Vous êtes sur la page 1sur 20

Asia Pacific Equity Research

16 March 2010

China Banks
LGFVs debt manageable from aggregate perspective,
asset quality risk from LGFVs well priced in

• Manageable size in banks’ loan book: LGFVs played a positive role in China
China’s urbanization and track record on such loans’ asset quality is also Banks
generally good. We estimate the 10 banks under our coverage had nearly AC
Samuel Chen
Rmb2.2trn LGFVs loans as of 09YE, or in total about 10% of 09E loans. (852) 2800-8557
This is consistent with regulators’ about Rmb6trn figure for the sector. We samuel.s.chen@jpmorgan.com
expect the 10 banks we cover to have Rmb2.8trn LGFV loans by 2010E. Cindy Xu
(852) 2800-8502
• Current debt levels will not shake the country's fiscal position. 1) With cindy.p.xu@jpmorgan.com
total revenue of around Rmb7trn in 2009, total local governments’ debt to
Sunil Garg
their 09 revenue was close to 100%, still in line with international
(852) 2800-8518
standards. 2) More importantly, we expect continued growth in fiscal sunil.garg@jpmorgan.com
revenue in coming years based on economic growth should help improve
J.P. Morgan Securities (Asia Pacific) Limited
debt servicing capability. We estimate at peak 2012-2013, annual debt
repayment will account for 21% of local governments’ revenues. 3) Even Figure 1: Projected size of local
with local government debt, China's government debt to GDP will still be government debt amount and as % of
close to 40%, lower than many developed countries' above 50% level. local governments' revenue
10,000 87.6% 96.6% 93.9% 72.5% 100%
• Debt servicing depends on a few factors: While there is no legally valid 8,000 80%
50.1%
guarantee, in most cases local governments provide fiscal subsidy and land 6,000 60%

Rmb bn
collateral to LGFVs. Thus other than project cash flows, debt repayments 8783
26.2%
4,000 7867 7780 40%
very much depends on local governments' fiscal position too. Future debt 6200 6135 13.2%
2,000 3696 20%
repayment depends on 1) economic growth, 2) stable property market, and 2113
- 0%
3) overall liquidity in China. Unless there is any shock to economic growth
2009E 2010E 2011E 2012E 2013E 2014E 2015E
or collapse in property development sector or a credit crunch, asset quality
Local governments' debt outs. as %of total local revenue
is not under huge risk. The Chinese government is also mitigating risks
through allowing qualified local governments to issue more debt in China, Source: J.P. Morgan estimates.
and securitizing some LGFV loans gradually.

• Stress tests show potential impact limited to manageable earnings risk.


Potential risk areas are mainly with "packaged loans" to LGFVs. Thanks to We analyse in this report:
low loan to asset ratios and high operating ROA, Chinese banks are in a
much stronger position to absorb credit loss compared to 10 years ago. We • Size and basics of LGFVs.
believe sector PPOP alone should absorb Rmb3trn new NPL formation
• Stress tests of individual
within 1-year. For the 10 banks under our coverage, with 11E PPOP at
banks’ financial
over Rmb1trn, even if 20% of LGFV loans default in 11E in addition to
strength/profitability to their
our assumed NPL formation, their ROEs would still stay in mid-high
LGFV exposure.
teens, suggesting limited downside for de-rating.
• Dynamic analysis of local
• Risks well priced. We believe many banks have already taken various government finance and debt
measures to manage credit risks. Our stress tests show that even in extreme servicing capability.
cases in which 20% of LGFVs loans default in a single year, in addition to
already assumed NPL formation in our base case, the sector is still trading
on just FY11E 12.6x PE or 1.9x PB, with ROE still in mid-high teen
percentage for most H-shares. We find that CMB and SDB in particular
are more resilient against potential LGFV risks, while Citic, BOC and
SDPB also show relatively strong resilience.

See page 15 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.
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Assessing the risks of LGFV exposure


The central government’s effort to control the rising number of local government
funding vehicles (LGFVs) and lending exposure to such entities has triggered a new
round of asset quality concerns in the market. As we mentioned in our 2010 outlook,
published in Jan 2010, excess concern on liquidity tightening, banks’ capital raising,
and potential asset quality risk dampened sentiment on this sector. While investors
generally agree the first 2 concerns have been gradually digested and well priced in,
asset quality concern dominates many investors' mindset and is elevating.

Although we acknowledge potential increase in NPL formation rate in


2011/2012E, we believe investors should not exaggerate such risk. Our analysis
concludes that while surging lending to LGFVs increased banks' credit risk, such risk
is still manageable and will not lead to a collapse in the system or even profitability.
In our stress test scenario, the 10 banks under our coverage would still have mid-teen
percentage ROE, even if we assume the extreme case in which 20% of the estimated
2010 outstanding LGFVs loans default within a single year 2011.

Table 1: Stress test results of 11E ROE: even if 20% LGFVs loans default in a single year 2011, ROE will stay at mid-high teen percentage.
11E ROE ICBC CCB BOC BoComm CMB Citic Minsheng SPDB Huaxia SZDB Total
Base case 24.5% 25.5% 21.3% 20.0% 21.2% 21.8% 17.0% 16.8% 19.2% 20.9% 22.6%
10% LGFV loan 20.6% 21.2% 18.3% 16.0% 19.5% 19.3% 14.4% 14.5% 15.6% 18.7% 19.0%
15% LGFV loan 18.7% 19.1% 16.7% 13.9% 18.7% 18.0% 13.0% 13.3% 13.7% 17.6% 17.1%
20% LGFV loan 16.6% 16.9% 15.1% 11.8% 17.8% 16.8% 11.6% 12.1% 11.9% 16.5% 15.3%
Source: J.P. Morgan estimates.

Table 2: Stress test of 11E credit provisioning as % of PPOP in various LGFV default scenarios in a single year 2011: Chinese banks have very
high pre-provisioning operating ROA to absorb potential NPLs from LGFVs
ICBC CCB BOC BoComm CMB Citic Minsheng SPDB Huaxia SZDB Total
Base case 10.7% 11.9% 12.2% 19.7% 11.1% 11.0% 17.7% 15.7% 27.8% 19.0% 12.8%
10% LGFV loan 29.3% 31.0% 28.8% 40.0% 21.0% 24.9% 35.3% 31.4% 45.2% 30.5% 30.6%
15% LGFV loan 38.1% 40.1% 36.7% 49.5% 25.8% 31.5% 43.4% 38.8% 53.2% 36.0% 39.1%
20% LGFV loan 46.6% 48.8% 44.3% 58.7% 30.4% 37.9% 51.0% 45.9% 60.7% 41.4% 39.1%
Source: J.P. Morgan estimates.

We thus believe potential risks in LGFV may lead to manageable earnings risks
to our base-case forecasts, but will not significantly weaken the financial
soundness of the banking system. After all, with relatively low loan to assets (at
about 52%) and strong operating ROA levels, these banks have very strong PPOP
buffer to absorb any sharp increase in credit costs without any book value hit.
Moreover, from a qualitative perspective, Chinese banks have also significantly
increased their internal risk management, and unlike in the 1990s, a lot of lending is
much more collateral-based.

