JP Morgan - 1 Feb 2011

Asia Pacific Equity Research
01 February 2011
Hong Kong Banks

Strong loan growth; FY10 results preview
We saw 29% system loan growth in 2010 (corporate, trade finance, China). Deposit growth was much slower at 7.5% (or 2.9% excluding RMB deposits). Earnings growth is, however, likely to be more visible in 2011. We forecast 10% earnings growth for FY10 (5% below consensus). Upside surprises are more likely for HSB, DSF and WHB. Stock picks unchanged: OW in BOCHK, WHB, BEA, and Public. Macro solid: Unemployment rate dropped to 4.0% from 4.1%, with a decline in unemployed coupled with labor force growth. Underlying CPI rose by 2.8% y/y, 0.5% m/m (food). Export growth was dragged by China-related trade, and external demand outlook appears patchy. Rmb 5% of system deposit: HKMA released December monetary statistics. Loan +2.0% m/m, +2.5% q/q (corporate, China, trade finance), +29% y/y, mortgages +15% y/y. Deposit +0.2% m/m. Rmb deposit +14% m/m, +422% y/y, 5.4% of system deposit. HIBOR 1-month/3month fell by 12bp/9bp m/m to 11bp/19bp in January. ADT HK$75bn, +20% m/m in January. Recent development: (1) HKMA rolled out BASEL III implementation, basic common equity ratio requirement 7% plus maximum 2.5% countercycle buffer by end-2018. Given current capital positions (system CAR 16.1%), we expect no equity raising in the short term; (2) Criteria restructuring was announced; its holdings in BEA is likely to continue, in our view; (3) ICBC acquired BEA USA business; (4) Fubon HK privatization was proposed; (5) Public Financial FY10 results were 3% below our expectation, showing credit cost being the major driver of earnings growth; (6) Value Partners announced its first China JV. Results preview: We expect 10% earnings growth in FY10 for our coverage, and we are 5% below Bloomberg consensus. Upside surprise on consensus is more likely for HSB and less for BOCHK. Costs could be the reasons for earnings disappointment, while potential credit writebacks could be a source of upside surprise. Reporting schedule: BEA 15 Feb, HSBC/HSB 28 Feb, STAN 2 Mar.
Table 1: HK banks valuation
31-Jan-11 BOCHK HSB BEA WHB DSF DSBG CHB PFH Wgt avg Bloomberg Code 2388 HK 11 HK 23 HK 302 HK 440 HK 2356 HK 1111 HK 626 HK TOTAL-HK Price Mkt cap HK$ US$ mn 25.15 34,102 128.60 31,531 33.80 8,852 104.90 3,973 54.55 2,048 13.78 2,161 22.70 1,266 5.50 774 84,707 P/E 11E 16.2 16.4 19.4 17.9 11.5 12.2 21.8 12.8 16.4 12E 13.0 14.4 14.5 15.4 9.4 9.7 17.5 10.2 13.5 P/BV 11E 2.32 3.64 1.58 2.07 1.02 1.16 1.49 0.95 2.33 12E 2.19 3.32 1.50 1.92 0.94 1.08 1.43 0.90 2.17 ROE 11E 14.7 23.0 8.7 12.1 9.3 9.9 7.0 7.6 14.2 12E 17.4 24.1 11.1 13.0 10.4 11.6 8.4 9.0 16.1 Div Yld 11E 4.0 4.1 3.2 1.7 4.3 4.1 2.3 3.9 3.8 12E 5.0 4.3 4.3 2.6 5.5 5.2 2.9 4.9 4.5
Hong Kong Banks Joseph Leung

AC
(852) 2800-8517 joseph.mj.leung@jpmorgan.com
Sunil Garg
(852) 2800-8518 sunil.garg@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited
Recent research notes

Hong Kong macro (Lu Jiang) - Unemployment -0.1% (18 Jan) - CPI +2.8% (20 Jan) - Export +13% (25 Jan) HK property (Amy Luk) - Weekly sales (31 Jan) HK banks (Joseph Leung) - Fubon HK privatization (10 Jan) - PFH: FY results (15 Jan) - Life of an offshore RMB transaction (17 Jan) - BEA: Disposal of US business to ICBC (24 Jan) - VP: First mainland JV (24 Jan)
Earnings growth FY10E
HSB BOCHK BEA WHB DSF DSBG CHB HK banks Rating OW N OW OW N N N OW Perf BOCHK HSB BEA WHB DSF DSBG CHB PFH HSI JPMe 6% 1% 31% 30% 61% 68% 72% 10% Cons 8% 10% 40% 32% 61% 74% 89% 15% Diff -2% -8% -6% -2% 0% -3% -9% -5%
Source: Bloomberg and J.P. Morgan estimates.
-1m -5% 1% 4% -2% 7% 4% 6% -2% 2%
-3m 3% 13% 2% 16% 6% 8% 18% 6% 2%
YTD -5% 1% 4% -2% 7% 4% 6% -2% 2%
Source: Company reports and J.P. Morgan estimates.
See page 34 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan 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.
Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com
Asia Pacific Equity Research 01 February 2011
Table of Contents
Hong Kong banking sector updates .......................................3
BASEL III implementation in Hong Kong ..................................................................3 BEA: Implication of Criteria Caixa restructuring ........................................................4 BEA: Disposal of US business to ICBC ......................................................................4 Fubon HK: Privatization proposal announced .............................................................5 Public Financial: Results below our estimates; higher cost assumptions for 2011 ......6 Value Partners: First mainland JV ...............................................................................6 Life of an offshore RMB transaction ...........................................................................7
Hong Kong banking statistics .................................................8

Volume ........................................................................................................................8 Interest rate and liquidity ...........................................................................................10 Retail investment sales...............................................................................................12 Credit quality indicators.............................................................................................13
Preview of FY10 results .........................................................14

Consensus analysis ....................................................................................................15
Share price and valuation......................................................17 Hong Kong property update ..................................................18 Companies
Hang Seng Bank ........................................................................................................20 Bank of China (BOCHK)...........................................................................................22 Bank of East Asia ......................................................................................................24 Wing Hang Bank .......................................................................................................26 Dah Sing Financial.....................................................................................................28 Dah Sing Banking Group...........................................................................................30 Chong Hing Bank ......................................................................................................32
Hong Kong banking sector updates

BASEL III implementation in Hong Kong
On 26 Jan 2011, HKMA announced the main outline of BASEL III implementation for Hong Kong banks. Requirements are largely similar to the proposal of BASEL committee. Key summary requirements are as follows. Common equity requirement 4.5% (previously 2%) Tier 1 ratio requirement 6% (previously 4%) Capital conservation buffer 2.5%, common equity only (new) Countercyclical capital buffer 0%-2.5% (new) Liquidity ratio for asset-liability management of 30-days or less (same as before) Net stable funding ratio, NSFR, for ALM of 1-year or above (new) More transparent capital disclosure
Table 2: BASEL III implementation schedule for Hong Kong banks
2011 Leverage ratio Common equity ratio Capital conservation buffer Common equity + conservation buffer Phased in tier 1 deduction (DTA, MI) Tier 1 ratio Total capital ratio Total capital + conservation buffer Capital instruments phased out Liquidity ratio Net stable funding ratio
Source: HKMA.
2012
2013
2014
2015
2016
2017 4.50% 1.25% 5.75% 80% 6.0% 8.0% 9.3%
2018 Pillar 1 4.50% 1.875% 6.375% 100% 6.0% 8.0% 9.9%
As of 1 Jan 2019 4.50% 2.50% 7.00% 100% 6.0% 8.0% 10.5%
Supervisory monitoring
Parallel run, disclosure starts 1 Jan 2015 3.50% 4.00% 4.50% 4.50% 0.625% 3.50% 4.00% 4.50% 5.125% 20% 40% 60% 4.5% 5.5% 6.0% 6.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.6% Phased out in 10 years between 2013 and 2023 Introduce
Observation period Observation period
Introduce
Figure 1: HK banks: Pro-forma common equity ratio (1H10)

14% 13% 12% 11% 10% 9% 8% 7% CHB PFH Existing tier 1 ratio Pro-forma common equity ratio
Source: Company reports and J.P. Morgan estimates. Note: DSF did a rights issue of HK$1 billion on 16 Nov 2010, which should boost tier 1 ratio by 102bp. This is not reflected in the data above.
Given the current capital positions of Hong Kong banks, we believe no equity raising is required in 2011 and 2012. We estimate banks under our coverage all meet the basic common equity and conservation buffer requirement of 7% even in the event of 100% tier 2 deduction is applied to common equity capital. In pro-forma BASEL III basis, capital positions of BOCHK and Chong Hing Bank appear to be the strongest, while Hang Seng Bank and BEA are in the lower end. Given the long transition period, we expect banks could make up capital deficit, if any, through lower payout ratio. While equity rising is not our base case, BEAs capital position appears to be the weakest, as its internal capital generation pace (ROE) is slower than that of Hang Seng Bank.
WHB
BOCHK
HSB
DSF
BEA
Table 3: Hong Kong banks: Potential BASEL III impact (1H10)

HK$ in millions Share capital Reserves Preferred shares Minority interest Less: Goodwill Less: Deduction Tier 1 capital Total capital RWA Tier 1 ratio (reported) Tier 1 capital Less: Preferred shares Less: Minority interest Common equity capital before tier 2 deduction Tier 2 deduction Common equity capital assuming 100% tier 2 deduction Common equity ratio assuming 100% tier 2 deduction Difference from existing tier 1 ratio 15% of tier 1 common equity Less: Tier 2 deduction in excess of 15% mark Common equity capital after tier 2 deduction Common equity ratio Difference from existing tier 1 ratio Distance from 7% common equity ratio and conservation buffer Distance from 9.5% common equity ratio, conservation and counter-cycle buffer BOCHK 43,043 32,969 0 0 0 715 75,297 107,526 664,776 11.3% 75,297 0 0 75,297 715 74,582 11.2% -0.1% 11,295 0 75,297 11.3% 0.0% 4.3% 1.8% HSB 9,559 33,177 0 0 972 9,086 32,678 38,070 294,908 11.1% 32,678 0 0 32,678 9,086 23,592 8.0% -3.1% 4,902 4,184 28,494 9.7% -1.4% 2.7% 0.2% BEA 14,367 19,855 0 3,727 2,034 3,756 32,159 42,977 311,428 10.3% 32,159 0 3,727 28,432 3,756 24,676 7.9% -2.4% 4,265 0 28,432 9.1% -1.2% 2.1% -0.4% WHB 789 10,024 0 0 1,306 327 9,179 15,040 88,471 10.4% 9,179 0 0 9,179 327 8,852 10.0% -0.4% 1,377 0 9,179 10.4% 0.0% 3.4% 0.9% DSF 4,063 5,597 0 0 921 453 8,286 13,349 77,609 10.7% 8,286 0 0 8,286 453 7,832 10.1% -0.6% 1,243 0 8,286 10.7% 0.0% 3.7% 1.2% CHB 1,760 3,476 0 0 0 122 5,114 6,438 42,230 12.1% 5,114 0 0 5,114 122 4,992 11.8% -0.3% 767 0 5,114 12.1% 0.0% 5.1% 2.6% PFH 4,123 1,579 0 0 2,775 79 2,849 2,816 24,069 11.8% 2,849 0 0 2,849 157 2,692 11.2% -0.7% 427 0 2,849 11.8% 0.0% 4.8% 2.3%
Source: Company reports and J.P. Morgan estimates. Note: DSF did a rights issue of HK$1 billion on 16 Nov 2010, which should boost tier 1 ratio by 102bp. This is not reflected in the data above.
BEA: Implication of Criteria Caixa restructuring

On 28 Jan 2011, Criteria, being 15% shareholder of BEA, announced its restructuring plan, transforming from a holding company structure into an integrated banking group. After the restructuring, the main shareholder of new CaixaBank (former Criteria) remains to be la Caixa (81.1%). The new CaixaBank will have a core capital ratio of 10.9%, after EUR1.5 billion issuance of mandatory convertible bond. In its announcement, BEA listed as one of the milestones its strategic goals of "building banking presence in attractive growth markets". BEA amounts to 4.3% of Criterias investment portfolio. We expect CaixaBank will continue to hold its stake in BEA.
BEA: Disposal of US business to ICBC

