Accommodative Monetary Policy Expected to Enhance Valuations, Maintain “Outperform” ? In 2016, we expect the growth of NPL ratios will slow down, leading to slowdown in the growth of impairment losses. Meanwhile, we expect the banks to continue to strengthen cost control thereby increasing net profit. Therefore, although the launch of deposit insurance will increase the banks costs, we expect the cost-to-income ratio will still continue to decline in 2016. As the growth of impairment losses is expected to slow down and the cost-to-income ratio is projected to continue to decline in 2016, we expect the growth of the banking sectors net profit in 2016 to be higher than that in 2015. We expect the banking sectors YoY growth of net profit in 2015, 2016 and 2017 to be 2.0%, 3.9% and 4.7%, respectively. ? As of 14 Dec. 2015, the 2016 consensus weighted average PER and PBR of the mainland listed banks are 4.7 and 0.7, respectively. The current valuations are still low. In the future, we expect the following factors to support the banks valuations: First, we expect Chinese liquidity to keep loose in the near future; Second, in 2016, the banking sectors growth of net profit is expected to recover compared with that of 2015; Third, mixed ownership reform, deregulation of mixed operations, development of internet finance and promotion of wealth management are expected to elevate operating efficiency and improve the structure of banks. Therefore, although we expect the NPL ratio to continue to climb in the future, we still maintain ?Outperform? rating for the banking sector. ? 2016 ? 2016 ?2016 ? 2016? 2015 ? 2015?2016?2017 ? 2.0%?3.9%?4.7%? ? ? 2015 ? 12 ? 14 ? 2016 ?4.7 ? 0.7 ?2016 ? 2015 ? Sector Performance ? -25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%HIS indexIndex of mainland listed banksSource: Bloomberg. Net Profit and its YoY Growth of The Banking Sectors ? 0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%0.0 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 1,600.0 1,800.0 Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Net profitYoY growth of net profit Source: the CBRC, Guotai Junan International. Company Name ? Code ? Price ? (HK$) Rating ? FY15 PER ? (x) FY16PER ? (x) FY17 PER ? (x) FY16 ROE ? (%) FY16 P/B ? (x) FY16 Yield ? (%) ICBC 01398 4.470 Accumulate 4.8 4.7 4.5 0.7 15.7 7.5 CCB 00939 5.160 Accumulate 4.7 4.6 4.5 0.7 15.8 7.7 ABC 01288 2.870 Accumulate 4.3 4.2 4.1 0.6 15.2 8.2 BOC 03988 3.330 Buy 4.8 4.6 4.5 0.6 13.1 7.0 BANKCOMM 03328 5.250 Accumulate 4.9 4.7 4.5 0.6 12.6 6.4 CMB 03968 17.520 Accumulate 6.2 5.9 5.5 0.8 14.1 5.1 MSB 01988 7.170 Accumulate 4.4 4.1 3.9 0.6 16.2 3.9 CITIC 00998 4.760 Accumulate 4.3 4.2 4.0 0.6 14.0 7.2 Weighted Average ? 4.8 4.6 4.4 0.7 14.8 7.1 16 December 2015 Banking Sector ? Sector Report The mainland listed banks underperformed the Hang Seng index YTD as of 15 Dec. 2015. As of the 15 December 2015, the weighted returns of the mainland listed banks in Hong Kong underperformed the Hang Seng index by 7.2 pts. In terms of the trend of the stock prices of the mainland listed banks, the banks surged in March to June and October 2015. Of which, in May-June 2015 the weighted returns of the mainland listed banks in Hong Kong outperformed the Hang Seng index. Exhibit 1: The trend of Hang Seng index and index of the mainland listed banks -25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%HIS indexIndex of mainland listed banks ? Source: Guotai Junan International. Note: index of the mainland listed banks are composited by the weighted average market capitalization of the mainland listed banks in Hong Kong, and the data are as of 15 Dec. 2015. Accommodative monetary policy results in loose liquidity. Given that the economic declining pressure is big and inflation is low, the PBOC adopted accommodative monetary policy in the past months of 2015. First, in order to make the banking systems liquidity sufficient, the PBOC adopted a combination of measures including open market operation, SLF, SLO, MLF, PSL and five cuts of RRRS. Meanwhile, the PBOC expanded the pilots of refinancing of pledged credit assets. Second, the PBOC cut benchmark lending and deposit interest rates and lowered interest rates for repo operations. Since Nov.2014, the PBOC had cut interest rates six times. Against this background, Chinas YoY growth of M1 as of th