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4 July 2023 | 11:21PM HKT
China Financial Services
Testing the ‘Impossible Trinity’ Part I: Nine questions

around local gov. debt
We introduce the ,rst report in our 3-part Testing the ‘Impossible Trinity’ series, Shuo Yang, Ph.D.
+852-2978-0701 | [email protected]
which looks at the idea that banks cannot maintain a good balance of provisions, Goldman Sachs (Asia) L.L.C.
capital and dividends at the same time owing to squeezed earnings. In this report,
we assume local gov. debt default risk will be limited as long as debt rollover is
permitted and net balances continue to increase, and assess the potential multi-year
margin loss of banks on the back of local gov. debt rollover due to lowering rates.
We look at nine questions that we think will be top of mind for investors and group
these questions under three broad themes.
The ,rst theme concerns the local gov. debt exposure on bank balance sheets, in
terms of size, mix and distribution. We conclude non-covered banks with 48% local
gov. debt to total assets (vs. 18% for covered banks) would face more challenges
with potential tail risk. Inferring from this, we expect six large banks with larger
balance sheets to step up and take on more local gov. debt.
The second theme is bank earnings risk, due to margin loss on local gov. debt. We
use a loss assumption of Rmb ~30tn (USD 4.5tn) gross addition of local gov. debt
and a ~30bps effective rate decrease each year, with banking system ROE
decreasing by ~100bps, and non-covered banks by ~150bps each year in 2023E-25E.
Based on this, we stress-test that a ~60bps rate cut per year on local gov. debt
would trigger non-covered banks to face recapitalization risk with ROE declining to
_
1.7%.
Our third theme assesses risk factors of local gov. debt widening the divergence of
individual banks. We highlight two sets of banks to see how these factors affect
divergence: 1) ABC (downgrade to Sell, from Neutral) and PSBC (upgrade to Buy,
from Sell) on the size of local gov. debt, and 2) ICBC (downgrade to Sell from Buy)
and CCB (maintain Buy) on the % of local gov. bonds.
For our investment views on each bank, please see the third report in this series,
Testing the ‘Impossible Trinity’ III: Increasing dividend risk; PSBC up to Buy,
ICBC/ABC/Industrial down to Sell.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the ,rm may have a conaict 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. For Reg AC
certi,cation and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US af,liates are not registered/quali,ed as research
analysts with FINRA in the U.S.
更更多⼀一⼿手调研纪要和研报数据加V：shu i mu9870
Goldman Sachs China Financial Services
Nine Questions around local gov. debt on bank balance sheets
1. What’s the size and mix of local gov. debt on bank balance sheets?
Based on our economists’ numbers, we estimate Rmb 34tn (USD 4.9tn) of local gov.
debt sits on the balance sheets of covered banks, which account for 61% of banking
assets. There are two elements to local gov. debt, namely loans (including shadow
credit) of Rmb 18tn (USD 2.6tn) and bonds of Rmb 16tn (USD 2.3tn), on our estimates.
We arrive at this by summing up loans with a tenor of more than 5 years (excluding
mortgages), and use the average portfolio share of ~48% for local gov. bonds held by
banks. We also include shadow credit in local gov. debt and summarize it as part of
loans.
Exhibit 1: We assess Rmb 34tn(USD 4.9tn) local gov. debt on Exhibit 2: BoCom/Huaxia have largest/smallest local gov. debt
balance sheets of covered banks, accouting for 61% of banking exposure (as % of IEA) at 29%/9%, with 16% avg. of covered banks.
assets, with loans (including shadow credit) of Rmb 18tn(USD 2.6tn) As of 2022, GSe
and bonds of Rmb 16tn(USD 2.3tn).
As of 2022, GSe
Local gov. debt exposure Local gov. debt as % of IEA (2022)

9.5 29%
10 30%
9 24% 24%
Covered banks 25%
8 20%
4 6.8 Rmb 34tn in total
7 20%
Rmb 16tn bonds 16%
6 Avg. 16%
Rmb tn
4.6 Rmb 18tn loans & shadow credits 13% 13%

5 3 15% 12% 11% 11% 10%
3.6 9%
4 3.1 10%
3 6 3 1 2.2
1.8
2 2 5%
4 1 1.0 0.8
1 2 2 0.4 0.3 0.2
2 1 1 1 0%
0
Local gov. loans Local gov. bonds Shadow banking Local gov. loan as % of IEA Local gov. bond as % of IEA Shadow banking as % of IEA
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
_
2. What about the local gov. debt exposure of non-covered banks ?

We estimate non-covered banks, which account for 39% of banking assets, have Rmb
59tn (USD 8.5tn) of local gov. debt, making up 63% of the total based on GS
economists’ estimates of total local gov. debt. We also estimate that non-covered banks
account for 48% of local gov. debt as a % of total IEA, vs. 18% for covered banks,
suggesting more earnings risk on potential margin loss on local gov. debt given the
larger size.
4 July 2023 2
Exhibit 3: Covered banks have Rmb 34tn(USD 4.9tn) local gov. debt, Exhibit 4: System local gov. debt exposure breakdown
18% of total assets, vs. Rmb 59tn(USD 8.5tn) and 48% of total assets As of 2022, GSe
for non-covered banks.
As of 2022, GSe
Local gov. debt exposure System local gov. debt exposure breakdown (2022)
120 60%
100 94 50% Covered banks:

48% Rmb 16tn,
Rmb 34tn,
17%
37% of total exposure
80 40% Rmb 32tn,
48 59 35%
Rmb tn
60 29% 30% Rmb 18tn,

19%
40 34 32 20%
18% Non-covered banks: Rmb 27tn,
16 Rmb 59tn,
20 45 10% 29%
63% of total exposure
27
18
0 0%
System Covered banks Non-covered banks
Covered banks - bonds Covered banks - loans
Local gov. loans + shadow banking Local gov. bonds As % of total assets (RHS) Non-covered banks - loans Non-covered banks - bonds
3. Do large banks have larger exposure to local gov. debt ?

The six large banks (ICBC, CCB, ABC, BOC, BoCom, PSBC) account for Rmb 29tn (USD
4.2tn) of local gov. debt, 31% of the estimated system total, based on GS economists’
estimates. And we assume larger banks can support more local gov. debt growth due to
their sizable balance sheets, with local gov debt as a % of IEA at 18%, compared with
29% for the system. With a 1% increase in exposure, we believe these six banks could
support additional local gov. debt of Rmb 1.6tn (USD 0.2tn), potentially offsetting the
slowdown in growth of local gov. debt on non-covered bank balance sheets, as we
assess the exposure would be 48%.
Exhibit 5: Six large banks total Rmb 29tn(USD 4.2tn) local gov debt, Exhibit 6: We expect large banks can support more local gov. debt
31% of estimated system total. growth on their large balance sheet, with local gov. debt as 18% of
As of 2022, GSe IEA, vs. 29% of system.
As of 2022, GSe
_
System local gov. debt exposure breakdown (2022) Local gov. debt as % of total assets
Smaller banks, Rmb 60%
5tn, 5%
50% 48%
40%
Large banks, 29%

Rmb 29tn, 31% 30%
Non-covered banks,
20% 18%
Rmb 59tn, 64% 16%
10%
0%
Non-covered banks System Six large banks Smaller banks
Non-covered banks Large banks Smaller banks (covered) (covered)
4. What’s the gross and net addition of local gov. debt each year ?
We estimate Rmb ~30tn (USD 4.5tn) of gross addition of local gov. debt each year to
2025E, with Rmb 20tn (USD 3.0tn) rollover balance and Rmb 10tn (USD 1.5tn) net
addition.
4 July 2023 3
For the purposes of this analysis, we assume an average 5 year duration of local gov.
debt, and unchanged weights of local gov. debt on bank balance sheets. This would
mean 20% of local gov. debt rollover and ~10% balance growth each year.
Exhibit 7: We estimate Rmb 30/31/34tn(USD 4.2/4.4/4.8tn) gross local Exhibit 8: ...compared with new system credit growth addition of
gov. debt increase, with Rmb 19/21/23tn(USD 2.7/3.0/3.3tn) of Rmb 25/23/25tn(USD 3.5/3.3/3.5tn), assuming annual balance growth
rollover and Rmb 11/10/11tn(USD 1.5/1.4/1.5tn) of net increase in of ~10%.
2023E/24E/25E...
Gross increase of local gov. debt (system) Gross/net increase of local gov. debt vs. system credit
40
140 34
35
31
120 11
30 30
10
100 23
11 25
21
Rmb tn
19
80 20
Rmb tn
34
126 15 30 31
60 115
105 25 23 25
94 10
40
5 11 10 11
20
0
0 2023E 2024E 2025E
2022 2023E 2024E 2025E
Net increase of system credit Gross increase of local gov. debt Net increase of local gov. debt
Local gov. debt Rollover New increase Gross increase
5. What’s the potential margin loss on local gov. debt?

We estimate system ROE will decrease by ~100bps each year in 2023E-25E, due to
margin loss on local gov. debt, else being equal. Looking at covered banks, we arrive at
a ~60bps ROE decrease, and non-covered banks at ~150bps.
We quantify the margin risk of both stock rollover and increased aows of local gov. debt,
assuming default risk is limited as long as rollover is allowed and net balances increase.
We expect lowering rates on both stock rollover and increases in local gov. debt aows
given the increasing size and dif,culty of preventing default risk. We assume a 1% rate
decrease on rollover debt each year and ~150 bps spread loss between local gov. debt
and the overall bank rate as opportunity cost to model the margin loss of local gov. debt.
_
This implies the effective interest rate on local gov. debt would decrease by ~30bps
each year on average in 2023E-25E. This would translate into a NIM decrease of covered
banks by an average 3-10bps each year in 2023E-25E. We believe ICBC/ABC/Industrial
bank would have a larger NIM contraction of 7.3/6.6/9.4bps vs. the 6.0bps average for
covered banks each year 2023-25E, while CMB and BOC would have a smaller NIM
decrease of 4.0/3.3bps, mainly due to the size of local gov. debt. The more local gov.
debt held by banks, the more NIM dilution.
Based on these assumptions, and with the multi-year margin contraction led by lowering
rates of increasing local gov. debt, banking system CET1 ratio could be 9.9%, with that
of non-covered banks remaining above the minimum requirement at 7.9% by
end-2025E, although the CET1 ratio would decrease by ~80bps cumulatively in
2023E-25E.
4 July 2023 4
Exhibit 9: We estimate system ROE decrease by ~100bps each year Exhibit 10: The effective rate cut each year would be ~30bps, with
in 2023E-25E, due to margin loss on local gov. debt, else being 1% rate cut for 20% balance rollover and 150bps opportunity cost
equal. Compared with covered banks which at a ~60bps ROE for ~10% new growth, which would translate to a NIM decrease of
decrease, non-covered banks would decrease c. ~150bps. covered banks by 3-10bps each year in 2023E-25E.
Margin loss impact to ROE Local gov. debt effective rate trajectory (base case)
14 360
12 0.72 340 -18
0.61 0.55
10 -16
320
8 1.10 0.96 0.89 -18
%
300
6 11.3 -12
11.1 10.8
bps
4 1.57 1.42 280 -18
7.8 7.6 7.4 1.38 350
2 260 316 -11
3.6 3.4 3.1
0 240 286
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
256
Covered banks System Non- covered banks 220
200
2022 Balance New 2023E Balance New 2024E Balance New 2025E
Adj. ROE vs. before adj.
rollover growth rollover growth rollover growth
Exhibit 11: We highlight ICBC/ABC/Industrial bank would have Exhibit 12: On our assumptions, with the multi-year margin
larger NIM contraction of 7.3/6.6/9.4bps vs. 6.0bps average of contraction led by lowering rates of increasing local gov. debts,
covered banks each year in 2023-25E, while CMB and BOC would banking system CET1 ratio could be 9.9%, with that of non-covered
have a smaller NIM decrease of 4.0/3.3bps, mainly due to the size of banks remaining above the min. requirement at 7.9% by end-2025E,
local gov. debt. though the CET1 ratio would decrease by ~80bps cumulatively in
2023E-25E.
NIM dilution (2023-25E avg.) Margin loss impact to CET-1 ratio

0.0 14
-1.0 12 0.06 0.11 0.15
-2.0 0.10
10 0.18 0.25
-3.0 0.15
-2.9 8 0.28 0.39
-4.0 -3.3
%
-4.0 6 11.6
bps
-5.0 -4.2 11.5 11.3

10.4 10.1 9.9
-4.8 4 8.5 8.2
-6.0 7.9
-5.7
-7.0 Avg. -6.0bps 2
-6.6
-7.1 -7.3
-8.0 -7.4 0
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
-9.0
-10.0 Covered banks System Non- covered banks
-9.4 -9.5
Adj. CET-1 ratio vs. before adj.

_
6. How low could the rates on local gov. debt go?

Our stress-test shows that, if the effective interest rate on local gov. debt decreases by
183bps cumulatively in 2023E-25E, or ~60bps each year, non-covered banks would face
recapitalization risk with the CET1 ratio dipping below 7.5%, the min. requirement, by
end-2025E. And the system ROE would be 6.6% vs. 7.4% in our base case, with
covered/non-covered banks ROE at 10.3%/1.7% vs. 10.8%/3.1% of our base case in
2025E.
This suggests that, before reaching the point of non-covered banks (39% of banking
assets) requiring recapitalization: 1) the effective interest rate on local gov. debt could go
lower, as our stress test suggests 30bps more rate cuts each year or ~100bps lower in
total for 2023E-25E; or 2) more time could be allowed for debt rollover, assuming a ,xed
setup of rate cuts on local gov. debt in our base case, else being equal.
4 July 2023 5
Exhibit 13: We stress-test that with effective interest rate on local Exhibit 14: The system ROE would be 6.6% vs. 7.4% base case, and
gov. debt decreasing by ~60bps each year, non-covered banks covered/non-covered banks ROE would arrive at 10.3%/1.7% vs.
would face recapitalization risk with the CET1 ratio dipping below 10.8%/3.1% of base case in 2025E.
7.5%, the min. requirement by end-2025E.
Adj. CET-1 ratio (stress case) Adj. ROE in base/stress case (2025E)
2.85%
3.0% 12.0
14.0 10.8
2.25% 2.5% 10.3
12.0 10.0
1.68% 2.0%
10.0
1.5% 8.0 7.4
8.0 Required min. 7.5 6.6
%
1.0%
%
6.0 6.0
11.5 11.4 11.2 0.5%
10.3 10.0 9.7
4.0 8.4 7.9 0.0%
7.5 4.0 3.1
2.0 -0.5%
1.7
2.0
0.0 -1.0%
2023E 2024E 2025E
0.0
Covered banks System Non- covered banks Base case Stress case Base case Stress case Base case Stress case
Required min. Effective rate (RHS) Covered banks System Non- covered banks
7. What would happen to covered banks if the local gov. debt rate went
lower towards the need for recapitilization?
If we stress test rates on local gov. debt going lower at ~60bps each year in 2023E-25E,
we could see covered banks have a NIM decrease of 12bps each year, driving ROE and
CET1 ratio decrease by ~120/10bps each year, assuming credit cost does not climb up
and else being equal. By the end-2025E, the stress tested ROE and CET1 ratio would be
10.3%/11.2% on average, or 52/14bps lower than the base case.
Exhibit 15: With the stress test to set rates on local gov. debt is to Exhibit 16: ...and CET-1 ratio would be 11.2%, or ~14bps lower than
lower at ~60bps each year in 2023E-25E vs. base case of ~30bps, base case, by the end-2025E.
ROE of covered banks would be 10.3%, or 52bps lower than of base
case...
Adj. ROE in base/stress case (2025E) Adj. CET-1 ratio in base/stress case (2025E)
17.0 0.3 15.0
0.09
_
14.0
15.0 0.8 0.10 0.19
13.0
0.7
13.0 12.0 0.08
0.8 0.8
1.0 11.0
0.4
%
%
11.0 16.4 0.16

0.3 10.0 13.9 0.06 0.19 0.20
0.7 0.7 0.13
14.5 12.9 12.9 0.19 0.15
9.0 13.0 0.3 0.9 9.0
11.5 0.20
11.7 11.6
10.6 10.2 8.0 9.9
9.8 9.3 9.1 9.6 9.5 9.4 9.1
7.0 8.5 8.4 8.8 8.7
7.0 8.3
5.0 6.0
Stress case vs. base case Stress case vs. base case Required min.
8. Does the local gov. debt mix matter as an offset to bank earnings?
With more bonds in local gov. debt portfolios, and more tax (0% tax rate vs. ~15% of
loans) and capital savings (10% (LGGB) or 20% (LGSB) risk weighting vs. 100% of
loans), it means banks can better offset the margin loss on local gov. debt.
Therefore, we believe the % of bonds in local debt portfolios is an important factor in
4 July 2023 6
differentiating banks’ bottom-line growth.
Most banks guide they would like to take more local gov. bonds onto their balance
sheets; despite nominal yields on local gov. bond not being high, the tax and capital
savings can provide more upside to adj. return. Banks also guide that if the central bank
allows more local gov. bonds as quali,ed collateral for liquidity, local gov. bonds can be
more attractive assets to enhance debt portfolio returns, amid lowering rates.
We estimate the system adjusted local gov. debt yield could be 0.8% higher on average
in 2023E-25E, thanks to the tax and capital bene,ts of local gov. bonds.
We estimate the weighted capital charges of local gov. bonds could be 39%, blended by
29% of LGGB (local government general bonds) with a 10% risk weighting, 43% of
LGSB (local government general bonds) with a 20% risk weighting, and 28% of implicit
LGFV (local government ,nancing vehicle bonds) with a 100% risk weighting. This could
help banks save capital by 61%, compared with loans which require 100% risk
weighting. We believe the saved capital could drive additional returns on normalized
ROE of 11% for covered banks, assuming the return on capital for each covered bank
remains unchanged.
Thereby, with inclusion of the tax and capital bene,ts of local gov. bonds, we could see
the decrease in ROE due to margin loss of local gov. debt narrow by 1.1ppts for covered
banks and 1.9ppts for non-covered banks.
Within our coverage, we have banks with larger local gov. bond exposures, i.e.
PSBC/CMB (83%/68% bond % local gov. debt), and banks with smaller exposures, i.e.
Industrial and BoCom (24%/31%), compared with the 50% average of covered banks.
Exhibit 17: More bonds in the local gov. debt portfolios, more tax Exhibit 18: We estimate the system adjusted local gov. debt yield
(0% tax rate vs. ~15% of loans) and capital savings (10%(LGGB) or could be 0.8% higher on average in 2023E-25E, thanks to the tax and
20% (LGSB) risk weighting vs. 100% of loans) mean banks can capital benebts of local gov. bonds.
offset the margin loss of local gov. debt
Mix Tax Risk
Rmb tn Balance Mix
_
(bond) rate weighting Total benefits of local gov. bond (2023E)

Total local gov. debt (onshore) 94 100% 9% 69%
700
1.0%
Local gov. bond (onshore) 48 52% 100% 4% 39% 1.1%
Official 35 37% 72% 0% 16% 600
0.8% 0.9%
LGGB 14 15% 29% 0% 10% 0.6%
500 0.7%
LGSB 21 22% 43% 0% 20% 408
0.5%
Rmb bn
Implicit (LGFV bond) 14 14% 28% 15% 100% 400

Local gov. loan 45 48% 15% 100% 0.3%
300 229
262
178 0.1%
200
129 -0.1%
100 133
146 -0.3%
100
46
0 -0.5%
System Covered banks Non-covered banks
Additional return on capital Tax saving △local gov. bond yield (RHS)
4 July 2023 7
Exhibit 19: With the inclusion of the tax and capital benebts of local Exhibit 20: Within our coverage, we have banks with larger local
gov. bonds, we could see the decrease in ROE due to margin loss of gov. bond exposures, PSBC/CMB (83%/68% bond % local gov. debt),
local gov. debt narrowing by 1.1ppts for covered banks and 1.9ppts and banks with smaller exposures, Industrial and Bocom
for non-covered banks. (24%/31%), compared with the 50% average of covered banks.
As of 2022, GSe
Adj. ROE after/before including benefits Local gov. mix (%)

14.0 12.5 100 1 1 2 1
12.2 11.9 4 4 5 7
90 16
12.0 1.2 31 38
1.1 1.1 80 32
9.3 48 44 52
9.1 8.8 70 54 62
10.0 63 68
60 69
1.5 1.5
8.0 1.4 50
83
%
5.5 5.3 40
6.0 5.0 68 64 62
11.3 11.1 30
10.8 52 52 48
1.9 20 41 38 35
4.0 7.8 1.9 1.9 31
7.6 7.4 10 24
0
2.0 3.6 3.4 3.1
0.0
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
Covered banks System Non- covered banks Local gov. bond as % of total Local gov. loan as % of total
Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits Shadow banking as % of total
9. What’s the potential earnings impact for covered banks?

We estimate an average 6bps PPOP ROA decrease for our covered banks in 2023E-25E
due to margin loss on local gov. debt. With the inclusion of tax and capital savings, we
could see a lower ROE decrease for our covered banks, by ~1.1ppts each year to
12.5%/12.2%/11.9% in 2023E-25E.
We think both size and mix of local gov. debt are factors that differentiate banks, as we
expect the larger levels of local debt held by banks, the more margin loss on the back of
lowering rates of local gov. debt, while the more bonds in local gov. debt portfolios, the
more tax and capital bene,ts can narrow the bottom-line decrease. Thus, we screen our
covered banks, and highlight two groups: 1) ABC (downgrade to Sell, from Neutral) and
PSBC (upgrade to Buy, from Sell) on the size of local gov. debt, and 2) ICBC (downgrade
to Sell, from Buy) and CCB (maintain Buy) on the % of local gov. bonds (see Part III in
_
the series for investment views of each bank).
n ABC and PSBC on the size of local gov. debt, given their similarly strong deposit
bases. ABC has 20% local gov. debt as a % of IEA, compared with 13% for PSBC.
Assuming local gov. debt on both banks rolls over with lowering rates, the PPOP
ROA of ABC would decrease by 7bps each year on average in 2023E-25E, compared
with 5bps of PSBC, else being equal. Moreover, when factoring in the tax and
capital savings of local gov. bonds - PSBC has 83% bond exposure in their local gov.
debt portfolio, compared with 48% for ABC - the savings could help PSBC narrow
its ROE decrease by 160bps each year on average in 2023E-25E, vs. 139bps at ABC.
n ICBC and CCB on their local gov. mix, as ICBC has 38% exposure to local gov.
bonds, compared with 62% for CCB. The more local gov. bonds, the more capital
and tax savings to mitigate earnings pressure caused by local gov. debt. We
compare ICBC with CCB as the two stocks generally trade in the same direction,
and as investors see few differences between the two. However, we think local gov.
debt can widen the divergence. If we look at these banks’ reported data and apply
4 July 2023 8
the same assumptions as our margin loss test, we estimate ICBC could see PPOP
ROA decrease by 7bps each year on average in 2023E-25E, compared with 4bps for
CCB. If we include tax and capital savings, the margin loss on the bottom line could
narrow more for CCB, with ROE decreasing less by 125bps each year on average in
2023E-25E, compared with 120bps for ICBC.
Exhibit 21: PSBC/ABC has 13%/20% local gov. debt exposure as % Exhibit 22: ICBC/CCB has 38%/62% local gov. bond mix, with ROE
of IEA, with ROE adjusted for margin loss and bond benebts at adjusted for margin loss and bond benebts at 12.2%/11.3% on
13.8%/11.7% on average in 2023-25E. average in 2023-25E.
Adj. ROE after/before including benefits Adj. ROE after/before including benefits
16.0 14.0 12.6
13.7 13.8 13.9 12.2 11.8 11.7 11.3
14.0 12.0 12.0 1.3 10.9
1.7 1.6 1.5 11.7 11.4 1.2 1.2 1.3 1.2
12.0 1.2
1.4 1.4 10.0
1.3
10.0
8.0
%
%
8.0
6.0 11.3
6.0 12.1 12.2 12.4 10.9 10.6 10.5 10.1
10.6 10.4 9.8
10.0 4.0
4.0
2.0 2.0
0.0 0.0
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
PSBC ABC CCB ICBC
Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits
The author would like to thank Zihan Wang and Claire Ouyang for their contributions to
this report.
_
4 July 2023 9
Appendix
Based on GS macro team estimates for gov. debt, we sum up of,cial local gov. debt of
Rmb 34.9tn (USD 5.0tn) and implicit onshore local gov. debt of Rmb 58.9tn (USD 8.4tn)
(incl. Rmb 13.5tn (USD 1.9tn) of bond and Rmb 45.4tn (USD 6.5tn) loans and shadow
credits), to get to the total onshore local gov. debt exposure of Rmb ~94tn (USD 13.4tn).
Exhibit 23: Local gov. debt (onshore) is estimated to be Rmb 94tn(USD 13.4tn), as of 2022.
_
Estimates from GS macro team.
Source: Goldman Sachs Global Investment Research, MOF, Wind, Bloomberg, CEIC
4 July 2023 10
Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reaect my personal views about the subject company or
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
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4 July 2023 11
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4 July 2023 12
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4 July 2023 14
4 July 2023 | 11:21PM HKT
Testing the ‘Impossible Trinity’ Part II: Assessing further

losses on bank credit portfolios
In this second Testing the ‘Impossible Trinity’ report, we continue our analysis of the Shuo Yang, Ph.D.
trade-offs between provisions, capital and dividends in the current environment. We Goldman Sachs (Asia) L.L.C.
assess the normalized provisioning level of banks, with the potential inclusion of
further losses on banks’ credit portfolios, in order to evaluate whether provision
release remains an option to drive pro>ts.
With these, we address top of mind questions, namely 1) where we are in the
property credit cycle, 2) hidden losses in non-loan assets, and 3) the adjusted ROE
and NPL coverage ratio of banks. In summary:
n The property credit cycle continues with an increasing NPL formation rate. Large
banks may face relatively less pressure given already high reported property NPL
ratios, averaging 4.5%, vs. 1.8% for smaller banks which may continue to
recognize more NPL.
n Risky non-loan assets including corporate bonds and shadow credit can be
captured in debt investments, which allows us to calculate the implied loss ratio
for covered banks averaging at 6% vs. 25% for CMB (Neutral). This suggests
CMB has less room going forward to lower provisions on non-loan assets.
n Additional losses and provisions required by banks could amount to Rmb
337/429bn (USD 48/61bn). Adj. bank ROE would be 9.6% vs. 12.0% before
adjustment. BoCom (Sell) and Huaxia (Sell) would see large ROE decreases of
_
450/438bps vs. 247bps on average.
For our investment views on each bank, please see the third report in this series,
Testing the ‘Impossible Trinity’ III: Increasing dividend risk; PSBC up to Buy,
ICBC/ABC/Industrial down to Sell.
The author would like to thank Zihan Wang and Claire Ouyang for their contributions
to this report.
investors should be aware that the >rm may have a conaict of interest that could affect the objectivity of this
certi>cation and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US af>liates are not registered/quali>ed as research
I. Three questions answered: property credit cycle, non-loan asset losses

and provisions, and adj. ROE with all loss
Banks have started to release provisions, which has supported pro9ts at a time of
soft revenue growth, against the backdrop of prolonged property credit cycle and
overarching regulation to clean bank balance sheets. Although banks have built up
a risk buffer since Covid, the sustainability of provision release to drive pro9t
growth is top of investors’ minds. We build a new bottom-up framework to assess
potential additional NPL and provisions arising from banks’ credit portfolios
including property credits, loan book and debt investment. We conclude 1) Rmb
~337 bn (USD 48bn) more asset losses could be recognized, and Rmb ~429bn
(USD 61bn) provisions required, resulting in an NPL coverage ratio decrease of
-6ppts, book value dilution of -2%, CET1 ratio and ROE decrease by 20/239bps to
9.6%/11.5% in 2023E. We address three key investor questions below.
1. Where are we in property credit cycle?

To recap, we expect banks’ loss taking order to be >rstly property bonds and shadow
credits given their mark-to-market pricing, and then bank loans (see Property Risk
Monitor I, II, III and IV). As banks have reported increasing property NPL ratios and
reduced total exposure (excluding mortgage) in >ve consecutive quarters, we expect
most losses of property bonds and shadow credits to have been taken by market
participants, and from here further losses should be recognized in bank balance sheets.
The framework suggests that divergence is set to widen between large banks and other
banks, as the large banks have reported much higher NPL ratios for property loans, with
an average of 4.5% vs. 1.8% for other covered banks. We would expect smaller banks
to report more property NPLs going forward, while large banks such as BOC and PSBC
could face less pressure on account of 1) the already high NPL ratio reported by BOC,
which is close to our stressed estimates of ~8.0% loss ratio of banks; 2) the low
_
property exposure of PSBC, which stands at 2% of total assets vs. 4% on average for
covered banks. We expect Rmb 90/140bn (USD 13/20bn) losses and provisions to be
recognized from property loans, with negative impacts on book value/ROE of
-2%/-2ppts in aggregate for covered banks.
2. Can banks reduce provisions set aside on non-loan assets?