Related research: BEA: Disposal of US business to ICBC by Joseph Leung on 24 Jan 2011
Strategically positive: On 23 Jan 2011, BEA announced to dispose 80% of BEA USA to ICBC at a consideration of US$140.2 million (HK$1,086.5 million), with a put option of dispose the remaining 20% stake to ICBC within 18 months after completion of the transaction. BEA USA has 13 branches in the US (2 in New York and 11 in California), and book value is not disclosed. We see this transaction to be positive to BEA as the business mix becomes more focused upon Asia. We maintain OW rating. Disposed Canada business in 2010: BEA also disposed 70% of BEA Canada to ICBC (announced on 4 Jun 2009, completed on 28 Jan 2010) at C$80.2 million
(HK$589.2 million), with a call option for ICBC to buy an additional 10% stake. Both US and Canada transactions indicate that (1) BEA is trimming its business in North America and (2) ICBC seems to have an interest to grow overseas, in our view. Share price remains event-driven: We expect some share price fluctuation in the short term after this transaction, particularly after ICBC (Asia) privatization was completed in Dec 2010. Major shareholders of BEA are Criteria Caixa 15%, BOCHK 4%, Sumitomo Mitsui Banking Corp 4%, and Guoco 9%. Earnings forecast maintained: We keep our earnings forecast unchanged given that the book value of BEA USA is not disclosed and the related disposal profit is likely to be an exceptional item. We maintain our Dec-11 PT at HK$40.
Related research: Fubon HK privatization by Joseph Leung on 10 Jan 2011
Fubon HK: Privatization proposal announced

Privatization offer HK$5: Fubon HK (636 HK, not rated) announced the privatization proposal on 10 Jan 2011. Offer price is HK$5 per share, 32% above the HK$3.78 close price of 7 Jan, at 1.42x book value (1H10). The announcement did not mention that the offer price is final. Fubon Financial owns 75% of Fubon HK. Pricing comparison: Recent ICBC (Asia) privatization was at 2.2x book value in Jul 2010 and CIFH privatization was at 1.4x in Jun 2008. Adjusting for ROE differential, we estimate the offer price implies a 74% premium to average operating ROE or 4% discount to peak ROE in 2007, compared to the 45% premium for ICBC (Asia) and 25% premium for CIFH. Reason and timing: The announcement stated that privatization could bring benefits including a simpler shareholding structure, an enhancement of management efficiency and shareholder value as well as effectively reducing fees and expenses relating to the listing status. It also indicated the proposed transaction to be completed in 2Q11. Implication to the sector: We expect some fluctuation to the share prices of other small banks in Hong Kong in the near term, and the reaction to banks with a lower valuation should be larger than those with a higher valuation. If the privatization proposal succeeds, we expect competition in Hong Kong banking sector to intensify, as Fubon HK strengths its capital positions and becomes more capable to expand, both organically and externally.
Table 4: Fubon HK privatization offer price
CIFH ROE Growth COE Fair P/B Privatization premium Privatization P/B Privatization price 9.6% 4.0% 9.0% 1.12 25% 1.40 ICBC (Asia) 11.5% 4.0% 9.0% 1.50 45% 2.17 29.5 Bear case 6.3% 4.0% 9.0% 0.45 213% 1.42 5.0 Fubon HK Base case 8.1% 4.0% 9.0% 0.82 74% 1.42 5.0 Bull case 11.4% 4.0% 9.0% 1.48 -4% 1.42 5.0
Figure 2: Fubon HK share price

4.4 4.2 4 3.8 3.6 3.4 3.2 3 Dec-09 Feb-10 Fubon HK HSI (rebased)
Source: Bloomberg.
Figure 3: Fubon HK P/B historical trends

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09
Aug-10
+2sd +1sd Avg -1sd -2sd
Source: Bloomberg.
Dec-10
Jun-10
Apr-10
Oct-10
Source: Company reports and J.P. Morgan estimates. Note: Base case ROE is the average operating ROE between 2002 and 2008. Bear case ROE is the average ROE between 2000 and 2009. Bull case ROE is the peak ROE in 2007.
Public Financial: Results below our estimates; higher cost assumptions for 2011
Results slightly below our estimates: Public Financial announced HK$450 million net profit for FY10, 3% below our estimates, +64% y/y. EPS was HK$0.41, DPS was HK$0.21, same as our expectations. The payout ratio dropped from 72% in FY09 to 51% in FY10. We expect it to remain at 50% level in the next few years. We maintain OW rating. FY10 fees and credit quality better: NIM fell by 6bp y/y, slightly better than our expectations. Loan growth was 9.5%, and deposit +1%. Fees +22%, cost +18%, with salary +17%, headcount +7%. Credit cost 109bp, -100bp y/y, -23bp h/h for 2H10. PPOP was flat at 0% y/y, reflecting that the credit cost was the main factor driving earnings growth in FY10. Factor in higher cost assumptions: We expect higher cost growth due to inflation and some increase in headcounts. Also, we expect to see (1) deposit growth to resume in FY11E given the better liquidity environment in recent months; (2) increase of consumer unsecured loans and taxi financing as bankruptcy continues its downtrend and thus should support some recovery in NIM; (3) credit cost to increase slightly as collective impairment release should tail off. Overall, we forecast a 5% earnings growth mainly due to higher cost pressure. JPMe 14% earnings CAGR: We lowered our earnings forecasts by 19%/12%/18% for FY11/12/13 to factor in higher cost and slower NIM recovery. Despite this decrease, we expect 14% earnings CAGR in FY10-12. Trading at 1.1x book value (11E), Public Financial valuation remains attractive in our view. We maintain our OW rating.
Related research: Public Financial: Results below; higher cost assumptions for 2011 by Joseph Leung on 15 Jan 2011
Value Partners: First mainland JV

Related research: Value Partners: First mainland JV by Joseph Leung on 24 Jan 2011
Catalyst materializing: Value Partners announced the first joint-venture in mainland China, with a cash outlay from the company to be Rmb99 million (HK$117 million). We expect more operations in the mainland China to be announced. We maintain OW rating. Details of the JV: The JV is a private equity fund management company (FMC). Value Partners owns 60% and Yunnan Industrial Investment in Kumming owns 40%. Register capital is Rmb15 million and seed capital is Rmb150 million. Target fund size is Rmb500 million and target investment area should be Yunnan-focused. The company expects this JV will be in operation by the end of 2011. Whats next? We expect there will be more operations in the mainland China to be announced, given that this JV uses only 16% of its proceeds from the placement in 2010 intended for China expansion, with HK$599 million (Rmb506 million) left in the pocket. Reiterate OW: We keep our earnings forecasts unchanged given that details of fees structure of the fund is not disclosed and AUM of this JV appears to be only 1% of total AUM. Fund performance of Value Partners is 1% YTD in 2011. Latest disclosed AUM is US$7.9 billion as at 31 Dec 2010.
Life of an offshore RMB transaction

Related research: Life of an offshore RMB transaction by Joseph Leung on 17 Jan 2011 RMB internationalization: Progress, future steps and implications by Jing Ulrich on 24 Jan 2011 The CNH market by Simon Song on 26 Jan 2011
In the midst of diverse news-flow, the primary driving factor of RMB internationalization remains trade settlement and focus should stay on offshore RMB deposits (5% of Hong Kong deposits by FY10 and 15% by FY11E), in our view. We expect earnings contribution to range between -1% and 9%; BOCHK is likely to benefit the most. Life of an offshore RMB transaction: In this report, we analyze the flow of an offshore RMB transaction from the start to the end. As we dig into details, we maintain that: (1) RMB business should not be analyzed on a standalone basis because of product bundling; (2) potential cannibalization with existing business and competition should not be underestimated; (3) RMB internationalization scheme carries policy risk and fundamental impact should become vivid only in the medium term. On a qualitative basis, RMB internationalization has already materially intensified competition in the Hong Kong banking sector. Trade is vital: Among the various sources of RMB, we see trade being the main source of offshore RMB. Our forecast of RMB deposit +191% for FY11 is primarily driven by trade flows. We however estimate that earnings impact to Hong Kong banks to remain less obvious in FY12 (3%). BOCHK appears to benefit the most from RMB internationalization. Whats next? We expect more policy relaxation in relation to RMB flowing from onshore to offshore. While this should help create a RMB deposit pool offshore, the impact to banks is likely to pick up only when RMB is allowed to flow back to onshore more freely. Also, we expect RMB policy similar to those existing in Hong Kong to be applied to other countries in the world, and these should not materially alter the role Hong Kong plays in RMB internationalization. Stock picks: Our bullish stance on BOCHK is centered on its China connection with a strong balance franchise. Although RMB business should help, it would not have a significant impact, in our view.
Figure 4: Offshore RMB flows
Onshore market Individual quota (not disclosed) Direct remittance (Rmb80k/ day) Currency conversion China banking system Direct remittance Import to China (trade quota) HK retail customers (max Rmb20k/ day) Rmb deposit taking banks (eg HSBC) Clearing banks (eg BOCHK) Central banks (PBOC) Offshore market China Interbank bond market Non-trade corporate customers
China retail (max Rmb50k/yr) Corporate (by case)
China Trade Settlement Enterprise (TSE)
Suppliers (eg Iron ore in Brazil)
TSE Rmb trade finance/ currency conversion
Rmb WM (eg Haitong Rmb fund)
Export from China (trade quota) Chinese enterprises FDI approval Chinese enterprises overseas Non-trade finance Rmb loans Secondary Rmb debt market Key: Rmb flow
Investments (eg roads, loans, factories)
SAFE approval
Rmb debts IPO (eg MOF, BOC, Mcdonald)
Wealth management channel, direct customer participation possible
Onshore equity market
Secondary Rmb equity market (mini QFII)
Market does not exist yet
Source: PBOC, HKMA, J.P. Morgan. 7
Hong Kong banking statistics

Volume
Table 5: HK system loan growth
Large corporate SME Mortgages Consumer loans Others Total
FY10A 24% 34% 14% 17% 48% 29% FY11E 8% 25% 5% 5% 34% 18%
Loans and deposits: Loan growth in FY10 was 28.5% y/y, 2.5% q/q, mainly driven by commercial lending, trade finance and China. As deposit growth is below that of the loans, loan-to-deposit ratio (LDR) climbs. HKD LDR reached 78%, approaching its recent peak in 2008 (84%), but we have seen HKD LDR going above 90%. We expect the trend to continue but the pace should slow down. RMB deposits reached RMB315 billion at the end of FY10, +13% m/m and +402% y/y, or HK$371 billion equivalent, +14% m/m and +422% y/y, contributing 5.4% of total system deposits. China-HK trade slowed down slightly in December, with 45% of trade settled in RMB. New RMB deposits in December amounted to 35% of RMB trade settlement.
Table 6: Hong Kong monetary statistics summary
Source: HKMA and J.P. Morgan estimates.
Figure 5: RMB deposits in HK

HK$ in millions
400 350 300 250 200 150 100 50 0 06 07 08 09 10 371
HK$ in millions
Dec 10 Loans Building and construction, property Wholesale and retail trade Manufacturing Transport and transport equipment Stockbrokers Miscellaneous - Corporate loans HOS mortgages Mortgages Credit card Other personal loans - Retail loans Loans used in Hong Kong Trade finance Loans used outside Hong Kong Total loans Total loans by currency: HK$ loans Foreign currency loans Deposits Demand deposits Savings deposits Time deposits Total deposits Total deposits by currency: HK$ deposits Foreign currency deposits RMB deposits Other FC deposits Mix y/y, % q/q, % m/m, %
Source: HKMA.
844,805 235,579 170,319 170,730 18,276 550,682 1,990,391 51,347 744,151 80,137 176,496 1,052,132 3,042,522 273,890 910,935 4,227,347 2,824,445 1,402,902 798,421 2,913,056 3,132,204 6,862,165 3,616,940 3,245,225 371,469 2,873,756
Dec 10 61.6% 78.1% 43.2%
20.0% 5.6% 4.0% 4.0% 0.4% 13.0% 47.1% 1.2% 17.6% 1.9% 4.2% 24.9% 72.0% 6.5% 21.5% 100.0% 66.8% 33.2% 11.6% 42.5% 45.6% 100.0% 52.7% 47.3% 5.4% 41.9%
23.8% 51.6% 26.0% 13.6% 48.5% 23.4% 25.8% -0.4% 15.1% 16.9% 16.8% 14.6% 21.7% 56.7% 48.4% 28.5% 17.6% 58.1% 12.9% 7.9% 6.1% 7.5% 7.2% 7.9% 421.6% -2.1%
y/y, ppt 10.1% 6.9% 13.7%
3.8% 0.9% 2.0% 2.2% -83.1% -0.1% -2.5% 3.6% 3.0% 12.3% 6.8% 4.3% -0.2% 6.0% 11.4% 2.5% -1.1% 10.5% -7.4% 3.5% 3.1% 1.9% -1.7% 6.2% 114.5% -0.3%
q/q, ppt 0.4% 0.5% 1.7%
na na na na na na na na na na na na 0.2% 2.3% 8.6% 2.0% 1.1% 3.8% -2.7% -0.1% 1.4% 0.2% -0.5% 1.0% 14.1% -0.5%
m/m, %pt 1.1% 1.2% 1.2%
Loan-to-deposit ratio Loan-to-deposit ratio (HK$) Loan-to-deposit ratio (Foreign currency)

