Download - Barclays Capital - Hong Kong Banks

EQUITY RESEARCH 10 October 2011

HONG KONG BANKS A lose-lose situation Hong Kong banks are facing unprecedented risks from the development of the offshore RMB market. We see rising foreign exchange risk, liquidity risk, operational risk, and regulatory risks. Asset quality risks are also rising. Regardless of the direction of the RMB/USD exchange rate, we believe Hong Kong banks lose. We see either pressure from continued HK$ liquidity tightening, or asset quality deterioration. We maintain our cautious view on the sector and prefer the international banks – HSBC (1-OW) and Standard Chartered (1-OW). Hang Seng Bank (2-EW) is our preferred local exposure.

Offshore RMB drag: The offshore RMB market has created new business opportunities for Hong Kong banks. However we believe these are being rapidly overshadowed by rising risks and unintended consequences associated with offshore RMB development. HK$ liquidity has continued to tighten, despite a slowdown in offshore RMB deposit growth. RMB product development has been largely dependent on RMB appreciation. More recently, RMB deposit growth has moderated after increasing regulatory tightening on so called “arbitrage” lending. Leakage of RMB back to China and competition from regional peers is a risk to RMB liquidity accumulation in Hong Kong. Ultimately, we believe Hong Kong banks will be under pressure regardless of FX currency movements:

RMB appreciation vs USD (China growth intact) = Tighter HK$ liquidity USD appreciation vs RMB (China hard landing) = Higher credit costs

Asset quality risk rising: Hong Kong banks are highly exposed to Mainland-related lending (e.g. 42% of loans for BEA). Our base case is for a soft landing in China and a gradual uptick in credit costs to 7 bps, 19bps and 26bps for FY11/12/13E. In a bear case scenario for FY13E, where credit costs reach long-term historical average levels of 100bp, we expect downside from our base case of -38% for earnings, -4% for book value and -3% for ROE (pg29). We believe Hang Seng Bank is most defensive against a potential deterioration in asset quality due to its strong risk management track record (peak credit cost of 121bps during 1998 Asian financial crisis) and high breakeven credit cost (due to its high pre-provision return on assets, ignoring contribution from Industrial Bank).

Cut FY11/12E earnings by up to 15% and lower PTs by 13% on average. This reflects pressure on funding cost, credit growth and market-related fee income. We prefer the bigger, liquid international banks – HSBC and Standard Chartered. Among the local banks, we like Hang Seng Bank (2-EW) for its strong, proven risk management track record. BOCHK (2-EW) is more susceptible to the risks of offshore RMB, in our view. Key risks include: 1) pace of global economic recovery; and 2) sector corporate action.

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 50.

SECTOR UPDATE Asia ex-Japan Banks 2-NEUTRAL Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2.

Asia Ex-Japan Banks Sharnie Wong +852 290 33457 [email protected] Barclays Bank, Hong Kong Tom Quarmby +852 290 33053 [email protected] Barclays Bank, Hong Kong Leon Qi +852 290 33994 [email protected] Barclays Bank, Hong Kong

Barclays Capital | Hong Kong Banks

10 October 2011 2

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)

Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 07-Oct-11 Old New %Chg Old New %Chg Old New %Chg

Asia ex-Japan Banks 2-Neu 2-Neu

Bank of China (Hong Kong) Ltd. (2388 HK / 2388.HK) 2-EW 2-EW 16.76 20.90 20.00 -4 1.93 1.92 -1 1.80 1.70 -6

Bank of East Asia Ltd. (23 HK / 0023.HK) 3-UW 3-UW 24.95 29.60 21.70 -27 2.33 2.29 -2 2.19 1.93 -12

Dah Sing Banking Group Ltd. (2356 HK / 2356.HK) 2-EW 2-EW 6.92 9.30 7.80 -16 0.91 0.91 - 0.96 0.82 -15

Dah Sing Financial Holdings Ltd. (440 HK / 0440.HK) 2-EW 2-EW 20.60 37.40 31.60 -16 3.58 3.42 -4 3.89 3.35 -14

Hang Seng Bank Ltd. (11 HK / 0011.HK) 2-EW 2-EW 92.75 123.30 115.70 -6 8.70 8.40 -3 10.00 8.62 -14

Wing Hang Bank Ltd. (302 HK / 0302.HK) 3-UW 3-UW 61.50 68.90 61.40 -11 6.91 6.84 -1 5.99 5.64 -6

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.

Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended

Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

http://my.barcapint.com/ERG/displayCompany.jsp?ticker=2388.HK�







10 October 2011 3

INVESTMENT SUMMARY

The potential return on investment from future offshore RMB business opportunities is subject to a high degree of risk and regulatory uncertainty, in our opinion. In this report, we discuss the potential risks and unintended consequences of RMB internationalisation. In light of uncertainty over the global economic outlook, we also look at sensitivities to deterioration in asset quality and exposure to European countries.

Risks of RMB internationalisation We believe that the market has underestimated the risks associated with RMB internationalisation.

Liquidity risk – HK$ and offshore RMB leakage

The first negative consequence was partial cannibalisation of the HK$ deposit base (flat YTD 2011) by rapid offshore RMB deposit growth (+93% ytd). Next, we believe the offshore RMB deposit base is under threat due to:

Tough regulatory stance on repatriation of funds to mainland China, which may dampen corporate demand for offshore RMB. This is already evident through the moderating offshore RMB deposit growth in the past few months, since the People’s Bank of China (PBOC) and Hong Kong Monetary Authority (HKMA) voiced concerns on “arbitrage lending” in June.

Gradual leakage to mainland China (onshore RMB) through corporate trade-related remittances and individual transfers (limit of HK$80,000/day).

Macro risk

The growing pool of offshore RMB has been partially driven by underlying business justifications (e.g. genuine trade in RMB), but to a larger extent has been driven by customer expectations on RMB appreciation, in our view. The events of recent weeks highlight that RMB appreciation may not be a certainty and may be subject to high market volatility.

Asset quality issues may arise if there is uncertainty over local and Mainland economic growth (potentially resulting in RMB depreciation vs the USD).

Customers and potentially banks may suffer losses on products structured on RMB appreciation. These sophisticated products could well be highly geared and have long tenors.

Regulatory risk – unknown return on investment

The scope and pace of offshore RMB development is driven by the regulators in mainland China. This uncertainty makes it difficult for the banks to calculate or estimate a return on investment despite making heavy investments in IT and human resources.

Asset quality risks Markets are increasingly pricing in higher credit costs on the back of European debt concerns and fears of a China hard landing. Our base case is on the assumption of a soft landing in China, and we expect a gradual normalisation of sector credit costs to 7bps, 19bps and 26bps for FY11/12/13E (from 3bps in FY10).


10 October 2011 4

If credit costs normalize from the current lows to the long-term historical average credit cost levels for each bank by FY12E (by FY13E for BOCHK, after de-risking its loan book from the very high credit losses in 1999), we estimate that in FY12E and FY13E:

Earnings will be lower by 16% and 38%, respectively Book value will be lower by 2.1% and 4%, respectively Return on equity will be lower by 1.1% and 3.1%, respectively

Hang Seng Bank is most defensive against a potential deterioration in asset quality, in our view, due to its strong risk management track record (peak credit cost of 121bp, lowest among peers) and high earnings buffer, with a break-even credit cost of 278bps. Hang Seng Bank’s FY12E pre-provision profit (which excludes contribution from Industrial Bank) is enough to withstand a seven-fold increase in its long-term historical credit cost of 28bps.

Hong Kong banks’ risk to claims on Western European countries (ex-UK) is limited to 4.3% of assets, on average, on our estimates. All banks in our coverage universe have immaterial exposure to peripheral European countries. For BOCHK, we estimate that a worse-case scenario where a 100% writedown is taken on Euro-denominated trading and AFS securities would result in a 13.3% hit to equity.

Earnings revision and valuation We lower our earnings forecasts for the Hong Kong banks by up to 15% for FY11-13E, on the back of lower credit growth and margin and slightly higher credit cost assumptions. Our estimates are 2-20% below Bloomberg consensus profit estimates on average.

Based on our blended valuation methodology approach, the sector offers 22% absolute upside potential based on fair value. However, in the near term, share price performance may be affected by market volatility. We estimate there is still 46% potential downside for Hong Kong bank shares vs historical trough P/B multiples (refer to Figure 1).

We prefer HSBC and Standard Chartered, both rated 1-OW, for their international presence, global business/markets exposure, and sensitivity to rising rates in Asia. Of the local banks we still prefer Hang Seng Bank (2-EW).

Figure 1: Hong Kong banks – blended valuation approach (FY12E) and price target summary

HK$ / Share HSB BEA BOCHK WHB DSF DSBG

DDM 107.48 16.78 16.51 30.39 14.71 4.14 GGM 126.75 16.15 17.54 49.70 16.67 4.82 Historic PE 134.29 29.06 19.83 58.33 41.80 10.18 Historic PB 152.52 31.82 19.17 92.14 55.55 15.56 Historic PPOP 88.17 30.40 17.64 69.54 33.34 7.38 Normalised ROE 80.53 5.02 21.92 47.57 19.51 -2.40 Normalised EPS 120.47 22.49 27.34 81.91 39.44 4.66 BLENDED VALUATION 115.70 21.70 20.00 61.40 31.60 7.80

Historical 1 yr forward trough P/B multiples 1.7x

(Aug-98) 0.6x

(Mar-09) 0.7x

(Mar-09) 0.4x

(Sep-98) 0.3x

(Nov-08) 0.4x

(Oct-08) Price at historical trough P/B 72.0 15.2 8.5 22.0 16.4 4.8 % potential downside to trough -38% -30% -58% -64% -48% -39% PRICE TARGET (HK$ / Share) 115.70 21.70 20.00 61.40 31.60 7.80 Current price (HK$ / Share) 92.75 24.95 16.76 61.50 20.60 6.92 Dividend (HK$ / Share) 5.60 1.05 1.11 1.99 1.01 0.25 12-month Total Shareholder Return 31% -9% 26% 3% 58% 16%

Source: Barclays Capital estimates


10 October 2011 5

Figure 2: Hong Kong banks valuation summary

Bank of East Asia BOCHK Hang Seng Bank Wing Hang Bank DSF DSBG Sector

Rating 3-UW 2-EW 2-EW 3-UW 2-EW 2-EW

Share Price (HK$) 24.95 16.76 92.75 61.50 20.60 6.92

12-mth Target Price 21.70 20.00 115.70 61.40 31.60 7.80

TSR (inc Dividend) -8% 26% 31% 3% 58% 17% 23%

Market Cap (US$m) 6,648 22,743 22,759 2,358 774 1,086 56,367


Valuation FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E

Price / EPS 11.9x 10.2x 11.9x 10.9x 8.7x 9.9x 11.9x 11.0x 10.8x 11.3x 9.0x 10.9x 5.6x 6.0x 6.1x 7.9x 7.6x 8.5x 11.8x 10.3x 10.9x

Price / Norm EPS 22.6x 16.6x 18.6x 12.0x 9.9x 8.5x 16.4x 16.3x 14.7x 14.6x 12.6x 11.3x 4.4x 5.7x 5.9x 10.1x 14.1x 22.7x 15.3x 13.7x 12.9x

P / PPOP 11.9x 9.2x 9.4x 9.9x 8.2x 7.2x 12.3x 12.1x 11.9x 10.8x 9.2x 8.7x 4.2x 4.9x 5.1x 7.4x 7.9x 9.0x 11.3x 10.2x 9.6x

P / Book 1.12x 1.02x 1.00x 1.60x 1.39x 1.30x 2.72x 2.42x 2.25x 1.37x 1.18x 1.08x 0.44x 0.42x 0.41x 0.70x 0.61x 0.58x 1.97x 1.74x 1.63x

P / NTA 1.05x 1.02x 0.98x 1.50x 1.34x 1.27x 2.53x 2.35x 2.18x 1.27x 1.11x 1.04x 0.43x 0.42x 0.40x 0.63x 0.59x 0.56x 1.84x 1.69x 1.58x

Yield 3.8% 4.9% 4.2% 5.8% 7.0% 6.6% 5.6% 5.9% 6.0% 2.2% 3.4% 3.2% 5.0% 5.0% 4.9% 3.8% 3.9% 3.5% 5.3% 6.1% 5.9%


Per Share Metrics (A$) FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E

EPS 2.09 2.45 2.09 1.53 1.92 1.70 7.80 8.40 8.62 5.46 6.84 5.64 3.67 3.42 3.35 0.88 0.91 0.82 2.22 2.60 2.41

Normalised EPS 1.11 1.50 1.34 1.40 1.69 1.96 5.67 5.70 6.31 4.21 4.89 5.44 4.67 3.64 3.51 0.68 0.49 0.30 1.73 1.97 2.17

Stated PPOP 2.09 2.72 2.64 1.70 2.03 2.34 7.57 7.65 7.81 5.67 6.68 7.04 4.88 4.22 4.08 0.94 0.88 0.77 2.31 2.62 2.82

BVPS 22.37 24.46 25.00 10.47 12.06 12.90 34.08 38.29 41.22 44.98 51.95 57.08 46.57 48.94 50.50 9.94 11.38 11.99 14.63 16.57 17.61

NTA 23.82 24.45 25.50 11.19 12.54 13.25 36.62 39.46 42.48 48.46 55.42 59.12 48.35 49.53 51.47 11.06 11.70 12.27 16.44 17.92 18.95

DPS 0.94 1.23 1.05 0.97 1.18 1.11 5.20 5.46 5.60 1.38 2.07 1.99 1.04 1.02 1.01 0.26 0.27 0.25 1.35 1.56 1.50


Profitability FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E

EPS Growth 50.2% 17.0% -14.6% 18.0% 25.5% -11.6% 13.5% 7.7% 2.6% 34.9% 25.2% -17.5% 52.5% -6.9% -1.8% 62.4% 3.7% -10.3% 20.5% 16.8% -7.0%

Norm EPS Growth -12.0% 35.5% -10.3% 25.3% 21.0% 16.1% -3.8% 0.6% 10.6% 18.4% 16.1% 11.4% 87.2% -22.0% -3.5% 452% -28.1% -38.0% 11.5% 13.8% 10.2%

PP-ROE 9.3% 11.1% 10.6% 16.2% 16.9% 18.1% 22.2% 20.0% 19.0% 12.6% 12.9% 12.3% 10.5% 8.6% 8.1% 9.4% 7.7% 6.5% 15.8% 15.8% 16.0%

PP-ROA 0.9% 0.9% 0.8% 1.3% 1.2% 1.4% 1.7% 1.5% 1.4% 1.1% 1.2% 1.1% 1.3% 1.2% 1.2% 0.5% 0.5% 0.6% 1.3% 1.2% 1.2%

ROE 9.4% 10.0% 8.4% 14.6% 15.9% 13.2% 22.9% 21.9% 20.9% 12.1% 13.2% 9.9% 7.9% 7.0% 6.6% 8.8% 8.0% 6.8% 15.2% 15.7% 13.7%

Norm ROE 4.9% 6.3% 5.4% 13.4% 13.9% 15.5% 15.7% 14.4% 14.7% 9.5% 9.7% 9.6% 10.7% 7.8% 7.1% 7.6% 4.6% 2.6% 8.6% 8.0% 7.5%

Note: Closing prices as at 7 October 2011. Source: Bloomberg, Company data, Barclays Capital estimates


10 October 2011 6

UNINTENDED RISKS OF RMB INTERNATIONALISATION

The market has underestimated the risks from offshore RMB development, in our view, including liquidity (HK$ and offshore leakage), regulatory and operational risk.