2
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Figure 2: Chinese banks have substantially improved their pre-prov. Figure 3: Sector loan to asset ratios have declined significantly over
operating ROA in the past 10 years the past 10-15 years
2.4% 90 83 35

%
83

%
1.9% 2.1% 1.9% 2.0% 79 80 77 30
2.1% 1.8% 80 75 75
1.7% 70
1.8% 63 64 63 25
1.4% 1.5% 1.5% 1.5% 70
59
1.5% 54 20
60 53
1.2% 1.1% 51 53 15
0.8% 50
0.9% 10
0.6% 0.7%
0.6% 40 5
0.3% 30 0
99 00 01 02 03 04 05 06 07 08 09E 10E 11E 12E 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Medium JSBs State-controlled banks Listed banks av g. Loan/asset ratio (LHS) Loan grow th (RHS)

Source: Company reports and J.P. Morgan estimates. Source: PBOC, CBRC.

Meanwhile, our analysis and projection also show that although debt level at local
governments may continue to rise to 2011E and debt repayment burden will increase
from 2012E, the debt level should be still manageable from aggregate systemic
perspective, if there is no major downside shock to economic growth and there is no
liquidity crunch. We believe at peak, the annual repayment burden will rise to
around 22% of total local governments’ revenue in 2012-2014E. Even if we
exclude ex-budget land sales revenue for local governments, this percentage will
still peak at about 24-25%. That said, we do acknowledge that as credit standards
rise and the central government tightens availability, there may be some liquidity-
driven NPL cases from LGFV emerging earlier than it would have been.

Figure 4: Projected aggregate local governments' annual principal and interest repayment burden
as % of total revenue: We expect it peaks in 2012-2014E at around 22%.
3,500 30.0%
21.6%
3,000 21.4% 21.1% 25.0%
2,500 15.0% 20.0%
14.6% 11.7%
2,000
Rmb bn

9.1% 15.0%
1,500 3,046
2,300 2,580 10.0%
1,000 1,865
1,220 1,362 5.0%
500 647
0 0.0%
2009E 2010E 2011E 2012E 2013E 2014E 2015E

annual principal & int.repay ment annual repay mnet as % of total local rev enue

Source: J.P. Morgan estimates.

We argue the risks are well priced in at current share price levels (see table 5 on page
10). Even in stressed scenario 3, 11E PE remains at 12.6x for the sector (11E PB at
1.9x). Although we expect investors remain concerned on asset quality risks, which
may suggest any re-rating may not be significant in near-term, the current valuation
remains attractive for investors focusing on medium-term horizon. Should the default
rate on such segment rise, we believe relatively resilient players will be CMB, SDB,
Citic, BOC and SPDB. While some other state-controlled banks particularly ICBC
and CCB do not stand out in stress tests, we believe they have safer exposure to
LGFVs loans, and subsequently will enjoy lower default rates, as compared with
smaller medium-sized banks.

3
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Basics of LGFV
Q: What are LGFV and their background?
The local government funding vehicles (LGFV) are entities established and
controlled by various levels of local governments to facilitate the public
infrastructure development in their respective administrative areas. Essentially
LGFVs can be seen as local-government-owned holding companies of various local
projects.

The LGFV are necessary Due to ongoing urbanization in China, fiscal revenue from local budgets and some
vehicles for local projects central government subsidy cannot fully meet the demand for renovation of urban
and so far have played a infrastructure. Yet China's prevailing budget law does not allow local governments to
positive role in supporting borrow directly or provide guarantees of legal validity, thus LGFVs became useful
urbanization in China. and necessary entities to facilitate local project financing. Typically local
governments will inject land, certain sustainable tax and tariff revenue, and some
equity stakes of SOEs into such LGFVs to meet capital and cash flow requirement
for bank lending.

Q: Are these LGFVs similar to the likes of GITIC in 1990s?


Although both were established by local governments, we believe LGFVs are
essentially very different from the legacy investment trust companies established in
1980s and 1990s. The GITIC bankruptcy case in 1999 has almost no similarity to the
potential risk of LGFV in our view.

Business scope
GITIC was a financial institution that lent to various industries and itself invested in
various industries. The collapse of GITIC thus was a typical example of very poor
management quite common in Chinese financial institutions in 1990s. For example,
it established numerous subsidiaries, the number of which even senior management
was not clear. These domestic and overseas subsidiaries soon became out of parents’
control. Meanwhile, there was also extremely lax financial and accounting control,
credit monitoring or approvals. Even after the Asia Financial Crisis in 1997, GITIC
lent over Rmb13bn to 500 debtors domestically and overseas. The surging default of
its debtors during the crisis led to huge credit charges in GITIC’s high-risk lending
and triggered its insolvency.

In contrast, LGFVs are a much simpler business and certainly do not take credit risks
as GITIC did. These are primarily holding companies managing local infrastructure
and urban development projects. The major functions are fund raising and
operational management of projects, and thus require much less management skills.

Leverage
As a financial institution, GITIC had naturally highly leveraged balance sheet. It also
took high-cost deposits illegally before the collapse, further adding leverage. LGFVs
generally don't have such issues and certainly financial leverage is much lower.

Implicit government guarantee


Although it was originally established by the Guangdong Government and was
poorly run, GITIC was a true commercial conglomerate and in contrast to market
perception, it never had any implicit guarantee from local governments.

4
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

In contrast while Chinese Budgeting Law does not allow legal guarantee to support
local infrastructure and economic development, LGFVs typically received land,
fiscal revenue and equity injection from their respective parent local governments.

LGFV loans: history and current status


Size of LGFV loans
We estimate the 10 banks According to the government authorities CBRC, PBOC and MOF, which
under our coverage should together with banks have conducted a thorough examination of banks’ loan
have nearly Rmb2.2trn loans book, the total size of outstanding LGFV loans were estimated to be around
to LGFVs. This may further Rmb6trn as of 2009 year end. Until 2008, the size of LGFV lending exposure was
rise to about Rmb2.8trn by still fairly small at around Rmb2trn. However, in 2009 alone the estimated size of
end of 2010. new lending to local government projects was nearly Rmb3.8trn. Meanwhile,
according to Sina Finance, PBOC 4Q09 data shows there are 3,800 LGFVs, that
manage over Rmb8trn assets, and with total debt of over Rmb5trn.

One recent academic research paper claims its estimated total size exceeded
Rmb10trn, nearly half of which were from last year's new loans. We question the
data validity. Other than the extreme difficulty to collect such data on bottom-up
basis due to lack of transparency to public datawatchers or investors, the data quoted
in the academic paper is also not consistent with sector loan data. For example,
PBOC’s total loan data shows new medium-term loans to non-personal sectors
amounted Rmb5trn last year. Thus 2009 new loans to LGFV last year cannot be as
high as Rmb5trn, since the increase in such loan segment still includes new property
development loans (around Rmb600bn) and fixed-asset investment loans by real
corporate sectors.

Unlike many developed countries and other developing countries, there is still no real
sizable muni-bonds market in China as local governments in China so far are largely
restricted to raise debt, except the Rmb200bn such debt issued in 2009 by MOF on
behalf of some provincial governments. The credit on such thus was accumulated
predominantly in banks. We believe the regulators' banking statistics should be quite
a reliable source.

