JP Morgan - 1 Feb 2011

Asia Pacific Equity Research 01 February 2011

Hong Kong Banks

Strong loan growth; FY10 results preview

Hong Kong Banks

Joseph LeungAC

(852) 2800-8517 [email protected]

Sunil Garg (852) 2800-8518 [email protected]

J.P. Morgan Securities (Asia Pacific) Limited

See page 34 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Recent research notes Hong Kong macro (Lu Jiang) - Unemployment -0.1% (18 Jan) - CPI +2.8% (20 Jan) - Export +13% (25 Jan) HK property (Amy Luk) - Weekly sales (31 Jan) HK banks (Joseph Leung) - Fubon HK privatization (10 Jan) - PFH: FY results (15 Jan) - Life of an offshore RMB

transaction (17 Jan) - BEA: Disposal of US business to

ICBC (24 Jan) - VP: First mainland JV (24 Jan)

Earnings growth FY10E JPMe Cons Diff HSB 6% 8% -2% BOCHK 1% 10% -8% BEA 31% 40% -6% WHB 30% 32% -2% DSF 61% 61% 0% DSBG 68% 74% -3% CHB 72% 89% -9% HK banks 10% 15% -5%

Source: Bloomberg and J.P. Morgan estimates.

We saw 29% system loan growth in 2010 (corporate, trade finance, China). Deposit growth was much slower at 7.5% (or 2.9% excluding RMB deposits). Earnings growth is, however, likely to be more visible in 2011. We forecast 10% earnings growth for FY10 (5% below consensus). Upside surprises are more likely for HSB, DSF and WHB. Stock picks unchanged: OW in BOCHK, WHB, BEA, and Public.

• Macro solid: Unemployment rate dropped to 4.0% from 4.1%, with a decline in unemployed coupled with labor force growth. Underlying CPI rose by 2.8% y/y, 0.5% m/m (food). Export growth was dragged by China-related trade, and external demand outlook appears patchy.

• Rmb 5% of system deposit: HKMA released December monetary statistics. Loan +2.0% m/m, +2.5% q/q (corporate, China, trade finance), +29% y/y, mortgages +15% y/y. Deposit +0.2% m/m. Rmb deposit +14% m/m, +422% y/y, 5.4% of system deposit. HIBOR 1-month/3-month fell by 12bp/9bp m/m to 11bp/19bp in January. ADT HK$75bn, +20% m/m in January.

• Recent development: (1) HKMA rolled out BASEL III implementation, basic common equity ratio requirement 7% plus maximum 2.5% counter-cycle buffer by end-2018. Given current capital positions (system CAR 16.1%), we expect no equity raising in the short term; (2) Criteria restructuring was announced; its holdings in BEA is likely to continue, in our view; (3) ICBC acquired BEA USA business; (4) Fubon HK privatization was proposed; (5) Public Financial FY10 results were 3% below our expectation, showing credit cost being the major driver of earnings growth; (6) Value Partners announced its first China JV.

• Results preview: We expect 10% earnings growth in FY10 for our coverage, and we are 5% below Bloomberg consensus. Upside surprise on consensus is more likely for HSB and less for BOCHK. Costs could be the reasons for earnings disappointment, while potential credit write-backs could be a source of upside surprise. Reporting schedule: BEA 15 Feb, HSBC/HSB 28 Feb, STAN 2 Mar.

Table 1: HK banks valuation 31-Jan-11 Bloomberg Price Mkt cap P/E P/BV ROE Div Yld Rating Perf Code HK$ US$ mn 11E 12E 11E 12E 11E 12E 11E 12E -1m -3m YTDBOCHK 2388 HK 25.15 34,102 16.2 13.0 2.32 2.19 14.7 17.4 4.0 5.0 OW BOCHK -5% 3% -5%HSB 11 HK 128.60 31,531 16.4 14.4 3.64 3.32 23.0 24.1 4.1 4.3 N HSB 1% 13% 1%BEA 23 HK 33.80 8,852 19.4 14.5 1.58 1.50 8.7 11.1 3.2 4.3 OW BEA 4% 2% 4%WHB 302 HK 104.90 3,973 17.9 15.4 2.07 1.92 12.1 13.0 1.7 2.6 OW WHB -2% 16% -2%DSF 440 HK 54.55 2,048 11.5 9.4 1.02 0.94 9.3 10.4 4.3 5.5 N DSF 7% 6% 7%DSBG 2356 HK 13.78 2,161 12.2 9.7 1.16 1.08 9.9 11.6 4.1 5.2 N DSBG 4% 8% 4%CHB 1111 HK 22.70 1,266 21.8 17.5 1.49 1.43 7.0 8.4 2.3 2.9 N CHB 6% 18% 6%PFH 626 HK 5.50 774 12.8 10.2 0.95 0.90 7.6 9.0 3.9 4.9 OW PFH -2% 6% -2%Wgt avg TOTAL-HK 84,707 16.4 13.5 2.33 2.17 14.2 16.1 3.8 4.5 HSI 2% 2% 2%Source: Company reports and J.P. Morgan estimates.

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Joseph Leung (852) 2800-8517 [email protected]

Table of Contents Hong Kong banking sector updates .......................................3 BASEL III implementation in Hong Kong ..................................................................3 BEA: Implication of Criteria Caixa restructuring ........................................................4 BEA: Disposal of US business to ICBC ......................................................................4 Fubon HK: Privatization proposal announced .............................................................5 Public Financial: Results below our estimates; higher cost assumptions for 2011 ......6 Value Partners: First mainland JV ...............................................................................6 Life of an offshore RMB transaction ...........................................................................7 Hong Kong banking statistics.................................................8 Volume ........................................................................................................................8 Interest rate and liquidity ...........................................................................................10 Retail investment sales...............................................................................................12 Credit quality indicators.............................................................................................13 Preview of FY10 results .........................................................14 Consensus analysis ....................................................................................................15 Share price and valuation......................................................17 Hong Kong property update..................................................18 Companies Hang Seng Bank ........................................................................................................20 Bank of China (BOCHK)...........................................................................................22 Bank of East Asia ......................................................................................................24 Wing Hang Bank .......................................................................................................26 Dah Sing Financial.....................................................................................................28 Dah Sing Banking Group...........................................................................................30 Chong Hing Bank ......................................................................................................32

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Hong Kong banking sector updates BASEL III implementation in Hong Kong On 26 Jan 2011, HKMA announced the main outline of BASEL III implementation for Hong Kong banks. Requirements are largely similar to the proposal of BASEL committee. Key summary requirements are as follows.

• Common equity requirement 4.5% (previously 2%)

• Tier 1 ratio requirement 6% (previously 4%)

• Capital conservation buffer 2.5%, common equity only (new)

• Countercyclical capital buffer 0%-2.5% (new)

• Liquidity ratio for asset-liability management of 30-days or less (same as before)

• Net stable funding ratio, NSFR, for ALM of 1-year or above (new)

• More transparent capital disclosure

Table 2: BASEL III implementation schedule for Hong Kong banks 2011 2012 2013 2014 2015 2016 2017 2018 As of 1

Jan 2019 Leverage ratio Supervisory monitoring Parallel run, disclosure starts 1 Jan 2015 Pillar 1 Common equity ratio 3.50% 4.00% 4.50% 4.50% 4.50% 4.50% 4.50% Capital conservation buffer 0.625% 1.25% 1.875% 2.50% Common equity + conservation buffer 3.50% 4.00% 4.50% 5.125% 5.75% 6.375% 7.00% Phased in tier 1 deduction (DTA, MI) 20% 40% 60% 80% 100% 100% Tier 1 ratio 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Total capital ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Total capital + conservation buffer 8.0% 8.0% 8.0% 8.6% 9.3% 9.9% 10.5% Capital instruments phased out Phased out in 10 years between 2013 and 2023 Liquidity ratio Observation period Introduce Net stable funding ratio Observation period Introduce Source: HKMA.

Given the current capital positions of Hong Kong banks, we believe no equity raising is required in 2011 and 2012. We estimate banks under our coverage all meet the basic common equity and conservation buffer requirement of 7% even in the event of 100% tier 2 deduction is applied to common equity capital. In pro-forma BASEL III basis, capital positions of BOCHK and Chong Hing Bank appear to be the strongest, while Hang Seng Bank and BEA are in the lower end. Given the long transition period, we expect banks could make up capital deficit, if any, through lower payout ratio. While equity rising is not our base case, BEA’s capital position appears to be the weakest, as its internal capital generation pace (ROE) is slower than that of Hang Seng Bank.

Figure 1: HK banks: Pro-forma common equity ratio (1H10)

7%8%9%

10%11%12%13%14%

CHB

PFH

BOCH

K

DSF

WHB HS

B

BEA

Existing tier 1 ratioPro-forma common equity ratio

Source: Company reports and J.P. Morgan estimates. Note: DSF did a rights issue of HK$1 billion on 16 Nov 2010, which should boost tier 1 ratio by 102bp. This is not reflected in the data above.

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Table 3: Hong Kong banks: Potential BASEL III impact (1H10) HK$ in millions BOCHK HSB BEA WHB DSF CHB PFHShare capital 43,043 9,559 14,367 789 4,063 1,760 4,123Reserves 32,969 33,177 19,855 10,024 5,597 3,476 1,579Preferred shares 0 0 0 0 0 0 0Minority interest 0 0 3,727 0 0 0 0Less: Goodwill 0 972 2,034 1,306 921 0 2,775Less: Deduction 715 9,086 3,756 327 453 122 79Tier 1 capital 75,297 32,678 32,159 9,179 8,286 5,114 2,849Total capital 107,526 38,070 42,977 15,040 13,349 6,438 2,816RWA 664,776 294,908 311,428 88,471 77,609 42,230 24,069Tier 1 ratio (reported) 11.3% 11.1% 10.3% 10.4% 10.7% 12.1% 11.8% Tier 1 capital 75,297 32,678 32,159 9,179 8,286 5,114 2,849Less: Preferred shares 0 0 0 0 0 0 0Less: Minority interest 0 0 3,727 0 0 0 0Common equity capital before tier 2 deduction 75,297 32,678 28,432 9,179 8,286 5,114 2,849Tier 2 deduction 715 9,086 3,756 327 453 122 157Common equity capital assuming 100% tier 2 deduction 74,582 23,592 24,676 8,852 7,832 4,992 2,692Common equity ratio assuming 100% tier 2 deduction 11.2% 8.0% 7.9% 10.0% 10.1% 11.8% 11.2%Difference from existing tier 1 ratio -0.1% -3.1% -2.4% -0.4% -0.6% -0.3% -0.7% 15% of tier 1 common equity 11,295 4,902 4,265 1,377 1,243 767 427Less: Tier 2 deduction in excess of 15% mark 0 4,184 0 0 0 0 0Common equity capital after tier 2 deduction 75,297 28,494 28,432 9,179 8,286 5,114 2,849Common equity ratio 11.3% 9.7% 9.1% 10.4% 10.7% 12.1% 11.8%Difference from existing tier 1 ratio 0.0% -1.4% -1.2% 0.0% 0.0% 0.0% 0.0% Distance from 7% common equity ratio and conservation buffer 4.3% 2.7% 2.1% 3.4% 3.7% 5.1% 4.8%Distance from 9.5% common equity ratio, conservation and counter-cycle buffer 1.8% 0.2% -0.4% 0.9% 1.2% 2.6% 2.3%Source: Company reports and J.P. Morgan estimates. Note: DSF did a rights issue of HK$1 billion on 16 Nov 2010, which should boost tier 1 ratio by 102bp. This is not reflected in the data above.

BEA: Implication of Criteria Caixa restructuring On 28 Jan 2011, Criteria, being 15% shareholder of BEA, announced its restructuring plan, transforming from a holding company structure into an integrated banking group. After the restructuring, the main shareholder of new CaixaBank (former Criteria) remains to be la Caixa (81.1%). The new CaixaBank will have a core capital ratio of 10.9%, after EUR1.5 billion issuance of mandatory convertible bond.

