.2% 7.9% 10.0% 17.4% 8.5% 15.8% 30.4% 12.0% 10.2% 17.5% 10.8% 17.5% 11.9%

Loans (Rmb bn) 13,057 11,757 9,973 9,720 4,103 3,262 2,878 2,462 300 44,507 12,704 48,610 8,601 57,511

y-o-y growth 9.4% 12.1% 9.2% 9.1% 10.2% 15.5% 13.8% 20.2% 11.9% 10.0% 14.2% 10.0% 16.2% 10.9%

Deposits (Rmb bn) 17,825 15,403 12,940 15,038 4,729 3,802 3,639 3,082 518 61,206 15,252 65,935 10,524 76,976

y-o-y growth 9.5% 12.7% 10.3% 11.1% 5.4% 6.4% 14.3% 12.8% 10.2% 10.8% 9.2% 10.4% 10.9% 10.5%


22

Figure 44: 2Q17 key ratios & growth rates




Big 4

banks

Mid-

size

banks

SOE

banks

Joint-

stock

banks

All

banks

Net profit to common equityholders 2.3% 4.4% 22.9% 5.0% -4.2% 14.2% 1.8% 2.8% 9.3% 7.5% 3.7% 6.7% 7.0% 6.7%


Pre-prov profit 0.5% 3.0% 13.7% 3.0% -1.9% 12.2% -0.8% -2.6% 5.2% 4.5% 2.0% 4.1% 3.7% 4.0%

Net interest income 11.7% 7.6% 14.8% 11.2% -7.7% 8.5% -5.8% -12.4% 7.6% 11.1% -3.6% 9.6% -1.9% 7.7%

Non interest income -11.0% -9.9% -49.5% -17.1% 19.3% -10.0% 21.9% -4.9% -7.2% -26.1% 3.7% -23.0% -0.5% -18.3%

Net fee income -6.6% 1.7% 6.0% -23.4% -2.1% -10.3% 16.5% -12.5% 4.4% -5.3% -3.9% -5.0% -4.4% -4.8%

Total operating income 5.4% 3.0% -14.8% 5.2% -0.4% 1.2% 3.0% -9.6% 5.8% -0.3% -1.1% -0.3% -1.4% -0.4%

Operating expense -2.3% -7.1% -1.2% 4.7% 6.9% 2.1% 4.7% -5.4% -6.1% -1.3% 2.7% -0.6% 0.9% -0.4%

Impairment loss on assets 43.7% 22.3% -86.1% 13.5% -9.6% -13.1% 7.0% -24.5% 40.4% -14.2% -10.5% -13.9% -10.7% -12.7%


y-o-y change 5bp -9bp 0bp 4bp -38bp -10bp -23bp -55bp -22bp 0bp -32bp -4bp -28bp -7bp

q-o-q change 10bp 2bp 3bp 4bp 0bp 1bp -4bp -4bp -15bp 5bp -1bp 5bp -1bp 4bp


y-o-y change -1.9ppt -2.7ppt 4.5ppt -0.2ppt 2.3ppt 0.3ppt 0.5ppt 1.2ppt -4.1ppt -0.3ppt 1.2ppt 0.0ppt 0.6ppt 0.1ppt



q-o-q change -8bp -40bp -71bp -17bp -4bp -33bp -40bp -33bp 8bp -33bp -25bp -30bp -35bp -19bp

NPL ratio 1.57% 1.51% 1.38% 2.19% 1.51% 1.71% 1.65% 1.69% 0.97% 1.66% 1.63% 1.64% 1.68% 1.64%

y-o-y change 2bp -12bp -9bp -20bp -3bp -12bp 25bp 1bp -2bp -9bp 2bp -9bp 5bp -7bp

q-o-q change -2bp -1bp -7bp -14bp -1bp -5bp -9bp 1bp 1bp -6bp -3bp -5bp -4bp -5bp

Net NPL formation rate (estimated) 1.30% 1.21% -0.58% 0.71% 0.74% 2.96% 1.32% 1.67% 1.88% 0.72% 1.59% 0.72% 2.01% 0.93%

y-o-y change 116bp -5bp -307bp -22bp -38bp -62bp -3bp -134bp -22bp -40bp -56bp -40bp -62bp -44bp

q-o-q change -26bp -113bp -176bp -81bp 74bp -113bp -106bp -78bp 41bp -94bp -41bp -79bp -97bp -81bp


y-o-y change 2.8ppt 8.5ppt -2.8ppt -4.1ppt 0.6ppt 35.6ppt -4.0ppt 0.8ppt 16.0ppt 1.4ppt 7.9ppt 1.3ppt 11.9ppt 3.0ppt

q-o-q change 4.3ppt 0.6ppt -6.5ppt 0.0ppt 0.8ppt 16.0ppt 1.4ppt -2.4ppt 0.6ppt -0.1ppt 4.1ppt 0.0ppt 6.0ppt 0.9ppt


y-o-y change 7bp -6bp -17bp -27bp -4bp 39bp 33bp 3bp 6bp -10bp 16bp -9bp 27bp -3bp

q-o-q change 4bp 0bp -21bp -6bp 0bp 16bp -11bp -3bp 6bp -5bp 1bp -5bp 3bp -4bp


y-o-y change -151bp -83bp 844bp -137bp -613bp -133bp -262bp -424bp -250bp 89bp -390bp 24bp -275bp -25bp

ROAE (annualised) 15.9% 17.0% 16.9% 15.9% 11.8% 18.8% 14.4% 15.8% 15.7% 16.4% 14.8% 16.0% 16.4% 16.0%

y-o-y change -110bp -83bp 197bp -57bp -143bp 87bp -79bp -151bp -53bp -23bp -77bp -35bp -39bp -36bp


y-o-y change 0.1ppt 2.8ppt 1.6ppt 2.6ppt 0.8ppt 0.4ppt 7.2ppt 6.2ppt -1.4ppt 1.7ppt 3.4ppt 1.6ppt 4.6ppt 2.1ppt

q-o-q change 0.2ppt 1.0ppt n.a. 0.8ppt 1.7ppt 1.0ppt n.a. n.a. 0.9ppt 11.1ppt 22.3ppt 10.2ppt 32.5ppt 13.6ppt


y-o-y change 3.7ppt 2.9ppt 2.6ppt 3.6ppt 1.9ppt 2.5ppt 1.5ppt 4.4ppt -0.4ppt 3.2ppt 2.5ppt 3.1ppt 2.8ppt 3.0ppt

q-o-q change n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


y-o-y change -9bp 96bp 6bp -4bp 435bp 350bp 994bp 1201bp -48bp 21bp 706bp 62bp 837bp 179bp


y-o-y change 13bp -38bp -11bp 52bp -30bp 32bp -28bp -16bp -12bp 3bp -8bp 0bp 2bp 1bp

q-o-q change -31bp -30bp -23bp 8bp -30bp 2bp -25bp 27bp -17bp -20bp -5bp -21bp 6bp -16bp


y-o-y change 9bp -40bp -18bp 50bp 49bp 32bp 66bp 10bp -20bp 0bp 44bp 4bp 40bp 10bp

q-o-q change -32bp -30bp -24bp 9bp -32bp 2bp -28bp 27bp -25bp -20bp -7bp -21bp 4bp -17bp


y-o-y change 20bp -59bp -51bp 35bp 68bp 70bp 49bp 38bp 36bp -12bp 62bp -5bp 57bp 6bp

q-o-q change -20bp -32bp -36bp -4bp 22bp 16bp -32bp 28bp -31bp -23bp 13bp -19bp 8bp -14bp

Assets (Rmb bn) 25,514 21,692 19,426 20,574 8,931 6,200 5,651 5,767 855 87,206 26,549 96,137 17,618 #####

y-o-y growth 8.5% 9.8% 10.4% 10.1% 12.2% 12.0% 0.8% 9.8% 10.8% 9.6% 9.0% 9.8% 7.5% 9.5%

Loans (Rmb bn) 13,866 12,507 10,651 10,412 4,370 3,540 3,091 2,706 324 47 13,707 51,806 9,337 61,467

y-o-y growth 9.4% 12.3% 9.5% 10.8% 9.7% 17.0% 12.4% 19.0% 8.3% 10.5% 13.9% 10.4% 16.0% 11.2%

Deposits (Rmb bn) 19,021 16,274 13,732 16,105 4,939 4,142 3,453 3,023 570 65 15,558 70,071 10,619 81,260

y-o-y growth 9.5% 10.9% 9.4% 10.9% 4.3% 12.2% 0.0% 3.0% 9.2% 10.2% 5.0% 9.7% 5.3% 9.1%


23

Figure 45: 1Q17 key ratios & growth rates




Big 4

banks

Mid-

size

banks

SOE

banks

Joint-

stock

banks

All

banks

Net profit to common equityholders 1.4% 3.0% 0.1% 1.9% 1.3% 8.9% 1.7% 3.6% 10.7% 1.7% 4.1% 1.7% 5.3% 2.3%


Pre-prov profit 0.7% -0.4% 2.5% -0.2% -2.9% 6.6% -0.3% -1.5% 11.8% 0.6% 0.7% 0.3% 2.2% 0.7%

Net interest income 2.7% -0.9% -1.2% 1.5% -8.3% 1.8% -8.9% -14.2% 2.4% 0.7% -6.7% 0.0% -6.1% -1.0%

Non interest income -7.9% 8.8% 16.8% 24.0% 11.0% -7.7% -2.4% -3.0% -13.9% 9.2% -1.6% 9.4% -5.0% 6.2%

Net fee income -5.8% 1.0% 0.1% -11.9% 4.7% -6.0% -2.1% -13.0% -7.9% -4.1% -5.0% -3.4% -7.3% -4.3%

Total operating income -0.5% 2.1% 5.2% 7.5% -2.5% -2.1% -6.8% -9.7% 0.5% 3.3% -4.9% 2.8% -5.7% 1.3%

Operating expense -19.5% -14.3% -3.3% 9.9% -6.5% -10.0% -19.6% -21.5% -15.4% -6.2% -13.5% -6.3% -16.4% -8.0%

Impairment loss on assets 33.1% 35.4% 39.4% 30.1% 8.8% -6.5% -1.8% -9.9% 2.7% 34.4% -3.8% 32.5% -5.8% 20.4%



q-o-q change 1bp 8bp 3bp 2bp -23bp 4bp -17bp -25bp 4bp 3bp -16bp 1bp -12bp -1bp


y-o-y change -5.4ppt -4.2ppt -2.9ppt 0.8ppt -1.4ppt -2.2ppt -4.3ppt -4.0ppt -6.0ppt -3.1ppt -2.8ppt -2.9ppt -3.5ppt -3.0ppt


y-o-y change 19bp 18bp 19bp 12bp -2bp -49bp 0bp -45bp -5bp 17bp -23bp 15bp -32bp 8bp

q-o-q change 26bp 26bp -7bp 10bp -3bp -19bp -47bp -26bp -33bp 15bp -23bp 13bp -31bp 5bp

NPL ratio 1.59% 1.52% 1.45% 2.33% 1.52% 1.76% 1.74% 1.68% 0.96% 1.71% 1.66% 1.70% 1.73% 1.70%

y-o-y change -7bp -11bp 2bp -6bp -2bp -5bp 34bp 6bp 1bp -6bp 7bp -6bp 12bp -3bp

q-o-q change -4bp 0bp -1bp -4bp 0bp -11bp 5bp -1bp 0bp -2bp -2bp -2bp -2bp -2bp


y-o-y change -37bp 25bp 15bp 46bp -151bp -112bp 27bp -88bp -23bp 10bp -90bp -5bp -57bp -13bp

q-o-q change 57bp 130bp -16bp 51bp -100bp 168bp -194bp -55bp -53bp 58bp -53bp 43bp -26bp 31bp


y-o-y change 0.3ppt 7.8ppt 10.5ppt -6.8ppt -1.0ppt 25.4ppt -14.5ppt 3.6ppt -2.4ppt 2.8ppt 2.6ppt 2.4ppt 4.6ppt 2.8ppt

q-o-q change 4.8ppt 9.2ppt -4.1ppt 0.2ppt -0.2ppt 28.6ppt -4.0ppt 0.3ppt -3.9ppt 2.9ppt 5.6ppt 2.6ppt 8.6ppt 3.5ppt


y-o-y change -10bp -5bp 18bp -27bp -6bp 36bp 32bp 15bp 2bp -7bp 16bp -7bp 27bp -1bp

q-o-q change 3bp 13bp -7bp -7bp -1bp 31bp 2bp -1bp -3bp 1bp 6bp 1bp 11bp 2bp



ROAE (annualised) 15.8% 17.6% 13.7% 17.5% 13.4% 19.4% 13.3% 16.7% 18.3% 16.2% 15.5% 15.9% 16.5% 16.0%


Demand deposit/ total deposits 50.0% 53.6% n.a. 55.8% 48.2% 62.6% n.a. n.a. 39.0% 41.2% 30.1% 41.9% 21.2% 38.6%

y-o-y change 1.2ppt 2.5ppt n.a. 2.6ppt 1.6ppt 2.3ppt n.a. n.a. -1.3ppt 1.6ppt 1.1ppt 1.6ppt 0.4ppt 1.4ppt

q-o-q change -0.5ppt -0.9ppt n.a. -0.6ppt -3.6ppt -1.4ppt n.a. n.a. -2.9ppt -10.9ppt -22.6ppt -10.3ppt -31.9ppt -13.6ppt


y-o-y change 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt 0.0ppt

q-o-q change -26.0ppt -30.8ppt -26.4ppt -26.3ppt -18.8ppt -22.3ppt -15.1ppt -12.0ppt -14.5ppt -27.4ppt -17.2ppt -26.6ppt -16.5ppt -24.9ppt


y-o-y change 65bp 73bp -212bp -100bp 412bp 546bp 684bp 766bp 111bp -31bp 582bp 16bp 660bp 118bp


y-o-y change 11bp -48bp -9bp 29bp -16bp 27bp -5bp -45bp 7bp -4bp -10bp -5bp -8bp -6bp

q-o-q change 11bp 0bp -21bp 12bp -9bp 86bp 22bp -4bp 7bp 1bp 23bp 0bp 37bp 7bp


y-o-y change 6bp -51bp -16bp 26bp 64bp 27bp 94bp -19bp 7bp -8bp 44bp -2bp 32bp 3bp

q-o-q change 9bp -1bp -24bp 10bp -13bp 86bp 23bp -3bp 7bp -1bp 22bp -2bp 36bp 5bp


y-o-y change 0bp -73bp -30bp 10bp 42bp 49bp 69bp 8bp 70bp -22bp 42bp -17bp 41bp -7bp

q-o-q change 5bp -12bp -51bp 16bp -38bp 110bp 10bp -10bp 2bp -9bp 14bp -12bp 38bp -3bp

Assets (Rmb bn) 24,905 21,695 18,918 20,324 8,734 6,001 5,752 5,957 824 85,842 26,443 94,575 17,709 113,109

y-o-y growth 8.8% 13.3% 11.0% 10.4% 18.0% 10.5% 5.0% 23.6% 13.6% 10.8% 14.3% 11.4% 12.6% 11.6%

Loans (Rmb bn) 13,572 12,172 10,365 10,113 4,344 3,435 2,949 2,612 312 46 13,339 50,565 8,996 59,873

y-o-y growth 9.9% 12.4% 9.4% 9.2% 11.7% 17.1% 10.6% 18.1% 9.5% 10.3% 14.0% 10.4% 15.2% 11.1%

Deposits (Rmb bn) 18,565 16,232 13,760 15,962 4,938 3,930 3,430 3,051 557 65 15,348 69,457 10,411 80,424

y-o-y growth 9.0% 11.3% 12.5% 10.9% 6.4% 9.8% 1.8% 7.5% 7.3% 10.8% 6.4% 10.5% 6.4% 9.9%


24

Company Briefs

Banks│Hong Kong│October 5, 2017

Company Note



Insert Insert

Agricultural Bank of China Low LDR a key asset amidst monetary tightening ■ We raise our target price slightly by 2% as our asset quality stress test-adjusted

valuation discount is trimmed to 16.7% (vs. 17.0% previously). ■ This is driven by a 1% pt cut in our ‘true’ corporate NPL ratio assumption (that is

embedded in our stress test-adjusted GGM) to 9%. ■ The cut reflects our view that we have reached a turning point in the asset quality

cycle, with asset quality continuing to improve. ■ In addition to falling credit costs, rising net interest margins are also expected to

continue to accelerate the recovery in ABC’s earnings growth in FY17F. ■ Our target price is raised to HK$5.40 (previously HK$5.30). Maintain Add.

1% pt cut in ‘true’ corporate NPL ratio drives 2% TP increase We use GGM to value ABC, with a discount on asset quality derived from our stress test, of which a key variable is the ‘true’ corporate NPL ratio assumption (see ‘A balance sheet driven multiple re-rating’ dated 4 Oct 2017 for more details). Our more bullish asset

quality outlook leads us to cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by ‘2% to HK$5.40’.

Best provisioned among the big four banks, with the lowest LDR ABC’s loan loss reserve (LLR) ratio of 4.0% at end-1H17 was the highest among the big four banks (average of 2.7%). Its provisioning coverage ratio of 182% was similarly the highest of the big four banks (average of 160%). Its loan-to-deposit ratio (LDR) was also the lowest of the big four banks at 65% vs. the big four’s average of 73% in 1H17. Its low LDR sees it well placed to benefit from the current environment of elevated interest rates, which are providing a near-term tailwind to net interest margins (NIM).

NIM to continue trending upwards In addition to higher yields on interbank assets and investment securities, we see the uptrend in loan yields as another tailwind for NIM and an arguably more important one as it comprises a larger proportion of interest-earning assets than interbank assets and investment securities. Rising loan yields (both corporate and mortgages) should see NIM continuing to rise, not only in 2H17F but also well into FY18F (see ‘Inflection point’ dated

9 Aug 2017 for more details).

Earnings recovery to strengthen The rising NIM and falling credit costs (see ‘Asset quality: To believe or not to believe’ dated 20 Apr 2017) are likely to be the key drivers strengthening China banks’ earnings recovery. We see loan books continuing to be de-risked (where growth of mortgages and other consumer loans continues to outpace that of corporate loans) in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated to be less than one-tenth of corporate loans, this provides a favourable tailwind to the credit cost outlook of ABC.

