September 26 , 201 6 5S9Ì ' 9 ( 0«pg.jrj.com.cn/acc/Res/HK_RES/STOCK/2016/9/26/28aff... · September 26 , 201 6 5S9Ì ... ^ 1.54% ¸©# 2±Cm!t+g 3.17% AL f 3.07% ¸©# 2±Cm!t+g

Banking | Company Research

SWS Research Co. Ltd is a subsidiary of Shenwan Hongyuan Securities. 99 East Nanjing Road, Shanghai | +86 21 2329 7818 www.swsresearch.com

Bringing China to the World

September 26, 2016

买入维持

安全边际交通银行(3328 HK )

Market Data: Sep 23

Closing Price (HK$) 6.25

Price Target (HK$) 7.96

HSCEI 9796

HSCCI 3973

52-week High/Low (HK$) 8.61/5.29

Market Cap (USD Mn) 68,216

Market Cap (HK$ Mn) 528,751

Shares Outstanding (Mn) 74,263

Exchange Rate (RMB-HK$) 1.21

Price Performance Chart:

Source: Bloomberg

Analyst Vivian Xue A0230511110001 BBE746 [email protected]

Related Reports "BANK OF COMMUNICATIONS CO-H (3328 HK ) -Upcoming reform" Nov 2, 2016

Financial summary and valuation 2014 2015E 2016E 2017E 2018E

Net interest income (Rmbm) 134,776 144,172 138,543 147,041 154,146

YOY (%) 3.15 6.97 (3.90) 6.13 4.83

Net income (Rmbm) 65,850 66,528 67,539 69,040 72,742

YOY (%) 5.71 1.03 1.52 2.22 5.36

EPS (Rmb) 0.89 0.90 0.91 0.93 0.98

Diluted EPS (Rmb) 0.89 0.90 0.91 0.93 0.98

BVPS (Rmb) 6.34 7.20 8.51 9.17 9.87

ROAE (%) 14.79 13.23 11.58 10.52 10.29

NPL ratio (%) 1.25 1.51 1.62 1.78 1.95

CAR (%) 14.04 13.01 12.51 12.01 12.31

PE (x) 6.03 5.97 5.88 5.75 5.46

PB (x) 0.84 0.74 0.63 0.58 0.54 Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible

debentures, stock options and warrants, were exercised.

资产配置审慎。在经济放缓的背景下，交通银行的资产配置更加审慎。从资产结构来看，2016 年

上半年交行债券投资占比从 2015 年的 21%上升到 25%。从贷款结构来看，制造业、采矿业和批发零

售业等高风险行业贷款占比由 28.4%下降到了 25.6%，按揭贷款占比由 16.2%上升到了 17.3%。上半

年新增贷款中，按揭贷款占比为 32%。从债券结构来看，按照发行主体划分，政府债券占比由 41%

上升到了 48%，公司债券占比由 28%下降到了 22%；按照持有目的划分，持有至到期债券投资占比

57%上升到了 62%，而应收款项类投资占比由 20%下降到了 17%。基于我们最近对公司的调研，我们

认为公司整体风险偏好持续下行，未来贷款增速会维持在 10%左右。从结构来看，交行会进一步加

大对按揭、消费、地方政府、基建、服务业、计算机和环保等行业的支持力度。

资产质量稳健。因为公司资产与贷款结构的优化、企业偿债能力边际的改善以及不良贷款核销处

置力度加大，交行名义不良率稳定在 1.54%，关注类贷款由 3.17%下降到 3.07%，关注类贷款由

3.04%下降到 1.98%。基于我们对公司的调研，第一轮资产质量风险爆发主要集中于中小企业和民

营企业，这些企业缺乏政府和集团的支持，风险爆发比较迅速，目前已经基本结束，而第二轮风险

主要集中于国有大中型企业，已经开始出现。但是在政府和股东支持下，银行不会轻易抽贷，风险

暴露会相对缓慢和温和，因此我们预计未来银行资产质量恶化的趋势会减缓。

改革陆续落地。15 年六月中，交行深化改革方案获得中华人民共和国国务院批准同意。今年七月

以来，国企改革显著提速，八月国资委宣布国企员工持股试点年内开始。我们认为如果政府要推进

银行业国企员工持股试点，那么交行将是最理想的标的，主要原因在于：（1）交行改革基因优

秀，交行是中国第一家全国股份制银行、第一家完成重组、第一家引入战略境外投资者、第一家境

外公开上市。（2）交行股权基因良好。目前公司已经形成了国有资本(财政部 27%、社保基金 4%，

其他 4%)、境外资本(汇丰银行 19%)和民营资本共有的股权架构，股权分散程度优于其他四大国有

行。（3）交行内生改革诉求最强。我们认为改革将会包括改善公司管理能力，引入股权激励措

施，员工持股计划以及业务导向的改革，诸如撤销和建立特定的业务部门和优化股权机构。我们相

信这些改革能在中长期提高交行的核心竞争力。

担忧过度。由于交行资产质量好于预期，我们上调公司 2016年-2018年 EPS至 0.91元、0.93 元和

0.98 元，对应同比增速 1.5%、2.2%和 5.4%。目前公司估值对应 0.63 倍 2016 年 PB,低于行业平均

0.73 倍的估值。在我们的基础假设下，我们估计公司的 2016年真实不良贷款率为 6.8%，但是公司

的超额拨备、超额资本和估值折价隐含的不良率为 10.6%，这表明公司的资产质量风险已经被充分

反映。在因刺激政策和改革预期推动市场情绪回暖的背景下，我们将 2016 年目标 PB 从 0.75 倍上

调到 0.8倍，目标价从 7.46港币上调到 7.96港币，对应 27%的上行空间，维持买入评级。

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Banking | Company Research

SWS Research Co. Ltd is a subsidiary of Shenwan Hongyuan Securities. 99 East Nanjing Road, Shanghai | +86 21 2329 7818 www.swsresearch.com

