NOT FOR DISTRIBUTION IN THE UNITED STATES AND NOT TO U.S. PERSON
IMPORTANT: You must read the following before continuing. The following applies to the preliminary offering circular following this page, and you are therefore advised to read this carefully before reading, accessing or making any other use of this preliminary offering circular. In accessing this preliminary offering circular, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a result of such access. In order to be eligible to view the preliminary offering circular or make an investment decision with respect to the securities, investors must be outside the United States. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THIS PRELIMINARY OFFERING CIRCULAR MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY ADDRESS IN THE UNITED STATES. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORISED AND WILL NOT BE ABLE TO PURCHASE ANY OF THE SECURITIES DESCRIBED THEREIN. Confirmation of Your Representation: You have accessed the attached preliminary offering circular on the basis that you have confirmed your representation that (1) you consent to delivery of the attached preliminary offering circular and any amendments or supplements thereto by electronic transmission and agree to the terms set forth herein; (2)(i) you are located outside the United States and you are not a U.S. person, or acting to, the account or benefit of a U.S. person (in each case as defined under Regulation S of the Securities Act), to the extent you purchase the securities described in the attached preliminary offering circular, you will be doing so pursuant to Regulation S under the Securities Act, and (ii) the e-mail address to which the attached preliminary offering circular has been delivered is not located in the United States; and (3) you acknowledge that you will make your own assessment regarding any legal, taxation or other economic conditions with respect to your decision to subscribe for or purchase any securities. You are reminded that this preliminary offering circular has been delivered to you on the basis that you are a person into whose possession this preliminary offering circular may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver, circulate, forward or distribute this preliminary offering circular to any other person. The materials relating to the offering of securities to which this preliminary offering circular relates do not constitute, and may not be used in connection with, an offer or solicitation by or on behalf of any of ABCL Glory Capital Limited (the “Issuer”), Agricultural Bank of China Limited Hong Kong Branch (the “Guarantor”, which except where the context requires otherwise, shall be construed to mean Agricultural Bank of China Limited), ABCI Capital Limited, Agricultural Bank of China Limited Hong Kong Branch, China International Capital Corporation Hong Kong Securities Limited (together, the “Joint Global Coordinators”), ABCI Capital Limited, Agricultural Bank of China Limited Hong Kong Branch, China International Capital Corporation Hong Kong Securities Limited, Australia and New Zealand Banking Group Limited, DBS Bank Ltd. and Wells Fargo Securities International Limited (together, the “Joint Bookrunners” and the “Joint Lead Managers”), in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the underwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the underwriters or such affiliate on behalf of the Issuer or the Guarantor in such jurisdiction. This preliminary offering circular has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Issuer, the Guarantor, the Joint Bookrunners, the Joint Lead Managers nor any person who controls any of them, nor any of their directors, officers, employees or agents, or any affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between this preliminary offering circular distributed to you in electronic format and the hard copy version available to you on request from the Joint Lead Managers. You are responsible for protecting against viruses and other destructive items. Your use of this electronic mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature. SUBJECT TO COMPLETION not PRELIMINARY OFFERING CIRCULAR DATED 7 JUNE 2016 STRICTLY CONFIDENTIAL are we ABCL GLORY CAPITAL LIMITED and (incorporated in the British Virgin Islands with limited liability) U.S.$[•••] [•••] per cent. Guaranteed Notes due [•••]
securities unconditionally and irrevocably guaranteed by these sell to
offer AGRICULTURAL BANK OF CHINA LIMITED HONG KONG BRANCH
an Issue Price: [•••] per cent.
not The [•••] per cent. Guaranteed Notes due [•••] (the “Notes”) will be issued in the aggregate principal amount of U.S.$[•••] by ABCL Glory Capital Limited (the “Issuer”) and will be unconditionally and irrevocably guaranteed (the “Guarantee”) by Agricultural Bank of China Limited Hong Kong Branch (the is “Guarantor”, which except where the context requires otherwise, shall be construed to mean Agricultural Bank of China Limited (the “Bank”). The Notes are in registered form in the denominations of U.S.$200,000 each and in integral multiples of U.S.$1,000 in excess thereof. The Issuer is an indirect wholly-owned subsidiary of ABC International Holdings Limited (農銀國際控股有限公司) and is under the management control of ABC Financial Leasing Co., Ltd. (the “Company”), both of which are wholly-owned subsidiaries of the Bank. circular The Notes will bear interest from and including [•••] at the rate of [•••] per cent. per annum. Interest on the Notes is payable semi-annually in arrear on the Interest Payment Dates (as defined in “Terms and Conditions of the Notes”) falling on [•••] and [•••] in each year. Unless previously redeemed, or purchased and cancelled, as provided in Condition 6 of the Terms and Conditions of the Notes, the Notes will mature on [•••] at their principal amount. The Notes constitute direct, unsubordinated, unconditional and, subject to Condition 4(a) of the Terms and Conditions of the Notes, unsecured obligations offering of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a) of the Terms and Conditions of the Notes, at all times rank at least equally with all the Issuer’s other present and future unsecured and unsubordinated obligations. The Guarantor will enter into a deed of guarantee (the “Deed of Guarantee”) relating to the Notes on or around [•••] 2016 (the “Issue Date”). The obligations of the Guarantor under the Guarantee shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a) of the Terms and Conditions of the Notes, at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations. preliminary Payments on the Notes and the Guarantee will be made without withholding or deduction for taxes of the British Virgin Islands, the PRC (as defined herein), or Hong Kong (as defined herein), in each case to the extent described under “Terms and Conditions of the Notes – Taxation”.
This The Notes are subject to redemption, in whole, but not in part, at their principal amount, together with interest accrued to the date of redemption, at the option of the Issuer at any time in the event of certain changes affecting taxes of the British Virgin Islands, Hong Kong or the PRC. See “Terms and Conditions of the Notes – Redemption and Purchase – Redemption for Taxation Reasons”. Pursuant to the Notice on the Administrative Reform for the Registration of Offshore Debt Issuances (國家發展改革委關於推進企業發行外債備案登記制 管理改革的通知（發改外資 號） changed. [2015]2044 ) (the “NDRC Circular”) issued by the National Development and Reform Commission of the PRC (“NDRC”)
permitted. on 14 September 2015 which came into effect on the same day, the Bank has registered the issuance of the Notes with the NDRC and obtained a certificate be from NDRC on 11 April 2016 evidencing such registration and intends to provide the requisite information on the issuance of the Notes to the NDRC
not within 10 working days following the Issue Date. is may Investing in the Notes involves risk. See “Risk Factors” beginning on page 11 for a description of certain factors to be considered in connection with an investment in the Notes. sale and The Notes are expected to be rated “A” by Fitch Ratings Ltd (“Fitch”). A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, qualification, suspension, reduction or withdrawal at any time by the assigning rating agency. Each rating should be evaluated or independently of any other rating of the Notes or other securities of the Bank. Application will be made to The Stock Exchange of Hong Kong Limited (the “SEHK” or the “Hong Kong Stock Exchange”) for the listing of, and
offer permission to deal in, the Notes by way of debt issues to professional investors only, and such permission is expected to become effective on or about [•••] complete 2016. This Offering Circular is for distribution to professional investors only. Investors should not purchase the Notes in the primary or secondary markets unless they are professional investors and understand the risks involved. The Notes are not suitable for retail investors. not such SEHK has not reviewed the contents of this document, other than to ensure that the prescribed form disclaimer and responsibility statements, and is a statement limiting distribution of this document to professional investors only have been reproduced in this document. Listing of the Notes on SEHK is not to be taken as an indication of the commercial merits or credit quality of the Notes, the Issuer or the Guarantor, where applicable or
where quality of disclosure in this document. Hong Kong Exchanges and Clearing Limited and the SEHK take no responsibility for the contents of this Offering Circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or
circular in reliance upon the whole or any part of the contents of this Offering Circular. The Notes and the Guarantee have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold within the United States or to, or for the account or benefit of U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the applicable state securities laws. For offering jurisdiction a description of these and certain further restrictions on offers and sales of the Notes and the distribution of this Offering Circular, see “Subscription and Sale”.
any The Notes will be represented by beneficial interests in the global certificate (the “Global Certificate”) in registered form which will be registered in the name of a nominee of, and shall be deposited on or about the Issue Date with, a common depositary for Euroclear Bank S.A./N.V. (“Euroclear”) and in Clearstream Banking S.A. (“Clearstream”). Beneficial interests in the Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream. Except as described herein, certificates for Notes will not be issued in exchange for interests in the Global Certificate. preliminary Joint Global Coordinators this securities
in Agricultural Bank of China Limited ABC International Hong Kong Branch CICC HK Securities these
buy Joint Bookrunners and Joint Lead Managers contained to Agricultural Bank of China Limited ABC International Hong Kong Branch CICC HK Securities offers ANZ DBS Bank Ltd. Wells Fargo Securities information The date of this Offering Circular is [•••] 2016. soliciting The IMPORTANT NOTICE
Each of the Issuer and the Guarantor, having made all reasonable enquiries, confirms that to the best of its knowledge this Offering Circular contains or incorporates all information which is material in the context of the issuance and offering of the Notes, that the information contained or incorporated by reference in this Offering Circular is true and accurate in all material respects and is not misleading in any material respect, that the opinions and intentions expressed in this Offering Circular are honestly held and that there are no other facts the omission of which would make this Offering Circular or any of such information or the expression of any such opinions or intentions misleading in any material respect and which, in each case, is material in the context of the issuance and offering of the Notes. The Issuer and the Guarantor accept responsibility accordingly.
No person has been authorised to give any information or to make any representation other than those contained in this Offering Circular in connection with the issue or sale of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by the Issuer, the Guarantor, any of the Joint Global Coordinators, the Joint Bookrunners or the Joint Lead Managers (as defined in “Summary of the Offering”) or the Agents (as defined in “Terms and Conditions of the Notes”). Neither this Offering Circular nor any other information supplied in connection with the Notes should be considered as a recommendation by the Issuer, the Guarantor, any Joint Global Coordinator, any Joint Bookrunner, any Joint Lead Manager or the Agents that any recipient of this Offering Circular or any other information supplied in connection with the Notes should purchase any Notes. This Offering Circular does not take into account the objectives, financial situation or needs of any potential investor. Each investor contemplating purchasing any Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer and the Guarantor. Neither this Offering Circular nor any other information supplied in connection with the Notes constitutes an offer or invitation by or on behalf of the Issuer, the Guarantor, any Joint Global Coordinator, any Joint Bookrunner, any Joint Lead Manager or the Agents to any person to subscribe for or to purchase any Notes.
Neither the delivery of this Offering Circular nor any sale made in connection herewith shall, under any circumstances, create any implication that there has been no change in the affairs of the Issuer, the Guarantor or the Bank and its subsidiaries (together, the “Group”) since the date hereof or that there has been no adverse change in the financial position of the Group since the date hereof or that any other information supplied in connection with the issue of the Notes is correct as of any time subsequent to the date hereof.
The distribution of this Offering Circular and the offering or sale of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular or any Notes may come are required by the Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers to inform themselves about and to observe any such restriction.
The Notes are being offered and sold to non-U.S. person outside the United States in offshore transactions in reliance on Regulation S. For a description of these and certain further restrictions on offers, sales and transfers of the Notes and distribution of this Offering Circular, see “Subscription and Sale”.
THE NOTES AND THE GUARANTEE HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OR WITH ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER UNITED STATES REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OR THE ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE IN THE UNITED STATES.
— i — This Offering Circular does not constitute an offer to sell or the solicitation of an offer to buy the Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. None of the Issuer, the Guarantor, any Joint Global Coordinator, any Joint Bookrunner or any Joint Lead Manager makes any representation to any investor in the Notes regarding the legality of its investment under any applicable law.
None of the Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers or the Agents represents that this Offering Circular may be lawfully distributed, or that any Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assumes any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers which is intended to permit a public offering of any Notes or distribution of this Offering Circular in any jurisdiction where action for that purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither this Offering Circular nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations.
To the fullest extent permitted by law, none of the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers or the Agents accept any responsibility for the contents of this Offering Circular or for any other statement, made or purported to be made by the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers or any Agent or on its behalf in connection with the Issuer, the Guarantor, the Group, the issue and offering of the Notes or the provision of the Guarantee. The Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and each Agent accordingly disclaim all and any liability whether arising in tort or contract or otherwise (save as referred to above) which it might otherwise have in respect of this Offering Circular or any such statement. Each potential investor of the Notes should determine for itself the relevance of the information contained in this Offering Circular and its purchase of the Notes should be based upon such investigation as it deems necessary. None of the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers undertakes to review the financial condition or affairs of the Issuer, the Guarantor or the Group during the life of the arrangements contemplated by this Offering Circular nor to advise any investor or potential investor in the Notes of any information coming to the attention of any of the Joint Global Coordinators, the Joint Bookrunners or the Joint Lead Managers.
This Offering Circular includes particulars given in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) for the purposes of giving information with regard to the Issuer. Each of the Issuer and the Guarantor accepts full responsibility for the accuracy of the information contained in this Offering Circular and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief there are no other facts the omission of which would make any statement herein misleading.
From time to time, in the ordinary course of business, certain of the Joint Global Coordinators and/or the Joint Bookrunners and/or the Joint Lead Managers and their respective affiliates have provided advisory and investment banking services, and entered into other commercial transactions with the Issuer, the Guarantor and their affiliates, including commercial banking services, for which customary compensation has been received. It is expected that the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and their affiliates will continue to provide such services to, and enter into such transactions, with the Issuer, the Guarantor and their affiliates in the future.
The Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers or certain of their respective affiliates may purchase the Notes and be allocated Notes for asset management and/or proprietary purposes and not with a view to distribution.
— ii — In making an investment decision, each potential investor must rely on its own examination of the Issuer, the Guarantor, the Group and the terms of the Notes being offered, including the merits and risks involved. The Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Agents do not make any representation regarding the legality of investment under any applicable laws. See “Risk Factors” for a discussion of certain factors to be considered in connection with an investment in the Notes.
Potential investors should be able to bear the economic risk of an investment in the Notes for an indefinite period of time.
IN CONNECTION WITH THE ISSUE OF THE NOTES, AGRICULTURAL BANK OF CHINA LIMITED HONG KONG BRANCH (THE “STABILISING MANAGER”) (OR PERSONS ACTING ON ITS BEHALF) AND MAY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, OVER- ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO OBLIGATION ON THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) TO DO THIS. SUCH STABILISING IF COMMENCED MAY BE DISCONTINUED AT ANY TIME, AND MUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD. SUCH STABILISING SHALL BE IN COMPLIANCE WITH ALL APPLICABLE LAWS, REGULATIONS AND RULES.
Listing of the Notes on the Hong Kong Stock Exchange is not to be taken as an indication of the merits of the Issuer, the Guarantor, the Group, the Notes or the Guarantee. The Issuer, the Guarantor, the Group, the Joint Bookrunners, the Joint Lead Managers and the Agents and their respective affiliates are not making any representation to any purchaser of the Notes regarding the legality of any investment in the Notes by such purchaser under any legal investment or similar laws or regulations. The contents of this Offering Circular should not be construed as providing legal, business, accounting or investment advice. Each person receiving this Offering Circular acknowledges that it has not relied on the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Agents or any of their respective affiliates in connection with its investigation of the accuracy of such information or its investment decision.
It is expected that the Notes will, when issued, be assigned a rating of “A” by Fitch. The rating will relate to the timely payments of interest and principal on the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, qualification, suspension, reduction or withdrawal at any time by the assigning rating agency. A revision, qualification, suspension or withdrawal of any rating assigned to the Notes may adversely affect the market price of the Notes.
In the Offering Circular, unless otherwise specified, references to “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China, all references to the “PRC” or “China” are to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau, references to “U.S.$” or “U.S. dollars” are to the lawful currency of the United States of America, references to “Renminbi” or “CNY” are to the lawful currency of the PRC, and references to “Hong Kong dollar” or “HK$” are to the lawful currency of Hong Kong.
Unless otherwise stated in this Offering Circular, all translations from Renminbi into U.S. dollars were made at the rate of CNY6.4778 to U.S.$1.00, the noon buying rate in New York City for cable transfers payable in Renminbi on 31 December 2015. All such translations in this Offering Circular are provided solely for investors’ convenience and no representation is made that the amounts referred to herein have been, could have been or could be converted into U.S. dollars or Renminbi, or vice versa, at any particular rate or at all. For further information relating to the exchange rates, see “Exchange Rate”.
— iii — In this Offering Circular, unless otherwise specified, references to:
• the “Bank” and the “Group” refer to either or both of Agricultural Bank of China Limited and the Bank’s predecessor, Agricultural Bank of China, as applicable, and, except as the context otherwise requires, the subsidiaries of Agricultural Bank of China Limited and of the Bank’s predecessor, Agricultural Bank of China;
• the “Guarantor” refers to Agricultural Bank of China Hong Kong Branch and which, except where the context requires otherwise, shall be construed to mean Agricultural Bank of China Limited;
• the “Company” refers to ABC Financial Leasing Co., Ltd. and, except as the context otherwise requires, the subsidiaries of ABC Financial Leasing Co., Ltd.;
• the “branch outlets” include the head office, branches and outlets and other establishments of the Bank;
• a “business day” is a day that is not Saturday, Sunday or a public holiday in Hong Kong; and
• the terms “associate”, “subsidiary” and “substantial shareholder” shall have the meanings given to such terms in the Listing Rules, unless the context otherwise requires.
For ease of reference, in this Offering Circular, unless otherwise indicated, the terms “loans and advances to customers”, “loans” and “loans to customers” are used synonymously and the terms “due to customers”, “deposits” and “deposits from customers” are used synonymously.
In this Offering Circular, unless otherwise indicated, the discussions on loans are based on the Bank’s gross loans and advances to customers, before taking into account the related allowance for impairment losses, rather than its net loans to customers. The Bank’s loans and advances to customers are reported net of the allowance for impairment losses on its consolidated statement of financial position.
The growth rates with respect to the business and financial data of the Bank presented in this Offering Circular are calculated based on amounts in millions of Renminbi.
— iv — INDUSTRY AND MARKET DATA
Market data and certain industry forecasts and statistics in this Offering Circular have been obtained from both public and private sources, including market research, publicly available information and industry publications. Although the Issuer and the Guarantor believe this information to be reliable, it has not been independently verified by the Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Agents or their respective directors, officers, employees, advisers or affiliates, and none of the Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Agents or their respective directors, officers, employees, advisers or affiliates makes any representation as to the accuracy or completeness of that information. In addition, third party information providers may have obtained information from market participants and such information may not have been independently verified. This Offering Circular summarises certain documents and other information, and investors should refer to them for a more complete understanding of what is discussed in those documents.
— v — PRESENTATION OF FINANCIAL INFORMATION
This Offering Circular contains the audited consolidated financial information of the Bank as at and for the years ended 31 December 2013, 2014 and 2015 derived from the Bank’s audited consolidated financial statements as at and for the years ended 31 December 2014 and 2015. The Bank’s consolidated financial statements at and for the years ended 31 December 2014 and 2015 were prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (the “IASB”). The audited consolidated financial statements of the Bank as at and for the years ended 31 December 2014 and 2015 included in this Offering Circular were audited by PricewaterhouseCoopers, Certified Public Accountants, Hong Kong (“PricewaterhouseCoopers”) in accordance with International Standards on Auditing and have been extracted from the 2014 and 2015 annual reports as published by the Bank, respectively.
Unless otherwise stated, all financial data contained herein which is stated as relating to the Bank is referring to the consolidated data of the Group.
In this Offering Circular, because certain amounts have been rounded, totals of columns or rows of numbers in tables may not be equal to the apparent total of the individual items, and actual numbers may differ from those contained herein due to rounding.
— vi — FORWARD-LOOKING STATEMENTS
Certain statements under “Risk Factors”, “Business” and elsewhere in this Offering Circular constitute “forward-looking statements”. The words including “believe”, “expect”, “plan”, “anticipate”, “schedule”, “estimate”, “may”, “will”, “would”, “could”, “aim”, “intend”, “project”, “potential”, “future”, “seek”, “should” and similar words or the negative thereof, or expressions identify forward-looking statements.
In addition, all statements other than statements of historical facts included in this Offering Circular, including, but without limitation, those regarding the financial position, business strategy, prospects, capital expenditure and investment plans of the Group and the plans and objectives of the Group’s management for its future operations (including development plans and objectives relating to the Group’s operations), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Group to differ materially from those expressed or implied by such forward-looking statements. Reliance should not be placed on these forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Group’s present and future business strategies and the environment in which the Group will operate in the future. Each of the Issuer and the Guarantor expressly disclaims any obligation or undertaking to release any updates or revisions to any forward-looking statements contained herein to reflect any change in the Issuer’s, the Guarantor’s or the Group’s expectations with regard thereto or any change of events, conditions or circumstances, on which any such statements were based. This Offering Circular discloses, under “Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from the Issuer’s, the Guarantor’s or the Group’s expectations. All subsequent written and forward-looking statements attributable to the Issuer, the Guarantor or the Group or persons acting on their behalf are expressly qualified in their entirety by such cautionary statements.
— vii — DEFINITIONS AND CONVENTIONS
In this Offering Circular, unless the context otherwise requires, the following terms shall have the meanings set out below.
Articles of Association Articles of Association of the Bank, as constituted and amended from time to time. Except where the context otherwise requires, the Articles of Association refers to the Articles of Association of the Bank approved by the CBRC on 31 December 2012
ABCI ABC International Holdings Limited
ABCLI ABC Leasing International Corporation Limited (農銀國際租賃有 限公司)
ATM Automatic Teller Machine
Basel II the revised Basel Capital Framework promulgated in June 2004
Basel III the newest Basel Capital Accord promulgated in December 2010
Business Tax Laws Provisional Regulations of the People’s Republic of China on Business Tax (中華人民共和國�業稅暫行條例)
CAGR compound annual growth rate
CBRC China Banking Regulatory Commission
CIRC China Insurance Regulatory Commission
County Areas areas designated as counties or county-level cities under China’s administrative division system. As an administrative division unit, a county or county-level city is generally directly below and under the direct supervision of its corresponding municipal-level or provincial-level government. County Areas include economically more developed county centres, towns and the vast rural areas within their jurisdictions
County Area Banking Business or a broad range of financial products and services the Bank provides Sannong Banking Business to customers in the County Areas through the Bank’s branch outlets located in counties and county-level cities in the PRC. The Bank refers to such banking business as the “County Area Banking Business” or “Sannong Banking Business” (三農金融業務), which are used interchangeably throughout this Offering Circular
CSRC China Securities Regulatory Commission
EIT Law Enterprise Income Tax Lawe of the People’s Republic of China (中 華人民共和國企業所得稅法)
Fiscal Agent Agricultural Bank of China Limited Hong Kong Branch
— viii — GDP gross domestic product
Huijin Central Huijin Investment Ltd. (中央�金投資有限責任公司), a state-owned investment company incorporated under the laws of the PRC
IAS 39 the International Accounting Standard 39 “Financial Instruments: Recognition and Measurement” and its interpretations by the IASB
Large Commercial Banks Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China
Macau the Macau Special Administrative Region of the PRC
MOF Ministry of Finance of the PRC
MOFCOM Ministry of Commerce of the PRC
NAO National Audit Office of the PRC
NBSC National Bureau of Statistics of China
National Joint Stock Commercial China CITIC Bank, China Everbright Bank, Huaxia Bank, Banks Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank, Industrial Bank, China Minsheng Bank, Evergrowing Bank, Zheshang Bank and Bohai Bank non-performing loans identified impaired loans and advances
OFAC the Office of Foreign Assets Control of the U.S. Department of the Treasury
PBOC People’s Bank of China
POS point of sale, a checkout counter in a shop or any location where a transaction occurs
QDIIs qualified domestic institutional investors in the PRC, which are licensed by the CSRC to invest in foreign securities markets
QFIIs qualified foreign institutional investors licensed by the CSRC to invest in Renminbi-denominated shares listed on China’s domestic securities exchanges
SAFE State Administration of Foreign Exchange of the PRC
SAIC State Administration for Industry and Commerce of the PRC
— ix — Sannong a short-hand reference to the Chinese pronunciation of the phrase “agriculture, rural areas and farmers” (農業、農村和農民). The terminology “Sannong” (三農) was initially created to refer to the three rural development issues in China (specifically, agriculture, rural areas and farmers) and has become an expression widely adopted by the policymakers in China. Throughout this Offering Circular, the Bank uses Sannong to refer to the PRC government’s policies or vision, as applicable, aiming to promote agricultural industry, rural development and the welfare of China’s farmers. The current economic development of China’s County Areas directly benefits from the PRC government’s “Sannong” policies
SASAC State-owned Assets Supervision and Administration Commission of the State Council
SAT State Administration of Taxation of the PRC
Securities and Futures the Securities and Futures Commission of Hong Kong Commission or SFC
SFO the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (as amended from time to time)
SHIBOR Shanghai Interbank Offered Rate, a daily reference rate published by the National Interbank Funding Centre
SMEs small- and medium-sized enterprises
SSE The Shanghai Stock Exchange
SSF National Council for Social Security Fund of the PRC
State Council the PRC State Council
United States or U.S. the United States of America, its territories, its possessions and all areas subject to its jurisdiction
Urban Area or Urban Areas the rest of China other than the County Areas
WTO World Trade Organisation
— x — In this Offering Circular, the Bank defines the geographical regions of China to which the Bank refers for the purpose of describing the Bank’s branch network and presenting certain results of operations and financial condition as follows:
Geographical regions Branches
“Yangtze River Delta” . . . . . • Shanghai Municipality • Zhejiang Province • Jiangsu Province • City of Ningbo “Pearl River Delta” ...... • Guangdong Province • Fujian Province • City of Shenzhen • City of Xiamen “Bohai Rim” ...... • Beijing Municipality • Shandong Province • Tianjin Municipality • City of Qingdao • Hebei Province “Central China” ...... • Shanxi Province • Jiangxi Province • Hubei Province • Hainan Province • Henan Province • Anhui Province • Hunan Province “Northeastern China” ...... • Liaoning Province • Jilin Province • Heilongjiang Province • City of Dalian “Western China” ...... • Chongqing Municipality • Xinjiang Autonomous Region • Sichuan Province • The Xinjiang Production and • Guizhou Province Construction Corps • Yunnan Province • Tibet Autonomous Region • Shaanxi Province • Inner Mongolia Autonomous • Gansu Province Region • Qinghai Province • Guangxi Autonomous Region • Ningxia Autonomous Region
— xi — TABLE OF CONTENTS
Page
SUMMARY ...... 1
SUMMARY OF THE OFFERING ...... 3
SUMMARY FINANCIAL INFORMATION OF THE BANK ...... 6
RISK FACTORS ...... 11
TERMS AND CONDITIONS OF THE NOTES ...... 39
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM ...... 50
EXCHANGE RATE ...... 52
CAPITALISATION AND INDEBTEDNESS OF THE BANK ...... 54
USE OF PROCEEDS ...... 56
DESCRIPTION OF THE ISSUER ...... 57
DESCRIPTION OF THE COMPANY ...... 58
DESCRIPTION OF THE GUARANTOR ...... 64
DESCRIPTION OF THE BANK ...... 65
RISK MANAGEMENT ...... 66
SUBSTANTIAL SHAREHOLDERS ...... 117
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT ...... 118
PRC REGULATIONS ...... 128
TAXATION ...... 130
CLEARANCE AND SETTLEMENT ...... 134
SUBSCRIPTION AND SALE ...... 135
GENERAL INFORMATION ...... 140
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ...... F-1
— xii — SUMMARY
Overview
The Bank is a leading commercial bank in China in terms of total assets, total loans and total deposits. As at 31 December 2013, 2014 and 2015, the Bank had total assets of CNY14,562.1 billion, CNY15,974.2 billion and CNY17,791.4 billion, respectively, and total gross loans of CNY7,224.7 billion, CNY8,098.1 billion and CNY8,909.9 billion, respectively. The Bank’s total due to customers amounted to CNY11,811.4 billion, CNY12,533.4 billion and CNY13,538.4 billion for the same periods, respectively.
The Bank has one of the leading domestic distribution networks among the Large Commercial Banks in terms of the number of branch outlets. As at 31 December 2015, it had a total number of 23,670 domestic branches. Leveraging its extensive network, the Bank provides a wide range of banking products and services to its corporate and retail customers in China.
As a leading bank in China’s Urban Areas, the Bank has benefited from China’s strong economic growth in recent years, and by leveraging its extensive distribution network and large customer base, the Bank was able to further strengthen its market position in the Urban Areas. As at 31 December 2013, 2014 and 2015, its deposits in the Urban Areas totalled CNY6,852.0 billion, CNY7,220.8 billion and CNY7,738.0 billion, respectively.
The Bank is a leading provider of financial services in China’s vast, fast-developing County Areas, with the largest number of domestic branch outlets among the Large Commercial Banks. The Bank refers to such banking business as the “County Area Banking Business” or “Sannong Banking Business”. It believes that the established market leadership and vast distribution network of its County Area Banking Business enable it to continue to take advantage of the various growth opportunities arising from the rapid urbanisation and favourable economic and policy developments in the County Areas. As at 31 December 2013, 2014 and 2015, the Bank’s loans and advances in the County Areas totalled CNY2,348.0 billion, CNY2,651.7 billion and CNY2,860.2 billion, respectively. The deposits it takes in the County Areas totalled CNY4,959.4 billion, CNY5,312.6 billion and CNY5,800.2 billion for the same periods, respectively.
The Bank believes that “Agricultural Bank of China” (“中國農業銀行”) is one of the most recognised financial services brands in China. In 2015, the Bank was named “Best Investment Banking Institution” for the seventh consecutive year, “Best Bond Underwriting Bank” and “Best Syndicated Financing Bank” by Securities Times, “Best Development Award” and the “Best Transaction Award” by China Banking Association and “Outstanding Sponsor of Asset-backed Securities” by China Central Depository & Clearing Co., Ltd., 2015 Best Green Bond by FinanceAisa, Best Bank for Small Enterprise Lending by Global Finance, Best Cash Management and Best Finance Company by EuroFinance, Outstanding Bond Dealer of Shanghai Stock Exchange for 2015, Banking Technology, Top 10 Financial Social Marketing Cases, Best Financial WeChat Public Platform, Best Electronic Bank of China and Best Online Banking Function in China for 2015 by China Financial Certification Authority (“CFCA”). It also ranked fourth among the Top 500 Global Banking Brands in 2016 by The Banker and eighth among the Top 100 Most Valuable Chinese Brands in 2016 by BRANDZ. It was also awarded Top 10 Innovative Financial Products (Retail Banking) by The Chinese Banker, CSR Chinese Culture Award (Best Strategic Philanthropy) for 2015 by People’s Daily, Best “Sannong” Banking Service of the Year by Financial News, Excellent Chinese Bank for 2015 by The Economic Observer, Best Banking Innovative Wealth Management Product in China for 2015 and Best Banking Open-ended Wealth Management Product in China for 2015 by Securities Times, Best Service for Credit Cards (Upgraded Pretty Mother Credit Card) by Shanghai Securities Times, Best Asia Bank of Financial Market Innovation, Best Corporate Culture, Best Banking Brand of Wealth Management, Best Banking Brand of Wealth Management and Best Bank of Service Innovation for 2015 by 21st Century Business Herald, Public Welfare Financial Institution of the Year by CBN, State-owned Commercial Bank of
— 1 — Excellent Competitiveness, Retail Bank of Excellent Competitiveness for 2015 by China Business Journal, Best Universal Bank and Best Bank of Internet Finance for 2015 by eastmoney.com, Outstanding Private Bank by National Business Daily, Best Cross-Border RMB Settlement Bank by TradeFinance, Top 50 Employers for University Graduates in China of 2015 and Top 15 Employers of Banking Industry by ChinaHR.com, Advanced Unit of Legal Risk Management in Banking Industry of China and Outstanding Contribution to Civilised and Normalised Services of Banking Industry in China for 2015 by China Banking Association and Top 10 Women-caring Enterprises by China Women’s Development Foundation. In 2014, the Bank was named “Best Managed Banking and Finance Institution in Asia” by Euromoney and “Best Online Bank” by CFCA In 2013, the Bank was recognised as “Top 3 Most Valuable Global Banking Brand in Asia” by Brand-Finance and awarded “Best Managed Banking and Finance Institution in Asia” by Euromoney. In 2012, the Bank was named “BrandZ Top 50 Most Valuable Chinese Brands” and “Financial Platinum Corporate Award” by The Asset. In 2011, the Bank was recognised as “2011 Most Innovative Chinese Company” by Fortune and named “China’s Most Promising Companies in 2011 Awards” by The Asset.
The Bank’s Competitive Strengths
• The Bank’s principal competitive strengths include: Balanced Urban and Rural Growth Strategy
• Extensive nationwide branch outlet network complemented by a multi-channel electronic banking system
• Large and diversified customer base providing significant growth potential
• Strong deposit base providing stable and low-cost funding
• Fast growing fee- and commission-based business
• Continuously enhanced risk management and internal control capabilities
• Leading information technology platform
• Experienced management team with a proven track record
The Bank’s Strategies
• Support the development of “One Belt and One Road” through global financial services
• Further strengthen the Bank’s leadership in the Urban Areas
• Solidify the Bank’s dominant position in the County Areas
• Diversify the Bank’s revenue mix by expanding its product and service offerings
• Continuously upgrade the Bank’s multi-channel distribution network
• Continuously strengthen the Bank’s risk management and internal control capabilities
• Attract, motivate and develop talented and experienced professionals
— 2 — SUMMARY OF THE OFFERING
The following summary contains some basic information about the Notes and is qualified in its entirety by the remainder of this Offering Circular. Some of the terms described below are subject to important limitations and exceptions. Words and expressions defined in “Terms and Conditions of the Notes” and “Summary of Provisions Relating to the Notes in Global Form” shall have the same meanings in this summary. For a more complete description of the terms of the Notes, see “Terms and Conditions of the Notes”.
Issuer ABCL Glory Capital Limited.
Company ABC Financial Leasing Co., Ltd.
Guarantor Agricultural Bank of China Limited Hong Kong Branch.
Notes U.S.$[•••] [•••] per cent. Guaranteed Notes due [•••].
Guarantee The Guarantor has unconditionally and irrevocably guaranteed the due payment of all sums expressed to be payable by the Issuer under the Notes.
Issue Price [•••] per cent.
Form and Denomination The Notes will be issued in registered form in the denomination of U.S.$200,000 each and in integral multiples of U.S.$1,000 in excess thereof.
Interest The Notes will bear interest from and including [•••] 2016 at the rate of [•••] per cent. per annum, payable semi-annually in arrear on [•••] and [•••] in each year.
Issue Date [•••] 2016.
Maturity Date [•••].
Status of the Notes and the The Notes constitute direct, unconditional, unsubordinated and Guarantee (subject to Condition 4(a) of the Terms and Conditions of the Notes) unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a) of the Terms and Conditions of the Notes, at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations.
The obligations of the Guarantor under the Guarantee shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a) of the Terms and Conditions of the Notes, at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations.
— 3 — Negative Pledge The Notes will contain a negative pledge provision as further described in Condition 4(a) of the Terms and Conditions of the Notes.
Cross-Default The Notes will contain a cross-default provision as further described in Condition 9(c) of the Terms and Conditions of the Notes.
Events of Default Upon the occurrence of certain events as described in Condition 9 of the Terms and Conditions of the Notes, any holder of the Notes may, by notice in writing given to the Fiscal Agent at its specified office, declare the Notes immediately repayable, whereupon they shall become immediately due and payable at their principal amount together with (if applicable) accrued interest unless such event shall have been remedied prior to the receipt of such notice by the Fiscal Agent.
Final Redemption Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed on the Maturity Date at their principal amount.
Redemption for Taxation Reasons The Issuer may redeem in whole, but not in part, of the Notes at their principal amount, together with interest accrued to the date fixed for redemption, in the event of certain changes affecting the taxes of the British Virgin Islands, the PRC or Hong Kong, as further described in Condition 6(b) of the Terms and Conditions of the Notes.
Withholding Taxes All payments of principal and interest by or on behalf of the Issuer or the Guarantor in respect of the Notes or under the Guarantee shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or within the British Virgin Islands, the PRC or Hong Kong or any authority therein or thereof having power to tax, unless such withholding or deduction is required by law. In that event, the Issuer or the Guarantor, as the case may be, shall, subject to certain exceptions, pay such additional amounts as will result in receipt by the Noteholders of such amounts as would have been received by them had no such withholding or deduction been required, as further described in Condition 8 of the Terms and Conditions of the Notes.
Clearing Systems The Notes will be represented initially by beneficial interests in a global certificate (a “Global Certificate”), which will be registered in the name of a nominee of, and deposited on the Issue Date with, a common depositary for, Euroclear and Clearstream. Beneficial interests in a Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream. Except as described in this Offering Circular, certificates for the Notes will not be issued in exchange for beneficial interests in a Global Certificate.
— 4 — The Common Code and ISIN for the Notes are [•••] and [•••], respectively.
Further Issues The Issuer may from time to time without the consent of the Noteholders create and issue further securities either having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest on them and the timing for reporting to the NDRC). Further securities issued in such manner may be consolidated and form a single series with the previously outstanding Notes or upon such terms as the Issuer may determine at the time of their issue.
Governing Law English law.
Fiscal Agent, Paying Agent, Agricultural Bank of China Limited Hong Kong Branch. Registrar and Transfer Agent
Listing Application will be made to the SEHK for listing of, and permission to deal in, the Notes by way of debt issues to professional investors only.
Rating The Notes are expected to be rated “A” by Fitch. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, qualification, suspension, reduction or withdrawal at any time by the assigning rating agency. Prospective investors should evaluate each rating independently of any other rating of the other securities of the Bank.
Use of Proceeds See “Use of Proceeds”.
Selling Restrictions For a description of certain restrictions on offers, sales and deliveries of the Notes and on the distribution of offering material in the United States, the United Kingdom, the PRC, Hong Kong, the British Virgin Islands, Singapore and Japan, see “Subscription and Sale”.
— 5 — SUMMARY FINANCIAL INFORMATION OF THE BANK
The summary historical consolidated financial information of the Bank as at and for the years ended 31 December 2013, 2014 and 2015 set forth below is derived from the Bank’s audited consolidated financial statements as at and for the years ended 31 December 2014 and 2015, which are included elsewhere in this Offering Circular. The Bank’s audited consolidated financial statements as at and for the years ended 31 December 2014 and 2015 were prepared in accordance with IFRS and have been audited by PricewaterhouseCoopers in accordance with International Standards on Auditing.
Summary historical financial information should be read in conjunction with the Bank’s audited consolidated financial statements and the notes thereto, which are included from page F-2 of this Offering Circular. The historical results do not necessarily indicate the expected results for any future period of the Bank.
Summary Historical Consolidated Income Statement
For the year ended 31 December 2013 2014 2015 2015 (Audited) (Audited) (Audited) CNY CNY CNY U.S.$ (in millions) (in millions) (in millions) (in millions) Interest income ...... 613,384 699,289 725,793 112,043 Interest expense ...... (237,182) (269,398) (289,653) (44,715)
Net interest income ...... 376,202 429,891 436,140 67,328 Fee and commission income ...... 89,697 87,883 90,494 13,970 Fee and commission expense ...... (6,526) (7,760) (7,945) (1,226)
Net fee and commission income ...... 83,171 80,123 82,549 12,743 Net trading gain ...... 2,360 1,908 3,562 550 Net gain/(loss) on financial instruments designated at fair value through profit or loss ...... (639) 1,505 1,727 267 Net gain/(loss) on investment securities ...... (350) 335 857 132 Other operating income ...... 5,027 10,364 16,027 2,474
Operating income ...... 465,771 524,126 540,862 83,495 Operating expenses ...... (198,607) (223,898) (225,818) (34,860) Impairment losses on assets ...... (52,990) (67,971) (84,172) (12,994)
Operating profit ...... 214,174 232,257 230,872 35,640 Share of result of associate ...... – – (15) (2)
Profit before tax ...... 214,174 32,257 230,857 35,638
Income tax expense ...... (47,963) (52,747) (50,083) (7,731)
Profit for the Bank ...... 166,211 179,510 180,774 27,907
Attributable to: – Equity holders of the Bank ...... 166,315 179,461 180,582 27,877
– Non-controlling interests ...... (104) 49 192 30
— 6 — Summary Historical Consolidated Statements of Financial Position
As at 31 December 2013 2014 2015 2015 (Audited) (Audited) (Audited) CNY CNY CNY U.S.$ (in millions) (in millions) (in millions) (in millions) Assets Cash and balances with central banks ...... 2,603,802 2,743,065 2,587,057 399,373 Deposits with banks and other financial institutions . . 397,678 572,805 697,923 107,741 Precious metals ...... 19,185 20,188 40,909 6,315 Placements and loans to banks and other financial institutions ...... 308,655 407,062 504,252 77,843 Financial assets held for trading ...... 53,864 58,425 79,782 12,316 Financial assets designated at fair value through profit or loss ...... 269,018 356,235 359,479 55,494 Derivative financial assets ...... 8,186 7,195 16,038 2,476 Financial assets held under resale agreements ...... 737,052 509,418 471,809 72,835 Loans and advances to customers ...... 6,902,522 7,739,996 8,506,675 1,313,204 Available-for-sale financial assets ...... 781,311 927,903 1,214,542 187,493 Held-to-maturity investments ...... 1,523,815 1,710,950 2,300,824 355,186 Debt instruments classified as receivables ...... 592,090 522,117 557,420 86,051 Investments in associates and joint ventures ...... 1 – 273 42 Property and equipment ...... 150,859 154,950 156,178 24,110 Goodwill ...... 1,381 1,381 1,381 213 Deferred tax assets ...... 74,075 78,640 81,548 12,589 Other assets ...... 138,608 163,822 215,303 33,237
Total assets ...... 14,562,102 15,974,152 17,791,393 2,746,518
Liabilities and Shareholders’ Equity Borrowings from central banks ...... 104 80,121 60,599 9,355 Deposits from banks and other financial institutions . . 729,354 831,141 1,221,901 188,629 Placements from banks and other financial institutions ...... 174,363 224,923 315,759 48,745 Financial liabilities held for trading ...... 20,805 25,211 24,036 3,711 Financial liabilities designated at fair value through profit or loss ...... 285,454 347,282 406,407 62,738 Derivative financial liabilities ...... 7,635 7,240 12,192 1,882 Financial assets sold under repurchase agreements . . . 26,787 131,021 88,804 13,709 Due to customers ...... 11,811,411 12,533,397 13,538,360 2,089,963 Debt securities issued ...... 266,261 325,167 382,742 59,085 Deferred tax liabilities ...... 8 43 111 17 Other liabilities ...... 395,383 435,987 528,597 81,601
Total liabilities ...... 13,717,565 14,941,533 16,579,508 2,559,435
— 7 — As at 31 December 2013 2014 2015 2015 (Audited) (Audited) (Audited) CNY CNY CNY U.S.$ (in millions) (in millions) (in millions) (in millions) Ordinary shares ...... 324,794 324,794 324,794 50,140 Preference shares ...... – 39,944 79,899 12,334 Capital reserve ...... 98,773 98,773 98,773 15,248 Investment revaluation reserve ...... (22,772) 3,118 22,429 3,462 Surplus reserve ...... 60,632 78,594 96,748 14,935 General reserve ...... 139,204 156,707 175,606 27,109 Retained earnings ...... 243,482 329,989 412,005 63,603 Foreign currency translation reserve ...... (1,005) (853) (163) (25) Non-controlling interests ...... 1,429 1,553 1,794 277
Total equity ...... 844,537 1,032,619 1,211,885 187,083
Total equity and liabilities ...... 14,562,102 15,974,152 17,791,393 2,746,518
Capital Ratio Data for the Bank
As at 31 December 2013 2014 2015 (Audited) (Audited) (Audited) Capital Adequacy Indicators (1) Common equity tier 1 capital adequacy ratio ...... 9.25% 9.09% 10.24% Tier 1 capital adequacy ratio ...... 9.25% 9.46% 10.96% Capital adequacy ratio ...... 11.86% 12.82% 13.40% Asset Quality Indicators (2) Non-performing loan ratio ...... 1.22% 1.54% 2.39% (3) Allowance to non-performing loans ...... 367.04% 286.53% 189.43% (4) Allowance to total loans ...... 4.46% 4.42% 4.53%
Notes:
(1) Figures were calculated in accordance with the Capital Rules for Commercial Banks (Provisional) and other relevant regulations after 2013. Excess loan loss provisions calculated in accordance with the Capital Rules for Commercial Banks (Provisional) were qualified as tier 2 capital. That is, during the parallel running period, while calculating the credit risk weighted asset by the Internal Ratings-Based (IRB) approach in the full year, the amount of excess loans loss provisions beyond the provision coverage ratio cap of 150 per cent. were all qualified as tier 2 capital. Besides, with the requirement of capital floor adjustment coefficients as 95 per cent., the difference between excess loan loss provisions qualified as tier 2 capital calculated using the advanced capital measurement approach and those calculated using other approaches was multiplied by 9.52 and recorded in risk-weighted assets.
(2) Calculated by dividing balance of non-performing loans by total loans and advances to customers.
(3) Calculated by dividing allowance for impairment losses on loans by balance of non-performing loans.
(4) Calculated by dividing allowance for impairment losses on loans by total loans and advances to customers.
— 8 — Other Financial Indicators
As at 31 December Regulatory standard 2013 2014 2015 (Audited) (Audited) (Audited) (1) Liquidity Ratio (%) ...... Renminbi ≥25 43.57 44.02 44.50 Foreign Currency ≥25 114.95 72.49 115.15 (2) Loan-to-deposit ratio (%) . . . . . Renminbi and Foreign Currency ≤75 61.17 64.61 65.81 Percentage of loans to the largest (3) single customer (%) ...... ≤10 3.33 5.23 7.15 Percentage of loans to top ten (4) customers (%) ...... 13.22 14.43 16.82 (5) Loan migration ration (%) . . . . . Normal 2.53 3.60 4.96 Special mention 4.36 4.99 18.28 Substandard 37.24 42.53 86.94 Doubtful 8.62 10.10 10.35
Notes:
(1) Calculated by dividing current assets by current liabilities in accordance with the relevant regulations of the CBRC.
(2) Calculated by dividing total gross loans and advances to customers by deposits from customers.
(3) Calculated by dividing loans to the largest single customer by net capital.
(4) Calculated by dividing loans to top ten customers by net capital.
(5) Calculated in accordance with the relevant regulations of the CBRC, reflecting domestic data only.
Operating Income By Business Segment
For the year ended 31 December 2013 2014 2015 2015 (Audited) (Audited) (Audited) CNY CNY CNY U.S.$ (in millions) (in millions) (in millions) (in millions) Corporate banking ...... 253,092 280,701 275,396 42,514 Retail banking ...... 180,223 189,876 196,679 30,362 Treasury operations ...... 27,916 45,686 55,756 8,607 Other operations ...... 4,540 7,863 13,031 2,012
Total ...... 465,771 524,126 540,862 83,495
— 9 — Key Financial Indicators of County Area Banking Business
As at and for the year ended 31 December 2013 2014 2015 (Audited) (Audited) (Audited) (1) Return on average total assets (%) ...... 1.15 1.05 0.97 Net fee and commission income to operating income (%) . 15.70 14.23 14.03 (2) Cost-to-income ratio (%) ...... 40.96 41.63 41.71 Loan-to-deposit ratio (%) ...... 47.34 49.91 49.31 Identified impaired gross loans and advances as a percentage of total gross loans and advances (%) . . . . . 1.54 1.82 3.02 (3) Allowance to non-performing loans (%) ...... 352.85 298.52 184.47 (4) Allowance to total loans (%) ...... 5.44 5.44 5.56
Notes:
(1) Calculated by dividing net profit by the average balances of total assets at the beginning and the end of the period.
(2) Calculated by dividing operating and administrative expenses by operating income under CASs, which is consistent with the figures as stated in the financial report of the Bank prepared in accordance with CASs.
(3) Calculated by dividing allowance for impairment losses on loans by balance of non-performing loans.
(4) Calculated by dividing allowance for impairment losses on loans by total loans and advances to customers.
— 10 — RISK FACTORS
Prior to making any investment decision, prospective investors should consider carefully all of the information contained in this Offering Circular, including the risks and uncertainties described below. The Bank’s business, financial condition or results of operations could be materially adversely affected by any of these risks. Each of the Issuer and the Guarantor believes that the following factors may affect the Issuer’s ability to fulfil its obligations under the Notes and the Guarantor’s ability to fulfil its obligations under the Guarantee. Additional considerations and uncertainties not presently known to the Issuer and the Guarantor or which the Issuer and the Guarantor currently deem immaterial may also have an adverse effect on an investment in the Notes. All of these factors are contingencies which may or may not occur and none of the Issuer or the Guarantor is in a position to express a view on the likelihood of any such contingency occurring.
Factors which each of the Issuer or the Guarantor believes may be material for the purpose of assessing the market risks associated with the Notes and the Guarantee are described below. Each of the Issuer or the Guarantor believes that the factors described below represent the principal risks inherent in investing in the Notes, but their inability to repay principal, pay interest (if any) or other amounts or fulfil other obligations on or in connection with the Notes or the Guarantee may occur for other reasons and it does not represent that the statements below regarding the risks of holding the Notes are exhaustive.
Risks Relating to the Bank’s Loan Portfolio
The Bank has a concentration of loans to certain regions, industries and customers, and if the conditions of these regions or these industries, or the financial conditions of these customers deteriorate significantly, its asset quality, financial condition and results of operations may be materially and adversely affected.
As at 31 December 2015, 39.0 per cent. of the Bank’s total loans and 46.0 per cent. of its non-performing loans originated in Western, Central and North-eastern China. Although these regions may currently benefit economically from favourable government policies, any of these economic policies may change in the future and the implementation of such policies may not be as effective as the Bank anticipates, nor can the Bank control or influence the change of such policies in these regions. A significant economic downturn in any of these regions, or any inaccurate assessment or the Bank’s failure in the management of the credit risks regarding borrowers who are located, or have substantial operations, in such regions, whether due to changes in government policies or otherwise, may materially and adversely affect its asset quality, financial condition and results of operations.
As at 31 December 2015, the Bank’s loans to China’s (i) manufacturing; (ii) transportation, logistics and postal services; (iii) real estate; (iv) production and supply of power, heat, gas and water and (v) retail and wholesale represented 25.4 per cent., 16.6 per cent., 9.8 per cent., 11.0 per cent. and 9.4 per cent. of its total corporate loans outstanding, respectively. A significant downturn in any industry in which its loans are highly concentrated may lead to a significant increase in non-performing loans, and may negatively affect the level of new lending or refinancing of existing loans to borrowers in that industry, which may materially and adversely affect its asset quality, financial condition and results of operations. In particular, the Bank has a higher concentration of non-performing loans in the manufacturing sector and the retail and wholesale sector. Downturn in these two industries may have a greater impact on the Bank compared to other industries.
In accordance with PRC national policies aimed at restricting the over-development of certain industries with excess capacity, including wind power equipment, steel, cement, coal, chemical and flat glass, among other industries, the Bank adopts a strict policy towards making loans to these industries. In order to reduce its loan exposure and strictly control risks associated with loans to these high-risk industries, the Bank
— 11 — carefully manages the size of its loans to these industries. If the PRC government introduces policies which further restrict these industries and/or these industries otherwise experience deterioration in their operations, such changes may adversely affect the quality of the Bank’s loans to these industries.
The Bank is exposed to the real estate market in China through, in particular, residential mortgage loans and other loans secured by real property collateral. As at 31 December 2015, the Bank’s residential mortgage loans represented 3.9 per cent. of its domestic retail loans outstanding. Any measures imposed by the PRC government aimed at cooling down the PRC real estate market may adversely affect the growth and quality of the Bank’s loans to the real estate industry and the Bank’s residential mortgage loans. On the other hand, a downturn in the PRC’s real estate market may materially and adversely affect the quality of the Bank’s existing loans and its ability to generate new loans, which in turn could have a material adverse effect on the Bank’s asset quality, financial condition and results of operations.
As at 31 December 2015, the Bank’s loans to its top ten customers totalled CNY247.5 billion, which represented 2.8 per cent. of its total loan portfolio and 16.8 per cent. of its regulatory capital. The Bank’s loans to the top ten customers were classified as performing. If any of the performing loans to the top ten customers deteriorates or becomes non-performing, the Bank’s asset quality, financial condition and results of operations may be materially and adversely affected.
Furthermore, the Bank also provides loans to SMEs and agriculture-related industries and customers. The loans to SMEs and agriculture-related industries and customers are, compared to its other loans, generally more vulnerable to the adverse impact of certain factors such as natural disasters and economic slowdown. The Bank adopted a number of measures to manage these risks, such as imposing stricter requirements on approving credit applications and charging higher interest rates, but there can be no certainty that these measures will effectively reduce or eliminate the risks relating to such industries or customers. If the Bank’s loans to SMEs and agriculture-related industries and customers deteriorate, its asset quality, financial condition and results of operations may be materially and adversely affected.
If the Bank is unable to effectively maintain the quality of its loan portfolio, its financial condition and results of operations may be materially and adversely affected.
As at 31 December 2013, 2014 and 2015, the Bank’s non-performing loan ratio was 1.22 per cent., 1.54 per cent. and 2.39 per cent., respectively and for the same periods, the Bank’s non-performing loans amounted to CNY87.8 billion, CNY125.0 billion and CNY212.9 billion, respectively, as a result of the general slowdown in macroeconomic growth in the PRC. There can be no assurance that the Bank will be able to maintain or lower its current non-performing loan ratio in the future or that the quality of its existing or future loans and advances to customers will not deteriorate.
The quality of the Bank’s loan portfolio may deteriorate in the future due to various reasons, including factors beyond the Bank’s control, such as restructuring of the PRC economy, PRC government’s initiative to tackle overcapacity in certain industries, a slowdown in the PRC or global economies, a relapse of the global credit crisis, adverse macroeconomic trends in China and other parts of the world and the occurrence of natural disasters, all of which could impair the ability of the Bank’s borrowers to service their outstanding debt. Inflation in China may cause rising costs and negatively impact the profitability of the Bank’s corporate customers, which in turn may lead to significant increases in the Bank’s allowance made for impaired loans. Any actual or perceived deterioration in creditworthiness of counterparties, declines in property prices in many third- and fourth- tier cities in China and resulting reduction in collateral values, higher unemployment rates or reduced profitability of corporate borrowers may also cause the Bank’s asset quality to deteriorate and may lead to significant increases in allowance made for impaired loans. If the Bank’s non-performing loans or the allowance made for impaired loans increase in the future, the results of its operations and financial condition may be materially and adversely affected. In addition, the sustainability of the Bank’s growth also depends largely on its ability to effectively manage its credit
— 12 — risk and maintain or improve the quality of its loan portfolio. The Bank seeks to continuously improve its credit risk management policies, procedures and systems. However, there can be no certainty that the Bank’s credit risk management policies, procedures and systems are effective or free from deficiency. Failure of the Bank’s credit risk management policies, procedures and systems may result in an increase in its non- performing loans and adversely affect the quality of its loan portfolio.
The Bank’s allowance for impairment losses may not be sufficient to cover the actual losses on its loan portfolio in the future.
As at 31 December 2013, 2014 and 2015, the Bank’s allowance for impairment losses on loans was CNY322.2 billion, CNY358.1 billion and CNY403.2 billion, respectively. For the same periods, the ratio of its allowance for impairment losses to total loans was 4.5 per cent., 4.4 per cent. and 4.5 per cent., respectively and the ratio of its allowance for impairment losses to non-performing loans was 367.0 per cent., 286.5 per cent. and 189.4 per cent., respectively. The allowance for impairment losses is based on the Bank’s current assessment of, and expectations concerning, various factors affecting the quality of its loan portfolio. These factors include, among other things, borrowers’ financial condition, repayment ability and repayment intention, the realisable value of any collateral, the ability of the guarantors of the borrowers to fulfil their obligations and the implementation of the Bank’s credit policies, as well as China’s economy, macroeconomic policies, interest rates, exchange rates, and legal and regulatory environments. Many of these factors are beyond the Bank’s control, and therefore its assessment and expectations on these factors may differ from future developments. The adequacy of the Bank’s allowance for impairment losses depends on the reliable application of its risk assessment system to estimate these potential losses, as well as its ability to accurately collect, process and analyse the relevant statistical data. If the Bank’s assessment of, and expectations concerning, the factors that affect the quality of its loan portfolio differ from actual developments, if its assessment results prove to be inaccurate, or if its application of the assessment systems or its ability to collect relevant statistical data proves to be insufficient, the Bank’s allowance for impairment losses may not be adequate to cover its actual losses and the Bank may need to make additional provisions for impairment losses, which may reduce its profit and therefore materially and adversely affect its asset quality, financial conditions and results of operations.
The collateral or guarantees securing the Bank’s loans may not be sufficient, and it may be unable to realise the full value of the collateral or guarantees in a timely manner or at all.
A significant portion of the Bank’s loans is secured by collateral or guarantees. As at 31 December 2015, 47.9 per cent. and 13.5 per cent. of its total loans were secured by mortgages and pledges, respectively, and 15.1 per cent. of its total loans were secured by guarantees.
The pledged collateral securing the Bank’s loans includes, among other things, bond or equity securities. The mortgages securing the Bank’s loans primarily comprise real properties and other assets located in China. The value of the collateral securing its loans may significantly fluctuate or decline due to factors beyond the Bank’s control, including macroeconomic factors affecting the economy of China. For example, a downturn in China’s real estate market may result in a decline in the value of the real properties securing the Bank’s loans to levels significantly below the outstanding principal and interest balances of such loans. Any decline in the value of such collateral may reduce the amounts the Bank can recover from such collateral and increase its impairment losses.
— 13 — The Bank’s policies require regular internal re-valuations of collateral. However, such policies may not be implemented in a timely manner and, as a result, it may not have updated valuation of such collateral, which may adversely affect the accuracy of the assessment of its loans secured by such collateral.
Some of the guarantees securing the Bank’s loans were provided by the borrowers’ affiliates. Such loans and advances are generally not backed by collateral or security interests other than guarantees. A significant deterioration in the financial condition of a guarantor could significantly decrease the amounts the Bank may recover under such guarantees. Moreover, it is subject to the risk that a court or other judicial or government authorities may declare a guarantee to be invalid or otherwise decline or fail to enforce such guarantees. The Bank is therefore exposed to the risk that it may not be able to recover all or any part of the amounts guaranteed in respect of its loans.
In China, the procedures for liquidating or otherwise realising the value of collateral in the form of non-monetary assets may be protracted and it may be difficult to enforce claims in respect of such collateral. As a result, it may be difficult and time-consuming for the Bank to take control of or liquidate the collateral securing non-performing loans. For example, in accordance with the Directive on Foreclosure of Mortgage on Residential Properties issued by the PRC Supreme Court (最高人民法院關於人民法院執行設定抵押的 房屋的規定), effective from 21 December 2005, the PRC courts cannot evict a borrower or his or her dependents from his or her principal residence during the six-month grace period after a court approves its petition to foreclose. In addition, under certain circumstances, the Bank’s rights to the collateral securing its loans may have lower priority than certain other rights. For example, according to the PRC Bankruptcy Law (中華人民共和國企業破產法), claims for the amount that a company in bankruptcy owed to its employees prior to 27 August 2006, including salaries, medical insurance claims and basic pension benefits, will have priority over the Bank’s rights to the collateral, if not adequately provided for in accordance with liquidation proceedings.
The Bank’s inability to realise the full value of the collateral and guarantees securing its loans on a timely basis may materially and adversely affect its asset quality, financial condition or results of operations.
The Bank’s loan classification and provisioning policies may be different in certain respects from those applicable to banks in certain other countries or regions.
The Bank classifies its loans using a five-category loan classification system in accordance with the guidelines set forth by the PRC regulators. The five categories are normal, special mention, substandard, doubtful and loss. The Bank assesses its loans for impairment, determines a level of allowance for impairment losses and recognises any related provisions made in a year using the five-category classification system. It performs such assessment, determination and recognition using the concept of impairment under IAS 39. For its corporate loans classified as substandard or lower, it makes an assessment on the impairment allowance on an individual loan basis. For the performing corporate loans and for all of the retail loans, it makes a collective assessment based on its historical loan loss experience. The Bank’s loan classification and impairment provisioning policies may be different in certain respects from those of banks incorporated in certain other countries or regions. As a result, the Bank’s loan classification as well as its allowance for impairment losses may differ from those reported by international banks incorporated in those countries or regions.
IFRS 9 that replaces IAS 39 may require the Bank to change its provisioning practice.
The Bank currently assesses its loans and investment assets for impairment under IAS 39. The IASB, which is responsible for developing and revising accounting standards under IFRS, issued in July 2014 the final version of IFRS 9 Financial Instruments (“IFRS 9”) that, among other things, includes a new general hedge accounting model and introduces an expected loss impairment model. The new standard allows an entity to
— 14 — change the accounting for financial liabilities that it has elected to measure under the fair value option, before applying any of the other requirements in IFRS 9. With that change, gains and losses resulting from an entity’s own credit risk will be recognised outside of profit or loss. The new standard also requires an entity to recognise expected credit losses at all times and to update the amount of expected credit losses recognised at each reporting date to reflect changes in the credit risk of financial instruments. IFRS 9, which is effective for reporting periods beginning on or after 1 January 2018 with early adoption permitted, may require the Bank’s current provisioning practice to change and may, as a result, adversely affect the Bank’s business, financial condition and results of operations.
If the Bank does not maintain the growth of its loan portfolio, its business operations and financial condition may be materially and adversely affected.
The Bank’s loans to customers, net of loan loss allowance, have grown significantly in the past few years, increasing to CNY8,506.7 billion as at 31 December 2015 from CNY7,740.0 billion at 31 December 2014 and CNY6,902.5 billion at 31 December 2013. The growth of its loan portfolio may be affected by various factors, such as China’s macroeconomic policies and capital constraints. The Bank’s loan portfolio experienced a significant increase in the first half of 2009. This was in part attributable to the moderately loose monetary policy and the implementation of the economic stimulus package of the PRC government. Since 2013, the growth rate of the Bank’s total loan portfolio has maintained a relatively steady pace. However, there can be no assurance that the Bank will be able to maintain the growth rate of its loan portfolio in the future, which may slow down or even decline. In addition, in response to the constraints from the amount of its regulatory capital, the Bank may adopt strategies to reduce its reliance on its loan portfolio and expand its activities in other businesses that require relatively lower capital. Any of the foregoing factors could impact the growth of its loan portfolio and thereby materially and adversely affect its business, business prospects, financial condition and results of operations.
Deterioration in the debt repayment abilities of local government financing vehicles of which the Bank extended loans to, may materially and adversely affect the Bank’s asset quality, financial condition and results of operations.
Loans extended to local government financing vehicles have been a part of the loan portfolio for China’s commercial banks. According to the CBRC, local government financing vehicles consist primarily of government-led vehicles and vehicles whose shares are controlled by the government. These vehicles primarily engage in financing activities wholly or partially supported by the direct or indirect repayment commitments or direct or indirect guarantees from local governments, to provide support to various infrastructure development and quasi-public interest government investment projects. The Bank extends loans primarily to local government financing vehicles for transportation and urban development as well as those vehicles relating to land reserve centres, economic development zones, industry parks or state asset management companies. Within China’s administrative division system, the recipients of these loans generally rank at or above the district city level. The Bank targets its loans to local government financing vehicles mainly to China’ economically developed areas, including the Yangtze River Delta, Pearl River Delta and Bohai Rim regions. The majority of its loans to local government financing vehicles are backed by mortgages, pledges or guarantees and have remaining maturities of five years or less.
Recently, with the aim of reinforcing the risk management of loans to local government financing vehicles, the State Council, the CBRC and the People’s Bank of China (the “PBOC”), along with several other PRC regulatory authorities promulgated a series of notices, guidelines and other regulatory documents to direct PRC banks and other financial institutions to optimise and strengthen their risk management measures regarding their loans to local government financing vehicles. While the Bank has taken various measures to reduce the risks of default such as setting clear thresholds for its loans to local government financing vehicles and enhancing the mortgages and guarantees on such loans, unfavourable developments in macroeconomic conditions, adverse changes to state policies, adverse changes to the financial condition of
— 15 — local governments or other factors may adversely affect the debt repayments of these financing vehicles, which may in turn materially and adversely affect the Bank’s asset quality, financial condition and results of operations.
Risks Relating to the Bank’s Business
The Bank faces certain risks relating to its recently implemented operational reform initiatives.
The Bank continues to develop and implement a number of operational reform initiatives in an effort to become more competitive and customer-oriented, including those relating to re-engineering its business process and organisational structure. For example, (i) the Bank has revamped its corporate banking products and services, targeting growth in value-added products and services such as asset management, bancassurance and investment banking business; (ii) it has prioritised the development of retail banking business, through implementing operational reform of branch outlets, streamlining business procedures and increasing investments in the distribution channels and IT system; and (iii) it has focused on product innovations in order to achieve greater customer satisfaction.
Although the Bank’s operational reform initiatives have contributed to its financial results in recent years, it may face certain risks relating to the implementation of these initiatives and there can be no assurance that the Bank will be able to achieve the results it expects in the future due to a number of factors, including:
• it may not have sufficient experience or expertise to successfully manage and continue implementing these operational reform initiatives;
• it may not have sufficient and effective management systems and information technology system to support the implementation of these operational reform initiatives according to its contemplated schedule or at all; and
• changes in government policies or banking regulations may adversely affect the schedule for implementing, or the Bank’s ability to implement, these operational reform initiatives.
If the Bank does not successfully implement all or any of these reform initiatives or, if implemented, these initiatives do not achieve the intended benefits or within its schedule, its business, results of operations and financial condition may be adversely affected.
Moreover, these operational reform initiatives may expose the Bank to additional risks. Accordingly, if it is unable to manage risks associated with its initiatives to transform its business, the Bank’s business prospects, financial condition and results of operations could be adversely and materially affected.
The Bank’s focus on the growth of its County Area Banking Business and its related initiatives expose it to increased risks that may materially and adversely affect its business.
The County Area Banking Business is an important component of the Bank’s business. Its initiatives in the County Areas are designed to further increase the penetration of its products and services into these areas. Historically, the County Area Banking Business has generally presented relatively higher risks and lower returns than the banking business in the Urban Areas. The Bank’s significant banking portfolio and initiatives in the County Areas expose it to higher risks, including: (i) risks that its provisions for impairment losses on loans may be higher than anticipated due to the limited financial capacity of its customers in the County Areas or otherwise; (ii) revenues from its County Area Banking Business may be lower than anticipated; (iii) if the actual development of the County Area banking market differs from its anticipation, the Bank may not be able to derive the return as anticipated from its increased allocation of resources to its County Area Banking Business; (iv) natural disasters and global climate changes may
— 16 — adversely affect the business operation and financial condition of certain of its customers who may not be able to service their obligations owed to it; and (v) the Bank’s extensive branch network in the vast County Areas may represent challenges to its operations. The Bank’s growing County Area Banking Business presents an increased challenge to its management skills, risk control capabilities and information technology systems.
In addition, many of the Bank’s initiatives in respect of the County Area Banking Business are unprecedented, and there can be no certainty that such initiatives will be successful or achieve the results anticipated. For example, the Bank is implementing a pilot programme at eight selected tier-1 branches in Sichuan, Fujian and other provinces to set up a business division dedicated to its County Area Banking Business in the respective regions. This initiative is unprecedented in China and the Bank may not be able to achieve the results anticipated or within its schedule. If any of the Bank’s initiatives in respect of the County Area Banking Business does not achieve the results anticipated, its County Area Banking Business, its overall business, results of operations and financial condition may be materially and adversely impacted.
Furthermore, certain governmental policies and guidelines relating to the Bank’s County Area Banking Business impose constraints on its operations. For example, on 23 April 2009, the CBRC issued the Guideline to Agricultural Bank of China’s County Area Banking Division Reform and Regulations (中國農 業銀行三農金融事業部制改革與監管指引), or the Guideline. The Guideline, which was further revised on 29 December 2010, has imposed requirements on its County Area Banking Business, including its organisation structure, operation mechanism and performance review. The Bank’s efforts to comply with the requirements of the Guideline may affect its business strategies, as well as its ability to optimise the resource allocation and customer selection, which may adversely affect its profitability in the near-and medium-term. In the past, there have been instances where the ratios of the Bank’s assets and liabilities in its County Area Banking Business to its total assets and liabilities and its cost-to-income ratio in the County Area Banking Business did not meet the requirements of the Guideline. Although the Bank has not been subject to any regulatory actions for such non-compliance, there can be no certainty that it will not be subject to any regulatory actions in the future for its past non-compliance. In addition, it cannot assure investors that it will be able to meet all regulatory requirements relating to its County Area Banking Business, including the requirements of the Guideline, in the future due to changes of these requirements or otherwise, or that it will not be subject to sanctions as a result. If any of the above circumstances occurs, the reputation, business, results of operations and financial condition of the Bank may be materially and adversely affected.
If the Bank is not effective in implementing enhanced risk management and internal control policies and procedures and introducing certain information technology systems to assist with its risk management and internal control, its business and prospects may be materially and adversely affected.
The Bank has in the past suffered from credit-quality problems, lapses in credit approval and control processes, internal control deficiencies and operational problems as a result of weaknesses in its risk management controls. The Bank has significantly enhanced its risk management and internal control policies and procedures in recent years in an effort to improve its risk management capabilities and enhance its internal control. However, there can be no certainty that the Bank’s risk management and internal control policies and procedures will adequately control, or protect it against, all credit and other risks. Some of these risks are yet to be identified by the Bank, and may be unforeseeable or higher than what it originally expected or the historical level. In addition, given the short history of certain aspects of its risk management and internal control policies and procedures, the Bank will require additional time to implement these policies and procedures and fully measure the impact of, and evaluate the compliance with, these policies and procedures. Moreover, the Bank’s staff will require time to adjust to these policies and procedures and it cannot assure investors that its employees will be able to consistently comply with or correctly apply these policies and procedures.
— 17 — The Bank’s risk management capabilities are limited by the information, tools or technologies available to it. For example, it may not be able to effectively monitor credit risk due to limited information resources or tools. In recent years, the Bank has introduced or refined certain risk management tools and systems to assist it in better managing risks, including the internal credit rating system, the assets and liabilities management system, the internal funds transfer pricing system, the treasury trading and risk management system and the Bank’s credit management system (“CMS”). These systems aim at enhancing the Bank’s ability to use quantitative measures to manage risks. However, its ability to operate such systems and to monitor and analyse the effectiveness of such systems is still subject to continuous testing. The Bank is also still in the process of further developing information systems to manage certain aspects of risk management, such as automated systems for the collection of certain information relating to connected party transactions and group lending.
If the Bank is not effective in improving its risk management and internal control policies, procedures and systems, or if the intended results of such policies, procedures or systems are not achieved in a timely manner, its asset quality, business, financial condition and results of operations may be materially and adversely affected.
The Bank’s expanding range of products, services and business activities exposes it to new risks.
The Bank has been increasing its product development efforts and expanding the range of its products and services to meet the needs of its customers and to enhance its competitiveness.
Expansion of its business activities exposes the Bank to a number of risks and challenges, including:
• insufficient experience or expertise in certain new products and services, which may prevent it from effectively competing in these areas;
• imitation or replication of its new products and services by its competitors;
• failure of its new products and services to be accepted by its customers or meet the expected targets;
• inability to hire additional qualified personnel or to hire personnel on commercially reasonable terms;
• insufficient financial, operational, management and other human resources to support its expanded range of products and services;
• inability to obtain regulatory approvals for its new products or services; and
• unsuccessful attempts to enhance its risk management and internal control capabilities and information technology systems to support a broader range of products and services.
If the Bank is not able to successfully expand into or grow new products, services and related business areas due to these risks or to achieve the intended results with respect to the new products and services, its business, financial condition and results of operations may be materially and adversely affected.
The Bank may face difficulties in meeting regulatory requirements relating to capital adequacy.
The Bank is required by the PRC Commercial Banking Law and the rules promulgated by the CBRC to maintain a minimum core capital adequacy ratio of 4 per cent. and a minimum capital adequacy ratio of 8 per cent., and under the Capital Rules for Commercial Banks (Provisional), the Bank’s minimum common equity tier 1 core capital adequacy and tier 1 capital adequacy ratio are 5 per cent. and 6 per cent., respectively. As at 31 December 2013, 2014 and 2015, the Bank’s consolidated core capital adequacy ratios
— 18 — were 9.81 per cent., 9.91 per cent. and 10.00 per cent., respectively, and its consolidated capital adequacy ratios were 12.57 per cent., 12.77 per cent. and 13.08 per cent., respectively. In accordance with the Capital Rules for Commercial Banks (Provisional), the common equity tier 1 core capital adequacy ratio, tier 1 capital adequacy ratio and capital adequacy ratio were 10.24 per cent., 10.96 per cent. and 13.40 per cent., respectively, as at 31 December 2015. Although these capital adequacy ratios were in compliance with the applicable PRC requirements, certain developments could affect the Bank’s ability to satisfy applicable capital adequacy requirements in the future.
In recent years, the CBRC has issued several regulations and guidelines governing capital adequacy requirements applicable to commercial banks in the PRC. Currently, the CBRC is actively pushing forward the implementation of Basel III. In April 2011, the CBRC promulgated the Guideline Concerning the Implementation of New Regulatory Standards for the PRC Banking Industry (關於中國銀行業實施新監管 標準的指導意見) to clarify the direction for future regulations and the requirement for prudent regulatory requirements. On 7 June 2012, the CBRC promulgated the Capital Rules for Commercial Banks (Provisional), which came into effect on 1 January 2013. The Capital Rules for Commercial Banks (Provisional) clarified and refined the categorisations and methods of measurement in respect of the capital instruments of commercial banks. According to the Capital Rules for Commercial Banks (Provisional), the regulatory requirements on the capital adequacy ratio of commercial banks shall cover the requirements on the minimum capital, reserve capital and counter-cyclical capital, additional capital for systematically important banks, as well as second pillar capital, which shall be reached by commercial banks by the end of 2018. In order to smoothly implement the Capital Rules for Commercial Banks (Provisional), on 30 November 2012, the CBRC promulgated the Notice of Transitional Arrangement for the Implementation of the Regulation Governing Capital of Commercial Banks (Provisional) (中國銀監會關於實施《商業銀行資本 管理辦法（試行）過渡期安排相關事項的通知》) (the “Notice of Transitional Arrangement”), pursuant to which commercial banks shall reach the minimum capital requirement by 1 January 2013. Within the transitional period for reaching required targets, the Capital Rules for Commercial Banks (Provisional) and the Notice of Transitional Arrangement require commercial banks to formulate and implement feasible plans for reaching capital adequacy ratio targets step by step, and submit the same to the CBRC for approval. Furthermore, the Financial Stability Board identified the Bank as a globally systemically important bank (“G-SIB”) in November 2013. As a G-SIB, the Bank is required to satisfy heightened capital adequacy ratios pursuant to Basel III. Given the requirement of capital adequacy ratio under the Capital Rules for Commercial Banks (Provisional) and the additional requirements due to its G-SIB status, the Bank’s capital adequacy may be substantially affected.
Although the Bank is currently in compliance with the requirement for capital adequacy, new requirements and regulations may adversely affect the Bank’s compliance with capital adequacy ratios, and it is possible that the Bank may face difficulties in meeting the requirement of the regulations regarding capital adequacy and that new requirements and regulations will also affect the Bank’s funding needs.
In addition, some regulatory developments may affect the Bank’s ability to continually comply with capital adequacy requirements, including the raising of minimum capital adequacy ratios by the CBRC and the changes in calculations of capital adequacy ratios by the CBRC. If any of these circumstances occurs, the Bank may be unable to comply with the regulatory requirements of the CBRC.
There can be no assurance that the Bank will be able to meet these requirements in the future at all times and any failure to meet these requirements may have a material and adverse effect on the Bank’s business, financial condition and results of operations.
In order to support its steady growth and development, the Bank may need to raise more capital to ensure that its capital complies with or exceeds the minimum regulatory requirement. In its future plans to raise capital, the Bank may sell any share securities that can contribute towards core capital or any debt securities that can contribute towards supplementary capital. The Bank’s capital-raising ability may be restricted by the
— 19 — Bank’s future business, financial condition and results of operations, the Bank’s credit rating, necessary regulatory approvals and overall market conditions, including Chinese and global economic, political and other conditions at the time of capital raising.
The Bank may not be able to detect and prevent fraud or other misconduct committed by its employees or third parties.
Fraud and other misconduct by employees or third parties may be difficult to detect and prevent and could subject the Bank to financial losses and sanctions imposed by governmental authorities as well as seriously harm its reputation. Types of possible misconduct by third parties against the Bank may include, among other things, fraud, theft and robbery. Types of misconduct by the Bank’s employees in the past have included, among other things, improper extension of credit, unauthorised business transactions, business process in breach of the Bank’s internal policies and procedures, inappropriate accounting treatment, theft, embezzlement or misappropriation of customer funds, fraud, and bribery. In addition, the Bank’s employees may commit errors or take improper actions that could subject the Bank to financial claims as well as regulatory actions. The Bank has a nationwide network of outlets in China and in other countries. There can be no certainty that all of the employees of the Bank will comply with its risk management and internal control policies and procedures.
In January 2016, the Bank discovered that two of its employees had been illegally selling bills of exchange to an agent who further on-sold the bills of exchange to another bank, exposing the Bank to risks worth of CNY3.92 billion. The Bank has been proactively working with public security authority to investigate the issue. Although the Bank has increased its efforts to detect and prevent employee and third-party fraud or other misconduct, it is not always possible to detect or prevent such activities, and the precautions it takes may not be effective in all cases. There can be no certainty that fraud or other misconduct, whether involving past acts that have gone undetected or future acts, will not have a material adverse effect on the reputation, results of operations and business prospects of the Bank, or that all of the employees of the Bank will comply with its risk management and internal control policies and procedures.
The Bank may be subject to penalties and other adverse consequences should it be determined that transactions in which it participates violate U.S. or other sanctions.
U.S. law generally prohibits U.S. persons from directly or indirectly investing or otherwise doing business in or with certain countries (such as Iran, Cuba, the Sudan, North Korea and others) and with certain persons or businesses that have been specially designated by the OFAC or other U.S. government agencies. Other governments and international or regional organisations also administer similar economic sanctions.
While the Bank does not believe that it is in violation of any applicable sanctions and the proceeds of the issue of the Notes is not intended to be used in violation of sanctions, if it were determined that transactions in which it participates violate U.S. or other sanctions, it could be subject to U.S. or other penalties, and its reputation and future business prospects in the United States or with U.S. persons, or in other jurisdictions, could be adversely affected.
If the Bank fails to maintain the growth rate in its customer deposits or if there is a significant decrease in customer deposits, its business operations and liquidity may be materially and adversely affected.
Customer deposits are the Bank’s primary source of funding. From 31 December 2013 to 31 December 2015, its average balance of deposits grew from CNY11,170.8 billion, CNY11,997.3 billion to CNY12,865.6 billion, and its domestic retail deposits grew from CNY6,923.6 billion, CNY7,422.3 billion to CNY8,065.6 billion. However, many factors affect the growth of deposits, some of which are beyond the Bank’s control, such as economic and political conditions, availability of investment alternatives and retail customers’
— 20 — changing perceptions toward savings. For example, with the continuing development of China’s capital markets, customers of the Bank may reduce their deposits and increase their investment in securities for a higher return.
If the Bank fails to maintain the growth rate in its deposits or if a substantial portion of its depositors withdraw their deposits or do not roll over their time deposits upon maturity, the Bank’s liquidity position, financial condition and results of operations may be materially and adversely affected. In such event, the Bank may need to seek more expensive sources of funding and there can be no assurance that it will be able to obtain additional funding on commercially reasonable terms as and when required. The Bank’s ability to raise additional funds may be impaired by factors over which it has little or no control, such as deteriorating market conditions, severe disruptions in the financial markets, or negative outlooks for the industries to which it has significant credit exposure.
The business of the Bank is highly dependent on the proper functioning and improvement of its information technology systems.
The Bank depends on its information technology systems to process transactions on an accurate and timely basis, and to store and process its business and operating data. The proper functioning of the Bank’s financial control, risk management, credit analysis and reporting, accounting, customer service and other information technology systems, as well as the communication networks between its branches and main data processing centres, is critical to its business and ability to compete effectively. The Bank’s disaster recovering testing centre in Beijing provides backup for its Shanghai data centre and could be used in the event of a catastrophe or a failure of its core production system. The Bank is in the process of establishing a backup data centre in Beijing, which is designed to further enhance its backup and disaster recovery capabilities. It has also established alternative communication networks where available. However, its business activities would be materially disrupted if there is a partial or complete failure of any of the information technology systems or communication networks. Such failure can be caused by a variety of reasons, including natural disasters, extended power outages, breakdown of key hardware systems and computer viruses. The proper functioning of the information technology systems of the Bank also depends on accurate and reliable data input and other sub-system installation, which are subject to human errors. Any failure or delay in recording or processing its transaction data could subject it to claims for losses and regulatory fines and penalties.
In particular, the secure transmission of confidential information is critical to the Bank’s operations. Its networks and systems may be vulnerable to unauthorised access and other security problems. There can be no assurance that its existing security measures will prevent unforeseeable security breaches, including break-ins and viruses, or other disruptions such as those caused by defects in hardware or software and errors or misconduct of operators. Persons that circumvent the security measures could use the Bank’s or its clients’ confidential information wrongfully. Any material security breach or other disruptions could expose the Bank to risk of loss and regulatory actions and harm its reputation.
The competitiveness of the Bank will to some extent depend on its ability to upgrade its information technology systems on a timely and cost-effective basis. In addition, the information available to and received by it through the existing information technology systems may not be timely or sufficient for the Bank to manage risks and prepare for, and respond to, market changes and other developments in the current operating environment. Any substantial failure to improve or upgrade the information technology systems effectively or on a timely basis could materially and adversely affect the competitiveness, results of operations and financial condition of the Bank.
— 21 — The Bank is subject to credit risk with respect to certain off-balance sheet commitments.
In the normal course of its business, the Bank makes commitments which, under applicable accounting principles, are not reflected as liabilities on the Bank’s consolidated statement of financial position, including bank acceptances, loan commitments, guarantees and letters of credit to guarantee the performance of the customers. The Bank is subject to credit risk on its off-balance sheet commitments because these commitments may need to be fulfilled by it in certain circumstances. If the Bank is unable to recover payment from its customers in respect of the commitments that it is called upon to fulfil, the financial condition and results of operations of the Bank could be adversely affected.
The Bank does not possess the relevant land use right certificates or building ownership certificates for some of its properties, and it may be required to seek alternative premises for some of the offices or business sites due to the landlords’ lack of relevant title certificates.
The Bank currently holds certain properties for which it does not have the relevant land use right certificates or building ownership certificates. The Bank is in the process of applying for the relevant land use rights and building ownership certificates that it has not yet obtained and it plans to cooperate closely with the local land and property management authorities to expedite such applications. The Bank has taken steps to rectify certain title defects. However, it may not be able to obtain certificates for all of these properties due to title defects or for other reasons. There can be no assurance that the ownership rights of the Bank would not be adversely affected in respect of properties for which it was unable to obtain the relevant title certificates. If the Bank was forced to relocate any of the operations it conducts on the affected properties, it may incur additional costs as a result of such relocation.
In addition, the Bank leases certain properties from lessors who were not able to provide the title certificates or documents evidencing the authorisation or consent of the owners of such properties. As a result, the leases may be invalid. In addition, there can be no assurance that the Bank would be able to renew its leases on terms acceptable to it upon their expiration. If any of the leases is terminated as a result of challenges by third parties or if the Bank fails to renew them upon expiration, it may be forced to relocate affected branches and sub-branches and incur additional costs associated therewith, and the business, financial condition and results of operations of the Bank may be adversely affected.
The Bank is subject to various PRC and overseas regulatory requirements, and its failure to fully comply with such requirements, if any, could materially and adversely affect its business, reputation, financial condition and results of operations.
The Bank is subject to the regulatory requirements and guidelines set forth by the PRC regulatory authorities. Its overseas branches, subsidiaries and representative offices are subject to local laws and regulations as well as to local regulatory authorities.
The PRC regulatory authorities include the Ministry of Finance of the PRC (the “MOF”), PBOC, CBRC, China Securities Regulatory Commission (the “CSRC”), China Insurance Regulatory Commission (the “CIRC”), State Administration of Taxation of the PRC (“SAT”), National Audit Office of the PRC (“NAO”), State Administration for Industry and Commerce of the PRC (“SAIC”) and State Administration of Foreign Exchange (“SAFE”). These regulatory authorities carry out periodic supervision and spot checks of the Bank’s compliance with laws, regulations and guidelines.
The Bank is subject to various PRC and overseas regulatory requirements, and the PRC and overseas regulatory authorities conduct periodic inspections, examinations and inquiries in respect of its compliance with such requirements. On occasion it has failed to meet certain requirements and guidelines set by the PRC regulatory authorities, or it was found to have violated certain regulations. In addition, the Bank has in the past been subject to fines and other penalties for cases of its noncompliance. There can be no assurance
— 22 — that it will be able to meet all the applicable regulatory requirements and guidelines, or comply with all the applicable regulations at all times, or that it will not be subject to sanctions, fines or other penalties in the future as a result of non-compliance. If sanctions, fines and other penalties are imposed on the Bank for failing to comply with applicable requirements, guidelines or regulations, the business, reputation, financial condition and results of operations of the Bank may be materially and adversely affected.
The Bank is subject to risks related to tax law changes.