In the past few quarters, banks like CMB reduced the provisions set against non-loan
assets to lower new provisions on bank credit portfolios, while more provisions were
built up against the loan book. On net, this results in lowering provisions to drive pro>t
growth, while the NPL coverage ratio based only on the loan book increased. Our
analysis suggests that non-loan assets provision release could be increasingly dif>cult,
as the implied loss ratio of credit portfolio in debt investment book could be 25% for
CMB vs. 6% on average for covered banks.
3. What would happen if banks were to restate NPL in 2023E?

Our analysis suggests that covered banks would be able to maintain CET1 ratio above
4 July 2023 2
the minimum requirement, book value dilution would not be signi>cant, with 2%
markdown on average for covered banks, but net pro>ts would decrease by 21% in
aggregate, with NPL coverage ratio down by 6ppts in aggregate and 23ppts on average.
Notably, CMB could have the largest NPL coverage ratio decrease with 138ppts. To
arrive at this conclusion, we assume banks fully recognize the loss in 2023E by booking
provisions, although banks may recognize losses over multiple years, which would
smooth earnings growth.
Exhibit 1: Summary of additional NPL and provision required for property risk and non-loan assets
Rmb bn
Large Joint-stock Regional
Aggregate Average
Rmb bn ICBC CCB BOC ABC BoCom PSBC CMB PAB Industrial Huaxia BONJ BONB
NPL coverage ratio 202% 228% 189% 296% 176% 371% 437% 262% 215% 147% 368% 476% 239% 281%
NPL 368 337 246 301 113 66 63 41 56 47 11 9 1,658 138
LLR 745 768 465 892 198 244 275 108 120 69 41 43 3,967 331
Additional NPL 30 61 3 37 18 30 49 24 60 25 1 1 337 28

- unrecognized 3rd stage assets 19 35 3 20 6 25 40 21 53 23 0 1 247 21
- property loss 11 25 0 17 12 5 9 3 6 2 1 0 90 8
Existing debt provision 33 41 10 20 3 28 43 16 45 17 3 2 262 22

Additional provision 49 112 35 101 43 8 17 22 25 16 3 0 429 36
- property loss 16 38 0 25 17 8 14 8 10 3 2 0 140 12
Adj. NPL coverage ratio 208% 231% 205% 300% 188% 292% 299% 223% 165% 142% 390% 451% 234% 258%
vs. before adj. (ppts) 5 4 16 4 12 -78 -138 -38 -50 -5 22 -25 -6 -23
Driven by NPL increase (ppts) -15 -35 -2 -32 -24 -116 -191 -96 -111 -51 -27 -50 -40 -63
- unrecognized 3rd stage assets -10 -22 -2 -18 -9 -103 -170 -87 -105 -49 -7 -50 -31 -53
- property loss -5 -13 0 -14 -15 -13 -22 -9 -6 -2 -20 0 -9 -10
Driven by provision increase (ppts) 20 38 18 36 35 37 54 58 61 46 49 25 35 40
- property loss 4 10 0 7 13 8 12 11 8 4 18 0 7 8
Adj. net NPL formation rate 0.8% 1.0% 0.7% 0.9% 1.2% 0.7% 2.7% 4.3% 2.0% 6.6% 12.0% 0.6% 1.3% 2.8%
Before adj. 0.7% 0.7% 0.7% 0.7% 0.9% 0.4% 2.0% 3.6% 0.9% 5.6% 11.9% 0.5% 1.0% 2.4%
Diff. (bps) 11 26 1 16 22 37 73 65 108 104 8 9 26 40
Impact (2023E):
△NPAT (Rmb bn) -42 -92 -29 -85 -41 -7 -14 -17 -22 -12 -2.2 -0.3 -363 -30
As % of NPAT -11% -28% -12% -32% -42% -8% -9% -34% -23% -47% -11% -1% -21% -22%
Adj. NPAT 328 241 209 183 56 86 137 34 71 14 18 26 1,402 117
Adj. book value 3,373 2,882 2,216 2,343 886 745 910 395 712 272 137 175 15,045 1,254
vs. before adj. -1% -2% -1% -2% -3% -1% -1% -4% -2% -3% -1% 0% -2% -2%
Adj. ROE 10.1% 8.6% 9.8% 8.0% 6.4% 12.0% 15.8% 9.0% 10.4% 5.2% 13.4% 15.8% 9.6% 10.4%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0% 12.0% 12.8%
diff. (bps) -123 -314 -130 -357 -450 -97 -152 -429 -300 -438 -159 -20 -239 -247
Adj. CET-1 ratio 13.5% 13.1% 11.5% 10.4% 9.7% 9.2% 13.3% 8.2% 9.6% 9.0% 9.5% 9.4% 11.5% 10.5%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4% 11.7% 10.7%
diff. (bps) -12 -29 -11 -27 -31 -6 -14 -33 -21 -30 -11 -2 -20 -19
_
Source: Company data, Goldman Sachs Global Investment Research
Exhibit 2: Additional losses could amount to Rmb 337bn or USD Exhibit 3: Additional provisions required by banks could amount to
48bn (2023E) Rmb 429bn or USD 61bn (2023E)
Additional NPL Additional provision

109% 24% 25%
120 180 21% 30%
85% 19%
62% 69% 100% 16%
49% 160 12% 20%
100
21% 50% 7% 8% 6% 8%
13% 9% 18% 14% 10% 140 3% 10%
1% 112 1%
80 120
61 0% 101
Rmb bn
60 0%
Rmb bn
60 49 100
-50% -10%
37 80
40 30 30 -20%
25 24 -100% 60 49 43
18 35
20 40 25 -30%
-150% 22
3 1 1 17 16
20 8 3 -40%
0 -200% 0
0 -50%
Unrecognized 3rd stage assets Property loss As % of reported NPL (2022) (RHS)
Unrecognized 3rd stage assets Property loss As % of reported LLR (2022) (RHS)
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
4 July 2023 3
Exhibit 4: Adj. NPL coverage ratio would be 234% vs. 239% before Exhibit 5: The adj. bank ROE would be 9.6% vs. 12.0% before
adjustment (2023E) adjustment (2023E)
Adj. NPL coverage ratio (%) Adj. ROE (%)

480 451 20
390 18
16 0.2 1.5
380
300 299 292 14 1.6
12 1.0 3.0
280 231 223 1.2 4.3
208 205 10 1.3 3.1
188 3.6
165 8 4.5
180 142 15.8 15.8 4.4
13.4
6 12.0
10.4 10.1 9.8
4 9.0 8.6 8.0
80
6.4 5.2
2
-20 0
Adj. NPL coverage ratio Before adj. Required min. =150% Adj. ROE vs. prior
Exhibit 6: Adj. Bank CET1 ratio would be 11.5% vs. 11.7% before Exhibit 7: Adj. book value would be ~2% lower vs. before
adjustment (2023E) adjustment (2023E)
Adj. CET-1 ratio (%) Adj. book value vs. before adjustment
14.0 0.12 0.14 0.0%
0.29
13.0 -0.5% 0%
12.0 0.11 -1%

-1.0%
-1% -1%
11.0 0.27 -1% -1%
-1.5%
10.0 13.5 13.3 13.1 0.31 0.21 0.11 0.02
0.06 0.30 -2.0%
11.5
9.0
10.4 0.33 -2% -2%
9.7 9.6 9.5 -2.5%
8.0 9.4 9.2 9.0 -2%
8.2 -3.0%
7.0
-3%
-3.5% -3%
-4.0% -4%
Adj. CET-1 ratio vs. prior
II. Quantifying additional property losses and provisions

_
Banks have reported increasing property NPL ratio since 3Q21, and guide that
suf9cient provisions are in place against losses. Based on our Property Risk
Monitor framework (see I, II, III and IV), we believe more losses should be
recognized in bank loans as property bonds and shadow credits are
mark-to-market and have taken losses. We believe the property NPL formation rate
has not peaked out given deteriorating property sales volume and price. We
estimate Rmb 90bn (USD 13bn) more NPL and Rmb 140bn (USD 20bn) more
provisions required for covered banks, which could result in ROE/CET1 ratio
decreasing by -78/-6bps, with adj. NPL coverage ratio on average decreasing to
274% from 281% prior. We note the adj. ROE of CMB would be 16.0% vs. 17.3%
before adjustment.
To assess the property risk of individual bank, we consider three factors, namely 1) size,
represented by % of total assets; 2) mix, the more non-loan assets, the higher risk; 3)
4 July 2023 4
pace of NPL recognition, the higher reported NPL ratio, the more likely close to the peak
of NPL cycle. We summarize the statistics as:
n PAB/CMB have the largest property exposure (excluding mortgage), with Rmb
403/605bn (USD 57/86bn) or 8%/6% of total assets.
n ABC/BOC have the largest loan mix, with 90%/89% of total exposure,
CMB/Industrial Bank have the lowest, suggesting riskier property credit portfolio
as the non-loan asset like bonds and shadow credits could take more losses.
n BOC/ICBC presented the highest property NPL ratios of 7.2%/6.1%, which is close
to our estimated 8.0% from our ECL (Expected Credit Loss) model.
Given the further slowdown of property sales and guidance of banks to expect
continued property risk, we expect property NPL formation rate has not peaked out yet,
despite the record high printed in 4Q22. Thus, we expect the property NPL ratio of
covered banks to continue to increase, which can drive widening divergence of banks,
given their varying reported property NPL ratios. We expect large banks may face less
pressure on smaller property exposure relative to their large balance sheets, which is
3% of total assets vs. 5% for smaller banks (Exhibit 8), and high reported property NPL
ratio of 4.5% on average vs. 1.8% for smaller banks. Our analysis suggests CMB with
large property exposure and low mix of property loans, and a reported property NPL
ratio lower than that of large banks could recognize more property losses arising from
its balance sheet.
We estimate that covered banks would recognize Rmb 90bn (USD 13bn) more property
NPL, or 31% more of the total recognized NPL. With this setup, PSBC/BONJ may
recognize more property NPL which takes 151%/132% of the reported, and
BOC/BONB could be less pressured given smaller new property NPL to recognize.
(Exhibit 12)
We also assess that Rmb 140bn (USD 20bn) more provisions would be required to
cover the additional property NPL. We factor in bank guidance to set aside 2x of bank
_
LLR (loan loss reserve) as the risk buffer against property loans, and expect banks to at
least maintain the current provisioning level for both existing and newly recognized
property NPL. The new provisions would result in a pro>t decrease of 7% for covered
banks, and ROE, CET1 ratio and book value decrease of 78bps/6bps/-0.6%. Our analysis
suggests BoCom/PAB/BONJ/CMB would recognize more provisions with ROE
decreases of 178/147/133/125bps vs. 92bps average of peers. (Exhibit 12)
In summary, with inclusion of more NPL and provisions to recognize, the adj. ROE and
NPL coverage ratio of covered banks on average could decrease to 11.9%/274% vs.
12.8%/281% prior. CMB’s adj. ROE and NPL coverage ratio would be 16.0%/400% vs.
17.3%/437% prior.
4 July 2023 5
Exhibit 8: Total property exposure (excl. mortgage) as % of total Exhibit 9: Property exposure (excl. mortgage) mix
assets As of 2022
As of 2022
Total property exposure (corporate) as % of total asset Property exposure mix

8% 100%
90%
6% 6% 80%
6%
5% 5% 70%
5% 5% 60%
5% 4% 50%
4% 3% 3%
4% 3% 3% 3% 40%
5% 4%
5% 4% 4% 2% 30%
3% 3% 2% 20%
3% 3% 2%
2% 10%
0%
Property bond Shadow banking Property loan Property bond Shadow banking Property loan
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 10: Target property NPL ratio (2023E) Exhibit 11: Gross NPL formation rate of property loan (2022)
Target property NPL ratio (2023E) Gross NPL formation rate of property loan (2022)
8.0% 7.2% 7.2% 7.2% 4.0%
7.0%
6.5% 3.5%
7.0% 3.5%
3.1%
6.0%
5.0% 3.0%
5.0% 4.5%
2.4%
3.6% 2.5% 2.2% 2.2%
4.0% 3.1%
2.6% 2.0% 1.9%
3.0% 2.3% 1.7% 1.6% Avg. 1.8%
1.5% 1.4%
2.0% 1.2%
1.0% 0.4% 1.0%
0.0% 0.5% 0.3%
0.0%
0.0%
Reported NPL ratio (2022) Gross NPL formation rate (2023E)
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
_
4 July 2023 6
Exhibit 12: Assessing additional NPL and provision of property risk

Rmb bn
Property loan (2022) 976 888 1,360 891 520 212 377 283 356 105 49 84
As % of total loan 4% 4% 8% 5% 7% 3% 6% 9% 7% 5% 5% 8%
As % of IEA 3% 3% 5% 3% 4% 2% 4% 5% 4% 3% 2% 4%
Reported NPL ratio (2022) 6.1% 4.4% 7.2% 5.2% 2.8% 1.5% 4.1% 1.4% 1.3% 2.8% 1.0% 0.4%
Gross property NPL formation rate (2023E) 1.1% 2.9% 0.0% 1.9% 2.2% 2.2% 2.4% 1.2% 1.8% 1.7% 1.4% 0.0%
Target NPL ratio 7.2% 7.2% 7.2% 7.0% 5.0% 3.6% 6.5% 2.6% 3.1% 4.5% 2.3% 0.4%
Additional NPL 11 25 0 17 12 5 9 3 6 2 1 0
LLR ratio of the bank 2.9% 3.3% 1.8% 4.0% 2.5% 3.0% 4.1% 2.9% 2.2% 2.9% 3.7% 0.2%
LLR ratio for property loan 5.7% 6.5% 3.6% 7.9% 4.9% 6.1% 8.2% 5.9% 4.3% 5.8% 7.5% 0.3%
Implied property NPL coverage ratio (based on reported NPL ratio) 93% 149% 49% 153% 175% 419% 201% 410% 332% 205% 779% 81%
Implied property NPL coverage ratio (based on target NPL ratio) 79% 90% 49% 113% 98% 167% 126% 224% 139% 129% 322% 79%
Target NPL coverage ratio for △property NPL (150% min.) 150% 150% 150% 150% 150% 167% 150% 224% 150% 150% 322% 150%
Additional provisions 16 38 0 25 17 8 14 8 10 3 2 0
Adj. NPL coverage ratio 201% 222% 189% 289% 174% 357% 400% 259% 209% 147% 365% 476%
NPL coverage ratio (2023E) 202% 228% 189% 296% 176% 371% 437% 262% 215% 147% 368% 476%
vs. before adj. (ppts) -1 -5 0 -8 -2 -13 -36 -3 -7 0 -3 0
Driven by NPL increase (ppts) -6 -16 0 -15 -16 -24 -55 -20 -22 -5 -21 -1
Driven by provision increase (ppts) 4 11 0 8 14 11 19 17 16 5 19 0
Impact (2023E):
△NPAT (Rmb bn) -14 -31 0 -21 -16 -7 -12 -6 -8 -2 -1.8 0.0
As % of NPAT -4% -9% 0% -8% -17% -8% -8% -12% -9% -8% -9% 0%
Adj. NPAT 356 301 238 247 80 86 139 45 85 24 18 26
Adj. book value 3,392 2,924 2,236 2,388 903 745 912 405 721 279 138 175
vs. before -0.3% -0.7% 0.0% -0.6% -1.2% -0.7% -0.9% -1.3% -0.8% -0.5% -0.9% 0.0%
Adj. ROE 10.9% 10.7% 11.1% 10.7% 9.1% 12.0% 16.0% 11.8% 12.3% 8.8% 13.7% 16.0%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0%
diff. (bps) -40 -107 0 -87 -178 -97 -125 -147 -115 -72 -133 -1
Adj. CET-1 ratio 13.6% 13.3% 11.6% 10.6% 9.9% 9.2% 13.4% 8.4% 9.8% 9.3% 9.6% 9.4%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4%
diff. (bps) -4 -10 0 -7 -13 -6 -12 -11 -8 -5 -9 0
III. Quantifying potential further losses and provisions for assets under
stage 3
We estimate Rmb 247bn (USD 35bn) more NPL and Rmb 289bn (USD 41bn) more
provisions in total would be required for assets under stage 3, with ROE and CET1
ratio decreasing by -167bps/-11bps. We calculate the implied loss ratio of debt
investments (excluding gov. bond) is 6% on average, and 25% for CMB, while
corporate bonds and non-standard credit assets (NSCA) are 9% of debt
_
investments for CMB, compared with 16% for covered banks on average.This
suggests to us that CMB is unlikely to bene9t easily going forward from reduced
provisions on non-loan assets that boosted earnings in the past quarters.
As assets under stage 3 are risky assets with high probability to incur losses, which
should be recognized as NPL. This in our view means that the NPL should be at least
equal to assets under stage 3, otherwise, the reported NPL would be understated. Like
NPL, assets under stage 3 should be well provisioned with appropriate risk buffers. As
such, we set the highest provisioning level of covered banks as the benchmark to
assess the provision required for loans, and apply 100% provisioning level to debt
investments (excluding gov. bonds) to assess the provision required. So we could have:
n In the loan book, Rmb 87bn (USD 12bn) more NPL to recognize, and Rmb 260bn
(USD 37bn) more provisions required. (Exhibit 16)
n In the debt investment, Rmb 160bn (USD 23bn) more NPL to recognize, and Rmb
30bn (USD 4.3bn) more provisions required. (Exhibit 19)
4 July 2023 7
To better assess the credit risk of debt investments, we exclude bonds from debt
investments to have shadow credit, which is also called non-standard credit assets
(NSCA), and add it back with corporate bonds to assess the implied loss of debt
investment as we assume gov. bond remains risk free. Thus, we can calculate the
implied loss ratio of the debt investment book, which could be 6% on average for
covered banks with 25% for CMB.
In summary, combining the assessment of loss and provisions for both the loan and
debt investment book (Exhibit 13):
n Most new loss is from debt investment book, which takes 65% of total loss we
estimate. CMB, Industrial, Huaxia could recognize further losses of Rmb
34/40/20bn (USD 4.9/5.7/2.9bn) from debt investment, or 59%/73%/50% of the
reported.
n Most new provisions are from bank loans, which take 90% of the total required
provision. ABC would potentially require Rmb 76bn (USD 11bn) more provisions, or
9% of the reported loan provision, against the additional loss of Rmb 19bn (USD
2.7bn) in its loan book.
So there could be Rmb 247bn (USD 35bn) total losses to recognize and Rmb 289bn
(USD 41bn) more risk buffer required for covered banks in aggregate, with pro>ts/CET1
ratio down -14%/-11bps.
Moreover, we conclude that CMB is unlikely to be able to further reduce provisions

easily on debt investment (non-loan assets) to drive pro>t growth, as it did in the
previous quarters, and the adj. ROE and NPL coverage ratio could be 17.0%/312% vs.
17.3%/437% before adjustment.
Exhibit 13: Aggregate impact of additional NPL and provisions in loan and debt investments
Rmb bn
Aggregate
_
Total additional NPL 19 35 3 20 6 25 40 21 53 23 0.2 1

-Loans 16 15 0.1 19 4 5 6 4 14 3 -0.2 1
-Debt investments 3 20 2 1 2 20 34 17 40 20 0.4 0.3
Total additional provision 33 74 35 76 26 0.0 3 14 15 13 0.4 0.4

-Loans 32 71 32 76 25 0.0 1 7 8 6 0.4 0.4
-Debt investments 0.4 3 2 0.01 0.8 0.0 1.7 7.2 7.3 7.3 0.04 0.01
Adj. NPL coverage ratio 209% 237% 205% 308% 191% 299% 312% 223% 166% 142% 394% 452%
vs. before adj. (ppts) 7 9 16 12 15 -72 -125 -38 -49 -5 26 -25
Driven by NPL increase (ppts) -10 -22 -2 -18 -9 -103 -170 -87 -105 -49 -7 -50
Driven by provision increase (ppts) 17 31 18 30 24 31 45 49 56 43 33 25
Impact (2023E):
△NPAT (Rmb bn) -28 -60 -29 -64 -24 0 -2 -11 -13 -10 -0.4 -0.3
As % of NPAT -8% -18% -12% -24% -25% 0% -2% -22% -14% -39% -2% -1%
Adj. NPAT 342 272 209 204 72 93 148 40 80 16 19 26
Adj. book value 3,382 2,904 2,216 2,358 897 750 920 400 718 273 139 175
vs. before -0.6% -1.4% -0.9% -1.9% -1.9% 0.0% -0.2% -2.4% -1.3% -2.7% -0.2% -0.2%
Adj. ROE 10.5% 9.7% 9.8% 8.9% 8.2% 13.0% 17.0% 10.5% 11.6% 5.9% 14.8% 15.8%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0%
diff. (bps) -86 -213 -135 -277 -276 0 -29 -292 -191 -373 -27 -20
Adj. CET-1 ratio 13.5% 13.2% 11.5% 10.5% 9.8% 9.2% 13.5% 8.3% 9.7% 9.1% 9.6% 9.4%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4%
diff. (bps) -7 -16 -9 -17 -18 0 -2 -17 -11 -19 -1 -1
4 July 2023 8
Exhibit 14: CMB new provision mix Exhibit 15: CMB NPL coverage ratio
CMB new provision mix CMB NPL coverage ratio (%)

30 500 484
21 22 463 454 456
25 20 20 21 20 451 451 448
441 438 439 439 443 437
20 16 450 425 428
2 2 14
12 13 10 8 403
15 13
14 26 9 400
10 10
Rmb bn
18 18 7 7 18 17
12 7
5 11 11 11
6 8 350
5 5
0 -2 0
-3 -4
-5 300
-16
-10 299 298 291
-15 250
-20
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23
Loan provision Non-loan provision Total new provision NPL coverage ratio Adjusted NPL coverage ratio
Source: Company data Source: Company data
Exhibit 16: In the loan book, Rmb 87bn more NPL to recognize, and Rmb 260bn more provisions required
Rmb bn
Loans
Loans in stage 3 as % of total 1.45% 1.46% 1.32% 1.47% 1.41% 0.92% 1.07% 1.16% 1.36% 1.89% 0.88% 0.83%
Reported NPL ratio 1.38% 1.38% 1.32% 1.37% 1.35% 0.84% 0.96% 1.05% 1.09% 1.75% 0.90% 0.75%
Diff. (bps) 7 8 0 10 6 8 11 11 27 14 -2 8
Additional NPL 16 15 0 19 4 5 6 4 14 3 0 1
Stage-3 loan coverage ratio 78% 64% 75% 61% 63% 89% 86% 70% 77% 74% 84% 85%
Target coverage ratio (sample max) 89% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89%
Diff (ppts) -10 -24 -14 -28 -26 0.0 -2 -18 -12 -15 -5 -4
Additional provision 32 71 32 76 25 0.0 1 7 8 6 0.4 0.4
Exhibit 17: Diff between stage-3 loan proportion and reported NPL Exhibit 18: Stage-3 loan coverage ratio as of 2022
ratio as of 2022
bps
Diff. between stage-3 loan proportion and reported NPL ratio Stage-3 loan coverage ratio
(bps)
100%
89% Target level (sample max) :89%
30 27 90% 86% 85% 84%
78% 77%
25 80% 75% 74%
70%
_
70% 64% 63%

20 61%
60%
14
15 50%
11 11 10
10 8 8 8 7 40%
6
30%
5
0 20%
0
10%
-5 -2 0%
Source: Company data Source: Company data
4 July 2023 9
Exhibit 19: In the debt investment, Rmb 160bn more NPL to recognize, and Rmb 30bn more provisions required
Rmb bn
Debt investments
Additional NPL 3 20 2 1 2 20 34 17 40 20 0.4 0.3
Existing debt provision 33 41 10 20 3 28 43 16 45 17 3 2
Stage-3 debt investment coverage ratio 86% 87% 90% 99% 54% 100% 95% 58% 81% 64% 90% 95%
Target coverage ratio (sample max) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Diff (ppts) -14 -13 -9 -1 -45 0.0 -5 -42 -18 -36 -10 -5
Additional provision 0.4 2.6 2.4 0.01 0.8 0.0 1.7 7.2 7.3 7.3 0.04 0.01
Exhibit 20: Risky non-loan assets including corp. bonds and Exhibit 21: Stage-3 debt investment coverage ratio as of 2022
shadow credit can be captured in debt investments, which allows
us to calculate the implied loss ratio for covered banks averaging
6%
As of 2022
Implied loss ratio of non-loan assets Stage-3 debt investment coverage ratio
30% 120%
25% 100% 99% Target level (sample max): 100%
25% 100% 95% 95%
90%
87% 86%
81%
20% 80%
64%
58%
15% 60% 54%
11%
10% 8% 40%
7% 6% 6%
4%
5% 3% 20%
2% 1%
0% 0%
0% 0%
Impact to CET-1 ratio (bps)

0
Source: Company data, Goldman Sachs Global Investment Research Source: Company data
_
4 July 2023 10
Appendix: What our top-down asset quality model implies
Given the importance of property developers to China’s economy, we assess the

spillover risk to bank loan portfolios given the potential for property credit default.
After incorporating 1Q23 earnings results for ~3,000 listed companies, our implied
NPL data shows that systemwide implied PD decreased in 1Q23 to 12.8% from
13.5% in 4Q22.
1. Total implied PD of our listco sample decreased to 12.8% in 1Q23, -1.0/-0.7ppts vs.
1Q22/4Q22, primarily driven by falling aggregate EIC (6.18x in 1Q23 vs. 6.34x in 4Q22).
We decompose changes in Earnings Interest Coverage (EIC) into three moving parts:
total debt, interest rates and cash aow.
Total debt increased by 5% in 1Q23 vs. 4Q22 driven by strong credit growth. (Exhibit
26)
Interest rate of corporate loans fell by 7bps in 1Q23 vs. 4Q22, driven by LPR cut and
liquidity loosening such as the cut to RRR. (Exhibit 27)
Cash aow deteriorated with 1Q23 EBIT falling 1.5% vs. 4Q22. (Exhibit 25)
All in, the decline in interest rates (a 0.1x improvement in EIC) is not enough to offset
the impact of increasing debt and decreasing EBIT (cash aow), which combined result in
a 0.16x deterioration in total EIC. (Exhibit 24)
2. What are consensus earnings estimates telling us? Based on the latest 2023E/2024E
Wind consensus estimates, 2023E implied PD is expected to drop to 9.9%, lower than
the peak of 2Q22, but rise to 10.4% in 2024E on macro challenges and cuts to
consensus earnings.
Banking sector margin of safety: Rmb 10.6tn (USD 1.5tn) in buffers vs. Rmb 8.4tn
(USD 1.2tn) NPLs
_
We set our stress test at an 7% NPL ratio on the total loan book, factoring in the asset
quality risk implied from A-share quasi-cash aow (as noted above: 12.8% PD, 55% LGD).
This implies total systemwide losses of Rmb 8.4tn (USD 1.2tn) vs. total risk buffers of
Rmb 10.6tn (USD 1.5tn) (above the minimum CET1 ratio). Overall, our covered banks
appear well placed to absorb losses with Rmb 7.6tn (USD 1.1tn) of risk buffers vs. Rmb
4.9tn (USD 0.7tn) in NPLs.
We could see widening divergence in banks’ balance sheet strength. Incorporating our
estimated loss of Rmb ~8.4tn (USD 1.2tn) we adjust the banks’ book value, and
compare them with our estimated book value. Our analysis suggests that most banks
show limited further markdowns, such as 0%/3%/3% for CMB/PSBC/PAB, while
Huaxia/BoCom could face more challenges if further property credit losses are
recognized.
4 July 2023 11
Exhibit 22: Total implied PD of our listco sample decreased to 12.8% Exhibit 23: ...-1.0/-0.7ppts vs. 1Q22/4Q22
in 1Q23...
Implied PD Implied PD chg. (ppts)

Based on Oct. consensus Based on latest consensus
yoy qoq
17.0%
7.7 7.7
14.5% 7.1
15.0% 13.8% 14.2%
13.5%
14.0%
13.7%
13.0% 5.1
12.8% 4.6
11.0%
9.2%
2.8 3.0
10.4% 2.7
9.0% 9.9% 2.3
1.9 1.9
6.7%6.8% 1.5
7.0% 6.0%6.4%6.1%6.1%
0.5 0.7 0.7 0.7
0.4
4.5%4.6% 0.1 0.1
5.0% 4.1%
3.3% (0.1)
(0.3) (0.3) (0.2)
3.0% (0.7) (0.7)
(1.0)
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23
Exhibit 24: The decline in interest rates (a 0.1x improvement in EIC) Exhibit 25: Cash bow deteriorated with 1Q23 EBIT falling 1.5% vs.
is not enough to offset the impact of increasing debt and 4Q22
decreasing EBIT (cash bow), which combined result in a 0.16x
deterioration in total EIC
Aggregate EIC (x) Implied NPLs (RHS) Aggregate TTM EBIT (Rmb tn)
3.80
3.68 3.64
3.63
7.0 6,000 3.59
6.34 3.56
-0.3 -0.07 6.18 3.60 3.52
0.24
5,500 3.44
6.0 3.36 3.39
3.40
5,207 5,000
5.0 Implied NPLs increased by
Rmb 525bn to Rmb 5207 bn in
4,682 4,500 3.20
Rmb bn
4.0
4,000
3.0
3.00 2.90 2.91 2.90 2.90
3,500
2.76 2.91
2.0 2.80
3,000
2.60
1.0 2,500 2.60
0.0 2,000 2.56