Banks are heavily investing to prepare for RMB growth but return on investment is unknown due to regulatory restrictions and timing uncertainties.

Structural headwinds lie ahead from the development of offshore RMB even if we disregard future currency directional trends and repatriation rules.

We lower system RMB deposit estimates to Rmb800bn, RMB1.4trn and RMB2trn for FY11/12/13E (from Rmb1trn, Rmb1.8trn and Rmb2.5trn previously), respectively.

Is the market underestimating the risks from offshore RMB? The rapid rise of the offshore RMB market has created many business opportunities for the Hong Kong banks, but comes with greater risks from a macro, micro and regulatory standpoint. We believe that the market is aware of the potential upside (i.e. tapping new customer relationships, developing RMB as an asset class, reserve currency and trading currency) but has underestimated the risks (i.e. HK$ liquidity drain, offshore RMB leakage).

The Hong Kong banking sector is heavily investing in preparation for future offshore RMB opportunities. Mainland companies are expanding globally, and the banking sector believes they cannot afford to be left behind. However, there is no way of determining the long-term profitability or return on investment due to uncertainty over the scope and timing of regulatory changes. Should investors continue to put up with near-term pain for long term gain?

In addition, the banking sector is facing a dilemma between creating an offshore RMB centre vs wanting quicker and easier repatriation of funds into China. To become the premier offshore RMB centre, a large pool of liquidity needs to be retained in Hong Kong, but at the same time, the banks are fighting for regulations to ease repatriation of funds to China. We see no near-term solution.

We will turn more positive once the use of offshore RMB is driven by business needs rather than currency expectations.

Why are the banks investing in offshore RMB?

Banks are investing heavily in developing offshore RMB business, despite near-term losses, because:

the internationalisation of Chinese companies gives them an opportunity to follow their clients in going global and tapping new business relationships; and

internationalisation of the RMB as an asset class and increasingly used as a reserve currency by other countries

RMB is increasingly used as an international trade currency. IMF has projected that China will contribute to more than one-third of global growth by 2015. The RMB trade settlement scheme launched in 2009 has allowed for shortened settlement cycles and corporates to better manage foreign exchange risk in conducting cross-border trade.


10 October 2011 7

Overseas Direct Investment (ODI) to be conducted in RMB under a pilot scheme introduced in January 2011 and potential regulatory changes to Foreign Direct Investment (FDI) rules and RMB fund remittance to China.

Potential opportunity to generate incremental profits

Over the past two years, we have seen a rapid rise in the development of the offshore RMB market. The first step was the development of the RMB deposit pool in Hong Kong which now stands at RMB609bn, ~10% of system deposits.

Figure 3: HK system deposits of all authorised institutions

System deposits, August 2011 Balance ytd growth m/m growth

Total HK$7,344bn 7.0% -0.5%

HK$ HK$3,619bn 0.1% -2.0%

FC (ex RMB) HK$2,980bn -11.4% -19.2%

RMB Rmb609bn 93.4% 6.4%

Source: CEIC, Barclays Capital

Figure 4: Offshore RMB deposits in Hong Kong

64 66 71 81 86 90 104

130

149

217

280

315

371

408

451

511

549

554

572

609

0

100

200

300

400

500

600

700

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-

10

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Rmb bn

0

2

4

6

8

10

12%

RMB deposits (LHS) As % of total deposits (RHS)


Next, outlets for the use of offshore RMB were developed, including dim sum bonds, trade settlements and wealth management products.

RMB trade settlements – Banks in Hong Kong now handle 84% of the Mainland’s trade settled in RMB. In August 2011, the scope of the RMB trade settlement scheme was expanded to cover the entire Mainland.

RMB financing – “Dim sum” bond issuances have grown exponentially, reaching Rmb149bn in 1H11. However, demand for RMB lending remains low as most customers prefer to borrow in USD/HKD at lower interest rates with no currency appreciation. RMB lending was only RMB5bn at June 2011, <1% of system loans. RMB foreign exchange transactions are supported by CNH markets, RMB deliverable forwards and non-deliverable forwards. A few types of financial institutions have limited access to the Shanghai interbank bond market (subject to a quota).


10 October 2011 8

RMB wealth management – The first R-IPO, Cheung Kong’s Hui Xian REIT, was launched in April 2011. In addition, R-QFII quota of RMB20bn was announced in August 2011.

Despite the rapid growth of offshore RMB investment opportunities, there is still abundant idle CNH liquidity which is placed with PBOC (via BOCHK as the clearing bank in Hong Kong) and generates a low yield of 62.9bps for most banks and 72bps for BOCHK as the clearing bank.

Future potential developments in the pipeline include:

Formalization of the use of RMB in foreign direct investment in the Mainland. Repatriation of RMB is currently subject to regulatory approval on a case by case basis. The aim is to establish a standardized process and allow automatic repatriation up to a certain threshold or when meeting certain criteria.

Extending access to the Shanghai interbank bond market for more financial institutions or increasing the quota.

Expanding the scale of “dim sum” bonds by allowing mainland companies (other than government entities and banks) to issue in Hong Kong.

Develop more sophisticated RMB products, e.g. RMB exchange traded products, RMB commodities contracts, RMB interest rate derivatives and risk management products.

Allow Chinese investors to buy ETFs linked to Hong Kong stocks.

Simplify approval procedures and implement favourable policies for Hong Kong under the Closer Economic Partnership Arrangements (CEPA), to realize full liberalization of trade between the two sides.

Risks and unintended consequences of RMB internationalisation

With any opportunity comes risk. The most evident consequence of the development of offshore RMB is tighter HK$ liquidity conditions (discussed in “Hong Kong Banks: Liquidity Squeeze”, dated 11 April 2011). In addition, we believe that offshore RMB growth will slow from its exponential growth pace (+93% y-t-d) due to the current leakage to onshore RMB and the expected widening of repatriation channels to mainland China. As such, we lower our Hong Kong system RMB deposit growth estimates to RMB800bn, RMB1.4trn and RMB2trn (from RMB1bn, RMB1.8bn and RMB2.5bn previously), for FY11/12/13E respectively.


10 October 2011 9

Figure 5: Offshore RMB deposits in Hong Kong

0.1 0.10.3

0.60.8

1.11.4

1.72.0

0.0

0.5

1.0

1.5

2.0

2.5

2H09

1H10

2H10

1H11

2H11

E

1H12

E

2H12

E

1H13

E

2H13

E

RMBtrn

0%

50%

100%

150%

200%

250%

300%

System offshore RMB deposits (LHS)

h/h growth (RHS)

Source: CEIC, Barclays Capital estimates

In summary, the system deposit base (both HK$ and RMB) could come under pressure resulting in a lower money multiplier going forward.

1. Tightening HK$ liquidity – limiting loan growth and pressuring margin

HK$ liquidity has tightened considerably since 2009, which is reflected in the rising HK$ loan to deposit ratio (LDR) due to partial cannibalisation of the HK$ deposit base by offshore RMB (10% of system deposits) and strong demand for HK$/USD lending, leading to a growing mismatch between loans and deposits and making asset-liability management (ALM) increasingly difficult for the Hong Kong banking sector.

System RMB deposits have grown 93% y-t-d, vs no growth for HK$ deposits and an 11% decline in all other foreign currency deposits including the USD. At the same time, the corporate loan portfolio rebounded sharply in 2010 as the local, Chinese and global economies proved far stronger than earlier expectations, in part due to aggressive fiscal stimulus by most governments. More recently, sustained low HK$ (and US$) lending rates led to continuously high demand for corporate credit, a large portion of which we believe is investment in China, where the cost of funds is considerably higher.


10 October 2011 10

If we exclude the two largest banks, HSBC and Standard Chartered, which are in a much better liquidity position (in terms of LDR), we estimate that system LDR is already close to 75%, the operational maximum, since banks are required to maintain a minimum liquidity ratio of 25%.

Tightening HK$ liquidity has also led to a price war on HK$ time deposits, especially in the 3-6M time deposit space where deposits taken now will straddle the year-end (December). Our channel checks show that the 6-month HK$ time deposit rate offered to a new customer with a HK$1m deposit has risen by 74bp to 1.5% in 3Q11 (refer to table below). In addition, the proportion of time as percentage of total system deposits continues to rise.

Figure 8: Survey of HK$ time deposit rates on HK$1m deposit balance

1M 1M 1M 3M 3M 3M 6M 6M 6M

HK$ deposit rates 29-Jun 24-Aug 27-Sep 29-Jun 24-Aug 27-Sep 29-Jun 24-Aug 27-Sep

HSBC 0.01% 0.02% 0.02% 0.01% 1.25% 1.25% 0.05% 0.05% 0.05%

STAN 1.30% 0.20% 0.50% 1.25% 1.25% 1.60% 0.75% 1.35% 1.80%

BOCHK 1.00% 0.73% 0.75% 0.67% 0.79% 0.77% 0.65% 1.15% 1.65%

HSB 0.40% 1.70% 0.80% 0.90% 1.25% 1.30% 0.18% 0.20% 1.50%

BEA 1.22% 1.05% 1.26% 1.28% 1.27% 1.37% 1.17% 1.38% 1.62%

DBS HK 0.70% 0.60% 0.60% 1.50% 1.50% 1.25% 1.60% 1.70% 1.80%

WHB 0.85% 0.10% 1.05% 1.10% 0.20% 1.50% 1.25% 1.50% 1.76%

DSBG 0.09% 1.29% 1.35% 1.05% 1.45% 1.56% 0.18% 1.55% 1.80%

WLB 0.10% 0.10% 0.10% 1.00% 1.00% 1.35% 1.05% 1.05% 1.50%

Average 0.63% 0.64% 0.71% 0.97% 1.11% 1.33% 0.76% 1.10% 1.50%


Figure 6: Hong Kong system loan to deposit ratio

Figure 7: China, HK and HK loans for use offshore y/y gth

67

85

75

40

50

60

70

80

90

Aug

-08

Nov

-08

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

May

-10

Aug

-10

Nov

-10

Feb-

11

May

-11

Aug

-11

%

System LDRHK$ LDRSystem (ex RMB deposits only)

16.427.0

45.6

-20-10

010203040506070

Aug

-04

Aug

-05

Aug

-06

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Aug

-11

%

ChinaHK totalHK loans for use outside HK

Source: CEIC, Barclays Capital Source: CEIC, Barclays Capital


10 October 2011 11

Figure 9: System time deposits as % of total deposits

45.045.546.046.547.047.548.048.549.0

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

%

33.033.534.034.535.035.536.036.537.037.5%

Total time as % of system deposits (LHS)

HK$ time as % of total HK$ deposits (RHS)


2. Offshore RMB leakage to China and regional centres

We believe that there is leakage from the offshore RMB deposit base to onshore RMB as investors seek higher returns in the onshore RMB market where the rate on a 3M time deposit is 3.1% (vs <50bps for offshore RMB deposits or ~2% on dim sum bonds). HK$ and offshore RMB drainage will result in a lower money multiplier in Hong Kong.

The leakage from offshore to onshore RMB comes from two sources:

individuals – Hong Kong residents can transfer up to a daily limit of HK$80,000/day from offshore to onshore RMB (e.g. from a Hong Kong bank account into an account held with the bank’s Mainland subsidiary)

corporates – can transfer funds for trade related activity while non-trade related transactions remain restricted.

RMB deposits growth has slowed substantially in the past few months, after the Mainland and Hong Kong regulators cracked down on RMB/USD currency “arbitrage” lending activities, i.e. using RMB assets as collateral to back cheaper HKD/USD funding in Hong Kong.

In addition, there is a threat to Hong Kong’s offshore RMB pool from regional and international peers (e.g. Singapore and London). Hong Kong banks are clearly the first movers and have a geographic advantage over other locations as the premier offshore RMB centre. However, there is growing competition to capture offshore RMB liquidity.

3. Regulatory risks and uncertainties – difficult for banks to plan

There is a high degree of regulatory uncertainty surrounding the pace and timing of RMB internationalisation. But we do know it will be a lengthy drawn out process, and understandably so, to allow regulators to carefully analyse and execute the plan and mitigate potentially negative and unwanted consequences of RMB internationalisation.

However, the lack of certainty makes planning difficult for the banks. Heavy investment has been made in the past few years in IT systems and human resources, but the potential return on investment is impossible to calculate due to policy risk over timing and scope.


10 October 2011 12

Banks have also called on formalising regulations over “grey areas” in the interaction between onshore and offshore RMB, e.g. rules on moving deposits between Hong Kong banking operations and Mainland banking subsidiaries.

4. Rising operational risks - RMB appreciation not a certainty

The offshore RMB market is new to regulators, investors, bank management, bank staff and also customers.

Operational risks arise with bank staff, who are responsible for transacting, dealing, and selling new products to customers, from simple offshore RMB deposits to complex structured products. Time needs to be taken to train the workforce so they can acquire the knowledge of the dynamics of the products they are selling and also the risks.

From the customer’s perspective, a recent survey conducted by Cimigo in September 2011, showed that investor education is one of the most important areas for improvement. In terms of offshore RMB developments, RMB appreciation has been viewed as a certainty by many investors and they may not be fully aware of the risks involved. This creates operational and reputational risks for the banks (as we’ve learnt through the Lehman minibonds debacle).

FX volatility in recent weeks has proved that there is always risk to every investment decision. USD appreciated against many currencies (including the CNH) as investors sought safety on concerns on a global economic slowdown. Risks arise when there is unwanted foreign currency volatility; some wealth management products have been structured to take advantage of RMB appreciation and are highly leveraged and often of long tenor. As past experience has shown with accumulators (bull market product popular in 2007) and Lehman mini-bond products, customers as well as the banks may suffer significant losses when things turn sour.

Banks do not take foreign exchange risk, meaning that they are not directly exposed to unwanted movements in RMB. However, they do take counter-party positions with clients who have a genuine FX trade need. Unwanted/extreme FX volatility may result in customer default.