On 23 March 2016, the MOF and the SAT jointly issued the Circular of Full Implementation of Business Tax to VAT Reform (Cai Shui [2016] No. 36) (關於全面推開�業稅改徵增值稅試點的通知) (財稅[2016] 36 號) (the “Circular 36”), which provides that all business tax payers are required by the pilot programme to pay VAT from 1 May 2016. VAT is applicable where the entities or individuals provide services within the PRC. VAT is unlikely to be applicable to any transfer of Notes between entities or individuals located outside of the PRC and therefore unlikely to be applicable to any gains realised upon such transfers of Notes, but there is uncertainty as to the applicability of VAT if either the seller or buyer of Notes is located inside the PRC. Circular 36 and its accompanying laws and regulations pertaining to VAT are relatively new and the interpretation and enforcement of such laws and regulations involve uncertainties. The reform may result in an increase in the overall tax liability of the Bank and would therefore adversely affect the Bank’s business, financial condition and results of operations.
The Bank is subject to risks related to PBOC’s changes in filing requirements.
On 29 April 2016, the PBOC issued the Circular of the People’s Bank of China on the Nationwide Implementation of the Macro-prudence Management of Cross-border Financing in Full Aperture (中國人民 銀行關於在全國範圍內實施全口徑跨境融資宏觀審慎管理的通知) (the “Cross Border Financing Circular”), which came into effect on 3 May 2016. The Cross Border Financing Circular established a mechanism aimed at regulating cross border financing activities conducted by domestic institutions, including domestic enterprises and financial institutions other than the governmental financing platforms and real estate enterprises, based on the capital or net asset of the borrowing entities using a prudent management principle on a macro nationwide scale. A one-year transitional period has been set for those regional cross boarder financing pilot programs established by PBOC or SAFE for overseas financings denominated in Renminbi or foreign currencies. After the transitional period, all cross border financing activities conducted by domestic institutions will be regulated by the Cross Border Financing Circular.
Neither the PBOC nor the SAFE has promulgated implementation rules of the Cross Border Financing Circular as at the date of this Offering Circular. The filing process for the aforesaid regulations and the interpretation and enforcement of the Cross Border Financing Circular thus involve substantial uncertainties due to its recent promulgation and publication. There is also uncertainty as to whether the Issuer and/or the Guarantor will fall under the Cross Border Financing Circular.
The Bank may not be able to detect money-laundering and other illegal or improper activities fully or on a timely basis, which could expose it to additional liability and harm its business or reputation.
The Bank is required to comply with applicable anti-money-laundering and anti-terrorism laws and other regulations in the PRC, Hong Kong, Singapore and other jurisdictions where it has operations. These laws and regulations require it, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities in different jurisdictions. The Bank has in the past been subject to administrative fines and penalties imposed by regulatory agencies in the PRC for, among other things, incidents of noncompliance with the PRC anti- money-laundering rules, including, for example, failure to report large or suspicious transactions. While it has adopted policies and procedures aimed at detecting and preventing the use of its banking networks for money-laundering activities and by terrorists and terrorist-related organisations and individuals generally,
— 23 — such policies and procedures may not completely eliminate instances where it may be used by other parties to engage in money-laundering and other illegal or improper activities due to, in part, the short history of these policies and procedures. To the extent it may fail to fully comply with applicable laws and regulations, the relevant government agencies to whom the Bank reports have the power and authority to impose fines and other penalties on the Bank. In addition, the business and reputation of the Bank could suffer if customers use it for money-laundering or illegal or improper purposes.
The uncertainties in the global economy, the global financial market and, in particular, in China could materially and adversely affect the financial condition and results of operations of the Bank.
Emerging from the peak of the global financial crisis, some countries started to withdraw the stimulus packages previously executed and implement more moderate monetary policies. China started to withdraw its economic stimulus plan implemented during the financial crisis and returned to its normal policy direction. The PRC government implemented stricter controlling measures on the real estate market, regulated the local government financing vehicles, cancelled the export tax refund policies for certain commodities and restarted the reform of Renminbi exchange rate.
Currently, the employment, credit and property market conditions of developed economies are still unstable. The status of the global economy therefore remains uncertain and such uncertainties in the global economy together with uncertainties in China’s economy may adversely affect the Bank’s financial condition and results of operations in many ways, including, among other things:
• during a period of economic slowdown, there is a greater likelihood that more of the Bank’s customers or counterparties could become delinquent in respect of their loan repayments or other obligations to the Bank, which, in turn, could result in a higher level of non-performing loans, allowance for impairment losses and write-offs, all of which would adversely affect its results of operations and financial condition;
• the increased regulation and supervision of the financial services industry in response to the financial crisis in certain jurisdictions where the Bank operates may restrict its business flexibility and increase the compliance costs, which may adversely affect its business operations;
• the value of the Bank’s investments in the debt securities issued by overseas governments and financial institutions may significantly decline, which may adversely affect its financial condition;
• the Bank’s ability to raise additional capital on favourable terms, or at all, could be adversely affected; and
• trade and capital flows may further contract as a result of protectionist measures being introduced in certain markets, which could cause a further slowdown in economies and adversely affect the Bank’s business prospects.
There can be no assurance that China’s economy or the global economy will maintain sustainable growth. If further economic downturn occurs or continues, the business, results of operations and financial condition of the Bank could be materially and adversely affected.
The Bank may be involved in legal and other disputes from time to time arising out of its operations and may face potential liabilities as a result.
The Bank is often involved in legal and other disputes for a variety of reasons, which generally arise because it seeks to recover outstanding amounts from borrowers or because customers or other claimants bring actions against it. The majority of these cases arise in the ordinary course of the Bank’s business.
— 24 — Where the Bank assesses that there is a probable risk of loss, it is the Bank’s policy to make provisions for the loss. The Bank has made provisions with respect to pending legal proceedings and other disputes against it.
However, there can be no assurance that the judgments in any of the litigation in which the Bank is involved would be favourable to it or that its litigation provisions are adequate to cover the losses arising from legal proceedings or other disputes. In addition, if the Bank’s assessment of the risk changes, its view on provisions will also change. It is expected that the Bank will continue to be involved in various legal and other disputes in the future, which may subject it to additional risks and losses. These disputes may relate to, among others, the amount of the unpaid obligations of the relevant borrowers, the terms for such borrowers to perform their obligations and the application of statute of limitations. In addition, the Bank may have to advance legal costs associated with such disputes, including fees relating to appraisal, notarisation, auction, execution and counsel’s legal services. These and other disputes may lead to legal, administrative or other proceedings and may result in damage to the reputation of the Bank, additional operational costs and a diversion of resources and management’s attention from its core business operations. There can be no assurance that the outcome of future or current disputes or proceedings will not materially and adversely affect the business, reputation, financial condition and results of operations of the Bank.
The Bank is subject to counterparty risks in its derivative transactions.
The Bank acts primarily as an intermediary in domestic and international foreign exchange and derivative markets, and it currently has foreign currency forward and swap arrangements and interest rate swap arrangements with a number of domestic and international banks, other financial institutions and other entities. While the Bank believes that the overall credit quality of its counterparties is satisfactory, there can be no assurance that the Bank’s counterparties with significant exposures will not face difficulty in paying the amounts on derivative contracts when due, which may result in financial losses to the Bank.
The Bank’s major shareholders have the ability to exercise significant influence over it.
As at 31 December 2015, the Bank’s major shareholders, the MOF and Huijin, own approximately 39.21 per cent. and 40.03 per cent., respectively, of its outstanding shares as beneficial owners. In accordance with the Articles of Association and applicable laws and regulations, the MOF and Huijin will have the ability to exercise a controlling influence over the business of the Bank, including matters relating to:
• the timing and amount of the distribution of dividends;
• the issuance of new securities;
• the election of the Bank’s directors and supervisors;
• the Bank’s business strategies and policies;
• any plans relating to mergers, acquisitions, joint ventures, investments or divestitures; and
• amendments to the Articles of Association.
The interests of the MOF and Huijin may conflict with the interests of the Bank. In addition, since the MOF is a ministry of the State Council and Huijin is a wholly state-owned limited liability company formed under the PRC law, they have strong interests in the successful implementation of the economic or fiscal policies enacted by the PRC government, which policies may not be in the best interest of the Bank.
— 25 — The Bank has expanded its business in jurisdictions other than the PRC, which has increased the complexity of the risks that it faces.
In recent years, the Bank has taken actions to expand its operations outside mainland China. As at 31 December 2015, it had nine overseas branches in Hong Kong, Singapore, Seoul, New York, Dubai, Tokyo, Frankfurt, Sydney and Luxembourg and three representative offices in Vancouver, Hanoi and Taipei.
The expansion into multiple jurisdictions outside of China exposes the Bank to a new variety of regulatory and business challenges and risks and has increased the complexity of risks in a number of areas, including currency risk, interest rate risk, regulatory and compliance risk, reputational risk and operational risk. Adverse market conditions in these overseas jurisdictions may result in mark-to-market and realised losses on the investment assets held by the overseas branches and increase their cost of funding. Furthermore, despite the Bank’s best efforts to comply with all applicable regulations in all the jurisdictions in which it operates, there may be incidences of failure to comply with the regulations in certain jurisdictions. Overseas regulators may bring administrative or judicial proceedings against the Bank or its employees, representatives, agents and third party service providers, which could result, among other things, in suspension or revocation of one or more of its licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary actions. In addition, the regulatory changes in various jurisdictions, including those in which it has or plans to have operations could have an adverse impact on the Bank’s growth, capital adequacy and profitability. If the Bank is unable to manage the risks resulting from its expansion outside mainland China, its business, reputation, financial condition and results of operations may be adversely affected.
Risks Relating to the Banking Industry in China
The Bank faces intense competition in China’s banking industry as well as competition from alternative corporate financing and investment channels.
The Bank faces competition from other commercial banks and financial institutions in both the Urban Areas and the County Areas. It competes primarily with other Large Commercial Banks, National Joint Stock Commercial Banks, city commercial banks and foreign banks in China.
Certain of these banks may have more established presence in certain areas and more financial, management and technology resources than the Bank does. In the County Areas, the Bank competes primarily with other Large Commercial Banks, rural credit cooperatives and the Postal Savings Bank of China. Some of these banks may have more simplified management structures and procedures in certain regions and areas. In recent years, the PRC government has gradually lowered the threshold for financial institutions to conduct business in the County Areas and strengthened the relevant financial and tax support, which, while the Bank believes will promote the development of the County Area financial market, will further intensify the competition among financial institutions in the County Areas.
Additionally, following the removal of regulatory restrictions on their geographical presence, customer base and operating license in China in December 2006 as part of China’s WTO accession commitments, the Bank has experienced increased competition from foreign-invested commercial banks. Recently, a number of well- known foreign banks have expanded their presence in the County Areas. Furthermore, the Mainland and Hong Kong Closer Economic Partnership Arrangement the Mainland and Macau Closer Economic Partnership Arrangement and the Cross-Straits Economic Co-operation Framework Agreement which permit Hong Kong, Macau and Taiwan banks to operate in China, have also increased competition in China’s banking industry.
— 26 — Moreover, the PRC government has, in recent years, implemented a series of measures designed to further liberalise the banking industry, including, among others, with respect to interest rates and non-interest-based products and services, which are changing the basis on which the Bank competes with other banks for customers.
The Bank competes with many of its competitors for substantially the same loan, deposit and fee-based business customers. Such competition may adversely affect the Bank’s business and future prospects by, for example:
• reducing its market share in its principal products and services;
• slowing down the growth of its loan or deposit portfolios and other products and services;
• decreasing its interest income or increasing its interest expenses, thereby reducing its net interest income;
• reducing its fee and commission income;
• increasing its non-interest expenses, such as marketing expenses;
• adversely affecting its asset quality; and
• increasing competition for senior management and qualified professional personnel.
The Bank may also face competition from direct corporate financing, such as the issuance of securities in the domestic and international capital markets. The domestic securities markets have experienced, and are expected to continue to experience, expansion and growth. If a substantial number of its customers choose alternative financing to fund their capital needs, the Bank’s interest income, financial condition and results of operations may be adversely affected.
Moreover, the Bank may face competition from other forms of investment alternatives as the PRC capital markets continue to develop. As the PRC equity and bond markets continue to develop and become more viable and attractive investment alternatives, the Bank’s deposit customers may elect to transfer their funds into equity and bond investments, which may reduce its deposit base and adversely affect its business, financial condition and results of operations.
The Bank’s business and operations are highly regulated, and its business, financial condition, results of operations and future prospects may be materially and adversely affected by regulatory changes or other governmental policies, including their interpretation and application.
The Bank’s business and operations are directly affected by changes in China’s policies, laws and regulations relating to the banking industry, such as those affecting the extent to which it can engage in specific businesses, as well as changes in other governmental policies. Since its establishment as the primary banking industry regulator assuming the majority of the bank regulatory functions from the PBOC in 2003, the CBRC has promulgated a series of banking regulations and guidelines. The banking regulatory regime in China is currently undergoing significant changes, most of which are applicable to the Bank and may result in additional costs or restrictions on its activities. For instance, in March 2011, the CBRC, the PBOC and the NDRC jointly issued a notice stipulating the cancellation of 34 service fees classified under 11 categories of domestic commercial banks effective from 1 July 2011. In February 2014, the NDRC and the CBRC jointly issued Measures for the Administration of the Service Prices of Commercial Banks (the “Measure”). According to the Measure, the prices of basic banking services that are widely used by clients and have significant influence on China’s economic development shall be subject to the guidance or
— 27 — determination of the government. The NDRC and the CBRC also jointly issued a circular on Printing and Distributing the Catalogue of Government-guided and Government-determined Prices for Services Provided by Commercial Banks (the “Catalogue”).
According to the Catalogue, the prices of the basic financial services provided by commercial banks for bank clients shall be subject to the government guided-prices and government pricing. Such basic financial services include part of commercial banks’ service items, such as wire transfer, remittance by cash, encashment and bills, and specific charge items and charging standards shall be subject to the Catalogue. There can be no assurance that the policies, laws and regulations governing the banking industry will not change in the future or that any such changes will not materially and adversely affect the Bank’s business, financial condition and results of operations nor can the Bank give any assurance that it will be able to adapt to all such changes on a timely basis. In addition, there may be uncertainties regarding the interpretation and application of new policies, laws and regulations. Failure to comply with the applicable policies, laws and regulations may result in fines and restrictions on the Bank’s activities, which could also have a significant impact on its business, financial condition and results of operations.
The Bank is subject to changes in interest rates and other market risks, and the Bank’s ability to hedge market risks is limited.
As with most commercial banks, the Bank’s results of operations depend to a great extent on its net interest income. For the years ended 31 December 2013, 2014 and 2015, the Bank’s net interest income represented 80.8 per cent., 82.0 per cent. and 80.6 per cent., respectively, of its operating income. Interest rates in China historically were highly regulated but have been gradually liberalised in recent years. Under current PBOC regulations, commercial banks in China cannot set interest rates above 150 per cent. of the relevant PBOC benchmark rate for Renminbi-denominated deposits. There used to be restriction with respect to the lower limit of the interest rates for Renminbi-denominated deposits. However, the PBOC promulgated the Notice on Further Promoting the Market-oriented Reform of Interest Rates on 19 July 2013, eliminating such restriction on Renminbi-denominated loans, except for residential mortgage loans. The PBOC may further liberalise the existing interest rate restrictions on Renminbi-denominated loans and deposits. If the existing regulations were substantially liberalised or eliminated, competition in China’s banking industry would likely intensify as China’s commercial banks seek to offer more attractive rates to customers. Further liberalisation by the PBOC would result in the narrowing of the spread in the average interest rates between Renminbi-denominated loans and Renminbi-denominated deposits, thereby materially and adversely affecting the Bank’s results of operations. Furthermore, there can be no assurance that the Bank will be able to adjust the composition of its asset and liability portfolios and its pricing mechanism to enable it to effectively respond to the further liberalisation of interest rates.
In recent years, the PBOC has adjusted the benchmark rates several times. Any adjustments by the PBOC in the benchmark interest rates on loans or deposits or changes in market interest rates may adversely affect the Bank’s financial condition and results of operations in different ways.
For example, changes in the PBOC benchmark interest rates could affect the average yield on the Bank’s interest-earning assets differently from the average cost on its interest-bearing liabilities and therefore may narrow its net interest margin and reduce its net interest income, which may materially and adversely affect its results of operations and financial condition. In addition, an increase in interest rates may result in increases in the finance costs of the Bank’s customers and thus reduce overall demand for loans, and, accordingly, adversely affect the growth of the Bank’s loan portfolio, as well as increase the risk of customer default. As a result, changes in interest rates may adversely affect the Bank’s net interest income, financial condition and results of operations.
— 28 — The Bank also undertakes trading and investment activities involving certain financial instruments both in China and abroad. The Bank’s income from these activities is subject to volatilities caused by, among other things, changes in interest rates and foreign currency exchange rates. For example, increases in interest rates generally have an adverse effect on the value of the Bank’s fixed rate securities portfolio, which may materially and adversely affect its results of operations and financial condition. Furthermore, as the derivatives market has yet to mature in China, there are limited risk management tools available to enable the Bank to reduce market risks.
The growth rate of China’s banking industry may not be sustainable.
The Bank expects the banking industry in China to continue to grow as a result of anticipated growth in China’s economy, increases in household income, further social welfare reforms, demographic changes and the opening of China’s banking industry to foreign participants. However, it is not clear how certain trends and events, such as the pace of China’s economic growth, China’s implementation of its commitment to WTO accession, the development of the domestic capital and insurance markets and the ongoing reform of the social welfare system will affect China’s banking industry. In addition, there can be no assurance that the banking industry in China is free from systemic risks. Consequently, there can be no assurance that the growth and development of China’s banking industry will be sustainable.
The effectiveness of the Bank’s credit risk management is affected by the quality and scope of information available in China.
The information infrastructure in China is relatively undeveloped. PRC national individual and corporate credit information databases developed by the PBOC commenced operation in 2006.
However, due to their short operational history, they can only provide limited information. Therefore, the Bank’s assessment of the credit risk associated with a particular customer may not be based on complete, accurate or reliable information. Until these nationwide credit information databases become more fully developed, the Bank has to rely on other publicly available resources and its internal resources, which are not as extensive nor as effective as a unified nationwide credit information system. As a result, the Bank’s ability to effectively manage its credit risk and in turn, its asset quality, financial condition and results of operations may be materially and adversely affected.
There can be no assurance of the accuracy or comparability of facts, forecasts and statistics contained in this Offering Circular with respect to China, its national or County Area economies or its banking industry.
Facts, forecasts and statistics in this Offering Circular relating to China, its national or County Area economies and financial conditions and its banking industry, including the Bank’s market share information, are derived from various sources which are generally believed to be reliable.
However, the Bank cannot guarantee the quality and reliability of such sources. In addition, these facts, forecasts and statistics have not been independently verified by the Bank and may not be consistent with the information available from other sources, and may not be complete or up to date. The Bank has taken reasonable caution in reproducing or extracting the information from such sources. However, because of potentially flawed methodologies, discrepancies in market practice and other problems, these facts, forecasts and other statistics may be inaccurate or may not be comparable from period to period or to facts, forecasts or statistics of other economies.
— 29 — Risks Relating to China
The slowdown of the PRC’s economy caused in part by the recent challenging global economic conditions may adversely affect us.
A substantial part of the Bank’s revenue is derived from the PRC. The Bank relies, to a significant degree, on its domestic operations to achieve revenue growth. Domestic demand for banking services is materially affected by growth of private consumption and overall economic growth in the PRC. The global crisis in financial services and credit markets in 2008 caused a slowdown in the economic growth in many countries, including the PRC. Although the PRC’s economic growth has increased compared to its level immediately after the global financial crisis, it has displayed signs of slowdown as evidenced by a decrease in the growth rate of the PRC’s gross domestic product in recent years. This was caused by a combination of factors most of which are beyond the Bank’s control, such as the global economic conditions, governmental policies and changes in market dynamics globally and regionally. In 2014, the PRC government reported a gross domestic product of RMB63.65 trillion, representing year-on-year growth of 7.4 per cent., which was a record-low figure for the past 24 years. In the first quarter of 2015, the PRC government reported a gross domestic product of RMB140.7 billion, representing year-on-year growth of 7.0 per cent., according to statistics released by National Bureau of Statistics of China. Although the PRC government has recently taken several measures and actions with an aim to increase investors’ confidence in the PRC economy, there can be no assurance that those measures will be effective. There are uncertainties relating to the overall prospects for the global and the PRC economies this year and beyond, which may have a material adverse impact on our business, prospects, financial conditions and results of operations.
Turmoil in the financial markets could increase the Bank’s cost of borrowing and impede access to or increase the cost of financing its operations and investments.
The Bank is significantly influenced by levels of investor confidence. Any factors that may affect market confidence could affect the costs or availability of funding for the Bank. Historically, challenging market conditions have resulted in reduced liquidity, widening of credit spreads, lack of price transparency in credit markets, a reduction in available financing and a tightening of credit terms. In 2015, the PRC stock markets have experienced significant turmoil and disruption. Throughout June and early July of 2015, the Shanghai Composite Index experienced significant declines and many PRC-listed companies were subject to trading suspensions on major stock exchanges. The PRC government responded by cutting interest rates, suspending initial public offerings and starting investigations into market manipulation in an effort to stabilise the market. Significant fluctuations in financial markets could cause substantial adverse effects on the Bank’s business operations and investments as a whole.
China’s economic, political and social conditions, as well as government policies, could affect the Bank’s business, financial condition and results of operations.
A substantial majority of the Bank’s businesses, assets and operations are located in China. Accordingly, the Bank’s financial condition, results of operations and business prospects are, to a significant degree, subject to the economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including, among other things, government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.
China’s economy was previously a planned economy, and a substantial portion of productive assets in China is still owned by the PRC government. The government also exercises significant control over China’s economic growth by allocating resources, setting monetary policy and providing preferential treatment to particular industries or companies. Although the government has implemented economic reform measures to introduce market forces and establish sound corporate governance in business enterprises, such economic reform measures may be adjusted, modified or applied inconsistently from industry to industry, or across
— 30 — different regions of the country. As a result, the Bank may not benefit from certain of such measures. The PRC government has the power to implement macroeconomic control measures affecting China’s economy. The government has implemented various measures in an effort to increase or control the growth rate and adjust the structure of certain industries. For example, in response to a decreased growth rate in part as a result of the global financial crisis and economic slowdown, beginning in September 2008, the PRC government began to implement a series of macroeconomic measures and the moderately loose monetary policy, which included announcing an economic stimulus package and reducing benchmark interest rates. Since 2010, the PRC government has begun to implement a number of macroeconomic measures and moderately tight monetary policies to curb inflation in China. The PRC government may continue to implement such policies to control inflation, which may in turn affect the Bank’s ability to make loans to its customers. As a result, the Bank’s financial condition, results of operations and prospects may be materially and adversely affected.
Certain of the PRC government’s macroeconomic measures may materially and adversely affect the Bank’s financial condition, results of operations and asset quality. For example, the decreases in the PBOC benchmark interest rates in the second half of 2008 have resulted in the narrowing of the Bank’s net interest margin and a decrease in its net interest income in 2009 compared to 2008, which adversely affected its profitability. In addition, the PRC government has imposed macroeconomic control measures aimed at tempering the real estate market. In November 2009, the PRC government shortened the period in which the real estate developers make payments for the land premiums and increased the relevant down payment requirement on the real estate developers. In April 2010, the PRC government raised the down payment requirements for people buying their second homes to a minimum of 50 per cent. of the property value from 40 per cent. and this threshold was further raised to 60 per cent. in January 2011. Down payment requirements on first homes of more than 90 square meters rose to a minimum of 30 per cent. of the property value from 20 per cent. In addition, the lowest interest rate that commercial banks are permitted to charge in respect of second-home residential mortgage loans has increased from 90 per cent. to 110 per cent. of the applicable PBOC benchmark rate. Pursuant to the Circular on Issues concerning Adjusting the Individual Housing Loan Policies issued by the PBOC and the CBRC on 1 February 2016 which came into effect on the same day, in the cities without restrictive measures for house purchase, the minimum down payment for the purchase shall, in principle, be 25 per cent. of the house price with regard to the commodity residential housing loans to each resident household for the first-time purchase of ordinary residential properties, and the said percentage may be decreased by 500 basis points; with respect to resident households that own a residential property with outstanding purchase loans and apply for commodity residential housing loans again to purchase ordinary residential properties for improving living conditions, the minimum down payment for the purchase shall be at least 30 per cent. of the purchase price. In the cities with restrictive measures for house purchase, the individual housing loans shall be subject to existing restrictions. In early 2011, individual housing property tax was introduced in Shanghai and Chongqing on a trial basis. The PRC government’s measures to cool down the housing market may adversely affect the growth and quality of the Bank’s loans related to real estate and could also have a significant impact on its business, financial condition and results of operations. Furthermore, on 26 September 2009, the State Council approved the Notice of “Several Opinions on Suppressing Overcapacity and Repetitive Constructions in Certain Industries for Healthy Development” issued by the NDRC and other ministries to curb the expansion of certain sectors with overcapacity, such as iron and steel, cement, flat glass, coal chemical, polysilicon, wind power equipment, electrolysis aluminium, ship building and soybean oil extraction. This notice prohibits financial institutions from financing projects which do not meet specified requirements and requires those who have made such loans to take remedial measures. These requirements may adversely affect the condition of certain of the Bank’s loans to the relevant industries.
China has been one of the world’s fastest growing economies, as measured by GDP growth, in recent years. However, China may not be able to sustain such a growth rate. If China’s economy experiences a decrease in growth rate or a significant downturn, the unfavourable business environment and economic condition for
— 31 — the Bank’s customers could negatively impact their ability or willingness to repay the Bank’s loans and reduce their demand for the Bank’s banking services. The Bank’s financial condition, results of operations and business prospects may be materially and adversely affected.
There exist uncertainties with respect to the interpretation and enforcement of PRC laws and regulations, and the PRC legal system could limit the legal protection available to you.
The Bank is organised under the laws of the PRC. The PRC legal system is based on written statutes. The PRC government has promulgated laws and regulations dealing with economic matters as the issuance and trading of securities, shareholder rights, foreign investment, corporate organisation and governance, commerce, taxation and trade. However, many of these laws and regulations continue to evolve, may be subject to different interpretation and may be inconsistently enforced. In addition, there is only a limited volume of published court decisions which may be cited for reference, but such cases have limited precedential value as they are not binding on subsequent cases. These uncertainties relating to the interpretation of PRC laws and regulations can affect the legal remedies and protection that are available to investors and can adversely affect the value of an investment.
For example, on 14 September 2015, the NDRC promulgated the NDRC Circular. According to the NDRC Circular, if a PRC enterprise or an offshore enterprise controlled by a PRC enterprise wishes to issue bonds outside of the PRC with a maturity of more than one year, such enterprise must in advance of issuing such bonds, file certain prescribed documents with the NDRC and procure a registration certificate from the NDRC in respect of such issue (the “pre-issuance registration”). The enterprise must also notify certain details of the bonds to the NDRC within 10 business days of the completion of the bond issue (the “post- issuance notification”). As at the date of this Offering Circular, the Bank has received a registration certificate from the NDRC in respect of the overseas bond issuances in 2016, including the proposed issue of the Notes, and the Bank intends to comply with the post-issuance notification requirements of the NDRC Circular. As the NDRC Circular is a new regulation, it is still uncertain how the NDRC will interpret, implement and enforce the NDRC Circular. The post-issuance notification is generally regarded as a procedural process which involves the reporting of certain post-issuance information in respect of the Notes by the Bank to the NDRC, rather than a substantive approval or consent process. There is a risk that such post-issuance notification cannot be completed in time or at all, as a result of such uncertainty. The NDRC Circular does not set forth the legal consequences of non-compliance with the pre-issuance registration requirement and the post-issuance notification. Additional guidance has been issued by NDRC (the “NDRC Circular Guidelines”) in December 2015, which states that companies, investment banks, law firms and other intermediaries involved in debt securities issuance which do not comply with the registration requirement under the NDRC Circular will be subject to a blacklist and sanctions. The NDRC Circular Guidelines does not set forth as to how such blacklist will be implemented or the exact sanctions that will be enacted by the NDRC.
The Bank believes that any failure by the Bank to complete the post-issuance notification in accordance with the NDRC Circular will not impact the validity or enforceability of the Notes. However, there is no assurance that the Bank will not be subject to any penalties if it fails to (including for reasons outside of the Bank’s control) complete the post-issuance notification within the required timeframe.
You may experience difficulties in effecting service of legal process and enforcing judgments against the Bank and the Bank’s management.
The Bank is a company incorporated under the laws of the PRC, and a substantial majority of its business, assets and operations are located in China. In addition, a majority of its directors, supervisors and executive officers reside in China, and substantially all of the assets of such directors, supervisors and executive officers are located in China. Therefore, it may not be possible for investors to effect service of process upon the Bank or those persons inside China.
— 32 — Furthermore, China does not have treaties or agreements providing for the reciprocal recognition and enforcement of judgments awarded by courts of many jurisdictions, including Japan, the United States and the United Kingdom. Hence, the recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or even impossible.
The Bank is subject to the PRC government controls on currency conversion and risks relating to fluctuations in exchange rates.
The Bank receives a substantial majority of its revenues in Renminbi, which is currently not a freely convertible currency. A portion of these revenues must be converted into other currencies in order to meet the Bank’s foreign currency obligations. For example, the Bank needs to obtain foreign currency to make payments of declared dividends, if any, on its H shares.
Under China’s existing foreign exchange regulations, by complying with certain procedural requirements, the Bank will be able to undertake current account foreign exchange transactions, including payment of dividends without prior approval from SAFE. However, in the future, the PRC government may, at its discretion, take measures to restrict access to foreign currencies for capital account and current account transactions under certain circumstances. In this case, the Bank may not be able to pay dividends in foreign currencies to holders of its H shares.
The value of the Renminbi against the U.S. dollar and other currencies fluctuates and is affected by, among other things, changes in China’s and international political and economic conditions and the PRC government’s fiscal and currency policies. Any appreciation of the Renminbi against the U.S. dollar or any other foreign currencies may result in the decrease in the value of the Bank’s foreign currency-denominated assets. Conversely, any devaluation of the Renminbi may adversely affect the value of, and any dividends payable on, the Bank’s H shares in foreign currency terms. As at 31 December 2015, 4.6 per cent. of the Bank’s financial assets and 4.9 per cent. of its financial liabilities were denominated in foreign currencies. The Bank recorded a net foreign exchange loss of RMB387 million for the first quarter of 2016, against the RMB719 million gain as recorded for the same period in 2015. Although the Bank seeks to reduce its exchange rate risk through currency derivatives or otherwise, it cannot assure investors that it will be able to reduce its foreign currency risk exposure relating to its foreign currency-dominated assets. In addition, there are limited instruments available for the Bank to reduce its foreign currency risk exposure at reasonable costs. Any appreciation of the Renminbi against the U.S. dollar or any other foreign currencies may materially and adversely affect the financial conditions of certain of the Bank’s customers, particularly those deriving substantial income from exporting products or engaging in related businesses, and in turn affect their abilities to service their obligations to the Bank. Furthermore, the Bank is also currently required to obtain the approval of SAFE before converting significant sums of foreign currencies into Renminbi. All of these factors could materially and adversely affect the Bank’s financial condition, results of operations and compliance with capital adequacy ratios and operational ratios.
Any force majeure events, including future occurrence of natural disasters or outbreaks of contagious diseases in China, may have a material adverse effect on the Bank’s business operations, financial condition and results of operations.
Any future force majeure events, such as occurrence of natural disasters or outbreaks of health epidemics and contagious diseases, may materially and adversely affect the Bank’s business and results of operations. An outbreak of a health epidemic or contagious disease could result in a widespread health crisis and restrict the level of business activity in affected areas, which may in turn adversely affect the Bank’s business. Moreover, China has experienced natural disasters like earthquakes, floods and droughts in the past few years. For example, in May 2008 and April 2010, China experienced earthquakes with reported magnitudes of 8.0 and 7.1 on the Richter scale in Sichuan Province and Qinghai Province, respectively, resulting in the
— 33 — death of tens of thousands of people. The Bank suffered an adverse impact from the earthquake in Sichuan Province. The Bank also suffered the adverse impact from the earthquake in Qinghai Province, but the impact is not material because its operations in the locality affected by the earthquake are small. In 2010, there were severe droughts and flood in various parts of China, resulting in significant economic losses in these areas. Any future occurrence of severe natural disasters in China may adversely affect its economy and in turn the Bank’s business, particularly in light of the substantial portion of the Bank’s County Area Banking Business which is more vulnerable to natural disasters. There is no guarantee that any future occurrence of natural disasters or outbreaks of contagious diseases, or the response measures taken by the PRC government or other countries, will not seriously interrupt the Bank’s operations or those of its customers, which may have a material and adverse effect on the Bank’s results of operations.
Risks Relating to the Notes and the Guarantee
The Issuer is a newly incorporated company with no material assets and will rely on remittances from the Company and its subsidiaries to make payments under the Notes.
The Issuer will not conduct business or any other activities other than the offering, sale or issuance of the Notes and the lending of the proceeds thereof to the Company and/or any of its subsidiaries or affiliates and any other activities in connection therewith or related thereto. The Issuer does not and will not have any material assets other than such on-lent loan and its ability to make payments under the Notes will depend on its receipt of timely remittances from such loan. In the event that the Company or any of its subsidiaries or affiliates do not make such payments due to limitations in such loans or other agreements, lack of available cash flow or other factors, the Issuer’s ability to make payments under the Notes could be adversely affected.
The Notes and the Guarantee are unsecured obligations.
The Notes and the Guarantee are the Issuer’s and the Guarantor’s respective unsecured obligations and will (i) rank equally and rateably in right of payment with all of their respective other present and future unsubordinated and unsecured indebtedness; and (ii) be effectively subordinated to all of their respective present and future secured indebtedness to the extent of the value of the collateral securing such obligations. In the event of the Issuer’s or the Guarantor’s bankruptcy, insolvency, liquidation, reorganisation, dissolution or other winding up, or any default in payment under the Issuer’s or the Guarantor’s secured indebtedness or other unsecured indebtedness, or upon any acceleration of the Issuer’s or the Guarantor’s indebtedness, these assets will be available to pay obligations on the Notes only after all other debts secured by these assets have been repaid in full. Any remaining assets will be available to the Noteholders rateably with all of the Issuer’s and the Guarantor’s other unsecured and unsubordinated creditors, including trade creditors. If there are not sufficient assets remaining to pay all these creditors, then all or a portion of the Notes then outstanding would remain unpaid.
The Notes and the Guarantee will be structurally subordinated to the existing and future indebtedness and other liabilities of the Issuer’s and the Bank’s existing and future subsidiaries, other than the Issuer and the Guarantor.
The Notes and the Guarantee will be structurally subordinated to any debt and other liabilities and commitments, including trade payables and lease obligations, of the Issuer’s and the Bank’s existing and future subsidiaries (other than the Issuer and the Guarantor), whether or not secured. The Notes will not be guaranteed by any of the Issuer’s and the Bank’s subsidiaries (other than the Guarantor), and Issuer and the Bank may not have direct access to the assets of such subsidiaries unless these assets are transferred by dividend or otherwise to the Issuer or the Bank. The ability of such subsidiaries to pay dividends or otherwise transfer assets to the Issuer and the Bank is subject to various restrictions under applicable laws.
— 34 — Each of the Issuer’s and the Bank’s subsidiaries (other than the Issuer and the Guarantor) are separate legal entities that have no obligation to pay any amounts due under the Notes or the Guarantee or make any funds available therefore, whether by dividends, loans or other payments.
The Issuer and the Bank’s right to receive assets of any of their respective subsidiaries upon liquidation or reorganisation will be effectively subordinated to the claim of that subsidiary’s creditors (except to the extent that the Issuer or the Bank is creditors of that subsidiary). Consequently, the Notes and the Guarantee will be effectively subordinated to all liabilities, including trade payables and lease obligations, of any of the Bank’s subsidiaries (other than the Issuer and the Guarantor), and any subsidiaries that the Issuer or the Bank may in the future acquire or establish.
In the event that the Guarantor failed to fully perform its obligations under the Deed of Guarantee, performance by the Bank of such obligations may be subject to approvals of the PRC government authorities.
According to the Law of the People’s Republic of China on Commercial Banks (中華人民共和國商業銀行 法) and the circular issued by the PBOC named “Reply on the Issues Regarding the Civil Liabilities of the Branches of Commercial Banks” (關於對商業銀行分支機構民事責任問題的覆函), in the event that a branch of a commercial bank fails to fully perform its obligations, such commercial bank shall fulfil such obligations to the extent and in the amount exceeding the portion covered by the assets of the branch.
Therefore, in the event the Guarantor is unable to or does not perform its obligations under the Deed of Guarantee, the Bank will assume all obligations of the Guarantor with respect to the payments under the Notes. The remittance of funds outside the PRC by the Bank in order to perform these obligations may be subject to approvals, registration or verification of SAFE and/or other competent PRC government authorities. There can be no assurance that the Bank will successfully obtain any of the requisite approvals in a timely manner, or at all.
The Guarantor’s ability to perform its obligations under the Deed of Guarantee is subject to the financial condition of the Bank.
The Guarantor is not a separate and independent legal person but has capacity to carry on its activities within its scope of the authorisation given by the Bank, and if the assets of the Guarantor are not sufficient to meet the obligations of the Guarantor under the Deed of Guarantee, the Bank would have an obligation to satisfy the balance of the obligations under the Deed of Guarantee. Therefore, the ability of the Guarantor to make payments under the Deed of Guarantee will depend on the financial condition of the Bank, which could be materially and adversely affected by a number of factors.
The Notes may not be a suitable investment for all investors.
Each potential investor in any Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
• have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Offering Circular or any applicable supplement;
• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact such investment will have on its overall investment portfolio;
— 35 — • have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where principal or interest is payable in one or more currencies, or where the currency for principal or interest payments is different from the potential investor’s currency;
• understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant indices and financial markets; and
• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Additionally, the investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (i) Notes are legal investments for it, (ii) Notes can be used as collateral for various types of borrowing and (iii) other restrictions apply to its purchase of any Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of Notes under any applicable risk-based capital or similar rules.
Modification and waivers
The Conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
The ratings assigned to the Notes may be downgraded or withdrawn in the future.
The Notes are expected to be assigned a rating of “A” by Fitch. The rating represents only the opinions of the rating agencies and their assessment of the ability of the Issuer and the Guarantor to perform their respective obligations under the Notes and the Fiscal Agency Agreement and credit risks in determining the likelihood that payments will be made when due under the Notes. Ratings are not recommendations to buy, sell or hold the Notes and may be subject to revision, qualification, suspension, reduction or withdrawn at any time. The Issuer and the Guarantor cannot assure investors that a rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by the relevant rating agency if in its judgment circumstances in the future so warrant. Neither the Issuer nor the Guarantor is obligated to inform holders of the Notes of any such revision, downgrade or withdrawal. Each rating should be evaluated independently of any other rating of the Notes or other securities of the Bank. A revision, qualification, suspension or withdrawal at any time of any rating assigned to the Notes may adversely affect the market price of the Notes.
A change in English law which governs the Notes may adversely affect Noteholders.
The Conditions of the Notes are governed by English law in effect as at the date of issue of the Notes. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of issue of the Notes.
The Notes are represented by the Global Certificate and holders of a beneficial interest in a Global Note must rely on the procedures of the relevant Clearing System(s).
The Notes are represented by the Global Certificate. Such Global Certificate will be deposited with a common depositary for Euroclear and Clearstream (each of Euroclear and Clearstream, a “Clearing System”). Except in the circumstances described in the Global Certificate, investors will not be entitled to
— 36 — receive Definitive Certificates. The relevant Clearing System(s) will maintain records of the beneficial interests in the Global Certificate. While the Notes are represented by the Global Certificate, investors will be able to trade their beneficial interests only through the Clearing Systems. While the Notes are represented by the Global Certificate, the Issuer will discharge its payment obligations under the Notes by making payments to the common depositary for Euroclear and Clearstream, for distribution to their account holders. A holder of a beneficial interest in the Global Certificate must rely on the procedures of the relevant Clearing System(s) to receive payments under the Notes. The Issuer has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Certificate. Holders of beneficial interests in the Global Certificate will not have a direct right to vote in respect of the Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by the relevant Clearing System(s) to appoint appropriate proxies.
Noteholders should be aware that a Definitive Certificate which has a principal amount that is not an integral multiple of the minimum Specified Denomination may be illiquid and difficult to trade.
In relation to any Note which has a principal amount consisting of a minimum Specified Denomination (as defined in the Conditions) plus a higher integral multiple of another smaller amount, it is possible that the Notes may be traded in amounts in excess of the minimum Specified Denomination that are not integral multiples of such minimum Specified Denomination. In such a case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than the minimum Specified Denomination will not receive a Definitive Certificate in respect of such holding (should definitive Notes be printed) and would need to purchase a principal amount of Notes such that it holds an amount equal to one or more Specified Denominations. If definitive Notes are issued, holders should be aware that a Definitive Certificate which has a principal amount that is not an integral multiple of the minimum Specified Denomination may be illiquid and difficult to trade.
Noteholders may not be familiar with the insolvency laws of British Virgin Islands and the PRC and other local insolvency laws.
Laws may differ from those of another jurisdiction with which the holders of the Notes are familiar. As the Issuer is incorporated under the laws of British Virgin Islands and the Bank is incorporated under the laws of the PRC, any insolvency proceeding relating to the Issuer or the Bank would likely involve insolvency laws of the British Virgin Islands or the PRC, as applicable, the procedural and substantive provisions of which may differ from comparable provisions of the local insolvency laws of jurisdictions with which the holders of the Notes are familiar.
Gains on the transfer of the Notes may become subject to income taxes under PRC tax laws.
Under the new Enterprise Income Tax (“EIT”) Law and its implementing regulations, any gains realised on the transfer of the Notes by Noteholders who are deemed under the new EIT Law and its implementing regulations as non-resident enterprises may be subject to PRC enterprise income tax if such gains are regarded as incomes derived from sources within the PRC. Under the new EIT Law and its implementing regulations, a “non-resident enterprise” means an enterprise established under the laws of a jurisdiction other than the PRC and whose actual administrative organisation is not in the PRC, which has established offices or premises in the PRC, or which has not established any offices or premises in the PRC but has obtained incomes derived from sources within the PRC. In addition, there is uncertainty as to whether gains realised on the transfer of the Notes by individual holders who are not PRC citizens or residents will be subject to PRC individual income tax. If such gains are subject to PRC income tax, the 10 per cent. enterprise income tax rate and 20 per cent. individual income tax rate will apply respectively unless there is an applicable tax treaty or arrangement that reduces or exempts such income tax. The taxable income will be the balance of the total income obtained from the transfer of the Notes minus all costs and expenses that are permitted under PRC tax laws to be deducted from the income. According to an arrangement between mainland China
— 37 — and Hong Kong for avoidance of double taxation, Noteholders who are Hong Kong residents, including both enterprise holders and individual holders, are exempted from PRC income tax on capital gains derived from a sale or exchange of the Notes.
If a Noteholder, being a non-resident enterprise or non-resident individual, is required to pay any PRC income tax on gains on the transfer of the Notes, the value of the relevant Noteholder’s investment in the Notes may be materially and adversely affected.
Foreign Account Tax Compliance withholding may affect payments on the Notes.
Whilst the Notes are in global form and held within Euroclear, Clearstream, Luxembourg, in all but the most remote circumstances, it is not expected that the U.S. Foreign Account Tax Compliance Act (“FATCA”) will affect the amount of any payment received by the Clearing Systems. Further, non-U.S. financial institutions in a jurisdiction which has entered into an intergovernmental agreement (an “IGA”) with the United States generally are not expected to be required to withhold under FATCA or an IGA (or any law implementing an IGA) from payments they make on securities such as the Notes. However, if FATCA withholding were relevant with respect to payments on the Notes, FATCA could affect payments made to custodians or intermediaries in the subsequent payment chain leading to the ultimate investor if any such custodian or intermediary generally is unable to receive payments free of FATCA withholding. It also could affect payments to any ultimate investor that is a financial institution that is not entitled to receive payments free of withholding under FATCA, or an ultimate investor that fails to provide its broker (or other custodian or intermediary from which it receives payment) with any information, forms, other documentation or consents that may be necessary for the payments to be made free of FATCA withholding. Investors should choose their custodians and intermediaries with care (to ensure each is compliant with FATCA or other laws or agreements related to FATCA), provide each custodian or intermediary with any information, forms, other documentation or consents that may be necessary for such custodian or intermediary to make a payment free of FATCA withholding. Investors should consult their own tax adviser to obtain a more detailed explanation of FATCA and how FATCA may affect them. The Issuer’s obligations under the Notes are discharged once it has paid the common depositary for Euroclear and Clearstream, Luxembourg (as registered holder of the Notes) and the Issuer has therefore no responsibility for any amount thereafter transmitted through hands of the Clearing Systems and custodians or intermediaries.
Risks Relating to the Market Generally
Set out below is a brief description of certain market risks, including liquidity risk, exchange rate risk, interest rate risk and credit risk:
The Notes have no current active trading market and may trade at a discount to their initial offering price and/or with limited liquidity.
The Notes will be new securities which may not be widely distributed and for which there is currently no active trading market. If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Bank. If the Notes are trading at a discount, investors may not be able as receive a favourable price for their Notes, and in some circumstances investors may not be able to sell their Notes at all or at their fair market value. Although an application will be made for the Notes to be admitted to listing on the SEHK, there is no assurance that such application will be accepted, that the Notes will be so admitted or that an active trading market will develop. In addition, the market for investment grade and crossover grade debt has been subject to disruptions that have caused volatility in prices of securities similar to the Notes. Accordingly, there is no assurance as to the development or liquidity of any trading market, or that disruptions will not occur, for the Notes.
— 38 — Exchange rate risks and exchange controls may result in investors receiving less interest or principal than expected.
The Issuer will pay principal and interest on the Notes in U.S. dollars (the “Specified Currency”). This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Inventor’s Currency relative to the Specified Currency would decrease (i) the Investor’s Currency equivalent yield on the Notes, (ii) the Investor’s Currency equivalent value of the principal payable on the Notes and (iii) the Investor’s Currency equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.
Changes in market interest rates may adversely affect the value of the Notes.
Investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes.
— 39 — TERMS AND CONDITIONS OF THE NOTES
The following are the terms and conditions of the Notes substantially in the form in which they (other than the texts in italics) will be endorsed on the Certificate issued in respect of the Notes and referred to in the global certificate relating to the Notes.
The issue of the U.S.$[•••] [•••] per cent. Guaranteed Notes due [•••] (the “Notes”) was authorised by resolutions of the sole director of ABCL Glory Capital Limited (the “Issuer”) passed on 3 June 2016 and the guarantee of the Notes was authorised by Agricultural Bank of China Limited, the headquarters of the Agricultural Bank of China Limited Hong Kong Branch (the “Guarantor”, which except where the context requires otherwise, shall be construed to mean the Agricultural Bank of China Limited) on 5 May 2016.
A fiscal agency agreement (the “Fiscal Agency Agreement”) will be entered into in relation to the Notes on or about [•••] 2016 between the Issuer, the Guarantor and Agricultural Bank of China Limited Hong Kong Branch as fiscal agent, paying agent, registrar and transfer agent. The fiscal agent, the registrar, the transfer agent and the paying agents for the time being are referred to below respectively as the “Fiscal Agent”, the “Registrar”, the “Transfer Agent” and the “Paying Agents” and together as the “Agents”. The Fiscal Agency Agreement includes the form of the Notes. The Notes have the benefit of a deed of guarantee dated on or about [•••] 2016 executed by the Guarantor relating to the Notes (the “Deed of Guarantee”). Copies of the Fiscal Agency Agreement and the Deed of Guarantee are available for inspection during normal business hours at the specified offices of the Paying Agents. The Noteholders are deemed to have notice of all the provisions of the Fiscal Agency Agreement applicable to them.
1 Form, Denomination and Title
(a) Form and denomination: The Notes shall be issued in registered form, without coupons attached, in the denomination of U.S.$200,000 each and in integral multiples of U.S.$1,000 in excess thereof. A certificate (each, a “Certificate”) will be issued to each holder of Notes in respect of its registered holding of Notes. Each Certificate shall be numbered serially and shall have an identifying number which shall be recorded on the relevant Certificate and in the register of holders of the Notes (the “Register”), which the Issuer shall procure to be kept by the Registrar.
(b) Title: Title to the Notes shall pass only by transfer and registration of title in the Register. The holder of any Note shall, except as otherwise required by law, be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on (other than the endorsed form of transfer), or the theft or loss of, the Certificate issued in respect of it), and no person shall be liable for so treating the holder. In these Conditions, “holder of the Notes”, “holder” and “Noteholder” in relation to a Note shall mean the person in whose name a Note is registered in the Register (or in the case of a joint holding, the first name thereof).
Upon issue, the Notes will be evidenced by a global certificate (each, a “Global Certificate”) deposited with a common depositary for, and representing Notes registered in the name of a nominee of such common depositary for, Euroclear and Clearstream. These conditions are modified by certain provisions contained in the relevant Global Certificate. See “Summary of Provisions Relating to the Notes in Global Form”.
— 40 — 2 Status and Guarantee
(a) Status: The Notes constitute direct, unconditional, unsubordinated and (subject to Condition 4(a)) unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a), at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations.
(b) Guarantee: The Guarantor has unconditionally and irrevocably guaranteed the due payment of all sums expressed to be payable by the Issuer under the Fiscal Agency Agreement and the Notes. Its obligations in that respect (the “Guarantee”) are contained in the Deed of Guarantee. The obligations of the Guarantor under the Guarantee shall, save for such exceptions as may be provided by applicable law and subject to Condition 4(a), at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations.
3 Transfers of Notes and Issue of Certificates
(a) Register: The Issuer will cause the Register to be kept at the specified office of the Registrar and in accordance with the terms of the Fiscal Agency Agreement, on which shall be entered the names and addresses of the holders of the Notes and the particulars of the Notes held by them and of all transfers of the Notes. Each Noteholder shall be entitled to receive only one Certificate in respect of its entire holding of Notes.
(b) Transfers: Subject to the Fiscal Agency Agreement and Conditions 3(e) and 3(f) herein, a Note may be transferred by delivery of the Certificate issued in respect of that Note, with the form of transfer endorsed on such Certificate duly completed and signed by the holder or his attorney duly authorised in writing, to the specified office of the Registrar or the Transfer Agent. No transfer of title to a Note will be valid unless and until entered on the Register.
(c) Delivery of New Certificates: Each new Certificate to be issued upon a transfer of Notes will, within seven Business Days (as defined below) of receipt by the Registrar or, as the case may be, any Transfer Agent of the Certificate and the form of transfer duly completed and signed, be made available for collection at the specified office of the Registrar or such Transfer Agent or, if so requested in the form of transfer, be mailed by uninsured mail at the risk of the holder entitled to the Notes but free of charge to the holder and at the Issuer’s (failing whom the Guarantor’s) expense to the address specified in the form of transfer. The form of transfer is available at the specified offices of the Transfer Agents.
Except in the limited circumstances described in the Global Certificate, owners of interests in Notes evidenced by the Global Certificate will not be entitled to receive physical delivery of definitive Certificates in respect of their individual holdings of Notes.
Where only part of a principal amount of the Notes (being that of one or more Notes) in respect of which a Certificate is issued is to be transferred or exchanged, a new Certificate in respect of the Notes not so transferred or exchanged will, within seven Business Days of delivery of the original Certificate to the Registrar or Transfer Agent, be made available for collection at the specified office of the Registrar or such Transfer Agent or, if so requested in the form of transfer, be mailed by uninsured mail at the risk of the holder of the Notes not so transferred or exchanged (but free of charge to the holder and at the Issuer’s (failing whom the Guarantor’s) expense) to the address of such holder appearing on the Register.
— 41 — In this Condition 3, “Business Day” shall mean a day (other than a Saturday, Sunday or public holiday) on which commercial banks are open for business in the city in which the specified office of the relevant Transfer Agent or the Registrar with whom a Certificate is deposited in connection with a transfer or exchange, is located.
(d) Formalities Free Of Charge: Registration of a transfer of Notes and issuance of new Certificates will be effected without charge by or on behalf of the Issuer or any of the Agents, but upon (i) payment (or the giving of such indemnity or security as the Issuer or any of the Agents may require) in respect of any tax or other governmental charges which may be imposed in relation to such transfer; (ii) the Registrar being satisfied in its absolute discretion with the documents of title or identity of the person making the application and (iii) the relevant Agent (after consultation with the Issuer if so required) being satisfied that the regulations concerning transfer of Notes have been complied with.
(e) Closed Periods: No Noteholder may require the transfer of a Note to be registered (i) during the period of 15 days ending on (and including) the due date for any payment of principal in respect of that Note, (ii) during the period of seven days ending on (and including) any Record Date (as defined in Condition 7(a)), or (iii) during the period of 15 days ending on (and including) any date of redemption pursuant to Condition 6(b).
(f) Regulations: All transfers of Notes and entries on the Register will be made subject to the detailed regulations concerning transfer of Notes scheduled to the Fiscal Agency Agreement. The regulations may be changed by the Issuer, with the prior written approval of the Registrar. A copy of the current regulations will be mailed (free of charge to the Noteholder and at the Issuer’s (failing whom the Guarantor’s) expense) by the Registrar to any Noteholder upon request and is available at the specified offices of the Transfer Agent.
Transfers of interests in the Notes evidenced by a Global Certificate will be effected in accordance with the rules of the relevant clearing systems.
4 Negative Pledge and Other Covenants
(a) Negative Pledge: So long as any Note remains outstanding (as defined in the Fiscal Agency Agreement) the Guarantor shall not, and will ensure that none of its Subsidiaries will create, or have outstanding any mortgage, charge, lien, pledge or other security interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Public External Indebtedness or to secure any guarantee or indemnity in respect of any Public External Indebtedness without at the same time or prior thereto according to the Notes the same security as is created or subsisting to secure any such Public External Indebtedness, guarantee or indemnity or such other security as shall be approved by an Extraordinary Resolution (as defined in the Fiscal Agency Agreement) of the Noteholders. This provision, however, will not apply to any (i) security interest on any property or asset existing at the time of acquisition of such property or asset or to secure the payment of all or any part of the purchase price or construction cost thereof or to secure any indebtedness incurred prior to, or at the time of, such acquisition or the completion of construction of such property or asset for the purpose of financing all or any part of the purchase price or construction cost thereof or (ii) lien arising by operation of law.
For the purposes of these Conditions:
— 42 — “Public External Indebtedness” means any indebtedness of the Guarantor (or, for the purpose of Condition 9, any Subsidiary), or any guarantee or indemnity by the Guarantor of indebtedness, for money borrowed, which (i) is in the form of, or represented or evidenced by, bonds, notes, debentures, loan stock or other securities which for the time being are, or are intended to be or capable of being, quoted, listed or dealt in or traded on any stock exchange or in any securities market (including, without limitation, any over-the-counter market) outside the People’s Republic of China (for the purpose hereof not including the Hong Kong and Macau Special Administrative Regions or Taiwan) (the “PRC”) (without regard, however, to whether or not such instruments are sold through public offerings or private placements); and (ii) has an original maturity of more than 365 days; and
“Subsidiary” means any entity whose financial statements at any time are required by law or in accordance with generally accepted accounting principles to be fully consolidated with those of the Guarantor.
(b) Limitation on the Issuer: So long as any Note remains outstanding, the Issuer undertakes not to conduct any business or any activities other than those in connection with the issue of, and the performance of its obligations under, the Notes, the lending of the proceeds of the issue of such Notes to Agricultural Bank of China Limited and/or any of its subsidiaries and any other activities incidental thereto.
5 Interest
Subject to the paragraph below (in respect of Notes only), the Notes bear interest on their outstanding principal amount from and including [•••] at the rate of [•••] per cent. per annum, payable semi- annually in arrear in equal instalments of U.S.$[•••] per Calculation Amount (as defined below) on [•••] and [•••] in each year (each an “Interest Payment Date”) commencing from [•••] 2016.
Each Note will cease to bear interest from the due date for redemption unless, upon surrender of the Certificate evidencing such Note, payment of principal is improperly withheld or refused. In such event it shall continue to bear interest at such rate (both before and after judgment) until whichever is the earlier of (a) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant holder, and (b) the day seven days after the Fiscal Agent has notified Noteholders of receipt of all sums due in respect of all the Notes up to that seventh day (except to the extent that there is failure in the subsequent payment to the relevant holders under these Conditions).
If interest is required to be calculated for a period of less than a complete Interest Period (as defined below), the relevant day-count fraction will be determined on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed.
In these Conditions, the period beginning on and including [•••] and ending on but excluding the first Interest Payment Date and each successive period beginning on and including an Interest Payment Date and ending on but excluding the next succeeding Interest Payment Date is called an “Interest Period”.
Interest in respect of any Note shall be calculated per U.S.$1,000 in principal amount of the Notes (the “Calculation Amount”). The amount of interest payable per Calculation Amount for any period shall, save as provided above in relation to equal instalments, be equal to the product of the rate of interest specified above, the Calculation Amount and the day-count fraction for the relevant period, rounding the resulting figure to the nearest cent (half a cent being rounded upwards).
— 43 — 6 Redemption and Purchase
(a) Final Redemption: Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their principal amount on [•••] (the “Maturity Date”). The Notes may not be redeemed at the option of the Issuer other than in accordance with this Condition 6.
(b) Redemption for Taxation Reasons: The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable), at their principal amount (together with interest accrued to the date fixed for redemption), if
(i) the Issuer (or if the Guarantee was called, the Guarantor) has or will become obliged to pay additional amounts as provided or referred to in Condition 8 as a result of any change in, or amendment to, the laws or regulations of any Tax Jurisdiction (as defined below) or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after [•••] 2016; and
(ii) such obligation cannot be avoided by the Issuer (or the Guarantor, as the case may be) taking reasonable measures available to it,
provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer (or the Guarantor, as the case may be) would be obliged to pay such additional amounts were a payment in respect of the Notes then due.
Prior to the publication of any notice of redemption pursuant to this Condition 6(b), the Issuer shall deliver to the Fiscal Agent a certificate signed by any director or authorised officer of the Issuer (or two authorised officers of the Guarantor, as the case may be) stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred, and an opinion of independent legal advisers of recognised standing to the effect that the Issuer (or the Guarantor, as the case may be) has or will become obliged to pay such additional amounts as a result of such change or amendment.
(c) Notices of Redemption: If more than one notice of redemption is given in respect of any Note (which shall include any notice given by the Issuer pursuant to Condition 6(b), the notice given first in time shall prevail and in the event of two notices being given on the same date, the first to be given shall prevail.
(d) Purchase: The Issuer, the Guarantor and their respective Subsidiaries may at any time purchase Notes in the open market or otherwise at any price. Any Notes purchased pursuant to this Condition 6(d) may be held, reissued, resold or surrendered to the Registrar for cancellation at the option of the Issuer, the Guarantor or their respective Subsidiaries (as the case may be). The Notes so purchased, while held by or on behalf of the Issuer, the Guarantor or any of their respective Subsidiaries, shall not entitle the holder to vote at any meetings of the Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders or for the purposes of Condition 12(a).
— 44 — 7 Payments
(a) Method of Payment:
(i) Payments of principal shall be made (subject to surrender of the relevant Certificates at the specified office of the Fiscal Agent or any other Paying Agent if no further payment falls to be made in respect of the Notes evidenced by such Certificates) in the manner provided in Condition 7(a)(ii) below.
(ii) Interest on each Note shall be paid to the person shown on the Register at the close of business on the fifteenth day before the due date for payment thereof (the “Record Date”). Payments of interest on each Note shall be made by transfer to the Registered Account of the holder of such Note or by US dollar cheque drawn on a bank and mailed to the holder (or to the first named of joint holders) of such Note at its address appearing in the Register if it does not have a registered account.
(iii) If the amount of principal being paid upon surrender of the relevant Certificate is less than the outstanding principal amount of such Certificate, the Registrar will annotate the Register with the amount of principal so paid and will (if so requested in writing by the Issuer or a Noteholder) issue a new Certificate with a principal amount equal to the remaining unpaid outstanding principal amount. If the amount of interest being paid is less than the amount then due, the Registrar will annotate the Register with the amount of interest so paid.
(b) Payment Initiation: Where payment is to be made by transfer to a US dollar registered account, payment instructions (for value on the due date or, if that is not a Payment Business Day, for value the first following day which is a Payment Business Day) will be initiated, and where payment is to be made by cheque, the cheque will be mailed, on the due date for payment (or, if that date is not a Payment Business Day, on the first following day which is a Payment Business Day), or, in the case of payments of principal where the relevant Certificate has not been surrendered at the specified office of the Fiscal Agent or any other Paying Agent, on a day on which the Fiscal Agent or such other Paying Agent is open for business and on which the relevant Certificate is surrendered.
(c) Payments Subject To Fiscal Laws: All payments are subject in all cases to (i) any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8 and (ii) any withholding or deduction required pursuant to an agreement described in Section 1471(b) or the U.S. Internal Revenue Code of 1986 (the “Code”) or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, any official interpretations thereof, or (without prejudice to the provisions of Condition 8) any law implementing an intergovernmental approach thereto. No commissions or expenses shall be charged to the Noteholders in respect of such payments.
(d) Appointment of Agents: The Fiscal Agent, the Registrar and the Transfer Agent initially appointed by the Issuer and the Guarantor and their respective specified offices are listed below. The Fiscal Agent, the Registrar and the Transfer Agent act solely as agents of the Issuer and the Guarantor and do not assume any obligation or relationship of agency or trust for or with any Noteholder. Each of the Issuer and the Guarantor reserves the right at any time to vary or terminate the appointment of the Fiscal Agent, the Registrar, the Transfer Agent or any of the other Agents and to appoint additional or other Agents, provided that the Issuer and
— 45 — the Guarantor shall at all times maintain (i) a Fiscal Agent, (ii) a Registrar, (iii) a Transfer Agent and (iv) such other agents as may be required by any stock exchange on which the Notes may be listed.
Notice of any such termination or appointment or any change of any specified office of an Agent shall promptly be given by the Issuer or the Guarantor to the Noteholders, as the case may be.
(e) Delay in Payment: Noteholders will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due on a Note if the due date is not a Payment Business Day or if the Noteholder is late in surrendering or cannot surrender its Certificate (if required to do so).
(f) Non-Payment Business Days: If any date for payment in respect of any Note is not a Payment Business Day, the holder shall not be entitled to payment until the next following Payment Business Day nor to any interest or other sum in respect of such postponed payment or if a cheque mailed in accordance with Condition 7(a) (ii) arrives after the due date for payment.
In this Condition 7:
“Payment Business Day” means a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are open for business in New York City, the place in which the specified office of the Registrar and the Fiscal Agent is located and (if surrender of the relevant Certificate is required) the relevant place of presentation; and
“Registered Account” of a Noteholder means the United States dollar account maintained by or on behalf of such Noteholder with a bank, details of which appear on the Register at the close of business on the fifth Payment Business Day before the due date for payment.
8 Taxation
All payments of principal and interest by or on behalf of the Issuer or the Guarantor in respect of the Notes or under the Guarantee shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or within the British Virgin Islands, the PRC or Hong Kong (each, a “Tax Jurisdiction”) or any authority therein or thereof having power to tax, unless such withholding or deduction is required by law. In that event, the Issuer or, as the case may be, the Guarantor shall pay such additional amounts as shall result in receipt by the Noteholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable with respect to any Note:
(a) Other Connection: to, or to a third party on behalf of, a holder who is liable to such taxes, duties, assessments or governmental charges in respect of such Note by reason of his having some connection with a Tax Jurisdiction other than the mere holding of the Note; or
(b) Presentation more than 30 days after the Relevant Date: presented (or in respect of which the Certificate evidencing it is presented) for payment more than 30 days after the Relevant Date except to the extent that the holder of it would have been entitled to such additional amounts on presenting it for payment on the thirtieth day.
— 46 — As used in these Conditions, “Relevant Date” in respect of any Note means the date on which payment in respect of it first becomes due or (if any amount of the money payable is improperly withheld or refused) the date on which payment in full of the amount outstanding is made or (if earlier) the date seven days after that on which notice is duly given to the Noteholders that, upon further presentation of the Note (or relevant Certificate) being made in accordance with these Conditions, such payment will be made, provided that payment is in fact made upon such presentation. Any reference in these Conditions to principal, premium (if any) and/or interest shall be deemed to include any additional amounts that may be payable under this Condition 8.
9 Events of Default
If any of the following events (“Events of Default”) occurs and is continuing, the holder of any Note may give written notice to the Fiscal Agent at its specified office that such Note is immediately repayable, whereupon the principal amount of such Note together (if applicable) with accrued interest to the date of payment shall become immediately due and payable unless such event of default shall have been remedied prior to the receipt of such notice by the Fiscal Agent:
(a) Non-Payment: there has been a failure to pay the principal of or any interest on any of the Notes when due, and such failure continues for a period of 30 days; or
(b) Breach of Other Obligations: the Issuer or the Guarantor does not perform or comply with any one or more of its other obligations in the Notes which default is incapable of remedy or is not remedied within 45 days after notice of such default shall have been given to the Fiscal Agent at its specified office by any Noteholder; or
(c) Cross-Default: (A) any other present or future Public External Indebtedness of the Guarantor or any of its Subsidiaries becomes due and payable prior to its stated maturity by reason of any actual default, event of default or the like (howsoever described), or (B) any such Public External Indebtedness is not paid when due or, as the case may be, within any originally applicable grace period, provided that the aggregate amount of the Public External Indebtedness in respect of which one or more of the events mentioned above in this Condition 9(c) have occurred equals or exceeds U.S.$25,000,000 or its equivalent (on the basis of the middle spot rate for the relevant currency against the U.S. dollar as quoted by any leading bank on the day on which this paragraph operates); or
(d) Insolvency: the Issuer, the Guarantor or any of the Guarantor’s Subsidiaries is (or is, or could be, deemed by law or a court to be) insolvent or bankrupt or unable to pay its debts, stops, suspends or threatens to stop or suspend payment of all or a material part of (or of a particular type of) its debts, proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any of such debts or a moratorium is agreed or declared in respect of or affecting all or any part of (or of a particular type of) the debts of the Issuer, the Guarantor or any of the Guarantor’s Subsidiaries; or
(e) Winding-up: an order is made or an effective resolution passed for the winding-up or dissolution of the Issuer, the Guarantor or any of the Guarantor’s Subsidiaries (except for the voluntary solvent winding-up of any such Subsidiary), or the Guarantor ceases or threaten to cease to carry on all or substantially all of its business or operations, in each case except for the purpose of and followed by a reconstruction, amalgamation, reorganisation, merger or consolidation (i) on terms approved by an Extraordinary Resolution (as defined in the Fiscal Agency Agreement) of the Noteholders or (ii) in the case of a Subsidiary, whereby the undertaking and assets of the Subsidiary are transferred to or otherwise vested in the Guarantor or another of its Subsidiaries; or
— 47 — (f) Illegality: it is or will become unlawful for the Issuer or the Guarantor to perform or comply with any one or more of its obligations under any of the Notes or the Deed of Guarantee; or
(g) Deed of Guarantee: the Deed of Guarantee is not (or is claimed by the Guarantor not to be) enforceable, valid or in full force and effect.
10 Prescription
Claims in respect of principal and interest shall be prescribed and will become void unless made within a period of 10 years in the case of principal and five years in the case of interest from the appropriate Relevant Date.
11 Replacement of Certificates
If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Registrar or any Transfer Agent, subject to all applicable laws or other relevant authority requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer and Registrar or Transfer Agent may require (provided that the requirement is reasonable in light of prevailing market practice). Mutilated or defaced Certificates must be surrendered before replacements will be issued.
12 Meetings of Noteholders and Modification
(a) Meetings of Noteholders: The Fiscal Agency Agreement contains provisions for convening meetings of Noteholders to consider matters affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of any of these Conditions or the Deed of Guarantee. Such a meeting may be convened by Noteholders holding not less than 10 per cent. in aggregate principal amount of the Notes for the time being outstanding. The quorum for any meeting convened to consider an Extraordinary Resolution will be two or more persons holding or representing a clear majority in aggregate principal amount of the Notes for the time being outstanding, or at any adjourned meeting two or more persons being or representing Noteholders whatever the principal amount of the Notes held or represented, unless the business of such meeting includes consideration of proposals, inter alia, (i) to amend the maturity of the Notes or the dates on which interest is payable in respect of the Notes, (ii) to reduce or cancel the principal amount of or interest on, the Notes, (iii) to vary the currency of payment or denomination of the Notes, (iv) to modify the provisions concerning the quorum required at any meeting of Noteholders or the majority required to pass an Extraordinary Resolution, or (v) to modify or cancel the Guarantee, in which case the necessary quorum will be two or more persons holding or representing not less than 75 per cent., or at any adjourned meeting not less than 25 per cent., in aggregate principal amount of the Notes for the time being outstanding. Any Extraordinary Resolution duly passed shall be binding on Noteholders (whether or not they were present at the meeting at which such resolution was passed).
The Fiscal Agency Agreement provides that a resolution in writing signed by or on behalf of the holders of not less than 90 per cent. in aggregate principal amount of the Notes outstanding shall for all purposes be as valid and effective as an Extraordinary Resolution passed at a meeting of Noteholders duly convened and held. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders.
— 48 — (b) Modification of Fiscal Agency Agreement: The Issuer and the Guarantor shall only permit any modification of, or any waiver or authorisation of any breach or proposed breach of or any failure to comply with, the Fiscal Agency Agreement, if to do so would not be prejudicial to the interests of the Noteholders.
13 Further Issues
The Issuer may from time to time without the consent of the Noteholders create and issue further securities either having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest on them and the timing for reporting to the NDRC) and so that such further issue shall be consolidated and form a single series with the previous outstanding Notes or upon such terms as the Issuer may determine at the time of their issue. References in these Conditions to the Notes include (unless the context requires otherwise) any other securities issued pursuant to this Condition and forming a single series with the Notes.
14 Notices
Notices to Noteholders will be valid if (i) made in writing in English and mailed to them by uninsured mail at the Issuer’s expense at their addresses which appear in the Register maintained by the Registrar and deemed to have been given on the fourth weekday (being a day other than a Saturday or a Sunday) after the date of mailing; or (ii) published at the Issuer’s expense in a daily newspaper with general circulation in Hong Kong (which is expected to be the South China Morning Post in Hong Kong). If any such publication is not practicable, notice shall be validly given if published in another leading daily English newspaper with general circulation in Asia. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once on different dates, on the first date on which publication is made.
15 Currency Indemnity
United States dollars is the sole currency of account and payment for all sums payable by the Issuer or the Guarantor under or in connection with the Notes, including damages. Any amount received or recovered in a currency other than United States dollars (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the insolvency, winding- up or dissolution of the Issuer or the Guarantor or otherwise) by any Noteholder in respect of any sum expressed to be due to it from the Issuer or Guarantor shall only constitute a discharge to the Issuer and Guarantor to the extent of the United States dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that United States dollar amount is less than the United States dollar amount expressed to be due to the recipient under any Note, the Issuer or the Guarantor (as the case may be) shall indemnify it against any loss sustained by it as a result. In any event, the Issuer or the Guarantor (as the case may be) shall indemnify the recipient against the cost of making any such purchase. For the purposes of this Condition, it will be sufficient for the Noteholder to demonstrate that it would have suffered a loss had an actual purchase been made. These indemnities constitute a separate and independent obligation from the Issuer’s and Guarantor’s other obligations, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any Noteholder and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Note or any other judgment or order.
— 49 — 16 Contracts (Rights of Third Parties) Act 1999
No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.
17 Governing Law
(a) Governing Law: The Fiscal Agency Agreement, the Notes and the Deed of Guarantee and any non-contractual obligations arising out of or in connection with them are governed by, and shall be construed in accordance with, English law.
(b) Jurisdiction: The courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with the Notes or the Guarantee and accordingly any legal action or proceedings arising out of or in connection with the Notes or the Deed of Guarantee (“Proceedings”) may be brought in such courts. Each of the Issuer and the Guarantor irrevocably submits to the jurisdiction of such courts and waives any objection to Proceedings in any such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum. This submission is made for the benefit of each of the Noteholders and shall not limit the right of any of them to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction (whether concurrently or not).
(c) Service of Process: Each of the Issuer and the Guarantor irrevocably appoints Agricultural Bank of China (UK) Limited at 7th Floor, 1 Bartholomew Lane, London EC2N2AX as its agent in England to receive service of process in any Proceedings in England based on any of the Notes or the Guarantee. If for any reason the Issuer (or as the case may be, the Guarantor) does not have such an agent in England, the Issuer (or as the case may be, the Guarantor) will promptly appoint a substitute process agent and notify the Noteholders of such appointment. Nothing herein shall affect the right to serve process in any other manner permitted by law.
(d) Waiver of Immunity: Each of the Issuer and the Guarantor hereby waives any right to claim sovereign or other immunity from jurisdiction or execution and any similar defence, and irrevocably consents to the giving of any relief or the issue of any process, including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment made or given in connection with any Proceedings.
— 50 — SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
Each Global Certificate contains provisions which apply to the Notes while they are in global form, some of which modify the effect of the Terms and Conditions of the Notes set out in this Offering Circular. The following is a summary of certain of those provisions.
Terms defined in the terms and conditions of the Notes (the “Conditions” or “Terms and Conditions”) set out in this Offering Circular have the meanings given in the paragraphs below.
The Notes will be represented by a Global Certificate which will be registered in the name of a nominee of, and deposited with, a common depositary on behalf of Euroclear and Clearstream.
Under each Global Certificate, the Issuer, for value received, will promise to pay such principal and interest on the Notes to the holder of the Notes on such date or dates as the same may become payable in accordance with the Terms and Conditions.
Each Global Certificate will become exchangeable in whole (but not in part), for individual Certificates in definitive form if (i) the Notes represented by such Global Certificate are held on behalf of Euroclear or Clearstream or any other clearing system (an “Alternative Clearing System”) and any such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so; or (ii) upon or following any failure to pay principal in respect of any Notes when it is due and payable, provided that, in the case of the first transfer of part of a holding pursuant to (i) or (ii) above, the holder of the Notes represented by such Global Certificate has given the Registrar not less than 30 days’ notice at its specified office of such holder’s intention to effect such transfer.
The following provisions shall apply to the Notes evidenced by a Global Certificate:
Record date: So long as the Notes are represented by a Global Certificate, each payment in respect of such Global Certificate will be made to the person whose name is entered on the Register at the close of business (of the relevant clearing system) on the Clearing System Business Day immediately prior to the due date for such payments, where “Clearing System Business Day” means a weekday (Monday to Friday, inclusive) except 25 December and 1 January.
Notices: So long as the Notes are represented by a Global Certificate and such Global Certificate is held on behalf of Euroclear or Clearstream or any Alternative Clearing System, notices to holders of the Notes shall be given by delivery of the relevant notice to Euroclear or Clearstream or such Alternative Clearing System, for communication by it to accountholders entitled to an interest in the Notes in substitution for notification as required by the Terms and Conditions.
Transfer of Notes represented by a Global Certificates: Transfers of interests in the Notes will be effected through the records of Euroclear and Clearstream (or any Alternative Clearing System) and their respective participants in accordance with the rules and procedures of Euroclear and Clearstream (or any Alternative Clearing System) and their respective direct and indirect participants. Where the holding of Notes represented by a Global Certificate is only transferable in its entirety, the certificate issued to the transferee upon transfer of such holding shall be a Global Certificate. Where transfers are permitted in part, certificates issued to transferees shall not be Global Certificates unless the transferee so requests and certifies to the Registrar that it is, or is acting as or as nominee for, a common depositary for Euroclear, Clearstream and/or an Alternative Clearing System.
— 51 — Cancellation: Cancellation of any Note represented by a Global Certificate which is required by the Terms and Conditions to be cancelled will be effected by reduction in the principal amount of the Notes in the register of the Notes and the relevant Global Certificate on its presentation to or to the order of the Fiscal Agent for annotation (for information only) in the relevant Global Certificate.
Events of Default: The holder of the Notes represented by a Global Certificate may exercise the right to declare Notes represented by the Global Certificate due and payable under Condition 9 by stating in the notice to the Fiscal Agent the principal amount of Notes (which may be less than the outstanding principal amount hereof) to which such notice relates. If the principal amount in respect of any Notes is not paid when due and payable, the holder of a Global Certificate may from time to time elect that Direct Rights under the provisions of the Schedule to such Global Certificate shall come into effect. Such election shall be made by notice to the Fiscal Agent and presentation of the Global Certificate to or to the order of the Fiscal Agent for reduction of the principal amount of Notes represented by the Global Certificate by such figure as shall be specified in the notice, by endorsement in the Schedule of such principal amount of Notes formerly represented hereby as the principal amount of Notes in respect of which Direct Rights have arisen under the Schedule. Upon such notice being given the appropriate Direct Rights shall take effect.
Meetings: For the purposes of any meeting of Noteholders, the holder of the Notes represented by a Global Certificate shall (unless the relevant Global Certificate represents only one Note) be treated as two persons for the purposes of any quorum requirements of a meeting of Noteholders and as being entitled to one vote in respect of each U.S.$1,000 of principal amount of the Notes.
Payment: Payments of principal and interest in respect of Notes evidenced by the Global Certificate held through Euroclear or Clearstream will be credited, to the extent received by the Fiscal Agent or such other Paying Agent, to the cash accounts of Euroclear and Clearstream participants in accordance with the relevant system’s rules and procedures and will be made without presentation for endorsement by the Fiscal Agent or such other Paying Agent and, if no further payment falls to be made in respect of the Notes, against presentation and surrender of the relevant Global Certificate to or to the order of the Fiscal Agent or to the order of such other Paying Agent as shall have been notified to the relevant holder for such purpose. No person shall, however, be entitled to receive any payment on a Global Certificate (or such part of the relevant Global Certificate which is required to be exchanged) falling due after any date of exchange into individual Certificates in definitive form unless exchange of the relevant Global Certificate for such individual Certificates is improperly withheld or refused by or on behalf of the Issuer or the Issuer does not perform or comply with any one or more of what are expressed to be its obligations under any such individual Certificates.
— 52 — EXCHANGE RATE
PRC
The PBOC sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the markets during the prior day. The PBOC also takes into account other factors such as the general conditions existing in the international foreign exchange market. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates in the world financial markets. From 1994 to 20 July 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On 21 July 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to that of the U.S. dollar only, to allow the value of the Renminbi to fluctuate within a narrow and managed band based on market supply and demand and by reference to a basket of currencies. This change in policy has resulted in a significant appreciation of the Renminbi against the U.S. dollar.
The PRC government has made further adjustments to the exchange rate system. The PBOC authorised the China Foreign Exchange Trading Centre, effective since 4 January 2006, to announce the central parity exchange rate of certain foreign currencies against the Renminbi at 9:15 a.m. each business day. This rate is set as the central parity for the trading against the Renminbi in the inter-bank foreign exchange spot market and the over the counter exchange rate for that business day. On 18 May 2007, the PBOC enlarged, effective on 21 May 2007, the floating band for the trading prices in the inter-bank spot exchange market of Renminbi against the U.S. dollar from 0.3 per cent. to 0.5 per cent. around the central parity rate. This allows the Renminbi to fluctuate against the U.S. dollar by up to 0.5 per cent. above or below the central parity rate published by the PBOC. On 19 June 2010, the PBOC announced that in view of the recent economic situation and financial market developments in China and abroad, and the balance of payments situation in China, it has decided to proceed further with reform of the Renminbi exchange rate regime and to enhance the Renminbi exchange rate flexibility. According to the announcement, the exchange rate floating bands will remain the same as previously announced but the PBOC will place more emphasis on reflecting the market supply and demand with reference to a basket of currencies. On 12 April 2012, the PBOC announced that on 16 April 2012, the floating band for the trading prices in the inter-bank spot exchange market of Renminbi against the U.S. dollar would be enlarged from 0.5 per cent. to 1.0 per cent. around the central parity rate, allowing the Renminbi to fluctuate against the U.S. dollar by up to 1.0 per cent. above or below the central parity rate published by the PBOC. The PBOC announced on 15 March 2014 that since 17 March 2014, the floating band for the trading prices in the inter-bank foreign exchange spot market of Renminbi against the U.S. dollar was further expanded from 1 per cent. to 2 per cent. On each business day, the spread between the Renminbi and U.S. dollar buying and selling prices offered by the designated foreign exchange banks to their clients shall be within 3.0 per cent. of the published central parity of the U.S. dollar on that day, instead of 2.0 per cent. On 11 August 2015, the PBOC adjusted the mechanism for market makers to form the central parity rate by requiring them to consider the closing exchange rate of the last trading date, the supply and demand of foreign exchange and the rate change at primary international currencies. For three consecutive days commencing 11 August 2015, the PBOC devalued the Renminbi against the U.S. dollar, leading to declines in the value of the Renminbi versus the U.S. dollar of up to 2.8 per cent. in currency markets and representing the largest single-day drop in the value of the Renminbi since 1994. On 11 December 2015, the China Foreign Exchange Trade System, a sub- institutional organisation of the PBOC, published the CFETS Renminbi exchange rate index for the first time which weighs the Renminbi based on 13 currencies, to guide the market in order to measure the Renminbi exchange rate from a new perspective.
— 53 — Although PRC governmental policies were introduced in 1996 to reduce restrictions on the convertibility of the Renminbi into foreign currency for current account items, conversion of the Renminbi into foreign currency for capital items, such as foreign direct investment, loans or security, requires the approval of SAFE and other relevant authorities.
The table below sets forth for the periods indicated, certain information concerning the exchange rates between Renminbi and U.S. dollars. For periods after 1 January 2010, the exchange rates reflect the exchange rates as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System of the United States.
Exchange Rate Period Period End Average(1) High Low (Renminbi per U.S.$1.00) 2010 ...... 6.6000 6.7603 6.8330 6.6000 2011 ...... 6.2939 6.4475 6.6364 6.2939 2012 ...... 6.2301 6.2990 6.3879 6.2221 2013 ...... 6.0537 6.1478 6.2438 6.0537 2014 ...... 6.2046 6.1704 6.2591 6.0402 2015 ...... 6.4778 6.2868 6.4896 6.1870 2016 January ...... 6.5752 6.5726 6.5932 6.5219 February ...... 6.5525 6.5501 6.5795 6.5154 March ...... 6.4480 6.5027 6.5500 6.4480 April ...... 6.4738 6.4754 6.5004 6.4571 May (through 27th May) ...... 6.3615 6.5216 6.5615 6.4738
Note:
(1) Determined by averaging the rates on the last business day of each month during the relevant year, except for monthly average rates, which are determined by averaging the daily rates during the respective months.
— 54 — CAPITALISATION AND INDEBTEDNESS OF THE BANK
As at 31 December 2015, the Bank had an authorised share capital of CNY324,794,117,000 divided into 30,738,823,096 H shares of CNY1.00 each and 294,055,293,904 A shares of CNY1.00 each.
The following table sets out the Group’s consolidated capitalisation and indebtedness as at 31 December 2015 and as adjusted to give effect to the issue of the Notes. This table should be read in conjunction with the audited consolidated financial statements of the Group as at 31 December 2015, including the notes thereto, included elsewhere in this Offering Circular.
As at 31 December 2015 Actual As Adjusted (Audited) (Unaudited) (Unaudited) (Unaudited) CNY U.S.$(1) CNY U.S.$(1) (in millions) (in millions) (in millions) (in millions) Debt:(2)(3) Debt securities issued: (4) Bonds ...... 198,476 30,639 198,476 30,639 (5) Other debt instruments ...... 184,266 28,446 184,266 28,446 (6) Bonds to be issued : ...... _ _ [•••] [•••] Total debt ...... 382,742 59,085 [•••] [•••] Equity: Ordinary shares ...... 324,794 50,140 324,794 50,140 Preference shares ...... 79,899 12,334 79,899 12,334 Capital reserve ...... 98,773 15,248 98,773 15,248 Investment revaluation reserve . . . . . 22,429 3,462 22,429 3,462 Surplus reserve ...... 96,748 14,935 96,748 14,935 General reserve ...... 175,606 27,109 175,606 27,109 Retained earnings ...... 412,005 63,603 412,005 63,603 Foreign currency translation reserve . . (163) (25) (163) (25) Non-controlling interests ...... 1,794 277 1,794 2777
Total equity ...... 1,211,885 187,083 1,211,885 187,083 (7) Total capitalisation ...... 1,594,627 246,168 [•••] [•••]
Notes:
(1) The translation of Renminbi amounts into U.S. dollar amounts has been made at the rate of CNY6.4778 to U.S.$1.00, the noon buying rate in New York City for cable transfers payable in Renminbi on 31 December 2015.
(2) As at 31 December 2015, in addition to debt, the Bank had other borrowed funds and liabilities, including borrowings from central banks, due to customers, deposits and placements from banks and other financial institutions, financial liabilities held for trading, derivative financial liabilities, financial assets sold under repurchase agreements and financial liabilities at fair value through profit or loss. See the Bank’s audited consolidated financial statements as at 31 December 2015 and the related attached as F-pages to this Offering Circular for further details.
(3) On 2 June 2016, Agricultural Bank of China Limited, New York Branch issued US$850,000,000 aggregate principal amount of floating rate notes due 2019 and US$400,000,000 aggregate principal amount of 1.875 per cent. notes due 2019 under its US$10,000,000,000 Senior Medium-Term Notes Programme by way of debt issues to professional investors.
(4) Includes CNY600,000 million 4.15 per cent. fixed rate green bonds maturing in October 2017, CNY2,597 million 2.125 per cent. fixed rate green bonds maturing in October 2018, CNY25,000 million 4.0 per cent. subordinated fixed rate bonds maturing in May 2024, CNY30,000 million 5.8 per cent. tier 2 capital fixed rate bonds maturing in August 2024,
— 55 — CNY3,247 million 2.75 per cent. fixed rate green bonds maturing in October 2020, CNY50,000 million 5.3 per cent. subordinated fixed rate bonds maturing in June 2026 and CNY50,000 million 4.99 per cent. subordinated fixed rate bonds maturing in December 2027 and medium-term notes of CNY37,164 million, less unamortised issuance costs and discounts.