2.40
4Q22 EIC Debt chg. Interest rate chg. EBIT chg. 1Q23 EIC
1Q192Q193Q194Q191Q202Q203Q204Q201Q212Q213Q214Q211Q222Q223Q224Q221Q23
Source: Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
_
Exhibit 26: Total debt increased by 5% in 1Q23 vs. 4Q22, driven by Exhibit 27: Interest rate of corporate loans fell by 7bps in 1Q23 vs.
strong credit growth 4Q22
23.0 Total debt (Rmb tn) Aggregate interest cost

22.3
3.70%
3.54% 3.54%
22.0 3.48%
21.1 21.2 3.50% 3.46% 3.38%
21.0 3.26%
3.25%
20.1 3.30% 3.18%
20.0 3.08% 3.09%
3.10% 3.02%
19.1 2.98% 2.99%
18.8
19.0 18.5 18.6 18.5
18.3 2.90% 2.78%
17.9 17.8 2.71%
18.0 17.5 2.64%
2.70% 2.57%
17.0 16.6 16.6 2.50%

16.5
16.2
16.0 2.30%
1Q192Q193Q194Q191Q202Q203Q204Q201Q212Q213Q214Q211Q222Q223Q224Q221Q23 1Q192Q193Q194Q191Q202Q203Q204Q201Q212Q213Q214Q211Q222Q223Q224Q221Q23
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
4 July 2023 12
Exhibit 28: Implied NPL mix of A share listed companies
NPL mix - A share

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2Q18
3Q18
4Q18
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
Energy Utilities Information Technology Consumer Staples Consumer Discretionary
Materials Industrials Property Healthcare
Source: Wind, Goldman Sachs Global Investment Research
Exhibit 29: We estimate Rmb 10.6tn in systemwide risk buffers, comprising Rmb 7.6tn from covered (large cap) banks and Rmb 2.9tn from
non-covered (small) banks
Rmb bn, as of 2023E
1st layer: Additional LLR 2nd layer: PPOP excl. provision 3rd layer: Additional CET-1 excl. new R/E
Total risk
Rmb bn, as of 2023E New Additional
Min. LLR Additional PPOP excl. Min. CET-1 buffer
LLR NPL PPOP Provision CET-1 CET-1 ratio Retained CET-1 excl.
ratio LLR provision ratio
earnings new R/E
ICBC 745 368 70% 487 631 196 435 3,381 13.6% 9.0% 260 884 1,807
CCB 768 337 70% 532 555 148 407 2,941 13.4% 9.0% 241 729 1,668
BOC 465 246 70% 293 408 110 299 2,169 11.6% 9.0% 174 316 908
_
ABC 892 301 70% 681 461 145 316 2,402 10.7% 8.5% 187 307 1,304
PSBC 244 66 70% 198 135 35 100 745 9.2% 8.0% 65 34 332
BoCom 198 113 70% 119 166 64 102 907 10.0% 8.3% 67 92 314
CMB 275 63 70% 231 233 53 180 895 13.5% 8.3% 104 243 654
PAB 108 41 70% 79 135 70 65 389 8.5% 7.8% 45 0 144
Huaxia 69 47 70% 36 64 29 35 283 9.3% 7.8% 20 28 99
Industrial 120 56 70% 81 157 49 108 731 9.9% 8.3% 69 50 239
BONB 43 9 70% 37 40 11 29 174 9.4% 7.8% 23 8 74
BONJ 41 11 70% 33 33 10 23 140 9.7% 7.5% 14 17 74
Banking system 6,664 3,503 70% 4,212 2,885 23,198 10.7% 8.2% 1,970 3,458 10,554
Covered banks 3,967 1,658 70% 2,807 3,018 919 2,099 15,157 11.7% 8.6% 1,268 2,710 7,616
Non-covered banks 2,697 1,845 70% 1,405 786 8,042 9.2% 7.5% 702 747 2,938
Source: Goldman Sachs Global Investment Research
4 July 2023 13
Exhibit 30: We forecast systemwide NPLs of Rmb 8.4tn, with possibility that non-covered small banks could exhaust their risk buffer
Rmb bn
Exposure Loss rate Implied NPL p Risk buffer (2023E) NPL absorption NPL ratio when…
Additional
On-B/S: Off-B/S: Implied Implied Additional Gap (as %
Total NPL Implied Additional PPOP excl. Additional PPOP excl. CET-1 No Recap
Corporate Shadow PD LGD on-B/S off-B/S CET-1 excl. Total of total
exposure ratio total NPL LLR provision LLR provision excl. new dividend required
loan banking NPL NPL new R/E buffer)
R/E
Rmb bn 2022 2022 2022 2023E 2023E 2023E 2023E
ICBC 14,202 180 14,382 12.8% 55% 7.0% 1,001 13 1,013 487 435 884 1,807 100% 100% 10% 0% 13% 19%
CCB 12,164 169 12,333 12.8% 55% 7.0% 857 12 869 532 407 729 1,668 100% 83% 0% 0% 14% 21%
BOC 11,099 148 11,247 12.8% 55% 7.0% 782 10 793 293 299 316 908 100% 100% 64% 0% 8% 15%
ABC 12,159 162 12,321 12.8% 55% 7.0% 857 11 868 681 316 307 1,304 100% 59% 0% 0% 11% 17%
PSBC 3,164 70 3,234 12.8% 55% 7.0% 223 5 228 198 100 34 332 100% 30% 0% 0% 10% 18%
BoCom 4,930 101 5,031 12.8% 55% 7.0% 347 7 355 119 102 92 314 100% 100% 100% 13% 6% 12%
CMB 2,890 264 3,153 12.8% 55% 7.0% 204 19 222 231 180 243 654 96% 0% 0% 0% 21% 28%
PAB 1,282 74 1,356 12.8% 55% 7.0% 90 5 96 79 65 0 144 100% 25% 0% 0% 11% 20%
Huaxia 1,566 43 1,609 12.8% 55% 7.0% 110 3 113 36 35 28 99 100% 100% 100% 14% 6% 11%
Industrial 3,009 176 3,185 12.8% 55% 7.0% 212 12 224 81 108 50 239 100% 100% 70% 0% 8% 15%
BONB 655 33 688 12.8% 55% 7.0% 46 2 48 37 29 8 74 100% 40% 0% 0% 11% 18%
BONJ 675 25 700 12.8% 55% 7.0% 48 2 49 33 23 17 74 100% 71% 0% 0% 10% 16%
Banking system 117,459 1,940 119,399 12.8% 55% 7.0% 8,277 137 8,414 4,212 2,885 3,458 10,554 100% 100% 38% 0% 9% 15%
Covered banks 67,793 1,446 69,239 12.8% 55% 7.0% 4,777 102 4,879 2,807 2,099 2,710 7,616 100% 99% 0% 0% 11% 18%
Non-covered banks 49,666 494 50,160 12.8% 55% 7.0% 3,500 35 3,535 1,405 786 747 2,938 100% 100% 100% 20% 6% 10%
Exhibit 31: Systemwide, risk buffer is sufccient to cover implied total NPL, with surplus of Rmb 2.1tn
Rmb tn
Total implied NPL vs. risk buffer

12.0
10.0
2.1
0.1 4.2
8.0
Rmb tn
6.0
10.6
2.9
4.0 8.3 8.4
2.0 3.5
0.0
On-B/S NPL Off-B/S NPL Implied total Risk buffer Total risk buffer Additional LLR PPOP excl. Additional CET-
NPL surplus provision 1 excl. new R/E

_
4 July 2023 14
Exhibit 32: Adj. book value after absorbing implied NPL
Due to Due to CET-1 Due to CET-

Book value Diff. with
PPOP erosion (excl. 1 erosion Adj. BV
(GSe) GSe
erosion gap) (gap)
Rmb bn A, 2023E B C D E=A+B+C+D F=E/A-1

ICBC 3,402 -260 -91 0 3,050 -10%
CCB 2,946 -200 0 0 2,746 -7%
BOC 2,236 -174 -201 0 1,860 -17%
ABC 2,403 -111 0 0 2,292 -5%
PSBC 750 -20 0 0 730 -3%
BoCom 914 -67 -92 -41 714 -22%
CMB 920 0 0 0 920 0%
PAB 410 -11 0 0 399 -3%
Huaxia 281 -20 -28 -14 218 -22%
Industrial 727 -69 -35 0 623 -14%
BONB 175 -9 0 0 166 -5%
BONJ 139 -10 0 0 129 -7%

_
4 July 2023 15
Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reaect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the speci>c
GS Factor Procle
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Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for speci>c metrics for each stock. The
vary depending on the >scal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for >nancial stocks, only EPS and sales growth), with a
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stocks, only ROE), with a higher percentile indicating a company with higher >nancial returns. Multiple is based on a stock’s forward-looking P/E, P/B,
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M&A Rank
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4 July 2023 19
4 July 2023 | 11:21PM HKT
Testing the ‘Impossible Trinity’ Part III: Increasing dividend

risk; PSBC up to Buy, ICBC/ABC/Industrial down to Sell
In the third of our Testing the ‘Impossible Trinity’ series, we assess the dividend Shuo Yang, Ph.D.
sustainability of banks in our coverage, based on adjusted book value incorporating Goldman Sachs (Asia) L.L.C.
the margin risk of local government debt and additional losses in bank credit
portfolios (see Parts I and II in the series).
Our analysis suggests that 1) adjusted dividend yields of A/H covered banks will
come in at ~4%/6% in 2023E, ~2ppt lower than before adjustment, and 2) dividend
payout targets could come under increasing pressure, on weaker earnings growth
and the need to maintain high CET1 ratio targets. Based on our framework, we see
potential for BoCom and Hua Xia to miss dividend payout targets in 2023E,
Industrial Bank in 2024E, and ICBC and ABC in 2025E (Exhibit 10-Exhibit 11).
Drawing parallels from the 2013-15 cycle, we note that banks struggled to maintain
dividends at the beginning of the downcycle then gave up dividend targets in order
to prioritize capital and risk buffers when the trinity of dividends, capital and
provisions could not be well balanced. We expect banks to face similar challenges in
2023-25E, with a similar dividend pattern to repeat.
Consensus believes that large banks are trading at distressed valuation multiples
(average ~2.5x P/PPOP), posing upside share performance risk. Fundamentally,
however, we believe a further multiple correction is likely, driven by margin risk from
local government debt and more losses within bank credit portfolios. This could
_
weaken earnings growth, pressure capital accumulation and thus pressure dividend
payout levels. We revise down our large bank PPOP estimates by -5%/-6% in
23E/24E reUecting margin risk. Our CAMELOT-based target P/PPOP (reUecting bank
PPOP growth, ROE, capital and dividend levels) is cut to 2.4x/2.2x for A/H shares in
order to capture squeezed bank earnings and notably incorporate dividend payout
risk, and therefore we revise our A/H 12m TPs by an average of -5%/-1%.
That said, PSBC‘s peer-leading earnings forecasts and stable dividend payouts are
underappreciated, in our view, and we upgrade PSBC-A/H to Buy from Sell, on
target P/PPOP of 3.75x/3.25x vs. 2.75x/2.25x prior and 3% PPOP increase vs. prior,
with new 12m TPs of Rmb6.03/HK$5.8 or 21%/19% upside. At the same time, we
downgrade ABC-A/H to Sell from Neutral, on target P/PPOP of 1.875x/1.6x vs.
investors should be aware that the frm may have a conUict of interest that could affect the objectivity of this
certifcation and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US affliates are not registered/qualifed as research
2x/1.6x prior and -9% PPOP change vs. prior, with new 12m TPs of Rmb2.59/HK$2.45 or
-28%/-21% downside, given similarly rich deposits but diverging local government debt
exposure. We model that ABC‘s dividend is not at risk until 2025E, with DPS increases
of 2%/1% vs. prior in 2023E/24E on provision release, but a 1ppt dividend payout cut in
2025E. With increasing target CET1 ratio (11.5% for ABC as G-SIB vs. 13.3% for ICBC),
ABC will face more dividend risk.
We maintain Buy on CCB A/H on more local government bond for capital and tax
savings to mitigate earnings risk. We downgrade ICBC A/H to Sell from Buy on large
local government debt, with increasing dividend risk owing to the high CET-1 ratio target
of 13% required as a G-SIB being diffcult to maintain. We cut DPS by 3%/5% vs. prior
in 2023E-24E and payout by 7ppts to 23% in 2025E and revise our target P/PPOP to
2.25x/1.75x from 2.75x/2.25x and -10% PPOP change vs. prior, to derive 12m TPs of
Rmb4.12/HK$3.55 or -16%/-16% downside.
We downgrade Industrial Bank to Sell from Buy on a worsening balance sheet. We cut
DPS by 4%/30% vs. prior in 2023E-24E, and revise target P/PPOP to 1.5x from 2.25x
and -4% PPOP change vs. prior, to derive our 12m TP of Rmb12.09 or -24% downside.
Lastly, we remain Neutral on CMB with new TPs of Rmb32.65/HK$36.24 or -3%/-2%
downside due to more credit losses to digest.
In summary, our DPS are 8%/15% lower vs. prior, driven by an average 3-4ppts payout
cut for covered banks. Having said that, we still see most banks able to maintain
dividends, though divergence is set to widen on payouts. In our view, upside risk could
come from new capital raises or lower CET1 ratio, which could allow banks such as
ICBC and ABC to alleviate dividend risk and sustain payouts.
The author would like to thank Zihan Wang and Claire Ouyang for their contributions to
this report.
Exhibit 1: Valuation revisions

_
Previous Target Upside/

Current Previous TP Previous Target PPOP Trading
Currency Current TP Rating Target multiple downside Implied P/E Implied P/B Trading P/E Trading P/B
price TP change rating P/PPOP change P/PPOP
multiple Change (%)
H-share (HKD) 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E
ICBC (H) HK$ 4.24 3.55 4.98 -29% Sell Buy 1.750x 2.250x -0.500x -10% -16% 3.1 3.0 0.3 0.3 3.7 3.6 0.4 0.4 2.2 2.1
BOC (H) HK$ 3.19 2.83 2.72 4% Neutral 1.750x 1.750x 2% -11% 3.2 3.0 0.3 0.3 3.6 3.4 0.4 0.3 2.1 2.0
CCB (H) HK$ 5.12 5.81 6.07 -4% Buy 2.250x 2.250x -6% 13% 3.9 3.8 0.4 0.4 3.5 3.3 0.4 0.4 2.1 2.0
ABC (H) HK$ 3.12 2.45 2.62 -6% Sell Neutral 1.600x 1.600x -9% -21% 2.9 2.8 0.3 0.3 3.7 3.5 0.4 0.4 2.1 2.0
BoCom (H) HK$ 5.20 3.88 3.97 -2% Sell 1.500x 1.500x -3% -25% 2.7 2.6 0.3 0.3 3.6 3.5 0.4 0.3 2.1 2.0
PSBC (H) HK$ 4.87 5.80 4.06 43% Buy Sell 3.250x 2.250x 1.000x 3% 19% 5.2 4.7 0.6 0.6 4.4 4.0 0.5 0.5 3.0 2.7
CMB (H) HK$ 37.05 36.24 40.85 -11% Neutral 3.250x 3.500x -0.250x -1% -2% 5.5 5.0 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.3
A-share (Rmb)
ICBC (A) Rmb 4.88 4.12 5.29 -22% Sell Buy 2.250x 2.750x -0.500x -10% -16% 4.0 3.5 0.4 0.4 4.7 4.5 0.5 0.5 2.8 2.7
BOC (A) Rmb 3.98 3.46 2.71 28% Neutral 2.375x 2.000x 0.375x 2% -13% 4.3 3.7 0.5 0.4 4.9 4.7 0.5 0.5 2.9 2.7
CCB (A) Rmb 6.34 6.40 6.46 -1% Buy 2.750x 2.750x -6% 1% 4.8 4.1 0.5 0.5 4.8 4.6 0.5 0.5 2.9 2.7
ABC (A) Rmb 3.62 2.59 2.85 -9% Sell Neutral 1.875x 2.000x -0.125x -9% -28% 3.4 2.9 0.4 0.3 4.7 4.5 0.5 0.5 2.7 2.6
BoCom (A) Rmb 5.89 3.79 3.74 1% Sell 1.625x 1.625x -3% -36% 2.9 2.5 0.3 0.3 4.6 4.4 0.5 0.4 2.6 2.5
PSBC (A) Rmb 4.98 6.03 4.31 40% Buy Sell 3.750x 2.750x 1.000x 3% 21% 6.0 4.9 0.7 0.7 4.9 4.5 0.6 0.6 3.4 3.1
CMB (A) Rmb 33.72 32.65 35.52 -8% Neutral 3.250x 3.500x -0.250x -1% -3% 5.5 4.5 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.4
Industrial Rmb 15.83 12.09 18.93 -36% Sell Buy 1.500x 2.250x -0.750x -4% -24% 2.7 2.3 0.3 0.3 3.5 3.3 0.5 0.4 2.1 2.0
PAB Rmb 11.49 13.12 16.84 -22% Buy 1.750x 2.250x -0.500x 0% 14% 5.0 4.0 0.6 0.6 4.3 3.9 0.5 0.5 1.7 1.5
HuaXia Rmb 5.48 4.25 4.23 0% Sell 1.000x 1.000x -3% -22% 2.5 2.2 0.2 0.2 3.3 3.1 0.3 0.3 1.3 1.3
BONB Rmb 25.58 30.52 35.76 -15% Buy 4.500x 5.000x -0.500x -5% 19% 7.7 6.0 1.1 1.0 6.4 5.6 1.0 0.8 4.3 3.8
BONJ Rmb 8.09 8.61 9.98 -14% Neutral 2.500x 2.750x -0.250x -16% 6% 4.5 3.8 0.6 0.6 4.2 3.9 0.6 0.5 2.5 2.3
TPs are on a 12-month timeframe; Priced as of July 3, 2023
4 July 2023 2
Exhibit 2: A-share banks current P/PPOP vs. historical range Exhibit 3: H-share banks current P/PPOP vs. historical range
A-share banks: Current P/PPOP (forward 12m) H-share banks: Current P/PPOP (forward 12m)
vs. historical range vs. historical range
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since 8.0
9.0 2014
2014
8.0 7.0
7.0 6.0
6.0 5.0
5.0
4.0
4.0
4.0 3.4 3.1
3.4 3.5 3.0
3.0 2.4
2.7 2.6 2.5 2.7 2.7 2.6 2.7 2.1 2.0 2.1
2.4 2.0 2.0 2.0
2.0 2.0
1.0
1.3 1.0
ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H) Covered ABC (H) PSBC (H)
banks (H)
0.0
BONB HuaXia BONJ Industrial ICBC (A) CMB (A) Covered BoCom CCB (A) BOC (A) ABC (A) BOC (A) PSBC (A)
banks (A) (A)
Source: Wind Source: Wind

_
4 July 2023 3
I. Dividend: Stress-tested bank dividend yield suggests ~2ppt lower yield

and increasing risk of payout miss
With ongoing weakening of balance sheets expected for China banks, we stress
tested dividend risk in 2023E-25E using an adjusted ROE, which assumes margin
losses on local government debt and additional losses from banks’ credit
portfolios.The stress test implies average 2023E-25E adjusted dividend yields of
5.5%/7.2%, vs. 6.4%/8.3% pre-adjustment for our covered A/H shares.The test also
suggests that banks like BoCom, Hua Xia, Industrial, ABC and ICBC are likely to
face heightened dividend risk from weakening balance sheets and difUculty
maintaining target CET1 ratios. Based on risk buffer shortfalls according to our
framework (Exhibit 10), we see potential for BoCom and Hua Xia to miss dividend
payout targets in 2023E, Industrial Bank in 2024E, and ICBC, PAB and ABC in
2025E.
As per our economists, local government debt risk has been a long-standing issue over
the past decade, but recent reports have brought bond default risks back to investors’
attention (here, here, here). With this in mind, we use adjusted ROE in our stress test,
which assumes earnings cuts caused by the margin risk of local government debt and
losses on bank credit portfolios. We further tested banks’ dividend risk to assess the
robustness of bank balance sheets and sustainable investor returns; of note, company
strategies in Asia Pacifc have recently moved toward reducing capital expenditures and
increasing R&D investment and cash to shareholders per our Asia Pacifc Strategy team
(here). Amid this environment, we attempt to answer: 1) what’s the adjusted bank
dividend yield as the current market price appears to be implying a higher yield (non
adjusted) in a declining rate environment at ~6%/8% for A/H shares, and; 2) which
banks can sustainably pay a dividend amid challenging fundamentals.
Starting with adjusted ROE in 2023E, we adjust bank book value by taking prolonged
margin loss led by a net balance increase of government debt in 2024E-25E. We Uex the
_
condition that the NPL coverage ratio is lowered to 150%, the minimum requirement.
We can assume this, because we have built in most credit losses in 2023E for the
stress test, though we expect banks in reality to manage the pace of loss digestion for
their credit portfolios.
So for the stress test, bank balance sheets from 2024E should be cleaner and setting an
NPL coverage ratio of 150% can allow for the maximum provision release banks can
have to maintain capital and dividend. We expect banks to prioritize capital over dividend
based on historical precedence, which means when the CET1 ratio cannot be
maintained at the target level, we believe provision release would fll in the capital
shortfall as the top priority over dividend payments.
We summarize our stress-test results below:
n Adj. bank dividend works out to 5.5%/7.2% for our A/H shares vs. 6.4%/8.3% before
adjustment on average for 2023-25E.
n From 2023E, BoCom and Huaxia could see heightened dividend payout risk, given
4 July 2023 4
their lower adj. ROEs at 5.4%/4.9% respectively, and any provision release will likely
not be suffcient to fll the capital shortfall. We bake in dividend payout cuts of
22ppts and 11ppts for BoCom and Huaxia in 2023E.
n Industrial Bank could miss its dividend payout target in 2024E, partly due to its high
target CET1 ratio, but more likely given fundamentals e.g. a worsening balance
sheet on larger local gov. debt exposure and potential for additional credit loss. Adj.
ROE before dividends in 2023E/24E/25E is 9.4%/12.3%/11.9% vs.
13.4%/12.9%/12.5% pre-adjustment. We bake in dividend payout cuts of 28ppts,
13ppts and 7ppts for BoCom, Huaxia and Industrial in 2024E.
n ICBC and ABC could see heightened dividend risk in 2025E, mainly due to the
prolonged margin loss on larger local gov. debt exposure. We expect ICBC and ABC
to maintain their high target CET1 ratios at 13.3%/11.5% as G-SIBs, which have set
an aggressive limit as the potential capital shortfall could be large and not covered
by provision release. We note that during the 2013-15 cycle, banks lowered CET1
ratios to meet the demands of provisions and dividends but weakened the overall
strength of their balance sheets, resulting in banks eventually cutting dividends to
save capital. (See Part II for bank dividend history.) We bake in dividend payout cuts
of 30ppts, 13ppts, 12ppts, 7ppts and 1ppts for BoCom, Huaxia, Industrial, ICBC,
PAB and ABC in 2025E.
Exhibit 4: A-share dividend yield pre/post adjustment (2023E) Exhibit 5: H-share dividend yield pre/post adjustment (2023E)
Div. yield (A) in 2023E Div. yield (H) in 2023E

9.0 10.0
8.0 9.0
7.0 8.0
6.0 7.0
5.0 6.0
%
4.0
5.0
%
3.0 6.0
5.3 5.3 5.2 5.2 5.1 4.0
2.0 4.4 7.2 6.7
3.9 3.8 3.2 3.0 6.0 5.8
1.0 2.1 5.1 5.0
1.6 2.0 4.0
0.0
1.0
0.0
_
BOC ICBC CCB PSBC CMB ABC BoCom

vs. before adj. Div. yield (A) Div. yield (H) vs. before adj.
4 July 2023 5

9.0 10.0
8.0 9.0
7.0 8.0
6.0 7.0
5.0 6.0
%
4.0 7.7 5.0
%
7.5 7.3
3.0 6.5 6.3 6.3 6.3 6.2 6.2 6.2 8.8 8.6
4.0 8.0 8.0 7.7
2.0 7.0
3.0 6.3
3.0 2.4
1.0
2.0
0.0
1.0
0.0
CCB BOC ABC ICBC BoCom PSBC CMB
Div. yield (A) vs. before adj. Div. yield (H) vs. before adj.

