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Global Equity ResearchDecember 8, 2005

Global Gambits - 2006The Right Moves for Right Now

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The following is a chapter from Global Gambits � The Right Moves for Right Now, dated December 8, 2005. This chapter is presented for convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is available on MorganMarkets.

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December 8, 2005

Global Equity Research Global Gambits - 2006 — The Right Moves for Right Now See jpmorganSaVanT.com for global sector valuation tools

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Banks The Bar-Bell Approach: Growth and Balance Sheet Restructuring Key Drivers • We take a ‘bar-bell’ approach to the Global Banking

sector, buying: (1) balance sheet restructuring, with a preference for Japan and Germany, and (2) growth, particularly in emerging Europe and Asia.

• We are Neutral on European banks. However, emerging Europe (CEE and Greece) offers attractive growth, in our view. As most of these countries are part of the EMU, the cost of equity is relatively low in combination with high growth (we expect 25% EPS growth in Greece 2005-07E, compared to 9% in Europe ex-CEE).

• In Asia, we see continued growth within select markets such as India and the Middle East, although with some downside risk in terms of asset quality in areas such as Taiwan. Overall, we believe, well-positioned banks can see up to 15% annual growth 2006E-07E. At this point we prefer Asian and CEE banks to Latam banks for growth.

• At the other end of the spectrum, we take a positive view on banks looking to degear problematic balance sheets, such as the Japanese banks, where NPLs have improved substantially, helped by positive trends in property prices. Also, in UniCredito we see significant balance sheet restructuring potential in acquired HVB, in Germany.

• We are underweight US regional banks. In our view, a flatter yield curve will put pressure on asset-liability management margins. In addition, we expect the Fed to raise policy rates to 5% by May 2006 (following 300bps hikes since June 2004) which could lead to both a slowdown in lending and potentially weaker asset quality. In addition, we see continued pricing pressure within US regional banks.

• Within the developed markets subsector, we prefer retail banks (with the exception of US regional banks) to investment banks and wholesale banks. In our view, expected rate hikes will help retail margins in Europe, while IBs could see a negative impact both on fixed income revenues and currently on corporate loan losses.

Our Non-Consensus Views Our top picks reflect our ‘bar-bell’ approach:

• For growth, we are Overweight on Standard Chartered, which we consider to be in the ‘sweet spot' in Asian markets. We also favor National Bank of Greece for its exposure to structural banking growth in Greece and positive gearing to rising interest rates through its large deposit base.

• Our top pick in the Japanese market is Mitsubishi UFJ Financial Group with good earnings momentum and expectations of continuous steepening in the yield curve, positive trends in loan growth, and continued rise in collateral values.

• We see UniCredito as uniquely positioned to benefit from both themes: (1) being a consolidator in the high growth CEE markets, and (2) having significant potential to restructure HVB’s German loan book.

• Our core global Underweights are: (1) Fifth Third, where we see margin pressure mainly on the deposit business, and potential asset quality risk as Fifth Third has leveraged its balance sheet, (2) Monte Paschi de Siena, currently at a 30% valuation premium to the Italian banking sector, and (3) Chinatrust Financial Holdings due to its potential exposure to deteriorating Taiwanese asset quality.

Global Sector Coordinator

Kian Abouhossein (44-20) 7325-1523 [email protected] J.P. Morgan Securities Ltd. Full sector coverage details on page 77

December 8, 2005


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Banks: Top Picks Company Key Financials Rationale and Catalysts Mitsubishi UFJ Financial Group Recommendation: Overweight Fiscal EPS (Local): Year-end March Ticker: 8306JP / 8306.T 2004 2005 2006E NM 68,903 76,156 Exchange: Tokyo Stock Exchange P/E (Calendar) Price (Local): ¥1510000 2005E 2006EMkt Cap (US$): 126.8 bn 21.9 19.8 Analyst: Katsuhito Sasajima P/B Phone: (81-3) 5545-8679 2005E 2006EEmail: [email protected] 2.5 2.2

• Mitsubishi UFJ Financial Group announced plans to redeem a portion of government-owned preferred shares this October—a surprising move, in our opinion. We think the decision stems from an increase in retained earnings, as both Mitsubishi Tokyo Financial Group and UFJ Holdings substantially raised their 1H FY05 consolidated net profit estimates in late September. We think Mitsubishi UFJ FG will likely repay the remaining ¥1,076.4 billion of government-provided capital in 2H FY05.