Figure 10: CNH/CNY sv USD volatility in recent weeks

Figure 11: Lehman minibond write-offs post-2008 crisis

6.3

6.35

6.4

6.45

6.5

6.55

14-J

ul-1

1

21-J

ul-1

1

28-J

ul-1

1

4-A

ug-1

1

11-A

ug-1

1

18-A

ug-1

1

25-A

ug-1

1

1-Se

p-11

8-Se

p-11

15-S

ep-1

1

22-S

ep-1

1

29-S

ep-1

1

6-O

ct-1

1

CNY Curncy CNH Curncy

0

500

1,000

1,500

2,000

2,500

3,000

3,500

BOC

HK

DSF

/DSB

G

WH

B

CH

B

BEA

ICBC

A

HK$m

0%

1%

2%

3%

4%

5%

6%

Lehman mini-bonds exposure (LHS)As % of FY08 equity (RHS)

Source: Bloomberg, Barclays Capital Source: [Source].


10 October 2011 13

Dilemma – offshore RMB liquidity pool vs easier repatriation?

The banking sector is now facing a dilemma – become a premier offshore RMB centre or allow easier repatriation of RMB back to China. To become the premier offshore RMB centre, a large pool of liquidity needs to be retained in Hong Kong, but at the same time, the banks are fighting for regulations to ease repatriation of funds to China.

If repatriation of RMB to China is allowed, we could see an outflow of RMB liquidity from Hong Kong into China. But if repatriation remains highly restricted, we could see lower demand for CNH from corporates if it is questionable if and when the funds can be put to use to fund their mainland business operations.

In recent weeks, there has been volatility in the CNH vs the USD as investors sought safety in the USD. Whether USD appreciation will continue remains to be seen, but we believe that the direction of CNH is irrelevant for the Hong Kong banks. IF CNH continues to appreciate vs the USD, the HK$ deposit base will continue to be cannibalised (at least partially) by conversion into RMB, limiting the ability of banks to fund loan growth. If CNH depreciation is sustained, it is likely to be due to concerns over a global macro-economic slowdown. At that point, asset quality concerns will far outweigh the need to improve banks’ liquidity positions (mainly to fund loan growth).

Therefore, we believe that Hong Kong banks will face structural headwinds from the development of offshore RMB even if we disregard future currency directional trends and repatriation rules:

RMB appreciation vs USD = Tighter HK$ liquidity

USD appreciation vs RMB = Higher credit costs

Figure 12: Scenario analysis of risks for RMB appreciation/depreciation and repatriation relaxation

Scenario 1: RMB appreciation vs USD/HKD, repatriation restricted Scenario 2: RMB appreciation vs USD/HKD, repatriation rules ease

Continued cannibalisation of the HK$ deposit base Continued cannibalisation of the HK$ deposit base

Moderating growth of corporate offshore RMB deposits if there is uncertainty over repatriation of funds for use in mainland China

Faster leakage of the offshore RMB deposit pool to onshore RMB due to more attractive onshore interest rates (unless CNH and CNY rates reach parity)

Tightening system liquidity and rising LDR due to strong customer demand for USD/HKD lending at lower interest rates and which is a depreciating liability

Even tighter system liquidity and rising LDR due to strong customer demand for USD/HKD lending at lower interest rates and which is a depreciating liability, as well as drainage of HK$/offshore RMB deposit base

Scenario 3: USD appreciation vs RMB, repatriation restricted Scenario 4: USD appreciation vs RMB, repatriation unrestricted

Asset quality concerns over China economic slowdown (USD appreciation as a result of flight to safety)

Asset quality concerns over China economic slowdown (USD appreciation as a result of flight to safety)

Improvement in HK$ liquidity Improvement in HK$ liquidity

Leakage of the offshore RMB deposit pool to onshore RMB due to more attractive onshore interest rates (unless CNH and CNY rates reach parity)



10 October 2011 14

FUTURE CAPITAL OUTFLOWS COULD THREATEN LIQUIDITY

Potential capital outflows could erode Hong Kong’s deposit base by 9.4%, resulting in even tighter liquidity.

The HKMA has asked the banks to conduct a stress test if they can withstand potential capital outflows, which is likely to occur if US interest rates rise and USD strengthens against HK$, as we’ve seen in recent weeks of volatility.

HKMA asks banks to conduct stress test for capital outflows

In May 2011, the HKMA asked the banks to conduct a stress test, assuming customer withdrawals of HK$690bn over the next year, due to concerns that the banks’ balance sheets have grown too fast (Bloomberg, 27 May 2011). Banks should assume that more than half of the HK$1.38trn of customer deposits in local and foreign currencies added since late 2008 will flow out in 6-12 months. Since May, system deposits have risen by HK$1.5trn, +26% since September 2008.

If HK$690bn of deposits flow out of Hong Kong, system deposits of HK$7.3trn (at August 2011) will be eroded by 9.4%. The system loan to deposit ratio would rise from 67% (at August 2011) to 74%.

Norman Chan, chief executive of the HKMA, explained that an increase in US interest rates or strengthening of the US dollar may lead to a reversal of the capital flows, and US dollar-funded carry trades will exacerbate the impact of a reversal in the flows of funds on the financial market, making it more volatile.

When US-dollar interest rates rise or the US dollar strengthens, investors will no longer use the US dollar to fund their carry trades. When they unwind these US dollar-funded carry trades and take a long position in the US dollar, the US dollar might appreciate considerably, resulting in funds flowing out of the Hong Kong dollar.

On the contrary, if capital flows reverse resulting in strong outflows from HK$, asset prices may fall and interest rates will go up according to the Currency Board system.

Chan noted that Hong Kong had not seen any large capital flows in or out of the territory during the market turmoil in recent weeks, unlike earlier phases of quantitative easing in the United States that saw waves of hot money pour into Hong Kong.


10 October 2011 15

Figure 13: Capital inflows into HK$

Figure 14: Deposit growth in Hong Kong

0100200300400500600700800900

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

HK$bn

0

2

4

6

8

10

12

14%

Aggregate balance & exchange fund bills (LHS)As % of M2 (RHS)

HK$648bn since 4Q08

5.0

5.5

6.0

6.5

7.0

7.5

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

Aug

-11

HK$trn

0%2%4%6%8%10%12%14%16%

Total deposits (licensed banks) (LHS)

y/y growth (LHS)

+HK$1.5trn since 4Q08, +26%



10 October 2011 16

IMPACT ON ASSET QUALITY FROM GLOBAL ECONOMIC SLOWDOWN

Markets are increasingly pricing in higher credit costs on the back of European debt concerns and fears of a China hard landing.

In the 2008 Asian financial crisis, NPLs peaked in September 1999, a year after Hong Kong banks’ share prices troughed in August 1998.

We assume a gradual normalisation of sector credit costs to 7bp, 19bp and 26bp for FY11/12/13E (from 3bp in FY10), respectively, based on the assumption of a soft landing of the Chinese economy.

Hang Seng Bank is most defensive against a potential deterioration in asset quality, in our view, due to their strong risk management track record (peak credit cost of 121bp, lowest among peers) and high earnings buffer with a break even credit cost of 278bps.

China hard landing fears intensifying Fears of a hard landing in China have once again intensified. While our base case remains a soft landing led mainly by an investment slowdown, we see increasing downside risk from the situation in Europe and at home.

We think benchmark interest rates will likely be on hold and the yuan will continue to strengthen at a relatively fast pace, while “selective easing” may help reduce financing pains for SMEs, property developers and local governments.

In the near term, we expect investors to remain cautious, as the European debt situation will likely worsen before it improves. But we think signs of a soft landing would benefit risky assets, including equities.

Global recession is the biggest risk we see facing the Chinese economy, as this could lead to the first hard landing (GDP growth of 5.5-6.5% in 2012) in more than 20 years. However, even if a hard landing were to occur, a meltdown (ie, full-blown fiscal and financial crisis) of the Chinese economy is unlikely, given relatively healthy balance sheets in China.

Chinese policymakers would likely respond quickly to an external recession, through expansion of monetary and fiscal policies and a reversal of housing policies, which we would expect to be supportive of investment and commodities.

The ultimate test for China lies with fiscal sustainability. For now, we believe the government still has enough room to stretch policy to prevent a systemic meltdown of the economy.

The latest escalation of hard landing fears was triggered by developments in a number of areas. Most importantly, indecisiveness on the part of European policymakers is seen as significantly increasing the risks of debt and banking crises. Our base case is that policymakers will eventually act effectively to prevent a major crisis or a global recession. The first necessary step is to resolve the Greek situation in an orderly manner. The existing proposal, however, is probably insufficient as it still leaves Greece with a debt service burden that is too large to manage successfully. Both Spain and Italy are fundamentally solvent, but investor confidence has deteriorated so much that the situation is unlikely to stabilise without outside assistance (see Global Outlook: A treacherous path, 22 September 2011).

Excerpt from “Are hard landing fears overpriced?”, dated 28

September 2011, by our China economist, Yiping Huang

Risks of European debt and banking crises have risen

https://live.barcap.com/go/publications/content?contentPubID=FC1749173�


10 October 2011 17

China is often mentioned in discussions of resolution of the European debt problems. Chinese policymakers have made it clear that they are not ready to rescue Europe, but would be willing to support Europe as a part of internationally coordinated efforts, such as those through the European Union, IMF and the G20.

The US Federal Reserve’s latest gloomy assessment of the economic outlook accompanying its “operation twist” has perhaps also dented market sentiment. In particular, many investors have said the Fed’s action will not be sufficient to stimulate growth or to reduce unemployment. All these factors raise concerns about a double-dip in the global economy and have cast a shadow on the outlook for Chinese exports and other economic activity.

China also has a number of home-grown problems, many of which have worsened lately.

First, due to government restrictions on purchases, house prices have started to stabilise or even decline in a large number of cities across the country in recent months (Figure 4). The government is considering extending the restrictions to many second- and third-tier cities. China’s property sector already showed clear signs of a bubble, illustrated by very high price/income ratios, very low rental yields and very high vacancy ratios, especially in the large metropolitan cities. For some investors, declines in house prices could be the beginning of a major meltdown, similar to those observed in Japan in 1989, Hong Kong in 1997 and the US in 2008.

Second, a downturn of the housing market could hit property developers hard, especially their funding situation. According to media reports, the China Banking Regulatory Commission (CBRC) recently ordered trust companies to review risks in their lending to Greentown, a prominent property developer in the southeast province of Zhejiang. According to the company CFO’s conference call on 23 September, Greentown has the highest leverage ratio in the industry and about 20% of its borrowing is from the trust companies. Falling property prices, declining transaction volumes and rising funding costs could push many property developers into insolvency or cause liquidity traps, as happened in the late 1990s.

Third, in the past few weeks a number of owners of small and medium enterprises (SMEs) in Zhejiang have reportedly fled1, as they were no longer able to repay their debts. Many SMEs are struggling to cope with a downturn in business activity and a rise in funding costs,

1 http://news.xinhuanet.com/fortune/2011-09/27/c_122091400.htm , 27 September 2011

China will support Europe as a part of the international efforts

Figure 15: Top 3 downside risks to EM assets

Figure 16: Sharper correction in H share and red-chip stocks

What is the biggest downside risk to EM assets in the next three months?

0%

10%

20%

30%

40%

A double-diprecession inthe globaleconomy

Europe's debtcrisis

China's hardlanding

A sharpincrease in

centraleconomies'bond yields

60

65

70

75

80

85

90

95

100

105

110

Jan-11 Feb-11 Apr-11 Jun-11 Jul-11 Sep-11

Hang Seng IndexHang Seng H-share Financial IndexHang Seng Red Chip Index

Jan11=100

Source: Barclays Capital, The Q3 Global Macro Survey Source: Bloomberg, Barclays Capital

Rising concerns about a double-dip in the global economy

Domestically, house prices show signs of a correction

Property developers at risk of insolvency

Some SME owners have reportedly fled as they are no

longer able to repay debts


10 October 2011 18

especially the latter as most have relatively high proportions of financing from outside the banking sector. Despite still relatively low official bank deposit and lending rates, market rates have ratcheted up rapidly this year due to the credit tightening. According to surveys by the local branch of the People’s Bank of China (PBOC), the average lending rate in Wenzhou’s kerb market have risen by 2.8ppts since the beginning of the year to above 17% in September.

Fourth, the formal financial system, especially the banking sector, has seen increasing disintermediation. Money began to leave the banks amid tight credit and significantly negative real deposit rates. Deposits in the four largest banks declined by CNY420bn in the first two weeks of September2, evidence of unstable deposits (Figure 5). In the meantime, banks’ off-balance-sheet activities and development of wealth management products have grown rapidly, which was an effective way for banks to bypass liquidity controls and interest rate regulations. Off-balance-sheet lending was CNY2.1trn in H1, almost half of the official new lending of CNY4.5trn (Figure 6). The expansion of these activities has prompted the PBOC’s efforts to monitor total social financing, instead of only bank credit, and to bring off-balance-sheet transactions under the reserve requirement regulations.

Finally, according to the National Audit Office, total outstanding debt from local governments and their affiliated entities totalled CNY10.7trn, or about 27% of GDP. Most of this borrowing financed investment projects, especially infrastructure (Figure 7). But there is already a serious overcapacity problem in areas of infrastructure, especially highways, railway and airports. Land sales used to account for between 30% and 50% of the local governments’ revenues, so recent declines in house prices are likely to reduce those revenues significantly. Should local governments become unable to service these debts, the levels of banks’ nonperforming loans could grow very rapidly.

The more pessimistic market participants see very high risks of crisis and collapse from these developments. While we do not share such a view, we agree that the risks have increased significantly during the past few weeks.

2 http://cn.reuters.com/article/chinaNews/idCNCHINA-4953720110922, 22 September 2011

Figure 17: A-H premium widened recently

Figure 18: Domestic housing prices appear to have stabilised

80

90

100

110

120

130

140

150

160

170

180

Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11

A-H Premium index (%)

44

10

16

41

13

36

11

23

39

12

19

36

22

27

17

26

1612

0

5

10

15

20

25

30

35

40

45

50

Increase Unchanged Decline

Mar Apr May Jun Jul Aug

# of cities (Existing home price, % m/m)

Source: Bloomberg, Barclays Capital Source: CEIC, Barclays Capital

Banking sector disintermediation has accelerated

Ballooning local government debt has worsened the dynamics


10 October 2011 19

The biggest risk is another global recession A recession in the global economy, which is not our base case, could be significant enough to cause a hard landing for the Chinese economy, due to its high dependency on trade connections and its much more limited policy flexibility.