10.0 12.0
9.0
8.0 10.0
7.0
6.0 8.0
5.0
%
6.0
%
4.0 8.0 7.9 7.9

6.9 6.9 6.8 6.7 6.6 6.5 6.4
3.0 9.2 9.0
2.0 4.0 8.3 8.3 8.0 7.7
3.3 2.8 6.9
1.0
0.0 2.0
0.0
CCB BOC ABC ICBC BoCom PSBC CMB
Div. yield (A) vs. before adj. Div. yield (H) vs. before adj.
_
4 July 2023 6
Exhibit 10: Dividend Stress test

2023E
Adj.NPL coverage ratio 208% 231% 205% 300% 188% 292% 299% 223% 165% 142% 390% 451%
Required min. 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150%
Diff. (ppts) 58 81 55 150 38 142 149 73 15 -8 240 301
Adj. NPL 398 398 249 338 130 96 112 66 115 72 12 10
Provision available to release 229 324 136 506 49 136 167 48 17 -6 29 31
Adj. CET-1 ratio after div. payout 13.0% 12.8% 11.2% 10.2% 9.5% 8.8% 12.7% 8.0% 9.3% 8.9% 9.2% 9.1%
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.3 -0.6 -0.3 -1.3 -1.3 -0.9 0.2 -0.7 -0.2 -0.2 -0.3 -0.5
RWA 24,852 21,891 18,651 22,447 9,064 8,080 6,643 4,580 7,419 3,023 1,452 1,847
CET-1 surplus (shortfall) -74 -122 -62 -303 -120 -73 12 -33 -16 -6 -4 -9
Adj. CET-1 ratio with provision release 13.8% 14.0% 11.8% 12.1% 10.0% 10.4% 14.8% 8.8% 9.5% 8.8% 10.8% 10.7%
Total additional risk buffer 155 202 74 203 -70 64 179 15 2 -11 24 21
YES YES YES YES NO YES YES YES YES NO YES YES
2024E
Required min. 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150%
Diff. (ppts) 42 71 51 139 25 138 148 48 1 -16 224 285
Adj. NPL 462 445 279 375 150 101 116 79 119 80 14 12
Provision available to release 193 314 142 522 38 139 172 38 2 -13 32 33
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.5 -0.9 -0.4 -1.7 -1.6 -1.1 0.4 -0.7 -0.3 -0.1 -0.5 -0.7
RWA 27,113 24,048 20,219 24,889 9,825 8,948 7,276 5,107 8,152 3,194 1,629 2,151
CET-1 surplus (shortfall) -141 -207 -75 -434 -152 -95 30 -35 -26 -4 -8 -15
Total additional risk buffer 51 108 67 88 -114 43 202 2 -24 -17 24 18
YES YES YES YES NO YES YES YES NO NO YES YES
2025E
Required min. 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150%
Diff. (ppts) 23 61 46 129 14 136 141 19 -15 -25 202 274
Adj. NPL 548 498 312 416 172 105 123 97 125 90 17 13
Provision available to release 127 303 145 536 23 143 173 19 -19 -23 35 35
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.7 -1.0 -0.4 -2.0 -1.7 -1.2 0.7 -0.6 -0.4 0.0 -0.6 -0.9
RWA 29,588 26,245 21,860 27,415 10,644 9,904 7,983 5,693 8,972 3,357 1,829 2,507
CET-1 surplus (shortfall) -216 -258 -79 -541 -177 -117 55 -35 -34 2 -12 -22
Total additional risk buffer -89 44 65 -6 -153 26 228 -16 -53 -21 23 13
NO YES YES NO NO YES YES NO NO NO YES YES
Exhibit 11: We baked in dividend payout cut of BoCom, Huaxia, Industrial, PAB, ICBC, and ABC in out years
given risk buffer shortfall built in our framework.
_
35% 30% 30% 30% 30% 30%

30% 27% 27%
24% 24% 24%
25%
20%
15% 12%
29%
20% 23%
10%
14% 15%
5% 11% 11% 9%
8%
0% 2% 0%
BoCom Huaxia BoCom Huaxia Industrial BoCom Huaxia Industrial ICBC ABC PAB
2023E 2024E 2025E
Adj. payout ratio vs. 2022 2022
4 July 2023 7
II. Learning from previous bank dividend misses
We expect banks to repeat the cycle of 2013-15 in terms of dividend risk given
deteriorating fundamentals. We believe that at the start of the down-cycle banks
would likely try to maintain dividends rather than risk buffers, but swiftly change
to cutting dividends and prioritizing provision release to secure capital. As such,
we believe bank dividend risk is increasing and adj. dividend yield in 2023E could
potentially be -2ppts lower vs. before adjustment.
In order to assess when the tipping point might be at which banks would cut dividends,
we have back-tested data from past cycles, to see whether banks prioritized capital over
investor returns, in order to strengthen balance sheets and maintain sustainable growth
amid challenging times.
In the exhibits below we display the changes in dividend payout, NPL coverage ratio and
CET1 ratio starting from 2010 until 2022, and note that at the beginning of the 2010-16
cycle, banks started to cut dividend payouts and release additional provisions to support
capital.
From 2013-16, we see that banks struggled to prioritize dividend over risk buffers until
their balance sheets were no longer able to maintain suffcient capital. Notably, 2013
was the most challenging year for banks, as NPL coverage ratios and CET1 ratios both
declined by 35ppts/75bps on average, the largest drop in the 2010-2016 cycle, but
average dividend payout was maintained. Bank valuations bottomed, with dividend yield
peaking in 2013, likely suggesting that the market was expecting deteriorating bank
balance sheets and dividend risk given the weakening risk buffers (Exhibit 13).
Moving into 2014 and 2015, banks cut dividends and further lowered NPL coverage
ratios to accumulate earnings and support capital. We summarize the change over
2013-15 as:
_
n Banks could prioritize dividend at the beginning to support high dividend yield,
despite weakening balance sheets;
n But approaching the tipping point when banks could not maintain the balance of
provision, capital and dividend, banks shifted to prioritize capital over dividend to
support the balance sheet.
We think the 2023E-25E cycle could largely repeat what happened in 2013-15. We
model dividend payout risk, with lowering DPS by 8%/15% vs. prior, driven by an
average 3-4ppts payout cut for covered banks. Having said that, we still see most banks
able to maintain dividends, though divergence is set to widen on payouts (Exhibit 14,
Exhibit 15).
4 July 2023 8
Exhibit 12: DPS

DPS (Rmb) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 0.18 0.20 0.24 0.26 0.26 0.23 0.23 0.24 0.25 0.26 0.27 0.29 0.30 0.31 0.32 0.26
CCB 0.21 0.24 0.27 0.30 0.30 0.27 0.28 0.29 0.31 0.32 0.33 0.36 0.39 0.40 0.42 0.44
BOC 0.15 0.16 0.18 0.20 0.19 0.18 0.17 0.18 0.18 0.19 0.20 0.22 0.23 0.24 0.25 0.27
ABC 0.15 0.13 0.16 0.18 0.18 0.17 0.17 0.18 0.17 0.18 0.19 0.21 0.22 0.23 0.24 0.24
BoCom 0.12 0.10 0.24 0.26 0.27 0.27 0.27 0.29 0.30 0.32 0.32 0.35 0.37 0.10 0.03 0.00
PSBC 0.07 0.15 0.19 0.21 0.22 0.25 0.28 0.30 0.33 0.37
CMB 0.29 0.42 0.63 0.62 0.67 0.69 0.74 0.84 0.94 1.20 1.25 1.52 1.74 1.90 2.09 2.32
PAB 0.27 0.16 0.17 0.15 0.16 0.15 0.15 0.22 0.18 0.23 0.29 0.32 0.36 0.30
Industrial 0.46 0.37 0.57 0.46 0.57 0.61 0.67 0.65 0.69 0.76 0.80 1.03 1.19 1.21 0.97 0.76
Huaxia 0.20 0.25 0.47 0.43 0.43 0.36 0.18 0.15 0.17 0.25 0.30 0.34 0.40 0.23 0.20 0.21
BONJ 0.20 0.30 0.41 0.46 0.57 0.40 0.26 0.34 0.39 0.46 0.39 0.48 0.53 0.57 0.62 0.67
BONB 0.20 0.20 0.25 0.40 0.45 0.45 0.35 0.40 0.41 0.53 0.50 0.50 0.50 0.57 0.65 0.75
△DPS (Rmb) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 0.01 0.02 0.04 0.02 0.00 -0.02 0.00 0.01 0.01 0.01 0.00 0.03 0.01 0.01 0.01 -0.06
CCB 0.01 0.02 0.03 0.03 0.00 -0.03 0.00 0.01 0.02 0.01 0.01 0.04 0.02 0.01 0.02 0.02
BOC 0.01 0.01 0.02 0.02 0.00 -0.02 -0.01 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.01 0.01
ABC -0.02 0.03 0.02 0.01 -0.02 0.00 0.01 0.00 0.01 0.00 0.02 0.02 0.01 0.01 0.00
BoCom -0.09 -0.02 0.14 0.02 0.01 0.00 0.00 0.01 0.01 0.02 0.00 0.04 0.02 -0.27 -0.08 -0.03
PSBC 0.07 0.05 0.02 0.01 0.03 0.03 0.03 0.03 0.03
CMB 0.05 0.13 0.21 -0.01 0.05 0.02 0.05 0.10 0.10 0.26 0.05 0.27 0.22 0.16 0.19 0.23
PAB -0.11 0.01 -0.02 0.01 -0.01 0.00 0.07 -0.04 0.05 0.06 0.04 0.04 -0.06
Industrial -0.04 -0.09 0.20 -0.11 0.11 0.04 0.06 -0.02 0.04 0.07 0.04 0.23 0.15 0.02 -0.24 -0.21
Huaxia 0.07 0.05 0.22 -0.04 0.00 -0.07 -0.18 -0.03 0.02 0.08 0.05 0.04 0.06 -0.16 -0.03 0.01
BONJ 0.10 0.10 0.11 0.05 0.11 -0.17 -0.14 0.08 0.05 0.07 -0.07 0.08 0.06 0.04 0.04 0.05
BONB 0.00 0.00 0.05 0.15 0.05 0.00 -0.10 0.05 0.01 0.12 -0.03 0.00 0.00 0.07 0.08 0.10
Exhibit 13: Dividend payout ratio

Payout ratio (%) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 39% 34% 35% 35% 33% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 23%
CCB 39% 35% 35% 35% 33% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
BOC 39% 35% 35% 35% 33% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
ABC 52% 35% 35% 35% 33% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 29%
BoCom 17% 12% 31% 31% 30% 30% 30% 30% 30% 30% 30% 30% 30% 8% 2% 0%
PSBC 15% 25% 30% 30% 30% 30% 30% 30% 30% 30%
CMB 24% 25% 30% 30% 30% 30% 30% 30% 29% 33% 32% 32% 32% 32% 32% 32%
PAB 10% 10% 10% 10% 12% 11% 10% 15% 12% 12% 12% 12% 12% 9%
Industrial 15% 16% 21% 21% 23% 23% 24% 24% 24% 24% 25% 26% 27% 27% 20% 15%
Huaxia 17% 19% 25% 25% 22% 21% 10% 10% 13% 17% 22% 22% 24% 14% 11% 11%
BONJ 26% 28% 30% 30% 30% 19% 19% 30% 30% 31% 30% 30% 30% 30% 30% 30%
BONB 25% 18% 18% 24% 26% 27% 17% 22% 19% 22% 20% 17% 14% 14% 14% 14%
_
△Payout ratio (ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC -5 -5 1 0 -2 -3 0 0 0 0 0 0 0 0 0 -7
CCB -5 -4 0 0 -2 -3 0 0 0 0 0 0 0 0 0 0
BOC -5 -4 0 0 -2 -3 0 0 0 0 0 0 0 0 0 0
ABC -17 0 0 -2 -3 0 0 0 0 0 0 0 0 0 -1
BoCom -18 -5 18 0 -1 0 0 0 0 0 0 0 0 -22 -6 -2
PSBC 10 5 0 0 0 0 0 0 0
CMB -1 1 5 0 0 0 0 0 -1 3 0 0 0 0 0 0
PAB 0 0 0 2 -1 -1 5 -3 0 0 0 0 -3
Industrial -4 1 5 0 2 0 0 0 0 0 1 1 1 0 -7 -5
Huaxia -1 2 7 0 -3 -1 -11 0 3 5 4 0 2 -11 -3 0
BONJ 14 2 2 0 0 -11 0 11 0 1 -1 0 0 0 0 0
BONB -9 -7 0 6 2 1 -9 4 -2 3 -2 -3 -3 0 0 0
4 July 2023 9
Exhibit 14: Dividend yield (A-share)

Div. yield (A-share, %) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 4.3 4.8 5.8 7.3 5.2 5.1 5.3 3.9 4.7 4.5 5.3 6.3 7.0 6.5 6.7 5.4
CCB 4.6 5.2 5.8 7.2 4.5 4.7 5.1 3.8 4.8 4.4 5.2 6.2 6.9 6.4 6.7 7.1
BOC 4.5 5.3 6.0 7.5 4.6 4.4 4.9 4.4 5.1 5.2 6.2 7.2 7.3 6.3 6.6 6.9
ABC 2.0 5.0 5.6 7.1 4.9 5.2 5.5 4.7 4.8 4.9 5.9 7.0 7.6 6.5 6.8 6.9
BoCom 2.2 2.2 4.9 6.8 4.0 4.2 4.7 4.6 5.2 5.6 7.1 7.7 7.9 1.8 0.5 0.0
PSBC 3.6 4.4 4.9 5.6 6.1 6.7 7.4
CMB 2.3 3.5 4.6 5.7 4.0 3.8 4.2 2.9 3.7 3.2 2.9 3.1 4.7 5.7 6.3 7.0
PAB 1.7 1.3 1.1 1.3 1.7 1.0 1.5 1.3 0.9 1.4 2.2 2.8 3.2 2.7
Industrial 1.9 3.0 3.4 4.5 3.5 3.6 3.8 3.8 4.6 3.8 3.8 5.4 6.8 7.7 6.2 4.8
Huaxia 1.8 2.2 4.5 5.1 3.2 3.0 1.7 1.7 2.4 3.2 4.8 6.0 7.4 4.3 3.7 3.9
BONJ 2.0 3.2 4.4 5.7 3.4 2.3 2.4 4.5 6.1 4.5 4.9 5.2 5.1 7.2 7.7 8.4
BONB 1.6 2.2 2.3 4.3 2.9 2.9 2.1 2.2 2.5 1.8 1.4 1.3 1.5 2.2 2.6 3.0
△Div. yield (A-share, ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 1.2 0.4 1.0 1.6 -2.1 -0.2 0.2 -1.4 0.9 -0.3 0.9 1.0 0.7 -0.5 0.2 -1.3
CCB 1.4 0.6 0.6 1.4 -2.8 0.3 0.4 -1.3 1.0 -0.4 0.8 1.0 0.7 -0.5 0.3 0.3
BOC 1.3 0.8 0.7 1.5 -2.9 -0.2 0.5 -0.5 0.7 0.1 1.0 1.1 0.1 -1.1 0.3 0.3
ABC 3.0 0.6 1.5 -2.2 0.3 0.3 -0.8 0.2 0.1 1.0 1.1 0.6 -1.1 0.3 0.1
BoCom 0.1 0.0 2.6 1.9 -2.8 0.2 0.5 -0.1 0.6 0.4 1.5 0.6 0.2 -6.1 -1.3 -0.5
PSBC 3.6 0.8 0.5 0.7 0.5 0.6 0.7
CMB 1.1 1.3 1.0 1.1 -1.7 -0.2 0.4 -1.3 0.8 -0.5 -0.3 0.3 1.5 1.1 0.6 0.7
PAB -0.4 -0.2 0.2 0.5 -0.7 0.5 -0.2 -0.4 0.5 0.8 0.7 0.3 -0.5
Industrial 0.7 1.0 0.5 1.1 -1.1 0.1 0.2 0.0 0.8 -0.8 0.0 1.6 1.3 0.9 -1.5 -1.4
Huaxia 0.8 0.4 2.3 0.5 -1.8 -0.2 -1.3 0.0 0.7 0.9 1.6 1.2 1.3 -3.1 -0.6 0.2
BONJ 1.5 1.2 1.2 1.3 -2.3 -1.2 0.1 2.1 1.6 -1.6 0.4 0.3 0.0 2.1 0.5 0.7
BONB 0.5 0.6 0.2 2.0 -1.5 0.0 -0.8 0.1 0.2 -0.7 -0.4 -0.1 0.2 0.7 0.3 0.4
Exhibit 15: Dividend yield (H-share)

Div. yield (H-share, %) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 3.8 5.4 5.4 6.3 5.7 5.9 5.8 4.6 5.1 4.8 6.4 7.8 8.6 8.3 8.6 6.9
CCB 3.7 5.4 5.4 6.5 6.0 6.1 5.4 4.8 5.4 5.2 6.6 7.9 9.1 8.7 9.1 9.6
BOC 4.2 6.7 6.3 6.9 5.5 6.0 5.6 5.5 6.2 6.3 9.0 9.2 9.3 8.5 8.9 9.4
ABC 1.7 4.8 5.1 5.8 5.9 6.2 6.1 6.1 5.8 5.8 7.9 9.0 9.4 8.4 8.7 8.9
BoCom 1.8 2.3 5.1 6.0 4.7 5.9 5.5 6.1 5.7 6.3 9.2 8.8 9.5 2.2 0.6 0.0
PSBC 2.0 4.3 5.3 4.3 5.7 5.3 6.1 6.9 7.5 8.3
CMB 1.8 3.3 4.6 4.7 4.4 4.4 4.6 3.3 3.7 3.3 3.1 2.9 4.6 5.8 6.4 7.1
△Div. yield (H-share, ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 0.8 1.6 -0.1 0.9 -0.6 0.2 -0.1 -1.1 0.5 -0.3 1.6 1.4 0.8 -0.3 0.3 -1.7
CCB 0.2 1.7 0.1 1.0 -0.5 0.1 -0.7 -0.6 0.6 -0.2 1.4 1.3 1.2 -0.3 0.4 0.4
BOC 0.4 2.5 -0.4 0.7 -1.4 0.5 -0.4 -0.1 0.7 0.0 2.7 0.2 0.1 -0.8 0.4 0.4
_
ABC 3.2 0.3 0.7 0.0 0.3 0.0 -0.1 -0.3 0.0 2.1 1.1 0.4 -1.1 0.3 0.2
BoCom -0.8 0.5 2.8 0.9 -1.3 1.2 -0.4 0.7 -0.4 0.5 2.9 -0.4 0.6 -7.3 -1.6 -0.6
PSBC 2.3 1.0 -1.0 1.4 -0.4 0.8 0.8 0.7 0.8
CMB 0.6 1.5 1.3 0.1 -0.4 0.1 0.2 -1.4 0.5 -0.5 -0.2 -0.1 1.6 1.2 0.6 0.7
4 July 2023 10
III. Rating changes: PSBC (A/H) up to Buy; ICBC (A/H), ABC (A/H) and
Industrial down to Sell
Despite the distressed valuations large banks in China are trading at and likely
stimulus policy to boost market sentiment and drive banks’ share prices, we
further cut our covered bank earnings and target P/PPOP multiples to bake in
deteriorating fundamentals on margin risk from local government debt and credit
loss, which could send capital and dividend at risk. We lower the ROE of our
covered banks to 9.6% on average in 2023E (from 12.8%), expecting Industrial
Bank to miss dividend payout targets in 2024E on a deteriorating balance sheet,
and ICBC and ABC in 2025E given G-SIB requirements to prioritize capital over
dividends.Therefore, we cut dividend payouts of BoCom, Huaxia, Industrial, ICBC,
ABC and PAB in outer years, assuming no new capital raise or decrease in target
CET1 ratio. We downgrade ICBC (A/H), Industrial Bank and ABC (A/H) to Sell.That
said, we believe the market has underappreciated PSBC which could maintain its
dividend on robust balance sheet. We upgrade PSBC A/H to Buy from Sell.
Given the expected overall weakening of balance sheets, making it more challenging for
banks to maintain dividend targets in outer years, we further cut our covered banks’ net
proft by -1%~-4% in 2023E-25E to factor in the margin risk of local government debt
and more losses within banks’ credit portfolios. With this, we revise the ROE for our
covered A/H banks to 10.9% on average for 2023-25E from 12.8% prior. Our revenue
estimates on average are -1%/-3%/-5% below Visible Alpha consensus, and net proft is
-1%/-2%/-2% below consensus. Average DPS is -8%/-15% vs. prior on payout cut of
3/4ppts vs. prior in 2023E-24E. We revise the target P/PPOP by -4%/+2% on average for
A/H shares, and revise our 12m TPs by an average of -5%/-1% for A/H shares.
Having said that, we see two factors, namely local government debt and credit losses,
that could further differentiate banks:
_
1. Divergence within large banks set to widen, with local government debt the key
factor: We estimate large banks to have Rmb 29tn (USD 4.1tn) in local government
debt, or 86% of total debt for our covered banks:
n Size: We expect ICBC, ABC and BoCom to have larger exposure to local
government debt at 24%/20%/29% of IEA, compared with 18% on average for the
large banks.
n Mix: Banks with more local government bonds could utilize tax savings and capital
effciency to offset the margin headwinds of local government debt. CCB has local
government bonds worth Rmb 2.9tn, or 62% of total exposure in terms of local gov.
debt, vs 38% for ICBC. PSBC has the largest local government bond exposure at
83%, the highest among covered banks, with tax and capital savings as a % of
NPAT of 13% in 2023E vs. 9% on average for the covered banks.
2. Large banks look overall better positioned than smaller banks, as their larger
balance sheets allow them to digest more credit losses. We estimate property
exposure as a % of total assets for the large banks at 3% on average vs. 5% for other
4 July 2023 11
covered banks, and reported NPL ratio of property loans at 4.5% vs. 1.8%. Given we
assume large banks to have better reporting standards, we expect other banks could
report a higher NPL ratio of property loans, and thus more losses. We upgrade PSBC to
Buy from Sell with 2% property exposure, compared to Neutral rated CMB with 6%
(see here), and Industrial Bank with 6%.
All in, with the adjusted ROE revisions we make, we further normalize bank dividend
yield:
1. We expect BoCom/Huaxia to print the largest drop in normalized bank dividend

yield also in 2023E, and BONB/CMB to show the smallest decrease in 2023E.
2. We expect Industrial Bank to miss its dividend target in 2024E, and ICBC/ABC in
2025E, assuming that maintaining the target CET1 ratio as G-SIBs is prioritized over
paying dividends.
We believe a further multiple correction is likely, driven by margin risk from local
government debt and the ongoing credit cycle, and as such, we recalibrate our
CAMELOT scorecard and revise our target P/PPOPs by -4%/+2% on average in 2024E
to 2.4x/2.2x for A/H shares, and further revise down PPOP by -3%/-4%/-2% in
2023E-25E. Given our more cautious sector view, the continued weak trend in retail
demand and more divergence expected among large banks, we make one upgrade and
three downgrades.
Upgrade
PSBC (A/H): We upgrade PSBC A/H to Buy from Sell on peer-leading earnings
forecasts within the large bank group, a strong risk buffer and better NIM trajectory. Our
new target P/PPOPs for A/H are 3.75x/3.25x in 2024E vs. 2.75x/2.25x prior, with a
+2%~+3% change in PPOP in 2023E-25E. Our new 12m TPs are Rmb6.03/HK$5.8 from
Rmb4.31/HK$4.06.
Downgrades
_
n ICBC (A/H): We downgrade ICBC A/H to Sell from Buy on increasing diffculty to
maintain dividend payout ratio targets in 2025E, given the high CET1 ratio target that
G-SIBs need to maintain. We lower our target P/PPOP to 2.25x/1.75x from
2.75x/2.25x prior, with our PPOP cut -8%/-10% in 2023E/24E. Our new 12m TPs for
A/H are Rmb4.12/HK$3.55 from Rmb5.29/HK$4.98.
n Industrial Bank: We downgrade Industrial Bank to Sell from Buy, on a double
squeeze of both top and bottom line growth, due to more margin dilution and credit
loss digestion. Our target P/PPOP moves lower to 1.5x in 2024E from 2.25x, with
PPOP down -3%~-5% in 2023E-25E. Our new 12m TP is Rmb12.09, from
Rmb18.93.
n ABC (A): We downgrade ABC A/H shares to Sell from Neutral on long-term
dividend uncertainty, on top of year-to-date outperformance (+21%/+15% vs.
+3.2%/+4.2% average of our covered banks). Our target P/PPOPs for A/H are
1.875x/1.6x vs. 2x/1.6x prior, with PPOP down -8%/-9% in 2023E/24E. Our new 12m
TPs for A/H are Rmb 2.59/HK$2.45 from Rmb2.85/HK$2.62.
4 July 2023 12
Others
For those banks we make no rating changes to, we lower the target P/PPOP multiples
of some to rebalance their relative position in terms of expected share price changes.
CMB (A/H): We maintain Neutral ratings on CMB A/H on continued soft retail growth
and more credit losses to contain provision releases per our framework (see Part II). Our
new target P/PPOPs for A/H decline to 3.25x/3.25x in 2024E vs. 3.5x/3.5x prior, with no
change to PPOP in 2023E-25E. Our 12m TPs decline to Rmb32.65/HK$36.24 from
Rmb35.52/HK$40.85.
BOC (A/H): We maintain Neutral ratings on BOC A/H on relatively low local government
debt exposure and an improving balance sheet as suggested by 1Q23 results. Our
target P/PPOP for A/H moves to 2.375x/1.75x vs. 2x/1.75x prior, with our PPOP
estimates in 2023E/24E changing by +3%/+2%. Our 12m TPs move to
Rmb3.46/HK$2.83 from Rmb2.71/HK$2.72.
PAB: We maintain a Neutral rating on PAB, with a lower target P/PPOP of 1.75x vs.
2.25x prior, to reUect increased credit losses needed to digest and a lower rank as
suggested by our CAMELOT framework. Our 12m TP declines to Rmb13.12 from
Rmb16.84.
BONJ: We maintain a Neutral rating on BONJ, with a lower target P/PPOP of 2.5x vs.
2.75x prior, to reUect the lower rank suggested by our CAMELOT framework. Our 12m
TP declines to Rmb8.61 from Rmb9.98.
BONB: We maintain a Buy rating on BONB, with a lower target P/PPOP of 4.5x vs. 5x
prior, to factor in sector headwinds. Our 12m TP declines to Rmb 30.52 from Rmb
35.76.
_
4 July 2023 13
Exhibit 16: GSe vs. Consensus

Rmb bn
Revenue NPAT
GSe growth yoy Consensus growth yoy GSe - consensus growth GSe growth yoy Consensus growth yoy GSe - consensus growth
Company Company
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
ICBC 3% 4% 5% 5% 8% 8% -3% -4% -3% ICBC 3% 3% 4% 3% 4% 5% 0% 0% -1%
CCB 3% 5% 5% 5% 9% 8% -1% -4% -3% CCB 3% 4% 5% 3% 5% 6% -1% -1% -1%
BOC 5% 5% 5% 3% 8% 7% 2% -3% -2% BOC 5% 5% 5% 4% 5% 5% 0% 0% 0%
ABC 2% 5% 5% 2% 9% 8% 0% -4% -3% ABC 3% 4% 4% 5% 6% 5% -1% -1% -1%
BoCom 3% 4% 5% 3% 6% 8% 0% -1% -2% BoCom 4% 4% 4% 5% 4% 4% 0% 0% 0%
PSBC 6% 10% 9% 7% 11% 11% -1% -1% -1% PSBC 9% 10% 10% 9% 11% 10% 0% -1% 0%
CMB 5% 9% 9% 5% 9% 10% 0% -1% -1% CMB 9% 10% 11% 11% 13% 12% -2% -3% -1%
PAB 5% 8% 7% 6% 9% 8% -1% -1% -1% PAB 13% 12% 12% 15% 14% 13% -2% -2% -1%
Industrial 1% 7% 7% 4% 8% 9% -2% -2% -1% Industrial 2% 6% 6% 5% 9% 9% -3% -3% -3%
Huaxia 0% 2% 3% 4% 7% 3% -5% -5% -1% Huaxia 3% 4% 4% 6% 5% 7% -3% -1% -3%
BONB 11% 13% 13% 11% 13% 14% 0% -1% -2% BONB 14% 15% 15% 15% 17% 16% -1% -2% -1%
BONJ 8% 8% 9% 10% 10% 11% -2% -2% -2% BONJ 8% 8% 9% 9% 10% 10% -1% -2% -2%
Aggregate Aggregate
Total 4% 6% 6% 4% 9% 8% -1% -3% -2% Total 4% 5% 6% 5% 7% 7% -1% -1% -1%
Large 3% 5% 6% 4% 8% 8% -1% -3% -3% Large 4% 5% 5% 4% 5% 5% 0% -1% -1%
Joint-stock 3% 7% 8% 5% 9% 8% -1% -1% -1% Joint-stock 7% 9% 9% 10% 11% 11% -3% -2% -1%
Regional 10% 11% 11% 11% 12% 13% -1% -1% -2% Regional 11% 12% 12% 12% 14% 14% -1% -2% -1%
Revenue NPAT
GSe Consensus Diff GSe Consensus Diff
Company Company
ICBC 867 901 945 890 961 1036 -3% -6% -9% ICBC 370 383 397 370 384 402 0% 0% -1%
CCB 785 823 865 794 862 935 -1% -5% -7% CCB 333 347 364 335 353 373 -1% -2% -2%
BOC 596 625 657 582 629 675 2% -1% -3% BOC 238 250 262 238 249 260 0% 0% 0%
ABC 702 737 777 700 762 823 0% -3% -6% ABC 268 279 290 271 286 301 -1% -3% -4%
BoCom 249 259 273 248 262 282 0% -1% -3% BoCom 96 100 104 96 101 105 0% -1% 0%
PSBC 354 390 427 359 399 441 -1% -2% -3% PSBC 93 102 113 93 104 115 0% -1% -1%
CMB 356 386 421 355 388 425 0% 0% -1% CMB 151 166 184 154 173 193 -2% -4% -5%
PAB 188 203 218 190 206 223 -1% -2% -2% PAB 51 58 65 52 59 67 -2% -3% -4%
Industrial 225 240 258 230 249 271 -2% -4% -5% Industrial 93 99 105 96 105 114 -3% -6% -8%
Huaxia 93 95 98 98 104 108 -4% -8% -9% Huaxia 26 27 28 28 29 30 -7% -7% -7%
BONB 64 72 82 64 73 83 0% 0% -2% BONB 26 30 35 27 31 36 -1% -3% -4%
BONJ 48 52 57 49 54 59 -1% -3% -4% BONJ 20 21 23 20 22 24 -1% -3% -5%
Aggregate Aggregate
Total 4528 4785 5076 4557 4946 5358 -1% -3% -5% Total 1765 1862 1970 1777 1893 2018 -1% -2% -2%
Large 3553 3735 3943 3572 3873 4189 -1% -4% -6% Large 1398 1461 1530 1403 1476 1555 0% -1% -2%
Joint-stock 863 925 995 872 948 1027 -1% -2% -3% Joint-stock 321 350 382 327 364 403 -2% -4% -5%
Regional 112 124 138 113 126 142 -1% -2% -3% Regional 46 51 58 47 53 60 -1% -3% -4%
Source: Visible Alpha Consensus Data, Goldman Sachs Global Investment Research
Exhibit 17: Valuation revisions

