The next 3-4 months will see uncertainty, as CBRC and policymakers

restructure and classify LGP loans. However we expect modest rather than

sharp NPL formation, and highlight that the current average 11X/9X

10E/11E post-recap diluted P/E for H-share and A-share banks already

partly discounts the LGP uncertainties. Even after factoring a hard landing

case into our 2011 earnings estimates, P/E valuation post recap would

remain reasonable at average 12X 2011E.

We prefer banks with a strong risk management track record, high

We have lowered earnings/NIM estimates and modestly raised some credit

costs for some major banks to reflect the recent slowdown and low chance

of rate hikes, but have raised earnings for some smaller banks with

improving SME exposure raising NIM sustainability (CMB, Minsheng). Our

revised earnings estimates on average reflect 21% EPS growth in 2011/12.

We have removed CCB H-shares from the C-Buy list in favor of CMB Ashares,

given CCB H’s recent outperformance and valuation. We retain Buy

on CCB H shares on solid fundamentals.

Positives: 1) fiscal reform delivering formal and transparent municipal

borrowing and infrastructure project financing; clarity on LGP provisioning;

2) macro easing. Downside risks: overly harsh NPL/provisioning standards

on LGP loans may lead to risk of significant slowdown of investment/GDP.