In its announcement, BEA listed as one of the milestones its strategic goals of "building banking presence in attractive growth markets". BEA amounts to 4.3% of Criteria’s investment portfolio. We expect CaixaBank will continue to hold its stake in BEA.

BEA: Disposal of US business to ICBC Strategically positive: On 23 Jan 2011, BEA announced to dispose 80% of BEA USA to ICBC at a consideration of US$140.2 million (HK$1,086.5 million), with a put option of dispose the remaining 20% stake to ICBC within 18 months after completion of the transaction. BEA USA has 13 branches in the US (2 in New York and 11 in California), and book value is not disclosed. We see this transaction to be positive to BEA as the business mix becomes more focused upon Asia. We maintain OW rating.

Disposed Canada business in 2010: BEA also disposed 70% of BEA Canada to ICBC (announced on 4 Jun 2009, completed on 28 Jan 2010) at C$80.2 million

Related research:

“BEA: Disposal of US business to ICBC” by Joseph Leung on 24 Jan 2011

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(HK$589.2 million), with a call option for ICBC to buy an additional 10% stake. Both US and Canada transactions indicate that (1) BEA is trimming its business in North America and (2) ICBC seems to have an interest to grow overseas, in our view.

Share price remains event-driven: We expect some share price fluctuation in the short term after this transaction, particularly after ICBC (Asia) privatization was completed in Dec 2010. Major shareholders of BEA are Criteria Caixa 15%, BOCHK 4%, Sumitomo Mitsui Banking Corp 4%, and Guoco 9%.

Earnings forecast maintained: We keep our earnings forecast unchanged given that the book value of BEA USA is not disclosed and the related disposal profit is likely to be an exceptional item. We maintain our Dec-11 PT at HK$40.

Fubon HK: Privatization proposal announced Privatization offer HK$5: Fubon HK (636 HK, not rated) announced the privatization proposal on 10 Jan 2011. Offer price is HK$5 per share, 32% above the HK$3.78 close price of 7 Jan, at 1.42x book value (1H10). The announcement did not mention that the offer price is final. Fubon Financial owns 75% of Fubon HK.

Pricing comparison: Recent ICBC (Asia) privatization was at 2.2x book value in Jul 2010 and CIFH privatization was at 1.4x in Jun 2008. Adjusting for ROE differential, we estimate the offer price implies a 74% premium to average operating ROE or 4% discount to peak ROE in 2007, compared to the 45% premium for ICBC (Asia) and 25% premium for CIFH.

Reason and timing: The announcement stated that privatization “could bring benefits including a simpler shareholding structure, an enhancement of management efficiency and shareholder value as well as effectively reducing fees and expenses relating to the listing status”. It also indicated the proposed transaction to be completed in 2Q11.

Implication to the sector: We expect some fluctuation to the share prices of other small banks in Hong Kong in the near term, and the reaction to banks with a lower valuation should be larger than those with a higher valuation. If the privatization proposal succeeds, we expect competition in Hong Kong banking sector to intensify, as Fubon HK strengths its capital positions and becomes more capable to expand, both organically and externally.

Table 4: Fubon HK privatization offer price CIFH ICBC (Asia) Fubon HK Bear case Base case Bull case ROE 9.6% 11.5% 6.3% 8.1% 11.4% Growth 4.0% 4.0% 4.0% 4.0% 4.0% COE 9.0% 9.0% 9.0% 9.0% 9.0% Fair P/B 1.12 1.50 0.45 0.82 1.48 Privatization premium 25% 45% 213% 74% -4% Privatization P/B 1.40 2.17 1.42 1.42 1.42 Privatization price 29.5 5.0 5.0 5.0

Source: Company reports and J.P. Morgan estimates. Note: Base case ROE is the average operating ROE between 2002 and 2008. Bear case ROE is the average ROE between 2000 and 2009. Bull case ROE is the peak ROE in 2007.

Related research:

“Fubon HK privatization” by Joseph Leung on 10 Jan 2011

Figure 2: Fubon HK share price

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44.24.4

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Fubon HK HSI (rebased)

Source: Bloomberg.

Figure 3: Fubon HK P/B historical trends

-2sd-1sdAvg+1sd+2sd

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Source: Bloomberg.

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Public Financial: Results below our estimates; higher cost assumptions for 2011 Results slightly below our estimates: Public Financial announced HK$450 million net profit for FY10, 3% below our estimates, +64% y/y. EPS was HK$0.41, DPS was HK$0.21, same as our expectations. The payout ratio dropped from 72% in FY09 to 51% in FY10. We expect it to remain at 50% level in the next few years. We maintain OW rating.

FY10 fees and credit quality better: NIM fell by 6bp y/y, slightly better than our expectations. Loan growth was 9.5%, and deposit +1%. Fees +22%, cost +18%, with salary +17%, headcount +7%. Credit cost 109bp, -100bp y/y, -23bp h/h for 2H10. PPOP was flat at 0% y/y, reflecting that the credit cost was the main factor driving earnings growth in FY10.

Factor in higher cost assumptions: We expect higher cost growth due to inflation and some increase in headcounts. Also, we expect to see (1) deposit growth to resume in FY11E given the better liquidity environment in recent months; (2) increase of consumer unsecured loans and taxi financing as bankruptcy continues its downtrend and thus should support some recovery in NIM; (3) credit cost to increase slightly as collective impairment release should tail off. Overall, we forecast a 5% earnings growth mainly due to higher cost pressure.

JPMe 14% earnings CAGR: We lowered our earnings forecasts by 19%/12%/18% for FY11/12/13 to factor in higher cost and slower NIM recovery. Despite this decrease, we expect 14% earnings CAGR in FY10-12. Trading at 1.1x book value (11E), Public Financial valuation remains attractive in our view. We maintain our OW rating.

Value Partners: First mainland JV Catalyst materializing: Value Partners announced the first joint-venture in mainland China, with a cash outlay from the company to be Rmb99 million (HK$117 million). We expect more operations in the mainland China to be announced. We maintain OW rating.

Details of the JV: The JV is a private equity fund management company (FMC). Value Partners owns 60% and Yunnan Industrial Investment in Kumming owns 40%. Register capital is Rmb15 million and seed capital is Rmb150 million. Target fund size is Rmb500 million and target investment area should be Yunnan-focused. The company expects this JV will be in operation by the end of 2011.

What’s next? We expect there will be more operations in the mainland China to be announced, given that this JV uses only 16% of its proceeds from the placement in 2010 intended for China expansion, with HK$599 million (Rmb506 million) left in the pocket.

Reiterate OW: We keep our earnings forecasts unchanged given that details of fees structure of the fund is not disclosed and AUM of this JV appears to be only 1% of total AUM. Fund performance of Value Partners is 1% YTD in 2011. Latest disclosed AUM is US$7.9 billion as at 31 Dec 2010.

Related research:

“Public Financial: Results below; higher cost assumptions for 2011” by Joseph Leung on 15 Jan 2011

Related research:

“Value Partners: First mainland JV” by Joseph Leung on 24 Jan 2011

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Life of an offshore RMB transaction In the midst of diverse news-flow, the primary driving factor of RMB internationalization remains trade settlement and focus should stay on offshore RMB deposits (5% of Hong Kong deposits by FY10 and 15% by FY11E), in our view. We expect earnings contribution to range between -1% and 9%; BOCHK is likely to benefit the most. • Life of an offshore RMB transaction: In this report, we analyze the flow of an

offshore RMB transaction from the start to the end. As we dig into details, we maintain that: (1) RMB business should not be analyzed on a standalone basis because of product bundling; (2) potential cannibalization with existing business and competition should not be underestimated; (3) RMB internationalization scheme carries policy risk and fundamental impact should become vivid only in the medium term. On a qualitative basis, RMB internationalization has already materially intensified competition in the Hong Kong banking sector.

• Trade is vital: Among the various sources of RMB, we see trade being the main source of offshore RMB. Our forecast of RMB deposit +191% for FY11 is primarily driven by trade flows. We however estimate that earnings impact to Hong Kong banks to remain less obvious in FY12 (3%). BOCHK appears to benefit the most from RMB internationalization.

• What’s next? We expect more policy relaxation in relation to RMB flowing from onshore to offshore. While this should help create a RMB deposit pool offshore, the impact to banks is likely to pick up only when RMB is allowed to flow back to onshore more freely. Also, we expect RMB policy similar to those existing in Hong Kong to be applied to other countries in the world, and these should not materially alter the role Hong Kong plays in RMB internationalization.

• Stock picks: Our bullish stance on BOCHK is centered on its China connection with a strong balance franchise. Although RMB business should help, it would not have a significant impact, in our view.

Figure 4: Offshore RMB flows Onshore market Offshore market

Secondary Rmb equity market

(mini QFII)

Onshore equity market

Suppliers(eg Iron ore in Brazil)

Rmb WM(eg Haitong Rmb

fund)

China Trade Settlement Enterprise

(TSE)

Rmb deposit taking banks

(eg HSBC)

Clearing banks(eg BOCHK)

Central banks(PBOC)

Secondary Rmb debt market

China banking system

HK retail customers (max Rmb20k/ day)

China Interbank bond market

Non-trade corporate customers

Currency conversion

TSE Rmb trade finance/ currency

conversion

Investments (eg roads, loans,

factories)

Rmb debts IPO(eg MOF, BOC,

Mcdonald)

SAFE approval

Market does not exist yet

Rmb flow

Wealth management channel, direct customer participation possible

Key:

Non-trade finance Rmb loans

Export from China (trade quota)

Directremittance

China retail (max Rmb50k/yr)

Corporate (by case)

Direct remittance (Rmb80k/ day)

Individual quota(not disclosed)

Import to China (trade quota)

Chineseenterprisesoverseas

Chineseenterprises

FDI approval

Source: PBOC, HKMA, J.P. Morgan.

Related research:

“Life of an offshore RMB transaction” by Joseph Leung on 17 Jan 2011

“RMB internationalization: Progress, future steps and implications” by Jing Ulrich on 24 Jan 2011

“The CNH market” by Simon Song on 26 Jan 2011

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Hong Kong banking statistics Volume Loans and deposits: Loan growth in FY10 was 28.5% y/y, 2.5% q/q, mainly driven by commercial lending, trade finance and China. As deposit growth is below that of the loans, loan-to-deposit ratio (LDR) climbs. HKD LDR reached 78%, approaching its recent peak in 2008 (84%), but we have seen HKD LDR going above 90%. We expect the trend to continue but the pace should slow down.

RMB deposits reached RMB315 billion at the end of FY10, +13% m/m and +402% y/y, or HK$371 billion equivalent, +14% m/m and +422% y/y, contributing 5.4% of total system deposits. China-HK trade slowed down slightly in December, with 45% of trade settled in RMB. New RMB deposits in December amounted to 35% of RMB trade settlement.

Table 6: Hong Kong monetary statistics summary HK$ in millions

Dec 10 Mix y/y, % q/q, % m/m, % Loans Building and construction, property 844,805 20.0% 23.8% 3.8% na Wholesale and retail trade 235,579 5.6% 51.6% 0.9% na Manufacturing 170,319 4.0% 26.0% 2.0% na Transport and transport equipment 170,730 4.0% 13.6% 2.2% na Stockbrokers 18,276 0.4% 48.5% -83.1% na Miscellaneous 550,682 13.0% 23.4% -0.1% na - Corporate loans 1,990,391 47.1% 25.8% -2.5% na HOS mortgages 51,347 1.2% -0.4% 3.6% na Mortgages 744,151 17.6% 15.1% 3.0% na Credit card 80,137 1.9% 16.9% 12.3% na Other personal loans 176,496 4.2% 16.8% 6.8% na - Retail loans 1,052,132 24.9% 14.6% 4.3% na Loans used in Hong Kong 3,042,522 72.0% 21.7% -0.2% 0.2% Trade finance 273,890 6.5% 56.7% 6.0% 2.3% Loans used outside Hong Kong 910,935 21.5% 48.4% 11.4% 8.6% Total loans 4,227,347 100.0% 28.5% 2.5% 2.0% Total loans by currency: HK$ loans 2,824,445 66.8% 17.6% -1.1% 1.1% Foreign currency loans 1,402,902 33.2% 58.1% 10.5% 3.8% Deposits Demand deposits 798,421 11.6% 12.9% -7.4% -2.7% Savings deposits 2,913,056 42.5% 7.9% 3.5% -0.1% Time deposits 3,132,204 45.6% 6.1% 3.1% 1.4% Total deposits 6,862,165 100.0% 7.5% 1.9% 0.2% Total deposits by currency: HK$ deposits 3,616,940 52.7% 7.2% -1.7% -0.5% Foreign currency deposits 3,245,225 47.3% 7.9% 6.2% 1.0% RMB deposits 371,469 5.4% 421.6% 114.5% 14.1% Other FC deposits 2,873,756 41.9% -2.1% -0.3% -0.5% Dec 10 y/y, ppt q/q, ppt m/m, %pt Loan-to-deposit ratio 61.6% 10.1% 0.4% 1.1% Loan-to-deposit ratio (HK$) 78.1% 6.9% 0.5% 1.2% Loan-to-deposit ratio (Foreign currency) 43.2% 13.7% 1.7% 1.2%

Source: HKMA.