price as of July 3
_
Previous Target Upside/

Current Previous TP Previous Target PPOP Trading
Currency Current TP Rating Target multiple downside Implied P/E Implied P/B Trading P/E Trading P/B
price TP change rating P/PPOP change P/PPOP
multiple Change (%)
H-share (HKD) 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E
ICBC (H) HK$ 4.24 3.55 4.98 -29% Sell Buy 1.750x 2.250x -0.500x -10% -16% 3.1 3.0 0.3 0.3 3.7 3.6 0.4 0.4 2.2 2.1
BOC (H) HK$ 3.19 2.83 2.72 4% Neutral 1.750x 1.750x 2% -11% 3.2 3.0 0.3 0.3 3.6 3.4 0.4 0.3 2.1 2.0
CCB (H) HK$ 5.12 5.81 6.07 -4% Buy 2.250x 2.250x -6% 13% 3.9 3.8 0.4 0.4 3.5 3.3 0.4 0.4 2.1 2.0
ABC (H) HK$ 3.12 2.45 2.62 -6% Sell Neutral 1.600x 1.600x -9% -21% 2.9 2.8 0.3 0.3 3.7 3.5 0.4 0.4 2.1 2.0
BoCom (H) HK$ 5.20 3.88 3.97 -2% Sell 1.500x 1.500x -3% -25% 2.7 2.6 0.3 0.3 3.6 3.5 0.4 0.3 2.1 2.0
PSBC (H) HK$ 4.87 5.80 4.06 43% Buy Sell 3.250x 2.250x 1.000x 3% 19% 5.2 4.7 0.6 0.6 4.4 4.0 0.5 0.5 3.0 2.7
CMB (H) HK$ 37.05 36.24 40.85 -11% Neutral 3.250x 3.500x -0.250x -1% -2% 5.5 5.0 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.3
A-share (Rmb)
ICBC (A) Rmb 4.88 4.12 5.29 -22% Sell Buy 2.250x 2.750x -0.500x -10% -16% 4.0 3.5 0.4 0.4 4.7 4.5 0.5 0.5 2.8 2.7
BOC (A) Rmb 3.98 3.46 2.71 28% Neutral 2.375x 2.000x 0.375x 2% -13% 4.3 3.7 0.5 0.4 4.9 4.7 0.5 0.5 2.9 2.7
CCB (A) Rmb 6.34 6.40 6.46 -1% Buy 2.750x 2.750x -6% 1% 4.8 4.1 0.5 0.5 4.8 4.6 0.5 0.5 2.9 2.7
ABC (A) Rmb 3.62 2.59 2.85 -9% Sell Neutral 1.875x 2.000x -0.125x -9% -28% 3.4 2.9 0.4 0.3 4.7 4.5 0.5 0.5 2.7 2.6
BoCom (A) Rmb 5.89 3.79 3.74 1% Sell 1.625x 1.625x -3% -36% 2.9 2.5 0.3 0.3 4.6 4.4 0.5 0.4 2.6 2.5
PSBC (A) Rmb 4.98 6.03 4.31 40% Buy Sell 3.750x 2.750x 1.000x 3% 21% 6.0 4.9 0.7 0.7 4.9 4.5 0.6 0.6 3.4 3.1
CMB (A) Rmb 33.72 32.65 35.52 -8% Neutral 3.250x 3.500x -0.250x -1% -3% 5.5 4.5 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.4
Industrial Rmb 15.83 12.09 18.93 -36% Sell Buy 1.500x 2.250x -0.750x -4% -24% 2.7 2.3 0.3 0.3 3.5 3.3 0.5 0.4 2.1 2.0
PAB Rmb 11.49 13.12 16.84 -22% Buy 1.750x 2.250x -0.500x 0% 14% 5.0 4.0 0.6 0.6 4.3 3.9 0.5 0.5 1.7 1.5
HuaXia Rmb 5.48 4.25 4.23 0% Sell 1.000x 1.000x -3% -22% 2.5 2.2 0.2 0.2 3.3 3.1 0.3 0.3 1.3 1.3
BONB Rmb 25.58 30.52 35.76 -15% Buy 4.500x 5.000x -0.500x -5% 19% 7.7 6.0 1.1 1.0 6.4 5.6 1.0 0.8 4.3 3.8
BONJ Rmb 8.09 8.61 9.98 -14% Neutral 2.500x 2.750x -0.250x -16% 6% 4.5 3.8 0.6 0.6 4.2 3.9 0.6 0.5 2.5 2.3
TPs are on a 12-month time frame; Priced as of July 3, 2023
4 July 2023 14
Exhibit 18: A-share banks current P/PPOP vs. historical range Exhibit 19: H-share banks current P/PPOP vs. historical range
vs. historical range vs. historical range
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since 8.0
9.0 2014
2014
8.0 7.0
7.0 6.0
6.0 5.0
5.0
4.0
4.0
4.0 3.4 3.1
3.4 3.5 3.0
3.0 2.4
2.7 2.6 2.5 2.7 2.7 2.6 2.7 2.1 2.0 2.1
2.4 2.0 2.0 2.0
2.0 2.0
1.0
1.3 1.0
ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H) Covered ABC (H) PSBC (H)
banks (H)
0.0
banks (A) (A)
Exhibit 20: A-share banks trading multiple vs target multiple: Exhibit 21: H-share banks trading multiple vs target multiple:
P/PPOP P/PPOP
vs. target multiple vs. target multiple
High / low since High / low since
9.0 Trading multiple Target multiple 8.0 Trading multiple Target multiple 2014
2014
8.0 7.0
7.0
6.0
6.0
5.0 5.0
4.500
4.0 3.75 4.0
3.0
3.25
2.75 3.25 3.25
2.50 2.38 2.38 3.0
2.0
2.25 2.31
1.63 1.88 2.25
1.50 2.0
2.19
1.0 1.00 1.75 1.75
1.50 1.60
0.0 1.0
banks (A) (A) ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H)
Covered banks (H)
ABC (H) PSBC (H)
Exhibit 22: New vs. Old: PPOP

Rmb bn
PPOP PPOP growth
_
New Old Change New Old Change

Company Company
2023E 2024E 2025E 2023E 2024E 2023E 2024E 2023E 2024E 2025E 2023E 2024E 2023E 2024E
ICBC 631 652 683 685 725 (8%) (10%) ICBC 4% 3% 5% 6% 6% (1) (2)
CCB 555 582 612 587 620 (5%) (6%) CCB 3% 5% 5% 5% 6% (2) (1)
BOC 408 429 450 398 421 3% 2% BOC 5% 5% 5% 5% 6% 0 (1)
ABC 461 483 508 499 531 (8%) (9%) ABC 2% 5% 5% 6% 6% (4) (2)
BoCom 166 173 182 171 179 (3%) (3%) BoCom 3% 4% 5% 4% 5% (1) (0)
PSBC 135 148 162 133 145 2% 3% PSBC 6% 10% 9% 5% 9% 2 1
CMB 233 253 276 236 256 (1%) (1%) CMB 5% 9% 9% 6% 8% (1) 0
Industrial 157 167 180 162 175 (3%) (4%) Industrial 1% 7% 7% 5% 8% (3) (1)
HuaXia 64 65 67 65 67 (2%) (3%) HuaXia (0%) 2% 3% (1%) 3% 1 (1)
PAB 135 145 156 135 145 (0%) 0% PAB 5% 8% 8% 5% 8% (0) 0
BONB 40 45 50 42 47 (4%) (5%) BONB 11% 13% 12% 16% 14% (5) (1)
BONJ 33 36 39 37 42 (12%) (16%) BONJ 8% 8% 9% 13% 13% (6) (5)
Aggregate Average
Total 3,018 3,179 3,366 3,150 3,352 (4%) (5%) Total 5% 7% 7% 6% 8% (2) (1)
Large 2,356 2,466 2,597 2,473 2,619 (5%) (6%) Large 4% 5% 6% 5% 6% (2) (1)
Joint-stock 589 632 679 598 643 (2%) (2%) Joint-stock 3% 6% 7% 4% 7% (2) (1)
Regional 73 80 89 79 90 (8%) (10%) Regional 10% 10% 11% 15% 13% (2) (1)
4 July 2023 15
Exhibit 23: New vs. Old: NPAT

Rmb bn
NPAT NPAT growth
Company Company
2023E 2024E 2025E 2023E 2024E 2023E 2024E 2023E 2024E 2025E 2023E 2024E 2023E 2024E
ICBC 370 383 397 383 404 (3%) (5%) ICBC 3% 3% 4% 5% 5% (2) (2)
CCB 333 347 364 327 342 2% 2% CCB 3% 4% 5% 4% 5% (1) (0)
BOC 238 250 262 237 249 0% 0% BOC 5% 5% 5% 4% 5% 0 (0)
ABC 268 279 290 264 275 2% 1% ABC 3% 4% 4% 4% 4% (1) (0)
BoCom 96 100 104 94 98 2% 2% BoCom 4% 4% 4% 3% 4% 1 (0)
PSBC 93 102 113 93 104 0% (1%) PSBC 9% 10% 10% 9% 12% 0 (2)
CMB 151 166 184 153 173 (1%) (4%) CMB 9% 10% 11% 11% 13% (2) (3)
Industrial 93 99 105 97 106 (4%) (7%) Industrial 2% 6% 6% 6% 10% (4) (4)
HuaXia 26 27 28 26 26 1% 2% HuaXia 3% 4% 4% 4% 3% (1) 1
PAB 51 58 65 54 61 (5%) (6%) PAB 13% 12% 12% 18% 14% (5) (2)
BONB 26 30 35 27 30 (1%) 0% BONB 14% 15% 15% 15% 14% (1) 1
BONJ 20 21 23 22 25 (8%) (14%) BONJ 8% 8% 9% 15% 14% (7) (7)
Aggregate Average
Total 1,765 1,862 1,970 1,775 1,893 (1%) (2%) Total 6% 7% 7% 8% 9% (2) (1)
Large 1,398 1,461 1,530 1,398 1,472 (0%) (1%) Large 4% 5% 5% 5% 6% (2) (1)
Joint-stock 321 350 382 329 367 (2%) (5%) Joint-stock 7% 8% 8% 10% 10% (2) (1)
Regional 46 51 58 48 55 (4%) (6%) Regional 11% 11% 12% 15% 14% (2) (2)
Exhibit 24: New vs. Old: DPS & div. payout ratio
DPS (Rmb) Dividend payout ratio (%)
Company Company
2023E 2024E 2025E 2023E 2024E 2023E 2024E 2023E 2024E 2025E 2023E 2024E 2023E 2024E
ICBC 0.31 0.32 0.26 0.32 0.34 (3%) (5%) ICBC 30 30 23 30 30 (0) (0)
CCB 0.40 0.42 0.44 0.39 0.41 2% 2% CCB 30 30 30 30 30 0 0
BOC 0.24 0.25 0.27 0.24 0.25 0% 0% BOC 30 30 30 30 30 (0) (0)
ABC 0.23 0.24 0.24 0.23 0.24 2% 1% ABC 30 30 29 30 30 0 0
BoCom 0.10 0.03 0.00 0.38 0.40 (73%) (93%) BoCom 8 2 0 30 30 (22) (28)
PSBC 0.30 0.33 0.37 0.30 0.34 0% (1%) PSBC 30 30 30 30 30 0 (0)
CMB 1.90 2.09 2.32 1.93 2.18 (2%) (4%) CMB 32 32 32 32 32 (0) (0)
Industrial 1.21 0.97 0.76 1.26 1.38 (4%) (30%) Industrial 27 20 15 27 27 0 (7)
HuaXia 0.23 0.20 0.21 0.37 0.38 (37%) (48%) HuaXia 14 11 11 22 22 (8) (11)
PAB 0.32 0.36 0.40 0.34 0.38 (5%) (6%) PAB 12 12 12 12 12 0 0
BONB 0.57 0.65 0.75 0.58 0.65 (1%) 0% BONB 14 14 14 14 14 0 (0)
BONJ 0.57 0.62 0.67 0.63 0.72 (9%) (14%) BONJ 30 30 30 30 30 0 0
Average Average
Total 0.53 0.54 0.56 0.58 0.64 (8%) (15%) Total 24 23 21 26 26 (3) (4)
Large 0.26 0.27 0.26 0.31 0.33 (15%) (19%) Large 26 25 24 30 30 (4) (5)
Joint-stock 0.92 0.91 0.92 0.97 1.08 (6%) (16%) Joint-stock 21 19 18 23 23 (2) (4)
Regional 0.57 0.64 0.71 0.60 0.69 (5%) (7%) Regional 22 22 22 22 22 0 0
_
4 July 2023 16
Downgrade ICBC A/H to Sell from Buy on uncertainties of dividend and

capital
1398.HK 12m Price Target: HK$3.55 Price: HK$4.24 Downside: 16.3%
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$1.5tr / $192.9bn Net inc. (attributable to equity 360,483.0 369,923.6 382,652.7 396,991.9
3m ADTV :HK$1.0bn/ $132.2mn Net inc. (Rmb mn) Old 366,367.2 383,241.5 403,635.4 --
China EPS (Rmb) New 1.01 1.04 1.07 1.11
China Financials EPS (Rmb) Old 1.03 1.08 1.13 --
EPS growth (%) 3.5 2.6 3.4 3.7
M&A Rank: 3 P/E (X) 3.6 3.8 3.7 3.5
P/B (X) 0.4 0.4 0.4 0.4
Price/PPOP (X) 2.3 2.2 2.1 2.0
Dividend yield (%) 8.3 7.9 8.2 6.6
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 0.25 0.23 0.27 0.28
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
601398.SS 12m Price Target: Rmb4.12 Price: Rmb4.88 Downside: 15.6%
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb1.7tr / $240.0bn Net inc. (attributable to equity 360,483.0 369,923.6 382,652.7 396,991.9
3m ADTV :Rmb1.6bn/ $227.9mn Net inc. (Rmb mn) Old 366,367.2 383,241.5 403,635.4 --
_
China EPS (Rmb) New 1.01 1.04 1.07 1.11

EPS growth (%) 3.5 2.6 3.4 3.7
M&A Rank: 3 P/E (X) 4.5 4.7 4.5 4.4
P/B (X) 0.5 0.5 0.5 0.4
Price/PPOP (X) 2.9 2.8 2.7 2.5
Dividend yield (%) 6.7 6.4 6.6 5.3
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 0.25 0.23 0.27 0.28
We downgrade ICBC A/H to Sell from Buy on increasing dividend risk given the high
CET1 ratio of ~13% required to maintain on the G-SIB list. Our stress-test which
includes margin risk of local gov. debt and loss of credit portfolio suggests that the
adjusted ROE of ICBC could be much lower than we previously expected at
4 July 2023 17
9.2%/10.3%/9.9% or 207/56/50 bps lower vs. before adjustment in 2023E/24E/25E. This

in turn could pose dividend risk to ICBC if the target CET1 ratio of ~13% is to be
maintained in 2025E. Our new target A/H share 2024E-based P/PPOP is 2.25x/1.75x vs.
2.75x/2.25x prior, to factor in uncertainties of dividend and capital. Our new TP is Rmb
4.12/HK$ 3.55 of A/H share vs. Rmb 5.29/HK$ 4.98 prior. Since we added ICBC-H to our
Buy list on April 5, 2018, the H-share has fallen -14% vs. Hang Seng China Ent index of
-46%. Since we added the ICBC-A to our Buy list on March 12, 2017, it has risen +38%
vs. CSI 300 index of +12%.
From our framework, we assess that:
1) ICBC could have a larger book of local gov. debt of Rmb 9.5tn, or 24% total IEA, vs.
18% average of large banks. As such, our stress test on margin loss from both stock
and Uow of local gov. debt suggests 85/69/63 bps ROE markdown and a -8%/-7%/-7%
net proft decrease, with a dilution of CET1 ratio by -8bps/-15bps/-20bps, leading to an
adjusted ROE of 10.5%/10.1%/9.8% in 2023E/24E/25E. We expect both the stock and
Uow of local gov. debt to lower rates, so with the net balance increase, the margin loss
is likely to persist and hurt bank book value, ROE and CET1 ratio. (More details can be
found in Part I of our series.)
2) ICBC has disclosed a high property NPL ratio of 6.1%, and better mix with 89% loan
of property credit exposure, vs. 3.2%/79% average of covered banks (as of 2022). But
given the backdrop of weak macro, we expect ICBC like other banks to see higher
losses in their credit portfolio. We stress test the FY23E total loss and estimate it at
Rmb 30bn, with Rmb 11bn from property loans and Rmb 19bn from assets under stage
3, and the provisions required would be Rmb 49bn, with Rmb 16bn from property loans
and Rmb 33bn from assets under stage 3, assuming 150% coverage ratio for additional
property NPL and 89%/100% (sample max) for the loan/debt portfolio. (Details for this
test are in Part II.)
All in, we forecast the adjusted ROE to be 9.2%/10.3%/9.9% by taking the

aforementioned margin dilution and credit loss, compared with 11.3%/10.8%/10.4%
_
before adjustment in 2023E/24E/25E. Assuming our adjusted NPL coverage ratio and
CET1 ratio, we think there is a risk to ICBC’s current dividend payout as the risk buffer
release cannot support our forecast dividend and capital in 2025E based on the target
~13% CET 1 ratio that we expect ICBC to maintain in order to remain as a G-SIB. We
model a dividend payout cut by 7ppts in 2025E, assuming no new capital raise or
decrease in target CET1 ratio. DPS is 3%/5% lower vs. prior in 2023E-24E.
GSe NPAT in 2023E-25E is -3%/-6%/-9% below Visible Alpha consensus data, which we
attribute to our more cautious view on potential margin loss from local gov. debt and
credit risk.
Upside risks and what would make us more positive:
n Better than expected NIM to drive NII growth, which may come from more deposit
cost savings: Potential factors would include a further deposit rate cut, a further
policy rate cut, a smaller proportion of time deposits, and smaller margin risk from
local gov. debt on less exposure or an improved macro environment.
4 July 2023 18
n Stronger-than-expected retail recovery to drive retail loan growth and fee income
(such as fees from credit card and consumption loans): Such a recovery could be
supported by more retail consumption demand and better than expected household
wealth growth.
n Larger dividend payout to improve cash return of investors.
Exhibit 25: We estimate ICBC has a larger book of local gov. debt of Exhibit 26: We expect ICBC to have additional NPL of Rmb 30bn,
Rmb 9.5tn, or 24% total IEA, vs. 18% average of large banks. with Rmb 11bn from property loans and Rmb 19bn from assets under
stage 3.
As of 2023E
Local gov. debt as % of IEA (2022E) Additional NPL

29% 109%
30% 120
85%
24% 24% 62% 69% 100%
25% 100 49%
20% 21% 13% 9% 18% 14% 10% 50%
1%
20% 80
16% 61 60 0%
Rmb bn
Avg. 16%
15% 13% 13% 60 49
12% 11% -50%
11% 37
10% 9% 40 30 30
10% 25 24 -100%
18
20 -150%
5% 3 1 1
0 -200%
0%
Unrecognized 3rd stage assets Property loss As % of reported NPL (2022) (RHS)
Local gov. loan as % of IEA Local gov. bond as % of IEA Shadow banking as % of IEA
Exhibit 27: We expect ICBC to have additional provisions of Rmb Exhibit 28: With adjusted NPL coverage ratio and CET1 ratio, we
49bn, with Rmb 16bn from property loans and Rmb 33bn from assets see a dividend risk for ICBC as risk buffer release cannot support
under stage 3. dividend and capital in 2025E on a target ~13% CET 1 ratio which
As of 2023E we expect ICBC to maintain as a G-SIB.
Additional provision ICBC adj. CET-1 ratio after div. and provision release
180 24% 25% 30% 14.0%
21% 13.8%
19%
160 16% 13.8%
12% 20%
7% 8% 6% 8%
140 3% 10% 13.6%
112 1% 13.4%
120 101 0% 13.4%
Rmb bn
100 13.3%
_
-10% 13.2%
80
13.0%
49 -20%
60 43 13.0%
35 -30%
40 25 22 12.8%
17 16
20 8 3 -40%
0 12.6%
0 -50%
12.4%
2023E 2024E 2025E
Adj.CET-1 ratio after div. payout Target CET-1 ratio

Unrecognized 3rd stage assets Property loss As % of reported LLR (2022) (RHS)
4 July 2023 19
Exhibit 29: Model revisions (we introduce 2025E)

Rmb mn
FY2023E FY2024E FY2025E Changes(%)
Rmb mn Prior Revised Prior Revised 2023E 2024E
Key items (Rmb mn)
Net interest income 757,581 710,373 805,602 739,015 778,150 (6.2) (8.3)
Non-interest income 174,356 156,584 179,775 161,606 167,221 (10.2) (10.1)
Net fee income 137,367 129,099 142,418 133,227 137,699 (6.0) (6.5)
Investment income 40,855 38,791 41,632 40,500 42,289 (5.1) (2.7)
Operating revenues 931,937 866,957 985,377 900,621 945,372 (7.0) (8.6)
Operating expenses 246,583 235,502 260,762 248,764 262,593 (4.5) (4.6)
Preprov operating profits 685,354 631,455 724,615 651,857 682,778 (7.9) (10.0)
Provision charges 227,405 196,389 242,468 201,749 215,907 (13.6) (16.8)
Pretax profits 457,949 435,066 482,148 450,108 466,871 (5.0) (6.6)
Taxes 72,580 63,142 76,384 65,455 67,880 (13.0) (14.3)
Net profits 385,369 371,924 405,763 384,653 398,992 (3.5) (5.2)
Net profits to common shareholders 374,495 355,114 394,889 367,843 382,182 (5.2) (6.8)
Key assumptions (%)

Revenue growth 5.5 2.6 5.7 3.9 5.0 (2.8) (1.9)
PPOP growth 5.6 4.4 5.7 3.2 4.7 (1.2) (2.5)
NPAT growth 4.6 3.0 5.3 3.4 3.7 (1.6) (1.9)
Net interest margin (bp) 183 172 178 161 156 (11.6) (16.7)
Loan growth 11.6 12.3 11.0 11.5 11.5 0.7 0.5
Deposit growth 10.3 13.0 9.9 10.0 10.0 2.7 0.1
Earning assets growth 11.8 12.6 9.4 10.6 9.3 0.8 1.2
Non-interest income growth 5.7 3.7 3.1 3.2 3.5 (2.0) 0.1
Operating expenses growth 5.2 (1.8) 5.8 5.6 5.6 (7.0) (0.1)
Credit cost 0.79 0.72 0.76 0.66 0.63 (0.1) (0.1)
ROA 0.9 0.8 0.9 0.8 0.8 (0.0) (0.1)
ROE 11.7 10.9 11.4 10.4 10.0 (0.9) (1.0)
New NPL formation rate 0.7 0.7 0.7 0.7 0.7 (0.1) (0.0)
NPL coverage ratio 195.4 202.2 185.3 186.1 167.5 6.8 0.7
NII growth 5.4 2.4 6.3 4.0 5.3 (3.0) (2.3)
Exhibit 30: ICBC(A) P/PPOP since 2014 Exhibit 31: ICBC(H) P/PPOP since 2014
ICBC (A) P/PPOP (Forward 12M) since 2014 ICBC (H) P/PPOP (Forward 12M) since 2014
(x) Current =2.7x Avg. since 2014 =3.2x (x) Current =2.1x Avg. since 2014 =2.9x
Avg. +1x std. dev. =3.7x Avg. -1x std. dev. =2.7x Avg. +1x std. dev. =3.4x Avg. -1x std. dev. =2.3x
Target P/PPOP =2.25x Old target P/PPOP =2.75x Target P/PPOP =1.75x Old target P/PPOP =2.25x
4.5
4.8
4.0
4.3
3.5
_
3.8
3.3 3.0
2.8 2.5
2.3 2.0
1.8 1.5
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
4 July 2023 20
Exhibit 32: ICBC Summary Table

Rmb mn
Factors driving earnings performance 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E Profit and loss (Rmb mn) 2019 2020 2021 2022 2023E 2024E 2025E
Loans 9.4% 9.0% 8.3% 8.7% 11.1% 11.0% 12.3% 12.3% 11.5% 11.5% Net interest income 606,926 646,765 690,680 693,687 710,373 739,015 778,150
Customer deposits 9.5% 7.9% 11.4% 7.3% 9.4% 5.2% 13.0% 13.0% 10.0% 10.0% Non-interest income 170,547 153,401 172,105 151,012 156,584 161,606 167,221
Net interest margin 2.10 2.14 2.18 2.14 2.08 2.06 1.89 1.72 1.61 1.56 Net fee income 155,600 131,215 133,024 129,265 129,099 133,227 137,699
Net interest income -7.1% 10.6% 9.7% 6.0% 6.6% 6.8% 0.4% 2.4% 4.0% 5.3% Investment income 20,812 42,762 48,472 28,662 38,791 40,500 42,289
Non-interest income 5.7% -9.5% -0.8% 10.5% -10.1% 12.2% -12.3% 3.7% 3.2% 3.5% Operating income 777,473 800,166 862,785 844,699 866,957 900,621 945,372
Investment income 7.4% -21.9% 7.3% 74.9% 105.5% 13.4% -40.9% 35.3% 4.4% 4.4% Operating expense 206,727 205,372 235,263 239,715 235,502 248,764 262,593
Net fee income 1.1% -3.7% 4.1% 7.1% -15.7% 1.4% -2.8% -0.1% 3.2% 3.4% Preprovision operating profits 570,746 594,794 627,522 604,984 631,455 651,857 682,778
Operating revenues -4.0% 5.3% 7.3% 7.0% 2.9% 7.8% -2.1% 2.6% 3.9% 5.0% Provision charges 178,957 202,668 202,623 182,419 196,389 201,749 215,907
Operating expenses -12.6% -3.8% 4.1% 7.2% -0.7% 14.6% 1.9% -1.8% 5.6% 5.6% Pretax profits 391,789 392,126 424,899 422,565 435,066 450,108 466,871
Preprovision operating profits 0.2% 9.1 % 8.4% 6.9% 4 .2% 5.5% -3.6% 4.4% 3.2% 4.7% Tax 78,428 74,441 74,683 61,527 63,142 65,455 67,880
Provision charges 1.0% 45.4% 26.5% 10.7% 13.2% 0.0% -10.0% 7.7% 2.7% 7.0% Net profits 313,361 317,685 350,216 361,038 371,924 384,653 398,992
Net profits to common shareholders -0.4% 2.9% 4.1% 5.0% -0.2% 10.3% 2. 0% 2.7% 3.6% 3.9% Minority interest 1,137 1,779 1,878 555 2,000 2,000 2,000
Dividend 0.4% 2.8% 4.1% 4.9% 1.2% 10.3% 3.5% 2.6% 3.4% -19.4% Dividends to preferred shareholders 4,525 8,839 9,607 14,810 14,810 14,810 14,810
Average Interest earning assets 7.7% 8.4% 7.8% 8.0% 9.4% 7.9% 9.7% 12.6% 10.6% 9.3% Net profits to comm on shareholders 307,699 307,067 338,731 345,673 355,114 367,843 382,182
CAMEL ratios (%) Balance sheet (Rmb mn)
C: Core Tier1 CAR 13.4 12.8 13.0 13.2 13.2 13.3 14.0 13.6 13.5 13.4 Gross lending 16,761,319 18,624,308 20,667,245 23,212,312 26,061,695 29,049,175 32,382,263
C: Total CAR 14.6 15.1 15.4 16.8 16.9 18.0 19.3 18.3 17.7 17.3 Total gross earning assets 29,069,373 31,979,294 33,847,453 38,334,965 42,987,567 46,988,654 51,368,095
C: Asset/Equity 7.8 7.8 8.1 8.2 8.0 8.3 7.9 7.7 7.6 7.5 Total LLR 478,498 530,300 603,764 672,762 744,800 804,653 867,937
C: RWA density 60 61 62 62 60 62 56 56 56 56 Total interest earning assets 29,547,871 32,509,594 34,451,217 39,007,727 43,732,367 47,793,307 52,236,032
A: NPL ratio 1.6 1.6 1.5 1.4 1.6 1.4 1.4 1 .4 1.5 1.6 Other non-interest earning assets 1,040,063 1,365,764 1,323,930 1,274,692 1,303,644 1,331,093 1,390,557
A: LLR/NPL 137 154 176 199 180 206 209 202 186 168 Total assets 30,109,436 33,345,058 35,171,383 39,609,657 44,291,211 48,319,747 52,758,652
A: LLR/total loans (%) 2.2 2.4 2.7 2.9 2.8 2.9 2.9 2.9 2.8 2.7 NPLs 240,187 293,978 293,429 321,170 368,290 432,423 518,104
A: Credit cost (%) 0.66 0.87 0.96 0.97 0.92 0.81 0.62 0.72 0.66 0.63 Customer deposits 22,977,655 25,134,726 26,441,774 29,870,491 33,753,655 37,129,020 40,841,922
E: ROA 1.2 1.1 1.1 1.1 1.0 1.0 0.9 0.8 0.8 0.8 Total interest-bearing liabilities 26,251,393 29,065,520 30,559,844 34,682,567 38,997,347 42,678,495 46,729,401
E: ROE 15.2 14.3 13.7 13.1 12.0 12.2 11.4 10.9 10.4 10.0 Non-interest-bearing liabilities 1,166,040 1,370,023 1,336,281 1,413,264 1,519,116 1,596,673 1,678,235
E: Cost to income 29.9 27.3 26.5 26.6 2 5.7 2 7.3 2 8.4 2 7.2 27 .6 27 .8 T otal liabilities 27,41 7,433 30,435,543 31,896,125 36,095,831 40,516,463 44,275,168 48,407,636
L: Loan/deposits 73.2 74.0 72.0 72.9 74.1 78.2 77.7 77.2 78.2 79.3 Share capital 356,407 356,407 356,407 356,407 356,407 356,407 356,407
L: Avg loans/earning assets 55.9 53.8 54.6 54.5 54.4 57.0 56.2 56.3 57.7 58.8 Total common equity 2,470,054 2,667,683 2,903,424 3,140,840 3,401,762 3,671,593 3,978,030
L: Avg. earning assets/assets 96.8 93.4 94.8 94.2 93.1 95.2 92.7 93.4 94.7 94.8 Preferred share/perpetual bond 206,132 225,819 354,331 354,331 354,331 354,331 354,331
ROA/ROE DuPont analysis Total liabilities and equity 30,093,619 33,329,045 35,153,880 39,591,002 44,272,556 48,301,092 52,739,997
ROE 15.2 14.3 13.7 13.1 12.0 12.2 11.4 10.9 10.4 10.0 RWA 18,616,886 20,124,139 21,690,349 22,225,272 24,852,126 27,112,568 29,603,271
/ leverage (x) 12.9 12.8 12.6 12.3 12.4 12.3 12.4 12.8 13.1 13.2
= ROA 1.18 1.12 1.09 1.06 0.97 0.99 0.92 0.85 0 .79 0.76
NII as % of assets 2.04 2.08 2.13 2.10 2.04 2.02 1.86 1.69 1.60 1.54
Non-interest inc. as % of assets 0.74 0.62 0.57 0.59 0.48 0.50 0.40 0.37 0.35 0.33
Net fee income as % of assets 0.63 0.56 0.54 0.54 0.41 0.39 0.35 0.31 0.29 0.27
Oper. rev. as % of assets 2.78 2.70 2.70 2.69 2.52 2.52 2.26 2.07 1.94 1.87
Oper. exp. as % of assets 0.83 0.74 0.72 0.72 0.65 0.69 0.64 0.56 0.54 0.52
PPOP ROA 1.95 1.96 1.99 1.97 1.87 1.83 1.62 1 .51 1.41 1.35
Loan prov. as % of assets 0.38 0.51 0.60 0.62 0.64 0.59 0.49 0.47 0.44 0.43
Pretax profits 1.57 1.4 5 1.38 1.36 1.24 1.2 4 1.13 1.04 0.97 0.92
Tax 0.36 0.31 0.27 0.27 0.23 0.22 0.16 0.15 0.14 0.13
Net profits 1.20 1.14 1.11 1.08 1.00 1.02 0.9 7 0.89 0.83 0.7 9
Net profits to common shareholders 1.18 1.12 1.09 1.06 0.97 0.99 0.9 2 0.85 0.79 0.76
Net profit/RWA 1.97 1 .85 1. 77 1.7 2 1.5 9 1.62 1 .57 1.5 1 1.4 2 1.35
PPOP/RWA 3.25 3.23 3.23 3.19 3.07 3.00 2.76 2.68 2.51 2.41