Figure 5: Estimated exposure to local government funding vehicles loans outstanding.


1000

800
650
550
600
Rmb bn

420
400
200
200 55 70 68 68 30 20
0
ICBC CCB BOC BoComm CMB Citic Minsheng SPDB Huax ia SZDB
2009E 2010E

Source: J.P. Morgan estimates, company data.

5
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Q: How is the historical track record of these loans?


As a financing model to support local infrastructure, LGFV model started about 10
years ago and so far has proved successful in most cases. China Development Bank
Contrary to illusionary (CDB) should be the first bank and still a major player in this segment and generally
impression, the LGFV loans speaking provided good experience in such loans. It enjoyed good asset quality on
historically had good asset such lending, often what it called as “two basics, one pillar” loans. As of 3Q09, its
quality track record in the NPL ratio was as low as 0.76%, much lower than the sector average.
past 10years.
CDB’s success, to some extent, encouraged other banks’ aggressive growth in this
segment in 2009 when real corporates lending carried higher near-term risk. In fact
even in CBRC’s guideline to encourage banks to adjust lending structure, released in
March 2009, the regulator also encouraged some local governments that met certain
conditions to establish funding vehicles to diversify their funding sources. As a result
of the central government's stimulus package, the size has ballooned in 2009.

Table 3: Historical key financial data of China Development Bank


RMB bn 2003 2004 2005 2006 2007 2008
Total assets 1,279 1,575 1,899 2,314 2,893 3,821
Equity 89 108 131 158 348 349
Loan 1,140 1,410 1,732 2,018 2,262 2,899
Net profit 13 17 23 28 29 21
NPL balance 21 17 14 15 13 28
NPL ratio 1.88% 1.18% 0.81% 0.72% 0.59% 0.96%
LLR/NPL 140% 142% 177% 191% 251% 210%
CAR 10.26% 10.50% 9.15% 8.05% 12.77% 11.31%
Source: Company reports.

Q: What are credit risks associated with such lending?


LGFVs may undertake various projects, some of which may have insufficient or
even no cash flow but is necessary for overall improvement in urban planning. For
example, while some projects such as toll roads, railway and utilities may have good
cash flow for debt repayment, some may yield insufficient cash flow, and yet some
basic public infrastructure, such as bridges, cultural and recreational facilities
typically may even have no cash flow. LGFVs may use excess cash flows created by
some projects to fund those projects that yield no or insufficient cash flow.

In reality, especially last year, within such lending there are also a good size of loans
to LGFVs in the form of a “packaged loan”, namely an overall pool to LGFV. This
allows LGFV to allocate the funding between projects. Nevertheless, in this case,
monitoring of actual use of loan proceeds would be an issue. The credit risk thus
mainly arise from those projects with low or no cash flow.

While projects’ own cash flow should be a key determinant in lending decisions,
banks also examine the fiscal position of local governments. Because in reality local
governments will typically take responsibility in supporting debt/interest repayment,
in case of any cash flow shortage. However, if the debt level is too high to be
supported by fiscal revenue, banks are under risk.

We believe the potential credit risks of LGFVs loans vary significantly depending on
the seniority of their parent governments. Generally speaking, we believe the LGFVs
directly held by provincial governments are generally fine, especially given rising
ability to tackle domestic credit market. In addition, 5 separately-planned cities
(Dalian, Ningbo, Miamian, Qingdao and Shenzhen), which enjoy the same authority

6
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

as a province from fiscal perspective and some developed cities such as many cities
in Yangtze River Delta also have much stronger financial positions.

Q: MOF recently said that local government guarantee will be “void”. Is that
true and what’s the implication on asset quality?
Officials in the Ministry of Finance reiterated a prevailing law, rather than make a
change. As we mentioned, the prevailing budgeting law does not allow local
governments to borrow raise debt or provide legally valid guarantee, since the
The guarantee from local political system in China is not a federal system but a “one government” system, in
governments carries no legal which the central government has implicit responsibility for provincial governments’
validity, but so far in reality fiscal liabilities while provincial governments have responsibilities for municipal
is well honored by local ones in the provinces. MOF thus needs to think from the overall country’s fiscal
governments. liabilities perspective.

Many investors thought those guarantees made are protected by law, but in reality
it’s only a kind of “letter of comfort” of good faith. However, lack of legal binding
does not mean local governments are more inclined to default at their will. In fact,
banks are fully aware of the lack of legal validity in such guarantees, but choose to
believe such implicit guarantees will be honored. In reality, local governments do
their best to honor their guarantees, or will at least try best to help restructure loans,
as they also need good relationship with banks to develop local economies.

Q: Does tighter control mean a cleaning up and stop lending to LGFVs?


No. Properly established LGFVs are still encouraged by the government. The
intention of the central government is to prevent ballooning of excess borrowing, and
increase transparency in actual loan usage. As mentioned previously, there were a
number of "packaged loans" to the LGFVs last year. Such packaged loans to LGFVs
Loans to real ongoing projects, make it difficult for banks to monitor actual loan use to any specific project.
which have enough project
capital, foreseeable income, and Now CBRC has asked banks to unpack those packaged loans and scrutinize existing
valuable collateral, will not be
LGFVs loans to allocate loans to specific projects, and in particular focus on the
affected.
projects' own cash flows. Any excess borrowing not associated with any projects
must be called back. Banks should also consider exit those high-risk projects.

Figure 6: Illustration of LGFV function: major area of risk is “packaged Figure 7: Illustration of form of local government borrowing now
loans” to LGFVs. required by CBRC
Local Municipal bond Bond Local
Government market Government

• Land
• Fiscal revenue
• Equity stakes of SOEs
Bank LGFV
Packaged Loans
Bank LGFV

Loan 1 Loan 2 Loan 3 Project


Management
Loan 1 Loan 2 Loan 3 Project 1 Project 2 Project 3 ……
Project 1 Project 2 Project 3 ……
Source: J.P. Morgan.
Source: J.P. Morgan

7
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Risks are manageable to banks, enough PPOP buffer


In fact, many banks have already taken measures to control risk and focus on cash
flow projections. For example, at the beginning of 2009, BOC established an internal
credit rating framework for local governments borrowing. It limited LGFV loans to
those established by 108 provinces and major cities, but really focusing on only 40 of
them. According to the bank, 40% of such loans are loans to provincial governments’
LGFVs, while including some major cities, such percentage will be over 70%.

While it is impossible for public investors to know the exact breakdown of so many
local governments’ project loans or details of these projects, and it takes time to see
which banks have better control on such lending over time, we can have reasonable
estimates on the total size of such lending and conduct stress test on bottom-up basis.

We show below for each bank, under 3 stress test scenarios (10%, 15%, 20%
additional default rate of such loans emerging in a single year 2011, on top of our
assumed total NPL formation rates), what are the downside to our FY11E base case
earnings and ROE estimates. Pleases note in the analysis, we do not consider the
excess general provisioning they took in the past couple of years, and assume on
these new NPLs banks provided 70% of nominal amount as credit charges. In our
view, a 20% default rate in a single year is very extreme and almost unlikely case. A
70% one-year provisioning rate is also sufficient or even conservative, considering
potential fiscal/land subsidiary from local governments.