Source: HKMA.
Figure 6: Loan growth rebounded solidly

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Dec-05 Dec-06 Dec-07 Jun-06 Jun-07 Jun-08 Loans YoY Deposits YoY
Figure 7: LDR improving

95% 90% 85% 80% 75% 70% 65% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Dec-08 Dec-09 Dec-10 Jun-09 Jun-10
LDR HK$
LDR Total (rhs)
64% 62% 60% 58% 56% 54% 52% 50% Jan-10

Dec 10
Source: HKMA.
Source: HKMA.
Figure 8: RMB trade settlement as % of China-HK trade

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10
Figure 9: New RMB deposits as % of RMB trade settlement

120% 100% 80% 60% 40% 20% 0% Aug 10
Source: HKMA.
Sep 10
Oct 10
Nov 10
Source: HKMA and CEIC.
Residential mortgage survey: Outstanding mortgages were +15.5% y/y in FY10. Approval declined sharply, particularly for primary mortgages, driven by the government's special stamp duty introduced in 19 Nov 2010. We expect mortgages to gradually recover in 1Q11 with volatility due to Chinese New Year effect. HIBORbased mortgages contribute 90% of total new mortgages (down by 1.8ppt m/m). We estimate it accounts for 49% of outstanding mortgages as of Dec 10 (+3ppt m/m).
Figure 10: HIBOR mortgages getting popular (%)
100 90 80 70 60 50 40 30 20 10 0 Dec-07 Mar-08 O/S HIBOR mortgages New HIBOR mortgages
Figure 11: Mortgage yield pressure continues (%)

2.50 2.00 1.50 1.00 0.50 0.00 Dec-08 Dec-09 Aug-09 Prime-based HIBOR-based Overall yield
Dec-08
Dec-09
Sep-08
Sep-09
Sep-10
Dec-10
Mar-09
Mar-10
Source: HKMA.
Source: HKMA and J.P. Morgan estimates.
Aug-10
Dec-10
9
Jun-09
Jun-10
Oct-09
Apr-09
Feb-09
Feb-10
Jun-08
Jun-09
Jun-10
Apr-10
Oct-10
Figure 12: New loans drawn down broke recent peak (HK$m)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Dec-07 Mar-08 Mortgage approved New loans drawn down Mortgage repayment
Figure 13: Refinancing picking up (HK$m)

30,000 25,000 20,000 15,000 10,000 5,000 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Primary market Refinance Secondary market
Dec-08
Dec-09
Sep-08
Sep-09
Sep-10
Dec-10
Jun-08
Jun-09
Mar-09
Mar-10
Jun-10
Source: HKMA.
Source: HKMA.
Interest rate and liquidity

Interest rates: In January, we saw HIBOR sliding. We expect liquidity to increase gradually, as illustrated in Liquidity section. For 1Q11, we expect HIBOR to remain at low levels underpinned by expansionary monetary policy in the US. In case of an increase in HIBOR, we expect banks' margins to benefit, as deposit spread widens and free fund benefits (HSB should see the most benefit, followed by BOCHK).
Figure 14: Hong Kong interest rates (%)
6 5 4 3 2 1 0 Dec-08 Dec-09 Dec-10 Jun-08 Jun-09 Jun-10 Sep-08 Sep-09 Sep-10 Mar-08 Mar-09 Mar-10 HIBOR 1M HIBOR 3M Prime
Figure 15: Prime HIBOR spread narrowing (%)

6 5 4 3 2 1 0 Dec-08 Dec-09 Sep-08 Sep-09 Sep-10 16-Jan-11 23-Jan-11 Dec-10 30-Jan-11 Jun-08 Jun-09 Mar-08 Mar-09 Mar-10 Jun-10 Prime HIBOR spread Prime HIBOR spread 3mth avg Prime HIBOR spread 6mth avg
Source: Bloomberg.
Source: Bloomberg.
Figure 16: HIBOR-LIBOR spread (%)

0.34 0.32 0.3 0.28 0.26 0.24 0.22 0.2 0.18 31-Oct 14-Nov 21-Nov 28-Nov 12-Dec 7-Nov 5-Dec HIBOR 3M LIBOR 3M
Figure 17: HIBOR-LIBOR spread (%)

0.04 0.02 0 -0.02 -0.04 -0.06 -0.08 -0.1 -0.12 14-Nov-10 21-Nov-10 28-Nov-10 12-Dec-10 19-Dec-10 26-Dec-10 7-Nov-10 30-Jan 31-Oct-10 5-Dec-10 LIBOR HIBOR spread
2-Jan-11
16-Jan
19-Dec
Source: Bloomberg.
26-Dec
23-Jan
Source: Bloomberg.
10
9-Jan-11
2-Jan
9-Jan
Jan-10
Liquidity: Interest rate (HIBOR) declined in Jan 2011, and other indicators are mixed, with a slight bias towards a gradually growing liquidity: (1) HKD is depreciating, touching 7.78 from 7.775 by month-end, suggesting international inflow is slowing in December, (2) HKMA aggregate balance and monetary base remained unchanged in January, (3) deposit rose in December 2010, (4) inflation in December further accelerated, and (4) stock turnover (ADT) dropped to HK$63 billion levels and velocity declined to 75% in December 2010 due to seasonality.
Figure 18: HKMA aggregate balance and liquidity (HK$ in billions)
1,200 1,000 800 600 400 200 0 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Total monetary base Exchange fund papers and aggregate balance Aggregate balance Exchange fund papers and aggregate balance
Figure 19: Exchange rate implies a slight decrease in capital flow

7.805 7.795 7.785 7.775 7.765 7.755 HKD 1m fwd HKD spot
Aggregate balance
7.745 12-Jan 19-Jan 10-Nov 17-Nov 24-Nov 15-Dec 22-Dec 29-Dec 26-Jan 49 46 44 1H01 1H02 1H03 1H04 1H05 1H06 1H07 1H08 1H09 1H10
11
3-Nov
1-Dec
Source: HKMA.
Source: Bloomberg.
Figure 20: Hong Kong Stock Exchange: Velocity

200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 +3SD +2SD +1SD Mean -1SD Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
Figure 21: Market share of category B & C participants (%)

57 56 55 53 51 49 47 45 43 52 52 49 49 50 50 46 47 48 47 49 50 48 49 48 55
Source: CEIC.
Source: HKEx.
8-Dec
5-Jan
Table 7: Hong Kong Stock Exchange turnover statistics (HK$mn)

2007 2008 2009 2010 2011 1H08 2H08 1H09 2H09 1H10 2H10 1H11 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Source: CEIC.
ADT 87,386 71,841 62,008 68,583 75,486
Velocity 126% 117% 114% 92% 86%
86,981 57,068 58,120 65,683 63,252 73,622 75,486 98,351 75,796 63,409 50,728 44,655 71,365 66,341 65,004 64,246 62,241 61,384 85,860 75,486
120% 115% 128% 101% 91% 93% 86% 137% 104% 105% 125% 115% 141% 108% 94% 92% 90% 84% 102% 86%
Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11
ADT 47,683 39,885 46,513 61,770 79,405 73,144 68,917 69,901 60,367 65,541 70,367 59,395 77,467 55,920 59,265 68,845 66,537 52,175 53,274 57,842 73,206 97,782 97,915 62,966 75,486
Velocity 120% 104% 121% 139% 155% 130% 117% 111% 95% 98% 101% 84% 109% 83% 84% 94% 99% 77% 76% 79% 97% 119% 114% 75% 86%
Retail investment sales

In November, we see continuous increase in sales but a drop in redemptions for retail investment funds flow, resulting in a net inflow of US$922 million. Net flows on a rolling 6 months basis stopped declining. We expect flows to improve in 1Q11 given the optimistic employment outlook and wage increases.
Figure 22: HK retail investment sales (US$mn)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Sales Redemptions
Figure 23: HK retail investment sales (US$mn)

6,000 4,000 2,000 0 -2,000 -4,000 -6,000 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Net investment (mth) Net investment (6m rolling)
Source: CEIC.
Source: CEIC
12
Credit quality indicators

With the downtrend in unemployment rate and bankruptcy continuing in December, we expect credit quality to remain robust in 2010. In December, bankruptcy was flat, with an increase of 3 cases to 625 cases, and down from the recent peak of 1,793 cases in March 2009.
Figure 24: Hong Kong unemployment rate (%)
10 9 8 7 6 5 4 3 2 1 0 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09
Figure 25: Hong Kong bankruptcy petition (Cases)

2,500 2,000 1,500 1,000 500 0 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
13
Source: CEIC.
Source: ORO. Note: 3-month average.
Preview of FY10 results

For FY10, we expect an average earnings growth of 10%. On an underlying basis, we expect operating profit to be flat (0% y/y). For 2H10, we expect a small decline in earnings (-3% h/h) driven by exceptions, and operating profit to grow by 4%. We expect NIM to remain largely flat, fees to continue to recover, and CIR to be stable. Credit quality appears to be a bright spot. While we do not expect further writebacks, potential loan loss release could be a source of upside surprise on earnings.
Table 8: Hong Kong banks FY10E earnings forecasts
HK$ in millions Attributable profits EPS (FD) DPS (ord) BVPS (FD) Income statement (y/y) Net interest income Net fees and commission income Non-interest income Total revenue Total operating expenses Pre-provision Profit Total provisioning charge/(writeback) Operating earnings before tax Attributable profits Balance sheet (y/y) Advances less provisions Investments Total assets Customer deposits Shareholders' funds Per share data (y/y) EPS (FD) DPS (ord) BVPS (FD) Ratios Loan growth Net interest margins (reported) Non-int inc / TR CIR Credit cost (prov / gross loans) ROA ROE CAR -Tier 1
Source: J.P. Morgan estimates.
HSB 14,028 7.34 5.20 32.7
BOCHK 13,909 1.32 0.86 10.3
BEA 3,355 1.66 1.00 21.5
WHB 1,565 5.25 1.06 46.7
DSF 1,005 3.86 1.04 51.4
DSBG 1,012 0.91 0.25 10.9
CHB 399 0.92 0.46 14.7
1.1% 8.6% 6.9% 3.0% 7.7% 0.7% -50.0% 3.8% 6.1%

20.0% -14.8% 3.7% 5.0% 7.5% 6.1% 0.0% 7.5%
4.2% 2.8% -1.8% 2.3% 12.3% -2.8% 95.4% -3.5% 1.3%

17.0% 1.8% 9.9% 13.0% 5.8% 19.1% 0.0% 5.8%
8.9% 14.3% -21.9% -3.7% 8.7% -18.1% -64.9% -5.8% 33.5%

18.7% -30.6% 8.6% 10.0% 18.2% 21.9% 31.0% 7.5%
9.4% -1.3% -15.0% 2.2% 13.4% -5.2% 8.8% -5.6% 29.9%

18.2% -22.6% 3.5% 3.0% 10.3% 29.8% 51.4% 10.1%
-3.2% 15.1% 14.1% 0.6% 7.1% -5.8% -58.8% 15.3% 60.6%

17.1% 3.4% 6.9% 3.0% 24.8% 60.6% n.a. 17.5%
-3.5% 14.2% 12.0% -0.7% 7.4% -9.1% -58.2% 15.7% 68.4%

17.3% 0.7% 6.6% 3.0% 23.6% 52.2% n.a. 12.4%
4.4% -11.7% -22.4% -5.6% 4.1% -16.7% -33.5% -13.3% 72.0%

13.6% -25.6% 1.3% 1.0% 3.4% 72.0% 63.6% 3.4%
19.8% 1.81% 33.9% 33.6% 0.11% 1.67% 23.2% 12.7% 10.9%
17.4% 1.58% 29.9% 37.3% 0.04% 1.09% 13.1% 15.2% 10.7%
20.0% 1.84% 33.2% 60.6% 0.14% 0.74% 8.7% 12.3% 9.2%
18.6% 1.87% 24.6% 44.2% 0.06% 1.05% 11.9% 16.8% 10.7%
19.9% 1.81% 24.7% 52.6% 0.28% 0.79% 7.8% 15.3% 9.3%
19.9% 1.81% 20.5% 55.3% 0.28% 0.86% 8.4% 15.3% 9.3%
13.2% 1.26% 30.5% 59.0% 0.19% 0.57% 6.3% 14.9% 12.0%
14
Table 9: Hong Kong banks 2H10E earnings forecasts