However, ABC still relatively riskier than the other big four banks Its 1H17 NPL ratio of 2.19% and its more-than-90-days overdue loan ratio of 1.86% were both higher than each of the other big four banks, with the big four banks’ average of 1.66% and 1.39%, respectively. Its 1H17 core Tier 1 ratio of 10.6%, while a significant improvement from the 8.65% level that it fell to in 2Q14 when it first implemented internal-rating-based (IRB) models to compute its capital ratios, remains the lowest among peers (big four banks’ average of 11.8%).

No changes to earnings estimates and rating The only changes are to our stress test-adjusted GGM-derived target price, which is lifted to HK$5.40 from HK$5.30. See pages 2-4 for valuation and risks.

SOURCE: COMPANY DATA, CIMB FORECASTS

Hong Kong

ADD (no change) Consensus ratings*: Buy 19 Hold 8 Sell 2

Current price: HK$3.64

Target price: HK$5.40

Previous target: HK$5.30

Up/downside: 48.4%

CIMB / Consensus: 25.8%

Reuters: 1288.HK

Bloomberg: 1288 HK

Market cap: US$183,746m

HK$1,434,430m

Average daily turnover: US$62.70m

HK$490.0m

Current shares o/s: 324,794m

Free float: 59.7% *Source: Bloomberg

Key changes in this note

No changes to core EPS.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0.8 -1.9 6.7

Relative (%) -1.5 -13.7 -13.1

Major shareholders % held Huijin 40.3

Insert

Analyst(s)

Michael CHANG


Financial Summary Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Net Interest Income (Rmbm) 436,140 398,104 436,140 497,293 569,797

Total Non-Interest Income (Rmbm) 104,722 112,024 122,228 132,167 142,969

Operating Revenue (Rmbm) 540,862 510,128 558,368 629,459 712,767

Total Provision Charges (Rmbm) (84,172) (86,446) (117,938) (141,122) (161,165)

Net Profit (Rmbm) 178,182 179,341 189,141 205,333 229,898

Core EPS (Rmb) 0.55 0.55 0.58 0.63 0.71

Core EPS Growth (0.5%) 0.7% 5.5% 8.6% 12.0%

FD Core P/E (x) 5.65 5.62 5.33 4.91 4.38

DPS (Rmb) 0.17 0.17 0.18 0.19 0.22

Dividend Yield 5.38% 5.48% 5.78% 6.27% 7.03%

BVPS (Rmb) 3.48 3.81 4.22 4.68 5.19

P/BV (x) 0.89 0.81 0.73 0.66 0.60

ROE 16.8% 15.1% 14.5% 14.2% 14.3%

% Change In Core EPS Estimates 0% 0% 0%

CIMB/consensus EPS (x) 1.01 1.02 1.05

84.0

89.6

95.1

100.7

106.2

3.00

3.20

3.40

3.60

3.80

Price Close Relative to HSI (RHS)

200

400

600

800

Oct-16 Jan-17 Apr-17 Jul-17

Vol m

https://brokingrfs.cimb.com/mTn0yv9ALhTzc3q8JiaqEiBUL5m97wjWZLzH2X0NV7FH4fcImWZojSLQ5q_Nm4C31IZg4AyDYHvZa0bA0.pdf

https://brokingrfs.cimb.com/5qFdOd9to_Fn0j6ZL3LCOgaiGfFx2RNVyq8C0WZfHlorWaeOGXtLNwPG67MQvWUvdWK6I-oRidebmw2.pdf

Banks│Hong Kong│Agricultural Bank of China│October 5, 2017

26

Low LDR a key asset amidst monetary tightening

Forecasts, valuation and risks

We value ABC using a stress test-adjusted Gordon Growth model (GGM).

This is to explicitly take into account investors’ lack of faith in China banks’ book values and concerns that worsening asset quality and rising shadow banking exposure could erode book values, with some banks potentially needing to raise capital.

Our key valuation assumptions are a COE of 12.3% (a slight increase from 11.4% previously to reflect its higher risk nature compared to the other big four banks), a sustainable growth assumption (g) of 3% (unchanged), an initial sustainable ROE assumption of 14.3% (based on FY19F ROE) (unchanged) and an asset quality and investor compensation valuation discount of 16.7% (previously 17.0%), which gives a stress test-adjusted 1H18F P/BV of 1.03x (previously 1.12x). This implies a sustainable ROE assumption of 12.5% (previously 12.4%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).

Our asset quality and investor compensation valuation discount is derived under a stress test of the listed banks under our coverage, where we assume a ‘true’ corporate NPL ratio of 9% (previously 10%). We then take into account the composition of each bank’s balance sheet, off-balance sheet exposures, potential investor compensation liability for defaulting wealth management products, provisioning buffers and capital ratios for a material rise in their NPL ratios.

Our stress test also takes into account our perception that investors do not have much faith in the book values reported by the China banks. For a much more detailed description of the stress test, please see ‘A balance sheet driven multiple re-rating’ dated 4 Oct 2017 or ‘Asset quality: To believe or not to believe’ dated 20 Apr 2017.

The results of this stress test can be seen in Figure 1, with our adjusted asset quality and investor compensation valuation discount of 28% (previously 31%) derived by inputting the estimated BVPS dilution impact under the stress test with the ROE impact into a GGM.

Figure 1: Summary of possible stress test impact


We then arrive at an initial target 1H18F P/BV multiple using a simple Gordon Growth model.




securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%


ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





27

Figure 2: Key valuation assumptions in our 'basic' Gordon Growth model approach (before applying asset quality discounts)

SOURCES: CIMB estimates

The asset quality and investor compensation valuation discount is then applied to the initial target P/BV multiple to derive a final target P/BV multiple, which we then apply to 1H18F BVPS to derive our target price in HK$, based on an Rmb/HK$ exchange rate assumption of 1.18 (previously assumed 1.06).

Figure 3: Key valuation assumptions in our stress test-adjusted GGM (1H18F), after applying asset quality discounts


Figure 4: Final TP implied P/BV and sustainable ROEs


Under our stress test, ABC does not need to raise ordinary equity capital.

Figure 5: Only two banks in our coverage need to raise capital, in our view – CITIC and MSB (based on a stress test of 1H17 disclosed exposures of the banks)


In ABC’s case, we estimate that the ‘true’ corporate NPL ratio could rise up to the 15.3% level before it needs to raise ordinary equity capital.

Figure 6: Estimated ‘true’ NPL ratio level that would trigger equity capital raising


1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x



ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


28

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition. A potential re-rating catalyst includes further southbound flow under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows highly correlated to expectations of renminbi depreciation.


29

Figure 7: Key financial data and estimates


Profit & loss

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Net interest income 376,202 429,891 436,140 398,104 436,140 497,293 569,797

yoy 10.0% 14.3% 1.5% -8.7% 9.6% 14.0% 14.6%

Non interest income 89,919 93,900 104,722 112,024 122,228 132,167 142,969

yoy 8.2% 4.4% 11.5% 7.0% 9.1% 8.1% 8.2%

Total revenue 466,121 523,791 540,862 510,128 558,368 629,459 712,767

yoy 9.7% 12.4% 3.3% -5.7% 9.5% 12.7% 13.2%

Operating expenses -198,607 -223,898 -225,818 -197,049 -201,724 -229,681 -262,680

Pre-prov profit 267,514 299,893 315,044 313,079 356,645 399,778 450,087

yoy 10.5% 12.1% 5.1% -0.6% 13.9% 12.1% 12.6%

Provisioning expenses -52,990 -67,971 -84,172 -86,446 -117,938 -141,122 -161,165

Net profit to common shareholders 166,665 179,126 178,182 179,341 189,141 205,333 229,898

yoy 14.8% 7.5% -0.5% 0.7% 5.5% 8.6% 12.0%

Key balance sheet items

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 7,224,713 8,098,067 8,909,918 9,719,639 10,691,603 11,760,763 12,936,840

Interbank assets 1,443,385 1,489,285 1,673,984 1,526,665 1,688,491 1,870,849 2,072,900

Investments 3,220,098 3,575,630 4,512,047 5,333,535 5,898,890 6,535,970 7,241,855

Deposits 11,811,411 12,533,397 13,538,360 15,038,001 16,289,770 17,649,833 19,127,759

Interbank liabilites 930,504 1,187,085 1,626,464 1,663,897 1,955,510 2,305,446 2,725,368

Bonds 266,261 325,167 382,742 388,215 407,626 428,007 449,407

Common shareholders' equity 843,108 991,122 1,130,192 1,238,294 1,372,220 1,519,320 1,686,001

Total shareholders' equity 844,537 992,675 1,131,986 1,321,591 1,455,642 1,602,879 1,769,711

RWA 9,065,631 10,852,619 10,986,302 11,856,530 12,671,894 13,790,673 15,033,666

Total assets 14,562,102 15,974,152 17,791,393 19,570,061 21,266,904 23,144,521 25,230,603

yoy

Loans 12.3% 12.1% 10.0% 9.1% 10.0% 10.0% 10.0%

Interbank assets 11.0% 3.2% 12.4% -8.8% 10.6% 10.8% 10.8%

Investments 12.9% 11.0% 26.2% 18.2% 10.6% 10.8% 10.8%

Deposits 8.7% 6.1% 8.0% 11.1% 8.3% 8.3% 8.4%

Interbank liabilites -1.2% 27.6% 37.0% 2.3% 17.5% 17.9% 18.2%

Bonds 38.2% 22.1% 17.7% 1.4% 5.0% 5.0% 5.0%

Common shareholders' equity 12.4% 17.6% 14.0% 9.6% 10.8% 10.7% 11.0%

Total shareholders' equity 12.4% 17.5% 14.0% 16.7% 10.1% 10.1% 10.4%

RWA 25.6% 19.7% 1.2% 7.9% 6.9% 8.8% 9.0%

Total assets 9.9% 9.7% 11.4% 10.0% 8.7% 8.8% 9.0%

Key ratios & drivers

2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.51 0.55 0.55 0.55 0.58 0.63 0.71

EPS Growth 15% 7% -1% 1% 5% 9% 12%

BVPS 2.60 3.05 3.48 3.81 4.22 4.68 5.19

BVPS Growth 12% 18% 14% 10% 11% 11% 11%

ROAE 20.9% 19.5% 16.8% 15.1% 14.5% 14.2% 14.3%

ROAA 1.2% 1.2% 1.1% 1.0% 0.9% 0.9% 1.0%

ROARWA 2.0% 1.8% 1.6% 1.6% 1.5% 1.6% 1.6%

PPOPOARWA 3.3% 3.0% 2.9% 2.7% 2.9% 3.0% 3.1%

DPS 0.18 0.18 0.17 0.17 0.18 0.19 0.22

Payout ratio 34% 33% 30% 31% 31% 31% 31%

Core tier 1 ratio 9.2% 9.1% 10.2% 10.4% 10.8% 11.0% 11.2%

Tier 1 ratio 9.2% 9.5% 11.0% 11.1% 11.4% 11.5% 11.7%

Total CAR 11.9% 12.8% 13.4% 13.1% 13.4% 13.5% 13.6%

Equity/Assets 6.1% 6.6% 6.8% 6.8% 6.9% 7.1% 7.2%

Loan-deposit ratio 61% 65% 66% 65% 66% 67% 68%

NPL ratio 1.22% 1.54% 2.39% 2.37% 2.39% 2.36% 2.31%

NPL write-off rate 11% 33% 33% 39% 39% 39% 39%

Net NPL formation rate 0.18% 0.92% 1.60% 1.13% 1.18% 1.13% 1.10%

NPL coverage 367% 287% 189% 173% 164% 162% 163%

LLR to loan 4.46% 4.42% 4.53% 4.12% 3.91% 3.81% 3.76%

Cost-income ratio 43% 43% 42% 39% 36% 36% 37%

Net interest margin 2.79% 2.92% 2.66% 2.25% 2.24% 2.36% 2.48%

Non interest income/ total income 19% 18% 19% 22% 22% 21% 20%

Credit cost 0.76% 0.85% 0.96% 0.85% 1.06% 1.15% 1.19%


30

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

13.0%13.9%14.8%15.7%16.6%17.5%18.4%19.3%20.2%21.1%22.0%

0.500.600.700.800.901.001.101.201.301.401.50

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-10.0%

-5.7%

-1.4%

2.9%

7.1%

11.4%

15.7%

20.0%

3.60

4.10

4.60

5.10

5.60

6.10

6.60

7.10


12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

(Rmbm) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Net Interest Income 436,140 398,104 436,140 497,293 569,797

Total Non-Interest Income 104,722 112,024 122,228 132,167 142,969

Operating Revenue 540,862 510,128 558,368 629,459 712,767

Total Non-Interest Expenses (225,818) (197,049) (201,724) (229,681) (262,680)

Pre-provision Operating Profit 315,044 313,079 356,645 399,778 450,087

Total Provision Charges (84,172) (86,446) (117,938) (141,122) (161,165)

Operating Profit After Provisions 230,872 226,633 238,707 258,656 288,922

Pretax Income/(Loss) from Assoc. (15) (9) (9) (9) (9)

Operating EBIT (incl Associates) 230,857 226,624 238,698 258,647 288,913

Non-Operating Income/(Expense) 0 0 0 0 0

Profit Before Tax (pre-EI) 230,857 226,624 238,698 258,647 288,913

Exceptional Items

Pre-tax Profit 230,857 226,624 238,698 258,647 288,913

Taxation (50,083) (42,564) (44,832) (48,579) (54,263)

Consolidation Adjustments & Others

Exceptional Income - post-tax

Profit After Tax 180,774 184,060 193,866 210,069 234,650

Minority Interests (192) (119) (125) (136) (152)

Pref. & Special Div (2,400) (4,600) (4,600) (4,600) (4,600)

FX And Other Adj. 0 0 0 0 0

Net Profit 178,182 179,341 189,141 205,333 229,898

Recurring Net Profit 178,182 179,341 189,141 205,333 229,898

Balance Sheet Employment

Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Gross Loans/Cust Deposits 65.8% 64.6% 65.6% 66.6% 67.6%

Avg Loans/Avg Deposits 65.2% 65.2% 65.2% 66.2% 67.2%

Avg Liquid Assets/Avg Assets 49.1% 49.4% 49.1% 48.7% 48.3%

Avg Liquid Assets/Avg IEAs 49.4% 49.8% 49.6% 49.1% 48.6%

Net Cust Loans/Assets 47.8% 47.6% 48.3% 48.9% 49.3%

Net Cust Loans/Broad Deposits 55.9% 54.8% 55.4% 55.9% 56.2%

Equity & Provns/Gross Cust Loans 18.1% 17.7% 17.5% 17.4% 17.4%

Asset Risk Weighting 61.8% 60.6% 59.6% 59.6% 59.6%

Provision Charge/Avg Cust Loans 0% 0% 0% 0% 0%

Provision Charge/Avg Assets 0% 0% 0% 0% 0%

Total Write Offs/Average Assets 0.23% 0.48% 0.49% 0.50% 0.50%


31

BY THE NUMBERS… cont’d


Balance Sheet


Total Gross Loans 10,583,902 11,246,304 12,380,094 13,631,612 15,009,740

Liquid Assets & Invst. (Current) 4,512,047 5,333,535 5,898,890 6,535,970 7,241,855

Other Int. Earning Assets 2,587,057 2,811,653 2,811,653 2,811,653 2,811,653

Total Gross Int. Earning Assets 17,683,006 19,391,492 21,090,637 22,979,235 25,063,247

Total Provisions/Loan Loss Reserve (403,243) (400,275) (418,226) (447,642) (487,046)

Total Net Interest Earning Assets 17,279,763 18,991,217 20,672,411 22,531,593 24,576,202

Intangible Assets 27,157 26,647 26,647 26,647 26,647

Other Non-Interest Earning Assets 484,473 552,197 567,846 586,281 627,754

Total Non-Interest Earning Assets 511,630 578,844 594,493 612,928 654,401

Cash And Marketable Securities 0 0 0 0 0

Long-term Investments 0 0 0 0 0

Total Assets 17,791,393 19,570,061 21,266,904 23,144,521 25,230,603

Customer Interest-Bearing Liabilities 13,538,360 15,038,001 16,289,770 17,649,833 19,127,759

Bank Deposits 1,687,063 1,954,949 2,246,562 2,596,498 3,016,420

Interest Bearing Liabilities: Others 813,185 671,881 691,292 711,673 733,073

Total Interest-Bearing Liabilities 16,038,608 17,664,831 19,227,623 20,958,004 22,877,252

Bank's Liabilities Under Acceptances

Total Non-Interest Bearing Liabilities 540,900 583,639 583,639 583,639 583,639

Total Liabilities 16,579,508 18,248,470 19,811,262 21,541,643 23,460,891

Shareholders' Equity 1,210,091 1,318,193 1,452,119 1,599,219 1,765,900

Minority Interests 1,794 3,398 3,523 3,659 3,811

Total Equity 1,211,885 1,321,591 1,455,642 1,602,879 1,769,711

Key Ratios


Total Income Growth 3.3% (5.7%) 9.5% 12.7% 13.2%

Operating Profit Growth 5.1% (0.6%) 13.9% 12.1% 12.6%

Pretax Profit Growth (0.5%) (1.8%) 5.3% 8.4% 11.7%

Net Interest To Total Income 80.6% 78.0% 78.1% 79.0% 79.9%

Cost Of Funds 1.90% 1.54% 1.57% 1.86% 1.73%

Return On Interest Earning Assets 4.32% 3.55% 3.59% 3.95% 3.95%

Net Interest Spread 2.42% 2.01% 2.02% 2.09% 2.22%

Net Interest Margin (Avg Deposits) 3.35% 2.79% 2.78% 2.93% 3.10%

Net Interest Margin (Avg RWA) 3.99% 3.49% 3.56% 3.76% 3.95%

Provisions to Pre Prov. Operating Profit 26.7% 27.6% 33.1% 35.3% 35.8%

Interest Return On Average Assets 2.58% 2.13% 2.14% 2.24% 2.36%

Effective Tax Rate 21.7% 18.8% 18.8% 18.8% 18.8%

Net Dividend Payout Ratio 30.4% 30.8% 30.8% 30.8% 30.8%

Return On Average Assets 1.06% 0.96% 0.93% 0.92% 0.95%

Key Drivers


Loan Growth (%) 10.0% 9.1% 10.0% 10.0% 10.0%

Net Interest Margin (%) 2.6% 2.1% 2.2% 2.3% 2.4%

Non Interest Income Growth (%) 11.5% 7.0% 9.1% 8.1% 8.2%

Cost-income Ratio (%) 41.8% 38.6% 36.1% 36.5% 36.9%

Net NPL Ratio (%) 2.4% 2.4% 2.4% 2.4% 2.3%

Loan Loss Reserve (%) 189.4% 173.4% 163.5% 161.5% 163.0%

GP Ratio (%) 4.7% 4.3% 4.1% 4.0% 3.9%

Tier 1 Ratio (%) 11.0% 11.1% 11.5% 11.6% 11.7%

Total CAR (%) 16.9% 16.4% 16.6% 16.6% 16.5%

Deposit Growth (%) 8.0% 11.1% 8.3% 8.3% 8.4%

Loan-deposit Ratio (%) 62.8% 62.0% 63.1% 64.1% 65.1%

Gross NPL Ratio (%) 2.4% 2.4% 2.4% 2.4% 2.3%

Fee Income Growth (%) 3.0% 10.2% 9.0% 9.0% 9.0%


Company Note



Insert Insert

Bank of China A beneficiary of a rising US rate cycle ■ We raise our target price by 24% to HK$5.20 from HK$4.20, due to a lower asset

quality stress test-adjusted valuation discount of 28% (vs. 35% previously). ■ This is driven by a 1% pt cut in our ‘true’ corporate NPL ratio assumption (that is


cycle, with recent asset quality improvements expected to continue. ■ In addition to falling credit costs, rising net interest margins are also expected to

continue to spur an accelerating recovery in BOC’s earnings growth in FY17F. ■ As 19% of its loan book at end-1H17 was denominated in US$ or HK$, we think BOC

benefits more than peers from a rising US rate cycle. Maintain Add.