• The recent succession of moves by MTFG/UFJ, including a retail banking partnership with Norinchukin Bank, has been noteworthy.

• For our base-case scenario, we assume no Y/Y change in net operating profit and credit costs of 30bps, and for our best-case scenario, benefits from an improved net interest margin and consolidated earnings contributions from the consumer finance and securities businesses. We use the undiluted number of shares in both cases.

Standard Chartered Plc Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: 2888 HK / 2888.HK 2004 2005E 2006E 9.16 10.67 12.18 Exchange: Hong Kong Stock Exchange P/E (Calendar) Price (Local): HK$170.90 2005E 2006EMkt Cap (US$): 28.9 bn 16.0 14.0 Analyst: Sunil Garg P/B Phone: (852) 2800-8518 2005E 2006EEmail: [email protected] 2.4 2.2

• Standard Chartered is cyclically well positioned to gain from growth opportunities in India and the Middle East, and at present there appears to be little credit stress in markets where Standard has a meaningful business.

• Earnings momentum: We see Standard as being in a cyclical sweet spot which should allow the group to deliver 15% CAGR in earnings over 2005-06E. Upside risks to forecasts come from strength in the Middle East and KFB.

• KFB acquisition: Integration of KFB (in Korea) is progressing well and we see Standard delivering easy and early gains in this deal. We expect the transaction to be EPS accretive from the first full year (2006).

• Unique asset: Arguably, Standard has the only asset of its kind with a premium pan-Asian banking franchise. This uniqueness is also the reason why Standard is consistently the subject of M&A speculation (source: Bloomberg and Asian Wall Street Journal) . This supports valuations.

UniCredito Italiano Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: UC IM / CRDI.MI 2004 2005E 2006E 0.36 0.34 0.47 Exchange: Milan Stock Exchange P/E (Calendar) Price (Local): €5.36 2005E 2006EMkt Cap (US$): 39.8 bn 15.9 11.3 Analyst: Francesca Tondi P/B Phone: (44-20) 7325-1579 2005E 2006EEmail: [email protected] 1.8 1.6

• In our view, UCI is one of the most attractive banking stories in Europe, with cheap valuation, attractive earnings growth and a very appealing restructuring angle following its acquisition of HVB. With this acquisition, UCI will become the largest bank in CEE, with exposure to significant growth in this market.

• We assign a November 2006 target price of €5.9/share, based on our 2007E EPS estimates of €0.54. On our forecast, UCI trades on an 9.9x P/E for 2007E, an 11% discount to the European sector, with EPS growth double that of the sector.

• We believe that synergies targeted by management for the integration of HVB (€1 billion pre-tax) are very conservative, and we see further 15% upside potential to our 2007E EPS (to €0.62) and TP (to €6.8) from potentially higher synergies and further asset restructuring (currently we only include management’s synergies). Given HVB’s large balance sheet (€250 billion of RWA, nearly double those of UCI with a lower profitability) balance sheet de-gearing and asset disposals are going to be key actions. The initial sale of €1.8 billion NPLs by HVB is a step in the right direction and we expect further significant asset sales when UCI takes over.

• We expect an update of the integration in 1H06. Source: Company data, Datastream, JPMorgan estimates, JPMorgan SaVanT. Prices as of November 22, 2005.