HK$ in millions Attributable profits EPS (FD) DPS (ord) BVPS (FD) Income statement (h/h) Net interest income Net fees and commission income Non-interest income Total revenue Total operating expenses Pre-provision Profit Total provisioning charge/(writeback) Operating earnings before tax Attributable profits Balance sheet (h/h) Advances less provisions Investments Total assets Customer deposits Shareholders' funds Per share data (h/h) EPS (FD) DPS (ord) BVPS (FD) Ratios Loan growth Net interest margins (reported) Non-int inc / TR CIR Credit cost (prov / gross loans) ROA ROE CAR -Tier 1
Source: J.P. Morgan estimates.
HSB 7,064 3.69 3.00 32.7
BOCHK 6,719 0.64 0.46 10.3
BEA 1,608 0.79 0.61 20.6
WHB 804 2.70 0.76 46.7
DSF 502 1.93 0.97 54.7
DSBG 505 0.45 0.18 10.9
CHB 205 0.47 0.36 14.7
11.1% -1.8% -0.6% 7.0% 5.2% 7.9% 65.4% 6.6% 1.4%

4.9% -7.6% -1.7% 2.7% 0.0% 1.4% 36.4% 0.8%
8.4% -3.0% 23.0% 12.6% 19.5% 8.7% -432.8% 3.5% -6.5%

3.3% -5.0% 2.4% 6.7% 2.1% -6.5% 13.8% 2.1%
0.3% -9.4% 9.4% 3.2% 3.5% 2.9% 58.9% -1.4% -15.9%

2.7% -44.3% -1.4% 4.4% -0.5% -16.3% 61.6% 0.0%
3.9% 0.9% 12.6% 5.9% 3.6% 7.8% -314.8% -8.3% 5.8%

5.4% 1.4% 4.0% 4.7% 3.4% 5.7% 153.3% 3.3%
5.8% 17.2% 60.0% 17.0% 20.9% 12.7% 313.3% -3.7% -0.4%

5.6% -2.0% 2.4% 2.7% 19.0% -0.4% 383.2% 16.7%
6.8% 15.8% 81.3% 18.7% 22.7% 13.9% 313.3% -6.6% -0.4%

5.7% -4.7% 2.2% 2.6% 16.6% -0.4% 163.7% 6.0%
8.9% 12.2% 12.4% 9.9% 9.0% 11.3% 144.9% -0.7% 6.1%

4.3% -23.1% 0.3% 1.5% 1.5% 6.1% 258.2% 1.5%
4.9% 1.87% 32.7% 33.3% 0.12% 1.64% 22.7% 12.7% 10.9%
5.8% 1.60% 31.2% 38.4% 0.11% 1.02% 12.5% 16.6% 12.0%
6.8% 1.85% 34.1% 60.7% 0.14% 0.68% 7.7% 12.3% 9.2%
5.9% 1.84% 25.3% 43.8% 0.23% 1.08% 11.8% 16.8% 10.7%
5.1% 1.82% 28.2% 53.4% 0.43% 0.77% 7.7% 12.2% 6.2%
5.1% 1.83% 24.4% 56.2% 0.43% 0.84% 8.2% 12.2% 6.2%
4.4% 1.27% 30.8% 58.7% 0.27% 0.58% 6.5% 14.9% 12.0%
Consensus analysis
J.P. Morgan earnings estimates for Hong Kong banks are 5%/7%/3% lower than Bloomberg consensus for FY10/11/12. Consensus is looking for 15% earnings growth, compared to 10% for JPMe. The difference between JPMe and consensus is the largest for BOCHK and Chong Hing Bank, reflecting our stance being relatively less optimistic than the consensus, and the smallest for Hang Seng Bank, Wing Hang Bank and Dah Sing Financials.
15
Table 10: Hong Kong banks earnings forecasts vs. consensus

HK$ in millions
Name Bloomberg consensus HSB BOCHK BEA WHB DSF DSBG CHB HK banks J.P. Morgan estimates HSB BOCHK BEA WHB DSF DSBG CHB HK banks JPMe vs. Consensus HSB BOCHK BEA WHB DSF DSBG CHB HK banks Ticker Net profit FY09 Net profit FY10E Net profit FY11E Net profit FY12E Net profit y/y FY10E Net profit y/y FY11E Net profit y/y FY12E
11 HK 2388 HK 23 HK 302 HK 440 HK 2356 HK 1111 HK HK banks 11 HK 2388 HK 23 HK 302 HK 440 HK 2356 HK 1111 HK HK banks 11 HK 2388 HK 23 HK 302 HK 440 HK 2356 HK 1111 HK HK banks
13,221 13,725 2,565 1,205 626 601 232 32,174 13,221 13,725 2,565 1,205 626 601 232 32,174 0% 0% 0% 0% 0% 0% 0% 0%
14,278 15,109 3,581 1,595 1,007 1,046 439 37,055 14,028 13,909 3,355 1,565 1,005 1,012 399 35,273 -2% -8% -6% -2% 0% -3% -9% -5%
16,335 17,539 4,129 1,888 1,278 1,296 504 42,969 14,966 16,425 3,680 1,746 1,387 1,377 453 40,034 -8% -6% -11% -8% 9% 6% -10% -7%
18,796 20,468 4,816 2,126 1,494 1,541 588 49,831 17,023 20,485 4,921 2,030 1,694 1,745 565 48,463 -9% 0% 2% -5% 13% 13% -4% -3%
8% 10% 40% 32% 61% 74% 89% 15% 6% 1% 31% 30% 61% 68% 72% 10%
14% 16% 15% 18% 27% 24% 15% 16% 7% 18% 10% 12% 38% 36% 14% 13%
15% 17% 17% 13% 17% 19% 17% 16% 14% 25% 34% 16% 22% 27% 25% 21%
Source: Bloomberg and J.P. Morgan estimates.
16
Share price and valuation

Figure 26: BOCHK P/B (HK$)
35 30 25 20 15 10 5 0 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 3x 2.5x 2x 1.5x 1x
Figure 27: HSB P/B (HK$)

250 200 150 100 50 0 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 3x 2x 1.5x 1x 0.5x Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 3x 2.5x 2x 1.5x 1x Dec-09 Jan-11 1.75x 1.25x 1x 0.75x 0.5x
17
6x 5x 4x 3x 2x
Source: Bloomberg, company reports and J.P. Morgan estimates.
Source: Bloomberg, company reports, and J.P. Morgan estimates.
Figure 28: BEA P/B (HK$)

70 60 50 40 30 20 10 0 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 3x 2.5x 2x 1.5x 1x
Figure 29: WHB P/B (HK$)

180 160 140 120 100 80 60 40 20 0
Figure 30: DSF P/B (HK$)

100 90 80 70 60 50 40 30 20 10 0 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 1.75x 1.25x 1x 0.75x 0.5x
Figure 31: DSBG P/B (HK$)

35 30 25 20 15 10 5 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Dec-07 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
Figure 32: CHB P/B (HK$)

25 20 15 10 5 0 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 1.5x 1.25x 1x 0.75x 0.5x
Figure 33: PFH P/B (HK$)

12 10 8 6 4 2 0 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05
Hong Kong property update

Primary sales slowed down before Chinese New Year: We recorded 46 units sold in the primary market last week, compared with 65 units sold the week before. SHKP/LHTs Park Nara remained the major sales contributor of the week (18 units). Other sales came from Kerrys Island Crest (4 units), Cheung Kongs Festival City Ph 2 (3 units) and SHKPs YOHO Midtown (3 units) and ARIA (3 units). Secondary prices of HK Island reaching peak level: Secondary prices continued to edge up. The latest Centaline index for the week ended 23 January was 91.21, up 1.3% W/W and was 11% below peak. The sub-index for Hong Kong Island has reached 100.24, exceeding the 100 level for the first time since 1997, which might raise the market concern on further policy measures. SHKP named West Kowloon project: While Cheung Kong's Uptown in Yuen Long is likely to be the first one to come to the market after Chinese New Year, another major project adds to the pipeline. SHKP named its Hoi Fai Road project in West Kowloon as Imperial Cullinan, which might be launched in 1Q or 2Q11. The project provides a total of 650 units with standard sizes ranging from 800 2,000 sf. According to Sing Tao Daily, the asking price of the project may refer to the developers' Cullinan, which is around HK$20,000 psf in the secondary market on average. Besides, SHKP may launch Avignon in Tuen Mun after Chinese New Year. The project provides 459 units. Developers rushing for building plans approval: Since the introduction of GFA inflation cap of 10% which will be effective on 1 April 2011, developers have turned more active in submitting building plans for approval. According to the Buildings Department, a total 134 plans were submitted in December 2010, compared with 92 plans in November and 65 plans in October. For the full year of 2010, 637 plans were submitted, up 62% Y/Y. The number of plans approved was 341 in 2010, same as 2009.
Table 11: Hong Kong property weekly sales
Date 7 November 14 November 21 November 28 November Units sold 62 44 234 19 359 18 20 38 28 104 33 52 97 65 46 293 Major Launches/re-launches 31 from Jade Suites 28 from Azura (sold by reservation) 216 from Festival City Phase 2 9 from Festival City Phase 2
Related research: Hong Kong Property Update: Weekly primary sales: 46 units by Amy Luk, on 31 Jan 2011
5 December 12 December 19 December 27 December 2 January 9 January 16 January 23 January 30 January
5 from Festival City Phase 2 5 from Festival City Phase 2 15 from Zebrano 9 from 80 Robinson Road 6 from 80 Robinson Road 17 from Full Silver Garden 69 from Park Nara 31 from Park Nara 18 from Park Nara
Source: Hong Kong Economic Journal, Hong Kong Economic Times, Sing Tao Daily, Mingpao, J.P. Morgan estimates.
18
For PT valuation methodology and risks, please see the individual company notes published today.
Companies
19

01 February 2011
Hang Seng Bank

Looking for NIM and capital guidance
JPMe 6% earnings growth: Hang Seng Bank is scheduled to report FY10 results on 28 February. We expect a net profit of HK$14 billion, +6% y/y, 2% below Bloomberg consensus. For 2H10, we forecast 4% earnings growth. We maintain our Neutral rating for Hang Seng Bank. Potential surprise/disappointment: We are relatively comfortable with our forecast. Potential sources of surprises are credit write-backs and better-than-expected NIM, and on the downside is higher-than-expected cost pressure. We expect a DPS of HK$5.2, and we would turn more bullish if we are surprised on the upside. What we look for from management: We will be looking for: (1) the possibility of better NIM management in FY11 in light of a prolonged period of low HIBOR, (2) capital management perspective, particularly with the latest BASEL III implementation announced by HKMA, (3) in relation to capital, the likely dividend payout policy for the next three years, and (4) loan demand and capacity available for further growth, given current capital management and dividend payout. Valuation: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$120. Trading at 3.6x book value with a dividend yield of 4.1% (11E), HSB appears to be valued fairly, in our view. We see two major drags for HSB: (1) NIM pressure and (2) dividend payout risks. We would turn more positive if these two drags were removed.
Neutral
0011.HK, 11 HK Price: HK$128.60 Price Target: HK$120.00

AC
Sunil Garg
Price Performance
130 HK$ 115 100
Feb-10 May-10 Aug-10 Nov-10
0011.HK share price (HK$ HSI (rebased)
YTD Abs Rel -1.1% -1.1%
1m 0.6% -1.2%
3m 13.4% 11.9%
12m 17.7% 1.9%
Hang Seng Bank Ltd. (Reuters: 0011.HK, Bloomberg: 11 HK)