Caveats:
The stress test certainly cannot differentiate banks’ risk management on such
lending. It also cannot differentiate the borrowers' mix of such lending. Arguably,
larger state banks have more loans to safer borrowers such as provincial
governments’ LGFVs, or those LGFVs of more developed cities, while other banks
may generally have higher exposure to various municipal governments’ LGFVs, or
even some county’s LGFVs. The mix difference plays a role in differentiating
ultimate default rate. Thus our stress test is only used to illustrate our argument that
the potential credit risk from LGFVs is manageable, rather than demonstrating which
particular bank is safer than others.

Table 4: Scenario 1: assuming additional new NPL from 10% of total LGTV loans and credit charge at 70% of new NPLs
Rmb bn LGFV % of 10E LGFV % of 11E Topline Credit Credit cost 11E Revised 11E earning 11E Revised 11E ROE Equity 11E revised 11E revised
10E loan book NPLs loans impact Charges impact Coverage impact ROE Impact Impact CAR tier-1
ICBC 845 13.2% 85 1.2% 4.6 59 0.9% 130.1% (18%) 20.6% (3.8%) (4.0%) 13.6% 10.2%
CCB 715 13.1% 72 1.2% 3.9 50 0.9% 137.9% (19%) 21.2% (4.3%) (3.3%) 11.6% 9.0%
BOC 546 9.8% 55 0.9% 3.0 38 0.6% 148.9% (16%) 18.3% (3.0%) (3.4%) 12.5% 9.8%
BoComm 260 11.8% 26 1.0% 1.4 18 0.8% 136.8% (22%) 16.0% (4.0%) (4.1%) 12.2% 9.0%
CMB 72 5.0% 7 0.4% 0.4 5 0.3% 194.6% (9%) 19.5% (1.7%) (1.7%) 11.0% 8.2%
Citic 91 7.6% 9 0.6% 0.5 6 0.5% 127.8% (13%) 19.3% (2.6%) (1.6%) 11.2% 8.7%
Minsheng 88 8.3% 9 0.7% 0.5 6 0.5% 143.6% (17%) 14.4% (2.6%) (2.6%) 10.1% 7.8%
SPDB 88 7.9% 9 0.7% 0.5 6 0.5% 160.6% (15%) 14.5% (2.3%) (2.3%) 12.5% 9.9%
Huaxia 39 7.5% 4 0.6% 0.2 3 0.5% 140.5% (20%) 15.6% (3.7%) (2.7%) 9.3% 6.1%
SZDB 25 5.8% 3 0.5% 0.1 2 0.4% 157.3% (12%) 18.7% (2.2%) (2.2%) 10.3% 7.8%
Total 2,768 10.9% 277 1.0% 15.2 194 0.7% 140.4% (18%) 19.0% (3.6%) (3.5%) 11.5% 8.7%
Source: J.P. Morgan estimates.

8
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Table 5: Scenario 2: assuming additional new NPL from 15% of total LGTV loans and credit charge at 70% of new NPLs
Rmb bn LGFV % of 10E LGFV % of 11E Topline Credit Credit cost 11E Revised 11E earning 11E Revised 11E ROE Equity 11E revised 11E revised
10E loan book NPLs loans impact Charges impact Coverage impact ROE Impact Impact CAR tier-1
ICBC 845 13.2% 127 1.8% 7.0 89 1.3% 118.1% (26%) 18.7% (5.8%) (6.0%) 13.4% 10.0%
CCB 715 13.1% 107 1.7% 5.9 75 1.3% 124.6% (28%) 19.1% (6.4%) (5.5%) 11.4% 8.8%
BOC 546 9.8% 82 1.3% 4.5 57 1.0% 134.1% (23%) 16.7% (4.6%) (5.0%) 12.4% 9.6%
BoComm 260 11.8% 39 1.5% 2.1 27 1.1% 123.9% (33%) 13.9% (6.1%) (6.1%) 12.0% 8.9%
CMB 72 5.0% 11 0.6% 0.6 8 0.5% 174.5% (13%) 18.7% (2.5%) (2.5%) 10.9% 8.1%
Citic 91 7.6% 14 0.9% 0.8 10 0.7% 117.1% (19%) 18.0% (3.8%) (2.8%) 11.1% 8.6%
Minsheng 88 8.3% 13 1.1% 0.7 9 0.8% 129.4% (25%) 13.0% (4.0%) (4.0%) 10.0% 7.7%
SPDB 88 7.9% 13 1.0% 0.7 9 0.8% 144.3% (23%) 13.3% (3.5%) (3.5%) 12.4% 9.8%
Huaxia 39 7.5% 6 1.0% 0.3 4 0.7% 130.5% (31%) 13.7% (5.5%) (4.5%) 9.2% 6.0%
SZDB 25 5.8% 4 0.7% 0.2 3 0.6% 143.3% (18%) 17.6% (3.3%) (3.3%) 10.2% 7.8%
Total 2,768 10.9% 415 1.4% 22.8 291 1.1% 127.0% (26%) 17.1% (5.4%) (5.3%) 11.3% 8.5%
Source: J.P. Morgan estimates.

Table 6: Scenario 3: assuming additional new NPL from 20% of total LGTV loans and credit charge at 70% of new NPLs
Rmb bn LGFV % of 10E LGFV % of 11E Topline Credit Credit cost 11E Revised 11E earning 11E Revised 11E ROE Equity 11E revised 11E revised
10E loan book NPLs loans impact Charges impact Coverage impact ROE Impact Impact CAR tier-1
ICBC 845 13.2% 169 2.4% 9.3 118 1.8% 110.1% (35%) 16.6% (7.8%) (8.0%) 13.2% 9.8%
CCB 715 13.1% 143 2.3% 7.9 100 1.7% 115.7% (37%) 16.9% (8.6%) (7.6%) 11.2% 8.6%
BOC 546 9.8% 109 1.7% 6.0 76 1.3% 124.0% (31%) 15.1% (6.2%) (6.6%) 12.2% 9.5%
BoComm 260 11.8% 52 2.0% 2.9 36 1.5% 115.2% (44%) 11.8% (8.2%) (8.1%) 11.9% 8.7%
CMB 72 5.0% 14 0.9% 0.8 10 0.6% 159.9% (18%) 17.8% (3.4%) (3.4%) 10.8% 8.0%
Citic 91 7.6% 18 1.3% 1.0 13 1.0% 109.8% (25%) 16.8% (5.1%) (4.1%) 11.0% 8.5%
Minsheng 88 8.3% 18 1.4% 1.0 12 1.1% 119.8% (34%) 11.6% (5.4%) (5.3%) 9.9% 7.6%
SPDB 88 7.9% 18 1.3% 1.0 12 1.0% 132.9% (31%) 12.1% (4.8%) (4.7%) 12.3% 9.7%
Huaxia 39 7.5% 8 1.3% 0.4 5 1.0% 122.9% (41%) 11.9% (7.4%) (6.3%) 9.1% 5.9%
SZDB 25 5.8% 5 1.0% 0.3 4 0.7% 133.2% (24%) 16.5% (4.4%) (4.4%) 10.1% 7.7%
Total 2,768 10.9% 554 1.9% 30.4 388 1.4% 117.8% (35%) 15.3% (7.3%) (7.2%) 11.2% 8.3%
Source: J.P. Morgan estimates.