Bringing China to the World

Improving assets and loans structure. Amid the economic slowdown, BOCOM is becoming more prudent in asset allocation. In terms of asset structure, the asset exposure to bond investment increased from 21% in 2015 to 25% in 1H16. In terms of outstanding loans structure, the loans exposure to high risky industries like manufacturing, mining and wholesale/retail industries declined from 28% in 2015 to 26% in 1H16 while the loans exposure to home mortgage increased from 16% in 2015 to 17% in 1H16. In terms of incremental loans structure, home mortgage accounted for 32%. In terms of bond investment structure, government bond proportion increased from 41% to 48%, while the corporate bond proportion declined from 28% to 22%. Hold to maturity proportion increased from 57% to 62%, while receivables investment proportion declined from 20% to 17%. According to our recent company visit, most banks believe loans growth of 10% is sustainable, and banks would further increase their loans exposure to home mortgage, consumption loans, local government, infrastructure, service, TMT and renewable energies.

Controllable asset quality risk. The improving bank assets and loans structure, the marginal improvements in enterprises’ solvency, as well as rising NPL write-off and disposals contributed to BOCOM’s stable NPL ratio of 1.54%, declining special mention loans ratio from 3.17% in 2015 to 3.07% in 1H16 and decreasing overdue loans ratio from 3.04% to 1.98%. According to our recent company visit, the first round of asset quality risk release from private companies or SMEs has largely been over, and the second round of asset quality risk release from SOEs and big enterprise has started. But given most of these companies are related to central government or local government, these enterprises have better collateral or potential support, so the deteriorating momentum of bank asset quality would decelerate.

Upcoming reform.In mid-June 2015, BOCOM’s reform scheme obtained the approval of the State Council. Since July 2016, China SOE reform accelerated. We believe BOCOM would be the first choice for the government to pilot its SOE reform in the banking sector, due to three reasons: (1) strong track record of reform and innovation (2)diversified equity structure: state-owned capital (3)strong internal motivation.We believe reforms may also include improving corporate governance improvement, introducing management stock incentive, employee stock ownership programmes and conducting business-oriented reform, spinoff and listing of certain business departments and optimizing share structure.We expect such reforms to improve its competitiveness in the mid-long term.

Concerns overdone. In light of the better than expected asset quality, we revise up our EPS forecasts by 1% to Rmb0.91 in 16E (+1.5% YoY), Rmb0.93 in 17E (+2.2% YoY) and Rmb0.98 in 18E (+5.4% YoY). BOCOM is trading at 0.63x 16E PB as compared to the sector average of 0.73x. Its estimated real NPL ratio in 2016 under our base case would be 6.8%, while its implied NPL ratio using its PB discount and excess provisioning/capital is 10.6% for 16E, indicating its asset quality risks fully priced in. Given the improving market sentiment backed by stimulus and reforms, we revise up its target 16E PB from 0.75x to 0.8x and revise up our target price from HK$7.46 to HK$ 7.96. With 27% upside, we maintain our BUY recommendation.

Please refer to the last page for important disclosures Page 1

September 26, 2016 Banking | Company Research

Improving assets and loans structure Amid the economic slowdown, BOCOM is becoming more prudent in asset allocation. In terms of asset structure, the asset exposure to bond investment increased from 21% in 2015 to 25% in 1H16.

In terms of outstanding loans structure, the loans exposure to high risky industries like manufacturing, mining and wholesale/retail industries declined from 28% in 2015 to 26% in 1H16 while the loans exposure to home mortgage increased from 16% in 2015 to 17% in 1H16. In terms of incremental loans structure, home mortgage accounted for 32%.

In terms of bond investment structure, government bond proportion increased from 41% to 48%, while the corporate bond proportion declined from 28% to 22%. Hold to maturity proportion increased from 57% to 62%, while receivables investment proportion declined from 20% to 17%.

According to our recent company visit, most banks believe loans growth of 10% is sustainable, and banks would further increase their loans exposure to home mortgage, consumption loans, local government, infrastructure, service, TMT and renewable energies.