Recently, we cut our GDP forecasts to 9.1% for 2011 and 8.4% for 2012 (Figure 9). However, while many analysts’ downward revisions of GDP forecasts for China on weaker external demand, our expectation for growth moderation next year reflects a slowing of investment. Barclays Capital expects global GDP growth of 3.7% in 2012, compared with 3.6% in 2011. In other words, significantly weaker external demand is not our base case.

But we think the investment slowdown is likely to continue, judging from trends in three key investment areas: infrastructure, manufacturing and housing (Figure 10). Growth in infrastructure investment has already slowed from its extraordinary pace in 2009-2010 to around 5-6% currently, as many of the projects planned under the stimulus policy are completed. With significant short-term overcapacity in many infrastructure areas, and the financial burdens these projects placed on both the government and the financial system, we expect infrastructure investment to remain slow or to weaken further.

Manufacturing investment picked up in the past year or two, on recovery of the global economy. But this is likely to falter again given a dimming outlook. Various purchasing manager indices have been weak in the past months, hovering around 50 (Figure 11). Heightened concerns about Europe’s debt crisis also cast a shadow on export markets.

Housing investment, which accounts for about a quarter of China’s total fixed asset investment, could be a wild card for the investment picture. Social housing is a compulsory policy for local governments and, therefore, will likely be implemented as planned. The commercial part of housing investment, however, could weaken substantially. The current boom, starting from late 2009, really followed the surge in housing prices from the second quarter of that year. Now that house prices have begun to decline, housing investment is likely to decelerate sharply, especially as some developers run into financial difficulties.

These factors are behind our expectation of slower economic growth next year in China. When investment growth moderates, consumption growth is also likely to slow. Although consumption could stay relatively more resilient, it is simply unrealistic to expect consumption to fill the gap of slowing investment and, therefore, to support GDP growth at

Global recession could cause a China hard landing

Our base case does not assume significantly

weaker external demand

Figure 19: Banks’ deposits have become more unstable Figure 20: Off-balance sheet lending has grown rapidly

-1000

-500

0

500

1000

1500

2000

2500

3000

Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-110

5

10

15

20

25

30

35New increased Deposit (CNY bn)Deposit growth (RHS,%y/y)

-2

0

2

4

6

8

10

12

14

16

2002 2005 2008 1H2011

Other forms of financing

Corporate bond and equity financing

Bank off-balance sheet lending

Bank loans

CNY trn



Our base case expects growth in infrastructure investment to

remain slow or weaken…

…manufacturing investment to falter…

…and private housing

investment to decelerate

Consumption growth unlikely to fill the gap of slowing investment


10 October 2011 20

current rates. Rapid wage growth has been positive for consumption but, historically, consumption was always positively correlated with investment and exports. Weakening exports will affect jobs and, thus, hurt consumption. About one-third of investment expenditure normally ended up in consumption spending in China.

While our base case remains a soft landing for next year, we cannot completely ignore the risks of another global recession. According to the latest Barclays Capital Global Macro Survey, close to 40% of investors believe that a double-dip is the greatest risk. Should that scenario come to pass, the Chinese economy would probably not be able to avoid a hard landing, the first in more than 20 years.

The most direct channel would be through a collapse in exports (Figure 12). Although we are not expecting a meaningful change in net exports in our base case scenario, a collapse in exports would have a significant impact on the economy. It could cause substantial worsening of the overcapacity problem, as happened in 1998-99, 2001-02 and 2008-09. This, in turn, could lead to a return of the deflation problem. A global recession would also have serious adverse effects on both investment and consumption.

The most important area to watch for the impact of a global recession would be the SME sector. In the Pearl River Delta and the Yangtze River Delta, SMEs are the main producers of exports. These companies have been squeezed by rising wages and increasing funding costs. But steady flows of export orders have kept these enterprises going. A disruption in order flows could be the last straw. According to surveys reported by our China Banks Equity Analyst, May Yan, more than 80% of SMEs rely on external funding but only 15% borrow from the banks (Figure 13, see China Banks: SMEs…banking friend or foe? 9 September 2011). These numbers imply that SMEs have much greater exposure to informal lending. Thus, export slowdown-induced financial difficulties for SMEs could have a greater contagion effect on the informal financial system.

The IMF recently examined the effect 3 of a potential global recession on the Asian economies, assuming -1% growth in the US and -3.5% in the eurozone. The IMF suggested that growth in China would be lowered by 4pp, while that in Japan and in emerging Asian economies would be cut by an average of 1.5pp.

3 Anoop Singh, "Asian economic outlook", Presentation at the IMF-SCID First Annual Conference on Emerging Asia, September 9, Stanford University, San Francisco

The risks of a global recession and China hard landing cannot

be ignored…

Figure 21: Total local government debt by usage

Figure 22: China’s high dependency on global growth cycles

Agriculture and

agrigation4%

Transpor-tation22%

Others22%

Social housing , science,

education, culture and health care

9%

Land reserve

10%

Urban infrastruct-

ure33%

Urban infrastructure

33%

Transportation22%

-10

-5

0

5

10

15

20

25

30

Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10-8

-6

-4

-2

0

2

4

6China IP (%q/q, saar)Global-ex China GDP (%q/q, saar, RHS)

Source: National Audit Office, Barclays Capital Source: CEIC, Barclays Capital

…and could follow a collapse in exports, worsening the overcapacity problem

SME situation is a key to watch for possible global recession

IMF estimates a 4pp reduction in China’s growth rate in case of a

global recession

http://my.barcapint.com/PRC/servlets/dv.search?contentPubID=FC1746012�


10 October 2011 21

If we apply these numbers, which we think are reasonable estimates, Chinese growth could slow to 4.5% in 2012 in the unlikely scenario of another global recession.

Of course, the Chinese government would respond quickly in such a scenario for fear of slow growth causing major economic and political instability. Unfortunately, policymakers’ freedom is far more limited now than it was three years ago. Monetary expansion would be much less aggressive. Over 2008–2009, the authorities not only cut interest rates but doubled new credit extended from CNY5trn to almost CNY10trn. In contrast, today liquidity conditions are still relatively loose and we think any additional easing would be limited.

Although the fiscal system is relatively sound, potential contingent liabilities – in the form of future nonperforming loans in the banking sector and bad asset investments by local governments – have probably increased significantly. As well, fiscal policy is already running a modest deficit this year, which would also limit the scope for additional expansion.

Without a doubt, we think the Chinese authorities could still do a number of things to mitigate the potential impact of a global recession, including:

Cutting the reserve requirement ratio, which is at 21.5% for larger banks;

Reducing interest rates as inflation pressures ease;

Easing the restrictions on housing purchases; and

Increasing fiscal spending on rural infrastructure and strategic industries.

We estimate that all of these stimulus measures could add 1-2ppt to China’s growth, implying that GDP growth could be supported at 5.5-6.5% in 2012 in the case of another global recession. This would undoubtedly be viewed as a hard landing by both the market and the public, especially as growth might be even slower in some areas.

Such a steep decline in growth, from 9% to 5%, would probably cause some difficulties, such as falling corporate profitability, deteriorating asset quality and intensifying social tension. But the consequences might not be as bad as some have feared. We used to think that China needed a minimum of 8% GDP growth. The rationale was that China needed to create 10mn new jobs per year (8mn new job market entrants plus 2mn from industry restructuring) to maintain social stability. But those calculations were based on 1990s data, and the demographic transition since then implies that the number of new job market entrants is much smaller today. In fact, the labour force is expected to start to decline from 2015. Therefore, we would argue that the minimum required pace of GDP growth today should be seen as much lower than 8%.

The government would respond quickly, but

monetary and fiscal policy flexibility is far more limited now

GDP growth could be at 5.5-6.5% in 2012 – a hard landing

But China may not need 8% growth to support employment


10 October 2011 22

Figure 23: Baseline GDP growth to slow to 8.4% in 2012…

Figure 24: … driven by investment growth slowdown

GDP contribution (pp) 2009 2010 11H1 2011F 2012F

Consumption 4.4 3.8 4.6 4.2 4.1

- Pvt consumption 3.1 2.8 3.4 3.0 3.0

- Govt consumption 1.3 1 1.2 1.2 1.1

Gross capital investment 8.4 5.6 5.1 5.0 4.4

Net exports -3.6 1.0 -0.1 -0.1 -0.1

Real GDP 9.2 10.4 9.6 9.1 8.4

0

5

10

15

20

25

30

35

40

45

Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11-50

0

50

100

150

200

250

Manufacturing Real estate Railway (RHS)

YTD, %y/y YTD, %y/y



10 October 2011 23

Orderly normalisation of credit cost as our base case

Hong Kong and Mainland China’s economies are highly interrelated. Our base case credit cost estimates are on the assumption of a soft landing for the Chinese economy.

As such, we expect a gradual normalization of credit costs upwards for the sector, 7bps, 19bps and 26bps for FY11/12/13E from 3bp in FY10.

We find that Hang Seng Bank has the most defensive risk profile against potential deterioration of asset quality. Hang Seng Bank’s FY12E pre-provision profit is enough to withstand a seven-fold increase in its long-term historical credit cost of 28bps.

Strong cross-border ties driving Mainland-related credit growth Low HK$ (and US$) lending rates and tightening of credit in mainland China have attracted continuous high demand for corporate credit, a large portion of which we believe is cross-border trade related or investment in China, where the cost of funds is considerably higher.

While credit growth has been broad-based, the fastest areas of growth have been in wholesale and retail trade, trade finance and loans for use outside Hong Kong (mainly in China).

Figure 25: China and Hong Kong loans y/y growth

Figure 26: HK system loan mix by sector – 1H11

16.427.0

45.6

-20-10

010203040506070

Aug

-04

Aug

-05

Aug

-06

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Aug

-11

%

China HK total HK loans for use

Mortgages17%

Other retail5%

Property19%

Trade and trade

finance14%

Overseas24%

Other corp use in HK

21%



10 October 2011 24

Figure 27: HK system loan growth by type y/y growth – June 2011

14%19%

16%

24%

59%

44%

28%

0%

10%

20%

30%

40%

50%

60%

70%

Mor

tgag

es

Oth

erre

tail

Prop

erty

Oth

er c

orp

use

in H

K

Trad

e an

dtr

ade

finan

ce

Ove

rsea

s

Tota

l


Because of close trade and investment ties between the Mainland and Hong Kong, a slowdown in the Mainland economy will result in a normalization of credit costs in Hong Kong, in our view. If we look at lending by Hong Kong banks, direct and indirect, to corporates for use in China, BEA has the highest exposure to Mainland-related corporates (48%) followed by BOCHK (38%).

Figure 28: Direct China and potentially China-related lending as % of total loans – 1H11

42%

22% 20%

8% 8%

3%

9% 10%

16%7%

4%

7% 4%

6%

4%

0%5%

10%15%20%25%30%35%40%45%50%

BEA BOCHK WHB HSB DSB

Use in China Trade finance Wholesale and retail trade, manufacturing

Source: Company data, Barclays Capital estimates

* assuming that trade finance, wholesale and retail trade and manufacturing loans are potentially Mainland related.

Low asset quality risk in the mortgage book Despite growing negative sentiment and our forecast decline in residential property prices (25-30% by end-2013), we believe asset quality will remain healthy. The Hong Kong mortgage market is characterized by abundant equity and healthy underwriting standards. Moreover, where higher (80-90% LTV) mortgages exist, they have been insured by the Hong Kong Government through the Hong Kong Mortgage Corporation’s (HKMC) mortgage insurance programme. The single driver of mortgage delinquency risk in Hong Kong is unemployment, in our view. The unemployment rate at August 2011 stands at a mere 3.5%.


10 October 2011 25

Figure 31: Exposure to residential and commercial property lending – 1H11

27% 24% 21% 18%10%

15%27%

19%16%

17%

0%

10%

20%

30%

40%

50%

60%

BOCHK HSB DSB WHB BEA

Residential property Commercial property

Source: CEIC< Barclays Capital

Figure 29: Property price index vs mortgage delinquency

Figure 30: Unemployment rate in Hong Kong

-50-40-30-20-10

0102030405060

Aug

-97

Aug

-99

Aug

-01

Aug

-03

Aug

-05

Aug

-07

Aug

-09

Aug

-11

%

-1.5

-1

-0.5

0

0.5

1

1.5%

Residential prop price index y/y growth (LHS)Mortgage delinquency ratio >3mths (RHS)

3.5

0

1

2

3

4

56

7

8

9

10

Aug

-95

Aug

-97

Aug

-99

Aug

-01

Aug

-03

Aug

-05

Aug

-07

Aug

-09

Aug

-11

%

Source: CEIC< Barclays Capital Source: CEIC, Barclays Capital


10 October 2011 26

A look back in history – share price performance vs asset quality trends At the height of the Asian financial crisis in 1998, Hong Kong banks’ share prices (weighted average of HSB, BEA, DSF and WHB) declined by 71% between June 1997 and August 1998, from peak to trough. However, non-performing loans peaked a year later, after the share price trough, in September 1999.

We expect a normalization of credit costs from the current lows, taking into account a global economic slowdown and rising HK$ interest rates in Hong Kong. YTD11, Hong Kong banks share prices have declined by 36% and does not currently factor in a hard landing of the China economy, in our view.

BOCHK and Dah Sing have historically had the most volatile credit cost experience, while HSB and BEA have historically experienced relatively more stable asset quality.

Figure 32: HK banks* share price performance in 1997-99

Figure 33: HK banks* share price performance YTD11

-

20

40

60

80

100

120

Jul-

97

Oct

-97

Jan-

98

Apr

-98

Jul-

98

Oct

-98

Jan-

99

Apr

-99

Jul-

99

Oct

-99

-71%

60

65

70

75

80

8590

95

100

105

110

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

-36%

Source: Bloomberg, Barclays Capital

* Weighted average of Hang Seng Bank, Bank of East Asia, Dah Sing Financial and Wing Hang Bank.


* Weighted average of Hang Seng Bank, Bank of East Asia, Dah Sing Financial and Wing Hang Bank.

Figure 34: HK system non-performing loans ratio

Figure 35: HK system bad debts expense as % of total assets

0.610

2

4

6

8

10

12

Jun-

97

Jun-

99

Jun-

01

Jun-

03

Jun-

05

Jun-

07

Jun-

09

Jun-

11

%

Special mentionGross NPL3M+ overdue and rescheduled

Peak gross NPL 10.61% in Sep-99

0.03

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Jun-

97

Jun-

99

Jun-

01

Jun-

03

Jun-

05

Jun-

07

Jun-

09

Jun-

11

%

Peak at 1.29% in Dec-98



10 October 2011 27

Figure 36: Historical credit cost (bad debts expense/loans)

17 46 47

139

292

148

130

76 55

3 7 19 26

1324

152

-12

-21

-24

-200-100

0100200300400500600700

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

bps

SECTOR BEA BOCHK HSB WHB DSF


In terms of earnings defensiveness against deteriorating asset quality, BOCHK and Hang Seng Bank rank highest, with the highest break even credit cost hurdle, i.e. credit cost which would wipe out pre-provision earnings. However, BOCHK also has the worst historical loss experience represented by its high long term historical average credit cost of 92bps.

