Contents
Accommodative monetary policy likely to persist in 3Q, though with some risk 3
We think Chinese banks are in a sweet spot under the current macro-economic
environment, as tightening of monetary policy stance seems unlikely yet until signs
of economic recovery turn more visible.
3
Mid-cap banks: rising share of new loans with better mix 4
Following record new loans in 1Q, we estimate state banks’ share of new lending
dropped 5ppt in April and May, while mid-cap banks’ share rose with their increased
share of loans flowing into the real economy.
4
Net interest margin: bottoming earlier than expected 5
We understand state banks’ margin bottomed in April and began to rise in May,
while mid-cap banks’ margins look likely to bottom by the end of 1H09. Higherthanexpected
loan volume and improving mix are the key reasons.
5
Key risk: earlier-than-expected tightening, in view of record new loans 7
A key risk to our positive sector view is if new loans continue to exceed
expectations by a large margin, we think the risk of a sooner-than-expected
tightening cannot be ruled out.
7
Medium-term asset-quality risk will remain an issue for the sector 8
Assuming Rmb8trn-9trn sector new Rmb loans in 2009, system loan growth would
reach 26-30% in the year (versus about 15% growth in 2005-08), and loans-to-GDP
ratio would reach roughly 120% by the end of 2009, one of the highest levels in the
world.
8
Fee income 9
We note China’s GDP per capita of US$3,300 in 2008 is now above the US$3,000-
threshold for a shift towards higher consumer spending. In addition, capital markets
penetration remains low with bank lending still accounting for the lion’s share of
financing.
9
Valuation and stock picks 10
Chinese bank shares have risen about 20% in the past month benefiting from better
global sentiment and strong China economic data. The discount in current P/TCE to
historical average has narrowed from 20% a month ago to less than 8% currently.
10
Appendix: Segmental loan breakdown 16
Company profiles 17
ICBC 18
Bank of China 23
China Construction Bank 28
Bank of Communications 33
China Merchants Bank 38
China CITIC Bank 43
Bank of Beijing 48