Fig 1: The asset structure of banks

Average amounts(2015) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Loans and advances to customers 56% 53% 57% 58% 57% 54% 51% 47% 41% 55%

Balances with central bank 15% 15% 15% 15% 14% 12% 11% 11% 12% 14%

Placements with banks and other financial institutions 7% 10% 8% 4% 10% 10% 5% 10% 22% 8%

financial assets hold under resale 0% 0% 0% 2% 0% 0% 2% 13% 0% 1%

Accounts receivable 0% 0% 0% 0% 0% 0% 19% 2% 0% 1%

Bonds 21% 22% 20% 21% 21% 24% 10% 18% 24% 21%

Others 0% 0% 0% 0% -2% 0% 0% 0% 0% 0%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Average amounts(1H16) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Loans and advances to customers 58% 53% 58% 59% 57% 56% 51% 47% 41% 56%

Balances with central bank 13% 14% 13% 14% 14% 11% 9% 9% 11% 13%

Placements with banks and other financial institutions 6% 7% 6% 4% 8% 8% 5% 9% 18% 6%

financial assets hold under resale 0% 0% 0% 1% 0% 0% 1% 9% 0% 1%

Accounts receivable 0% 0% 0% 0% 0% 0% 23% 2% 0% 1%

Bonds 22% 25% 22% 22% 25% 25% 11% 23% 31% 23%

Others 0% 0% 0% 0% -4% 0% 0% 0% 0% 0%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Company data, SWS Research

Fig 2: The liability structure of banks

Average amounts(2015) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Deposits from customers 83% 86% 79% 84% 71% 73% 71% 65% 78% 80%

Deposits and placements from banks

and other financial institutions

0% 0% 0% 0% 0% 23% 25% 24% 18% 4%



Borrowings from banks and other financial

institutions 15% 11% 19% 13% 27% 1% 1% 5% 1% 13%

Financial assets sold under repurchase

agreements 0% 0% 0% 0% 0% 0% 1% 1% 0% 0%

Debt securities issued 2% 0% 2% 3% 4% 4% 2% 5% 3% 2%

Others 0% 3% 0% 0% -2% 0% 0% 0% 0% 0%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Average amounts(1H16) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Deposits from customers 84% 88% 81% 86% 71% 73% 66% 63% 79% 81%

Deposits and placements from banks

and other financial institutions

0% 0% 0% 0% 0% 19% 30% 24% 13% 4%


institutions 14% 9% 17% 11% 28% 2% 2% 8% 3% 12%


agreements 0% 0% 0% 1% 0% 0% 1% 1% 0% 0%

Debt securities issued 2% 0% 2% 2% 5% 6% 2% 4% 5% 2%

Others 0% 3% 0% 1% -4% 0% 0% 0% 0% 0%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Fig 3: The asset yield of banks

Average yield(2015) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB

Loans and advances to customers 5.31% 5.52% 4.88% 5.42% 5.76% 5.94% 5.85% 6.05% 6.63%

Balances with central bank 1.51% 1.58% 1.31% 1.53% 1.46% 1.42% 1.47% 1.53% 1.58%

Placements with banks and other financial institutions 2.52% 3.91% 3.47% 3.91% 3.36% 3.62% 1.92% 3.82% 5.44%

financial assets hold under resale 3.29% 3.90% 4.12%

Accounts receivable 5.20% 6.62%

Bonds 3.94% 4.03% 3.45% 3.97% 4.05% 4.10% 3.86% 4.69% 5.79%

Others 0.07%

Total 4.24% 4.43% 3.96% 4.43% 4.63% 4.72% 4.77% 4.87% 5.56%

Average yield(1H16) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB

Loans and advances to customers 4.43% 4.54% 4.18% 4.46% 4.88% 5.21% 5.07% 5.16% 5.52%

Balances with central bank and other financial institutions 1.54% 1.58% 1.35% 1.52% 1.49% 1.45% 1.54% 1.51% 1.56%

Placements with banks and other financial institutions 2.19% 3.20% 2.77% 2.80% 2.62% 2.39% 2.02% 2.95% 4.24%