On balance, taking into the historical loss experience, risk profile and the defensiveness of earnings against a future uptick in credit costs, we find that Hang Seng Bank is the most defensive relative to peers.

Hang Seng Bank’s pre-provision profit is enough to withstand a 7 fold increase in its long term historical credit cost of 28bps.

Figure 37: Breakeven credit cost (PPOP/avg loans) – FY12E

Figure 38: Long term avg historical credit cost (1994-2010)

345

195 183154

115

345

278

187167 167

-

50

100

150

200

250

300

350

400

BOCHK HSB WHB BEA DSBG

bps

Breakeven credit cost Breakever credit cost (inc associate)

92 74 52 51 28

121 (FY98)

155 (FY98)

253 (FY99)

281 (FY02)

628 (FY99)

0

100

200

300

400

500

600

700

BOCHK DSBG BEA WHB HSB

bps

LT average Historical peak

Source: Barclays Capital estimates * Long term average of FY1994-2010 except for BOCHK which uses 1999-2010. BOCHK was listed in July 2002. Source: Company data, Barclays Capital


10 October 2011 28

Figure 39: Breakeven credit cost / long term average credit cost – FY12E

7.0

3.8 3.63.0

1.6

10.0

3.8 3.6 3.22.3

-

2.0

4.0

6.0

8.0

10.0

12.0

HSB BOCHK WHB BEA DSBG

x

ex associate contribution inc associate contribution



10 October 2011 29

Credit cost bear case scenario

If credit costs normalize from the current lows to the long-term historical average credit cost levels for each bank by FY12E (by FY13E for BOCHK, after de-risking their loan book from the very high credit losses in 1999), we estimate that in FY12E and FY13E:

Earnings will be lower by 16% and 38%, respectively

Book value will be lower by 2.1% and 4%, respectively

Return on equity will be lower by 1.1% and 3.1%, respectively

Figure 40: Credit cost bear case scenario analysis

FY12E FY13E

Credit cost Base case Bear case Change Base case Bear case Change

BOCHK 0.15% 0.46% 0.31% 0.27% 0.92% 0.65%

HSB 0.19% 0.28% 0.09% 0.19% 0.56% 0.37%

BEA 0.22% 0.52% 0.30% 0.28% 1.04% 0.76%

WHB 0.20% 0.51% 0.31% 0.30% 1.02% 0.72%

DSBG 0.32% 0.74% 0.42% 0.45% 1.48% 1.03%

Simple average 0.22% 0.50% 0.29% 0.30% 1.00% 0.71%

EPS Base case Bear case Change Base case Bear case Change

BOCHK 1.68 1.52 -10% 1.80 1.44 -20%

HSB 8.62 8.40 -3% 9.78 8.84 -10%

BEA 1.93 1.56 -19% 2.04 1.01 -50%

WHB 5.14 4.15 -19% 5.12 2.68 -48%

DSBG 0.82 0.58 -29% 0.95 0.34 -64%

Simple average 3.64 3.24 -16% 3.94 2.86 -38%

BVPS Base case Bear case Change Base case Bear case Change

BOCHK 13.2 12.8 -3.1% 14.0 13.5 -3.9%

HSB 42.5 41.4 -2.5% 45.9 44.5 -3.0%

BEA 25.5 25.2 -1.1% 26.6 25.7 -3.5%

WHB 59.1 57.6 -2.6% 62.5 59.2 -5.3%

DSBG 12.3 12.1 -1.4% 13.0 12.4 -4.6%

Simple average 30.5 29.8 -2.1% 32.4 31.0 -4.1%

ROE Base case Bear case Change Base case Bear case Change

BOCHK 12.7% 11.8% -0.9% 12.9% 10.7% -2.2%

HSB 20.3% 20.3% 0.0% 21.3% 19.9% -1.4%

BEA 7.6% 6.2% -1.4% 7.7% 4.0% -3.7%

WHB 8.8% 7.3% -1.5% 8.3% 4.6% -3.7%

DSBG 6.6% 4.8% -1.8% 7.4% 2.7% -4.6%

Simple average 11.2% 10.1% -1.1% 11.5% 8.4% -3.1%


For BOCHK, the biggest difference in loan mix between FY99 and 1H11 is an increase in offshore related lending, most likely China-related trade and investment exposure. We


10 October 2011 30

believe that BOCHK has de-risked its loan book since FY99 (where credit costs reached 6.3%) and has established a much stronger franchise since listing in 2001, especially among Mainland-related corporates and individuals. Therefore, our bear case scenario analysis assumes that BOCHK will reach its long-term average credit cost of 92bps by FY13 (rather than FY12 for peers).

Risks to stake in Mainland associates

Hang Seng Bank’s 12.8% stake in Industrial Bank has been growing in size owing to IB’s fast growing balance sheet (asset growth of 31% for CAGR 2005-10). IB’s profit contributes 20% to HSB net profit and investment in IB accounts for 17% of assets.

We estimate that Industrial Bank will need to raise capital at some point to fund future growth. If IB boosts FY12E capital from 7.5% to 10%, we estimate that it will amount to Rmb43bn, of which HSB’s share will amount to HK$6.7bn. This will result in a reduction of HSB’s FY12E Tier 1 CAR from 10.5% to 8.7%, on our estimates.

Figure 41: BOCHK loan mix – FY99

Figure 42: BOCHK loan mix – 1H11

Comm Prop23%

Other retail (inc CC)

6%

Other comm15%

Trade finance

6%

Offshore8%

Mortgages (inc HOS

PSPS)26%

Wholesale and retail trade,

manufactur'g16%

Comm Prop

15%Offshore27%

Trade finance

9%Other comm12%

Other retail (inc CC)

3%

Wholesale and retail trade,

manufactur'g7%

Mortgages(inc HOS PSPS)

27%

Source: Company data, Barclays Capital Source: Company data, Barclays Capital


10 October 2011 31

Figure 43: Potential capital dilution if Industrial Bank issues Rmb43bn of capital in FY12E

FY10 FY11E FY12E

Industrial Bank, Rmb mn

Profit (Bloomberg consensus) 18,521 22,809 26,950

Assets 916,911 1,964,599 2,289,720

Equity 91,995 103,677 127,725

ROE 20% 22% 21%

ROA 2.0% 1.2% 1.2%

Tier 1 Capital 87,858 107,187 131,122

RWA 991,702 1,339,301 1,740,575

Tier 1 CAR 8.9% 8.0% 7.5%

To boost Tier 1 to 10% Industrial will need to raise Rmb42,936mn, equivalent to HK$52,415m

HSB's 12.8% stake amounts to HK$6,709 m

Hang Seng Bank, HK$m

Tier 1 Capital 33,898 34,937 38,916

RWA 313,437 336,533 368,928

Tier 1 CAR 10.8% 10.4% 10.5%

If HSB participates fully in IB’s rights issue, FY12E Tier 1 CAR will fall to 8.7%



10 October 2011 32

In terms of asset quality risk, credit costs will need to rise beyond ~3% before IB’s pre-provision profit is fully wiped out. If this does occur, HSB’s PTP will decline by 20% in FY11E and 24% in FY12E.

Figure 44: Industrial Bank’s associate contribution to Hang Seng Bank

Hang Seng Bank, HK$m 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Associate pre-tax profit contribution (P&L) 1,122 1,807 1,748 2,661 3,755 4,519 5,220 5,808

HSB's PPOP 18,365 16,501 14,026 14,475 14,626 14,933 16,866 18,409

HSB's pre tax profit 21,107 15,878 15,400 17,345 18,518 18,847 21,376 23,258

Investment in associate (BS) 6,177 8,870 10,226 15,666 19,027 22,605 25,881 28,534

HSB's total assets 745,999 762,168 830,668 916,911 1,003,342 1,072,988 1,137,400 1,205,144

HSB's assets ex associate 739,822 753,298 820,442 901,245 984,316 1,050,382 1,111,519 1,176,610

HSB's equity 56,456 51,626 62,148 70,012 75,446 81,214 87,758 94,884

Associate contribution to HSB's PTP 5.3% 11.4% 11.4% 15.3% 20.3% 24.0% 24.4% 25.0%

Investment in associate as % of HSB's assets 0.83% 1.16% 1.23% 1.71% 1.90% 2.11% 2.28% 2.37%

Investment in associate as % of HSB's equity 10.9% 17.2% 16.5% 22.4% 25.2% 27.8% 29.5% 30.1%


Figure 45: Industrial Bank’s breakeven and actual credit cost (bad debts charge/avg loans)

2.61%

3.46%3.87%

2.95%3.37%

2.50%

1.54%1.15%

2.29%

2.22%

0.46%0.85%0.71%0.66%

0.09% 0.30%0.76%

2.33%

0.42%0.54%0.83%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2004 2005 2006 2007 2008 2009 2010

Breakeven credit cost Actual credit cost NPLs/loans

Source: Company data, Barclays Capital


10 October 2011 33

Exposure to European investment securities

Hong Kong banks’ risk to claims on Western European countries (ex UK) is limited to 4.3% of assets, on average. All banks in our coverage universe have immaterial exposure to peripheral European countries.

For BOCHK, a worse-case scenario where a 100% writedown is taken on Euro-denominated trading and AFS securities would result in a 13.3% hit to equity.

While the risk of contagion is always present, depending on how the events of the European debt crisis unfold, we believe the risk to the Hong Kong banks are limited since cross-border claims on Western Europe (ex UK) account for only 4.3% of assets. Cross-border claims include loans and receivables, interbank and investment securities.

The Hong Kong banks have been reducing exposure to European countries since the beginning of FY10 when European debt concerns first arose. In 1H11, cross border claims on Western Europe ex UK declined by 13% h/h. Most local banks have been increasing exposure to RMB-denominated securities.

Figure 46: Cross-border claims on Western Europe ex UK – 1H11

Western Europe ex UK cross border claims, HK$m Banks Public sector entities (PSE) Others Total

HSB 32,321 6,802 13,452 52,575 BOCHK 42,673 18,878 5,502 67,053 BEA* 24,194 0 1,494 25,688 WHB 3,461 1,045 177 4,683 DSBG* 5,996 89 2,727 8,812 Total 108,645 26,814 23,352 158,811

As % of assets Banks PSE Others Total

HSB 3.3% 0.7% 1.4% 5.4% BOCHK 2.3% 1.0% 0.3% 3.7% BEA 4.0% 0.0% 0.2% 4.3% WHB 2.0% 0.6% 0.1% 2.6% DSBG 4.2% 0.1% 1.9% 6.2% Total 2.9% 0.7% 0.6% 4.3%

As % of equity Banks PSE Others Total

HSB 44% 9% 18% 71% BOCHK 33% 15% 4% 52% BEA 47% 0% 3% 50% WHB 21% 6% 1% 29% DSBG 43% 1% 19% 63% Total 38% 9% 8% 56%

h/h % growth Banks PSE Others Total

HSB -22.1% 2.0% 35.2% -9.5% BOCHK -24.6% 34.0% 10.3% -11.4% BEA -18.3% n.a. -68.9% -25.4% WHB -25.1% -22.6% 11.3% -23.6% DSBG 19.0% 0.0% -3.1% 11.0% Total -20.9% 20.8% 2.8% -12.9% Source: Company data, Barclays Capital * Note BEA and DSBG includes cross border claims on the UK.


10 October 2011 34

All the local Hong Kong banks in our universe have said that their exposure to peripheral European countries is immaterial. For BOCHK, of the HK$20bn in Euro-denominated investment securities, only HK$1bn relates to euro peripheral countries. Even if we assume an impairment charge for the full exposure, this will only affect FY11E profit by 5%.

From BOCHK’s currency risk disclosure in 1H11, a full writedown of Euro-denominated trading and AFS securities will result in a 13.3% hit to equity.

Figure 47: Investment securities by type and by currency – 1H11

HK$m Trading and FVPL AFS HTM Loans and

receivables Total

Accounting method MTM through P&LMTM through

reserves At amortised cost At amortised cost

Sovereign 14,322 80,206 21,248 115,776

Public Sector entities 281 39,341 8,611 48,233

Banks and other FI 24,003 173,926 29,155 15,381 242,465

Corporate 9,731 21,590 4,178 35,499

Total 48,337 315,063 63,192 15,381 441,973

RMB 1,571 24,628 17,795 43,994

USD 13,881 160,954 23,877 198,712

HK$ 32,676 77,546 10,911 4,004 125,137

Euro 129 17,099 1,706 1,431 20,365

Yen 1,333 2,055 3,388

Pound 272 8 9,688 9,968

Other 80 33,231 6,840 258 40,409

Total 48,337 315,063 63,192 15,381 441,973

Total assets 1,830,379

Total equity 129,623

Euro denominated securities as % of assets 0.01% 0.93% 0.09% 0.08% 1.1%

Euro denominated securities as % of equity 0.1% 13.2% 1.3% 1.1% 15.7%

Source: Company data, Barclays Capital


10 October 2011 35

EARNINGS REVISIONS AND VALUATION

We lower our earnings forecasts for the Hong Kong banks by 2-10% for FY11 and FY12, respectively, on the back of lower credit growth, margin and slightly higher credit cost assumptions; we are now 2-20% below Bloomberg consensus profit estimates.

Based on our blended valuation methodology approach, the sector offers 22% absolute upside potential to our fair value. However, in the near term, share price performance may be affected by market volatility. We estimate there is still 46% downside potential for Hong Kong bank shares vs historical trough P/B multiples.

We prefer HSBC and Standard Chartered, both 1-OW, for their international presence, larger and global business/markets exposure, and sensitivity to rising rates in Asia. We lower our PT for the remaining local Hong Kong banks by 13% (on average) and still prefer Hang Seng Bank (2-EW).

Revising down profit estimates by 2-10%

We have made adjustments to our earnings forecasts for the Hong Kong banks, mainly reflecting:

Our base case 100bps hike in Prime rate in 1H13 (in line with Barclays Capital economics team’s US Fed Fund rate hike forecasts).

Lower loan growth estimates of 12.1%, 7.9% and 6% (from 8% to 17.7% previously), and mortgage growth to +5%, -6.6% and -7.6% (from -5% to 10% previously), for FY11/12/13E respectively.