Findings
• Investors may see in the tables above that even in a very extreme scenario 3 in
At worst, we believe there is only
which we assume banks see additional NPLs amounting 20% of LGFVs loans, or
manageable earnings impact, around Rmb550bn in total for the 10 banks, it still represents nearly 2% of their
rather than balance sheet aggregate 11E loans only.
impact.
• While in scenario 3 credit charges and top line impact will in total be around
Rmb420bn, partly this should be offset by a cut in performance-related staff costs
estimates. Thus net impact on our 2011E earnings would be around 35%. In other
words, the 10 banks will report on average about 20% declines in 2011E earnings
vs. 2010E. This ranges from the biggest decline at 30% to some modest increase
in some banks like CMB and SDB. Some banks including Citic, SPDB and BOC
will only have very modest earnings contraction at around 10% or below.
• In terms of ROE, in scenario 3, ROE may decline by 7ppt (a range of 3.5 to
9ppt). Yet banks will still be able to achieve a weighted average ROE of over
15%, compared with our base case of 22.6% in 2011E, and 2010E’s 21.7%. At
such ROE, banks are not badly hit.
We therefore can conclude that while there could be potential credit risks, it’s still
manageable earnings impact, rather than any shakeup in the balance sheets of banks.
This is fundamentally different compared with NPL problem in 1990s, when banks

9
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

had very weak profitability (both ROA and ROE), and very highly leveraged balance
sheets.

The potential risks are well priced in


We believe the potential risks are thus also well priced in. As seen below, should
20% of LGFVs loans become NPLs in addition to our existing new NPL formation
estimates, Chinese banks are still trading at 12.6x FY11E PE, and 1.9x FY11E PB.
(vs. 8.2x and 1.7x of our current base case EPS and BVS forecasts). At still mid-high
teen percentage ROE, we believe such valuations are still cheap, and downside to
such valuation would be very limited.

Table 5: Valuations as of 16 March 2010 market close have well priced in asset quality risks from LGFVs.
Impact on 11E EPS Base case 11E PE in var. scenarios Impact on 11E BVPS ased case 11E PB in var. scenarios
Scen. 1 Scen. 2 Scen. 3 11E PE Scen. 1 Scen. 2 Scen. 3 Scen. 1 Scen. 2 Scen. 3 11E PB Scen. 1 Scen. 2 Scen. 3
ICBC-H (17%) (26%) (35%) 8.3x 10.0x 11.2x 12.7x (4%) (6%) (8%) 1.9x 2.0x 2.0x 2.1x
CCB-H (18%) (27%) (36%) 7.5x 9.1x 10.3x 11.7x (3%) (5%) (8%) 1.8x 1.8x 1.9x 2.0x
BOC-H (16%) (24%) (32%) 6.3x 7.5x 8.2x 9.2x (3%) (5%) (7%) 1.2x 1.3x 1.3x 1.4x
BoComm-H (22%) (33%) (43%) 8.3x 10.6x 12.3x 14.7x (4%) (6%) (8%) 1.5x 1.6x 1.7x 1.8x
CMB-H (9%) (13%) (17%) 11.0x 12.1x 12.7x 13.3x (2%) (3%) (3%) 2.1x 2.2x 2.2x 2.2x
Citic-H (12%) (19%) (25%) 6.5x 7.4x 8.0x 8.6x (2%) (3%) (4%) 1.3x 1.3x 1.3x 1.4x
Minsheng-H (17%) (25%) (33%) 8.1x 9.7x 10.8x 12.2x (3%) (4%) (5%) 1.3x 1.3x 1.3x 1.4x
H-Share (18%) (26%) (35%) 7.7x 9.4x 10.5x 11.9x (3%) (5%) (7%) 1.7x 1.7x 1.8x 1.9x
SPDB (15%) (23%) (30%) 10.1x 11.9x 13.1x 14.5x (2%) (4%) (5%) 1.6x 1.6x 1.7x 1.7x
Huaxia (20%) (30%) (40%) 8.1x 10.2x 11.6x 13.6x (3%) (5%) (6%) 1.4x 1.5x 1.5x 1.6x
SZDB (11%) (17%) (23%) 9.6x 10.9x 11.6x 12.5x (2%) (3%) (4%) 1.8x 1.9x 1.9x 2.0x
ICBC-A (17%) (26%) (35%) 7.8x 9.5x 10.6x 12.1x (4%) (6%) (8%) 1.8x 1.9x 2.0x 2.1x
CCB-A (18%) (27%) (36%) 7.8x 9.5x 10.7x 12.2x (3%) (5%) (8%) 1.8x 1.9x 2.0x 2.0x
BOC-A (16%) (24%) (32%) 7.6x 9.0x 10.0x 11.1x (3%) (5%) (7%) 1.8x 1.9x 2.0x 2.0x
Bocomm-A (22%) (33%) (43%) 8.9x 11.4x 13.2x 15.7x (4%) (6%) (8%) 1.8x 1.9x 2.0x 2.1x
CMB-A (9%) (13%) (17%) 10.2x 11.2x 11.8x 12.4x (2%) (3%) (3%) 1.8x 1.9x 1.9x 1.9x
Citic-A (12%) (19%) (25%) 9.4x 10.8x 11.6x 12.5x (2%) (3%) (4%) 1.8x 1.9x 1.9x 1.9x
Minsheng-A (17%) (25%) (33%) 8.6x 10.3x 11.5x 12.9x (3%) (4%) (5%) 1.8x 1.9x 1.9x 2.0x
Total (18%) (26%) (35%) 8.2x 9.9x 11.1x 12.6x (3%) (5%) (7%) 1.7x 1.8x 1.9x 1.9x
Source: J.P. Morgan estimates. Note: Scenario 1, 2, 3 assumes that in addition to 11E new NPL formation already factored in our model, 10%, 15% and 20% of their respective 10E outstanding
LGFVs become new NPLs in 2011.

LGFV loans are still affordable from aggregate perspective


We believe the debt burden is still manageable given that: 1) Currently on aggregate
basis, total local government debts to fiscal revenue stood at nearly 100%, which is
not astonishingly high by international standards. 2) We expect fiscal revenue and
other source of income for Chinese governments, including those of local
governments, may still grow at strong double-digit percentage rate, mitigating rising
repayment burden in coming years. 3) From debt to GDP perspective, China’s
government debt to GDP would still be below 40% of GDP.

Aggregate local government debt to revenues ratio is not alarmingly high by


global standards
In many developed countries, We don’t see any high possibility of any systemic debt crisis. With about Rmb6-7trn
government debt to fiscal local government debt, the aggregate local government debt to their revenues in 2009
revenue ratio is set within the is about 90-100%. In contrast, in some other countries such as US, the ratio of local
range of 90%-150% in developed
countries.
government debt to their fiscal revenue is capped at 90-120% (for US) or in some
cases 150%, while some countries like Brazil may allow a cap of 200%. That said,

10
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

we acknowledge that on individual basis, certain governments may have high debt
levels as high as a few hundred percentage of fiscal revenue.