Table 5: HK system loan growth FY10A FY11E Large corporate 24% 8% SME 34% 25% Mortgages 14% 5% Consumer loans 17% 5% Others 48% 34% Total 29% 18%

Source: HKMA and J.P. Morgan estimates.

Figure 5: RMB deposits in HK HK$ in millions

371

050

100150200250300350400

06 07 08 09 10

Source: HKMA.

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Figure 6: Loan growth rebounded solidly

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Source: HKMA.

Figure 7: LDR improving

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64% LDR HK$ LDR Total (rhs)

Source: HKMA.

Figure 8: RMB trade settlement as % of China-HK trade

0%5%

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

Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Source: HKMA and CEIC.

Figure 9: New RMB deposits as % of RMB trade settlement

0%

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40%

60%

80%

100%

120%

Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Source: HKMA. Residential mortgage survey: Outstanding mortgages were +15.5% y/y in FY10. Approval declined sharply, particularly for primary mortgages, driven by the government's special stamp duty introduced in 19 Nov 2010. We expect mortgages to gradually recover in 1Q11 with volatility due to Chinese New Year effect. HIBOR-based mortgages contribute 90% of total new mortgages (down by 1.8ppt m/m). We estimate it accounts for 49% of outstanding mortgages as of Dec 10 (+3ppt m/m).

Figure 10: HIBOR mortgages getting popular (%)

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Source: HKMA.

Figure 11: Mortgage yield pressure continues (%)

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Prime-based HIBOR-based Overall yield

Source: HKMA and J.P. Morgan estimates.

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Figure 12: New loans drawn down broke recent peak (HK$m)

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Dec-0

9

Mar-1

0

Jun-

10

Sep-

10

Dec-1

0

Mortgage approvedNew loans drawn downMortgage repayment

Source: HKMA.

Figure 13: Refinancing picking up (HK$m)

-

5,000

10,000

15,000

20,000

25,000

30,000

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Primary market Secondary marketRefinance

Source: HKMA. Interest rate and liquidity Interest rates: In January, we saw HIBOR sliding. We expect liquidity to increase gradually, as illustrated in “Liquidity” section. For 1Q11, we expect HIBOR to remain at low levels underpinned by expansionary monetary policy in the US. In case of an increase in HIBOR, we expect banks' margins to benefit, as deposit spread widens and free fund benefits (HSB should see the most benefit, followed by BOCHK).

Figure 14: Hong Kong interest rates (%)

0

1

2

3

4

5

6

Mar-0

8

Jun-

08

Sep-

08

Dec-0

8

Mar-0

9

Jun-

09

Sep-

09

Dec-0

9

Mar-1

0

Jun-

10

Sep-

10

Dec-1

0

HIBOR 1M HIBOR 3M Prime

Source: Bloomberg.

Figure 15: Prime HIBOR spread narrowing (%)

0

1

2

3

4

5

6

Mar-0

8

Jun-

08

Sep-

08

Dec-0

8

Mar-0

9

Jun-

09

Sep-

09

Dec-0

9

Mar-1

0

Jun-

10

Sep-

10

Dec-1

0

Prime HIBOR spreadPrime HIBOR spread 3mth avgPrime HIBOR spread 6mth avg

Source: Bloomberg.

Figure 16: HIBOR-LIBOR spread (%)

0.180.2

0.220.240.260.28

0.30.320.34

31-O

ct

7-No

v

14-N

ov

21-N

ov

28-N

ov

5-De

c

12-D

ec

19-D

ec

26-D

ec

2-Ja

n

9-Ja

n

16-Ja

n

23-Ja

n

30-Ja

n

HIBOR 3M LIBOR 3M

Source: Bloomberg.

Figure 17: HIBOR-LIBOR spread (%)

-0.12-0.1

-0.08-0.06-0.04-0.02

00.020.04

31-O

ct-10

7-No

v-10

14-N

ov-1

0

21-N

ov-1

0

28-N

ov-1

0

5-De

c-10

12-D

ec-1

0

19-D

ec-1

0

26-D

ec-1

0

2-Ja

n-11

9-Ja

n-11

16-Ja

n-11

23-Ja

n-11

30-Ja

n-11

LIBOR HIBOR spread

Source: Bloomberg.

11



Liquidity: Interest rate (HIBOR) declined in Jan 2011, and other indicators are mixed, with a slight bias towards a gradually growing liquidity: (1) HKD is depreciating, touching 7.78 from 7.775 by month-end, suggesting international inflow is slowing in December, (2) HKMA aggregate balance and monetary base remained unchanged in January, (3) deposit rose in December 2010, (4) inflation in December further accelerated, and (4) stock turnover (ADT) dropped to HK$63 billion levels and velocity declined to 75% in December 2010 due to seasonality.

Figure 18: HKMA aggregate balance and liquidity (HK$ in billions)

Exchange fund papers and aggregate balance

Aggregate balance

0

200

400

600

800

1,000

1,200

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Total monetary baseExchange fund papers and aggregate balanceAggregate balance

Source: HKMA.

Figure 19: Exchange rate implies a slight decrease in capital flow

7.745

7.755

7.765

7.775

7.785

7.795

7.805

3-No

v

10-N

ov

17-N

ov

24-N

ov

1-De

c

8-De

c

15-D

ec

22-D

ec

29-D

ec

5-Ja

n

12-Ja

n

19-Ja

n

26-Ja

n

HKD 1m fwd HKD spot

Source: Bloomberg.

Figure 20: Hong Kong Stock Exchange: Velocity

Mean

+1SD

+2SD

+3SD

-1SD

0%20%40%60%80%

100%120%140%160%180%200%

Jan 9

5Ja

n 96

Jan 9

7Ja

n 98

Jan 9

9Ja

n 00

Jan 0

1Ja

n 02

Jan 0

3Ja

n 04

Jan 0

5Ja

n 06

Jan 0

7Ja

n 08

Jan 0

9Ja

n 10

Jan 1

1

Source: CEIC.

Figure 21: Market share of category B & C participants (%)

56

52 52

49 49

55

50 50

46 4748

4749 50

48

44

46

4948

49

43

45

47

49

51

53

55

57

1H01

1H02

1H03

1H04

1H05

1H06

1H07

1H08

1H09

1H10

Source: HKEx.

12



Table 7: Hong Kong Stock Exchange turnover statistics (HK$mn) ADT Velocity ADT Velocity

2007 87,386 126% Jan 09 47,683 120% 2008 71,841 117% Feb 09 39,885 104% 2009 62,008 114% Mar 09 46,513 121% 2010 68,583 92% Apr 09 61,770 139% 2011 75,486 86% May 09 79,405 155% Jun 09 73,144 130% 1H08 86,981 120% Jul 09 68,917 117% 2H08 57,068 115% Aug 09 69,901 111% 1H09 58,120 128% Sep 09 60,367 95% 2H09 65,683 101% Oct 09 65,541 98% 1H10 63,252 91% Nov 09 70,367 101% 2H10 73,622 93% Dec 09 59,395 84% 1H11 75,486 86% Jan 10 77,467 109% Feb 10 55,920 83% 1Q08 98,351 137% Mar 10 59,265 84% 2Q08 75,796 104% Apr 10 68,845 94% 3Q08 63,409 105% May 10 66,537 99% 4Q08 50,728 125% Jun 10 52,175 77% 1Q09 44,655 115% Jul 10 53,274 76% 2Q09 71,365 141% Aug 10 57,842 79% 3Q09 66,341 108% Sep 10 73,206 97% 4Q09 65,004 94% Oct 10 97,782 119% 1Q10 64,246 92% Nov 10 97,915 114% 2Q10 62,241 90% Dec 10 62,966 75% 3Q10 61,384 84% Jan 11 75,486 86% 4Q10 85,860 102% 1Q11 75,486 86%

Source: CEIC.

Retail investment sales In November, we see continuous increase in sales but a drop in redemptions for retail investment funds flow, resulting in a net inflow of US$922 million. Net flows on a rolling 6 months basis stopped declining. We expect flows to improve in 1Q11 given the optimistic employment outlook and wage increases.

Figure 22: HK retail investment sales (US$mn)

01,0002,0003,0004,0005,0006,0007,000

Jun-

05

Dec-0

5

Jun-

06

Dec-0

6

Jun-

07

Dec-0

7

Jun-

08

Dec-0

8

Jun-

09

Dec-0

9

Jun-

10

Sales Redemptions

Source: CEIC.

Figure 23: HK retail investment sales (US$mn)

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

Jun-

05

Dec-0

5

Jun-

06

Dec-0

6

Jun-

07

Dec-0

7

Jun-

08

Dec-0

8

Jun-

09

Dec-0

9

Jun-

10Net investment (mth) Net investment (6m rolling)

Source: CEIC

13



Credit quality indicators With the downtrend in unemployment rate and bankruptcy continuing in December, we expect credit quality to remain robust in 2010. In December, bankruptcy was flat, with an increase of 3 cases to 625 cases, and down from the recent peak of 1,793 cases in March 2009.

Figure 24: Hong Kong unemployment rate (%)

0123456789

10

Dec-8

1

Dec-8

3

Dec-8

5

Dec-8

7

Dec-8

9

Dec-9

1

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Source: CEIC.

Figure 25: Hong Kong bankruptcy petition (Cases)

0

500

1,000

1,500

2,000

2,500

Mar-9

8

Mar-9

9

Mar-0

0

Mar-0

1

Mar-0

2

Mar-0

3

Mar-0

4

Mar-0

5

Mar-0

6

Mar-0

7

Mar-0

8

Mar-0

9

Mar-1

0

Source: ORO. Note: 3-month average.

14



Preview of FY10 results For FY10, we expect an average earnings growth of 10%. On an underlying basis, we expect operating profit to be flat (0% y/y). For 2H10, we expect a small decline in earnings (-3% h/h) driven by exceptions, and operating profit to grow by 4%. We expect NIM to remain largely flat, fees to continue to recover, and CIR to be stable. Credit quality appears to be a bright spot. While we do not expect further write-backs, potential loan loss release could be a source of upside surprise on earnings.