1% pt cut in the ‘true’ corporate NPL ratio drives 24% TP increase We employ a stress test-adjusted GGM to value BOC, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for more details). Our more bullish asset quality outlook sees us cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 24% to HK$5.20.

Beneficiary of US interest rates rising and Rmb internationalisation Given its above-peer overseas exposure (19% of loan book at end-1H17 was denominated in US$ or HK$), we think BOC would benefit more from a rising US rate cycle, although we note this rate upcycle appears to be moving at a much slower pace than past upcycles. BOC has been the main beneficiary of China’s drive to liberalise the Rmb. In our view, BOC will also be a primary beneficiary of China’s “One Belt One Road” policy, although its control and pricing of credit risks related to these projects are key.

Net interest margins (NIM) to continue trending upwards In addition to higher yields on interbank assets and investment securities, we see the uptrend in loan yields as another tailwind for NIM, an arguably more important one as it comprises a larger proportion of interest-earning assets than interbank assets and investment securities. Rising loan yields should see NIM continuing to rise, not only in 2H17F but also well into FY18F (see “Inflection point” dated 9 Aug 2017 for more details). 2Q17’s NIM of 1.83% rose 3bp qoq for the second consecutive quarter.

Earnings recovery to strengthen The rising NIM, together with falling credit costs (see “Asset quality to believe or not to believe” dated 20 Apr 2017) are likely to be the key drivers of the strengthening China banks earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans continues to outpace corporate loans) continuing in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated to be less than one-tenth of corporate loans, this provides a favourable tailwind to the credit cost outlook of BOC.

Lower risk, but lower profitability ratios BOC’s 1H17 NPL ratio and special mention loans ratio of 1.38% and 2.77%, respectively, were the lowest of the big four banks (average of 1.66% and 3.32%, respectively). However, BOC’s 1H17 NIM of 1.82% was the lowest of its big four bank peers (average of 2.10%), as was its 1H17 ROE of 15.5% (peer average of 16.5%).

Maintain Add; no changes to earnings estimates We have, however, increased our stress test-adjusted GGM-derived target price to HK$5.20 (up 24%). (See pages 2-3 for valuation and risks.)


a Hong Kong





Up/downside: 28.7%


Reuters: 3988.HK

Bloomberg: 3988 HK


HK$1,360,217m


HK$1,462m




No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0 4.9 12.2

Relative (%) -2.3 -6.9 -7.6

Major shareholders % held Huijin 67.8 SSF 2.7

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 165,833 157,860 164,990 179,708 201,408

Core EPS (Rmb) 0.56 0.54 0.56 0.61 0.68

Core EPS Growth (6.8%) (5.0%) 4.5% 8.9% 12.1%

FD Core P/E (x) 6.05 6.42 6.14 5.64 5.03

DPS (Rmb) 0.18 0.17 0.18 0.20 0.22

Dividend Yield 5.08% 4.88% 5.31% 5.76% 6.43%

BVPS (Rmb) 4.09 4.46 4.86 5.29 5.78

P/BV (x) 0.84 0.77 0.71 0.65 0.60

ROE 14.6% 12.5% 12.0% 12.0% 12.4%



89.0

94.0

99.0

104.0

109.0

114.0

3.20

3.40

3.60

3.80

4.00

4.20


500

1000

1500


Vo

l m




Banks│Hong Kong│Bank of China│October 5, 2017

33

A beneficiary of a rising US rate cycle


We value BOC using a stress test-adjusted Gordon Growth model (GGM).

This is to explicitly take into account investors’ lack of faith in China banks’ book values, and concerns that worsening asset quality and rising shadow banking exposure could erode book values, with some banks potentially needing to raise capital.

Our key valuation assumptions are a COE of 10.7% (unchanged), a sustainable growth assumption (g) of 3% (unchanged), an initial sustainable ROE assumption of 13.8% (based on FY19F ROE) (unchanged), and an asset quality and investor compensation valuation discount of 28% (previously 35%), which gives a stress test-adjusted 1H18F P/BV of 0.87x (previously 0.78x). This implies a sustainable ROE assumption of 9.7% (previously 9.0%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).

Our asset quality and investor compensation valuation discount was derived under a stress test of the listed banks under our coverage, where we assume a ‘true’ corporate NPL ratio of 9% (previously 10%). We then take into account the composition of each bank’s balance sheet, off-balance sheet exposures, potential investor compensation liability for defaulting wealth management products, provisioning buffers and capital ratios for a material rise in their NPL ratios.

Such a stress test thus also takes into account our perception that investors lack faith in the book values reported by the China banks. For a much more detailed description of the stress test, please see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 or “Asset quality: To believe or not to believe” dated 20 Apr 2017.

The results of this stress test can be seen in Figure 1, with our adjusted asset quality and investor compensation valuation discount of 28% (previously 35%) derived by inputting into a GGM, the estimated BVPS dilution impact under the stress test with the ROE impact.







securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%


ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





34








Under our stress test, BOC does not need to raise ordinary equity capital.

Figure 5: Only two banks in our coverage need to raise capital, in our view – CITIC and MSB (based on a stress test of 1H17 disclosed exposures of the banks)


In BOC’s case, we estimate that the ‘true’ corporate NPL ratio could rise up to the 17.2% level before it would need to raise ordinary equity capital.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x



ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


35

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition. A potential re-rating catalyst includes faster-than-expected US rate rises and further southbound flow under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows highly correlated to expectations of renminbi depreciation. BOC has historically been one of the bigger beneficiaries of southbound buying


36



Profit & loss

(Rmb m) 2014 2015 2016 2017F 2018F 2019F

Net interest income 321,102 328,650 306,048 326,380 374,582 431,292

yoy 13.2% 2.4% -6.9% 6.6% 14.8% 15.1%

Non interest income 135,226 145,262 179,608 165,002 179,419 195,145

yoy 9.6% 7.4% 23.6% -8.1% 8.7% 8.8%

Total revenue 456,328 473,912 485,656 491,381 554,002 626,438

yoy 12.1% 3.9% 2.5% 1.2% 12.7% 13.1%

Operating expenses -177,788 -185,401 -175,069 -171,983 -195,840 -223,660

Pre-prov profit 278,540 288,511 310,587 319,398 358,162 402,778

yoy 18.7% 3.6% 7.7% 2.8% 12.1% 12.5%

Provisioning expenses -48,381 -59,274 -89,072 -102,387 -122,474 -139,550

Net profit to common shareholders 169,595 165,833 157,860 164,990 179,708 201,408

yoy 8.1% -2.2% -4.8% 4.5% 8.9% 12.1%


(Rmb m) 2014 2015 2016 2017F 2018F 2019F

Loans 8,483,275 9,135,860 9,973,362 10,870,965 11,849,351 12,915,793

Interbank assets 1,215,334 1,081,226 1,254,030 1,313,435 1,378,780 1,450,660

Investments 2,710,375 3,595,095 3,972,884 4,328,309 4,709,530 5,125,318

Deposits 10,885,223 11,729,171 12,939,748 13,565,974 14,561,482 15,628,668

Interbank liabilites 1,780,247 1,764,320 1,420,527 1,562,580 1,718,838 1,890,721

Bonds 278,045 282,929 362,318 362,318 362,318 362,318

Common shareholders' equity 1,069,114 1,205,232 1,311,968 1,429,880 1,557,899 1,700,820

Total shareholders' equity 1,183,428 1,357,605 1,487,092 1,613,620 1,750,992 1,904,356

RWA 9,934,105 10,654,081 11,269,592 11,825,224 12,727,381 13,707,604

Total assets 15,251,382 16,815,597 18,148,889 19,043,696 20,332,834 21,725,267

yoy

Loans 11.5% 7.7% 9.2% 9.0% 9.0% 9.0%

Interbank assets 0.0% -11.0% 16.0% 4.7% 5.0% 5.2%

Investments 12.8% 32.6% 10.5% 8.9% 8.8% 8.8%

Deposits 7.8% 7.8% 10.3% 4.8% 7.3% 7.3%

Interbank liabilites 14.7% -0.9% -19.5% 10.0% 10.0% 10.0%

Bonds 23.7% 1.8% 28.1% 0.0% 0.0% 0.0%

Common shareholders' equity 15.7% 12.7% 8.9% 9.0% 9.0% 9.2%

Total shareholders' equity 23.1% 14.7% 9.5% 8.5% 8.5% 8.8%

RWA 5.5% 7.2% 5.8% 4.9% 7.6% 7.7%

Total assets 9.9% 10.3% 7.9% 4.9% 6.8% 6.8%


2014 2015 2016 2017F 2018F 2019F

EPS 0.61 0.56 0.54 0.58 0.63 0.71

EPS Growth 8% -7% -5% 9% 9% 12%

BVPS 3.70 4.09 4.46 4.86 5.29 5.78

BVPS Growth 12% 11% 9% 9% 9% 9%

ROAE 17.0% 14.6% 12.5% 12.0% 12.0% 12.4%

ROAA 1.16% 1.07% 0.94% 0.92% 0.95% 0.99%

ROARWA 1.75% 1.61% 1.44% 1.43% 1.46% 1.52%

PPOPOARWA 2.88% 2.80% 2.83% 2.77% 2.92% 3.05%

DPS 0.19 0.18 0.17 0.18 0.19 0.21

Payout ratio 33% 31% 31% 31% 31% 31%

Core tier 1 ratio 10.6% 11.1% 11.4% 11.8% 12.0% 12.1%

Tier 1 ratio 11.3% 12.1% 12.3% 12.7% 12.8% 12.9%

Total CAR 13.9% 14.1% 14.3% 14.8% 14.9% 15.0%

Equity/Assets 8.1% 8.4% 8.5% 8.8% 8.9% 9.1%

Loan-deposit ratio 78% 78% 77% 78% 79% 80%

NPL ratio 1.18% 1.43% 1.46% 1.48% 1.49% 1.49%

NPL write-off rate 35% 45% 40% 40% 40% 40%

Net NPL formation rate 0.69% 0.89% 0.74% 0.74% 0.74% 0.74%

NPL coverage 189% 154% 164% 174% 190% 208%

LLR to loan 2.22% 2.20% 2.38% 2.57% 2.83% 3.11%

Cost-income ratio 39% 39% 36% 35% 35% 36%

Net interest margin 2.25% 2.12% 1.83% 1.82% 1.97% 2.12%

Non interest income/ total income 30% 31% 37% 34% 32% 31%

Credit cost 0.60% 0.67% 0.93% 0.98% 1.08% 1.13%


37

BY THE NUMBERS


11.0%

12.1%

13.3%

14.4%

15.6%

16.7%

17.9%

19.0%

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20


P/BV vs ROE


-10.0%

-6.9%

-3.8%

-0.6%

2.5%

5.6%

8.8%

11.9%

15.0%

3.90

4.40

4.90

5.40

5.90

6.40

6.90

7.40

7.90





Profit & Loss









Pretax Income/(Loss) from Assoc. 2,334 897 897 897 897




Exceptional Items 0 0 0 0 0

Pre-tax Profit 231,571 222,412 217,908 236,585 264,124

Taxation (52,154) (38,361) (37,584) (40,806) (45,555)



Profit After Tax 179,417 184,051 180,323 195,779 218,569

Minority Interests (8,572) (19,473) (8,615) (9,354) (10,443)

Pref. & Special Div (5,012) (6,718) (6,718) (6,718) (6,718)


Net Profit 165,833 157,860 164,990 179,708 201,408












Provision Charge/Avg Cust Loans 0.67% 0.93% 0.98% 1.08% 1.13%

Provision Charge/Avg Assets 0.37% 0.51% 0.55% 0.62% 0.66%



38



Balance Sheet










Total Non-Interest Earning Assets 1,008,018 914,689 939,196 966,153 994,106

Cash And Marketable Securities 654,378 659,982 659,982 659,982 659,982


Total Assets 16,815,597 18,148,889 19,043,696 20,331,338 21,718,825


Bank Deposits 2,180,029 2,287,621 2,429,674 2,585,932 2,757,815








Total Equity 1,357,605 1,487,092 1,613,620 1,750,992 1,904,356

Key Ratios


Total Income Growth 3.9% 2.5% 1.2% 12.7% 13.1%

Operating Profit Growth 3.6% 7.7% 2.8% 12.1% 12.5%

Pretax Profit Growth 0.0% (4.0%) (2.0%) 8.6% 11.6%


Cost Of Funds 1.99% 1.69% 1.91% 1.64% 1.48%










Key Drivers


Loan Growth (%) 7.7% 9.2% 9.0% 9.0% 9.0%


Non Interest Income Growth (%) 7.4% 23.6% -8.1% 8.7% 8.8%


Net NPL Ratio (%) 1.4% 1.5% 1.5% 1.5% 1.5%


GP Ratio (%) 1.7% 2.1% 2.5% 2.9% 3.2%

Tier 1 Ratio (%) 11.1% 11.4% 11.8% 12.0% 12.1%

Total CAR (%) 13.1% 13.4% 13.9% 14.1% 14.2%

Deposit Growth (%) 7.8% 10.3% 4.8% 7.3% 7.3%


Gross NPL Ratio (%) 1.4% 1.5% 1.5% 1.5% 1.5%

Fee Income Growth (%) 1.3% -4.1% 6.0% 10.0% 10.0%


Company Note



Insert Insert

Bank of Communications On the path to recovery; Upgrade to Add from Hold ■ We upgrade BOCOM to Add from Hold, on the back of reduced asset quality concerns

and a better outlook for net interest margins. ■ We raise our target price by 18% to HK$7.20 from HK$6.10 as we apply a lower asset


embedded in our stress test-adjusted GGM) to 9%. ■ The cut reflects our view that the asset quality cycle has reached a turning point and

the recent asset quality improvements are likely to continue. ■ We also expect rising NIM on a qoq basis throughout 2H17F to help drive earnings.

1% pt cut in ‘true’ corporate NPL ratio drives 18% TP increase We employ a stress test-adjusted GGM to value BOCOM, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (See “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook leads us to cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 18% to HK$7.20.

NIM at a turning point We see the current industry uptrend in loan yields as a tailwind for NIM. Rising loan yields (both corporate and mortgages) are likely to support continued increase in NIM, not only in 2H17F but well into FY18F (see “Inflection point” dated 9 Aug 2017 and Accelerating recovery = positive 1H17 results season dated 14 Aug 2017 for more details). 2Q17 NIM was flat qoq at 1.57%, a marked change from 1Q17’s 23bp qoq fall.

Earnings recovery to strengthen The rising NIM, together with falling credit costs (see “Asset quality to believe or not to believe” dated 20 Apr 2017) are likely to be the key drivers of strengthening China banks

earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans continues to outpace corporate loans) continuing in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated to be less than one-tenth of corporate loans, this provides favourable tailwind to the credit cost outlook for BOCOM. BOCOM’s mix of loans comprising mortgages was 19.1% in 1H17.

Highest corporate loan mix among peers BOCOM’s corporate loans comprised 67% of total loans in 1H17, the highest among peers and well above the peer group average of 55%. In the past, its high proportion of corporate loans left BOCOM exposed to weakening corporate profitability and caused it to incur steeper increase in credit costs than its peers. Given that China’s economy is showing increasing signs of strength and resilience, we think BOCOM’s high corporate loan mix is well placed to benefit.

Profitability ratios in need of a turnaround While we are more optimistic about the earnings outlook for BOCOM, a simple comparison of key profitability metrics indicates that there is much room for improvement. Its 1H17 ROE was 13.1% was the lowest among peers (average of 16.2%), while its 1H17 cost-to-income ratio of 34.1% was the second-highest after ABC (peer average of 28.8%). Its 1H17 NPL recognition ratio was 79.5%, the third-lowest after MSB and CITIC (peer average of 112.7%).

Upgrade to Add from Hold We make no changes to our earnings estimates but upgrade the stock to Add from Hold and raise our stress test-adjusted GGM-derived TP to HK$7.20 (up 18%). (See pages 2-3 for valuation and risks.)


Hong Kong

ADD (previously HOLD) Consensus ratings*: Buy 11 Hold 10 Sell 8




Up/downside: 21.4%


Reuters: 3328.HK

Bloomberg: 3328 HK


HK$499,688m


HK$168.1m




No changes

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 1.4 7.4 -1.3

Relative (%) -0.9 -4.4 -21.1

Major shareholders % held MOF 26.5 HSBC 19.0

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 66,452 66,230 70,430 76,940 84,831

Core EPS (Rmb) 0.89 0.89 0.95 1.04 1.14

Core EPS Growth 0.9% (0.3%) 6.3% 9.2% 10.3%

FD Core P/E (x) 5.65 5.67 5.33 4.88 4.42

DPS (Rmb) 0.27 0.27 0.29 0.31 0.35

Dividend Yield 5.34% 5.37% 5.71% 6.23% 6.87%

BVPS (Rmb) 7.00 7.67 8.34 9.09 9.92

P/BV (x) 0.72 0.66 0.61 0.56 0.51

ROE 13.4% 12.2% 11.8% 11.9% 12.0%



74.0

88.6

103.2

5.30

5.80

6.30


50

100

150


Vo

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https://brokingrfs.cimb.com/LbJVvk6nVvqQQ20IhKaoSKHNHyshq4yR_cIjiDO6p33wZBe3dGQgOjEvBdmDYeUVJVbMEHpvx0S69zR60.pdf



Banks│Hong Kong│Bank of Communications│October 5, 2017

40

On the path to recovery; Upgrade to Add from Hold


We value BOCOM using a stress test-adjusted Gordon Growth model (GGM).