Growth in various streams of local government revenues can digest pressure


More importantly, investors must note that China may still enjoy reasonably fast
economic growth, and thus fiscal revenue growth in coming years. In the past 10
years, local government fiscal revenue (excluding the subsidiary and fiscal revenue
transfer from central government) grew by a CAGR of nearly 20% to Rmb3.26trn in
2009). We estimate with about 14% CAGR growth, the local government's budget
revenue would nearly double to Rmb6.3trn by 2014.

Figure 8: Local government total revenues have been growing strongly.

16

12
7.7
6.6
Rmb trn

8 5.6
4.8
3.4 4.1
2.9
4 1.8 2.3 7.1
0.8 1.0 1.4 4.8 5.5 6.3
0.4 0.5 0.6 0.7 1.1
1.8 2.4 2.9 3.3 3.7 4.2
- 0.6 0.6 0.8 0.9 1.0 1.2 1.5

99 00 01 02 03 04 05 06 07 08 09 10E 11E 12E 13E 14E 15E

Budget local rev enue central gov nmt subsidiary & transfer Ex -budget land sales rev enue

Source: CEIC, JPMorgan estimates.

In addition to the local government’s own budget revenue, the subsidy and transfer
from central government revenue also is an important source to the budget revenue
for local government. This depends on the degree of transfer from central
government revenue to local government revenue. In recent years, this has been
rising, as historically local government assumed more budget expenditure while
sharing less budget income.

Figure 9: Central government's fiscal subsidy and revenue transfer to local governments has
been rising
12,000 70% 70% 80%
63% 61% 64% 63% 61% 62% 66%68% 70% 70%
10,000 61% 66%
59%
54% 54% 60%
8,000
Rmb bn

6,000 40%
4,000
20%
2,000
0 0%
99 00 01 02 03 04 05 06 07 08 09 10E 11E 12E 13E 14E 15E

Central gov ernment rev enue central gov ernment subsidy as % of central gov nmt rev enue

Source: J.P. Morgan estimates, CEIC.

Meanwhile, another important source of income for local governments is non-budget


fiscal revenue, mainly from land sales. Land sales revenue mainly goes to local

11
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

government. In 2009, we estimate local governments receive about Rmb1trn, or 60%


of the whole Rmb1.59trn land sales in China.

Assessing debt servicing capability in coming years


In the table below, we show that while local government loans to their aggregate
revenues are high, this can be solvable. This of course depends on continued
economic recovery and expansion in the next 2 years or so.

Table 6: Growing local governments' revenues from various streams means LGFVs loan quality are manageable from systemic perspective
RMB bn 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Local govmnt budget revenue 2,865 3,258 3,714 4,234 4,827 5,503 6,273 7,089
memo: growth 22% 14% 14% 14% 14% 14% 14% 13%
Central government subsidiary 2,299 2,862 3,378 4,071 4,848 5,646 6,610 7,686
memo: growth 27% 24% 18% 21% 19% 16% 17% 16%
Ex-budget revenue (land sales) 584 955 1,050 1,050 1,050 1,103 1,213 1,213
memo: growth -25.1% 63.4% 10.0% 0.0% 0.0% 5.0% 10.0% 0.0%
Local govmt total revenue 5,748 7,075 8,142 9,355 10,725 12,252 14,096 15,988
among which: land-related 962 1,402 1,564 1,643 1,722 1,865 2,078 2,078
Land-related as % of revenue 16.7% 19.8% 19.2% 17.6% 16.1% 15.2% 14.7% 13.0%

Debt 2,611 6,200 7,867 8,783 7,780 6,135 3,696 2,113


New Loans during the year 1,611 4,000 2,500 1,800 800 500 300 100
Principal payment 411 833 883 1,803 2,145 2,739 1,683
Interest Payment 236 387 479 497 435 307 182
Memo: Interest rate 5.35% 5.50% 5.75% 6.00% 6.25% 6.25% 6.25%
Total debt & int. repayment 647 1,220 1,362 2,300 2,580 3,046 1,865

As % of total local revenue 9.1% 15.0% 14.6% 21.4% 21.1% 21.6% 11.7%
As % of revenue ex land sales 10.6% 17.2% 16.4% 23.8% 23.1% 23.6% 12.6%
Outs. debt as % of revenue 87.6% 96.6% 93.9% 72.5% 50.1% 26.2% 13.2%
Source: J.P. Morgan estimates, CEIC.

China’s government debt to GDP is still low even including local government’s
debt in domestic banks
From the whole country's systemic perspective, we also think China’s total
government debt level is still relatively low. As of 2009, the central government debt
to GDP stood at around 19%. Even including the local government debt, such ratio
would still stand at close to 40%. This is still well below many developed countries,
whose government debt to GDP typically stood at above 50%. Moreover, similar to
Japan, China’s government debt are predominantly domestic claims, which
mean less international liquidity pressure. As long liquidity remains in the
domestic system, we see little difficult for government to refinance their debt.

12
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Figure 10: Government debt to GDP comparison


180.0
150.0
120.0
90.0
60.0
30.0 20.4 21.2 22.3 22.4 20.3 21.9
13.2 16.1 19.1 17.4 18.8
0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Japan U.K. U.S. China

Source: J.P. Morgan Economics.

Chinese government also taking other measures to mitigate risks


Other than scrutinizing the existing local government debt, the central government is
also tackling the root of the issue. To solve such issues, the central government may

• Potentially increase revenue transfer to local governments. This tackles some root
of fiscal imbalance at local government level. To increase the transparency, land
sales should also be included in the budget revenues.
• More flexibility in local governments’ bond issuance. MOF will continue to issue
on behalf of some provincial governments in domestic market. Over time, the
government could consider allowing more qualified local governments (including
some municipal ones) to issue muni-bonds. This not only would grow China's
bond market but also help mitigate credit risks accumulated in the banking sector.
• The government is also carefully developing asset securitization market in China.
China Development Bank also has the task to be a pioneer in such areas in
securitizing some LGFVs loans.
Conclusion
We believe the Chinese government's targets to contain size of local government
debt and thus mitigate the credit risks in the banking system are achievable, in view
of the expected economic recovery which should support sustainable double-digit
fiscal revenue growth. This of course mainly depends on 1) economic growth and 2)
a stable property market without any major collapse in property prices. 3) overall
liquidity in the system.

From system aggregate perspective, the local government debt burden is manageable.
However, as credit standards may rise on tighter overall quota control, there could
inevitably be some liquidity-driven default cases, which could drive rising new NPL
formation, given current NPL formation rates have already been very low and credit
costs may normalize over time. We however do not expect wide-spread credit crunch
affecting the financing of many projects. After all, the majority of local government
projects will have cash flow, and local governments themselves need good
relationships with banks, and so have strong intention to be credit-worthy borrowers.

13
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Figure 11: Even in our base case NPL formation rate in the four state- Figure 12: Estimated net new NPL formation rate (% of avg. loans)
controlled Chinese banks we cover should move up gradually, mainly trend in the 10 banks under JPM coverage.
reflecting some new NPL from LGFVs.
1.20% 1.14% 1.00%
1.09%
1.00% 0.60%
0.80% 0.77% 0.79%
0.80%
0.61% 0.20%
0.60% 0.52% 0.52%
0.67% -0.20%
0.40%
-0.60%
0.20%
-1.00%
0.00%
2004 2005 2006 2007 1H08 2H08 1H09 2H09 2010E 2011E 2012E
2006 2007 1H08 2H08 1H09 2H09E 2010E 2011E 2012E
Medium JSBs State-controlled

Source: J.P. Morgan estimates. Source: J.P. Morgan estimates.