_
4 July 2023 21
Downgrade Industrial Bank to Sell from Buy on worsening balance sheet
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb328.9bn / $45.4bn Net inc. (attributable to equity 91,377.0 92,964.4 98,829.8 105,047.0
3m ADTV :Rmb1.2bn/ $168.1mn Net inc. (Rmb mn) Old 91,377.0 96,801.7 106,368.6 115,085.3
China EPS (Rmb) New 4.40 4.48 4.76 5.06
China Financials EPS (Rmb) Old 4.40 4.66 5.12 5.54
EPS growth (%) 10.5 1.7 6.3 6.3
M&A Rank: 3 P/E (X) 4.3 3.5 3.3 3.1
P/B (X) 0.6 0.5 0.4 0.4
Price/PPOP (X) 2.1 2.1 2.0 1.8
Dividend yield (%) 6.3 7.6 6.1 4.8
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 1.21 0.91 1.37 1.28
We downgrade Industrial Bank to Sell, from Buy, on a worsening balance sheet, its
larger exposure to local government debt vs. our other covered banks and further losses
from bank credit portfolios. We estimate the adjusted ROE before dividend could be
9.4%/12.3%/11.9% in 2023E/24E/25E vs. 13.4%/12.9%/12.5% before adjustment.
Based on this stressed scenario, we think dividend risk is high starting in 2024E. We
have changed our PPOP estimates by -3%/-4%/-5% vs. previously, with a new target
P/PPOP of 1.5x vs. 2.25x prior resulting in a new 12-month TP of Rmb 12.09 vs. Rmb
18.93 prior.
_
From our framework, we assess that Industrial Bank has:
1) Larger local government debt exposure, with Rmb 2.2tn as of 2022, or 24% of total
IEA vs. avg 16% of our covered banks. The margin dilution assuming declining rates of
local government debt could drive net proft to decrease by -8%/-9%/-9% in 2023E-25E,
resulting in adj. ROE of 12.3%/11.9%/11.6% vs. 13.4%/12.9%/12.5% before adjustment,
and the book value to change by -0.8%/-1.5%/-2.1% vs. before adjustment in
2023E-25E, all else being equal.
2) Additional losses on credit portfolio could be Rmb 60bn in total (as of 2023E),
including Rmb 6bn of property loans, and Rmb 53bn of assets under stage 3. This also
requires more provision to set aside against the additional losses, which we estimate to
be Rmb 25bn in total, with Rmb 10bn for property loans and Rmb 15bn for assets under
stage 3. Hence we calculate the adjusted NPL coverage ratio would change to 165%
from 215%, with net proft further decreasing by -23%, and ROE by -300bps, and book
value decreasing -2% in 2023E.
3) All in, the adjusted ROE/CET1 ratio could be 9.4%/9.6% vs. 13.4%/9.9% before
4 July 2023 22
adjustment in 2023E. As a result, we think the dividend is likely to miss the target
starting from 2024, as the adjusted NPL coverage ratio may not be able to support both
dividend and capital maintenance.
Thus, we have changed the PPOP by -3%/-4%/-5% vs. previously in 2023E/24E/25E.

Our new target P/PPOP is 1.5x vs. 2.25x prior, and our new TP is Rmb 12.09 vs. Rmb
18.93 previously, implying -24% downside vs. average -6% downside of our A-share
covered banks. Since being added to the Buy list on 8 June 2018, the stock has gained
31% vs the CSI300 up 0.3%. We model dividend payout to cut by 7ppts/12ppts in
2024/25E, assuming no new capital raise or lowering target CET1 ratio. DPS will be
-4%/-30% vs. prior in 2023E-24E.
Our NPAT estimates for 2023E-25E are -2%/-4%/-5% below Visible Alpha consensus as
we take into account Industrial’s larger exposure to local government debt vs. our other
covered banks and further losses from bank credit portfolios.
Upside risks and what could make us turn positive again:
n Better than expected asset quality, especially in property and local government debt,
which offer more room to release proft by lowering NPL coverage ratio.
n Better than expected NIM on deposit cost saving and improving funding mix:
Potential factors would include a further deposit rate cut, a further policy rate cut, or
a smaller proportion of time deposits.
n Stronger than expected retail fnance growth supported by retail lending balance
increase and fee income growth: This growth could be driven by more retail
consumption demand and better than expected household wealth growth.
Exhibit 33: We calculate Industrial Bank has larger local gov. debt Exhibit 34: We estimate Industrial Bank to have Rmb 60bn
exposure, with Rmb 2.2tn, or 24% of total IEA vs. avg 16% of our additional losses on credit portfolio in total, including Rmb 6bn of
covered banks property loans and Rmb 53bn of assets under stage 3...
As of 2023E
_
Local gov. debt as % of IEA (2022E) Additional NPL

29% 109%
30% 120
85%
24% 24% 62% 69% 100%
25% 100 49%
20% 21% 13% 9% 18% 14% 10% 50%
1%
20% 80
16% 61 0%
Rmb bn
Avg. 16% 60
15% 13% 13% 60 49
12% 11% -50%
11% 37
10% 9% 40 30 30
10% 25 24 -100%
18
20 -150%
5% 3 1 1
0 -200%
0%
Shadow banking as % of IEA Local gov. bond as % of IEA Property loss Unrecognized 3rd stage assets As % of reported NPL (2022) (RHS)
Local gov. loan as % of IEA
4 July 2023 23
Exhibit 35: ...and additional provision of Rmb 25bn in total, with Rmb Exhibit 36: All in, the adjusted CET1 ratio/ROE could be 9.4%/9.6%
10bn for property loans and Rmb 15bn for assets under stage 3 vs. 13.4%/9.9% before adjustment in 2023E; So we think the
As of 2023E dividend is likely to miss target starting in 2024
Additional provision Industrial adj. CET-1 ratio after div. and provision release
24% 25% 9.6% 9.5%
180 21% 30%
19% 9.5%
160 16% 9.5%
12% 20%
7% 8% 6% 8% 9.4%
140 3% 10%
112 1% 9.3% 9.2%
120 101 0%
Rmb bn
100 9.2%
-10% 9.1%
80 9.0%
49 -20% 9.0%
60 43
35 -30% 8.9%
40 25 22 17 16
8 -40% 8.8%
20 3 0
8.7%
0 -50%
8.6%
2023E 2024E 2025E

Property loss Unrecognized 3rd stage assets As % of reported LLR (2022) (RHS)
Exhibit 37: Model revision

Rmb mn
Prior Revised Prior Revised Prior Revised 2023E 2024E 2025E
Key items (Rmb mn)
Net interest income 151,492 146,914 161,577 155,441 172,773 166,331 (3.0) (3.8) (3.7)
Non-interest income 81,145 78,352 89,248 84,893 99,231 92,005 (3.4) (4.9) (7.3)
Net fee income 48,225 42,084 53,116 45,228 59,567 48,615 (12.7) (14.8) (18.4)
Operating revenues 232,637 225,266 250,825 240,334 272,004 258,336 (3.2) (4.2) (5.0)
Operating expenses 70,492 68,376 76,006 72,876 82,472 78,423 (3.0) (4.1) (4.9)
PPOP 162,145 156,890 174,818 167,458 189,532 179,913 (3.2) (4.2) (5.1)
Provision charges 49,429 48,589 51,100 52,412 55,796 57,722 (1.7) 2.6 3.5
Pretax profits 112,716 108,301 123,718 115,045 133,736 122,190 (3.9) (7.0) (8.6)
Taxes 14,648 14,071 16,083 14,949 17,385 15,877 (3.9) (7.1) (8.7)
NPAT 98,068 94,230 107,635 100,096 116,351 106,313 (3.9) (7.0) (8.6)
Key assumptions (%)

Revenue growth 4.8 1.5 7.8 6.7 8.4 7.5 (3.3) (1.1) (1.0)
PPOP growth 4.7 1.3 7.8 6.7 8.4 7.4 (3.4) (1.1) (1.0)
NPAT growth 6.1 2.0 9.8 6.2 8.1 6.2 (4.2) (3.5) (1.9)
Net interest margin (bp) 159.1 154.0 154.8 148.1 151 144 (5.2) (6.7) (6.7)
Loan growth 12.3 11.2 12.4 11.4 12.6 11.7 (1.2) (1.1) (1.0)
Deposit growth 11.8 11.1 12.1 11.5 12.5 11.8 (0.7) (0.6) (0.7)
Earning assets growth 8.7 9.0 9.6 10.0 9.8 10.0 0.2 0.4 0.2
_
Non-interest income growth 5.8 2.2 10.0 8.3 11.2 8.4 (3.6) (1.6) (2.8)
Operating expenses growth 5.0 1.9 7.8 6.6 8.5 7.6 (3.2) (1.2) (0.9)
Credit cost 0.6 0.6 0.5 0.6 0.52 0.55 (0.0) 0.0 0.0
ROA 0.95 0.91 0.96 0.88 0.9 0.9 (0.0) (0.1) (0.1)
ROE 13.4 12.8 13.3 12.4 13.0 12.0 (0.5) (0.9) (1.0)
New NPL formation rate 1.0 0.9 1.0 0.9 1.1 0.9 (0.1) (0.1) (0.2)
NPL coverage ratio 199.1 215.3 150.8 185.1 104.5 150.4 16.2 34.2 45.9
NII growth 4.3 1.1 6.7 5.8 6.9 7.0 (3.2) (0.9) 0.1
4 July 2023 24
Exhibit 38: Industrial P/PPOP since 2014
Industrial P/PPOP (Forward 12M) since 2014

(x)
Current =2.2x Avg. since 2014 =2.6x
Avg. +1x std. dev.
=3x =2.2x
3.9 Avg. -1x std. dev. New target P/PPOP
=1.5x Old Target P/PPOP
=2.25x
3.4
2.9
2.4
1.9
1.4
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
Source: Wind
Exhibit 39: Industrial Bank Summary Table

Rmb mn
Factors driving earnings performance 2019 2020 2021 2022 2023E 2024E 2025E Profit and loss (Rmb mn) 2019 2020 2021 2022 2023E 2024E 2025E
Loans 17% 15% 12% 13% 11% 11% 12% Net interest income 102,988 143,515 145,679 145,273 146,914 155,441 166,331
Customer deposits 15% 8% 7% 10% 11% 12% 12% Non-interest income 77,924 58,897 74,316 76,689 78,352 84,893 92,005
Net interest margin 1.53 1.96 1.81 1.66 1.54 1.48 1.44 Net fee income 49,679 37,710 42,680 45,041 42,084 45,228 48,615
Net interest income 8% 39% 2% 0% 1% 6% 7% Investm ent income 26,614 19,887 30,656 29,591 34,559 37,874 41,513
Non-interest income 25% -24% 26% 3% 2% 8% 8% Operating income 180,912 202,412 219,995 221,962 225,266 240,334 258,336
Investment income -9% -25% 54% -3% 17% 10% 10% Operating expense 48,313 50,348 57,675 67,121 68,376 72,876 78,423
Net fee income 16% -24% 13% 6% -7% 7% 7% Preprovision operating profits 132,599 152,064 162,320 154,841 156,890 167,458 179,913
Operating revenues 15% 12% 9% 1% 1% 7% 7% Provision charges 58,096 75,427 67,010 48,620 48,589 52,412 57,722
Operating expenses 11% 4% 15% 16% 2% 7% 8% Pretax profits 74,503 76,637 95,310 106,221 108,301 115,045 122,190
Preprovision operating profits 16% 1 5% 7% -5% 1% 7% 7% Tax 7,801 8,956 11,494 13,807 14,071 14,949 15,877
Provision charges 25% 30% -11% -27% 0% 8% 10% Net profits 66,702 67,681 83,816 92,414 94,230 100,096 106,313
Net profits to common shareholders 9% 1% 2 4% 11% 2% 6% 6% Minority interest 834 1,055 1,136 1,037 1,266 1,266 1,266
Dividend 10% 5% 29% 15% 2% -20% -22% Dividends to preferred shareholders 1,482 2,549 4,260 4,212 4,212 4,212 4,212
Average Interest earning assets 6% 9% 10% 9% 9% 10% 10% Net profits to common shareholders 64,386 64,077 78,420 87,165 88,752 94,618 100,835
C: Core Tier1 CAR 9.5 9.3 9.8 9.8 9.9 9.9 10.0 Gross lending 3,441,451 3,965,674 4,428,183 4,982,887 5,540,250 6,171,319 6,892,361
C: Total CAR 13.4 13.5 14.4 14.4 14.1 13.8 13.5 Total gross earning assets 6,875,583 7,566,514 8,297,494 8,952,310 9,882,500 10,879,839 11,995,875
C: Asset/Equity 6.8 6.7 6.9 7.1 7.1 7.2 7.3 Total LLR 105,581 108,661 130,909 128,834 119,653 110,060 98,049
C: RWA density 72 72 71 73 73 73 73 Total interest earning assets 6,981,164 7,675,175 8,428,403 9,081,144 10,002,153 10,989,899 12,093,924
A: NPL ratio 1.5 1.3 1.1 1.1 1.0 1.0 0.9 Other non-interest earning assets 270,098 327,486 305,530 314,361 307,911 324,403 346,824
A: LLR/NPL 199.1 218.8 268.7 236.4 215.3 185.1 150.4 Total assets 7,145,681 7,894,000 8,603,024 9,266,671 10,190,411 11,204,242 12,342,699
A: LLR/total loans (%) 3.1 2.7 3.0 2.6 2.2 1.8 1.4 NPLs 53,022 49,656 48,714 54,488 55,572 59,473 65,191
A: Credit cost (%) 1.4 1.2 1.0 0.8 0.6 0.6 0.6 Customer deposits 3,794,832 4,084,242 4,355,748 4,788,754 5,321,263 5,933,209 6,633,327
E: ROA 0.9 0.9 1.0 1.0 0.9 0.9 0.9 Total interest-bearing liabilities 6,481,866 7,112,850 7,721,874 8,300,530 9,138,465 10,055,787 11,085,712
E: ROE 13.9 12.6 13.9 13.9 12.8 12.3 11.8 Non-interest-bearing liabilities 114,163 156,347 186,852 208,843 224,219 240,838 258,810
E: Cost to income 26.7 24.9 26.2 30.2 30.4 30.3 30.4 Total liabilitie s 6,596,029 7,269,197 7,908,726 8,509,373 9,362,684 10,296,625 11,344,522
L: Loan/deposits 90.7 97.1 101.7 104.1 104.1 104.0 103.9 Share capital 20,774 20,774 20,774 20,774 20,774 20,774 20,774
L: Avg loans/earning assets 45.7 48.3 49.8 51.8 52.6 53.3 54.0 Total com mon equity 485,518 529,784 595,151 657,227 727,423 807,313 897,873
L: Avg. earning assets/assets 94.5 92.8 93.6 94.5 93.6 93.7 93.5 Preferred share/perpetual bond 55,842 85,802 88,960 88,960 88,960 88,960 88,960
ROA/ROE DuPont analysis Total liabilities and equity 7,137,389 7,884,783 8,592,837 9,255,560 10,179,067 11,192,898 12,331,355
ROE 13.9 12.6 13.9 13.9 12.8 12.3 11.8 RWA 5,123,362 5,663,756 6,102,620 6,746,229 7,418,721 8,156,800 8,985,608
/ leverage (x) 15.0 14.8 14.7 14.3 14.1 13.9 13.8
= ROA 0.93 0.85 0.95 0.98 0.91 0.88 0.86
NII as % of assets 1.49 1.91 1.77 1.63 1.51 1.45 1.41
Non-interest inc. as % of assets 1.12 0.78 0.90 0.86 0.81 0.79 0.78
Net fee income as % of assets 0.72 0.50 0.52 0.50 0.43 0.42 0.41
_
Oper. rev. as % of assets 2.61 2.69 2.67 2.48 2.32 2.25 2.19
Oper. exp. as % of assets 0.70 0.67 0.70 0.75 0.70 0.68 0.67
PPOP ROA 1.91 2.02 1.97 1.73 1.61 1 .57 1.53
Loan prov. as % of assets 0.84 1.00 0.81 0.54 0.50 0.49 0.49
Pretax profits 1.08 1.02 1.16 1.19 1.11 1.08 1 .04
Tax 0.11 0.12 0.14 0.15 0.14 0.14 0.13
Net profits 0.96 0.90 1.02 1.03 0.97 0.94 0.90
Net profits to common shareholders 0.93 0.85 0.95 0.98 0.91 0.88 0.86
Net profit/RWA 1.31 1.19 1. 33 1.3 6 1.25 1.21 1.18
PPOP/RWA 2.69 2.82 2.76 2.41 2.22 2.15 2.10
4 July 2023 25
Downgrade ABC-A/H to Sell on relative valuation and risk
1288.HK 12m Price Target: HK$2.45 Price: HK$3.12 Downside: 21.5%
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$1.1tr / $139.4bn Net inc. (attributable to equity 259,140.0 267,868.3 278,705.9 289,993.3
3m ADTV :HK$416.3mn/ $53.1mn Net inc. (Rmb mn) Old 253,435.5 263,782.0 275,086.0 --
China EPS (Rmb) New 0.74 0.77 0.80 0.83
EPS growth (%) 7.4 3.4 4.0 4.0
M&A Rank: 3 P/E (X) 3.1 3.8 3.6 3.5
P/B (X) 0.4 0.4 0.4 0.4
Price/PPOP (X) 2.2 2.2 2.1 2.0
Dividend yield (%) 9.5 8.0 8.3 8.4
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 0.20 0.18 0.20 0.19
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb1.3tr / $174.8bn Net inc. (attributable to equity 259,140.0 267,868.3 278,705.9 289,993.3
3m ADTV :Rmb1.7bn/ $239.2mn Net inc. (Rmb mn) Old 253,435.5 263,782.0 275,086.0 --
China EPS (Rmb) New 0.74 0.77 0.80 0.83
_
EPS growth (%) 7.4 3.4 4.0 4.0

M&A Rank: 3 P/E (X) 4.0 4.7 4.5 4.4
P/B (X) 0.5 0.5 0.5 0.5
Price/PPOP (X) 2.8 2.7 2.6 2.5
Dividend yield (%) 7.6 6.3 6.6 6.7
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 0.20 0.18 0.20 0.19
We downgrade ABC A/H to Sell, from Neutral, as we believe relative outperformance

YTD (+21%/+15% vs. +3.2%/+4.2% average of covered A/H banks) does not take into
account increasing uncertainties around dividend and capital. Given the structural
headwinds the banking system is facing, namely local government debt risk and a credit
downcycle on weaker macro, we think ABC’s relatively large local government debt
exposure (20% of IEA), in addition to more losses to digest in its credit portfolio
4 July 2023 26
(Rmb37bn estimated additional loss, or 13% of reported losses) and below average
CET1 ratio among large banks, will increase its challenges maintaining its dividend, and
thus a dividend payout miss is likely in 2025E. Our new target P/PPOPs for the A/H
shares are 1.875x/1.6x vs. 2x/1.6x prior, and our PPOP growth forecasts are 2%/5%/5%
in 2023E/24E/25E. Based on these, we revise our 12m TPs for the A/H shares to
Rmb2.59/HK$2.45, from Rmb2.85/HK$2.62 prior. We consider A/H valuations stretched,
with our TPs offering -28%/-21% downside vs. banks coverage averages of -7%/-6%,
respectively. GSe NPAT in 2023E-25E is -0%/-3%/-6% below Visible Alpha consensus,
which we attribute to our more cautious view on potential margin loss from local gov.
debt and credit risk.
Based on our framework, we estimate that ABC could have Rmb6.8tn of local
government debt on its balance sheet, with Rmb3.5tn of loans and Rmb3.3tn of bonds.
Our test is based on the margin loss from 1) debt rollover on 1% lower rates each year;
and 2) the opportunity cost due to a spread existing between the weighted bank loan
rate and the local government debt yield. Also, assuming that 20% of existing local
government debt will roll over and that new local government debt growth will be in line
with the pace of balance sheet expansion, we model adjusted ROE for ABC in
2023E/24E/25E at 10.6%/10.4%/10.0%.
To adjust the book value, we stress test ABC‘s balance sheet by including potential
losses from property loans and assets under stage 3. Our analysis suggests a potential
Rmb37bn total loss, which would mark down book value by -2%. In this scenario,
adjusted ROE would be 8.0% vs. 11.6% before adjustment in 2023E.
Thus, with a target CET 1 ratio set at 11.5%, we believe the bank could face dividend
risk in 2025E, as provision release from the adjusted NPL coverage ratio is unlikely to
support capital and the dividend. We do not see ABC dividend at risk until 2025E, with
DPS increases of 2%/1% vs. prior in 2023E/24E on provision release, but dividend
payout cut in 2025E. With increasing target CET1 ratio (11.5% for ABC as G-SIB vs.
13.3% for ICBC), ABC will face more dividend risk.
_
Revising down our PPOP estimates by -8%/-9% for 2023E/24E and adjusting our target
P/PPOPs for the A/H shares to 1.875x/1.6x vs. 2x/1.6x prior, we arrive at new 12m TPs of
Rmb2.59/HK$2.45 vs. Rmb 2.85/HK$ 2.62 prior.
Upside risks and what could make us more constructive
n Better than expected NIM to drive NII growth, which may come from deposit cost
saving and improving the funding structure: Potential factors would include a further
deposit rate cut, a further policy rate cut, and a smaller proportion of time deposits.
n Lower than expected local government debt rollover risk: This could be driven by a
lower than expected local gov. debt rate cut, and/or less than expected rollover
scale.
n Better than expected asset quality on improving macro: Potential drivers would
include less than expected property NPL formation and fewer than expected assets
moved to stage 3, which would require less additional provisioning and allow more
room for provision release to boost earnings.
4 July 2023 27
n Stronger-than-expected retail recovery to drive retail loan growth and fee income
(such as fees from credit card and consumption loans): Such a recovery could be
supported by more retail consumption demand and better than expected household
wealth growth.
Exhibit 40: We estimate that ABC could have Rmb6.8tn of local gov. Exhibit 41: We estimate that ABC has Rmb37bn of additional losses
debt on its balance sheet, with Rmb3.5tn of loans and Rmb3.3tn of in the credit portfolio in total, comprising Rmb17bn of property
bonds loans and Rmb20bn of assets under stage 3...
As of 2022, GSe As of 2023E
Local gov. debt exposure Additional NPL

29% 109%
30% 120
24% 24% 85%
14 62% 69% 100%
20% 25% 100 49%
12 21% 18% 50%
16% 20% 13% 9% 14% 10%
9.5 1%
10 13% 13% 80
11% 11% 12% 15% 61 0%
10%
Rmb bn
9% 60
Rmb tn
8 6.8
4 10% 60 49
-50%
6 4.6 5% 37
3 3.6 40 30 30
3.1 25 24 -100%
4 2.2 0% 18
6 3 1 1.8
2 1.0 0.8 20 -150%
2 4 1 0.4 0.3 0.2 -5% 3 1 1
2 2 1 1 2 1
0 -10% 0 -200%
Local gov. loans Local gov. bonds

Shadow banking Local gov. debt exposure
Total local gov. debt as % of IEA (RHS) Property loss Unrecognized 3rd stage assets As % of reported NPL (2022) (RHS)
29%
Exhibit 42: ...and additional provisions of Rmb101bn in total, Exhibit 43: We believe ABC could face dividend risk in 2025E, as
comprising Rmb25bn for property loans and Rmb76bn for assets provision release from the adjusted NPL coverage ratio is unlikely
under stage 3 to support capital and the dividend
As of 2023E
Additional provision ABC adj. CET-1 ratio after div. and provision release
180 24% 25% 30% 12.2% 12.1%
19% 21%
160 16% 12.0%
12% 20%
7% 8% 6% 8%
140 3% 10%
1% 11.8%
112
120 101 11.5%
0% 11.6%
Rmb bn
100 11.5%
-10% 11.4%
80
-20% 11.2%
60 49 43 11.2%
35 -30%
40 25
_
22 17 11.0%
16
20 8 3 -40%
0 10.8%
0 -50%
10.6%
2023E 2024E 2025E

4 July 2023 28
Exhibit 44: Model revisions (we introduce 2025E)

Rmb mn
Rmb mn Prior Revised Prior Revised Revised 2023E 2024E
Key items (Rmb mn)
Net interest income 651,965 592,576 695,535 625,017 660,403 (9.1) (10.1)
Non-interest income 91,831 109,674 95,105 111,747 116,213 19.4 17.5
Net fee income 84,954 82,571 88,170 85,692 88,946 (2.8) (2.8)
Investment income 7,926 22,735 7,926 20,966 21,385 186.8 164.5
Operating revenues 743,796 702,250 790,640 736,764 776,617 (5.6) (6.8)
Operating expenses 236,341 241,398 250,929 254,250 268,199 2.1 1.3
PPOP 507,455 460,851 539,711 482,514 508,418 (9.2) (10.6)
Provision charges 181,489 144,855 199,608 153,802 166,370 (20.2) (22.9)
Pretax profits 317,510 315,997 331,126 328,712 342,048 (0.5) (0.7)
Taxes 53,718 49,042 56,030 50,921 52,968 (8.7) (9.1)
NPAT 263,792 266,954 275,096 277,792 289,079 1.2 1.0
Key assumptions (%)

Revenue growth 6.6 2.2 6.3 4.9 5.4 (4.46) (1.38)
PPOP growth 6.4 2.1 6.4 4.7 5.4 (4.32) (1.66)
NPAT growth 4.1 3.2 4.3 4.1 4.1 (0.89) (0.23)
Net interest margin (bp) 182 163 176 154 147 (18.40) (22.00)
Loan growth 12.7 14.3 11.3 12.0 10.9 1.64 0.74
Deposit growth 11.9 15.0 11.0 12.0 11.0 3.12 1.05
Earning assets growth 13.5 14.9 10.3 12.0 10.6 1.40 1.73
Non-interest income growth (3.3) 12.6 3.6 1.9 4.0 15.93 (1.68)
Operating expenses growth 7.2 2.4 6.2 5.3 5.5 (4.81) (0.85)
Credit cost 0.79 0.61 0.78 0.58 0.56 (0.18) (0.20)
ROA 0.7 0.7 0.7 0.6 0.6 (0.02) (0.03)
ROE 11.2 10.8 10.8 10.5 10.1 (0.38) (0.35)
New NPL formation rate 0.5 0.7 0.6 0.7 0.7 0.15 0.14
NPL coverage ratio 264.0 296.1 243.3 284.7 273.6 32.12 41.46
NII growth 8.2 0.4 6.7 5.5 5.7 (7.76) (1.21)
Exhibit 45: ABC (A) P/PPOP since 2014 Exhibit 46: ABC (H) P/PPOP since 2014
ABC (A) P/PPOP (Forward 12M) since 2014 ABC (H) P/PPOP (Forward 12M) since 2014
(x) Current=2.7x Avg. since 2014=2.9x (x) Current=2.07x Avg. since 2014=2.44x
Avg. +1x std. dev.=3.3x Avg. -1x std. dev.=2.4x Avg. +1x std. dev.=2.93x Avg. -1x std. dev.=1.95x
New target P/PPOP =1.88x Old target P/PPOP =2x New target P/PPOP =1.6x Old target P/PPOP =1.6x
4.2
_
3.7
3.7
3.2
3.2
2.7
2.7
2.2
2.2
1.7
1.7
1.2 1.2
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
4 July 2023 29
Exhibit 47: ABC Summary Table