This is to explicitly take into account investors’ lack of faith in China banks’ book values, and concerns that worsening asset quality and rising shadow banking exposure could erode book values, with certain banks possibly needing to raise capital.

Our key valuation assumptions are a COE of 11.1% (a slight increase from 10.7% previously to reflect its higher beta than the big three banks - ICBC, CCB and BOC), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 14.0% (unchanged) based on FY19F ROE and an asset quality and investor compensation valuation discount of 37% (previously 44%), which gives a stress test-adjusted target 1H18F P/BV multiple of 0.70x (previously 0.66x). This implies a sustainable ROE assumption of 8.7% (previously 8.1%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).

Our asset quality and investor compensation valuation discount was derived under a stress test of the listed banks under our coverage, where we assume a “true” corporate NPL ratio of 9% (previously 10%). We then take into account the composition of each bank’s balance sheet, off-balance sheet exposure, possible investor compensation liability for defaulting wealth management products, provisioning buffers and capital ratios for a material rise in its NPL ratio.

Our stress test also takes into account our perception that investors lack faith in the book values reported by the China banks. For a much more detailed description of our stress test, please see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 or “Asset quality: To believe or not to believe” dated 20 Apr 2017.)

The results of this stress test can be seen in Figure 1, whereby we derive our adjusted asset quality and investor compensation valuation discount of 37% (previously 44%) and use GGM to estimate possible BVPS dilution and ROE impact under the stress test.







securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





41



The asset quality and investor compensation valuation discount is applied to the initial target P/BV multiple to derive the final target P/BV multiple, which we then apply to 1H18F BVPS to derive our target price in HK$, based on a Rmb/HK$ exchange rate assumption of 1.18 (previously assumed 1.06).

Figure 3: Key valuation assumptions in our stress-test-adjusted GGM (1H18F), after applying asset quality discounts


Figure 4: Final target price-implied P/BV and sustainable ROE


Under our stress test, BOCOM does not need to raise ordinary equity capital.

Figure 5: Only two banks under our coverage would need to raise capital, in our view – CITIC and MSB (based on a stress test of 1H17 disclosed exposures of the banks)


In BOCOM’s case, we estimate that the ‘true’ corporate NPL ratio could rise to the 12.3% level before it would need to raise ordinary equity capital.

Figure 6: Estimated ‘True’ NPL ratio level that would trigger equity capital raising


1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)

Final TP implied P/BV

(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


42

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition.


43


CIMB RESEARCH, COMPANY

Profit & loss

(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 8.8% 3.2% 7.0% -6.5% 9.1% 9.3% 10.6%


yoy 21.0% 24.5% 10.9% 9.3% 7.0% 9.3% 9.3%

Total revenue 163,855 176,098 190,000 184,973 200,734 219,390 241,865

yoy 11.0% 7.5% 7.9% -2.6% 8.5% 9.3% 10.2%


Pre-prov profit 98,277 105,366 113,096 114,494 126,257 137,177 150,323

yoy 9.5% 7.2% 7.3% 1.2% 10.3% 8.6% 9.6%



yoy 6.7% 5.9% 0.9% -0.3% 6.2% 9.2% 10.3%


(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 3,266,368 3,431,735 3,722,006 4,102,959 4,472,225 4,874,726 5,313,451

Interbank assets 566,429 525,033 611,191 715,787 715,787 715,787 715,787

Investments 1,069,821 1,162,876 1,661,100 2,314,445 2,372,198 2,627,593 2,919,083

Deposits 4,157,833 4,029,668 4,484,814 4,728,589 5,095,438 5,554,027 6,053,890

Interbank liabilites 1,120,692 1,324,606 1,505,919 1,787,463 1,776,517 1,901,834 2,036,336

Bonds 82,238 129,547 170,106 229,515 252,467 277,713 305,484

Common shareholders' equity 419,561 471,055 519,961 569,266 619,534 675,064 736,507

Total shareholders' equity 421,484 473,605 538,092 632,407 683,143 739,184 801,189

RWA 4,274,068 4,164,477 4,653,723 5,163,250 5,427,208 5,835,930 6,280,872

Total assets 5,960,937 6,268,299 7,155,362 8,403,166 8,832,757 9,497,950 10,222,091

yoy

Loans 10.8% 5.1% 8.5% 10.2% 9.0% 9.0% 9.0%

Interbank assets 8.7% -7.3% 16.4% 17.1% 0.0% 0.0% 0.0%

Investments 21.8% 8.7% 42.8% 39.3% 2.5% 10.8% 11.1%

Deposits 11.5% -3.1% 11.3% 5.4% 7.8% 9.0% 9.0%

Interbank liabilites 18.9% 18.2% 13.7% 18.7% -0.6% 7.1% 7.1%

Bonds 3.4% 57.5% 31.3% 34.9% 10.0% 10.0% 10.0%



RWA 31.8% -2.6% 11.7% 10.9% 5.1% 7.5% 7.6%

Total assets 13.0% 5.2% 14.2% 17.4% 5.1% 7.5% 7.6%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.84 0.89 0.90 0.89 0.95 1.04 1.14

EPS Growth 7% 6% 1% 0% 6% 9% 10%

BVPS 5.65 6.34 7.00 7.67 8.34 9.09 9.92

BVPS Growth 10% 12% 10% 9% 9% 9% 9%

ROAE 15.6% 14.8% 13.4% 12.2% 11.8% 11.9% 12.0%

ROAA 1.1% 1.1% 1.0% 0.9% 0.8% 0.8% 0.9%

ROARWA 1.7% 1.6% 1.5% 1.4% 1.3% 1.4% 1.4%

PPOPOARWA 2.6% 2.5% 2.6% 2.3% 2.4% 2.4% 2.5%

DPS 0.26 0.27 0.27 0.27 0.29 0.31 0.35

Payout ratio 31% 30% 30% 30% 30% 30% 30%

Core tier 1 ratio 9.8% 11.3% 11.1% 11.0% 11.4% 11.6% 11.7%

Tier 1 ratio 9.8% 11.3% 11.5% 12.2% 12.5% 12.6% 12.7%

Total CAR 12.1% 14.0% 13.5% 14.0% 14.3% 14.3% 14.3%

Equity/Assets 7.6% 8.1% 7.9% 7.3% 7.6% 7.7% 7.8%


NPL ratio 1.05% 1.25% 1.51% 1.52% 1.51% 1.50% 1.50%



NPL coverage 214% 179% 156% 150% 157% 162% 167%

LLR to loan 2.24% 2.24% 2.35% 2.28% 2.37% 2.44% 2.50%




Credit cost 0.59% 0.61% 0.76% 0.73% 0.84% 0.82% 0.82%


44

BY THE NUMBERS


11.0%

12.1%

13.3%

14.4%

15.6%

16.7%

17.9%

19.0%

0.400

0.500

0.600

0.700

0.800

0.900

1.000

1.100


P/BV vs ROE


-10.0%

-6.9%

-3.8%

-0.6%

2.5%

5.6%

8.8%

11.9%

15.0%

3.80

4.30

4.80

5.30

5.80

6.30

6.80

7.30

7.80





Profit & Loss









Pretax Income/(Loss) from Assoc. 0 0 0 0 0




Exceptional Items

Pre-tax Profit 85,936 86,014 90,447 98,703 108,712

Taxation (19,181) (18,459) (18,665) (20,369) (22,434)



Profit After Tax 66,755 67,555 71,782 78,334 86,278


Pref. & Special Div 0 (884) (884) (884) (884)


Net Profit 66,452 66,230 70,430 76,940 84,831
















45



Balance Sheet




Other Int. Earning Assets









Total Assets 7,155,362 8,403,166 8,832,757 9,497,950 10,222,091


Bank Deposits 1,641,239 2,231,060 2,220,114 2,345,431 2,479,933






Shareholders' Equity 534,885 629,142 679,410 734,940 796,383


Total Equity 538,092 632,407 683,143 739,184 801,189

Key Ratios




Pretax Profit Growth 1.2% 0.1% 5.2% 9.1% 10.1%


Cost Of Funds 2.70% 2.29% 2.61% 2.55% 2.49%










Key Drivers


Loan Growth (%) 8.5% 10.2% 9.0% 9.0% 9.0%




Net NPL Ratio (%) 1.5% 1.5% 1.5% 1.5% 1.5%


GP Ratio (%) 2.4% 2.3% 2.4% 2.5% 2.6%

Tier 1 Ratio (%) 11.5% 12.2% 12.5% 12.6% 12.7%

Total CAR (%) 17.1% 18.5% 18.9% 19.0% 19.1%

Deposit Growth (%) 11.3% 5.4% 7.8% 9.0% 9.0%


Gross NPL Ratio (%) 1.5% 1.5% 1.5% 1.5% 1.5%



Company Note



Insert Insert

China CITIC Bank Upgrade to Hold on valuation grounds ■ We upgrade CITIC from Reduce to Hold on valuation grounds and due to reduced

asset quality concerns and a better outlook for net interest margins. ■ We raise our target price by 38% to HK$5.40 from HK$3.90 as we apply a lower asset



the recent asset quality improvements are likely to continue. ■ We also expect rising NIM on a qoq basis throughout 2H17F to help drive earnings.

1% pt cut in ‘true’ corporate NPL ratio drives 38% TP increase We employ a stress test-adjusted GGM to value CITIC with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook for the industry leads us to cut this ‘true’ corporate NPL ratio assumption, which drives our 38% target price rise to HK$5.40.

NIM near a turning point We see the industry uptrend in loan yields as a tailwind for NIM. Rising loan yields (both corporate and mortgages) are likely to support higher NIM, in 2H17F and well into FY18F (see “Inflection point” dated 9 Aug 2017 and Accelerating recovery = positive 1H17 results season dated 14 Aug 2017). 2Q17 NIM only slipped 4bp qoq to 1.75%, a marked change from 1Q17’s 17bp qoq fall. CITIC’s NIM is the third-lowest (after MSB and BOCOM) of peers, with average 2Q17 NIM of China banks under our coverage at 2.05%.

Earnings recovery to strengthen With NIM near a turning point, and credit costs expected to keep falling (see “Asset quality to believe or not to believe” dated 20 Apr 2017), we see these factors as drivers of CITIC’s earnings recovery in FY18F-19F. We see loan book de-risking (where growth of mortgages and other consumer loans outpace corporate loans) continuing in 2H17F, FY18F and FY19F, provide favourable tailwinds to CITIC’s credit cost outlook. Loan mix comprising mortgages was 16.0% in 1H17 vs. 2H16’s 15.1% vs. 1H16’s 14.5%.

But still higher risk than listed banking peers CITIC’s 1H17 loan-to-deposit ratio (LDR) of 89.5% is the joint-highest (together with MSB) among the banks under our coverage, with this ratio rising 9.9% pts yoy, with loans up 12% yoy and deposits flat yoy. CITIC’s >90 day overdue loans ratio of 2.11% in 1H17 was the second highest in the sector (after MSB) and its NPL recognition ratio of 78.4% in 1H17 was the second lowest (after MSB). CITIC’s 1H17 core Tier 1 ratio of 8.6% was the lowest among its peers.

Capital raising remains a risk CITIC’s 8.6% core Tier 1 ratio in 1H17 does not provide much of capital buffer over and above the 7.5% minimum regulatory capital requirement effective by the end of 2018F, especially given its relatively low 1H17 ROE of 13.9% (second lowest among peers after BOCOM) and solid loan growth (12% yoy in 1H17). Under our stress test, CITIC is one of two banks (the other being MSB) that may need to raise ordinary equity capital.

Upgrade to Hold from Reduce, no changes to earnings estimates We also raise our stress test-adjusted GGM-derived TP to HK$5.40 (up 38%). (See pages 2-3 for valuation and risks.)

[Add FP Header] [Add FP BodyText]

[ #Do Not Leave 'ANY Text’ beyond the Last Para/Fig, Else it will appear in the Emails]


Hong Kong

HOLD (previously REDUCE) Consensus ratings*: Buy 11 Hold 9 Sell 6




Up/downside: 6.3%

CIMB / Consensus: -0.1%

Reuters: 0998.HK

Bloomberg: 998 HK


HK$328,187m


HK$240.1m




No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -0.6 5.6 -1.9

Relative (%) -2.9 -6.2 -21.7

Major shareholders % held CITIC Group 64.2 China Tobacco Corporation 4.4

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 41,158 41,629 43,807 48,867 56,662

Core EPS (Rmb) 0.86 0.85 0.90 1.00 1.16

Core EPS Growth (1.1%) (1.1%) 5.2% 11.5% 16.0%

FD Core P/E (x) 5.03 5.09 4.84 4.34 3.74

DPS (Rmb) 0.21 0.22 0.23 0.25 0.29

Dividend Yield 4.90% 4.97% 5.23% 5.83% 6.76%

BVPS (Rmb) 6.49 7.04 7.72 8.49 9.39

P/BV (x) 0.67 0.62 0.56 0.51 0.46

ROE 14.3% 12.6% 12.1% 12.3% 13.0%



76.0

83.8

91.6

99.3

107.1

4.60

4.80

5.00

5.20

5.40


1

1

2


Vo

l b






Banks│Hong Kong│China CITIC Bank│October 5, 2017

47

Upgrade to Hold on valuation grounds


We value CITIC using a stress test-adjusted Gordon Growth model (GGM).


Our key valuation assumptions are a COE of 12.7% (a slight increase from 12.0% previously to reflect its higher risk compared to the other listed banks, and the fact that there is capital-raising-risk over the next few years), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 12.0% (unchanged) based on FY19F ROE and an asset quality and investor compensation valuation discount of 39% (previously 54%), which gives a stress test-adjusted target 1H18F P/BV multiple of 0.56x (previously 0.45x). This implies a sustainable ROE assumption of 8.4% (previously 7.1%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).


Our stress test also takes into account our perception that investors lack faith in the book values reported by the China banks. For a much more detailed description of our stress test, please see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 or “Asset quality: To believe or not to believe” dated 20 Apr 2017.








securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





48



The asset quality and investor compensation valuation discount is applied to the initial target P/BV multiple to derive the final target P/BV multiple, which we then apply to 1H18F BVPS to derive our target price in HK$, based on an Rmb/HK$ exchange rate assumption of 1.18 (previously assumed 1.06).





Under our stress test, CITIC needs to raise ordinary equity capital.

Figure 5: Only two banks under our coverage need to raise capital, in our view – CITIC and MSB (based on a stress test of 1H17 disclosed exposures of the banks)


In CITIC’s case, we estimate that a ‘true’ corporate NPL ratio of above 5.7% would necessitate an ordinary equity capital raising.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)


(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


49

Key upside/downside risks are better-than/worse-than-expected asset quality trends and lower-than/greater-than-expected mortgage competition.


50



Profit & loss

(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 13.5% 10.6% 10.2% 1.6% 12.5% 13.9% 14.2%


yoy 34.5% 57.4% 36.7% 16.7% 16.8% 16.2% 16.5%

Total revenue 104,815 124,841 145,572 154,167 175,547 201,207 231,192

yoy 16.8% 19.1% 16.6% 5.9% 13.9% 14.6% 14.9%

Operating expense -40,435 -46,796 -50,602 -47,272 -50,141 -57,470 -66,035

Pre-prov profit 64,380 78,045 94,970 106,895 125,406 143,737 165,157

yoy 17.6% 21.2% 21.7% 12.6% 17.3% 14.6% 14.9%

Provision -11,940 -23,673 -40,037 -52,288 -67,940 -79,632 -90,825

Net Profit to common 39,175 40,692 41,158 41,629 43,807 48,867 56,662

yoy 26.2% 3.9% 1.1% 1.1% 5.2% 11.5% 16.0%

Key balance item

(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 1,941,175 2,187,908 2,528,780 2,877,927 3,223,278 3,610,072 4,043,280


Investments 643,854 1,068,126 1,692,127 1,852,670 2,163,388 2,500,000 2,920,765

Deposits 2,651,678 2,849,574 3,182,775 3,639,290 4,076,005 4,565,125 5,112,940

Interbank liabilites 609,568 749,549 1,188,960 1,185,511 1,412,410 1,683,158 2,006,296

Bonds 76,869 133,488 289,135 386,946 444,988 511,736 588,496



RWA 2,600,494 2,941,627 3,468,135 3,964,448 4,469,179 5,047,096 5,710,333

Total assets 3,641,193 4,138,815 5,122,292 5,931,050 6,686,158 7,550,756 8,542,997

yoy

Loans 16.7% 12.7% 15.6% 13.8% 12.0% 12.0% 12.0%

Interbank assets 18.2% -44.9% 13.5% 61.7% 0.0% 0.0% 0.0%

Investments 60.8% 65.9% 58.4% 9.5% 16.8% 15.6% 16.8%

Deposits 17.6% 7.5% 11.7% 14.3% 12.0% 12.0% 12.0%

Interbank liabilites 52.5% 23.0% 58.6% -0.3% 19.1% 19.2% 19.2%

Bonds 36.3% 73.7% 116.6% 33.8% 15.0% 15.0% 15.0%



RWA 32.7% 13.1% 17.9% 14.3% 12.7% 12.9% 13.1%

Total assets 23.0% 13.7% 23.8% 15.8% 12.7% 12.9% 13.1%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.84 0.87 0.88 0.85 0.90 1.00 1.16