Persistently low interest rates in FY12 and 1H13 and lower margin assumption of 1.63%, 1.54% and 1.61% for our three consecutive forecast years (from ~1.6-1.7% previously). We cut our offshore RMB deposits estimates to Rmb800bn by end-2011 (12% of system deposits), 1.4trn by end-2012 and 2trn by end-2013 (from 1/1.7/2.5trn previously). We factor in a spread on RMB business of just 5bps since most RMB deposits are held by the PBOC currently. There is upside to our margin estimate if positive offshore RMB developments occur in the near term.

Lower fee income growth of 11%, 8% and 11% for FY11/12/13E, respectively, reflecting weaker investor sentiment and resulting in lower wealth management, brokerage and investment banking income.

Figure 48: Earnings revision summary – Net profit forecasts New New Old Old Change HK$m FY11E FY12E FY11E FY12E FY11E FY12E BEA 5,020 4,286 5,116 4,832 -1.9% -11.3% BOCHK 20,323 17,974 20,400 18,984 -0.4% -5.3% HSB 16,063 16,479 16,650 19,109 -3.5% -13.8% WHB 2,053 1,693 2,075 1,800 -1.1% -5.9% DSBG 1,113 999 1,115 1,175 -0.2% -15.0% DSF 1,000 982 1,049 1,138 -4.6% -13.7% Sector 45,573 42,414 46,405 47,038 -1.8% -9.8%


Our profit forecasts for the sector on average are now 2% to 20% below Bloomberg consensus for FY11, FY12 and FY13, respectively.


10 October 2011 36

Figure 49: Barclays Capital vs Bloomberg consensus net profit forecasts

Net profit Barclays estimates vs Bloomberg consensus

HK$m FY11E FY12E FY13E FY11E FY12E FY13E

BEA 5,020 4,286 4,514 5.4% -15.7% -22.2%

BOCHK 20,323 17,974 19,255 -0.6% -9.7% -15.2%

HSB 16,063 16,479 18,697 -3.5% -11.3% -11.3%

WHB 2,053 1,693 1,686 4.2% -14.5% -23.6%

DSBG 1,113 999 1,165 -5.6% -25.0% -23.3%

DSF 1,000 982 1,130 -14.1% -24.7% -23.2%

Sector simple average -2.4% -16.8% -19.8%

Source: Bloomberg, Barclays Capital estimates

We expect sector average ROE to rise to 15.7% in FY11 (from 15.2% in FY10) due to significant one-offs (e.g. BOCHK’s Lehman write-back, property revaluation gains) before normalising to 13.7% in FY12 and 14.1% in FY13, mainly as a result of persistent margin pressure and a slight uptick in credit costs.

Figure 50: Hong Kong banks’ ROA & ROE (excludes HSBC and Standard Chartered)

0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0%

ROE (LHS) ROA (RHS)

Source: Company Reports, Barclays Capital estimates

The DuPont-style analysis below highlights the decomposition of profitability. The increase in sector leverage is mainly a result of rapid growth of offshore RMB deposits, which boosts bank assets (balances with central bank) and liabilities but does not affect equity.

We have yet to factor in the benefit from a transition to an internal ratings-based approach for the smaller banks (BEA, WHB and DSBG thereafter), which should slightly increase leverage.


10 October 2011 37

Figure 51: Hong Kong banks: DuPont analysis (weighted)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

Net Interest Income 2.10 1.93 1.72 1.71 1.85 1.90 1.89 1.65 1.51 1.36 1.36 1.38

Net Fee Income 0.48 0.47 0.53 0.45 0.50 0.72 0.53 0.53 0.53 0.49 0.50 0.50

FX & Trading 0.12 0.16 0.17 0.17 0.20 0.22 0.12 0.17 0.11 0.14 0.16 0.15

Other Income 0.12 0.16 0.13 0.17 0.11 0.04 -0.09 0.02 0.05 0.04 0.06 0.06

Non-Interest Income 0.71 0.79 0.83 0.79 0.81 0.98 0.57 0.71 0.70 0.67 0.71 0.72

Total Operating Income 2.81 2.72 2.56 2.50 2.65 2.88 2.46 2.36 2.20 2.03 2.07 2.10

Staff & Pensions 0.52 0.52 0.52 0.47 0.49 0.54 0.51 0.52 0.50 0.45 0.47 0.48

Occupancy 0.22 0.21 0.20 0.18 0.19 0.20 0.22 0.22 0.21 0.19 0.19 0.19

Other Expenses 0.18 0.15 0.17 0.22 0.22 0.21 0.25 0.35 0.20 0.17 0.17 0.17

Operating Expenses 0.92 0.88 0.89 0.86 0.90 0.94 0.98 1.09 0.90 0.80 0.84 0.84

Pre-Provision Op. Profit 1.89 1.84 1.66 1.64 1.75 1.93 1.47 1.28 1.30 1.22 1.24 1.26

Impairment Cost 0.36 0.25 -0.11 -0.09 -0.05 0.10 0.68 0.06 0.01 0.03 0.09 0.12

Pre-Tax Profit 1.54 1.59 1.77 1.73 1.80 1.83 0.80 1.21 1.29 1.19 1.15 1.14

Income Tax Expense 0.19 0.17 0.28 0.29 0.31 0.32 0.12 0.23 0.23 0.25 0.24 0.24

Associates 0.00 0.01 0.01 0.03 0.04 0.06 0.07 0.08 0.11 0.12 0.14 0.15

Significant & Minorities -0.06 -0.08 0.18 0.19 0.08 0.15 -0.02 0.09 0.08 0.14 0.01 0.01

Net Profit (ROA) 1.29 1.35 1.68 1.66 1.62 1.72 0.73 1.16 1.25 1.21 1.06 1.06

Leverage 12.0x 12.0x 11.9x 11.4x 11.4x 12.3x 12.6x 12.6x 12.1x 12.9x 12.9x 13.3x

Return on Equity (ROE) 15.4 16.2 20.1 18.9 18.5 21.1 9.2 14.6 15.2 15.7 13.7 14.1



10 October 2011 38

Price target methodology

Our valuation approach is unchanged; we use an unweighted, blended valuation approach for the Hong Kong banks (ex HSBC and StanChart). Our approach is intended to capture a number of differing investment philosophies over the short-, medium- and longer-term outlook for earnings growth and profitability. Our blended approach incorporates the following standalone valuation techniques:

Three-stage dividend discount models (DDM) – incorporating three years of dividend forecasts, an eight-year fade to perpetuity growth, and a perpetuity value.

Single-stage (Gordon Growth) model (GGM) – incorporating one-year forward ROE, individual stock cost of equity calculated using the capital asset pricing model and a perpetuity growth assumption (as used in the three-stage DDM).

Historic price-to-earnings – we use a five-year average of one-year forward consensus EPS estimates to calculate historic P/E and apply this to our one-year forward EPS estimate.

Historic price-to-book – we use a five-year average of one-year forward consensus book value estimates to calculate historic P/B, and apply this to our one-year forward BVPS estimate.

Historic price-to-pre-provision operating profit (PPOP) – we use a five-year average of one-year forward consensus PPOP/share estimates to calculate historic P-PPOP, and apply this to our one-year forward PPOP estimate.

Single-stage (Gordon Growth) model (normalised) – we replace our one-year forward forecast ROE with our one-year forward normalised ROE estimate. Cost of equity and perpetuity growth is consistent with our other modelling.

Normalised P/E – we apply historic average normalised P/E (five years of data) to one-year forward normalised EPS estimates.

We have removed the special premium for market factors previously included for the smaller Hong Kong banks, which have historically traded at varying levels above fundamental value.

We believe the Hong Kong banks are currently trading at below fair value due to concerns over increasing risk of a global economic slowdown or China hard landing. As such, we incorporate a discount based on historical P/B trough multiples.

Our price targets now incorporate our changes to earnings estimates (lower margin and market-related fee income, slower lending and uptick in credit costs). In the near term, uncertainty over global growth could result in further market volatility; the potential downsides to trough P/B multiples are shown below.


10 October 2011 39

Figure 52: Hong Kong banks – blended valuation approach (FY12E) and price target summary

HK$ / Share HSB BEA BOCHK WHB DSF DSBG

DDM 107.48 16.78 16.51 30.39 14.71 4.14

GGM 126.75 16.15 17.54 49.70 16.67 4.82

Historic PE 134.29 29.06 19.83 58.33 41.80 10.18

Historic PB 152.52 31.82 19.17 92.14 55.55 15.56

Historic PPOP 88.17 30.40 17.64 69.54 33.34 7.38

Normalised ROE 80.53 5.02 21.92 47.57 19.51 -2.40

Normalised EPS 120.47 22.49 27.34 81.91 39.44 4.66

BLENDED VALUATION 115.70 21.70 20.00 61.40 31.60 7.80

Historical trough P/B multiples 1.7x

(Aug-98)

0.6x

(Mar-09)

0.7x

(Mar-09)

0.4x

(Sep-98)

0.3x

(Nov-08)

0.4x

(Oct-08)

Price at historical trough P/B 72.0 15.2 8.5 22.0 16.4 4.8

% potential downside to trough -38% -30% -58% -64% -48% -39%

PRICE TARGET (HK$ / Share) 115.70 21.70 20.00 61.40 31.60 7.80

Current price (HK$ / Share) 92.75 24.95 16.76 61.50 20.60 6.92

Dividend (HK$ / Share) 5.60 1.05 1.11 1.99 1.01 0.25

12-month Total Shareholder Return 31% -9% 26% 3% 58% 16%

Note: Closing price as of 7 October 2011. Source: Bloomberg, Barclays Capital estimates

Current 12 month forward P/B multiplies are still 37% on average above trough valuations.

Figure 53: Target, current and trough P/B multiples – FY12E

HSB BEA BOCHK WHB DSF DSBG

Target 2.8x 0.9x 1.5x 1.1x 0.6x 0.7x

Current 2.3x 1.0x 1.3x 1.1x 0.4x 0.6x

Trough 1.7x

(Aug-98)

0.6x

(Mar-09)

0.7x

(Mar-09)

0.4x

(Sep-98)

0.3x

(Nov-08)

0.4x

(Oct-08)


Reiterate our cautious view on Hong Kong banks We believe that more sophisticated, international and markets-oriented banks will be the biggest beneficiaries of RMB internationalisation. We prefer HSBC (5 HK, 1-OW, PT HK$93) and Standard Chartered (2888 HK, 1-OW, PT HK$231). Please refer to our recent publications HSBC: Restructuring, growth and resilience, dated 9 September 2011, and UK Banks: Chink in the Clouds, dated 8 September 2011.

We have lowered our price targets for the other local Hong Kong banks to reflect slower credit growth, weaker market-related fee income and lower margin assumptions.

Of the local Hong Kong banks, Hang Seng Bank remains the most defensive, in our view. We lower out PT to HK$115.7 (from HK$123.2) and maintain our 2-EW rating. We like Hang Seng Bank’s strong liquidity position, which will allow it to re-price credit and defend itself against a downturn in the global economy. It has the best risk management track record among peers and the best PPOP coverage vs long-term historical credit costs.

For BOCHK, we lower our PT to HK$20 (from HK$20.9) and maintain a 2-EW rating. BOCHK is more susceptible to the risks associated with RMB internationalisation as the largest


10 October 2011 40

offshore RMB deposit taker in Hong Kong (33% market share at June 2011). Our view may change if more beneficial regulations are introduced to assist the Hong Kong banking industry to execute development of the offshore RMB market.

Bank of East Asia remains our least preferred pick; we maintain our 3-UW rating and lower our PT to HK$21.7 (from HK$29.6 previously) as we believe China’s 75% LDR requirement will continue to be a constraint on BEA China’s loan growth potential owing to BEA’s weaker deposit franchise relative to domestic Chinese banks. In addition, margins will continue to remain under pressure as BEA attempts to retain and attract more RMB deposits. A key upside risk is continued buying by Guoco (BEA’s second largest shareholder with 13% stake) which may provide share price support from the downside.

We leave our ratings unchanged for Dah Sing names at 2-EW and Wing Hang Bank at 3-UW, but cut PTs to HK$7.8 for DSBG (from HK$9.3), HK$31.6 for DSF (from HK$37.4) and HK$61.4 for WHB (from HK$68.9) reflecting our lower earnings estimates and removal of a special premium accounting for market factors. DSBG/DSF and WHB will be subject to higher funding costs on rising HK$ deposit competition and potential migration of demand deposits in time. On a relative basis, we believe the Dah Sing names have less downside risk, trading at just 0.4-0.6x FY12E P/B.

A key upside risk to the mid-cap banks is potential sector M&A activity (a long-running theme discussed in the media, including Bloomberg 28 September 2009). For example, Wing Hang Bank may reportedly be of interest to one of the Big 4 Mainland banks. Bloomberg reported possible interest from ICBC on 9 September 2010. However, we believe that corporate action is unlikely at the currently depressed valuations.