Table 8: Hong Kong banks FY10E earnings forecasts HK$ in millions HSB BOCHK BEA WHB DSF DSBG CHB Attributable profits 14,028 13,909 3,355 1,565 1,005 1,012 399 EPS (FD) 7.34 1.32 1.66 5.25 3.86 0.91 0.92 DPS (ord) 5.20 0.86 1.00 1.06 1.04 0.25 0.46 BVPS (FD) 32.7 10.3 21.5 46.7 51.4 10.9 14.7 Income statement (y/y) Net interest income 1.1% 4.2% 8.9% 9.4% -3.2% -3.5% 4.4% Net fees and commission income 8.6% 2.8% 14.3% -1.3% 15.1% 14.2% -11.7% Non-interest income 6.9% -1.8% -21.9% -15.0% 14.1% 12.0% -22.4% Total revenue 3.0% 2.3% -3.7% 2.2% 0.6% -0.7% -5.6% Total operating expenses 7.7% 12.3% 8.7% 13.4% 7.1% 7.4% 4.1% Pre-provision Profit 0.7% -2.8% -18.1% -5.2% -5.8% -9.1% -16.7% Total provisioning charge/(writeback) -50.0% 95.4% -64.9% 8.8% -58.8% -58.2% -33.5% Operating earnings before tax 3.8% -3.5% -5.8% -5.6% 15.3% 15.7% -13.3% Attributable profits 6.1% 1.3% 33.5% 29.9% 60.6% 68.4% 72.0% Balance sheet (y/y) Advances less provisions 20.0% 17.0% 18.7% 18.2% 17.1% 17.3% 13.6% Investments -14.8% 1.8% -30.6% -22.6% 3.4% 0.7% -25.6% Total assets 3.7% 9.9% 8.6% 3.5% 6.9% 6.6% 1.3% Customer deposits 5.0% 13.0% 10.0% 3.0% 3.0% 3.0% 1.0% Shareholders' funds 7.5% 5.8% 18.2% 10.3% 24.8% 23.6% 3.4% Per share data (y/y) EPS (FD) 6.1% 19.1% 21.9% 29.8% 60.6% 52.2% 72.0% DPS (ord) 0.0% 0.0% 31.0% 51.4% n.a. n.a. 63.6% BVPS (FD) 7.5% 5.8% 7.5% 10.1% 17.5% 12.4% 3.4% Ratios Loan growth 19.8% 17.4% 20.0% 18.6% 19.9% 19.9% 13.2% Net interest margins (reported) 1.81% 1.58% 1.84% 1.87% 1.81% 1.81% 1.26% Non-int inc / TR 33.9% 29.9% 33.2% 24.6% 24.7% 20.5% 30.5% CIR 33.6% 37.3% 60.6% 44.2% 52.6% 55.3% 59.0% Credit cost (prov / gross loans) 0.11% 0.04% 0.14% 0.06% 0.28% 0.28% 0.19% ROA 1.67% 1.09% 0.74% 1.05% 0.79% 0.86% 0.57% ROE 23.2% 13.1% 8.7% 11.9% 7.8% 8.4% 6.3% CAR 12.7% 15.2% 12.3% 16.8% 15.3% 15.3% 14.9% -Tier 1 10.9% 10.7% 9.2% 10.7% 9.3% 9.3% 12.0% Source: J.P. Morgan estimates.

15



Table 9: Hong Kong banks 2H10E earnings forecasts HK$ in millions HSB BOCHK BEA WHB DSF DSBG CHBAttributable profits 7,064 6,719 1,608 804 502 505 205EPS (FD) 3.69 0.64 0.79 2.70 1.93 0.45 0.47DPS (ord) 3.00 0.46 0.61 0.76 0.97 0.18 0.36BVPS (FD) 32.7 10.3 20.6 46.7 54.7 10.9 14.7Income statement (h/h) Net interest income 11.1% 8.4% 0.3% 3.9% 5.8% 6.8% 8.9%Net fees and commission income -1.8% -3.0% -9.4% 0.9% 17.2% 15.8% 12.2%Non-interest income -0.6% 23.0% 9.4% 12.6% 60.0% 81.3% 12.4%Total revenue 7.0% 12.6% 3.2% 5.9% 17.0% 18.7% 9.9%Total operating expenses 5.2% 19.5% 3.5% 3.6% 20.9% 22.7% 9.0%Pre-provision Profit 7.9% 8.7% 2.9% 7.8% 12.7% 13.9% 11.3%Total provisioning charge/(writeback) 65.4% -432.8% 58.9% -314.8% 313.3% 313.3% 144.9%Operating earnings before tax 6.6% 3.5% -1.4% -8.3% -3.7% -6.6% -0.7%Attributable profits 1.4% -6.5% -15.9% 5.8% -0.4% -0.4% 6.1%Balance sheet (h/h) Advances less provisions 4.9% 3.3% 2.7% 5.4% 5.6% 5.7% 4.3%Investments -7.6% -5.0% -44.3% 1.4% -2.0% -4.7% -23.1%Total assets -1.7% 2.4% -1.4% 4.0% 2.4% 2.2% 0.3%Customer deposits 2.7% 6.7% 4.4% 4.7% 2.7% 2.6% 1.5%Shareholders' funds 0.0% 2.1% -0.5% 3.4% 19.0% 16.6% 1.5%Per share data (h/h) EPS (FD) 1.4% -6.5% -16.3% 5.7% -0.4% -0.4% 6.1%DPS (ord) 36.4% 13.8% 61.6% 153.3% 383.2% 163.7% 258.2%BVPS (FD) 0.8% 2.1% 0.0% 3.3% 16.7% 6.0% 1.5%Ratios Loan growth 4.9% 5.8% 6.8% 5.9% 5.1% 5.1% 4.4%Net interest margins (reported) 1.87% 1.60% 1.85% 1.84% 1.82% 1.83% 1.27%Non-int inc / TR 32.7% 31.2% 34.1% 25.3% 28.2% 24.4% 30.8%CIR 33.3% 38.4% 60.7% 43.8% 53.4% 56.2% 58.7%Credit cost (prov / gross loans) 0.12% 0.11% 0.14% 0.23% 0.43% 0.43% 0.27%ROA 1.64% 1.02% 0.68% 1.08% 0.77% 0.84% 0.58%ROE 22.7% 12.5% 7.7% 11.8% 7.7% 8.2% 6.5%CAR 12.7% 16.6% 12.3% 16.8% 12.2% 12.2% 14.9% -Tier 1 10.9% 12.0% 9.2% 10.7% 6.2% 6.2% 12.0%Source: J.P. Morgan estimates.

Consensus analysis J.P. Morgan earnings estimates for Hong Kong banks are 5%/7%/3% lower than Bloomberg consensus for FY10/11/12. Consensus is looking for 15% earnings growth, compared to 10% for JPMe. The difference between JPMe and consensus is the largest for BOCHK and Chong Hing Bank, reflecting our stance being relatively less optimistic than the consensus, and the smallest for Hang Seng Bank, Wing Hang Bank and Dah Sing Financials.

16



Table 10: Hong Kong banks earnings forecasts vs. consensus HK$ in millions Name Ticker Net profit Net profit Net profit Net profit Net profit y/y Net profit y/y Net profit y/y FY09 FY10E FY11E FY12E FY10E FY11E FY12E Bloomberg consensus HSB 11 HK 13,221 14,278 16,335 18,796 8% 14% 15% BOCHK 2388 HK 13,725 15,109 17,539 20,468 10% 16% 17% BEA 23 HK 2,565 3,581 4,129 4,816 40% 15% 17% WHB 302 HK 1,205 1,595 1,888 2,126 32% 18% 13% DSF 440 HK 626 1,007 1,278 1,494 61% 27% 17% DSBG 2356 HK 601 1,046 1,296 1,541 74% 24% 19% CHB 1111 HK 232 439 504 588 89% 15% 17% HK banks HK banks 32,174 37,055 42,969 49,831 15% 16% 16% J.P. Morgan estimates HSB 11 HK 13,221 14,028 14,966 17,023 6% 7% 14% BOCHK 2388 HK 13,725 13,909 16,425 20,485 1% 18% 25% BEA 23 HK 2,565 3,355 3,680 4,921 31% 10% 34% WHB 302 HK 1,205 1,565 1,746 2,030 30% 12% 16% DSF 440 HK 626 1,005 1,387 1,694 61% 38% 22% DSBG 2356 HK 601 1,012 1,377 1,745 68% 36% 27% CHB 1111 HK 232 399 453 565 72% 14% 25% HK banks HK banks 32,174 35,273 40,034 48,463 10% 13% 21% JPMe vs. Consensus HSB 11 HK 0% -2% -8% -9% BOCHK 2388 HK 0% -8% -6% 0% BEA 23 HK 0% -6% -11% 2% WHB 302 HK 0% -2% -8% -5% DSF 440 HK 0% 0% 9% 13% DSBG 2356 HK 0% -3% 6% 13% CHB 1111 HK 0% -9% -10% -4% HK banks HK banks 0% -5% -7% -3% Source: Bloomberg and J.P. Morgan estimates.

17



Share price and valuation Figure 26: BOCHK P/B (HK$)

1x

1.5x

2x

2.5x

3x

05

101520253035

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Source: Bloomberg, company reports and J.P. Morgan estimates.

Figure 27: HSB P/B (HK$)

2x3x4x5x6x

0

50

100

150

200

250

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Source: Bloomberg, company reports, and J.P. Morgan estimates. Figure 28: BEA P/B (HK$)

1x

1.5x

2x

2.5x

3x

010203040506070

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9


Figure 29: WHB P/B (HK$)

0.5x1x1.5x2x

3x

020406080

100120140160180

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Source: Bloomberg, company reports, and J.P. Morgan estimates. Figure 30: DSF P/B (HK$)

0.5x0.75x1x1.25x

1.75x

0102030405060708090

100

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9


Figure 31: DSBG P/B (HK$)

1x

1.5x

2x

2.5x

3x

05

101520253035

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Source: Bloomberg, company reports, and J.P. Morgan estimates. Figure 32: CHB P/B (HK$)

0.5x

0.75x

1x

1.25x

1.5x

0

5

10

15

20

25

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9


Figure 33: PFH P/B (HK$)

0.5x0.75x1x1.25x

1.75x

0

2

4

6

8

10

12

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Source: Bloomberg, company reports, and J.P. Morgan estimates.

18



Hong Kong property update • Primary sales slowed down before Chinese New Year: We recorded 46 units sold

in the primary market last week, compared with 65 units sold the week before. SHKP/LHT’s Park Nara remained the major sales contributor of the week (18 units). Other sales came from Kerry’s Island Crest (4 units), Cheung Kong’s Festival City Ph 2 (3 units) and SHKP’s YOHO Midtown (3 units) and ARIA (3 units).

• Secondary prices of HK Island reaching peak level: Secondary prices continued to edge up. The latest Centaline index for the week ended 23 January was 91.21, up 1.3% W/W and was 11% below peak. The sub-index for Hong Kong Island has reached 100.24, exceeding the 100 level for the first time since 1997, which might raise the market concern on further policy measures.

• SHKP named West Kowloon project: While Cheung Kong's Uptown in Yuen Long is likely to be the first one to come to the market after Chinese New Year, another major project adds to the pipeline. SHKP named its Hoi Fai Road project in West Kowloon as Imperial Cullinan, which might be launched in 1Q or 2Q11. The project provides a total of 650 units with standard sizes ranging from 800 - 2,000 sf. According to Sing Tao Daily, the asking price of the project may refer to the developers' Cullinan, which is around HK$20,000 psf in the secondary market on average. Besides, SHKP may launch Avignon in Tuen Mun after Chinese New Year. The project provides 459 units.

• Developers rushing for building plans approval: Since the introduction of GFA inflation cap of 10% which will be effective on 1 April 2011, developers have turned more active in submitting building plans for approval. According to the Buildings Department, a total 134 plans were submitted in December 2010, compared with 92 plans in November and 65 plans in October. For the full year of 2010, 637 plans were submitted, up 62% Y/Y. The number of plans approved was 341 in 2010, same as 2009.

Table 11: Hong Kong property weekly sales Date Units sold Major Launches/re-launches 7 November 62 31 from Jade Suites 14 November 44 28 from Azura (sold by reservation) 21 November 234 216 from Festival City Phase 2 28 November 19 9 from Festival City Phase 2 359 5 December 18 5 from Festival City Phase 2 12 December 20 5 from Festival City Phase 2 19 December 38 15 from Zebrano 27 December 28 9 from 80 Robinson Road 104 2 January 33 6 from 80 Robinson Road 9 January 52 17 from Full Silver Garden 16 January 97 69 from Park Nara 23 January 65 31 from Park Nara 30 January 46 18 from Park Nara 293

Source: Hong Kong Economic Journal, Hong Kong Economic Times, Sing Tao Daily, Mingpao, J.P. Morgan estimates.