EPS Growth 26% 4% 1% -3% 5% 12% 16%

BVPS 4.82 5.55 6.49 7.04 7.72 8.49 9.39

BVPS Growth 14% 15% 17% 8% 10% 10% 11%

ROAE 18.5% 16.8% 14.3% 11.9% 11.1% 11.3% 12.0%

ROAA 1.2% 1.0% 0.9% 0.8% 0.7% 0.7% 0.7%

ROARWA 1.7% 1.5% 1.3% 1.1% 1.0% 1.0% 1.1%

PPOPOARWA 2.8% 2.8% 3.0% 2.9% 3.0% 3.0% 3.1%

DPS 0.25 0.00 0.21 0.22 0.23 0.25 0.29

Payout ratio 30% 0% 25% 25% 25% 25% 25%

Core tier 1 ratio 8.8% 8.9% 9.1% 8.6% 8.4% 8.2% 8.0%

Tier 1 ratio 8.8% 9.0% 9.2% 9.7% 9.2% 8.9% 8.6%

Total CAR 11.2% 12.3% 11.9% 12.0% 12.0% 11.5% 11.0%

Equity/Assets 6.6% 6.7% 6.6% 6.8% 6.6% 6.3% 6.2%


NPL ratio 1.03% 1.30% 1.43% 1.69% 1.79% 1.79% 1.74%



NPL coverage 207% 181% 168% 156% 160% 170% 182%

LLR to loan 2.13% 2.36% 2.39% 2.62% 2.87% 3.04% 3.17%




Credit cost 0.63% 1.07% 1.49% 1.69% 1.92% 1.96% 1.93%


51

BY THE NUMBERS


11.0%

12.3%

13.7%

15.0%

16.3%

17.7%

19.0%

0.500

0.600

0.700

0.800

0.900

1.000

1.100


P/BV vs ROE


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2.90

3.40

3.90

4.40

4.90

5.40

5.90

6.40

6.90





Profit & Loss













Exceptional Items

Pre-tax Profit 54,986 54,608 57,466 64,104 74,332

Taxation (13,246) (12,822) (13,493) (15,052) (17,453)



Profit After Tax 41,740 41,786 43,973 49,053 56,879


Pref. & Special Div 0 0 0 0 0


Net Profit 41,158 41,629 43,807 48,867 56,662
















52



Balance Sheet













Total Assets 5,122,292 5,931,050 6,686,158 7,550,756 8,542,997


Bank Deposits 1,226,460 1,369,561 1,596,460 1,867,208 2,190,346








Total Equity 319,686 384,496 417,948 455,929 500,457

Key Ratios




Pretax Profit Growth 0.8% (0.7%) 5.2% 11.6% 16.0%


Cost Of Funds 2.62% 2.13% 2.30% 2.21% 2.11%










Key Drivers


Loan Growth (%) 15.6% 13.8% 12.0% 12.0% 12.0%




Net NPL Ratio (%) 1.4% 1.7% 1.8% 1.8% 1.7%


GP Ratio (%) 2.5% 2.7% 3.0% 3.1% 3.3%

Tier 1 Ratio (%) 9.2% 9.7% 9.2% 8.9% 8.6%

Total CAR (%) 21.1% 22.4% 21.9% 21.6% 21.3%

Deposit Growth (%) 11.7% 14.3% 12.0% 12.0% 12.0%


Gross NPL Ratio (%) 1.4% 1.7% 1.8% 1.8% 1.7%



Company Note



Insert

China Construction Bank Best exposure to low-risk mortgages ■ We raise our target price by 16% as we apply a lower asset quality stress test-

adjusted valuation discount of 28% (vs. 31% previously). ■ This is driven by a 1% pt cut in our ‘true’ corporate NPL ratio assumption (that is


the recent asset quality improvements are likely to continue. ■ In addition to falling credit costs, rising net interest margins are also expected to

continue to spur accelerating recovery in CCB’s earnings growth in 2H17F. ■ Our target price is raised to HK$8.80 (previously HK$7.60). Add rating maintained.

1% pt cut in ‘true’ corporate NPL ratio drives 16% TP increase We employ a stress test-adjusted GGM to value CCB, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (See “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook leads us to cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 16% to HK$8.80.

One of the best capitalised among big four banks, with a low LDR CCB’s core tier 1 ratio of 12.7% at end-1H17 was on par with ICBC as the highest among peers and above the big four banks’ average of 11.8%. Its loan-to-deposit ratio (LDR) was also relatively low at 76.9% in 1H17. We think investors are more likely to pay a valuation premium for strongly-capitalised banks with low LDR, given that the current environment of elevated interest rates is providing near-term tailwind to net interest margins (NIM), as interbank assets and investment securities reprice upwards.

NIM to continue trending upwards In addition to higher yields on interbank assets and investment securities, we see the uptrend in loan yields as another tailwind for NIM, an arguably more important one as it comprises a larger proportion of interest-earning assets than interbank assets and investment securities. Rising loan yields (both corporate and mortgages) are likely to support continued increase in NIM, not only in 2H17F but well into FY18F (see “Inflection point” dated 9 Aug 2017 for more details).

Earnings recovery to strengthen The rising NIM, together with falling credit costs (see “Asset quality to believe or not to believe” dated 20 Apr 2017) are likely to be the key drivers of strengthening China banks

earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans continues to outpace corporate loans) continuing in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated to be less than one-tenth of corporate loans, this provides favourable tailwind to the credit cost outlook for CCB. CCB has the highest proportion of mortgages among its peers (31.7% of loan book in 1H17).

CCB is one of the best-managed China banks CCB’s historical cost-to-income ratio, ROA and ROE are better than its peers’ average. CCB’s 1H17 cost-to-income ratio was best of the big four banks at 23.3% and below the big four average of 28.7% and listed peer average of 28.8%. Meanwhile, its 1H17 ROA was 1.31% (highest among peers) vs. sector average of 1.13% and big four banks’ average of 1.19%. Its 1H17 ROE of 17.3% in 1H17 was the second-highest of the banks under our coverage (above sector average and big four banks’ average of 16.2%).

CCB remains one of our sector top picks We make no changes to earnings estimates or rating but raise our stress test-adjusted GGM-derived TP to HK$8.80 (up 16%). (See pages 2-3 for valuation and risks.)

[ #Do Not Leave 'ANY Text’ beyond the Last Para/Fig, Else it will appear in the Emails]


a Hong Kong





Up/downside: 27.9%


Reuters: 0939.HK

Bloomberg: 939 HK


HK$1,732,800m


HK$1,874m




No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 2.1 14.9 17.8

Relative (%) -0.2 3.1 -2

Major shareholders % held Huijin 57.3 Temasek 5.8

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 228,145 230,393 235,264 253,410 280,740

Core EPS (Rmb) 0.91 0.92 0.94 1.01 1.12

Core EPS Growth 0.1% 1.0% 2.1% 7.7% 10.8%

FD Core P/E (x) 6.42 6.36 6.23 5.78 5.22

DPS (Rmb) 0.27 0.28 0.28 0.31 0.34

Dividend Yield 4.67% 4.74% 4.84% 5.22% 5.78%

BVPS (Rmb) 5.66 6.23 6.89 7.62 8.44

P/BV (x) 1.04 0.94 0.85 0.77 0.69

ROE 17.2% 15.5% 14.3% 14.0% 14.0%



92.0

97.0

102.0

107.0

112.0

5.20

5.70

6.20

6.70

7.20


1

1

2


Vo

l b





Banks│Hong Kong│China Construction Bank│October 5, 2017

54

Best exposure to low-risk mortgages


Stress test-adjusted Gordon Growth model

We value CCB using a stress test-adjusted Gordon Growth model (GGM).


Our key valuation assumptions are a COE of 10.7% (unchanged), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 14.0% based on FY19F ROE (unchanged) and an asset quality and investor compensation valuation discount of 28% (previously 31%), which gives a stress test-adjusted target 1H18F P/BV multiple of 1.02x (previously 0.99x). This implies a sustainable ROE assumption of 10.9% (previously 10.6%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).


Our stress test also takes into account our perception that investors lack faith in the book values reported by the China banks. For a much more detailed description of our stress test, please see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 or “Asset quality: To believe or not to believe” dated 20 Apr 2017.)

The results of this stress test can be seen in Figure 1, whereby we derive our adjusted asset quality and investor compensation valuation discount of 28% (previously 31%) and use a GGM to estimate possible BVPS dilution and ROE impact under the stress test.







securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





55








Under our stress test, CCB does not need to raise ordinary equity capital.



In CCB’s case, we estimate that the ‘true’ corporate NPL ratio could rise to the 19.1% level before it would need to raise ordinary equity capital.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)


(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


56

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition. A potential re-rating catalyst is further southbound flow under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows highly correlated to expectations of renminbi depreciation. CCB has historically been one of the bigger beneficiaries of southbound buying.


57



Profit & loss

(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 10.3% 12.3% 4.7% -8.7% 6.1% 14.5% 13.8%


yoy 11.2% -1.9% 8.0% 10.2% 5.0% 9.2% 9.4%

Total revenue 511,140 556,740 586,687 559,860 592,613 670,793 756,412

yoy 10.5% 8.9% 5.4% -4.6% 5.9% 13.2% 12.8%


Pre-prov profit 322,955 360,752 391,861 388,345 418,326 471,540 529,481

yoy 10.8% 11.7% 8.6% -0.9% 7.7% 12.7% 12.3%



yoy 11.1% 6.1% 0.1% 1.0% 2.1% 7.7% 10.8%


(Rmb mn) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 8,590,057 9,474,523 10,485,140 11,757,032 13,050,306 14,420,588 15,862,646

Interbank assets 754,798 788,737 974,472 858,462 920,700 982,387 1,048,207

Investments 3,414,617 3,727,869 4,271,406 5,068,584 5,500,822 5,932,161 6,381,678

Deposits 12,223,037 12,898,675 13,668,533 15,402,915 16,876,141 18,410,064 19,995,794

Interbank liabilites 909,885 1,388,048 2,029,119 2,126,121 2,296,211 2,536,123 2,801,570

Bonds 357,540 431,652 415,544 451,554 474,132 497,838 522,730

Common shareholders' equity 1,065,951 1,241,510 1,414,361 1,556,841 1,722,601 1,905,039 2,109,332

Total shareholders' equity 1,074,329 1,251,848 1,445,083 1,589,654 1,756,363 1,939,822 2,145,246

RWA 9,872,790 10,203,643 10,722,082 11,937,774 13,003,933 14,281,158 15,639,388

Total assets 15,363,210 16,744,093 18,349,489 20,963,705 22,835,966 24,860,592 26,990,073

yoy

Loans 14.3% 10.3% 10.7% 12.1% 11.0% 10.5% 10.0%

Interbank assets -26.9% 4.5% 23.5% -11.9% 7.3% 6.7% 6.7%

Investments 19.1% 9.2% 14.6% 18.7% 8.5% 7.8% 7.6%

Deposits 7.8% 5.5% 6.0% 12.7% 9.6% 9.1% 8.6%


Bonds 36.0% 20.7% -3.7% 8.7% 5.0% 5.0% 5.0%



RWA 29.3% 3.4% 5.1% 11.3% 8.9% 9.8% 9.5%

Total assets 10.0% 9.0% 9.6% 14.2% 8.9% 8.9% 8.6%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.86 0.91 0.91 0.92 0.94 1.01 1.12

EPS Growth 11% 6% 0% 1% 2% 8% 11%

BVPS 4.26 4.97 5.66 6.23 6.89 7.62 8.44

BVPS Growth 13% 16% 14% 10% 11% 11% 11%

ROAE 21.4% 19.7% 17.2% 15.5% 14.3% 14.0% 14.0%

ROAA 1.5% 1.4% 1.3% 1.2% 1.1% 1.1% 1.1%

ROARWA 2.5% 2.3% 2.2% 2.0% 1.9% 1.9% 1.9%

PPOPOARWA 3.7% 3.6% 3.7% 3.4% 3.4% 3.5% 3.5%

DPS 0.30 0.30 0.27 0.28 0.28 0.31 0.34

Payout ratio 35% 33% 30% 30% 30% 30% 30%

Core tier 1 ratio 10.8% 12.1% 13.1% 13.0% 13.2% 13.3% 13.5%

Tier 1 ratio 10.8% 12.1% 13.3% 13.1% 13.4% 13.5% 13.6%

Total CAR 13.3% 14.9% 15.4% 14.9% 15.1% 15.2% 15.3%

Equity/Assets 7.5% 8.0% 8.4% 8.0% 8.2% 8.3% 8.5%


NPL ratio 0.99% 1.19% 1.58% 1.52% 1.52% 1.51% 1.50%

NPL write-off rate 22.4% 44.3% 81.7% 43.3% 45.0% 45.0% 45.0%


NPL coverage 268% 222% 151% 150% 155% 168% 185%

LLR to loan 2.66% 2.66% 2.39% 2.29% 2.35% 2.54% 2.77%




Credit cost 0.53% 0.66% 0.93% 0.81% 0.95% 1.08% 1.13%


58

BY THE NUMBERS


13.0%14.0%15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%23.0%

0.500.600.700.800.901.001.101.201.301.401.50


P/BV vs ROE


0.0%

2.3%

4.6%

6.9%

9.1%

11.4%

13.7%

16.0%

3.80

4.30

4.80

5.30

5.80

6.30

6.80

7.30





Profit & Loss













Exceptional Items

Pre-tax Profit 298,497 295,210 298,997 321,955 356,532

Taxation (69,611) (62,821) (61,718) (66,457) (73,594)



Profit After Tax 228,886 232,389 237,279 255,498 282,938

Minority Interests (741) (929) (949) (1,021) (1,131)

Pref. & Special Div 0 (1,067) (1,067) (1,067) (1,067)


Net Profit 228,145 230,393 235,264 253,410 280,740
















59



Balance Sheet













Total Assets 18,349,489 20,963,705 22,835,966 24,860,592 26,990,073


Bank Deposits 2,071,167 2,565,460 2,735,550 2,975,462 3,240,909

Interest Bearing Liabilities: Others 718,193 848,145 910,382 977,713 1,050,593







Total Equity 1,445,083 1,589,654 1,756,363 1,939,822 2,145,246

Key Ratios



Operating Profit Growth 8.6% (0.9%) 7.7% 12.7% 12.3%

Pretax Profit Growth (0.2%) (1.1%) 1.3% 7.7% 10.7%


Cost Of Funds 1.98% 1.58% 2.18% 1.97% 1.86%










Key Drivers


Loan Growth (%) 10.7% 12.1% 11.0% 10.5% 10.0%




Net NPL Ratio (%) 1.6% 1.5% 1.5% 1.5% 1.5%


GP Ratio (%) 2.4% 2.3% 2.4% 2.6% 2.8%

Tier 1 Ratio (%) 13.4% 13.2% 13.4% 13.5% 13.6%

Total CAR (%) 19.3% 18.8% 18.8% 18.7% 18.7%

Deposit Growth (%) 6.0% 12.7% 9.6% 9.1% 8.6%


Gross NPL Ratio (%) 1.6% 1.5% 1.5% 1.5% 1.5%



Company Note



Insert

China Merchants Bank High-quality, well-run bank but fully valued ■ We raise our target price by 48% to HK$32.50 from HK$22.00, due to a lower asset




continue to spur an accelerating recovery in CMB’s earnings growth in FY17F. ■ Maintain Hold. CMB is a high-quality, well-run bank but we believe it is fully valued.

1% pt cut in the ‘true’ corporate NPL ratio drives 48% TP increase We employ a stress test-adjusted GGM to value CMB, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook sees us cut this ‘true’ corporate NPL ratio assumption, which together with CMB’s reduced exposure to shadow-banking related assets in recent years, results in our target price rising by 48% to HK$32.50.

Net interest margins (NIM) to trend upwards in 2H17F and FY18F We see the current industry uptrend in loan yields as a tailwind for NIM. Rising loan yields (both corporate and mortgages) are likely to support continued increase in NIM, not only in 2H17F but well into FY18F (see “Inflection point” dated 9 Aug 2017 and “Accelerating recovery = positive 1H17 results season” dated 14 Aug 2017 for more

details). 2Q17 NIM was up 1bp qoq to 2.44%, versus 1Q17’s 4bp qoq rise.

Earnings recovery to strengthen Rising NIM and falling credit costs (see “Asset quality to believe or not to believe” dated

20 Apr 2017) are likely to drive the China banks earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans outpace corporate loans) continuing in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated at less than 10% of corporate loans, this provides favourable tailwind to CMB’s credit cost outlook. Mortgages comprised 22.8% of its loan mix in 1H17, up 2.5% yoy.

A well-run, high-quality bank CMB’s demand deposit-to-total deposits ratio in 1H17 was the highest among peers at 62.4% (peer average was 52.2%). Its 1H17 NIM of 2.43% was the second highest (after CQRCB) among peers (average was 2.03%). Its 1H17 ROE of 19.1% was the highest among peers (average of 16.2%). Its 1H17 core Tier 1 ratio of 12.4% was the third best (after CCB and ICBC) among peers (average of 11.4%).

But CMB appears to be fully valued On a 12-month-rolling-forward P/BV basis on 4 Oct 2017, CMB traded at a 70% premium over the average of the big four banks, which is a nine-year high and well above its 36% historical average P/BV premium (Sep 2006-Oct 2017) over the big four banks. Similarly, CMB now trades at a 126% 12-month-rolling-forward P/BV premium over MSB (a bank it is often compared to), which is an all-time high and well above the average P/BV premium of 40% since MSB listed in 2009.

Hold rating maintained; Earning estimated unchanged We raise our stress test-adjusted GGM-derived TP to HK$32.50 (up 48%). (See pages 2-3 for valuation and risks.)


Hong Kong

HOLD (no change) Consensus ratings*: Buy 15 Hold 13 Sell 3




Up/downside: 9.1%


Reuters: 3968.HK

Bloomberg: 3968 HK


HK$757,370m


HK$595.7m




No changes.

Source: Bloomberg


Relative (%) -0.1 16.1 30.4

Major shareholders % held China Merchants Group 33.0

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 57,696 62,081 70,142 83,429 103,357

Core EPS (Rmb) 2.29 2.46 2.78 3.31 4.10

Core EPS Growth 3.2% 7.6% 13.0% 18.9% 23.9%

FD Core P/E (x) 11.10 10.32 9.13 7.68 6.20

DPS (Rmb) 0.69 0.74 0.83 0.99 1.23

Dividend Yield 2.72% 2.91% 3.29% 3.91% 4.84%

BVPS (Rmb) 14.31 15.95 17.99 20.47 23.57

P/BV (x) 1.78 1.59 1.41 1.24 1.08

ROE 17.1% 16.3% 16.4% 17.2% 18.6%



93.0

107.1

121.1

135.2

16.0

21.0

26.0

31.0


20

40

60

80


Vo

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Banks│Hong Kong│China Merchants Bank│October 5, 2017

61

Good quality well-run bank, but fully valued


We value CMB using a stress test-adjusted Gordon Growth model (GGM).


