􀀗 Economic data supports China’s target
of 8% GDP growth in 2009; the
government’s efforts seem to be working
􀀗 We expect monetary policy to be less
negative for banks – NIM bottoms in
1H09, FY09 profit growth turns positive,
and NPL risks are delayed
􀀗 Prefer mid-sized banks BoCOM and
CITIC in near term on beta convergence.
Upgrade H-shares of BoCOM and CITIC
to OW(V) and CCB to N(V)
The risk of China’s GDP growth falling sharply below 8%
in 2009 now seems more limited. Economic growth likely
bottomed in 1Q09; whilst too early to call a recovery, PMI and
consumption have rebounded from earlier lows. China’s central
government seems intent on achieving 8% growth in 2009.
Monetary policy to stabilise…we cut our forecasts for
additional rate cuts in 2009 to nil. Capital is flowing (e.g.
loans) – one of the goals of China’s aggressive monetary easing
that began in 2H08. Questions about whether loans are reaching
the real economy may remain unsolved in the near term, but the
rise in longer-term loans and project starts indicates capital is
being deployed to support China’s stimulus programme. We
also raise our forecast for new loans to RMB7.6trn in 2009, but
q-o-q growth will slow from 1Q09. This lending volume, no
more rate cuts and improved mix for loans and deposits raise
our 2009e profit forecasts between 15% and 60%.
NPLs unlikely to be a near-term issue but provisions may
be a policy risk. NPL formation may be delayed during this
economic cycle and not appear for several years. However,
the near-term threat to profits may be provisions, which have
become a new policy lever in recent months. As NIM and
profits improve in coming quarters, we believe the risk of
increased coverage requirements through policy will rise.
Upgrade H-shares of BoCOM and CITIC to OW(V) and
CCB to N(V); other ratings unchanged. Beta convergence
pushes mid-size banks into the limelight as risk to economic
growth is reduced. In the near term, we prefer mid-size
banks on greater profit improvement as monetary policy
likely becomes more favourable.

More favourable policies turn
profit growth positive 5
Macro indicators “bottoming”? 5
Monetary easing achieves goal of capital flow 6
Profit growth turns positive 7
Prefer mid-size banks on favourable monetary policy 7
NIM to bottom in 2Q09 9
Macro data may indicate decline is “bottoming” 9
NIM to bottom in 1H09? 12
Beyond 2009…policy remains a critical driver of profits 15
Mid-size banks are likely winners 17
Loan growth revised to
RMB7.6bn in 2009e 18
Quality growth? 18
Lending curbs…again? 20
Revised loan growth lifts 2009e earnings 2-10% 21
NPLs: deferred to later 23
NPL – not a worry for 2009 23
Looking beyond… 24
A-listed company data raises some questions on NPL risks 25
Coverage ratio for SOE banks likely to rise 26
2009: NPL ratio flat to down; coverage likely a policy issue 26
“Worst case” scenario from loan carve-outs of the past 27
Company profiles 29
Bank of China (3988) 31
Bank of Communications (3328) 37
China Construction Bank (939) 43
China CITIC Bank (998) 49
China Merchants Bank (3968) 57
Industrial and Commercial Bank of China (1398) 63
Disclosure appendix 68
Disclaimer 71
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