5 February, 2014 HONG KONG SECTOR RESEARCH | SEE PAGE 67 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS China Banks Overweight (Unchanged) Latest China trip confirms our optimistic outlook  Minimal NIM pressure from interest rate deregulation.  Only slight rise in NPLs and credit costs in 2013-14. Strong capital positions to sustain dividend payout ratio.  Top BUYs: ABC, BOC, CCB and CQRB. Top SELLs: BOCOM andCMSB. Maintain Overweight. What’s New Our earnings forecasts could be understated. We expect H-share banks’ net profit to grow at 6-14% CAGR during 2012-15. Most banks agree with our projections of stable loan growth, minimalNIM pressure and stable-to-improving cost-income ratio. However, most believe our outlook on asset quality is too conservative (weexpect credit costs of most banks will rise >70bps during 2013-14). Gradual reduction in shadow banking assets. The potential launch of Document No.9 may prompt banks to reduce their directand indirect exposures to shadow banking assets. Banks may be required to make provisions of 1% for these assets under thisdocument. We project an impairment charge of 1.5-2% on these assets of H-share banks for 2014-15. Sustainable dividend payout. No H-share banks indicate they needto replenish their equity capital in 2014-15. Their internal capital generation should be sufficient to support stable loan growth anddividend payout ratio (30-35% for large H-share banks) for 2014-15. What’s Our View H-share banks have underperformed the market recently. Webelieve the market concerns are overdone. We maintain ourOVERWEIGHT rating on China banks. This is due to: (i) China banksconfirm continued net profit growth (and hence, the growth inBVPS) in the coming years; (ii) we expect earnings upgrades for 2014 from some pessimistic sell-side analysts; and (iii) dividendpayout of most banks should be sustainable. Our top picks areAgricultural Bank of China, Bank of China, China Construction Bankand Chongqing Rural Commercial Banks. Analysts Steven ST Chan (852) 2268-0645 stevenchan@kimeng.com.hk Kieran KK Luk (852) 2268-0631 kieranluk@kimeng.com.hk Financial summary of China banks (share price as of 4 Feb 2014) Bank BB SP TP Upside Net profit (CNYb) P/E (x) P/B (x) ROE (%) Yield (%) name code Rating (HKD) (HKD) (%) 2012 2013F 2014F 2012 2013F 2014F 2012 2013F 2014F 2012 2013F 2014F 2012 2013F 2014FABC 1288 HK BUY 3.29 4.60 39.8 145.1 147.4 168.9 5.9 5.8 5.1 1.1 1.0 0.9 20.7 18.4 18.5 5.9 5.2 5.9 BOC 3988 HK BUY 3.21 4.30 34.0 139.4 130.6 155.8 5.1 5.5 4.6 0.9 0.8 0.7 18.0 15.1 16.2 6.8 6.4 7.6 BOCOM 3328 HK SELL 4.91 4.50 (8.4) 58.4 41.8 55.3 5.0 7.0 5.3 0.8 0.7 0.7 17.9 10.6 12.9 6.1 4.3 5.7 BOCQ 1963 HK BUY 4.70 6.60 40.4 1.9 2.3 1.9 4.0 4.4 5.4 0.9 0.8 0.7 26.2 21.9 13.8 1.3 5.7 4.6 CCB 939 HK BUY 5.20 7.25 39.4 193.2 188.8 224.7 5.4 5.5 4.6 1.1 1.0 0.9 22.0 18.8 19.7 6.4 6.3 7.5 CMB 3968 HK HOLD 13.34 13.55 1.6 45.3 46.1 52.4 5.1 5.1 5.2 1.2 1.0 0.9 24.8 19.7 18.3 5.9 5.1 5.8 CMSB 1988 HK SELL 7.45 6.95 (6.7) 37.6 38.9 43.0 4.5 4.3 4.3 1.0 0.9 0.7 25.7 21.9 19.6 5.0 5.2 5.3 CNCB 998 HK HOLD 3.64 3.95 8.5 31.0 29.8 33.6 4.4 4.6 4.1 0.7 0.6 0.6 16.6 14.2 14.4 5.1 5.5 6.2 CQRB 3618 HK BUY 3.24 4.25 31.2 5.4 5.4 5.4 4.5 4.4 4.5 0.8 0.7 0.6 17.9 16.1 14.4 6.6 6.8 6.7 HUSB 3698 HK BUY 3.56 4.05 13.8 4.3 5.0 5.5 5.4 6.3 5.8 1.1 1.0 0.9 22.9 19.2 16.3 3.5 4.8 5.2 ICBC 1398 HK BUY 4.66 5.40 15.9 238.5 229.8 260.6 5.5 5.7 5.0 1.2 1.0 0.9 22.9 19.2 19.2 6.4 6.2 7.0 Source: Company data, Maybank Kim Eng February 5, 2014 2 China Banks Contents Three most important charts/tables ............ 3 Investment summary .............................. 4 Stable loan growth and limited NIM pressure .. 6 Aim to maintain or improve cost efficiency . 10 Asset quality – cautiously stable ............... 12 Capital adequacy – maintaining dividend payout ............................................. 16 Agricultural Bank of China (1288 HK) ......... 22 Bank of China (3988 HK) ........................ 26 Bank of Communications (3328 HK) ........... 30 Bank of Chongqing (1963 HK) .................. 34 China Construction Bank (939 HK) ............. 38 China Merchants Bank (3968 HK) .............. 42 China Minsheng Bank (1988 HK) ................ 46 China CITIC Bank (998 HK) ...................... 50 Chongqing Rural Commercial Bank (3618 HK) 54 Huishang Bank (3698 HK) ....................... 58 Ind’l and Commercial Bank of China (1398 HK) ...................................................... 62 February 5, 2014 3 China Banks Three most important charts/tables Figure 1: Forecast NIM of H-share banks 1Q13 2Q13 3Q13 1H13 2H13F 2012 2013F 2014F ABC 2.78 2.70 2.77 2.74 2.75 2.81 2.74 2.73 BOC 2.22 2.24 2.21 2.23 2.19 2.15 2.21 2.20 BOCOM 2.57 2.54 2.49 2.56 2.48 2.59 2.51 2.46 BOCQ N/A N/A N/A 2.7