Our key valuation assumptions are a COE of 11.5% (a slight decrease from 12.0% previously to reflect its lower risk as it has substantially reduced some of its shadow banking exposures in recent years), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 18.6% (unchanged) based on FY19F ROE and an asset quality and investor compensation valuation discount of 22% (previously 38%), which gives a stress test-adjusted target 1H18F P/BV multiple of 1.43x (previously 1.08x). This implies a sustainable ROE assumption of 15.2% (previously 12.7%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).










securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





62








Under our stress test, CMB does not need to raise ordinary equity capital.



In CMB’s case, we estimate that the ‘true’ corporate NPL ratio could rise to the 15.3% level before it would need to raise ordinary equity capital.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)


(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


63

Key upside/downside risks are better/worse-than-expected asset quality trends and lower/greater-than-expected mortgage competition. Potential catalysts for re-rating include better-than-expected credit costs driving stronger earnings growth, as well as further southbound flows under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows highly correlated to expectations of renminbi depreciation. CMB has historically been one of the bigger beneficiaries of southbound buying.


64



Profit & loss

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 11.9% 18.5% 17.4% -2.2% 5.7% 17.5% 17.5%


yoy 34.8% 44.5% 31.7% 16.8% 18.1% 17.0% 17.4%

Total revenue 132,699 166,035 201,879 209,701 230,984 270,949 318,266

yoy 17.0% 25.1% 21.6% 3.9% 10.1% 17.3% 17.5%


Pre-prov profit 78,555 104,954 134,209 144,801 162,500 191,419 225,782

yoy 20.7% 33.6% 27.9% 7.9% 12.2% 17.8% 18.0%

Provision -10,218 -31,681 -59,266 -66,159 -73,630 -85,677 -94,723


yoy 14.3% 8.1% 3.2% 7.6% 13.0% 18.9% 23.9%

Key balance item

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 2,197,094 2,513,919 2,824,286 3,261,681 3,653,083 4,091,453 4,582,427


Investments 756,830 986,902 1,427,841 1,450,922 1,712,318 2,038,213 2,426,516

Deposits 2,775,276 3,304,438 3,571,698 3,802,049 4,505,860 4,985,075 5,516,076

Interbank liabilites 792,478 859,039 1,051,945 967,425 1,119,728 1,298,374 1,508,219

Bonds 68,936 106,155 251,507 275,082 357,607 464,889 604,355



RWA 2,744,991 3,146,571 3,208,152 3,368,990 3,930,528 4,423,206 4,996,025

Total assets 4,016,399 4,731,829 5,474,978 5,942,311 6,932,767 7,760,698 8,719,836

yoy

Loans 15.4% 14.4% 12.3% 15.5% 12.0% 12.0% 12.0%

Interbank assets 3.0% 3.8% 13.0% -1.9% 15.8% 13.2% 13.2%

Investments 46.2% 30.4% 44.7% 1.6% 18.0% 19.0% 19.1%

Deposits 9.6% 19.1% 8.1% 6.4% 18.5% 10.6% 10.7%


Bonds -10.6% 54.0% 136.9% 9.4% 30.0% 30.0% 30.0%



RWA 32.1% 14.6% 2.0% 5.0% 16.7% 12.5% 13.0%

Total assets 17.8% 17.8% 15.7% 8.5% 16.7% 11.9% 12.4%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 2.30 2.22 2.29 2.46 2.78 3.31 4.10

EPS Growth 10% -4% 3% 8% 13% 19% 24%

BVPS 10.53 12.47 14.31 15.95 17.99 20.47 23.57

BVPS Growth 13% 18% 15% 12% 13% 14% 15%

ROAE 22.2% 19.3% 17.1% 16.3% 16.4% 17.2% 18.6%

ROAA 1.4% 1.3% 1.1% 1.1% 1.1% 1.1% 1.3%

ROARWA 2.1% 1.9% 1.8% 1.9% 1.9% 2.0% 2.2%

PPOPOARWA 3.3% 3.6% 4.2% 4.4% 4.5% 4.6% 4.8%

DPS 0.62 0.67 0.69 0.74 0.83 0.99 1.23

Payout ratio 30% 30% 30% 30% 30% 30% 30%

Core tier 1 ratio 9.3% 9.6% 10.8% 11.5% 11.2% 11.3% 11.5%

Tier 1 ratio 9.3% 9.6% 10.8% 11.5% 11.2% 11.3% 11.5%

Total CAR 11.1% 11.7% 13.0% 13.7% 13.5% 13.5% 13.6%

Equity/Assets 9.3% 9.6% 10.8% 11.5% 11.2% 11.3% 11.5%


NPL ratio 0.83% 1.11% 1.68% 1.87% 1.83% 1.79% 1.70%



NPL coverage 266% 233% 179% 180% 180% 187% 200%

LLR to loan 2.22% 2.59% 3.00% 3.37% 3.29% 3.34% 3.39%




Credit cost 0.50% 1.33% 2.15% 2.12% 2.07% 2.15% 2.12%


65

BY THE NUMBERS


15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%23.0%24.0%25.0%

0.700.800.901.001.101.201.301.401.501.601.70


P/BV vs ROE


0.0%

3.1%

6.3%

9.4%

12.5%

15.6%

18.8%

21.9%

25.0%

4.20

4.70

5.20

5.70

6.20

6.70

7.20

7.70

8.20





Profit & Loss














Pre-tax Profit 75,079 78,963 89,216 106,117 131,463

Taxation (17,061) (16,583) (18,736) (22,286) (27,609)



Profit After Tax 58,018 62,380 70,480 83,831 103,855




Net Profit 57,696 62,081 70,142 83,429 103,357
















66



Balance Sheet













Total Assets 5,474,978 5,942,311 6,932,767 7,760,698 8,719,836


Bank Deposits 1,138,584 1,297,533 1,449,836 1,628,482 1,838,327







Minority Interests 952 1,012 1,350 1,752 2,249

Total Equity 361,758 403,362 455,179 517,968 596,794

Key Ratios






Cost Of Funds 2.12% 1.56% 2.06% 2.03% 1.94%










Key Drivers


Loan Growth (%) 12.3% 15.5% 12.0% 12.0% 12.0%




Net NPL Ratio (%) 1.7% 1.9% 1.8% 1.8% 1.7%


GP Ratio (%) 3.1% 3.5% 3.4% 3.5% 3.5%

Tier 1 Ratio (%) 10.8% 11.5% 11.2% 11.3% 11.5%

Total CAR (%) 20.8% 21.9% 22.2% 23.6% 25.3%

Deposit Growth (%) 8.1% 6.4% 18.5% 10.6% 10.7%


Gross NPL Ratio (%) 1.7% 1.9% 1.8% 1.8% 1.7%



Company Note



Insert Insert

China Minsheng Bank Upgrade to Add on valuation grounds ■ We upgrade China Minsheng Bank (MSB) to Add from Hold on the back of reduced

asset quality concerns and a better outlook for net interest margins. ■ We raise our target price by 9% to HK$9.40 from HK$8.60 as we apply a lower asset



that asset quality will continue to improve, with lower credit costs helping earnings. ■ We also expect earnings to be driven by sequentially higher NIM throughout 2H17F.

1% pt cut in ‘true’ corporate NPL ratio drives 9% TP increase We use GGM to value MSB, with a discount on asset quality derived from our stress test, of which a key variable is the ‘true’ corporate NPL ratio assumption (see ‘A balance sheet driven multiple re-rating’ dated 4 Oct 2017 for more details). Our more bullish asset

quality outlook for the industry leads us to reduce this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 9% to HK$9.40.

NIM approaching a turning point We see the current industry uptrend in loan yields as a tailwind for NIM. Rising loan yields (both corporate and mortgages) are likely to lift NIM, not only in 2H17F but well into FY18F (see ‘Inflection point’ dated 9 Aug 2017 and ‘Accelerating recovery = positive 1H17 results season’ dated 14 Aug 2017 for more details). 2Q17 NIM was only down 4bp qoq to 1.39%, a contrast to 1Q17’s 25bp qoq fall. MSB’s NIM is by far the lowest among peers, with the average 2Q17 NIM of the China banks under our coverage at 2.05%.

Earnings recovery to strengthen With NIM near a turning point and credit costs falling (see ‘Asset quality: To believe or not to believe’ dated 20 Apr 2017), we see MSB’s earnings recovery strengthening in FY18F and FY19F. We also see loan book de-risking (where growth of mortgages and other consumer loans continues to outpace corporate loans) continuing in 2H17F, FY18F and FY19F, providing favourable tailwinds to MSB’s credit cost outlook. Mortgages made up 12.9% of its loan mix in 1H17 vs. 12.0% in 2H16 and 8.6% in 1H16.

However, MSB still faces higher risk than listed banking peers MSB’s 1H17 loan-to-deposit ratio of 89.5% is the joint-highest (together with CITIC) among the banks under our coverage, rising 12% pts yoy as its loans rose 19% yoy while deposits grew only 3% yoy. Its 1H17 NIM of 1.40% is the lowest among peers while its >90 days overdue loans ratio of 2.46% is the highest. In our banking universe, MSB’s NPL recognition ratio (NPLs as a percentage of loans >90 days overdue) of 69% in 1H17 was the lowest, while its core Tier 1 ratio of 9.2% was the second lowest (after CITIC).

Upgrade to Add from Hold on valuation grounds We make no changes to our earnings estimates but upgrade the stock to Add from Hold and raise our stress test-adjusted GGM-derived TP to HK$9.40 (up 9%). (See pages 2-3 for valuation and risks.)


Hong Kong

ADD (previously HOLD) Consensus ratings*: Buy 5 Hold 12 Sell 11




Up/downside: 27.4%


Reuters: 1988.HK

Bloomberg: 1988 HK


HK$330,215m


HK$351.8m




No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -4.8 -4.9 -18

Relative (%) -7.1 -16.7 -37.8

Major shareholders % held New Hope Investment Co., Ltd. 4.7 China Life 4.1

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 46,111 47,843 49,929 57,823 66,738

Core EPS (Rmb) 1.31 1.31 1.37 1.58 1.83

Core EPS Growth (8.4%) 0.4% 4.4% 15.8% 15.4%

FD Core P/E (x) 4.82 4.80 4.60 3.97 3.44

DPS (Rmb) 0.24 0.28 0.29 0.34 0.39

Dividend Yield 3.74% 4.45% 4.65% 5.38% 6.21%

BVPS (Rmb) 8.26 9.12 10.21 11.50 12.99

P/BV (x) 0.76 0.69 0.62 0.55 0.48

ROE 17.0% 15.1% 14.2% 14.6% 14.9%



58.0

68.0

78.0

88.0

98.0

108.0

6.90

7.40

7.90

8.40

8.90

9.40


500

1000


Vo

l m






Banks│Hong Kong│China Minsheng Bank│October 5, 2017

68

Upgrade to Add on valuation grounds


We value MSB using a stress test-adjusted Gordon Growth model (GGM).

This is to explicitly take into account investors’ lack of faith in China banks’ book values and concerns that worsening asset quality and rising shadow banking exposure could erode book values, with certain banks possibly needing to raise capital.

Our key valuation assumptions are a COE of 12.6% (a slight increase from 12.0% previously to reflect its higher risk compared to the other listed banks), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 14.9% (unchanged) based on FY19F ROE and an asset quality and investor compensation valuation discount of 41% (previously 44%), which gives a stress test-adjusted target 1H18F P/BV multiple of 0.73x (previously 0.79x). This implies a sustainable ROE assumption of 10.0% (previously 10.1%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).

Our asset quality and investor compensation valuation discount was derived under a stress test of the listed banks under our coverage, where we assume a ‘true’ corporate NPL ratio of 9% (previously 10%). We then take into account the composition of each bank’s balance sheet, off-balance sheet exposure, possible investor compensation liability for defaulting wealth management products, provisioning buffers and capital ratios for a material rise in its NPL ratio.

Our stress test also takes into account our perception that investors do not have much faith in the book values reported by the China banks. For a much more detailed description of our stress test, please see ‘A balance sheet driven multiple re-rating’ dated 4 Oct 2017 or ‘Asset quality: To believe or not to believe’ dated 20 Apr 2017.




We then compute an initial target 1H18F P/BV multiple using a simple Gordon Growth model.




securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





69








Under our stress test, MSB needs to raise ordinary equity capital.



In MSB’s case, we estimate that a ‘true’ corporate NPL ratio of above 7.3% will necessitate an ordinary equity capital raising.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)


(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


70

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition. A potential catalyst for re-rating is positive quarterly results, as better-than-expected asset quality could have positive impact on MSB’s share price.


71



Profit & loss

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 7.6% 11.0% 2.3% 0.4% 3.7% 12.3% 12.2%


yoy 27.5% 33.6% 37.3% -0.2% 6.6% 17.2% 17.4%

Total revenue 115,469 135,469 153,751 154,051 161,451 184,418 210,837

yoy 12.6% 17.3% 13.5% 0.2% 4.8% 14.2% 14.3%


Pre-prov profit 70,850 80,925 95,575 101,627 105,072 121,770 139,215

yoy 18.4% 14.2% 18.1% 6.3% 3.4% 15.9% 14.3%

Provision -13,699 -21,132 -34,801 -41,378 -42,637 -49,464 -55,760


yoy 12.6% 5.4% 3.5% 3.8% 4.4% 15.8% 15.4%

Key balance item

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 1,574,263 1,812,666 2,048,048 2,461,586 2,756,976 3,087,813 3,458,351


Investments 304,591 598,164 913,562 2,206,909 2,560,462 2,936,553 3,368,004

Deposits 2,146,689 2,433,810 2,732,262 3,082,242 3,409,420 3,771,906 4,173,552

Interbank liabilites 638,244 975,010 1,039,904 1,521,274 1,732,477 1,975,360 2,254,676

Bonds 91,968 129,279 181,233 398,376 478,051 573,661 688,394



RWA 2,325,105 2,862,710 3,346,232 3,786,073 4,209,090 4,726,758 5,318,517

Total assets 3,226,210 4,015,136 4,520,688 5,895,877 6,554,622 7,303,892 8,155,283

yoy

Loans 13.7% 15.1% 13.0% 20.2% 12.0% 12.0% 12.0%

Interbank assets -26.8% 20.9% -2.9% -48.8% 11.7% 13.2% 13.2%

Investments 25.8% 96.4% 52.7% 141.6% 16.0% 14.7% 14.7%

Deposits 11.4% 13.4% 12.3% 12.8% 10.6% 10.6% 10.6%


Bonds 22.7% 40.6% 40.2% 119.8% 20.0% 20.0% 20.0%



RWA 15.1% 23.1% 16.9% 13.1% 11.2% 12.3% 12.5%

Total assets 0.4% 24.5% 12.6% 30.4% 11.2% 11.4% 11.7%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 1.49 1.31 1.30 1.31 1.37 1.58 1.83

EPS Growth 9% -12% -1% 1% 4% 16% 15%

BVPS 6.97 7.03 8.26 9.12 10.21 11.50 12.99

BVPS Growth 21% 1% 17% 10% 12% 13% 13%

ROAE 23.4% 20.3% 17.0% 15.1% 14.2% 14.6% 14.9%

ROAA 1.3% 1.2% 1.1% 0.9% 0.8% 0.8% 0.9%

ROARWA 1.9% 1.7% 1.5% 1.3% 1.2% 1.3% 1.3%

PPOPOARWA 3.3% 3.1% 3.1% 2.8% 2.6% 2.7% 2.8%

DPS 0.26 0.19 0.24 0.28 0.29 0.34 0.39

Payout ratio 17% 15% 19% 21% 21% 21% 21%

Core tier 1 ratio 8.7% 8.6% 9.2% 8.9% 9.0% 9.0% 9.1%

Tier 1 ratio 8.7% 8.6% 9.2% 9.2% 9.3% 9.3% 9.3%

Total CAR 10.7% 10.7% 11.5% 11.7% 11.6% 11.5% 11.4%

Equity/Assets 6.5% 6.4% 7.2% 6.0% 6.0% 6.1% 6.2%


NPL ratio 0.85% 1.17% 1.60% 1.68% 1.67% 1.64% 1.61%



NPL coverage 260% 182% 154% 155% 155% 160% 167%

LLR to loan 2.21% 2.12% 2.46% 2.62% 2.58% 2.62% 2.68%




Credit cost 0.88% 1.18% 1.71% 1.83% 1.63% 1.68% 1.69%


72

BY THE NUMBERS


13.0%

14.6%

16.1%

17.7%

19.2%

20.8%

22.3%

23.9%

25.4%

27.0%

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40


P/BV vs ROE


-20.0%

-13.3%

-6.7%

0.0%

6.7%

13.3%

20.0%

26.7%

33.3%

40.0%

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50





Profit & Loss














Pre-tax Profit 60,774 60,249 62,435 72,307 83,455

Taxation (13,752) (11,471) (11,531) (13,354) (15,413)



Profit After Tax 47,022 48,778 50,904 58,953 68,043

Minority Interests (911) (935) (976) (1,130) (1,304)



Net Profit 46,111 47,843 49,929 57,823 66,738
















73



Balance Sheet



Liquid Assets & Invst. (Current) 913,562 2,206,909 2,560,462 2,936,553 3,368,004





Intangible Assets 0 0 0 0 0





Total Assets 4,520,688 5,895,877 6,554,622 7,303,892 8,155,283


Bank Deposits 1,102,381 1,836,712 2,047,915 2,290,798 2,570,114








Total Equity 309,783 352,027 392,715 441,007 496,703

Key Ratios




Pretax Profit Growth 1.6% (0.9%) 3.6% 15.8% 15.4%


Cost Of Funds 2.87% 2.34% 2.89% 2.80% 2.80%










Key Drivers


Loan Growth (%) 13.0% 20.2% 12.0% 12.0% 12.0%


Non Interest Income Growth (%) 37.3% -0.2% 6.6% 17.2% 17.4%


Net NPL Ratio (%) 1.6% 1.7% 1.7% 1.6% 1.6%


GP Ratio (%) 2.5% 2.7% 2.7% 2.7% 2.8%

Tier 1 Ratio (%) 9.2% 9.2% 9.3% 9.3% 9.3%

Total CAR (%) 16.9% 22.3% 23.0% 23.6% 24.3%

Deposit Growth (%) 12.3% 12.8% 10.6% 10.6% 10.6%


Gross NPL Ratio (%) 1.6% 1.7% 1.7% 1.6% 1.6%



Company Note



Insert Insert

Chongqing Rural Comm Bank A well-run city commercial bank ■ We raise our target price by 4% to HK$7.70 from HK$7.40, due to a lower asset




continue to spur an accelerating recovery in CQRCB’s earnings growth in FY17F. ■ Maintain our Add rating. We see CQRCB as a well-run city commercial bank.

