China Financials: Further de-leveraging or positive development loop? How to invest?

Research evidence excerpt

China Financials: Further de-leveraging or positive development loop? How to invest?

FoundationMValuation Methodology and Risks

Bank of Ningbo Co. Ltd (002142.SZ)

We continue to use a three-stage dividend discount model, probability-weighted 60% base,

20% bull, 20% bear, based on our view of asset yield rebound and smooth risk digestion for

China's banks in a positive development loop, and an equally likely polarity for credit risks and

global demand.The discount rate is 11.4% in the base case, and we assume 13.7% for second-

stage and 13% for long-term ROE with a 58% dividend payout ratio in the long run.

Risks to Upside

n Noticeable reduction in policy intervention amid a rapid rebound in business fundamen-

tals.

n Better-than-expected NIM and asset quality.

n Higher-than-expected non-interest income from stronger wealth management busi-

ness revenue.

Risks to Downside

n Risks from potential change in leadership.

n Higher default risks from SME and retail business expansion.

n Pricing pressure from destructive competition in the market.

China CITIC Bank Corporation Limited (0998.HK)

3-stage dividend discount model, probability-weighted 60% base, 20% bull, 20% bear, based

on our view of asset yield rebound and smooth risk digestion for China's banks, and an equally

likely polarity for credit risks and global demand. Base case assumptions: 9.8% discount rate,

9.2% second-stage ROE, 8.8% long-term ROE, 39% long-term dividend payout. We apply a 1.14

RMB/HKD exchange rate and 10% discount on target P/B for H share price target.

n Faster-than-expected fee growth.

n Better-than-expected asset quality.

n Noticeable reduction in policy intervention.

n Asset quality could deteriorate if economic trends worsen.

n Unexpected decrease/slowdown in fee income.