Tighter Monetary Policy to Facilitate Financial Deleveraging in China

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

China Financials / Thematic (Sector/Industry)

China’s banking regulator, CBRC, released 2016 operating data for commercial banks, with net profit up 3.5% from 2015. Fourth-quarter earnings remained tough as preprovision operating profit growth fell to zero from the year-ago period. Slowing growth was attributable to asset yield compression and lower fee income growth in the quarter, while lower credit costs versus the year-ago period partially offset the negatives.We expect zero or negative net profit growth for large Chinese banks and low-single digit growth for joint-stock banks in our coverage. At this stage, we are sticking with our fair value estimates for Chinese banks we cover.Coverage list: <a href="https://www.smartkarma.com/entities/1120" target="_blank" data-smartkarma-citation="entities:1120:1">Agricultural Bank Of China Limited (1288 HK)</a> | <a href="https://www.smartkarma.com/entities/656" target="_blank" data-smartkarma-citation="entities:656:1">Bank Of China Ltd (H) (3988 HK)</a> | <a href="https://www.smartkarma.com/entities/1119" target="_blank" data-smartkarma-citation="entities:1119:1">Ind &amp; Comm Bk Of China H (1398 HK)</a> | <a href="https://www.smartkarma.com/entities/45" target="_blank" data-smartkarma-citation="entities:45:1">China Construction Bank H (939 HK)</a> and othersAnalysts: Iris Tan, CFA and Michael Wu, CAIA

China’s banking regulator, CBRC, released 2016 operating data for commercial banks, with net profit up 3.5% from 2015. Fourth-quarter earnings remained tough as preprovision operating profit growth fell to zero from the year-ago period. Slowing growth was attributable to asset yield compression and lower fee income growth in the quarter, while lower credit costs versus the year-ago period partially offset the negatives.We expect zero or negative net profit growth for large Chinese banks and low-single digit growth for joint-stock banks in our coverage. At this stage, we are sticking with our fair value estimates for Chinese banks we cover.Coverage list: Agricultural Bank Of China Limited (1288 HK) | Bank Of China Ltd (H) (3988 HK) | Ind &amp; Comm Bk Of China H (1398 HK) | China Construction Bank H (939 HK) and othersAnalysts: Iris Tan, CFA and Michael Wu, CAIA

Haitong Securities Co Ltd (A) (600837 CH)

Chongqing Rural Commercial Bank (3618 HK)

Shanghai Pudong Development Bank Co. (600000 CH)

China International Capital Corporation (3908 HK)

China Financial Services Holdings (2980 HK)

China Merchants Securities Co Ltd (A) (600999 CH)

China Pacific Insurance (Group) Co., (601601 CH)

Flying Financial Service Holdings (8030 HK)

China Huirong Financial Holdings (1290 HK)

Changjiang Securities Company (000783 CH)

China Merchants Securities Co Ltd (H) (6099 HK)

Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX EQUITY)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

4Q: Industrywide Bad-Debt Ratio Fell, While We Believe Credit Cycle Has Yet to Peak