1% pt cut in the ‘true’ corporate NPL ratio drives 4% TP increase We employ a stress test-adjusted GGM to value CQRCB, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook sees us cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 4% to HK$7.70.

Net interest margins (NIM) at a turning point We see the current industry uptrend in loan yields as a tailwind for NIM. Rising loan yields (both corporate and mortgages) are likely to support continued increase in NIM, not only in 2H17F but well into FY18F (see “Inflection point” dated 9 Aug 2017 and Accelerating recovery = positive 1H17 results season dated 14 Aug 2017 for more details). We do not believe that 2Q17’s NIM fall of 22bp qoq to 2.51% will be repeated and expect NIM to trend up sequentially from current levels.

Earnings recovery to strengthen Rising NIM and falling credit costs (see “Asset quality to believe or not to believe” dated

20 Apr 2017) are likely to drive China banks’ earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans outpace corporate loans) in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated at less than 10% of corporate loans, this can provide favourable tailwind to CQRCB’s credit cost outlook. Its loan mix comprising mortgages was 14.2% in 1H17.

ROE resilience A key benefit of CQRCB being located in Western China, in particular Chongqing, has been its remarkable resilience to asset quality pressures vs. the other China banks, given that Chongqing has been one of China’s fastest growing regions in recent years. This, in our view, has been the major reason why its ROE has performed much better than peers (-1.1% pts over FY14-FY16 to 16.0% in FY16 vs. -4.3% pts peer average), over a period where industry NPL ratios are rising and net interest margins are falling.

Strong provisioning buffers have not been needed thus far As a result of better-than-expected asset quality, CQRCB has not yet needed to draw down on its strong provisioning buffers. Its provisioning coverage ratio of 425% in 1H17 was best among peers and more than double the listed peer average of 164%. Its 1H17 loan loss reserve ratio of 4.10% was also best among peers and well above the listed peer average of 2.7%.

Add rating maintained; earnings estimates unchanged We raise our stress test-adjusted GGM-derived TP to HK$7.70 (up 4%). (See pages 2-3 for valuation and risks.)


Hong Kong





Up/downside: 49.8%


Reuters: 3618.HK

Bloomberg: 3618 HK


HK$47,802m


HK$51.80m




No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -2.7 -3.4 5.1

Relative (%) -5 -15.2 -14.7

Major shareholders % held Chongqing Yufu Assets Management Group Co. Ltd 6.8 Chongqing City Construction Investment Co. Ltd 6.7

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 7,224 7,945 8,908 10,146 11,972

Normalised EPS (Rmb) 0.78 0.85 0.96 1.09 1.29

Normalised EPS Growth 5.8% 10.0% 12.1% 13.9% 18.0%

FD Normalised P/E (x) 5.64 5.13 4.57 4.02 3.40

DPS (Rmb) 0.20 0.20 0.22 0.26 0.30

Dividend Yield 4.57% 4.57% 5.12% 5.83% 6.88%

BVPS (Rmb) 5.03 5.66 6.41 7.28 8.31

P/BV (x) 0.87 0.77 0.68 0.60 0.53

ROE 16.4% 16.0% 15.9% 15.9% 16.5%

% Change In Normalised EPS Estimates 0% 0% 0%

Normalised EPS/consensus EPS (x) 1.04 1.09 1.14

82.0

90.8

99.5

108.3

117.0

4.20

4.70

5.20

5.70

6.20


10

20

30

40


Vo

l m




Banks│Hong Kong│Chongqing Rural Comm Bank│October 5, 2017

75

A well-managed city commercial bank


We value CQRCB using a stress test-adjusted Gordon Growth model (GGM).


Our key valuation assumptions are a COE of 13.8% (an increase from 12.8% previously to reflect a higher beta given its relatively small size and lack of geographically-diversified risk, as its credit risks are heavily concentrated in the Chongqing region), a sustainable growth (g) assumption of 3% (unchanged), an initial sustainable ROE assumption of 16.5% (unchanged) based on FY19F ROE and an asset quality and investor compensation valuation discount of 24% (previously 26%), which gives a stress test-adjusted target 1H18F P/BV multiple of 0.95x (previously 1.02x). This implies a sustainable ROE assumption of 13.3% (previously 13.0%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).










securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%

Earnings impact* -20% -20% -10% -20% -28% -14% -32% -29% -15%

ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





76








Under our stress test, CQRCB does not need to raise ordinary equity capital.



In CQRCB’s case, we estimate that the ‘true’ corporate NPL ratio could rise to the 12.8% level before it would need to raise ordinary equity capital.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x

Final TP (HK$)


(1H18F)


ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


77

Key downside risks are worse-than-expected asset quality trends and greater-than-expected deposit competition in the Chongqing region. Potential catalysts for re-rating include better-than-expected credit costs and net interest margins, driving stronger earnings growth.


78



Profit & loss

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 19.9% 16.8% 9.9% -3.8% 8.6% 17.4% 17.9%

Non interest income 603 1,459 1,733 2,368 2,808 3,335 3,965

yoy 7.3% 142.1% 18.8% 36.6% 18.6% 18.8% 18.9%

Total revenue 16,306 19,808 21,899 21,772 23,884 28,070 33,131

yoy 19.4% 21.5% 10.6% -0.6% 9.7% 17.5% 18.0%


Pre-prov profit 9,098 11,407 12,823 13,321 14,948 17,568 20,735

yoy 20.0% 25.4% 12.4% 3.9% 12.2% 17.5% 18.0%

Provision -1,181 -2,297 -3,236 -2,677 -3,011 -3,972 -4,692


yoy 11.7% 14.0% 5.8% 10.0% 12.1% 13.9% 18.0%

Key balance item

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 205,252 242,198 268,586 300,421 336,472 376,849 422,070


Investments 105,984 134,726 213,384 263,657 323,253 394,725 483,182

Deposits 347,883 409,720 470,228 518,186 570,527 628,336 692,196

Interbank liabilites 103,586 142,303 144,757 134,003 171,515 220,280 283,674

Bonds 2,300 5,000 34,847 58,487 58,487 58,487 58,487



RWA 306,159 413,387 476,413 535,339 603,297 683,746 779,811

Total assets 502,446 618,889 716,805 803,158 905,114 1,025,810 1,169,934

yoy

Loans 18.3% 18.0% 10.9% 11.9% 12.0% 12.0% 12.0%

Interbank assets 27.5% 32.9% -3.5% -1.6% 4.1% 5.6% 6.6%

Investments 1.1% 27.1% 58.4% 23.6% 22.6% 22.1% 22.4%

Deposits 18.1% 17.8% 14.8% 10.2% 10.1% 10.1% 10.2%


Bonds 0.0% 117.4% 596.9% 67.8% 0.0% 0.0% 0.0%



RWA 9.0% 35.0% 15.2% 12.4% 12.7% 13.3% 14.0%

Total assets 15.8% 23.2% 15.8% 12.0% 12.7% 13.3% 14.0%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.64 0.73 0.78 0.85 0.96 1.09 1.29

EPS Growth 12% 14% 6% 10% 12% 14% 18%

BVPS 3.90 4.45 5.03 5.66 6.41 7.28 8.31

BVPS Growth 14% 14% 13% 12% 13% 14% 14%

ROAE 17.6% 17.6% 16.4% 16.0% 15.9% 15.9% 16.5%

ROAA 1.28% 1.22% 1.08% 1.05% 1.04% 1.05% 1.09%

ROARWA 2.0% 1.9% 1.6% 1.6% 1.6% 1.6% 1.6%

PPOPOARWA 3.1% 3.2% 2.9% 2.6% 2.6% 2.7% 2.8%

DPS 0.19 0.20 0.20 0.20 0.22 0.26 0.30

Payout ratio 29% 27% 26% 23% 23% 23% 23%

Core tier 1 ratio 11.9% 10.1% 9.9% 9.9% 9.9% 9.9% 9.9%

Tier 1 ratio 11.9% 10.1% 9.9% 9.9% 9.9% 9.9% 9.9%

Total CAR 13.6% 12.4% 12.1% 12.7% 12.6% 12.5% 12.4%

Equity/Assets 7.8% 7.2% 7.0% 7.0% 7.1% 7.1% 7.1%


NPL ratio 0.80% 0.78% 0.98% 0.96% 1.00% 0.99% 0.97%



NPL coverage 431% 460% 420% 428% 400% 412% 429%

LLR to loan 3.46% 3.58% 4.11% 4.10% 4.02% 4.07% 4.18%




Credit cost 0.51% 0.82% 1.17% 0.94% 0.95% 1.11% 1.17%


79

BY THE NUMBERS


15.00%

15.44%

15.88%

16.31%

16.75%

17.19%

17.63%

18.06%

18.50%

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30


P/BV vs ROE


4.0%

6.2%

8.4%

10.7%

12.9%

15.1%

17.3%

19.6%

21.8%

24.0%

3.10

3.60

4.10

4.60

5.10

5.60

6.10

6.60

7.10

7.60


12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

12-mth Fwd Rolling FD Normalised P/E (x) (lhs)

Diluted Normalised EPS Growth (rhs)

Profit & Loss













Exceptional Items

Pre-tax Profit 9,588 10,645 11,937 13,595 16,043

Taxation (2,360) (2,644) (2,964) (3,376) (3,984)



Profit After Tax 7,228 8,001 8,972 10,219 12,059




Preference Dividends (Australia)

Net Profit 7,224 7,945 8,908 10,146 11,972

Normalised Net Profit 7,228 8,001 8,972 10,219 12,059















80



Balance Sheet


Total Gross Loans 500,400 537,111 579,387 628,537 684,667

Liquid Assets & Invst. (Current) 213,384 263,657 323,253 394,725 483,182


Total Gross Int. Earning Assets 713,784 800,768 902,640 1,023,262 1,167,848


Total Net Interest Earning Assets 702,739 788,463 889,112 1,007,914 1,150,219






Total Assets 716,805 803,158 905,114 1,025,810 1,169,934

Customer Interest-Bearing Liabilities 470,228 518,186 570,527 628,336 692,196

Bank Deposits 150,476 158,958 201,460 256,214 326,795


Total Interest-Bearing Liabilities 655,551 735,631 830,475 943,038 1,077,478



Total Liabilities 668,517 748,968 843,812 956,375 1,090,815



Total Equity 48,288 54,190 61,302 69,436 79,119

Key Ratios






Cost Of Funds 2.46% 1.94% 2.20% 1.89% 1.79%










Key Drivers


Loan Growth (%) 10.9% 11.9% 12.0% 12.0% 12.0%




Net NPL Ratio (%) 1.0% 1.0% 1.0% 1.0% 1.0%


GP Ratio (%) 4.3% 4.3% 4.2% 4.2% 4.4%

Tier 1 Ratio (%) 9.9% 9.9% 9.9% 9.9% 9.9%

Total CAR (%) 19.4% 23.6% 22.3% 21.0% 19.9%

Deposit Growth (%) 14.8% 10.2% 10.1% 10.1% 10.2%


Gross NPL Ratio (%) 1.0% 1.0% 1.0% 1.0% 1.0%



Company Note



Insert

ICBC Strong capital and superior profitability ■ We raise our target price by 17% due to a lower asset quality stress test-adjusted

valuation discount of 28% (vs. 31% previously). ■ This is driven by a 1% pt cut in our ‘true’ corporate NPL ratio assumption (that is



continue to spur an accelerating recovery in ICBC’s earnings growth in FY17F. ■ Our target price is raised to HK$7.40 (previously HK$6.30). Maintain Add.

1% pt cut in the ‘true’ corporate NPL ratio drives 17% TP increase We employ a stress test-adjusted GGM to value ICBC, with asset quality valuation discounts derived from this stress test, a key variable of which is the ‘true’ corporate NPL ratio assumption (see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 for

more details). Our more bullish asset quality outlook sees us cut this ‘true’ corporate NPL ratio assumption, which results in our target price rising by 17% to HK$7.40.

One of the best capitalised of the big four banks, with a low LDR ICBC’s core tier 1 ratio of 12.7% at end-1H17 was on par with CCB as the highest among peers and above the big four banks’ average of 11.8%. Its loan-to-deposit ratio (LDR) was also low at 72.9% vs. sector average of 76.4% in 1H17. We think investors are more likely to pay a valuation premium for strongly-capitalised banks with low LDR, given the current environment of elevated interest rates providing near-term tailwind to net interest margins (NIM), as interbank assets and investment securities reprice upwards.

NIM to continue trending upwards In addition to higher yields on interbank assets and investment securities, we see the uptrend in loan yields as another tailwind for NIM, an arguably more important one as it comprises a larger proportion of interest-earning assets than interbank assets and investment securities Rising loan yields (both corporate and mortgages) should see NIM continuing to rise, not only in 2H17F but also well into FY18F (see “Inflection point” dated

9 Aug 2017 for more details).

Earnings recovery to strengthen The rising NIM, together with falling credit costs (see “Asset quality to believe or not to believe” dated 20 Apr 2017) are likely to be the key drivers of the strengthening China

banks earnings recovery. We see loan book de-risking (where growth of mortgages and other consumer loans continues to outpace corporate loans) continuing in 2H17F, FY18F and FY19F. With credit cost generation of mortgages estimated to be less than one-tenth of corporate loans, this provides a favourable tailwind to the credit cost outlook of ICBC.

ICBC is one of the best-managed China banks ICBC’s historical cost-to-income ratio, ROA and ROE are better than its peer group average. ICBC’s 1H17 cost-to-income ratio was the second best of the big four banks at 23.8%, below the big four banks’ average of 28.7% and listed peer average of 28.8%. Meanwhile, its 1H17 ROA was 1.24% (third-highest among peers) vs. sector average of 1.13% and big four banks’ average of 1.19%. Its 1H17 ROE of 16.2% in 1H17 was in line with the sector average and big four banks’ average of 16.2%.

One of our sector top picks ICBC remains one of our sector top picks. There are no changes to our earnings estimates or ratings but we increase our stress test-adjusted GGM-derived TP to HK$7.40 (up 17%). (See pages 2-3 for valuation and risks.)


Hong Kong





Up/downside: 16.2%


Reuters: 1398.HK

Bloomberg: 1398 HK


HK$2,457,495m


HK$1,915m




No change.

Source: Bloomberg


Relative (%) 8.1 16.6 8.9

Major shareholders % held Central Huijin 34.7

Insert

Analyst(s)

Michael CHANG







Net Profit (Rmbm) 274,800 273,799 282,666 302,645 334,174

Core EPS (Rmb) 0.77 0.77 0.79 0.85 0.94

Core EPS Growth (1.1%) (0.8%) 3.2% 7.1% 10.4%

FD Core P/E (x) 7.01 7.07 6.84 6.39 5.79

DPS (Rmb) 0.23 0.23 0.24 0.26 0.29

Dividend Yield 4.30% 4.32% 4.46% 4.77% 5.27%

BVPS (Rmb) 4.80 5.29 5.84 6.45 7.13

P/BV (x) 1.13 1.03 0.93 0.84 0.76

ROE 17.1% 15.2% 14.3% 13.8% 13.8%



89.0

94.0

99.0

104.0

109.0

114.0

4.20

4.70

5.20

5.70

6.20

6.70


500

1000


Vo

l m




Banks│Hong Kong│ICBC│October 5, 2017

82

Strong capital and superior profitability


Stress test-adjusted Gordon Growth model

We value ICBC using a stress test-adjusted Gordon Growth model (GGM).

This is to explicitly take into account investors’ lack of faith in China banks’ book values, and concerns that worsening asset quality and rising shadow banking exposure could erode book values, with some banks potentially needing to raise capital.

Our key valuation assumptions are a COE of 10.7% (unchanged), a sustainable growth assumption (g) of 3% (unchanged), an initial sustainable ROE assumption of 13.8% (based on FY19F ROE) (unchanged), and an asset quality and investor compensation valuation discount of 28% (previously 31%), which gives a stress test-adjusted 1H18F P/BV of 1.02x (previously 0.97x). This implies a sustainable ROE assumption of 10.9% (previously 10.5%). We also update our Rmb/HK$ assumption and now use an exchange rate of 1.18 (previously 1.06).

Our asset quality and investor compensation valuation discount was derived under a stress test of the listed banks under our coverage, where we assume a ‘true’ corporate NPL ratio of 9% (previously 10%). We then take into account the composition of each bank’s balance sheet, off-balance sheet exposures, potential investor compensation liability for defaulting wealth management products, provisioning buffers and capital ratios for a material rise in their NPL ratios.

Such a stress test thus also takes into account our perception that investors lack faith in the book values reported by the China banks. For a much more detailed description of the stress test, please see “A balance sheet driven multiple re-rating” dated 4 Oct 2017 or “Asset quality: To believe or not to believe” dated 20 Apr 2017.

The results of this stress test can be seen in Figure 1, with our adjusted asset quality and investor compensation valuation discount of 28% (previously 31%) derived by inputting into a GGM, the estimated BVPS dilution impact under the stress test with the ROE impact.







securities -1% -1% -1% -1% -2% -2% -6% -6% -6%


compensation -2% -1% 0% -1% -2% -2% -2% -3% -1%


reqmts. (RMB m) 0 0 0 0 0 0 38,307 21,587 0



BVPS dilution -14% -15% -7% -13% -17% 10% -12% -26% -13%


ROE impact* -1.7% -1.7% -1.1% -1.6% -2.1% -1.5% -1.5% -2.4% -1.6%





83








Under our stress test, ICBC does not need to raise ordinary equity capital.

Figure 5: Only two banks in our coverage need to raise capital, in our view – CITIC and MSB


In ICBC’s case, we estimate that the ‘true’ corporate NPL ratio could rise up to the 19.7% level before it would need to raise ordinary equity capital.