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Banks: Top Picks (cont’d) Company Key Financials Rationale and Catalysts National Bank of Greece Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: ETE GA / NBGr.AT 2004 2005E 2006ETicker ADR: 0.90 2.00 2.60 Exchange: Athens Stock Exchange P/E (Calendar) Price (Local): €34.82 2005E 2006EMkt Cap (US$): 13.5 bn 17.4 13.4 Analyst: Paul Formanko P/B Phone: (44-20) 7325-6028 2005E 2006EEmail: [email protected] 4.1 3.5

• Strong underlying macro-economic fundamentals, an above EU-GDP growth, and relatively low banking penetration make Greek banking a very positive investment story, in our view. In this space, we like National and estimate its net profit growth at an average 25% between 2005 and 2007 and EPS to move up from €0.90 in end-2004 to €3.12 by end-2007. The stock has attractive valuations and is currently trading at 11.2 x 2007E earnings.

• National is a market leader with an estimated market share of around 23% in loans and 31% in deposits (end 2Q05). While 55% of its loan book consists of high yield asset mix of consumer and credit card loans, SME loans and mortgages, the bank has maintained its asset quality with gross NPLs remaining stable at 5% and provision coverage high at 78%.

• Revenues continue to rise supported by a stable NIM and the bank’s steady efforts at cost-reduction (C/I ratio down to 56% 2Q05 from 63% Y/Y). Management is also considering a second voluntary retirement program following the highly successful first one. National is also likely to benefit from potential rising interest rates in Europe next year due to its low cost retail deposit rate.

• The bank is increasingly focusing on expanding its presence in the high growth and potentially high dividend-paying Southern Emerging Europe region. Its favorable capital position (CAR of 15.7%, 2Q05, an estimated current Core Tier 1 of around 10%, post the sale of treasury shares and the Atlantic Bank of New York) is further supported by capital restructuring via the sale of subsidiaries in mature markets and non-core asset disposals. A low leverage balance sheet that is much better versus peers (loans/deposits ratio of 69% in 2Q05 versus Eurobank’s 138% and Alpha’s 117% in 2Q05) provides further liquidity to support the bank’s growth in the dynamic Greek and Balkan markets.

Source: Company data, Datastream, JPMorgan estimates, JPMorgan SaVanT. Prices as of November 22, 2005.

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Banks: Stocks to Underweight Company Key Financials Rationale and Catalysts Fifth Third Bancorp Recommendation: Underweight Fiscal EPS (Local): Year-end December Ticker: FITB US / FITB 2004 2005E 2006E 2.68 2.92 3.15 Exchange: NASDAQ P/E (Calendar) Price (Local): US$41.94 2005E 2006EMkt Cap (US$): 23.3 bn 14.4 13.3 Analyst: Vivek Juneja P/B Phone: (1-212) 622-6465 2005E 2006EEmail: [email protected] 2.5 2.4

• Weak earnings performance and outlook with some uncertainty about earnings run rate. FITB’s performance is struggling in several areas: deposits, expenses, and credit quality.

• Pricing pressure in the deposit business, we believe, coming from focus on ‘hot money’ customers and strategy of attracting customers by offering well above market rates.

• We expect higher credit losses in commercial loans (from Delta bankruptcy) and consumer loans (sharp rise in 90-day past due loans) near-term. The recent extremely strong loan growth, particularly commercial loans, needs careful monitoring, in our view, especially as it’s focused in the Midwest.

• High expense growth and weak efficiency ratio in the past year. • Lot of management turnover over the past two years. • Recent history of taking short-term measures that boost earnings but, in our view, increase risk (balance sheet

leveraging). • Recent stock price run-up due to consolidation speculation in the press (such as Dow Jones and Reuters) - key risk to

our rating. But we believe this is less likely due to the limited number of buyers, lower cost savings potential, lower growth markets, and the tradition of being an acquirer. FITB may use stock price run-up to make more acquisitions.

Chinatrust Financial Holding Recommendation: Underweight Fiscal EPS (Local): Year-end December Ticker: 2891 TT / 2891.TW 2004 2005E 2006E 2.23 2.13 2.15 Exchange: Taiwan Stock Exchange P/E (Calendar) Price (Local): NT$26.45 2005E 2006EMkt Cap (NT$ bn): 5.5 bn 12.19 12.08 Analyst: Sunil Garg P/B Phone: (852) 2800-8518 2005E 2006EEmail: [email protected] 1.68 1.56

• In our view, asset quality problems in unsecured consumer lending are a major threat for Taiwan’s banks in general and Chinatrust specifically given a 20% (of loan book) exposure to this business.