Rmb mn
Key items growth yoy 2019 2020 2021 2022 2023E 2024E 2025E Profit and loss (Rmb mn) 2019 2020 2021 2022 2023E 2024E 2025E
Net interest income 2% 12% 6% 2% 0% 5% 6% Investm ent income 25,480 6,375 23,025 22,704 22,735 20,966 21,385
Non-interest income 12% -28% 32% -11% 13% 2% 4% Operating income 602,211 628,114 687,794 687,340 702,250 736,764 776,617
Investment income 11% -75% 261% -1% 0% -8% 2% Operating expense 196,912 198,161 225,914 235,798 241,398 254,250 268,199
Net fee income 11% -14% 8% 1% 2% 4% 4% Preprovision operating profits 405,299 429,953 461,880 451,542 460,851 482,514 508,418
Preprovision operating profits 4% 6% 7% -2% 2% 5% 5% Tax 53,652 48,650 53,944 47,528 49,042 50,921 52,968
Provision charges 1% 19% 1% -12% 0% 6% 8% Net profits 212,924 216,400 241,936 258,688 266,954 277,792 289,079
Net profits to common shareholders 5% 2% 1 2% 7% 3% 4% 4% Minority interest 826 475 753 -452 -914 -914 -914
Dividend 5% 2% 12% 7% 3% 4% 2% Dividends to preferred shareholders 4,600 9,530 13,798 17,239 17,239 17,239 17,239
C: Asset/Equity 7.0 6.9 7.1 6.6 6.3 6.1 6.0 Total LLR 540,578 618,009 736,687 820,233 891,504 963,278 1,038,835
L: Avg loans/earning assets 50.8 52.5 55.4 54.1 54.8 55.9 56.5 Total com mon equity 1,748,469 1,884,914 2,054,733 2,228,412 2,402,811 2,596,965 2,800,747
ROA/ROE DuPont analysis 2019 2020 2021 2022 2023E 2024E 2025E Total liabilities and equity 24,866,881 27,199,090 29,062,401 33,921,494 38,335,244 42,506,517 46,822,562
ROE 12.4 11.4 11.5 11.3 10.8 10.5 10.1 RWA 15,485,352 16,989,668 17,849,566 19,862,505 22,446,857 24,888,883 27,415,665
/ leverage (x) 14.2 14.3 14.3 14.7 15.6 16.2 16.6
= ROA 0.87 0.79 0.81 0.77 0.69 0.65 0.61
NII as % of assets 2.05 2.09 2.05 1.87 1.64 1.55 1.48
PPOP ROA 1.71 1.65 1.64 1.43 1.28 1 .19 1.14
Pretax profits 1.12 1.02 1.05 0.97 0.87 0.81 0 .77
Tax 0.23 0.19 0.19 0.15 0.14 0.13 0.12
Net profits 0.90 0.83 0.86 0.82 0.74 0.69 0.65
Net profit/RWA 1.42 1.27 1. 31 1.2 8 1.18 1.10 1.04
PPOP/RWA 2.78 2.65 2.65 2.39 2.18 2.04 1.94

_
4 July 2023 30
Upgrade PSBC to Buy from Sell on robust balance sheet to maintain

dividend
1658.HK 12m Price Target: HK$5.8 Price: HK$4.87 Upside: 19.1%
Buy GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$482.9bn / $61.7bn Net inc. (attributable to equity 85,224.0 93,162.6 102,326.8 112,992.4
3m ADTV :HK$232.1mn/ $29.6mn Net inc. (Rmb mn) Old 85,224.0 92,914.0 103,823.1 115,116.7
China EPS (Rmb) New 0.92 1.01 1.11 1.22
EPS growth (%) 11.9 9.3 9.8 10.4
M&A Rank: 3 P/E (X) 5.0 4.5 4.1 3.7
P/B (X) 0.6 0.6 0.5 0.5
Price/PPOP (X) 3.5 3.3 3.0 2.8
Dividend yield (%) 6.0 6.7 7.4 8.1
6/22 12/22 6/23E 12/23E

EPS (Rmb) 0.51 0.41 0.55 0.46
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul close.
601658.SS 12m Price Target: Rmb6.03 Price: Rmb4.98 Upside: 21.1%
Buy GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb493.8bn / $68.1bn Net inc. (attributable to equity 85,224.0 93,162.6 102,326.8 112,992.4
3m ADTV :Rmb887.3mn/ $127.0mn Net inc. (Rmb mn) Old 85,224.0 92,914.0 103,823.1 115,116.7
_
China EPS (Rmb) New 0.92 1.01 1.11 1.22

EPS growth (%) 11.9 9.3 9.8 10.4
M&A Rank: 3 P/E (X) 5.4 4.9 4.5 4.1
P/B (X) 0.7 0.6 0.6 0.5
Price/PPOP (X) 3.9 3.7 3.3 3.0
Dividend yield (%) 5.6 6.1 6.7 7.4
3/23 6/23E 9/23E 12/23E

EPS (Rmb) 0.27 0.27 0.32 0.14
We upgrade PSBC A/H share to Buy, despite sector headwinds. Based on our
framework, we expect PSBC to maintain its dividend and healthy ROE due to its robust
balance sheet. We forecast an adjusted 2023E ROE before dividends of 11.1%, or
-187bps vs. prior. With 292% adjusted NPL coverage ratio and 9.1% adjusted CET1
4 July 2023 31
ratio, we believe PSBC should be able to maintain dividends in our forecast years. We
also estimate 6%/10%/9% PPOP growth vs. 4%/5%/6% of large banks in
2023E/24E/25E, to factor in PSBC‘s growth potential. Our new TP of A/H share is Rmb
6.03/HK$ 5.8 vs. Rmb 4.31/HK$ 4.06 prior. Since our Sell rating in March 2023, PSBC
A/H share prices changed by +10%/+4% vs. +4%/+3% average of covered A/H share
banks, mainly due to greater than expected deposit cost savings leading to upbeat
NIMs. Since we added PSBC-H to our Sell list on March 2, 2023, its return has been
-0.2% vs. Hang Seng China Ent index at -7%. Since we added the A-share to our Sell list
on March 2, 2023, it has returned +6.5% vs. CSI 300 index of -7%. We think the
outperformance was mainly due to funding cost saving with deposit rate cut, given its
large deposits (96% of total liability).
From the framework we built in to assess the adjusted ROE of banks, we fnd that
PSBC’s robust balance sheet is due to:
1) The smaller gov. debt exposure, which we estimate at Rmb 1.8tn, or 13% of total IEA
with Rmb 0.3tn local gov. loans and Rmb 1.5tn local gov. bonds. Our analysis shows that
the margin dilution could lead to a 92/83/76 bps ROE markdown in 2023E/24E/25E vs.
77/67/61bps average of large banks, if we treat local gov. bonds and loans equally,
meaning no tax and capital benefts of local gov. bonds.
As we estimate PSBC holds more local gov. bonds (83% of total vs. 52% average of
large banks) than loans, the tax and capital benefts could be larger and thereby offset
the negative impact of margin risk of local gov. debt.
2) The smaller property exposure and likely recognition of a small loss. We estimate that
PSBC could have additional losses of Rmb 30bn to digest in total, with Rmb 5bn from
property loans and Rmb 25bn from assets under stage 3, and will set aside Rmb 8bn in
provisions with all of it for the property loan losses and Rmb 0bn against the assets
under stage 3. With this, we have adjusted our FY23E NPL coverage ratio and ROE for
PSBC to 292%/12%, -78ppts/-97bps vs. before adjustment, and this compares with
-6ppts/-245bps change on average of large banks.
_
Taking into account our adjusted key drivers, namely ROE, NPL coverage ratio and target
CET1 ratio, we note that PSBC should be able to continue to pay dividends in outer
years, provided the target CET1 ratio remains at the historical average. We forecast the
adjusted dividend yield in 2023E/24E/25E to be 5.2%/6.2%/6.9% vs. 4.5%/6.3%/6.6%
of larger banks’ average for A-share, and 5.8%/7.0%/7.7% vs. 5.8%/8.0%/8.4% of larger
banks’ average for H-share. We think PSBC‘s robust balance sheet will enable it to
maintain its trading P/PPOP valuation multiple, despite sector headwinds. Our PPOP
growth is 6%/10%/9% yoy vs. 4%/5%/6% average of large banks in 2023E/24E/25E.
We increase our estimated PPOP by +2%/+3%/+3% vs. prior to factor in its robust
balance sheet, and apply target P/PPOPs of A/H to 3.75x/3.25x, slightly above the
historical avg, to reUect both its robust balance sheet due to lower local gov. debt
exposure and fewer additional losses to recognize in its credit portfolio, vs. 2.75x/2.25x
prior. Our target price of A/H rises to Rmb 6.03/HK$ 5.8 vs. Rmb 4.31/HK$ 4.06 prior,
implying 21%/19% upside.
4 July 2023 32
Downside Risk:
n Worsening asset quality, especially in property sector, which will require more
provisions and thus less room to release proft.
n Greater than expected NIM dilution, which may come from further LPR cuts, faster
than expected mortgage repricing, higher than expected mortgage early repayments
and weaker than expected retail loan demand.
n Weaker fee income growth due to a weaker than expected retail recovery.
n Recapitalization risk which dilutes ROE and poses downward pressure on share
price.
Exhibit 48: We estimate PSBC has smaller gov. debt exposure, Exhibit 49: As PSBC holds more local gov. bonds per our estimation
which we estimate Rmb 1.8tn, or 13% of total IEA with Rmb 0.3tn (83% of total vs. 52% average of large banks) than loans, the tax
local gov. loans and Rmb 1.5tn local gov. bonds. and capital beneats could be larger to offset the negative impact of
As of 2022, GSe margin risk of local gov. debts.
As of 2022
Local gov. debt exposure Local gov. mix (%)

29%
100 1 1 4 4 5 2 1 7
30%
14 24% 24% 90 16
20% 25% 80 31 32 38
12 48 44 52
16% 20% 70 54 62 63
9.5 68
10 13% 13% 60 69
11% 11% 12% 15%
10% 9% 50
Rmb tn
8 6.8
4 10% 40 83
30 68 64 62
6 4.6 5% 52 52
3 3.6 20 48 41
3.1 38 35 31
4 2.2 0% 24
3 1 1.8 10
6 1.0
2 2 0.8 -5% 0
4 1 0.4 0.3 0.2
2 2 1 1 2 1
0 -10%
Shadow banking Local gov. bonds Shadow banking as % of total Local gov. loan as % of total
Local gov. loans Local gov. debt exposure
Total local gov. debt as % of IEA (RHS) Local gov. bond as % of total
29%
Exhibit 50: We estimate that PSBC could have Rmb 30bn more loss Exhibit 51: ...and Rmb 8bn provision to beef up in total, with Rmb
to digest in total, with Rmb 5bn from property loans and Rmb 25bn 8bn set aside against the property loan loss and Rmb 0bn against
from assets under stage 3... the asset under stage 3.
_
As of 2023E As of 2023E
Additional NPL Additional provision

109% 24% 25%
120 180 21% 30%
85% 19%
62% 69% 100%
160 16%
100 49% 12% 20%
21% 50% 7% 8% 6% 8%
13% 9% 18% 14% 10% 140 3% 10%
1% 112 1%
80 120
61 0% 101 0%
Rmb bn
60
Rmb bn
60 49 100
-50% -10%
37 80
40 30 30 -20%
25 24 -100% 60 49 43
18 35
20 40 25 -30%
-150% 22
3 1 1 17 16
20 8 3 -40%
0 -200% 0
0 -50%
Property loss Unrecognized 3rd stage assets As % of reported NPL (2022) (RHS)
4 July 2023 33
Exhibit 52: Taking the adjusted key drivers, namely ROE, NPL
coverage ratio and target CET1 ratio, we note that PSBC could
continue to pay dividends in outer years, provided the target CET1
ratio remains at historical average.
PSBC adj. CET-1 ratio after div. and provision release

10.6%
10.4%
10.4%
10.2% 10.1%
10.0% 9.9%
9.8%
9.7%
9.6%
9.4%
9.2%
2023E 2024E 2025E
Exhibit 53: Model revisions

Rmb mn
Rmb mn Prior Revised Prior Revised Prior Revised 2023E 2024E 2025E
Key items (Rmb mn)
Net interest income 280,865 288,893 304,442 316,718 328,729 345,210 2.9 4.0 5.0
Non-interest income 72,585 65,521 81,525 73,575 91,657 81,458 (9.7) (9.8) (11.1)
Net fee income 34,633 34,220 38,528 38,154 42,911 42,590 (1.2) (1.0) (0.7)
Investment income 32,991 28,909 37,658 31,800 42,996 34,980 (12.4) (15.6) (18.6)
Operating revenues 353,450 354,414 385,968 390,294 420,386 426,668 0.3 1.1 1.5
Operating expenses 220,909 219,634 241,144 241,828 262,571 264,319 (0.6) 0.3 0.7
PPOP 132,541 134,779 144,823 148,466 157,815 162,349 1.7 2.5 2.9
Provision charges 32,997 34,972 33,626 38,826 34,520 41,330 6.0 15.5 19.7
Pretax profits 99,544 99,807 111,197 109,640 123,295 121,019 0.3 (1.4) (1.8)
Taxes 6,480 6,494 7,224 7,113 8,028 7,827 0.2 (1.5) (2.5)
NPAT 93,064 93,313 103,973 102,527 115,267 113,192 0.3 (1.4) (1.8)
Attributable profit 86,206 86,455 97,115 95,619 108,409 106,284 0.3 (1.5) (2.0)
Key assumptions (%)

Revenue growth 5.5 5.8 9.2 10.1 8.9 9.3 0.3 0.9 0.4
PPOP growth 4.6 6.4 9.3 10.2 9.0 9.4 1.8 0.9 0.4
NPAT growth 9.0 9.3 11.7 9.9 10.9 10.4 0.3 (1.8) (0.5)
Net interest margin (bp) 189 194 185 192 180 189 5.4 7.5 9.1
_
Loan growth 11.5 11.5 10.9 10.9 11.0 11.0 0.0 (0.1) 0.1
Deposit growth 11.5 11.5 11.0 11.0 10.9 10.9 0.0 0.0 0.0
Earning assets growth 11.5 11.5 10.9 10.9 10.7 10.7 0.0 (0.0) 0.0
Non-interest income growth 18.1 6.6 12.3 12.3 12.4 10.7 (11.5) (0.0) (1.7)
Operating expenses growth 6.0 5.4 9.2 10.1 8.9 9.3 (0.6) 0.9 0.4
Credit cost 0.39 0.41 0.36 0.41 0.33 0.40 0.0 0.1 0.1
ROA 0.6 0.6 0.6 0.6 0.6 0.6 0.0 (0.0) (0.0)
ROE 12.0 12.1 12.4 12.2 12.6 12.3 0.0 (0.2) (0.2)
New NPL formation rate 0.4 0.4 0.4 0.4 0.4 0.3 (0.0) (0.0) (0.0)
NPL coverage ratio 361.9 370.8 352.3 359.0 332.8 351.6 8.9 6.7 18.8
NII growth 2.7 5.6 8.4 9.6 8.0 9.0 2.9 1.2 1.0
4 July 2023 34
Exhibit 54: PSBC (A) P/PPOP since 2019 Exhibit 55: PSBC (H) P/PPOP since 2016
PSBC (A) P/PPOP (Forward 12M) since Dec 2019 PSBC (H) P/PPOP (Forward 12M) since Sep 2016
(x) (x)
Current =3.9x Avg. since Dec 2019=3.6x Current =3.23x Avg. since Sep 2016 =3.14x
Avg. +1x std. dev.=4x Avg. -1x std. dev.=3.2x Avg. +1x std. dev. =3.6x Avg. -1x std. dev. =2.68x
5.0 New Target P/PPOP =3.75x Old Target P/PPOP =2.75x 4.8
New Target P/PPOP =3.25x Old Target P/PPOP =2.25x
4.5 4.3
4.0 3.8
3.5 3.3
3.0 2.8
2.5 2.3
2.0 1.8
Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22
Exhibit 56: PSBC Summary Table

Rmb mn
Key items growth yoy 2019 2020 2021 2022 2023E 2024E 2025E Profit and loss (Rmb mn) 2019 2020 2021 2022 2023E 2024E 2025E
Net interest income 3% 5% 6% 2% 6% 10% 9% Investment income 16,323 19,181 26,973 26,155 28,909 31,800 34,980
Non-interest income 38% -12% 49% 25% 7% 12% 11% Operating income 277,735 286,389 318,682 335,036 354,414 390,294 426,668
Investment income 332% 18% 41% -3% 11% 10% 10% Operating expense 158,595 167,836 190,570 208,325 219,634 241,828 264,319
Net fee income 18% -3% 33% 29% 20% 11% 12% Preprovision operating profits 119,140 118,553 128,112 126,711 134,779 148,466 162,349
Preprovision operating profits 9% 0% 8% -1% 6% 1 0% 9% Tax 2,709 3,818 4,922 6,009 6,494 7,113 7,827
Provision charges 0% -9% -7% -24% -1% 11% 6% Net profits 61,036 64,318 76,532 85,355 93,313 102,527 113,192
Net profits to common shareholders 16% 5% 19% 1 2% 9% 10% 10% Minority interest 103 119 362 131 150 200 200
Dividend 16% 5% 19% 12% 9% 10% 10% Dividends to preferred shareholders 2,501 2,584 5,276 6,708 6,708 6,708 6,708
C: Asset/Equity 4.9 4.8 5.1 4.9 4.8 4.7 4.7 Total LLR 166,124 203,897 216,900 232,723 244,102 253,393 264,908
L: Avg loans/earning assets 45.3 47.1 48.4 48.5 48.7 48.9 49.1 Total com mon equity 495,998 543,941 636,236 684,239 749,595 821,416 900,702
ROA/ROE DuPont analysis 2019 2020 2021 2022 2023E 2024E 2025E Total liabilities and equity 10,215,694 11,352,132 12,586,415 14,065,693 15,641,476 17,322,474 19,172,796
ROE 12.7 11.8 12.0 11.9 12.1 12.2 12.3 RWA 4,969,658 5,651,439 6,400,338 7,266,134 8,080,069 8,948,350 9,904,092
/ leverage (x) 21.4 20.7 20.3 20.2 20.7 21.0 21.2
= ROA 0.59 0.57 0.59 0.59 0.58 0.58 0.58
NII as % of assets 2.43 2.35 2.25 2.05 1.94 1.92 1.89
_
PPOP ROA 1.21 1.10 1.07 0.95 0.91 0 .90 0.89
Pretax profits 0.65 0.63 0.68 0.69 0.67 0.67 0 .66
Tax 0.03 0.04 0.04 0.05 0.04 0.04 0.04
Net profits 0.62 0.60 0.64 0.64 0.63 0.62 0.62
Net profit/RWA 1.26 1.16 1. 18 1.1 5 1.13 1.12 1.13
PPOP/RWA 2.57 2.23 2.13 1.85 1.76 1.74 1.72
4 July 2023 35
Appendix I: Various bank indicators

Exhibit 57: New vs. Old: NIM and Loan growth
NIM (%) Loan growth
New Old Change(bps) New Old Change(ppts)
Company Company
ICBC 1.72 1.61 1.56 1.83 1.78 0.00 (12) (17) ICBC 12% 11% 11% 12% 11% -100% 1 0
CCB 1.78 1.69 1.62 1.87 1.81 0.00 (9) (12) CCB 11% 11% 10% 11% 10% -100% 0 1
BOC 1.51 1.46 1.42 1.65 1.61 0.00 (14) (15) BOC 11% 9% 8% 11% 9% -100% 1 0
ABC 1.63 1.54 1.47 1.82 1.76 0.00 (18) (22) ABC 14% 12% 11% 13% 11% -100% 2 1
BoCom 1.27 1.22 1.19 1.32 1.27 0.00 (5) (5) BoCom 11% 10% 10% 12% 10% -100% (1) (1)
PSBC 1.94 1.92 1.89 1.89 1.85 1.80 5 7 9 PSBC 11% 11% 11% 11% 11% 11% - (0) 0
CMB 2.20 2.16 2.14 2.20 2.16 2.14 (0) - - CMB 11% 11% 11% 11% 11% 11% - - -
Industrial 1.54 1.48 1.44 1.59 1.55 1.51 (5) (7) (7) Industrial 11% 11% 12% 12% 12% 13% (1) (1) (1)
HuaXia 1.79 1.72 1.67 1.83 1.75 0.00 (4) (3) HuaXia 5% 5% 5% 6% 5% -100% (0) (0)
PAB 2.44 2.43 2.40 2.45 2.42 2.39 (0) 1 2 PAB 11% 10% 10% 11% 10% 10% - - -
BONB 1.71 1.68 1.66 1.78 1.75 1.74 (6) (7) (8) BONB 15% 16% 16% 21% 21% 21% (6) (5) (5)
BONJ 1.37 1.33 1.31 1.45 1.42 0.00 (8) (9) BONJ 15% 15% 15% 18% 16% -100% (3) (2)
Average Average
Total 1.74 1.69 1.65 1.81 1.76 (6) (7) Total 12% 11% 11% 12% 12% (1) (1)
Large 1.64 1.57 1.52 1.73 1.68 (6) (6) Large 12% 11% 10% 11% 11% (1) (1)
Joint-stock 1.99 1.95 1.91 2.02 1.97 (6) (6) Joint-stock 9% 9% 10% 10% 10% (1) (1)
Regional 1.54 1.51 1.49 1.61 1.58 (5) (5) Regional 15% 15% 15% 19% 19% (1) (1)
Exhibit 58: New vs. Old: Credit cost and Provisions

Credit cost (%) Provision charges
New Old Change(bps) New Old Change
Company Company
ICBC 0.72 0.66 0.63 0.79 0.76 (7) (10) ICBC 208 228 254 227 242 0 -9% -6%
CCB 0.60 0.57 0.56 0.74 0.72 (15) (15) CCB 148 158 171 184 198 0 -20% -20%
BOC 0.72 0.66 0.63 0.48 0.47 24 19 BOC 110 116 123 96 103 0 15% 12%
ABC 0.61 0.58 0.56 0.79 0.78 (18) (20) ABC 145 154 166 181 200 0 -20% -23%
BoCom 0.75 0.72 0.70 0.85 0.81 (10) (9) BoCom 64 67 72 73 76 0 -12% -12%
PSBC 0.41 0.41 0.40 0.39 0.3 6 0.33 2 6 7 PSBC 35 39 41 33 34 35 6% 15% 20%
CMB 0.75 0.70 0.65 0.75 0.64 0.55 0 6 9 CMB 53 55 56 53 50 48 0% 10% 16%
Industrial 0.58 0.56 0.55 0.58 0.54 0.52 (0) 2 3 Industrial 49 52 58 49 51 56 -2% 3% 3%
HuaXia 1.17 1.11 1.07 1.19 1.16 (2) (5) HuaXia 29 29 30 31 32 0 -5% -8%
PAB 1.80 1.70 1.59 1.72 1.59 1.46 8 12 13 PAB 70 73 75 67 68 69 4% 8% 9%
BONB 0.72 0.66 0.63 0.69 0.67 0.66 3 (1) (2) BONB 11 12 13 12 14 16 -12% -17% -23%
BONJ 0.84 0.80 0.77 1.02 0.98 (19) (18) BONJ 10 10 11 12 13 0 -19% -21%
Average Aggregate
Total 0.80 0.76 0.73 0.83 0.79 (3) (3) Total 930 993 1,070 1,018 1,081 -9% -8%
Large 0.63 0.60 0.58 0.67 0.65 (4) (5) Large 709 761 827 794 853 -11% -11%
Joint-stock 1.07 1.02 0.96 1.06 0.98 1 4 Joint-stock 201 209 219 200 201 0% 4%
Regional 0.78 0.73 0.70 0.86 0.82 (8) (10) Regional 20 22 24 24 28 -15% -19%
Exhibit 59: Time series: PPOP growth

_
PPOP growth Change (yoy, ppts)

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Large banks
ICBC 11% 8% 0% 9% 8% 7% 4% 6% -4% 4% 3% 5% (3) (7) 9 (1) (2) (3) 1 (9) 8 (1) 2
BOC 18% 4% 7% 0% 6% 7% 4% 4% 2% 5% 5% 5% (15) 3 (7) 6 2 (4) 1 (2) 3 (0) 0
CCB 12% 9% -1% 10% 7% 7% 7% 4% -2% 3% 5% 5% (3) (10) 11 (2) (1) 1 (4) (6) 5 2 0
ABC 12% 5% -1% 8% 15% 4% 6% 7% -2% 2% 5% 5% (7) (6) 8 7 (11) 2 1 (10) 4 3 1
BoCom 9% 7% 1% -1% 13% 8% 6% 9% -1% 3% 4% 5% (2) (5) (3) 14 (5) (2) 3 (10) 5 1 1
PSBC 37% 12% -11% 30% 40% 9% 0% 8% -1% 6% 10% 9% (24) (23) 41 10 (31) (10) 9 (9) 7 4 (1)
Joint stock banks

CMB 34% 28% 8% 4% 11% 7% 5% 14% 4% 5% 9% 9% (6) (20) (4) 8 (5) (1) 9 (11) 1 4 0
Industrial 19% 25% 6% -13% 14% 16% 15% 7% -5% 1% 7% 7% 6 (19) (19) 27 2 (1) (8) (11) 6 5 1
PAB 53% 44% 29% -4% 10% 20% 12% 12% 7% 5% 8% 8% (9) (15) (33) 14 10 (8) (0) (4) (3) 3 (1)
HuaXia 24% 13% 17% 9% 9% 21% 17% -1% -4% 0% 2% 3% (11) 4 (8) (0) 12 (4) (18) (3) 3 3 0
Regional banks
BONB 27% 24% 27% 9% 15% 21% 11% 31% 9% 11% 13% 12% (3) 3 (18) 6 6 (10) 20 (22) 2 2 (0)
BONJ 60% 52% 21% -9% 11% 20% 4% 18% 8% 8% 8% 9% (9) (30) (31) 21 9 (16) 14 (10) (0) 0 1
Aggregate
Total 26% 19% 9% 4% 13% 12% 8% 10% 1% 5% 7% 7% (7) (10) (5) 9 (1) (5) 2 (9) 4 2 0
Large 16% 7% -1% 9% 15% 7% 4% 6% -1% 4% 5% 6% (9) (8) 10 6 (8) (3) 2 (8) 5 1 0
Joint-stock 33% 28% 15% -1% 11% 16% 12% 8% 1% 3% 6% 7% (5) (12) (16) 12 5 (4) (4) (7) 2 4 0
Regional 43% 38% 24% 0% 13% 21% 8% 24% 8% 10% 10% 11% (6) (14) (25) 14 8 (13) 17 (16) 1 1 0
4 July 2023 36
Exhibit 60: Time series: NIM

NIM Change (yoy, bps)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Large banks
ICBC 2.55 2.43 2.10 2.14 2.18 2.14 2.08 2.06 1.89 1.72 1.61 1.56 (12) (33) 4 4 (4) (6) (2) (17) (17) (10) (6)
BOC 2.30 2.15 1.84 1.87 1.83 1.59 1.67 1.58 1.57 1.51 1.46 1.42 (15) (31) 4 (4) (24) 8 (9) (1) (6) (5) (4)
CCB 2.76 2.65 2.17 2.15 2.17 2.11 2.17 2.09 1.99 1.78 1.69 1.62 (11) (48) (2) 3 (6) 5 (8) (10) (22) (9) (7)
ABC 2.85 2.61 2.16 2.20 2.20 2.06 2.10 2.06 1.87 1.63 1.54 1.47 (23) (45) 4 (0) (15) 4 (4) (19) (24) (10) (7)
BoCom 2.28 2.23 1.80 1.52 1.45 1.51 1.52 1.48 1.41 1.27 1.22 1.19 (5) (43) (28) (7) 6 1 (4) (7) (14) (5) (3)
PSBC 2.85 2.66 2.05 2.20 2.54 2.44 2.35 2.25 2.05 1.94 1.92 1.89 (19) (62) 15 34 (10) (9) (10) (20) (11) (2) (3)
Joint stock banks