(5) Includes certificates of deposits issued of CNY165,508 million, commercial papers issued of CNY11,586 million and interbank certificates of deposit issued of CNY7,172 million.
(6) Represents the gross proceeds from the offering of the Notes before deduction of underwriting commissions and other estimated expenses in connection with the offering.
(7) Total capitalisation equals total debt plus total equity.
Except as disclosed above, there has been no material adverse change in the total capitalisation and indebtedness of the Group, on a consolidated basis, since 31 December 2015.
— 56 — USE OF PROCEEDS
The Issuer estimates the net proceeds to it from its sale of Notes pursuant to this Offering Circular to be approximately U.S.$[•••] after deducting commissions payable to the Joint Bookrunners and the Joint Lead Managers and other offering expenses. The net proceeds will be advanced by the Issuer to the Company and/ or any of its subsidiaries or affiliates and used for general corporate purposes.
— 57 — DESCRIPTION OF THE ISSUER
Formation
ABCL Glory Capital Limited is a BVI company incorporated under the BVI Business Companies Act, 2004 of the British Virgin Islands (BVI Company Number: 1907231). It was incorporated in the British Virgin Islands on 29 February 2016. The Issuer is a direct wholly-owned subsidiary of ABCLI, which in turn is an indirect wholly-owned subsidiary of ABCI and the Bank. Pursuant to a management agreement dated July 2012 between ABCI and the Company, the Company is solely in charge of the management of the Issuer.
Business Activity
The Issuer was established pursuant to the objects and powers set out in its memorandum and articles of association. The Issuer does not sell any products or provide any services and it has undertaken no business activities since the date of its incorporation, other than those incidental to its incorporation and those incidental to the issue of the Notes.
Financial Statements
Under British Virgin Islands law, the Issuer is not required to publish interim or annual financial statements. The Issuer has not published, and does not propose to publish, any financial statements. The Issuer is, however, required to keep proper books of account as are necessary to give a true and fair view of the state of the Issuer’s affairs and to explain its transactions.
Directors
The sole director of the Issuer is Mr. CHENG Gan, who is appointed by the Company. The sole director of the Issuer does not hold any shares or options to acquire shares of the Issuer. The Issuer does not have any employees or subsidiaries.
Share Capital
The Issuer is authorised under its memorandum and articles of association to issue a maximum of 50,000 shares with a par value of U.S.$1.00 each. The register of members of the Issuer is maintained at its registered office in the British Virgin Islands at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. No part of the equity securities of the Issuer is listed or dealt on any stock exchange and no listing or permission to deal in such securities is being or is proposed to be sought. As at the date of this Offering Circular, the Issuer does not have any debt outstanding.
— 58 — DESCRIPTION OF THE COMPANY
Overview
The Company is a wholly-owned onshore subsidiary of the Bank and is a key component of the Bank’s corporate banking business. The Company offers specialised leasing and asset-financing services in various sectors, such as equipment manufacturing, transportation, public services, financial markets and institutions and agriculture. The Company adopts the “1+4” segment division, strategically focusing on agricultural leasing, while also engaging in transport leasing, electrical power and telecommunication leasing, large-scale equipment leasing and public infrastructure leasing. The Company also provides financial market-related services and advisory and asset management services.
The Company was established in Shanghai in September 2010 as approved by the CBRC, and its registered capital at establishment was CNY2 billion. In March 2015, its registered capital was increased to CNY3 billion. As at the date of this Offering Circular, the Company’s registered capital is CNY3 billion. The Company has a significant strategic position within the Bank’s system, and is an indispensable part of the Bank’s complete financial platform. Since 2014, the Company has been focusing its business in key regions such as the Yangtze River Delta, the Bohai Economic Rim and the Pearl River Delta, which is in line with the national and the Bank’s overall strategies. The Company has effectively served its core client base, and has assisted the Bank in further developing its debt and intermediary service. It has obtained strong support and assistance for its business development and financing from the Bank since its establishment. The Company is able to share the Bank’s customer resources and rely on the Bank’s brand value and financial strength. The synergy among the Company, branches of the Bank in various regions and the Bank has been built up based on the business liaison and cooperation. As a result of such resources and advantages, the Company has developed a customer base comprising high-end and quality customers in the leasing market, which is supported by its competitive financial strength and comprehensive leasing products. In the specialised leasing sectors, the Company provides its customers with innovative products and quality services and carries out professional leasing business satisfying customers’ demands. In recent years, the Company has been focusing on developing relationships with its agro-related and high-end clients, while at the same time increasing its investments in the asset-based sectors such as aircraft, track transportation and port.
The Company’s Strengths
Strong Support from Bank
As one of the Bank’s four major integrated business subsidiaries, the Company is a strategically important component of the Bank’s corporate banking business and is responsible for the Bank’s integral financial leasing capabilities. As a shareholder, the Bank contributes to the registered capital of the Company and provides shareholder loans to the Company. Furthermore, as required by the regulatory authorities, the Bank will provide liquidity support to the Company when the Company has difficulties in payments, and the Bank will inject new capital into the Company when the Company is operating at a loss.
Stable Client Base
The Company, as a strategically important subsidiary of the Bank, enjoys the business synergies with the Bank by sharing the Bank’s client resources. Meanwhile, the Company has its own independent business operation and through its own marketing sales and cooperation with other leasing companies, the Company manages to build up its client base and maintain a stable client source.
— 59 — Strong Product Capabilities and Innovative Power
The Company has a track record of actively structuring and offering innovative products and services for clients and believes it has achieved a number of “firsts”:
• the first PRC aircraft joint leasing transaction with ICBC Financial Leasing Co., Ltd. and won “Innovation Award in Aircraft Joint Leasing Transactions” in the 2nd China Aviation Finance Ceremony in 2014;
• the first PRC export credit agency (ECA) financing transaction with U.S. Export-Import Bank in China for the business aircraft segment under an innovative security structure;
• the first cross-border joint leasing transaction of marine engineering equipment, which was a landmark for marine technology. The transaction was selected as one of the first batches of model innovative financial transactions in the Tianjin Free Trade Zone;
• the first foreign debt financing transaction and won the “Innovation Award in Cross-Border Financing” in the 3rd China Aviation Finance Ceremony in 2015;
• the first transaction on equity transfer in an aircraft project company with leasing, and the first transaction on aircraft asset transfer, won “Innovation Award in the First Equity Transaction” and “Innovation Award in the First Bonded Assets Transaction” in the 3rd China Aviation Finance Ceremony in 2015;
The Company’s Business Coverage
The Company has featured businesses including agricultural leasing, aircraft leasing, green leasing, interbank leasing and public infrastructure leasing. These featured businesses largely involve several sectors: the agricultural sector, the transport sector, the electrical power and telecommunications sector, the large- scale equipment sector and the public infrastructure sector.
Agriculture
The Company is committed and specialised in providing leasing services to the agro-related sector and is the only financial leasing company in the PRC primarily focusing on the “Sannong Banking Business”. The Company provides financing for agricultural equipment manufacturing, urbanisation projects and agricultural production equipment and logistic equipment purchase. The Company has created innovative pilot programmes such as mechanical cotton picker leasing in Xinjiang, sugarcane harvester leasing in Guangxi and tractor leasing in Jilin, all of which were highly regarded by the Ministry of Agriculture and the Ministry of Finance. The Company has also been reaching out to other modern agro-related businesses such as ocean fishing and water conservancy construction. The Company’s major clients include agro-related enterprises and agricultural service providers, rural infrastructure operators, large agricultural machinery manufacturers and distributors, and large-scale farms.
Transport
Aviation
The Company has established its profile as a well-recognised competitor in the financial leasing market of Shanghai and in the PRC. In 2014, the Company has completed its first joint aircraft leasing project. The Company’s major clients in the aircraft industry include various PRC mainstream and regional leading airlines, airports and aircraft end users, including both enterprises and high net wealth individuals. Eying on
— 60 — the repaid development of the corporate jet market, the Company is one of the first companies that leased corporate jets. The aircraft leasing business of the Company provides financing for aircraft and airport equipment and facility purchase. The Company owns or manages SPVs in domestic free trade zones in the PRC and offshore SPV platforms to provide operating leasing and financial leasing services in U.S. dollar and Renminbi. The Company has specially set up an aircraft leasing department, comprising experienced professionals from financial institutions, airlines, leasing companies and manufacturers who are experts in the areas of commercial, legal, technologies and finance. The Company not only maintains good business relationships with domestic and international airlines, but also has extensive connections with aircraft engine manufacturers and various professional service agents.
Shipping
The Company places strategic emphasis on its ship leasing business with a focus on continuous innovation on business models. The Company has successfully carried out business cooperation with a large number of quality customers including Yingkou Port Group Co., Ltd. (�口�務集團有限公司) and has made satisfactory achievements. Its major clients include ship owners and charterers, shipyards and vessel manufacturers, and ports and terminals. The Company’s ship leasing business provides financing for construction projects and vessels and terminal facilities purchase. The Company provides a wide range of diversified products and various lease subjects, including bulk ships, container ships, oil tankers and marine engineering ships and equipment.
Electrical Power and Telecommunications
The Company is expanding its electrical power and telecommunication leasing business given the significance of public demand of such area. The PRC government has strong policy supporting renewable energy. In order to align with such policy the Company actively supports nuclear power, hydropower and fire power projects, as well as some wind power projects on a selective basis. The Company mainly supports national electricity companies, national grid companies and national telecommunication companies.
Large-scale Equipment
In light of the country’s economic structural adjustment and transformation upgrade, the Company seizes the chance to cooperate with enterprises who are supportive of national policy and who are advanced and have high demand in the industry. The Company has always been involved in equipment manufacturing industry which has a large market demand. The Company provides financing leasing products to support the advancement and upgrading of the renewable of the equipment and technology, as well as provides financing services to large enterprises, for large-scale equipment purchase and engineering constructions.
Public Infrastructure
The Company maintains good communication and cooperation with various clients in sectors such as track transportation, road transportation and public services. It cooperates with different local platforms and supports the local infrastructure projects. The public infrastructure leasing business of the Company involves every aspect of various urban infrastructures and its key clients include PRC railway authorities, railway operators such as Ningbo Rail Transit Group Co., Ltd. (寧波市軌道交通集團有限公司), Chongqing Rail Transit (Group) Co., Ltd. (重慶市軌道交通（集團）有限公司), Tianjin Metro Group Co., Ltd. (天津市地下 鐵道集團有限公司), and Guangzhou Metro Group Co., Ltd. (廣州市地下鐵道總公司), railway facilities manufacturers and maintenance companies, urban bus operators, auto financing and leasing companies, infrastructure operators, including Nanping Punan Expressway Co., Ltd. (南平浦南高速公路有限責任公司) and Beijing Infrastructure Investment Co., Ltd. (北京市基礎設施投資有限公司), and public welfare institutions such as schools and medical service providers. The public infrastructure leasing business of the Company provides financing for construction projects and locomotives, vehicles and railway facilities
— 61 — purchase, commercial vehicle purchase and lease, and construction equipment and application equipment purchase. The Company’s public infrastructure leasing business plays a positive role in supporting local economy development, environment protection and enhancement of citizen’s livelihood in the PRC.
Overseas business
In addition to its PRC businesses, the Company also seeks to expand its overseas businesses in the areas of aircraft leasing and container leasing. Besides developing corporate jet leasing business, the Company also explores opportunities to cooperate with overseas airlines. The Company is also supportive of PRC government’s policy of “Go Out” and “One Belt One Road” policy by providing PRC enterprises with off- shore financing support.
The Company’s Business Models
The Company provides high quality leasing services to its clients in various sectors. Its leasing services include the following:
• operating lease: in an operating lease, the Company purchases the asset from the manufacturer or supplier, and leases the asset to the lessee. The lessee is only entitled to part of the economic interest associated with the asset while the Company is legally entitled to the ownership of the asset, and holds the residual value and other relevant risks associated with the asset.
• financial lease: financial lease includes direct lease and sale-leaseback. In a direct financial lease, the lessee chooses the asset to purchase on its own, and the Company is only responsible for financing the purchase. During the lease term, the Company is the legal owner of the leased asset while the lessee has the right to use the asset, and is responsible for all the risks and benefits associated with the asset. Upon the maturity of the contract, the ownership of the leased asset will be transferred to the lessee at a nominal price. In a sale-leaseback, the lessee and the supplier are the same person or entity – the lessee sells an asset to the Company at market price and leases it back from the Company. The Company is legally entitled to the ownership of the leased asset, but essentially the principal benefits and risks associated with the asset are borne by the lessee.
• joint lease: in a joint lease, the Company and other qualified domestic or international institutions (as joint lessors) lease the asset to the lessee through financial or operating lease to share market opportunities and leverage the advantages of the joint parties.
• sub-lease: in a sub-lease scenario, the Company first acquires the asset from another leasing company (the first lessor); subsequently the Company will act as the second lessor and lease the asset to the end user. This type of structure is designed for tax benefits and lowering financing costs.
• other business: other than financial leasing, the Company’s key business includes liability business and advisory and asset management services. Liability business includes account receivable factoring, asset-backed securities, structured financing and export credit while advisory and asset management services include asset management, equipment service management, advisory services and risk management.
— 62 — The Company’s Sources of Funding/Financing Channels
The Company is dedicated to seeking equilibrium between cost control and liquidity risk management. The Company is focused on ensuring the diversity of financing channels, which include inter-bank borrowing, factorage financing, trade financing and asset-backed financing. With the support provided by the Bank and in addition by virtue of its strong operation performance, the Company has developed a strong reputation in the market, and its total facilities are constantly increased.
The Company’s System Management and Internal Control
Developed Management System
The Company has put in significant efforts to develop a set of comprehensive rules and policies for its business management. It has both regularly and from time to time, revised and improved its existing rules and policies as required by the regulatory authorities as well as subject to the needs of its own business development. The Company also closely monitors its system to identify issues in time. It also sets out plans for its future system building to keep its system up-to-date.
Advanced business technology management system
The Company’s business management system fully covers both of its leasing and financing services, and has the functions of carrying out one-stop online approval operations and statistical analysis, thereby providing a strong system support for business development and risk control. Furthermore, the system has fully implemented the online operations of the office automation (OA) system, which manages to achieve the online full-process management of matters relating to non-business approval, and provide a specialised platform for the Company’s information sharing and exchange.
Effective cost control
The Company exercises overall control of all expenditures incurred during the course of business activities through budgeting, cost accounting and ex-post cost analysis. It has been exercising effective control over its capital costs, tax costs, business expenditures, losses from non-performing assets and business management expenses through comprehensive management of the operational process and the staff.
Excellent employee training and corporate culture building
The Company places great emphasis on personnel training and ensures its staff is properly train to provide support to its business development. The Company offers regular staff training new joiner induction, workshops and seminars. The Company firmly believes in corporate culture and has made constant efforts in promoting core corporate values and encouraging a corporate culture of cooperation, endeavour and enterprise.
The Company’s Risk Management
The Company has established an integral system for the management, prevention and control of risk which is in line with the Bank’s general risk management principles while taking into consideration features unique to the Company’s leasing business. Firstly, in order to effectively prevent and control credit risk, the Company implements standardised management along the entire procedure of its leasing business and formulates comprehensive internal regulations to manage its daily operation and employees’ conduct. Through the risk rating system, the policies, systems and procedures relating to the credit risk management, the leasing information system, the administration on the investment in leasing business and the optimisation of the leasing asset structure, the Company is able to promptly and effectively identify, monitor and manage
— 63 — the potential credit risks in various aspects. By carrying out several specific measures, including asset management, credit quota administration, risk-mitigation measures administration, analysis on the credit risk impairment and provisions for impairment, the Company is able to effectively control potential credit risk. The Company ensures clients adhere to the relevant business guidelines of the Company. The Company also has a risk management committee to monitor factors which are critical to risk control, such as risk categorisation, pricing, credit protection. Secondly, the Company measures, monitors, and manages interest rate risk and market risk, by complying with the sensitivity indicators for the risk in respect of the interest rate provided for in the Basel Accord and other relevant tools. Thirdly, the Company manages the liquidity risk by monitoring the proportions of liquidity of different terms and other relevant indicators, and establishes liquidity emergency plans for the purpose of liquidity risk prevention. Fourthly, the Company sets strict operational procedures and various administration measures such as specific risk management measures for different phases of a transaction and implementing a comprehensive approval regime for its business in order to strictly control operational risk, which include operation accidents, the information and technology safety and outsourcing risks. The Company also coordinates management among all relevant branches across the PRC to monitor and ensure customers’ timely payments. Lastly, the Company has a special department to monitor and report the potential legal and compliance risks and the Company has implemented “Guidance of Internal Management Compliance”, in order to ensure the compliance of its various legal documents and operation procedures with the relevant laws.
The Company’s Management
The following table sets out certain information relating to the Company’s senior management.
Name Position
GAO Keqin ...... Chairman CHEN Peihua ...... President SHEN Jianlin ...... Vice President YANG Jinguo ...... Vice President WANG Xinye ...... Vice President ZHANG Zhe ...... Chief Risk Officer CHEN Changfei ...... Chief Financial Officer SUN Zhiyuan ...... President Assistant
— 64 — DESCRIPTION OF THE GUARANTOR
The Guarantor is the Hong Kong branch of the Bank established on 22 November 1995 as the first overseas stronghold of the Bank. It holds a banking business license and focuses on corporate banking business, providing domestic and overseas companies with syndicate loans, working capital loans, bond underwriting and distribution, international settlement, trade finance and deposit-taking services.
The Guarantor has 14 departments: legal and compliance, internal audit, corporate affairs, finance, information technology, operations, trade finance, cross-border finance, corporate banking, credit, financial markets, private wealth management, financial institutions and risk management. It has a three-tier structure of frontline departments, middle and back offices which collaborate with each other to enhance operations.
— 65 — DESCRIPTION OF THE BANK
OVERVIEW
The Bank is a leading commercial bank in China in terms of total assets, total loans and total deposits. As at 31 December 2013, 2014 and 2015, the Bank had total assets of CNY14,562.1 billion, CNY15,974.2 billion and CNY17,791.4 billion, respectively, and total gross loans of CNY7,224.7 billion, CNY8,098.1 billion and CNY8,909.9 billion, respectively. The Bank’s total due to customers amounted to CNY11,811.4 billion, CNY12,533.4 billion and CNY13,538.4 billion for the same periods, respectively.
The Bank has one of the leading domestic distribution networks among the Large Commercial Banks in terms of the number of branch outlets. As at 31 December 2015, it had a total number of 23,670 domestic branches. Leveraging its extensive network, the Bank provides a wide range of banking products and services to its corporate and retail customers in China.
As a leading bank in China’s Urban Areas, the Bank has benefited from China’s strong economic growth in recent years, and by leveraging its extensive distribution network and large customer base, the Bank was able to further strengthen its market position in the Urban Areas. As at 31 December 2013, 2014 and 2015, its deposits in the Urban Areas totalled CNY6,852.0 billion, CNY7,220.8 billion and CNY7,738.0 billion, respectively.
The Bank is a leading provider of financial services in China’s vast, fast-developing County Areas, with the largest number of domestic branch outlets among the Large Commercial Banks. The Bank refers to such banking business as the “County Area Banking Business” or “Sannong Banking Business”. It believes that the established market leadership and vast distribution network of its County Area Banking Business enable it to continue to take advantage of the various growth opportunities arising from the rapid urbanisation and favourable economic and policy developments in the County Areas. As at 31 December 2013, 2014 and 2015, the Bank’s loans and advances in the County Areas totalled CNY2,348.0 billion, CNY2,651.7 billion and CNY2,860.2 billion, respectively. The deposits it takes in the County Areas totalled CNY4,959.4 billion, CNY5,312.6 billion and CNY5,800.2 billion for the same periods, respectively.
The Bank believes that “Agricultural Bank of China” (“中國農業銀行”) is one of the most recognised financial services brands in China. In 2015, the Bank was named “Best Investment Banking Institution” for the seventh consecutive year, “Best Bond Underwriting Bank” and “Best Syndicated Financing Bank” by Securities Times, “Best Development Award” and the “Best Transaction Award” by China Banking Association and “Outstanding Sponsor of Asset-backed Securities” by China Central Depository & Clearing Co., Ltd., 2015 Best Green Bond by FinanceAisa, Best Bank for Small Enterprise Lending by Global Finance, Best Cash Management and Best Finance Company by EuroFinance, Outstanding Bond Dealer of Shanghai Stock Exchange for 2015, Banking Technology, Top 10 Financial Social Marketing Cases, Best Financial WeChat Public Platform, Best Electronic Bank of China and Best Online Banking Function in China for 2015 by China Financial Certification Authority (“CFCA”). It also ranked fourth among the Top 500 Global Banking Brands in 2016 by The Banker and eighth among the Top 100 Most Valuable Chinese Brands in 2016 by BRANDZ. It was also awarded Top 10 Innovative Financial Products (Retail Banking) by The Chinese Banker, CSR Chinese Culture Award (Best Strategic Philanthropy) for 2015 by Peope’s Daily, Best “Sannong” Banking Service of the Year by Financial News, Excellent Chinese Bank for 2015 by The Economic Observer, Best Banking Innovative Wealth Management Product in China for 2015 and Best Banking Open-ended Wealth Management Product in China for 2015 by Securities Times, Best Service for Credit Cards (Upgraded Pretty Mother Credit Card) by Shanghai Securities Times, Best Asia Bank of Financial Market Innovation, Best Corporate Culture, Best Banking Brand of Wealth Management, Best Banking Brand of Wealth Management and Best Bank of Service Innovation for 2015 by 21st Century Business Herald, Public Welfare Financial Institution of the Year by CBN, State-owned Commercial Bank of Excellent Competitiveness, Retail Bank of Excellent Competitiveness for 2015 by China Business Journal,
— 66 — Best Universal Bank and Best Bank of Internet Finance for 2015 by eastmoney.com, Outstanding Private Bank by National Business Daily, Best Cross-Border RMB Settlement Bank by TradeFinance, Top 50 Employers for University Graduates in China of 2015 and Top 15 Employers of Banking Industry by ChinaHR.com, Advanced Unit of Legal Risk Management in Banking Industry of China and Outstanding Contribution to Civilised and Normalised Services of Banking Industry in China for 2015 by China Banking Association and Top 10 Women-caring Enterprises by China Women’s Development Foundation. In 2014, the Bank was named “Best Managed Banking and Finance Institution in Asia” by Euromoney and “Best Online Bank” by CFCA In 2013, the Bank was recognised as “Top 3 Most Valuable Global Banking Brand in Asia” by Brand-Finance and awarded “Best Managed Banking and Finance Institution in Asia” by Euromoney. In 2012, the Bank was named “BrandZ Top 50 Most Valuable Chinese Brands” and “Financial Platinum Corporate Award” by The Asset. In 2011, the Bank was recognised as “2011 Most Innovative Chinese Company” by Fortune and named “China’s Most Promising Companies in 2011 Awards” by The Asset.
Headquartered in Beijing with a nationwide distribution network, as at 31 December 2015, the Bank had nine overseas branches in Hong Kong, Singapore, Seoul, New York, Dubai, Tokyo, Frankfurt, Sydney and Luxembourg and three representative offices in Vancouver, Hanoi and Taipei. In addition, the Bank has a number of wholly-owned overseas subsidiaries, including ABC International Holdings Limited and China Agricultural Finance Co., Ltd. The following chart sets out the Bank’s group structure as at 31 December 2015:
(1) The Bank received a letter from Huijin on 29 December 2015, whereby Huijin notified the Bank that it had transferred 1,255,434,700 A Shares of the Bank to its wholly-owned subsidiary, Central Huijin Asset Management Ltd., through share transfer by agreement. Following this transfer, Huijin directly holds 130,005,103,782 A Shares of the Bank, representing approximately 44.21 per cent. of the Bank’s A Shares and approximately 40.03 per cent. of the Bank’s total issued share capital.
(2) Includes the head office and its business department, three specialised institutions managed by the head office, 37 tier-1 branches (including branches directly managed by the head office), 362 tier-2 branches (including business departments of branches in provinces), 3,513 tier-1 sub-branches (including business departments in municipalities, business departments of branches directly managed by the head office and business departments of tier-2 branches), 19,698 foundation-level establishments and 55 other establishments.
(3) The Bank’s major domestic subsidiaries include ABC-CA Fund Management Co., Ltd., ABC Financial Leasing Co., Ltd., ABC Life Insurance Co., Ltd., ABC Hubei Hanchuan Rural Bank Limited Liability Company, ABC Hexigten Rural Bank Limited Liability Company, ABC Ansai Rural Bank Limited Liability Company, ABC Jixi Rural Bank Limited Liability Company, ABC Xiamen Tong’an Rural Bank Limited Liability Company and ABC Zhejiang Yongkang Rural Bank Limited Company.
(4) The Bank’s major overseas subsidiaries include Agricultural Bank of China (UK) Limited, ABC International Holdings Limited, China Agricultural Finance Co., Ltd., Agricultural Bank of China (Luxembourg) Limited and Agricultural Bank of China (Moscow) Limited.
(5) Hong Kong, Singapore, Seoul, New York, Dubai, Tokyo, Frankfurt, Sydney and Luxemburg branches.
— 67 — (6) Vancouver, Hanoi and Taipei representative offices.
THE BANK’S COMPETITIVE STRENGTHS
The Bank’s principal competitive strengths include: Balanced Urban and Rural Growth Strategy
With a significant market share and a broad presence in both Urban Areas and County Areas, the Bank is well-positioned to capitalise on China’s future growth by providing comprehensive products and services to its customers through an integrated platform that covers both Urban Areas and County Areas.
For the year ended 31 December 2015, County Areas contributed to 37.1 per cent. of the Bank’s operating income. The Bank endeavours to maintain balanced development in both Urban Areas and County Areas to minimise volatility to its business arising from potential asymmetric policies applying to Urban Areas and County Areas.
Rapid urbanisation, increasing business flows between the Urban Areas and the County Areas and the continued shift to a more consumption-driven economy have stimulated a strong growth in both Urban Areas and County Areas. The economic development in the County Areas has spurred rapid growth of the banking industry in these areas. Benefitting from its established leadership in both Urban Areas and County Areas, the Bank believes that it is well-positioned to capitalise on China’s future growth in both Urban Areas and County Areas.
Extensive nationwide branch outlet network complemented by a multi-channel electronic banking system
The Bank has a nationwide distribution network with a leading number of branch outlets among the Large Commercial Banks. As at 31 December 2015, the Bank had a total number of 23,670 domestic branch outlets, covering all of the provincial-level administrative regions, prefectural-level cities and county-level administrative regions except Sansha. It maintains a strong presence and extensive network in economically developed areas. Such an extensive network helps the Bank to diversify risk and minimises potential adverse influence of regional economic risk on the overall business of the Bank. The Bank is well-positioned to benefit from lower penetration, less competition and larger loan pricing power in rural areas, which complements its urban banking business in economically developed areas.
As an important complement to and extension of its nationwide distribution network, the Bank has a multi- channel electronic banking transaction system consisting primarily of ATMs, Internet banking, telephone banking, mobile phone banking and non-cash transaction terminals. The Bank also has a leading electronic customer service system with Internet portals and a call centre which operates 24 hours a day, seven days a week.
The Bank’s extensive nationwide branch outlet network together with its multi-channel electronic banking system provides it with a strong sales platform, which enables it to cross-sell its products and deliver high- quality, convenient and comprehensive services. It has also allowed the Bank to establish a leading position in major product and service offerings including deposits, lending, settlement, custody, agency services and bank cards.
Large and diversified customer base providing significant growth potential
Through the Bank’s extensive multi-channel distribution network, the Bank serves a large and diversified corporate and retail customer base.
— 68 — As at 31 December 2015, the Bank had approximately 3.64 million corporate banking customers, of which approximately 74,000 had outstanding loans from the Bank. As at the same date, the Bank also had approximately 4.5 million Renminbi-denominated corporate settlement accounts and approximately 809,500 cash management customers. In addition to expanding the Bank’s customer base, the Bank has focused on optimising its customer mix by developing relationships with large industry-leading companies, financial institutions and government agencies. Over the years, the Bank has established extensive strategic cooperation with the major enterprises of the leading sectors in China, including two major power grid companies, five major power generation companies, three major petroleum companies and three major telecommunication operators. Such cooperation substantially extended the Bank’s customer base to the leading enterprises of the energy, telecommunication, aviation, steel, automobile, chemical, electronic industries. The Bank has also established extensive strategic cooperation relationships with companies in the financial services sector as well as the central government departments and provincial governments. As at 31 December 2015, the Bank had established business cooperation with 216 banks, offered third-party depositary services to 98 securities firms and had 25.2 million contracted customers. The Bank continues to focus on expanding the institutional banking market and continued to deepen its cooperation with other banks, securities firms, futures brokerage companies, governments and insurance companies.
The Bank has established a large retail banking customer base in China with over 474 million retail customers, including more than 25 million VIP customers, as at 31 December 2015. The Bank’s large and affluent retail customer base enables it to identify and introduce attractive new products and services.
The Bank believes that the demand for emerging financial services, such as wealth management, bancassurance and investment, will increase significantly as its customers’ personal wealth continues to grow. The Bank believes that its large and diversified customer base will provide significant business growth opportunities, which will in turn enhance its competitive position across various business segments.
Strong deposit base providing stable and low-cost funding
The Bank believes that its large distribution network has enabled it to provide convenient services to its broad customer base across China and establish a strong brand recognition among its customers. The Bank has one of the largest domestic customer deposit base among all commercial banks in China, amounting to CNY13,449.0 billion as at 31 December 2015, representing a substantial market share among all PRC banking institutions. The Bank believes that its large deposit base provides it with access to stable source of funding at a relatively low cost, which enables it to grow its loan business and improve its financial results.
The Bank had CNY8,065.6 billion in domestic retail deposits as at 31 December 2015. At the same date, the Bank’s domestic retail deposits accounted for 59.6 per cent. of its total deposits. This is a result of higher residential savings rate in the County Areas and the Bank’s extensive branch network. The Bank believes its advantage in retail deposit base will be further strengthened from increasing wealth of population in the County Areas through enlarged government fiscal subsidies to support agricultural development. In addition, the Bank has a greater percentage of demand deposits within its deposit mix. Domestic demand deposits accounted for 23.8 per cent. of its total deposits at 31 December 2015. Having deposits primarily consisting of demand deposits enables the Bank to maintain a lower cost of deposits compared to other commercial banks in China. For the years ended 31 December 2013, 2014 and 2015, the Bank’s average domestic cost of deposits was 1.7 per cent., 1.9 per cent. and 1.8 per cent., respectively.
Fast growing fee- and commission-based business
It has been an important strategic focus for the Bank to grow its fee- and commission-based business. The Bank’s integrated branch and electronic banking network and increasingly diversified product and service portfolio have enabled it to successfully develop its fee- and commission-based business. For the year ended 31 December 2015, the Bank’s net fee and commission income was CNY82.5 billion. Through product
— 69 — innovation, resources sharing among the Bank’s different business segments and cross-selling efforts, the Bank has been able to maintain its strengths in settlement, asset custody, bank cards and bancassurance businesses.
As at 31 December 2015, the Bank’s assets under custody reached CNY7,145.1 billion, among which, the value of its insurance assets under custody was the highest among all commercial banks in China. In addition, the Bank has maintained a consistently high ranking in terms of the total number of bank cards issued as at the end of each year from 2006 to 2015. The Bank had issued approximately 813 million debit cards as at 31 December 2015 and its “Kins Card” (金穗卡) brand is widely recognised in the PRC. For the year ended 31 December 2015, the Bank maintained its leading position in the bancassurance market and collected CNY198.6 billion in new insurance premiums and recorded CNY4.8 billion in fees and commissions from the Bank’s bancassurance business. The Bank has ranked first by market share among the Large Commercial Banks for six consecutive years in terms of revenue.
Furthermore, given the Bank’s large and diversified customer base, it has experienced a rapid growth in certain new business areas. For the year ended 31 December 2015, fees and commissions income from its bank card service and agency service reached CNY20.7 billion and CNY28.6 billion, respectively, representing an increase of 7.3 per cent. and 24.8 per cent. over the year ended 31 December 2014. In addition, the Bank has also taken initiatives in new business areas that it believes present strong growth potential, such as asset management, wealth management and investment banking. The Bank was one of the first banks to offer CBRC-approved Renminbi-denominated wealth management products among approximately 100 banking institutions in China that currently offer such wealth management products. In addition, the Bank was one of the first banks licensed to provide custodian services to mutual funds.
Continuously enhanced risk management and internal control capabilities
In recent years, the Bank has strengthened its risk management and internal control capabilities by improving its policies and procedures and introducing advanced risk management tools. The Bank has adopted a prudent risk management strategy and continued to enhance its risk management organisational structure, in order to create a centralised risk management system and an independent and effective risk management function. In 2015, the Bank implemented a comprehensive, balanced and effective risk management strategy, adhered to a prudent and innovative risk appetite, strengthened its comprehensive risk management concept and improved its comprehensive risk management system. The Bank also identified the responsibilities of risk management and enhanced risk management in key areas of credit risk, formulated the policies for annual capital transactions and market risk management, optimised the system of market risk limit indicators, strengthened prevention and control of case and operational risks and conducted special assessments of counter business, third-party payment and other risks.
The Bank has continued to enhance its credit risk management system. In this context, the Bank has adopted industry-specific credit guidelines and a customer list-based management system, and implemented a standardised authorisation and credit approval process, where credit applications are reviewed by dedicated professionals. The Bank has further refined its risk management tools and systems by adopting credit limits with respect to its exposure to borrowers, developing a risk reporting system and implementing a 12- category loan classification system and adopting a customer credit rating system for corporate loans. The Bank has developed a plan to implement New Basel Capital Accord and upgrade its internal rating-based system for its customers. The Bank has also expanded the use of economic capital management tools from credit risk management to market risk and operational risk management, further reinforced the implementation and application of the advanced approach of capital management and conducted financial stability stress tests in coordination with the PBOC and the CBRC. In addition, the Bank has strengthened on-going monitoring and regular validation of its internal retail rating system and improved the accuracy and prudence of the rating for non-retail clients and retail clients. The Bank also promoted the application of the
— 70 — Internal Models Approach and enhanced its compliance evaluation, as well as applied the Advanced Measurement Approach for operational risk to economic capital measurement and optimised its models in order to improve the stability and sensitivity of the economic capital models.
The Bank also established and improved its internal control and compliance management system and internal audit system. These systems have enabled it to enhance its internal control and compliance management capabilities, strengthen its designated internal audit function and reduce operational risks and incidences of fraud and other non-compliance.
Leading information technology platform
The Bank believes that it has one of the most advanced information technology platforms among all commercial banks in China. The Bank accomplished data centralisation in 2006 and has gradually established a centralised computer network system which, through its national data centre, covers nationwide branch outlets and links teller terminals throughout China. In 2010, the Bank completed the construction project of a new-generation core banking system and IT infrastructure, core business system as well as basic data platform.
By establishing an information technology system which effectively integrates the Bank’s customer service channels, including physical counters, internet banking, customer service system, phone banking, mobile phone banking and information platforms, the Bank is able to provide its management team with certain financial and operational data on a T+1 basis and better serve its customers in an efficient and effective manner. The Bank has also focused on calibrating its information systems to meet the requirements of its County Area Banking Business and strengthen its information technology capabilities in support of its continued expansion in the County Areas.
Experienced management team with a proven track record
The Bank has an energetic, experienced and entrepreneurial management team with an established proven track record in the financial services industry. The Bank’s President, Mr. ZHAO Huan, has more than 15 years of experience in the financial industry and has served as executive vice president of China Construction Bank since March 2011 and successively as executive director of China Everbright Group Limited and China Everbright Group Ltd. and executive director and president of China Everbright Bank Company Limited (listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange under stock codes: 06818 and 601818, respectively) since January 2014. The Chairman of the Bank’s Board of Supervisors, Mr. YUAN Changqing, has extensive experience in supervising financial institutions and previously served as president of the Xinjiang and Henan branches of the Industrial and Commercial Bank of China. The Bank’s senior management team have on average over 20 years of professional experience in the financial industry. All members of the Bank’s management team have in-depth knowledge of banking operations and management and, through their working experience with the Bank and at other Chinese financial institutions, have gained an in-depth understanding of China’s macroeconomic environment, its banking industry and the financial system in China’s County Areas in particular.
The Bank’s experienced management team has demonstrated a track record of successfully implementing a series of transformational initiatives, including the Bank’s financial restructuring and the improvement of the Bank’s corporate governance and risk management. Under the leadership of its management team, the Bank has significantly improved its operations and financial results, and is moving toward its goal of becoming a world-class commercial bank.
— 71 — THE BANK’S STRATEGIES
By leveraging its leading positions in both Urban Areas and County Areas, the Bank believes it will become a world-class financial institution through the successful implementation of the following strategies.
Support the development of “One Belt and One Road” through global financial services
To align with the PRC government’s “One Belt and One Road” policy, the Bank formulated the “Opinions on the Implementation of ‘One Belt and One Road’ Strategy” to tons on supporting relevant projects, including international agricultural cooperation, infrastructures interconnectivity, investments in energy and resources. Meanwhile, the opinions specified supporting policies on the establishment of overseas institutions, expansion of “Go Out” customer base and financial services system construction, to satisfy financial needs of “Go Out” enterprises overseas.
For the year ended 31 December 2015, the Bank handled business related to “Go Out” enterprises of more than USD28,000 million in over 80 countries and regions, including business of over USD5,000 million involving countries located along “One Belt and One Road”.
Further strengthen the Bank’s leadership in the Urban Areas
The Bank plans to further strengthen its leadership in the Urban Areas by focusing on key customers and selected geographical regions and promoting innovative, high value-added products and services. Specifically:
• The Bank plans to further develop its business in the more economically developed regions, such as the Yangtze River Delta, Pearl River Delta and Bohai Rim, focusing on key cities and other areas with abundant financial resources, such as provincial capitals and regional centres.
• The Bank will continue to focus on large and high-quality customers in its corporate banking business, including industry-leading companies, large state-owned enterprises and Chinese subsidiaries of global Fortune 500 companies, while maintaining its leadership in the SME segment. In addition, the Bank plans to tailor its sales and marketing efforts to industry sectors with significant growth potential.
• The Bank will further upgrade its outlets and strengthen its customer segmentation capabilities to enhance cross-selling in its retail banking business. The Bank aims to achieve higher returns through continued focus on high-growth business areas, such as wealth management and private banking.
Solidify the Bank’s dominant position in the County Areas
The Bank believes that China’s vast, fast-growing County Areas present significant growth potential and will be a key driver for China’s long-term economic growth. The Bank has a business unit dedicated to the County Area banking market. The Bank intends to leverage its dominant market position and its first-mover advantage, to strengthen its presence and customer penetration in the County Areas, which the Bank believes will deliver more significant profit contribution. Specifically:
• The Bank intends to capture opportunities arising from the urbanisation and industrialisation process to provide customers in the County Areas, particularly industry-leading companies in the County Areas as well as their suppliers, customers and distributors, with comprehensive financial products and services.
— 72 — • The Bank aims to meet the needs of mid- to high-end retail customers in the County Areas, and to leverage its “Huinong Card” (惠穗卡) to develop businesses related to new rural pension insurance and new rural cooperative medical insurance schemes.
• The Bank plans to leverage its extensive electronic distribution channels to expand its coverage in the County Areas, provide its customers in the County Areas with more convenient and user-friendly services and increase its operational efficiency in the County Areas.
• The Bank will continue to allocate additional resources to selected sub-branches in the County Areas to drive the growth of its business in the County Areas.
Diversify the Bank’s revenue mix by expanding its product and service offerings
The Bank intends to further diversify its revenue sources and increase its overall revenue by expanding its product and service offerings, particularly fee- and commission-based business, through the following efforts.
• The Bank aims to leverage its extensive distribution network to strengthen its leading position in bank cards, settlement, insurance agency and custody services.
• The Bank also intends to further expand emerging business areas, such as asset management, investment banking, financial leasing and rural insurance.
In addition to expanding its product and services portfolio, the Bank intends to adopt a more sophisticated pricing mechanism by taking into account several factors, including market competition and customer risk profiles.
Continuously upgrade the Bank’s multi-channel distribution network
The Bank aims to upgrade its multi-channel distribution network. The Bank believes that its upgraded outlets and improved electronic banking will enable it to further enhance its operational efficiency and profitability.
• The Bank plans to continue to upgrade its outlets, allocate separate space to different service functions and streamline the business operations to increase its operational efficiency and marketing capability.
• The Bank intends to continue its efforts to upgrade certain of its branch outlets, including establishing more high-end wealth management centres to develop its wealth management business, and provide a wider range of products and services to its customers.
• In electronic banking, the Bank intends to leverage its leading information technology platform to expand its service offerings and improve its service quality, while at the same time increasing efficiency.
Continuously strengthen the Bank’s risk management and internal control capabilities
The Bank seeks to continue to enhance its risk management and internal control capabilities by:
• continuing to focus on implementing a comprehensive risk management strategy characterised by a sound governance structure, independent credit risk management and strong risk management culture shared by all its employees;
— 73 — • proactively preparing for the implementation of Basel II/Basel III guidelines, applying advanced risk management tools, upgrading related information technology system and continuously enhancing its risk identification, measurement, monitoring and control capabilities; and
• further streamlining its internal control organisation structure, continuously examining and improving its internal control policies and procedures and supervising and evaluating the implementation of such policies and procedures to enhance the effectiveness of its internal control system.
Attract, motivate and develop talented and experienced professionals
The Bank believes that a key to its success is its ability to recruit, retain, motivate and develop talented and experienced professionals. The Bank intends to:
• continue to enhance its human resources management to meet its growth plans and its business needs;
• continue to focus on the recruitment and cultivation of a high-quality and professional workforce, provide training and development programmes for its employees to enhance their professional knowledge and capabilities, and create a collegial culture that promotes its employees’ personal and professional development; and
• continue to improve its management and employee incentive programmes, including an enhanced economic value-added based incentive scheme, to align compensation with employee performance.
RECENT DEVELOPMENTS
On 28 April 2016, the Bank published its unaudited financials as at and for the three months ended 31 March 2016 on the website of Hong Kong Stock Exchange (the “2016 First Quarter Financials”).
As at 31 March 2016, the Bank’s deposits with banks and other financial institutions, total assets, total liabilities and total shareholders’ equity amounted to CNY684,615 million, CNY18,413,470 million, CNY17,150,375 million and CNY1,263,095 million, respectively. For the three months ended 31 March 2016, the Bank’s operating income, operating profit and net profit amounted to CNY139,030 million, CNY69,078 million and CNY54,568 million, respectively.
Save for the financial information disclosed in the preceding paragraph, the 2016 First Quarter Financials are not included in and do not form a part of this Offering Circular. None of the 2016 First Quarter Financials have been audited or reviewed by the Group’s independent accountants, or any other independent accountants and may be subject to adjustments if audited and reviewed. Consequently, potential investors must exercise caution when using such data to evaluate the Bank’s financial condition and results of operations.
— 74 — THE BANK’S PRINCIPAL BUSINESSES
The Bank’s business segments consist of corporate banking, retail banking, treasury operations and other operations. The following table sets forth, for the periods indicated, the Bank’s operating income by business segments.
For the year ended 31 December 2013 2014 2015 Amount % of total Amount % of total Amount % of total (in CNY millions, except for percentages) Corporate banking ...... 253,092 54.3 280,701 53.6 275,396 50.9 Personal banking ...... 180,223 38.7 189,876 36.2 196,679 36.4 Treasury operations ...... 27,916 6.0 45,686 8.7 55,756 10.3 Others ...... 4,540 1.0 7,863 1.5 13,031 2.4
Total operating income . . . 465,771 100.0 524,126 100.0 540,862 100
Corporate Banking
Corporate banking constitutes the Bank’s primary source of income and has consistently contributed more than half of its total operating income. The Bank offers a broad range of corporate banking products and services to corporations and other entities, including state-owned enterprises, private enterprises, foreign- invested enterprises and government agencies, which the Bank collectively refers to as its corporate banking customers. Over the year of 2015, the Bank proactively coped with the “new normal” of the economic development and further promoted the transformation of corporate banking business. Closely following the national industrial policies, the Bank strongly supported infrastructure construction projects such as highway, railway and power generation facilities, and chose good projects in strategic emerging industries such as advanced manufacturing industry and energy-saving and environmental protection industry. Serving to the regional development strategies of the PRC government, the Bank formulated policy to facilitate the synergetic cooperation between the regional businesses in Yangtze River Delta and Pearl River Delta to support the development of corporate business in these key regions.
The Bank’s corporate banking business consists primarily of corporate lending, discounted bills, corporate deposits, clearing and settlement services, cash management, investment banking, custody services, corporate treasury services, guarantee services, third-party depository and futures margin depository and other agency services. Corporate banking accounted for 54.3 per cent., 53.6 per cent., and 50.9 per cent. of its total operating income in the years ended 31 December 2013, 2014 and 2015, respectively. The Bank’s domestic corporate loans accounted for 65.4 per cent., 63.6 per cent. and 60.4 per cent. of its total loans, and its domestic corporate deposits accounted for 36.5 per cent., 35.4 per cent. and 35.6 per cent. of its total deposits from customers as at 31 December 2013, 2014 and 2015, respectively.
Customer base
As at 31 December 2015, the Bank had approximately 3.64 million corporate banking customers, of which approximately 74,000 had outstanding loans.
As at 31 December 2015, the Bank’s major corporate loan customers were concentrated in (i) manufacturing; (ii) transportation, logistics and postal services; (iii) real estate; (iv) retail and wholesale and (v) production and supply of power, heat, gas and water; represented 25.4 per cent., 16.6 per cent., 9.8 per cent., 9.4 per cent. and 11.0 per cent. of its total corporate loans outstanding, respectively.
— 75 — In addition to expanding its customer base, the Bank has focused on optimising its customer mix by developing relationships with large state-owned enterprises, industry-leading companies and government agencies.
Major products and services
Corporate loans
Corporate loans have historically constituted the largest component of the Bank’s loan portfolio. The Bank’s corporate loans include working capital loans, real estate development loans, project loans, trade finance products, small business loans and syndicated loans. The Bank’s corporate loans consist substantially all of its Renminbi-denominated loans. As at 31 December 2013, 2014 and 2015, the Bank had CNY4,728.9 billion, CNY5,147.4 billion and CNY5,378.4 billion in domestic corporate loans outstanding, respectively, accounting for 65.4 per cent., 63.6 per cent. and 60.4 per cent. of its total loans for the same periods, respectively.
Discounted bills
Discounted bills refer to the Bank’s discounted purchase of bank acceptance bills and commercial acceptance bills with a remaining maturity of less than six months. Bill discounting is a form of short-term financing provided to corporate customers. The Bank may resell these bills to the PBOC or other financial institutions authorised to conduct bill discounting, providing it with additional liquidity and spread income. As at 31 December 2013, 2014 and 2015, the Bank had domestic discounted bills of CNY92.8 billion, CNY157.3 billion and CNY357.0 billion outstanding, respectively, representing 1.3 per cent., 1.9 per cent. and 4.0 per cent. of its total loan portfolio for the same periods, respectively.
Corporate deposits
The Bank offers its corporate customers time and demand deposits in Renminbi and major foreign currencies. In addition, the Bank offers a call deposit product that bears a higher interest rate than those of demand deposits but also retains some of the flexibility of demand deposits by allowing its customers to withdraw money with one or seven days’ prior notice. As at 31 December 2013, 2014 and 2015, the Bank had domestic total corporate deposits of CNY4,311.4 billion, CNY4,437.3 billion and CNY4,821.8 billion, respectively.
Fee- and commission-based products and services
The Bank provides its corporate customers with a broad range of fee- and commission-based products and services, including settlement services, cash management, investment banking, custody services, corporate treasury services, guarantee services, agency services and depositary services for securities transaction clearing fund and futures margin. As the Bank has focused on developing and offering fee- and commission- based corporate banking products and services in recent years, this segment of its corporate banking business has grown significantly and generated net fee and commission income of CNY47.0 billion, CNY43.4 billion and CNY41.4 billion in the years ended 31 December 2013, 2014 and 2015, respectively.
Settlement services
The Bank offers broad and convenient settlement services through a wide range of channels such as bank counters, Internet banking, phone banking, ATMs and POS. By leveraging its strength in traditional settlement services, the Bank continues to promote the usage of electronic settlement accounts, through
— 76 — which its customers can settle payments online. As at 31 December 2015, the Bank had approximately 4.5 million Renminbi-denominated corporate settlement accounts, representing an increase of 6.5 per cent. over 31 December 2014.
The Bank’s international settlement services include documentary letters of credit, documentary collection, remittances and clean collection. The Bank has developed a centrally-managed global transaction system (GTS) for international settlement to further enhance its professional services. For the years ended 31 December 2013, 2014 and 2015, the international settlement volume of the Bank’s domestic branches totalled U.S.$781.1 billion, U.S.$902.1 billion and U.S.$1,000.7 billion, respectively.
The Bank has traditionally been a leading participant in cross-border trade settlement in Renminbi and was one of the first banks to introduce this service. For the year ended 31 December 2015, the Bank’s transaction volume for cross-border Renminbi trade settlement rose to approximately CNY1,277.3 billion.
Cash management
The Bank provides integrated cash management services to its corporate customers for their liquidity management, including account management, information services, collection and disbursements, trade settlement, investment and financing services. Cash management services are particularly useful for large companies that need to centrally manage their cash flow across many locations or subsidiaries. In 2015, the Bank adjusted the classification of cash management customers to include customers of settlement package, golden account and account supervision services. As at 31 December 2013, 2014 and 2015, the Bank had approximately 254,000, 342,000 and 809,500 cash management customers, respectively.
Investment banking
The Bank provides investment banking services to its corporate customers and engages in financial advisory services, restructuring and acquisition services, underwriting of debt instruments such as commercial paper and medium-term notes, fixed-income investment advisory services and asset securitisation advisory services.
Through its financial advisory service platform, the Bank provides its customers with financial advice, business plan formulation and in-depth industry and financial markets analysis. The Bank actively promotes product innovation in investment banking, such as the introduction in the PRC of the first foreign currency- denominated medium-term note, the first private company medium-term notes and the pilot test of collective notes for rural and agricultural small businesses. The Bank has received numerous awards for its investment banking business, including “Best Investment Banking Institution” for the seventh consecutive year from 2009 to 2015, “Best Syndicated Financing Bank” from 2011 to 2015 and other awards including “Best Bond Underwriting Bank”, “Best Financial Advisory Bank” and “Best Private Debt Bank” by Securities Times, as well as various awards such as “Best Syndicate Development” and “Best Syndicated Deal” by the China Banking Association in 2012 and 2013, “Best Bond Underwriting Bank” by Global Finance in 2013 and “Best Investment Banking Business” by CFO World in 2012 and 2013. In 2015, in the appraisal campaign of annual syndicated loans organised by China Banking Association, the Bank won the “Best Development Award” and the “Best Transaction Award”. The Bank was also named as an “Outstanding Sponsor of Asset- backed Securities” by China Central Depository & Clearing Co., Ltd.
Custody services
The Bank has one of the most comprehensive custody services among all commercial banks in China. Assets under custody primarily include assets of investment funds, insurance assets, corporate annuities, investments managed by QFIIs and QDIIs, certain customer assets of fund management companies, collective investment scheme funds managed by securities firms and private equity funds. The Bank’s
— 77 — custody services include custody, fund clearing, asset valuation, investment monitoring and custody reporting services. In addition, the Bank offers value-added services, such as providing market information, research reports and tax consultation. The Bank seeks to continuously streamline the business process and enhances the effectiveness and soundness of its internal control systems in respect of custody services on an ongoing basis and has successfully passed SAS70 international authentication for internal control. In the appraisal campaign of Chinese bond market members in 2015 organised by China Central Depository & Clearing Co., Ltd, the Bank won the “Excellent Custody Institution Award”.
The Bank is the largest insurance assets custodian in China. As at 31 December 2013, 2014 and 2015, the Bank had CNY3,585.9 billion, CNY4,964.0 billion and CNY7,145.1 billion in assets under custody, respectively, of which CNY1,707.1 billion, CNY1,926.8 billion and CNY2,379,2 billion was insurance assets. For the years ended 31 December 2013, 2014 and 2015, the Bank’s custodian and other fiduciary service fees amounted to CNY3,338 million, CNY3,114 million and CNY2,857 million, respectively.
Pension business
The Bank started its pension fund custody business in 2008, which has developed to cover corporate annuities, pension funds for farmers and social security funds. As at 31 December 2013, 2014 and 2015, pension funds under custody amounted to CNY208.2 billion, CNY263.3 billion and CNY318.3 billion, respectively.
Corporate wealth management
For the year ended 31 December 2015, the balance of the Bank’s corporate wealth management products amounted to CNY561.1 billion. The Bank’s products such as “An Xin Kuai Xian” open-ended series products, “Ben Li Feng Corporate Series Products”, “An Xin De Li Corporate Series Products” and “Hui Li Feng Corporate Series Products” and “KaiYang” equity series products gained positive feedback from customers for their stable yields and flexible maturities. The number of contracted customers for wealth management steadily increased during 2014 and 2015.
Guarantee services
The Bank provides surety services for its corporate banking customers primarily through performance guarantees, bid guarantees, prepayment guarantees and quality guarantees.
Third-party depositary and futures margin depositary
The Bank offers third-party depository services to securities firms in respect of settled funds for securities trading and to futures companies and exchanges in respect of futures margins. As at 31 December 2015, the Bank had offered third-party depositary services to 98 securities firms. As at 31 December 2013, 2014 and 2015, the Bank’s contracted customers reached 13.9 million, 15.4 million and 25.2 million, respectively. For the years ended 31 December 2013, 2014 and 2015, the aggregate average daily balance of funds deposited from securities firms amounted to CNY66.6 billion, CNY88.6 billion and CNY275.8 billion, respectively.
The Bank has established business relationships with three major domestic commodities and futures exchanges as well as the China Financial Futures Exchange. As at 31 December 2015, the Bank had offered margin depositary service to 147 domestic futures brokerage companies, with outstanding margin deposit amounting to CNY27.1 billion.
— 78 — Other products and services
In addition to the products and services described above, the Bank cooperates with other banks and non-banking institutions and participates in factoring, mutual and common entrustment.
Marketing
The Bank’s head office is responsible for formulating the Bank’s overall corporate business development plans and establishing the Bank’s general marketing guidelines based on industry, geographical region, customer and product considerations. The Bank’s tier-1 branches develop detailed marketing plans tailored to key regions, customers and businesses based on these guidelines.
The Bank conducts customer segmentation to implement differentiated marketing strategies. The Bank classifies its key customers into three categories and assigns them to the head office, tier-1 branches and tier-2 branches, respectively. The Bank employs marketing strategies customised for specific customers and markets. The Bank strategically allocates more resources to certain of its tier-1 and tier-2 branches and encourages them to grant more flexibility to their sales department catering to local market.
Marketing for corporate banking is conducted primarily by the Bank’s relationship and product managers across different departments. The Bank promotes cooperation among the different departments and sets up matrix marketing and service programmes.
The Bank promotes individualised marketing and cross-selling to meet the specific needs of its customers. The Bank adopts a marketing model which focuses on using one principal product or service to drive the sales of additional products or services, namely a “1+N Model” to grow its business. Moreover, the Bank cooperates with securities firms, insurance companies and futures brokerage companies to develop third- party depositary, bancassurance and fund transfer businesses with futures companies to strengthen the interaction between corporate and retail banking.
Retail Banking
The Bank provides its retail banking customers with a broad range of products and services, including retail loans, bank cards, retail deposits, settlement, bancassurance, personal wealth management and other fee- and commission-based products and services.
For the years ended 31 December 2013, 2014 and 2015, the Bank’s retail banking business generated operating income of CNY180.2 billion, CNY189.9 billion and CNY196.7 billion, respectively, representing 38.7 per cent., 36.2 per cent. and 36.4 per cent. of its total operating income for the same periods, respectively.
As at 31 December 2013, 2014 and 2015, the Bank had domestic retail deposits of CNY6,923.6 billion, CNY7,422.3 billion and CNY8,065.6 billion, representing 58.6 per cent., 59.2 per cent. and 59.6 per cent. of its total deposits, and outstanding domestic retail loans of CNY2,093.3 billion, CNY2,396.6 billion and CNY2,727.9 billion, representing 29.0 per cent., 29.6 per cent. and 30.6 per cent. of its total loans.
As at 31 December 2015, the Bank issued 813 million debit cards, representing an increase of 88 million debit cards over the end of 2014 and ranking first among the Large Commercial Banks in terms of the number of cards issued. The Bank has maintained a consistently high ranking among all commercial banks in China in terms of the total number of bank cards issued from 2006 to 2015.
— 79 — Customer base
As at 31 December 2015, the Bank had over 474 million retail banking customers, including more than 25 million retail VIP customers. The following table sets forth certain information about the number of retail customers of the Bank as at or for the periods ended on the dates indicated.
As at or for the year ended 31 December 2013 2014 2015 Retail customers Number of individual customers (in millions) ...... 440 456 474 Number of individual VIP customers (in millions) . . . 19 22 25
Major products and services
Retail loans
As at 31 December 2013, 2014 and 2015, the Bank had a total of CNY2,093.3 billion, CNY2,396.6 billion and CNY2,727.9 billion, respectively, in domestic retail loans outstanding, which accounted for 29.0 per cent., 29.6 per cent. and 30.6 per cent. of its total loans.
Residential mortgage loans
The Bank provides its customers with floating-rate residential mortgage loans, fixed-rate residential mortgage loans and hybrid-rate residential mortgage loans. The Bank’s residential mortgage loans are generally secured by the underlying property being purchased. As at 31 December 2013, 2014 and 2015, the Bank’s residential mortgage loans outstanding amounted to CNY1,292.0 billion, CNY1,550.7 billion and CNY1,927.0 billion, respectively, which accounted for 61.7 per cent., 64.7 per cent. and 70.7 per cent. of its total domestic retail loans outstanding for the same periods, respectively.
Personal consumption loans
The Bank provides a variety of personal consumption loans including personal credit lines, consumer auto loans, comprehensive consumer loans and retail loans secured by pledges. As at 31 December 2015, the Bank had CNY179.5 billion of personal consumption loans outstanding, representing 6.6 per cent. of its total domestic retail loans.
Loans to private businesses
Loans to private businesses are generally granted to private business owners to meet their funding needs arising from their operations, primarily including loans to finance the operations of private businesses, commercial mortgage loans to private businesses and auto loans to private businesses. As at 31 December 2013, 2014 and 2015, the Bank had CNY255.8 billion, CNY263.1 billion and CNY230.2 billion in loans to private businesses outstanding, respectively, which accounted for 12.2 per cent., 11.0 per cent. and 8.4 per cent. of its total domestic retail loans outstanding for the same periods, respectively.
Overdraft on personal bank cards
The Bank’s credit card and quasi-credit card customers are allowed to withdraw or overdraft through its credit consumption function. As at 31 December 2013, 2014 and 2015, the outstanding overdraft amounts for the Bank’s personal bank cards totalled CNY194.3 billion, CNY222.9 billion and CNY222.2 billion, respectively, which accounted for 9.3 per cent., 9.3 per cent. and 8.1 per cent. of its total domestic retail loans outstanding for the same periods, respectively.
— 80 — Other retail loans
The Bank offers other types of retail loans to customers, such as loans to rural households and education loans. As at 31 December 2013, 2014 and 2015, the Bank’s outstanding amount for these types of retail loans was CNY148.6 billion, CNY156.4 billion and CNY169.0 billion, respectively, which accounted for 7.1 per cent., 6.5 per cent. and 6.2 per cent. of its total domestic retail loans outstanding for the same periods, respectively.
Bank cards
The Bank offers integrated card products and services to personal customers under the brand name “Kins Card”, which consists of Renminbi-denominated debit cards, credit cards and quasi-credit cards and dual- currency credit cards denominated in Renminbi and U.S. dollars. The following table sets forth certain information about the debit card and credit card businesses of the Bank as at or for the periods ended on the dates indicated.
As at or for the year ended 31 December 2013 2014 2015 Debit card business Number of debit cards issued (in millions) ...... 637 725 813 Transaction volume (in CNY billions) ...... 5,518 6,693 6,702 Credit card business Number of credit cards issued (in millions) ...... 40 47 53 Transaction volume (in CNY billions) ...... 798 987 1,147
As at 31 December 2015, the Bank had issued 813 million debit cards. For the year ended 31 December 2015, total transaction volume for the Bank’s debit cards reached CNY6,702.4 billion. As at 31 December 2015, the Bank had issued 53 million credit cards. For the year ended 31 December 2015, total transaction volume for the Bank’s credit cards reached CNY1,146.7 billion. As at the same date, the Bank’s dedicated credit card merchants network had approximately 1,020.3 thousand members. For the years ended 31 December 2013, 2014 and 2015, the total fees and commissions generated by the Bank’s bank card business were CNY15.9 billion, CNY19.3 billion and CNY20.7 billion, respectively.
The Bank is one of the founding members of China Unionpay, the Chinese bank card network organisation. The Bank’s bank cards are accepted through its own network in China and the domestic and overseas network of China Unionpay. The Bank’s dual-currency credit cards are also accepted outside of China through MasterCard and VISA networks.
Retail deposits
The Bank offers retail demand deposits and time deposits in Renminbi and foreign currencies to its retail banking customers. Retail demand deposits include general demand deposits and flexible-term deposits.
Retail time deposits consist of general time deposits, call deposits, education savings deposits, and deposits and withdrawals in lump sums, deposits in instalments while withdrawing in lump sums and time deposits with periodic interest payments that can be withdrawn on demand. The Bank currently offers regular time deposit products with terms ranging from three months to five years for Renminbi-denominated deposits and one month to two years for foreign currency-denominated deposits.
— 81 — As at 31 December 2013, 2014 and 2015, the Bank had domestic retail deposits of CNY6,923.6 billion, CNY7,422.3 billion and CNY8,065.6 billion, which accounted for 58.6 per cent., 59.2 per cent. and 59.6 per cent., respectively, of its total deposits. The Bank is one of the leading commercial banks in China in terms of market share expansion.
Fee- and commission-based products and services
The Bank offers retail banking customers products and services, such as bancassurance, personal wealth management, personal settlement and agency sales of PRC government bonds, fund products and physical gold. For the years ended 31 December 2013, 2014 and 2015, the Bank’s net fee and commission income relating to its retail banking business amounted to CNY35.1 billion, CNY35.6 billion and CNY40.0 billion, respectively.
Bancassurance
The Bank distributes insurance policies as an agent for insurance companies. The Bank has been actively expanding its relationships with insurance companies.
For the year ended 31 December 2015, the Bank collected CNY198.6 billion in new insurance premiums and CNY4.8 billion in total income from its bancassurance business. The Bank ranked first among major commercial banks in China in terms of income from bancassurance for the same period, further consolidating its leading position.
Distribution of fund products
In collaboration with fund management companies and securities firms, the Bank distributes various fund products as an agent. For the year ended 31 December 2015, the Bank acted as an agent for the issuance of CNY405.5 billion in cumulatively distributed fund products.
Personal wealth management services
The Bank has a comprehensive portfolio of products for its personal wealth management services. The Bank’s wealth management products received honours such as “Golden Bull Wealth Management Products Award for 2013 (Guaranteed Profit, Net Value)” awarded by China Securities Journal, “The Best Bank Wealth Management Products for 2013” and “Outstanding Wealth Management Brand for 2013” awarded by Shanghai Securities News. The Bank was rewarded “The Best Steady Income-Based Wealth Management Product for 2014” for “An Xin De Li”, “The Best Structural Wealth Management Product for 2014” for its aggressive series products and “The Best Innovative Wealth Management Product” for “An Xin De Li- Ru Yi Equity Index Derivatives” by Shenzhen Secutimes.
Agency sales of PRC government bonds
In the year ended 31 December 2015, the Bank acted as an agent for the issuance of 14 batches of saving treasury bonds, comprising four batches of certificated saving treasury bonds with actual sales of CNY15.9 billion and 10 batches of electronic saving treasury bonds with actual sales of CNY22.9 billion. The Bank was granted the award of “Outstanding Underwriters of PRC Government Bonds in Book Entry Form” by the MOF and the PBOC in 2012.
— 82 — Settlement services
The Bank offers settlement services to its retail banking customers, including Renminbi- and foreign currency-denominated money transfer and remittance services, collection services and settlement of cashier’s checks, bank drafts and checks. The Bank also provides settlement services to merchants in respect of payments made with debit cards, credit cards and quasi-credit cards. As at 31 December 2015, the Bank provided such settlement services to approximately 1,020,300 dedicated credit card merchants.
Physical gold trading agency
As an agent of gold business, the Bank is engaged in physical gold trading at designated outlets. The Bank is one of the first banks in the PRC to provide physical gold trading services to retail banking customers.
Treasury operations
The Bank’s treasury operations consist primarily of (i) money market activities, (ii) investment and trading activities, (iii) treasury transactions on behalf of customers, and (iv) precious metal trading and other businesses. In conducting its treasury operations, the Bank seeks to ensure its liquidity and achieves a balance between returns and risks on its investment portfolio, taking into consideration various factors including the market and macroeconomic conditions. As at 31 December 2015, operating income from the Bank’s treasury operations was CNY55.8 billion.
Money market activities
The Bank’s money market activities primarily consist of (i) inter-bank money market activities, repurchase and reverse repurchase transactions and (ii) public market bidding, including bidding for repurchase and reverse repurchase transactions by the PBOC, PBOC bills and national treasury cash administration. The securities underlying the Bank’s inter-bank repurchase and reverse repurchase transactions are predominantly Renminbi-denominated PRC government and policy bank bonds, bank acceptance bills and PBOC bills, with a portion of foreign currency-denominated bonds primarily issued by foreign governments and agencies.
The Bank was one of the first banks to be approved by the PBOC to provide SHIBOR quotes. As one of the SHIBOR-quoting banks, the Bank provides daily quotes based on its own liquidity and capital supply and demand. For the year ended 31 December 2015, the Bank’s Renminbi-denominated financing transactions amounted to CNY25,626.1 billion.
Investment and trading activities
As at 31 December 2015, the Bank’s net investment in securities and other financial assets amounted to CNY4,512.0 billion, representing an increase of CNY936.4 billion compared to 31 December 2014.
Trading activities
The Bank purchases and sells various highly-liquid debt securities and bills for trading purposes, from which the Bank seeks to obtain short-term profits. The Bank primarily invests in debt securities issued by the PRC government, PBOC bills and debt securities issued by foreign governments. The Bank classifies such trading securities as financial assets at fair value through profit or loss, and the Bank employs strict stop-loss and other limits for such trading transactions.
In addition, the Bank hedges its investment risks through the purchase of derivative financial instruments, such as interest rate swap contracts.
— 83 — Investment activities
The Bank sets the target returns on available-for-sale financial assets, held-to-maturity investments and receivables, principally through its assessment of the interest rate, exchange rate, credit, liquidity, macroeconomic trends and other risks associated with the investment. In the domestic market, the Bank primarily invests in debt securities issued by the PRC government, PBOC bills, debt securities issued by the policy banks and, to a lesser extent, debt securities issued by other financial institutions and non-financial institutions. In light of the global macroeconomic environment, a substantial portion of the Bank’s debt securities denominated in foreign currencies are short-term.
Treasury transactions on behalf of customers
The Bank is one of the first commercial banks in China approved to provide forward settlement services and other financial derivative products. The Bank also engages in a broad range of treasury transactions on behalf of its corporate and retail banking customers. In addition, the Bank provides settlement, foreign currency trading, foreign currency derivatives trading and treasury services on behalf of its customers through its treasury operations. The Bank actively developed Renminbi settlement services to capitalise on the appreciation of Renminbi. For the year ended 31 December 2015, the transaction volume of the Bank’s exchange settlement on behalf of customers reached U.S.$287.8 billion, and that of foreign exchange trading on behalf of customers amounted to U.S.$14.7 billion.
Precious metal business
The Bank has steadily developed its precious metal agency business. To meet the demands of different customers for risk hedging and investments, the Bank introduced precious metal forward business and precious metal leasing business to its customers, accelerated the research and development of agency retail spot deferred trading system and gold passbook product, and launched the system development for retail paper gold (silver) business. Targeting at retail, corporate and institutional customers, the Bank sped up the establishment of precious metal business system, focusing on the development of products, financing and services. In 2014, the Bank was among the first batch of banks to obtain the international membership of Shanghai Gold Exchange and the qualification for settlement on its international board. In 2013, the Bank won the Outstanding Member Award, the Outstanding Award of Statistics and Supervision on Gold Market by the Shanghai Gold Exchange and “Enterprises with Top 10 Gold Trading Volumes” by the China Gold Association.
OVERSEAS OPERATIONS
The Bank conducts its overseas operations through its overseas branches, representative offices and subsidiaries. As at 31 December 2015, we had nine overseas branches and three overseas representative offices, namely the Hong Kong, Singapore, Seoul, New York, Dubai, Tokyo, Frankfurt, Sydney and Luxembourg branches and the Vancouver, Hanoi and Taipei representative offices. As at 31 December 2015, total assets of the Bank’s overseas branches and subsidiaries reached U.S.$109.7 billion, and the net profit was U.S.$604 million for the year ended 31 December 2015.
ABC International Holdings Limited and China Agricultural Finance Co., Ltd. are among the Bank’s wholly-owned subsidiaries incorporated in Hong Kong. ABC International Holdings Limited engages in investment banking activities through its operating subsidiaries, primarily corporate finance, securities brokerage, principal investments and fund management. The Bank has three additional overseas subsidiaries, namely Agricultural Bank of China (UK) Limited, Agricultural Bank of China (Luxembourg) Limited and Agricultural Bank of China (Moscow) Limited.
— 84 — The Bank’s overseas representative offices do not conduct business operations, and they primarily carry out liaison and information collection activities.
PRODUCTS AND SERVICES PRICING POLICY
The interest rates the Bank charges on its Renminbi-denominated loans are generally regulated by the PBOC. Effective on 20 July 2013, the PBOC removed the lower limit for new loans provided by commercial banks, except for new residential mortgage loans. With respect to interest rates for residential mortgage loans, the lowest interest rates the Bank can charge on residential mortgage loans is 70 per cent. of the PBOC benchmark interest rate of the same term. Interest rates for foreign currency-denominated loans are generally not subject to PRC regulatory restrictions, and the Bank is permitted to negotiate the interest rates on such loans.
The interest rates the Bank provides on its Renminbi-denominated deposits are generally regulated by the PBOC. Effective on 23 October 2015, the PBOC removed the upper limit on interest rates for deposits from customers. The Bank is permitted to provide negotiated time deposits to insurance companies, the National Council for Social Security Fund and Postal Savings Bank of China under certain circumstances. The Bank is also permitted to negotiate the interest rates on foreign currency deposits other than those denominated in U.S. dollars, Euros, Japanese Yen and HK dollars in an amount less than U.S.$3 million or equivalent.
With respect to fee- and commission-based business, certain services are subject to government guideline prices, such as basic Renminbi settlement services specified by the CBRC and the PBOC. The Bank’s Asset and Liability Management Committee is responsible for determining its pricing policies. In compliance with the provisions of applicable regulatory requirements, the Bank prices its products based on various criteria, such as the risk profile of its assets, an individual customer’s contribution to its business, its costs, the expected risk- and cost-adjusted returns and its internal fund pricing benchmarks. In addition, the Bank considers general market conditions and prices for similar products and services offered by its competitors.
Currently, the Bank’s tier-1 branches have implemented centralised treasury operations. Subject to the approval of the Bank’s Asset and Liability Management Committee, the Bank’s Asset and Liability Management Department determines the Bank’s internal transfer pricing benchmarks based on a number of factors, including prevailing interest rate trends in the China’s capital markets, the interest rate structure of the Bank’s deposits and loans, and the strategies and objectives set by the Bank’s Asset and Liability Management Committee.
The Bank’s Fee- and Commission-based Business Management Committee is responsible for the development of, and pricing policies applicable to, the Bank’s fee- and commission-based business. In principle, the Bank’s Fee- and Commission-based Business Management Committee adjusts the prices of fee- and commission-based products annually based on several factors, such as the Bank’s fee collection rate and changing market conditions.
DISTRIBUTION CHANNELS
The Bank’s distribution network consisted of 23,670 domestic branch and entities nationwide as at 31 December 2015 and is complemented by comprehensive electronic banking channels. The Bank provides its customers with convenient services through its multi-channel distribution network.
Branch Outlets
As at 31 December 2015, the Bank had 23,670 domestic branch outlets, including the head office, the business department of the head office, three specialised institutions managed by the head office, 37 tier-1 branches (including branches directly managed by the head office), 362 tier-2 branches (including business
— 85 — departments of branches in provinces), 3,513 tier-1 sub-branches (including business departments in municipalities, business departments of branches directly managed by the head office and business departments of tier-2 branches), 19,698 foundation-level establishments and 55 other establishments. The Bank’s head office is located in Beijing, and is responsible for the overall decision-making and management of the Bank. The Bank’s tier-1 branches are located in capital cities of provinces, autonomous regions and directly-controlled municipalities in China. The tier-1 branches serve as the regional head office managing all the branch outlets in the respective regions and directly report to the Bank’s head office. The Bank’s tier- 2 branches are generally located in prefectural-level cities within the provinces and autonomous regions. The tier-2 branches report to the respective tier-1 branches in each of the regions. In addition to carrying out their own operations, the Bank’s tier-2 branches are also responsible for the management of lower-tier branch outlets. The Bank’s tier-1 sub-branches are primarily responsible for the business operations and management of outlets and report to the tier-2 branches directly above them. The Bank’s other establishments are primarily branch outlets that provide financial services directly to customers but are not classified as any of the above categories.
The Bank’s branch outlets cover all of the provincial-level administrative regions, prefectural-level cities, and county-level administrative regions except Sansha. The Bank believes the Bank is the only Large Commercial Bank to have branch outlets covering all of the cities and most of the counties in China.
As at 31 December 2015, the percentage of the Bank’s deposits from County Areas and Urban Areas amounted to 57.2 per cent. and 42.8 per cent., respectively. The following table sets forth, for the periods indicated, the Bank’s domestic branch outlets by regions.
As at 31 December 2013 2014 2015 Number % of total Number % of total Number % of total Area (1) Head office ...... 8 0.0 8 0.0 8 0.0 Yangtze River Delta . . . . . 3,102 13.2 3,112 13.2 3,122 13.2 Pearl River Delta ...... 2,575 10.9 2,584 10.9 2,594 11.0 Bohai Rim ...... 3,344 14.2 3,369 14.3 3,386 14.3 Central China ...... 5,233 22.2 5,246 22.2 5,255 22.2 Northeastern China ...... 2,247 9.6 2,260 9.6 2,269 9.6 Western China ...... 7,038 29.9 7,033 29.8 7,036 29.7
Total ...... 23,547 100.0 23,612 100.0 23,670 100.0
Note:
(1) Includes the head office, Business Department Dealing with Discounted Bills, Big Client Department, Private Banking Department, Credit Card Centre, Changchun Training Institute, Tianjin Training Institute and Wuhan Training Institute.
The Bank accelerated the upgrade project of branch outlets, standardised the image of branch outlets, pushed forward the establishment of model branch outlets and wealth management centre and launched the new standard for branches’ image. The Bank has optimised the management procedures for the classification, arrangements and standardised establishment of branch outlets. The Bank accelerated the development and promotion of information management, management system of intelligent service and other transformation application systems.
— 86 — Rural Finance
The Bank has been dedicated to serving agriculture, rural areas and farmers. As at 31 December 2014, 75.2 per cent. of the administrative villages were covered by the Bank’s rural service points. As at the same date, 5,066 leading enterprises of agricultural industrialisation were supported by the Bank. Additionally, the Bank had CNY1,154 billion outstanding loans for rural urbanisation and CNY155 billion outstanding loans for farmers as at 31 December 2014, representing an increase of 7.7 per cent. and 5.3 per cent., respectively, compared to 31 December 2013. In 2014, the Bank sent 301 officials of its Zhejiang branch to townships to develop rural finance, assisted 800 large grain-producing counties in building water-saving projects, and helped 41,000 Tibetan households of farmers and herdsmen move into new homes.
As at 31 December 2015, the balance of deposits and loans (excluding discounted bills) for the Bank’s corporate customers in County Areas amounted to CNY1,615.8 billion and CNY1,829.6 billion, representing an increase of CNY114.3 billion and CNY92.5 billion, respectively, compared to 31 December 2014.
As at 31 December 2015, the balance of deposits and loans for the Bank’s retail banking business in County Areas amounted to CNY4,024.8 billion and CNY963.3 billion, representing an increase of CNY380.3 billion and CNY81.3 billion, respectively, compared to 31 December 2014.
The following table sets forth certain details regarding the interest spread between the Bank’s deposits and loans as at the dates indicated.
As at 31 December 2013 2014 2015 (%) Group ...... 4.25 4.21 3.71 County Area ...... 4.76 4.77 4.21
The following table sets forth certain additional information about the Bank’s County Area loans as at the dates indicated.
As at 31 December 2013 2014 2015
County Area loans (in CNY billions) ...... 2,348 2,652 2,860 Contribution of County Area loans to total loans (%) ...... 32.5 32.7 32.1
ELECTRONIC BANKING
The Bank provides its customers with secure, fast, flexible and efficient electronic banking services, including account management, cash deposit and withdrawal, money transfer and settlement, fee payment and investment and wealth management. The Bank offers these services 24 hours a day, seven days a week through Internet banking, phone banking, mobile phone banking and self-service banking.
For the year ended 31 December 2015, the Bank completed approximately 20.9 billion electronic transactions, representing an increase of 41.2 per cent. compared to the year ended 31 December 2014. The Bank received numerous awards for its electronic banking business, including the “Top Ten Financial Social Marketing Cases Award” and “Top Ten Financial WeChat Public Platforms Award” in the 2015 Financial Social Marketing Competition jointly held by the CFCA and www.cebnet.com.cn in 2015 and the “Top Ten Innovative Cases of the China Internet Banking Award” by Securities Times in 2013.
— 87 — Internet Banking
The Bank’s Internet banking platform consists of both retail Internet banking and corporate Internet banking systems. The Bank’s retail Internet banking products and services include retail account management, money transfer and remittance, fee payment, investment and wealth management, credit card, retail loans and online shopping.
The Bank’s corporate Internet banking products and services include account management, money transfer and remittance, group treasury services, loans, foreign currency business, investment and treasury services and cash management.
As at 31 December 2015, the Bank had approximately 150 million retail Internet banking customers and approximately 3.8 million corporate Internet banking customers. For the year ended 31 December 2015, the total transaction volume for the Bank’s retail Internet banking and corporate Internet banking was approximately CNY84.4 trillion and CNY100.1 trillion, respectively.
Telephone Banking
The Bank has set up a 3+3 customer service system consisting of three customer service centres at the head office level in Tianjin, Chengdu and Shanghai plus three customer service centres at the provincial level in Jiangsu, Zhejiang and Guangdong provinces. In the year ended 31 December 2015, the Bank optimised and upgraded its telephone banking services and functions, integrated transaction functions and streamlined operation procedures in order to improve customer satisfaction. For the year ended 31 December 2015, the Bank received 419 million calls via the Bank’s 95599 customer service centre.
Mobile Banking
The Bank’s mobile phone banking service was officially launched nationwide in April 2008, providing services such as account inquiry, money transfer, fee payment and credit card repayment. In order to increase customer service channels, the Bank explored channels such as online customer services, Weibo customer services and WeChat customer services. In 2015, the Bank launched a new version of customer- oriented mobile banking service, which included a new social sharing feature, streamlined transaction procedures and several levels of security verification to improve user experience and enhance security of the Bank’s mobile banking service. The Bank also enhanced the transaction platform of “e-shopping Tianjie” and launched two new features, namely “Discovery” and “Special Offers”, as well as integrated all its commercial resources in relation to its regular marketing and special offer activities. As at 31 December 2015, the Bank had 140 million registered customers using its mobile phone banking business.
The Bank provides short messaging services (SMS) to its contracted customers, including sending short messages relating to bank account transactions, customer care and safety verification. As at 31 December 2015, the Bank had 310 million customers contracted for the Bank’s SMS banking services.
Self-service Banking
In 2014, the Bank accelerated the establishment of its self-service platform and upgraded various services, including the application approval procedures for financial IC cards through the self-service terminal system. In the year ended 31 December 2015, the Bank introduced direct marketing features such as messaging services and customer relationship manager notifications, modified the usage conditions of its international cards and streamlined its self-service cash transaction process. As at 31 December 2015, the Bank had 122,800 cash-related self-service banking facilities, of which 48,500 are self-service banking terminals.
— 88 — E-Commerce
The Bank has a leading E-Commerce payment platform. The Bank’s electronic payment product line includes B2C, B2B, credit payment platforms, and it has formed an E-Commerce model to sell funds directly. In the year ended 31 December 2015, the Bank proactively developed electronic commercial banking services in County Areas. The Bank also launched pilot schemes of special electronic commercial services such as “Sirong Platform” (an online integrated financial service platform providing fund facilities, financing, trading and market intelligence, towards farmers and the whole process of agricultural production) and “e-Agricultural Steward” in selected areas. As at 31 December 2015, the Bank completed 2.3 million transactions with a total transaction amount of approximately CNY12.6 billion through its “Rong Tong” platform and 646 transactions with a total transaction amount of approximately CNY30.3 million through its “Rong Zi” platform, while its “Rong Shang” platform had a total of 488 online shops which handled 60,600 trade requests and completed 59,600 transactions with a total transaction amount of CNY10.1 billion. For internet payment, “Yinxuntong” was promoted in all regions within Sichuan province and started pilot operations in Heilongjiang and Jilin provinces. For the year ended 31 December 2015, the Bank had approximately 11,800 contracted agencies of “Yinxuntong” and conducted approximately 4.6 million transactions with a total transaction amount of CNY1.0 billion. The Bank also commenced its internet financing operations in Shenzhen, Shandong and Inner Mongolia.
INFORMATION TECHNOLOGY
Information technology is at the core of the Bank’s competitiveness. The Bank focuses on the development of its information technology capabilities and has established an Information Technology Development Committee under its senior management. The Bank has also developed an IT development decision-making system to meet its operational needs as well as the IT management system and capabilities to provide comprehensive support to its business operations.
The Bank developed a centralised computer network system in 2006 which, through the Shanghai data centre, covers all of the Bank’s domestic branch outlets except a small number of branch outlets in the Tibet Autonomous Region and links teller terminals throughout China. Only a small number of branch outlets located in the Tibet Autonomous Region have not been linked to the central network system due to a number of constraints including the lack of sufficient power and telecommunication infrastructure at these remote locations. Transactions at these branch outlets, typically small in volume, are manually recorded and then the financial accounts of these branch outlets are entered into the system on a monthly basis.
Over the year 2015, the Bank advanced the research and development of technology and product innovation orderly, which provided a solid technological support to the development of the Bank’s businesses. Over the year 2015, eight technology achievements of the Bank were granted the “Banking Technology Development Awards” by the PBOC and three achievements were granted the “Awards for Research Achievement on Information Technology Risk Management of the Banking Industry” by the CBRC. The Bank was also granted 31 patent licenses by the State Intellectual Property Office. In addition, the “Specification of Description for Banking Products” (national standard GB/T 32319-2015), the preparation of which was led by the Bank, was released by the Standardisation Administration of the PRC.
In addition, the Bank strengthened the technological support for business fields. It launched “e-Agricultural Steward” to foster a financial ecosphere with features of country areas, upgraded the super counters and global cash management system. facilitated the research and development of Free Trade Zones system, supported the comprehensive operation reform, counter process optimisation and risk control of all the outlets and carried out pilot program of using electronic vouchers and seals. Construction of the key technology projects was pushed forward, which includes the fourth phase operation of BoEing, bank-wide
— 89 — centralised framework of data platform and the big data platform. In order to better reinforce the production safety management, the Bank formulated the data center’s overall system, cloud infrastructure platform and the monitoring and management and control platform.
Information system
The Bank’s information system covers all aspects of its business. It consists of six application systems, including its core business system, front office application system, channel application system, internal management system, marketing analysis system and office automation system.
Core business system
BoEing is a new generation of core business system developed by the Bank. BoEing currently covers more than 10,000 products across six product lines, including corporate and retail loans, corporate deposits, cash management, investment and wealth management, intra-bank transfer and trade finance. BoEing operates with flexibility, determining different rates according to each customer’s profile. It integrates the Bank’s leading technical and business systems, standardising data measurements, and creating a centralised customer profile, allowing for accurate and seamless use of the Bank’s services. This system improved the quality of the Bank’s database, allowing for a more practical and efficient teller experience. The system also reduces operation risks by enhancing the automated control of business processes, eliminating risks in operation processes and strengthening the automated control. BoEing focuses on improving customer services and product innovation, as well as providing meaningful data for management.
Front office application system
The Bank’s front office application system is anchored on its Application Integrated Preconsole System (AIPS), financial services platform named “TULIP”, investment platform, Bank International Business System (BIBS) and other IT application platforms and supports the Bank’s derivatives, fee- and commission- based and localised businesses, such as distribution of funds and bonds, third-party depositary, treasury, custody and other emerging lines of business. In addition, through its front office application system, the Bank has developed a banking service platform to support its business growth and product development and integrate its various functions such as management, research and development, operation, maintenance and statistical analysis.
Channel application system
The Bank’s channel application system forms the basis of its Advanced Client Browser System (ACBS), Internet banking, customer service system, telephone banking and mobile phone banking platforms and provides comprehensive support to its various banking service channels and banking services to its customers for 24 hours a day, seven days a week. The Bank relies on the advanced “.Net” platform and has developed its proprietary Internet banking system. The Bank has established a 95599 telephone banking system and an IT system for its three customer service centres in Tianjin, Chengdu and Shanghai.
Internal management system
The Bank’s internal management system includes credit management, financial management and assets and liabilities management. It is capable of meeting the Bank’s needs relating to risk control, internal management, decision-making analysis and information disclosure.