Related research:

“Hong Kong Property Update: Weekly primary sales: 46 units” by Amy Luk, on 31 Jan 2011

19



For PT valuation methodology and risks, please see the individual company notes published today.

Com

pani

es


Hang Seng Bank

Neutral 0011.HK, 11 HK

Looking for NIM and capital guidance

Price: HK$128.60

Price Target: HK$120.00

Hong Kong Banks

Joseph LeungAC




100

115

130

HK$

Feb-10 May-10 Aug-10 Nov-10

Price Performance

0011.HK share price (HK$HSI (rebased)

YTD 1m 3m 12mAbs -1.1% 0.6% 13.4% 17.7%Rel -1.1% -1.2% 11.9% 1.9%

Hang Seng Bank Ltd. (Reuters: 0011.HK, Bloomberg: 11 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 14,136 14,240 15,597 17,590 18,420Net Profit 13,221 14,028 14,966 17,023 17,947Cash EPS (HK$) 6.92 7.34 7.83 8.90 9.39Fully Diluted EPS (HK$) 6.92 7.34 7.83 8.90 9.39DPS (HK$) 5.20 5.20 5.30 5.50 5.50EPS growth (%) (6.2%) 6.1% 6.7% 13.7% 5.4%ROE 24.1% 23.2% 23.0% 24.1% 23.1%P/E 18.6 17.5 16.4 14.4 13.7BVPS (HK$) 30.45 32.75 35.30 38.69 42.63P/BV 4.2 3.9 3.6 3.3 3.0Div. Yield 4.0% 4.0% 4.1% 4.3% 4.3%

52-wk range (HK$) 133.90 - 101.00Market cap (HK$ mn) 245,863Market cap ($ mn) 31,557Shares outstanding (mn) 1,912Fiscal Year End DecPrice (HK$) 128.60Date Of Price 31 Jan 11Avg daily value (HK$ mn) 379.6Avg daily value ($ mn) 48.7Avg daily vol (mn) 9.7HSI 23,447Exchange Rate 7.79

Source: Company data, Bloomberg, J.P. Morgan estimates. See page 34 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

• JPMe 6% earnings growth: Hang Seng Bank is scheduled to report FY10 results on 28 February. We expect a net profit of HK$14 billion, +6% y/y, 2% below Bloomberg consensus. For 2H10, we forecast 4% earnings growth. We maintain our Neutral rating for Hang Seng Bank.

• Potential surprise/disappointment: We are relatively comfortable with our forecast. Potential sources of surprises are credit write-backs and better-than-expected NIM, and on the downside is higher-than-expected cost pressure. We expect a DPS of HK$5.2, and we would turn more bullish if we are surprised on the upside.

• What we look for from management: We will be looking for: (1) the possibility of better NIM management in FY11 in light of a prolonged period of low HIBOR, (2) capital management perspective, particularly with the latest BASEL III implementation announced by HKMA, (3) in relation to capital, the likely dividend payout policy for the next three years, and (4) loan demand and capacity available for further growth, given current capital management and dividend payout.

• Valuation: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$120. Trading at 3.6x book value with a dividend yield of 4.1% (11E), HSB appears to be valued fairly, in our view. We see two major drags for HSB: (1) NIM pressure and (2) dividend payout risks. We would turn more positive if these two drags were removed.

21



Hang Seng Bank: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.90% 1.81% 1.89% 2.03% 2.03% Loans 4.7% 20.0% 8.4% 6.4% 5.5%Earning Assets/Assets 93% 93% 93% 93% 93% Deposits 13.2% 5.0% 5.0% 5.0% 5.0%NIM (as % of avg. Assets) 1.76% 1.68% 1.75% 1.88% 1.88% Assets 8.4% 3.7% 4.6% 4.8% 4.9%

Equity 12.8% 7.5% 7.8% 9.6% 10.2%Net Interest Income 14,023 14,173 15,344 17,271 18,109 RWA -8.2% 21.3% 7.8% 6.1% 5.2%

Total Non-Interest Revenues 6,789 7,259 7,892 8,439 8,947 Net Interest Income -13.6% 1.1% 8.3% 12.6% 4.9%Fee income 4,321 4,695 5,258 5,569 5,926 Non-Interest Income -3.9% 6.9% 8.7% 6.9% 6.0%FX/Trading gains 1,864 1,938 1,971 2,168 2,277 of which fee grth -13.0% 8.6% 12.0% 5.9% 6.4%Other operating income 604 626 663 702 744 Revenues -10.7% 3.0% 8.4% 10.6% 5.2%Total operating revenues 20,812 21,432 23,236 25,710 27,055 Costs -1.8% 7.7% 6.2% 6.3% 6.4%Operating costs (6,676) (7,191) (7,639) (8,120) (8,636) Pre-Provision Profits -14.3% 0.7% 9.5% 12.8% 4.7%Operating profit 14,136 14,240 15,597 17,590 18,420 Loan Loss Provisions -42.0% -50.0% 128.0% -14.3% 8.3%Loan Loss Provisions (812) (406) (926) (793) (860) Pre-Tax -2.5% 6.6% 6.7% 13.7% 5.4%Other provisions 0 0 0 0 0 Attributable Income -6.2% 6.1% 6.7% 13.7% 5.4%Exceptionals 0 0 0 0 0 EPS -6.2% 6.1% 6.7% 13.7% 5.4%Disposals/ Other income 405 222 0 0 0 DPS -17.5% 0.0% 1.9% 3.8% 0.0%Pre-tax profit 15,477 16,503 17,608 20,027 21,114Tax 2,256 2,476 2,641 3,004 3,167 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 0 0 0 0 0 Loan/Deposit 54.2% 61.9% 63.9% 64.7% 65.0%Attributable net income 13,221 14,028 14,966 17,023 17,947 Investment/Assets 39.2% 35.1% 30.8% 29.5% 28.7%

Loan/Assets 42.4% 45.1% 49.2% 50.4% 50.9%Customer deposits/Liab. 81.1% 83.6% 84.4% 84.9% 85.4%LT Debt/Liabilities 0.0% 0.0% 0.0% 0.0% 0.0%

Per Share Data 2009 2010e 2011e 2012e 2013e Asset Quality/Capital 2009 2010e 2011e 2012e 2013eEPS (HKD) 6.92 7.34 7.83 8.90 9.39 Loan loss reserves/Loans 0.57% 0.44% 0.52% 0.53% 0.54%Dividend (HKD) 5.20 5.20 5.30 5.50 5.50 NPLs/loans 0.72% 0.57% 0.58% 0.60% 0.63%Payout ratio 0.75 0.71 0.68 0.62 0.59 Loan loss reserves/NPLs 78.3% 77.3% 88.9% 87.5% 85.8%NAV (HKD) 30.45 32.75 35.30 38.69 42.63 Growth in NPLs -26.3% -5.0% 10.0% 10.0% 10.0%Avg. Shares issued (mn) 1,912 1,912 1,912 1,912 1,912 Tier 1 Ratio 12.8% 10.9% 11.1% 11.6% 12.3%

Total CAR 15.8% 12.7% 12.5% 12.8% 13.1%

Key balance sheet - HKDmn 2009 2010e 2011e 2012e 2013e Du-Pont Analysis 2009 2010e 2011e 2012e 2013eNet Customer Loans 344,621 413,424 448,354 476,862 502,933 NIR/Avg. Assets 1.77% 1.68% 1.75% 1.88% 1.88%Investments 318,599 271,307 267,936 273,836 278,469 Total Rev/Avg. Assets 2.62% 2.55% 2.65% 2.80% 2.81%Other Earning Assets 126,637 134,073 140,777 147,816 161,258 Cost/Income 32.1% 33.6% 32.9% 31.6% 31.9%Average Earning Assets 736,953 781,055 813,688 852,389 893,947 Cost/Assets 0.84% 0.85% 0.87% 0.89% 0.90%Total assets 825,968 856,256 895,970 938,991 984,845 Operating ROAA 1.78% 1.69% 1.78% 1.92% 1.91%

LLP/Loans 0.24% 0.11% 0.21% 0.17% 0.17%Interbank funding 4,870 4,870 4,870 4,870 4,870 Loan/Assets 42.4% 45.1% 49.2% 50.4% 50.9%Customer deposits 636,369 668,187 701,597 736,677 773,510 Other inc & associate 10.8% 11.6% 11.4% 11.7% 11.7%Long-term bond funding 12,602 12,300 12,403 12,510 12,620 Pre-tax ROAA 1.95% 1.96% 2.01% 2.18% 2.19%Other Interest Bearing Liabilities Tax 14.6% 15.0% 15.0% 15.0% 15.0%Average Interest Bearing Liab. 620,534 669,599 702,114 736,463 772,528 MI 0.0% 0.0% 0.0% 0.0% 0.0%Average Assets 794,068 841,112 876,113 917,481 961,918 ROAA 1.66% 1.67% 1.71% 1.86% 1.87%Shareholders' equity 58,224 62,604 67,484 73,972 81,508 RoRWA 5.01% 5.02% 4.70% 5.00% 4.99%Risk Weighted Assets 252,729 306,541 330,421 350,575 368,947 Equity/Assets 6.9% 7.2% 7.4% 7.7% 8.1%Average Risk Weighted Assets 264,047 279,635 318,481 340,498 359,761 ROE 24.1% 23.2% 23.0% 24.1% 23.1% Source: Company reports and J.P. Morgan estimates.


Bank of China (BOCHK)

Overweight 2388.HK, 2388 HK

We expect RMB contribution to come later

Price: HK$25.15


Hong Kong Banks

Joseph LeungAC




14

20

26HK$


Price Performance

2388.HK share price (HK$R-CHIP (rebased)

YTD 1m 3m 12mAbs -6.0% -4.9% 3.5% 51.5%Rel -4.1% -4.5% 4.7% 45.5%

Bank of China (Hong Kong) (Reuters: 2388.HK, Bloomberg: 2388 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 17,192 16,707 21,042 25,939 29,618Net Profit 13,725 13,909 16,425 20,485 23,490Cash EPS (HK$) 1.30 1.32 1.55 1.94 2.22Fully Diluted EPS (HK$) 1.30 1.32 1.55 1.94 2.22DPS (HK$) 0.86 0.86 1.01 1.26 1.44EPS growth (%) 310.6% 1.3% 18.1% 24.7% 14.7%ROE 14.8% 13.1% 14.7% 17.4% 18.7%P/E 19.4 19.1 16.2 13.0 11.3BVPS (HK$) 9.73 10.30 10.83 11.50 12.28P/BV 2.6 2.4 2.3 2.2 2.0Div. Yield 3.4% 3.4% 4.0% 5.0% 5.7%

52-wk range (HK$) 29.40 - 16.04Market cap (HK$ mn) 265,905Market cap ($ mn) 34,130Shares outstanding (mn) 10,573Fiscal Year End DecPrice (HK$) 25.15Date Of Price 31 Jan 11Avg daily value (HK$ mn) 342.5Avg daily value ($ mn) 44.0Avg daily vol (mn) 36.4R-CHIP 4,153Exchange Rate 7.79


• JPMe 4% underlying earnings growth for 2H10: BOCHK will report FY10 results toward the end of Mar 2011. We expect a net profit of HK$14 billion, +1% y/y, 8% below Bloomberg consensus. For 2H10, we forecast 7% earnings decline h/h, driven by the absence of HK$601 million fair value gain of investment properties in 1H10. We expect 4% earnings growth h/h on an underlying basis. We maintain our positive stance on BOCHK in the long term.

• Potential surprises/disappointments: A potential source of earnings disappointment is larger-than-expected NIM pressure. Brokerage fees and potential credit write-backs are two possible drivers of potential earnings surprises on the upside. We expect a better-than-industry average deposit growth for BOCHK. Also, we expect the capital strength of BOCHK to support its long-term dividend payout policy.

• What we look for from management: We will be looking for: (1) updates on RMB business and related earnings contribution, (2) future strategic direction of its China platform, (3) guidance of capital levels with reference to latest HKMA announcement of BASEL III implementation, and (4) latest developments of its insurance operation.

