Initiate coverage with Overweight, Dec-11 price target Rmb31.5:Given its low P/B multiple relative to high ROE, we expect the stock tore-rate on an improving macro environment and benign property marketoutlook in China. On the back of its higher-than-industry average volumegrowth, better profitability and superior asset quality, we expect IndustrialBank to deliver 20%/18% EPS growth in 2011/2012. Investment positives: 1) Higher-than-industry average loan yield andbanking spread thanks to its innovative and practical management, whichled to lending consistent with the macro outlook. It is also a pioneer inniche markets, such as “green finance”. 2) Strong interbank and treasurybusinesses make the bank potentially well-prepared for future interest ratederegulation. 3) Highly efficient operations (very low CIR and cost toasset ratios). 4) Superior asset quality metrics, reflecting consistent goodrisk management. Issues and challenges: 1) Higher-than-industry average exposure to realestatemakes the shares more sensitive to news on the property sector,although the asset quality of their property-related loan is high amonglocal-listed peers. 2) Credit costs could rise over the next few years asCBRC pushes for 2.5% LLR/Loan. (JPM estimates the bank to haveLLR/Loan of 1.5%/1.8%/2.0% for 2010/11/12E). 3) Liability businessneeds to be further improved to reduce LD ratio to below 75%. 4) LGFVloans remain an overhang. Valuation, price target, risks: Although we are confident in the bank’searnings ability, our assumptions in fair valuation are conservativeconsidering potentially higher provision and capital requirements. We useda normalized P/B of 1.4x and ROE of 14.1% (vs. FY11E ROE of 22.3%)to derive our Dec-11 PT of Rmb31.5, suggesting 30% upside potential,implying 1.4x 2012E P/B and 7.1x 2012E P/E. Key risks to our pricetarget are shorter-than-expected grace period to reach 2.5% LLR/Loan,severe credit tightening, and a deterioration in the Chinese propertymarkets.

Introducing Dec-11 PT of HK$8.5/Rmb7: As we roll forward our P/BVbasedPTs to Dec-11 from Dec-10, our PTs rise by 17% to HK$8.5 andRmb7.0 for ICBC-H and ICBC-A, respectively. Despite some modest finetuningof our estimates line by line, our 2010-2012 bottom-line estimatesare largely unchanged. Above-average earnings growth from below-average loan growth:While ICBC’s loan growth may decelerate to 13% in 2011, below the sectoraverage of about 15%, we expect ICBC to maintain over 20% earningsgrowth in 2011. Steady margin expansion on the back of improving creditpricing power and a rising rate environment, coupled with strong feebusiness, are helping ICBC grow its bottom line with less reliance oncapital-intensive lending business. Meanwhile, its very liquid balance sheetmay also benefit from bond reinvestment. Low provision pressure: We think ICBC’s earnings are highly resilient topotential regulation changes thanks to its already strong balance sheet andsuperior operating profitability. Its relatively prudent and conservative creditmanagement and high reserve level leave little room for higher credit costsin the next two years under a benign economic outlook. We expect ICBC’sLLR to reach 2.5% of total loans in 2010, so there should be no moreprovisioning pressure from 2011 onwards even if CBRC requires a 2.5%LLR/loan ratio. Maintain OW on both ICBC-A and ICBC-H: Within H-share state banks,our top pick among bigger banks is now ICBC, which is more of a puredomestic play in view of rising rates and a strong economy in China. YTD,ICBC has lagged behind many of its peers, partly due to its higher valuationand relatively low “alpha”. However, we believe ICBC now has the abilityto maintain an above-20% ROE even in the next 3-5 years. While we seepotentially better returns in ICBC-A from a 12-to-18-month view, this ismore dependent on A-share market liquidity rather than fundamentals, in ourview. Tactically, we believe domestic investors may continue to favorhigher-growth smaller banks in a relatively bullish market environment.