The Bank’s credit management system supports the routine processing, evaluation and approval of loans, post-disbursement management, risk alert, loan classifications, loan and customer information administration as well as data-mining.
— 90 — The Bank’s financial management information system supports cost management, financial budgets, financial settlements and performance evaluations.
The Bank’s assets and liabilities management information system provides technological support to its bank- wide assets and liabilities management and capital management.
Marketing analysis system
The Bank’s customer relationship management system provides market analysis to support its marketing efforts. This system allows the Bank to manage its individual customers and group customers by performing market segmentation and customer ranking analysis, retrieving information on customer defaults and conducting marketing performance evaluations.
Office automation system
The Bank’s office automation system includes an e-mail system and a documentation system. The e-mail system allows internal and external communication by the Bank’s employees. The documentation system allows certain workflows to be automated and completed electronically. The office automation system enhances the Bank’s operating efficiency by increasing communication efficiency and enabling long-term record-keeping.
IT RISK MANAGEMENT
The Bank’s IT risk management is coordinated by an operational risk management committee, with responsibilities allocated to the information technology department, risk management department, audit office and internal compliance department. The scope of the Bank’s IT risk management also covers security, personnel, network, research and development, operation and maintenance, emergency response and outsourcing.
The Bank has adopted IT safety security measures, including firewalls, transmission encryption, intrusion detection and centralised authentication. The Bank’s Shanghai branch and the IT management department and the software R&D centre of the Bank’s head office obtained the Information Safety Administration International Certification (ISO 27001), which evidenced the enhanced safety of the Bank’s IT system.
In addition, the Bank has established a dedicated disaster recovery management unit and constructed a comprehensive disaster recovery management system to protect its data centre, tier-1 branches and tier-2 branches. The Bank’s core production system is located at the Shanghai data centre, with the disaster recovery testing centre at Beijing serving as a disaster recovery function for the core production system and core operating data. The Bank’s disaster recovery system enables its branches to link smoothly to its Beijing disaster recovery testing centre if a disaster occurs at the Shanghai data centre.
Since 2013, the Bank launched a number of key IT projects to improve its financial services and delicacy financial management, including establishing additional channels for mobile banking and increasing the functionality of the mobile banking, corporate Internet banking and retail Internet banking platforms. The Bank supported the globalisation strategy by completing the integration of core overseas business systems of its overseas institutions and launching an online U.S. dollar settlement service through its New York branch. Various systems were installed to improve the management of operation, finance, risk, assets and liabilities, including the second generation of centralised operation platform, centralised operation management platform, phase II of online account management, risk management system 2.0 and the enhanced asset- liability management system.
— 91 — Information Technology Research and Operational Ability
Software research and development capability. The Bank’s software research and development centre located at the Bank’s head office is responsible for the implementation of major IT projects and the research and development of IT software, and has the capability to carry out demand analysis, process design, project implementation and promotion for large-scale projects.
The Bank has managed to continue streamlining its software development procedures, improving IT product quality and enhancing its IT risk management. The Bank’s software research and development centre obtained the level-3 CMMI certification at the end of 2008.
Production and operation capability. The Bank’s data centre in Shanghai is responsible for the support of its business operations and production of its management information, technology and business security, production data management, trading supervision and back-end processing for the Bank’s overall operation and data administration. The operation and service capability of the Bank’s information system has been maintained at 99.9 per cent. for five consecutive years from 2010 to 2014. The Bank continued to integrate and improve its IT infrastructure by completing the compliance project related to server rooms of the domestic branches and upgrading the core systems and the network of Beijing’s data centre. The Bank’s disaster recovery testing centre in Beijing provides long-distance backup and emergency recovery for the core operational data in the Bank’s Shanghai data centre. The Bank currently plans to establish a third data centre in northern China. The Bank has actively introduced the ISO20000 IT service management system to raise the operation and maintenance standard level of the production system of the Bank. Effective contingency management has also facilitated the healthy development of the Bank’s business operations. In 2015, the Bank was awarded “Operational Risk Technology Implementation of the Year (Asia-Pacific Risk Management Award)” by The Asian Banker.
IT PLANNING
During 2013, the Bank formulated the 2013-2015 IT development plan and continued to improve IT management. The Bank established a pricing model and verification system to improve the application of information technology in cost delicacy management. In 2013, the Bank implemented the “technology first” strategy, focused on the research and development of IT products, strengthened the management of information systems and continued to enhance the level of its IT governance to provide a solid technology support to develop the Bank’s businesses.
CAPITAL MANAGEMENT
In 2015, the Bank strictly complied with the capital plan for 2013-2015 and the capital adequacy ratio plan for 2013-2018, adhered to its general principle of capital management and the target of capital adequacy ratio, and enhanced the capital constraint and returns. The Bank also established a comprehensive and effective capital management mechanism, to ensure the capital adequacy ratio can cover risks, create value and comply with regulatory requirements continuously. In 2015, the Bank continued to strengthen its capital constraints, constantly refined the structure of its on- and off-balance sheet assets and further optimised the allocation of economic capital in accordance with the strategic objectives of value creation and structural optimisation. To improve the economic capital allocation among branches, the Bank formed an economic capital management mechanism for its business lines to reinforce the capital constraint of its businesses.
Key Principles of the Bank’s Capital Management
• Continue to satisfy the regulatory requirements, maintain a reasonable capital level, and align the Bank’s capital adequacy level with the maximisation of shareholders’ value;
— 92 — • Continue to refine the Bank’s economic capital-based value management system, optimise the Bank’s asset mix, reasonably allocate economic capital, cover all types of risks and ensure sustainable business growth; and
• Utilise various capital instruments, refine the Bank’s capital base and structure, enhance capital quality and reduce capital costs.
Targets for the Bank’s Capital Adequacy Ratio Management
The Bank has developed its capital adequacy ratio targets under the general principles of the Bank’s capital management and based on an analysis of the macroeconomic and financial environment, various regulatory requirements, the Bank’s business strategy and risk preferences. Assuming that, among other things, there will be no material deterioration in the economic and financial environment, the Bank’s capital adequacy ratio target is no less than 11.5 per cent. from 2013 to 2015. In order to improve its capital strength, optimise its capital structure and ensure robust and sustainable business development, the Bank announced in January 2016 its intention to issue eligible tier 2 capital instruments with an aggregate principal amount not exceeding CNY80 billion, subject to approval by the CBRC, the PBOC and other competent regulatory authorities.
In accordance with the “Capital Rules for Commercial Banks (Provisional)”, the CET 1 capital adequacy ratio, tier 1 capital adequacy ratio and capital adequacy ratio were 10.24 per cent., 10.96 per cent. and 13.40 per cent., respectively, as at 31 December 2015.
Capital Enhancement Mechanism
The Bank’s priority approach to enhance its capital base will be through retention of profits. The Bank may also enhance its capital base through various external alternatives, including, but not limited to, issuances of subordinated bonds, convertible bonds or hybrid capital bonds, conducting rights offerings or private placements, and certain other alternatives acknowledged by the CBRC.
Capital Management Measures
• Strengthen Profitability and Improve Internal Capital Generation Capability. The Bank plans to enhance its profitability through various measures including accelerating business operations transformation, promoting revenue diversification and increasing operating efficiencies. In addition, the Bank seeks to strengthen internal capital generation capability through setting a reasonable dividend payout ratio.
• Explore Capital Enhancement Tools and Expand Capital Enhancement Channels. The Bank seeks to utilise the various types of tools and channels under current regulatory framework, and continue to explore new capital enhancement tools and expand capital enhancement channels.
• Refine Capital Control Mechanism and Enhance Capital Allocation Efficiency. The Bank seeks to strengthen capital budgeting management, increase its focus on performance evaluation based on economic capital metrics such as Economic Value Added (“EVA”) and Risk-adjusted Return on Economic Capital (“RAROC”), promote awareness of capital constraints and control the growth of risk-weighted assets through economic capital management. The Bank also plans to refine economic capital allocation management, guides the adjustment of its business and asset mix, prioritises the development of business that provides higher overall return and requires lower capital, in order to reduce capital consumption.
— 93 — • Enhance Risk Management Capability and Establish Capital Adequacy Assessment Procedures. The Bank seeks to establish and continues to refine its capital adequacy assessment procedures, which form an important component of the Bank’s internal management and decision-making. The Bank plans to accelerate its utilisation of quantitative risk management measurement techniques, refine economic capital measurement. Adequate capital will be held against its major risk exposures.
• Strengthen Capital Planning Management and Maintain Adequate Capital Base. Based on changes in the macroeconomic and regulatory environment, as well as the progress of its implementation of Basel II/Basel III and its business development needs, the Bank plans to actively adjust its capital planning to ensure that the size of its capital base is commensurate with the future growth of its business and its risk exposure.
COMPETITION
The Bank faces significant competition in the Bank’s principal areas of business from other commercial banks and other financial institutions in China. The Bank currently competes primarily with the Large Commercial Banks and National Joint Stock Commercial Banks. The Bank also faces increasing competition from other financial institutions, including city commercial banks and foreign banks operating in China. The Bank’s competition with other commercial banks and financial institutions in China primarily focuses on the variety, pricing and quality of products and services, convenience of banking facilities, reach of distribution network and brand recognition as well as information technology capabilities.
In the County Areas, the Bank’s competitors vary across geographical regions as a result of the differences among regions in terms of economic development and maturity of the financial market. In addition to other Large Commercial Banks, National Joint Stock Commercial Banks, city commercial banks and foreign- invested bank operating in China, the Bank primarily competes with local rural cooperatives, rural commercial banks, Postal Savings Bank of China and other agriculture-related financial institutions in the County Areas. With the easing of regulatory restrictions on access to the County Area banking market, an increasing number of township banks, loan companies, rural mutual cooperatives and other new types of rural financial institutions have been established in the County Areas. In addition, various financial institutions have strengthened their penetration in the County Area banking market. As a result, the Bank faces increasingly intense competition in the County Areas.
In addition, the Bank faces competition from non-banking institutions such as securities firms and insurance companies in providing financing services to the Bank’s customers.
The Bank’s competition with foreign-invested financial institutions will likely intensify in the future. In 2006, pursuant to its WTO commitment, the PRC government eliminated measures restricting the geographic presence, customer base and operational licenses of foreign-invested banks operating in China. In addition, China’s Closer Economic Partnership Arrangement with Hong Kong and Macau allows smaller banks from those jurisdictions to operate in the PRC, which has also increased competition in the PRC banking industry.
See “Risk Factors – Risks Relating to the Banking Industry in China – The Bank faces intense competition in China’s banking industry as well as competition from alternative corporate financing and investment channels”.
In response to the competitive environment, the Bank intends to continue to implement its strategies to differentiate itself from its competitors and compete effectively in the PRC commercial banking industry.
— 94 — EMPLOYEES
The Bank had 503,082 employees (and an additional 11,288 contracted employees) as at 31 December 2015. The number of the Bank’s employees as at 31 December 2015 included 8,061 employees at its major domestic subsidiaries and 722 local employees at its overseas branches, subsidiaries and representative offices.
The Bank contributes to its employees’ social insurance, provident housing fund and certain other employee benefits in accordance with PRC laws and regulations.
The Bank has established a performance-based compensation system whereby an employee’s compensation is determined based on his position and performance review.
The Bank provides training programmes to its employees to improve their professional competence and skills.
The Bank’s training programmes mainly include:
• management training programmes for senior management of the Bank’s head office, tier-1 branches and tier-2 branches;
• professional training programmes for professionals in areas such as investment and asset management, risk management, financial accounting, product development, legal and compliance and information technology;
• overseas training programmes for employees to gain exposure to international practice; and technical training programmes for skilled employees.
The Bank has also been developing its job qualification system whereby the Bank will define the required qualifications for each position throughout the Bank’s operational processes and arrange respective trainings. The Bank’s labour union represents the interests of the employees and works closely with the Bank’s management on labour-related issues. The Bank has not experienced any strikes or other material labour activities that have interfered with its operations, and the Bank believes that the relationship between the Bank’s management and the labour union has been good.
PROPERTIES
The Bank is headquartered in Beijing, PRC.
For some of the properties it holds and occupies in the PRC, the Bank has not obtained title certificates. The Bank is in the process of applying for the relevant land use rights and building ownership certificates that it has not yet obtained, and it plans to cooperate closely with the local land and property management authorities to expedite such applications and obtain the relevant valid title certificates as soon as practicable. The Bank has been unable to obtain certain of these title certificates due to various title defects or for other reasons. While there may be legal impediments to its obtaining certain of these title certificates as a result of these title defects, the aggregate gross floor area of these properties with defective titles is immaterial comparing to all of the properties it owns. The Bank believes that since the relevant properties are situated in different provinces in the PRC, the risk of losing the ability to use all of such properties at one time is comparatively low. It also believes that it will be able to obtain replacements in nearby locations, and accordingly, it is not expected that any relocation will have any material adverse impact on the operations and financial position of the Group as a whole. For the leased properties in the PRC, the relevant lessors have not provided valid title certificates or consent to lease some of the properties, which are mainly served
— 95 — for commercial uses including outlets, offices and ATM. As the owner of the properties, the lessors are responsible for applying relevant valid title certificates or providing the Bank the consent to lease properties. In respect of this, the Bank has proactively procured these lessors to apply for the relevant valid title certificates or provide the Bank the consent to lease properties. The Bank is of the view that most of these leased properties occupied can, if necessary, be replaced by other comparable alternative premises without any material adverse effect on its operations.
LEGAL AND REGULATORY PROCEEDINGS
Licensing Requirements
As at 31 December 2015, the Bank had obtained the financial operating licenses required for conducting its current businesses.
Legal Proceedings
The Bank is involved in certain legal proceedings in the ordinary course of its business. Most of these proceedings involve enforcement claims initiated by the Bank to recover payments on its non-performing loans. The legal proceedings against the Bank include actions relating to customer disputes and claims brought by its counterparties on contracts related to its banking operations.
As at the date of this Offering Circular, the Bank was not involved in any litigation, arbitration or administrative proceedings, and was not aware of any such litigation, arbitration or administrative proceedings, whether pending or threatened, which are or might be material in the context of the issuance of the Notes.
Regulatory Reviews and Proceedings
The Bank is subject to inspections and examinations by the relevant PRC regulatory authorities, including the PBOC, CBRC, MOF, CSRC, CIRC, SAIC, SAFE, NAO, SAT and their respective local offices. These audits and examinations have previously resulted in findings of incidents of noncompliance and the incurrence of certain penalties. Although these incidents and penalties did not have any material adverse effect on the Bank’s business, financial condition and results of operations, the Bank has implemented improvement and remedial measures to prevent the reoccurrence of such incidents. The Bank believes that, save as disclosed in this Offering Circular, there were no other material breaches and material incidents of regulatory non-compliance.
— 96 — RISK MANAGEMENT
Overview
The Bank has adopted a prudent risk management strategy, seeking to balance risks and returns with sustainable growth and sound asset quality to achieve an appropriate level of risk-adjusted returns and capital adequacy.
The objectives of the Bank’s risk management are:
• continuously enhancing its corporate governance and risk management to ensure that its Board of Directors and senior management as well as its risk management personnel throughout its organisational structure follow its risk management strategies and implement comprehensive risk management;
• establishing a comprehensive, independent and vertically-integrated risk management organisational framework and developing a risk management organisational structure with clearly-defined division of responsibilities;
• implementing robust risk policies and procedures to ensure that its risk management function covers all of its business lines, products and personnel;
• developing and applying advanced risk management tools and methodologies to accurately identify and measure risks and to ensure the prompt communication of information throughout various levels of its organisational structure; and
• cultivating a sound risk management culture through continuous management reinforcement, rigorous implementation of risk management policies and management accountability, and bank-wide in-depth employee training.
Risk management initiatives in recent years
Prior to 1996, the Bank was a state-owned specialised bank and the Bank’s risk management capabilities were limited. In the middle to late 1990s, the Bank began to operate on a commercial basis and started to manage the Bank’s risks more proactively.
In 2007, the Bank established the Risk Management Department at its head office and began to implement its centralised risk management strategy. In 2009, the Bank established a comprehensive risk management organisational structure. Under the principle of separating the supervision function from the formulation and implementation of risk management policies, the Bank has defined risk management responsibilities and related reporting lines of its Board of Directors and its specialised committees, senior management and the specialised committees under their supervision, as well as its various departments with risk management responsibilities.
Since 2013, the Bank continued to refine its risk management policy system. The Bank formulated the risk management plan for 2013 to 2015 and revised the risk evaluation method, as well as the working rules of the Risk Management Committee. The Bank also strengthened its risk management systems in various specific aspects, and developed or revised policies and measures such as procedures for loan defaults identification, risk assessment on County Area credit products, market risks monitoring and reporting, risk classification in the wealth management business and country risk management. In addition, the Bank
— 97 — formulated the objectives and implementation plans for the three pillars under the Capital Rules for Commercial Banks (Provisional) and the administrative measures for Internal Capital Adequacy Assessment Process (ICAAP), and conducted its 2015 internal capital adequacy assessment.
In 2015, the Bank continued to refine its risk management policy systems. For credit risk, the Bank formulated the administrative measures on consolidated credits to group customers and the administrative measures on warning for the tolerance of rural non-performing loans, and revised industry-specific credit policies, the administrative measures on loans for merger and acquisition and the administrative measures on commercial housing mortgage loans to corporate customers. In terms of market risk, the Bank formulated the policies for annual treasury transaction and investment and market risks management, and revised the administrative measures on risk management of wealth management business with fixed income asset portfolios. In terms of operational risk, the Bank revised the reporting standard of the operational risk events.
The Bank believes the implementation of the foregoing risk management strategy and initiatives has led to an enhanced operating framework, improved risk management capabilities and a rigorous risk management culture.
Risk management structure
The chart below illustrates the Bank’s risk management structure:
Board of Directors and board committees
The Bank’s Board of Directors bears the ultimate responsibility for risk management. It performs risk management functions through the Risk Management Committee and the Audit and Compliance Committee under the Board of Directors.
— 98 — The Risk Management Committee of the Board of Directors is primarily responsible for reviewing the Bank’s risk management strategies, policies and procedures, assessing the Bank’s risk management and internal control efforts, evaluating the organisational framework, operating procedures and effectiveness of the Bank’s risk management and internal control departments and making recommendations to the Bank’s Board of Directors accordingly.
The Audit and Compliance Committee of the Board of Directors is primarily responsible for monitoring the Bank’s internal control function, reviewing and overseeing the implementation of the Bank’s critical accounting policies, overseeing and evaluating the Bank’s internal audit operations and external auditors, reviewing annual audit reports and annual financial statements and making recommendations to the Bank’s Board of Directors accordingly.
Senior management and special committees
The Bank’s senior management assumes the highest level of execution power in risk management.
President
The Bank’s president manages risks associated with the Bank’s business operations, formulates risk management policies and procedures, determines economic capital allocation and makes recommendations and reports the Bank’s overall risk management operations to the Bank’s Board of Directors. The Bank’s president is also responsible for the implementation of risk management strategies, plans, policies and systems as determined by the Bank’s Board of Directors.
Special committees under senior management
The Bank has four special committees under its senior management, namely, the Risk Management Committee, the Credit Approval Committee, the Asset Disposal Approval Committee and the Asset and Liability Management Committee, which are responsible for organising, coordinating and reviewing various risk management tasks.
• Risk Management Committee. The Risk Management Committee has three specialised sub- committees, namely, the Credit risk management committee, the Market risk management committee and the Operational risk management committee. The Risk Management Committee is responsible for analysing and assessing the Bank’s bank-wide risk profile, reviewing and formulating the Bank’s bank-wide risk management plans and risk exposure limits, determining and adjusting the Bank’s risk management measures, reviewing, coordinating and supervising the implementation of policies, procedures and methodologies relating to credit, market and operational risk management as well as significant risk management initiatives, and leading the Bank’s bank-wide risk management efforts.
• Credit Approval Committee. The Credit Approval Committee is responsible for reviewing the credit applications which exceed a certain amount and with higher levels of complexity. It also reviews special authorisations and special credit extensions as well as certain other credit risk management operations. It also oversees customer credit rating.
• Asset Disposal Approval Committee. The Asset Disposal Approval Committee reviews the disposal of the Bank’s non-performing loans and other impaired assets which exceed certain amounts as well as write-offs, loan restructuring, waivers of interest and foreclosure on repossessed assets.
— 99 — • Asset and Liability Management Committee. The Asset and Liability Management Committee is responsible for formulating the Bank’s strategies for balance sheet management and capital management. It reviews the Bank’s medium- to long-term business plans and annual business plans and conducts periodic examinations of the Bank’s business operations. It is also a decision-making body in the Bank’s liquidity risk management.
Chief risk officer
The primary responsibility of the Bank’s chief risk officer is to assist the Bank’s president in risk management.
Head office risk management departments
Risk Management Department
The Risk Management Department coordinates the Bank’s bank-wide risk management efforts and carries out risk management responsibilities, including the formulation and implementation of the risk management strategies, policies and procedures, the coordination on the implementation of Basel III and the development of risk measurement tools meeting the applicable regulatory requirements. The Risk Management Department is also responsible for conducting customer credit ratings, supervising asset classification, assessing the Bank’s assets for impairment, measuring the Bank’s bank-wide economic capital, monitoring key risk indicators and issues and organising risk reporting. It also coordinates the determination of risk exposure limits, formulates risk portfolio management plans and assesses the Bank’s risk exposure levels. In addition, it coordinates risk management functions across all branches and business lines.
Credit Management Department
The Credit Management Department is responsible for establishing and strengthening the Bank’s credit risk management system. It develops industry-specific credit guidelines, determines customer admission criteria and organises and implements customer list-based management. It reviews and approves credit extensions in accordance with the Bank’s policies and procedures, and evaluates counterparty risks. It is also responsible for refining the Bank’s credit management system to improve the Bank’s credit risk identification, measurement and mitigation capabilities.
Credit Administration Department
The Credit Administration Department is primarily responsible for risk management in connection with loan disbursements. It coordinates and oversees disbursement of loan funds and post-disbursement management, conducts on-site inspections of significant risks identified through online supervision, and organises compliance review of the Bank’s credit review and approval personnel.
Asset Disposal Department
The Asset Disposal Department is responsible for formulating the policies and procedures in respect of disposal of non-performing assets and coordinating the implementation efforts. It also conducts on-site inspections of large-amount or cross-regional non-performing asset disposals, monitors the implementation of specific asset disposal projects, and manages books for large-amount non-performing assets. It also coordinates the Bank’s asset preservation efforts and manages foreclosures and write-offs of non-performing assets.
— 100 — County Area Credit Management Division
The County Area Credit Management Division is responsible for establishing and strengthening the Bank’s credit risk management system specific to County Areas. It develops County Area credit guidelines, explores innovative post-disbursement management of the County Area banking business, determines customer admission criteria, sets classification of loans to rural households, determines treatment of impairment allowance and implements specific risk allowance and write-offs policies for County Area banking business.
Front Offices
Asset and Liability Management Department
The Asset and Liability Management Department is responsible for formulating and implementing risk management policies and procedures in respect of liquidity risk as well as interest rate risk and exchange rate risk arising from the Bank’s banking book.
Financial Market Department
Pursuant to the risk preferences determined by the Bank’s head office, the Financial Market Department manages market risk arising from the Bank’s investment and trading portfolios both for the Bank’s own account and on behalf of the Bank’s customers, within the respective transaction authorisations and market risk exposure limits.
Internal Control and Compliance Department
The Internal Control and Compliance Department oversees and monitors the implementation of risk management policies and procedures, rectifies deficiencies and conducts internal control and compliance inspections and assessments. It manages compliance risks, conducts compliance evaluations and tests on the Bank’s business procedures and new product and service offerings and monitors authorisations.
Operational Management Department
The Operational Management Department is responsible for managing the bank-wide back office operational risks, formulating and implementing policies and procedures relating to operational management, establishing and refining the operational risk management system, streamlining the back office procedures for various business lines and products and deterring operational risk through centralised management.
Legal Affairs Department
The Legal Affairs Department is responsible for the bank-wide legal risk management, ensuring the legality and thoroughness of the Bank’s risk policies and managing risks associated with litigation, contract disputes and intellectual property.
Branch level and sub-branch level risk management structure
Branch and sub-branch management
The heads of the Bank’s branches or sub-branches are the primary responsible persons for the Bank’s risk management operations at their respective branches or sub-branches. The deputy heads in charge of risk management organise and coordinate risk management operations. Meanwhile, risk management at the
— 101 — Bank’s tier-2 branches and sub-branches is also supervised by risk officers and risk managers, respectively, appointed by the higher-tier branches. As a further check and balance, the regional offices of the Bank’s Audit Office conduct periodic review of branch-level risk exposures.
Risk management committees and risk management departments at branch and sub-branch levels
The Bank has established risk management committees at its tier-1 and tier-2 branches under their respective management. The branch-level risk management committees are responsible for reviewing the risk exposure limits and risk portfolios within their respective jurisdictions, reviewing and organising the implementation of risk management objectives and procedures, and reviewing risk management issues within their authorisation. The branch-level risk management committees conduct periodic analysis and review of the overall risk exposure and supervise risk management functions.
At the Bank’s tier-1 branches, the Bank has established risk management departments that are responsible for setting forth comprehensive risk management measures and supervising the implementation of various risk management strategies and policies. The departments also supervise asset classification and impairment tests, formulate and supervise the implementation of risk exposure limits and portfolio management plans. In addition, they manage and organise trainings to the risk managers within their respective jurisdictions and evaluate their performance. These risk management departments also examine, analyse and evaluate the risk management functions of the relevant departments and lower tier branches.
The credit management departments at the Bank’s tier-2 branches or the risk management department at its sub-branches perform risk management functions.
Risk officers and risk managers
As part of its risk management initiatives targeting at strengthening risk management at its lower-tier branches and sub-branches, the Bank has started a pilot programme to appoint risk officers from tier-1 branches to tier-2 branches as well as risk managers from tier-2 branches to sub-branches. The risk officers and risk managers supervise and assess risk management functions at the branches or sub-branches where they are stationed. They report to the management team of the branches that appointed them.
Credit risk management
Credit risk is the risk of loss from the default by an obligor or counterparty when payments fall due. The Bank is exposed to credit risk primarily through its loan portfolio, investment portfolio, guarantees and various other on- and off-balance sheet credit risk exposures.
The Bank manages credit risk through a variety of methods, including streamlining its credit approval process, establishing bank-wide standardised authorisation and credit extension management system, monitoring risk exposure and borrower concentrations and mitigating credit risk through the use of collateral and other arrangements.
The Bank has increased efforts to prepare for the implementation of Basel III and its adoption of industry- specific credit guidelines and customer list-based management to improve credit risk management capabilities and refine its credit asset profiles.
— 102 — Credit risk management for corporate loans
Credit guidelines
The Bank is focused on the development and implementation of its credit guidelines and is seeking to achieve a balance between loan growth and a prudent risk management culture. The Bank formulates credit guidelines on an annual basis to streamline its credit business procedures, adjust its loan portfolio compositions and prioritise its lending to the key regions, industries and customers.
The Bank’s industry-specific credit guidelines consist primarily of industry-specific customer admission policies, authorisation policies and post-disbursement management requirements. The Bank adjusts its credit guidelines based on a number of considerations such as changes in the PRC government’s industry policies and the developments of various industries as well as the overall effectiveness of its existing credit guidelines. The Bank has developed industry-specific credit policies for 41 industries and, in industries for which a credit policy has not been introduced, implemented a customer list-based credit management system that divides its loan customers into “support”, “maintenance”, “reduction” and “termination” categories. The Bank periodically imposes credit exposure limits and releases recommended credit limits in respect of industries with relatively large exposure and higher risk to adjust and control the total credit exposure to specific industries and refine the mix of its loan portfolio based on industry prospects, the overall credit quality of individual industries and regulatory changes.
The Bank also proactively adjusts its credit guidelines in line with the PRC government’s macroeconomic control policies. For example, the PRC government has implemented certain restrictive measures with respect to the real estate and steel industries in recent years. Also see “Risk Factors – Risks Relating to the Bank’s Loan Portfolio – If the Bank is unable to effectively maintain the quality of its loan portfolio, its financial condition and results of operations may be materially and adversely affected”. In light of these measures, the Bank has adjusted its credit guidelines with a more prudent view to extending credit to borrowers in the real estate industry and the steel industry and set target limits on the growth in its loans to these industries. The Bank has further clarified its customer admission criteria and prioritised its lending to key cities and high quality customers. With respect to borrowers in the steel industry, the Bank has tightened credit approval authorisations and limited new credit extensions to its valued customers.
In lending to government financing vehicles, the Bank applies the same review, approval and monitoring criteria to these loans as it does to loans to other corporate customers. The Bank has clearly defined the admission standards for loans to government financing vehicles, and it seeks to focus on government- sponsored projects with sufficient cash flows and secured sources for loan repayments as well as the projects sponsored by the governments of provincial, provincial capital-levels and above. The Bank’s tier-1 branches implement customer list-based management of government-sponsored projects within their respective jurisdictions and determine admission criteria for non-commercial projects sponsored by local governments of city level or lower. For these projects, the Bank requires that equity investments in these projects be in place prior to its loan disbursements, or simultaneously with its loan disbursements on a proportional basis. Loans to financing vehicles for local governments below the city level must be fully secured by land or building.
The following flow chart illustrates the basic process for the Bank’s credit business.
— 103 — Customer applications and pre-loan review
The Bank conducts pre-loan review under a policy of two-person investigation and review. Pre-loan review is carried out by a primary reviewer (generally, a customer manager) and an assistant reviewer (for example, a business manager) at a branch or sub-branch. For large loans to a single borrower and loans for medium- and long-term projects, reviewers from the corporate banking business departments at higher-tier branches conduct independent customer reviews. To avoid conflicts of interest, the Bank requires a reviewer to refrain from participating in any credit review relating to a company controlled by the reviewer or the reviewer’s close relatives. The Bank conducts pre-loan review and customer information verification through both on site visits and circumstantial investigations. When necessary, the Bank uses a third-party credit agency to verify customer information.
The Bank conducts pre-loan review to: (i) collect basic information such as the compliance track record, shareholders and managers, industry, growth prospects and business of the applicant; (ii) analyse the use of the loan proceeds and sources for repayment; (iii) study the applicant’s financial statements, cash flows and request additional information (such as evidence of tax payments and utilities bills) from the applicant if the Bank believes that the financial data collected do not fully reflect the applicant’s financial condition; (iv) assess the creditworthiness of the applicant and its management, its loan repayment history and its ability to fulfil contractual obligations; (v) review the collateral provided by the applicant and guarantees provided by the guarantor; and (vi) examine the loan application pursuant to the Bank’s credit policies. Upon the completion of the pre-loan review, the reviewers prepare a written report, which serves as one of the main bases for the Bank’s credit decision. The primary reviewer and the assistant reviewer are jointly accountable for the conclusion of their pre-loan review.
Customer credit rating
The Bank maintains a ten-grade rating system, namely, AAA+, AAA, AA+, AA, A+, A, B, C, D and Rating Exempted, and assign a credit rating to a customer based on its scale of operation, competitiveness, growth prospects, quality of management, net cash flow, debt repayment ability, profitability, contribution to the Bank’s business, creditworthiness and other factors.
In principle, the Bank rates all customers that have outstanding loans with it and that have provided guarantees to secure the Bank’s loans on a periodic basis, and the credit ratings assigned are generally valid for no more than one year. The Bank assigns a credit rating to a new customer before granting credit to such customer. If there is a material change affecting a customer’s repayment ability or creditworthiness, the Bank re-rates the customer. The customer credit rating results have been widely used in the Bank’s credit approvals, loan classifications, loan loss provisioning, management of exposure limits, risk reporting and economic capital management.
— 104 — Collateral appraisal
For loans secured with collateral, the Bank conducts collateral appraisals prior to loan approval either internally or through external appraisers. The Bank requires a final confirmation of the appraised value from an appraiser within the Bank regardless whether the appraisal was performed by an external appraiser or by the Bank’s own employees. Loans secured by collateral are generally subject to the following loan-to-value ratio limits, depending on the type of collateral:
Type of Collateral Maximum Loan-to-Value Ratio Properties Land use rights and buildings ...... 70 per cent. Manufacturing equipment ...... Up to 40 per cent. for manufacturing equipment for general use; up to 20 per cent. for manufacturing equipment for specialised use Inventories ...... Generally up to 50 per cent., maximum limit 70 per cent. Monetary assets Government bonds and financial bonds . . If in the same currency as the Bank’s loans, the amount of collateral shall be no less than the loan amount; if in a different currency, up to 90 per cent. Corporate bonds ...... Up to 80 per cent. for listed corporate bonds; up to 50 per cent. for other corporate bonds Warehouse receipts ...... Up to 85 per cent. for exchange standard warehouse receipts; up to 70 per cent. for other warehouse receipts
The Bank generally requires regular reappraisal of collateral. In respect of a third-party guarantor, the Bank assesses the guarantor’s financial condition, credit history and ability to meet its obligations to determine the appropriate guarantee amount.
Credit review and approval
The Bank’s credit approval function for corporate loans is performed primarily by authorised approval officers, credit review and approval centres and credit approval committees.
• Authorised approval officers. Authorised approval officers consist of the president and the vice president in charge of credit approval at the Bank’s head office and, at the branch level, the heads and deputy heads (including assistants to branch heads) in charge of credit approval at their respective branches and independent credit approval officers who are entitled to approve credit. Independent credit approval officers are authorised to make loan approval decisions based on their independent investigation, review and evaluation. Independent credit approval officers at branch level typically consist of credit approval officers at the same branch or at the higher-tier branch depending on which branch appointed them. The independent credit approval officer appointed by the same branch reports to his own branch and receives his approval authorisation from the branch head, while an independent credit approval officer appointed by the higher-tier branch reports to the higher-tier branch that appointed him and receives his authorisation approval from the head of that higher-tier branch. The independent credit approval officers approve loans according to their specific areas of expertise and are organised into groups focusing on different business lines such as corporate banking, retail banking and County Area Banking Business, respectively.
• Credit review and approval centres. The Bank has set up credit review and approval centres at its head office and branches. Applications for loans exceeding the authorisation limits of the respective independent approval officers are submitted to the credit review and approval centres for approval.
— 105 — • Credit approval committees. The Bank has set up credit approval committees at its head office and branches. A credit approval committee consists of chairman of the committee, credit risk department members, expert members and independent credit approval officers. The credit approval committee at the head office reviews applications for fixed asset loans with principals above certain specified amount, credit limit approval and other tasks. It currently consists of 11 members, including four expert members, one independent credit approval officer and one vice president from the Bank’s head office who acts as the chairman of the committee. Sub-branches located in counties generally have no credit approval committee. Credit approval officers designated by branches of higher-tier are primarily responsible for review and approval of credit applications made through the sub-branches.
Customer credit limit approval
The Bank determines a customer’s total credit limit based on a comprehensive analysis of the customer’s credit rating, net assets, cash flows, collateral offered and financing needs. The Bank’s different tiers of branches may approve credit line applications within their specific authorisation limits in accordance with its customer segmentation-based management system. A customer’s credit limit is generally valid for no longer than one year and is subject to annual review. Even if a credit application is within the customer’s credit limit, the originating branch still must carry out the required loan review and approval procedures according to its authorisation limit. Credit line applications that exceed the authorisation limits of the originating branches must be submitted to a higher-tier branch with requisite authorisation or, if necessary, to the Bank’s head office.
The entire process of credit reporting, review and approval has been automated and is managed by CMS. The system automatically controls the authorisation levels of the Bank’s approval officers. If a loan application is approved, the Bank’s legal departments will review the agreements on non-standard forms and correspondences and other documents for its credit extension business.
The Bank seeks to manage credit extension to group borrowers on a consolidated basis. Its credit administration departments are responsible for reviewing, approving and allocating credits made to group customers.
Loan disbursement and post-disbursement management
The Bank disburses loans upon the completion of review of disbursement-related criteria by its credit administration departments. The Bank’s business units and credit administration departments are responsible for post-disbursement management. The Bank’s post-disbursement management includes fund account monitoring, on-site examination, monitoring of the borrower, monitoring of collateral and guarantor, risk alert and management, credit asset risk classification, record-keeping and recovery of loans.
Management of drawdown
Before signing a credit agreement, the business department in the originating branch is responsible for ensuring the satisfaction of the conditions precedent specified in the agreement for loan disbursements and drawdowns. The Bank has designated disbursement review personnel at its tier-1 and tier-2 branches and its credit administration departments to review the application of conditions for loan disbursement and usage and the compliance with the credit agreement, collateral arrangement and other loan disbursement procedures.
— 106 — Post-disbursement monitoring
The Bank undertakes initial and follow-on monitoring at the post-disbursement stage. The Bank generally conducts initial monitoring within 15 days from the disbursement of project loans, the credit lines for new customers and incremental credit lines for existing customers. The frequency of the Bank’s regular post- disbursement monitoring varies depending on whether a customer is new or existing, the importance of the customer to its business, its credit rating and the loan product. The Bank employs a variety of methods for conducting post-disbursement monitoring, including assigning a dedicated professional for each loan; monitoring the borrower’s cash flows; conducting regular on-site visits to examine collateral; generating early alerts through IT platform; proactively notifying borrowers of due dates and maturity dates; regularly visiting the borrower; and terminating loan exposure to delinquent customers.
Risk alert
The Bank has set up a risk alert mechanism at all tiers of its branches and sub-branches. The Bank aims to promptly detect and mitigate risks by monitoring a customer’s account information, financial reports, information of suppliers and customers, and industry and macroeconomic policies.
Customer managers and designated risk management personnel are required to report to the heads of their respective departments on a timely basis upon the receipt of a risk alert signal. The business department of the branch that manages the relevant customer account, the credit administration department and others with risk management responsibilities in turn are required to formulate risk mitigation solutions. Upon authorisation from relevant branch heads, the business department involved at the branch is required to start implementing the risk mitigation measures. If the originating branch is of a higher tier than the branch that manages the customer accounts, such lower tier branch is required to report the resolution to the credit administration department of the originating branch, which will supervise the implementation.
Loan classification
The Bank classifies a loan according to its five-category loan classification criteria, which include a comprehensive assessment of various factors such as the borrower’s repayment ability and track record, its willingness to perform repayment obligations, the profitability of the project financed by the loan and the collateral provided.
The Bank’s designated loan classification officer may adjust the classification assigned to a loan in accordance to prescribed procedures in the event that there is a mismatch between a classification assigned and the criteria for such classification. The classification of a loan must be adjusted on a timely basis if a change in its risk profile is identified. Solely for risk management purposes, the Bank adopted a 12-category classification system, which refined the five-category loan classification system, to classify its corporate loans. Classification of such loans is conducted at least on a quarterly basis. The following table illustrates the Bank’s 12-grade loan classification system:
Normal Special Mention Substandard Doubtful Loss Normal One Normal Two Normal Three Normal Four Special Special Special Substandard Substandard Doubtful One Doubtful Two Loss Mention Mention Mention One Two One Two Three
Through this loan classification system, the Bank determines the classification of a corporate loan on the basis of both quantitative and qualitative factors through analysing default risk of a corporate borrower and transaction risk arising from the loan and considering the estimated impairment losses. When analysing a borrower’s default risk, the Bank considers the credit rating of the borrower and the risk factors relating to the borrower’s industry, operations, management and willingness to repay the loan. When analysing the
— 107 — transaction risk relating to a loan, the Bank considers the existence, validity, adequacy and liquidity of collateral and the length of the period by which the principal or interest is overdue. The system utilises a quantitative scoring model, through which the Bank’s loan classification personnel confirms loan classification results.
The Bank’s 12-grade loan classification system is designed to enable the Bank to better monitor changes in its asset quality, detect potential credit risks and more effectively conduct post-disbursement management of its loan portfolio. The Bank believes that this system has helped it strengthen its loan monitoring capabilities.
The Bank applies a five-category classification system for retail loans and certain corporate loans in countries which satisfied the small business standards required by the CBRC.
Termination of customers with potential risks
The Bank has established an exit management mechanism in order to optimise its portfolio of borrowers and prevent potential risks from materialising. Customers with potential risks refer to those who are currently experiencing or are expected to experience adverse changes in their business or financial condition in the near future that may affect their loan repayments. For these customers, the Bank may demand repayment of loans ahead of their contract maturities or it may reduce their respective credit lines.
The Bank identifies customers with potential risks among those whose loans are originally classified as “normal” or “special mention”. The Bank’s head office adjusts, on a timely basis, the parameters and indicators for identifying customers with potential risks, in accordance with macroeconomic conditions, industry policies and the Bank’s business strategies. The Bank’s branches and sub-branches develop annual customer exit plans and compile exiting customer lists.
Non-performing loan management
The Bank proactively manages non-performing loans to reduce risks relating to its loan portfolio and improve its recovery on disposals. The Bank is committed to continuously improving its ability to manage non-performing loan disposals and establishing and refining its management system for non-performing loan disposals. The Bank has undertaken various initiatives such as customer list-based management, information technology system upgrade and performance-based compensation.
The Bank’s asset disposal departments are responsible for managing the Bank’s non-performing loans. The Bank seeks to recover its non-performing loans through various means, including collection, foreclosure on collateral, legal or arbitration proceedings, third-party agent collection, waiver of interest or principal, loan restructuring and write-offs.
Credit risk management for retail loans
Pre-loan review
Once a retail loan application is received by the originating branch, a retail loan reviewer at that branch will conduct due diligence on the loan applicant by checking relevant databases and holding in-person meetings with the applicant. For applications involving large amounts or posing high risk, two retail loan reviewers generally conduct on-site visits. For retail loans secured by collateral, the reviewers are required to conduct appraisal of the collateral. Recommendations of the reviewers are submitted to the retail loan officers, who will review and confirm before submitting the conclusions and recommendations to the appropriate credit review approval centres.
— 108 — Credit review and approval
The Bank’s designated teams at its credit review and approval centres review retail loan applications based on their evaluation of the completeness of the application package and the applicant’s risk profile. They submit their recommendations to the appropriate personnel with approval authority for final review. Applications for large loans or loans involving higher risks are required to be reviewed and approved by a credit approval committee and also approved by an authorised credit approval officer.
Loan disbursement and post-disbursement management
After a loan application is approved, the originating branch assigns designated personnel to ensure the satisfaction of the conditions precedent for loan disbursement, register and record collateral, execute loan agreements and disburse loan proceeds to the borrower. The Bank’s post-disbursement management of retail loans is conducted by both the business departments in the originating branch and the risk management departments at its different tiers of branches through the post-disbursement management system, a sub- system of the CMS. The Bank monitors retail loan risks through measures, including daily post- disbursement monitoring, post-disbursement inspections (site visits), account monitoring, online monitoring and a centralised collection platform. Once a risk alert signal is identified, the Bank takes immediate actions to prevent and mitigate the associated risk and control potential losses.
The CMS automatically classifies the Bank’s retail loans into five categories based on the number of days by which the payment of principal or any interest is overdue as well as types of collateral provided. The Bank’s business departments and risk management departments may jointly adjust the classification in response to risk data gathered through loan monitoring.
Credit card risk management
The Bank manages credit risk arising from its credit card business through the following measures:
• setting credit limits according to the risk profiles of each credit card customer to mitigate risks at preliminary stage;
• strengthening its statistical analysis capabilities, the development of credit rating data modelling and continuing to adjust its risk management policies;
• implementing a risk alert system to detect and prevent credit card fraud;
• optimising its risk monitoring system to enhance its capabilities to monitor and mitigate risks on a real-time basis; and
• carrying out centralised investigation into new e-commerce merchants and implementing a merchant risk alert system including off-site monitoring and on-site inspection.
— 109 — Credit risk management for County Area Banking Business
Risk management in the Bank’s County Area Banking Business falls under the Bank’s overall bank-wide risk management framework and follows its bank-wide risk management system and procedures. In addition to these standardised credit policies and procedures, the Bank has also implemented differentiated risk management policies for its County Area Banking Business.
• The Bank has established a Credit Management Department of County Area Banking Business at the head office level and a Risk Management Centre of County Area Banking Business under the Risk Management Department. The Bank has started to appoint risk officers from its tier-1 branches to tier-2 branches and risk managers from tier-2 branches to sub-branches. The Bank has established a dual reporting risk management structure at its branches and sub-branches in the County Areas.
• In conducting performance evaluation, the Bank has focused on applying economic capital indicators to its branches and sub-branches in the County Areas. The Bank has included the risk-adjusted returns as one of the key indicators to assess the performance of these branches or sub-branches.
• To balance risk and return, the Bank is in the process of implementing a multi-channel risk mitigation mechanism where appropriate loan pricing is adopted to cover potential risk exposure. For example, the Bank cooperates with credit guaranty companies in the County Areas to share risk exposure; in addition, the Bank has rolled out certain products, such as forest-ownership-pledged loans, to tackle the inadequacy of collateral securing loans in the County Areas.
• The Bank has focused on risk disciplines and set maximum non-performing loan ratios and minimum recovery ratios for loans beyond their maturities. If a sub-branch exceeds the pre-set risk control targets or there have occurred significant risk events, the Bank may impose deadlines for remediation actions, investigate and hold the responsible parties accountable and suspend authorisations.
• In balancing risk and efficiency, the Bank has established credit review and approval centres to strengthen its credit risk management in the County Areas. In addition, the Bank has introduced an online information platform to speed up communications with remote areas and leverage local information sources to achieve efficiency in its risk management.
• The County Area Banking Business has been a focus of the Bank’s internal review and audits. The Bank has strengthened its internal review and audits in respect of the identity of the borrowers of its small-amount rural household loans and the performance of the departing senior management of its sub-branches in the County Areas through both on-site and off-site review and audits.
Credit origination and review
Based on the Bank’s bank-wide risk management strategy and risk preferences and taking into consideration of the characteristics of the Bank’s County Area Banking Business, the Bank focuses on the following measures. In customer identification, the Bank focuses on leading agriculture industrialisation enterprises and other quality corporate customers as well as mid- to high-end retail customers. In product offerings, the Bank focuses on rural infrastructure project loans, urbanisation loans, loans for County Area merchandise distributions and County Areas SME loans. In addition, the Bank leverages its Huinong Cards to grow its small-amount rural household loans. Geographically, the Bank focuses on business development in the areas where the local economy is relatively more developed, such as the top ten counties of each province.
— 110 — The Bank has developed a score card system and designed rating indicators tailored for its County Area customer base, which consists mostly of small enterprises, private businesses and rural households. The Bank has largely completed the development of its County Area customer rating system and expects to achieve automatic rating to further improve the accuracy of its rating system.
Credit approval
The Bank has established review and approval policies specifically designed for its County Area Banking Business. Higher-tier branches appoint independent credit approval officers, who are familiar with the County Area Banking Business and designated to review and approve loan applications submitted by the Bank’s branch outlets in the County Areas. The Bank has established credit review and approval centres at its tier-2 branches to ensure a centralised and efficient review and approval process. The Bank has further improved its review and approval procedures and promoted online review and approval, to improve overall efficiency of its review and approval procedures without compromising its risk control.
The Bank has structured multiple types of security interest such as joint household guarantees, “company + farmer” guarantees and guarantees by farmers’ cooperatives. Moreover, the Bank has further strengthened its cooperation with insurance companies to combine loan origination with the offering of insurance products that are designed to reduce its risk exposure. The Bank strives to streamline its procedures for processing credit applications in its County Area Banking Business and reduce associated cost, without compromising its risk management. For example, for small business customers in the County Areas, the Bank consolidates credit rating, approval and drawdowns into one step.
Loan classification and monitoring
The Bank’s bank-wide policies and procedures for loan classification apply to its County Area Banking Business. The Bank is developing an automated loan classification system for retail loans, supplemented by manual checks. Considering such factors as the impact of natural disaster on its County Area customers’ repayment ability, the Bank has sought to refine its loan classification criteria for loans to rural households and agriculture-related businesses and adopted more stringent loan classification criteria strictly based on the number of days by which the payment of interest or principal of a loan is overdue.
The Bank has established an online monitoring and risk alert system for its County Area loans to monitor the risk profile of its County Area loan businesses and identify non-compliance with its policies and procedures, issue alerts, and take precautionary and corrective measures on a timely basis.
Post-disbursement management
The Bank conducts post-disbursement reviews and management of delinquent customers in the County Areas in substantially the same manner as it does for its Urban Area customers. The Bank conducts post disbursement monitoring and tracking of loans of its County Area Banking Business through CMS, with a focus on the borrower’s business fundamentals and financial condition, especially cash flows. The Bank also tracks non-financial information such as tax receipts and utilities bills to better understand the real business operations and fundamentals of the borrowers. The Bank reviews rural household loans through, for example, spot checking Huinong Card transaction records.
Credit risk management for treasury operations
The Bank’s treasury operations involve investments in treasury bonds, government bonds, financial institution bonds, corporate bonds, commercial paper, medium-term notes, and asset-backed securities. The Bank conducts credit risk management in respect of its treasury operations primarily through managing credit lines for counterparties. The Bank assigns the total credit limit for domestic and foreign financial
— 111 — institutions and set sub-limits for various business lines. Its head office reviews the Bank’s annual credit limits on exposure to financial institutions, determines authorisation limits for the Bank’s various departments at its head office and domestic and overseas branches, and engages in dynamic risk classification and adjustment in response to changes in counterparty risk.
Internal rating based system (IRBS) for credit risks
The Bank launched an internal rating-based system in 2007 in order to improve its ability to measure credit risks and to comply with Basel III and the regulatory requirements of the CBRC. The Bank developed its internal rating framework in three stages, with the adoption of a non-retail Foundation Internal Ratings- Based (FIRB) approach being the first stage, the adoption of a retail Advanced Internal Ratings-Based (AIRB) approach being the second stage and the adoption of a non-retail AIRB approach being the third stage. In 2013, the Bank applied to the CBRC for the implementation of advanced capital management methodology, including the non-retail IRB approach, retail exposures IRB approach and standardised approach for operational risk, and further reinforced the implementation and application of the advanced approach of capital management in 2015.
Information technology in credit risk management
The CMS is the Bank’s primary IT platform for credit business operations as well as the primary tool for credit risk management. For details of the Bank’s CMS, see “Description of the Bank – Information Technology – Information System”.
The Bank’s CMS enables the Bank to integrate the management of its corporate and retail customers. It covers loans, discounted bills, acceptances, letters of credit, letters of guarantee and other main credit products the Bank offers. It also supports online management of the Bank’s entire credit management process from loan application, review and approval to disbursement and post-disbursement management. It has the capability to conduct customer credit ratings automatically based on quantitative indicators and credit risk classification and determine market risk-related asset value markdowns. The Bank’s CMS allows speedy data retrieval and customised reporting. The Bank is in the process of upgrading its CMS, which is expected to improve its credit risk management capability through a more automated system.
Moreover, to support the development of a new customer rating model, the Bank has completed the development of IRBS. The IRBS has been in operation since June 2009.
Market risk management
Market risk arises from movements in exchange rates, interest rates and other market changes that affect market risk-sensitive instruments.
The Bank is exposed to market risk primarily through the assets and liabilities on its statement of financial position, as well as its off-balance sheet commitments and guarantees. The major types of market risk that may impact the Bank’s business are interest rate risk and exchange rate risk. Interest rate risk refers to the risk of losses in a bank’s income or economic value arising from adverse movements in statutory or market interest rates. Exchange rate risk means that a bank may experience losses because of mismatches in the currency denomination of the Bank’s assets and liabilities, or from the exposure of the Bank’s foreign exchange derivative transactions.
The Bank’s market risk management covers the entire process of identifying, measuring, monitoring and controlling market risk and aims to maximise its returns within the limit of its well-defined risk tolerance. The Bank primarily conducts market risk management through exposure limit management, authorisation management and counter-party credit extension management. Exposure limit management refers to the
— 112 — control over the level of market risk that the Bank’s head office, branches and overseas operations are facing. The Risk Management Department at the Bank’s head office sets exposure limit authorisations in respect of the Bank’s various business departments which are subject to the approval of the Board of Directors. There are two types of limits, namely, mandatory limits and recommended limits. A mandatory limit places a strict ceiling on the amount of market risk the Bank is willing to accept on the relevant business or products; by contrast, a recommended limit provides a relatively flexible constraint on the market risk and is geared more toward providing risk guidance and warning. In the case of a breach of a recommended limit, the Bank takes measures to reduce its risk exposure. In the case of a breach of a mandatory limit, the business unit bearing the market risk is required to take remedial measures unless there are justifiable reasons or circumstances that warrant the exposure temporarily exceeding the limit. The organisational unit is required to specify the reasons for such breaches and the time needed for resolving the situation in a report to be reviewed by the Risk Management Department at the Bank’s head office, which in turn will report the situation to the Bank’s senior management. Absent approval by the Bank’s head office senior management, the unit that breached the mandatory limit must take appropriate measures to ensure that the limit is restored. Market risk limits include, but are not limited to, exposure, loss, risk and stress testing limits. Exposure limits include limits on positions for transactions in total or for net transactions, and limits related to the Bank’s business targets. Loss limits refer to limits on loss in the mark-to-market value of asset portfolios. Risk limits refer to the limits set for indicators for measuring market risk. Stress testing limits refer to limits for losses that occurred in a stress scenario.
The Bank closely monitors market risk exposure limits through both the Risk Management Department and the risk management divisions of the Asset and Liability Management Department and the Financial Market Department. For a mandatory limit, an early warning is activated once a threshold of 80 per cent. of the limit is reached; for a recommended limit, the threshold is 90 per cent. The Bank’s trading management system allows the Bank to monitor and analyse data for the entire transaction process. Market risk reports consist of market risk analysis reports, market risk event reports and market risk management reports. The Bank plans to continue to institutionalise and standardise its market risk monitoring and reporting policies and procedures to further improve its ability to monitor and mitigate market risk.
The Bank separates its banking book and trading book. The Bank’s trading book covers the financial instruments and commodities positions the Bank holds for trading or hedging purposes. The Bank’s banking book covers all of its on- and off-balance sheet assets and liabilities and off-balance sheet positions not covered in the trading book.
The Bank formulates policies for annual treasury transaction and investment and market risks management. The Bank optimises the system of limit indicators for market risk and improves the market risk management system by adding more parameters. The Bank performs comprehensive validation of the Internal Model Approach and continued to optimise the measurement models. The Bank corporates with CBRC to evaluate the compliance of the advanced approach of capital management.
Market risk management for the Bank’s banking book
Interest rate risk management
The major source of interest rate risk in the Bank’s banking book is the mismatch of the maturity or repricing dates of the Bank’s interest rate-sensitive assets and liabilities. Due to the mismatch, the Bank’s net interest income and economic value may be affected by changes in interest rates. The Bank currently manages the interest rate risk in its banking book primarily through managing its assets and liabilities mix. The general strategy of interest rate risk management is to identify interest rate risk, adjust assets and liabilities pricing in a timely manner and control interest rate sensitivity exposure. Applying interest rate sensitivity analysis, gap analysis, scenario analysis and stress testing, the Bank conducts static measurements
— 113 — of the repricing characteristics of its assets and liabilities and evaluates the potential impact of changes in interest rates. Based on the results of such analysis, the Bank adjusts the maturity structure of its assets and liabilities and improve the management of the interest rate risk exposure in its banking book.
Exchange rate risk management
Exchange rate risk refers to the risk due to mismatches in the currency denominations of the Bank’s assets and liabilities. Through exposure limit management and the management of the currency structure of its assets and liabilities, the Bank seeks to ensure that the adverse impact of exchange rate fluctuations falls within an acceptable range.
Market risk management for the Bank’s trading book
Market risk arising from the Bank’s trading book primarily comes from fluctuations in the value of the Bank’s financial instruments on the trading book resulting from changes in exchange rates and interest rates. The Bank utilises interest risk sensitivity indicators such as duration and basis point value and applies analytical tools to monitor the market risks of the Bank’s trading accounts and improve the interest rate risk management of the financial instruments in the Bank’s trading book. In addition, the Bank strictly segregates the trading from non-trading functions and responsibilities, monitors and ensures the compliance of the Bank’s trading positions with its policies. Moreover, the Bank’s Audit Office conducts regular audits on the implementation of the Bank’s internal procedures for the management of the Bank’s trading book in accordance with requirements by the regulators and the Bank’s own policies.
Liquidity risk management
Liquidity risk refers to the risk of being unable to liquidate a position in a timely manner to acquire sufficient funds or failing to acquire sufficient funds at a reasonable cost in response to asset growth or to fulfil payment obligations. Factors affecting the Bank’s liquidity include the term structure of the Bank’s assets and liabilities and changes to banking industry policies, such as changes in the requirements relating to loan-to-deposit ratio and statutory deposit reserve ratio. The Bank is exposed to liquidity risk primarily in the funding of its lending, trading and investment activities, as well as in the management of its liquidity positions. The primary objective of the Bank’s liquidity risk management is to ensure that the Bank are able to meet its payment obligations and fund its lending and investment operations on a timely basis. The Bank seeks to improve its liquidity management through various measures, including:
• focusing on maintaining stable sources of funding and increasing its core deposits;
• enhancing its marketing efforts, increasing its total deposit amount, securing the continued growth in deposits to meet its liquidity needs and maintaining its capital raising capabilities; and
• improving the diversity of assets and maintaining an appropriate mix of short-, medium- or long-term assets.
Market Risk Exposure Limit Management
Market risk exposure limit of the bank is classified into directive limit and indicative limit based on its effects. Bank optimises the indicator system for market risk limit and strengthened monitoring and control on the limits. Through squaring positions, hedging and reduction of transaction volume, the Bank controls the market risk exposure in a timely manner.
— 114 — Operational risk management
Operational risk refers to the risk resulting from inadequate or failed internal control procedures, from human or information system related factors, or from external events. The operational risk that the Bank faces primarily includes, among others, internal fraud, external fraud, damages to property, disruptions to the Bank’s operations or information technology system and problems associated with transaction execution and closing as well as business processes. Since 2009, the Bank has implemented initiatives to streamline its business and operational processes and centralise its back office management to enhance its capabilities in the identification, measurement, reporting and control of operational risks. In 2015, the Advanced Measurement Approach for operational risk was applied to economic capital measurement and its models were optimised, in order to improve the stability and sensitivity of the economic capital models. The Bank believes that these measures will strengthen its operational risk management.
The Bank has established three lines of defence against operational risk. The first line is risk management by business units. The second line is the Bank’s risk management departments and internal control and compliance departments. Led by the Bank’s senior management, the Bank’s risk management departments are responsible for implementing operational risk management strategies, policies and procedures; developing and promoting operational risk management instruments; monitoring and reporting operational risks; and deploying economic capital measurement tools. The Bank’s internal control and compliance departments supervise and evaluate compliance with the Bank’s operational risk management policies and applicable laws and regulations. The third line is the Bank’s internal audit function, which is responsible for supervising and evaluating the Bank’s operational risk management system, evaluating the adequacy and effectiveness of the Bank’s operational risk management policies and procedures and supervising and assessing the Bank’s internal control system and compliance.
Since 2008, the Bank has conducted a comprehensive review of a number of areas of its business including its credit business, retail banking, operations management, e-banking and information technology. Through such review, the Bank has identified risk factors and risk indicators, developed operational risk identification procedures, and established procedures for monitoring and assessing key risk areas as well as a dynamic mechanism for continuous risk identification. The Bank identifies operational risk through the process analysis methodology, which identifies the business areas that may be subject to operational risk, and locates potential risk factors and the relevant risk indicators based on its past experience. The Bank’s head office and its tier-1 branches carry out, at least once a year, a comprehensive operational risk identification process and systematically review risk factors and risk indicators that have emerged in the Bank’s operations.
The Bank has established a bottom-up reporting system for operational risk. Once an operational risk occurs, the Bank’s branches at or above the county level are required to report the operational risk in a timely manner through the Bank’s operational risk reporting lines.
Compliance
Compliance risk refers to the risk of regulatory or legal breaches that may result in potential legal sanctions, regulatory penalties, significant financial losses and reputational harm. Compliance management is an important part of the Bank’s risk management activities. To strengthen its compliance management capabilities, the Bank has established, and is committed to continuing to strengthen, its bank-wide compliance management framework.
Organisational structure of the Bank’s compliance function
The Bank’s Internal Control and Compliance Department leads the Bank’s compliance risk management efforts. It is responsible for the Bank’s bank-wide compliance risk management, including identifying compliance risks, tracking and analysing control weaknesses and deficiencies, monitoring and assessing the
— 115 — Bank’s risk exposures and implementing preventative and corrective measures. The Bank has internal control and compliance management teams at its tier-1 and tier-2 branches and has launched a pilot programme to appoint compliance managers to selected sub-branches. The compliance managers under the pilot programme do not report to the sub-branches where they work; instead, they are under the direct supervision of the higher-tier branches that appointed them and report directly to the management of their respective higher-tier branches.
The Bank seeks to improve its compliance reporting mechanism and its database for non-compliance incidents. The Bank has established internal reporting procedures for employee misconduct. Significant cases of employee misconduct are required to be escalated through the higher-tier branches to the Bank’s head office within 24 hours of the discovery of these cases. In addition, the Bank is also required to report to the CBRC significant cases of employee misconduct. To promote compliance awareness of its employees, the Bank has adopted a points programme to deter incidents of non-compliance. In addition, the Bank has started to compile a comprehensive compliance handbook to describe and refine its business and operational process.
Anti-money laundering
In 2002, the Bank established a steering group responsible for anti-money laundering management. In 2003, the Bank formed an anti-money laundering division at its head office. Currently, the Internal Control and Compliance Department leads the Bank’s bank-wide anti-money laundering efforts.
The Bank has developed and refined anti-money laundering policies, clearly defining the duties and responsibilities, working procedures, and authorisations of the Bank’s various departments and branches. The Bank invests heavily in its anti-money laundering compliance efforts and provides regular training to its employees to strengthen their compliance awareness and skills. The Bank is committed to fulfilling its reporting obligations under anti-money-laundering laws and has been cooperating with regulatory authorities and the judiciaries to carry out anti-money laundering investigations. The Bank systematically carries out customer due diligence, and collects customer information and transaction records according to applicable laws and regulations. The Bank seeks to continue to improve its anti-money laundering capabilities and its compliance with bank-wide anti-money laundering policies and procedures through reinforcing the implementation of the “know-your-customer” procedures and standardised operational processes, improving its information collection and processing capabilities relating to large and suspicious transactions and strengthening its review and reporting of these transactions, as well as enhancing the functionality of its anti-money laundering information system to generate risk alerts on a timely basis.
Internal audit
The Bank has established a designated internal audit function, which follows a vertical reporting line. The Bank’s internal audit offices perform audits and evaluations on the Bank’s operations and management, business activities and financial performance. The Bank’s internal audit offices report to the Bank’s Board of Directors and are subject to the examination, supervision and evaluation by the Audit Compliance Committee of the Bank’s Board of Directors. The Bank’s internal audit offices are also under the supervision of the Bank’s Board of Supervisors. The Bank’s internal audit offices consist of the Audit Office at the Bank’s head office and 10 regional offices. The Audit Office is responsible for the organisation, management and reporting of the Bank’s bank-wide internal audit efforts. The regional offices, under the direct supervision of the Audit Office, perform internal audits in their respective specified areas and report to the Audit Office.
— 116 — The chart below shows the organisational structure of the Bank’s internal audit function:
The Bank’s internal audits are organised in an effort to promote the Bank’s compliance with and implementation of the applicable laws and regulations, assess the Bank’s risk management, internal control and corporate governance and maintain the Bank’s risk exposures within an acceptable range to continue to improve the Bank’s business operations and management.
The Bank’s internal audit focuses on:
• the Bank’s compliance with the applicable PRC laws and regulations, macroeconomic policies and regulatory guidelines as well as the Bank’s internal policies and procedures;
• the soundness and effectiveness of compliance in the Bank’s operations, the performance of the Bank’s compliance departments and the effectiveness and efficiency of the Bank’s various departments;
• the integrity, soundness and effectiveness of the Bank’s internal control system;
• the Bank’s risk exposures and the applicability and effectiveness of the Bank’s risk identification, measurement and monitoring procedures;
• the accuracy and reliability of the Bank’s accounting records and financial statements;
• the management, use and disposal of the Bank’s various assets;
• the results of the Bank’s operations and the implementation of the Bank’s business plans and financial budgets;
• the planning, development, operation and maintenance of the Bank’s information system;
• performance audits and departure audits of the executive officers of the Bank’s head office (including various divisions of the Bank’s head office), tier-1 branches and branches directly managed by the Bank’s head office and the nominees for such executive officers;
• the remediation measures in respect of the issues identified in the Bank’s internal audits; and
• other internal audits requested by the Board of Directors and the Audit and Compliance Committee under the Board of Directors.
— 117 — SUBSTANTIAL SHAREHOLDERS
As at 31 December 2015, the persons who had, or were deemed or taken to have interests or short positions in the shares or underlying shares which would fall to be disclosed to the Bank under the provisions of Division 2 and 3 of Part XV of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) or which were recorded in the Bank’s register required to be kept under section 336 of the SFO or who were directly or indirectly interested in 5 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Bank were as follows:
Percentage of Percentage of issued class total issued Interests and Name of shareholders Type of shares shares (%) shares (%) short positions (1) (2) MOF ...... A shares 46.64 42.23 137,158,823,563 Huijin ...... A shares 44.21 40.03 130,005,103,782 Citigroup Inc...... H shares 13.75 1.30 4,229,407,762 JPMorgan Chase & Co...... H shares 7.13 0.68 2,193,996,129 Blackrock, Inc...... H shares 6.33 0.60 1,945,876,327 Qatar Holding LLC ...... H shares 13.88 1.31 4,267,172,500 (3) Qatar Investment Authority . . . . . H shares 13.88 1.31 4,267,172,500
Notes:
(1) 9,797,058,826 A Shares are held by the SSF but the voting rights of these shares were transferred to the MOF according to the share subscription agreement dated 21 April 2010 and the Approval on the Proposed Transfer of State- owned Shares of the Agricultural Bank of China issued by the MOF on 5 May 2010.
(2) According to the register of shareholders of the Bank as at 31 December 2015, the MOF held 127,361,764,737 A Shares of the Bank, accounting for 43.31 per cent. of the issued A Shares and 39.21 per cent. of the total issued shares of the Bank.
(3) Qatar Investment Authority is deemed to be interested in 4,267,172,500 H Shares of the Bank held by Qatar Holding LLC, a wholly-owned subsidiary of Qatar Investment Authority.
— 118 — DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
DIRECTORS
The following table sets out certain information relating to the Bank’s directors:
Name Position Term of appointment
ZHAO Huan ...... Vice Chairman of the Board of Directors, 2016.03-2019.03 Executive Director, President CAI Huaxiang ...... Executive Director, Executive Vice President 2015.09-2018.09 LOU Wenlong ...... Executive Director, Executive Vice President 2012.12-2018.12 ZHAO Chao ...... Non-executive Director 2012.02-2018.02 ZHOU Ke ...... Non-executive Director 2014.07-2017.07 ZHANG Dinglong . . . . . Non-executive Director 2015.01-2018.01 CHEN Jianbo ...... Non-executive Director 2015.01-2018.01 HU Xiaohui ...... Non-executive Director 2015.01-2018.01 XU Jiandong ...... Non-executive Director 2015.02-2018.02 WEN Tiejun ...... Independent Non-executive Director 2011.05-2017.06 Francis YUEN Tin-fan . . Independent Non-executive Director 2013.03-2019.03 XIAO Xing ...... Independent Non-executive Director 2015.03-2018.03 (1) LU Jianping ...... Independent Non-executive Director 2015.06-present WANG Xinxin Independent Non-executive Director 2016.05-present
Note:
(1) Mr. Frederick MA Si-hang and Mr. LU Jianping resigned as Independent Non-executive Directors and from positions at relevant special committees of the Board of the Bank due to work arrangements in December 2015. Mr. Frederick MA Si-hang and Mr. LU Jianping will continue to perform their duties as Independent Non-executive Directors until the CBRC ratifies the eligibilities of the newly nominated Independent Non-executive Directors to meet the requirements of relevant regulatory rules and the Articles of Association.
Executive Directors
Mr. ZHAO Huan received a bachelor’s degree in engineering from Xi’an Jiaotong University and holds a certificate of senior economist. Mr. ZHAO has served as President of the Bank since March 2016. Mr. ZHAO previously served in China Construction Bank, successively as deputy director and director of Business Management Division of Banking Credit Department, director of General Administration Division of Corporate Business Department, Deputy General Manager of Corporate Business Department, Vice President of Xiamen Branch, Deputy General Manager and General Manager of Corporate Business Department, and President of Shanghai Branch. He has served as the Executive Vice President of China Construction Bank since March 2011. Since January 2014, Mr. ZHAO has served successively as executive director of China Everbright Group Limited, China Everbright Group Ltd., executive director and the President of China Everbright Bank Company Limited (listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange under stock codes: 06818 and 601818, respectively).
Mr. CAI Huaxiang received a master’s degree in engineering from China University of Geosciences and is a Senior Economist. He has served as Executive Director of the Bank since September 2015 and as Executive Vice President of the Bank since February 2010. Mr. CAI previously served successively as deputy director of the Personnel Bureau of China Development Bank; president of Nanchang branch and Jiangxi branch of China Development Bank; general manager of Operation Department of China Development Bank and president of Beijing branch of China Development Bank. Mr. CAI was appointed as vice president of China Development Bank Corporation in September 2008. He concurrently serves as the vice chairman of the 5th Committee of China International Finance Society.
— 119 — Mr. LOU Wenlong holds a bachelor’s degree and is a Senior Economist. He has served as a member of senior management of the Bank since August 2012. He has served as Executive Vice President of the Bank since September 2012 and as Executive Director and Executive Vice President of the Bank since December 2012. Mr. LOU previously served as secretary of the Youth League Committee, head of Students’ Affairs Division and chief of the Teaching and Researching Office of Urban Finance of Zhejiang Banking College. Mr. LOU later served in several positions in the PBOC, including secretary of Youth League Committee of the Head Office of Zhejiang Branch, vice division chief and division chief of Zhejiang Branch, director and assistant commissioner of Banking Inspection Division, Hangzhou Financial Supervision Office of Shanghai Branch, and deputy head of the supervisory team for China Construction Bank of Banking Supervision Department I. He was then appointed to several positions successively in the CBRC, including deputy director and then director of Banking Supervision Department II in September 2005, and director-general of Beijing Office in February 2009. He is now serving as the head of management department of Shanghai Branch of the Bank, a guest professor with Capital University of Economics and Business, and the vice chairman of the 7th session of the Committee of the China Institute of Rural Finance.
Non-executive Directors
Mr. ZHAO Chao holds a bachelor’s degree and is a Statistician. He currently works with Central Huijin Investment Ltd. and has served as Non-executive Director of the Bank since February 2012. Mr. ZHAO started working with the Bureau of Statistics of Shanxi Province in 1982, and served successively as vice director of Finance and Trade Division, Bureau of Statistics of Shanxi Province; director of Business and Trade Division and Legislation Division, State-owned Assets Supervision and Administration Bureau of Shanxi Province; director of Supervision and Inspection Division, Policies and Legislation Department of National State-owned Assets Supervision and Administration Bureau, director of Property Rights Legal Affairs Division, the MOF State-owned Capital Basic Management Department; counsel of Lottery Management Division, the MOF Department of Policy Planning; secretary general of the MOF General Department, vice director of the MOF Investment Appraisal and Censoring Centre, and vice counsel of the MOF Department of Treaty and Law.
Mr. ZHOU Ke holds a bachelor’s degree. He currently works with Central Huijin Investment Ltd. He has served as Non-executive Director of the Bank since July 2014. Mr. ZHOU started working with the MOF in 1988, and served successively as deputy director of Water Resources Division of Department of Agriculture, director of the Science and Technology Division, director of Project Management Department III and director of Policy Research Department of the National Agricultural Comprehensive Development Office, deputy director of the National Agricultural Comprehensive Development Evaluation Centre, and deputy director of the National Agricultural Comprehensive Development Office.
Mr. ZHANG Dinglong received a doctorate degree in law from Minzu University of China. He currently works with Central Huijin Investment Ltd. Mr. ZHANG has served as Non-executive Director of the Bank since January 2015. He used to serve as deputy director (in charge) of Issue Division of the Liaison Office of the Rural Policy Research Department of the Secretariat of the Central Committee and Rural Development Research Centre of the State Council, division head and deputy director of the Rural Economy Research Department, director of the Secretariat Department, deputy director of the Security Committee and chairman of the Labour Committee of State Council Research Office. He is a representative of the 11th and 12th National People’s Congress and a special supervisor of the Supreme People’s Court.
Mr. CHEN Jianbo received a doctorate degree in management from Renmin University of China. He currently works with Central Huijin Investment Ltd. Mr. CHEN has served as Non-executive Director of the Bank since January 2015. He used to serve as an assistant research fellow and deputy director of the Rural Policy Research Office of the Central Committee and the Enterprise Research Division of the Development Research Department of the Rural Development Research Centre of the State Council, division head and
— 120 — research fellow of the Rural Department of the Development Research Centre of the State Council, counsel of the Central Financial Affairs Leading Group Office and the Rural Group 1 of the Central Rural Affairs Leading Group Office.
Mr. HU Xiaohui holds a bachelor’s degree and is an Economist. He currently works with Central Huijin Investment Ltd. Mr. HU has served as Non-executive Director of the Bank since January 2015. He used to be a deputy director of Xiangtan Group, deputy director (in charge) of Yiyang Group, deputy director (in charge) of the general office, deputy director and director of the general division, director of the Division I, assistant commissioner, secretary of the party committee, deputy counsel, deputy inspection commissioner and discipline inspection team leader of Office of the Finance Discipline Inspection Commissioner of the MOF in Hunan Province.
Mr. XU Jiandong holds a bachelor’s degree. He currently works with Central Huijin Investment Ltd. Mr. XU has served as Non-executive Director of the Bank since February 2015. He used to work with SAFE successively in several positions, including deputy director of the Market Exchange Rate Division of the Balance of Payment Department, director of the Banking Foreign Exchange Balance of Payment Management Division of the Balance of Payment Department, deputy counsel of the Balance of Payment Department. He also used to serve as deputy director of the Financial Affairs Office of Jilin Province and deputy counsel of the Management and Inspection Department of SAFE.
Independent Non-executive Directors
Mr. WEN Tiejun, received a PhD in management from China Agricultural University. Mr. WEN is currently the executive president of the Institute of Advanced Study of Sustainable Development and a second-grade professor of Renmin University of China, and an expert entitled to Government Special Allowance by the State Council of the PRC. He has served as Independent Non-executive Director of the Bank since May 2011. He used to serve concurrently as the head of school of Agricultural Economics and Rural Development of Renmin University of China, a director of Rural Construction Centre of Renmin University of China, director of China Rural Economy and Finance Research Institute, the executive dean of School of China Rural Construction of Southwest University. He has also served as a member of the National Environment Advisory Committee, ministerial adviser and advisory expert of the Ministry of Commerce, the State Forestry Administration, Beijing and Fujian Province of the PRC. Mr. WEN was elected as vice president of the Chinese Association of Agricultural Economics in 2007 and a member of the Sixth Session Disciplinary Assessment Team under the Academic Degree Commission of the State Council of the PRC in 2008. He was previously deputy secretary-general of the China Society of Economic Reform, a researcher of the Research Centre for Rural Economy of Ministry of Agriculture of the PRC and the deputy chief of office of Rural Reform Pilot Area.
Mr. Francis YUEN Tin-fan holds a bachelor’s degree in economics from University of Chicago and is a member of the Shanghai Municipal Committee of Chinese People’s Political Consultative Conference. He is now a non-executive vice chairman of Pacific Century Regional Developments Limited (listed on the Singapore Exchange under stock code: P15), and has served as Independent Non-executive Director of the Bank since March 2013. Mr. YUEN previously served as chief executive of the Hong Kong Stock Exchange, vice chairman and executive director of Pacific Century Group, chairman and board representative of Pacific Century Group Japan Co., Ltd., vice chairman and executive director of PCCW Limited (listed on the Hong Kong Stock Exchange under stock code: 00008), vice chairman of Pacific Century Premium Developments Limited (listed on the Hong Kong Stock Exchange under stock code: 00432), executive chairman of Pacific Century Insurance Holdings Limited (now known as Ageas Insurance Company (Asia) Limited), vice chairman and executive director of Pacific Century Regional Developments Limited, non-executive director of Kee Shing (Holdings) Limited (listed on the Hong Kong Stock Exchange under stock code: 00174) (now known as Gemini Investments (Holdings) Limited) and an independent non- executive director of China Pacific Insurance Group Co., Ltd. (listed on the Hong Kong Stock Exchange and
— 121 — the Shanghai Stock Exchange under stock codes: 02601 and 601601, respectively). Mr. YUEN is currently serving as an independent non-executive director of China Foods Limited (listed on the Hong Kong Stock Exchange under stock code: 00506) and China Chengxin International Credit Rating Co., Ltd. He is also chairman of the board of trustees of the Hong Kong Centre for Economic Research, chairman of the advisory committee of Ortus Capital Management Limited, and a member of the board of trustees of the University of Chicago and Fudan University in Shanghai.
Ms. XIAO Xing holds a PhD in accounting. She is currently the chair of Accounting Department of School of Economics and Management and associate professor and tutor with long-term contract of Tsinghua University. She has served as Independent Non-executive Director of the Bank since March 2015. During her tenure, she visited Harvard University, Massachusetts Institute of Technology, University of Wisconsin for study or as a senior visiting scholar. She was elected as a Fulbright scholar in 2011. Ms. XIAO used to serve as a member of the expert panel of China Development Bank, an independent consultant for the World Bank and an independent director of Beijing Thunisoft Corporation Limited. She concurrently serves as a board member of the Finance and Cost Sub-society of the Accounting Society of China, a member of the Teaching Collaboration Committee for Accounting of Universities in Beijing, vice editor of China Accounting and Finance Review, an editor and editorial board member of China Accounting Review, a senior research fellow of Corporate Governance Research Centre of Tsinghua University, and an independent director of Rongxin Power Electronic Co., Ltd. GoerTek Inc. and Dohia Home Textile Co., Ltd., respectively.
Mr. LU Jianping received a PhD in laws from University of Montpellier, France. Mr. Lu is currently the standing associate dean of the Criminal Law Science Research Institute, professor and tutor for Ph.D. candidates of Beijing Normal University. He has served as Independent Non-executive Director of the Bank since June 2015. He used to serve as director of the International Economic Law Department, associate dean of the Foreign Trade College and director of the Public Management Department of Zhejiang University and executive director of Criminal Law Science Research Center of Renmin University of China. He serves concurrently as director of China Law Society, vice president of Criminology Research Committee of China Law Society, director of International Association of Penal Law and standing vice chairman of China branch of International Association of Penal Law, and director of International Society of Social Defence. Mr. LU’s resignation as an Independent Non-executive Director of the Bank and from his relevant positions in the Board committees will become effective upon the approval of appointment of a new independent director by the CBRC.
Mr. WANG Xinxin has served as an independent non-executive director of the Bank since May 2016. Mr. Wang previously served as a member of the drafting workgroup of the Enterprise Bankruptcy Law of the PRC and a member of the drafting and amending workgroup of the Partnership Law of the PRC, both organized by the Financial and Economic Committee of the National People’s Congress of the PRC. He is currently a professor and Ph.D tutor at Teaching and Research Section of Economic Law, Law School of Renmin University of China and he is currently serving as the director of the Research Center of Bankruptcy Law at Renmin University of China, the chairman of Beijing Bankruptcy Law Society, the honorary chairman of the Enterprise Bankruptcy and Reorganization Panel of Shandong Law Society, a counsel of the Bankruptcy Law Panel of Shanghai Law Society, a managing director of Economic Law Panel of China Law Society, and an independent director of Hubei Feilihua Quartz Glass Co., Ltd (listed on Growth Enterprises Market of Shenzhen Stock Exchange under stock code: 300395) and Jolywood (Suzhou) Sunwatt Co., Ltd. (listed on Growth Enterprises Market of Shenzhen Stock Exchange under stock code: 300393), respectively.
— 122 — SUPERVISORS
The following table sets out certain information relating to the Bank’s supervisors.
Name Position
YUAN Changqing ...... Chairman of the Board of Supervisors WANG Xingchun ...... Supervisor Representing Shareholders ZHENG Xin ...... Supervisor Representing Employees XIA Zongyu ...... Supervisor Representing Employees XIA Taili ...... Supervisor Representing Employees LI Wang ...... External Supervisor LV Shuqin ...... External Supervisor
Mr. YUAN Changqing received an MBA degree from the University of Hong Kong and is a senior economist. He has served as the Chairman of the Board of Supervisors as well as the Supervisor representing shareholders of the Bank since June 2015. Mr. YUAN previously served as the president of Xinjiang Branch and Henan Branch of the Industrial and Commercial Bank of China (“ICBC”) and the general manager of Human Resources Department of ICBC. Mr. YUAN was appointed as the secretary of the Party Discipline Committee of China Everbright (Group) Corporation (“Everbright”) in December 2008, the executive director, vice-president and secretary of the Party Discipline Committee of Everbright in August 2012 and the vice-general manager and secretary of the Party Discipline Committee of Everbright in December 2014. During the period from September 2011 to September 2014, he also served as the Chairman of Everbright Securities Co., Ltd.
Mr. WANG Xingchun received a master’s degree in economics from the Graduate School of the PBOC and is a Senior Economist. He has served as the Supervisor representing shareholders of the Bank since June 2014. Mr. WANG previously served successively in several positions in the Bank, including deputy chief of the Policy Research Division of the Research Office, chief of the Policy Research Division of the Development Planning Department, assistant to general manager of the Market Development Department, deputy general manager of the Market Development Department and deputy general manager of the Training Department. He was appointed as vice president of Tianjin Training Institute of the Bank in February 2002, general manager of the Legal Affairs Department of the Bank in November 2003, general manager of the Legal and Compliance Department of the Bank in June 2006, general manager of the Legal Affairs Department of the Bank in July 2008, supervisor representing employees and general manager of the Legal Affairs Department of the Bank in April 2009, supervisor representing employees and branch principal of the Audit Office’s Affiliated Office of the Bank in March 2011, branch principal of the Audit Office’s Affiliated Office of the Bank in July 2011, and director of Office of the Board of Supervisors in March 2014.
Mr. ZHENG Xin graduated with a junior college diploma and is a Senior Accountant. Mr. ZHENG has served as Supervisor representing employees of the Bank since July 2011. He previously served as the assistant to the director of the Personnel Department in Shanghai branch, director of the Personnel and Education Department of Shanghai Pudong branch, deputy director of the Personnel Department, deputy director and director of the Finance and Accounting Department, secretary of Party Committee and president of Xuhui Sub-branch, member of Party Committee and vice president of Shanghai branch, deputy secretary of Party Committee (in charge), secretary of Party Committee and president of Anhui branch of the Bank, secretary of Party Committee and president of Shanghai branch of the Bank and general manager of the Internal Control and Compliance Department of the Bank. He has served as the general manager of the Internal Control and Legal & Compliance Department of the Bank since July 2011.
— 123 — Mr. XIA Zongyu holds a master’s degree and is a Senior Economist. Mr. XIA has served as Supervisor representing employees of the Bank since May 2013. He used to serve in several positions in the Executive Office of the Bank, including deputy chief of the General Division, deputy chief and chief of the Policy Research Division and chief of the Document Management Division. Mr. XIA was appointed to several positions in the Bank, including deputy director of the Executive Office in October 2003, principal of the Sannong Retail Banking Department in April 2008, general manager of the Sannong Retail Banking Department in July 2008 and vice president of Fujian branch in June 2009. He was appointed as principal of the Labour Union Affairs Department in November 2012 and director of the Labour Union Affairs Department in January 2013.
Mr. XIA Taili graduated with a college diploma. He has served as Supervisor representing employees of the Bank since December 2014. He used to serve as deputy director of the General Department in the Third Discipline Inspection Office of the Central Commission for Discipline Inspection, and at the same time as deputy secretary of the CPC County Committee in Zhangpu County, Fujian Province. He used to serve in several positions with the Central Commission for Discipline Inspection, including director level inspector, supervisor and deputy director of the General Department in the Third Discipline Inspection Office, director level inspector and supervisor of the Second Discipline Inspection Office, director of the Second Department and the General Department in the Second Discipline Inspection Office, deputy bureau level discipline inspection commissioner and supervisor in the Second Discipline Inspection Office, deputy bureau level discipline inspection commissioner and supervisor in the Seventh Discipline Inspection Office and director (department manager) of the Inspection Work Leading Group Office of the Bank. He served as deputy secretary of the CPC Discipline Committee and general manager of the Inspection and Supervision Department of the Bank since April 2014. He has served as director of the Inspection and Supervision Office of the Bank since March 2015.
Mr. LI Wang holds a doctorate degree in law. Mr. LI has served as the external Supervisor of the Bank since June 2015. He previously served in the School of Law of Tsinghua University as a professor and tutor for PhD students, a teaching assistant at the Faculty of Law of Kyoto University, and a lawyer at Sakamoto Law Firm in Japan, Oh-Ebashi LPC & Partners in Japan and J&R Law Firm in Beijing. Currently Mr. LI also works as a lawyer at the Tiantai Law Firm and an independent director at Beijing Capital Land Ltd.
Ms. LV Shuqin received a bachelor’s degree. Ms. LV has served as the external Supervisor of the Bank since June 2015. She previously worked as an accountant in charge of materials in the industry manager department of Xiping County of Henan Province. She served as deputy director of general office of China Logistics Publishing House of the Ministry of Material Supplies, the director of finance department, the assistant general manager, chief accountant of China Wood Company of the Ministry of Material Supplies, the head of audit department of Huajian Accounting Firm, the planning and development department of and China Audit Certified Public Accountants LLP, the deputy chief accountant of Zhongrui Yuehua Certified Public Accountants LLP and the deputy head of China Audit Asia Pacific Certified Public Accountants LLP. Ms. LV has been the partner of Union Power CPAs Co., Ltd since July 2014, and currently she is also an independent director of WanXiang Doneed Co., Ltd.