financial assets hold under resale 2.62% 2.34% 3.24%

Accounts receivable 4.15% 5.66%

Bonds 3.69% 3.76% 3.17% 3.73% 3.81% 3.56% 3.64% 3.87% 5.03%

Others 0.03%

Total 3.73% 3.83% 3.49% 3.80% 4.05% 4.16% 4.20% 4.15% 4.71%




Fig 4: The liability cost of banks

Average cost(2015) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB

Deposits from customers 1.91% 1.81% 1.94% 1.84% 2.24% 1.80% 2.16% 2.27% 2.12%

Deposits and placements from banks and other financial institutions

2.79% 3.72% 3.48% 4.13%


institutions 1.81% 2.56% 2.01% 2.31% 3.30% 3.45% 3.51% 3.73% 3.56%


agreements 2.72% 2.43% 3.62%

Debt securities issued 3.70% 4.02% 4.07% 3.68% 4.17% 5.24% 4.69% 4.30%

Others 3.43% 3.20% 1.64%

Total 1.94% 1.94% 1.99% 1.97% 2.57% 2.13% 2.64% 2.77% 2.57%

Average cost(1H16) ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB

Deposits from customers 1.60% 1.53% 1.65% 1.52% 1.94% 1.34% 1.77% 1.82% 1.65%

Deposits and placements from banks and other financial institutions

2.45% 2.85% 2.85% 3.40%


institutions 1.69% 2.52% 1.82% 2.08% 2.84% 3.12% 3.08% 2.65% 3.09%


agreements 2.55% 2.49% 2.71%

Debt securities issued 3.47% 3.97% 4.05% 3.34% 3.26% 5.16% 4.31% 3.63%

Others 3.39% 2.73% 3.06%

Total 1.66% 1.67% 1.73% 1.65% 2.22% 1.71% 2.20% 2.27% 2.01%


Fig 5: Improving asset structure


1.2%

0.4%0.9%

1.1%

0.3%

1.8%

-0.2%0.4%

-0.7%

1.4%

3.0%

1.8%

1.0%

4.2%

1.7%

0.5%

5.9%6.5%

-2%

0%

2%

4%

6%

8%

ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB

Loan proportion change Bonds investment proportion change



Fig 6: The loans structure of banks

End of 2015 Manufacturing Wholesale and retail Mining Mortgages

ICBC 12.54% 6.16% 2.07% 21.10%

ABC 16.63% 7.30% 2.92% 21.63%

BOC 19.47% - 3.16% 24.72%

CCB 11.61% 3.69% 2.16% 26.45%

BOCOM 16.72% 8.97% 2.73% 16.27%

CMB 11.77% 8.90% 2.06% 17.69%

CITIC 16.38% 10.31% - 10.63%

CMBC 12.56% 8.87% 5.65% 5.58%

CRCB 18.48% 5.94% - 16.42%

Mid of 2016 Manufacturing Wholesale and retail Mining Mortgages

ICBC 11.69% 5.37% 1.89% 22.60%

ABC 15.48% 6.28% 2.62% 23.82%

BOC 18.52% - 2.91% 27.31%

CCB 11.13% 3.57% 2.01% 28.56%

BOCOM 15.61% 7.35% 2.67% 17.28%

CMB 10.36% 8.06% 1.62% 20.32%

CITIC 15.10% 9.36% - 12.66%

CMBC 12.97% 8.83% 5.28% 8.57%

CRCB 18.59% 6.58% - 14.53%


Fig 7: Declining loans exposure to more risky industries


23.1%25.1%

22.5%

17.5%

28.4%

22.7%

26.7% 27.1%

24.4%22.9%

18.9%

21.8% 21.6%

16.7%

25.6%

20.0%

24.5%

27.1%25.2%

20.6%

0%

5%

10%

15%

20%

25%

30%

ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

The loans exposure to more risky industries as of end 2015 The loans exposure to more risky industries as of end 1H16



Fig 8: Declining asset exposure to more risky industries


Fig 9: Declining loans exposure to property development


13.0% 13.2% 12.9%

10.1%

16.2%

12.3%

13.7%12.6%

10.1%

12.7%

10.9% 11.6%12.6%

9.9%

14.7%

11.2%

12.5%12.7%

10.3%11.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


The exposure to more risky industries in total assets as of end 2015 The exposure to more risky industries in total assets as of end 1H16

4.7%

6.2%

8.3%

4.3%

6.1%

7.5%

10.1%

11.9%

6.6% 6.3%

3.5%

5.5%

8.2%

3.6%

5.6%

6.8%

10.8% 10.8%

5.6% 5.7%

0%

2%

4%

6%

8%

10%

12%

14%


The loans exposure to property development as of end 2015 The loans exposure to property development as of end 1H16



Fig 10: Rising loans exposure to retail loans


Fig 11: Rising loans exposure to home mortgage


Fig 12: Rising loans exposure to home mortgage

1H16 ICBC ABC BOC CCB BOCO

M CMB CITIC CMBC CRCB Industr

y

Trading financial assets 8% 9% 4% 8% 6% 5% 3% 2% 0% 7%

Available for sale financial assets 29% 27% 35% 27% 15% 24% 62% 14% 5% 27%

Hold to maturity financial assets 57% 53% 48% 55% 62% 31% 35% 33% 28% 51%

Receivables investments 6% 12% 13% 10% 17% 40% 0% 50% 66% 15%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

29.7%32.2% 30.3%

33.1%

26.7%

43.4%

26.4%

35.5% 35.9%

31.5%30.5%32.4% 31.7%

34.9%

27.3%

44.7%

29.2%

35.3% 32.6%32.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


The loans exposure to retail loans as of end 2015 The loans exposure to retail loans as of end 1H16

21.1%22.8% 22.4%

26.5%

16.2%17.7%

10.6%

5.6%

16.4%

21.0%22.6%

20.5%

24.2%

28.6%

17.3%

20.3%

12.7%

8.6%

14.5%

22.1%

0%

5%

10%

15%

20%

25%

30%


The loans exposure to home mortgage as of end 2015 The loans exposure to home mortgage as of end 1H16



2015 ICBC ABC BOC CCB BOCO

M CMB CITIC CMBC CRCB Industr

y

Trading financial assets 7% 10% 3% 6% 7% 5% 2% 3% 2% 6%

Available for sale financial assets 29% 27% 30% 25% 16% 21% 61% 17% 6% 26%

Hold to maturity financial assets 57% 51% 50% 60% 57% 25% 37% 30% 30% 51%

Receivables investments 7% 12% 17% 9% 20% 50% 0% 49% 62% 16%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Controllable asset quality risk The improving bank assets and loans structure, the marginal improvements in enterprises’ solvency, as well as rising NPL write-off and disposals contributed to BOCOM’s stable NPL ratio of 1.54%, declining special mention loans ratio from 3.17% in 2015 to 3.07% in 1H16 and decreasing overdue loans ratio from 3.04% to 1.98%.

According to our recent company visit, the first round of asset quality risk release from private companies or SMEs has largely been over, and the second round of asset quality risk release from SOEs and big enterprise has started. But given most of these companies are related to central government or local government, these enterprises have better collateral or potential support, so the deteriorating momentum of bank asset quality would decelerate. Therefore we believe a systematic risk is unlikely.

