Against an environment of high structural risk, slow policy relaxation so far has deterred
further outperformance of PRC banks. Risk to our loan growth forecast (RMB8.0-8.5trn) is
towards the downside as loan growth disappoints, tilting China‟s risk profile unfavourably.
 As economic growth slows and inflation recedes, we expect more room to loosen policy,
fuelling monetary growth. Signs pointing to loan growth pickup going forward include
interbank rate declines since late February, supporting the growth of discounted bills, and
relaxation of mortgage terms available for first-time home buyers. However, the question is
timing and magnitude, the later seems hampered by weak corporate demand so far.
 PRC banks are fundamentally inexpensive. On the premise of a continued tail risk reprieve,
we are positive on PRC banks‟ 12-month share performance prospects. We prefer large
banks amid moderate monetary easing. Our top pick is ICBC.
Loan growth continues to disappoint
 Monetary easing continues; but progress remains slow: Monetary growth is still slow, the
key disappointment since February. Interbank liquidity has loosened since the RRR cut in late
February, indicated by the seven-day repo rate falling to 3% from the average of 4% in
Jan/Feb. This should support growth in discounted bills (priced off interbank rates) and
interbank borrowing by the smaller banks/city commercial banks.
 Property developers’ solvency is a key risk: Standard Chartered remains cautious on
China‟s property market, expecting 15-20% decline in transaction volumes in 2012 vs. 2011.
Despite recent volume pickup and price cuts, restrictive policies intended to pressure property
developers‟ solvency is driving continuing inventory build-up.
 Continue to prefer large-cap banks: Our positive thesis on PRC banks is premised on
continued policy easing. The slow progress to policy easing so far and uncertainty to the
completion of capital raising plans of the smaller banks support our preference towards the
large-cap banks with stronger deposit franchises, particularly ICBC (our top pick) and CCB.