Year-end Dec (HK$ in mn) Operating Profit Net Profit Cash EPS (HK$) Fully Diluted EPS (HK$) DPS (HK$) EPS growth (%) ROE P/E BVPS (HK$) P/BV Div. Yield
Source: Company data, Bloomberg, J.P. Morgan estimates.
FY09A FY10E FY11E FY12E FY13E 14,136 14,240 15,597 17,590 18,420 52-wk range (HK$) 13,221 14,028 14,966 17,023 17,947 Market cap (HK$ mn) 6.92 7.34 7.83 8.90 9.39 Market cap ($ mn) 6.92 7.34 7.83 8.90 9.39 Shares outstanding (mn) 5.20 5.20 5.30 5.50 5.50 Fiscal Year End (6.2%) 6.1% 6.7% 13.7% 5.4% Price (HK$) 24.1% 23.2% 23.0% 24.1% 23.1% Date Of Price 18.6 17.5 16.4 14.4 13.7 Avg daily value (HK$ mn) 30.45 32.75 35.30 38.69 42.63 Avg daily value ($ mn) 4.2 3.9 3.6 3.3 3.0 Avg daily vol (mn) 4.0% 4.0% 4.1% 4.3% 4.3% HSI Exchange Rate
133.90 - 101.00 245,863 31,557 1,912 Dec 128.60 31 Jan 11 379.6 48.7 9.7 23,447 7.79
Hang Seng Bank: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.90% 93% 1.76% 14,023 6,789 4,321 1,864 604 20,812 (6,676) 14,136 (812) 0 0 405 15,477 2,256 0 13,221 2010e 1.81% 93% 1.68% 14,173 7,259 4,695 1,938 626 21,432 (7,191) 14,240 (406) 0 0 222 16,503 2,476 0 14,028 2011e 1.89% 93% 1.75% 15,344 7,892 5,258 1,971 663 23,236 (7,639) 15,597 (926) 0 0 0 17,608 2,641 0 14,966 2012e 2.03% 93% 1.88% 17,271 8,439 5,569 2,168 702 25,710 (8,120) 17,590 (793) 0 0 0 20,027 3,004 0 17,023 2013e 2.03% 93% 1.88% 18,109 8,947 5,926 2,277 744 27,055 (8,636) 18,420 (860) 0 0 0 21,114 3,167 0 17,947 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 4.7% 13.2% 8.4% 12.8% -8.2% -13.6% -3.9% -13.0% -10.7% -1.8% -14.3% -42.0% -2.5% -6.2% -6.2% -17.5% 2009 54.2% 39.2% 42.4% 81.1% 0.0% 2009 0.57% 0.72% 78.3% -26.3% 12.8% 15.8% 2009 1.77% 2.62% 32.1% 0.84% 1.78% 0.24% 42.4% 10.8% 1.95% 14.6% 0.0% 1.66% 5.01% 6.9% 24.1% 2010e 20.0% 5.0% 3.7% 7.5% 21.3% 1.1% 6.9% 8.6% 3.0% 7.7% 0.7% -50.0% 6.6% 6.1% 6.1% 0.0% 2010e 61.9% 35.1% 45.1% 83.6% 0.0% 2010e 0.44% 0.57% 77.3% -5.0% 10.9% 12.7% 2010e 1.68% 2.55% 33.6% 0.85% 1.69% 0.11% 45.1% 11.6% 1.96% 15.0% 0.0% 1.67% 5.02% 7.2% 23.2% 2011e 8.4% 5.0% 4.6% 7.8% 7.8% 8.3% 8.7% 12.0% 8.4% 6.2% 9.5% 128.0% 6.7% 6.7% 6.7% 1.9% 2011e 63.9% 30.8% 49.2% 84.4% 0.0% 2011e 0.52% 0.58% 88.9% 10.0% 11.1% 12.5% 2011e 1.75% 2.65% 32.9% 0.87% 1.78% 0.21% 49.2% 11.4% 2.01% 15.0% 0.0% 1.71% 4.70% 7.4% 23.0% 2012e 6.4% 5.0% 4.8% 9.6% 6.1% 12.6% 6.9% 5.9% 10.6% 6.3% 12.8% -14.3% 13.7% 13.7% 13.7% 3.8% 2012e 64.7% 29.5% 50.4% 84.9% 0.0% 2012e 0.53% 0.60% 87.5% 10.0% 11.6% 12.8% 2012e 1.88% 2.80% 31.6% 0.89% 1.92% 0.17% 50.4% 11.7% 2.18% 15.0% 0.0% 1.86% 5.00% 7.7% 24.1% 2013e 5.5% 5.0% 4.9% 10.2% 5.2% 4.9% 6.0% 6.4% 5.2% 6.4% 4.7% 8.3% 5.4% 5.4% 5.4% 0.0% 2013e 65.0% 28.7% 50.9% 85.4% 0.0% 2013e 0.54% 0.63% 85.8% 10.0% 12.3% 13.1% 2013e 1.88% 2.81% 31.9% 0.90% 1.91% 0.17% 50.9% 11.7% 2.19% 15.0% 0.0% 1.87% 4.99% 8.1% 23.1%
Per Share Data EPS (HKD) Dividend (HKD) Payout ratio NAV (HKD) Avg. Shares issued (mn)
2009 6.92 5.20 0.75 30.45 1,912
2010e 7.34 5.20 0.71 32.75 1,912
2011e 7.83 5.30 0.68 35.30 1,912
2012e 8.90 5.50 0.62 38.69 1,912
2013e 9.39 5.50 0.59 42.63 1,912
Key balance sheet - HKDmn Net Customer Loans Investments Other Earning Assets Average Earning Assets Total assets Interbank funding Customer deposits Long-term bond funding Other Interest Bearing Liabilities Average Interest Bearing Liab. Average Assets Shareholders' equity Risk Weighted Assets Average Risk Weighted Assets
2009 344,621 318,599 126,637 736,953 825,968 4,870 636,369 12,602 620,534 794,068 58,224 252,729 264,047
2010e 413,424 271,307 134,073 781,055 856,256 4,870 668,187 12,300 669,599 841,112 62,604 306,541 279,635
2011e 448,354 267,936 140,777 813,688 895,970 4,870 701,597 12,403 702,114 876,113 67,484 330,421 318,481
2012e 476,862 273,836 147,816 852,389 938,991 4,870 736,677 12,510 736,463 917,481 73,972 350,575 340,498
2013e 502,933 278,469 161,258 893,947 984,845 4,870 773,510 12,620 772,528 961,918 81,508 368,947 359,761
21

01 February 2011
Bank of China (BOCHK)

We expect RMB contribution to come later
JPMe 4% underlying earnings growth for 2H10: BOCHK will report FY10 results toward the end of Mar 2011. We expect a net profit of HK$14 billion, +1% y/y, 8% below Bloomberg consensus. For 2H10, we forecast 7% earnings decline h/h, driven by the absence of HK$601 million fair value gain of investment properties in 1H10. We expect 4% earnings growth h/h on an underlying basis. We maintain our positive stance on BOCHK in the long term. Potential surprises/disappointments: A potential source of earnings disappointment is larger-than-expected NIM pressure. Brokerage fees and potential credit write-backs are two possible drivers of potential earnings surprises on the upside. We expect a better-than-industry average deposit growth for BOCHK. Also, we expect the capital strength of BOCHK to support its long-term dividend payout policy. What we look for from management: We will be looking for: (1) updates on RMB business and related earnings contribution, (2) future strategic direction of its China platform, (3) guidance of capital levels with reference to latest HKMA announcement of BASEL III implementation, and (4) latest developments of its insurance operation. Why are we positive? We maintain our OW rating, earnings estimates, and Dec-11 PT of HK$30. Our positive stance on BOCHK centers on our view that BOCHK is the only bank in Hong Kong with both a China connection and balance sheet franchise. This combination of advantages should allow BOCHK to gain market share and leverage up its balance sheet. RMB business helps, but we believe its impact on earnings wont be obvious until FY12E or later.
Overweight

AC
Sunil Garg
Price Performance
26 HK$ 20 14
2388.HK share price (HK$ R-CHIP (rebased)
YTD Abs Rel -6.0% -4.1%
1m -4.9% -4.5%
3m 3.5% 4.7%
12m 51.5% 45.5%
Bank of China (Hong Kong) (Reuters: 2388.HK, Bloomberg: 2388 HK)

FY09A FY10E FY11E FY12E FY13E 17,192 16,707 21,042 25,939 29,618 52-wk range (HK$) 13,725 13,909 16,425 20,485 23,490 Market cap (HK$ mn) 1.30 1.32 1.55 1.94 2.22 Market cap ($ mn) 1.30 1.32 1.55 1.94 2.22 Shares outstanding (mn) 0.86 0.86 1.01 1.26 1.44 Fiscal Year End 310.6% 1.3% 18.1% 24.7% 14.7% Price (HK$) 14.8% 13.1% 14.7% 17.4% 18.7% Date Of Price 19.4 19.1 16.2 13.0 11.3 Avg daily value (HK$ mn) 9.73 10.30 10.83 11.50 12.28 Avg daily value ($ mn) 2.6 2.4 2.3 2.2 2.0 Avg daily vol (mn) 3.4% 3.4% 4.0% 5.0% 5.7% R-CHIP Exchange Rate
29.40 - 16.04 265,905 34,130 10,573 Dec 25.15 31 Jan 11 342.5 44.0 36.4 4,153 7.79
BOCHK: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.69% 90% 1.52% 17,932 8,123 6,508 675 940 26,055 (8,863) 17,192 (112) 0 (3,278) 2,915 16,724 2,678 321 13,725 2010e 1.58% 93% 1.47% 18,683 7,976 6,693 1,722 (439) 26,659 (9,952) 16,707 (219) 0 0 657 17,145 2,915 321 13,909 2011e 1.77% 93% 1.65% 23,221 8,566 7,171 840 555 31,787 (10,745) 21,042 (866) 0 0 0 20,176 3,430 321 16,425 2012e 1.91% 93% 1.78% 27,986 9,205 7,707 924 574 37,191 (11,251) 25,939 (871) 0 0 0 25,068 4,262 321 20,485 2013e 1.95% 93% 1.83% 31,491 9,852 8,287 970 594 41,342 (11,724) 29,618 (930) 0 0 0 28,688 4,877 321 23,490 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 12.3% 5.0% 5.7% 24.4% 5.7% -11.0% 47.7% 25.7% 1.6% 10.8% -2.6% -83.4% 310.1% 310.6% 310.6% 95.2% 2009 62.6% 31.0% 42.2% 75.8% 0.0% 2009 0.43% 0.34% 128.3% -17.3% 11.6% 16.9% 2009 1.52% 2.21% 34.0% 0.75% 1.46% 0.02% 42.2% 11.5% 1.42% 17.0% 2.3% 1.16% 2.28% 7.9% 14.8% 2010e 17.0% 13.0% 9.9% 5.8% 15.9% 4.2% -1.8% 2.8% 2.3% 12.3% -2.8% 95.4% 2.5% 1.3% 19.1% 0.0% 2010e 64.8% 29.8% 44.9% 77.1% 0.0% 2010e 0.40% 0.23% 174.7% -20.0% 10.7% 15.2% 2010e 1.47% 2.09% 37.3% 0.78% 1.31% 0.04% 44.9% 12.1% 1.35% 17.0% 2.3% 1.09% 2.08% 8.3% 13.1% 2011e 11.4% 15.0% 11.3% 5.1% 11.7% 24.3% 7.4% 7.1% 19.2% 8.0% 25.9% 295.7% 17.7% 18.1% 18.1% 18.1% 2011e 62.8% 29.5% 46.3% 79.1% 0.0% 2011e 0.40% 0.23% 176.7% 10.0% 10.2% 14.3% 2011e 1.65% 2.26% 33.8% 0.76% 1.49% 0.14% 46.3% 11.8% 1.43% 17.0% 1.9% 1.17% 2.16% 7.9% 14.7% 2012e 10.1% 15.0% 11.7% 6.2% 10.7% 20.5% 7.5% 7.5% 17.0% 4.7% 23.3% 0.6% 24.2% 24.7% 24.7% 24.7% 2012e 60.1% 31.3% 46.0% 81.3% 0.0% 2012e 0.40% 0.23% 177.1% 10.0% 9.9% 13.7% 2012e 1.78% 2.37% 30.3% 0.72% 1.65% 0.12% 46.0% 12.3% 1.60% 17.0% 1.5% 1.31% 2.42% 7.5% 17.4% 2013e 8.9% 10.0% 8.2% 6.8% 8.9% 12.5% 7.0% 7.5% 11.2% 4.2% 14.2% 6.7% 14.4% 14.7% 14.7% 14.7% 2013e 59.4% 32.4% 45.8% 82.9% 0.0% 2013e 0.40% 0.23% 175.9% 10.0% 9.9% 13.3% 2013e 1.83% 2.40% 28.4% 0.68% 1.72% 0.12% 45.8% 12.6% 1.66% 17.0% 1.3% 1.36% 2.53% 7.3% 18.7%
2009 1.30 0.86 0.66 9.73 10,573
2010e 1.32 0.86 0.65 10.30 10,573
2011e 1.55 1.01 0.65 10.83 10,573
2012e 1.94 1.26 0.65 11.50 10,573
2013e 2.22 1.44 0.65 12.28 10,573
2009 527,135 375,933 259,380 1,061,065 1,212,791 137,957 842,321 26,776 980,496 1,180,018 102,902 619,792 602,954
2010e 616,729 382,564 282,304 1,179,680 1,333,030 137,957 951,823 26,508 1,061,671 1,272,911 108,907 718,202 668,997
2011e 686,937 447,143 296,419 1,309,061 1,483,059 137,957 1,094,596 26,508 1,187,675 1,408,045 114,511 802,508 760,355
2012e 756,019 535,036 311,240 1,463,855 1,656,015 137,957 1,258,786 26,508 1,341,156 1,569,537 121,600 888,409 845,458
2013e 823,094 583,544 330,291 1,611,761 1,791,847 137,957 1,384,664 26,508 1,486,190 1,723,931 129,849 967,355 927,882
23