Fig 13: Stable nominal NPL ratio, but special mentioned loans and overdue loans still under pressure

Bank NPL ratio

Proportion of special mention loans

Proportion of overdue loans

NPL ratio before write-

offs

2014 3Q15 2015 1Q16 1H16 2014 2015 1H16 2014 2015 1H16 2015 1H16

ICBC 1.1% 1.4% 1.5% 1.7% 1.6% 2.90% 4.36% 4.91% 1.91% 2.79% 2.95% 1.55% 1.88%

ABC 1.5% 2.0% 2.4% 2.4% 2.4% 3.29% 3.42% 3.34% 2.06% 3.13% 3.23% 2.85% 2.81%

BOC 1.2% 1.4% 1.4% 1.4% 1.5% 2.37% 2.51% 2.84% 1.48% 1.96% 1.88% 1.93% 1.77%

CCB 1.2% 1.5% 1.6% 1.6% 1.6% 2.97% 2.89% 3.06% 1.41% 1.65% 1.99% 1.92% 1.75%

BOCOM 1.3% 1.4% 1.5% 1.5% 1.5% 2.68% 3.17% 3.07% 2.37% 3.04% 1.98% 1.96% 1.78%

CMB 1.1% 1.6% 1.7% 1.8% 1.8% 1.86% 2.61% 2.48% 2.10% 2.84% 2.71% 3.04% 2.37%

CITIC 1.3% 1.4% 1.4% 1.4% 1.4% 3.12% 3.57% 2.61% 3.47% 2.96% 3.60% 2.46% 2.12%

CMBC 1.2% 1.5% 1.6% 1.6% 1.7% 1.98% 3.69% 4.01% 2.74% 3.94% 4.64% 2.27% 2.06%

CRCB 0.8% 0.9% 1.0% 1.0% 1.0% 2.35% 2.26% 2.57% 1.25% 1.82% 2.02% 1.26% 1.06%

Average 1.2% 1.5% 1.64% 1.68% 1.69% 2.65% 3.28% 3.29% 2.19% 2.79% 2.87% 2.25% 2.07%

Source: SWS Research



Fig 14: NPL ratio using a bottom-up methodology(not taking cash recovery from NPLs into account)

Total interest bearing liabilities of enterprises(RMB Mn)

Non-performing liabilities of enterprises(RMB Mn)

The proportion of non-performing enterprise liabilities

The NPL ratio of total loans

2013 6,428,794 348,211 5.42% 3.81%

1Q14 6,826,487 861,213 12.62% 8.49%

1H14 7,214,073 784,030 10.87% 7.36%

3Q14 7,265,734 613,091 8.44% 5.78%

2014 6,761,637 444,305 6.57% 4.57%

1Q15 7,491,063 825,162 11.02% 7.45%

1H15 7,842,270 782,739 9.98% 6.78%

3Q15 7,534,175 849,333 11.27% 7.62%

2015 7,761,300 891,506 11.49% 7.76%

1Q16 8,113,293 898,674 11.08% 7.49%

1H16 8,413,434 743,813 8.84% 6.04%

Source: Wind, SWS Research

Fig 15: NPL ratio of different industries using a bottom-up methodology


Fig 16: Rising write-off Bank Total loans Non-performing loans Amount of write-off loans NPL ratio before write-off Write-off proprotion to NPLs

ICBC 12,677,317 196,303 42,148 1.88% 17.68%

ABC 9,395,838 225,389 38,269 2.81% 14.51%

BOC 9,728,275 142,942 29,181 1.77% 16.95%

CCB 11,137,877 181,949 13,427 1.75% 6.87%

BOCOM 3,983,756 61,350 9,438 1.78% 13.33%

CMB 3,026,532 55,256 16,403 2.37% 22.89%

CITIC 2,749,227 38,520 19,872 2.12% 34.03%

CMBC 2,274,710 38,077 8,761 2.06% 18.70%

CRCB 299,021 2,966 197 1.06% 6.24%


0.1 1.1 1.3 2.2 2.3 2.8 3.3 4.4 4.4 4.5 4.6 5.1 6.2 6.8 7.7 8.5 9.7 9.8 10.8 11.0 11.5 13.4 14.7 14.8

23.3 27.9

35.9

0

10

20

30

40

50

60

70

80

The real NPL ratio as of end 2014 The real NPL ratio as of end 3Q15 The real NPL ratio as of end 2015

The real NPL ratio as of end 1Q16 The real NPL ratio as of end 1H16

%



Basing on the updated real NPL ratio of listed companies and updated bank loans structure, we arrive at our new the bottom-up real NPL ratio. As of end 2016, our base case real NPL ratio is 6.5% in 2016, while the implied NPL ratio by PB discount and additional provisions and capital is 7.0% in 2016, so asset quality risks are fully priced in.

