Our view
In 2008, we think timing is the prime factor for the H-share banks. As in 2007,
concern over monetary tightening is likely to drag price performance over the first
half. But confirmation of solid EPS growth — even under tightening — on release of
1H08 results in August could spark an autumn rally. We remain Bullish.
Anchor themes
China’s banks have reacted to monetary tightening by redeploying funds into highyield
medium-term loans, from low-yielding discounted bills. This, combined with
rising interest rates, should drive NIM over FY07-08F.
Amid slowing growth and continued asset quality concerns in the US and Europe,
we prefer emerging-market banking exposure, particularly China and India, where
the growth potential looks much greater.
Tightness and fitness
􀁣 H-share banks tend to underperform in the first half
While allowing for their short history, we note the share prices of H-share
banks tend to be weak in 1H but to perform well in 2H. Although the market
may be unsure, we see high earnings visibility for more than 30% EPS
growth and hence a repeat of the historical trading pattern in the current year.
Tax cuts should help.
􀁤 How tight is tight?
We believe Beijing’s key policy goal is to steer the economy back to the
trend growth rate. This means that the central bank should target about 13%
loan growth in 2008F, from 16% in 2007F. Meanwhile, as long as deposit
growth remains strong, by deploying more funds into the interbank and fixed
income markets, banks can maintain high growth in interest-earning assets.
􀁥 You can control either pricing or quantity
We have NIM continuing to rise in 2008F, driven mainly by interest rate
resetting in January. Imposing a loan growth cap may lead to excess loan
demand, which should drive up loan pricing. Anecdotal evidence suggests
this is well under way. Cost of funds, however, should remain low.
􀁦 How bad are sub-prime and NPL risks?
H-share banks’ exposure to sub-prime now stands at less than 1% of total
assets. We expect BOC to accelerate the downsizing of its sub-prime
portfolio. H-share banks’ excessive provision coverage (102%) should
provide a sufficient buffer in case of any sharp deterioration in asset quality.

Contents
Buy in 1H; looking toward 2H rally 3
How tight is tight? 5
Not too tight to breathe, we say 5
We see the loan growth target at 13% y-y for 2008 5
Targeting smoother implementation 5
IEA matters, not just loans 6
You can control either pricing or quantity 7
Restricting supply inevitably leads to higher prices 7
Cost of funds still low 11
Sustainability of fee income growth 13
Fee income up sharply in the past two years 13
But is this sustainable? 14
Don’t worry too much 14
CMB and BOCOM will take the biggest hit 15
Risks should be controllable 16
“Double decline” may come to an end… 16
… but no panic 16
One-offs buffered by tax reduction 18
Watch out for one-off expenses 18
Tax reduction remains a key sweetener 19
Valuations and stock picks 21
Risks 23
Hard landing 23
Sub-prime remains an overhang 23
Company profiles
Bank of China Ltd 25
Bank of Communications 28
China CITIC Bank 31
China Construction Bank 34
China Merchants Bank Co Ltd 37
ICBC 40