10 October 2011 41

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

x

1 yr forward P/B Avg -1SD +1SD

0.5

1.0

1.5

2.0

2.5

3.0

02 03 04 05 06 07 08 09 10 11

x


Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

93 95 97 99 01 03 05 07 09

x


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

93 95 97 99 01 03 05 07 09

x



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

93 95 97 99 01 03 05 07 09

x


0.0

0.5

1.0

1.5

2.0

2.5

04 05 05 06 06 07 07 08 08 09 09 10 10 11 11

x



Figure 54: Hang Seng Bank – 1 yr forward P/B Figure 55: BOCHK – 1 yr forward P/B

Figure 56: BEA – 1 yr forward P/B Figure 57: WHB – 1 yr forward P/B

Figure 58: DSF – 1 yr forward P/B Figure 59: DSBG – 1 yr forward P/B


10 October 2011 42

COMPANY FINANCIALS


10 October 2011 43

COMPANY SNAPSHOT

Bank of China (Hong Kong) Asia ex-Japan Banks

Income statement (HK$mn) 2010A 2011E 2012E 2013E CAGR

Net interest income 18,734 20,270 22,117 24,226 8.9% Stock Rating 2-EQUAL WEIGHTNon-interest income 8,774 11,186 13,749 15,454 20.8% Sector View 2-NEUTRALOperating income 27,508 31,456 35,866 39,680 13.0% Price (07-Oct-2011) HK$16.76Operating expenses (9,584) (9,953) (11,140) (12,424) 9.0% Price Target HK$20Pre-provision earnings 17,924 21,502 24,726 27,256 15.0% Ticker 2388 HK/2388.HKLoan-loss provisions 315 (259) (1,097) (1,990) NA

Pre-tax income 18,239 21,243 23,629 25,266 11.5% Investment case

Net income 16,196 20,323 17,974 19,255 5.9%

Balance sheet (HK$mn) CAGRTotal assets 1,661,040 1,717,685 1,940,338 2,129,642 8.6%Risk-weighted assets 690,597 707,813 765,561 815,581 5.7%

Non-performing loans (NPLs) 867 575 790 1,765 26.7%Loans 613,219 696,625 736,755 763,284 7.6%Deposits 1,027,033 1,164,809 1,333,837 1,482,070 13.0%Interest-earning assets 1,255,879 1,704,942 1,761,188 1,970,512 16.2% Upside case HK$23.8Tier 1 77,943 86,996 97,535 108,883 11.8%

Core Tie r 1 77,943 86,996 97,535 108,883 11.8%

Shareholders' equity 118,289 132,551 140,043 148,063 7.8%

Loan/deposit ratio 59.7 59.8 55.2 51.5 -4.8%

Valuation and leverage metrics AverageP/E (x) 10.9 8.7 9.9 9.2 9.7

P/B (tangible)(x) 1.5 1.3 1.3 1.2 1.3 Downside case HK$10.6Dividend yield (%) 5.8 7.0 6.6 7.1 6.6

P/PPOP (x) 9.9 8.2 7.2 6.5 7.9

Tier 1 (%) 11.3 12.3 12.7 13.4 12.4

ROOT 1 (%) 22.5 26.1 20.7 19.7 22.2

PD ROOT 1 (%) 8.2 10.0 7.2 6.9 8.1

Tangible asset/tan equity (x) 16.2 15.3 16.3 16.9 16.2

Margin and return data (%) Average Upside/downside scenariosReturn on RWAs 2.47 2.91 2.44 2.44 2.56

ROA 1.13 1.20 0.98 0.95 1.06

ROE (tangible) 14.5 16.2 13.2 13.4 14.3

PPOP growth 28.8 20.0 15.0 10.2 18.5

Net interest margin 1.49 1.19 1.26 1.23 1.29

Cost/income 34.8 31.6 31.1 31.3 32.2

Impairment cost (% GLAA) -0.01 0.07 0.15 0.27 0.12

Credit quality ratios (%) Average

Loan-loss provisions/loans 0.38 0.35 0.36 0.47 0.39

Collective provs/total loans 0.32 0.33 0.40 0.50 0.39 Source: Thomson Reuters DataStream, Barclays Capital est.

Coverage ratio 267 384 319 195 291 Loan mix 1H11NPL ratio 0.14 0.08 0.11 0.23 0.14

Per share data CAGR

EPS (HK$) 1.53 1.92 1.70 1.82 5.9%

Dividend per share (HK$) 0.97 1.18 1.11 1.19 6.9%

BPS (HK$) 11.2 12.5 13.2 14.0 7.8%

Payout ratio 63% 61% 65% 65% 0.9%

Diluted shares (m) 10,573 10,573 10,573 10,573 0.0%

Source: Company data, Barclays Capital estimates Note: FY end Dec. Source: Company data, Barclays Capital

Why a 2-Equal Weight? We believe currentvaluations already take into account BOCHK's widercurrency mismatch between loans and deposits vspeers.

The opening up of more substantial RMB investmentoutlets and new PBOC/HKMA initiatives. Faster-than-expected pace of RMB liberalisation could generatesignificant margin upside. Upside case based target14x P/E.

A double dip in the US economy would adverselyaffect BOCHK's investment portfolio and assetquality. Downside case based on historical trough0.8x P/B.

Other corp19%

Offshore27%

Other retail3%

Trade finance9%

Mortgages27%

Comm. Property

15%

DownsideCase

$10.6(-36.7%)

PriceTarget

$15.4(-8.11%)

UpsideCase

$23.8(42.0%)

5

1015

20

2530

35

27-Oct-10 7-Oct-11

DownsideCase

$10.6(-36.7%) Price

Target

$20(19.3%)

UpsideCase

$23.8(42.0%)

5

1015

20

2530

35

27-Oct-10 7-Oct-11


10 October 2011 44

COMPANY SNAPSHOT

Hang Seng Bank Asia ex-Japan Banks

Income statement (HK$mn) 2010A 2011E 2012E 2013E CAGRNet interest income 14,300 15,324 15,907 17,789 7.5% Stock Rating 2-EQUAL WEIGHTNon-interest income 7,530 7,246 7,611 8,335 3.4% Sector View 2-NEUTRALOperating income 21,830 22,570 23,518 26,124 6.2% Price (07-Oct-2011) HK$92.75Operating expenses (7,355) (7,944) (8,585) (9,258) 8.0% Price Target HK$115.7Pre-provision earnings 14,475 14,626 14,933 16,866 5.2% Ticker 0011.HKLoan-loss provisions (390) (404) (1,004) (1,110) 41.7%


Net income 14,917 16,063 16,479 18,697 7.8%

Balance sheet (HK$mn) CAGRTotal assets 916,911 1,003,342 1,072,988 1,137,400 7.4%Risk-weighted assets 313,437 336,533 368,928 423,007 10.5%

Non-performing loans (NPLs) 1,990 1,613 1,779 2,256 4.3%Loans 474,473 522,792 566,995 605,144 8.4%Deposits 686,723 747,040 823,612 890,819 9.1%Interest-earning assets 802,464 891,174 954,769 1,016,856 8.2% Upside case HK$152.5Tier 1 33,898 34,937 38,916 43,822 8.9%

Core Tie r 1 33,898 34,937 38,916 43,822 8.9%





P/PPOP (x) 12.3 12.1 11.9 10.5 11.7

Tier 1 (%) 10.8 10.4 10.5 10.4 10.5

ROOT 1 (%) 46.0 47.4 47.2 48.0 47.1

PD ROOT 1 (%) 15.3 16.6 16.5 16.8 16.3



ROA 1.71 1.67 1.59 1.69 1.66

ROE (tangible) 22.6 22.1 21.0 22.1 22.0

PPOP growth 3.2 1.0 2.1 12.9 4.8


Cost/income 33.7 35.2 36.5 35.4 35.2

Impairment cost (% GLAA) 0.09 0.08 0.18 0.19 0.14

Credit quality ratios (%) AverageLoan-loss provisions/loans 0.39 0.33 0.37 0.41 0.37



Per share data CAGREPS (HK$) 7.80 8.40 8.62 9.78 7.8%


NTAPS (HK$) 36.6 39.5 42.5 45.9 7.8%

Payout ratio 67% 65% 65% 65% -0.8%

Diluted shares (mn) 1,912 1,912 1,912 1,912 0.0%

Source: Company data, Barclays Capital estimates Source: Company data, Barclays Capital

Why a 2-Equal Weight? Despite lower mortgagevolumes, we believe that HSB will continue to benefitfrom corporate lending, wealth management andbenign asset quality. We expect a progressivedividend policy and forecast a payout of 65%, whichis down from 85% historically, mirroring HSBC(parent)'s capital conservation mode.

An improvement in HK$ liquidity and sustained lowcredit costs. A faster-than-expected pace of RMBliberalisation could drive RMB lending and RMBinvestment outlets.

Potentially punitive changes to capital requirementsand further capital raising by HSB's associate,Industrial Bank, would lower capital adequacy. Assetquality deterioration when interest rates begin torise. Downside target based on historical trough 1.7xP/B.

Comm.

property26%

Trade finance

16%

Offshore15%

Other retail6%

Mortgages (in HOS)

24%

Other corp13%

DownsideCase

$72.2(-22.1%)

PriceTarget

$100.9(8.7%)

UpsideCase

$152.5(64.4%)

36

86

136

186

27-Oct-10 7-Oct-11

DownsideCase

$72.2(-22.1%) Price

Target

$115.7(24.7%)

UpsideCase

$152.5(64.4%)

36

86

136

186

27-Oct-10 7-Oct-11


10 October 2011 45

COMPANY SNAPSHOT

Bank of East Asia Asia ex-Japan Banks


Net interest income 7,543 8,930 9,597 10,939 13.2% Stock Rating 3-UNDERWEIGHTNon-interest income 3,583 4,535 4,744 4,996 11.7% Sector View 2-NEUTRALOperating income 11,126 13,465 14,341 15,935 12.7% Price (07-Oct-2011) HK$24.95Operating expenses (6,904) (7,883) (8,924) (9,923) 12.9% Price Target HK$21.7Pre-provision earnings 4,222 5,582 5,418 6,012 12.5% Ticker 23 HK/0023.HKLoan-loss provisions (306) (144) (762) (1,103) NA


Net income 4,224 5,020 4,286 4,514 2.2%

Balance sheet (HK$mn) CAGRTotal assets 534,193 626,604 691,284 752,685 12.1%Risk-weighted assets 341,898 398,291 445,944 494,756 13.1%

Non-performing loans (NPLs) 1,592 1,233 1,052 972 -15.2%Loans 297,044 330,634 372,998 410,014 11.3%Deposits 425,419 504,225 555,908 612,888 12.9%Interest-earning assets 423,333 523,290 580,642 639,727 14.8% Upside case HK$31.8Tier 1 33,506 35,832 37,784 39,838 5.9%

Core Tie r 1 33,506 35,832 37,784 39,838 5.9%





P/PPOP (x) 11.9 9.2 9.4 8.5 9.8

Tier 1 (%) 9.8 10.4 9.8 9.2 9.8

ROOT 1 (%) 15.9 15.0 10.3 10.3 12.9

PD ROOT 1 (%) 8.7 7.5 5.2 5.2 6.6



ROA 0.87 0.86 0.65 0.63 0.75

ROE (tangible) 9.6 10.2 8.4 8.5 9.1

PPOP growth 4.0 32.2 -2.9 11.0 11.1


Cost/income 62.1 58.5 62.2 62.3 61.3





Coverage ratio 69 72 93 136 93 Loan mix - 1H11NPL ratio 0.54 0.37 0.28 0.24 0.36

Per share data CAGR

EPS (HK$) 1.93 2.29 1.93 2.04 1.9%


BPS (HK$) 24.1 24.4 25.5 26.6 3.3%

Payout ratio 49% 54% 54% 54% 3.4%

Diluted shares (m) 2,020 2,051 2,051 2,051 0.5%


Why a 3-Underweight? We believe BEA is notgenerating capital to sustain Mainland expansion.China profits may slow as NII growth momentumslows and expenses pick up. In addition, its HongKong's margins will remain under pressure in atightening liquidity environment.

Expectation of any potential corporate action (Guocolast increased its stake to 10.06% in Feb 2011)would be positive. Stronger-than-expected Chinalending and faster-than-expected hike in HIBORrelative to Prime, since BEA benefits as a net lenderin the interbank market.

Significant rise in costs from Mainland expansion,BEA already runs at a higher-than-peer cost/incomeratio of ~60%. Further tightening measures in Chinawould slow business on the Mainland. Downsidecase based on trough historical P/B of 0.6x.

China41%

Trade finance

3%Other retail

5%

Mortgages10%

Other corp11%

Comm. Property

17%

Other offshore

13%

DownsideCase

$15.3(-38.6%)

PriceTarget

$19.1(-23.4%) Upside

Case

$31.8(27.4%)

7

17

27

37

27-Oct-10 7-Oct-11

DownsideCase

$15.3(-38.6%)

PriceTarget

$21.7(-13.0%)

UpsideCase

$31.8(27.4%)

7

17

27

37

27-Oct-10 7-Oct-11


10 October 2011 46

COMPANY SNAPSHOT

Wing Hang Bank Asia ex-Japan Banks


Net interest income 2,644 2,821 2,939 3,179 6.3% Stock Rating 3-UNDERWEIGHTNon-interest income 654 781 908 961 13.7% Sector View 2-NEUTRALOperating income 3,298 3,602 3,847 4,140 7.9% Price (07-Oct-2011) HK$61.5Operating expenses (1,610) (1,595) (1,732) (1,890) 5.5% Price Target HK$61.4Pre-provision earnings 1,688 2,007 2,115 2,250 10.1% Ticker 302 HK/0302.HKLoan-loss provisions 65 (92) (232) (375) NA


Net income 1,626 2,053 1,693 1,686 1.2%


Non-performing loans (NPLs) 301 311 486 759 36.1%Loans 97,254 113,863 121,291 128,856 9.8%Deposits 135,939 158,984 171,957 185,989 11.0%Interest-earning assets 143,932 167,570 181,144 192,370 10.2% Upside case HK$110Tier 1 9,690 11,069 12,120 13,082 10.5%

Core Tie r 1 9,690 11,069 12,120 13,082 10.5%




P/B (tangible)(x) 1.3 1.1 1.0 1.0 1.1 Downside case HK$44Dividend yield (%) 2.2 3.4 3.2 3.7 3.1

P/PPOP (x) 10.8 9.2 8.7 8.2 9.2

Tier 1 (%) 10.3 10.1 10.2 10.2 10.2

ROOT 1 (%) 19.0 21.2 15.3 13.9 17.4

PD ROOT 1 (%) 14.2 14.8 9.9 8.3 11.8

Tangible asset/tang. equity (x) 12.0 12.3 12.1 12.1 12.1


ROA 1.06 1.19 0.89 0.83 0.99

ROE (tangible) 12.1 13.3 9.9 9.3 11.2

PPOP growth 31.8 18.9 5.4 6.4 15.6


Cost/income 48.8 44.3 45.0 45.7 45.9

Impairment cost (% GLAA) -0.07 0.09 0.20 0.30 0.13





Per share data CAGR

EPS (HK$) 5.46 6.84 5.64 5.62 0.9%


BPS (HK$) 48.0 54.9 58.6 62.0 8.9%

Payout ratio 25% 30% 35% 40% 16.9%

Diluted shares (mn) 298 300 300 300 0.3%


Why a 3-Underweight? Rising deposit competitionand HK$/US$ liquidity squeeze will lead to marginpressure and constrain domestic lending capability.

M&A is a recurring theme in the HK banking sector.Past deals in Hong Kong were as high as 3.1x P/B(for China Merchants and Wing Lung Bank tie-up in2008).

Rising margin pressure from competition forHK$/US$ deposits. Weakness in G3 economies anda tightening cycle in Mainland China may result inasset quality deterioration. Downside target basedon historical trough P/B of 0.8x.