• Why are we positive? We maintain our OW rating, earnings estimates, and Dec-11 PT of HK$30. Our positive stance on BOCHK centers on our view that BOCHK is the only bank in Hong Kong with both a China connection and balance sheet franchise. This combination of advantages should allow BOCHK to gain market share and leverage up its balance sheet. RMB business helps, but we believe its impact on earnings won’t be obvious until FY12E or later.

23



BOCHK: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.69% 1.58% 1.77% 1.91% 1.95% Loans 12.3% 17.0% 11.4% 10.1% 8.9%Earning Assets/Assets 90% 93% 93% 93% 93% Deposits 5.0% 13.0% 15.0% 15.0% 10.0%NIM (as % of avg. Assets) 1.52% 1.47% 1.65% 1.78% 1.83% Assets 5.7% 9.9% 11.3% 11.7% 8.2%

Equity 24.4% 5.8% 5.1% 6.2% 6.8%Net Interest Income 17,932 18,683 23,221 27,986 31,491 RWA 5.7% 15.9% 11.7% 10.7% 8.9%

Total Non-Interest Revenues 8,123 7,976 8,566 9,205 9,852 Net Interest Income -11.0% 4.2% 24.3% 20.5% 12.5%Fee income 6,508 6,693 7,171 7,707 8,287 Non-Interest Income 47.7% -1.8% 7.4% 7.5% 7.0%FX/Trading gains 675 1,722 840 924 970 of which fee grth 25.7% 2.8% 7.1% 7.5% 7.5%Other operating income 940 (439) 555 574 594 Revenues 1.6% 2.3% 19.2% 17.0% 11.2%Total operating revenues 26,055 26,659 31,787 37,191 41,342 Costs 10.8% 12.3% 8.0% 4.7% 4.2%Operating costs (8,863) (9,952) (10,745) (11,251) (11,724) Pre-Provision Profits -2.6% -2.8% 25.9% 23.3% 14.2%Operating profit 17,192 16,707 21,042 25,939 29,618 Loan Loss Provisions -83.4% 95.4% 295.7% 0.6% 6.7%Loan Loss Provisions (112) (219) (866) (871) (930) Pre-Tax 310.1% 2.5% 17.7% 24.2% 14.4%Other provisions 0 0 0 0 0 Attributable Income 310.6% 1.3% 18.1% 24.7% 14.7%Exceptionals (3,278) 0 0 0 0 EPS 310.6% 19.1% 18.1% 24.7% 14.7%Disposals/ Other income 2,915 657 0 0 0 DPS 95.2% 0.0% 18.1% 24.7% 14.7%Pre-tax profit 16,724 17,145 20,176 25,068 28,688Tax 2,678 2,915 3,430 4,262 4,877 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 321 321 321 321 321 Loan/Deposit 62.6% 64.8% 62.8% 60.1% 59.4%Attributable net income 13,725 13,909 16,425 20,485 23,490 Investment/Assets 31.0% 29.8% 29.5% 31.3% 32.4%



Total CAR 16.9% 15.2% 14.3% 13.7% 13.3%

Key balance sheet - HKDmn 2009 2010e 2011e 2012e 2013e Du-Pont Analysis 2009 2010e 2011e 2012e 2013eNet Customer Loans 527,135 616,729 686,937 756,019 823,094 NIR/Avg. Assets 1.52% 1.47% 1.65% 1.78% 1.83%Investments 375,933 382,564 447,143 535,036 583,544 Total Rev/Avg. Assets 2.21% 2.09% 2.26% 2.37% 2.40%Other Earning Assets 259,380 282,304 296,419 311,240 330,291 Cost/Income 34.0% 37.3% 33.8% 30.3% 28.4%Average Earning Assets 1,061,065 1,179,680 1,309,061 1,463,855 1,611,761 Cost/Assets 0.75% 0.78% 0.76% 0.72% 0.68%Total assets 1,212,791 1,333,030 1,483,059 1,656,015 1,791,847 Operating ROAA 1.46% 1.31% 1.49% 1.65% 1.72%

LLP/Loans 0.02% 0.04% 0.14% 0.12% 0.12%Interbank funding 137,957 137,957 137,957 137,957 137,957 Loan/Assets 42.2% 44.9% 46.3% 46.0% 45.8%Customer deposits 842,321 951,823 1,094,596 1,258,786 1,384,664 Other inc & associate 11.5% 12.1% 11.8% 12.3% 12.6%Long-term bond funding 26,776 26,508 26,508 26,508 26,508 Pre-tax ROAA 1.42% 1.35% 1.43% 1.60% 1.66%Other Interest Bearing Liabilities Tax 17.0% 17.0% 17.0% 17.0% 17.0%Average Interest Bearing Liab. 980,496 1,061,671 1,187,675 1,341,156 1,486,190 MI 2.3% 2.3% 1.9% 1.5% 1.3%Average Assets 1,180,018 1,272,911 1,408,045 1,569,537 1,723,931 ROAA 1.16% 1.09% 1.17% 1.31% 1.36%Shareholders' equity 102,902 108,907 114,511 121,600 129,849 RoRWA 2.28% 2.08% 2.16% 2.42% 2.53%Risk Weighted Assets 619,792 718,202 802,508 888,409 967,355 Equity/Assets 7.9% 8.3% 7.9% 7.5% 7.3%Average Risk Weighted Assets 602,954 668,997 760,355 845,458 927,882 ROE 14.8% 13.1% 14.7% 17.4% 18.7% Source: Company reports and J.P. Morgan estimates.


Bank of East Asia


Multiple events

Price: HK$33.80


Hong Kong Banks

Joseph LeungAC




24

30

36

HK$


Price Performance


YTD 1m 3m 12mAbs 0.9% 3.8% 2.1% 27.8%Rel 0.9% 2.0% 0.6% 12.0%

Bank of East Asia (Reuters: 0023.HK, Bloomberg: 23 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 5,295 4,335 5,266 6,943 8,043Net Profit 2,514 3,355 3,680 4,921 5,891Cash EPS (HK$) 1.36 1.66 1.74 2.33 2.78Fully Diluted EPS (HK$) 1.36 1.66 1.74 2.33 2.78DPS (HK$) 0.80 1.00 1.09 1.45 1.74EPS growth (%) 5736.7% 21.9% 4.9% 33.4% 19.4%ROE 7.5% 8.7% 8.7% 11.1% 12.5%P/E 24.8 18.0 18.2 13.9 11.7BVPS (HK$) 19.01 20.55 21.40 22.48 23.82P/BV 1.8 1.6 1.6 1.5 1.4Div. Yield 2.4% 2.9% 3.2% 4.3% 5.1%

52-wk range (HK$) 36.60 - 26.15Market cap (HK$ mn) 69,019Market cap ($ mn) 8,852Shares outstanding (mn) 2,042Fiscal Year End DecPrice (HK$) 33.80Date Of Price 31 Jan 11Avg daily value (HK$ mn) 251.0Avg daily value ($ mn) 32.2Avg daily vol (mn) 12.3HSI 23,447Exchange Rate 7.80


• JPMe 31% earnings growth: BEA is scheduled to report FY10 results on 15 February. We expect a net profit of HK$3.4 billion, +31% y/y, and we are 6% below Bloomberg consensus. For 2H10, we forecast -16% h/h earnings growth, mainly driven by HK$230 million BEA Canada disposal gain. On an underlying basis, we expect earnings to be flat h/h. We maintain OW rating for BEA.

• Potential surprise/disappointment: Potential source of positive surprises are better-than-expected fees income growth and better-than-expected NIM due to China operation. Loan volume is however a potential disappointment given that BEA China needs to maintain a 75% LDR requirement.

• What we look for from the management: We will be looking for (1) amount of disposal gain of BEA USA, (2) updates on the relationship with CaixaBank especially after the restructuring, and (3) strategy for China expansion given the latest changes in China banking policy.

• Event-driven: We see share price to remain event-driven in the short-term, specifically related to its relationship with ICBC and CaixaBank. We maintain our OW rating, earnings estimates, and Dec-11 PT of HK$40. We continue to believe that BEA China will help to drive a revenue growth better than its peers in the medium term and thus ROE uplift potentially from 7.5% in FY09 to 12.5% in FY13E.

25



Bank of East Asia: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.80% 1.84% 1.92% 2.05% 2.07% Loans 7.4% 18.7% 11.4% 10.2% 7.5%Earning Assets/Assets 88% 88% 88% 89% 89% Deposits 5.8% 10.0% 15.0% 15.0% 10.0%NIM (as % of avg. Assets) 1.59% 1.62% 1.69% 1.81% 1.84% Assets 4.5% 8.6% 12.6% 12.9% 9.0%

Equity 9.4% 18.2% 4.4% 5.3% 6.2%Net Interest Income 6,747 7,348 8,482 10,244 11,531 RWA 15.6% 17.6% 11.6% 10.2% 7.7%

Total Non-Interest Revenues 4,677 3,651 4,111 4,482 4,790 Net Interest Income -0.7% 8.9% 15.4% 20.8% 12.6%Fee income 2,262 2,586 2,862 3,140 3,377 Non-Interest Income 694.1% -21.9% 12.6% 9.0% 6.9%FX/Trading gains 1,910 490 639 693 723 of which fee grth 5.5% 14.3% 10.7% 9.7% 7.5%Other operating income 505 575 610 649 691 Revenues 54.8% -3.7% 14.5% 16.9% 10.8%Total operating revenues 11,424 10,999 12,593 14,726 16,321 Costs 6.1% 8.7% 9.9% 6.2% 6.4%Operating costs (6,129) (6,664) (7,326) (7,783) (8,278) Pre-Provision Profits 230.3% -18.1% 21.5% 31.8% 15.8%Operating profit 5,295 4,335 5,266 6,943 8,043 Loan Loss Provisions 98.0% -64.9% 55.0% 27.4% -8.9%Loan Loss Provisions (1,105) (388) (602) (767) (699) Pre-Tax 43600.0% 34.6% 8.1% 30.5% 18.3%Other provisions 0 0 0 0 0 Attributable Income 6346.2% 33.5% 9.7% 33.7% 19.7%Exceptionals 0 230 0 0 0 EPS 5736.7% 21.9% 4.9% 33.4% 19.4%Disposals/ Other income (958) 160 0 0 0 DPS 146.9% 31.0% 9.4% 33.4% 19.4%Pre-tax profit 3,496 4,706 5,090 6,644 7,859Tax 858 941 1,018 1,329 1,572 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 73 80 62 64 66 Loan/Deposit 76.4% 82.5% 79.9% 76.6% 74.8%Attributable net income 2,514 3,355 3,680 4,921 5,891 Investment/Assets 10.1% 10.1% 8.3% 8.7% 9.2%


Per Share Data 2009 2010e 2011e 2012e 2013e Asset Quality/Capital 2009 2010e 2011e 2012e 2013eEPS (HKD) 1.36 1.66 1.74 2.33 2.78 Loan loss reserves/Loans 0.51% 0.42% 0.42% 0.45% 0.45%Dividend (HKD) 0.76 1.00 1.09 1.45 1.74 NPLs/loans 0.99% 0.74% 0.70% 0.70% 0.71%Payout ratio 0.59 0.60 0.60 0.60 0.60 Loan loss reserves/NPLs 54.9% 59.4% 60.0% 64.3% 63.6%NAV (HKD) 19.96 21.47 21.40 22.48 23.82 Growth in NPLs 54.4% -10.0% 10.0% 10.0% 10.0%Avg. Shares issued (mn) 1,844 2,018 2,109 2,114 2,119 Tier 1 Ratio 9.2% 9.2% 9.2% 9.6% 10.2%

Total CAR 13.3% 12.3% 11.9% 11.9% 12.3%




Wing Hang Bank


We expect solid fundamentals to continue

Price: HK$104.90


Hong Kong Banks

Joseph LeungAC




60

90

120

HK$


Price Performance


YTD 1m 3m 12mAbs -2.7% -2.4% 15.8% 58.3%Rel -2.7% -4.2% 14.3% 42.5%

Wing Hang Bank (Reuters: 0302.HK, Bloomberg: 302 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 2,100 1,990 2,212 2,540 3,018Net Profit 1,205 1,565 1,746 2,030 2,430Cash EPS (HK$) 4.05 5.25 5.85 6.80 8.13Fully Diluted EPS (HK$) 4.05 5.25 5.85 6.80 8.13DPS (HK$) 0.70 1.06 1.77 2.74 4.10EPS growth (%) 3.7% 29.8% 11.4% 16.2% 19.6%ROE 10.4% 11.9% 12.1% 13.0% 14.5%P/E 25.7 19.8 17.8 15.3 12.8BVPS (HK$) 42.40 46.69 50.76 54.68 58.49P/BV 2.5 2.2 2.1 1.9 1.8Div. Yield 0.7% 1.0% 1.7% 2.6% 3.9%

52-wk range (HK$) 117.80 - 62.45Market cap (HK$ mn) 30,976Market cap ($ mn) 3,976Shares outstanding (mn) 295Fiscal Year End DecPrice (HK$) 104.90Date Of Price 31 Jan 11Avg daily value (HK$ bn) 0.1Avg daily value ($ mn) 6.9Avg daily vol (mn) 0.8HSI 23,447Exchange Rate 7.79


• JPMe 30% earnings growth: Wing Hang Bank will report FY10 results in mid-March. We expect a net profit of HK$1.6 billion, +30% y/y, 2% below Bloomberg consensus. For 2H10, we forecast 6% earnings growth. We maintain OW rating for Wing Hang Bank.