Fig 17: Scenario test on real NPL ratio (not taking cash recovery from NPLs into account)

1H16 ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Nominal NPL ratio of enterprise loans 1.78% 3.39% 1.74% 2.67% 1.78% 2.78% 1.53% 1.52% 0.65% 2.21%

Real NPL ratio of enterprise loans 8.91% 8.82% 7.85% 8.57% 7.49% 7.94% 7.25% 7.89% 7.71% 8.31%

Nominal NPL ratio of retail loans and bills discount 1.27% 1.00% 0.86% 0.48% 1.00% 0.91% 1.13% 1.95% 1.50% 0.96%

Enterprise loans proportion 55.25% 58.49% 68.34% 52.44% 69.23% 49.26% 67.87% 64.72% 60.03% 59.26%

Nominal NPL ratio of total loans 1.55% 2.40% 1.46% 1.63% 1.54% 1.83% 1.40% 1.67% 0.99% 1.70%

Real NPL ratio of total loans 5.49% 5.58% 5.64% 4.72% 5.49% 4.37% 5.28% 5.79% 5.23% 5.31%

2016 ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Bull case Real NPL ratio of total loans in 2016(assuming total loans growth of 10% and NPL growth of 30%)

6.33% 6.47% 6.59% 5.52% 6.41% 5.04% 6.14% 6.66% 6.02% 6.17%

Base case Real NPL ratio of total loans in 2016(assuming total loans growth of 12% and NPL growth of 60%)

7.54% 7.74% 7.91% 6.62% 7.68% 6.00% 7.35% 7.91% 7.15% 7.38%

Bear case Real NPL ratio of total loans in 2016(assuming total loans growth of 15% and NPL growth of 90%)

8.62% 8.88% 9.10% 7.62% 8.83% 6.86% 8.44% 9.03% 8.17% 8.47%


Fig 18: Scenario test on real NPL ratio (taking cash recovery from NPLs into account)

2016 ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB Industry

Bull case Real NPL ratio of total loans in 2016(assuming total loans growth of 10% and NPL growth of 30%)

5.57% 5.70% 5.80% 4.86% 5.64% 4.43% 5.40% 5.86% 5.29% 5.43%

Base case Real NPL ratio of total loans in 2016(assuming total loans growth of 12% and NPL growth of 60%)

6.63% 6.81% 6.96% 5.83% 6.76% 5.28% 6.47% 6.96% 6.29% 6.50%

Bear case Real NPL ratio of total loans in 2016(assuming total loans growth of 15% and NPL growth of 90%)

7.59% 7.82% 8.01% 6.71% 7.77% 6.04% 7.43% 7.95% 7.19% 7.46%


Fig 19: Tier 1 implied NPL ratio

ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB TOTAL

2016E Net assets 1,837,456 1,277,440 1,257,572 1,630,059 607,135 422,487 337,891 332,871 54,395 7,757,306

2016 PB 0.79 0.72 0.71 0.75 0.61 0.98 0.57 0.72 0.72 0.73



NPL implied by PB discount 383,117 359,428 363,304 407,072 238,999 8,515 144,229 94,137 15,448 2,014,248

2016E Total loan balance 14,548,527 10,208,907 10,502,694 11,851,508 3,685,106 3,074,958 2,724,568 2,272,030 326,873 59,195,170

NPL ratio implied by PB discount 2.63% 3.52% 3.46% 3.43% 6.49% 0.28% 5.29% 4.14% 4.73% 3.40%

2016E Nominal NPL ratio 1.90% 2.40% 1.85% 1.91% 1.80% 2.05% 2.00% 2.01% 1.05% 1.89%

2016E NPL amount 276,422 245,014 194,300 226,364 66,332 63,037 54,359 45,668 3,432 1,115,838

2016E Coverage ratio 151.00% 177.00% 155.00% 155.00% 155.00% 180.00% 155.00% 152.00% 399.00% 160.00%

2016E Extra provision 2,764 66,154 9,715 11,318 3,317 18,911 2,718 913 8,546 111,584

NPL ratio implied by extra provision

0.02% 0.65% 0.09% 0.10% 0.09% 0.62% 0.10% 0.04% 2.61% 0.19%

2016E Risk weighted assets 13,503,782 11,186,739 10,862,628 11,015,181 4,578,971 3,099,489 3,250,723 3,278,166 492,332 61,268,012

2016 Core tier 1 CAR requirement 7.70% 7.70% 7.70% 7.70% 7.70% 7.70% 7.70% 7.70% 6.70% 7.59%

2016E Core tier 1 capital 1,637,279 1,087,244 1,138,786 1,357,731 502,249 335,712 306,060 298,150 45,889 6,709,100

2016E extra core tier 1 capital 597,488 225,865 302,364 509,562 149,668 97,051 55,754 45,731 12,903 1,996,387

NPL ratio implied by extra capital 4.11% 2.21% 2.88% 4.30% 4.06% 3.16% 2.05% 2.01% 3.95% 3.37%

Tier 1 Implied NPL ratio 6.76% 6.38% 6.43% 7.83% 10.64% 4.05% 7.44% 6.20% 11.29% 6.96%

Source: Bloomberg, SWS Research

Fig 20: Comparison between real NPL ratio and implied NPL ratios


Deleverage and releverage

Recently BIS, the Bank for International Settlements, warned in its quarterly report that China’s "credit to GDP gap" has reached 30.1%, the highest to date and in a different league altogether from any other major country tracked by the institution.

