Macro controls are real, but we expect a
27% PBT CAGR in 2008-09e on strong
fundamentals
􀀗 Yet, greater uncertainty about tighter
controls by the central government
increases policy risk
􀀗 Revising forecasts; increasing equity
risk premium and reducing target prices
by 19-38%
Macro controls and slower economic growth…but
banks’ PBT up 25-39% in 2008e. Loan ceilings slow
growth but stabilised NIM and strong demand for alternative
savings products remain key. We have adjusted our forecasts
to reflect relatively lower growth but still estimate 34-54%
earnings growth after the benefits of lower tax in 2008.
“Black box” nature of foreign currency investment assets
likely to remain a sentiment factor. Global credit markets
continue to impact profits and/or NAV. BOC most exposed
with cUS$89bn US dollar investment assets at end-1H07.
Raising our equity risk premium to reflect greater policy
risks in China. As policy risk increases and bank profits are
c90%+ from China (except BOC), we have raised our equity
risk premium from 5.0% to 6.5% and held our risk-free rate
constant at 4.8%. Our targets are most sensitive to COE and
thus are reduced by 19-38%.
Reiterate Overweight on CCB and BoCOM (adding V);
upgrade ICBC to Overweight from Neutral; and
downgrade BOC to Neutral (V) from Overweight. Favour
big banks (CCB, ICBC) and new emerging business models
(BoCOM). Share prices may be volatile near term; we
suggest investors adopt a trading approach to investing in Hshare
banks or focus on a horizon of longer than one year.

PBT to grow 25-39% in 2008e 7
Revising estimates and
valuations 20
Company profiles 27
Bank of China 29
Bank of Communications 35
China Construction Bank 39
China CITIC Bank 43
China Merchants Bank 45
Industrial and Commercial Bank of China 49
Appendix: Macro / austerity
threats 51
Disclosure appendix 57
Disclaimer 60