• Potential surprise/ disappointment: We are relatively comfortable with our forecast for WHB. Potential sources of surprises are credit write-backs and better-than-expected fees income growth on the upside, and higher-than-expected NIM and cost pressure on the downside.

• What we look for from the management: We will be looking for (1) latest development of its China operation, (2) possibility of equity raising given recently announced BASEL III implementation and business growth outlook, and (3) guidance of dividend payout policy.

• Maintain OW: We maintain our OW rating reflecting WHB’s better-than-peers fundamentals, driven by solid management and expansion in China. We keep our earnings estimates and Dec-11 PT of HK$115 unchanged. Key downside risk to our PT is larger-than-expected pressure in relation to the new capital requirement.

27



Wing Hang Bank: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.82% 1.87% 1.94% 1.95% 1.99% Loans 1.3% 18.2% 11.5% 10.4% 10.9%Earning Assets/Assets 96% 96% 96% 96% 97% Deposits 9.6% 3.0% 10.0% 15.0% 15.0%NIM (as % of avg. Assets) 1.75% 1.80% 1.86% 1.88% 1.92% Assets 9.5% 3.5% 9.4% 13.6% 13.7%


Total Non-Interest Revenues 1,033 878 969 1,067 1,158 Net Interest Income 0.6% 9.4% 10.3% 12.7% 16.4%Fee income 662 653 723 798 874 Non-Interest Income 17.9% -15.0% 10.4% 10.1% 8.5%FX/Trading gains 340 192 211 232 244 of which fee grth -6.3% -1.3% 10.7% 10.3% 9.6%Other operating income 31 33 35 37 40 Revenues 5.2% 2.2% 10.3% 12.0% 14.5%Total operating revenues 3,493 3,570 3,938 4,412 5,050 Costs 0.8% 13.4% 9.3% 8.4% 8.5%Operating costs (1,393) (1,580) (1,726) (1,872) (2,031) Pre-Provision Profits 8.3% -5.2% 11.1% 14.8% 18.8%Operating profit 2,100 1,990 2,212 2,540 3,018 Loan Loss Provisions -88.1% 8.8% 167.5% -5.1% 3.2%Loan Loss Provisions (53) (58) (154) (146) (151) Pre-Tax 5.3% 30.2% 11.5% 16.3% 19.7%Other provisions 0 0 0 0 0 Attributable Income 3.7% 29.9% 11.6% 16.3% 19.7%Exceptionals (178) 9 0 0 0 EPS 3.7% 29.8% 11.4% 16.2% 19.6%Disposals/ Other income (473) (97) 0 0 0 DPS -34.1% 51.4% 67.2% 54.9% 49.5%Pre-tax profit 1,434 1,867 2,083 2,422 2,898Tax 227 299 333 387 464 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 2 4 4 4 4 Loan/Deposit 65.3% 75.0% 76.0% 73.0% 70.4%Attributable net income 1,205 1,565 1,746 2,030 2,430 Investment/Assets 24.5% 28.6% 24.2% 25.3% 27.9%


Per Share Data 2009 2010e 2011e 2012e 2013e Asset Quality/Capital 2009 2010e 2011e 2012e 2013eEPS (HKD) 4.05 5.25 5.85 6.80 8.13 Loan loss reserves/Loans 0.30% 0.29% 0.32% 0.33% 0.33%Dividend (HKD) 0.70 1.06 1.77 2.74 4.10 NPLs/loans 0.51% 0.36% 0.34% 0.33% 0.33%Payout ratio 0.17 0.20 0.30 0.40 0.50 Loan loss reserves/NPLs 60.4% 82.6% 95.3% 98.6% 99.4%NAV (HKD) 42.42 46.72 50.76 54.68 58.49 Growth in NPLs -27.6% -15.0% 5.0% 10.0% 10.0%Avg. Shares issued (mn) 298 298 298 299 299 Tier 1 Ratio 10.6% 10.7% 10.9% 11.0% 10.9%

Total CAR 17.8% 16.8% 16.4% 16.0% 15.4%


LLP/Loans 0.06% 0.06% 0.15% 0.13% 0.12%Interbank funding 832 873 917 963 1,011 Loan/Assets 58.2% 60.1% 64.6% 64.2% 62.6%Customer deposits 126,183 129,968 142,965 164,410 189,071 Other inc & associate 6.6% 8.5% 8.6% 8.9% 9.3%Long-term bond funding 972 993 1,005 1,018 1,032 Pre-tax ROAA 1.02% 1.25% 1.31% 1.36% 1.43%Other Interest Bearing Liabilities Tax 15.8% 16.0% 16.0% 16.0% 16.0%Average Interest Bearing Liab. 123,069 129,910 138,361 155,639 178,752 MI 0.0% 0.0% 0.0% 0.0% 0.0%Average Assets 140,762 149,708 159,445 177,958 202,272 ROAA 0.86% 1.05% 1.09% 1.14% 1.20%Shareholders' equity 12,521 13,805 15,021 16,199 17,344 RoRWA 1.48% 1.80% 1.78% 1.86% 2.00%Risk Weighted Assets 80,396 93,033 103,573 114,981 128,214 Equity/Assets 8.2% 8.8% 9.0% 8.8% 8.3%Average Risk Weighted Assets 81,563 86,715 98,303 109,277 121,597 ROE 10.4% 11.9% 12.1% 13.0% 14.5% Source: Company reports and J.P. Morgan estimates.


Dah Sing Financial


Look for China expansion strategy

Price: HK$54.55


Hong Kong Banks

Joseph LeungAC




30

45

60

HK$


Price Performance


YTD 1m 3m 12mAbs 4.8% 7.3% 1.4% 47.8%Rel 4.8% 5.5% -0.1% 32.0%

Dah Sing Financial (Reuters: 0440.HK, Bloomberg: 440 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 1,519 1,430 1,879 2,311 2,570Net Profit 626 1,005 1,387 1,694 1,886Cash EPS (HK$) 2.40 3.86 4.74 5.79 6.44Fully Diluted EPS (HK$) 2.40 3.86 4.74 5.79 6.44DPS (HK$) 0.00 1.04 2.35 2.98 3.45EPS growth (%) 478.6% 60.6% 22.8% 22.2% 11.3%ROE 5.9% 7.8% 9.3% 10.4% 10.8%P/E 22.7 15.0 11.5 9.4 8.5BVPS (HK$) 43.78 48.59 53.25 57.86 61.83P/BV 1.2 1.1 1.0 0.9 0.9Div. Yield 0.0% 1.9% 4.3% 5.5% 6.3%

52-wk range (HK$) 63.22 - 33.69Market cap (HK$ mn) 15,973Market cap ($ mn) 2,050Shares outstanding (mn) 293Fiscal Year End DecPrice (HK$) 54.55Date Of Price 31 Jan 11Avg daily value (HK$ bn) 0.0Avg daily value ($ mn) 2.3Avg daily vol (mn) 1.5HSI 23,447Exchange Rate 7.79


• JPMe 61% earnings growth: Dah Sing Financial will report FY10 results in mid-March. We expect net profit of HK$1 billion, +61% y/y, and we are the same as Bloomberg consensus. For 2H10, we forecast flat h/h earnings growth. We maintain our Neutral rating for Dah Sing Financial.

• Potential surprise/ disappointment: We see credit quality and NIM as two potential sources of earnings surprise on the upside, and we see few downside risks to JPMe/ consensus earnings.

• What we look for from management: We will be looking for: (1) guidance on the strategy for its China expansion and required capital outlay, (2) dividend payout guidance, given its China expansion, rights issue in 2010 and recently released BASEL III implementation, and (3) sight of turnaround in its insurance operation.

• Maintain Neutral: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$60. We are concerned with the leverage levels in light of recently announced BASEL III implementation and the impact to sustainable ROE. We should turn more positive when we see evidence of China expansion.

29



Dah Sing Financial: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.95% 1.81% 1.86% 2.00% 2.06% Loans -3.5% 17.1% 14.2% 10.0% 7.7%Earning Assets/Assets 99% 99% 99% 100% 100% Deposits 10.5% 3.0% 12.7% 10.1% 8.1%NIM (as % of avg. Assets) 1.93% 1.79% 1.85% 1.99% 2.06% Assets 2.0% 6.9% 10.3% 8.5% 6.9%


Total Non-Interest Revenues 654 746 1,049 1,138 1,179 Net Interest Income -1.1% -3.2% 12.4% 17.8% 11.2%Fee income 327 377 399 423 449 Non-Interest Income -1.1% 14.1% 40.7% 8.5% 3.6%FX/Trading gains 216 354 453 465 478 of which fee grth -35.0% 15.1% 6.0% 6.0% 6.1%Other operating income 111 15 197 250 252 Revenues -1.1% 0.6% 19.4% 15.1% 9.1%Total operating revenues 2,998 3,015 3,600 4,144 4,521 Costs 5.4% 7.1% 8.6% 6.5% 6.5%Operating costs (1,479) (1,585) (1,721) (1,832) (1,951) Pre-Provision Profits -6.7% -5.8% 31.3% 23.0% 11.2%Operating profit 1,519 1,430 1,879 2,311 2,570 Loan Loss Provisions -34.2% -58.8% -3.1% -5.3% -12.0%Loan Loss Provisions (433) (179) (173) (164) (144) Pre-Tax 383.9% 66.8% 37.5% 23.4% 12.5%Other provisions 0 0 0 0 0 Attributable Income 489.5% 60.6% 38.0% 22.2% 11.3%Exceptionals (390) 0 0 0 0 EPS 478.6% 60.6% 22.8% 22.2% 11.3%Disposals/ Other income (11) (45) 0 0 0 DPS -100.0% #DIV/0! 126.9% 26.7% 15.8%Pre-tax profit 886 1,477 2,031 2,506 2,820Tax 96 210 288 360 412 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 163 262 356 451 523 Loan/Deposit 77.0% 87.5% 88.6% 88.6% 88.3%Attributable net income 626 1,005 1,387 1,694 1,886 Investment/Assets 25.3% 26.2% 25.0% 24.1% 23.8%



Total CAR 16.8% 15.3% 14.1% 13.4% 13.1%




Dah Sing Banking Group


Look for China expansion strategy

Price: HK$13.78


Hong Kong Banks

Joseph LeungAC




9

12

15

HK$


Price Performance


YTD 1m 3m 12mAbs 1.2% 4.4% 3.8% 32.0%Rel 1.2% 2.6% 2.3% 16.2%

Dah Sing Banking Group (Reuters: 2356.HK, Bloomberg: 2356 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 1,274 1,158 1,488 1,883 2,155Net Profit 601 1,012 1,377 1,745 2,020Cash EPS (HK$) 0.60 1.01 1.13 1.43 1.65Fully Diluted EPS (HK$) 0.60 1.01 1.13 1.43 1.65DPS (HK$) 0.00 0.25 0.56 0.71 0.83EPS growth (%) 195.6% 68.4% 11.8% 26.7% 15.8%ROE 6.3% 8.4% 9.9% 11.6% 12.5%P/E 23.0 13.7 12.2 9.7 8.3BVPS (HK$) 9.69 10.89 11.88 12.75 13.69P/BV 1.4 1.3 1.2 1.1 1.0Div. Yield 0.0% 1.8% 4.1% 5.2% 6.0%

52-wk range (HK$) 15.52 - 8.57Market cap (HK$ mn) 16,852Market cap ($ mn) 2,163Shares outstanding (mn) 1,223Fiscal Year End DecPrice (HK$) 13.78Date Of Price 31 Jan 11Avg daily value (HK$ bn) 0.0Avg daily value ($ mn) 4.8Avg daily vol (mn) 0.7HSI 23,447Exchange Rate 7.79


• JPMe 68% earnings growth: Dah Sing Banking Group will report FY10 results in mid-March. We expect net profit of HK$1 billion, +68% y/y, and we are 3% below Bloomberg consensus. For 2H10, we forecast flat h/h earnings growth. We maintain our Neutral rating for Dah Sing Banking Group.