• New delinquency formation now exceeds receivables growth and this suggests to us a slowdown in revenues going forward—this is, we believe, an issue the market is less focused on and a potential area of negative surprises.

• Fees, 30% accounted for by cards, are also likely to take a hit as transaction volumes decline and this issue is being ignored by the street, in our opinion.

• Earnings downgrades to continue despite downgrades of 25-30% over the last two months; further risks exist, both on higher provisioning costs and lower revenues.

• Valuations have held up despite the sharp downgrades and further risks—we think a strong shock awaits.

Monte Paschi di Siena Recommendation: Underweight Fiscal EPS (Local): Year-end December Ticker: BMPS IM / BMPS.MI 2004 2005E 2006E 0.19 0.23 0.26 Exchange: Milan Stock Exchange P/E (Calendar) Price (Local): €3.99 2005E 2006EMkt Cap (US$): 11.5 bn 17.3 15.6 Analyst: Francesca Tondi P/B Phone: (44-20) 7325-1579 2005E 2006EEmail: [email protected] 1.8 1.7

• MPS’ stock price has performed strongly (up 48% YTD) largely due to the relief that the bank did not get involved in the takeover of BNL and the news flow that a change in the law will likely reduce the voting power of the foundation (its main shareholder), coupled with press speculation (Il Sole 24 Ore) that the bank could become a consolidation target. The bank’s fundamentals have also stabilized in 2005, having been under pressure in 2003 and 2004, which has also given some support to the price, in our view.

• However, MPS is now one of the most expensive banks in Europe, trading on a 40% P/E 2006E premium to the European sector and a 30% premium to the Italian banking sector, on our estimates. Even if we use management’s targets (which we believe are challenging), MPS would trade on a nearly 20% premium to the sector.

• Our stance is mainly linked to our conviction that as one of the most expensive banks in Europe, MPS has now reached its peak valuation, positive news flow (or speculation) is largely behind us, and therefore the stock is likely to underperform going forward.

Source: Company data, Datastream, JPMorgan estimates, JPMorgan SaVanT. Prices as of November 22, 2005.

December 8, 2005


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JPMorgan Global Banking Team – Research Equity Research Credit Research Banks Brokers and Asset Managers Mortgage Finance Specialty Finance

Americas Americas Americas Americas Americas United States

Vivek Juneja Jeanne Sun John Pancari Richard Xu Monique Sinmao Grace Lee Marco Villegas

United States Patra Chakshuvej Daniel Harris

United States George Sacco Stewart Gronek

United States George Sacco

United States Kabir Caprihan (HG/HY) Anne Devries (HG/HY)

Latin America Yolanda C. Courtines, CFA Adrian E. Huerta Magdalena Stoklosa

` Latin America Victoria Miles Tatiana Tchembarova

EMEA EMEA EMEA Pan Europe Roger Doig

Hubert Lam Christian Leukers

South Africa Jacques Badenhorst Pan Europe

Iberia

Carla Antunes da Silva Ashley Stuart Ignacio Cerezo

Austria, Greece, CEEMEA

Paul Formanko

Italy Francesca Tondi Switzerland, Germany and the Netherlands

Kian Abouhossein Jacob Kruse

Ben Ashby (HG) Roberto Henriques (HG)

Nordic Banks Jonas Erikson South Africa Jacques Badenhorst CEEMEA Yolanda C. Courtines, CFA

Adrian E. Huerta CEEMEA Victoria Miles

Tatiana Tchembarova Asia Pacific Asia Pacific Asia Pacific Asia Pacific Pan Asia

Sunil Garg Jimmy Wong

Australia Shane Fitzgerald

Pan Asia

Sunil Garg Jimmy Wong

Australia, New Zealand Allison Bellows Tiernan

Australia Brian Johnson Richard Wiles Ed Henning

Japan Natsumu Tsujino, CFA Hong Kong Michael Chan Ex-Japan Asia Andrea Cheng, CFA