4.0%

6.2% 6.4% 6.4% 6.8%7.4% 7.8%

10.6%11.3%

8.0%

10.1%9.4% 9.9% 10.0%

10.8%11.5%

13.8%

15.6%

11.1%

13.1%12.2%

13.5%12.8%

13.8%14.4%

16.5%17.1%

5.3%

7.0% 7.0% 6.8% 6.6% 6.5%5.8%

6.8% 6.3%

0%

5%

10%

15%

20%

CMB CMBC BOC ABC ICBC CITIC CCB BOCOM CRCB

PB discount+Extra provision+Extra capital PB discount+Extra provision+Extra capital+PPOP

PB discount+Extra capital+PPOP+Total provision Base case Real NPL ratio of total loans in 2016



We notice the article used two figures to demonstrate the excessive credit in China: (1) credit from All sectors to Private non-financial sector to GDP gap (actual-trend), (2) Credit to the non-financial sector to GDP.

(1) Credit from All sectors to Private non-financial sector to GDP gap (actual-trend)

According to BIS, as of end 1Q16, China reported the highest credit to GDP gap of 30%. It argued that earlier banking crises around the world over the last sixty years suggest any score above ten requires careful monitoring. But if we look at the historical data, the credit to GDP of both HK and Singapore rose significantly since 2008, and the peak of credit to GDP of HK even reached above 50% in 2014. But this did not create muchtroubles to the economies thereafter.So we believe the credit to GDP gap depends on the stage of economic development and financing system and could differ a lot among different countries.

Fig 21: Credit to GDP gap as of end 1Q16


Fig 22: Historical credit to GDP gap


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(2)Credit to the non-financial sector to GDP.

As of end-1Q16, the level of leverage for Chinese enterprises reached 169%, which was significantly higher than that of most countries. However, government and household leverage levels of 45% and 41% were much lower. In our view, China’s deleveraging process will be moderate given the L-shaped economic growth target. We expect the government, households and some emerging industries to re-leverage to offset the negative impact brought with the deleverage of overcapacity industries.

Fig 23: Leverage ratio of non-financial corporations


Fig 24: Leverage ratio of households


0

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160

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Total reporting countries - Non-financial corporations Advanced economies - Non-financial corporations

Emerging economies - Non-financial corporations China - Non-financial corporations

0

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Total reporting countries - Households and NPISHs Advanced economies - Households and NPISHs

Emerging economies - Households and NPISHs China - Households and NPISHs



Fig 25: Leverage ratio of government


Upcoming reform In July 2014, BOCOM announced that it was conducting a feasibility study into diversification of company ownership. In mid-June 2015, BOCOM’s reform scheme obtained the approval of the State Council. Since July 2016, China SOE reform accelerated and in Aug State-owned Assets Supervision and Administration Commission announced to kick off the first round of SOE employee share ownership pilot before yearend. We believe BOCOM may be the first choice for the government to pilot its employee share ownership among SOE banks, due to three reasons: (1) The company has a strong track record of reform and innovation, being the first state-owned bank to restructure as a joint-stock company, to introduce overseas strategic investors and to list in Hong Kong. (2) The company’s equity structure is already much more diversified than the Big Four banks, which comprises state-owned capital (Ministry of Finance 27%; social security fund 4%, others 4%),foreign capital (HSBC 19%) and private capital. (3) BOCOM would be more motivated to conduct reform, given it enjoys neither the wide networks/customer base as the Big Four, nor the flexible strategy of the joint-stock banks. Besides employee stock ownership programmes, we believe reforms may also include improving corporate governance improvement, introducing management stock incentive and conducting business-oriented reform, spinoff and listing of certain business departments and optimizing share structure.We expect such reforms to improve its competitiveness in the mid-long term. Three rounds of management share purchases in May 2014, Sep 2014 and July 2015also demonstrate management’s confidence in the company.

Concerns overdone We turned positive on HK listed China banks in mid-June and upgraded the sector to overweight in early July. Since mid-June the sector has rallied by 28%, outperforming HSCEI by 14ppts. And the best performers are CRCB and BOCOM, reporting 36% and 35% share price rally.

Fig 26:Share price performance

ICBC ABC BOC CCB BOCOM CMB CITIC CMBC CRCB HSCEI Index Bank Avg Big banks Small banks

2014.4.1-2014.12.31 27% 23% 36% 25% 52% 46% 49% 61% 52% 19% 41% 28% 52%

0

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Total reporting countries - General government Advanced economies - General government

Emerging economies - General government China - General government



2015.1.1-2015.12.31 -13% -14% -17% -12% -21% -3% -19% -24% 1% -19% -14% -14% -13%

2014.4.1-2015.12.31 13% 9% 19% 13% 31% 43% 30% 38% 53% 0% 28% 14% 39%

2016.1.1-2.15 -16% -19% -16% -15% -18% -25% -15% -15% -21% -19% -18% -16% -19%

2016.2.16-4.19 12% 9% 9% 10% 12% 22% 17% 14% 11% 15% 13% 10% 15%

2016.4.20-2016.5.19 -13% -6% -9% -11% -12% -12% -12% -6% -10% -11% -10% -10% -10%

2016.5.20-2016.9.21 40% 36% 32% 41% 47% 34% 28% 31% 41% 19% 37% 37% 36%

2016.1.1-2016.9.21 15% 15% 13% 20% 21% 11% 12% 21% 12% 2% 16% 16% 16%

2016.6.16-2016.9.21 30% 30% 22% 24% 35% 29% 19% 28% 36% 14% 28% 26% 29%

2016.7.7-2016.9.21 20% 22% 20% 17% 26% 16% 15% 22% 28% 15% 21% 20% 21%


Looking forward, given the marginal improvements in fundamental and possible valuation recovery by stimulus and reforms, we are still positive on the sector. But after sharp share price rally, we should be more selective in stock picks. Basing on our real NPL ratio and implied NPL ratio comparison, we recommend Chongqing rural commercial bank, bank of communication and CCB.