01 February 2011
Bank of East Asia

Multiple events
JPMe 31% earnings growth: BEA is scheduled to report FY10 results on 15 February. We expect a net profit of HK$3.4 billion, +31% y/y, and we are 6% below Bloomberg consensus. For 2H10, we forecast -16% h/h earnings growth, mainly driven by HK$230 million BEA Canada disposal gain. On an underlying basis, we expect earnings to be flat h/h. We maintain OW rating for BEA. Potential surprise/disappointment: Potential source of positive surprises are better-than-expected fees income growth and better-thanexpected NIM due to China operation. Loan volume is however a potential disappointment given that BEA China needs to maintain a 75% LDR requirement. What we look for from the management: We will be looking for (1) amount of disposal gain of BEA USA, (2) updates on the relationship with CaixaBank especially after the restructuring, and (3) strategy for China expansion given the latest changes in China banking policy. Event-driven: We see share price to remain event-driven in the shortterm, specifically related to its relationship with ICBC and CaixaBank. We maintain our OW rating, earnings estimates, and Dec-11 PT of HK$40. We continue to believe that BEA China will help to drive a revenue growth better than its peers in the medium term and thus ROE uplift potentially from 7.5% in FY09 to 12.5% in FY13E.
Overweight

AC
Sunil Garg
Price Performance
36 HK$ 30 24
YTD Abs Rel 0.9% 0.9%
1m 3.8% 2.0%
3m 2.1% 0.6%
12m 27.8% 12.0%
Bank of East Asia (Reuters: 0023.HK, Bloomberg: 23 HK)

FY09A 5,295 2,514 1.36 1.36 0.80 5736.7% 7.5% 24.8 19.01 1.8 2.4%
FY10E 4,335 3,355 1.66 1.66 1.00 21.9% 8.7% 18.0 20.55 1.6 2.9%
FY11E 5,266 3,680 1.74 1.74 1.09 4.9% 8.7% 18.2 21.40 1.6 3.2%
FY12E 6,943 4,921 2.33 2.33 1.45 33.4% 11.1% 13.9 22.48 1.5 4.3%
FY13E 8,043 5,891 2.78 2.78 1.74 19.4% 12.5% 11.7 23.82 1.4 5.1%
52-wk range (HK$) Market cap (HK$ mn) Market cap ($ mn) Shares outstanding (mn) Fiscal Year End Price (HK$) Date Of Price Avg daily value (HK$ mn) Avg daily value ($ mn) Avg daily vol (mn) HSI Exchange Rate
36.60 - 26.15 69,019 8,852 2,042 Dec 33.80 31 Jan 11 251.0 32.2 12.3 23,447 7.80
Bank of East Asia: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.80% 88% 1.59% 6,747 4,677 2,262 1,910 505 11,424 (6,129) 5,295 (1,105) 0 0 (958) 3,496 858 73 2,514 2010e 1.84% 88% 1.62% 7,348 3,651 2,586 490 575 10,999 (6,664) 4,335 (388) 0 230 160 4,706 941 80 3,355 2011e 1.92% 88% 1.69% 8,482 4,111 2,862 639 610 12,593 (7,326) 5,266 (602) 0 0 0 5,090 1,018 62 3,680 2012e 2.05% 89% 1.81% 10,244 4,482 3,140 693 649 14,726 (7,783) 6,943 (767) 0 0 0 6,644 1,329 64 4,921 2013e 2.07% 89% 1.84% 11,531 4,790 3,377 723 691 16,321 (8,278) 8,043 (699) 0 0 0 7,859 1,572 66 5,891 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 7.4% 5.8% 4.5% 9.4% 15.6% -0.7% 694.1% 5.5% 54.8% 6.1% 230.3% 98.0% 43600.0% 6346.2% 5736.7% 146.9% 2009 76.4% 10.1% 59.5% 88.4% 0.0% 2009 0.51% 0.99% 54.9% 54.4% 9.2% 13.3% 2009 1.59% 2.69% 53.7% 1.44% 1.25% 0.44% 59.5% 8.6% 0.82% 24.5% 2.8% 0.59% 0.94% 7.9% 7.5% 2010e 18.7% 10.0% 8.6% 18.2% 17.6% 8.9% -21.9% 14.3% -3.7% 8.7% -18.1% -64.9% 34.6% 33.5% 21.9% 31.0% 2010e 82.5% 10.1% 63.2% 90.4% 0.0% 2010e 0.42% 0.74% 59.4% -10.0% 9.2% 12.3% 2010e 1.62% 2.43% 60.6% 1.47% 0.96% 0.14% 63.2% 12.3% 1.04% 20.0% 2.1% 0.74% 1.07% 8.5% 8.7% 2011e 11.4% 15.0% 12.6% 4.4% 11.6% 15.4% 12.6% 10.7% 14.5% 9.9% 21.5% 55.0% 8.1% 9.7% 4.9% 9.4% 2011e 79.9% 8.3% 65.5% 91.6% 0.0% 2011e 0.42% 0.70% 60.0% 10.0% 9.2% 11.9% 2011e 1.69% 2.51% 58.2% 1.46% 1.05% 0.19% 65.5% 11.2% 1.02% 20.0% 1.5% 0.73% 1.03% 8.5% 8.7% 2012e 10.2% 15.0% 12.9% 5.3% 10.2% 20.8% 9.0% 9.7% 16.9% 6.2% 31.8% 27.4% 30.5% 33.7% 33.4% 33.4% 2012e 76.6% 8.7% 64.4% 92.4% 0.0% 2012e 0.45% 0.70% 64.3% 10.0% 9.6% 11.9% 2012e 1.81% 2.60% 52.9% 1.38% 1.23% 0.22% 64.4% 11.7% 1.18% 20.0% 1.2% 0.87% 1.24% 7.9% 11.1% 2013e 7.5% 10.0% 9.0% 6.2% 7.7% 12.6% 6.9% 7.5% 10.8% 6.4% 15.8% -8.9% 18.3% 19.7% 19.4% 19.4% 2013e 74.8% 9.2% 63.2% 93.0% 0.0% 2013e 0.45% 0.71% 63.6% 10.0% 10.2% 12.3% 2013e 1.84% 2.61% 50.7% 1.32% 1.28% 0.18% 63.2% 12.1% 1.25% 20.0% 1.0% 0.94% 1.36% 7.5% 12.5%
2009 1.36 0.76 0.59 19.96 1,844
2010e 1.66 1.00 0.60 21.47 2,018
2011e 1.74 1.09 0.60 21.40 2,109
2012e 2.33 1.45 0.60 22.48 2,114
2013e 2.78 1.74 0.60 23.82 2,119
2009 261,803 54,236 99,504 374,833 434,082 11,886 342,528 7,158 358,955 424,668 35,165 287,727 268,320
2010e 310,822 37,633 103,961 398,581 471,560 12,480 376,781 2,953 376,893 452,821 41,551 338,405 313,066
2011e 346,327 45,663 119,278 442,540 531,054 13,104 433,298 3,041 420,829 501,307 43,376 377,506 357,956
2012e 381,525 52,845 144,706 500,704 599,543 13,760 498,293 3,132 482,314 565,299 45,675 416,177 396,842
2013e 410,265 63,008 158,992 556,269 653,457 14,448 548,122 3,226 540,490 626,500 48,519 448,265 432,221
25

01 February 2011
Wing Hang Bank

We expect solid fundamentals to continue
JPMe 30% earnings growth: Wing Hang Bank will report FY10 results in mid-March. We expect a net profit of HK$1.6 billion, +30% y/y, 2% below Bloomberg consensus. For 2H10, we forecast 6% earnings growth. We maintain OW rating for Wing Hang Bank. Potential surprise/ disappointment: We are relatively comfortable with our forecast for WHB. Potential sources of surprises are credit write-backs and better-than-expected fees income growth on the upside, and higher-than-expected NIM and cost pressure on the downside. What we look for from the management: We will be looking for (1) latest development of its China operation, (2) possibility of equity raising given recently announced BASEL III implementation and business growth outlook, and (3) guidance of dividend payout policy. Maintain OW: We maintain our OW rating reflecting WHBs betterthan-peers fundamentals, driven by solid management and expansion in China. We keep our earnings estimates and Dec-11 PT of HK$115 unchanged. Key downside risk to our PT is larger-than-expected pressure in relation to the new capital requirement.
Overweight

AC
Sunil Garg
Price Performance
120 HK$ 90 60
YTD Abs Rel -2.7% -2.7%
1m -2.4% -4.2%
3m 15.8% 14.3%
12m 58.3% 42.5%
Wing Hang Bank (Reuters: 0302.HK, Bloomberg: 302 HK)

FY09A 2,100 1,205 4.05 4.05 0.70 3.7% 10.4% 25.7 42.40 2.5 0.7%
FY10E 1,990 1,565 5.25 5.25 1.06 29.8% 11.9% 19.8 46.69 2.2 1.0%
FY11E 2,212 1,746 5.85 5.85 1.77 11.4% 12.1% 17.8 50.76 2.1 1.7%
FY12E 2,540 2,030 6.80 6.80 2.74 16.2% 13.0% 15.3 54.68 1.9 2.6%
FY13E 3,018 2,430 8.13 8.13 4.10 19.6% 14.5% 12.8 58.49 1.8 3.9%
52-wk range (HK$) Market cap (HK$ mn) Market cap ($ mn) Shares outstanding (mn) Fiscal Year End Price (HK$) Date Of Price Avg daily value (HK$ bn) Avg daily value ($ mn) Avg daily vol (mn) HSI Exchange Rate
117.80 - 62.45 30,976 3,976 295 Dec 104.90 31 Jan 11 0.1 6.9 0.8 23,447 7.79
Wing Hang Bank: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.82% 96% 1.75% 2,460 1,033 662 340 31 3,493 (1,393) 2,100 (53) 0 (178) (473) 1,434 227 2 1,205 2010e 1.87% 96% 1.80% 2,692 878 653 192 33 3,570 (1,580) 1,990 (58) 0 9 (97) 1,867 299 4 1,565 2011e 1.94% 96% 1.86% 2,968 969 723 211 35 3,938 (1,726) 2,212 (154) 0 0 0 2,083 333 4 1,746 2012e 1.95% 96% 1.88% 3,344 1,067 798 232 37 4,412 (1,872) 2,540 (146) 0 0 0 2,422 387 4 2,030 2013e 1.99% 97% 1.92% 3,891 1,158 874 244 40 5,050 (2,031) 3,018 (151) 0 0 0 2,898 464 4 2,430 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 1.3% 9.6% 9.5% 18.3% -2.8% 0.6% 17.9% -6.3% 5.2% 0.8% 8.3% -88.1% 5.3% 3.7% 3.7% -34.1% 2009 65.3% 24.5% 58.2% 96.5% 0.0% 2009 0.30% 0.51% 60.4% -27.6% 10.6% 17.8% 2009 1.75% 2.48% 39.9% 0.99% 1.49% 0.06% 58.2% 6.6% 1.02% 15.8% 0.0% 0.86% 1.48% 8.2% 10.4% 2010e 18.2% 3.0% 3.5% 10.3% 15.7% 9.4% -15.0% -1.3% 2.2% 13.4% -5.2% 8.8% 30.2% 29.9% 29.8% 51.4% 2010e 75.0% 28.6% 60.1% 97.0% 0.0% 2010e 0.29% 0.36% 82.6% -15.0% 10.7% 16.8% 2010e 1.80% 2.38% 44.2% 1.06% 1.33% 0.06% 60.1% 8.5% 1.25% 16.0% 0.0% 1.05% 1.80% 8.8% 11.9% 2011e 11.5% 10.0% 9.4% 8.8% 11.3% 10.3% 10.4% 10.7% 10.3% 9.3% 11.1% 167.5% 11.5% 11.6% 11.4% 67.2% 2011e 76.0% 24.2% 64.6% 97.2% 0.0% 2011e 0.32% 0.34% 95.3% 5.0% 10.9% 16.4% 2011e 1.86% 2.47% 43.8% 1.08% 1.39% 0.15% 64.6% 8.6% 1.31% 16.0% 0.0% 1.09% 1.78% 9.0% 12.1% 2012e 10.4% 15.0% 13.6% 7.8% 11.0% 12.7% 10.1% 10.3% 12.0% 8.4% 14.8% -5.1% 16.3% 16.3% 16.2% 54.9% 2012e 73.0% 25.3% 64.2% 97.4% 0.0% 2012e 0.33% 0.33% 98.6% 10.0% 11.0% 16.0% 2012e 1.88% 2.48% 42.4% 1.05% 1.43% 0.13% 64.2% 8.9% 1.36% 16.0% 0.0% 1.14% 1.86% 8.8% 13.0% 2013e 10.9% 15.0% 13.7% 7.1% 11.5% 16.4% 8.5% 9.6% 14.5% 8.5% 18.8% 3.2% 19.7% 19.7% 19.6% 49.5% 2013e 70.4% 27.9% 62.6% 97.7% 0.0% 2013e 0.33% 0.33% 99.4% 10.0% 10.9% 15.4% 2013e 1.92% 2.50% 40.2% 1.00% 1.49% 0.12% 62.6% 9.3% 1.43% 16.0% 0.0% 1.20% 2.00% 8.3% 14.5%
2009 4.05 0.70 0.17 42.42 298
2010e 5.25 1.06 0.20 46.72 298
2011e 5.85 1.77 0.30 50.76 298
2012e 6.80 2.74 0.40 54.68 299
2013e 8.13 4.10 0.50 58.49 299
2009 82,431 48,315 11,949 135,165 147,124 832 126,183 972 123,069 140,762 12,521 80,396 81,563
2010e 97,443 37,410 12,902 143,603 152,292 873 129,968 993 129,910 149,708 13,805 93,033 86,715
2011e 108,698 39,715 13,537 153,123 166,599 917 142,965 1,005 138,361 159,445 15,021 103,573 98,303
2012e 119,971 50,378 14,203 171,316 189,318 963 164,410 1,018 155,639 177,958 16,199 114,981 109,277
2013e 133,094 62,340 14,903 195,240 215,225 1,011 189,071 1,032 178,752 202,272 17,344 128,214 121,597
27