While we do not have very detailed breakdown of different banks’ LGFV exposure,
it's fair to say larger state-controlled banks tend to have higher percentage of such
loans to local governments of higher hierarchy, which we believe tend to be safer in
reality. We also find that some banks shows less earnings downside to stress tests on
LGFVs exposure. CMB and SDB both may be less affected, while Citic, BOC, and
SPDB will also not show significant earnings contraction even if they suffer from
additional NPLs from 20% of their respective LGFVs loans.

We believe the current low valuation suggests such asset quality concerns are well
priced in. We remain cautiously optimistic on the sector but will focus on bottom-up
opportunities. Our top picks are still BOC-H and Citic-H. In A-share market, we
prefer CMB-A and SPDB.

Table 7: Valuation summary of Chinese banks as of market close on 16th March 2010
Bank name Rating Blbg Price Upside Mkt Cap P/E EPS growth PB ROE Div. yield P/PPOP Mkt cap/deposits
code to PT USDbn 10E 11EE 10E 11E 10E 11E 09E 10E 11E 09E 10EE 10E 11E 10E 11E
BOC-A OW 601988 CH 4.14 23% 146 9.5 7.6 35% 24% 1.7 1.5 16.8% 20.7% 21.3% 3.9% 4.6% 6.2 5.1 14% 13%
BoComm - A NR 601328 CH 8.02 24% 56 10.5 8.9 25% 18% 1.9 1.7 19.0% 20.0% 20.0% 2.7% 3.1% 6.3 5.4 15% 13%
CCB-A NR 601939 CH 5.55 36% 184 9.6 7.8 28% 24% 2.1 1.8 21.3% 23.9% 25.5% 4.1% 4.7% 6.5 5.3 14% 12%
CMB-A N 600036 CH 15.37 33% 45 13.2 10.2 26% 29% 2.4 2.0 23.0% 21.3% 21.2% 0.9% 1.3% 9.0 6.9 16% 14%
Huaxia UW 600015 CH 11.57 7% 8 10.9 8.1 52% 34% 1.7 1.4 12.2% 16.6% 19.2% 1.2% 1.8% 5.2 4.3 8% 7%
Minsheng-A N 600016 CH 7.33 18% 24 11.4 8.6 3% 32% 1.6 1.4 19.8% 14.8% 17.0% 1.1% 1.3% 6.9 5.3 12% 10%
SPDB OW 600000 CH 21.19 19% 27 12.0 10.1 9% 18% 1.8 1.6 26.7% 19.8% 16.8% 0.7% 0.8% 7.7 6.5 15% 12%
SZDB OW 000001 CH 22.55 19% 10 12.0 9.6 16% 24% 2.2 1.8 27.3% 22.1% 20.9% 0.0% 1.2% 7.3 5.9 15% 12%
ICBC-A OW 601398 CH 4.82 42% 239 9.7 7.8 29% 24% 2.1 1.8 20.1% 22.8% 24.5% 4.0% 5.2% 6.6 5.4 14% 13%
Citic-A N 601998 CH 6.98 0% 36 12.0 9.4 50% 27% 2.2 1.9 15.2% 20.3% 21.8% 1.4% 1.8% 8.2 6.3 17% 14%
A-share banks avg. 10.2 8.2 23% 25% 2.0 1.7 19.9% 21.8% 22.9% 3.3% 4.1% 6.7 5.5 14% 13%
BOC-H OW 3988 HK 3.90 49% 145 7.8 6.3 35% 24% 1.4 1.2 16.8% 20.7% 21.3% 4.7% 5.6% 5.1 4.2 12% 10%
BoComm-H OW 3328 HK 8.54 33% 56 9.8 8.3 25% 18% 1.8 1.5 19.0% 20.0% 20.0% 2.9% 3.3% 5.9 5.1 14% 12%
CCB-H OW 939 HK 6.08 42% 183 9.2 7.5 28% 24% 2.1 1.8 21.3% 23.9% 25.5% 4.2% 4.9% 6.2 5.1 13% 12%
CMB-H N 3968 HK 18.84 23% 43 14.2 11.0 26% 29% 2.6 2.1 23.0% 21.3% 21.2% 0.8% 1.2% 9.6 7.4 17% 15%
ICBC-H OW 1398 HK 5.81 34% 241 10.2 8.3 29% 24% 2.2 1.9 20.1% 22.8% 24.5% 3.8% 4.9% 6.9 5.7 15% 13%
Citic-H OW 998 HK 5.47 46% 35 8.2 6.5 50% 27% 1.5 1.3 15.2% 20.3% 21.8% 2.0% 2.7% 5.6 4.4 12% 10%
Minsheng-H N 1988 HK 7.88 24 10.7 8.1 3% 32% 1.5 1.3 19.8% 14.8% 17.0% 1.2% 1.4% 6.5 5.0 12% 10%
H-share banks avg. 9.6 7.7 31% 25% 1.9 1.7 19.6% 22.0% 23.2% 3.7% 4.5% 6.4 5.2 14% 12%
Source: J.P. Morgan estimates, Bloomberg. Note: Prices of H-shares and A-shares are based on HKD and Rmb respectively. Valuations of H-shares are based on spot exchange rate.

14
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Companies Recommended in This Report (all prices in this report as of market close on 16 March 2010)
Bank of China - H (3988.HK/HK$3.90/Overweight), China Citic Bank - H Share (0998.HK/HK$5.47/Overweight), China
Merchants Bank Co., Ltd - A (600036.SS/Rmb15.37/Neutral), Shanghai Pudong Development Bank
(600000.SS/Rmb21.19/Overweight)
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

• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Bank of China - H.
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
China Merchants Bank Co., Ltd - A within the past 12 months.
• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Bank
of China - H: Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the
shares of China Citic Bank - H Share: Cindy Xu.
• Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of
Bank of China - H.
• Client of the Firm: Bank of China - H is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company non-investment banking securities-related services and non-securities-related services. China Citic Bank -
H Share is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-
investment banking securities-related services and non-securities-related services. China Merchants Bank Co., Ltd - A is or was in
the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-
related services and non-securities-related services. Shanghai Pudong Development Bank is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-
securities-related services.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Bank of China - H, China Merchants Bank Co., Ltd - A.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Bank of China - H, China Citic Bank - H Share, China Merchants Bank Co., Ltd - A, Shanghai
Pudong Development Bank. An affiliate of JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Bank of China - H, China Citic Bank - H Share, China Merchants Bank Co., Ltd - A, Shanghai
Pudong Development Bank.
• " J.P. Morgan Securities (Asia Pacific) Ltd. ("J.P. Morgan") is acting as Joint Lead Underwriter on the approximately USD3.2bn A
& H share rights offering for China Merchants Bank (CMB). J.P. Morgan will receive a fee for so acting. J.P. Morgan or one or more
of its associates may perform, or may seek to perform, other financial or advisory services for CMB and may have other interests in
or relationships with CMB, and receive fees, commissions or other compensation in such capacities. J.P. Morgan or one or more of
its associates may have received fees, commissions or other compensation from CMB in the past 12 months, and expects to become
entitled to receive such fees, commissions or other compensation in the future, in addition to the fees referred to above. J.P. Morgan
and its affiliates may also deal in, hold or act as market maker in relation to securities issued by CMB and receive fees for doing so."