• Potential surprise/ disappointment: We see credit quality and NIM as two potential sources of earnings surprise on the upside, and we see few downside risks to JPMe/ consensus earnings.

• What we look for from management: We will be looking for: (1) guidance on the strategy for its China expansion and required capital outlay, and (2) dividend payout guidance, given its China expansion, rights issue in 2010 and recently released BASEL III implementation.

• Maintain Neutral: We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$15. We are concerned with the leverage levels in light of recently announced BASEL III implementation and the impact to sustainable ROE. We would turn more positive when we see evidence of China expansion. We prefer DSBG over DSFH because of: (1) better capital structure, and (2) less optimistic outlook for insurance operation.

31



Dah Sing Banking Group: Summary of financials Income statement - HKDmn 2009 2010e 2011e 2012e 2013e Growth Rates 2009 2010e 2011e 2012e 2013eMargins (% of Earning Assets) 1.95% 1.81% 1.89% 2.06% 2.14% Loans -3.6% 17.3% 14.3% 10.1% 7.7%Earning Assets/Assets 97% 97% 97% 97% 97% Deposits 9.4% 3.0% 12.0% 10.0% 8.0%NIM (as % of avg. Assets) 1.89% 1.75% 1.84% 2.01% 2.08% Assets 1.1% 6.6% 10.3% 8.7% 7.2%


Total Non-Interest Revenues 475 533 706 745 786 Net Interest Income -3.3% -3.5% 13.6% 19.4% 12.0%Fee income 348 398 420 445 470 Non-Interest Income -28.7% 12.0% 32.6% 5.5% 5.5%FX/Trading gains 99 103 251 264 277 of which fee grth -34.6% 14.2% 5.7% 5.7% 5.8%Other operating income 28 32 34 36 39 Revenues -9.2% -0.7% 17.5% 16.2% 10.7%Total operating revenues 2,610 2,592 3,047 3,541 3,918 Costs 6.5% 7.4% 8.7% 6.3% 6.3%Operating costs (1,336) (1,435) (1,559) (1,658) (1,763) Pre-Provision Profits -21.3% -9.1% 28.5% 26.6% 14.5%Operating profit 1,274 1,158 1,488 1,883 2,155 Loan Loss Provisions -35.1% -58.2% -3.1% -5.3% -12.0%Loan Loss Provisions (428) (179) (173) (164) (144) Pre-Tax 222.7% 76.2% 36.1% 26.7% 15.8%Other provisions 0 0 0 0 0 Attributable Income 218.5% 68.4% 36.1% 26.7% 15.8%Exceptionals (390) 0 0 0 0 EPS 195.6% 52.2% 23.7% 26.7% 15.8%Disposals/ Other income 27 (45) 0 0 0 DPS -100.0% #DIV/0! 126.9% 26.7% 15.8%Pre-tax profit 684 1,205 1,640 2,077 2,405Tax 83 193 262 332 385 Balance Sheet Gearing 2009 2010e 2011e 2012e 2013eMinorities/preference dividends 0 0 0 0 0 Loan/Deposit 74.8% 85.2% 86.9% 87.0% 86.8%Attributable net income 601 1,012 1,377 1,745 2,020 Investment/Assets 22.5% 23.0% 21.4% 20.4% 20.1%



Total CAR 16.8% 15.3% 14.1% 13.4% 13.1%




Chong Hing Bank


Potential corporate action premium in the price

Price: HK$22.70


Hong Kong Banks

Joseph LeungAC




12

18

24

HK$


Price Performance


YTD 1m 3m 12mAbs 5.6% 6.3% 18.2% 61.2%Rel 5.6% 4.5% 16.7% 45.4%

Chong Hing Bank (Reuters: 1111.HK, Bloomberg: 1111 HK)Year-end Dec (HK$ in mn) FY09A FY10E FY11E FY12E FY13EOperating Profit 609 508 563 691 817Net Profit 232 399 453 565 679Cash EPS (HK$) 0.53 0.92 1.04 1.30 1.56Fully Diluted EPS (HK$) 0.53 0.92 1.04 1.30 1.56DPS (HK$) 0.28 0.46 0.52 0.65 0.78EPS growth (%) 282.3% 72.0% 13.5% 24.7% 20.2%ROE 3.8% 6.3% 7.0% 8.4% 9.6%P/E 42.6 24.8 21.8 17.5 14.6BVPS (HK$) 14.19 14.67 15.24 15.83 16.60P/BV 1.6 1.5 1.5 1.4 1.4Div. Yield 1.2% 2.0% 2.3% 2.9% 3.4%

52-wk range (HK$) 24.40 - 13.78Market cap (HK$ mn) 9,875Market cap ($ mn) 1,267Shares outstanding (mn) 435Fiscal Year End DecPrice (HK$) 22.70Date Of Price 31 Jan 11Avg daily value (HK$ mn) 1.3Avg daily value ($ mn) 0.2Avg daily vol (mn) 0.1HSI 23,447Exchange Rate 7.79


• JPMe 72% earnings growth: Chong Hing Bank is scheduled to report FY10 results on 2 March. We expect a net profit of HK$399 million, +72% y/y, 9% below Bloomberg consensus. For 2H10, we forecast 6% earnings growth. We maintain Neutral rating for Chong Hing Bank.

• Potential surprise/ disappointment: Excluding the one-off provision related to Lehman minibonds, we expect PPOP to decline by 17% y/y. We see brokerage income and trading gains being the potential sources of earnings surprise on the upside, and higher-than-expected cost pressure on the downside.

• What we look for from the management: We will be looking for mainly (1) guidance of dividend payout in relation to the recently announced BASEL III implementation for Hong Kong banks, and (2) guidance on NIM given that HIBOR should continue to remain low in 2011.

• Valuation: Since the removal of the family's last name “Liu” from its brand, CHB has been a target of potential takeover (source: Bloomberg News, 26 Nov 2006). Trading at 1.5x book value and 22x earnings (11E), CHB appears to have some M&A premium priced in. We maintain our Neutral rating, earnings estimates, and Dec-11 PT of HK$20.

33



Chong Hing Bank: Summary of financials Income statement - HKDmn 2008 2009e 2010e 2011e 2012e Growth Rates 2008 2009e 2010e 2011e 2012eMargins (% of Earning Assets) 1.28% 1.23% 1.26% 1.29% 1.41% Loans 3.5% -1.1% 13.6% 4.6% 4.3%Earning Assets/Assets 98% 97% 97% 97% 97% Deposits -1.5% 2.3% 1.0% 5.0% 5.0%NIM (as % of avg. Assets) 1.26% 1.19% 1.22% 1.25% 1.37% Assets -1.0% 2.4% 1.3% 4.8% 4.8%

Equity -5.0% 3.7% 3.4% 3.9% 3.9%Net Interest Income 864 823 859 908 1,040 RWA 0.0% -1.4% 11.4% 4.7% 4.4%

Total Non-Interest Revenues 363 487 378 413 440 Net Interest Income -11.0% -4.7% 4.4% 5.7% 14.5%Fee income 217 264 233 255 277 Non-Interest Income -15.1% 33.9% -22.4% 9.3% 6.7%FX/Trading gains 43 113 33 40 42 of which fee grth -23.5% 21.6% -11.7% 9.6% 8.5%Other operating income 104 110 112 117 121 Revenues -12.2% 6.7% -5.6% 6.8% 12.1%Total operating revenues 1,228 1,310 1,237 1,321 1,480 Costs 21.7% -11.6% 4.1% 3.9% 4.1%Operating costs (792) (701) (729) (758) (789) Pre-Provision Profits -41.8% 40.0% -16.7% 10.9% 22.8%Operating profit 435 609 508 563 691 Loan Loss Provisions 10.1% 12.0% -33.5% 8.9% 6.5%Loan Loss Provisions (91) (102) (68) (74) (79) Pre-Tax -84.3% 196.1% 79.5% 13.5% 24.7%

Attributable Income -88.0% 282.3% 72.0% 13.5% 24.7%Exceptionals 0 (288) 0 0 0 EPS -88.0% 282.3% 72.0% 13.5% 24.7%Disposals/ Other income (164) 13 5 0 0 DPS -69.2% 40.0% 63.6% 13.5% 24.7%Pre-tax profit 89 264 475 539 672Tax 29 33 76 86 108 Balance Sheet Gearing 2008 2009e 2010e 2011e 2012eMinorities/preference dividends 0 0 0 0 0 Loan/Deposit 56.6% 54.7% 61.6% 61.4% 61.0%Attributable net income 61 232 399 453 565 Investment/Assets 20.5% 20.5% 22.0% 18.7% 18.9%



Total CAR 15.6% 16.0% 14.9% 14.8% 14.9%


LLP/Loans 0.28% 0.31% 0.19% 0.20% 0.20%Interbank funding 1,526 1,448 1,520 1,596 1,676 Loan/Assets 48.1% 48.3% 50.4% 53.3% 53.1%Customer deposits 59,402 60,788 61,396 64,466 67,689 Other inc & associate 2.3% 2.5% 6.1% 6.5% 7.3%Long-term bond funding 0 0 0 0 0 Pre-tax ROAA 0.13% 0.38% 0.67% 0.74% 0.88%Other Interest Bearing Liabilities Tax 32.1% 12.3% 16.0% 16.0% 16.0%Average Interest Bearing Liab. 60,856 61,582 62,576 64,489 67,714 MI 0.0% 0.0% 0.0% 0.0% 0.0%Average Assets 68,715 69,191 70,455 72,607 76,095 ROAA 0.09% 0.33% 0.57% 0.62% 0.74%Shareholders' equity 5,957 6,174 6,383 6,629 6,886 RoRWA 0.15% 0.58% 0.95% 1.00% 1.19%Risk Weighted Assets 40,188 39,644 44,182 46,242 48,265 Equity/Assets 8.9% 8.8% 8.9% 9.0% 8.9%Average Risk Weighted Assets 40,187 39,916 41,913 45,212 47,253 ROE 1.0% 3.8% 6.3% 7.0% 8.4% Source: Company reports and J.P. Morgan estimates.

34



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report 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(s) in this report.

Important Disclosures

Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan 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.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Joseph Leung: Bank of China (BOCHK) (2388.HK), Bank of East Asia (0023.HK), Chong Hing Bank (1111.HK), Dah Sing Banking Group (2356.HK), Dah Sing Financial (0440.HK), Hang Seng Bank (0011.HK), Public Financial Holdings Limited (0626.HK), Value Partners Group Limited (0806.HK), Wing Hang Bank (0302.HK)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage 46% 42% 12% IB clients* 53% 50% 38% JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/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: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

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.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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http://www.morganmarkets.com/

35



Other Disclosures

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Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB010675237/INB010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms:

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JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised January 8, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.#$J&098$#*P

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JP Morgan - 1 Feb 2011