China Joseph Zeng, CFA Japan Natsumu Tsujino, CFA Hong Kong Michael Chan South Korea Scott Seo

India Sachin Sheth Subramanian Balakrishnan

Thailand Derek Bloomfield

Japan

Indonesia Rizal B. Prasetijo Japan Katsuhito Sasajima

Akito Kono

Mana Nakazora

Malaysia, Singapore South Korea

Christopher Oh Scott Seo

Kian Abouhossein Global Sector Coordinator

Thailand Derek Bloomfield See page 193 for team member contact details.

December 8, 2005


Analyst Certification The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research.

Important Disclosures for Compendium Reports — U.S., European, Latin American, and Australian equities recommended in this report: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on JP Morgan's website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406).

Important Disclosures — Asian and Japanese equities recommended in this report: • Market Maker: JPMSI makes a market in the stock of Pacific Basin Shipping, SPIL (Siliconware Precision Industries). • Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for San Miguel Corporation,

Standard Chartered within the past 12 months. • Analyst Position: The covering analyst, research associate, or member(s) of their respective household(s) have a long position in the securities of CapitaLand. • Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of Maanshan Iron and Steel. • Client of the Firm: Acer Inc is or was in the past 12 months a client of JPMSI. Alcatel is or was in the past 12 months a client of JPMSI; during the past 12

months, JPMSI provided to the company investment banking services and non-investment banking securities-related service. AU Optronics is or was in the past 12 months a client of JPMSI. CapitaLand is or was in the past 12 months a client of JPMSI. China Oriental is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Chinatrust Financial Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Henderson Land Development is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Hyundai Motor is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Ibiden (4062) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Japan Tobacco (2914) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Komatsu (6301) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Mitsubishi UFJ Financial Group (8306) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. NEC Electronics (6723) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Pacific Basin Shipping is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Polaris Industries is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. San Miguel Corporation is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Sinopec Corp. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. SPIL (Siliconware Precision Industries) is or was in the past 12 months a client of JPMSI. Standard Chartered is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Taiwan Cement is or was in the past 12 months a client of JPMSI. Tata Consultancy Services is or was in the past 12 months a client of JPMSI.

December 8, 2005


• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Alcatel, China Oriental, Chinatrust Financial Holdings, Henderson Land Development, Komatsu (6301), Mitsubishi UFJ Financial Group (8306), Pacific Basin Shipping, San Miguel Corporation, Standard Chartered.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Alcatel, CapitaLand, China Oriental, Chinatrust Financial Holdings, Henderson Land Development, Hyundai Motor, Komatsu (6301), Mitsubishi UFJ Financial Group (8306), NEC Electronics (6723), Pacific Basin Shipping, San Miguel Corporation, Standard Chartered.

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Alcatel, Chinatrust Financial Holdings, Hyundai Motor, Ibiden (4062), Japan Tobacco (2914), Komatsu (6301), NEC Electronics (6723), San Miguel Corporation, Standard Chartered. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from CapitaLand, Chinatrust Financial Holdings, Hyundai Motor, Komatsu (6301), NEC Electronics (6723), San Miguel Corporation, Standard Chartered.

Explanation of Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication.

JPMorgan Equity Research Ratings Distribution, as of September 30, 2005 Overweight

(buy) Neutral (hold)

Underweight(sell)

JPM Global Equity Research Coverage 40% 42% 18% IB clients* 46% 45% 39% JPMSI Equity Research Coverage 34% 49% 17% IB clients* 65% 55% 45%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category, our Neutral rating falls into a hold rating category, and our Underweight rating falls into a sell rating category.

Valuation and Risks: Company notes and reports include a discussion of valuation methods used, including methods used to determine a price target (if any), and a discussion of risks to the price target.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

December 8, 2005


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