— 124 — SENIOR MANAGEMENT
The following table sets out certain information relating to the Bank’s senior management.
Name Position
ZHAO Huan ...... Vice Chairman of the Board of Directors, Executive Director, President CAI Huaxiang ...... Executive Director, Executive Vice President GONG Chao ...... Executive Vice President, Secretary of the Party Discipline Committee LOU Wenlong ...... Executive Director, Executive Vice President WANG Wei ...... Executive Vice President LIN Xiaoxuan ...... Executive Vice President ZHANG Keqiu ...... Secretary to the Board of Directors
For the detailed biography of Mr. ZHAO Huan, Mr. CAI Huaxiang and Mr. LOU Wenlong, see “Directors” above. The biographies of other senior management personnel are as follows:
Mr. GONG Chao received a master’s degree in economics from Xi’an Jiaotong University and is a Senior Economist. He has served as Secretary of the Party Discipline Committee of the Bank since December 2011 and as Executive Vice President and secretary of the Party Discipline Committee of the Bank since March 2012. Mr. GONG previously served as the deputy director of the personnel department of Agricultural Development Bank of China, deputy director of the Administrative Affairs Department and the Executive General Office of the SSF, and vice president of the Beijing branch of Agricultural Development Bank of China. Mr. GONG was appointed as general manager of the human resources department of Agricultural Development Bank of China in September 2006.
Mr. WANG Wei received a master’s degree in economics from Nanjing Agricultural University and is a Senior Economist. He has served as a member of senior management of the Bank since December 2011 and an Executive Vice President of the Bank since December 2013. Mr. WANG previously served in several positions in the Bank, including as deputy president of Ningxia branch, deputy president of Gansu branch, president of Gansu branch, president of Xinjiang branch and president of Xinjiang Production and Construction Corps branch, director of the General Office of the Bank and president of Hebei branch, general manager of the Internal Control and Compliance Department, general manager of the Human Resources Department and chief officer of the Sannong Business. He is concurrently the vice chairman of the fourth committee of Chinese Society of Financial Ideological and Political Work and a member of the fourth national standing committee of Chinese Financial Association.
Mr. LIN Xiaoxuan received a master’s degree in engineering from East China Normal University. He is a researcher and an expert entitled to Government Special Allowance granted by the State Council. He has served as Executive Vice President of the Bank since September 2015. Mr. LIN previously served several positions in ICBC, including the Chief of Technology Protection Section and Head of Software Development and Operation Centre of Fujian Branch, the Deputy General Manager of Technology Protection Department of the Head Office and the General Manager of Information and Technology Department of ICBC, during which period he concurrently served as the General Manager of Data Centre of ICBC. Mr. LIN was appointed as Chief Officer of Information and Technology and General Manager of Information and Technology Department of ICBC in July 2009 and Chief Information Officer of ICBC in December 2010.
— 125 — COMPANY SECRETARY
Ms. ZHANG Keqiu received a master’s degree from Nankai University. Ms. ZHANG has served as secretary to the Board of Directors of the Bank since June 2015. She is a senior accountant and an expert entitled to Government Special Allowance granted by the State Council. She had previously served in various positions in the Bank, including deputy director of Funds Division and director of System Management Division of the International Business Department, director of Finance Division of Finance and Accounting Department, general manager of Business Department of Beijing Branch and chief representative of London Representative Office. She was appointed as deputy general manager of Finance and Accounting Department in April 2004, deputy general manager of Accounting and Settlement Department in May 2006, deputy general manager of Planning and Finance Department in April 2008, deputy general manager of Finance and Accounting Department and special resident auditor in Beijing Branch and Tianjin Branch concurrently in November 2008, general manager of Asset and Liability Management Department of the Bank in August 2009, general manager of Finance and Accounting Department of the Bank in June 2011. Ms. ZHANG has served as chief financial officer and general manager of Finance and Accounting Department of the Bank since November 2012. Ms. ZHANG is currently also a deputy secretary-general of executive committee of the Banking Accounting Society of China.
SPECIAL COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors established the Strategic Planning Committee, the County Area Banking Business Development Committee, the Nomination and the Remuneration Committee, the Audit and Compliance Committee and the Risk Management Committee (which established the Related Party Transactions Management Committee thereunder).
Strategic Planning Committee
The Strategic Planning Committee currently comprises seven directors, including Mr. CAI Huaxiang and Mr. LOU Wenlong (as Executive Directors), Mr. ZHAO Chao, Mr. ZHANG Dinglong, Mr. CHEN Jianbo and Mr. HU Xiaohui (as Non-executive Directors) and Mr. WEN Tiejun (as Independent Non-executive Director). The primary duties of the Strategic Planning Committee are to review the overall development strategy and specific strategic development plans, major investment and financing plans, mergers and acquisitions plans and other material matters critical to the development of the Bank and make suggestions to the Board of Directors.
County Area Banking Business Development Committee
The County Area Banking Business Development Committee currently comprises seven directors, including Mr. LOU Wenlong (as Executive Director), Mr. ZHOU Ke, Mr. ZHANG Dinglong, Mr. CHEN Jianbo and Mr. HU Xiaohui (as Non-executive Directors) and Mr. WEN Tiejun and Ms. XIAO Xing (as Independent Non-executive Directors). The primary duties of the County Area Banking Business Development Committee are to review the strategic development plan, policies, basic management rules and the risk strategic plan of the County Area Banking Business and other major matters critical to the development of the County Area Banking Business. It is also responsible for monitoring the implementation of the Bank’s County Area Banking Business strategic plan, policies and basic management rules, evaluating the services for customers of County Area Banking Business, and making suggestions to the Board of Directors.
— 126 — Nomination and Remuneration Committee
The Nomination and Remuneration Committee currently comprises six Directors, including Mr. ZHOU Ke and Mr. XU Jiandong (as Non-executive Directors) and Mr. Frederick MA Si-hang, Mr. WEN Tiejun, Ms. XIAO Xing and Mr. LU Jianping (as Independent Non-executive Directors). Mr. WEN Tiejun is the chairman of the Nomination and Remuneration Committee. The primary duties of the Nomination and Remuneration Committee are to formulate standards and procedures for election of directors, chairmen and members of board committees and senior management members and submit the proposed candidates and their qualifications to the Board of Directors for approval, and to formulate the remuneration packages for directors, supervisors and senior management members and submit the same to the Board of Directors for approval.
Audit and Compliance Committee
The Audit and Compliance Committee of the Board of Directors currently comprises six Directors, including Mr. ZHANG Dinglong and Mr. HU Xiaohui (as Non-executive Directors) and Mr. Frederick MA Si-hang, Mr. WEN Tiejun, Mr. Francis YUEN Tin-fan and Ms. XIAO Xing (as Independent Non-executive Directors). Mr. Frederick MA Si-hang is the chairman of the Audit and Compliance Committee. The primary duties of the Audit and Compliance Committee are to supervise, inspect and review the Bank’s internal audit, financial information and internal control, and to make suggestions to the Board of Directors.
Risk Management Committee
The Risk Management Committee currently comprises eight directors, including Mr. CAI Huaxiang (as Executive Director), Mr. ZHAO Chao, Mr. ZHOU Ke, Mr. CHEN Jianbo and Mr. XU Jiandong (as Non executive Directors) and Mr. Frederick MA Si-hang, Mr. Francis YUEN Tin-fan and Mr. LU Jianping (as Independent Non-executive Directors). Mr. Francis YUEN Tin-fan is the chairman of the Risk Management Committee. The primary duties of the Risk Management Committee are to review the Bank’s risk strategy, risk management policies, risk management reports and proposals on deployment of risk-based capital, supervise and assess the performance of relevant senior management members and risk management departments in respect of risk management, and to make suggestions to the Board of Directors.
Related Party Transactions Management Committee
The Related Party Transactions Management Committee currently comprises four directors, including Mr. ZHAO Chao (as Non-Executive Director) and Mr. Frederick MA Si-hang, Mr. Francis YUEN Tin-fan and Mr. LU Jianping (as Independent Non-executive Directors). Mr. Francis YUEN Tin-fan is the chairman of the Related Party Transactions Management Committee. The primary duties of the Related Party Transactions Management Committee are to identify related parties of the Bank, review the Bank’s general management system for related party transactions, review and record the related party transactions, and to make suggestions to the Board of Directors.
CONFLICTS OF INTEREST
As far as is known to the Bank, no potential conflicts of interest exist between any duties to the Bank of any directors or senior management and their private or other duties.
— 127 — PRC REGULATIONS
In March 2014, the CBRC promulgated the Measures on Financial Leasing Companies (Order of CBRC [2014] No. 3) (the “Measures on Financial Leasing Companies”), which replaced the previous Measures on Financial Leasing Companies promulgated on 23 January 2007 by CBRC, which specifically targeted the financial leasing companies it regulates. The Measures on Financial Leasing Companies aimed to provide more comprehensive regulation of the rights and obligations of the parties to leasing transactions and allow more financial institutions to participate in the financial leasing industry. In particular, the Measures on Financial Leasing Companies (i) considerably relaxed the qualification requirements for establishing such financial leasing companies; (ii) permitted these financial leasing companies’ business scope to further expand upon approval from the CBRC; and (iii) allowed such financial leasing companies to further establish their subsidiaries upon approval from the CBRC. According to the Notice of CBRC General Notice on Promulgation of the Interim Provisions of Administration Specialised Subsidiaries Financial Leasing Companies (中國銀監會辦公廳關於印發金融租賃公司專業子公司管理暫行規定的通知) promulgated by the CBRC on 11 July 2014, financial leasing companies are allowed to establish specialised subsidiaries that operate specific financial leasing businesses in the free trade zone and tax free zone in the PRC or abroad.
Under the Measures on Financial Leasing Companies, the promoter of a financial leasing company shall stipulate in the articles of association of the financial leasing company that if the financial leasing company has difficulties meeting payment obligations, the promoter will provide liquidity support. Furthermore, the promoter shall promptly inject capital when the financial leasing company’s operating losses erode its capital. The new rules create a more favourable environment for competent financial leasing companies, and at the same time require more support by the promoters of the leasing business.
On 10 January 2014, SAFE released a Notice on Further Improving and Adjusting Regulation on Capital Item Foreign Exchange Management (關於進一步改進和調整資本項目外匯管理政策的通知). This Notice relaxed the foreign exchange regulation over financial leasing companies by (i) only requiring such companies to register their overseas claims after the occurrence of such claims; (ii) lifting the quota limitation on entering into offshore financial leasing transactions (which is replaced by a post-signing filing procedure); and (iii) allowing for direct remittance and settlement with banks.
Based on the business licence and the financial licence of the Company, the Company is permitted to engage in inter-bank lending and borrowing business. On 1 September 2015, the General Office of the State Council promulgated the Guiding Opinion on Promoting the Healthy Development of Financial Leasing Industry (國 務院辦公廳關於促進金融租賃行業健康發展的指導意見), which is intended to promote the development of the financial leasing industry, encourage involvement of private capital in the financial leasing industry and strengthen the financial leasing companies’ core competitiveness. In addition, it also encourages financial leasing enterprises to establish more specialised subsidiaries in the free trade zone and tax free zone in the PRC or abroad to improve their service quality, simplifies the registration process of transactions to benefit the financial leasing companies, and improves the ship registration system to promote the development of the shipping financial leasing industry.
In order to promote issuance of offshore debts and facilitate cross-border financing activities, the NDRC issued the NDRC Circular. In accordance with the NDRC Circular, if any onshore entity, any offshore branch of any onshore entity or any offshore entity which is controlled by any onshore entity intends to issue any offshore debt (including bonds or long-term and medium-term international commercial loans), and the term of such debt is more than one year, it is required to (1) provide an application to the NDRC for registration of such offshore debt before the issuance of such offshore debt and (2) report the issuance information to the NDRC within the prescribed period after the completion of such issuance.
— 128 — In addition, the establishment of the Shanghai Free Trade Zone also provided a series of tax preferences, registered capital relaxation and other special treatment to financial leasing companies. Its policy on financial leasing companies is believed to be a spotlight of the free trade zone area. The Bank believes that the steps taken by the PRC government above illustrate the government’s support for the financial leasing industry in further developing this sector. In addition, the reform and decentralisation process of the PRC government is likely to give rise to further business opportunities for financial leasing companies. For example, the Notice on the Credit Asset Securitisation Registration Workflow Notification (關於信貸資產證 券化備案登記工作流程的通知) promulgated by the CBRC in 2014 and the People’s Bank of China Announcement on Matters relating to Administration of the Issuance of Credit Asset-Backed Securities (中國 人民銀行公告2015年第7號–關於信貸資產支持證券發行管理有關事宜的公告) promulgated by the PBOC in 2015 have reformed the asset securitisation process by replacing the approval process with a registration procedure, which means projects no longer need to be approved on a case-by-case basis. The PBOC and the CBRC have also lowered the entry requirements for financial leasing companies to issue bonds.
— 129 — TAXATION
The following is a general description of certain tax considerations relating to the Notes and is based upon applicable laws, rules, regulations and relevant interpretation thereof in effect as at the date of this Offering Circular, all of which are subject to changes and does not constitute legal or taxation advice. It does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in those countries or elsewhere. Prospective purchasers of the Notes should consult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding and disposing of the Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of those countries. Neither these statements nor any other statements in this Offering Circular are to be regarded as advice on the tax position of any holder of the Notes or any persons acquiring, selling or otherwise dealing in the Notes or on any tax implications arising from the acquisition, sale or other dealings in respect of the Notes. It is emphasised that none of the Issuer, the Guarantor, the Bank nor any other persons involved in the offering of the Notes accepts responsibility for any tax effects or liabilities resulting from the subscription for purchase, holding or disposal of the Notes.
British Virgin Islands
The following is a discussion on certain British Virgin Islands income tax consequences of an investment in the Notes. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under British Virgin Islands law.
Under existing British Virgin Islands laws:
(i) The Issuer and all payments of interest and principal on the Notes and other amounts made by the Issuer to persons who are not persons resident in the British Virgin Islands and any capital gains realised with respect to the disposal of the Notes by persons who are not persons resident in the British Virgin Islands are exempt from all provisions of the Income Tax Ordinance in the British Virgin Islands.
(ii) No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the British Virgin Islands with respect to any shares, debt obligation or other securities of the Issuer.
(iii) All instruments relating to transfers of property to or by the Issuer and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the Issuer and all instruments relating to other transactions relating to the business of the Issuer are exempt from payment of stamp duty in the British Virgin Islands. This assumes that the Issuer does not hold an interest in real estate in the British Virgin Islands.
(iv) There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to the Issuer or its shareholders.
Hong Kong
Withholding Tax
Under existing Hong Kong law, payments of principal and interest in respect of the Notes can be made without withholding for or on account of any Hong Kong taxes. In addition, no tax is required to be withheld in Hong Kong in respect of any gains arising from resale of the Notes.
— 130 — Stamp Duty
The Notes are not subject to Hong Kong stamp duty either upon issue or on any subsequent transfer.
Profits Tax
Profits tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of assessable profits arising in or derived from Hong Kong from such trade, profession or business.
Interest on the Notes may be subject to profits tax in Hong Kong in the following circumstances:
(i) interest on the Notes is derived from Hong Kong and is received by or accrues to a company carrying on a trade, profession or business in Hong Kong;
(ii) interest on the Notes is derived from Hong Kong and is received by or accrues to a person, other than a company, carrying on a trade, profession or business in Hong Kong and is in respect of the funds of that trade, profession or business; or
(iii) interest on the Notes is received by or accrues to a financial institution (as defined in the Inland Revenue Ordinance (Cap. 112) of Hong Kong) and arises through or from the carrying on by the financial institution of its business in Hong Kong.
Sums received by or accrued to a financial institution by way of gains or profits arising through or from the carrying on by the financial institution of its business in Hong Kong from the sale, disposal or redemption of the Notes may be subject to Hong Kong profits tax.
Sums derived from the sale, disposal or redemption of the Notes may be subject to Hong Kong profits tax where received by or accrued to a person, other than a financial institution, who carries on a trade, profession or business in Hong Kong and the sum has a Hong Kong source. The source of such sums will generally be determined by having regard to the manner in which the Notes are acquired and disposed.
PRC
EIT
The following summary accurately describes the principal PRC tax consequences of ownership of the Notes by beneficial owners who, or which, are not residents of mainland China for PRC tax purposes.
These beneficial owners are referred to as non-PRC Noteholders in this “Taxation – PRC” section. In considering whether to invest in the Notes, investors should consult their individual tax advisers with regard to the application of PRC tax laws to their particular situations as well as any tax consequences arising under the laws of any other tax jurisdiction. Reference is made to PRC taxes from the taxable year beginning on or after 1 January 2008.
Pursuant to the EIT Law and its implementing regulations, enterprises that are established under laws of foreign countries and regions (including Hong Kong, Macau and Taiwan) but whose “de facto management organisation” are within the territory of the PRC shall be PRC tax resident enterprises for the purpose of the EIT Law and they shall pay enterprise income tax at the rate of 25 per cent. in respect of their income sourced from both within and outside the PRC. If the relevant PRC tax authorities decide, in accordance with applicable tax rules and regulations, that the Issuer’s “de facto management organisation” is within the territory of the PRC, it may be held to be a PRC tax resident enterprise for the purpose of the EIT Law and be subject to enterprise income tax at the rate of 25 per cent. for its income sourced from both within and
— 131 — outside the PRC. Pursuant to the EIT Law and its implementing regulations, any non-resident enterprise without an establishment within the PRC or whose income has no actual connection to its establishment within the PRC, shall be required to pay an income tax at the rate of 10 per cent. on the income sourced inside the PRC. Such income tax shall be withheld by the PRC payer that is acting as the obligatory withholder and such PRC payer shall withhold the tax amount from each payment or payment due. In the event the Issuer is deemed to be a PRC tax resident enterprise by the PRC tax authorities, it will be required to withhold income tax from the payments of interest in respect of the Notes for any non-PRC Noteholder, and any gain from the disposition of the Notes may be subject to PRC tax, if the income or gain is treated as PRC-source. However, despite the potential withholding of the PRC tax by the Issuer, the Issuer has agreed to pay additional amounts to holders of the Notes so that holders of the Notes will receive the full amount of the scheduled payment, as further set out in “Terms and Conditions of the Notes”.
According to the double taxation arrangement between China and Hong Kong and relevant PRC tax regulations, residents of Hong Kong will not be subject to PRC tax on any capital gains from a sale or exchange of the Notes. Other non-PRC Noteholders will also not be subject to the PRC tax on any capital gains derived from a sale or exchange of Notes consummated outside the PRC between non-PRC Noteholders, except however, if the Issuer is treated as a PRC tax resident enterprise under the EIT Law and related implementing regulations, any gain realised by the non-PRC Noteholders from the transfer of the Notes may be regarded as being derived from sources within the PRC and accordingly other non-PRC resident Noteholders would be subject to up to 10 per cent. of PRC withholding tax. No PRC stamp duty will be imposed on non-PRC Noteholders either upon issuance of the Notes or upon a subsequent transfer of Notes.
In the event that the Guarantor failed to fully perform its obligations under the Deed of Guarantee and the Bank makes any payments in respect of interest on the Notes, the Bank may be obliged to withhold PRC enterprise income tax at the rate of up to 10 per cent. on such payments to non-PRC resident enterprise Noteholders if such payments will be regarded as being derived from sources within the PRC by PRC tax authorities, and PRC value added tax at a rate of 6 per cent. may also be applicable if the Noteholders is regarded as providing financial services within the PRC by PRC tax authorities.
In the event that PRC withholding tax applies to payments drawn under the Deed of Guarantee, the Bank shall pay such additional tax amounts as will result in receipt by the Noteholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable with respect to any Note.
Value-added Tax
On 23 March 2016, the MOF and the SAT jointly issued the Circular 36 which provides that all business tax payers are included into the pilot programme to pay VAT from 1 May 2016. With effect from 1 May 2016, the income derived from the provision of financial services which previously attracted business tax will be entirely replaced by, and subject to, VAT.
According to Circular 36, the entities and individuals providing the services within PRC shall be subject to VAT. The services are treated as being provided within PRC where either the service provider or the service recipient is located in PRC. The services subject to VAT include the provision of financial services such as the provision of loans. It is further clarified under Circular 36 that the “loans” refers to the activity of lending capital for another’s use and receiving the interest income thereon. Based on the interpretation of “loans” under the Circular 36, the issuance of Notes may be treated as the holders of the Notes providing loans to the Issuer and the Guarantor, which thus shall be regarded as the provision of financial services that could be subject to VAT. As at the date of this Offering Circular, as confirmed by the Company, neither the Issuer nor the Guarantor has been notified or informed by the PRC tax authorities that it is considered as a PRC tax resident. Further, if the Issuer or the Guarantor is treated as a PRC tax resident in the future, the holders of the Notes could be regarded as providing financial services within PRC and consequently, the
— 132 — holders of the Notes shall be subject to VAT at the rate of 6 per cent. when receiving the interest payments from the Issuer or the Guarantor under the Notes. In addition, in that case the holders of the Notes shall also be subject to the local levies at approximately 12 per cent. of the VAT payment and consequently, the combined rate of VAT and local levies would be around 6.7 per cent. Given that the Issuer or the Guarantor pays interest income to Noteholders who are located outside of the PRC, if such interest income is subject to VAT in the future, the Issuer or the Guarantor, acting as the obligatory withholder in accordance with applicable law, shall withhold VAT and local levies from the payment of interest income to Noteholders who are located outside of the PRC.
Where a holder of the Notes who is an entity or individual located outside of the PRC resells the Notes to an entity or individual located outside of the PRC and derives any gain, since neither the service provider nor the service recipient is located in the PRC, theoretically the Circular 36 does not apply and the Issuer or the Guarantor does not have the obligation to withhold the VAT or the local levies. However, there is uncertainty as to the applicability of VAT if either the seller or buyer of Notes is located within the PRC.
The Circular 36 has been issued quite recently and the above disclosure may be subject to further change upon the issuance of further clarification rules and/or different interpretation by the competent tax authority. There is uncertainty as to the application of the Circular 36.
Pursuant to the EIT Law, the Business Tax Laws and the VAT reform detailed above, if the Issuer or the Guarantor is treated as a PRC tax resident in the future, the Issuer or the Guarantor may need to withhold EIT, (should such tax apply) from the payments of interest in respect of the Notes for any non-PRC-resident Noteholder and the Issuer or the Guarantor may need to withhold business tax or VAT (should such tax apply) from the payments of interest in respect of the Notes for any Noteholders located outside of the PRC. However, in the event that the Issuer or the Guarantor is required to make such a deduction or withholding (whether by way of EIT, business tax or VAT or otherwise), the Issuer and the Guarantor have agreed to pay such additional amounts as will result in receipt by the Noteholders of such amounts after such withholding or deduction as would have been received by them had no such withholding or deduction been required. For more information, see “Terms and Conditions of the Notes – Condition 8 (Taxation)”.
The Proposed Financial Transactions Tax (“FTT”)
On 14 February 2013, the European Commission published a proposal for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the participating Member States). However, Estonia has since stated that it will not participate.
The proposed FTT has very broad scope. If introduced in the form proposed on 14 February 2013, it could apply to certain dealings in the Notes (including secondary market transactions) in certain circumstances.
Under the 14 February 2013 proposal, FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Notes where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.
The FTT proposal remains subject to negotiation between participating Member States. Additional EU Member States may decide to participate, although certain other Member States have expressed strong objections to the proposal. The FTT proposal may therefore be altered prior to any implementation, the timing of which remains unclear. Prospective holders of the Notes are advised to seek their own professional advice in relation to the FTT.
— 133 — CLEARANCE AND SETTLEMENT
The information set out below is subject to any change in or reinterpretation of the rules, regulations and procedures of Euroclear and Clearstream currently in effect. The information in this section concerning the Clearing Systems has been obtained from sources that the Issuer believes to be reliable, but neither the Issuer, the Guarantor nor any Joint Bookrunner, any Joint Lead Manager takes any responsibility for the accuracy thereof. Investors wishing to use the facilities of any of the Clearing Systems are advised to confirm the continued applicability of the rules, regulations and procedures of the relevant Clearing System. Neither the Issuer, the Guarantor nor any other party to the Fiscal Agency Agreement will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Notes held through the facilities of any Clearing System or for maintaining, supervising or reviewing any records relating to, or payments made on account of, such beneficial ownership interests.
The Clearing Systems
Euroclear and Clearstream
Euroclear and Clearstream each holds securities for participating organisations and facilitates the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide to their respective participants, among other things, services for safekeeping, administration, clearance and settlement of internationally- traded securities and securities lending and borrowing. Euroclear and Clearstream participants are financial institutions throughout the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organisations. Indirect access to Euroclear or Clearstream is also available to others, such as banks, brokers, dealers and trust companies which clear through or maintain a custodial relationship with a Euroclear or Clearstream participant, either directly or indirectly.
Distributions of principal with respect to book-entry interests in the Notes held through Euroclear or Clearstream will be credited, to the extent received by the Paying Agent, to the cash accounts of Euroclear or Clearstream participants in accordance with the relevant system’s rules and procedures.
Book-Entry Ownership
Registered Notes
The Issuer will make applications to Euroclear and Clearstream for acceptance in their respective book- entry systems in respect of the Notes to be represented by the Global Certificate. Investors in Notes may hold their interests in the Global Certificate through Euroclear, Clearstream.
The Global Certificate will be subject to restrictions on transfer contained in a legend appearing on the front of such Global Certificate, as set out in “Subscription and Sale”.
The Notes will initially be in the form of a Global Certificate.
— 134 — SUBSCRIPTION AND SALE
The Issuer and the Guarantor have entered into a subscription agreement with the Joint Global Coordinators and the Joint Lead Manager and Joint Bookrunners dated [•••] 2016 (the “Subscription Agreement”), pursuant to which and subject to certain conditions contained therein, the Issuer has agreed to sell to each Joint Lead Manager, and each Joint Lead Manager has agreed, severally but not jointly, to subscribe and pay for, or to procure subscribers to subscribe and pay for, the aggregate principal amount of the Notes indicated in the following table:
Principal amount of the Joint Lead Managers Notes (U.S.$)
ABCI Capital Limited ...... [•••] Agricultural Bank Of China Limited Hong Kong Branch ...... [•••] China International Capital Corporation Hong Kong Securities Limited ...... [•••] Australia and New Zealand Banking Group Limited ...... [•••] DBS Bank Ltd...... [•••] Wells Fargo Securities International Limited ...... [•••]
Total ...... [•••]
The Subscription Agreement provides that the Issuer and the Guarantor will jointly and severally indemnify the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and their respective directors, agents, officers, partners, representatives, employees and affiliates against certain liabilities in connection with the offer and sale of the Notes. The Subscription Agreement provides that the obligations of the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers are subject to certain conditions precedent and entitles the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers to terminate it in certain circumstances prior to payment being made to the Issuer.
The Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities (“Banking Services or Transactions”). The Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers and their respective affiliates may have, from time to time, performed, and may in the future perform, various Banking Services and/or Transactions with the Issuer and the Guarantor for which they have received, or will receive, fees and expenses.
In connection with the offering of the Notes, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers and/or their respective affiliates, or affiliates of the Issuer or the Guarantor, may place orders, receive allocations and purchase Notes for their own account (without a view to distributing such Notes). Such entities may hold or sell such Notes or purchase further Notes for their own account in the secondary market or deal in any other securities of the Issuer or the Guarantor, and therefore, they may offer or sell the Notes or other securities otherwise than in connection with the Offering. Accordingly, references herein to the Notes being “offered” should be read as including any offering of the Notes to the Joint Bookrunners and the Joint Lead Managers and/or their respective affiliates, or affiliates of the Issuer or the Guarantor for their own account. Such entities are not expected to disclose such transactions or the extent of any such investment, otherwise than in accordance with any legal or regulatory obligation to do so. Furthermore, it is possible that only a limited number of investors may subscribe for a significant proportion of the Notes and an active trading market for the Notes may not develop. See “Risk Factors − Risks Relating to the Notes and the Guarantee − The Notes have no current active trading market and may trade
— 135 — at a discount to their initial offering price and/or with limited liability”. The Issuer, the Guarantor, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers are under no obligation to disclose the extent of the distribution of the Notes among individual investors.
The Joint Global Coordinators the Joint Bookrunners and the Joint Lead Managers and their respective affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Issuer and/or the Guarantor. The Joint Global Coordinators the Joint Bookrunners and the Joint Lead Managers have received, or may in the future receive, customary fees and commissions for these transactions.
In the ordinary course of their various business activities, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers and their respective affiliates make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the Issuer and/or the Guarantor, including the Notes. The Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers or certain of their respective affiliates that have a lending relationship with the Issuer and/or the Guarantor routinely hedge their credit exposure to the Issuer and/or the Guarantor consistent with their customary risk management policies. Typically, such Joint Global Coordinators, Joint Bookrunners, Joint Lead Managers and their respective affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in the Issuer’s and/or the Guarantor’s securities, including potentially the Notes offered hereby. Any such short positions could adversely affect future trading prices of the Notes offered hereby.
The Joint Global Coordinators, the Joint Bookrunners, Joint Lead Managers and their respective affiliates may make investment recommendations and/or publish or express independent research views (positive or negative) in respect of the Notes or other financial instruments of the Issuer or the Guarantor, and may recommend to their clients that they acquire long and/or short positions in the Notes or other financial instruments.
In connection with the issue of the Notes, Agricultural Bank of China Limited Hong Kong Branch (the “Stabilising Manager”) or any person acting on behalf of the Stabilising Manager may, to the extent permitted by applicable laws and directives, over allot the Notes or effect transactions with a view to supporting the price of the Notes at a level higher than that which might otherwise prevail, but in so doing, the Stabilising Manager or any person acting on behalf of the Stabilising Manager shall act as principal and not as agent of the Issuer or the Guarantor. However, there is no assurance that the Stabilising Manager or any person acting on behalf of the Stabilising Manager will undertake stabilisation action. Any loss or profit sustained as a consequence of any such overallotment or stabilisation shall be for the account of the Stabilising Manager only.
General
The distribution of this Offering Circular or any offering material and the offering, sale or delivery of the Notes is restricted by law in certain jurisdictions. Therefore, persons who may come into possession of this Offering Circular or any offering material are advised to consult with their own legal advisers as to what restrictions may be applicable to them and to observe such restrictions. This Offering Circular may not be used for the purpose of an offer or invitation in any circumstances in which such offer or invitation is not authorised.
— 136 — No action has been or will be taken in any jurisdiction by the Issuer, the Guarantor, the Joint Global Coordinators, or the Joint Lead Managers that would permit a public offering, or any other offering under circumstances not permitted by applicable law, of the Notes, or possession or distribution of this Offering Circular, any amendment or supplement thereto issued in connection with the proposed resale of the Notes or any other offering or publicity material relating to the Notes, in any country or jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this Offering Circular nor any other offering material or advertisements in connection with the Notes may be distributed or published, by the Issuer, the Guarantor or the Joint Lead Managers, in or from any country or jurisdiction, except in circumstances which will result in compliance with all applicable rules and regulations of any such country or jurisdiction and will not impose any obligations on the Issuer, the Guarantor or the Joint Lead Managers.
If a jurisdiction requires that an offering of Notes be made by a licensed broker or dealer and a Joint Global Coordinator, Joint Lead Manager or Joint Bookrunner or any affiliate of the Joint Global Coordinator, Joint Lead Manager or Joint Bookrunner is a licensed broker or dealer in that jurisdiction, such offering shall be deemed to be made by that the Joint Global Coordinator, Joint Lead Manager or the Joint Bookrunner or its affiliate on behalf of the Issuer in such jurisdiction.
United States
The Notes and the Guarantee have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Each Joint Lead Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer or sell the Notes and the Guarantee (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each dealer to which it sells the Notes and the Guarantee during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes and the Guarantee within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.
The Notes and the Guarantee are being offered and sold outside of the United States to non-U.S. persons in reliance on Regulation S. In addition, until 40 days after the commencement of the offering of the Notes and the Guarantee, an offer or sale of the Notes and the Guarantee within the United States by a dealer that is not participating in the offering may violate the registration requirements of the Securities Act.
United Kingdom
Each Joint Lead Manager has represented, warranted and agreed that:
(1) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer or the Guarantor; and
(2) it has complied and will comply with all applicable provisions of the FSMA (and all rules and regulations made under the FSMA) with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
— 137 — The People’s Republic of China
Each Joint Lead Manager has represented, warranted and agreed that the Notes are not being offered or sold and may not be offered or sold, directly or indirectly, in the People’s Republic of China (for such purpose, not including the Hong Kong, Macau and Taiwan), except as permitted by the laws and regulatory requirements of the People’s Republic of China.
Hong Kong
Each Joint Lead Manager has represented, warranted and agreed that (i) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Notes other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and (ii) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and any rules made under that Ordinance.
British Virgin Islands
No invitation will be or has been made directly or indirectly to any person resident in the British Virgin Islands to subscribe for any of the Notes.
Singapore
Each Joint Lead Manager has acknowledged that this Offering Circular has not been and will not be registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Joint Lead Manager has represented, warranted and agreed that it has not offered or sold any Notes or caused such Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell such Notes or cause such Notes to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this Offering Circular or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such Notes, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,
— 138 — securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA, except:
(1) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(2) where no consideration is or will be given for the transfer;
(3) where the transfer is by operation of law;
(4) as specified in Section 276(7) of the SFA; or
(5) as specified in Regulation 32 of the Securities and Futures (Offer of Investments) (Shares and Debentures) Regulations 2005 of Singapore.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended the “Financial Instruments and Exchange Act”) and, accordingly, each of the Joint Lead Managers has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any Notes in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan) or to others for re-offering or re-sale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with the Financial Instruments and Exchange Act and other relevant laws and regulations of Japan.
— 139 — GENERAL INFORMATION
1. Clearing Systems: The Notes have been accepted for clearance through Euroclear and Clearstream. The securities codes for the Notes are as follows:
Common Code: [•••] ISIN: [•••]
2. Listing: Application will be made to the SEHK for the listing of, and permission to deal in, the Notes by way of debt issues to professional investors only, and such permission is expected to become effective on or about [•••] 2016.
3. Litigation: Except as disclosed in this Offering Circular, none of the Bank, the Issuer, the Guarantor or any other subsidiary of the Bank is involved in any material litigation or arbitration proceedings relating to claims or amounts which are material in the context of the issue of the Notes or giving the Guarantee nor is the Issuer or the Guarantor aware that any such proceedings are pending or threatened.
4. Authorisations: The Issuer has obtained all necessary consents, approvals and authorisations as may be required in connection with the issue and performance of the Notes and the entering into and performance of the Fiscal Agency Agreement. The issue and performance of the Notes and the entering into and performance of the Fiscal Agency Agreement were authorised by resolutions of the sole director of the Issuer passed on 3 June 2016. Except as disclosed in the section headed “Risk Factors – Risks Relating to the Notes and the Guarantee – In the event that the Guarantor failed to fully perform its obligations under the Deed of Guarantee, performance by the Bank of such obligations may be subject to approvals of the PRC government authorities” of this Offering Circular, the Guarantor has obtained all necessary consents, approvals and authorisations as may be required in connection with the entering into and performance of the Deed of Guarantee and the Fiscal Agency Agreement. The entering into and performance of the Deed of Guarantee and the Fiscal Agency Agreement were authorised by the Bank passed on 5 May 2016.
5. No Material Adverse Change: Except as disclosed in this Offering Circular, there has been no significant change in the financial or trading position of the Issuer, the Guarantor, the Bank or of the Group since 31 December 2015 and no material adverse change in the financial position or prospects of the Issuer, the Guarantor, the Bank or of the Group since 31 December 2015.
6. Available Documents: As long as any Note is outstanding, the following documents will be available, during usual business hours on any weekday (Saturdays and public holidays excepted), for inspection at the offices of the Issuer (as at the date of this Offering Circular, at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands) and/or the Fiscal Agent (as at the date of this Offering Circular, at 25/F., Agricultural Bank of China Tower, 50 Connaught Road, Central, Hong Kong):
(a) the Memorandum and Articles of Association of the Bank;
(b) the audited consolidated financial statements of the Bank as at and for the years ended 31 December 2014 and 2015 (together with the audit reports in connection therewith);
(c) copies of the most recent annual and interim reports (including the financial statements) published by the Bank;
— 140 — (d) the Fiscal Agency Agreement (and any supplement thereto) and the Deed of Guarantee (and any supplement thereto); and
(e) a copy of this Offering Circular.
7. Financial Statements: The audited consolidated financial statements of the Bank as at and for the years ended 31 December 2014 and 2015, which are included elsewhere in this Offering Circular, have been audited by PricewaterhouseCoopers in accordance with International Standards on Auditing, as stated in their reports appearing herein.
— 141 — INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited consolidated financial statements of the Bank as at and for the year ended 31 December 2014 ...... F-2
Audited consolidated financial statements of the Bank as at and for the year ended 31 December 2015 ...... F-196
Note:
The audited consolidated financial statements of the Bank set out herein are reproduced from the Bank’s annual reports for the years ended 31 December 2014 and 2015. Pages and references included in the audited consolidated financial statements as of and for the year’s ended 31 December 2014 and 2015 set out herein refer to pages set out in the relevant annual report.
— F-1 — Independent Auditor’s Report
To the shareholders of Agricultural Bank of China Limited (Incorporated in the People’s Republic of China with Limited Liability)
We have audited the consolidated financial statements of Agricultural Bank of China Limited (“the Bank”) and its subsidiaries (together, the “Group”) set out on pages 178 to 369, which comprise the consolidated and the Bank’s statements of financial position as at 31 December 2014, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Directors’ Responsibility for the Consolidated Financial Statements The directors of the Bank are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
176
— F-2 — Independent Auditor’s Report
Opinion In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Bank and of the Group as at 31 December 2014, and of the Group’s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.
Other Matters This report, including the opinion, has been prepared for and only for you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
PricewaterhouseCoopers Certified Public Accountants
Hong Kong, 24 March 2015
Annual Report 2014 177
— F-3 — Consolidated Income Statement For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes Year ended 31 December IV 2014 2013 Interest income 1 699,289 613,384 Interest expense 1 (269,398) (237,182) Net interest income 1 429,891 376,202 Fee and commission income 2 87,883 89,697 Fee and commission expense 2 (7,760) (6,526) Net fee and commission income 2 80,123 83,171 Net trading gain 3 1,908 2,360 Net gain/(loss) on financial instruments designated at fair value through profit or loss 4 1,505 (639) Net gain/(loss) on investment securities 335 (350) Other operating income 5 10,364 5,027 Operating income 524,126 465,771 Operating expenses 6 (223,898) (198,607) Impairment losses on assets 8 (67,971) (52,990) Profit before tax 232,257 214,174 Income tax expense 9 (52,747) (47,963) Profit for the year 179,510 166,211 Attributable to: Equity holders of the Bank 179,461 166,315 Non-controlling interests 49 (104) 179,510 166,211 Earnings per share attributable to the equity holders of the Bank (expressed in RMB yuan per share) — Basic and diluted 11 0.55 0.51
The accompanying notes form an integral part of these consolidated financial statements.
178
— F-4 — Consolidated Statement of Comprehensive Income For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Year ended 31 December 2014 2013 Profit for the year 179,510 166,211 Other comprehensive income/(expenses): Items that may be reclassified subsequently to profit or loss: Fair value changes on available-for-sale financial assets 34,587 (29,102) Income tax impact for fair value changes on available-for-sale financial assets (8,622) 7,227 Foreign currency translation differences 152 (321) Other comprehensive income/(expenses), net of tax 26,117 (22,196) Total comprehensive income for the year 205,627 144,015 Total comprehensive income attributable to: Equity holders of the Bank 205,503 144,123 Non-controlling interests 124 (108) 205,627 144,015
The accompanying notes form an integral part of these consolidated financial statements.
Annual Report 2014 179
— F-5 — Consolidated Statement of Financial Position At 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2014 2013 Assets Cash and balances with central banks 12 2,743,065 2,603,802 Deposits with banks and other financial institutions 13 572,805 397,678 Precious metals 20,188 19,185 Placements with and loans to banks and other financial institutions 14 407,062 308,655 Financial assets held for trading 15 58,425 53,864 Financial assets designated at fair value through profit or loss 16 356,235 269,018 Derivative financial assets 17 7,195 8,186 Financial assets held under resale agreements 18 509,418 737,052 Loans and advances to customers 19 7,739,996 6,902,522 Available-for-sale financial assets 20 927,903 781,311 Held-to-maturity investments 21 1,710,950 1,523,815 Debt instruments classified as receivables 22 522,117 592,090 Investments in associates and joint ventures — 1 Property and equipment 24 154,950 150,859 Goodwill 23 1,381 1,381 Deferred tax assets 25 78,640 74,075 Other assets 26 163,822 138,608 Total assets 15,974,152 14,562,102 Liabilities Borrowings from central bank 27 80,121 104 Deposits from banks and other financial institutions 28 831,141 729,354 Placements from banks and other financial institutions 29 224,923 174,363 Financial liabilities held for trading 30 25,211 20,805 Financial liabilities designated at fair value through profit or loss 31 347,282 285,454 Derivative financial liabilities 17 7,240 7,635 Financial assets sold under repurchase agreements 32 131,021 26,787 Due to customers 33 12,533,397 11,811,411 Debt securities issued 34 325,167 266,261 Deferred tax liabilities 25 43 8 Other liabilities 35 435,987 395,383 Total liabilities 14,941,533 13,717,565
180
— F-6 — Consolidated Statement of Financial Position At 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2014 2013 Equity Ordinary shares 36 324,794 324,794 Preference shares 37 39,944 — Capital reserve 38 98,773 98,773 Investment revaluation reserve 39 3,118 (22,772) Surplus reserve 40 78,594 60,632 General reserve 41 156,707 139,204 Retained earnings 329,989 243,482 Foreign currency translation reserve (853) (1,005) Equity attributable to equity holders of the Bank 1,031,066 843,108 Non-controlling interests 1,553 1,429 Total equity 1,032,619 844,537 Total equity and liabilities 15,974,152 14,562,102
The accompanying notes form an integral part of these consolidated financial statements.
Approved and authorized for issue by the Board of Directors on 24 March 2015.
Chairman Executive Director
Annual Report 2014 181
— F-7 — Statement of Financial Position At 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2014 2013 Assets Cash and balances with central banks 12 2,742,797 2,603,625 Deposits with banks and other financial institutions 13 562,792 389,938 Precious metals 20,188 19,185 Placements with and loans to banks and other financial institutions 14 412,825 310,967 Financial assets held for trading 15 58,425 53,497 Financial assets designated at fair value through profit or loss 16 355,763 267,994 Derivative financial assets 17 6,950 8,176 Financial assets held under resale agreements 18 509,412 736,742 Loans and advances to customers 19 7,700,348 6,866,183 Available-for-sale financial assets 20 917,381 776,715 Held-to-maturity investments 21 1,703,508 1,517,998 Debt instruments classified as receivables 22 511,174 585,459 Investment in subsidiaries 23 10,564 8,248 Property and equipment 24 152,374 149,001 Deferred tax assets 25 78,368 73,938 Other assets 26 148,290 126,684 Total assets 15,891,159 14,494,350 Liabilities Borrowings from central bank 27 80,030 30 Deposits from banks and other financial institutions 28 834,765 732,194 Placements from banks and other financial institutions 29 197,803 145,924 Financial liabilities held for trading 30 25,211 20,805 Financial liabilities designated at fair value through profit or loss 31 347,286 285,454 Derivative financial liabilities 17 7,072 7,633 Financial assets sold under repurchase agreements 32 126,950 24,670 Due to customers 33 12,530,169 11,808,163 Debt securities issued 34 323,336 266,261 Other liabilities 35 389,088 361,104 Total liabilities 14,861,710 13,652,238
182
— F-8 — Statement of Financial Position At 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2014 2013 Equity Ordinary shares 36 324,794 324,794 Preference shares 37 39,944 — Capital reserve 38 98,574 98,574 Investment revaluation reserve 39 3,043 (22,750) Surplus reserve 40 78,445 60,542 General reserve 41 156,145 138,751 Retained earnings 329,133 242,980 Foreign currency translation reserve (629) (779) Total equity 1,029,449 842,112 Total equity and liabilities 15,891,159 14,494,350
The accompanying notes form an integral part of these consolidated financial statements.
Approved and authorized for issue by the Board of Directors on 24 March 2015.
Chairman Executive Director
Annual Report 2014 183
— F-9 — Consolidated Statement of Changes in Equity For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Total equity attributable to equity holders of the Bank Foreign Investment currency Non- Notes Ordinary Preference Capital revaluation Surplus General Retained translation controlling IV shares shares reserve reserve reserve reserve earnings reserve Subtotal interests Total As at 1 January 2014 324,794 — 98,773 (22,772) 60,632 139,204 243,482 (1,005) 843,108 1,429 844,537 Profit for the year — — — — — — 179,461 — 179,461 49 179,510 Other comprehensive income — — — 25,890 — — — 152 26,042 75 26,117 Total comprehensive income for the year — — — 25,890 — — 179,461 152 205,503 124 205,627 Issuance of preference shares — 39,944 — — — — — — 39,944 — 39,944 Appropriation to surplus reserve 40 — — — — 17,962 — (17,962) — — — — Appropriation to general reserve 41 — — — — — 17,503 (17,503) — — — — Dividends 10 — — — — — — (57,489) — (57,489) — (57,489) As at 31 December 2014 324,794 39,944 98,773 3,118 78,594 156,707 329,989 (853) 1,031,066 1,553 1,032,619 As at 1 January 2013 324,794 — 98,773 (901) 43,996 75,349 208,488 (684) 749,815 1,539 751,354 Profit for the year — — — — — — 166,315 — 166,315 (104) 166,211 Other comprehensive expenses — — — (21,871) — — — (321) (22,192) (4) (22,196) Total comprehensive (expenses)/income for the year — — — (21,871) — — 166,315 (321) 144,123 (108) 144,015 Appropriation to surplus reserve 40 — — — — 16,636 — (16,636) ———— Appropriation to general reserve 41 — — — — — 63,855 (63,855) ———— Dividends 10 — — ————(50,830) — (50,830) — (50,830) Dividends paid to non-controlling interests — — ——————— (2)(2) As at 31 December 2013 324,794 — 98,773 (22,772) 60,632 139,204 243,482 (1,005) 843,108 1,429 844,537
The accompanying notes form an integral part of these consolidated financial statements.
184
— F-10 — Consolidated Statement of Cash Flows For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Year ended 31 December 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 232,257 214,174 Adjustments for: Amortization of intangible assets and other assets 2,713 2,342 Depreciation of property and equipment 16,615 15,119 Impairment losses on assets 67,971 52,990 Interest income arising from investment securities (123,053) (106,831) Interest income arising from impaired loans and advances to customers (1,002) (693) Interest expense on debt securities issued 10,179 8,493 Net (gain)/loss on investment securities (335) 350 Net gain on disposal of investment in associates and joint ventures — (309) Dividend income arising from investment securities — (5) Net gain on disposal of property, equipment and other assets (393) (656) Net foreign exchange loss 1,107 5,037 206,059 190,011 Net change in operating assets and operating liabilities: Net increase in balances with central banks, deposits with banks and other financial institutions (335,229) (187,328) Net increase in placements with and loans to banks and other financial institutions (48,818) (44,823) Net decrease/(increase) in financial assets held under resale agreements 122,146 (40,995) Net increase in loans and advances to customers (887,572) (795,948) Net increase in borrowings from central bank 80,017 38 Net increase in placements from banks and other financial institutions 50,560 24,642 Net increase in due to customers and deposits from banks and other financial institutions 823,773 893,478 Increase in other operating assets (121,778) (180,820) Increase in other operating liabilities 214,283 228,648 Cash from operations 103,441 86,903 Income tax paid (68,826) (54,024) NET CASH FROM OPERATING ACTIVITIES 34,615 32,879
Annual Report 2014 185
— F-11 — Consolidated Statement of Cash Flows For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2014 2013 CASH FLOWS FROM INVESTING ACTIVITIES Cash received from disposal/redemption of investment securities 629,129 634,630 Cash received from interest income arising from investment securities 112,781 99,120 Cash received from disposal of investment in associates and joint ventures 1 416 Cash received from disposal of property, equipment and other assets 2,819 765 Cash paid for purchase of investment securities (859,158) (891,097) Cash paid for purchase of property, equipment and other assets (25,997) (28,170) NET CASH USED IN INVESTING ACTIVITIES (140,425) (184,336) CASH FLOWS FROM FINANCING ACTIVITIES Contribution from preference shareholders 40,000 — Cash payments for transaction cost of preference shares issued (38) — Cash received from debt securities issued 271,873 118,771 Cash payments for transaction cost of debt securities issued (58) (15) Repayments of debt securities issued (213,359) (45,153) Cash payments for interest on debt securities issued (10,107) (7,707) Dividends recognized as distribution (57,489) (50,830) Dividends paid to non-controlling interests — (2) NET CASH FROM FINANCING ACTIVITIES 30,822 15,064 NET DECREASE IN CASH AND CASH EQUIVALENTS (74,988) (136,393) CASH AND CASH EQUIVALENTS AT 1 JANUARY 813,799 952,936 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (570) (2,744) CASH AND CASH EQUIVALENTS AT 31 DECEMBER 42 738,241 813,799 NET CASH FLOWS FROM OPERATING ACTIVITIES INCLUDE: Interest received 548,718 494,213 Interest paid (229,793) (199,880)
The accompanying notes form an integral part of these consolidated financial statements.
186
— F-12 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
I GENERAL INFORMATION Agricultural Bank of China Limited (the “Bank”) is the successor entity to the Agricultural Bank of China (the “Predecessor Entity”) which was a wholly state-owned commercial bank approved for setup by the People’s Bank of China (the “PBOC”) and founded on 23 February 1979 in the People’s Republic of China (the “PRC”). On 15 January 2009, the Bank was established after the completion of the financial restructuring of the Predecessor Entity. The Bank’s establishment was authorized by the PBOC. The Bank was listed on the Shanghai Stock Exchange and The Stock Exchange of Hong Kong Limited on 15 July 2010 and 16 July 2010, respectively.
The Bank operates under financial services certificate No. B0002H111000001 issued by the China Banking Regulatory Commission (the “CBRC”), and business license No. 100000000005472 issued by the State Administration of Industry and Commerce of the PRC. The registered office of the Bank is located at No.69 Jianguomen Nei Avenue, Dongcheng District, Beijing, the PRC.
The principal activities of the Bank and its subsidiaries (collectively, the “Group”) include Renminbi (“RMB”) and foreign currency deposits, loans, clearing and settlement services, assets custody services, fund management, financial leasing services, insurance services and other services as approved by relevant regulators, and the provision of related services by its overseas establishments as approved by the respective local regulators.
The head office and domestic branches of the Bank and its subsidiaries operating in the Mainland China are referred to as “Domestic Operations”. Branches and subsidiaries registered and operating outside of the Mainland China are referred to as “Overseas Operations”.
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1 Basis of preparation
Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and by the Predecessor Hong Kong Companies Ordinance (Cap.32) for this financial year and the comparative period.
Basis of preparation The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments which are measured at fair value, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of consideration given in exchange for assets and that is received (or in some circumstances the amount expected to be paid) with respect to liabilities.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note III.
Annual Report 2014 187
— F-13 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.1 Standards and amendments effective in 2014 and adopted by the Group The following standards have been adopted by the Group for the first time during the financial year ended 31 December 2014:
(1) Amendments to IFRS 10, Investment Entities IFRS 12 and IAS 27 (2) Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities (3) Amendments to IAS 36 Impairment of Assets — Recoverable Amount Disclosures for Non-Financial Assets (4) Amendments to IAS 39 Financial Instruments: Recognition and Measurement-Novation of Derivatives and Continuation of Hedge Accounting (5) IFRIC 21 Levies
(1) Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities The amendments give an exemption to an “investment entity”, as defined by specific characteristics. According to the amendments, many investment funds and similar entities will be exempt from consolidating most of their subsidiaries. Instead, these subsidiaries will be measured at fair value through profit or loss.
(2) Amendments to IAS 32: Offsetting Financial Assets and Financial Liabilities These amendments relate to the application guidance in IAS 32 — Financial Instruments: Presentation, and clarify that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendments also consider settlement mechanisms.
(3) Amendments to IAS 36: Impairment of Assets — Recoverable Amount Disclosures for Non-Financial Assets These amendments address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal.
188
— F-14 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.1 Standards and amendments effective in 2014 and adopted by the Group (Continued)
(4) Amendments to IAS 39: Financial Instruments: Recognition and Measurement — Novation of Derivatives and Continuation of Hedge Accounting These amendments consider legislative changes to ‘over-the-counter’ derivatives and the establishment of central counterparties. Under IAS 39, novation of derivatives to central counterparties would result in discontinuance of hedge accounting. These amendments provide relief from discontinuing hedge accounting when novation of a hedging instrument to a central counterparty meets specified criteria.
(5) IFRIC 21: Levies This is an interpretation of IAS 37 — Provisions, Contingent Liabilities and Contingent Assets, establishes criteria for the recognition of a liability, arising when an entity incurs a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy to a government for undertaking a specific activity is the actual performance of the activity specified in the relevant legislation that triggers the payment of the levy.
The adoption of these new standards and amendments does not have a significant impact on the operating results, comprehensive income, or financial position of the Group.
Annual Report 2014 189
— F-15 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2014 The Group has not adopted the following new and revised IFRSs that have been issued but are not yet effective.
Effective for annual periods beginning on or after (1) Amendment to IAS 19 Employee Benefits — To Plans that 1 July 2014 (as revised in 2011) Require Employees or Third Parties to Contribute Towards the Cost of Benefits (2) Amendments to IFRSs Annual Improvements to IFRSs 2010 — 1 July 2014 2012 Cycle (3) Amendments to IFRSs Annual Improvements to IFRSs 2011 — 1 July 2014 2013 Cycle (4) IFRS 14 Regulatory Deferral Account 1 January 2016 (5) Amendments to IFRS 11 Acquisition of Interests in 1 January 2016 Joint Operations (6) Amendments to IAS 16 Clarification of Acceptable Methods of 1 January 2016 and IAS 38 Depreciation and Amortization (7) Amendments to IAS 27 Equity Method in Separate Financial 1 January 2016 Statements (8) Amendments to IFRS 10 On the Sale or Contribution of Assets 1 January 2016 and IAS 28 between An Investor and Its Associate or Joint Venture (9) Amendments to IAS 16 Agriculture: bearer plants 1 January 2016 and IAS 41 (10) Amendments to IFRSs Annual improvements to 1 January 2016 IFRSs 2012 — 2014 cycle (11) IFRS 15 Revenue from Contracts with Customers 1 January 2017 (12) IFRS 9 Financial Instruments 1 January 2018
190
— F-16 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2014 (Continued)
(1) Amendment to IAS 19 (as revised in 2011): Employee Benefits — To Plans that Require Employees or Third Parties to Contribute Towards the Cost of Benefits The amendment to IAS 19 (as revised in 2011) — Employee Benefits will affect the defined benefit plans where employees or third parties are required to bear some of the cost of the plan. The amendment clarifies the accounting by entities with plans that require contributions linked only to service in each period. Entities with plans that require contributions that vary with service period will be required to recognize the benefit of those contributions over employees’ working lives. The Group anticipates that the adoption of the amendment will not have a significant impact on the Group’s consolidated financial statements.
(2) Amendments to IFRSs: Annual Improvements to IFRSs 2010 — 2012 Cycle The annual improvements to IFRSs 2010 — 2012 Cycle include a number of amendments to various IFRSs. The amendments are effective for annual periods beginning on or after 1 July 2014. Amendments to IFRSs include the amendments to IFRS 2 — Share-Based Payment, the amendments to IFRS 3 — Business Combinations, the amendments to IFRS 8 — Operating Segments, the amendments to IFRS 13 — Fair Value Measurement, the amendments to IAS 24 — Related Party Disclosures, the amendments to IAS 16 — Property, Plant and Equipment, and the amendments to IAS 38 — Intangible Assets. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
(3) Amendments to IFRSs: Annual Improvements to IFRSs 2011 — 2013 Cycle The annual improvements to IFRSs 2011 — 2013 Cycle include a number of amendments to various IFRSs. The amendments are effective for annual periods beginning on or after 1 July 2014. Amendments to IFRSs include the amendments to IFRS 1 — First-time Adoption of International Financial Reporting Standards, the amendments to IFRS 3 — Business Combinations, the amendments to IFRS 13 — Fair Value Measurement, and the amendments to IAS 40 — Investment Property. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
Annual Report 2014 191
— F-17 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2014 (Continued)
(4) IFRS 14: Regulatory Deferral Account The IASB has issued IFRS 14 — Regulatory Deferral Accounts, an interim standard on the accounting for certain balances that arise from rate-regulated activities (“regulatory deferral accounts”). IFRS 14 is only applicable to entities that apply IFRS 1 — First-time Adoption of International Financial Reporting Standards as first-time adopters of IFRS. It permits such entities, on adoption of IFRS, to continue to apply their previous GAAP accounting policies for the recognition, measurement, impairment and de-recognition of regulatory deferral accounts. The Group anticipates that the adoption of this new standard will not have a significant impact on the Group’s consolidated financial statements.
(5) Amendments to IFRS 11: Acquisition of Interests in Joint Operations The amendments to IFRS 11 — Joint Arrangements provide specific guidance on accounting for the acquisition of an interest in a joint operation that is a business. The amendments require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
(6) Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization The amendments to IAS 16 — Property, Plant and Equipment, clarify that depreciation of an item of property, plant and equipment based on revenue generated by using the asset is not appropriate. The amendments to IAS 38 — Intangible Assets, establish a rebuttable presumption that amortization of an intangible asset based on revenue generated by using the asset is inappropriate. The presumption may only be rebutted in certain limited circumstances. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
192
— F-18 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2014 (Continued)
(7) Amendments to IAS 27: Equity Method in Separate Financial Statements The IASB has amended IAS 27 — Separate Financial Statements. The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The Group anticipates that the adoption of this new amendment will not have a significant impact on the Group’s consolidated financial statements.
(8) Amendments to IFRS 10 and IAS 28: On the Sale or Contribution of Assets between An Investor and Its Associate or Joint Venture These amendments address an inconsistency between the requirements in IFRS 10 — Consolidated Financial Statements and those in IAS 28 — Investment in Associates and Joint Ventures in the sale and contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognized when a transaction involves a business. A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
(9) Amendments to IAS 16 and IAS 41 on Agriculture: Bearer Plants The amendments change the reporting for bearer plants, such as grape vines, rubber trees and oil palms. Bearer plants should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing. The amendments include them in the scope of IAS 16 rather than IAS 41. The produce on bearer plants will remain in the scope of IAS 41. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
(10) Amendments to IFRSs: Annual Improvements to IFRSs 2012-2014 cycle The Annual Improvements to IFRSs 2012 — 2014 Cycle include a number of amendments to various IFRSs, including the amendments IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations regarding methods of disposal, the amendments to IFRS 7 — Financial Instruments: Disclosures regarding servicing contracts, the amendments to IAS 19 — Employee Benefits regarding discount rates, the amendments to IAS 34 Interim Financial Reporting regarding disclosure of information. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
Annual Report 2014 193
— F-19 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2014 (Continued)
(11) IFRS 15: Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize through a 5-step approach. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. It moves away from a revenue recognition model based on an ‘earnings processes’ to an ‘asset- liability’ approach based on transfer of control. IFRS 15 provides specific guidance on capitalization of contract cost and license arrangements. It also includes a cohesive set of disclosure requirements about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Group is in the process of assessing the impact on the Group’s consolidated financial statements from this new standard.
(12) IFRS 9: Financial Instruments The complete version of IFRS 9 – Financial Instruments was issued in July 2014. It replaces the guidance in IAS 39 — Financial Instruments: Recognition and Measurement that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income (“OCI”) and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in which case the accumulated fair value changes in OCI will not be recycled to the profit or loss in the future. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement, except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. The Group is in the process of assessing the impact on the Group’s consolidated financial statements from this new standard.
194
— F-20 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation
Basis of consolidation The consolidated financial statements include the financial statements of the Bank and the subsidiaries as well as structured entities controlled by the Group. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Income and expense of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of acquisition or up to the date on which control ceases, respectively.
Adjustments are made to the financial statements of subsidiaries, where appropriate, to consistently reflect the accounting policies of the Group.
All intra-Group transactions, balances, and income and expense are eliminated on consolidation.
Non-controlling interests of consolidated subsidiaries are presented separately from the controlling party’s equity therein.
The carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Further, total comprehensive income of a subsidiary is attributed, based on the proportion of their respective holdings, to the equity holders of the Bank and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
In the Bank’s statement of financial position, its investments in subsidiaries are stated at cost, less impairment losses, if any.
Annual Report 2014 195
— F-21 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation (Continued)
Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair value of the assets transferred by the Group, liabilities incurred or assumed by the Group, and any equity interests issued by the Group. Acquisition related costs are recognized in the consolidated income statement as incurred.
At the acquisition date, irrespective of non-controlling interests, the identifiable assets acquired and liabilities and contingent liabilities assumed are recognized at their fair values; except that deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 — Income Taxes and IAS 19 — Employee Benefits, respectively.
Goodwill is measured as the excess of the difference between (i) the consideration transferred, the fair value of any non-controlling interests in the acquiree, and the fair value of the Group’s previously held equity interest in the acquiree (if any) and (ii) the net fair value of the identifiable assets acquired and the liabilities and contingent liabilities incurred or assumed.
Non-controlling interests that represent ownership interests in the acquiree, and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are accounted for at either fair value or the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by- transaction basis.
Goodwill Goodwill represents the excess of the cost of an acquisition less the fair value of the Group’s share of the net identifiable assets of acquired subsidiaries and associates at the date of acquisition. Goodwill on acquisitions of subsidiaries is presented separately in the consolidated statement of financial position. Goodwill on acquisition of associates is included in investment in associates.
For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (“CGU”) or groups of CGUs that is expected to benefit from the synergies of the business combination.
A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
196
— F-22 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation (Continued)
Goodwill (Continued) A CGU to which goodwill has been allocated is tested for impairment annually or more frequently when there is indication that the unit may be impaired. With respect to goodwill arising during a reporting period, the CGU to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the CGU, which is the higher of fair value less costs to sell and value in use, is less than its carrying amount, the deficit, reflecting an impairment loss, is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU on a pro-rata basis, based on the carrying amount of each asset in the CGU. Any goodwill impairment loss is recognized directly in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in subsequent periods.
3 Interest income and expense Interest income and expense for all interest-earning financial assets and interest-bearing financial liabilities are recognized within Interest Income and Interest Expense, respectively, in the consolidated income statement using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount on initial recognition. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. The calculation includes all fees and interest paid or received that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.
Interest income on an impaired financial asset or a group of impaired similar financial assets is recognized using the original interest rate which was used to discount the future cash flows for the purpose of measuring the impairment loss.
4 Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. For those services that are provided over a specified period of time, fee and commission income is accrued over that period as the services are provided. For other services, fee and commission income are recognized at the time the services are completed.
Annual Report 2014 197
— F-23 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
5 Foreign currency transactions The functional currency of the Domestic Operations is RMB. The presentation currency of the Group and the Bank is RMB.
In preparing the financial statements of each individual Group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchange prevailing at the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognized in the consolidated income statement in the period in which they arise, except for the following:
(i) exchange differences arising on a monetary item that forms part of the Bank’s net investment in Overseas Operations;
(ii) changes in the fair value of monetary assets denominated in foreign currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the monetary assets and other changes in the carrying amount. Translation differences related to changes in the amortized cost are recognized in the consolidated income statement, and other changes in the carrying amount are recognized in other comprehensive income.
Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the consolidated income statement for the period except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which cases, the exchange differences are also recognized directly in other comprehensive income.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s Overseas Operations are translated into the presentation currency of the Group at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at exchange rates at the date of the transactions, or a rate that approximates the exchange rates of the date of the transaction. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity under the heading of Foreign Currency Translation Reserve and Non-controlling Interests, as appropriate. The accumulated foreign currency translation reserve related to Overseas Operations will be reclassified from equity to the consolidated income statement on disposal of all or part of the Overseas Operations.
198
— F-24 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6 Taxation Income tax expense represents the sum of the tax currently payable and deferred tax.
Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred Tax Liabilities are generally recognized for all taxable temporary differences. Deferred Tax Assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax assets and liabilities are not recognized for temporary difference related to goodwill or the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit.
Deferred Tax Liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Annual Report 2014 199
— F-25 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6 Taxation (Continued)
Deferred tax (Continued) The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax is recognized in the consolidated income statement, except when it relates to items that are recognized in other comprehensive income or directly in equity, in which case the current and deferred tax is also recognized in other comprehensive income or directly in equity, respectively.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
7 Employee benefits Employee benefits are all forms of consideration given and other relevant expenditures incurred by the Group in exchange for services rendered by employees or for termination of the employment contracts. These benefits include short-term employee benefits, post-employment benefits and early retirement benefits.
Short-term employee benefits In the reporting period in which an employee has rendered services, the Group recognizes the short- term employee benefits payable for those services as a liability with a corresponding increase in the expenses in the consolidated income statement. Short-term employee benefits include salaries, bonuses, allowance and subsidies, staff welfare, medical insurance, employment injury insurance, maternity insurance, housing funds as well as labor union fees and staff education expenses.
Post-employment benefits The Group’s post-employment benefits are primarily the payments for basic pensions and unemployment insurance related to government mandated social welfare programs, as well as the annuity scheme established. All these post-employment benefits are defined contribution plans, under which, the Group makes fixed contributions into a separate fund and will have no legal or constructive obligation to make further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods.
200
— F-26 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
7 Employee benefits (Continued)
Post-employment benefits (Continued) Contributions to the basic pensions and unemployment insurance plan are recognized in the consolidated income statement for the period in which the related payment obligation is incurred.
The employees of the Bank’s head office and domestic branches (“Domestic Institutions”) participate in an annuity scheme established by the Bank (the “Annuity Scheme”). The Bank pays annuity contributions with reference to employees’ salaries, and such contributions are expensed in the consolidated income statement when incurred. The Bank has no further obligation if the Annuity Scheme does not have sufficient assets for the payment of any retirement benefits to employees funded by the Annuity Scheme.
Early retirement benefits Early retirement benefits have been paid to those employees who accept voluntary retirement before the normal retirement date, as approved by management. The related benefit payments are made from the date of early retirement to the normal retirement date.
The accounting treatment of the Group’s early retirement benefits is in accordance with termination benefits as determined in IAS 19. The liability is recognized for the early retirement benefit payments from the date of early retirement to the normal retirement date when the criteria for recognition as termination benefit is met with a corresponding charge in the consolidated income statement. Differences arising from changes in assumptions and estimates of the present value of the liabilities are recognized in the consolidated income statement when incurred.
8 Financial instruments Financial assets and liabilities are recognized in the consolidated statement of financial position and classified into one of the categories presented below. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or liabilities, respectively, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or liabilities at fair value through profit or loss are recognized immediately in the consolidated income statement.
Annual Report 2014 201
— F-27 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets The Group’s financial assets are classified into four categories — financial assets at fair value through profit or loss (“FVTPL”), held-to-maturity investments, available-for-sale financial assets and, loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
Financial assets at fair value through profit or loss Financial assets at FVTPL have two subcategories — financial assets held for trading and those designated at FVTPL on initial recognition.
A financial asset is classified as held for trading if:
• it has been acquired principally for the purpose of sale in the near future; or
• it forms part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
• it is a derivative instrument that is not designated and effective as a hedging instrument.
A financial asset other than a financial asset held for trading may be designated at FVTPL upon initial recognition if:
• such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
• the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
• it forms part of a contract containing one or more embedded derivatives, and IAS 39 — Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated at FVTPL.
Financial assets at FVTPL are stated at fair value, with changes in fair value arising from re- measurement recognized directly in the consolidated income statement in the period in which they arise.
202
— F-28 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets, quoted in an active market, with fixed or determinable payments and fixed maturities that the Group has the positive intention and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are carried at amortized cost using the effective interest method, less any impairment losses.
Financial assets classified as loans and receivables primarily include deposits with central banks, deposits with banks and other financial institutions, placements with and loans to banks and other financial institutions, financial assets held under resale agreements, loans and advances to customers, and specified debt securities.
Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated as such or are not classified as financial assets at FVTPL, loans and receivables or held-to-maturity investments.
Available-for-sale financial assets are measured at fair value at the end of the reporting period. Changes in fair value are recognized in other comprehensive income and accumulated in the investment revaluation reserve, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to the consolidated income statement.
Equity investments classified as available-for-sale that do not have a quoted price in an active market and whose fair value cannot be reliably determined are measured at cost, less any impairment losses, at the end of each reporting period.
Interest income related to financial assets classified as available-for-sale debt instruments is calculated using the effective interest method and recorded as an element of Interest Income in the consolidated income statement. Dividends on available-for-sale equity instruments are recognized in the consolidated income statement when the Group’s right to receive such payments is established.
Annual Report 2014 203
— F-29 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets Financial assets, other than those classified as FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated future cash flows of the financial assets have been adversely affected.
A significant or prolonged decline in the fair value of an equity investment classified as available-for-sale below its cost is considered to be objective evidence of impairment.
For all other financial assets, the objective evidence of impairment could include:
• significant financial difficulty of the issuer or obligor;
• a breach of contract, such as a default or delinquency in interest or principal payments;
• the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
• it becomes probable that the borrower will enter bankruptcy or other financial reorganization;
• the disappearance of an active market for that financial asset because of financial difficulties; or
• observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets, although the decrease cannot yet be attributed to individual financial assets in the portfolio.
— adverse changes in the payment status of borrowers in the portfolio; and
— national or local economic conditions that correlate with defaults on the assets in the portfolio.
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in collective assessment of impairment.
204
— F-30 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets carried at amortized cost For financial assets carried at amortized cost, an impairment loss is recognized in the consolidated income statement when there is objective evidence that the assets are impaired. The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. For financial assets with variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The calculation of present value of the estimated future cash flows of a collaterized financial asset reflects the cash flows that are expected to result from foreclosure, less the cost of obtaining and selling the collateral.
The carrying amount of an impaired financial asset is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated income statement. When a financial asset is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to the consolidated income statement.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, such as an improvement in the debtor’s credit rating, the previously recognized impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
Impairment of financial assets classified as available-for-sale For available-for-sale equity instruments, a significant or prolonged decline in fair value below cost is considered to be objective evidence of impairment. In determining whether a decline in fair value has been significant or prolonged, the Group considers if the fair value of an available-for-sale equity instrument as at the balance sheet date is lower than 50% (including 50%) of its initial cost of investment or lower than its initial cost of investment for more than one year (including one year) together with other relevant considerations.
When a decline in the fair value of a financial asset classified as available-for-sale has been recognized directly in other comprehensive income and accumulated in the investment revaluation reserve, and there is objective evidence that asset is impaired, the cumulative losses previously recognized in other comprehensive income are reclassified to the consolidated income statement in the period in which the impairment takes place.
Annual Report 2014 205
— F-31 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets classified as available-for-sale (Continued) An impairment loss on an equity investment classified as available-for-sale, and carried at fair value, is not reversed through the consolidated income statement in subsequent periods. Any increase in fair value subsequent to impairment loss is recognized directly in other comprehensive income and accumulated in the investment revaluation reserve. An impairment loss on an equity investment classified as available-for-sale equity investment, and carried at cost, is not reversed. An impairment loss on a debt investment classified as available-for-sale is subsequently reversed through the consolidated income statement if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.
8.2 Financial liabilities Financial liabilities and equity instruments issued by the Group are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument in IAS 39 and IAS 32, respectively.
The Group’s financial liabilities are generally classified into financial liabilities at FVTPL and other financial liabilities, carried at amortized cost.
Financial liabilities at fair value through profit or loss Financial liabilities at FVTPL have two subcategories, including financial liabilities held for trading and those designated at FVTPL on initial recognition.
A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated and effective as hedging instruments.
The criteria for a financial liability designated at FVTPL is the same as those for a financial asset designated at FVTPL.
Financial liabilities at FVTPL are stated at fair value, with changes in fair value arising on re- measurement recognized directly in the consolidated income statement in the period in which they arise.
206
— F-32 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.2 Financial liabilities (Continued)
Other financial liabilities Other financial liabilities are measured at amortized cost, using the effective interest method.
8.3 Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
A financial instrument is an equity instrument if, and only if, both conditions (i) and (ii) below are met:
(i) The financial instrument includes no contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; and
(ii) If the financial instrument will or may be settled in the Group’s own equity instruments, it is a non-derivative instrument that includes no contractual obligations for the Group to deliver a variable number of its own equity instruments; or a derivative that will be settled only by the Group exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.
Equity instruments issued by the Group are recorded at the fair value of proceeds received, net of direct issuance expenses.
8.4 Derivative financial instruments Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured at their fair value at the end of the reporting period. The resulting gain or loss is recognized in the consolidated income statement.
Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their characteristics and risks are not clearly and closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognized in the consolidated income statement. These embedded derivatives are separately accounted for at FVTPL.
Annual Report 2014 207
— F-33 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.5 Determination of fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.
For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices. This includes listed equity securities and quoted debt instruments on major exchanges.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.
For financial instruments not traded in active markets, fair value is determined using appropriate valuation techniques. Valuation techniques include the use of recent transaction prices, discounted cash flow analysis, option pricing models and others commonly used by market participants. These valuation techniques include the use of observable and/or unobservable inputs.
8.6 De-recognition The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group continues to recognize the asset to the extent of its continuing involvement and recognizes an associated liability. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.
On de-recognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and, where applicable, the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in the consolidated income statement.
Financial liabilities are derecognized when the related obligation is discharged, is cancelled or expires. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in the consolidated income statement.
208
— F-34 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.7 Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount presented in the consolidated statement of financial position when both of the following conditions are satisfied: (i) the Group has a legal right to set off the recognized amounts and the legal right is currently enforceable; and (ii) the Group intends either to settle on a net basis, or to realize the financial asset and settle the financial liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
8.8 Repurchase agreements and agreements to resell Financial assets transferred as collateral in connection with standard repurchase agreements, involving fixed repurchase dates and prices, are not derecognized. They continue to be recorded as Investments Classified as Held-to-Maturity Investments, Available-for-sale financial assets, Debt Instruments Classified as receivables or Loans and advances to customers as appropriate. The corresponding liability is included in Financial Assets Sold under Repurchase Agreements. The items which are not derecognized are disclosed in Note IV 46 Contingent Liabilities and Commitments — Collateral.
Consideration paid for financial assets held under agreements to resell are recorded as Financial assets held under resale agreements.
The difference between purchase and sale price is recognized as interest expense or income in the consolidated income statement over the term of the agreements using the effective interest method.
9 Insurance contracts
Insurance contract classification Insurance contracts are those contracts under which the Group has accepted significant insurance risk, relative to an insured event or occurrence. The Group issues primarily life insurance contracts, which insure events associated with mortality over a long duration. The Group also issues non-life insurance contracts, which cover short-term casualty and health insurance risk. When necessary, the Group enters into reinsurance contracts to transfer insurance risks to reinsurer. A significant insurance risk test is performed at inception of the insurance contracts.
Some insurance contracts contain both an insurance component and a deposit component. The Group unbundles those components, if the insurance component and the deposit component are separately measurable. The unbundled insurance component is accounted for according to IFRS 4 — Insurance Contracts and the unbundled deposit component is accounted for as a financial liability under investment contract liabilities.
Annual Report 2014 209
— F-35 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
9 Insurance contracts (Continued)
Insurance income recognition Premiums from long-term life insurance contracts are recognized as revenue when due from policyholders. Premiums related to short-term non-life insurance contracts are recognized when received at the inception of the policy, as unearned insurance premiums in the consolidated statement of financial position, and are amortized on a straight-line basis into the consolidated income statement over the term of the policy.
When the Group has transferred insurance risk through reinsurance contracts, the Group calculates the amount of premium ceded and the reinsurers’ share of expenses and recognizes them through the consolidated income statement in accordance with the terms of the reinsurance contracts.
Insurance contract liabilities Insurance contract liabilities are measured based on a reasonable estimate of the amount of payments that the Group will be required to make to fulfill its obligations under the insurance contracts, which represents the difference between expected future cash outflows and inflows related to such contracts. A reasonable estimate of expected future net cash flows is determined based on information currently available as at the end of the reporting period. The Group has considered the impact of time value in the liability calculation for long-term life insurance.
The Group performs liability adequacy tests based on information currently available, as at the reporting date. Additional insurance contract liabilities will be recorded if any deficiency exists.
10 Precious metals Precious metals comprise gold, silver and other precious metals.
Precious metals that are not related to the Group’s trading activities are initially measured at acquisition cost and subsequently measured at the lower of cost and net realizable value. Precious metals that are related to the Group’s trading activities are initially recognized at fair value, with changes in fair value arising from re-measurement recognized directly in the consolidated income statement in the period in which they arise.
210
— F-36 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
11 Property and equipment Property and equipment including buildings held for use in the supply of services, or for administrative purpose (other than construction in progress) are stated in the consolidated statement of financial position at cost less subsequent accumulated depreciation and accumulated impairment losses, if any. When the costs attributable to the land use rights cannot be reliably measured and separated from that of the building at inception, the costs are included in the cost of buildings and recorded in Property and Equipment.
Depreciation is recognized as a component of Operating Expenses in the consolidated income statement so as to recognize the consumption of the economic value of property and equipment (other than construction in progress), less their estimated residual values, over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation rates are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
The useful lives, estimated residual value rates and annual depreciation rates of each class of property and equipment are as follows:
Annual Estimated residual Depreciation Classes Useful lives Value rates rates Buildings 5–50 years 3% 1.94%–19.40% Electronic equipment, furniture and fixtures 3–11 years 3% 8.82%–32.33% Motor vehicles 5–8 years 3% 12.13%–19.40%
Properties in the course of construction for supply of services or administrative purposes are carried at cost, as construction in progress, less any impairment loss. Construction in progress is reclassified to the appropriate category of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property and equipment, commences when the assets are ready for their intended use.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from its continued use. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in Other Operating Income in the consolidated income statement. The accounting policies of impairment of property and equipment are included in Note II 18 Impairment of Tangible and Intangible Assets Other Than Goodwill.
Annual Report 2014 211
— F-37 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
12 Land use rights Land use rights are classified in other assets and amortized over a straight-line basis over their authorized useful lives.
13 Foreclosed assets Foreclosed assets are initially recognized at fair value and subsequently measured at the lower of their carrying amount and fair value, less costs to sell, at the end of each reporting period. When the fair value, less costs to sell, is lower than a foreclosed asset’s carrying amount, an impairment loss is recognized in the consolidated income statement.
Any gain or loss arising on the disposal of the foreclosed asset is included in the consolidated income statement in the period in which the item is disposed.
A foreclosed asset used by the Group is transferred to property and equipment at its net carrying amount.
14 Investment property Investment property is property held to earn rental income or for capital appreciation, or both.
Investment property is initially measured at its acquisition cost. Subsequent expenditures incurred for the investment property are included in the cost of the investment property if it is probable that economic benefits associated with the asset will flow to the Group and the subsequent expenditures can be measured reliably. Other subsequent expenditures are recognized in the consolidated income statement in the period in which they are incurred.
Investment properties are measured using the cost model. Depreciation and amortization is recognized the same way as property and equipment and land use rights.
At the end of the reporting period, the Group reviews the carrying amounts of its investment properties to determine whether there is any indication that the assets have suffered an impairment loss. If any such indication exists, the recoverable amount (the higher of fair value less costs to sell and value in use) of the property is estimated in order to determine the extent of the impairment loss, if any. If the recoverable amount of a property is estimated to be less than its carrying amount, the carrying amount of the property is reduced to its recoverable amount. An impairment loss is recognized in the consolidated income statement. The accounting policies of impairment of investment property are included in Note II 18 Impairment of Tangible and Intangible Assets Other Than Goodwill.
Where an impairment loss subsequently reverses, the carrying amount of the investment property is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount had no impairment loss been recognized. A reversal of an impairment loss is recognized in the consolidated income statement.
When an investment property is sold, transferred, retired or damaged, the Group recognizes the amount of any proceeds on disposal, net of the carrying amount and related expenses, in the consolidated income statement.
212
— F-38 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
15 Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The Group as lessor When the Group is the lessor in a finance lease, an amount representing the minimum lease payment receivables and unguaranteed residual value, net of initial direct costs, all discounted at the implicit lease rate (the “net lease investment”) is recorded in the consolidated statement of financial position as Loans and advances to customers. The difference between the net lease investment and the undiscounted amount is recorded as unearned finance income, amortizing over the term of the lease using the effective interest method and recognized in the consolidated income statement.
When the Group is the lessor in an operating lease, the assets subject to the operating lease continue to be recognized as the Group’s property and equipment. Rental income from operating leases is recognized as Other Operating Income in the consolidated income statement on a straight- line basis over the term of the related lease.
The Group as lessee When the Group is a lessee under finance leases, the leased assets are capitalized initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in Other Liabilities. Finance charges are charged over the term of the lease using the effective interest method and recognized in the consolidated income statement. The depreciation policy for depreciable leased assets is consistent with that for depreciable assets that are owned.
When the Group is the lessee in an operating lease, operating lease payments are recognized as an expense and charged to Operating Expenses in the consolidated income statement on a straight- line basis over the lease term. Contingent rentals arising under operating leases are recognized as expenses in the periods in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are considered in determining the amount to be recognized over the lease term.
16 Cash and cash equivalents Cash and cash equivalents are short-term and highly liquid assets, which are readily convertible into known amounts of cash and subject to an insignificant risk of changes in value. Cash and cash equivalents include Cash and assets with original maturity of three months or less under Balances with Central Banks, Deposits with Banks and Other Financial Institutions, Placements with and Loans to Banks and Other Financial Institutions and Financial Assets Held under Resale Agreements.
Annual Report 2014 213
— F-39 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
17 Intangible assets Intangible assets acquired separately and with finite useful lives are carried at cost less accumulated amortization and any accumulated impairment loss. Amortization for intangible assets with finite useful lives is recognized on a straight-line basis over their estimated useful lives which generally range from 5 to 20 years.
Intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment assessment.
Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated income statement.
18 Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized in the consolidated income statement.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount had no impairment loss been recognized. A reversal of an impairment loss is recognized in the consolidated income statement.
19 Dividend distribution Dividend distribution to the Bank’s ordinary shareholders is recognized as a liability in the Group’s and the Bank’s financial statements in the period in which the dividends are approved by the shareholders’ annual general meeting of the Bank.
As authorized by the shareholders’ annual general meeting, the Board of Directors has the sole discretion to declare and distribute dividends on preference shares. Preference share dividend distribution is recognized as a liability in the Group’s and the Bank’s financial statements in the period in which the dividends are approved by the Board of Directors of the Bank.
214
— F-40 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
20 Provision Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Provisions are measured at the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
21 Fiduciary activities The Group acts as a custodian, trustee and in other fiduciary capacities to safeguard assets for customers in accordance with custody agreements between the Group and securities investment funds, social security funds, insurance companies, trust companies, qualified foreign institutional investors, annuity schemes and other institutions and individuals. The Group receives fees in return for its services provided under the custody agreements and does not have any interest in the economic risks and rewards related to assets under custody. Therefore, assets under custody are not recognized in the Group’s consolidated statement of financial position.
The Group conducts entrusted lending arrangements for its customers. Under the terms of entrusted loan arrangements, the Group grants loans to borrowers, as an intermediary, according to the instruction of its customers who are the lenders providing the entrusted loans. The Group is responsible for the arrangement and collection of the entrusted loans and receives a commission for the services rendered. As the Group does not assume the economic risks and rewards of the entrusted loans and the funding for the corresponding entrusted funds, they are not recognized as assets and liabilities of the Group.
22 Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due, in accordance with the terms of a debt instrument.
Financial guarantees are initially recognized at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the initial amount, less amortization of guarantee fees recognized in accordance with the revenue recognition policy, and the best estimate of the expenditure required to settle the guarantee. These estimates are determined based on experience of similar transactions, historical losses and supplemented by the judgment of management. Any increase in the liability relating to guarantees is taken to the consolidated income statement.
Annual Report 2014 215
— F-41 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
23 Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognized, but disclosed, unless the possibility of an outflow of resources embodying economic benefits is probable. The Group’s contingent liabilities are disclosed in Note IV 46 Contingent Liabilities and Commitments.
A provision is recognized when it meets the criteria as set forth in Note II 20 Provision.
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES In the application of the Group’s accounting policies, which are described in Note II, management is required to make judgments, estimates and assumptions that affect the carrying amounts of assets and liabilities. The estimates and related assumptions are based on historical experience and other relevant factors including on the basis of reasonable expectations for future events.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the critical judgments and key estimates that the management has made in the process of applying the Group’s accounting policies and that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next twelve months.
1 Impairment losses on loans and advances to customers The Group reviews its loan portfolio to assess impairment on a periodic basis during the year. In determining whether an impairment loss should be recognized in the consolidated income statement, the Group makes estimates and judgments as to whether there is any observable data indicating that there is objective evidence of impairment and the extent, if any, to which it will have a measurable decrease in the estimated future cash flows related to individually significant loans or pools of loans with similar risk characteristics, as described in Note II 8.1 Impairment of Financial Assets Carried at Amortized Cost.
Significant judgments are made in the determination of whether objective evidence of impairment exists in individually significant loans or pools of smaller-balance loans with similar risk characteristics. Among other things, objective evidence of impairment includes deterioration in the financial condition of specific borrowers (or specific pools of borrowers) affecting their ability to meet their loan payment obligations, as well as increasing industry sector over-capacity or obsolescence, or deterioration in national or regional economic conditions that are correlated to increasing loan defaults. These judgments are made both during management’s regular assessments of loan quality and when other circumstances indicate the possibility that objective evidence of impairment may exist.