Fig 27: Gap between real and implied NPL ratio


In light of the better than expected asset quality, we revise up our EPS forecasts by 1% to Rmb0.91 in 16E (+1.5% YoY), Rmb0.93 in 17E (+2.2% YoY) and Rmb0.98 in 18E (+5.4% YoY). BOCOM is trading at 0.63x 16E PB as compared to the sector average of 0.73x. Its estimated real NPL ratio in 2016 under our base case would be 6.8%, while its implied NPL ratio using its PB discount and excess provisioning/capital is 10.6% for 16E, indicating its asset quality risks fully priced in. Given the improving market sentiment backed by stimulus and reforms, we revise up its target 16E PB from 0.75x to 0.8x and revise up our target price from HK$7.46 to HK$ 7.96. With 27% upside, we maintain our BUY recommendation.

5.0%

3.9%

2.0%

1.0%

0.1%

-0.4% -0.5% -0.8%-1.2%

-3%

0%

3%

5%

8%

CRCB BOCOM CCB CITIC ICBC ABC BOC CMBC CMB

Gap between tier 1 implied NPL ratio and real NPL ratio



Fig 28: Gap between real and implied NPL ratio

Company Code Rating Target price (HK$) +/- (%) Trading PE Trading PB Dividend yield 14A 15A 16E 14A 15A 16E

CRCB 3618 HK BUY 5.51 11.1% 5.63 5.33 4.99 0.93 0.82 0.72 4.7%

BOCOM 3328 HK BUY 7.96 27.4% 5.81 5.75 5.72 0.81 0.72 0.61 5.1%

CCB 939 HK - - - 5.47 5.47 5.40 1.00 0.87 0.75 5.4%

BOC 3988 HK O-PF 3.54 -3.5% 5.21 5.20 5.33 0.77 0.77 0.71 5.7%

CITIC 998 HK O-PF 5.62 5.2% 5.12 5.06 4.98 0.80 0.66 0.57 4.7%

ICBC 1398 HK Hold 4.12 -18.1% 5.38 5.37 5.57 0.97 0.87 0.79 5.5%

CMBC 1988 HK Hold 8.97 1.6% 5.65 5.45 5.38 1.05 0.83 0.72 3.3%

ABC 1288 HK Underperform 2.42 -28.8% 5.13 5.12 5.24 0.89 0.79 0.72 5.7%

CMB 3968 HK Underperform 16.71 -13.7% 7.28 7.06 6.72 1.30 1.13 0.98 4.2%




Information Disclosure： The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst I (We) am (are) conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China and have registered as the Securities Analyst. I hereby issue this report independently and objectively with due diligence, professional and prudent research methods and only legitimate information is used in this report. I am also responsible for the content and opinions of this report. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Disclosure with respect to the Company The company is a subsidiary of Shenwan Hongyuan Securities. The company is a qualified securities investment consulting institute approved by China Securities Regulatory Commission with the code number ZX0065. Releasing securities research reports is the basic form of the securities investment consulting services. The company may analyze the values or market trends of securities and related products or other relevant affecting factors, provide investment analysis advice on securities valuation/ investment rating, etc. by issuing securities research reports solely to its clients. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials or log into www.swsresearch.com for the analysts' qualifications，the arrangement of the quiet period and the affiliates’ shareholdings. Introduction of Share Investment Rating Security Investment Rating： When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period. BUY: Share price performance is expected to generate more than 20% upside over a 12-month period. Outperform: Share price performance is expected to generate between 10-20% upside over a 12-month period. Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period. Underperform: Share price performance is expected to generate between 10-20% downside over a 12-month period. SELL: Share price performance is expected to generate more than 20% downside over a 12-month period. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market；

Equal weight： Industry performs about the same as that of the whole market；

Underweight：Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. HSCEI is the benchmark employed in this report.

Disclaimer： This report is to be used solely by the clients of SWS Research Co., Ltd. ( subsidiary of Shenwan Hongyuan Securities, hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report. This report is based on public information, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.swsresearch.com). The clients may ask for follow-up explanations if they so wish. The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein. Save and except as otherwise stipulated in this report, the contactor upon the first page of the report only acts as the liaison who shall not provide any consulting services. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The clients should make investment decisions independently and solely at your own risk. Please be reminded that in any event, the company will not share gains or losses of any securities investment with the clients. Whether written or oral, any commitment to share gains or losses of securities investment is invalid. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary. Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone. Please be particularly cautious to the risks and exposures of the market via investment. Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company.



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Distribution in Singapore If distributed in Singapore, this report is meant only for Accredited Investors and Institutional Investors as defined under Section 4A of the Securities and Futures Act of Singapore. If you are not an Accredited Investor or an Institutional Investor, you shall ignore the report and its contents. The Singapore recipients of the report are to contact the Singapore office of Shenwan Hongyuan Singapore Private Limited. at 65-6323-5208, or 65-6323-5209 in respect of any matters arising from, or in connection with, the report.

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