Closer to recovery
We are more bullish about an H-share bank earnings recovery in 2010
as NIM contraction is likely to bottom out earlier than we expected back
in May and asset quality remains benign in 2009-10. As NIMs stop
contracting, revenue growth could resume in 2H09, tracking the pace of
balance-sheet expansion. Banking watchdog CBRC will help keep badloan
risks in check. Overweight H-share banks, we would buy on
weakness. Our top picks are China Construction Bank and Bank of China.
Better prospects
􀂉 In May, we lifted our 09-10 earnings forecasts by 6.6% and 15.2% on higher loan
growth, earlier bottoming of NIM and lower credit costs.
􀂉 We are surprised by the improvement in H-share-bank operating performance since
we upgraded the sector to Overweight in May.
􀂉 We now expect EPS growth of 6.2% in 2009 and 22.7% in 2010.
Earlier bottoming of NIM
􀂉 In May we concluded that NIM would bottom by end-09. We now believe this will
happen earlier. Key here is the significant drop in discounted bills in new loans.
􀂉 More A-share IPOs should bring a more favourable deposit mix, hence lower
funding costs, while rising Shibor/bond yields might lift treasury returns.
􀂉 Combining higher loan balances (09CL: Rmb10tn new loans) and better NIM,
we project better net interest income prospects for 2009-10.
Fees and operating costs
􀂉 Fee prospects look bright as sentiment warms and the A-share IPOs return.
􀂉 New China Banking Regulatory Commission (CBRC) rules on wealth management
have little impact.
􀂉 Ex-China Merchants Bank, tight discipline should keep cost growth slow in 2009.
Bad-loan risks well covered
􀂉 A long-term challenge but short term benign, asset quality has been improving.
􀂉 The credit boom to more likely present problems in 2012.
􀂉 Tighter regulation helps to keep risk under wraps, while pre-emptive
preprovisioning means nonperforming-loan risks are well covered for now.
Best of the bunch
􀂉 We like BOC for its earnings recovery and strong asset growth;, and CCB for its
infrastructure niche and strong ROE and NIM prospects.
􀂉 As for smaller banks, Bank of Communications (Bocom) remains our preferred
exposure given its strong position in Shanghai.
􀂉 CMB remains at the bottom of the deck given hefty valuations but the sharpest
earnings decline and the lowest Tier-1 ratio. We don’t rule out capital-raising.

Contents
Executive summary ............................................................................ 3
Better prospects................................................................................. 4
Earlier bottoming of NIM.................................................................. 10
Fees and operating costs.................................................................. 18
Bad-loan risks well covered.............................................................. 22
Best of the bunch ............................................................................. 27
Company profiles
ICBC.......................................31
China Construction Bank ...........39
Bank of China ..........................47
Bank of Communications .................55
China Merchants Bank.....................63
China CITIC Bank ...........................71
Appendices
1: Economic indicators..........................................................................78
2: H-share bank comparisons ................................................................82
3: Global valuations..............................................................................84