216
— F-42 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
1 Impairment losses on loans and advances to customers (Continued) Where it is determined that objective evidence of impairment exists, significant judgments and estimates are made in estimating the adverse impact on future cash flows related to individually significant impaired loans. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Factors affecting these estimates include the availability and granularity of information related to specific borrowers and the clarity of the correlation between qualitative factors, such as industry sector performance or changes in regional economic conditions and loan defaults of related borrowers.
When the decrease may not have been identified individually or the individual loan is not significant, management uses estimates based on historical loss experience on a collective basis on loans with similar credit risk characteristics to assess the impairment loss. Significant judgments are also applied to the calculation of collectively assessed impairment. Critical factors affecting these judgments include modeling assumptions (e.g., loss emergence period and loss given default) and levels of correlation between qualitative factors and loan default. The Group considers the impact of the changes and uncertainty in the macro-economic environment, in which the Group operates when assessing the methodology and assumptions used for loss estimation, as well as management’s capability in managing loan portfolio, and makes adjustments where appropriate.
2 Fair value of financial instruments The Group uses valuation techniques to estimate the fair value of financial instruments which are not quoted in an active market. These valuation techniques include the use of recent transaction prices of the same or similar instruments, discounted cash flow analysis and option pricing models. To the extent practical market observable inputs and data, such as interest rate yield curves, foreign currency rates and implied option volatilities, are used when estimating fair value through a valuation technique. Where market observable inputs are not available, they are estimated using assumptions that are calibrated as closely as possible to market observable data. However, areas such as the credit risk of the Group and the counterparty, volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the estimated fair value of financial instruments.
With respect to PRC government obligations related to large-scale policy directed financing transactions, fair value is determined using the stated terms of the related instrument and with reference to terms determined by the PRC government in similar transactions engaged in or directed by the PRC government. In this regard, there are no other relevant market prices or yields reflecting arm’s length transactions of a comparable size and tenor.
Annual Report 2014 217
— F-43 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
3 Held-to-maturity investments The Group classifies non-derivative financial assets, quoted in an active market, with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity as held-to-maturity investments. In assessing the Group’s intention and ability to hold such investments to maturity, management primarily considers the business purpose for acquiring a security, as well as the Group’s liquidity needs. This is a significant judgment because if the Group fails to hold these investments to maturity, other than for specific and limited circumstances (e.g., sale of an insignificant amount close to maturity), it will be required to reclassify the entire portfolio of held-to-maturity investments as available-for-sale financial assets and be precluded from classifying investments as held-to-maturity investments for two years.
4 Impairment of other financial assets For held-to-maturity investments and financial instruments classified as receivables, the determination of whether such an investment is impaired requires significant judgment. Objective evidence that a financial asset or group of financial assets is impaired includes a breach of contract, such as a default or delinquency in interest or principal payments or the disappearance of an active market for that financial asset because of significant financial difficulty of the issuer, etc. In making such judgment, the impact of objective evidence of impairment on expected future cash flows of the investment is taken into account.
For available-for-sale investments, the determination of whether such an investment is impaired requires significant judgment. In making this judgment, the Group considers the duration and extent to which the fair value of an investment is less than its cost; or whether other objective evidence of impairment exists based on the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, credit ratings, delinquency rates and counterparty risk.
5 Taxes There are certain transactions and activities, occurring during the ordinary course of business, for which the ultimate tax effect is uncertain. The Group has made estimates for items of uncertainty and application of new tax legislation taking into account existing tax legislation and past practice. Where the final tax outcome of these matters is different from the amounts that were initially estimated, based on management’s assessment of the appropriate tax treatment, such differences will affect the current income tax and/or deferred income tax during the period in which the tax treatment is finalized.
218
— F-44 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
6 Employee early retirement benefits obligations The Group recognizes liabilities in connection with early retirement benefits for employees in Domestic Institutions using the projected unit credit actuarial cost method based on various assumptions, including the discount rate, average medical expenses growth rate, pension benefit growth rate for early retirements and other factors. The present value of the liability is determined through discounting the estimated future cash outflows using interest rates of RMB treasury bonds which have terms to maturity approximating the terms of the related liability. Any difference arising from the actual result or changes in assumptions may affect the amount of expense recognized in the consolidated income statement in the period during which such changes take place and the corresponding liability recognized in the consolidated statement of financial position.
7 Control over structured entity Where the Group acts as asset manager of structured entities, the Group makes judgment on whether it is the principal or an agent to assess whether the Group controls the structured entities and should consolidate them. When performing this assessment, the Group considers several factors including, among other things, the scope of its decision-making authority over the structured entities, the rights held by other parties, the remuneration to which it is entitled in accordance with the related agreements for the assets management services, the Group’s exposure to variability of returns from other interests that it holds in the structured entities. The Group performs re- assessment periodically.
Annual Report 2014 219
— F-45 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 NET INTEREST INCOME Year ended 31 December 2014 2013 Interest income Loans and advances to customers 470,829 414,270 Including: Corporate loans and advances 326,541 292,774 Personal loans and advances 138,500 114,272 Discounted bills 5,788 7,224 Held-to-maturity investments 66,152 53,633 Balances with central banks 40,018 37,517 Available-for-sale financial assets 35,257 32,277 Financial assets held under resale agreements 27,981 28,693 Deposits with banks and other financial institutions 22,784 16,657 Debt instruments classified as receivables 21,644 20,921 Placements with and loans to banks and other financial institutions 12,516 7,638 Financial assets held for trading 1,923 1,431 Financial assets designated at fair value through profit or loss 185 347 Subtotal 699,289 613,384 Interest expense Due to customers (221,706) (194,903) Deposits from banks and other financial institutions (26,681) (23,657) Debt securities issued (10,179) (8,493) Placements from banks and other financial institutions (7,318) (9,732) Financial assets sold under repurchase agreements (2,511) (395) Borrowings from central bank (1,003) (2) Subtotal (269,398) (237,182) Net interest income 429,891 376,202 Interest income on listed investments 99,507 88,105 Interest income on unlisted investments and other debt instruments 25,654 20,504 Interest income accrued on impaired financial assets (included within interest income) 1,002 693
220
— F-46 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2 NET FEE AND COMMISSION INCOME Year ended 31 December 2014 2013 Fee and commission income Agency services 22,945 21,651 Settlement and clearing services 21,123 22,760 Bank card 19,279 15,929 Consultancy and advisory services 11,031 16,371 Electronic banking services 7,379 6,564 Custodian and other fiduciary 3,114 3,338 Credit commitment 2,807 2,687 Others 205 397 Subtotal 87,883 89,697 Fee and commission expense Bank card (3,127) (2,536) Settlement and clearing services (2,283) (1,918) Electronic banking services (1,766) (1,350) Others (584) (722) Subtotal (7,760) (6,526) Net fee and commission income 80,123 83,171
3 NET TRADING GAIN Year ended 31 December 2014 2013 Net gain/(loss) on held-for-trading debt securities 1,179 (972) Net gain on precious metals (1) 667 1,561 Net gain on foreign exchange rate derivatives 115 1,557 Net (loss)/gain on interest rate derivatives (53) 214 Total 1,908 2,360
(1) Net gain on precious metals consists of net gain on precious metals and precious metal related derivative products.
4 NET GAIN/(LOSS) ON FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Year ended 31 December 2014 2013 Net gain/(loss) on principal guaranteed wealth management products 1,507 (401) Net gain/(loss) on debt securities 12 (215) Others (14) (23) Total 1,505 (639)
Annual Report 2014 221
— F-47 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5 OTHER OPERATING INCOME Year ended 31 December 2014 2013 Insurance premium 3,684 711 Net gain on foreign exchange 2,915 312 Government grant 1,969 1,442 Gain on disposal of property and equipment 416 304 Rental income 336 377 Others 1,044 1,881 Total 10,364 5,027
6 OPERATING EXPENSES Year ended 31 December 2014 2013 Staff costs (1) 111,469 104,729 General operating and administrative expenses (2) 49,195 45,750 Business tax and surcharges (3) 28,880 27,226 Depreciation and amortization 19,328 17,461 Insurance benefits and claims 3,904 669 Provision for guarantees and commitments 8,898 811 Others 2,224 1,961 Total 223,898 198,607
(1) Staff costs Year ended 31 December 2014 2013 Short-term employee benefits Salaries, bonuses, allowance and subsidies 66,780 63,758 Housing funds 8,186 7,213 Social insurance 4,454 3,837 Including: Medical insurance 3,848 3,302 Employment injury insurance 278 249 Maternity insurance 328 286 Labor union fees and staff education expenses 2,977 2,827 Others 12,825 12,138 Subtotal 95,222 89,773 Defined contribution benefits 14,636 13,102 Early retirement benefits 1,611 1,854 Total 111,469 104,729
222
— F-48 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6 OPERATING EXPENSES (Continued) (2) Included in general operating and administrative expenses is auditor’s remuneration of RMB132 million for the year (2013: RMB123 million).
(3) Business tax for the Group’s Domestic Operations is generally calculated as 5% of taxable income, which was declared and paid with the local tax department by Domestic Operations.
In accordance with the “Circular regarding the Business Taxes Preferential Policies on Agriculture-related Loans Granted by the County Area Banking Division of Agricultural Bank of China Limited” (Cai Shui [2014] No.5), jointly issued by the MOF and the State Administration of Taxation on 10 January 2014, business tax of the Group’s county-level sub-branches in the 19 provinces for the pilot program would be levied at 3% on interest income from agriculture- related loans from 1 November 2013 to 31 December 2015.
Additionally, city construction and maintenance tax is calculated as 1%–7% of business tax for the Group’s Domestic Operations.
Education surcharge is calculated as 3%–5% of business tax for the Group’s Domestic Operations.
Annual Report 2014 223
— F-49 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 EMOLUMENTS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENTS AND THE HIGHEST PAID INDIVIDUALS
(1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB):
Year ended 31 December 2014 Basic salaries, allowance Contribution and benefits to pension Item Fees in kind schemes Bonus Total Executive Directors Liu Shiyu (i) — 179 14 — 193 Zhang Yun (ii) — 999 73 — 1,072 Lou Wenlong (ii) — 908 69 — 977 Independent Non- Executive Directors Anthony Wu Ting-yuk 410 — — — 410 Qiu Dong 440 — — — 440 Frederick Ma Si-hang 350 — — — 350 Wen Tiejun 360 — — — 360 Francis Yuen Tin-fan 360 — — — 360 Non-Executive Directors Shen Bingxi (iii) — — —— — Cheng Fengchao (iii) — — —— — Xiao Shusheng (iii) — — —— — Zhao Chao (iii) — — —— — Zhou Ke (iii)(iv) — — —— — Supervisors Che Yingxin — 960 72 — 1,032 Wang Xingchun (v) — — —— — Jia Xiangsen (vi) 30 — — — 30 Zheng Xin (vi) 30 — — — 30 Xia Zongyu (vi) 30 — — — 30 Xia Taili (vi)(vii) — — —— — Dai Genyou 280 — — — 280 Senior Managements Cai Huaxiang — 908 69 — 977 Gong Chao — 908 69 — 977 Wang Wei — 908 69 — 977 Li Zhenjiang (viii) — 908 69 — 977 Zhu Gaoming (viii) — 679 33 — 712 Executive Directors resigned Jiang Chaoliang (ix) — 802 61 — 863 Guo Haoda (x) — 605 46 — 651 Non-executive Directors resigned Li Yelin (xi) — — —— — Lin Damao (xii) — — —— — Supervisors resigned Liu Hong (xiii) — — —— — Zhang Jianzhong (xiv) 30 — — — 30 Total 2,320 8,764 644 — 11,728
224
— F-50 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 EMOLUMENTS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENTS AND THE HIGHEST PAID INDIVIDUALS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB) (Continued): (i) Liu Shiyu was elected Chairman of the Board of Directors effective 11 Dec 2014.
(ii) Zhang Yun and Lou Wenlong are also the Senior Management of the Group and their emoluments disclosed above include those for services rendered by them as the Senior Management.
(iii) These Non-Executive Directors of the Bank did not receive any fees from the Group. Their emoluments were borne by the major Equity Holders of the Bank.
(iv) Zhou Ke was elected Non-Executive Director effective 31 July 2014.
(v) Wang Xingchun was elected Shareholder Representative Supervisor effective 23 June 2014. Wang Xingchun did not receive any emoluments for his part-time position as shareholder representative supervisor from the Bank in 2014.
(vi) For Employee Representative Supervisors of the Bank, the amounts set forth above only included fees for their services as supervisors.
(vii) Xia Taili was elected Supervisor representing employees of the Bank effective 2 December 2014 at the Employee Representatives Meeting.
(viii) Li Zhenjiang ceased to be Secretary to the Board of Directors effective 27 March 2014. Zhu Gaoming was elected Secretary to the Board of Directors effective 27 March 2014.
(ix) Jiang Chaoliang ceased to be Chairman of the Board of Directors effective 31 August 2014.
(x) Guo Haoda ceased to be Executive Director effective 9 September 2014. In his tenure, he was also the Senior Management of the Group and his emolument disclosed above include that for service rendered by him as the Senior Management.
(xi) Li Yelin ceased to be Non-Executive Director effective 28 July 2014.
(xii) Lin Damao ceased to be Non-Executive Director effective 5 August 2014.
(xiii) Liu Hong ceased to be Shareholder Representative Supervisor effective 24 April 2014. Liu Hong did not receive any emoluments for his part-time position as Shareholder Representative Supervisor from the Bank in 2014.
(xiv) Zhang Jianzhong ceased to be Employee Representative Supervisor effective 2 December 2014.
Annual Report 2014 225
— F-51 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 EMOLUMENTS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENTS AND THE HIGHEST PAID INDIVIDUALS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB) (Continued): Year ended 31 December 2013 Basic salaries, allowance Contribution and benefits to pension Item Fees in kind schemes Bonus Total Executive Directors Jiang Chaoliang — 1,070 64 — 1,134 Zhang Yun (i) — 1,002 57 — 1,059 Guo Haoda (i) — 876 54 — 930 Lou Wenlong (i) — 876 54 — 930 Independent Non-Executive Directors Anthony Wu Ting-yuk 410 — — — 410 Qiu Dong 440 — — — 440 Frederick Ma Si-hang 350 — — — 350 Wen Tiejun 360 — — — 360 Francis Yuen Tin-fan (ii) 295 — — — 295 Non-Executive Directors Shen Bingxi (iii) — — ——— Lin Damao (iii) — — ——— Cheng Fengchao (iii) — — ——— Li Yelin (iii) — — ——— Xiao Shusheng (iii) — — ——— Zhao Chao (iii) — — ——— Supervisors Che Yingxin — 947 56 — 1,003 Liu Hong (iv) — — ——— Jia Xiangsen (v) 30 — — — 30 Zheng Xin (v) 30 — — — 30 Zhang Jianzhong (v)(vi) 17 — — — 17 Xia Zongyu (v)(vi) 17 — — — 17 Dai Genyou 280 — — — 280 Senior Managements Cai Huaxiang — 876 54 — 930 Gong Chao — 876 54 — 930 Wang Wei — 876 54 — 930 Li Zhenjiang — 820 53 — 873 Supervisor resigned Wang Yurui (vii) 12 — — — 12 Yan Chongwen (vii) 12 — — — 12 Total 2,253 8,219 500 — 10,972
226
— F-52 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 EMOLUMENTS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENTS AND THE HIGHEST PAID INDIVIDUALS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB) (Continued): (i) Zhang Yun, Guo Haoda and Lou Wenlong were also the Senior Management of the Group and their emoluments disclosed above include those for services rendered by them as the Senior Management.
(ii) Francis Yuen Tin-fan was elected Independent Non-Executive Director effective 8 March 2013.
(iii) These Non-Executive Directors of the Bank did not receive any fees from the Group. Their emoluments were borne by the major equity holders of the Bank.
(iv) Liu Hong did not receive any emoluments for his part-time position as Shareholder Representative Supervisor from the Bank in 2013.
(v) For Employee Representative Supervisors of the Bank, the amounts set forth above only included fees for their services as supervisors.
(vi) Zhang Jianzhong and Xia Zongyu were elected as Supervisors representing employees of the Bank effective 7 May 2013 at the Employee Representatives Meeting.
(vii) Wang Yurui and Yan Chongwen ceased to be Employee Representative Supervisor effective 7 May 2013.
As of the announcement date of these consolidated financial statements, the above compensation package for the Directors, Supervisors and Senior Management for the years ended 31 December 2014 and 31 December 2013 have not been finalized. Management of the Group believes that difference between the final emoluments and that disclosed above will not have significant impact on the consolidated financial statements of the Group. The final compensation will be disclosed in a separate announcement when determined.
Annual Report 2014 227
— F-53 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 EMOLUMENTS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENTS AND THE HIGHEST PAID INDIVIDUALS (Continued)
(2) Five individuals with the highest emoluments in the Group (i) Of the five individuals with the highest emoluments, none of them are directors or supervisors whose emoluments are disclosed above. The emoluments of the five individuals whose emoluments were the highest in the Group for the year ended 31 December 2014 and 2013 were as follows (in thousands of RMB):
Year ended 31 December 2014 2013 Basic salaries and allowance 7,435 7,889 Discretionary bonuses 7,682 6,342 Contribution to pension schemes and other 867 542 Total 15,984 14,773
(ii) The number of these five individuals whose emoluments fell within the following bands are as follows:
Year ended 31 December 2014 2013 RMB2,500,000 to RMB3,000,000 yuan 1 3 RMB3,000,001 to RMB3,500,000 yuan 3 1 RMB3,500,001 to RMB4,000,000 yuan 1 1
During the current and prior year, no emolument was paid by the Group to any of the Directors, Supervisors, Senior Managements or the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as a compensation for loss of office. None of the Directors or Supervisors waived any emoluments during the current and prior year.
8 IMPAIRMENT LOSSES ON ASSETS Year ended 31 December 2014 2013 Loans and advances to customers 65,063 52,126 Placements with and loans to banks and other financial institutions 1,181 200 Debt instruments classified as receivables 861 141 Held-to-maturity investments 279 379 Property and equipment 27 14 Deposits with banks and other financial institutions — (34) Available-for-sale financial assets (37) (129) Other assets 597 293 Total 67,971 52,990
228
— F-54 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9 INCOME TAX EXPENSE Year ended 31 December 2014 2013 Current income tax — PRC Enterprise Income Tax 65,291 57,503 — Hong Kong Profits Tax 386 305 — Other jurisdictions 222 61 Subtotal 65,899 57,869 Deferred tax (Note IV 25) (13,152) (9,906) Total 52,747 47,963
PRC Enterprise Income Tax is calculated at 25% of the estimated taxable profit for both years, and also includes supplementary PRC tax on Overseas Operations as determined in accordance with the relevant PRC income tax rules and regulations. Taxation arising in other jurisdictions (including Hong Kong) is calculated at the rates prevailing in the relevant jurisdictions. Pre-tax deduction items of enterprise income tax are governed by the relevant regulations of the PRC.
The tax charges for the years ended 31 December 2014 and 2013 can be reconciled to the profit per the consolidated income statement as follows:
Year ended 31 December 2014 2013 Profit before tax 232,257 214,174 Tax calculated at applicable PRC statutory tax rate of 25% 58,064 53,544 Tax effect of income not taxable for tax purpose (1) (7,083) (6,652) Tax effect of items such as expenses not deductible for tax purpose 1,770 1,077 Effect of different tax rates in other jurisdictions (4) (6) Income tax expense 52,747 47,963
(1) Non-taxable income primarily includes interest income from PRC treasury bonds.
Annual Report 2014 229
— F-55 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10 DIVIDENDS Year ended 31 December 2014 2013 Dividends on ordinary shares declared and paid Cash dividend related to 2013 (1) 57,489 — Cash dividend related to 2012 (2) — 50,830 57,489 50,830
A final dividend of RMB0.182 per ordinary share in respect of the year ended 31 December 2014 totalling RMB59,113 million has been proposed by the directors and is subject to approval by the ordinary shareholders in the annual general meeting.
(1) Distribution of final dividend for 2013
A cash dividend of RMB0.177 per share related to 2013, amounting to RMB57,489 million in total was approved, after the required appropriations for the statutory surplus reserve and the general reserve for 2013 as determined in accordance with the relevant accounting rules and financial regulations applicable to PRC enterprises (the “PRC GAAP”), at the annual general meeting held on 23 June 2014.
The above dividend was recognized as distribution and distributed during the year ended 31 December 2014.
(2) Distribution of final dividend for 2012
A cash dividend of RMB0.1565 per share related to 2012, amounting to RMB50,830 million in total was approved, after the required appropriations for the statutory surplus reserve and the general reserve for 2012 as determined in accordance with the PRC GAAP, at the annual general meeting held on 18 June 2013.
The above dividend was recognized as distribution and distributed during the year ended 31 December 2013.
11 EARNINGS PER SHARE Year ended 31 December 2014 2013 Earnings: Profit for the year attributable to equity holders of the Bank 179,461 166,315 Less: profit for the year attributable to preference shareholders of the Bank — — Profit for the year attributable to ordinary shareholders of the Bank 179,461 166,315 Number of shares: Weighted average number of ordinary shares in issue (million) 324,794 324,794 Basic and diluted earnings per share (RMB yuan) 0.55 0.51
The Bank issued non-cumulative preference shares during the year ended 31 December 2014 under the terms and conditions as detailed in Note IV 37 Preference Shares. For the purpose of calculating basic earnings per share, dividends on non-cumulative preference shares declared in respect of the period should be deducted from the amounts attributable to ordinary shareholders of the Bank. The Bank has not declared any dividend on preference shares for the year ended 31 December 2014.
230
— F-56 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11 EARNINGS PER SHARE (Continued) The conversion feature of preference shares is considered to fall within contingently issuable ordinary shares. The triggering events of conversion did not occur as at 31 December 2014 and the conversion feature of preference shares has no effect on the basic and diluted earnings per share calculation.
12 CASH AND BALANCES WITH CENTRAL BANKS Group As at 31 December 2014 2013 Cash 111,962 99,759 Mandatory reserve deposits with central banks (1) 2,409,181 2,279,918 Surplus reserve deposits with central banks (2) 49,253 100,519 Other deposits with central banks (3) 172,669 123,606 Total 2,743,065 2,603,802
Bank As at 31 December 2014 2013 Cash 111,914 99,737 Mandatory reserve deposits with central banks (1) 2,408,994 2,279,774 Surplus reserve deposits with central banks (2) 49,220 100,508 Other deposits with central banks (3) 172,669 123,606 Total 2,742,797 2,603,625
(1) The Group places mandatory reserve deposits with the PBOC and overseas regulatory bodies. These include RMB reserve deposits and foreign currency reserve deposits. These mandatory reserve deposits are not available for the Group’s daily operations.
As at 31 December 2014, for Domestic Operations of the Bank which meet the requirements of “Notice on Differential Mandatory Reserve Deposits for the Sannong Banking Operations of Agricultural Bank of China Limited for 2013 issued by the People’s Bank of China” (Yinbanfa [2013] No.57) and effective 7 March 2013, RMB mandatory reserve deposits with the PBOC were based on 18% of qualified RMB deposits (31 December 2013: 18%), while for the remaining Domestic Operations of the Bank, RMB mandatory reserve deposits were based on 20% of qualified RMB deposits (31 December 2013: 20%). Foreign currency mandatory reserve deposits were based on 5% (31 December 2013: 5%) of qualified foreign currency deposits from customers. Mandatory reserve deposits placed by the Bank’s Overseas Operations were determined based on respective overseas regulatory requirements. The foreign currency reserve deposits placed with the PBOC are non-interest bearing.
(2) Surplus reserve deposits are deposits maintained with the PBOC in addition to the mandatory reserve deposits and mainly for the purpose of clearing.
(3) Other deposits with central banks primarily represent fiscal deposits placed with the PBOC that are not available for use in the Group’s daily operations, of which fiscal deposits are non-interest bearing.
Annual Report 2014 231
— F-57 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13 DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS Group As at 31 December 2014 2013 Deposits with: Domestic banks 543,394 360,762 Other domestic financial institutions 2,021 1,713 Overseas banks 27,390 35,203 Total 572,805 397,678
Bank As at 31 December 2014 2013 Deposits with: Domestic banks 534,046 353,117 Other domestic financial institutions 2,020 1,713 Overseas banks 26,726 35,108 Total 562,792 389,938
As at 31 December 2014, the carrying amount of deposits with banks and other financial institutions which have been pledged as security was RMB1,833 million (31 December 2013: RMB1,205 million). These deposits were mainly security deposits pledged with exchanges.
232
— F-58 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14 PLACEMENTS WITH AND LOANS TO BANKS AND OTHER FINANCIAL INSTITUTIONS Group As at 31 December 2014 2013 Placements with and loans to: Domestic banks 124,060 81,436 Other domestic financial institutions 267,358 223,566 Overseas banks 17,400 4,228 Gross amount 408,818 309,230 Allowance for impairment losses — collectively assessed (1,756) (575) Placements with and loans to banks and other financial institutions 407,062 308,655
Bank As at 31 December 2014 2013 Placements with and loans to: Domestic banks 124,060 81,436 Other domestic financial institutions 270,408 223,866 Overseas banks 20,113 6,240 Gross amount 414,581 311,542 Allowance for impairment losses — collectively assessed (1,756) (575) Placements with and loans to banks and other financial institutions 412,825 310,967
Annual Report 2014 233
— F-59 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15 FINANCIAL ASSETS HELD FOR TRADING Group As at 31 December 2014 2013 Debt securities issued by: Governments 3,545 4,979 Public sector and quasi-governments 23,445 24,073 Financial institutions 1,112 474 Corporates 12,708 12,486 Subtotal 40,810 42,012 Equity instruments — 48 Precious metal contracts 17,615 11,804 Total 58,425 53,864 Analyzed as: Listed outside Hong Kong (1) 40,632 42,060 Unlisted 17,793 11,804 Total 58,425 53,864
Bank As at 31 December 2014 2013 Debt securities issued by: Governments 3,545 4,979 Public sector and quasi-governments 23,445 24,073 Financial institutions 1,112 474 Corporates 12,708 12,167 Subtotal 40,810 41,693 Precious metal contracts 17,615 11,804 Total 58,425 53,497 Analyzed as: Listed outside Hong Kong (1) 40,632 41,693 Unlisted 17,793 11,804 Total 58,425 53,497
(1) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
234
— F-60 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16 FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Group As at 31 December 2014 2013 Debt securities issued by: Governments 11,235 8,721 Public sector and quasi-governments 25,278 25,983 Financial institutions 2,899 11,021 Corporates 6,681 12,282 Subtotal 46,093 58,007 Interests in trust products (1) 248,794 171,280 Other debt instruments (1) 59,876 38,710 Equity instruments 1,472 1,021 Total 356,235 269,018 Analyzed as: Listed in Hong Kong 816 183 Listed outside Hong Kong (2) 31,963 43,255 Unlisted 323,456 225,580 Total 356,235 269,018
Bank As at 31 December 2014 2013 Debt securities issued by: Governments 11,235 8,721 Public sector and quasi-governments 25,278 25,983 Financial institutions 2,899 11,021 Corporates 6,681 12,282 Subtotal 46,093 58,007 Interests in trust products (1) 248,794 171,277 Other debt instruments (1) 60,876 38,710 Total 355,763 267,994 Analyzed as: Listed in Hong Kong 181 183 Listed outside Hong Kong (2) 31,963 43,255 Unlisted 323,619 224,556 Total 355,763 267,994
(1) Underlying assets of the trust products and other debt instruments held by the Group mainly include credit assets, deposits with domestic banks and other domestic financial institutions and debt securities, which have been disclosed in Note IV 45 Structured Entities.
(2) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
Annual Report 2014 235
— F-61 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES The Group primarily enters into foreign exchange rate, interest rate and precious metal derivative contracts related to trading, asset and liability management, and customer initiated transactions.
The contractual/notional amounts and fair values of the derivative financial instruments entered into by the Group are set out in the following tables. The contractual/notional amounts of derivative financial instruments provide a basis for comparison with fair values of instruments recognized on the consolidated statement of financial position but do not necessarily indicate the amounts of future cash flows involved or the current fair values of the instruments and, therefore, do not indicate the Group’s exposure to credit or market risks. The fair value of derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market interest rates, foreign exchange rates or precious metal prices relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly.
Certain financial assets and financial liabilities of the Group are subject to enforceable master netting arrangements or similar agreements. The agreement between the Group and the counterparty generally allows for net settlement of the relevant financial assets and financial liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and financial liabilities will be settled on a gross basis. However, each party to the master netting arrangements or similar agreements will have the option to settle all such amounts on a net basis in the event of default of the other party. As at 31 December 2014 and 2013, the amount of the financial assets and financial liabilities subject to enforceable master netting arrangements or similar agreements are not material to the Group. The Group did not elect to settle these financial assets and financial liabilities on a net basis. The Group does not hold any other financial instruments, other than derivatives, that are subject to master netting arrangements or similar agreements.
236
— F-62 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (Continued) Group 31 December 2014 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards 340,045 3,078 (2,241) Currency swaps 481,198 2,476 (3,675) Cross-currency interest rate swaps 6,785 192 (251) Currency options 33,112 72 (79) Subtotal 5,818 (6,246) Interest rate derivatives Interest rate swaps 166,002 795 (936) Precious metal contracts 12,732 561 (58) Others 55 21 — Total derivative financial assets and liabilities 7,195 (7,240)
31 December 2013 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards 256,278 1,624 (2,786) Currency swaps 365,555 3,886 (2,215) Cross-currency interest rate swaps 17,966 372 (678) Currency options 11,864 33 (15) Subtotal 5,915 (5,694) Interest rate derivatives Interest rate swaps 165,722 1,637 (1,940) Precious metal contracts 7,201 634 — Others 1,494 — (1) Total derivatives financial assets and liabilities 8,186 (7,635)
Annual Report 2014 237
— F-63 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (Continued) Bank 31 December 2014 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards 333,559 2,998 (2,225) Currency swaps 474,327 2,332 (3,523) Cross-currency interest rate swaps 6,785 192 (251) Currency options 33,112 72 (79) Subtotal 5,594 (6,078) Interest rate derivatives Interest rate swaps 166,002 795 (936) Precious metal contracts 12,732 561 (58) Total derivative financial assets and liabilities 6,950 (7,072)
31 December 2013 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards 256,081 1,624 (2,784) Currency swaps 357,624 3,876 (2,215) Cross-currency interest rate swaps 17,966 372 (678) Currency options 11,864 33 (15) Subtotal 5,905 (5,692) Interest rate derivatives Interest rate swaps 165,722 1,637 (1,940) Precious metal contracts 7,201 634 — Others 1,494 — (1) Total derivatives financial assets and liabilities 8,176 (7,633)
238
— F-64 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (Continued) Credit risk weighted amount for derivative transaction counterparties represents the counterparty credit risk associated with derivative transactions and is calculated in accordance with the “Capital Rules for Commercial Banks (Provisional)” issued by the CBRC which was effective 1 January 2013 and is dependent on, among other factors, creditworthiness of the customers and maturity characteristics of each type of contract. As at 31 December 2014, the credit risk weighted amount for derivative transaction counterparty was measured under the Internal Ratings — Based approach as disclosed in Note IV 49 Capital Management.
As at 31 December 2014 Group Bank Credit risk weighted amount for counterparty 12,576 12,298
As at 31 December 2013, credit risk weighted amount for derivative transaction counterparty of the Group and the Bank were RMB11,380 million and RMB11,326 million, respectively, which was measured under the Weighted approach as disclosed in Note IV 49 Capital Management.
18 FINANCIAL ASSETS HELD UNDER RESALE AGREEMENTS Group As at 31 December 2014 2013 Analyzed by collateral type: Debt securities 209,160 402,454 Bills 300,258 332,921 Loans and others — 1,677 Total 509,418 737,052
Bank As at 31 December 2014 2013 Analyzed by collateral type: Debt securities 209,154 402,144 Bills 300,258 332,921 Loans and others — 1,677 Total 509,412 736,742
The collateral received in connection with the purchase of financial assets under resale agreement is disclosed in Note IV 46 Contingent Liabilities and Commitments — Collateral.
Annual Report 2014 239
— F-65 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS Analysis of loans and advances to customers:
Group As at 31 December 2014 2013 Corporate loans and advances Loans and advances 5,516,854 5,031,088 Discounted bills 180,229 97,993 Subtotal 5,697,083 5,129,081 Personal loans and advances 2,400,984 2,095,632 Gross loans and advances 8,098,067 7,224,713 Allowance for impairment losses Individually assessed (73,094) (50,127) Collectively assessed (284,977) (272,064) Total allowance for impairment losses (358,071) (322,191) Loans and advances to customers, net 7,739,996 6,902,522
Bank As at 31 December 2014 2013 Corporate loans and advances Loans and advances 5,476,778 4,994,468 Discounted bills 180,226 97,991 Subtotal 5,657,004 5,092,459 Personal loans and advances 2,399,975 2,094,948 Gross loans and advances 8,056,979 7,187,407 Allowance for impairment losses Individually assessed (72,578) (50,050) Collectively assessed (284,053) (271,174) Total allowance for impairment losses (356,631) (321,224) Loans and advances to customers, net 7,700,348 6,866,183
240
— F-66 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS (Continued) Analysis of loans and advances to customers by collective and individual assessments:
Group Identified impaired Loans and Identified impaired loans and advances (2) gross loans advances and advances for which For which For which as a % of the allowance the allowance the allowance total gross is collectively is collectively is individually loans and assessed (1) assessed assessed Subtotal Total advances 31 December 2014 Gross loans and advances 7,973,097 21,063 103,907 124,970 8,098,067 1.54 Allowance for impairment losses (270,386) (14,591) (73,094) (87,685) (358,071) Loans and advances to customers, net 7,702,711 6,472 30,813 37,285 7,739,996 31 December 2013 Gross loans and advances 7,136,932 15,426 72,355 87,781 7,224,713 1.22 Allowance for impairment losses (261,624) (10,440) (50,127) (60,567) (322,191) Loans and advances to customers, net 6,875,308 4,986 22,228 27,214 6,902,522
Bank Identified impaired Loans and Identified impaired loans and advances (2) gross loans advances and advances for which For which For which as a % of the allowance the allowance the allowance total gross is collectively is collectively is individually loans and assessed (1) assessed assessed Subtotal Total advances 31 December 2014 Gross loans and advances 7,932,727 21,052 103,200 124,252 8,056,979 1.54 Allowance for impairment losses (269,466) (14,587) (72,578) (87,165) (356,631) Loans and advances to customers, net 7,663,261 6,465 30,622 37,087 7,700,348 31 December 2013 Gross loans and advances 7,100,334 15,425 71,648 87,073 7,187,407 1.21 Allowance for impairment losses (260,734) (10,440) (50,050) (60,490) (321,224) Loans and advances to customers, net 6,839,600 4,985 21,598 26,583 6,866,183
Annual Report 2014 241
— F-67 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS (Continued) Analysis of loans and advances to customers by collective and individual assessments (Continued):
(1) Loans and advances for which allowance is collectively assessed consist of loans and advances which have not been specifically identified as impaired.
(2) Identified impaired loans and advances include loans for which objective evidence of impairment exists and which have been identified as bearing impairment losses, which are measured either individually (corporate loans and advances) or collectively (personal loans and advances).
Movements of the allowance for impairment losses on loans and advances to customers:
Group Year ended 31 December 2014 Individually Collectively assessed assessed allowance allowance Total 1 January 2014 50,127 272,064 322,191 Impairment allowance on loans charged 58,579 59,031 117,610 Reversal of impairment allowance (9,976) (42,571) (52,547) Net additions 48,603 16,460 65,063 Write-offs and transfer out (25,772) (3,450) (29,222) Recovery of loans and advances written off in previous years 921 220 1,141 Unwinding of discount on allowance (688) (314) (1,002) Exchange difference (97) (3) (100) 31 December 2014 73,094 284,977 358,071
Year ended 31 December 2013 Individually Collectively assessed assessed allowance allowance Total 1 January 2013 52,242 227,746 279,988 Impairment allowance on loans charged 16,390 73,442 89,832 Reversal of impairment allowance (10,785) (26,921) (37,706) Net additions 5,605 46,521 52,126 Write-offs and transfer out (7,842) (1,942) (9,784) Recovery of loans and advances written off in previous years 600 220 820 Unwinding of discount on allowance (454) (239) (693) Exchange difference (24) (242) (266) 31 December 2013 50,127 272,064 322,191
242
— F-68 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS (Continued) Movements of the allowance for impairment losses on loans and advances to customers (Continued):
Bank Year ended 31 December 2014 Individually Collectively assessed assessed allowance allowance Total 1 January 2014 50,050 271,174 321,224 Impairment allowance on loans charged 58,140 58,817 116,957 Reversal of impairment allowance (9,976) (42,390) (52,366) Net additions 48,164 16,427 64,591 Write-offs and transfer out (25,772) (3,450) (29,222) Recovery of loans and advances written off in previous years 921 220 1,141 Unwinding of discount on allowance (688) (314) (1,002) Exchange difference (97) (4) (101) 31 December 2014 72,578 284,053 356,631
Year ended 31 December 2013 Individually Collectively assessed assessed allowance allowance Total 1 January 2013 52,242 227,339 279,581 Impairment allowance on loans charged 16,313 72,927 89,240 Reversal of impairment allowance (10,785) (26,734) (37,519) Net additions 5,528 46,193 51,721 Write-offs and transfer out (7,842) (1,942) (9,784) Recovery of loans and advances written off in previous years 600 65 665 Unwinding of discount on allowance (454) (239) (693) Exchange difference (24) (242) (266) 31 December 2013 50,050 271,174 321,224
Annual Report 2014 243
— F-69 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20 AVAILABLE-FOR-SALE FINANCIAL ASSETS Group As at 31 December 2014 2013 Debt securities issued by: Governments 147,513 149,808 Public sector and quasi-governments 449,232 409,382 Financial institutions 138,698 52,030 Corporates 186,574 167,724 Subtotal 922,017 778,944 Fund investments (1) 3,358 988 Equity instruments 2,528 819 Others (1) — 560 Total 927,903 781,311 Analyzed as: Debt securities Listed in Hong Kong 19,163 14,442 Listed outside Hong Kong (2) 892,466 749,029 Unlisted 10,388 16,033 Equity instruments, fund investments and others Listed in Hong Kong 79 — Listed outside Hong Kong 4,307 1,141 Unlisted (3) 1,500 666 Total 927,903 781,311
Bank As at 31 December 2014 2013 Debt securities issued by: Governments 147,342 149,584 Public sector and quasi-governments 448,190 409,382 Financial institutions 138,421 50,751 Corporates 182,857 166,494 Subtotal 916,810 776,211 Equity instruments 571 504 Total 917,381 776,715 Analyzed as: Debt securities Listed in Hong Kong 19,096 14,430 Listed outside Hong Kong (2) 887,326 745,763 Unlisted 10,388 16,018 Equity instruments Listed outside Hong Kong 287 — Unlisted (3) 284 504 Total 917,381 776,715
(1) The Group’s available-for-sale fund investments and other investments have been disclosed in Note IV 45 Structured Entities.
(2) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
(3) As at 31 December 2014, unlisted equity instruments of the Group and the Bank amounted to RMB284 million were measured at cost because their fair value cannot be reliably measured (31 December 2013: RMB241 million).
244
— F-70 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21 HELD-TO-MATURITY INVESTMENTS Group As at 31 December 2014 2013 Debt securities issued by: Governments 548,330 519,265 Public sector and quasi-governments 936,274 808,838 Financial institutions 67,878 29,688 Corporates 159,349 166,623 Gross amount 1,711,831 1,524,414 Allowance for impairment losses-collectively assessed (881) (599) Held-to-maturity investments, net 1,710,950 1,523,815 Analyzed as: Listed in Hong Kong 1,381 715 Listed outside Hong Kong (1) 1,700,044 1,521,141 Unlisted 9,525 1,959 Total 1,710,950 1,523,815
Bank As at 31 December 2014 2013 Debt securities issued by: Governments 548,330 519,265 Public sector and quasi-governments 934,063 808,838 Financial institutions 65,853 27,012 Corporates 156,143 163,482 Gross amount 1,704,389 1,518,597 Allowance for impairment losses-collectively assessed (881) (599) Held-to-maturity investments, net 1,703,508 1,517,998 Analyzed as: Listed in Hong Kong 1,381 715 Listed outside Hong Kong (1) 1,692,991 1,515,324 Unlisted 9,136 1,959 Total 1,703,508 1,517,998
(1) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
Annual Report 2014 245
— F-71 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22 DEBT INSTRUMENTS CLASSIFIED AS RECEIVABLES Group As at 31 December 2014 2013 Debt instruments: Receivable from the MOF (1) 278,314 362,054 Special government bond (2) 93,300 93,300 Public sector and quasi-government bonds 56,141 66,485 Financial institution bonds 45,334 27,124 Corporate bonds 35,020 31,018 Certificate treasury bonds and savings treasury bonds 3,590 6,037 Others (3) 11,621 6,414 Gross amount, unlisted 523,320 592,432 Allowance for impairment losses Individually assessed (478) (44) Collectively assessed (725) (298) Total allowance for impairment losses (1,203) (342) Debt instruments classified as receivables, net 522,117 592,090
Bank As at 31 December 2014 2013 Debt instruments: Receivable from the MOF (1) 278,314 362,054 Special government bond (2) 93,300 93,300 Public sector and quasi-government bonds 56,141 66,485 Financial institution bonds 46,295 27,124 Corporate bonds 34,277 31,018 Certificate treasury bonds and savings treasury bonds 3,462 5,820 Others 646 — Gross amount, unlisted 512,435 585,801 Allowance for impairment losses Individually assessed (463) (44) Collectively assessed (798) (298) Total allowance for impairment losses (1,261) (342) Debt instruments classified as receivables, net 511,174 585,459
(1) Pursuant to the “Notice on Relevant Issues Concerning the Disposal of Non-performing Assets of Agricultural Bank of China” (Caijin [2008] No. 138) issued by the Ministry of Finance (the “MOF”), receivable from the MOF is to be settled annually over a tentative period of 15 years starting from 1 January 2008 at an interest rate of 3.3% per annum.
(2) Special government bond refers to the non-transferable bond issued by the MOF in 1998 in the aggregate principal amount of RMB93.3 billion to the Predecessor Entity for capital replenishment. The bond will mature in 2028 and bears interest at a fixed rate of 2.25% per annum, starting from 1 December 2008.
(3) Other debt instruments classified as receivables have been disclosed in Note IV 45 Structured Entities.
246
— F-72 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23 INVESTMENT IN SUBSIDIARIES Bank As at 31 December 2014 2013 Investment cost 11,223 8,907 Allowance for impairment losses (659) (659) Investments in subsidiaries 10,564 8,248
The following are the principal subsidiaries of the Bank as at 31 December 2014:
Date of Place of Percentage of Percentage of incorporation/ incorporation/ Authorized/ equity interest voting rights Name of entity establishment establishment paid-in capital (%) (%) Principal activities China Agricultural Finance 1 November 1988 Hong Kong, PRC HKD588,790,000 100.00 100.00 Investment holding Co., Ltd. ABC International (i) 11 November 2009 Hong Kong, PRC HKD4,113,392,449 100.00 100.00 Investment holding Holdings Limited ABC Financial Leasing Co., Ltd. (i) 29 September 2010 Shanghai, PRC RMB3,000,000,000 100.00 100.00 Financial leasing Agricultural Bank of 29 November 2011 London, USD100,000,000 100.00 100.00 Banking China (UK) Limited United Kingdom ABC-CA Fund 18 March 2008 Shanghai, PRC RMB200,000,001 51.67 51.67 Fund management Management Co., Ltd. ABC Hexigten Rural Bank 12 August 2008 Inner Mongolia, RMB19,600,000 51.02 51.02 Banking Limited Liability Company PRC ABC Hubei Hanchuan (ii) 12 August 2008 Hubei, PRC RMB31,000,000 50.00 66.67 Banking Rural Bank Limited Liability Company ABC Jixi Rural Bank 25 May 2010 Anhui, PRC RMB29,400,000 51.02 51.02 Banking Limited Liability Company ABC Ansai Rural Bank 30 March 2010 Shaanxi, PRC RMB20,000,000 51.00 51.00 Banking Limited Liability Company ABC Zhejiang Yongkang 20 April 2012 Zhejiang, PRC RMB210,000,000 51.00 51.00 Banking Rural Bank Limited Liability Company ABC Xiamen Tong’an 24 May 2012 Fujian, PRC RMB100,000,000 51.00 51.00 Banking Rural Bank Limited Liability Company ABC Life Insurance Co., Ltd. (iii) 19 December 2005 Beijing, PRC RMB2,032,653,061 51.00 51.00 Life insurance Agricultural Bank of (iv) 26 November 2014 Luxembourg, EUR 20,000,000 100.00 100.00 Banking China (Luxembourg) Limited Luxembourg Agricultural Bank of (iv) 23 December 2014 Moscow, Russia RUB1,400,000,000 100.00 100.00 Banking China (Moscow) Limited
Annual Report 2014 247
— F-73 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23 INVESTMENT IN SUBSIDIARIES (Continued) During the year ended 31 December 2014, other than subsidiaries newly established, there were no changes in the proportion of equity interest or voting rights the Bank held in its subsidiaries.
(i) During the year ended 31 December 2014, the Bank contributed additional registered capital to ABC International Holdings Limited and ABC Financial Leasing Co., Ltd. of HKD1,200 million and RMB1,000 million, respectively.
(ii) Two of the three directors on the board of ABC Hubei Hanchuan Rural Bank Limited Liability Company were appointed by the Bank. The Bank concluded that it has effective control over this entity and has included it in its consolidation scope.
(iii) On 31 December 2012, the Bank acquired 51% of the issued share capital of Jiahe Life Insurance Co., Ltd. and renamed it as ABC Life Insurance Co., Ltd., and the Group recognized goodwill of RMB1,381 million as a result of this acquisition. For the years ended 31 December 2014 and 2013, there was no objective evidence noted for any goodwill impairment.
(iv) During the year ended 31 December 2014, the Bank established Agricultural Bank of China (Luxembourg) Limited and Agricultural Bank of China (Moscow) Limited as its wholly-owned subsidiaries.
248
— F-74 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24 PROPERTY AND EQUIPMENT Group Electronic equipment, furniture and Motor Construction Buildings fixtures vehicles in progress Total Cost 1 January 2014 124,294 55,314 4,746 28,682 213,036 Additions 1,526 7,703 604 13,263 23,096 Transfers 17,569 491 — (18,060) — Disposals (594) (7,460) (536) — (8,590) 31 December 2014 142,795 56,048 4,814 23,885 227,542 Accumulated depreciation 1 January 2014 (31,529) (27,400) (2,947) — (61,876) Charge for the year (7,574) (8,723) (318) — (16,615) Eliminated on disposals 370 5,335 512 — 6,217 31 December 2014 (38,733) (30,788) (2,753) — (72,274) Allowance for impairment losses 1 January 2014 (288) (10) (2) (1) (301) Impairment loss (20) — — (7) (27) Eliminated on disposals 9 1 — — 10 31 December 2014 (299) (9) (2) (8) (318) Carrying value 31 December 2014 103,763 25,251 2,059 23,877 154,950 1 January 2014 92,477 27,904 1,797 28,681 150,859 Cost 1 January 2013 112,618 48,476 4,030 26,375 191,499 Additions 2,001 8,472 964 13,503 24,940 Transfers 10,196 1,000 — (11,196) — Disposals (521) (2,634) (248) — (3,403) 31 December 2013 124,294 55,314 4,746 28,682 213,036 Accumulated depreciation 1 January 2013 (24,688) (22,141) (2,873) — (49,702) Charge for the year (7,011) (7,795) (313) — (15,119) Eliminated on disposals 170 2,536 239 — 2,945 31 December 2013 (31,529) (27,400) (2,947) — (61,876) Allowance for impairment losses 1 January 2013 (293) (10) (3) (1) (307) Impairment loss (14) — — — (14) Eliminated on disposals 19 — 1 — 20 31 December 2013 (288) (10) (2) (1) (301) Carrying value 31 December 2013 92,477 27,904 1,797 28,681 150,859 1 January 2013 87,637 26,325 1,154 26,374 141,490
Annual Report 2014 249
— F-75 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24 PROPERTY AND EQUIPMENT (Continued) Bank Electronic equipment, furniture and Motor Construction Buildings fixtures vehicles in progress Total Cost 1 January 2014 122,927 55,115 4,722 28,193 210,957 Additions 1,412 7,532 601 12,691 22,236 Transfers 17,568 491 — (18,059) — Disposals (538) (7,417) (518) — (8,473) 31 December 2014 141,369 55,721 4,805 22,825 224,720 Accumulated depreciation 1 January 2014 (31,421) (27,302) (2,932) — (61,655) Charge for the year (7,530) (8,702) (316) — (16,548) Eliminated on disposals 349 5,330 496 — 6,175 31 December 2014 (38,602) (30,674) (2,752) — (72,028) Allowance for impairment losses 1 January 2014 (288) (10) (2) (1) (301) Impairment loss (20) — — (7) (27) Eliminated on disposals 9 1 — — 10 31 December 2014 (299) (9) (2) (8) (318) Carrying value 31 December 2014 102,468 25,038 2,051 22,817 152,374 1 January 2014 91,218 27,803 1,788 28,192 149,001 Cost 1 January 2013 112,171 48,283 4,006 25,477 189,937 Additions 1,970 8,453 963 13,013 24,399 Transfers 9,297 1,000 — (10,297) — Disposals (511) (2,621) (247) — (3,379) 31 December 2013 122,927 55,115 4,722 28,193 210,957 Accumulated depreciation 1 January 2013 (24,618) (22,054) (2,862) — (49,534) Charge for the year (6,970) (7,778) (309) — (15,057) Eliminated on disposals 167 2,530 239 — 2,936 31 December 2013 (31,421) (27,302) (2,932) — (61,655) Allowance for impairment losses 1 January 2013 (293) (10) (3) (1) (307) Impairment loss (14) — — — (14) Eliminated on disposals 19 — 1 — 20 31 December 2013 (288) (10) (2) (1) (301) Carrying value 31 December 2013 91,218 27,803 1,788 28,192 149,001 1 January 2013 87,260 26,219 1,141 25,476 140,096
250
— F-76 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24 PROPERTY AND EQUIPMENT (Continued) According to the relevant laws and regulations, subsequent to the Bank’s transformation into a joint stock company, the legal title of properties previously held by the Predecessor Entity are to be transferred to the Bank. As at 31 December 2014, the registration transfer process of certain properties has not been completed. Management believes that the incomplete registration transfer process does not affect the rights of the Bank as the legal successor to those assets.
The carrying amounts of buildings located on land with the following remaining lease terms are as follows:
Group As at 31 December 2014 2013 Held in Hong Kong on long-term lease (over 50 years) 117 83 Held outside Hong Kong on long-term lease (over 50 years) 4,869 4,451 on medium-term lease (10–50 years) 89,601 79,003 on short-term lease (less than 10 years) 9,176 8,940 Subtotal 103,646 92,394 Total 103,763 92,477
Bank As at 31 December 2014 2013 Held in Hong Kong on long-term lease (over 50 years) 82 83 Held outside Hong Kong on long-term lease (over 50 years) 4,869 4,451 on medium-term lease (10–50 years) 88,341 77,744 on short-term lease (less than 10 years) 9,176 8,940 Subtotal 102,386 91,135 Total 102,468 91,218
Annual Report 2014 251
— F-77 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25 DEFERRED TAXATION For the purpose of presentation in the consolidated statement of financial position, certain deferred tax assets and liabilities have been offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the deferred tax balances:
Group As at 31 December 2014 2013 Deferred tax assets 78,640 74,075 Deferred tax liabilities (43) (8) Net 78,597 74,067
Bank As at 31 December 2014 2013 Deferred tax assets 78,368 73,938
252
— F-78 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25 DEFERRED TAXATION (Continued) (1) The following are the movements and major deferred tax assets and liabilities recognized:
Group Allowance Accrued Fair value for but not Early changes of impairment paid staff retirement financial losses cost benefits Provision instruments Others Total 1 January 2014 56,137 6,165 2,589 1,181 8,011 (16) 74,067 Credit/(charge) to the consolidated income statement 11,377 83 (354) 2,295 (289) 40 13,152 Charge to other comprehensive income — — — — (8,622) — (8,622) 31 December 2014 67,514 6,248 2,235 3,476 (900) 24 78,597
Allowance Accrued Fair value for but not Early changes of impairment paid staff retirement financial losses cost benefits Provision instruments Others Total 1 January 2013 46,289 6,388 2,944 879 437 (3) 56,934 Credit/(charge) to the consolidated income statement 9,848 (223) (355) 302 347 (13) 9,906 Credit to other comprehensive income ————7,227 — 7,227 31 December 2013 56,137 6,165 2,589 1,181 8,011 (16) 74,067
Annual Report 2014 253
— F-79 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25 DEFERRED TAXATION (Continued) (1) The following are the movements and major deferred tax assets and liabilities recognized (Continued):
Bank Allowance Accrued Fair value for but not Early changes of impairment paid staff retirement financial losses cost benefits Provision instruments Others Total 1 January 2014 56,024 6,157 2,589 1,181 8,000 (13) 73,938 Credit/(charge) to the income statement 11,234 80 (354) 2,295 (288) 38 13,005 Charge to other comprehensive income — — — — (8,575) — (8,575) 31 December 2014 67,258 6,237 2,235 3,476 (863) 25 78,368
Allowance Accrued Fair value for but not Early changes of impairment paid staff retirement financial losses cost benefits Provision instruments Others Total 1 January 2013 46,287 6,380 2,944 879 444 — 56,934 Credit/(charge) to the income statement 9,737 (223) (355) 302 347 (13) 9,795 Credit to other comprehensive income ————7,209 — 7,209 31 December 2013 56,024 6,157 2,589 1,181 8,000 (13) 73,938
254
— F-80 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25 DEFERRED TAXATION (Continued) (2) Deferred income tax assets/(liabilities) and related temporary differences, before offsetting qualifying amounts, are attributable to the following items:
Group 31 December 2014 31 December 2013 Deductible/ Deductible/ (taxable) Deferred (taxable) Deferred temporary tax assets/ temporary tax assets/ difference (liabilities) difference (liabilities) Deferred tax assets Allowance for impairment losses 270,124 67,514 224,604 56,137 Fair value changes of financial instruments 10,404 2,601 42,899 10,725 Accrued but not paid staff cost 24,992 6,248 24,661 6,165 Early retirement benefits 8,938 2,235 10,356 2,589 Provision 13,902 3,476 4,723 1,181 Others 228 57 40 9 Subtotal 328,588 82,131 307,283 76,806 Deferred tax liabilities Fair value changes of financial instruments (14,006) (3,501) (10,857) (2,714) Others (140) (33) (157) (25) Subtotal (14,146) (3,534) (11,014) (2,739) Net 314,442 78,597 296,269 74,067
Bank 31 December 2014 31 December 2013 Deductible/ Deductible/ (taxable) Deferred (taxable) Deferred temporary tax assets/ temporary tax assets/ difference (liabilities) difference (liabilities) Deferred tax assets Allowance for impairment losses 269,100 67,258 224,152 56,024 Fair value changes of financial instruments 10,404 2,601 42,831 10,708 Accrued but not paid staff cost 24,948 6,237 24,627 6,157 Early retirement benefits 8,938 2,235 10,356 2,589 Provision 13,902 3,476 4,723 1,181 Others 208 52 22 4 Subtotal 327,500 81,859 306,711 76,663 Deferred tax liabilities Fair value changes of financial instruments (13,855) (3,464) (10,831) (2,708) Others (109) (27) (106) (17) Subtotal (13,964) (3,491) (10,937) (2,725) Net 313,536 78,368 295,774 73,938
Annual Report 2014 255
— F-81 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26 OTHER ASSETS Group As at 31 December 2014 2013 Interest receivable 97,948 75,022 Land use rights (1) 23,524 23,857 Accounts receivable and temporary payments (2) 16,708 18,656 Premiums receivable and reinsurance assets 13,532 9,346 Long-term deferred expenses 3,649 3,480 Investment property 2,846 3,312 Intangible assets 2,593 2,627 Foreclosed assets 487 873 Others 2,535 1,435 Total 163,822 138,608
Bank As at 31 December 2014 2013 Interest receivable 97,411 74,607 Land use rights (1) 23,074 23,838 Accounts receivable and temporary payments (2) 15,924 17,210 Long-term deferred expenses 3,640 3,470 Investment property 2,916 2,905 Intangible assets 2,400 2,426 Foreclosed assets 487 873 Others 2,438 1,355 Total 148,290 126,684
256
— F-82 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26 OTHER ASSETS (Continued)
(1) Land use rights The carrying amount of land use rights (including leasehold land in Hong Kong) analyzed by the remaining terms of the leases:
Group As at 31 December 2014 2013 Held in Hong Kong on long-term lease (over 50 years) 1,458 1,023 Held outside Hong Kong on long-term lease (over 50 years) 394 367 on medium-term lease (10–50 years) 21,624 22,402 on short-term lease (less than 10 years) 48 65 Subtotal 22,066 22,834 Total 23,524 23,857
Bank As at 31 December 2014 2013 Held in Hong Kong on long-term lease (over 50 years) 1,027 1,023 Held outside Hong Kong on long-term lease (over 50 years) 394 367 on medium-term lease (10–50 years) 21,605 22,383 on short-term lease (less than 10 years) 48 65 Subtotal 22,047 22,815 Total 23,074 23,838
According to the relevant laws and regulations, subsequent to the Bank’s transformation into a joint stock company, land use rights previously held by the Predecessor Entity are to be transferred to the Bank. As at 31 December 2014, the registration transfer process of certain land use rights has not been completed. Management believes that the incomplete registration transfer process does not affect the rights of the Bank as the legal successor to those land use rights.
(2) Accounts receivable and temporary payments primarily include items in the process of clearing and settlement.
27 BORROWINGS FROM CENTRAL BANK As at 31 December 2014, borrowings from central bank mainly include Medium-term Lending Facilities from PBOC amounting to RMB80,000 million (31 December 2013: None).
Annual Report 2014 257
— F-83 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
28 DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Group As at 31 December 2014 2013 Deposits from: Domestic banks 148,043 172,322 Other domestic financial institutions 666,905 547,711 Overseas banks 13,045 8,153 Other overseas financial institutions 3,148 1,168 Total 831,141 729,354
Bank As at 31 December 2014 2013 Deposits from: Domestic banks 148,304 173,459 Other domestic financial institutions 670,267 549,413 Overseas banks 13,046 8,154 Other overseas financial institutions 3,148 1,168 Total 834,765 732,194
29 PLACEMENTS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Group As at 31 December 2014 2013 Placements from: Domestic banks and other financial institutions 62,537 64,511 Overseas banks and other financial institutions 162,386 109,852 Total 224,923 174,363
Bank As at 31 December 2014 2013 Placements from: Domestic banks and other financial institutions 40,191 38,135 Overseas banks and other financial institutions 157,612 107,789 Total 197,803 145,924
258
— F-84 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
30 FINANCIAL LIABILITIES HELD FOR TRADING The financial liabilities held for trading are liabilities related to precious metal contracts.
31 FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Group As at 31 December 2014 2013 Principal guaranteed wealth management products 347,282 285,454
Bank As at 31 December 2014 2013 Principal guaranteed wealth management products 347,286 285,454
The Group designates wealth management products with principal guaranteed by the Group as financial liabilities at fair value through profit or loss. The corresponding investments are designated as financial assets at fair value through profit or loss. As at 31 December 2014, the fair value of these products issued by the Group and the Bank were lower than the contractual amount payable to the holders of these products upon maturity by RMB8,558 million (31 December 2013: RMB6,104 million).
For the current and prior year, there were no significant changes in the fair value of the Group and the Bank’s financial liabilities designated at fair value through profit or loss that were attributable to the changes in the Group and the Bank’s own credit risk.
Annual Report 2014 259
— F-85 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
32 FINANCIAL ASSETS SOLD UNDER REPURCHASE AGREEMENTS Group As at 31 December 2014 2013 Analyzed by type of collateral: Debt securities 131,021 26,391 Bills — 37 Loans — 359 Total 131,021 26,787
Bank As at 31 December 2014 2013 Analyzed by type of collateral: Debt securities 126,950 24,633 Bills — 37 Total 126,950 24,670
The collateral pledged under repurchase agreement is disclosed in Note IV 46 Contingent Liabilities and Commitments — Collateral.
260
— F-86 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
33 DUE TO CUSTOMERS Group As at 31 December 2014 2013 Demand deposits Corporate customers 3,012,527 3,014,858 Individual customers 3,546,541 3,437,661 Time deposits Corporate customers 1,485,274 1,345,988 Individual customers 3,882,102 3,490,197 Pledged deposits (1) 299,437 247,656 Others 307,516 275,051 Total 12,533,397 11,811,411
Bank As at 31 December 2014 2013 Demand deposits Corporate customers 3,012,745 3,014,816 Individual customers 3,546,432 3,437,536 Time deposits Corporate customers 1,485,168 1,346,016 Individual customers 3,881,683 3,489,914 Pledged deposits (1) 296,625 244,830 Others 307,516 275,051 Total 12,530,169 11,808,163
(1) Analyzed by the activity to which the deposits are related: Group As at 31 December 2014 2013 Bank acceptance 118,330 89,842 Guarantee and letters of guarantee 63,630 45,625 Trade finance 50,423 30,305 Letters of credit 21,567 29,918 Others 45,487 51,966 Total 299,437 247,656
Annual Report 2014 261
— F-87 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
33 DUE TO CUSTOMERS (Continued)
(1) Analyzed by the activity to which the deposits are related: (Continued) Bank As at 31 December 2014 2013 Bank acceptance 118,330 89,842 Guarantee and letters of guarantee 63,630 45,625 Trade finance 50,423 30,305 Letters of credit 21,567 29,918 Others 42,675 49,140 Total 296,625 244,830
34 DEBT SECURITIES ISSUED Group As at 31 December 2014 2013 Bonds issued (1) 191,994 156,300 Certificates of deposit issued (2) 113,388 106,991 Commercial papers issued (3) 11,800 — Interbank certificates of deposit issued (4) 7,985 2,970 Total 325,167 266,261
Bank As at 31 December 2014 2013 Bonds issued (1) 190,163 156,300 Certificates of deposit issued (2) 113,388 106,991 Commercial papers issued (3) 11,800 — Interbank certificates of deposit issued (4) 7,985 2,970 Total 323,336 266,261
As at 31 December 2014 and 2013, there was no default related to any debt securities issued.
262
— F-88 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
34 DEBT SECURITIES ISSUED (Continued)
(1) The carrying value of the Group’s bonds issued are as follows: Group As at 31 December 2014 2013 5.3% subordinated fixed rate bonds maturing in June 2026 (i) 50,000 50,000 4.99% subordinated fixed rate bonds maturing in December 2027 (ii) 50,000 50,000 5.8% Tier-two capital fixed rate bonds maturing in August 2024 (iii) 30,000 — 4.0% subordinated fixed rate bonds maturing in May 2024 (iv) 25,000 25,000 3.2% fixed rate RMB bonds maturing in November 2015 (v) 1,000 1,000 3.3% subordinated fixed rate bonds maturing in May 2019 (vi) — 20,000 Subordinated floating rate bonds maturing in May 2019 (vii) — 5,000 Medium term notes issued (viii) 36,125 5,404 Total nominal value 192,125 156,404 Less: Unamortized issuance cost and discounts (131) (104) Carrying value 191,994 156,300
Bank As at 31 December 2014 2013 5.3% subordinated fixed rate bonds maturing in June 2026 (i) 50,000 50,000 4.99% subordinated fixed rate bonds maturing in December 2027 (ii) 50,000 50,000 5.8% Tier-two capital fixed rate bonds maturing in August 2024 (iii) 30,000 — 4.0% subordinated fixed rate bonds maturing in May 2024 (iv) 25,000 25,000 3.2% fixed rate RMB bonds maturing in November 2015 (v) 1,000 1,000 3.3% subordinated fixed rate bonds maturing in May 2019 (vi) — 20,000 Subordinated floating rate bonds maturing in May 2019 (vii) — 5,000 Medium term notes issued (viii) 34,289 5,404 Total nominal value 190,289 156,404 Less: Unamortized issuance cost and discounts (126) (104) Carrying value 190,163 156,300
Annual Report 2014 263
— F-89 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
34 DEBT SECURITIES ISSUED (Continued)
(1) The carrying value of the Group’s bonds issued are as follows: (Continued) Pursuant to the approval by relevant regulatory authorities, the bonds issued by the Group are set out as below:
(i) The subordinated fixed rate bonds issued in June 2011 have a tenor of 15 years, with a fixed coupon rate of 5.3%, payable annually. The Bank has an option to redeem all of the bonds at face value on 7 June 2021. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 5.3% per annum from 7 June 2021 onwards.
(ii) The subordinated fixed rate bonds issued in December 2012 have a tenor of 15 years, with a fixed coupon rate of 4.99%, payable annually. The Bank has an option to redeem all of the bonds at face value on 20 December 2022. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 4.99% per annum from 20 December 2022 onwards.
(iii) The Tier-two capital bonds issued in August 2014 have a tenor of 10 years, with a fixed coupon rate of 5.8% payable annually. The Bank has an option to redeem part or all of the bonds at face value on 17 August 2019 if specified redemption conditions as stipulated in the offering documents were met, subject to regulatory approval. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 5.8% per annum from 18 August 2019 onwards. The Tier-two capital bonds have the write-down feature of a Tier-two capital instrument, which allows the Bank to write down the entire principal of the bonds when regulatory triggering events as stipulated in the offering documents occur and any accumulated unpaid interest would become not payable. These Tier-two capital bonds are qualified as Tier-two Capital Instruments in accordance with the CBRC requirements.
(iv) The subordinated fixed rate bonds issued in May 2009 have a tenor of 15 years, with a fixed coupon rate of 4.0%, payable annually. The Bank has an option to redeem all of the bonds at face value on 20 May 2019. If the Bank would not exercise this option, the coupon rate of the bonds will increase to 7.0% per annum from 20 May 2019 onwards.
(v) The RMB bonds issued in Hong Kong in November 2012 have a tenor of 3 years, with a fixed coupon rate 3.2%, payable semi-annually.
(vi) The subordinated fixed rate bonds issued in May 2009 had a tenor of 10 years, with a fixed coupon rate of 3.3%, payable annually. The Bank had an option and had exercised the option to redeem all of the bonds at face value on 20 May 2014.
(vii) The subordinated floating rate bonds issued in May 2009 had a tenor of 10 years. The coupon rate was based on the PBOC one-year fixed deposit rate on the issue date and reset annually plus 60 basis points. Interest was payable annually. The Bank had an option and had exercised the option to redeem all of the bonds at face value on 20 May 2014.
264
— F-90 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
34 DEBT SECURITIES ISSUED (Continued)
(1) The carrying value of the Group’s bonds issued are as follows: (Continued) Pursuant to the approval by relevant regulatory authorities, the bonds issued by the Group are set out as below: (Continued)
(viii) The medium term notes (MTN) were issued by the Overseas Operations of the Group and are measured at amortized cost. The details of medium term notes issued were as follows:
Group As at 31 December 2014 Maturity dates Coupon rates Outstanding ranging from (%) balance Fixed rate USD MTNs January 2015 to December 2018 0.21–2.875 18,774 Fixed rate RMB MTNs February 2015 to August 2019 2.70–3.80 11,683 Fixed rate CHF MTNs July 2015 to August 2015 0.85–1.00 1,743 Floating rate USD MTNs April 2015 to 3-month USD LIBOR March 2017 plus 0.88 to 1.35 1,626 Fixed rate EUR MTNs August 2015 to September 2015 0.99–1.12 895 Fixed rate HKD MTNs May 2015 to August 2015 1.35–1.49 600 Fixed rate JPY MTNs August 2015 to November 2015 0.50–0.70 431 Zero coupon EUR MTN January 2015 — 373 Total 36,125
Bank As at 31 December 2014 Maturity dates Coupon rates Outstanding ranging from (%) balance Fixed rate USD MTNs January 2015 to December 2018 0.85–2.875 16,938 Fixed rate RMB MTNs February 2015 to August 2019 2.70–3.80 11,683 Fixed rate CHF MTNs July 2015 to August 2015 0.85–1.00 1,743 Floating rate USD MTNs April 2015 to 3-month USD LIBOR March 2017 plus 0.88–1.35 1,626 Fixed rate EUR MTNs August 2015 to September 2015 0.99–1.12 895 Fixed rate HKD MTNs May 2015 to August 2015 1.35–1.49 600 Fixed rate JPY MTNs August 2015 to November 2015 0.50–0.70 431 Zero coupon EUR MTN January 2015 — 373 Total 34,289
Group and Bank As at 31 December 2013 Maturity dates Coupon rates Outstanding ranging from (%) balance Fixed rate USD MTNs December 2018 2.875 3,040 Fixed rate RMB MTNs June 2014 to December 2018 2.40–3.60 2,364 Total 5,404
Annual Report 2014 265
— F-91 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
34 DEBT SECURITIES ISSUED (Continued) (2) As at 31 December 2014, certificates of deposit were issued by the Overseas Operations of the Group and were measured at amortized cost.
(3) As at 31 December 2014, the commercial papers were issued by the Overseas Operations of the Group and were measured at amortized cost. The terms of the commercial papers range from seven days to one year, with the interest rates ranging from 0.19% to 0.93%.
(4) The interbank certificates of deposit were issued by the Head Office of the Bank. As at 31 December 2014, the face value of outstanding interbank certificates of deposit issued with a tenor of three months, nine months and one year were RMB4,000 million, RMB3,000 million and RMB1,000 million, respectively. As at 31 December 2013, the face value of outstanding interbank certificates of deposit issued were RMB3,000 million with a tenor of three months.
35 OTHER LIABILITIES Group As at 31 December 2014 2013 Interest payable 192,876 163,328 Clearing and settlement 46,433 51,365 Insurance liabilities 42,789 30,864 Income taxes payable 41,338 44,263 Staff costs payable (1) 40,511 45,573 Provision 13,902 4,723 Business and other taxes payable 7,535 7,492 Amount payable to the MOF (2) 3,275 1,539 Dormant accounts 1,616 1,871 Others 45,712 44,365 Total 435,987 395,383
266
— F-92 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 OTHER LIABILITIES (Continued) Bank As at 31 December 2014 2013 Interest payable 192,688 163,221 Clearing and settlement 46,431 51,346 Income taxes payable 41,187 44,132 Staff costs payable (1) 40,163 45,220 Provision 13,902 4,723 Business and other taxes payable 7,553 7,492 Amount payable to the MOF (2) 3,275 1,539 Dormant accounts 1,616 1,871 Others 42,273 41,560 Total 389,088 361,104
(1) Staff costs payable Group As at 31 December 2014 2013 Short-term employee benefits (i) 30,952 34,514 Defined contribution benefits (ii) 621 703 Early retirement benefits (iii) 8,938 10,356 Total 40,511 45,573
Bank As at 31 December 2014 2013 Short-term employee benefits (i) 30,604 34,161 Defined contribution benefits (ii) 621 703 Early retirement benefits (iii) 8,938 10,356 Total 40,163 45,220
Annual Report 2014 267
— F-93 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(i) Short-term employee benefits Group 2014 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 24,973 66,780 (67,525) 24,228 Housing funds (a) 245 8,186 (8,248) 183 Social insurance (a) 181 4,454 (4,457) 178 Including: Medical insurance 149 3,848 (3,843) 154 Employment injury insurance 16 278 (282) 12 Maternity insurance 16 328 (332) 12 Labor union fees and staff education expenses 2,726 2,977 (2,520) 3,183 Others 6,389 12,825 (16,034) 3,180 Total 34,514 95,222 (98,784) 30,952
Group 2013 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 25,704 63,758 (64,489) 24,973 Housing funds (a) 301 7,213 (7,269) 245 Social insurance (a) 190 3,837 (3,846) 181 Including: Medical insurance 157 3,302 (3,310) 149 Employment injury insurance 15 249 (248) 16 Maternity insurance 18 286 (288) 16 Labor union fees and staff education expenses 2,304 2,827 (2,405) 2,726 Others 5,745 12,138 (11,494) 6,389 Total 34,244 89,773 (89,503) 34,514
268
— F-94 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(i) Short-term employee benefits (Continued) Bank 2014 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 24,627 65,927 (66,666) 23,888 Housing funds (a) 244 8,148 (8,209) 183 Social insurance (a) 181 4,425 (4,428) 178 Including: Medical insurance 149 3,821 (3,816) 154 Employment injury insurance 16 277 (281) 12 Maternity insurance 16 327 (331) 12 Labor union fees and staff education expenses 2,726 2,954 (2,499) 3,181 Others 6,383 12,731 (15,940) 3,174 Total 34,161 94,185 (97,742) 30,604
Bank 2013 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 25,553 62,969 (63,895) 24,627 Housing funds (a) 299 7,183 (7,238) 244 Social insurance (a) 190 3,814 (3,823) 181 Including: Medical insurance 157 3,281 (3,289) 149 Employment injury insurance 15 248 (247) 16 Maternity insurance 18 285 (287) 16 Labor union fees and staff education expenses 2,298 2,823 (2,395) 2,726 Others 5,739 12,045 (11,401) 6,383 Total 34,079 88,834 (88,752) 34,161
(a) Salaries, bonuses, allowance and subsidies, housing funds and social insurance are timely distributed and paid in accordance with the relevant laws and regulations and the Group’s policy.
Annual Report 2014 269
— F-95 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(ii) Defined contribution benefits Group 2014 1 January Accrued Paid 31 December Basic pensions 629 10,695 (10,783) 541 Unemployment insurance 65 804 (803) 66 Annuity Scheme 9 3,137 (3,132) 14 Total 703 14,636 (14,718) 621
Group 2013 1 January Accrued Paid 31 December Basic pensions 624 9,491 (9,486) 629 Unemployment insurance 63 730 (728) 65 Annuity Scheme 989 2,881 (3,861) 9 Total 1,676 13,102 (14,075) 703
Bank 2014 1 January Accrued Paid 31 December Basic pensions 629 10,632 (10,720) 541 Unemployment insurance 65 803 (802) 66 Annuity Scheme 9 3,137 (3,132) 14 Total 703 14,572 (14,654) 621
Bank 2013 1 January Accrued Paid 31 December Basic pensions 624 9,444 (9,439) 629 Unemployment insurance 63 730 (728) 65 Annuity Scheme 972 2,881 (3,844) 9 Total 1,659 13,055 (14,011) 703
The defined contribution benefits are timely distributed and paid in accordance with the relevant laws and regulations and the Group’s policy.
270
— F-96 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(iii) Early retirement benefits Group and bank 2014 1 January Accrued Paid 31 December Early retirement benefits 10,356 1,611 (3,029) 8,938
Group and bank 2013 1 January Accrued Paid 31 December Early retirement benefits 11,777 1,854 (3,275) 10,356
The principal assumptions used for the purpose of the actuarial valuations were as follows:
Group and Bank As at 31 December 2014 2013 Discount rate 3.41% 4.38% Annual average medical expense growth rate 8.00% 8.00% Annual subsidies growth rate 8.00% 8.00% Normal retirement age — Male 60 60 — Female 55 55
Assumptions regarding future mortality experience are based on the China Life Insurance Mortality Table (year 2000–2003) (published historical statistics in China).
Any difference arising from the actual result or changes in assumptions may affect the amount of expense recognized in the consolidated income statement.
(2) Amount payable to the MOF
Pursuant to the “Notice on Relevant Issues Concerning the Disposal of Non-performing Assets of Agricultural Bank of China” (Caijin [2008] No. 138) issued by the MOF, the MOF commissioned the Bank to manage and dispose of non-performing assets transferred. The amount payable to the MOF represents proceeds collected by the Group from the disposal of these non-performing assets on behalf of the MOF.
Annual Report 2014 271
— F-97 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
36 ORDINARY SHARES For the current and prior year, there was no change in the Bank’s ordinary share capital.
As at 31 December 2014 and 2013 Number of shares Nominal (millions) value Registered, issued and fully paid: A shares of RMB1 each 294,055 294,055 H shares of RMB1 each 30,739 30,739 Total 324,794 324,794
A share refers to the ordinary shares listed in the Mainland China. They are offered and traded in RMB. H share refers to the ordinary shares listed in Hong Kong. Their par value is denominated in RMB. They were initially offered and are currently traded in HKD.
As at 31 December 2014, 9,892 million A shares and none of the H shares of the Bank with par value of RMB1 per share were subject to lock-up restriction respectively (31 December 2013: 9,892 million A shares and none of the H shares, respectively).
37 PREFERENCE SHARES Issued Issued number nominal Financial instruments Issued price of shares value Maturity in issue Dividend rate (RMB yuan) (millions) (millions) date Conversions Preference shares 6% per annum for the first five years after issuance, No conversion and re-priced every five years No maturity during as stated below. 100 400 40,000 date the year
The Bank was authorized to issue 800 million preference shares of RMB100 each pursuant to the approval by its ordinary shareholders and relevant regulatory authorities. The first tranche of 400 million preference shares were issued at par in November 2014. The carrying amount, net of direct issuance expenses, was RMB39,944 million as at 31 December 2014. There were no changes in such amount since issuance.
The first tranche preference shares bear a dividend rate of 6% per annum payable annually for the first five years from issuance. The dividend rate will be re-priced every five years thereafter with reference to the five-year PRC treasury bonds yield plus a fixed premium of 2.29%.
272
— F-98 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
37 PREFERENCE SHARES (Continued) As authorized by the shareholders’ annual general meeting, the Board of Directors has the sole discretion to declare and distribute dividends on preference shares. The Bank shall not distribute any dividends to its ordinary shareholders before it declares such dividends to preference shareholders for the relevant period. The distribution of preference shares dividend is at the Bank’s discretion and is non-cumulative. Preference shareholders are not entitled to participate in the distribution of retained profits except for the dividends stated above.
The Bank has redemption option when specified conditions as stipulated in the offering documents are met and subject to regulatory approval, whereas preference shareholders have no right to require the Bank to redeem the preference shares.
Upon liquidation, the claims of preference shareholders have priority over ordinary shareholders on the residual assets of the Bank, but are subordinated to those of depositors, general creditors, Tier- Two Capital Instruments holders or any other subordinated debt holders with equivalent rights.
Upon occurrence of the triggering events as stipulated in paragraph 2(3) of the Guidance of the China Banking Regulatory Commission on Commercial Banks’ Innovation on Capital Instruments (CBRC No. 56 [2012]) and subject to regulatory approval, preference shares shall be mandatorily converted into ordinary A shares of the Bank at the conversion price of RMB2.43 yuan per share, partially or entirely. The conversion price of the preference shares will be adjusted in the events including bonus issues, rights issue, capitalization of reserves and new issuances of ordinary shares, subject to terms and formulas provided for in the offering documents, to maintain the relative interests between preference shareholders and ordinary shareholders.
The preference shares are classified as equity instruments, and presented as equity in the consolidated statement of financial position. The preference shares are qualified as Additional Tier- one Capital Instruments in accordance with the CBRC requirements.
38 CAPITAL RESERVE The capital reserve represents the premium related to ordinary shares issued by the Bank in 2010. Share premium was recorded in the capital reserve after deducting direct issue expenses, which consisted primarily of underwriting fees and professional fees.
Annual Report 2014 273
— F-99 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
39 INVESTMENT REVALUATION RESERVE
Group 2014 Gross amount Tax effect Net effect 1 January 2014 (30,313) 7,541 (22,772) Fair value changes on available-for-sale financial assets 34,722 (8,657) 26,065 Transferred to the consolidated income statement upon disposal of available-for-sale financial assets (233) 58 (175) 31 December 2014 4,176 (1,058) 3,118
2013 Gross amount Tax effect Net effect 1 January 2013 (1,224) 323 (901) Fair value changes on available-for-sale financial assets (29,440) 7,306 (22,134) Transferred to the consolidated income statement upon disposal of available-for-sale financial assets 351 (88) 263 31 December 2013 (30,313) 7,541 (22,772)
274
— F-100 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
39 INVESTMENT REVALUATION RESERVE (Continued)
Bank 2014 Gross amount Tax effect Net effect 1 January 2014 (30,282) 7,532 (22,750) Fair value changes on available-for-sale financial assets 34,360 (8,573) 25,787 Transferred to the income statement upon disposal of available-for-sale financial assets 8 (2) 6 31 December 2014 4,086 (1,043) 3,043
2013 Gross amount Tax effect Net effect 1 January 2013 (1,221) 323 (898) Fair value changes on available-for-sale financial assets (29,492) 7,317 (22,175) Transferred to the income statement upon disposal of available-for-sale financial assets 431 (108) 323 31 December 2013 (30,282) 7,532 (22,750)
Annual Report 2014 275
— F-101 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
40 SURPLUS RESERVE Under PRC Law, the Bank is required to transfer 10% of its net profit determined under the PRC GAAP to a non-distributable statutory surplus reserve. Appropriation to the statutory surplus reserve may cease when the balance of this reserve has reached 50% of share capital. Pursuant to the resolution of the Board of Directors’ Meeting held on 24 March 2015, an appropriation of 10% of the profit for the current year, determined under the generally accepted accounting principles of the PRC, to the statutory surplus reserve, in the amount of RMB17,894 million (2013: RMB16,578 million) was approved.
Subject to the approval of the equity holders, the statutory surplus reserves can be used for replenishing accumulated losses or increasing the Bank’s ordinary share capital. The statutory surplus reserves amount used to increase the ordinary share capital is limited to a level where the balance of the statutory surplus reserves after such capitalization is not less than 25% of the ordinary share capital.
41 GENERAL RESERVE Pursuant to Caijin [2012] No. 20 “Requirements on Impairment Allowance for Financial Institutions” (the “Requirement”) issued by the MOF, effective 1 July 2012, in addition to impairment allowance, the Bank establishes a general reserve within equity holders’ equity through the appropriation of profit to address unidentified potential impairment risks. The general reserve should not be less than 1.5% of the aggregate amount of risk assets as defined by the Requirement. The general reserve includes regulatory reserve appropriated by the Bank’s overseas branches (“Overseas Institutions”) pursuant to local regulatory requirements.
Pursuant to relevant PRC regulatory requirements, some domestic subsidiaries of the Bank are required to appropriate certain amounts of their net profit as general reserves.
During the year ended 31 December 2014, the Group and the Bank transferred RMB17,503 million (2013: RMB63,855 million) and RMB17,394 million (2013: RMB63,570 million) to the General Reserve pursuant to the regulatory requirements in the PRC and overseas jurisdictions. Of this amount, RMB17,330 million (2013: RMB63,482 million) related to the appropriation proposed for the year ended 31 December 2013 which was approved in the annual general meeting held on 23 June 2014.
42 CASH AND CASH EQUIVALENTS For the purpose of the consolidated statement of cash flows, cash and cash equivalents include the following balances with an original maturity of three months or less:
Group As at 31 December 2014 2013 Cash 111,962 99,759 Balance with central banks 76,525 101,697 Deposits with banks and other financial institutions 68,355 76,223 Placements with and loans to banks and other financial institutions 197,151 146,383 Financial assets held under resale agreements 284,248 389,737 Total 738,241 813,799
276
— F-102 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS Operating segments are identified on the basis of internal management reports with respect to the components of the Group that are regularly reviewed by the Board and relevant management committees, which constitute the chief operating decision makers, for the purposes of allocating resources to segments and assessing their performance. The Group’s chief operating decision makers review three different sets of financial information based on (i) geographical locations, (ii) business activities and (iii) County Area and Urban Area banking business.
The measurement of segment assets and liabilities, as well as segment revenue, expense and results is based on the Group’s accounting policies. There is no difference between the accounting policies used in the preparation of the consolidated financial statements and those used in preparing the operating segment information.
Transactions between segments are conducted under normal commercial terms and conditions. Internal charges and transfer pricing are determined with reference to market rates and have been reflected in the performance of each segment.