01 February 2011
Dah Sing Financial

Look for China expansion strategy
JPMe 61% earnings growth: Dah Sing Financial will report FY10 results in mid-March. We expect net profit of HK$1 billion, +61% y/y, and we are the same as Bloomberg consensus. For 2H10, we forecast flat h/h earnings growth. We maintain our Neutral rating for Dah Sing Financial. Potential surprise/ disappointment: We see credit quality and NIM as two potential sources of earnings surprise on the upside, and we see few downside risks to JPMe/ consensus earnings. What we look for from management: We will be looking for: (1) guidance on the strategy for its China expansion and required capital outlay, (2) dividend payout guidance, given its China expansion, rights issue in 2010 and recently released BASEL III implementation, and (3) sight of turnaround in its insurance operation. Maintain Neutral: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$60. We are concerned with the leverage levels in light of recently announced BASEL III implementation and the impact to sustainable ROE. We should turn more positive when we see evidence of China expansion.
Neutral

AC
Sunil Garg
Price Performance
60 HK$ 45 30
1m 7.3% 5.5%
3m 1.4% -0.1%
12m 47.8% 32.0%
Dah Sing Financial (Reuters: 0440.HK, Bloomberg: 440 HK)

FY09A 1,519 626 2.40 2.40 0.00 478.6% 5.9% 22.7 43.78 1.2 0.0%
FY10E 1,430 1,005 3.86 3.86 1.04 60.6% 7.8% 15.0 48.59 1.1 1.9%
FY11E 1,879 1,387 4.74 4.74 2.35 22.8% 9.3% 11.5 53.25 1.0 4.3%
FY12E 2,311 1,694 5.79 5.79 2.98 22.2% 10.4% 9.4 57.86 0.9 5.5%
FY13E 2,570 1,886 6.44 6.44 3.45 11.3% 10.8% 8.5 61.83 0.9 6.3%
63.22 - 33.69 15,973 2,050 293 Dec 54.55 31 Jan 11 0.0 2.3 1.5 23,447 7.79
Dah Sing Financial: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.95% 99% 1.93% 2,344 654 327 216 111 2,998 (1,479) 1,519 (433) 0 (390) (11) 886 96 163 626 2010e 1.81% 99% 1.79% 2,269 746 377 354 15 3,015 (1,585) 1,430 (179) 0 0 (45) 1,477 210 262 1,005 2011e 1.86% 99% 1.85% 2,550 1,049 399 453 197 3,600 (1,721) 1,879 (173) 0 0 0 2,031 288 356 1,387 2012e 2.00% 100% 1.99% 3,005 1,138 423 465 250 4,144 (1,832) 2,311 (164) 0 0 0 2,506 360 451 1,694 2013e 2.06% 100% 2.06% 3,342 1,179 449 478 252 4,521 (1,951) 2,570 (144) 0 0 0 2,820 412 523 1,886 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 -3.5% 10.5% 2.0% 15.2% -0.9% -1.1% -1.1% -35.0% -1.1% 5.4% -6.7% -34.2% 383.9% 489.5% 478.6% -100.0% 2009 77.0% 25.3% 57.1% 81.4% 0.0% 2009 0.98% 0.96% 123.4% -46.0% 10.2% 16.8% 2009 1.93% 2.47% 49.3% 1.22% 1.25% 0.69% 57.1% 8.7% 0.73% 16.0% 0.1% 0.52% 0.83% 8.8% 5.9% 2010e 17.1% 3.0% 6.9% 24.8% 16.6% -3.2% 14.1% 15.1% 0.6% 7.1% -5.8% -58.8% 66.8% 60.6% 60.6% #DIV/0! 2010e 87.5% 26.2% 58.2% 84.4% 0.0% 2010e 0.83% 0.52% 187.6% -35.0% 9.3% 15.3% 2010e 1.79% 2.38% 52.6% 1.25% 1.13% 0.28% 58.2% 15.7% 1.16% 16.0% 0.2% 0.79% 1.23% 10.1% 7.8% 2011e 14.2% 12.7% 10.3% 9.6% 13.9% 12.4% 40.7% 6.0% 19.4% 8.6% 31.3% -3.1% 37.5% 38.0% 22.8% 126.9% 2011e 88.6% 25.0% 61.9% 84.5% 0.0% 2011e 0.79% 0.39% 202.3% 0.0% 8.7% 14.1% 2011e 1.85% 2.61% 47.8% 1.25% 1.36% 0.23% 61.9% 17.9% 1.47% 16.0% 0.3% 1.01% 1.47% 10.8% 9.3% 2012e 10.0% 10.1% 8.5% 8.7% 10.0% 17.8% 8.5% 6.0% 15.1% 6.5% 23.0% -5.3% 23.4% 22.2% 22.2% 26.7% 2012e 88.6% 24.1% 63.4% 85.7% 0.0% 2012e 0.78% 0.37% 209.7% 5.0% 8.5% 13.4% 2012e 1.99% 2.75% 44.2% 1.22% 1.53% 0.19% 63.4% 19.6% 1.66% 16.0% 0.3% 1.12% 1.61% 10.8% 10.4% 2013e 7.7% 8.1% 6.9% 6.9% 7.7% 11.2% 3.6% 6.1% 9.1% 6.5% 11.2% -12.0% 12.5% 11.3% 11.3% 15.8% 2013e 88.3% 23.8% 64.0% 86.5% 0.0% 2013e 0.76% 0.36% 209.5% 5.0% 8.5% 13.1% 2013e 2.06% 2.79% 43.1% 1.20% 1.58% 0.16% 64.0% 20.7% 1.74% 16.0% 0.3% 1.16% 1.65% 10.8% 10.8%
2009 2.40 0.00 0.00 43.78 261
2010e 3.86 1.04 0.30 51.45 261
2011e 4.74 2.35 0.50 53.25 293
2012e 5.79 2.98 0.51 57.86 293
2013e 6.44 3.45 0.54 61.83 293
2009 68,046 32,691 15,025 120,212 122,576 1,435 88,370 2,060 91,093 121,378 11,396 75,424 75,762
2010e 79,653 33,815 10,612 125,613 131,088 1,722 91,057 2,678 93,661 126,832 14,227 87,936 81,680
2011e 90,943 35,225 11,137 136,896 144,593 1,808 102,609 2,758 101,317 137,840 15,591 100,139 94,037
2012e 100,043 37,518 11,688 150,077 156,835 1,899 112,942 2,841 112,429 150,714 16,942 110,133 105,136
2013e 107,723 39,785 12,266 161,845 167,679 1,994 122,035 2,926 122,319 162,257 18,103 118,624 114,379
29

01 February 2011
Dah Sing Banking Group

Look for China expansion strategy
JPMe 68% earnings growth: Dah Sing Banking Group will report FY10 results in mid-March. We expect net profit of HK$1 billion, +68% y/y, and we are 3% below Bloomberg consensus. For 2H10, we forecast flat h/h earnings growth. We maintain our Neutral rating for Dah Sing Banking Group. Potential surprise/ disappointment: We see credit quality and NIM as two potential sources of earnings surprise on the upside, and we see few downside risks to JPMe/ consensus earnings. What we look for from management: We will be looking for: (1) guidance on the strategy for its China expansion and required capital outlay, and (2) dividend payout guidance, given its China expansion, rights issue in 2010 and recently released BASEL III implementation. Maintain Neutral: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$15. We are concerned with the leverage levels in light of recently announced BASEL III implementation and the impact to sustainable ROE. We would turn more positive when we see evidence of China expansion. We prefer DSBG over DSFH because of: (1) better capital structure, and (2) less optimistic outlook for insurance operation.
Neutral

AC
Sunil Garg
Price Performance
15 HK$ 12 9
1m 4.4% 2.6%
3m 3.8% 2.3%
12m 32.0% 16.2%
Dah Sing Banking Group (Reuters: 2356.HK, Bloomberg: 2356 HK)

FY09A 1,274 601 0.60 0.60 0.00 195.6% 6.3% 23.0 9.69 1.4 0.0%
FY10E 1,158 1,012 1.01 1.01 0.25 68.4% 8.4% 13.7 10.89 1.3 1.8%
FY11E 1,488 1,377 1.13 1.13 0.56 11.8% 9.9% 12.2 11.88 1.2 4.1%
FY12E 1,883 1,745 1.43 1.43 0.71 26.7% 11.6% 9.7 12.75 1.1 5.2%
FY13E 2,155 2,020 1.65 1.65 0.83 15.8% 12.5% 8.3 13.69 1.0 6.0%
15.52 - 8.57 16,852 2,163 1,223 Dec 13.78 31 Jan 11 0.0 4.8 0.7 23,447 7.79
Dah Sing Banking Group: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2009 1.95% 97% 1.89% 2,135 475 348 99 28 2,610 (1,336) 1,274 (428) 0 (390) 27 684 83 0 601 2010e 1.81% 97% 1.75% 2,060 533 398 103 32 2,592 (1,435) 1,158 (179) 0 0 (45) 1,205 193 0 1,012 2011e 1.89% 97% 1.84% 2,341 706 420 251 34 3,047 (1,559) 1,488 (173) 0 0 0 1,640 262 0 1,377 2012e 2.06% 97% 2.01% 2,796 745 445 264 36 3,541 (1,658) 1,883 (164) 0 0 0 2,077 332 0 1,745 2013e 2.14% 97% 2.08% 3,132 786 470 277 39 3,918 (1,763) 2,155 (144) 0 0 0 2,405 385 0 2,020 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2009 -3.6% 9.4% 1.1% 31.8% -0.9% -3.3% -28.7% -34.6% -9.2% 6.5% -21.3% -35.1% 222.7% 218.5% 195.6% -100.0% 2009 74.8% 22.5% 60.4% 87.1% 0.0% 2009 1.00% 0.96% 123.4% -46.0% 10.2% 16.8% 2009 1.89% 2.31% 51.2% 1.18% 1.13% 0.69% 60.4% 3.2% 0.60% 12.1% 0.0% 0.53% 0.79% 8.4% 6.3% 2010e 17.3% 3.0% 6.6% 23.6% 16.6% -3.5% 12.0% 14.2% -0.7% 7.4% -9.1% -58.2% 76.2% 68.4% 52.2% #DIV/0! 2010e 85.2% 23.0% 62.0% 90.3% 0.0% 2010e 0.84% 0.52% 187.6% -35.0% 9.3% 15.3% 2010e 1.75% 2.21% 55.3% 1.22% 0.99% 0.28% 62.0% 7.4% 1.03% 16.0% 0.0% 0.86% 1.24% 10.3% 8.4% 2011e 14.3% 12.0% 10.3% 9.1% 13.9% 13.6% 32.6% 5.7% 17.5% 8.7% 28.5% -3.1% 36.1% 36.1% 23.7% 126.9% 2011e 86.9% 21.4% 66.1% 90.0% 0.0% 2011e 0.79% 0.39% 202.3% 0.0% 8.7% 14.1% 2011e 1.84% 2.39% 51.2% 1.22% 1.17% 0.23% 66.1% 8.6% 1.29% 16.0% 0.0% 1.08% 1.46% 10.9% 9.9% 2012e 10.1% 10.0% 8.7% 7.3% 10.0% 19.4% 5.5% 5.7% 16.2% 6.3% 26.6% -5.3% 26.7% 26.7% 26.7% 26.7% 2012e 87.0% 20.4% 67.7% 90.7% 0.0% 2012e 0.79% 0.37% 209.7% 5.0% 8.5% 13.4% 2012e 2.01% 2.54% 46.8% 1.19% 1.35% 0.19% 67.7% 9.4% 1.49% 16.0% 0.0% 1.25% 1.66% 10.8% 11.6% 2013e 7.7% 8.0% 7.2% 7.4% 7.7% 12.0% 5.5% 5.8% 10.7% 6.3% 14.5% -12.0% 15.8% 15.8% 15.8% 15.8% 2013e 86.8% 20.1% 68.3% 91.3% 0.0% 2013e 0.77% 0.37% 209.5% 5.0% 8.5% 13.1% 2013e 2.08% 2.60% 45.0% 1.17% 1.43% 0.16% 68.3% 9.8% 1.60% 16.0% 0.0% 1.34% 1.77% 10.7% 12.5%
2009 0.60 0.00 0.00 9.69 1,005
2010e 0.91 0.25 0.30 10.89 1,112
2011e 1.13 0.56 0.50 11.88 1,223
2012e 1.43 0.71 0.50 12.75 1,223
2013e 1.65 0.83 0.50 13.69 1,223
2009 66,984 26,880 14,736 109,475 113,629 1,435 89,572 2,060 92,666 113,007 10,774 75,424 75,762
2010e 78,570 27,067 10,315 113,629 121,126 1,722 92,259 2,678 94,863 117,377 13,320 87,936 81,680
2011e 89,838 27,542 10,831 123,552 133,614 1,808 103,330 2,758 102,278 127,370 14,530 100,139 94,037
2012e 98,916 29,287 11,373 135,506 145,227 1,899 113,664 2,841 113,150 139,420 15,594 110,133 105,136
2013e 106,573 31,260 11,941 146,418 155,692 1,994 122,757 2,926 123,040 150,460 16,744 118,624 114,379
31

