Inexpensive with robust earnings
Chinese banks' earnings growth remains robust, with positive
momentum in fee income and nasty credit surprises looking
unlikely. Valuations seem inexpensive versus the region. Our top
pick is ICBC, second CCB. Overweight the sector versus Asian banks.
Recommendation and valuation summary
Price FY09F
B'berg Rec. Price Target +/- PBV PER P/PPOP Yield ROE
(HKD) (HKD) (%) (X) (X) (X) (%) (%)
ICBC 1398 HK BUY 6.10 7.90 29.5 2.28 10.7 7.2 4.9 22.7
CCB 939 HK BUY 7.12 8.60 20.8 2.24 10.3 6.8 4.7 23.3
BoC 3988 HK BUY 3.99 4.80 20.3 1.56 9.2 6.0 4.7 17.7
CMB 3968 HK HOLD 30.80 31.00 0.6 3.42 13.6 9.0 1.1 27.7
CITIC 998 HK HOLD 4.94 4.80 -2.8 1.41 9.6 5.9 2.5 15.7
BoCom 3328 HK HOLD 10.82 10.50 -3.0 2.40 12.2 7.6 2.8 20.9
FY09F valuations assume Rmb appreciation of 12.4% in 2008 and 5.7% in 2009.
Source: ABN AMRO forecasts
Fee income could continue to surprise positively this year
1Q08 fee incomes were well above our expectations, with the big banks showing
annualised growth of 35-40% versus FY07, despite weakness in wealth management.
We estimate that non-wealth management-related fees for the big banks probably
showed annualised growth of over 60% versus FY07 - clear acceleration compared
with the past two years. Scope exists for upward revisions of our fee income
assumptions - 1Q fee income already accounted for 27-29% of our revised FY
forecasts.
Over-reserving cycle looks to be ending
From 2005-07, H-share banks had been putting through stable to higher credit costs
to boost provision coverage from an average 74% to 117%. This is despite declining
NPL ratios (from on average 3.8% to 2.3%) and improving new NPL formations.
Given over 100% provision coverage, this over-reserving cycle looks to be ending, as
indicated by the significant easing of credit cost at most banks in 1Q08.
2007 credit costs enough to cover a moderate deterioration in NPL
With coverage rebuild pressure easing, we estimate that 2007 credit cost levels in
general are sufficient to pay for a 50bp rise in new NPL formations (from 2007 levels)
while maintaining steady provision coverage. We believe ICBC is best positioned in
the sector to absorb credit deterioration, given that in 2007 it had a sector-high credit
cost of 86bp and a substantial decline in new NPL formations (positive momentum for
NPLs to continue declining in 2008).
Inexpensive versus the region, top pick is ICBC
Whilst the sector may consolidate near term following the sharp gains from the March
lows, we remain positive on Chinese banks given valuations that look inexpensive
versus the region, with the big banks on 9.5-11.0x FY09F PE. Earnings growth
remains strong (avg 34% pa in FY08-09F) with positive fee income momentum and
nasty credit surprises unlikely. Our top pick is ICBC (potential for a positive earnings
surprise on fee income and credit cost). Our second pick is CCB (solid earnings
growth, inexpensive valuation). CMB ranks as our least preferred (ROE and earnings
growth pressure due to slowing asset growth and surplus capital build-up). We are
Overweight Chinese banks in the region.
Produced by: ABN AMRO
Bank NV Hong Kong
Branch
www.abnamroresearch.com
Analysts
Simon Ho, CFA
Hong Kong
+852 2700 5160
simon.ho@hk.abnamro.com
Sharnie Wong
+852 2700 5596
sharnie.wong@hk.abnamro.com
38/F Cheung Kong Center, 2 Queen's Road Central, Hong Kong

Contents
B A N K S 1 4 M A Y 2 0 0 8 2
I N D U S T R Y D Y N A M I C S
Fee income could continue to surprise 3
1Q08 fee incomes were well above expectations despite weakness in wealth
management. We estimate non-wealth management related fees for the big
banks probably showed annualised growth of over 60% versus FY07.
Consensus revisions have so far been mild 3
Non-wealth management fees made up the slack 4
S E C T O R D Y N A M I C S
Over-reserving cycle ending 6
From 2005-07, H-share banks have been putting through stable to higher credit
costs to boost provision coverage from an average 74% to 117%. This is despite
declining NPL ratios and improving new NPL formations.
Credit risks have increased 6
But over-reserving cycle seems to be ending 6
Enough to cover a moderate deterioration 8
Big banks’ loan books appear less risky 9
V A L U A T I O N D A T A
Inexpensive versus the region 10
We believe Chinese banks are inexpensive versus the region, with strong earnings
growth. Our sector top pick is ICBC and second pick is CCB. We rank CMB as our
least preferred in the sector.
Raising earnings forecasts, mainly on fee income 10
ICBC is firmly our top pick 12
C O M P A N Y P R O F I L E S
Company profiles 15
Bank of China 16
Bank of Communications 22
China CITIC Bank 27
China Construction Bank 32
China Merchants Bank 38
Industrial & Comm Bank of China 44