Segment revenue, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Geographical operating segments The details of the geographical operating segments are as follows:
Head Office Yangtze River Delta: Shanghai, Jiangsu, Zhejiang, Ningbo Pearl River Delta: Guangdong, Shenzhen, Fujian, Xiamen Bohai Rim: Beijing, Tianjin, Hebei, Shandong, Qingdao Central China: Shanxi, Hubei, Henan, Hunan, Jiangxi, Hainan, Anhui Western China: Chongqing, Sichuan, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang (including Xinjiang Bingtuan), Tibet, Inner Mongolia, Guangxi Northeastern China: Liaoning, Heilongjiang, Jilin, Dalian Overseas and Others: Overseas branches and subsidiaries
Annual Report 2014 277
— F-103 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
Geographical operating segments (Continued)
For the year ended 31 December 2014
Head Yangtze Pearl Bohai Central Western Northeastern Overseas Consolidated Office River Delta River Delta Rim China China China and Others Eliminations total External interest income 195,050 120,056 79,418 87,736 67,622 113,607 20,717 15,083 — 699,289 External interest expense (17,947) (59,107) (33,242) (50,234) (39,903) (46,172) (14,182) (8,611) — (269,398) Inter-segment interest (expense)/income (134,867) 24,333 11,247 33,126 29,229 27,096 9,455 381 — — Net interest income 42,236 85,282 57,423 70,628 56,948 94,531 15,990 6,853 — 429,891 Fee and commission income 12,679 17,100 12,959 12,321 11,849 16,651 3,350 974 — 87,883 Fee and commission expense (517) (1,542) (1,468) (1,146) (1,269) (1,427) (346) (45) — (7,760) Net fee and commission income 12,162 15,558 11,491 11,175 10,580 15,224 3,004 929 — 80,123 Net trading gain/(loss) 3,196 133 104 77 93 256 83 (2,034) — 1,908 Net gain/(loss) on financial instruments designated at fair value through profit or loss 1,383 22 54 91 — (1) — (44) — 1,505 Net (loss)/gain on investment securities (12) — — — — — — 347 — 335 Other operating (expenses)/income (435) 1,018 613 755 402 2,458 142 5,411 — 10,364 Operating income 58,530 102,013 69,685 82,726 68,023 112,468 19,219 11,462 — 524,126 Operating expenses (11,598) (39,131) (28,276) (35,222) (35,454) (52,093) (15,371) (6,753) — (223,898) Impairment losses on assets (2,569) (18,152) (10,182) (16,826) (7,285) (12,872) 464 (549) — (67,971) Profit before tax 44,363 44,730 31,227 30,678 25,284 47,503 4,312 4,160 — 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses (1,639) (3,171) (2,289) (2,921) (3,374) (4,362) (1,428) (144) — (19,328) Capital expenditure 1,610 3,333 2,961 3,943 3,967 7,051 1,617 1,378 — 25,860 As at 31 December 2014 Segment assets 4,211,552 3,147,375 1,928,364 2,629,880 2,276,362 3,152,220 743,602 590,362 (2,784,205) 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Include: non-current assets (1) 10,481 36,833 18,919 29,870 29,437 42,106 12,531 8,766 — 188,943 Segment liabilities (3,254,625) (3,143,950) (1,923,067) (2,627,471) (2,267,258) (3,145,053) (745,298) (577,635) 2,784,205 (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 32,555 457,653 211,896 345,025 172,803 263,993 60,369 38,431 — 1,582,725
278
— F-104 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
Geographical operating segments (Continued)
For the year ended 31 December 2013
Head Yangtze Pearl Bohai Central Western Northeastern Overseas Consolidated Office River Delta River Delta Rim China China China and Others Eliminations total External interest income 175,921 107,759 67,730 76,239 58,502 99,305 17,545 10,383 — 613,384 External interest expense (17,657) (51,665) (30,477) (43,229) (35,706) (40,339) (12,352) (5,757) — (237,182) Inter-segment interest (expense)/income (121,899) 21,851 11,332 28,818 26,494 25,072 8,311 21 — — Net interest income 36,365 77,945 48,585 61,828 49,290 84,038 13,504 4,647 — 376,202 Fee and commission income 9,644 19,396 13,443 13,062 12,705 17,342 3,126 979 — 89,697 Fee and commission expense (410) (1,096) (1,151) (968) (1,233) (1,325) (332) (11) — (6,526) Net fee and commission income 9,234 18,300 12,292 12,094 11,472 16,017 2,794 968 — 83,171 Net trading gain/(loss) 1,618 786 185 129 149 368 125 (1,000) — 2,360 Net (loss)/gain on financial instruments designated at fair value through profit or loss (382) (217) (123) 40 — (2) — 45 — (639) Net (loss)/gain on investment securities (434) — — — — — — 84 — (350) Other operating (expenses)/income (2,036) 1,139 606 638 809 1,911 132 1,828 — 5,027 Operating income 44,365 97,953 61,545 74,729 61,720 102,332 16,555 6,572 — 465,771 Operating expenses (7,649) (36,650) (24,707) (30,442) (33,423) (48,046) (14,481) (3,209) — (198,607) Impairment losses on assets (1,370) (18,545) (7,442) (5,930) (6,000) (8,328) (4,990) (385) — (52,990) Profit/(loss) before tax 35,346 42,758 29,396 38,357 22,297 45,958 (2,916) 2,978 — 214,174 Income tax expense (47,963) Profit for the year 166,211 Depreciation and amortization included in operating expenses (1,412) (3,071) (2,011) (2,605) (3,051) (3,892) (1,291) (128) — (17,461) Capital expenditure 1,990 3,521 3,092 4,244 4,780 7,372 2,107 639 — 27,745 As at 31 December 2013 Segment assets 3,753,134 2,952,862 1,781,197 2,504,764 2,070,925 2,892,185 656,673 411,586 (2,535,299) 14,488,027 Including: Investments in associates and joint ventures — — — — — — — 1 — 1 Unallocated assets 74,075 Total assets 14,562,102 Include: non-current assets (1) 10,569 37,238 18,270 29,286 29,414 40,097 12,556 8,087 — 185,517 Segment liabilities (3,010,413) (2,937,132) (1,770,841) (2,490,676) (2,059,375) (2,876,763) (660,204) (403,189) 2,535,299 (13,673,294) Unallocated liabilities (44,271) Total liabilities (13,717,565) Credit commitments 37,739 434,829 221,253 330,680 161,443 204,160 50,915 40,926 — 1,481,945
(1) Non-current assets include property and equipment, investment properties, land use rights, intangible assets and other long-term assets.
Annual Report 2014 279
— F-105 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
Business operating segments The details of the business operating segments are as follows:
Corporate banking The corporate banking segment provides financial products and services to corporations, government agencies and financial institutions. The range of products and services includes corporate loans and advances, trade finance, deposit products, corporate wealth management services and other types of corporate intermediary services.
Personal banking The personal banking segment provides financial products and services to individual customers. The range of products and services includes personal loans, deposit products, card business, personal wealth management services and other types of personal intermediary services.
Treasury operations The Group’s treasury operations conduct money market and repurchase transactions, debt instruments investments, precious metal transactions and derivative transactions for its own accounts or on behalf of customers.
Others Others comprise components of the Group that are not attributable to any of the above segments, along with certain assets, liabilities, income or expenses of the Head Office that could not be allocated on a reasonable basis.
280
— F-106 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
Business operating segments (Continued)
For the year ended 31 December 2014 Corporate Personal Treasury Consolidated banking banking operations Others total External interest income 351,644 138,133 205,715 3,797 699,289 External interest expense (93,897) (152,025) (21,908) (1,568) (269,398) Inter-segment interest (expense)/ income (22,285) 166,724 (144,439) — — Net interest income 235,462 152,832 39,368 2,229 429,891 Fee and commission income 45,921 40,857 23 1,082 87,883 Fee and commission expense (2,478) (5,240) (2) (40) (7,760) Net fee and commission income 43,443 35,617 21 1,042 80,123 Net trading gain — — 1,818 90 1,908 Net gain/(loss) on financial instruments designated at fair value through profit or loss — — 1,524 (19) 1,505 Net (loss)/gain on investment securities — — (8) 343 335 Other operating income 1,796 1,427 2,963 4,178 10,364 Operating income 280,701 189,876 45,686 7,863 524,126 Operating expenses (100,065) (97,354) (20,086) (6,393) (223,898) Impairment losses on assets (56,215) (9,491) (1,850) (415) (67,971) Profit before tax 124,421 83,031 23,750 1,055 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses (4,139) (11,223) (3,885) (81) (19,328) Capital expenditure 5,555 15,065 5,214 26 25,860 At 31 December 2014 Segment assets 5,571,140 2,826,973 7,388,768 108,631 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Segment liabilities (5,558,920) (7,929,911) (1,315,632) (95,689) (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 1,252,331 330,394 — — 1,582,725
Annual Report 2014 281
— F-107 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
Business operating segments (Continued)
For the year ended 31 December 2013 Corporate Personal Treasury Consolidated banking banking operations Others total External interest income 307,360 114,527 188,071 3,426 613,384 External interest expense (85,716) (126,896) (23,076) (1,494) (237,182) Inter-segment interest (expense)/ income (17,217) 156,155 (138,938) — — Net interest income 204,427 143,786 26,057 1,932 376,202 Fee and commission income 48,934 39,686 1 1,076 89,697 Fee and commission expense (1,959) (4,558) (1) (8) (6,526) Net fee and commission income 46,975 35,128 — 1,068 83,171 Net trading gain — — 2,353 7 2,360 Net (loss)/gain on financial instruments designated at fair value through profit or loss — — (668) 29 (639) Net (loss)/gain on investment securities — — (431) 81 (350) Other operating income 1,690 1,309 605 1,423 5,027 Operating income 253,092 180,223 27,916 4,540 465,771 Operating expenses (88,401) (90,876) (16,174) (3,156) (198,607) Impairment losses on assets (23,305) (28,719) (559) (407) (52,990) Profit before tax 141,386 60,628 11,183 977 214,174 Income tax expense (47,963) Profit for the year 166,211 Depreciation and amortization included in operating expenses (3,920) (10,089) (3,375) (77) (17,461) Capital expenditure 6,251 16,087 5,381 26 27,745 At 31 December 2013 Segment assets 5,061,143 2,404,907 6,937,843 84,134 14,488,027 Including: Investments in associates and joint ventures — — — 1 1 Unallocated assets 74,075 Total assets 14,562,102 Segment liabilities (5,206,616) (7,444,267) (948,506) (73,905) (13,673,294) Unallocated liabilities (44,271) Total liabilities (13,717,565) Credit commitments 1,181,880 300,065 — — 1,481,945
282
— F-108 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments The Group’s operating segments organized by County Area and Urban Area banking business are set out as follows:
County Area banking business The Group’s County Area banking business provides a broad range of financial products and services to customers in designated County Area, through its operating branches in the counties or county-level cities throughout the PRC. The products and services mainly comprise loans, deposits, bank cards, and other types of intermediary services.
Urban Area banking business The Group’s Urban Area banking business comprises all banking activities outside of the County Area banking business, overseas branches and subsidiaries.
Annual Report 2014 283
— F-109 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments
For the year ended 31 December 2014
County Area Urban Area banking banking Consolidated business business Eliminations total External interest income 166,526 532,763 — 699,289 External interest expense (93,707) (175,691) — (269,398) Inter-segment interest income/ (expense) 94,083 (94,083) — — Net interest income 166,902 262,989 — 429,891 Fee and commission income 31,348 56,535 — 87,883 Fee and commission expense (3,152) (4,608) — (7,760) Net fee and commission income 28,196 51,927 — 80,123 Net trading gain 222 1,686 — 1,908 Net gain on financial instruments designated at fair value through profit or loss 39 1,466 — 1,505 Net gain on investment securities — 335 — 335 Other operating income 2,719 7,645 — 10,364 Operating income 198,078 326,048 — 524,126 Operating expenses (93,018) (130,880) — (223,898) Impairment losses on assets (28,240) (39,731) — (67,971) Profit before tax 76,820 155,437 — 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses (8,865) (10,463) — (19,328) Capital expenditure 8,210 17,650 — 25,860 At 31 December 2014 Segment assets 5,841,613 10,136,691 (82,792) 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Segment liabilities (5,509,147) (9,473,797) 82,792 (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 323,296 1,259,429 — 1,582,725
284
— F-110 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
43 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments (Continued)
For the year ended 31 December 2013
County Area Urban Area banking banking Consolidated business business Eliminations total External interest income 144,389 468,995 — 613,384 External interest expense (82,146) (155,036) — (237,182) Inter-segment interest income/ (expense) 92,253 (92,253) — — Net interest income 154,496 221,706 — 376,202 Fee and commission income 31,833 57,864 — 89,697 Fee and commission expense (2,618) (3,908) — (6,526) Net fee and commission income 29,215 53,956 — 83,171 Net trading gain 357 2,003 — 2,360 Net loss on financial instruments designated at fair value through profit or loss (137) (502) — (639) Net loss on investment securities — (350) — (350) Other operating income 2,154 2,873 — 5,027 Operating income 186,085 279,686 — 465,771 Operating expenses (84,944) (113,663) — (198,607) Impairment losses on assets (23,895) (29,095) — (52,990) Profit before tax 77,246 136,928 — 214,174 Income tax expense (47,963) Profit for the year 166,211 Depreciation and amortization included in operating expenses (7,933) (9,528) — (17,461) Capital expenditure 9,660 18,085 — 27,745 At 31 December 2013 Segment assets 5,477,335 9,076,193 (65,501) 14,488,027 Including: Investments in associates and joint ventures — 1 — 1 Unallocated assets 74,075 Total assets 14,562,102 Segment liabilities (5,191,798) (8,546,997) 65,501 (13,673,294) Unallocated liabilities (44,271) Total liabilities (13,717,565) Credit commitments 286,409 1,195,536 — 1,481,945
Annual Report 2014 285
— F-111 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 RELATED PARTY TRANSACTIONS
(1) The Group and the MOF As at 31 December 2014, the MOF directly owned 39.21% (31 December 2013: 39.21%) of the ordinary shares of the Bank.
The MOF is a Chinese government ministry, primarily responsible for managing state fiscal revenue and expenditures, and establishing and enforcing taxation policies. It reports to the Chinese State Council.
The Group had the following balances and transactions with the MOF in its ordinary course of business under normal commercial terms:
As at 31 December 2014 2013 Treasury bonds and special government bond 734,578 729,892 Receivable from the MOF (Note IV 22) 278,314 362,054 Interest receivable — treasury bonds and special government bond 9,366 9,017 — receivable from the MOF 26 33 Amount payable to the MOF (Note IV 35) 3,275 1,539 Customer deposits 10,613 11,292 Interest payable 10 10 Other liability — redemption of treasury bonds on behalf of the MOF 105 112
Year ended 31 December 2014 2013 Interest income 38,623 38,152 Interest expense (82) (85) Fee and commission income 7,430 8,297
Interest rate ranges for transactions with the MOF during the year are as follows:
Year ended 31 December 2014 2013 %% Treasury bonds and receivable from the MOF 1.85–9.00 1.77–9.00 Customer deposits 0.01–3.25 0.01–3.25
The Group’s redemption commitment for treasury bonds underwriting is disclosed in Note IV 46 Contingent Liabilities and Commitments.
286
— F-112 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 RELATED PARTY TRANSACTIONS (Continued)
(2) The Group and Huijin Central Huijin Investment Ltd. (“Huijin”) is a wholly-owned subsidiary of China Investment Corporation Limited, which is incorporated in Beijing, PRC. Huijin was established to hold certain equity interests in state-owned financial institutions as authorized by the Chinese State Council and does not engage in other commercial activities. Huijin exercises its legal rights and assumes obligations related to the Bank on behalf of the PRC Government.
As at 31 December 2014, Huijin directly owned 40.28% (31 December 2013: 40.28%) of the ordinary shares of the Bank.
Transactions with Huijin The Group had the following balances and transactions with Huijin in its ordinary course of business under normal commercial terms:
As at 31 December 2014 2013 Investment in debt securities 11,244 11,130 Interest receivable 134 134 Customer deposits 3,829 10,960 Interest payable — 158
Year ended 31 December 2014 2013 Interest income 429 429 Interest expense (177) (352)
Interest rate ranges for transactions with Huijin during the year are as follows:
Year ended 31 December 2014 2013 %% Debt securities 3.14–4.20 3.14–4.20 Customer deposits 0.72–3.30 0.39–3.30
Annual Report 2014 287
— F-113 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 RELATED PARTY TRANSACTIONS (Continued)
(2) The Group and Huijin (Continued)
Transactions with companies under Huijin
Huijin has equity interests in certain other banks and financial institutions under the direction of the Chinese government. The Group enters into transactions with these banks and financial institutions in the ordinary course of business under normal commercial terms. Corresponding balances with these banks and financial institutions were as follows:
As at 31 December 2014 2013 Investment securities 769,490 686,833 Deposits with banks and other financial institutions 40,060 21,059 Placements with and loans to banks and other financial institutions 92,797 31,926 Derivative financial assets 451 623 Financial assets held under resale agreements 39,363 88,706 Loans and advances to customers 4,219 385 Deposits from banks and other financial institutions 30,342 45,561 Placements from banks and other financial institutions 44,965 26,362 Derivative financial liabilities 465 457 Financial assets sold under repurchase agreements 110,300 11,859 Customer deposits 1,000 200 Preference shares 200 — Off-balance sheet items: Non-principal guaranteed wealth management products issued by the Bank 300 —
(3) The Group and other government related entities Other than disclosed above, a significant portion of the Group’s banking transactions are entered into with government authorities, agencies, affiliates and other State controlled entities. These transactions are entered into under normal commercial terms and conditions and mainly include provision of credit and guarantee, deposits, foreign exchange transactions, derivative transactions, agency services, underwriting and distribution of bonds issued by government agencies, purchase, sales and redemption of investment securities issued by government agencies.
Management considers that transactions with these entities are activities conducted in the ordinary course of business, and that the dealings of the Group have not been significantly or unduly affected by the fact that the Group and those entities are government related. The Group has also established pricing policies for products and services and such pricing policies do not depend on whether or not the customers are government authorities, agencies, affiliates and other State controlled entities.
288
— F-114 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 RELATED PARTY TRANSACTIONS (Continued)
(4) The Bank and its subsidiaries The Bank entered into banking transactions with its subsidiaries at arm’s length in the ordinary course of business.
Management considers that transactions between the Bank and its subsidiaries are not significant.
(5) Key management personnel Key management personnel are those persons who have the authority and responsibility to plan, direct and control the activities of the Group.
The Group enters into banking transactions with key management personnel in the normal course of business. During the years ended 31 December 2014 and 2013, the Group had no material transactions with key management personnel.
The remuneration of directors and other members of key management during the years was as follows:
Year ended 31 December 2014 2013 Salaries, bonuses and staff welfare 11.73 10.97
According to the regulations of the relevant authorities in the PRC, the key management personnel’s final emoluments for the years ended 31 December 2014 and 2013 have not been finalised. Management of the Group believes that difference between the final emoluments and that disclosed above will not have significant impact on the consolidated financial statements of the Group. The final compensation will be disclosed in a separate announcement when determined.
Annual Report 2014 289
— F-115 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 RELATED PARTY TRANSACTIONS (Continued)
(6) The Group and the Annuity Scheme The Group had the following balances and transactions with the Annuity Scheme set up by the Bank apart from the obligation for defined contribution to the Annuity Scheme:
As at 31 December 2014 2013 Deposits from Annuity Scheme 8,050 8,050 Interest payable 15 15 Off-balance sheet item: Non-principal guaranteed wealth management products issued by the Bank — 500
Year ended 31 December 2014 2013 Interest expense 490 490
Interest rate range for transactions with the Annuity Scheme during the year is as follows: Year ended 31 December 2014 2013 %% Deposits from Annuity Scheme 5.75–6.20 5.75–6.20
290
— F-116 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 STRUCTURED ENTITIES
(1) Unconsolidated structured entities managed by the Group The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid. The WMP Vehicles invest in a range of primarily fixed-rate assets, most typically money market instruments, debt securities and loan assets. As the manager of WMPs, the Group invests, on behalf of its customers, the funds raised in the assets as described in the investment plan related to each WMP and receives Fee and Commission Income. The variable return that the Group has in relation to the WMPs is not significant, therefore, the WMP Vehicles are not consolidated by the Group.
As at 31 December 2014, the outstanding WMPs issued by WMP vehicles (excluding those with the principal guaranteed issued by the Group) amounted to RMB672,983 million (31 December 2013: RMB412,190 million), which represent the total size of the WMP vehicles. In 2014, the Group’s interest in the WMP Vehicles included Net Fee And Commission Income of RMB5,070 million (31 December 2013: RMB4,752 million) and Net interest income of RMB499 million (31 December 2013: RMB478 million), which related to placements and reverse repurchase agreement transactions by the Group with WMP Vehicles.
The Group has entered into placements and reverse repurchase agreement transactions at market interest rates with the WMP Vehicles. The average balance during 2014 and the outstanding balance as at 31 December 2014 of these transactions were RMB19,788 million (weighted average outstanding period of 3.72 days) and RMB81,300 million, respectively. The average balance during 2013 and the outstanding balance as at 31 December 2013 of these transactions were RMB30,453 million (weighted average outstanding period of 2.9 days) and RMB80,282 million, respectively. The Group was under no obligation to enter into these transactions. As at 31 December 2014 and 31 December 2013, the outstanding balance of these transactions was presented in Placements with and Loans to Banks and Other Financial Institutions and represented the Group’s maximum exposure to the WMP Vehicles.
There were no contractual liquidity arrangements, guarantees or other commitments among or between the Group, WMP vehicles or any third parties that could increase the level of the Group’s risk from or reduce its interest in WMP vehicles disclosed above during the years ended 31 December 2014 and 2013. The Group is not required to absorb any losses incurred by WMPs before other parties. In 2014 and 2013, no loss was incurred by the WMP Vehicles relating to the Group’s interests in the WMP Vehicles, and the WMP Vehicles did not experience difficulty in financing their activities.
Annual Report 2014 291
— F-117 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 STRUCTURED ENTITIES (Continued)
(2) Unconsolidated structured entities held by the Group The Group invests in a number of other unconsolidated structured entities which are sponsored and managed by other entities for investment return, and records trading gains or losses and Interest Income therefrom. These assets include underlying investments made by WMPs managed by the Group, and for which the Group has provided investors of the WMPs with a principal and/or return guarantee. The Group’s maximum exposure to these other unconsolidated structured entities is summarized in the table below.
Group As at 31 December 2014 Financial assets designated at fair value Debt through Available- Held-to- instruments profits for-sale maturity classified as or losses Investments investment receivables Total Interest in trust products 248,794 — — — 248,794 Other debt instruments 59,876 — — — 59,876 Asset management products issued by other entities (i) — — — 10,613 10,613 Asset-backed securities — 5,054 — — 5,054 Fund investments — 3,358 — — 3,358 Mortgage-backed securities — 48 40 — 88 Total 308,670 8,460 40 10,613 327,783
292
— F-118 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 STRUCTURED ENTITIES (Continued)
(2) Unconsolidated structured entities held by the Group (Continued) Group As at 31 December 2013 Financial assets designated at fair value Debt through Available- Held-to- instruments profits or for-sale maturity classified as losses Investments investment receivables Total Interest in trust products 171,280 — — — 171,280 Other debt instruments 38,710 — — — 38,710 Asset management products issued by other entities (i) — 560 — 5,908 6,468 Asset-backed securities — 1,918 — — 1,918 Fund investments — 988 — — 988 Mortgage-backed securities — 87 45 — 132 Total 209,990 3,553 45 5,908 219,496
(i) The asset management products issued by other entities primarily consist of WMPs, asset management plans and debt investment plans.
The information of total size of the Unconsolidated Structured Entities listed above is not readily available from the public.
(3) Consolidated structured entities The Group’s consolidated structured entities consist principally of WMP Vehicles that issue and distribute WMPs with respect to which the Group has guaranteed the investor’s principal investment and/or return upon maturity of the WMP, regardless of its actual performance; and a special purpose trust founded by a third party trust company for issuing asset backed securities by the Group. During the years ended 31 December 2014 and 2013, the Group did not enter into financing transactions with any of these WMP Vehicles and the special purpose trust.
Annual Report 2014 293
— F-119 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 CONTINGENT LIABILITIES AND COMMITMENTS
Legal proceedings The Bank and its subsidiaries are involved as defendants in certain lawsuits arising from their normal business operations. As at 31 December 2014, provisions of RMB1,316 million were made by the Group and the Bank (31 December 2013: RMB962 million) based on court judgments or advice of legal counsel, and included in Note IV 35 Other Liabilities. Management of the Group believes that the final result of these lawsuits will not have a material impact on the financial position or operations of the Group.
Capital commitments As at 31 December Group Bank 2014 2013 2014 2013 Contracted but not provided for 5,302 6,404 4,772 6,404 Authorized but not contracted for 3,656 1,261 3,656 1,261 Total 8,958 7,665 8,428 7,665
In addition, the Group’s and the Bank’s equity investment commitments for its investee companies as at 31 December 2014 were RMB306 million and RMB1,306 million, respectively (31 December 2013: None).
Credit commitments As at 31 December Group Bank 2014 2013 2014 2013 Loan commitments — With an original maturity of less than 1 year 15,664 35,858 15,664 35,858 — With an original maturity of 1 year or above 425,394 434,411 425,394 434,411 Subtotal 441,058 470,269 441,058 470,269 Bank acceptance 418,937 404,852 418,937 404,852 Credit card commitments 254,222 219,682 254,222 219,682 Guarantee and letters of guarantee 241,171 191,073 243,007 191,073 Letters of credit 227,337 196,069 227,337 196,069 Total 1,582,725 1,481,945 1,584,561 1,481,945
Credit commitments represent credit cards and general credit facility limits granted to customers under non-cancellable agreements. These general credit facilities may be drawn in the form of loans or through the issuance of letters of credit, guarantee and letters of guarantee or bank acceptance.
294
— F-120 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Credit risk weighted amount for credit commitments Credit risk weighted amount for credit commitments represents the counterparty credit risk associated with credit commitments and is calculated in accordance with the “Capital Rules for Commercial Banks (Provisional)” issued by the CBRC which was effective 1 January 2013 and is dependent on, among other factors, creditworthiness of counterparties and maturity characteristics of each type of contract. As at 31 December 2014, credit risk weighted amount for credit commitments was measured under the Internal Ratings — Based approach as disclosed in Note IV 49 Capital Management.
As at 31 December 2014 Group Bank Credit commitments 800,383 786,732
As at 31 December 2013, credit risk weighted amount for credit commitments of the Group and the Bank were RMB728,028 million and RMB727,438 million, respectively, which were measured under the Weighted approach as disclosed in Note IV 49 Capital Management.
Operating lease commitments At the end of each reporting period, the Group, as a lessee, had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:
As at 31 December Group Bank 2014 2013 2014 2013 Within 1 year 4,206 3,575 3,729 3,536 1 to 2 years 3,153 3,039 3,099 3,016 2 to 3 years 2,525 2,550 2,512 2,537 3 to 5 years 3,193 2,527 3,193 2,527 Above 5 years 1,969 3,204 1,969 3,204 Total 15,046 14,895 14,502 14,820
In the current year, operating lease expense recognized as operating expense by the Group and the Bank were RMB4,743 million and RMB4,667 million, respectively, and is included in Note IV 6 Operating Expenses (2013: RMB4,169 million and RMB4,106 million, respectively).
Annual Report 2014 295
— F-121 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Finance lease commitments At the end of each reporting period, the Group, as a lessor, had the following non-cancellable finance lease commitments:
As at 31 December Group Bank 2014 2013 2014 2013 Contractual amount — 61 — —
As at 31 December 2014, the gross amount of finance lease receivables included in the Group’s loans and advances were RMB35,502 million (31 December 2013: RMB33,154 million), with the remaining maturity as follows:
As at 31 December Group Bank 2014 2013 2014 2013 Overdue 1,991 63 — — Within 1 year 11,511 9,131 — — 1 to 5 years 17,829 22,572 — — Above 5 years 4,171 1,388 — — Total 35,502 33,154 — —
Collateral
Assets pledged At the end of each reporting period, the carrying amounts of assets pledged as collateral under repurchase agreements are as follows:
As at 31 December Group Bank 2014 2013 2014 2013 Debt securities 131,828 27,011 127,757 25,248 Bills — 38 — 38 Loans — 600 — — Total 131,828 27,649 127,757 25,286
296
— F-122 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Collateral (Continued)
Assets pledged (Continued) The carrying value of financial assets sold under repurchase agreements by the Group as at 31 December 2014 was RMB131,021 million and the Bank was RMB126,950 million (Group as at 31 December 2013 was RMB26,787 million and the Bank was RMB24,670 million) as set out in Note IV 32 Financial Assets Sold under Repurchase Agreements. Repurchase agreements are primarily due within 12 months from the effective dates of these agreements.
Financial assets sold under repurchase agreements included certain transactions under which, title of the pledged securities has been transferred to counterparties. These transactions have been disclosed in Note IV 47 Transferred Financial Assets.
In addition, debt securities and deposits with banks and other financial institutions pledged in accordance with regulatory requirements or as collateral for derivative transactions by the Group and the Bank as at 31 December 2014 amounted to RMB102,364 million in total (Group and Bank as at 31 December 2013: RMB5,637 million).
Collateral accepted The Group received debt securities, bills, loans and other assets as collateral in connection with the purchase of assets under resale agreements as set out in Note IV 18 Financial Assets Held Under Resale Agreements. Certain of these collateral can be resold or re-pledged. The Group and the Bank has accepted collateral that can be resold or re-pledged with a carrying amount of RMB3,055 million as at 31 December 2014 (31 December 2013: RMB1,744 million). The Group and the Bank has not resold or re-pledged any collateral accepted as at 31 December 2014 (31 December 2013: None).
Redemption commitment for treasury bonds The Group is entrusted by the MOF to underwrite certain treasury bonds. The investors of these treasury bonds have a right to redeem the bonds at par at any time prior to maturity and the Group is committed to honor such redemption requests. The redemption price is calculated as the par value of the bond plus unpaid interest in accordance with the terms of the related early redemption arrangement.
As at 31 December 2014, the nominal value of treasury bonds the Group and the Bank was obligated to redeem prior to maturity was RMB44,879 million (31 December 2013: RMB37,913 million). The original maturities of these bonds vary from 1 to 5 years. Management of the Group expects the amount of redemption before the maturity dates of these bonds will not be material.
The MOF will not provide funding for the early redemption of these bonds on a back-to-back basis, but will settle the principal and interest upon maturity.
Annual Report 2014 297
— F-123 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
47 TRANSFERRED FINANCIAL ASSETS The Group enters into transactions in the normal course of business by which it transfers recognized financial assets to third parties or to structured entities. In some cases these transfers may give rise to full or partial de-recognition of the financial assets concerned. In other cases where the transferred assets do not qualify for de-recognition as the Group has retained substantially all the risks and rewards of these assets, the Group continued to recognize the transferred assets.
Other than the securitization transactions stated below, debt securities with title transferred to counterparties recorded in financial assets sold under repurchase agreements that the Group and the Bank did not derecognize amounted to RMB9,157 million as at 31 December 2014 (31 December 2013: RMB3,548 million), as disclosed in Note IV 46 Contingent Liabilities and Commitments – Collateral.
Securitization transactions The Group enters into securitization transactions in the normal course of business by which it transfers credit assets to structured entities which issue asset-backed securities to investors.
The Group may retain interests in the form of subordinated tranches which may give rise to the Group’s continuing involvement in the transferred assets. Those financial assets are recognized on the consolidated statement of financial position to the extent of the Group’s continuing involvement. The extent of the Group’s continuing involvement is the extent to which the Group is exposed to changes in the value of the transferred assets.
As at 31 December 2014, loans with an original carrying amount of RMB10,125 million (31 December 2013: None) have been securitized by the Group under arrangements in which the Group retains a continuing involvement in such assets in the form of subordinated tranches. As at 31 December 2014, the carrying amount of assets that the Group continues to recognize was RMB967 million (31 December 2013: None) and the assets were classified as Loans and Advances to Customers. Arising from this continuing involvement, the Group has recognized continuing involvement assets and continuing involvement liabilities of RMB967 million, respectively.
298
— F-124 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT
Overview The Group’s primary risk management objective is to maintain risk within acceptable parameters to meet the requirements of regulators, depositors and other stakeholders, as well as to maximize return for investors within an acceptable level of risk.
The Group has designed risk management policies, which address, among other things, the establishment of risk limits and controls to identify, analyze, monitor and report risks. Relevant and timely information used to conduct these risk management activities is provided through information systems maintained by the Group and intended to address the Group’s information needs in this area. The Group regularly reviews its risk management policies and systems to address changes in markets, products and emerging best practices.
The most significant types of risk to which the Group is exposed are credit risk, market risk and liquidity risk. Market risk includes foreign exchange rate risk, interest rate risk and other price risk.
Risk management framework The Board of Directors is responsible for establishing the overall risk appetite of the Group and reviewing and approving its risk management objectives and strategies.
Within this framework, the Group’s senior management has overall responsibility for managing all aspects of risk, including implementing risk management strategies, initiatives and credit policies and approving internal rules, measures and procedures related to risk management. The Risk Management Department of the Group implements procedures for managing the significant risks to which the Group is exposed.
Annual Report 2014 299
— F-125 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk
Credit risk management Credit risk represents the potential loss that may arise from a customer or counterparty’s failure to meet its obligations when due. Credit risk can also arise from operational failures that result in an unauthorized or inappropriate advance, commitment or investment. The Group’s major credit risks arise from loans and receivables, treasury operations and off-balance sheet related credit risk exposures.
The Group’s credit risk management system is composed of the Board of Directors and its Risk Management Committee, Senior Management and its Risk Management Committee, Credit Approval Committee and Asset Disposal Committee, as well as the Risk Management Department, Credit Management Department, Credit Approval Department and related front- office customer departments. The Group’s credit risk management function operates under centralized management and authorization under a range of specified limits.
The Group performs standardized credit management procedures, including credit due diligence and proposal submission, credit underwriting review, loan disbursement, post- lending monitoring and non-performing loan management. The Group enhances its credit risk management by strictly complying with its credit management procedures; strengthening customer investigation, credit rating, lending approval and post-lending monitoring measures; enhancing risk mitigation effect of loans through collateral; accelerating disposal process of non-performing loans and continuously upgrading the credit management system.
For the current year, the Group implemented more rigid management over the credit origination process. Further, the Group enhanced its forecasting capability using forward- looking information, as well as its proactive risk control and credit limit management processes. The Group reinforced its risk identification and monitoring, including the governance over areas of special focus, industries, and products, as well as refined the risk mitigation activities. It also exited high risk clients on a timely basis. The Group also accelerated the disposal of non-performing loans, emphasized the accountability related to non-performing loans and maintained the stability of credit asset quality.
Apart from the credit risk exposures on credit-related assets, deposits and Placements with and Loans to Banks and Other Financial Institutions, the credit risk arising from treasury business is managed by selecting counterparties with acceptable credit quality, balancing credit risk and return, referencing to both internal and external credit rating information where available and by applying appropriate limits subject to different level of management authority, and by timely reviewing and adjusting those limit in credit system. In addition, the Group also provides loan commitments and financial guarantee services to customers which may require the Group to make payments on behalf of customers upon their failure to perform under the terms of the related contract. Risks arising from loan commitments and financial guarantees are similar to those associated with loans and advances. These transactions are, therefore, subject to the same risk management policies and procedures.
300
— F-126 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Impairment assessment
Key factors related to the Group’s impairment assessment In accordance with the “Guideline for Loan Credit Risk Classification” issued by the CBRC, the Group has established a loan credit risk classification system and performs credit risk management based on loan classification in one of five categories. The Group classifies loans into the following five categories: normal, special-mention, substandard, doubtful and loss. Loans classified as substandard, doubtful and loss are regarded as non- performing loans. The primary factors considered in loan impairment assessment include probability of loan repayment and recoverability of principal and interest, which reflect borrowers’ repayment ability, repayment record and intention, projected profitability, bank guarantees or collateral and legal responsibility of repayment. The allowance for impairment losses is assessed collectively or individually, as appropriate.
The five categories of loan classification into which the Group classifies its loans and advances to customers are set out below:
Normal Borrowers can honor the terms of their loans. There is no reason to doubt their ability to repay principal and interest in full on a timely basis.
Special – mention Borrowers are able to service their loans currently, although repayment may be adversely affected by specific factors.
Substandard Borrowers’ ability to service their loans is in question and they cannot rely entirely on normal operating revenues to repay principal and interest. Losses may ensue even when collateral or guarantees are invoked.
Doubtful Borrowers cannot repay principal and interest in full and significant losses will need to be recognized even when collateral or guarantees are invoked.
Loss Only a small portion or none of the principal and interest can be recovered after taking all possible measures and exhausting all legal remedies.
With respect to investments in debt securities other than held for trading or designated at fair value through profit or loss, the Group assesses for indicators of impairment at the end of each reporting period based on objective evidence and performs impairment assessment individually or collectively, as appropriate. For the impaired available-for-sale investments, the amount of the impairment allowance for available-for-sale investments is equal to the existing unrealized loss, which is recorded as a charge in the consolidated income statement.
Annual Report 2014 301
— F-127 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Maximum exposure to credit risk before taking into account any collateral held or other credit enhancements The maximum exposure to credit risk represents the credit risk exposure to the Group at the end of each reporting period, without taking into account any collateral held or other credit enhancements. The exposure to credit risk at the end of each reporting period primarily arises from credit and treasury operations; as well as off-balance sheet items such as loan commitments, credit card commitments, bank acceptance, guarantee and letters of guarantee and letters of credit, as credit risks arising from these items are similar to those associated with loans and receivables.
A summary of the maximum exposure to credit risk is as follows:
As at 31 December Group Bank 2014 2013 2014 2013 Balances with central banks 2,631,103 2,504,043 2,630,883 2,503,888 Deposits with banks and other financial institutions 572,805 397,678 562,792 389,938 Placements with and loans to banks and other financial institutions 407,062 308,655 412,825 310,967 Financial assets held for trading 58,404 53,814 58,404 53,495 Financial assets designated at fair value through profit or loss 354,763 267,997 355,763 267,994 Derivative financial assets 7,195 8,186 6,950 8,176 Financial assets held under resale agreements 509,418 737,052 509,412 736,742 Loans and advances to customers 7,739,996 6,902,522 7,700,348 6,866,183 Available-for-sale financial assets 922,017 778,944 916,810 776,211 Held-to-maturity investments 1,710,950 1,523,815 1,703,508 1,517,998 Debt instruments classified as receivables 522,117 592,090 511,174 585,459 Other financial assets 128,188 103,024 113,335 91,817 Subtotal 15,564,018 14,177,820 15,482,204 14,108,868 Credit commitments 1,582,725 1,481,945 1,584,561 1,481,945 Total 17,146,743 15,659,765 17,066,765 15,590,813
302
— F-128 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Maximum exposure to credit risk before taking into account any collateral held or other credit enhancements (Continued) The Group has implemented specific policies and credit enhancement practices to mitigate credit risk exposure to an acceptable level. The most typical practice is obtaining guarantee deposits, collateral and guarantees. The amount and type of acceptable collateral are determined by credit risk evaluations of borrowers. The Group implements guidelines on the acceptability of specific classes of collateral and evaluation parameters.
The main types of collateral obtained are as follows:
— Mortgage loans to retail customers are generally collateralized by mortgages over residential properties;
— Other personal lending and corporate loans and advances are primarily collateralized by charges over land and properties or other assets of the borrowers; and
— Financial assets held under resale agreements transactions are primarily collateralized by debt securities, bills and loans.
The Group monitors the market value of collateral periodically and requests for additional collateral in accordance with the underlying agreement when necessary.
Annual Report 2014 303
— F-129 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers The following tables set out the concentration of risk for loans and advances to customers by geographical area and industry.
(1) The composition of loans and advances to customers by geographical area is analyzed as follows: Group As at 31 December 2014 2013 Amount % of total Amount % of total Corporate loans and advances Head Office 147,614 2.6 115,027 2.2 Yangtze River Delta 1,312,497 23.0 1,225,018 23.9 Pearl River Delta 669,532 11.8 622,736 12.1 Bohai Rim 1,036,523 18.2 958,418 18.7 Central China 684,153 12.0 605,634 11.8 Western China 1,236,514 21.7 1,101,790 21.5 Northeastern China 217,926 3.8 193,057 3.8 Overseas and Others 392,324 6.9 307,401 6.0 Subtotal 5,697,083 100.0 5,129,081 100.0 Personal loans and advances Head Office 107 — 110 — Yangtze River Delta 606,026 25.2 555,257 26.5 Pearl River Delta 440,572 18.3 390,258 18.6 Bohai Rim 345,542 14.4 292,778 14.0 Central China 335,059 14.0 288,221 13.8 Western China 573,220 23.9 482,475 23.0 Northeastern China 96,113 4.0 84,206 4.0 Overseas and Others 4,345 0.2 2,327 0.1 Subtotal 2,400,984 100.0 2,095,632 100.0 Gross loans and advances to customers 8,098,067 7,224,713
304
— F-130 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued) (1) The composition of loans and advances to customers by geographical area is analyzed as follows (Continued): Bank As at 31 December 2014 2013 Amount % of total Amount % of total Corporate loans and advances Head Office 147,614 2.6 115,027 2.3 Yangtze River Delta 1,312,497 23.2 1,225,018 24.1 Pearl River Delta 669,532 11.8 622,736 12.2 Bohai Rim 1,036,523 18.3 958,418 18.8 Central China 684,153 12.1 605,634 11.9 Western China 1,236,514 21.9 1,101,790 21.6 Northeastern China 217,926 3.9 193,057 3.8 Overseas and Others 352,245 6.2 270,779 5.3 Subtotal 5,657,004 100.0 5,092,459 100.0 Personal loans and advances Head Office 107 — 110 — Yangtze River Delta 606,026 25.3 555,257 26.5 Pearl River Delta 440,572 18.3 390,258 18.6 Bohai Rim 345,542 14.4 292,778 14.0 Central China 335,059 14.0 288,221 13.8 Western China 573,220 23.9 482,475 23.0 Northeastern China 96,113 4.0 84,206 4.0 Overseas and Others 3,336 0.1 1,643 0.1 Subtotal 2,399,975 100.0 2,094,948 100.0 Gross loans and advances to customers 8,056,979 7,187,407
Annual Report 2014 305
— F-131 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(2) The composition of loans and advances to customers by industry is analyzed as follows: Group As at 31 December 2014 2013 Amount % of total Amount % of total Corporate loans and advances Manufacturing 1,459,857 25.6 1,430,267 28.0 Transportation, logistics and postal services 779,230 13.7 624,699 12.2 Retail and wholesale 629,609 11.1 593,434 11.6 Real estate 587,916 10.3 547,722 10.7 Production and supply of power, heat, gas and water 551,929 9.7 493,262 9.6 Leasing and commercial services 399,910 7.0 338,820 6.6 Mining 261,932 4.6 222,436 4.3 Finance 218,286 3.8 134,595 2.6 Construction 212,961 3.7 201,631 3.9 Water, environment and public utilities management 209,769 3.7 197,140 3.8 Others 385,684 6.8 345,075 6.7 Subtotal 5,697,083 100.0 5,129,081 100.0 Personal loans and advances Residential mortgage 1,550,702 64.6 1,292,038 61.6 Personal business 266,913 11.1 256,245 12.2 Personal consumer 204,102 8.5 204,448 9.8 Credit cards 222,865 9.3 194,330 9.3 Others 156,402 6.5 148,571 7.1 Subtotal 2,400,984 100.0 2,095,632 100.0 Gross loans and advances to customers 8,098,067 7,224,713
306
— F-132 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(2) The composition of loans and advances to customers by industry is analyzed as follows (Continued): Bank As at 31 December 2014 2013 Amount % of total Amount % of total Corporate loans and advances Manufacturing 1,444,830 25.5 1,412,900 27.9 Transportation, logistics and postal services 768,661 13.6 622,302 12.2 Retail and wholesale 624,704 11.0 591,085 11.6 Real estate 587,246 10.4 547,002 10.7 Production and supply of power, heat, gas and water 551,378 9.7 489,456 9.6 Leasing and commercial services 399,233 7.1 338,064 6.6 Mining 260,736 4.6 220,388 4.3 Finance 218,286 3.9 134,595 2.6 Construction 211,799 3.7 198,609 3.9 Water, environment and public utilities management 208,044 3.7 196,255 3.9 Others 382,087 6.8 341,803 6.7 Subtotal 5,657,004 100.0 5,092,459 100.0 Personal loans and advances Residential mortgage 1,550,701 64.6 1,292,033 61.6 Personal business 266,393 11.1 255,808 12.2 Personal consumer 204,044 8.5 204,425 9.8 Credit cards 222,865 9.3 194,330 9.3 Others 155,972 6.5 148,352 7.1 Subtotal 2,399,975 100.0 2,094,948 100.0 Gross loans and advances to customers 8,056,979 7,187,407
Annual Report 2014 307
— F-133 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(3) The composition of loans and advances to customers by contractual maturity and security type is analyzed as follows: Group 31 December 2014 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 794,488 295,993 705,780 1,796,261 Guaranteed loans 785,858 285,079 317,351 1,388,288 Loans secured by collateral 1,164,594 668,884 2,105,571 3,939,049 Pledged loans 476,414 52,629 445,426 974,469 Total 3,221,354 1,302,585 3,574,128 8,098,067
31 December 2013 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 763,479 301,703 556,910 1,622,092 Guaranteed loans 769,611 231,430 295,572 1,296,613 Loans secured by collateral 1,131,696 661,376 1,719,816 3,512,888 Pledged loans 366,943 41,668 384,509 793,120 Total 3,031,729 1,236,177 2,956,807 7,224,713
Bank 31 December 2014 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 793,465 291,450 698,277 1,783,192 Guaranteed loans 781,915 266,598 314,546 1,363,059 Loans secured by collateral 1,164,101 667,969 2,105,512 3,937,582 Pledged loans 475,428 52,292 445,426 973,146 Total 3,214,909 1,278,309 3,563,761 8,056,979
31 December 2013 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 761,773 301,104 556,890 1,619,767 Guaranteed loans 768,979 230,030 295,550 1,294,559 Loans secured by collateral 1,131,364 629,023 1,719,798 3,480,185 Pledged loans 366,742 41,646 384,508 792,896 Total 3,028,858 1,201,803 2,956,746 7,187,407
308
— F-134 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(4) Past due loans Group 31 December 2014 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 9,442 4,744 616 371 15,173 Guaranteed loans 19,103 14,380 7,639 4,559 45,681 Loans secured by collateral 40,740 32,292 13,845 7,585 94,462 Pledged loans 3,854 5,041 721 1,688 11,304 Total 73,139 56,457 22,821 14,203 166,620
31 December 2013 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 5,211 4,379 1,282 442 11,314 Guaranteed loans 8,075 6,078 7,005 6,913 28,071 Loans secured by collateral 20,067 10,324 14,201 10,174 54,766 Pledged loans 1,540 1,129 1,326 2,278 6,273 Total 34,893 21,910 23,814 19,807 100,424
Bank 31 December 2014 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 9,421 4,744 616 371 15,152 Guaranteed loans 17,195 13,641 6,932 4,559 42,327 Loans secured by collateral 40,737 32,284 13,845 7,585 94,451 Pledged loans 3,632 4,486 721 1,688 10,527 Total 70,985 55,155 22,114 14,203 162,457
31 December 2013 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 5,211 4,379 1,282 442 11,314 Guaranteed loans 7,442 6,005 7,005 6,913 27,365 Loans secured by collateral 20,067 10,324 14,201 10,174 54,766 Pledged loans 1,540 1,129 1,326 2,278 6,273 Total 34,260 21,837 23,814 19,807 99,718
When either loan principal or interest is past due by one day in any period, the whole loan is classified as past due loan.
Annual Report 2014 309
— F-135 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers Group As at 31 December 2014 2013 Neither past due nor impaired (i) 7,923,816 7,112,117 Past due but not impaired (ii) 49,281 24,815 Impaired (iii) 124,970 87,781 Subtotal 8,098,067 7,224,713 Allowance for impairment losses of loans and advances to customers (358,071) (322,191) Loans and advances to customers 7,739,996 6,902,522
Bank As at 31 December 2014 2013 Neither past due nor impaired (i) 7,886,891 7,075,519 Past due but not impaired (ii) 45,836 24,815 Impaired (iii) 124,252 87,073 Subtotal 8,056,979 7,187,407 Allowance for impairment losses of loans and advances to customers (356,631) (321,224) Loans and advances to customers 7,700,348 6,866,183
(i) Loans and advances neither past due nor impaired Group 31 December 2014 Special- Normal mention Total Corporate loans and advances 5,303,893 265,154 5,569,047 Personal loans and advances 2,352,828 1,941 2,354,769 Total 7,656,721 267,095 7,923,816
31 December 2013 Special- Normal mention Total Corporate loans and advances 4,800,374 252,101 5,052,475 Personal loans and advances 2,057,357 2,285 2,059,642 Total 6,857,731 254,386 7,112,117
310
— F-136 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued) (i) Loans and advances neither past due nor impaired (Continued) Bank 31 December 2014 Special- Normal mention Total Corporate loans and advances 5,268,590 264,528 5,533,118 Personal loans and advances 2,351,839 1,934 2,353,773 Total 7,620,429 266,462 7,886,891
31 December 2013 Special- Normal mention Total Corporate loans and advances 4,766,252 250,325 5,016,577 Personal loans and advances 2,056,659 2,283 2,058,942 Total 6,822,911 252,608 7,075,519
(ii) Loans and advances past due but not impaired Group 31 December 2014 Up to 31–60 61–90 91–360 Fair value 30 days days days days Total of collateral Corporate loans and advances 15,280 3,978 3,575 1,290 24,123 23,606 Personal loans and advances 15,662 5,440 4,053 3 25,158 33,285 Total 30,942 9,418 7,628 1,293 49,281 56,891
Bank 31 December 2014 Up to 31–60 61–90 91–360 Fair value 30 days days days days Total of collateral Corporate loans and advances 14,063 3,978 2,645 — 20,686 22,764 Personal loans and advances 15,658 5,440 4,052 — 25,150 33,285 Total 29,721 9,418 6,697 — 45,836 56,049
Annual Report 2014 311
— F-137 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued) (ii) Loans and advances past due but not impaired (Continued) Group and bank 31 December 2013 Up to 31–60 61–90 91–360 Fair value 30 days days days days Total of collateral Corporate loans and advances 4,017 187 30 — 4,234 4,303 Personal loans and advances 14,070 4,033 2,478 — 20,581 24,986 Total 18,087 4,220 2,508 — 24,815 29,289
(iii) Impaired loans and advances Group 31 December 2014 Allowance for impairment Net book Book value losses value Individually assessed 103,907 (73,094) 30,813 Collectively assessed 21,063 (14,591) 6,472 Total 124,970 (87,685) 37,285
31 December 2013 Allowance for impairment Net book Book value losses value Individually assessed 72,355 (50,127) 22,228 Collectively assessed 15,426 (10,440) 4,986 Total 87,781 (60,567) 27,214
312
— F-138 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued) (iii) Impaired loans and advances (Continued) Bank 31 December 2014 Allowance for impairment Net book Book value losses value Individually assessed 103,200 (72,578) 30,622 Collectively assessed 21,052 (14,587) 6,465 Total 124,252 (87,165) 37,087
31 December 2013 Allowance for impairment Net book Book value losses value Individually assessed 71,648 (50,050) 21,598 Collectively assessed 15,425 (10,440) 4,985 Total 87,073 (60,490) 26,583
Including:
Group As at 31 December 2014 2013 Individually assessed and impaired 103,907 72,355 Individually assessed and impaired as a percentage of gross loans and advances of the Group 1.28% 1.00% Fair value of collateral 14,697 9,237
Annual Report 2014 313
— F-139 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued) (iii) Impaired loans and advances (Continued) Bank As at 31 December 2014 2013 Individually assessed and impaired 103,200 71,648 Individually assessed and impaired as a percentage of gross loans and advances of the Group 1.28% 1.00% Fair value of collateral 14,697 9,237
The composition of impaired loans and advances to customers by geographical area is analyzed as follows:
Group 31 December 2014 31 December 2013 Amount % of total Amount % of total Head Office 7 — 3 — Yangtze River Delta 26,242 21.0 19,373 22.1 Pearl River Delta 16,790 13.4 12,407 14.1 Bohai Rim 26,727 21.4 16,603 19.0 Central China 18,656 14.9 14,075 16.0 Western China 30,332 24.3 19,523 22.2 Northeastern China 5,368 4.3 4,927 5.6 Overseas and Others 848 0.7 870 1.0 Total 124,970 100.0 87,781 100.0
314
— F-140 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued) (iii) Impaired loans and advances (Continued) Bank 31 December 2014 31 December 2013 Amount % of total Amount % of total Head Office 7 — 3 — Yangtze River Delta 26,242 21.1 19,373 22.2 Pearl River Delta 16,790 13.5 12,407 14.2 Bohai Rim 26,727 21.5 16,603 19.1 Central China 18,656 15.0 14,075 16.2 Western China 30,332 24.5 19,523 22.4 Northeastern China 5,368 4.3 4,927 5.7 Overseas and Others 130 0.1 162 0.2 Total 124,252 100.0 87,073 100.0
(6) Rescheduled loans and advances
Rescheduled loans and advances arise from renegotiating terms of contract, and such loans and advances require continuous monitoring. Rescheduled loans and advances of the Group and the Bank as at 31 December 2014 amounted to RMB26,403 million (31 December 2013: RMB10,376 million).
(7) Assets foreclosed under credit enhancement arrangement
Such assets are disclosed as foreclosed assets in Note IV 26 Other assets.
Annual Report 2014 315
— F-141 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments
Credit quality of debt instruments The table below represents the carrying value and accumulated impairment charges of held-to-maturity investments and debt instruments classified as receivables:
Group As at 31 December 2014 2013 Neither past due nor impaired (1) 2,233,960 2,116,801 Impaired (2) 1,191 45 Subtotal 2,235,151 2,116,846 Individually assessed (478) (44) Collectively assessed (1,606) (897) Allowance for impairment losses (2,084) (941) Total held-to-maturity investments and debt instruments classified as receivables, net 2,233,067 2,115,905
Bank As at 31 December 2014 2013 Neither past due nor impaired (1) 2,216,133 2,104,353 Impaired (2) 691 45 Subtotal 2,216,824 2,104,398 Individually assessed (463) (44) Collectively assessed (1,679) (897) Allowance for impairment losses (2,142) (941) Total held-to-maturity investments and debt instruments classified as receivables, net 2,214,682 2,103,457
316
— F-142 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (1) Debt instruments neither past due nor impaired Group 31 December 2014 Financial assets at fair value Available- Debt through for-sale Held-to- instruments profit financial maturity classified as or loss assets investments receivables Total Debt securities issued by: — Governments 14,780 147,513 548,330 — 710,623 — Public sector and quasi- governments 48,723 449,183 936,274 56,141 1,490,321 — Financial institutions 4,011 137,730 67,878 45,334 254,953 — Corporates 19,389 186,574 159,349 34,475 399,787 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 278,314 278,314 Certificate treasury bonds and savings treasury bonds — — — 3,590 3,590 Interests in trust products 248,794 — — — 248,794 Other debt instruments 59,876 — — 10,975 70,851 Total 395,573 921,000 1,711,831 522,129 3,550,533
Annual Report 2014 317
— F-143 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (1) Debt instruments neither past due nor impaired (Continued) Group (Continued) 31 December 2013 Financial assets at fair value Available- Debt through for-sale Held-to- instruments profit financial maturity classified as or loss assets investments receivables Total Debt securities issued by: — Governments 13,700 149,808 519,265 — 682,773 — Public sector and quasi- governments 50,056 409,322 808,838 66,485 1,334,701 — Financial institutions 11,495 48,702 29,688 27,124 117,009 — Corporates 24,768 167,724 166,623 30,973 390,088 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 362,054 362,054 Certificate treasury bonds and savings treasury bonds — — — 6,037 6,037 Interests in trust products 171,280 — — — 171,280 Other debt instruments 38,710 — — 6,414 45,124 Total 310,009 775,556 1,524,414 592,387 3,202,366
318
— F-144 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (1) Debt instruments neither past due nor impaired (Continued) Bank 31 December 2014 Financial assets at fair value Available- Debt through for-sale Held-to- instruments profit financial maturity classified as or loss assets investments receivables Total Debt securities issued by: — Governments 14,780 147,342 548,330 — 710,452 — Public sector and quasi- governments 48,723 448,141 934,063 56,141 1,487,068 — Financial institutions 4,011 137,453 65,853 46,295 253,612 — Corporates 19,389 182,857 156,143 34,232 392,621 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 278,314 278,314 Certificate treasury bonds and savings treasury bonds — — — 3,462 3,462 Interests in trust products 248,794 — — — 248,794 Other debt instruments 60,876 — — — 60,876 Total 396,573 915,793 1,704,389 511,744 3,528,499
Annual Report 2014 319
— F-145 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (1) Debt instruments neither past due nor impaired (Continued) Bank (Continued) 31 December 2013 Financial assets at fair value Available- Debt through for-sale Held-to- instruments profit financial maturity classified as or loss assets investments receivables Total Debt securities issued by: — Governments 13,700 149,584 519,265 — 682,549 — Public sector and quasi- governments 50,056 409,322 808,838 66,485 1,334,701 — Financial institutions 11,495 47,423 27,012 27,124 113,054 — Corporates 24,449 166,494 163,482 30,973 385,398 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 362,054 362,054 Certificate treasury bonds and savings treasury bonds — — — 5,820 5,820 Interests in trust products 171,277 — — — 171,277 Other debt instruments 38,710 — — — 38,710 Total 309,687 772,823 1,518,597 585,756 3,186,863
320
— F-146 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (2) Impaired debt instruments Group 31 December 2014 Debt Held-to- instruments maturity classified as investments receivables Total Corporate bonds — 545 545 Others — 646 646 Allowance for impairment losses — (478) (478) Impaired held-to-maturity investments and debt instruments classified as receivables, net — 713 713
Bank 31 December 2014 Debt Held-to- instruments maturity classified as investments receivables Total Corporate bonds — 45 45 Others — 646 646 Allowance for impairment losses — (463) (463) Impaired held-to-maturity investments and debt instruments classified as receivables, net — 228 228
Group and Bank 31 December 2013 Debt Held-to- instruments maturity classified as investments receivables Total Corporate bonds — 45 45 Allowance for impairment losses — (44) (44) Impaired held-to-maturity investments and debt instruments classified as receivables, net — 1 1
Annual Report 2014 321
— F-147 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (2) Impaired debt instruments (Continued) The Group’s available-for-sale debt instruments were individually assessed for impairment. As at 31 December 2014, the carrying amount of the impaired available-for-sale debt instruments of the Group and the Bank was RMB1,017 million (31 December 2013: RMB3,388 million), among which the total impairment losses recognized for these impaired available-for-sale debt instruments by the Group and the Bank as at 31 December 2014 was RMB295 million (31 December 2013: RMB331 million).
(3) Debt instruments analyzed by credit rating The Group adopts a credit rating approach to manage the credit risk of the debt securities portfolio held. The ratings are obtained from major rating agencies where the issuers of the securities are located. The carrying amounts of debt securities investments analyzed by rating as at the end of the reporting period are as follows:
Group 31 December 2014 Unrated (i) AAA AA A Below A Total Debt securities issued by: — Governments 694,230 10,297 809 5,287 — 710,623 — Public sector and quasi-governments 1,372,558 110,807 3,044 3,783 — 1,490,192 — Financial institutions 170,221 48,639 15,686 13,636 6,958 255,140 — Corporates (ii) 51,096 289,920 11,875 42,033 4,701 399,625 Special government bond 93,300 ————93,300 Receivable from the MOF 278,314 — — — — 278,314 Certificate treasury bonds and savings treasury bonds 3,590 — — — — 3,590 Interests in trust products (iii) 248,794 ————248,794 Other debt instruments (iii) 71,079 ————71,079 Total 2,983,182 459,663 31,414 64,739 11,659 3,550,657
322
— F-148 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (3) Debt instruments analyzed by credit rating (Continued) Group (Continued) 31 December 2013 Unrated (i) AAA AA A Below A Total Debt securities issued by: — Governments 680,349 637 1,707 80 — 682,773 — Public sector and quasi-governments 1,251,211 79,857 3,057 443 — 1,334,568 — Financial institutions 24,284 49,902 31,531 9,340 5,074 120,131 — Corporates (ii) 23,452 230,604 118,313 11,935 5,287 389,591 Special government bond 93,300 ————93,300 Receivable from the MOF 362,054 — — — — 362,054 Certificate treasury bonds and savings treasury bonds 6,037 — — — — 6,037 Interests in trust products (iii) 171,280 ————171,280 Other debt instruments (iii) 45,124 ————45,124 Total 2,657,091 361,000 154,608 21,798 10,361 3,204,858
Bank 31 December 2014 Unrated (i) AAA AA A Below A Total Debt securities issued by: — Governments 694,230 10,297 638 5,287 — 710,452 — Public sector and quasi-governments 1,370,416 109,698 3,044 3,783 — 1,486,941 — Financial institutions 171,110 47,836 14,265 13,621 6,895 253,727 — Corporates (ii) 50,316 284,025 10,896 42,033 4,701 391,971 Special government bond 93,300 ————93,300 Receivable from the MOF 278,314 — — — — 278,314 Certificate treasury bonds and savings treasury bonds 3,462 — — — — 3,462 Interests in trust products (iii) 248,794 ————248,794 Other debt instruments (iii) 61,104 ————61,104 Total 2,971,046 451,856 28,843 64,724 11,596 3,528,065
Annual Report 2014 323
— F-149 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued) (3) Debt instruments analyzed by credit rating (Continued) Bank (Continued) 31 December 2013 Unrated (i) AAA AA A Below A Total Debt securities issued by: Governments 680,349 413 1,707 80 — 682,549 Public sector and quasi-governments 1,251,211 79,857 3,057 443 — 1,334,568 Financial institutions 22,813 49,105 29,908 9,321 5,029 116,176 Corporates (ii) 23,079 227,386 117,227 11,922 5,287 384,901 Special government bond 93,300 ————93,300 Receivable from the MOF 362,054 — — — — 362,054 Certificate treasury bonds and savings treasury bonds 5,820 — — — — 5,820 Interests in trust products (iii) 171,277 ————171,277 Other debt instruments (iii) 38,710 — — — — 38,710 Total 2,648,613 356,761 151,899 21,766 10,316 3,189,355
(i) Unrated debt investments held by the Group are bonds issued primarily by policy banks, the Chinese government and receivable from the MOF.
(ii) The ratings of super short-term commercial papers of the Group and the Bank amounted to RMB31,704 million (31 December 2013: RMB66,938 million), as included in corporate bonds above are based on issuer rating for this credit risk analysis.
(iii) The trust products and other debt instruments are classified within Level 3 of the fair value measurement hierarch and the related credit risk is described in Note IV 50 Fair Value of Financial Instruments.
324
— F-150 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk Liquidity risk is the risk that funds will not be available to meet liabilities as they fall due. This may arise from cash flows or maturity mismatches of assets and liabilities.
The Group’s Assets and Liabilities Management Department manages its liquidity risk through:
— Optimizing asset and liability structure;
— Maintaining stability of deposit base;
— Making projections of future cash flows, and evaluating the appropriate current asset position;
— Maintaining an efficient internal funds transfer mechanism within the Group; and
— Performing stress testing on a regular basis.
Annual Report 2014 325
— F-151 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities The tables below summarize the maturity analysis of financial assets and financial liabilities by remaining contractual maturities based on the carrying amount at the end of each reporting period.
Group 31 December 2014 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 161,215 27,272 — — — — 2,554,578 2,743,065 Deposits with banks and other financial institutions — 42,452 37,201 130,547 360,405 2,200 — — 572,805 Placements with and loans to banks and other financial institutions — — 193,149 38,487 136,584 38,842 — — 407,062 Financial assets held for trading — 21 4,628 8,816 23,580 16,446 4,934 — 58,425 Financial assets designated at fair value through profit or loss — — 32,860 63,158 173,300 67,672 17,773 1,472 356,235 Derivative financial assets — — 924 1,419 3,358 1,264 230 — 7,195 Financial assets held under resale agreements — — 355,523 106,487 47,408 — — — 509,418 Loans and advances to customers 29,656 — 426,767 742,945 2,326,006 1,673,235 2,541,387 — 7,739,996 Available-for-sale financial assets — — 14,821 42,862 175,149 492,102 197,083 5,886 927,903 Held-to-maturity investments — — 8,571 62,181 167,984 860,252 611,962 — 1,710,950 Debt instruments classified as receivables 1 88 — 2,388 25,085 88,789 405,766 — 522,117 Other financial assets 1,542 14,184 26,099 42,044 44,055 219 45 — 128,188 Total financial assets 31,199 217,960 1,127,815 1,241,334 3,482,914 3,241,021 3,779,180 2,561,936 15,683,359 Borrowings from central bank — (30) — (80,011) (80) — — — (80,121) Deposits from banks and other financial institutions — (284,412) (16,656) (52,011) (189,971) (288,091) — — (831,141) Placements from banks and other financial institutions — — (95,431) (72,370) (53,337) (2,667) (1,118) — (224,923) Financial liabilities held for trading — (10,085) (6,074) (6,789) (2,263) — — — (25,211) Financial liabilities designated at fair value through profit or loss — — (155,596) (85,497) (80,022) (26,131) (36) — (347,282) Derivative financial liabilities — — (1,846) (1,150) (2,867) (1,013) (364) — (7,240) Financial assets sold under repurchase agreements — — (113,805) (14,229) (2,987) — — — (131,021) Due to customers — (7,046,736) (604,561) (1,105,613) (2,363,672) (1,412,631) (184) — (12,533,397) Debt securities issued — — (21,203) (37,911) (85,934) (80,168) (99,951) — (325,167) Other financial liabilities — (96,209) (19,113) (54,347) (58,660) (73,596) (24,276) — (326,201) Total financial liabilities — (7,437,472) (1,034,285) (1,509,928) (2,839,793) (1,884,297) (125,929) — (14,831,704) Net position 31,199 (7,219,512) 93,530 (268,594) 643,121 1,356,724 3,653,251 2,561,936 851,655
326
— F-152 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities (Continued) Group (Continued) 31 December 2013 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 200,278 1,178————2,402,346 2,603,802 Deposits with banks and other financial institutions — 48,464 49,142 55,092 145,639 99,341 — — 397,678 Placements with and loans to banks and other financial institutions — — 162,547 19,083 87,668 39,357 — — 308,655 Financial assets held for trading — 2 4,554 3,805 24,003 17,702 3,750 48 53,864 Financial assets designated at fair value through profit or loss — — 56,835 61,947 93,573 55,611 31 1,021 269,018 Derivative financial assets — — 780 949 2,105 3,897 455 — 8,186 Financial assets held under resale agreements — — 439,889 119,212 177,951———737,052 Loans and advances to customers 17,843 — 408,485 710,851 2,165,795 1,474,567 2,124,981 — 6,902,522 Available-for-sale financial assets — — 16,579 29,761 114,846 437,173 180,585 2,367 781,311 Held-to-maturity investments — — 6,179 31,417 203,297 719,537 563,385 — 1,523,815 Debt instruments classified as receivables 1 113 10,635 1,775 44,367 55,104 480,095 — 592,090 Other financial assets 785 15,666 22,433 30,725 33,155 203 57 — 103,024 Total financial assets 18,629 264,523 1,179,236 1,064,617 3,092,399 2,902,492 3,353,339 2,405,782 14,281,017 Borrowings from central bank — (30) — — (74) — — — (104) Deposits from banks and other financial institutions — (252,802) (32,408) (13,820) (43,910) (386,414) — — (729,354) Placements from banks and other financial institutions — — (69,464) (65,740) (37,427) (1,732) — — (174,363) Financial liabilities held for trading — (9,598) (4,209) (2,525) (4,473) — — — (20,805) Financial liabilities designated at fair value through profit or loss — — (110,696) (94,884) (58,302) (21,538) (34) — (285,454) Derivative financial liabilities — — (912) (1,713) (2,291) (2,064) (655) — (7,635) Financial assets sold under repurchase agreements — — (22,225) (1,714) (2,489) (359) — — (26,787) Due to customers — (6,993,059) (566,840) (1,009,991) (2,159,729) (1,081,790) (2) — (11,811,411) Debt securities issued — — (3,261) (26,195) (94,704) (16,961) (125,140) — (266,261) Other financial liabilities — (98,269) (14,171) (42,008) (57,676) (58,631) (16,894) — (287,649) Total financial liabilities — (7,353,758) (824,186) (1,258,590) (2,461,075) (1,569,489) (142,725) — (13,609,823) Net position 18,629 (7,089,235) 355,050 (193,973) 631,324 1,333,003 3,210,614 2,405,782 671,194
Annual Report 2014 327
— F-153 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities (Continued) Bank 31 December 2014 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 161,134 27,272 ————2,554,391 2,742,797 Deposits with banks and other financial institutions — 41,363 34,714 129,869 356,846 — — — 562,792 Placements with and loans to banks and other financial institutions — — 197,856 38,332 138,022 38,615 — — 412,825 Financial assets held for trading — 21 4,628 8,816 23,580 16,446 4,934 — 58,425 Financial assets designated at fair value through profit or loss — — 32,860 64,158 173,300 67,672 17,773 — 355,763 Derivative financial assets — — 919 1,389 3,180 1,232 230 — 6,950 Financial assets held under resale agreements — — 355,517 106,487 47,408 — — — 509,412 Loans and advances to customers 28,187 — 424,910 739,782 2,314,910 1,655,179 2,537,380 — 7,700,348 Available-for-sale financial assets — — 14,821 42,862 174,930 491,112 193,085 571 917,381 Held-to-maturity investments — — 8,571 62,181 167,915 857,989 606,852 — 1,703,508 Debt instruments classified as receivables 1 88 — 2,388 24,974 85,717 398,006 — 511,174 Other financial assets 1,542 13,514 25,635 28,848 43,541 210 45 — 113,335 Total financial assets 29,730 216,120 1,127,703 1,225,112 3,468,606 3,214,172 3,758,305 2,554,962 15,594,710 Borrowings from central bank — (30) — (80,000) — — — — (80,030) Deposits from banks and other financial institutions — (286,636) (16,656) (52,011) (190,671) (288,791) — — (834,765) Placements from banks and other financial institutions — — (92,584) (65,191) (39,903) (125) — — (197,803) Financial liabilities held for trading — (10,085) (6,074) (6,789) (2,263) — — — (25,211) Financial liabilities designated at fair value through profit or loss — — (155,600) (85,497) (80,022) (26,131) (36) — (347,286) Derivative financial liabilities — — (1,843) (1,139) (2,740) (986) (364) — (7,072) Financial assets sold under repurchase agreements — — (110,891) (13,072) (2,987) — — — (126,950) Due to customers — (7,047,374) (604,087) (1,105,479) (2,362,977) (1,410,250) (2) — (12,530,169) Debt securities issued — — (21,203) (37,911) (85,934) (78,337) (99,951) — (323,336) Other financial liabilities — (90,529) (18,727) (40,274) (56,770) (73,386) (164) — (279,850) Total financial liabilities — (7,434,654) (1,027,665) (1,487,363) (2,824,267) (1,878,006) (100,517) — (14,752,472) Net position 29,730 (7,218,534) 100,038 (262,251) 644,339 1,336,166 3,657,788 2,554,962 842,238
328
— F-154 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities (Continued) Bank (Continued) 31 December 2013 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 200,245 1,178————2,402,202 2,603,625 Deposits with banks and other financial institutions — 47,016 48,318 55,092 145,611 93,901 — — 389,938 Placements with and loans to banks and other financial institutions — — 165,906 19,087 87,516 38,458 — — 310,967 Financial assets held for trading — 2 4,553 3,805 24,003 17,384 3,750 — 53,497 Financial assets designated at fair value through profit or loss — — 56,834 61,947 93,573 55,609 31 — 267,994 Derivative financial assets — — 770 949 2,105 3,897 455 — 8,176 Financial assets held under resale agreements — — 439,579 119,212 177,951 — — — 736,742 Loans and advances to customers 17,782 — 407,765 708,516 2,156,961 1,451,535 2,123,624 6,866,183 Available-for-sale financial assets — — 16,479 29,509 114,375 435,732 180,116 504 776,715 Held-to-maturity investments — — 6,179 31,417 203,297 717,817 559,288 — 1,517,998 Debt instruments classified as receivables 1 113 10,135 1,775 38,370 54,970 480,095 — 585,459 Other financial assets 785 15,181 21,532 21,355 32,705 203 56 — 91,817 Total financial assets 18,568 262,557 1,179,228 1,052,664 3,076,467 2,869,506 3,347,415 2,402,706 14,209,111 Borrowings from central bank — (30) — — — — — — (30) Deposits from banks and other financial institutions — (254,118) (32,408) (13,820) (44,130) (387,718) — — (732,194) Placements from banks and other financial institutions — — (67,231) (59,639) (19,054) — — — (145,924) Financial liabilities held for trading — (9,598) (4,209) (2,525) (4,473) — — — (20,805) Financial liabilities designated at fair value through profit or loss — — (110,696) (94,884) (58,302) (21,538) (34) — (285,454) Derivative financial liabilities — — (912) (1,711) (2,291) (2,064) (655) — (7,633) Financial assets sold under repurchase agreements — — (20,467) (1,714) (2,489) — — — (24,670) Due to customers — (6,992,996) (566,747) (1,009,957) (2,156,715) (1,081,746) (2) — (11,808,163) Debt securities issued — — (3,261) (26,195) (94,704) (16,961) (125,140) — (266,261) Other financial liabilities — (94,794) (13,211) (32,118) (56,293) (57,738) (58) — (254,212) Total financial liabilities — (7,351,536) (819,142) (1,242,563) (2,438,451) (1,567,765) (125,889) — (13,545,346) Net position 18,568 (7,088,979) 360,086 (189,899) 638,016 1,301,741 3,221,526 2,402,706 663,765
Annual Report 2014 329
— F-155 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows Assets available to meet obligations related to the Group’s liabilities and outstanding credit commitments primarily include cash and balances with central banks, deposits with banks and other financial institutions, placements with and loans to banks and other financial institutions, financial assets at fair value through profit or loss, and financial assets held under resale agreements. In the normal course of business, the majority of customer deposits repayable on demand or on maturity are expected to be retained. In addition, the Group is able to sell the available-for-sale financial assets to repay matured liabilities, if necessary.
330
— F-156 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued) The tables below present the undiscounted cash flows of non-derivative financial assets and financial liabilities by remaining contractual maturities at the end of each reporting period:
Group 31 December 2014 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 161,215 27,272 1,214———2,554,578 2,744,279 Deposits with banks and other financial institutions — 42,452 38,239 136,039 375,953 2,405 — — 595,088 Placements with and loans to banks and other financial institutions — — 193,395 41,169 143,735 39,889 — — 418,188 Financial assets held for trading — 21 4,969 9,157 25,016 18,631 5,382 — 63,176 Financial assets designated at fair value through profit or loss — — 33,893 65,871 183,564 79,102 21,326 1,472 385,228 Financial assets held under resale agreements — — 358,139 108,674 48,451 — — — 515,264 Loans and advances to customers 91,690 — 496,444 853,270 2,695,148 2,570,241 3,875,869 — 10,582,662 Available-for-sale financial assets — — 17,235 48,402 211,037 572,898 233,973 5,886 1,089,431 Held-to-maturity investments — — 13,085 75,141 217,912 1,058,738 765,378 — 2,130,254 Debt instruments classified as receivables 45 88 50 3,744 31,868 111,405 429,642 — 576,842 Other financial assets — 13,993 1,530 13,198 1,512 — 7 — 30,240 Total non-derivative financial assets 91,735 217,769 1,184,251 1,355,879 3,934,196 4,453,309 5,331,577 2,561,936 19,130,652 Non-derivative financial liabilities Borrowings from central bank — (30) — (80,711) (80) — — — (80,821) Deposits from banks and other financial institutions — (284,415) (17,993) (60,647) (197,047) (324,822) — — (884,924) Placements from banks and other financial institutions — — (96,160) (73,017) (54,152) (2,940) (1,251) — (227,520) Financial liabilities held for trading — (10,085) (6,100) (6,816) (2,279) — — — (25,280) Financial liabilities designated at fair value through profit or loss — — (157,088) (87,454) (83,150) (28,104) (44) — (355,840) Financial assets sold under repurchase agreements — — (114,138) (14,354) (2,997) — — — (131,489) Due to customers — (7,050,998) (620,383) (1,142,823) (2,461,528) (1,628,319) (184) — (12,904,235) Debt securities issued — — (21,271) (38,484) (95,599) (113,036) (115,305) — (383,695) Other financial liabilities — (91,631) (871) (14,125) (2,070) (352) (24,276) — (133,325) Total non-derivative financial liabilities — (7,437,159) (1,034,004) (1,518,431) (2,898,902) (2,097,573) (141,060) — (15,127,129) Net position 91,735 (7,219,390) 150,247 (162,552) 1,035,294 2,355,736 5,190,517 2,561,936 4,003,523
Annual Report 2014 331
— F-157 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued) Group (Continued) 31 December 2013 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 200,278 1,178 1,153 — — — 2,402,346 2,604,955 Deposits with banks and other financial institutions — 48,496 50,276 56,664 155,291 102,998 — — 413,725 Placements with and loans to banks and other financial institutions — — 164,128 20,528 91,973 41,194 — — 317,823 Financial assets held for trading — 2 4,730 3,927 25,471 19,989 4,208 48 58,375 Financial assets designated at fair value through profit or loss — — 57,269 63,174 97,889 59,294 53 1,021 278,700 Financial assets held under resale agreements — — 442,670 122,239 183,822 — — — 748,731 Loans and advances to customers 64,722 — 466,646 804,865 2,487,474 2,245,244 3,232,695 — 9,301,646 Available-for-sale financial assets — — 19,240 34,582 138,445 513,619 213,689 2,367 921,942 Held-to-maturity investments — — 8,564 42,404 248,001 878,663 685,041 — 1,862,673 Debt instruments classified as receivables 45 113 10,974 2,109 51,609 74,562 505,591 — 645,003 Other financial assets — 15,331 1,944 9,371 1,348 — 8 — 28,002 Total non-derivative financial assets 64,767 264,220 1,227,619 1,161,016 3,481,323 3,935,563 4,641,285 2,405,782 17,181,575 Non-derivative financial liabilities Borrowings from central bank — (30) — — (74) — — — (104) Deposits from banks and other financial institutions — (252,893) (33,610) (20,668) (50,639) (433,243) — — (791,053) Placements from banks and other financial institutions — — (69,890) (66,373) (38,244) (1,770) — — (176,277) Financial liabilities held for trading — (9,598) (4,226) (2,540) (4,503) — — — (20,867) Financial liabilities designated at fair value through profit or loss — — (111,814) (96,388) (60,587) (22,723) (45) — (291,557) Financial assets sold under repurchase agreements — — (22,237) (1,736) (2,498) (439) — — (26,910) Due to customers — (6,996,955) (578,178) (1,040,462) (2,256,545) (1,246,341) (2) — (12,118,483) Debt securities issued — — (3,304) (26,700) (102,947) (42,022) (144,077) — (319,050) Other financial liabilities — (94,256) (1,052) (9,784) (1,411) (925) (16,893) — (124,321) Total non-derivative financial liabilities — (7,353,732) (824,311) (1,264,651) (2,517,448) (1,747,463) (161,017) — (13,868,622) Net position 64,767 (7,089,512) 403,308 (103,635) 963,875 2,188,100 4,480,268 2,405,782 3,312,953
332
— F-158 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued) Bank 31 December 2014 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 161,134 27,272 1,214———2,554,391 2,744,011 Deposits with banks and other financial institutions — 41,364 35,751 135,286 372,139 — — — 584,540 Placements with and loans to banks and other financial institutions — — 198,113 41,038 145,233 39,677 — — 424,061 Financial assets held for trading — 21 4,969 9,157 25,016 18,631 5,382 — 63,176 Financial assets designated at fair value through profit or loss — — 33,893 66,888 183,564 79,102 21,326 — 384,773 Financial assets held under resale agreements — — 358,133 108,674 48,451 — — — 515,258 Loans and advances to customers 89,563 — 494,360 849,622 2,682,514 2,549,344 3,871,153 — 10,536,556 Available-for-sale financial assets — — 17,220 48,387 210,569 570,892 228,322 571 1,075,961 Held-to-maturity investments — — 13,059 75,102 217,516 1,055,040 758,929 — 2,119,646 Debt instruments classified as receivables 45 88 50 3,744 31,757 108,351 421,882 — 565,917 Other financial assets — 13,340 1,060 7 1,510 — 7 — 15,924 Total non-derivative financial assets 89,608 215,947 1,183,880 1,339,119 3,918,269 4,421,037 5,307,001 2,554,962 19,029,823 Non-derivative financial liabilities Borrowings from central bank — (30) — (80,700) — — — — (80,730) Deposits from banks and other financial institutions — (286,639) (17,993) (60,661) (197,786) (325,596) — — (888,675) Placements from banks and other financial institutions — — (93,274) (65,547) (40,311) (130) — — (199,262) Financial liabilities held for trading — (10,085) (6,100) (6,816) (2,279) — — — (25,280) Financial liabilities designated at fair value through profit or loss — — (157,092) (87,454) (83,150) (28,104) (44) — (355,844) Financial assets sold under repurchase agreements — — (111,212) (13,183) (2,997) — — — (127,392) Due to customers — (7,051,636) (619,909) (1,142,689) (2,460,833) (1,625,937) (2) — (12,901,006) Debt securities issued — — (21,271) (38,484) (95,595) (111,192) (115,305) — (381,847) Other financial liabilities — (86,148) (481) (45) (185) (139) (164) — (87,162) Total non-derivative financial liabilities — (7,434,538) (1,027,332) (1,495,579) (2,883,136) (2,091,098) (115,515) — (15,047,198) Net position 89,608 (7,218,591) 156,548 (156,460) 1,035,133 2,329,939 5,191,486 2,554,962 3,982,625
Annual Report 2014 333
— F-159 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued) Bank (Continued) 31 December 2013 Less than 1–3 3–12 1–5 Over Past due On demand 1 month months months years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 200,245 1,178 1,153 — — — 2,402,202 2,604,778 Deposits with banks and other financial institutions — 47,042 49,451 56,627 155,038 97,083 — — 405,241 Placements with and loans to banks and other financial institutions — — 167,541 20,530 91,814 40,277 — — 320,162 Financial assets held for trading — 2 4,730 3,927 25,471 19,664 4,208 — 58,002 Financial assets designated at fair value through profit or loss — — 57,269 63,174 97,889 59,291 53 — 277,676 Financial assets held under resale agreements — — 442,360 122,239 183,822 — — — 748,421 Loans and advances to customers 64,627 — 465,783 802,052 2,476,937 2,218,946 3,231,188 — 9,259,533 Available-for-sale financial assets — — 19,137 34,327 137,947 512,140 213,208 504 917,263 Held-to-maturity investments — — 8,564 42,404 248,001 876,899 680,844 — 1,856,712 Debt instruments classified as receivables 45 113 10,471 2,109 45,464 74,425 505,591 — 638,218 Other financial assets — 14,882 1,039 7 1,274 — 8 — 17,210 Total non-derivative financial assets 64,672 262,284 1,227,523 1,148,549 3,463,657 3,898,725 4,635,100 2,402,706 17,103,216 Non-derivative financial liabilities Borrowings from central bank — (30) — — — — — — (30) Deposits from banks and other financial institutions — (254,209) (33,610) (20,684) (50,912) (434,678) — — (794,093) Placements from banks and other financial institutions — — (67,582) (60,038) (19,322) — — — (146,942) Financial liabilities held for trading — (9,598) (4,226) (2,540) (4,503) — — — (20,867) Financial liabilities designated at fair value through profit or loss — — (111,814) (96,388) (60,587) (22,723) (45) — (291,557) Financial assets sold under repurchase agreements — — (20,475) (1,736) (2,498) — — — (24,709) Due to customers — (6,996,892) (578,085) (1,040,428) (2,253,530) (1,246,297) (2) — (12,115,234) Debt securities issued — — (3,304) (26,700) (102,947) (42,022) (144,077) — (319,050) Other financial liabilities — (90,785) (107) — (9) (33) (57) — (90,991) Total non-derivative financial liabilities — (7,351,514) (819,203) (1,248,514) (2,494,308) (1,745,753) (144,181) — (13,803,473) Net position 64,672 (7,089,230) 408,320 (99,965) 969,349 2,152,972 4,490,919 2,402,706 3,299,743
334
— F-160 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Derivative cash flows
Derivatives settled on a net basis The fair values of the Group’s derivatives that will be settled on a net basis are primarily interest rates products. The tables below present the undiscounted contractual cash flows of the Group’s net derivative positions based on their remaining contractual maturities:
Group and Bank 31 December 2014 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Interest rate derivatives (3) 18 14 (59) (102) (132)
31 December 2013 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Interest rate derivatives 1 (13) (251) (118) 66 (315)
Derivatives settled on a gross basis The fair values of the Group’s derivatives that will be settled on a gross basis are primarily foreign exchange rates and precious metal products. The tables below present the undiscounted contractual cash flows of the Group’s gross derivative positions based on their remaining contractual maturities:
Group 31 December 2014 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Derivatives settled on a gross basis — Cash inflow 270,824 174,010 400,347 62,974 2,050 910,205 — Cash outflow (271,642) (173,741) (399,764) (62,679) (2,050) (909,876) Total (818) 269 583 295 — 329
Annual Report 2014 335
— F-161 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Derivative cash flows (Continued)
Derivatives settled on a gross basis (Continued) Group (Continued) 31 December 2013 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Derivatives settled on a gross basis — Cash inflow 194,523 138,784 262,107 55,253 1,998 652,665 — Cash outflow (194,832) (139,651) (259,969) (55,220) (1,998) (651,670) Total (309) (867) 2,138 33 — 995
Bank 31 December 2014 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Derivatives settled on a gross basis — Cash inflow 268,528 172,069 394,116 58,860 2,050 895,623 — Cash outflow (269,348) (171,819) (393,564) (58,570) (2,050) (895,351) Total (820) 250 552 290 — 272
31 December 2013 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Derivatives settled on a gross basis — Cash inflow 194,305 137,385 256,212 54,638 1,998 644,538 — Cash outflow (194,609) (138,253) (253,998) (54,606) (1,998) (643,464) Total (304) (868) 2,214 32 — 1,074
336
— F-162 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.2 Liquidity risk (Continued)
Credit Commitments The tables below summarize the amounts of credit commitments by remaining maturity.
Group 31 December 2014 Less than 1–5 Over 1 year years 5 years Total Loan commitments 57,799 135,864 247,395 441,058 Bank acceptance 418,937 — — 418,937 Credit card commitments 254,222 — — 254,222 Guarantee and letters of guarantee 102,668 104,440 34,063 241,171 Letters of credit 219,359 7,978 — 227,337 Total 1,052,985 248,282 281,458 1,582,725
Bank 31 December 2014 Less than 1–5 Over 1 year years 5 years Total Loan commitments 57,799 135,864 247,395 441,058 Bank acceptance 418,937 — — 418,937 Credit card commitments 254,222 — — 254,222 Guarantee and letters of guarantee 102,669 106,275 34,063 243,007 Letters of credit 219,359 7,978 — 227,337 Total 1,052,986 250,117 281,458 1,584,561
Group and Bank 31 December 2013 Less than 1–5 Over 1 year years 5 years Total Loan commitments 65,822 143,778 260,669 470,269 Bank acceptance 404,852 — — 404,852 Credit card commitments 219,682 — — 219,682 Guarantee and letters of guarantee 77,638 72,772 40,663 191,073 Letters of credit 192,953 2,680 436 196,069 Total 960,947 219,230 301,768 1,481,945
Annual Report 2014 337
— F-163 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk Market risk represents the potential loss arising from changes in market rates of interest and foreign exchange, as well as commodity and equity prices. Market risk arises from both the Group’s proprietary positions and customer driven transactions, in both cases related to on- and off-balance sheet activities.
