Too much premium for defensive play
Banks: Too much premium for defensive play
The 26% rebound in the banking sector since late March has paid too
much premium on the expectation of the China government easing
credit controls. Signs of potential easing have not been detected. A few
reverse changes expected are a decline in banks’ NIM in 3Q08 and
4Q08, and fee-income growth, which is likely to reach 60% y-y in 1Q08,
will head downward to single-digit growth in full-year 2008. Pressure on
asset quality comes from both land developers and exporters, and
government’s potential credit easing is likely to lag deterioration in these
industries. Current valuation of banks is excessive for defensive play.
Insurers: Cost inflation ahead
The premium growth spike in 1Q08 of more than 60% y-y should not be
viewed as a sign of rising insurance awareness of the general public, but
rather as the combined effect of banks’ intensified sales efforts in
bancassurance products and retail investors’ demand for more
defensive investment. However, current growth pattern indicates
declining insurance product margin, which will urge insurers to control
sales growth in 2H08. The benefit from reserved investment gain is likely
to be much smaller than our previous expectation given continued
weakness in the A share market.
Top BUYs: Ping An and ICBC. Top SELL: PICC
Ping An insurance is our top sector pick given the stock plunge since
4Q07 mostly factors in the impact of stock market correction and dilution
effect of potential fund raising. Acquisition of Fortis Asset Management
will shift the company’s earnings driver from one-off investment gains to
sustainable risk-free fee income. Active asset and liability management
and flexible strategy under tightening environment led to ICBC’s more
than 50% earnings growth in 1Q08, and its full year earnings visibility is
higher than industry peers. Change in stipulated auto third-party liability
insurance could push PICC to underwriting loss in 2008. Maintain PICC
as Top SELL.

Contents
Banks: Too much premium for defensive play.. 3
Rebound has factored easing potential 3
How 2Q08 will turn different 6
Insurers: Cost inflation ahead........ 12
Company updates..... 17
Bank of China 18
Bank of Communications 21
China Construction Bank 24
China Insurance 27
China Life 30
China Merchants Bank 33
ICBC 36
PICC 39
Ping An Insurance 42