1H18F BVPS (Rmb)

FY19F


Initial target

P/BV (1H18F)

ICBC 6.15 13.8% 10.7% 8% 3% 0.97 3% 1.40x

CCB 7.25 14.0% 10.7% 8% 3% 0.97 3% 1.42x

BOC 5.07 12.4% 10.7% 8% 3% 0.97 3% 1.21x

ABC 4.45 14.3% 12.3% 8% 3% 1.16 3% 1.22x

BOCOM 8.72 12.0% 11.1% 8% 3% 1.01 3% 1.11x

CMB 19.23 18.6% 11.5% 8% 3% 1.06 3% 1.84x

CITIC 8.10 12.0% 12.7% 8% 3% 1.21 3% 0.93x

MSB 10.85 14.9% 12.6% 8% 3% 1.20 3% 1.25x

CQRCB 6.85 16.5% 13.8% 8% 3% 1.35 3% 1.25x

Initial target P/BV

(1H18F)

Initial target

price (HK$)

Asset quality /

Investor

compensation

valuation discount

Stress test

adjusted

target price

(HK$)


P/BV (1H18F)

ICBC 1.40x 10.16 -28% 7.40 1.02x

CCB 1.42x 12.19 -28% 8.80 1.03x

BOC 1.21x 7.27 -28% 5.20 0.87x

ABC 1.22x 6.44 -17% 5.40 1.03x

BOCOM 1.11x 11.45 -37% 7.20 0.70x

CMB 1.84x 41.75 -22% 32.50 1.43x

CITIC 0.93x 8.92 -39% 5.40 0.56x

MSB 1.25x 15.99 -41% 9.40 0.73x

CQRCB 1.25x 10.11 -24% 7.70 0.95x



ROE

ICBC 7.40 1.02x 10.9%

CCB 8.80 1.03x 10.9%

BOC 5.20 0.87x 9.7%

ABC 5.40 1.03x 12.5%

BOCOM 7.20 0.70x 8.7%

CMB 32.50 1.43x 15.2%

CITIC 5.40 0.56x 8.4%

MSB 9.40 0.73x 10.0%

CQRCB 7.70 0.95x 13.3%


Core tier 1 ratio 13.3% 13.2% 11.8% 10.8% 11.4% 11.2% 8.4% 9.0% 9.9%







raising

19.7% 19.1% 17.2% 15.3% 12.3% 15.3% 5.7% 7.3% 12.8%


84

Key downside risks are worse-than-expected asset quality trends and greater-than-expected mortgage competition. A potential re-rating catalyst includes further southbound flow under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows highly correlated to expectations of renminbi depreciation. ICBC has historically been one of the bigger beneficiaries of southbound buying.


85



Profit & loss

(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F


yoy 6.1% 11.3% 2.9% -7.1% 7.0% 10.7% 10.2%


yoy 21.2% 4.3% 13.8% 5.6% 7.7% 9.4% 9.5%

Total revenue 578,901 634,858 668,733 641,681 687,697 759,161 835,256

yoy 9.3% 9.7% 5.3% -4.0% 7.2% 10.4% 10.0%


Pre-prov profit 374,761 416,184 447,898 448,569 491,052 542,081 594,028

yoy 10.3% 11.1% 7.6% 0.1% 9.5% 10.4% 9.6%



yoy 10.1% 5.0% -0.4% -0.4% 3.2% 7.1% 10.4%


(Rmb m) 2013 2014 2015 2016 2017F 2018F 2019F

Loans 9,922,374 11,026,331 11,933,466 13,056,846 14,111,186 15,193,691 16,359,237

Interbank assets 1,049,887 1,251,238 1,680,126 1,553,100 1,708,213 1,841,476 2,013,894

Investments 4,322,244 4,433,237 5,009,963 5,378,485 5,668,748 5,811,507 6,010,498

Deposits 14,620,825 15,556,601 16,281,939 17,825,302 19,005,234 20,191,234 21,455,033

Interbank liabilites 1,568,559 1,920,196 2,603,051 2,606,105 2,841,710 2,925,128 3,012,717

Bonds 253,018 279,590 306,622 357,937 375,834 394,626 414,357

Common shareholders' equity 1,274,134 1,496,431 1,710,099 1,883,700 2,082,860 2,299,295 2,541,165

Total shareholders' equity 1,278,463 1,537,304 1,800,519 1,981,163 2,181,207 2,398,588 2,641,501

RWA 11,982,187 12,475,939 13,216,687 14,564,617 15,550,271 16,458,756 17,432,676

Total assets 18,917,752 20,609,953 22,209,780 24,137,265 25,770,744 27,276,333 28,890,366

yoy

Loans 12.7% 11.1% 8.2% 9.4% 8.1% 7.7% 7.7%

Interbank assets -11.1% 19.2% 34.3% -7.6% 10.0% 7.8% 9.4%

Investments 5.8% 2.6% 13.0% 7.4% 5.4% 2.5% 3.4%

Deposits 7.2% 6.4% 4.7% 9.5% 6.6% 6.2% 6.3%


Bonds 9.0% 10.5% 9.7% 16.7% 5.0% 5.0% 5.0%



RWA 26.0% 4.1% 5.9% 10.2% 6.8% 5.8% 5.9%

Total assets 7.8% 8.9% 7.8% 8.7% 6.8% 5.8% 5.9%


2013 2014 2015 2016 2017F 2018F 2019F

EPS 0.75 0.78 0.77 0.77 0.79 0.85 0.94

EPS Growth 10% 5% -2% 0% 3% 7% 10%

BVPS 3.63 4.23 4.80 5.29 5.84 6.45 7.13

BVPS Growth 13% 17% 13% 10% 11% 10% 11%

ROAE 21.9% 19.9% 17.1% 15.2% 14.3% 13.8% 13.8%

ROAA 1.4% 1.4% 1.3% 1.2% 1.1% 1.1% 1.2%

ROARWA 2.4% 2.3% 2.1% 2.0% 1.9% 1.9% 2.0%

PPOPOARWA 3.5% 3.4% 3.5% 3.2% 3.3% 3.4% 3.5%

DPS 0.26 0.26 0.23 0.23 0.24 0.26 0.29

Payout ratio 35% 33% 30% 30% 30% 30% 30%

Core tier 1 ratio 10.6% 11.9% 12.9% 12.9% 13.3% 13.9% 14.5%

Tier 1 ratio 10.6% 12.2% 13.5% 13.4% 13.9% 14.4% 15.0%

Total CAR 13.1% 14.5% 15.2% 14.6% 15.5% 15.9% 16.5%

Equity/Assets 7.2% 8.0% 8.8% 8.9% 9.2% 9.6% 10.0%


NPL ratio 0.94% 1.13% 1.50% 1.62% 1.61% 1.60% 1.59%



NPL coverage 257% 207% 156% 137% 140% 150% 160%

LLR to loan 2.43% 2.34% 2.35% 2.22% 2.26% 2.40% 2.54%




Credit cost 0.41% 0.54% 0.75% 0.69% 0.86% 0.96% 0.96%


86

BY THE NUMBERS


12.0%13.2%14.4%15.6%16.8%18.0%19.2%20.4%21.6%22.8%24.0%

0.500.600.700.800.901.001.101.201.301.401.50


P/BV vs ROE


-10.0%

-5.7%

-1.4%

2.9%

7.1%

11.4%

15.7%

20.0%

3.90

4.40

4.90

5.40

5.90

6.40

6.90

7.40





Profit & Loss









Pretax Income/(Loss) from Assoc. 2,330 2,604 2,604 2,604 2,604




Exceptional Items

Pre-tax Profit 363,235 363,279 374,856 400,940 442,104

Taxation (85,515) (84,173) (86,855) (92,899) (102,437)



Profit After Tax 277,720 279,106 288,000 308,041 339,667

Minority Interests (589) (857) (884) (946) (1,043)

Pref. & Special Div (2,331) (4,450) (4,450) (4,450) (4,450)


Net Profit 274,800 273,799 282,666 302,645 334,174
















87



Balance Sheet









Other Non-Interest Earning Assets 807,246 1,087,558 1,250,270 1,444,256 1,572,168

Total Non-Interest Earning Assets 807,246 1,087,558 1,250,270 1,444,256 1,572,168



Total Assets 22,209,780 24,137,265 25,770,744 27,276,333 28,890,366


Bank Deposits 2,603,051 2,606,105 2,841,710 2,925,128 3,012,717








Total Equity 1,800,519 1,981,163 2,181,207 2,398,588 2,641,501

Key Ratios






Cost Of Funds 1.92% 1.57% 1.75% 1.64% 1.53%










Key Drivers


Loan Growth (%) 8.2% 9.4% 8.1% 7.7% 7.7%




Net NPL Ratio (%) 1.5% 1.6% 1.6% 1.6% 1.6%


GP Ratio (%) 2.4% 2.3% 2.3% 2.5% 2.6%

Tier 1 Ratio (%) 13.5% 13.4% 13.9% 14.4% 15.0%

Total CAR (%) 17.5% 17.1% 17.9% 18.3% 18.9%

Deposit Growth (%) 4.7% 9.5% 6.6% 6.2% 6.3%


Gross NPL Ratio (%) 1.5% 1.6% 1.6% 1.6% 1.6%



88

DISCLAIMER #03

The content of this report (including the views and opinions expressed therein, and the information comprised therein) has been prepared by and belongs to CIMB and is distributed by CIMB.

This report 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 where such distribution, publication, availability or use would be contrary to law or regulation.

By accepting this report, the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein (including the “Restrictions on Distributions” set out below). Any failure to comply with these limitations may constitute a violation of law. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. CIMB has no, and will not accept any, obligation to (i) check or ensure that the contents of this report remain current, reliable or relevant, (ii) ensure that the content of this report constitutes all the information a prospective investor may require, (iii) ensure the adequacy, accuracy, completeness, reliability or fairness of any views, opinions and information, and accordingly, CIMB, or any of their respective affiliates, or its related persons (and their respective directors, associates, connected persons and/or employees) shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof. In particular, CIMB disclaims all responsibility and liability for the views and opinions set out in this report.

Unless otherwise specified, this report is based upon sources which CIMB considers to be reasonable. Such sources will, unless otherwise specified, for market data, be market data and prices available from the main stock exchange or market where the relevant security is listed, or, where appropriate, any other market. Information on the accounts and business of company(ies) will generally be based on published statements of the company(ies), information disseminated by regulatory information services, other publicly available information and information resulting from our research.

Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and those investing may, depending on the investments in question, lose more than the initial investment. No report shall constitute an offer or an invitation by or on behalf of CIMB or its affiliates to any person to buy or sell any investments.

CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMB, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

CIMB or its affiliates may enter into an agreement with the company(ies) covered in this report relating to the production of research reports. CIMB may disclose the contents of this report to the company(ies) covered by it and may have amended the contents of this report following such disclosure.

The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.

Reports relating to a specific geographical area are produced by the corresponding CIMB entity as listed in the table below. The term “CIMB” shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, CIMB Group Holdings Berhad ("CIMBGH") and its affiliates, subsidiaries and related companies.

Country CIMB Entity Regulated by

Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong

India CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI)

Indonesia PT CIMB Securities Indonesia Financial Services Authority of Indonesia

Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia

Singapore CIMB Research Pte. Ltd. Monetary Authority of Singapore

South Korea CIMB Securities Limited, Korea Branch Financial Services Commission and Financial Supervisory Service

Thailand CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand

(i) As of October 4, 2017, CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:


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(a) Agricultural Bank of China, Bank of China, China Construction Bank, ICBC

(ii) As of October 5, 2017, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affil iates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates’ clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto.

Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report.

The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cth) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. You represent and warrant that if you are in Australia, you are a “wholesale client”. This research is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of the individual recipient. CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited do not hold, and are not required to hold an Australian financial services licence. CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited rely on “passporting” exemptions for entities appropriately licensed by the Monetary Authority of Singapore (under ASIC Class Order 03/1102) and the Securities and Futures Commission in Hong Kong (under ASIC Class Order 03/1103).

Canada: This research report has not been prepared in accordance with the disclosure requirements of Dealer Member Rule 3400 – Research Restrictions and Disclosure Requirements of the Investment Industry Regulatory Organization of Canada. For any research report distributed by CIBC, further disclosures related to CIBC conflicts of interest can be found at https://researchcentral.cibcwm.com .

China: For the purpose of this report, the People’s Republic of China (“PRC”) does not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region or Taiwan. The distributor of this report has not been approved or licensed by the China Securities Regulatory Commission or any other relevant regulatory authority or governmental agency in the PRC. This report contains only marketing information. The distribution of this report is not an offer to buy or sell to any person within or outside PRC or a solicitation to any person within or outside of PRC to buy or sell any instruments described herein. This report is being issued outside the PRC to a limited number of institutional investors and may not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose.

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Germany: This report is only directed at persons who are professional investors as defined in sec 31a(2) of the German Securities Trading Act (WpHG). This publication constitutes research of a non-binding nature on the market situation and the investment instruments cited here at the time of the publication of the information.

The current prices/yields in this issue are based upon closing prices from Bloomberg as of the day preceding publication. Please note that neither the German Federal Financial Supervisory Agency (BaFin), nor any other supervisory authority exercises any control over the content of this report.

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK.

CIMB Securities Limited does not make a market on other securities mentioned in the report.

None of the analyst(s) or the associates serve as an officer of the listed corporation mentioned in this report.

CIMB does not have an officer serving in any of the listed corporation mentioned in this report

CIMB does not receive any compensation or other benefits from any of the listed corporation mentioned, relating to the production of research reports.

India: This report is issued and distributed in India by CIMB Securities (India) Private Limited (“CIMB India”) which is registered with the National Stock Exchange of India Limited and BSE Limited as a trading and clearing member under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. In accordance with the provisions of Regulation 4(g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CIMB India is not required to seek registration with the Securities and Exchange Board of India (“SEBI”) as an Investment Adviser. CIMB India is registered with SEBI as a Research Analyst pursuant to the SEBI (Research Analysts) Regulations, 2014 ("Regulations").


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This report does not take into account the particular investment objectives, financial situations, or needs of the recipients. It is not intended for and does not deal with prohibitions on investment due to law/jurisdiction issues etc. which may exist for certain persons/entities. Recipients should rely on their own investigations and take their own professional advice before investment.

The report is not a “prospectus” as defined under Indian Law, including the Companies Act, 2013, and is not, and shall not be, approved by, or filed or registered with, any Indian regulator, including any Registrar of Companies in India, SEBI, any Indian stock exchange, or the Reserve Bank of India. No offer, or invitation to offer, or solicitation of subscription with respect to any such securities listed or proposed to be listed in India is being made, or intended to be made, to the public, or to any member or section of the public in India, through or pursuant to this report.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

CIMB Securities (India) Pte Ltd has not received any investment banking related compensation from the companies mentioned in the report in the past 12 months.

CIMB Securities (India) Pte Ltd has not received any compensation from the companies mentioned in the report in the past 12 months.

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (“CIMBI”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to update its opinion or the information in this research report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable Indonesian capital market laws and regulations.

This research report is not an offer of securities in Indonesia. The securities referred to in this research report have not been registered with the Financial Services Authority (Otoritas Jasa Keuangan) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market law and regulations.

Ireland: CIMB is not an investment firm authorised in the Republic of Ireland and no part of this document should be construed as CIMB acting as, or otherwise claiming or representing to be, an investment firm authorised in the Republic of Ireland.

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New Zealand: In New Zealand, this report is for distribution only to persons who are wholesale clients pursuant to section 5C of the Financial Advisers Act 2008.

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Recipients of this report are to contact CIMB Research Pte Ltd, 50 Raffles Place, #19-00 Singapore Land Tower, Singapore in respect of any matters arising from, or in connection with this report. CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CIMBR directly, you may not rely, use or disclose to anyone else this report or its contents.

If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. If the recipient is an accredited investor, expert investor or institutional investor, the recipient is deemed to acknowledge that CIMBR is exempt from certain requirements under the FAA and its attendant regulations, and as such, is exempt from complying with the following : (a) Section 25 of the FAA (obligation to disclose product information); (b) Section 27 (duty not to make recommendation with respect to any investment product without having a reasonable basis where you may be reasonably expected to rely on the recommendation) of the FAA; (c) MAS Notice on Information to Clients and Product Information Disclosure [Notice No. FAA-N03]; (d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16]; (e) Section 36 (obligation on disclosure of interest in securities), and (f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permitted by applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institutional investor acknowledges that a CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA.

CIMB Research Pte Ltd ("CIMBR"), its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMBR, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.


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As of October 4, 2017, CIMBR does not have a proprietary position in the recommended securities in this report.

CIMB Research Pte Ltd does not make a market on other securities mentioned in the report.

CIMB Securities Singapore Pte Ltd does not make a market on other securities mentioned in the report.

CIMB Bank Berhad, Singapore branch does not make a market on other securities mentioned in the report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch (“CIMB Korea”) which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. In South Korea, this report is for distribution only to professional investors under Article 9(5) of the Financial Investment Services and Capital Market Act of Korea (“FSCMA”).

Spain: This document is a research report and it is addressed to institutional investors only. The research report is of a general nature and not personalised and does not constitute investment advice so, as the case may be, the recipient must seek proper advice before adopting any investment decision. This document does not constitute a public offering of securities.

CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.

Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research).

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no obligation to update its opinion or the information in this research report.

If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient are unaffected.

CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, ANAN, AOT, AP, BA, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEC, BEM, BJC, BH, BIG, BLA, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, GFPT, GLOBAL, GLOW, GPSC, GUNKUL, HMPRO, INTUCH, IRPC, ITD, IVL, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MALEE, MEGA, MINT, MONO, MTLS, PLANB, PSH, PTL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, S, SAWAD, SCB, SCC, SCCC, SIRI, SPALI, SPRC, STEC, STPI, SUPER, TASCO, TCAP, THAI, THANI, THCOM, TISCO, TKN, TMB, TOP, TPIPL, TRUE, TTA, TU, TVO, UNIQ, VGI, WHA, WORK.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK. Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment


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research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on other securities mentioned in the report.

Neither CIMB Securities (USA) Inc., nor its affiliates have managed or co-managed a public offering of any of the securities mentioned in the past 12 months.

Neither CIMB Securities (USA) Inc., nor its affiliates have received compensation for investment banking services from any of the company mentioned in the past 12 months.

Neither CIMB Securities (USA) Inc., nor its affiliates expects to receive or intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016

AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared, AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BJCHI – Good, Declared, BLA – Very Good, Certified, BPP – not available, n/a, BR - Good, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GGC – not available, n/a, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, III – not available, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MACO – Very Good, n/a, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PLAT – Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH – Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPA - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TNR – not available, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, TVO – Very Good, Declared UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into:

- Companies that have declared their intention to join CAC, and

- Companies certified by CAC

Rating Distribution (%) Inv estment Banking clients (%)

Add 51.2% 5.5%

Hold 35.7% 3.1%

Reduce 11.9% 0.1%

Distribution of stock ratings and inv estment banking clients for quarter ended on 30 June 2017

1288 companies under cov erage for quarter ended on 30 June 2017


93

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

Documents

Banks China Overweight (no change) Balance sheet … in 1H17 We cut the ‘true’ corporate NPL ratio assumption embedded in our stress test- ... We stress tested each bank’s loan