Expect further re-rating. Remain Overweight

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 27 January 2015 Asia Pacific/China Equity Research Financials / Banks (Diversified Financials CN (Asia)/Banks CN (Asia)) China Banks in 2015 COMMENT Expect further re-rating. Remain Overweight ■ Positive on banks given accommodative monetary policy and reduced asset quality concern. We expect China banks' performance to remain strong in 2015 and the sector to be further re-rated to 1.2x forward P/B. We also expect that accommodative monetary policy (lower COE and more active resident asset allocation into equities) and higher asset quality confidence (a result of lower corporate funding costs and an improved local government financing structure) will result in sector multiple expansion, more than offsetting sector ROE gradually declining due to deregulation. ■ Sector deregulation results in divergence. When interest rates are deregulated and new licences bring in more competition, banks have greater operating flexibility, e.g. asset securitisation and a wider use of new technology. We see a more liberal market allowing divergence, as premium quality banks should defend or even lift ROE when weak ones suffer. ■ Extend forecast period and adjust TPs. We slightly revise down 2015/16 EPS for China banks by 3.6% and 3.4% respectively. We move the TP base from 2015 year-end BVPS to mid-2016 and have modified COE assumption in response to active capital market. We also downgrade five A-share banks (BOC, BCOM, CEB, SPDB, HXB) to NEUTRAL from Outperform and upgrade two H-share banks (CEB and Huishang) to OUTPERFORM. ■ H-share: 12 OPs vs one Neutral; A-share: Six OP vs 10 Neutrals. We value China banks at 0.88-1.51x mid-2016E BVPS. Our top picks are CMB-H and ICBC-H for their premium loan quality, high ROE, strong client base and more balanced revenue structure. Apart from three SOE banks (ICBC, CCB and ABC) and three joint-stock banks (CMB, CIB and MSB) OP, we rate the other A-share banks NEUTRAL after a strong performance (Fig 2). ■ Key risks come from asset quality and reform execution. We estimate spot share prices imply H- and A-share banks will have 11% and 6% sector NPL ratios, meaningfully higher than the current 1%. Also, regulators should properly give incentives to bank managers to carry out challenging reforms. Figure 1: We expect sector profit growth to slow to a level similar or lower than nominal GDP; but expect valuations to recover * We use CCB-H as a proxy for its longest listing track record among large China banks. Source: CBRC, WIND, Credit Suisse estimates 0%5%10%15%20%200420062008201020122014E2016EBanking sector ROE (%, LHS)0%10%20%30%40%50%60%70%200620072008200920102011201220132014E2015E2016ENominal GDP (YoY chg, %)Banking profit (YoY chg, %)0.0x1.0x2.0x3.0x4.0x12m Fwd PB (RHS)*Research Analysts Victor Wang 852 2101 6730 victor.wang@credit-suisse.com Steven Zhu 852 2101 6535 steven.zhu.2@credit-suisse.com Arjan van Veen 852 2101 7508 arjan.vanveen@credit-suisse.com 27 January 2015 China Banks in 2015 2 Figure 2: We rate most H-share banks an OP, but most A-share names NEUTRAL H-share stocks Ticker Rating Rating change Old target price (HK$) New target price (HK$) Implied 12M upside Target P/B TP % chg from old TP Big 4 SOE Banks ICBC-H 1398.HK OP 7.3 8.9 55% 1.43 22% CCB-H 0939.HK OP 7.9 9.8 53% 1.33 24% ABC-H 1288.HK OP 4.7 5.8 48% 1.30 23% BOC-H 3988.HK OP 5.0 6.3 12% 1.17 26% Joint-stock Banks BCOM-H 3328.HK N 6.1 7.9 17% 0.88 30% CMB-H 3968.HK OP 21.9 28.7 57% 1.51 31% CITIC-H 0998.HK OP 6.6 9.0 56% 1.09 43% Minsheng-H 1988.HK OP 11.5 15.5 54% 1.40 35% CEB-H 6818.HK OP ↑ from N 4.3 5.6 28% 0.99 40% City Banks CQRC 3618.HK OP 5.5 6.5 35% 0.99 18% Huishang 3698.HK OP ↑ from N 3.5 4.6 35% 0.96 31% HRB 6138.HK OP 3.7 4.9 69% 1.22 32% BoCQ 1963.HK OP 7.8 10.7 67% 1.19 37% A-share stocks Ticker Rating Rating change Target price (Rmb) Implied 12-m upside Target P/B % chg of Target Price Big 4 SOE Banks ICBC-A 601398.SS OP 5.8 7.1 46% 1.43 22% CCB-A 601939.SS OP 6.3 7.8 27% 1.33 24% ABC-A 601288.SS OP 3.8 4.6 25% 1.30 21% BOC-A 601988.SS N ↓ from OP 4.0 5.1 5% 1.17 28% Joint-stock Banks BCOM-A 601328.SS N ↓ from OP 4.9 6.3 -8% 0.88 29% CMB-A 600036.SS OP 17.5 22.9 52% 1.51 31% CITIC-A 601998.SS N 5.3 7.2 0% 1.09 44% Minsheng-A 600016.SS OP 9.2 12.4 22