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)

15
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Bank of China - H (3988.HK) Price Chart

9
Date Rating Share Price Price Target
8 OW HK$4.6 N HK$5.7 N HK$5 N HK$4.1 OW HK$5 OW HK$6.302 (HK$) (HK$)
07-Jan-07 N 4.19 4.80
7 OW HK$4.8 N HK$5.3 N HK$4.5 N HK$4.6 OW HK$4.1 OW HK$5.7
07-Mar-07 OW 3.66 4.80
6 07-May-07 OW 3.93 4.60
N HK$4.8 UW HK$4.6 N HK$4.8 N HK$4.7 OW HK$4 OW HK$5.2 OW HK$5.8
24-Aug-07 UW 4.09 4.60
5
Price(HK$) 04-Oct-07 N 4.29 5.30
4 31-Oct-07 N 4.93 5.70
3 13-Jan-08 N 3.59 4.80
26-Feb-08 N 3.22 4.50
2
29-Apr-08 N 3.89 5.00
1 06-Jul-08 N 3.34 4.70
29-Aug-08 N 3.32 4.60
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
29-Oct-08 N 2.09 4.10
06 07 07 07 07 08 08 08 08 09 09 09 09 10 04-Mar-09 OW 2.09 4.00
25-Mar-09 OW 2.38 4.10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it 28-Jun-09 OW 3.68 5.00
over the entire period.
28-Aug-09 OW 3.81 5.20
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
01-Nov-09 OW 4.52 5.70
30-Nov-09 OW 4.13 6.30
10-Mar-10 OW 4.01 5.80
China Citic Bank - H Share (0998.HK) Price Chart

11
Date Rating Share Price Price Target
10 (HK$) (HK$)
9 OW HK$8 23-Nov-09 OW 6.73 8.60
8 10-Mar-10 OW 5.80 8.00
OW HK$8.6
7

6
Price(HK$)
5
4
3
2

1
0
Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
07 07 07 08 08 08 08 09 09 09 09 10 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Nov 23, 2009. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

16
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

China Merchants Bank Co., Ltd - A (600036.SS) Price Chart

Date Rating Share Price Price Target


60 N Rmb20.4
N Rmb36.6 N Rmb31.5 N Rmb18.3 (Rmb) (Rmb)
04-Aug-04 N 7.65 -
48 N Rmb15.6 N Rmb28.2 N Rmb40.1N Rmb31.2 N Rmb19 N Rmb18.8 15-Nov-06 OW 9.48 13.50
07-Jan-07 N 11.72 15.60
W Rmb13.5N Rmb21.1 N Rmb47.8 N Rmb33.4 N Rmb20.8 N Rmb19.2 N Rmb20.4 13-Apr-07 N 14.73 20.40
36
Price(Rmb) 17-Apr-07 N 15.55 21.10
09-Jul-07 N 19.90 28.20
24 12-Aug-07 N 27.90 36.60
23-Oct-07 N 31.15 47.80
12 15-Jan-08 N 33.18 40.10
18-Mar-08 N 22.05 31.50
28-Apr-08 N 25.88 33.40
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
31-May-08 N 22.82 31.20
06 07 07 07 07 08 08 08 08 09 09 09 09 10 07-Nov-08 N 9.28 20.80
07-Jan-09 N 10.08 19.00
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage May 03, 2005 - Nov 15, 2006. This chart shows J.P. Morgan's continuing coverage of this stock; the 04-Mar-09 N 10.81 18.30
current analyst may or may not have covered it over the entire period.
28-Jun-09 N 16.84 19.20
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
31-Aug-09 N 13.63 18.80
02-Mar-10 N 16.30 20.40
Shanghai Pudong Development Bank (600000.SS) Price Chart

60 Date Rating Share Price Price Target


N Rmb30 OW Rmb33.9
OW Rmb23.4OW Rmb24.1 OW Rmb26
OW Rmb25 (Rmb) (Rmb)
04-Dec-06 OW 9.09 20.00
48 OW Rmb24.1 N Rmb51.1 OW Rmb28.2
OW Rmb21.2 OW Rmb27.1
OW Rmb28.419 07-Jan-07 OW 11.45 24.10
30-Mar-07 N 14.66 30.00
36 OW Rmb20 N Rmb56.6 OW Rmb27.6
OW Rmb23 OW Rmb29
OW Rmb25.5 11-Jan-08 N 31.30 56.60
Price(Rmb) 28-Feb-08 N 22.32 51.10
01-Jun-08 OW 20.31 33.90
24
06-Jul-08 OW 14.96 27.60
28-Aug-08 OW 14.99 28.20
12 28-Sep-08 OW 11.16 23.40
06-Nov-08 OW 9.11 23.00
07-Jan-09 OW 10.34 21.20
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
04-Mar-09 OW 12.10 24.10
06 07 07 07 07 08 08 08 08 09 09 09 09 10 28-Jun-09 OW 23.21 29.00
04-Sep-09 OW 20.23 27.10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage May 03, 2005 - Dec 04, 2006. This chart shows J.P. Morgan's continuing coverage of this stock; the 29-Sep-09 OW 19.10 26.00
current analyst may or may not have covered it over the entire period.
01-Nov-09 OW 22.97 25.50
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
30-Nov-09 OW 21.46 28.42
10-Mar-10 OW 20.74 25.20

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.

17
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

Coverage Universe: Samuel Chen: Bank of China - A (601988.SS), Bank of China - H (3988.HK), Bank of
Communications Co (3328.HK), China Citic Bank - H Share (0998.HK), China Construction Bank (0939.HK), China
Merchants Bank - H (3968.HK), China Merchants Bank Co., Ltd - A (600036.SS), China Minsheng Banking - A
(600016.SS), China Minsheng Banking - H (1988.HK), Huaxia Bank (600015.SS), Industrial and Commercial Bank of
China - A (601398.SS), Industrial and Commercial Bank of China - H (1398.HK), Shanghai Pudong Development Bank
(600000.SS), Shenzhen Development Bank (000001.SZ)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009


Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 42% 44% 14%
IB clients* 58% 57% 42%
JPMSI Equity Research Coverage 41% 49% 10%
IB clients* 78% 73% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: 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 JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI,
and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide. J.P. Morgan Cazenove is a
brand name for equity research produced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited; JPMorgan Chase Bank, N.A., Dubai
Branch; and J.P. Morgan Bank International LLC.
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.: JPMSI 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 authorised 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 is a member of
the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the 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

18
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

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)
020/01/2010 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 authorised 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 that 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 for derivative warrants issued by J.P. Morgan Structured
Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website:
http://www.hkex.com.hk/prod/dw/Lp.htm. 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: 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 JPMSI 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

19
Samuel Chen Asia Pacific Equity Research
(852) 2800-8557 16 March 2010
samuel.s.chen@jpmorgan.com

mentioned herein. JPMSI 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 March 1, 2010.

Copyright 2010 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.

20