CMB 2.60 2.71 2.38 2.39 2.48 2.46 2.37 2.35 2.28 2.20 2.16 2.14 12 (33) 1 9 (2) (9) (2) (7) (8) (4) (2)
Industrial 2.42 2.55 2.04 1.46 1.50 1.53 1.96 1.81 1.66 1.54 1.48 1.44 13 (51) (58) 4 2 43 (15) (15) (12) (6) (4)
PAB 2.70 2.94 2.93 2.52 2.35 2.51 2.43 2.62 2.58 2.44 2.43 2.40 24 (1) (41) (18) 16 (8) 19 (3) (14) (2) (2)
HuaXia 2.64 2.39 2.25 1.95 1.99 2.27 2.55 2.25 1.97 1.79 1.72 1.67 (25) (14) (29) 4 27 29 (30) (28) (18) (7) (5)
Regional banks
BONB 2.67 2.49 2.17 1.77 1.85 1.66 1.95 1.84 1.74 1.71 1.68 1.66 (18) (32) (40) 8 (20) 29 (11) (11) (2) (3) (2)
BONJ 2.71 2.77 2.30 1.85 1.84 1.67 1.67 1.67 1.42 1.37 1.33 1.31 6 (47) (45) (1) (17) (0) 0 (25) (5) (4) (2)
Average
Total 2.61 2.55 2.18 2.00 2.03 2.00 2.07 2.01 1.87 1.74 1.69 1.65 (6) (37) (18) 3 (4) 7 (6) (14) (13) (6) (4)
Large 2.60 2.46 2.02 2.01 2.06 1.98 1.98 1.92 1.80 1.64 1.57 1.52 (14) (44) (0) 5 (9) 1 (6) (12) (15) (7) (5)
Joint-stock 2.59 2.65 2.40 2.08 2.08 2.19 2.33 2.26 2.12 1.99 1.95 1.91 6 (25) (32) (0) 11 14 (7) (13) (13) (5) (3)
Regional 2.69 2.63 2.24 1.81 1.84 1.66 1.81 1.76 1.58 1.54 1.51 1.49 (6) (40) (43) 4 (18) 15 (5) (18) (4) (4) (2)
Exhibit 61: Time series: Loan growth

Loan growth Change (yoy, ppts)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Large banks
ICBC 11% 8% 9% 9% 8% 9% 11% 11% 12% 12% 11% 11% (3) 1 (0) (1) 0 2 (0) 1 (0) (1) 0
BOC 12% 8% 9% 9% 8% 10% 9% 11% 12% 11% 9% 8% (4) 1 0 (1) 2 (1) 2 1 (0) (2) (1)
CCB 10% 11% 12% 10% 7% 9% 12% 12% 13% 11% 11% 10% 0 1 (2) (3) 3 3 0 1 (1) 0 (1)
ABC 12% 10% 9% 10% 11% 12% 14% 13% 15% 14% 12% 11% (2) (1) 1 1 1 2 (0) 2 (1) (2) (1)
BoCom 5% 8% 10% 9% 9% 9% 10% 12% 11% 11% 10% 10% 3 2 (2) 0 0 1 2 (1) (1) (1) (0)
PSBC 26% 32% 22% 21% 18% 16% 15% 13% 12% 11% 11% 11% 6 (10) (1) (3) (2) (1) (2) (1) (0) (1) 0
Joint stock banks

CMB 14% 12% 15% 9% 10% 14% 12% 11% 9% 11% 11% 11% (2) 3 (6) 1 4 (2) (1) (2) 2 0 0
Industrial 17% 12% 17% 17% 21% 17% 15% 12% 13% 11% 11% 12% (6) 5 (0) 4 (3) (2) (4) 1 (1) 0 0
PAB 21% 19% 21% 15% 17% 16% 15% 15% 9% 11% 10% 10% (2) 3 (6) 2 (1) (2) 0 (6) 2 (1) 0
HuaXia 14% 14% 14% 15% 16% 16% 13% 5% 3% 5% 5% 5% (0) 0 1 1 0 (3) (8) (2) 3 (0) 0
Regional banks
BONB 23% 22% 18% 14% 24% 23% 30% 25% 21% 15% 16% 16% (1) (3) (4) 9 (1) 7 (5) (4) (6) 1 (0)
BONJ 19% 44% 32% 17% 23% 18% 19% 17% 20% 15% 15% 15% 25 (12) (15) 6 (5) 0 (1) 3 (5) 0 0
Aggregate
Total 12% 11% 12% 11% 10% 11% 12% 12% 12% 12% 11% 10% 1 (1) (3) 1 (0) 0 (1) (1) (1) (0) (0)
Large 11% 10% 11% 10% 9% 10% 11% 12% 13% 12% 11% 10% 0 (1) (1) (1) 1 1 0 0 (1) (1) (1)
Joint-stock 16% 13% 17% 13% 15% 16% 14% 11% 9% 10% 10% 10% (3) 3 (3) 2 (0) (2) (3) (2) 1 (0) 0
Regional 21% 32% 25% 16% 24% 21% 24% 21% 21% 15% 15% 15% 12 (8) (9) 8 (3) 3 (3) (1) (6) 1 0
Exhibit 62: Time series: NPAT growth

NPAT growth Change (yoy, ppts)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
_
Large banks
ICBC 5% 0% 0% 3% 4% 5% 1% 10% 3% 3% 3% 4% (5) (0) 2 1 1 (4) 9 (7) (1) 1 0
BOC 8% 1% -4% 5% 4% 4% 3% 12% 5% 5% 5% 5% (7) (4) 8 (0) (0) (1) 9 (7) (0) 0 (0)
CCB 6% 0% 1% 5% 5% 5% 2% 12% 7% 3% 4% 5% (6) 1 3 0 (0) (3) 10 (5) (4) 2 0
ABC 8% 1% 2% 5% 5% 5% 2% 12% 7% 3% 4% 4% (7) 1 3 0 (0) (3) 10 (4) (4) 1 0
BoCom 6% 1% 1% 4% 5% 5% 1% 12% 5% 4% 4% 4% (5) (0) 3 0 0 (4) 11 (7) (1) (0) 0
PSBC 10% 7% 14% 20% 10% 16% 5% 19% 12% 9% 10% 10% (3) 7 6 (10) 7 (11) 13 (7) (3) 1 1
Joint stock banks

CMB 8% 3% 8% 13% 15% 15% 5% 23% 15% 9% 10% 11% (5) 4 5 2 0 (10) 18 (8) (6) 1 1
Industrial 14% 7% 7% 6% 6% 9% 1% 24% 11% 2% 6% 6% (8) 1 (1) (0) 3 (8) 23 (14) (9) 5 (0)
PAB 30% 10% 3% 3% 7% 14% 3% 26% 25% 13% 12% 12% (20) (7) (1) 4 7 (11) 23 (0) (12) (1) 0
HuaXia 16% 5% 4% 1% 5% 5% -3% 11% 6% 3% 4% 4% (11) (1) (3) 5 (0) (8) 13 (4) (3) 1 (0)
Regional banks
BONB 16% 16% 19% 20% 20% 23% 10% 30% 18% 14% 15% 15% 0 3 0 0 3 (13) 20 (12) (4) 1 (0)
BONJ 25% 25% 18% 17% 15% 12% 5% 21% 16% 8% 8% 9% 0 (7) (1) (2) (2) (7) 16 (5) (9) 0 1
Aggregate
Total 13% 6% 6% 8% 8% 10% 3% 18% 11% 6% 7% 7% (6) (0) 2 0 1 (7) 15 (7) (5) 1 0
Large 7% 2% 3% 7% 6% 7% 2% 13% 7% 4% 5% 5% (5) 1 4 (1) 1 (4) 10 (6) (2) 1 0
Joint-stock 17% 6% 6% 6% 8% 11% 1% 21% 14% 7% 8% 8% (11) (1) 0 3 2 (9) 19 (7) (7) 1 0
Regional 20% 21% 19% 18% 17% 18% 7% 25% 17% 11% 11% 12% 0 (2) (0) (1) 0 (10) 18 (8) (6) 1 1
4 July 2023 37
Exhibit 63: Time series: Credit cost

Credit cost Change (yoy, bps)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Large banks
ICBC 0.51 0.72 0.66 0.87 0.96 0.97 0.92 0.81 0.62 0.72 0.66 0.63 21 (6) 21 8 1 (4) (11) (20) 10 (6) (3)
BOC 0.55 0.61 0.87 0.77 0.91 0.76 0.73 0.63 0.53 0.72 0.66 0.63 6 26 (10) 14 (16) (3) (10) (10) 19 (6) (3)
CCB 0.63 0.88 0.76 0.96 1.04 0.99 1.00 0.85 0.66 0.60 0.57 0.56 26 (12) 19 8 (5) 0 (14) (19) (7) (2) (1)
ABC 0.80 0.92 0.81 0.87 1.09 0.99 0.92 0.99 0.71 0.61 0.58 0.56 12 (11) 5 23 (10) (7) 7 (27) (10) (3) (1)
BoCom 0.60 0.73 0.69 0.67 0.88 0.93 0.96 0.97 0.79 0.75 0.72 0.70 13 (4) (3) 21 5 4 1 (17) (4) (3) (2)
PSBC 1.09 1.04 0.67 0.58 1.01 0.95 0.92 0.45 0.52 0.41 0.41 0.40 (5) (36) (9) 43 (5) (4) (47) 8 (11) 0 (2)
Joint stock banks

CMB 1.24 2.04 1.98 1.68 1.51 1.21 0.93 0.66 0.75 0.75 0.70 0.65 79 (6) (29) (18) (30) (28) (27) 8 1 (5) (5)
Industrial 1.23 2.08 2.23 1.18 1.30 1.36 1.24 1.03 0.76 0.58 0.56 0.55 85 15 (105) 12 6 (12) (21) (27) (18) (2) (1)
PAB 1.43 2.46 3.08 2.39 2.19 2.29 1.62 1.94 1.93 1.80 1.70 1.59 103 62 (68) (21) 11 (68) 32 (1) (13) (9) (11)
HuaXia 0.56 0.82 1.10 1.18 1.25 1.56 1.72 1.16 1.19 1.17 1.11 1.07 27 28 8 7 31 16 (56) 3 (2) (6) (4)
Regional banks
BONB 1.15 1.67 1.65 0.92 1.23 1.12 1.12 1.02 0.72 0.66 0.63 (115) 167 (2) (73) 32 (12) 1 (10) (30) (6) (3)
BONJ 1.47 2.50 2.15 0.97 1.37 1.41 1.14 1.01 1.05 0.84 0.80 0.77 103 (35) (118) 40 4 (28) (12) 3 (21) (4) (3)
Average
Total 0.94 1.35 1.39 1.15 1.20 1.22 1.10 0.97 0.88 0.80 0.76 0.73 30 16 (24) 5 2 (12) (13) (9) (7) (4) (3)
Large 0.70 0.82 0.75 0.79 0.98 0.93 0.91 0.78 0.64 0.63 0.60 0.58 12 (7) 4 19 (5) (2) (13) (14) (1) (3) (2)
Joint-stock 1.11 1.85 2.10 1.61 1.56 1.61 1.38 1.20 1.16 1.07 1.02 0.96 74 25 (49) (5) 4 (23) (18) (4) (8) (6) (6)
Regional 1.31 2.50 1.91 1.31 1.15 1.32 1.13 1.07 1.03 0.78 0.73 0.70 (6) 66 (60) (16) 18 (20) (6) (4) (26) (5) (3)
Exhibit 64: Time series: NPL coverage ratio

NPL coverage ratio Change (yoy, ppts)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Large banks
ICBC 207 156 137 154 176 199 180 206 209 202 186 168 (51) (20) 17 21 24 (19) 25 4 (7) (16) (19)
BOC 188 153 163 159 182 183 178 187 189 189 187 184 (34) 10 (4) 23 1 (5) 9 2 0 (2) (3)
CCB 222 151 150 171 208 227 213 240 242 228 216 205 (71) (1) 21 37 19 (14) 27 2 (14) (12) (11)
ABC 287 189 173 208 252 289 261 300 303 296 285 274 (97) (16) 35 44 37 (28) 39 3 (6) (11) (11)
BoCom 179 156 151 153 173 172 144 166 181 176 164 152 (23) (5) 3 20 (1) (28) 23 14 (5) (12) (12)
PSBC 364 298 272 325 345 388 405 412 383 371 359 352 (65) (26) 53 20 43 17 7 (29) (12) (12) (7)
Joint stock banks

CMB 233 179 180 262 358 427 438 484 451 437 428 403 (54) 1 82 96 69 11 46 (33) (14) (9) (24)
Industrial 250 210 211 212 207 199 219 269 236 215 185 150 (40) 0 1 (5) (8) 20 50 (32) (21) (30) (35)
PAB 201 166 155 151 155 183 201 288 290 262 216 173 (35) (10) (4) 4 28 18 87 2 (29) (46) (43)
HuaXia 233 167 159 157 159 140 146 151 160 147 134 122 (66) (8) (2) 2 (19) 6 5 9 (13) (13) (12)
Regional banks
BONB 285 309 351 493 522 524 506 526 505 476 455 441 23 43 142 29 2 (19) 20 (21) (28) (21) (14)
BONJ 326 431 457 463 463 418 392 397 397 368 355 335 105 26 5 0 (45) (26) 6 (0) (29) (12) (20)
Average
Total 248 214 213 242 267 279 274 302 295 281 264 247 (34) (1) 29 24 12 (5) 29 (7) (15) (16) (18)
Large 241 184 174 195 223 243 230 252 251 244 233 222 (57) (10) 21 28 20 (13) 22 (1) (7) (11) (10)
Joint-stock 229 181 176 195 220 237 251 298 284 265 241 212 (49) (4) 19 24 17 14 47 (14) (19) (24) (29)
Regional 305 370 404 478 492 471 449 461 451 422 405 388 64 35 74 14 (21) (22) 13 (10) (29) (17) (17)
Exhibit 65: Time series: CET-1 ratio

CET-1 Ratio Change (yoy, ppts)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
_
Large banks
ICBC 11.9% 12.9% 12.9% 12.8% 13.0% 13.2% 13.2% 13.3% 14.0% 13.6% 13.5% 13.5% 0.9 0.0 (0.1) 0.2 0.2 (0.0) 0.1 0.7 (0.4) (0.1) 0.0
BOC 10.6% 11.1% 11.4% 11.2% 11.4% 11.2% 11.3% 11.3% 11.8% 11.6% 11.6% 11.6% 0.5 0.3 (0.2) 0.3 (0.2) 0.1 0.0 0.5 (0.2) 0.0 0.0
CCB 12.1% 13.1% 13.0% 13.1% 13.8% 14.4% 13.6% 13.6% 13.7% 13.4% 13.2% 13.2% 1.0 (0.2) 0.1 0.7 0.6 (0.8) (0.0) 0.1 (0.3) (0.2) 0.0
ABC 9.1% 10.2% 10.4% 10.6% 11.6% 11.2% 11.0% 11.4% 11.2% 10.7% 10.4% 10.4% 1.2 0.1 0.3 0.9 (0.3) (0.2) 0.4 (0.3) (0.5) (0.3) 0.0
BoCom 11.3% 11.1% 11.0% 10.8% 11.2% 11.2% 10.9% 10.6% 10.1% 10.2% 10.4% 10.4% (0.2) (0.1) (0.2) 0.4 0.1 (0.4) (0.3) (0.6) 0.2 0.2 0.0
PSBC 8.4% 8.5% 8.6% 8.6% 9.8% 9.9% 9.6% 9.9% 9.4% 9.2% 9.1% 9.1% 0.1 0.1 (0.0) 1.2 0.1 (0.3) 0.3 (0.6) (0.1) (0.1) 0.0
Joint stock banks

CMB 10.4% 10.8% 11.5% 12.1% 11.8% 12.0% 12.3% 12.7% 13.7% 13.5% 13.8% 13.8% 0.4 0.7 0.5 (0.3) 0.2 0.3 0.4 1.0 (0.2) 0.3 0.0
Industrial 8.5% 8.4% 8.6% 9.1% 9.3% 9.5% 9.3% 9.8% 9.8% 9.9% 9.9% 9.9% (0.0) 0.1 0.5 0.2 0.2 (0.1) 0.5 0.0 0.0 0.1 0.0
PAB 8.6% 9.0% 8.4% 8.3% 8.5% 9.1% 8.7% 8.6% 8.6% 8.5% 8.6% 8.6% 0.4 (0.7) (0.1) 0.3 0.6 (0.4) (0.1) 0.0 (0.2) 0.1 0.0
HuaXia 8.5% 8.9% 8.4% 8.3% 9.5% 9.3% 8.8% 8.8% 9.2% 9.4% 9.7% 9.7% 0.4 (0.5) (0.2) 1.2 (0.2) (0.5) (0.0) 0.5 0.2 0.2 0.0
Regional banks
BONB 10.1% 9.0% 8.6% 8.6% 9.2% 9.6% 9.5% 10.2% 9.8% 9.4% 9.3% 9.3% (1.0) (0.5) 0.1 0.6 0.5 (0.1) 0.6 (0.4) (0.3) (0.1) 0.0
BONJ 8.6% 9.4% 8.2% 8.0% 8.5% 8.9% 10.0% 10.2% 9.7% 9.7% 9.5% 9.5% 0.8 (1.2) (0.2) 0.5 0.4 1.1 0.2 (0.4) (0.1) (0.1) 0.0
Average
Total 9.8% 10.2% 10.1% 10.1% 10.6% 10.8% 10.7% 10.9% 10.9% 10.8% 10.8% 10.8% 0.4 (0.1) 0.0 0.5 0.2 (0.1) 0.2 0.1 (0.2) 0.0 0.0
Large 10.6% 11.2% 11.2% 11.2% 11.8% 11.9% 11.6% 11.7% 11.7% 11.5% 11.4% 11.4% 0.6 0.0 (0.0) 0.6 0.1 (0.3) 0.1 (0.0) (0.2) (0.1) 0.0
Joint-stock 9.0% 9.3% 9.2% 9.4% 9.8% 9.9% 9.8% 10.0% 10.3% 10.3% 10.5% 10.5% 0.3 (0.1) 0.2 0.4 0.2 (0.2) 0.2 0.4 (0.0) 0.2 0.0
Regional 9.3% 9.2% 8.4% 8.3% 8.8% 9.2% 9.7% 10.2% 9.7% 9.5% 9.4% 9.4% (0.1) (0.8) (0.1) 0.5 0.4 0.5 0.4 (0.4) (0.2) (0.1) 0.0
4 July 2023 38
Appendix II: Updated Investment Theses for 4 banks
Investment Thesis - Industrial and Commercial Bank of China

ICBC (Industrial and Commercial Bank of China) is a state-owned commercial bank,
providing corporate and personal banking, asset management and fnancial market
business services. We are Sell rated on increasing dividend risk. That said, our
stress-test including margin risk of local gov. debt and loss of credit portfolio suggests
that the adjusted ROE of ICBC could be much lower than we previously expected,
which in turn could pose dividend risk to ICBC if the target CET1 ratio of ~13% is to be
maintained in 2025E. Upside risks include better than expected NIM to drive NII growth,
stronger-than-expected retail recovery to drive retail loan growth and fee income and
larger dividend payout to improve cash return of investors.
Investment Thesis - Industrial Bank

Industrial Bank is one of the frst joint-stock commercial banks in China, with businesses
including trust, fnancial lease, funds, futures, asset management, consumer fnance,
research and consulting, and digital fnance. We are Sell rated on a worsening balance
sheet, its larger exposure to local government debt and further losses from bank credit
portfolios. Upside risks include better than expected asset quality especially in property
and local government debt, better than expected NIM on deposit cost saving and
improving funding mix, and stronger than expected retail fnance growth.
Investment Thesis - Agricultural Bank of China

Agricultural Bank of China (ABC) is one of China’s big four banks providing corporate and
retail banking products and services, asset management, while conducting treasury
operations. ABC is well-positioned in the fast-growing county areas of China, in our
view, with a strong deposit franchise. We are Sell rated on ABC A/H shares on
increasing dividend and capital uncertainties, on top of year-to-date share price
_
outperformance. That said, we think ABC’s relatively large local government debt
exposure, in addition to more losses to digest in its credit portfolio and below average
CET1 ratio among large banks, will increase its challenges maintaining its dividend.
Upside risks include better than expected NIM to drive NII growth, lower than expected
local government debt rollover risk, better than expected asset quality on improving
macro and stronger-than-expected retail recovery to drive retail loan growth and fee
income.
Investment Thesis - Postal Savings Bank of China

Postal Savings Bank of China (PSBC) is a commercial retail bank strategically focused on
providing fnancial services to Sannong (agriculture, rural areas and rural residents)
customers, urban and rural residents and SMEs. We are Buy-rated on PSBC A/H on
peer-leading earnings forecasts within the large bank group, a strong risk buffer and
better NIM trajectory. Downside risks include worsening asset quality especially in
property sector, greater than expected NIM dilution, faster than expected mortgage
repricing, higher than expected mortgage early repayments, weaker than expected retail
4 July 2023 39
recovery and recapitalization risk.
Price Target Risks and Methodology - Bank of China

Valuation: We are Neutral rated on BOC H/A shares with 12-month target prices of
HK$2.83/Rmb3.46. Our 2024E-based target P/PPOP multiples are 1.75x/2.375x for H/A
shares.
Key risks: Weaker/stronger-than-expected funding cost control;

worse/better-than-expected NPLs; slower/faster-than-expected NIM expansion,
lower/higher-than-expected tax rate; FX volatility due to high overseas exposure.
Price Target Risks and Methodology - China Merchants Bank

Valuation methodology: We are Neutral rated on CMB H/A shares with 12m TPs of
HK$36.24/Rmb32.65. Our 2024E-based target P/PPOP multiple for both H/A shares is
3.25x. Upside risks: Better than expected NIM; stronger-than-expected retail recovery;
better than expected asset quality; larger dividend payout. Downside risks: Worsening
asset quality; greater than expected NIM dilution; faster than expected mortgage
repricing; weaker fee income growth; recapitalization risk.
Price Target Risks and Methodology - Bank of Communications

Valuation: We are Sell rated on BoCom H/A shares with 12-month target prices of
HK$3.88/Rmb3.79. Our 2024E-based target P/PPOP multiples for BoCom H/A are
1.5x/1.625x.
Key risks: Lower-than-expected funding cost; better-than-expected asset quality; higher

operating effciency with lower CIR
Price Target Risks and Methodology - Bank of Ningbo

Valuation: We are Buy rated on BONB with a 12-month target price of Rmb30.52. Our
2024E-based target P/PPOP multiple is 4.5x.
_
Key risks: Worse-than-expected NIM, asset quality and more-than-expected investment

loss. Deposit outUow.
Price Target Risks and Methodology - Bank of Nanjing

Valuation: We are Neutral rated on BONJ with a 12-month target price of Rmb8.61. Our
Key risks: 1) developer risk moderates, 2) greater-than-expected loan growth; 3) margin

dilution; 2) worsening asset quality.
Price Target Risks and Methodology - Hua Xia Bank

Valuation: We are Sell rated on Hua Xia with a 12-month target price of Rmb4.25. Our
2024E-based target P/PPOP multiple is 1x.
Key risks: better-than-expected asset quality, margin expansion and trading income
recovery.
4 July 2023 40
Price Target Risks and Methodology - Ping An Bank Co.

Valuation: We are Buy rated on PAB with a 12-month target price of Rmb13.12. Our
Key risks: 1) worse-than-expected asset quality and fee income; 2) margin dilution; 3)
developer risk.
Price Target Risks and Methodology - China Construction Bank

Valuation: We are Buy rated on CCB H/A shares with 12-month target prices of
HK$5.81/Rmb6.4. Our 2024E-based target P/PPOP multiples for CCB H/A are
2.25x/2.75x.
Key risks: 1) Weakening NIMS; 2) credit costs becoming more sensitive to net proft
given increasingly large loan book due to strong loan growth.
_
4 July 2023 41
Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reUect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specifc
GS Factor Proale
The Goldman Sachs Factor Profle provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specifc metrics for each stock. The
vary depending on the fscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for fnancial stocks, only EPS and sales growth), with a
higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for fnancial
stocks, only ROE), with a higher percentile indicating a company with higher fnancial returns. Multiple is based on a stock’s forward-looking P/E, P/B,
price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for fnancial stocks, only P/E, P/B and P/D), with a higher percentile
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fscal year-end at least three quarters in the future. Growth uses inputs
for the fscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Profle, please contact your GS representative.
M&A Rank
Quantum
Quantum is Goldman Sachs’ proprietary database providing access to detailed fnancial statement histories, forecasts and ratios. It can be used for
Disclosures
The rating(s) for Agricultural Bank of China (A), Agricultural Bank of China (H), Bank of China (A), Bank of China (H), Bank of Communications
(A), Bank of Communications (H), Bank of Nanjing, Bank of Ningbo, China Construction Bank (A), China Construction Bank (H), China
Merchants Bank (A), China Merchants Bank (H), Hua Xia Bank, ICBC (A), ICBC (H), Industrial Bank, Ping An Bank Co., Postal Savings Bank of
China Co. (A) and Postal Savings Bank of China Co. (H) is/are relative to the other companies in its/their coverage universe: Agricultural Bank
of China (A), Agricultural Bank of China (H), Bank of China (A), Bank of China (H), Bank of Communications (A), Bank of Communications (H), Bank of
Nanjing, Bank of Ningbo, China Construction Bank (A), China Construction Bank (H), China Merchants Bank (A), China Merchants Bank (H), Hua Xia
Bank, ICBC (A), ICBC (H), Industrial Bank, Ping An Bank Co., Postal Savings Bank of China Co. (A), Postal Savings Bank of China Co. (H)
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compendium can be found in the latest relevant published research


Global 48% 36% 16% 63% 56% 47%
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Banking Relationships chart reUects the percentage of subject companies within each rating category for whom Goldman Sachs has provided
Price target and rating history chart(s)

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4 July 2023 42
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4 July 2023 43
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更更多资料料加⼊入知识星球：⽔水⽊木调研纪要 关注公众号：⽔水⽊木纪要

4 July 2023 | 11:21PM HKT

China Financial Services

Testing the ‘Impossible Trinity’ Part I: Nine questions

Nine Questions around local gov. debt on bank balance sheets

Local gov. debt exposure Local gov. debt as % of IEA (2022)

4.6 Rmb 18tn loans & shadow credits 13% 13%

2. What about the local gov. debt exposure of non-covered banks ?

100 94 50% Covered banks:

60 29% 30% Rmb 18tn,

3. Do large banks have larger exposure to local gov. debt ?

Large banks, 29%

5. What’s the potential margin loss on local gov. debt?

NIM dilution (2023-25E avg.) Margin loss impact to CET-1 ratio

-5.0 -4.2 11.5 11.3

Adj. CET-1 ratio vs. before adj.

6. How low could the rates on local gov. debt go?

11.0 16.4 0.16

Therefore, we believe the % of bonds in local debt portfolios is an important factor in

differentiating banks’ bottom-line growth.

(bond) rate weighting Total benefits of local gov. bond (2023E)

Implicit (LGFV bond) 14 14% 28% 15% 100% 400

Adj. ROE after/before including benefits Local gov. mix (%)

9. What’s the potential earnings impact for covered banks?

the series for investment views of each bank).

Estimates from GS macro team.

Rating Distribution Investment Banking Relationships

Interest in Connection with Investment Research.

Ratings, coverage universe and related debnitions

Global product; distributing entities

4 July 2023 | 11:21PM HKT

China Financial Services

Testing the ‘Impossible Trinity’ Part II: Assessing further

450/438bps vs. 247bps on average.

I. Three questions answered: property credit cycle, non-loan asset losses

1. Where are we in property credit cycle?

2. Can banks reduce provisions set aside on non-loan assets?

3. What would happen if banks were to restate NPL in 2023E?

Additional NPL 30 61 3 37 18 30 49 24 60 25 1 1 337 28

Existing debt provision 33 41 10 20 3 28 43 16 45 17 3 2 262 22

Source: Company data, Goldman Sachs Global Investment Research

Additional NPL Additional provision

Adj. NPL coverage ratio (%) Adj. ROE (%)

12.0 0.11 -1%

Adj. CET-1 ratio vs. prior

II. Quantifying additional property losses and provisions

Total property exposure (corporate) as % of total asset Property exposure mix

Reported NPL ratio (2022) Gross NPL formation rate (2023E)

Exhibit 12: Assessing additional NPL and provision of property risk

Source: Company data, Goldman Sachs Global Investment Research

Moreover, we conclude that CMB is unlikely to be able to further reduce provisions

Total additional NPL 19 35 3 20 6 25 40 21 53 23 0.2 1

Total additional provision 33 74 35 76 26 0.0 3 14 15 13 0.4 0.4

Source: Company data, Goldman Sachs Global Investment Research

CMB new provision mix CMB NPL coverage ratio (%)

Source: Company data Source: Company data

Source: Company data, Goldman Sachs Global Investment Research

70% 64% 63%

Source: Company data Source: Company data

Source: Company data, Goldman Sachs Global Investment Research

Impact to CET-1 ratio (bps)

Appendix: What our top-down asset quality model implies

Given the importance of property developers to China’s economy, we assess the

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