01 February 2011
Chong Hing Bank

Potential corporate action premium in the price
JPMe 72% earnings growth: Chong Hing Bank is scheduled to report FY10 results on 2 March. We expect a net profit of HK$399 million, +72% y/y, 9% below Bloomberg consensus. For 2H10, we forecast 6% earnings growth. We maintain Neutral rating for Chong Hing Bank. Potential surprise/ disappointment: Excluding the one-off provision related to Lehman minibonds, we expect PPOP to decline by 17% y/y. We see brokerage income and trading gains being the potential sources of earnings surprise on the upside, and higher-than-expected cost pressure on the downside. What we look for from the management: We will be looking for mainly (1) guidance of dividend payout in relation to the recently announced BASEL III implementation for Hong Kong banks, and (2) guidance on NIM given that HIBOR should continue to remain low in 2011. Valuation: Since the removal of the family's last name Liu from its brand, CHB has been a target of potential takeover (source: Bloomberg News, 26 Nov 2006). Trading at 1.5x book value and 22x earnings (11E), CHB appears to have some M&A premium priced in. We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$20.
Neutral

AC
Sunil Garg
Price Performance
24 HK$ 18 12
1m 6.3% 4.5%
3m 18.2% 16.7%
12m 61.2% 45.4%
Chong Hing Bank (Reuters: 1111.HK, Bloomberg: 1111 HK)

FY09A 609 232 0.53 0.53 0.28 282.3% 3.8% 42.6 14.19 1.6 1.2%
FY10E 508 399 0.92 0.92 0.46 72.0% 6.3% 24.8 14.67 1.5 2.0%
FY11E 563 453 1.04 1.04 0.52 13.5% 7.0% 21.8 15.24 1.5 2.3%
FY12E 691 565 1.30 1.30 0.65 24.7% 8.4% 17.5 15.83 1.4 2.9%
FY13E 817 679 1.56 1.56 0.78 20.2% 9.6% 14.6 16.60 1.4 3.4%
52-wk range (HK$) Market cap (HK$ mn) Market cap ($ mn) Shares outstanding (mn) Fiscal Year End Price (HK$) Date Of Price Avg daily value (HK$ mn) Avg daily value ($ mn) Avg daily vol (mn) HSI Exchange Rate
24.40 - 13.78 9,875 1,267 435 Dec 22.70 31 Jan 11 1.3 0.2 0.1 23,447 7.79
Chong Hing Bank: Summary of financials

Income statement - HKDmn Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets) Net Interest Income Total Non-Interest Revenues Fee income FX/Trading gains Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income 2008 1.28% 98% 1.26% 864 363 217 43 104 1,228 (792) 435 (91) 0 (164) 89 29 0 61 2009e 1.23% 97% 1.19% 823 487 264 113 110 1,310 (701) 609 (102) (288) 13 264 33 0 232 2010e 1.26% 97% 1.22% 859 378 233 33 112 1,237 (729) 508 (68) 0 5 475 76 0 399 2011e 1.29% 97% 1.25% 908 413 255 40 117 1,321 (758) 563 (74) 0 0 539 86 0 453 2012e 1.41% 97% 1.37% 1,040 440 277 42 121 1,480 (789) 691 (79) 0 0 672 108 0 565 Growth Rates Loans Deposits Assets Equity RWA Net Interest Income Non-Interest Income of which fee grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS Balance Sheet Gearing Loan/Deposit Investment/Assets Loan/Assets Customer deposits/Liab. LT Debt/Liabilities Asset Quality/Capital Loan loss reserves/Loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio Total CAR Du-Pont Analysis NIR/Avg. Assets Total Rev/Avg. Assets Cost/Income Cost/Assets Operating ROAA LLP/Loans Loan/Assets Other inc & associate Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE 2008 3.5% -1.5% -1.0% -5.0% 0.0% -11.0% -15.1% -23.5% -12.2% 21.7% -41.8% 10.1% -84.3% -88.0% -88.0% -69.2% 2008 56.6% 20.5% 48.1% 97.1% 0.0% 2008 0.34% 0.30% 114.1% -53.4% 12.6% 15.6% 2008 1.26% 1.79% 64.5% 1.15% 0.63% 0.28% 48.1% 2.3% 0.13% 32.1% 0.0% 0.09% 0.15% 8.9% 1.0% 2009e -1.1% 2.3% 2.4% 3.7% -1.4% -4.7% 33.9% 21.6% 6.7% -11.6% 40.0% 12.0% 196.1% 282.3% 282.3% 40.0% 2009e 54.7% 20.5% 48.3% 96.7% 0.0% 2009e 0.40% 0.16% 249.5% -46.6% 12.7% 16.0% 2009e 1.19% 1.89% 53.5% 1.01% 0.88% 0.31% 48.3% 2.5% 0.38% 12.3% 0.0% 0.33% 0.58% 8.8% 3.8% 2010e 13.6% 1.0% 1.3% 3.4% 11.4% 4.4% -22.4% -11.7% -5.6% 4.1% -16.7% -33.5% 79.5% 72.0% 72.0% 63.6% 2010e 61.6% 22.0% 50.4% 96.7% 0.0% 2010e 0.41% 0.14% 292.4% 0.0% 12.0% 14.9% 2010e 1.22% 1.76% 59.0% 1.04% 0.72% 0.19% 50.4% 6.1% 0.67% 16.0% 0.0% 0.57% 0.95% 8.9% 6.3% 2011e 4.6% 5.0% 4.8% 3.9% 4.7% 5.7% 9.3% 9.6% 6.8% 3.9% 10.9% 8.9% 13.5% 13.5% 13.5% 13.5% 2011e 61.4% 18.7% 53.3% 96.6% 100.0% 2011e 0.43% 0.16% 277.1% 15.0% 12.1% 14.8% 2011e 1.25% 1.82% 57.4% 1.04% 0.78% 0.20% 53.3% 6.5% 0.74% 16.0% 0.0% 0.62% 1.00% 9.0% 7.0% 2012e 4.3% 5.0% 4.8% 3.9% 4.4% 14.5% 6.7% 8.5% 12.1% 4.1% 22.8% 6.5% 24.7% 24.7% 24.7% 24.7% 2012e 61.0% 18.9% 53.1% 96.6% 200.0% 2012e 0.43% 0.16% 277.7% 5.0% 12.3% 14.9% 2012e 1.37% 1.95% 53.3% 1.04% 0.91% 0.20% 53.1% 7.3% 0.88% 16.0% 0.0% 0.74% 1.19% 8.9% 8.4%
2008 0.14 0.20 1.44 13.69 435
2009e 0.53 0.28 0.53 14.19 435
2010e 0.92 0.46 0.50 14.67 435
2011e 1.04 0.52 0.50 15.24 435
2012e 1.30 0.65 0.50 15.83 435
2008 33,635 10,605 23,028 67,525 68,377 1,526 59,402 0 60,856 68,715 5,957 40,188 40,187
2009e 33,268 17,804 17,863 66,937 70,006 1,448 60,788 0 61,582 69,191 6,174 39,644 39,916
2010e 37,808 13,250 18,756 68,211 70,905 1,520 61,396 0 62,576 70,455 6,383 44,182 41,913
2011e 39,563 13,939 19,694 70,341 74,309 1,596 64,466 0 64,489 72,607 6,629 46,242 45,212
2012e 41,266 14,799 20,679 73,806 77,880 1,676 67,689 0 67,714 76,095 6,886 48,265 47,253
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Important Disclosures
Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgans website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Joseph Leung: Bank of China (BOCHK) (2388.HK), Bank of East Asia (0023.HK), Chong Hing Bank (1111.HK), Dah Sing Banking Group (2356.HK), Dah Sing Financial (0440.HK), Hang Seng Bank (0011.HK), Public Financial Holdings Limited (0626.HK), Value Partners Group Limited (0806.HK), Wing Hang Bank (0302.HK)
J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010 Overweight (buy) 46% 53% 43% 71% Neutral (hold) 42% 50% 49% 63% Underweight (sell) 12% 38% 8% 59%
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Asia Pacific Equity Research

Hong Kong Banks

Hong Kong Banks Joseph Leung

(852) 2800-8517 joseph.mj.leung@jpmorgan.com

Recent research notes

Source: Bloomberg and J.P. Morgan estimates.

-1m -5% 1% 4% -2% 7% 4% 6% -2% 2%

-3m 3% 13% 2% 16% 6% 8% 18% 6% 2%

YTD -5% 1% 4% -2% 7% 4% 6% -2% 2%

Source: Company reports and J.P. Morgan estimates.

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Hong Kong banking statistics .................................................8

Preview of FY10 results .........................................................14

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Hong Kong banking sector updates

2017 4.50% 1.25% 5.75% 80% 6.0% 8.0% 9.3%

2018 Pillar 1 4.50% 1.875% 6.375% 100% 6.0% 8.0% 9.9%

As of 1 Jan 2019 4.50% 2.50% 7.00% 100% 6.0% 8.0% 10.5%

Observation period Observation period

Figure 1: HK banks: Pro-forma common equity ratio (1H10)

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Table 3: Hong Kong banks: Potential BASEL III impact (1H10)

BEA: Implication of Criteria Caixa restructuring

BEA: Disposal of US business to ICBC

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Fubon HK: Privatization proposal announced

Figure 2: Fubon HK share price

Figure 3: Fubon HK P/B historical trends

+2sd +1sd Avg -1sd -2sd

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Value Partners: First mainland JV

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Life of an offshore RMB transaction

China retail (max Rmb50k/yr) Corporate (by case)

China Trade Settlement Enterprise (TSE)

Suppliers (eg Iron ore in Brazil)

TSE Rmb trade finance/ currency conversion

Rmb WM (eg Haitong Rmb fund)

Investments (eg roads, loans, factories)

Rmb debts IPO (eg MOF, BOC, Mcdonald)

Wealth management channel, direct customer participation possible

Onshore equity market

Secondary Rmb equity market (mini QFII)

Market does not exist yet

Source: PBOC, HKMA, J.P. Morgan. 7

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Hong Kong banking statistics

Source: HKMA and J.P. Morgan estimates.

Figure 5: RMB deposits in HK

Loan-to-deposit ratio Loan-to-deposit ratio (HK$) Loan-to-deposit ratio (Foreign currency)

Joseph Leung (852) 2800-8517 joseph.mj.leung@jpmorgan.com

Asia Pacific Equity Research 01 February 2011

Figure 6: Loan growth rebounded solidly

Figure 7: LDR improving

LDR Total (rhs)

64% 62% 60% 58% 56% 54% 52% 50% Jan-10