Other corp17%

China21%

Macau12%

Other retail6%

Trade Fin10%

Mortgages18%

Comm property

16%

DownsideCase

$44(-28.4%)

PriceTarget

$51.5(-16.2%) Upside

Case

$110(78.8%)

2242

6282

102

122142

27-Oct-10 7-Oct-11

DownsideCase

$44(-28.4%)

PriceTarget

$61.4(-0.16%) Upside

Case

$110(78.8%)

2242

6282

102

122142

27-Oct-10 7-Oct-11


10 October 2011 47

COMPANY SNAPSHOT

Dah Sing Banking Group Asia ex-Japan Banks


Net interest income 1,956 1,922 1,840 2,058 1.7% Stock Rating 2-EQUAL WEIGHTNon-interest income 470 510 533 565 6.3% Sector View 2-NEUTRALOperating income 2,426 2,432 2,372 2,623 2.6% Price (07-Oct-2011) HK$6.92Operating expenses (1,278) (1,359) (1,427) (1,498) 5.4% Price Target HK$7.80Pre-provision earnings 1,147 1,073 946 1,125 -0.6% Ticker 2356 HK/2356.HKLoan-loss provisions (98) (174) (268) (386) NA


Net income 1,074 1,113 999 1,165 2.8%


Non-performing loans (NPLs) 182 321 551 797 63.5%Loans 72,749 80,201 84,736 88,577 6.8%Deposits 102,027 108,101 112,475 117,026 4.7%Interest-earning assets 123,924 132,281 138,665 144,424 5.2% Upside case HK$18.4Tier 1 8,481 9,260 9,960 10,775 8.3%

Core Tie r 1 8,481 9,260 9,960 10,775 8.3%


Loan/deposit ratio 71.3 74.2 75.3 75.7 2.0%



P/PPOP (x) 7.4 7.9 9.0 7.5 7.9

Tier 1 (%) 10.2 10.3 10.4 10.6 10.4

ROOT 1 (%) 13.9 13.1 10.8 11.7 12.4

PD ROOT 1 (%) 9.8 9.2 7.6 8.2 8.7



ROA 0.88 0.82 0.69 0.77 0.79

ROE (tangible) 8.8 8.0 6.8 7.6 7.8

PPOP growth 88.1 -6.5 -11.9 19.0 22.2


Cost/income 52.7 55.9 60.1 57.1 56.5




Collective provs/total loans 0.42 0.44 0.45 0.48 0.45 Source: Thomsone Reuters DataStream, Barclays Capital est.


Per share data CAGR

EPS (HK$) 0.92 0.91 0.82 0.95 1.0%


BPS (HK$) 11.1 11.7 12.3 12.9 5.4%

Payout ratio 29% 30% 30% 30% 1.7%

Diluted shares (mn) 1,223 1,223 1,223 1,223 0.0%

Source: Company data, Barclays Capital estimates Source: Company data, Barclays Capital

Why a 2-Equal Weight? We believe that slower-than-industry earnings growth from tighter liquidity andmargin pressure will persist in FY11E and FY12E.DSF/DSBG are fairly valued, in our view, given strongmacro headwinds.

Market speculation on potential banking sector M&Aactivity (e.g. Bloomberg, 28 October 2009). Upsidecase 1.5x P/B12E.

Faster-than-expected asset quality deterioration. Apotential listing of BoCQ could dilute Dah Sing'sstake, as Dah Sing does not have QFII status.Downside case based on historical trough 0.4x P/B.

Other corp15%

Trade finance7%

China8%

Macau9%

Comm. Property

19%

Other offshore

11%

Other retail10%

Mortgages (inc HOS)

21%

DownsideCase

$4.9(-29.1%) Price

Target

$5.6(-19.0%) Upside

Case

$18.4(165.%)

2

7

12

17

22

27-Oct-10 7-Oct-11

DownsideCase

$4.9(-29.1%) Price

Target

$7.8(12.7%) Upside

Case

$18.4(165.%)

2

7

12

17

22

27-Oct-10 7-Oct-11


10 October 2011 48

COMPANY SNAPSHOT

Dah Sing Financial Holdings Asia ex-Japan Banks


Net interest income 2,179 2,110 2,034 2,261 1.2% Stock Rating 2-EQUAL WEIGHTNon-interest income 613 590 745 810 9.7% Sector View 2-NEUTRALOperating income 2,793 2,700 2,779 3,071 3.2% Price (07-Oct-2011) HK$20.60Operating expenses (1,454) (1,463) (1,585) (1,673) 4.8% Price Target HK$31.60Pre-provision earnings 1,339 1,237 1,194 1,399 1.5% Ticker 440 HK/0440.HKLoan-loss provisions (98) (174) (268) (386) NA


Net income 1,006 1,000 982 1,130 3.9%


Non-performing loans (NPLs) 182 321 551 797 63.5%Loans 72,749 80,201 84,736 88,577 6.8%Deposits 100,873 108,101 112,475 117,026 5.1%Interest-earning assets 131,622 141,991 148,925 155,419 5.7% Upside case HK$72.1Tier 1 8,481 9,260 9,960 10,775 8.3%

Core Tie r 1 8,481 9,260 9,960 10,775 8.3%


Loan/deposit ratio 72.1 74.2 75.3 75.7 1.6%



P/PPOP (x) 4.5 4.9 5.1 4.3 4.7

Tier 1 (%) 10.2 10.3 10.4 10.6 10.4

ROOT 1 (%) 13.1 11.8 10.6 11.3 11.7

PD ROOT 1 (%) 9.1 8.3 7.4 7.9 8.2



ROA 0.76 0.68 0.63 0.69 0.69

ROE (tangible) 7.9 7.0 6.6 7.3 7.2

PPOP growth 56.8 -7.6 -3.5 17.2 15.7


Cost/income 52.1 54.2 57.0 54.5 54.4




Collective provs/total loans 0.42 0.44 0.45 0.48 0.45 Source: Thomson Reuters Datastream, Barclays Capital est.


Per share data CAGR

EPS (HK$) 3.67 3.42 3.35 3.86 1.7%


BPS (HK$) 48.3 49.5 51.5 54.2 3.9%

Payout ratio 28% 30% 30% 30% 2.0%

Diluted shares (mn) 293 293 293 293 0.0%


Why a 2-Equal Weight? We believe that slower-than-industry earnings growth from tighter liquidity andmargin pressure will persist in FY11E and FY12E. At1x 1-year forward P/B, DSF/DSBG are fairly valued,in our view.

Market speculation on potential banking sector M&Aactivity (e.g. Bloomberg, 28 October 2009). Upsidecase 1.4x P/B12E.

Faster-than-expected asset quality deterioration. Apotential listing of BoCQ could dilute Dah Sing'sstake, as Dah Sing does not have QFII status.Downside case based on historical trough P/B of0.3x.

Other corp15%

Trade finance7%

Macau

9%

China8%

Other retail10%

Comm. Property

19%

Other offshore11%

Mortgages21%

DownsideCase

$15.4(-25.2%) Price

Target

$19.9(-3.39%) Upside

Case

$72.1(250%)

7

27

47

67

87

27-Oct-10 7-Oct-11

DownsideCase

$15.4(-25.2%) Price

Target

$31.6(53.3%) Upside

Case

$72.1(250%)

7

27

47

67

87

27-Oct-10 7-Oct-11


10 October 2011 49

Valuation Methodology and Risks

Asia ex-Japan Banks

Bank of China (Hong Kong) Ltd. (2388 HK / 2388.HK)

Valuation Methodology: We incorporate seven standalone valuation techniques in a blended (average) methodology. We include a 3-stage dividend discount model; 1-year forward Gordon Growth Model (ROE-g / COE-g); application of historic P/B, P/E and P/PPOP to one-year forward estimates; and the value of Normalised ROE and Normalised EPS.

Risks which May Impede the Achievement of the Price Target: Upside risks include: more RMB investment alternatives and new RMB liberalisation measures from the mainland regulators; stronger-than-expected mainland China loan growth; and faster-than-expected hike in Hibor.

Bank of East Asia Ltd. (23 HK / 0023.HK)


Risks which May Impede the Achievement of the Price Target: Upside risks include: continued newsflow on potential corporate action; stronger-than-expected mainland China loan and deposit growth; and faster-than-expected hike in Hibor, from which BEA benefits as net lender in the interbank market.

Dah Sing Banking Group Ltd. (2356 HK / 2356.HK)


Risks which May Impede the Achievement of the Price Target: Upside risks include: possible M&A activity among the small- to medium-sized Hong Kong banks; a bigger-than-expected profit contribution from Bank of Chongqing; faster-than-expected growth in loans; and better-than-expected asset quality due to a strong domestic economic recovery, which benefits SMEs and the transport sector. Downside risks: potential dilution from any BoCQ capital raising activity or A-share listing; larger than expected pressure on margin from higher funding costs and slow loan upward repricing.

Dah Sing Financial Holdings Ltd. (440 HK / 0440.HK)


Risks which May Impede the Achievement of the Price Target: Upside risks include: possible M&A activity among the small- to medium-sized Hong Kong banks; a bigger-than-expected profit contribution from Bank of Chongqing; faster-than-expected growth in loans; and better-than-expected asset quality due to a strong domestic economic recovery, which benefits SMEs and the transport sector. Downside risks: potential dilution from any BoCQ capital raising activity or A-share listing; larger than expected pressure on margin from higher funding costs and slow loan upward repricing.

Hang Seng Bank Ltd. (11 HK / 0011.HK)


Risks which May Impede the Achievement of the Price Target: Key upside risks: a faster-than-expected hike in the Prime rate which is beneficial for margins; and stronger-than-expected corporate and morgage growth. Key downside risks: a longer-than-expected low interest rate environment; and further potential capital management plans by Industrial Bank, which may put pressure on Hang Seng Bank's core capital adequacy ratio.

Wing Hang Bank Ltd. (302 HK / 0302.HK)


Risks which May Impede the Achievement of the Price Target: Upside risks include: a bigger-than-expected contribution from mainland China and Macau business; and possible M&A activity among the small- to medium-sized Hong Kong banks.

Source: Barclays Capital


10 October 2011 50

ANALYST(S) CERTIFICATION(S)

I, Sharnie Wong, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related tothe specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’saccount.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Primary Stocks (Ticker, Date, Price)

Bank of China (Hong Kong) Ltd. (2388.HK, 07-Oct-2011, HKD 16.76), 2-Equal Weight/2-Neutral

Bank of East Asia Ltd. (0023.HK, 07-Oct-2011, HKD 24.95), 3-Underweight/2-Neutral

Dah Sing Banking Group Ltd. (2356.HK, 07-Oct-2011, HKD 6.92), 2-Equal Weight/2-Neutral

Dah Sing Financial Holdings Ltd. (0440.HK, 07-Oct-2011, HKD 20.60), 2-Equal Weight/2-Neutral

Hang Seng Bank Ltd. (0011.HK, 07-Oct-2011, HKD 92.75), 2-Equal Weight/2-Neutral

HSBC Holdings PLC (0005.HK, 07-Oct-2011, HKD 61.60), 1-Overweight/2-Neutral

Standard Chartered PLC (2888.HK, 07-Oct-2011, HKD 161.10), 1-Overweight/2-Neutral

Wing Hang Bank Ltd. (0302.HK, 07-Oct-2011, HKD 61.50), 3-Underweight/2-Neutral

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sectorcoverage universe”).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":

Asia ex-Japan Banks

Agricultural Bank of China Limited (1288.HK) Bank Central Asia (BBCA.JK) Bank Danamon Indonesia (BDMN.JK)


10 October 2011 51


Bank Mandiri (BMRI.JK) Bank Negara Indonesia (BBNI.JK) Bank of China (Hong Kong) Ltd. (2388.HK)

Bank of China Limited (3988.HK) Bank of Communications Co., Ltd. (3328.HK)

Bank of East Asia Ltd. (0023.HK)

Bank Rakyat Indonesia (BBRI.JK) Bank Tabungan Negara (BBTN.JK) Chang Hwa Commercial Bank (2801.TW)

China CITIC Bank Corporation (0998.HK) China Construction Bank Corp. (0939.HK) China Merchants Bank Co., Ltd. (3968.HK)

China Minsheng Banking Corp., Ltd. (1988.HK)

Chinatrust Financial Holding (2891.TW) Chongqing Rural Commercial Bank (3618.HK)

Dah Sing Banking Group Ltd. (2356.HK) Dah Sing Financial Holdings Ltd. (0440.HK) First Financial Holding (2892.TW)

Hang Seng Bank Ltd. (0011.HK) HSBC Holdings PLC (0005.HK) Industrial & Commercial Bank of China Ltd. (1398.HK)

Mega Financial Holding (2886.TW) SinoPac Financial Holdings (2890.TW) Standard Chartered PLC (2888.HK)

Taishin Financial Holding (2887.TW) Wing Hang Bank Ltd. (0302.HK)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 1832 companies under coverage.

44% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 59% of companies with this rating are investment banking clients of the Firm.

42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 51% of companies with this rating are investment banking clients of the Firm.

12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 36% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Capital Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period.

Barclays Capital offices involved in the production of equity research:

London

Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York

Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Capital Japan Limited (BCJL, Tokyo)

São Paulo

Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg

Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

Mexico City

Barclays Bank Mexico, S.A. (BBMX, Mexico City)

Taiwan

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)

Seoul

Barclays Capital Securities Limited (BCSL, Seoul)

Mumbai

Barclays Capital Securities (India) Private Limited (BSIPL, Mumbai)


10 October 2011 52


Singapore

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

DISCLAIMER:

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It isprovided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties ofmerchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients ofthis report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors,partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to bereliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject tochange, and Barclays Capital has no obligation to update its opinions or the information in this publication.

The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individualfinancial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends thatinvestors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). Theinformation herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.

This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of theFinancial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professionalexperience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange.

Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewithaccepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.

Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise.

This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca). To access Barclays Capitalpolicy on the dissemination of research reports, please go to http://www.barcap.com/Client+offering/Research/Research+Policy.

Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial servicesprovider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. Thispublication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person orentity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane,Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital.

In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutionalinvestors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial ServicesAgency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143.

Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority.Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.

This material is issued in Taiwan by Barclays Capital Securities Taiwan Limited. This material on securities not traded in Taiwan is not to be construed as'recommendation' in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays Capital.

This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch.

All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/INF 231292732 (NSE), INB/INF 011292738(BSE), Registered Office: 208 | Ceejay House | Dr. Annie Besant Road | Shivsagar Estate | Worli | Mumbai - 400 018 | India, Phone: + 91 22 67196363). Other research reports are distributed in India by Barclays Bank PLC, India Branch.

Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).

This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd.

This material is distributed in Brazil by Banco Barclays S.A.

This material is distributed in Mexico by Barclays Bank Mexico, S.A.

Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLC-DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence.

Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporatedoutside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi(Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi).

Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar.

This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined by the DFSA, and Business Customers as defined by the QFCRA.

This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option oradvice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number:1010283024.

This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21.

This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles QuayLevel 28, South Tower, Singapore 048583.

Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined byAustralian Corporations Act 2001.

IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be taxadvice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other mattersaddressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.

Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference.

© Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of BarclaysCapital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional informationregarding this publication will be furnished upon request.

US08-000001

Download - Barclays Capital - Hong Kong Banks

Top Related