The Group is primarily exposed to interest rate risk through its lending, fixed-income and funding activities. Interest rate risk is inherent in many of the Group’s businesses and this situation is common among large banks. It fundamentally arises through mismatches between the maturity and re-pricing dates of interest-earning assets and interest-bearing liabilities. As discussed further below, interest rate risk is actively managed.
Foreign exchange rate risk is the potential loss related to changes in foreign exchange rates affecting the translation of foreign currency denominated monetary assets and liabilities. The risk of loss results from movements in foreign currency exchange rates.
The Group is also exposed to commodity risk, primarily related to gold and other precious metals. The risk of loss results from movements in commodity price. The Group manages the risk related to gold price together with foreign exchange rate risk.
The Group has determined that the levels of market risk related to changes in equity prices and commodity prices other than gold, with respect to the related exposures in its trading and investment portfolios, are immaterial.
Segregation of Trading Book and Banking Book To enhance the effectiveness of market risk management, as well as the accuracy of determining the levels of regulatory capital required related to market risk, the Group segregates all financial instruments and commodities, both on- and off-balance sheet, into either the trading book or banking book. The trading book is comprised of financial instruments and commodity positions held for trading, including all derivatives instruments. Any other financial instruments are included in the banking book.
Market Risk Management for Trading Book The Group manages market risk in the trading book through methodologies that include Value at Risk (VaR), monitoring and management of established limits, sensitivity analysis, duration analysis, exposure analysis and stress testing.
338
— F-164 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Market Risk Management for Trading Book (Continued) The Group has formulated policies, which are subject to review annually or as circumstances otherwise dictate, to manage market risk. Further, in this regard, the Group’s market risk management is focused on movements in domestic and global financial markets, as well as the composition of the trading book and management’s trading strategies, within approved limits. Moreover, the Group has implemented more specific policies for financial instruments, closely monitoring the exposure to specific issuers and counterparties, as well as the tenor of individual positions and trading strategies. The foundation of the Group’s limit and risk monitoring system is based on VaR, which is used consistently to monitor all classes of financial instruments in the trading book.
The Bank has adopted an historical simulation method, with a confidence level of 99% based on holding period of 1 day and historical data for 250 days to calculate the VaR of the trading books, which includes the Head Office, domestic branches and overseas branches. Based on the differences between domestic and overseas markets, the Bank selected applicable parameters for model and risk factors in order to reflect the actual market risk levels. The Bank verified the accuracy and reliability of market risk measurements through data analysis, parallel modeling and back-testing of the market risk measurements.
VaR Analysis for the Trading Book Bank 2014 At the end of the year Average Maximum Minimum Interest rate risk 73 69 98 50 Exchange rate risk (1) 32 92 247 31 Commodity risk 36 21 36 2 Overall VaR 88 135 289 57
2013 At the end of the year Average Maximum Minimum Interest rate risk 81 46 91 17 Exchange rate risk (1) 161 80 161 12 Commodity risk 31 17 51 2 Overall VaR 211 113 211 36
Annual Report 2014 339
— F-165 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
VaR Analysis for the Trading Book (Continued) The Bank calculates VaR for its trading book (excluding RMB foreign currency settlement contracts with customers under relevant regulations). The Bank conducts stress testing for its trading book quarterly. The specific areas subject to this testing include the major areas of exposure, such as bonds, interest rate derivatives, foreign exchange derivatives and gold. The stress testing uses a range of scenarios, to assess the potential impact on profit and loss.
(1) VaR related to gold is recognized as a component of foreign exchange rate risk.
Market Risk Management for Banking Book The Group manages market risk related to the banking book by consistently applying techniques across the Group that include exposure limit management, stress testing, scenario analysis and gap analysis.
Interest Rate Risk Management The interest rate risk existing in the banking book broadly relates to the mismatch of the maturity or re-pricing dates of interest rate-sensitive financial assets and financial liabilities, as well as inconsistencies in the change of the benchmark interest rates on which most domestic interest rate-sensitive financial assets and financial liabilities are based.
The Group closely monitors changes in the macro-economic environment and the monetary policies of the PBOC, enabling it to timely and flexibly adjusts its pricing strategy. The Group establishes comprehensive interest rate risk management policies and protocols and has improved the consistency of interest rate risk measurement, monitoring, analysis and management of interest rate risk across the Group.
The Group regularly measures and analyzes the Group’s interest rate risk by conducting gap analysis, sensitivity analysis, scenario analysis and stress testing to manage interest rate risk within established limits.
Foreign Exchange Rate Risk Management Foreign exchange rate risk relates to the mismatch of foreign currency denominated monetary assets and liabilities, and the potential loss related to changes in foreign exchange rates, which largely arises through operational activities.
The Group performs monitoring and sensitivity analysis of foreign exchange rate risk exposure, manages the mismatch of foreign currency denominated assets and liabilities to effectively manage foreign exchange rate risk exposure within acceptable limits.
340
— F-166 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Market Risk Exposure Limit Management Market risk exposure limits are classified as either directive limits or indicative limits, based on the character of the underlying instruments or transactions, including exposure limit monitoring, enforcement of stop-loss limit, VaR limits, and stress testing limits.
The Group is committed to continuous improvement of its market risk exposure limit management. The Group establishes exposure limits reflecting its risk appetite and continuously refines the categorization of market risk exposure limits. Further, it regularly monitors, reports, refines, and implements improvements to the market risk exposure limit process.
Foreign exchange rate risk The Group primarily conducts its business activities in RMB, with certain transactions denominated in USD, HKD and, to a lesser extent, other currencies. Transactions in foreign currencies mainly arise from the Group’s foreign currency operations and treasury exposures.
Annual Report 2014 341
— F-167 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Foreign exchange rate risk (Continued) The composition of all financial assets and liabilities at the end of each reporting period analyzed by currency is as follows:
Group 31 December 2014 Other USD HKD currencies (RMB (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,702,760 38,745 892 668 2,743,065 Deposits with banks and other financial institutions 532,320 27,498 6,780 6,207 572,805 Placements with and loans to banks and other financial institutions 346,830 59,933 — 299 407,062 Financial assets held for trading 58,425 — — — 58,425 Financial assets designated at fair value through profit or loss 343,566 2,208 10,461 — 356,235 Derivative financial assets 2,810 4,203 21 161 7,195 Financial assets held under resale agreements 509,418 — — — 509,418 Loans and advances to customers 7,335,891 349,456 40,546 14,103 7,739,996 Available-for-sale financial assets 878,428 43,910 1,247 4,318 927,903 Held-to-maturity investments 1,701,059 9,428 — 463 1,710,950 Debt instruments classified as receivables 522,054 62 — 1 522,117 Other financial assets 120,380 5,373 1,464 971 128,188 Total financial assets 15,053,941 540,816 61,411 27,191 15,683,359 Borrowings from central bank (80,121) — — — (80,121) Deposits from banks and other financial institutions (694,023) (135,707) (703) (708) (831,141) Placements from banks and other financial institutions (57,575) (118,923) (36,431) (11,994) (224,923) Financial liabilities held for trading (25,211) — — — (25,211) Financial liabilities designated at fair value through profit or loss (347,012) (179) — (91) (347,282) Derivative financial liabilities (2,924) (2,278) (45) (1,993) (7,240) Financial assets sold under repurchase agreements (122,632) (8,389) — — (131,021) Due to customers (12,296,462) (194,887) (26,645) (15,403) (12,533,397) Debt securities issued (205,846) (96,943) (15,720) (6,658) (325,167) Other financial liabilities (312,235) (9,392) (2,660) (1,914) (326,201) Total financial liabilities (14,144,041) (566,698) (82,204) (38,761) (14,831,704) Net on-balance sheet position 909,900 (25,882) (20,793) (11,570) 851,655 Net notional amount of derivatives (103,658) 60,135 25,844 16,029 (1,650) Credit commitments 1,412,973 153,012 7,566 9,174 1,582,725
342
— F-168 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Foreign exchange rate risk (Continued) Group (Continued) 31 December 2013 Other USD HKD currencies (RMB (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,591,348 10,141 1,705 608 2,603,802 Deposits with banks and other financial institutions 354,025 29,913 9,279 4,461 397,678 Placements with and loans to banks and other financial institutions 286,869 20,828 472 486 308,655 Financial assets held for trading 53,864 — — — 53,864 Financial assets designated at fair value through profit or loss 256,157 7,474 5,387 — 269,018 Derivative financial assets 2,695 4,362 487 642 8,186 Financial assets held under resale agreements 737,052 — — — 737,052 Loans and advances to customers 6,520,161 332,795 33,709 15,857 6,902,522 Available-for-sale financial assets 727,690 47,290 2,605 3,726 781,311 Held-to-maturity investments 1,521,466 1,990 157 202 1,523,815 Debt instruments classified as receivables 592,089 — — 1 592,090 Other financial assets 92,736 8,683 946 659 103,024 Total financial assets 13,736,152 463,476 54,747 26,642 14,281,017 Borrowings from central bank (104) — — — (104) Deposits from banks and other financial institutions (591,172) (136,898) (1,087) (197) (729,354) Placements from banks and other financial institutions (69,272) (76,661) (19,225) (9,205) (174,363) Financial liabilities held for trading (20,805) — — — (20,805) Financial liabilities designated at fair value through profit or loss (285,172) (152) (24) (106) (285,454) Derivative financial liabilities (1,814) (4,166) (1,505) (150) (7,635) Financial assets sold under repurchase agreements (23,653) (3,134) — — (26,787) Due to customers (11,604,979) (158,648) (34,279) (13,505) (11,811,411) Debt securities issued (202,197) (44,444) (18,870) (750) (266,261) Other financial liabilities (277,167) (8,358) (1,984) (140) (287,649) Total financial liabilities (13,076,335) (432,461) (76,974) (24,053) (13,609,823) Net on-balance sheet position 659,817 31,015 (22,227) 2,589 671,194 Net notional amount of derivatives (28,817) 232 26,246 3,295 956 Credit commitments 1,288,368 167,463 6,811 19,303 1,481,945
Annual Report 2014 343
— F-169 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Foreign exchange rate risk (Continued) Bank 31 December 2014 Other USD HKD currencies (RMB (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,702,492 38,745 892 668 2,742,797 Deposits with banks and other financial institutions 523,904 26,251 6,430 6,207 562,792 Placements with and loans to banks and other financial institutions 350,438 61,864 — 523 412,825 Financial assets held for trading 58,425 — — — 58,425 Financial assets designated at fair value through profit or loss 343,133 2,172 10,458 — 355,763 Derivative financial assets 2,706 4,074 21 149 6,950 Financial assets held under resale agreements 509,412 — — — 509,412 Loans and advances to customers 7,304,743 344,250 40,546 10,809 7,700,348 Available-for-sale financial assets 868,651 43,244 1,168 4,318 917,381 Held-to-maturity investments 1,693,617 9,428 — 463 1,703,508 Debt instruments classified as receivables 511,173 — — 1 511,174 Other financial assets 106,687 5,328 374 946 113,335 Total financial assets 14,975,381 535,356 59,889 24,084 15,594,710 Borrowings from central bank (80,030) — — — (80,030) Deposits from banks and other financial institutions (697,647) (135,707) (703) (708) (834,765) Placements from banks and other financial institutions (37,235) (113,765) (35,681) (11,122) (197,803) Financial liabilities held for trading (25,211) — — — (25,211) Financial liabilities designated at fair value through profit or loss (347,016) (179) — (91) (347,286) Derivative financial liabilities (2,800) (2,276) (45) (1,951) (7,072) Financial assets sold under repurchase agreements (118,561) (8,389) — — (126,950) Due to customers (12,292,883) (195,092) (26,936) (15,258) (12,530,169) Debt securities issued (205,846) (95,112) (15,720) (6,658) (323,336) Other financial liabilities (268,495) (8,299) (1,148) (1,908) (279,850) Total financial liabilities (14,075,724) (558,819) (80,233) (37,696) (14,752,472) Net on-balance sheet position 899,657 (23,463) (20,344) (13,612) 842,238 Net notional amount of derivatives (102,597) 58,317 25,844 16,758 (1,678) Credit commitments 1,412,973 154,848 7,566 9,174 1,584,561
344
— F-170 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Foreign exchange rate risk (Continued) Bank (Continued) 31 December 2013 Other USD HKD currencies (RMB (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,591,171 10,141 1,705 608 2,603,625 Deposits with banks and other financial institutions 347,122 29,824 8,601 4,391 389,938 Placements with and loans to banks and other financial institutions 287,174 22,282 472 1,039 310,967 Financial assets held for trading 53,497 — — — 53,497 Financial assets designated at fair value through profit or loss 255,562 7,045 5,387 — 267,994 Derivative financial assets 2,695 4,352 487 642 8,176 Financial assets held under resale agreements 736,742 — — — 736,742 Loans and advances to customers 6,487,640 330,006 33,559 14,978 6,866,183 Available-for-sale financial assets 723,604 46,780 2,605 3,726 776,715 Held-to-maturity investments 1,515,649 1,990 157 202 1,517,998 Debt instruments classified as receivables 585,458 — — 1 585,459 Other financial assets 82,288 8,656 214 659 91,817 Total financial assets 13,668,602 461,076 53,187 26,246 14,209,111 Borrowings from central bank (30) — — — (30) Deposits from banks and other financial institutions (593,959) (136,898) (1,140) (197) (732,194) Placements from banks and other financial institutions (43,205) (75,112) (19,068) (8,539) (145,924) Financial liabilities held for trading (20,805) — — — (20,805) Financial liabilities designated at fair value through profit or loss (285,172) (152) (24) (106) (285,454) Derivative financial liabilities (1,814) (4,164) (1,505) (150) (7,633) Financial assets sold under repurchase agreements (21,536) (3,134) — — (24,670) Due to customers (11,601,828) (158,622) (34,279) (13,434) (11,808,163) Debt securities issued (202,197) (44,444) (18,870) (750) (266,261) Other financial liabilities (245,279) (7,881) (913) (139) (254,212) Total financial liabilities (13,015,825) (430,407) (75,799) (23,315) (13,545,346) Net on-balance sheet position 652,777 30,669 (22,612) 2,931 663,765 Net notional amount of derivatives (28,761) 233 26,266 3,295 1,033 Credit commitments 1,288,368 167,463 6,811 19,303 1,481,945
Annual Report 2014 345
— F-171 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Foreign exchange rate risk (Continued) The table below indicates the potential effect on profit before tax and other comprehensive income arising from a 1% appreciation or depreciation of RMB spot and forward foreign exchange rates against a basket of all other currencies on the net positions of foreign currency monetary assets and liabilities of Domestic Operations in the consolidated statement of financial position. Foreign currency position of the Group’s Overseas Operations is not included in this assessment.
Group 31 December 2014 31 December 2013 Other Other Profit comprehensive Profit comprehensive before tax income before tax income 1% appreciation 123 (3) 202 (1) 1% depreciation (123) 3 (202) 1
Bank 31 December 2014 31 December 2013 Other Other Profit comprehensive Profit comprehensive before tax income before tax income 1% appreciation 89 (3) 197 (1) 1% depreciation (89) 3 (197) 1
The effect on profit before tax and other comprehensive income is calculated based on the assumption that the Group’s foreign currency sensitive exposures and foreign currency derivative instruments net position at the end of each reporting period remain unchanged. The Group mitigates its foreign exchange rate risk through active management of its foreign currency exposures and the appropriate use of derivative instruments, based on management expectation of future foreign currency exchange rate movements. Such analysis does not take into account the correlation effect of changes in different foreign currencies, nor any further actions that could be taken by management to mitigate the effect of foreign exchange differences. Therefore, the sensitivity analysis above may differ from actual results occurring through changes in foreign exchange rates.
346
— F-172 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk The Group’s interest rate risk arises from the mismatches between contractual maturities or re- pricing dates of interest-generating assets and interest-bearing liabilities. The Group’s interest- generating assets and interest-bearing liabilities are primarily denominated in RMB. The PBOC established RMB benchmark interest rates for loans with a floor and such policy was eliminated with effect 20 July 2013 whereby financial institutions are in a position to price their loans based on commercial and market factors. The PBOC continues to establish RMB benchmark interest rates for deposit with a cap.
The Group manages its interest rate risk by:
— Regularly monitoring the macro-economic factors that potentially impact the PBOC benchmark interest rates;
— Optimizing the management over the differences in timing between contractual maturities or re-pricing dates of interest-generating assets and interest-bearing liabilities; and
— Enhancing the interest rate margin on interest-generating assets and interest-bearing liabilities, with reference to the prevailing PBOC benchmark interest rates where appropriate.
Annual Report 2014 347
— F-173 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) The tables below summarize the contractual maturity or re-pricing date, whichever is earlier, of the Group’s financial assets and liabilities at the end of each reporting period.
Group 31 December 2014 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,475,672 — — — — 267,393 2,743,065 Deposits with banks and other financial institutions 106,337 115,347 347,054 2,200 — 1,867 572,805 Placements with and loans to banks and other financial institutions 194,417 38,624 136,089 37,932 — — 407,062 Financial assets held for trading 5,791 10,549 23,439 13,691 4,934 21 58,425 Financial assets designated at fair value through profit or loss 41,513 79,998 164,045 51,442 17,765 1,472 356,235 Derivative financial assets — — — — — 7,195 7,195 Financial assets held under resale agreements 355,523 106,487 47,408 — — — 509,418 Loans and advances to customers 2,646,120 1,412,923 3,364,374 133,099 183,480 — 7,739,996 Available-for-sale financial assets 42,447 85,587 203,966 411,264 178,753 5,886 927,903 Held-to-maturity investments 11,192 81,195 192,417 823,752 602,394 — 1,710,950 Debt instruments classified as receivables 1 2,388 35,064 78,810 405,766 88 522,117 Other financial assets — ————128,188 128,188 Total financial assets 5,879,013 1,933,098 4,513,856 1,552,190 1,393,092 412,110 15,683,359 Borrowings from central bank — (80,011) (80) — — (30) (80,121) Deposits from banks and other financial institutions (309,021) (50,908) (187,588) (283,479) — (145) (831,141) Placements from banks and other financial institutions (96,461) (73,279) (53,152) (2,031) — — (224,923) Financial liabilities held for trading (6,074) (6,789) (2,263) — — (10,085) (25,211) Financial liabilities designated at fair value through profit or loss (155,596) (85,497) (80,022) (26,131) (36) — (347,282) Derivative financial liabilities — — — — — (7,240) (7,240) Financial assets sold under repurchase agreements (113,805) (14,229) (2,987) — — — (131,021) Due to customers (7,477,195) (1,105,613) (2,363,672) (1,412,631) (184) (174,102) (12,533,397) Debt securities issued (25,646) (44,772) (76,427) (23,409) (154,913) — (325,167) Other financial liabilities — ————(326,201) (326,201) Total financial liabilities (8,183,798) (1,461,098) (2,766,191) (1,747,681) (155,133) (517,803) (14,831,704) Interest rate gap (2,304,785) 472,000 1,747,665 (195,491) 1,237,959 (105,693) 851,655
348
— F-174 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) Group (Continued) 31 December 2013 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,372,965 ————230,837 2,603,802 Deposits with banks and other financial institutions 116,138 50,929 129,431 98,968 — 2,212 397,678 Placements with and loans to banks and other financial institutions 162,657 21,862 86,453 37,683 — — 308,655 Financial assets held for trading 6,289 5,759 23,673 14,370 3,723 50 53,864 Financial assets designated at fair value through profit or loss 71,322 77,635 90,059 28,950 31 1,021 269,018 Derivative financial assets — — — — — 8,186 8,186 Financial assets held under resale agreements 439,889 119,212 177,951 — — — 737,052 Loans and advances to customers 2,397,715 1,355,109 2,909,162 100,804 139,732 — 6,902,522 Available-for-sale financial assets 52,362 72,720 141,801 351,271 160,790 2,367 781,311 Held-to-maturity investments 11,522 67,157 234,029 669,875 541,232 — 1,523,815 Debt instruments classified as receivables 10,635 1,775 54,372 45,099 480,095 114 592,090 Other financial assets — ————103,024 103,024 Total financial assets 5,641,494 1,772,158 3,846,931 1,347,020 1,325,603 347,811 14,281,017 Borrowings from central bank — — (74) — — (30) (104) Deposits from banks and other financial institutions (296,210) (13,109) (43,112) (376,853) — (70) (729,354) Placements from banks and other financial institutions (69,464) (65,740) (37,427) (1,732) — — (174,363) Financial liabilities held for trading (4,209) (2,525) (4,473) — — (9,598) (20,805) Financial liabilities designated at fair value through profit or loss (110,696) (94,884) (58,302) (21,538) (34) — (285,454) Derivative financial liabilities — — — — — (7,635) (7,635) Financial assets sold under repurchase agreements (22,225) (1,714) (2,489) (359) — — (26,787) Due to customers (7,415,705) (1,009,991) (2,159,729) (1,081,790) (2) (144,194) (11,811,411) Debt securities issued (14,846) (35,979) (81,761) (8,534) (125,141) — (266,261) Other financial liabilities — — — — — (287,649) (287,649) Total financial liabilities (7,933,355) (1,223,942) (2,387,367) (1,490,806) (125,177) (449,176) (13,609,823) Interest rate gap (2,291,861) 548,216 1,459,564 (143,786) 1,200,426 (101,365) 671,194
Annual Report 2014 349
— F-175 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) Bank 31 December 2014 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,475,451 — — — — 267,346 2,742,797 Deposits with banks and other financial institutions 102,516 114,669 343,895 — — 1,712 562,792 Placements with and loans to banks and other financial institutions 198,716 38,150 137,527 38,432 — — 412,825 Financial assets held for trading 5,791 10,549 23,439 13,691 4,934 21 58,425 Financial assets designated at fair value through profit or loss 41,513 80,998 164,045 51,442 17,765 — 355,763 Derivative financial assets — ————6,950 6,950 Financial assets held under resale agreements 355,517 106,487 47,408 — — — 509,412 Loans and advances to customers 2,644,664 1,407,939 3,353,263 115,015 179,467 — 7,700,348 Available-for-sale financial assets 42,410 85,561 203,194 410,529 175,116 571 917,381 Held-to-maturity investments 11,192 80,961 189,992 821,853 599,510 — 1,703,508 Debt instruments classified as receivables 1 2,388 34,953 75,739 398,005 88 511,174 Other financial assets —————113,335 113,335 Total financial assets 5,877,771 1,927,702 4,497,716 1,526,701 1,374,797 390,023 15,594,710 Borrowings from central bank — (80,000) — — — (30) (80,030) Deposits from banks and other financial institutions (311,397) (50,908) (188,164) (284,151) — (145) (834,765) Placements from banks and other financial institutions (92,584) (65,191) (39,903) (125) — — (197,803) Financial liabilities held for trading (6,074) (6,789) (2,263) — — (10,085) (25,211) Financial liabilities designated at fair value through profit or loss (155,600) (85,497) (80,022) (26,131) (36) — (347,286) Derivative financial liabilities — — — — — (7,072) (7,072) Financial assets sold under repurchase agreements (110,891) (13,072) (2,987) — — — (126,950) Due to customers (7,477,359) (1,105,479) (2,362,977) (1,410,250) (2) (174,102) (12,530,169) Debt securities issued (25,646) (44,772) (76,427) (21,578) (154,913) — (323,336) Other financial liabilities — — — — — (279,850) (279,850) Total financial liabilities (8,179,551) (1,451,708) (2,752,743) (1,742,235) (154,951) (471,284) (14,752,472) Interest rate gap (2,301,780) 475,994 1,744,973 (215,534) 1,219,846 (81,261) 842,238
350
— F-176 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) Bank (Continued) 31 December 2013 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,372,810 ————230,815 2,603,625 Deposits with banks and other financial institutions 114,808 50,729 129,431 93,501 — 1,469 389,938 Placements with and loans to banks and other financial institutions 166,016 21,150 86,301 37,500 — — 310,967 Financial assets held for trading 6,289 5,503 23,610 14,370 3,723 2 53,497 Financial assets designated at fair value through profit or loss 71,322 77,635 90,059 28,947 31 — 267,994 Derivative financial assets — — — — — 8,176 8,176 Financial assets held under resale agreements 439,579 119,212 177,951 — — — 736,742 Loans and advances to customers 2,397,012 1,352,794 2,900,373 77,635 138,369 — 6,866,183 Available-for-sale financial assets 52,262 72,344 139,669 351,146 160,790 504 776,715 Held-to-maturity investments 11,521 66,569 228,801 669,875 541,232 — 1,517,998 Debt instruments classified as receivables 10,135 1,775 48,369 44,971 480,095 114 585,459 Other financial assets — — — — — 91,817 91,817 Total financial assets 5,641,754 1,767,711 3,824,564 1,317,945 1,324,240 332,897 14,209,111 Borrowings from central bank — — — — — (30) (30) Deposits from banks and other financial institutions (297,526) (13,109) (43,332) (378,157) — (70) (732,194) Placements from banks and other financial institutions (67,231) (59,639) (19,054) — — — (145,924) Financial liabilities held for trading (4,209) (2,525) (4,473) — — (9,598) (20,805) Financial liabilities designated at fair value through profit or loss (110,696) (94,884) (58,302) (21,538) (34) — (285,454) Derivative financial liabilities — — — — — (7,633) (7,633) Financial assets sold under repurchase agreements (20,467) (1,714) (2,489) — — — (24,670) Due to customers (7,415,549) (1,009,957) (2,156,715) (1,081,746) (2) (144,194) (11,808,163) Debt securities issued (14,846) (35,979) (81,761) (8,534) (125,141) — (266,261) Other financial liabilities — — — — — (254,212) (254,212) Total financial liabilities (7,930,524) (1,217,807) (2,366,126) (1,489,975) (125,177) (415,737) (13,545,346) Interest rate gap (2,288,770) 549,904 1,458,438 (172,030) 1,199,063 (82,840) 663,765
Annual Report 2014 351
— F-177 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) The following table illustrates the potential pre-tax impact, of a parallel upward or downward shift of 100 basis points in relevant RMB, USD and HKD interest rate curves on the Group’s net Interest Income and other comprehensive income for the next twelve months from the reporting date, based on the Group’s positions of interest-earning assets and interest-bearing liabilities at the end of each reporting period. This analysis assumes that interest rates of all maturities move by the same amount, and does not reflect the potential impact of unparalleled yield curve movements.
The sensitivity analysis on net interest income is based on reasonably possible changes in interest rates with the assumption that the structure of financial assets and financial liabilities held at the period end remains unchanged, and does not take changes in customer behavior, basis risk or any prepayment options on debt securities into consideration.
The sensitivity analysis on other comprehensive income reflects only the effect of changes in fair value of those financial instruments classified as available-for-sale financial assets held, whose fair value changes are recorded as an element of other comprehensive income.
Group 31 December 2014 31 December 2013 Other Other Net interest comprehensive Net interest comprehensive income income income income +100 basis points (11,600) (23,485) (11,922) (19,330) –100 basis points 11,600 23,485 11,922 19,330
Bank 31 December 2014 31 December 2013 Other Other Net interest comprehensive Net interest comprehensive income income income income +100 basis points (11,548) (23,165) (11,882) (19,330) –100 basis points 11,548 23,165 11,882 19,330
The assumptions do not reflect actions that might be taken under the Group’s capital and interest rate risk management policy to mitigate changes to the Group’s interest rate risk. Therefore the above analysis may differ from the actual situation.
352
— F-178 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
48 FINANCIAL RISK MANAGEMENT (Continued)
48.3 Market risk (Continued)
Interest rate risk (Continued) In addition, the presentation of interest rate sensitivity above is for illustration purposes only, showing the potential impact on net interest income and other comprehensive income of the Group under different parallel yield curve movements, relative to their position at period-end.
48.4 Insurance risk The Group engages in its insurance business primarily in Mainland China. Insurance risk refers to the financial impact resulting from the unexpected occurrence of insured events. These risks are actively managed by the Group through effective sales management, underwriting control, reinsurance management and claim management. Through effective sales management, the risk of mis-selling could be reduced and the accuracy of information used for underwriting is improved. Through underwriting control, risk of adverse selection could be reduced and moreover differential pricing policy based on the level of each kind of risk could be utilized. Through reinsurance, the Group’s insurance capacity could be enhanced and targeted risks could be mitigated. Effective claims management is designed to ensure that insurance payments are controlled according to established criteria.
Uncertainty in the estimation of future benefit payments and premium receipts for long-term life insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality. The Group conducts experience analysis of mortality rate and surrender rate, in order to improve its risk assessment and as a basis for reasonable estimates.
49 CAPITAL MANAGEMENT The Group’s capital management objectives are as follows:
— maintain an adequate capital base to support the development of its business;
— support the Group’s financial stability and profitable growth;
— allocate capital through an efficient and risk based approach to optimize risk-adjusted return to shareholders; and
— safeguard the long-term sustainability of the Group’s franchise so that it can continue to provide sufficient shareholder returns and benefits for other stakeholders.
In 2012, the CBRC issued the “Capital Rules for Commercial Banks (Provisional)” which took effect from 1 January 2013. Upon the effectiveness of this new regulation, the then existing “Measures for the Management of Capital Adequacy Ratio of Commercial Banks”, issued by the CBRC, was superseded in full.
Annual Report 2014 353
— F-179 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 CAPITAL MANAGEMENT (Continued) The “Capital Rules for Commercial Banks (Provisional)” includes, among other things, requirements for minimum capital, capital conservation buffer, additional capital surcharge for systemically important banks, countercyclical buffer and Pillar II capital as follows:
— minimum regulatory requirements for Common Equity Tier-one Capital Adequacy Ratio, Tier- one Capital Adequacy Ratio and Capital Adequacy Ratio are 5%, 6% and 8%, respectively;
— capital conservation buffer requires additional 2.5% of Common Equity Tier-one Capital Adequacy Ratio;
— additional capital surcharge for systemically important banks requires additional 1% of Common Equity Tier-one Capital Adequacy Ratio;
— should the regulators require countercyclical buffer under particular circumstances or regulators impose additional Pillar II capital requirements for specific banks, these requirements shall be met within the specified time limits.
The Group has been using the Weighted approach and the Basic Indicator approach to measure its Credit Risk-weighted Assets and Operational Risk-weighted Assets, respectively, for the purpose of calculating its Capital Adequacy Ratios. In April 2014, the CBRC has officially approved the Group to adopt the Internal Ratings — Based approach to measure its Credit Risk-weighted Assets for both retail and non-retail risk exposures and the Standardized approach to measure its Operational Risk- weighted Assets, respectively. The CBRC will determine the parallel run period for the Group, which should last for at least three years. During the parallel run period, the Group should calculate its Capital Adequacy Ratios under the above two approaches, and should conform to the capital floor requirements as stipulated in the “Capital Rules for Commercial Banks (Provisional)”.
As at 31 December 2014 and 31 December 2013, the Group adopted the Standardized approach for Market Risk-weighted Assets measurement.
Capital adequacy and the utilization of regulatory capital are closely monitored by the Group’s management in accordance with the guidelines developed by the Basel Committee and relevant regulations promulgated by the CBRC. Required information related to capital levels and utilization is filed quarterly with the CBRC.
354
— F-180 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 CAPITAL MANAGEMENT (Continued) The table below summarizes the Capital Adequacy Ratios and capital composition as at 31 December 2014 calculated pursuant to the “Capital Rules for Commercial Banks (Provisional)” and under the Internal Ratings — Based approach for Credit Risk-weighted Asset and the Standardized approach for Market Risk-weighted Assets and Operational Risk-weighted Assets, respectively, as approved by the CBRC in April 2014.
31 December 2014 Common Equity Tier-one Capital Adequacy Ratio (1) 9.09% Tier-one Capital Adequacy Ratio (1) 9.46% Capital Adequacy Ratio (1) 12.82% Common Equity Tier-one Capital (2) 991,429 Deductible Items from Common Equity Tier-one Capital (3) (5,223) Net Common Equity Tier-one Capital 986,206 Additional Tier-one Capital (4) 39,946 Net Tier-one Capital 1,026,152 Tier-two Capital (5) 362,407 Net Capital 1,391,559 Risk-weighted Assets (6) 10,852,619
As at 31 December 2013, the Group’s Common Equity Tier-one Capital Adequacy Ratio, Tier-one Capital Adequacy Ratio and Capital Adequacy Ratio with Credit Risk-weighted Assets, Market Risk- weighted Assets and Operational Risk-weighted Assets measured under the Weighted approach, the Standardized approach, and the Basic Indicator approach were 9.25%, 9.25% and 11.86% respectively.
Annual Report 2014 355
— F-181 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 CAPITAL MANAGEMENT (Continued) Pursuant to the “Capital Rules for Commercial Banks (Provisional)”:
(1) The scope of consolidation related to the calculation of the Group’s Capital Adequacy Ratios includes Domestic Institutions, Overseas Institutions and affiliated financial subsidiaries specified in the Regulation.
The Common Equity Tier-one Capital Adequacy Ratio is calculated as Net Common Equity Tier-one Capital divided by Risk-weighted Assets. The Tier-one Capital Adequacy Ratio is calculated as Net Tier-one Capital divided by Risk-weighted Assets. The Capital Adequacy Ratio is calculated as Net Capital divided by Risk-weighted Assets.
(2) The Group’s Common Equity Tier-one Capital includes: ordinary share capital, capital reserve (subject to regulatory limitations), surplus reserve, general reserve, retained earnings, non- controlling interests (to the extent permitted in the Common Equity Tier-one Capital under the Regulation), and the foreign currency translation reserve.
(3) The Group’s Deductible Items from Common Equity Tier-one Capital include: other intangible assets (excluding land-use rights), and Common Equity Tier-one Capital investments made in financial institutions over which the Group has control but are outside the regulatory consolidation scope for the Capital Adequacy Ratios calculation.
(4) The Group’s Additional Tier-one Capital includes: preference shares issued and non-controlling interests (to the extent permitted in the Additional Tier-one Capital definition under the Regulation).
(5) The Group’s Tier-two Capital includes: Tier-two capital instruments and related premium (to the extent allowed under the Regulation), excessive allowance for loan losses, and minority interests (to the extent permitted in the Tier-two Capital definition under the Regulation).
(6) Risk-weighted Assets include Credit Risk-weighted Assets, Market Risk-weighted Assets and Operational Risk-weighted Assets.
356
— F-182 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS The majority of the Group’s assets and liabilities in the consolidated statement of financial position are financial assets and financial liabilities. Fair value measurement of non-financial assets and non- financial liabilities do not have a material impact on the Group’s financial position and operations, taken as a whole.
The Group does not have any financial assets or financial liabilities subject to non-recurring fair value measurements for the years ended 31 December 2014 and 2013.
50.1 Valuation technique, input and process The fair value of the Group’s financial assets and financial liabilities are determined as follows:
— If traded in active markets, fair values of financial assets and financial liabilities with standard terms and conditions are determined with reference to quoted market bid prices and ask prices, respectively;
— If not traded in active markets, fair values of financial assets and financial liabilities are determined in accordance with generally accepted pricing models or discounted cash flow analysis using prices from observable current market transactions for similar instruments. If there were no available observable current market transactions prices for similar instruments, quoted prices from counterparty is used for the valuation, and management performs analysis on these prices. Discounted cash flow analysis using the applicable yield curve for the duration of the instruments is used for derivatives other than options, and option pricing models are used for option derivatives.
The Group has established an independent valuation process for financial assets and financial liabilities. The Finance Market Department is responsible for the valuation of financial assets and financial liabilities, and the Risk Management Department performs an independent review of the valuation methodologies, inputs, assumptions and valuation results. The Operations Department records the accounting for these items and prepares the disclosure of the financial assets and financial liabilities, based on the independently reviewed valuation.
The Group’s valuation policies and procedures for different types of financial instruments are approved by the Risk Management Committee. Any change to the valuation policies, or the related procedures, must be reported to the Risk Management Committee for approval before they are implemented.
For the year ended 31 December 2014, there was no significant change in the valuation techniques or inputs used to determine fair value measurements.
Annual Report 2014 357
— F-183 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.2 Fair value hierarchy The Group classifies financial assets and financial liabilities into the following three levels based on the extent to which inputs to valuation techniques used to measure fair value of the financial assets and financial liabilities are observable.
Level 1: fair value measurements are those derived from quoted prices (unadjusted) in an active market for identical assets or liabilities;
Level 2: fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and
Level 3: fair value measurements are not based on observable market data (that is, unobservable inputs).
50.3 Financial assets and financial liabilities not measured at fair value on the consolidated statement of financial position
The tables below summarize the carrying amounts and fair values of those financial assets and financial liabilities not measured in the consolidated statement of financial position at their fair value. Financial assets and financial liabilities for which the carrying amounts approximate fair value, such as Balances with Central Banks, Deposits with Banks and Other Financial Institutions, Placements with and Loans to Banks and Other Financial Institutions, Financial Assets Held under Resale Agreements, Loans and Advances to Customers, Receivable from the MOF, Special Government Bond, Borrowings from Central Bank, Deposits and Placements from Banks and Other Financial Institutions, Due to Customers, Financial Assets Sold under Repurchase Agreements and Certificates of Deposit Issued, Interbank Certificate of Deposits Issued and Commercial Papers Issued are not included in the tables below.
358
— F-184 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.3 Financial assets and financial liabilities not measured at fair value on the consolidated statement of financial position (Continued) Group 31 December 2014 31 December 2013 Carrying Carrying amount Fair value amount Fair value Financial assets Held-to-maturity investments 1,710,950 1,725,227 1,523,815 1,444,898 Debt instruments classified as receivables (1) 150,503 150,690 136,736 131,214 Total 1,861,453 1,875,917 1,660,551 1,576,112 Financial liabilities Bonds issued (2) 191,994 193,493 156,300 146,741
Bank 31 December 2014 31 December 2013 Carrying Carrying amount Fair value amount Fair value Financial assets Held-to-maturity investments 1,703,508 1,717,746 1,517,998 1,439,081 Debt instruments classified as receivables (1) 139,560 139,681 130,105 124,583 Total 1,843,068 1,857,427 1,648,103 1,563,664 Financial liabilities Bonds issued (2) 190,163 191,672 156,300 146,741
Other than as stated below, financial assets and financial liabilities as set out above were classified within Level 2 of the fair value measurement hierarchy.
(1) As at 31 December 2014, included in the Group’s debt instruments classified as receivables, RMB11,204 million were classified within Level 3 of the fair value measurement hierarchy (31 December 2013: RMB6,414 million). The Bank has no debt instruments classified as receivables classified within Level 3 of the fair value measurement hierarchy as at 31 December 2014 and 31 December 2013.
(2) As at 31 December 2014, included in the Group’s and the Bank’s bonds issued RMB3,055 million were classified within Level 1 of the fair value measurement hierarchy (31 December 2013: RMB3,048 million).
Annual Report 2014 359
— F-185 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position The tables below summarize the fair values of the financial assets and financial liabilities measured in the consolidated statement of financial position at their fair value.
Group 31 December 2014 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 40,810 — 40,810 — Precious metal contracts — 17,615 — 17,615 Subtotal — 58,425 — 58,425 Financial assets designated at fair value through profit or loss — Debt securities 122 45,971 — 46,093 — Interest in trust products — — 248,794 248,794 — Other debt instruments — — 59,876 59,876 — Equity instruments 3 633 836 1,472 Subtotal 125 46,604 309,506 356,235 Derivative financial assets — Exchange rate derivatives — 5,654 164 5,818 — Interest rate derivatives — 757 38 795 — Precious metal contracts — 561 — 561 — Others — — 21 21 Subtotal — 6,972 223 7,195 Available-for-sale financial assets — Debt securities 19,098 902,804 115 922,017 — Equity instruments 919 — 1,325 2,244 — Fund investments 3,358 — — 3,358 Subtotal 23,375 902,804 1,440 927,619 Total assets 23,500 1,014,805 311,169 1,349,474 Financial liabilities held for trading — Financial liabilities related to precious metals — (25,211) — (25,211) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (347,282) (347,282) Derivative financial liabilities — Exchange rate derivatives — (6,020) (226) (6,246) — Interest rate derivatives — (866) (70) (936) — Precious metal contracts — (58) — (58) Subtotal — (6,944) (296) (7,240) Total liabilities — (32,155) (347,578) (379,733)
360
— F-186 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) Group (Continued) 31 December 2013 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 42,012 — 42,012 — Equity instruments 48 — — 48 — Precious metal contracts — 11,804 — 11,804 Subtotal 48 53,816 — 53,864 Financial assets designated at fair value through profit or loss — Debt securities — 58,007 — 58,007 — Interest in trust products — — 171,280 171,280 — Other debt instruments — — 38,710 38,710 — Equity instruments — — 1,021 1,021 Subtotal — 58,007 211,011 269,018 Derivative financial assets — Exchange rate derivatives — 5,623 292 5,915 — Interest rate derivatives — 1,582 55 1,637 — Precious metal contracts — 634 — 634 Subtotal — 7,839 347 8,186 Available-for-sale financial assets — Debt securities 6,802 771,946 196 778,944 — Equity instruments 549 — 29 578 — Fund investments 988 — — 988 — Others — 560 — 560 Subtotal 8,339 772,506 225 781,070 Total assets 8,387 892,168 211,583 1,112,138 Financial liabilities held for trading — Financial liabilities related to precious metals — (20,805) — (20,805) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (285,454) (285,454) Derivative financial liabilities — Exchange rate derivatives — (5,123) (571) (5,694) — Interest rate derivatives — (1,820) (120) (1,940) — Others — — (1) (1) Subtotal — (6,943) (692) (7,635) Total liabilities — (27,748) (286,146) (313,894)
Annual Report 2014 361
— F-187 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) Bank 31 December 2014 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 40,810 — 40,810 — Precious metal contracts — 17,615 — 17,615 Subtotal — 58,425 — 58,425 Financial assets designated at fair value through profit or loss — Debt securities 122 45,971 — 46,093 — Interest in trust products — — 248,794 248,794 — Other debt instruments — — 60,876 60,876 Subtotal 122 45,971 309,670 355,763 Derivative financial assets — Exchange rate derivatives — 5,430 164 5,594 — Interest rate derivatives — 757 38 795 — Precious metal contracts — 561 — 561 Subtotal — 6,748 202 6,950 Available-for-sale financial assets — Debt securities 18,847 897,848 115 916,810 — Equity instruments 287 — — 287 Subtotal 19,134 897,848 115 917,097 Total 19,256 1,008,992 309,987 1,338,235 Financial liabilities held for trading — Financial liabilities related to precious metals — (25,211) — (25,211) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (347,286) (347,286) Derivative financial liabilities — Exchange rate derivatives — (5,852) (226) (6,078) — Interest rate derivatives — (866) (70) (936) — Precious metal contracts — (58) — (58) Subtotal — (6,776) (296) (7,072) Total — (31,987) (347,582) (379,569)
362
— F-188 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) Bank (Continued) 31 December 2013 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 41,693 — 41,693 — Precious metal contracts — 11,804 — 11,804 Subtotal — 53,497 — 53,497 Financial assets designated at fair value through profit or loss — Debt securities — 58,007 — 58,007 — Interest in trust products — — 171,277 171,277 — Other debt instruments — — 38,710 38,710 Subtotal — 58,007 209,987 267,994 Derivative financial assets — Exchange rate derivatives — 5,613 292 5,905 — Interest rate derivatives — 1,582 55 1,637 — Precious metal contracts — 634 — 634 Subtotal — 7,829 347 8,176 Available-for-sale financial assets — Debt securities 6,420 769,595 196 776,211 — Equity instruments 263 — — 263 Subtotal 6,683 769,595 196 776,474 Total 6,683 888,928 210,530 1,106,141 Financial liabilities held for trading — Financial liabilities related to precious metals — (20,805) — (20,805) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (285,454) (285,454) Derivative financial liabilities — Exchange rate derivatives — (5,121) (571) (5,692) — Interest rate derivatives — (1,820) (120) (1,940) — Others — — (1) (1) Subtotal — (6,941) (692) (7,633) Total — (27,746) (286,146) (313,892)
Annual Report 2014 363
— F-189 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position (Continued) Substantially all financial instruments classified within Level 2 of the fair value hierarchy are debt investments, currency forwards, currency swaps, interest rate swaps, currency options and precious metal contracts. Fair value of debt investments denominated in RMB is determined based upon the valuation published by the China Central Depository & Clearing Co., Ltd. Fair value of debt investments denominated in foreign currencies is determined based upon the valuation results published by Bloomberg. The fair value of currency forwards, currency swaps, interest rate swaps and currency options are calculated by applying discounted cash flow analysis or the Black Scholes Pricing Model. The fair value of precious metal contracts is determined with reference to the closing spot price of gold of the Shanghai Gold Exchange. All significant inputs are observable in the market.
Substantially all financial assets and financial liabilities classified within Level 3 of the fair value hierarchy are credit assets and other financial assets and financial Liabilities Designated at Fair Value through Profit or Loss. Generally, these assets are the investments into which wealth management products have invested, and for which the Group has provided investors with a principal, and/or return guarantee. The related liability, the wealth management product itself, is also designated at fair value through profit or loss. These designations offset the accounting mismatch.
The nature of the assets classified within Level 3 of the fair value measurement hierarchy is primarily investment products issued by domestic trust companies or other financial institutions, underlying assets of which include credit assets, deposits with financial institutions and debt securities. The counterparties of the underlying deposits are primarily commercial banks in Mainland China. The credit assets and debt securities are loans and advances to corporate customers and, plain vanilla bonds or notes issued by corporates or financial institutions in Mainland China. As not all of the inputs needed to estimate the fair value of deposits, credit assets and debt securities in the investment products are observable, the Group classified the investment product as a whole within Level 3 of the fair value measurement hierarchy. The significant unobservable inputs related to the credit assets are those around credit risk and liquidity risk. This largely relates to the lack of historical default and liquidity information through one or more economic cycles, which Mainland China has not experienced. Management has made assumptions, based on observed indicators of impairment or significant changes in yield, but the actual value realized from these underlying assets in a current arm’s length sale could differ from those disclosed.
There were no significant transfers between levels of the fair value hierarchy during the years ended 31 December 2014 and 2013.
364
— F-190 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position (Continued) The reconciliation of Level 3 classified financial assets and financial liabilities presented at fair value on the consolidated statement of financial position is as follows:
Group 2014 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2014 211,011 347 225 (285,454) (692) Purchases 367,322 21 1,325 — — Issues — — — (3,084,325) — Settlements/disposals (285,313) (17) (110) 3,036,734 36 Total gains/(losses) recognized in — Profit or loss 16,486 (128) 2 (14,237) 360 — Other comprehensive income — — (2) — — 31 December 2014 309,506 223 1,440 (347,282) (296) Change in unrealized (losses)/gains for the year included in profit or loss for assets/liabilities held at the end of the year (787) (128) — 439 360
Annual Report 2014 365
— F-191 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position (Continued) Group (Continued) 2013 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2013 127,094 796 5,741 (155,071) (1,856) Purchases 433,011———— Issues — — — (1,201,295) — Settlements/disposals (357,601) (48) (5,536) 1,080,965 232 Total gains/(losses) recognized in — Profit or loss 8,507 (401) 22 (10,053) 932 — Other comprehensive income — — (2) — — 31 December 2013 211,011 347 225 (285,454) (692) Change in unrealized gains/(losses) for the year included in profit or loss for assets/liabilities held at the end of the year 647 (401) — (693) 932
366
— F-192 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position (Continued) Bank Year ended 31 December 2014 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2014 209,987 347 196 (285,454) (692) Purchases 367,902 — — — — Issues — — — (3,084,329) — Settlements/disposals (284,689) (17) (80) 3,036,734 36 Total gains/(losses) recognized in — Profit or loss 16,470 (128) 1 (14,237) 360 — Other comprehensive income — — (2) — — 31 December 2014 309,670 202 115 (347,286) (296) Change in unrealized (losses)/gains for the year included in profit or loss for assets/liabilities held at the end of the year (787) (128) — 439 360
Annual Report 2014 367
— F-193 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
50.4 Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position (Continued) Bank (Continued) Year ended 31 December 2013 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2013 126,310 796 5,468 (155,071) (1,856) Purchases 432,777 — — — — Issues — — — (1,201,295) — Settlements/disposals (357,577) (48) (5,291) 1,080,965 232 Total gains/(losses) recognized in — Profit or loss 8,477 (401) 22 (10,053) 932 — Other comprehensive income — — (3) — — 31 December 2013 209,987 347 196 (285,454) (692) Change in unrealized gains/(losses) for the year included in profit or loss for assets/liabilities held at the end of the year 647 (401) — (693) 932
In Level 3 of the fair value hierarchy, total gains or losses included in profit or loss for the year are presented in Net Trading Gain/(loss) on Investment Securities of the consolidated income statement.
368
— F-194 — Notes to the Consolidated Financial Statements For the year ended 31 December 2014 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 EVENTS AFTER THE REPORTING PERIOD
51.1 Profit appropriation Pursuant to the meeting of the Board of Directors on 24 March 2015, the proposal for profit appropriations of the Bank for the year ended 31 December 2014 is set forth as follows:
(i) An appropriation of RMB17,894 million to the statutory surplus reserve;
(ii) An appropriation of RMB18,721 million to the general reserve;
(iii) A cash dividend of RMB0.182 per ordinary share in respect of the year ended 31 December 2014 based on the number of ordinary shares issued as at 31 December 2014 totaling RMB59,113 million (Note IV 10 Dividends).
As at 31 December 2014, the statutory surplus reserve had been recognized as appropriation. The other two items will be recognized on the Bank’s and the Group’s financial statements after approval by shareholders in the forthcoming general meeting.
51.2 Issuance of preference shares The Bank completed the issuance of the second tranche of 400 million preference shares at par on 18 March 2015. The second tranche preference shares bear a dividend rate of 5.5% per annum for the first five years from issuance, and the dividend rate will be re-priced every five years thereafter with reference to the five-year PRC treasury bonds yield plus a fixed premium of 2.24%. For details of terms and conditions of preference shares, please refer to Note IV 37 Preference Shares.
52 COMPARATIVES Certain comparative amounts have been reclassified to conform with the current year’s presentation.
Annual Report 2014 369
— F-195 — Independent Auditor’s Report
To the shareholders of Agricultural Bank of China Limited (Incorporated in the People’s Republic of China with Limited Liability)
We have audited the consolidated financial statements of Agricultural Bank of China Limited (the “Bank”) and its subsidiaries set out on pages 182 to 337, which comprise the consolidated statement of financial position as at 31 December 2015, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Directors’ Responsibility for the Consolidated Financial Statements The directors of the Bank are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
180
— F-196 — Independent Auditor’s Report
Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Bank and its subsidiaries as at 31 December 2015, and of their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.
Other Matters This report, including the opinion, has been prepared for and only for you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
PricewaterhouseCoopers Certified Public Accountants
Hong Kong, 31 March 2016
Annual Report 2015 181
— F-197 — Consolidated Income Statement For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Notes Year ended 31 December IV 2015 2014 Interest income 1 725,793 699,289 Interest expense 1 (289,653) (269,398) Net interest income 1 436,140 429,891 Fee and commission income 2 90,494 87,883 Fee and commission expense 2 (7,945) (7,760) Net fee and commission income 2 82,549 80,123 Net trading gain 3 3,562 1,908 Net gain on financial instruments designated at fair value through profit or loss 4 1,727 1,505 Net gain on investment securities 857 335 Other operating income 5 16,027 10,364 Operating income 540,862 524,126 Operating expenses 6 (225,818) (223,898) Impairment losses on assets 8 (84,172) (67,971) Operating profit 230,872 232,257 Share of result of associate 24 (15) — Profit before tax 230,857 232,257 Income tax expense 9 (50,083) (52,747) Profit for the year 180,774 179,510 Attributable to: Equity holders of the Bank 180,582 179,461 Non-controlling interests 192 49 180,774 179,510 Earnings per share attributable to the equity holders of the Bank (expressed in RMB yuan per share) — Basic and diluted 11 0.55 0.55
The accompanying notes form an integral part of these consolidated financial statements.
182
— F-198 — Consolidated Statement of Comprehensive Income For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Year ended 31 December 2015 2014 Profit for the year 180,774 179,510 Other comprehensive income/(expenses): Items that may be reclassified subsequently to profit or loss: Fair value changes on available-for-sale financial assets 25,831 34,587 Income tax impact for fair value changes on available-for-sale financial assets (6,449) (8,622) Foreign currency translation differences 690 152 Other comprehensive income, net of tax 20,072 26,117 Total comprehensive income for the year 200,846 205,627 Total comprehensive income attributable to: Equity holders of the Bank 200,583 205,503 Non-controlling interests 263 124 200,846 205,627
The accompanying notes form an integral part of these consolidated financial statements.
Annual Report 2015 183
— F-199 — Consolidated Statement of Financial Position At 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2015 2014 Assets Cash and balances with central banks 12 2,587,057 2,743,065 Deposits with banks and other financial institutions 13 697,923 572,805 Precious metals 40,909 20,188 Placements with and loans to banks and other financial institutions 14 504,252 407,062 Financial assets held for trading 15 79,782 58,425 Financial assets designated at fair value through profit or loss 16 359,479 356,235 Derivative financial assets 17 16,038 7,195 Financial assets held under resale agreements 18 471,809 509,418 Loans and advances to customers 19 8,506,675 7,739,996 Available-for-sale financial assets 20 1,214,542 927,903 Held-to-maturity investments 21 2,300,824 1,710,950 Debt instruments classified as receivables 22 557,420 522,117 Investments in associate 24 273 — Property and equipment 25 156,178 154,950 Goodwill 23 1,381 1,381 Deferred tax assets 26 81,548 78,640 Other assets 27 215,303 163,822 Total assets 17,791,393 15,974,152 Liabilities Borrowings from central banks 28 60,599 80,121 Deposits from banks and other financial institutions 29 1,221,901 831,141 Placements from banks and other financial institutions 30 315,759 224,923 Financial liabilities held for trading 31 24,036 25,211 Financial liabilities designated at fair value through profit or loss 32 406,407 347,282 Derivative financial liabilities 17 12,192 7,240 Financial assets sold under repurchase agreements 33 88,804 131,021 Due to customers 34 13,538,360 12,533,397 Debt securities issued 35 382,742 325,167 Deferred tax liabilities 26 111 43 Other liabilities 36 528,597 435,987 Total liabilities 16,579,508 14,941,533
184
— F-200 — Consolidated Statement of Financial Position At 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Notes As at 31 December IV 2015 2014 Equity Ordinary shares 37 324,794 324,794 Preference shares 38 79,899 39,944 Capital reserve 39 98,773 98,773 Investment revaluation reserve 40 22,429 3,118 Surplus reserve 41 96,748 78,594 General reserve 42 175,606 156,707 Retained earnings 412,005 329,989 Foreign currency translation reserve (163) (853) Equity attributable to equity holders of the Bank 1,210,091 1,031,066 Non-controlling interests 1,794 1,553 Total equity 1,211,885 1,032,619 Total equity and liabilities 17,791,393 15,974,152
The accompanying notes form an integral part of these consolidated financial statements.
Approved and authorized for issue by the Board of Directors on 31 March 2016.
Vice Chairman Executive Director
Annual Report 2015 185
— F-201 — Consolidated Statement of Changes in Equity For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Total equity attributable to equity holders of the Bank Foreign Investment currency Non- Notes Ordinary Preference Capital revaluation Surplus General Retained translation controlling IV shares shares reserve reserve reserve reserve earnings reserve Subtotal interests Total As at 1 January 2015 324,794 39,944 98,773 3,118 78,594 156,707 329,989 (853) 1,031,066 1,553 1,032,619 Profit for the year — — — — — — 180,582 — 180,582 192 180,774 Other comprehensive income — — — 19,311 — — — 690 20,001 71 20,072 Total comprehensive income for the year — — — 19,311 — — 180,582 690 200,583 263 200,846 Issuance of preference shares 38 — 39,955 — — — — — — 39,955 — 39,955 Appropriation to surplus reserve 41 — — — — 18,154 — (18,154) ———— Appropriation to general reserve 42 — — — — — 18,899 (18,899) ———— Dividends paid to ordinary shareholders 10 — — ————(59,113) — (59,113) — (59,113) Dividends paid to preference shareholders 10 — — ————(2,400) — (2,400) — (2,400) Dividends paid to non-controlling interests — — ———————(22) (22) As at 31 December 2015 324,794 79,899 98,773 22,429 96,748 175,606 412,005 (163) 1,210,091 1,794 1,211,885 As at 1 January 2014 324,794 — 98,773 (22,772) 60,632 139,204 243,482 (1,005) 843,108 1,429 844,537 Profit for the year ——————179,461 — 179,461 49 179,510 Other comprehensive income — — — 25,890 — — — 152 26,042 75 26,117 Total comprehensive income for the year — — — 25,890 — — 179,461 152 205,503 124 205,627 Issuance of preference shares 38 — 39,944 ——————39,944 — 39,944 Appropriation to surplus reserve 41 — — — — 17,962 — (17,962) — — — — Appropriation to general reserve 42 — — — — — 17,503 (17,503) — — — — Dividends paid to ordinary shareholders 10 — — — — — — (57,489) — (57,489) — (57,489) As at 31 December 2014 324,794 39,944 98,773 3,118 78,594 156,707 329,989 (853) 1,031,066 1,553 1,032,619
The accompanying notes form an integral part of these consolidated financial statements.
186
— F-202 — Consolidated Statement of Cash Flows For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Year ended 31 December 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 230,857 232,257 Adjustments for: Impairment losses on assets 84,172 67,971 Depreciation of property and equipment 16,743 16,615 Amortization of intangible assets and other assets 2,890 2,713 Interest income arising from investment securities (145,535) (123,053) Interest income arising from impaired loans and advances to customers (1,765) (1,002) Interest expense on debt securities issued 10,988 10,179 Revaluation gain on financial instruments at fair value through profit or loss (5,285) (1,861) Net gain on investment securities (857) (335) Share of result of associate 15 — Net gain on disposal of property, equipment and other assets (440) (393) Net foreign exchange (gain)/loss (11,615) 1,107 180,168 204,198 Net change in operating assets and operating liabilities: Net decrease/(increase) in balances with central banks, deposits with banks and other financial institutions 108,639 (335,229) Net increase in placements with and loans to banks and other financial institutions (60,050) (48,818) Net decrease in financial assets held under resale agreements 6,593 122,146 Net increase in loans and advances to customers (824,382) (887,572) Net (decrease)/increase in borrowings from central banks (19,522) 80,017 Net increase in placements from banks and other financial institutions 90,836 50,560 Net increase in due to customers and deposits from banks and other financial institutions 1,395,723 823,773 Increase in other operating assets (119,076) (119,917) Increase in other operating liabilities 124,032 214,283 Cash from operations 882,961 103,441 Income tax paid (62,613) (68,826) NET CASH FROM OPERATING ACTIVITIES 820,348 34,615
Annual Report 2015 187
— F-203 — Consolidated Statement of Cash Flows For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
Notes Year ended 31 December IV 2015 2014 CASH FLOWS FROM INVESTING ACTIVITIES Cash received from disposal/redemption of investment securities 870,994 629,129 Cash received from interest income arising from investment securities 135,037 112,781 Cash received from disposal of investment in joint ventures — 1 Cash received from disposal of property, equipment and other assets 1,032 2,819 Cash paid for purchase of investment securities (1,752,782) (859,158) Increase in investment in associate (288) — Cash paid for purchase of property, equipment and other assets (21,687) (25,997) NET CASH USED IN INVESTING ACTIVITIES (767,694) (140,425) CASH FLOWS FROM FINANCING ACTIVITIES Contribution from preference shareholders 40,000 40,000 Cash received from debt securities issued 552,851 271,873 Dividends paid to: (61,535) (57,489) Ordinary shareholders (59,113) (57,489) Preference shareholders (2,400) — Non-controlling interests (22) — Repayments of debt securities issued (496,684) (213,359) Cash payments for interest on debt securities issued (11,306) (10,107) Cash payments for transaction cost of preference shares issued (63) (38) Cash payments for transaction cost of debt securities issued (17) (58) NET CASH FROM FINANCING ACTIVITIES 23,246 30,822 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 75,900 (74,988) CASH AND CASH EQUIVALENTS AT 1 JANUARY 738,241 813,799 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 7,828 (570) CASH AND CASH EQUIVALENTS AT 31 DECEMBER 43 821,969 738,241 NET CASH FLOWS FROM OPERATING ACTIVITIES INCLUDE: Interest received 554,629 548,718 Interest paid (245,840) (229,793)
The accompanying notes form an integral part of these consolidated financial statements.
188
— F-204 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
I GENERAL INFORMATION Agricultural Bank of China Limited (the “Bank”) is the successor entity to the Agricultural Bank of China (the “Predecessor Entity”) which was a wholly state-owned commercial bank approved for setup by the People’s Bank of China (the “PBOC”) and founded on 23 February 1979 in the People’s Republic of China (the “PRC”). On 15 January 2009, the Bank was established after the completion of the financial restructuring of the Predecessor Entity. The Bank’s establishment was authorized by the PBOC. The Bank was listed on the Shanghai Stock Exchange and the Stock Exchange of Hong Kong Limited on 15 July 2010 and 16 July 2010, respectively.
The Bank operates under financial services certificate No. B0002H111000001 issued by the China Banking Regulatory Commission (the “CBRC”), and business license No. 100000000005472 issued by the State Administration of Industry and Commerce of the PRC. The registered office of the Bank is located at No. 69 Jianguomen Nei Avenue, Dongcheng District, Beijing, the PRC.
The principal activities of the Bank and its subsidiaries (collectively, the “Group”) include Renminbi (“RMB”) and foreign currency deposits, loans, clearing and settlement services, assets custody services, fund management, financial leasing services, insurance services and other services as approved by relevant regulators, and the provision of related services by its overseas establishments as approved by the respective local regulators.
The head office and domestic branches of the Bank and its subsidiaries operating in the Mainland China are referred to as the “Domestic Operations”. Branches and subsidiaries registered and operating outside of the Mainland China are referred to as the “Overseas Operations”.
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1 Basis of preparation
Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance (Cap.622) for this financial year and the comparative period.
Basis of preparation The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments which are measured at fair value, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of consideration given in exchange for assets and that is received (or in some circumstances the amount expected to be paid) with respect to liabilities.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note III.
Annual Report 2015 189
— F-205 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.1 Amendments to the accounting standards effective in 2015 and adopted by the Group The following amendments have been adopted by the Group for the first time during the financial year ended 31 December 2015.
(1) Amendments to IAS 19 Employee Benefits — To Plans that Require Employees (as revised in 2011) or Third Parties to Contribute Towards the Cost of Benefits (2) Amendments to IFRSs Annual Improvements to IFRSs 2010–2012 Cycle (3) Amendments to IFRSs Annual Improvements to IFRSs 2011–2013 Cycle
(1) Amendment to IAS 19 (as revised in 2011): Employee Benefits — To Plans that Require Employees or Third Parties to Contribute Towards the Cost of Benefits The amendment to IAS 19 (as revised in 2011) — Employee Benefits applies to defined benefit plans where employees or third parties are required to bear some of the cost of the plan. The amendment clarifies the accounting by entities with plans that require contributions linked only to service in each period. Entities with plans that require contributions that vary with service period will be required to recognize the benefit of those contributions over employees’ service period.
(2) Amendments to IFRSs: Annual Improvements to IFRSs 2010–2012 Cycle The annual improvements to IFRSs 2010–2012 Cycle include a number of amendments to various IFRSs, including the amendments to IFRS 2 — Share-Based Payment, the amendments to IFRS 3 — Business Combinations, the amendments to IFRS 8 — Operating Segments, the amendments to IFRS 13 — Fair Value Measurement, the amendments to IAS 24 — Related Party Disclosures, the amendments to IAS 16 — Property, Plant and Equipment, and the amendments to IAS 38 — Intangible Assets.
(3) Amendments to IFRSs: Annual Improvements to IFRSs 2011–2013 Cycle The annual improvements to IFRSs 2011–2013 Cycle include a number of amendments to various IFRSs, including the amendments to IFRS 1 — First-time Adoption of International Financial Reporting Standards, the amendments to IFRS 3 — Business Combinations, the amendments to IFRS 13 — Fair Value Measurement, and the amendments to IAS 40 — Investment Property.
The adoption of these amendments does not have a significant impact on the operating results, comprehensive income, or financial position of the Group.
190
— F-206 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.2 New Hong Kong Companies Ordinance (Cap.622) In addition, the requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) come into operation during the financial year, as a result, there are changes to presentation and disclosures of certain information in the consolidated financial statements.
1.3 Amendments that are not yet effective but have been early adopted in 2015 The Group has adopted the following amendments that have been issued but are not yet effective in 2015.
Effective for annual periods beginning on or after Amendments to IAS 27 Equity Method in Separate 1 January 2016 Financial Statements
Amendments to IAS 27: Equity Method in Separate Financial Statements The IASB has amended IAS 27 — Separate Financial Statements. The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The Group has early adopted this amendment in 2015 and used equity method to account for investment in associate in separate financial statements. The adoption of this new amendment does not have a significant impact on the Bank’s financial statements.
Annual Report 2015 191
— F-207 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 The Group has not adopted the following new and amended standards that have been issued but are not yet effective.
Effective for annual periods beginning on or after (1) IFRS 14 Regulatory Deferral Account 1 January 2016 (2) Amendments to Acquisition of Interests in 1 January 2016 IFRS 11 Joint Operations (3) Amendments to IAS 16 Clarification of Acceptable Methods of 1 January 2016 and IAS 38 Depreciation and Amortization (4) Amendments to IAS 16 Agriculture: Bearer plants 1 January 2016 and IAS 41 (5) Amendments to IFRSs Annual Improvements to IFRSs 2012– 1 January 2016 2014 cycle (6) Amendments to IFRS 10, Investment Entities: Applying the 1 January 2016 IFRS 12 and IAS 28 Consolidation Exception (7) Amendments to IAS 1 Disclosure Initiative 1 January 2016 (8) Amendments to IAS 12 Income Taxes 1 January 2017 (9) Amendments to IAS 7 Statement of Cash Flows 1 January 2017 (10) IFRS 15 Revenue from Contracts with 1 January 2018 Customers (11) IFRS 9 Financial Instruments 1 January 2018 (12) IFRS 16 Leases 1 January 2019 (13) Amendments to Sale or Contribution of Assets The amendments were IFRS 10 and IAS 28 between An Investor and originally intended to Its Associate or Joint Venture be effective for annual periods beginning on or after 1 January 2016. The effective date has now been deferred/removed.
192
— F-208 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 (Continued)
(1) IFRS 14: Regulatory Deferral Account The IASB has issued IFRS 14 — Regulatory Deferral Accounts, an interim standard on the accounting for certain balances that arise from rate-regulated activities (“regulatory deferral accounts”). IFRS 14 is only applicable to entities that apply IFRS 1 — First-time Adoption of International Financial Reporting Standards as first-time adopters of IFRS. It permits such entities, on adoption of IFRS, to continue to apply their previous GAAP accounting policies for the recognition, measurement, impairment and de-recognition of regulatory deferral accounts. The interim standard also provides guidance on selecting and changing accounting policies (on first-time adoption or subsequently) and on presentation and disclosure. The Group anticipates that the adoption of this new standard should not have any impact on the Group’s consolidated financial statements.
(2) Amendments to IFRS 11: Acquisition of Interests in Joint Operations The amendments to IFRS 11 — Joint Arrangements provide specific guidance on accounting for the acquisition of an interest in a joint operation that is a business. The amendments require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
(3) Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization The amendments to IAS 16 — Property, Plant and Equipment, clarify that depreciation of an item of property, plant and equipment based on revenue generated by using the asset is not appropriate. The amendments to IAS 38 — Intangible Assets, establish a rebuttable presumption that amortization of an intangible asset based on revenue generated by using the asset is inappropriate. The presumption may only be rebutted in certain limited circumstances. The Group anticipates that the adoption of these amendments should not have any impact on the Group’s consolidated financial statements.
Annual Report 2015 193
— F-209 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 (Continued)
(4) Amendments to IAS 16 and IAS 41 on Agriculture: Bearer Plants The amendments change the reporting for bearer plants, such as grape vines, rubber trees and oil palms. Bearer plants should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing. The amendments include them in the scope of IAS 16 rather than IAS 41. The produce on bearer plants will remain in the scope of IAS 41. The Group anticipates that the adoption of these amendments should not have any impact on the Group’s consolidated financial statements.
(5) Amendments to IFRSs: Annual Improvements to IFRSs 2012–2014 cycle The Annual Improvements to IFRSs 2012–2014 Cycle include a number of amendments to various IFRSs, including the amendments IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations regarding methods of disposal, the amendments to IFRS 7 — Financial Instruments: Disclosures regarding servicing contracts, the amendments to IAS 19 — Employee Benefits regarding discount rates, the amendments to IAS 34 — Interim Financial Reporting regarding disclosure of information. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
(6) Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception The amendments to IFRS 10 clarify that the exception from preparing consolidated financial statements is available to intermediate parent entities which are subsidiaries of investment entities. The exception is available when the investment entity parent measures its subsidiaries at fair value. The intermediate parent would also need to meet the other criteria for exception listed in IFRS 10. The amendments also clarify that an investment entity should consolidate a subsidiary which is not an investment entity and which provides services in support of the investment entity’s investment activities, such that it acts as an extension of the investment entity. However, the amendments also confirm that if the subsidiary is itself an investment entity, the investment entity parent should measure its investment in the subsidiary at fair value through profit or loss. This approach is required regardless of whether the subsidiary provides investment-related services to the parent or to third parties.
194
— F-210 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 (Continued)
(6) Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception (Continued) The amendments to IAS 28 allow an entity which is itself not an investment entity, but has an interest in an associate or a joint venture which is an investment entity, a policy choice to retain the fair value measurement applied by the associate or joint venture, or to unwind the fair value measurement and perform a consolidation at the level of the associate or joint venture for their subsidiaries.
The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
(7) Amendments to IAS 1: Disclosure Initiative The amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. Although the amendments do not require specific changes, they clarify a number of presentation issues and highlight that preparers are permitted to tailor the format and presentation of the financial statements to their circumstances and the needs of users. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
(8) Amendments to IAS 12: Income Taxes The IASB has issued amendments to IAS 12 — Income taxes. These amendments on the recognition of deferred tax assets for unrealized losses clarify how to account for deferred tax assets related to debt instruments measured at fair value. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
(9) Amendments to IAS 7: Statement of Cash Flows The IASB has issued an amendment to IAS 7 introducing an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. The Group anticipates that the adoption of the amendments will not have a significant impact on the Group’s consolidated financial statements.
Annual Report 2015 195
— F-211 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 (Continued)
(10) IFRS 15: Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize through a 5-step approach. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. It moves away from a revenue recognition model based on an ‘earnings processes’ to an ‘asset-liability’ approach based on transfer of control. IFRS 15 provides specific guidance on capitalization of contract cost and license arrangements. It also includes a cohesive set of disclosure requirements about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
(11) IFRS 9: Financial Instruments The complete version of IFRS 9 — Financial Instruments was issued in July 2014. It replaces the guidance in IAS 39 — Financial Instruments: Recognition and Measurement that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income (“OCI”) and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI in which case the accumulated fair value changes in OCI will not be recycled to the profit or loss in the future. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement, except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. The Group is in the process of assessing the impact on the Group’s consolidated financial statements from this new standard.
196
— F-212 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1 Basis of preparation (Continued)
1.4 Standards and amendments that are not yet effective and have not been adopted before their effective dates by the Group in 2015 (Continued)
(12) IFRS 16: Leases IFRS 16 addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The Group is in the process of assessing the impact on the Group’s consolidated financial statements from this new standard.
(13) Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between An Investor and Its Associate or Joint Venture These amendments address an inconsistency between the requirements in IFRS 10 – Consolidated Financial Statements and those in IAS 28 – Investment in Associates and Joint Ventures in the sale and contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognized when a transaction involves a business. A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. The Group anticipates that the adoption of these amendments will not have a significant impact on the Group’s consolidated financial statements.
Annual Report 2015 197
— F-213 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation
Basis of consolidation The consolidated financial statements include the financial statements of the Bank and the subsidiaries as well as structured entities controlled by the Group. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Income and expense of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of acquisition or up to the date on which control ceases, respectively.
Adjustments are made to the financial statements of subsidiaries, where appropriate, to consistently reflect the accounting policies of the Group.
All intra-group transactions, balances, and income and expense are eliminated on consolidation.
Non-controlling interests of consolidated subsidiaries are presented separately from the controlling party’s equity therein.
The carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Further, total comprehensive income of a subsidiary is attributed, based on the proportion of their respective holdings, to the equity holders of the Bank and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
In the Bank’s statement of financial position, its investments in subsidiaries are stated at cost, less impairment losses, if any.
198
— F-214 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation (Continued)
Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair value of the assets transferred by the Group, liabilities incurred or assumed by the Group, and any equity interests issued by the Group. Acquisition related costs are recognized in the consolidated income statement as incurred.
At the acquisition date, irrespective of non-controlling interests, the identifiable assets acquired and liabilities and contingent liabilities assumed are recognized at their fair values; except that deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 — Income Taxes and IAS 19 — Employee Benefits, respectively.
Goodwill is measured as the excess of the difference between (i) the consideration transferred, the fair value of any non-controlling interests in the acquiree, and the fair value of the Group’s previously held equity interest in the acquiree (if any) and (ii) the net fair value of the identifiable assets acquired and the liabilities and contingent liabilities incurred or assumed.
Non-controlling interests that represent ownership interests in the acquiree, and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are accounted for at either fair value or the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.
Goodwill Goodwill represents the excess of the cost of an acquisition less the fair value of the Group’s share of the net identifiable assets of acquired subsidiaries and associates at the date of acquisition. Goodwill on acquisitions of subsidiaries is presented separately in the consolidated statement of financial position. Goodwill on acquisition of associates is included in investment in associates.
For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (“CGU”) or groups of CGUs that is expected to benefit from the synergies of the business combination.
A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Annual Report 2015 199
— F-215 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation (Continued)
Goodwill (Continued) A CGU to which goodwill has been allocated is tested for impairment annually or more frequently when there is indication that the unit may be impaired. With respect to goodwill arising during a reporting period, the CGU to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the CGU, which is the higher of fair value less costs to sell and value in use, is less than its carrying amount, the deficit, reflecting an impairment loss, is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU on a pro-rata basis, based on the carrying amount of each asset in the CGU. Any goodwill impairment loss is recognized directly in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in subsequent periods.
Investment in associate An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not constitute control or joint control over those policy decisions.
The post-acquisition profit or loss of an associate is incorporated in the consolidated financial statements using the equity method of accounting. Under the equity method, investment in an associate is initially recognized at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate. When the Group’s share of loss of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognizing its share of further loss. Additional loss is recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.
At the end of each reporting period, the Group considers whether there are circumstances that indicate the possibility of impairment of the Group’s investment in an associate; when that is the case, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 — Impairment of Assets, as a single asset by comparing its recoverable amount (the higher of fair value less costs to sell and value in use) with its carrying amount, any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of an impairment loss is recognized, to the extent that the recoverable amount of the investment subsequently increases.
200
— F-216 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2 Consolidation (Continued)
Investment in associate (Continued) When an entity in the Group transacts with the Group’s associate, profits and losses resulting from the transaction are recognized in the Group’s consolidated financial statements only to the extent of interest in the associate that are not related to the Group.
3 Interest income and expense Interest income and expense for all interest-earning financial assets and interest-bearing financial liabilities are recognized within Interest Income and Interest Expense, respectively, in the consolidated income statement using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount on initial recognition. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. The calculation includes all fees and interest paid or received that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.
Interest income on an impaired financial asset or a group of impaired similar financial assets is recognized using the original interest rate which was used to discount the future cash flows for the purpose of measuring the impairment loss.
4 Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. For those services that are provided over a specified period of time, fee and commission income is accrued over that period as the services are provided. For other services, fee and commission income are recognized at the time the services are completed.
Annual Report 2015 201
— F-217 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
5 Foreign currency transactions The functional currency of the Domestic Operations is RMB. The presentation currency of the Group and the Bank is RMB.
In preparing the financial statements of each individual Group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchange prevailing at the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognized in the consolidated income statement in the period in which they arise, except for the following:
(i) exchange differences arising on a monetary item that forms part of the Bank’s net investment in the Overseas Operations;
(ii) changes in the fair value of monetary assets denominated in foreign currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the monetary assets and other changes in the carrying amount. Translation differences related to changes in the amortized cost are recognized in the consolidated income statement, and other changes in the carrying amount are recognized in other comprehensive income.
Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the consolidated income statement for the period except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which cases, the exchange differences are also recognized directly in other comprehensive income.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s Overseas Operations are translated into the presentation currency of the Group at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at exchange rates at the date of the transactions, or a rate that approximates the exchange rates of the date of the transaction. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity under the heading of Foreign Currency Translation Reserve and Non-controlling Interests, as appropriate. The accumulated foreign currency translation reserve related to the Overseas Operations will be reclassified from equity to the consolidated income statement on disposal of all or part of the Overseas Operations.
202
— F-218 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6 Taxation Income tax expense represents the sum of the tax currently payable and deferred tax.
Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax assets and liabilities are not recognized for temporary difference related to goodwill or the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Annual Report 2015 203
— F-219 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6 Taxation (Continued)
Deferred tax (Continued) The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax is recognized in the consolidated income statement, except when it relates to items that are recognized in other comprehensive income or directly in equity, in which case the current and deferred tax is also recognized in other comprehensive income or directly in equity, respectively.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
7 Employee benefits Employee benefits are all forms of consideration given and other relevant expenditures incurred by the Group in exchange for services rendered by employees or for termination of the employment contracts. These benefits include short-term employee benefits, post-employment benefits and early retirement benefits.
Short-term employee benefits In the reporting period in which an employee has rendered services, the Group recognizes the short-term employee benefits payable for those services as a liability with a corresponding increase in the expenses in the consolidated income statement. Short-term employee benefits include salaries, bonuses, allowance and subsidies, staff welfare, medical insurance, employment injury insurance, maternity insurance, housing funds as well as labor union fees and staff education expenses.
Post-employment benefits The Group’s post-employment benefits are primarily the payments for basic pensions and unemployment insurance related to government mandated social welfare programs, as well as the annuity scheme established. All these post-employment benefits are defined contribution plans, under which, the Group makes fixed contributions into a separate fund and will have no legal or constructive obligation to make further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods.
204
— F-220 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
7 Employee benefits (Continued)
Post-employment benefits (Continued) Contributions to the basic pensions and unemployment insurance plan are recognized in the consolidated income statement for the period in which the related payment obligation is incurred.
The employees of the Bank’s head office and domestic branches (“Domestic Institutions”) participate in an annuity scheme established by the Bank (the “Annuity Scheme”). The Bank pays annuity contributions with reference to employees’ salaries, and such contributions are expensed in the consolidated income statement when incurred. The Bank has no further obligation if the Annuity Scheme does not have sufficient assets for the payment of any retirement benefits to employees funded by the Annuity Scheme.
Early retirement benefits Early retirement benefits have been paid to those employees who accept voluntary retirement before the normal retirement date, as approved by management. The related benefit payments are made from the date of early retirement to the normal retirement date.
The accounting treatment of the Group’s early retirement benefits is in accordance with termination benefits as determined in IAS 19. The liability is recognized for the early retirement benefit payments from the date of early retirement to the normal retirement date when the criteria for recognition as termination benefit is met with a corresponding charge in the consolidated income statement. Differences arising from changes in assumptions and estimates of the present value of the liabilities are recognized in the consolidated income statement when incurred.
8 Financial instruments Financial assets and liabilities are recognized in the consolidated statement of financial position and classified into one of the categories presented below. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or liabilities, respectively, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or liabilities at fair value through profit or loss are recognized immediately in the consolidated income statement.
Annual Report 2015 205
— F-221 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets The Group’s financial assets are classified into four categories — financial assets at fair value through profit or loss (“FVTPL”), held-to-maturity investments, available-for-sale financial assets and, loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
Financial assets at fair value through profit or loss Financial assets at FVTPL have two subcategories — financial assets held for trading and those designated at FVTPL on initial recognition.
A financial asset is classified as held for trading if:
• it has been acquired principally for the purpose of sale in the near future; or
• it forms part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
• it is a derivative instrument that is not designated and effective as a hedging instrument.
A financial asset other than a financial asset held for trading may be designated at FVTPL upon initial recognition if:
• such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
• the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
• it forms part of a contract containing one or more embedded derivatives, and IAS 39 — Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated at FVTPL.
Financial assets at FVTPL are stated at fair value, with changes in fair value arising from re-measurement recognized directly in the consolidated income statement in the period in which they arise.
206
— F-222 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets, quoted in an active market, with fixed or determinable payments and fixed maturities that the Group has the positive intention and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are carried at amortized cost using the effective interest method, less any impairment losses.
Financial assets classified as loans and receivables primarily include deposits with central banks, deposits with banks and other financial institutions, placements with and loans to banks and other financial institutions, financial assets held under resale agreements, loans and advances to customers, and specified debt securities.
Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated as such or are not classified as financial assets at FVTPL, loans and receivables or held-to-maturity investments.
Available-for-sale financial assets are measured at fair value at the end of the reporting period. Changes in fair value are recognized in other comprehensive income and accumulated in the investment revaluation reserve, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to the consolidated income statement.
Equity investments classified as available-for-sale that do not have a quoted price in an active market and whose fair value cannot be reliably determined are measured at cost, less any impairment losses, at the end of each reporting period.
Interest income related to financial assets classified as available-for-sale debt instruments is calculated using the effective interest method and recorded as an element of Interest Income in the consolidated income statement. Dividends on available-for-sale equity instruments are recognized in the consolidated income statement when the Group’s right to receive such payments is established.
Annual Report 2015 207
— F-223 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets Financial assets, other than those classified as FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated future cash flows of the financial assets have been adversely affected.
A significant or prolonged decline in the fair value of an equity investment classified as available-for-sale below its cost is considered to be objective evidence of impairment.
For all other financial assets, the objective evidence of impairment could include:
• significant financial difficulty of the issuer or obligor;
• a breach of contract, such as a default or delinquency in interest or principal payments;
• the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
• it becomes probable that the borrower will enter bankruptcy or other financial reorganization;
• the disappearance of an active market for that financial asset because of financial difficulties; or
• observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets, although the decrease cannot yet be attributed to individual financial assets in the portfolio.
— adverse changes in the payment status of borrowers in the portfolio; and
— national or local economic conditions that correlate with defaults on the assets in the portfolio.
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in collective assessment of impairment.
208
— F-224 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets carried at amortized cost For financial assets carried at amortized cost, an impairment loss is recognized in the consolidated income statement when there is objective evidence that the assets are impaired. The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. For financial assets with variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The calculation of present value of the estimated future cash flows of a collaterized financial asset reflects the cash flows that are expected to result from foreclosure, less the cost of obtaining and selling the collateral.
The carrying amount of an impaired financial asset is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated income statement. When a financial asset is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to the consolidated income statement.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, such as an improvement in the debtor’s credit rating, the previously recognized impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
Impairment of financial assets classified as available-for-sale For available-for-sale equity instruments, a significant or prolonged decline in fair value below cost is considered to be objective evidence of impairment. In determining whether a decline in fair value has been significant or prolonged, the Group considers if the fair value of an available-for-sale equity instrument as at the balance sheet date is lower than 50% (including 50%) of its initial cost of investment or lower than its initial cost of investment for more than one year (including one year) together with other relevant considerations.
When a decline in the fair value of a financial asset classified as available-for-sale has been recognized directly in other comprehensive income and accumulated in the investment revaluation reserve, and there is objective evidence that asset is impaired, the cumulative losses previously recognized in other comprehensive income are reclassified to the consolidated income statement in the period in which the impairment takes place.
Annual Report 2015 209
— F-225 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.1 Financial assets (Continued)
Impairment of financial assets classified as available-for-sale (Continued) An impairment loss on an equity investment classified as available-for-sale, and carried at fair value, is not reversed through the consolidated income statement in subsequent periods. Any increase in fair value subsequent to impairment loss is recognized directly in other comprehensive income and accumulated in the investment revaluation reserve. An impairment loss on an equity investment classified as available-for-sale equity investment, and carried at cost, is not reversed. An impairment loss on a debt investment classified as available-for-sale is subsequently reversed through the consolidated income statement if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.
8.2 Financial liabilities Financial liabilities and equity instruments issued by the Group are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument in IAS 39 and IAS 32, respectively.
The Group’s financial liabilities are generally classified into financial liabilities at FVTPL and other financial liabilities, carried at amortized cost.
Financial liabilities at fair value through profit or loss Financial liabilities at FVTPL have two subcategories, including financial liabilities held for trading and those designated at FVTPL on initial recognition.
A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated and effective as hedging instruments.
The criteria for a financial liability designated at FVTPL is the same as those for a financial asset designated at FVTPL.
Financial liabilities at FVTPL are stated at fair value, with changes in fair value arising on re-measurement recognized directly in the consolidated income statement in the period in which they arise.
210
— F-226 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.2 Financial liabilities (Continued)
Other financial liabilities Other financial liabilities are measured at amortized cost, using the effective interest method.
8.3 Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
A financial instrument is an equity instrument if, and only if, both conditions (i) and (ii) below are met:
(i) The financial instrument includes no contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; and
(ii) If the financial instrument will or may be settled in the Group’s own equity instruments, it is a non-derivative instrument that includes no contractual obligations for the Group to deliver a variable number of its own equity instruments; or a derivative that will be settled only by the Group exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.
Equity instruments issued by the Group are recorded at the fair value of proceeds received, net of direct issuance expenses.
8.4 Derivative financial instruments Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured at their fair value at the end of the reporting period. The resulting gain or loss is recognized in the consolidated income statement.
Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their characteristics and risks are not clearly and closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognized in the consolidated income statement. These embedded derivatives are separately accounted for at FVTPL.
Annual Report 2015 211
— F-227 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.5 Determination of fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.
For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices. This includes listed equity securities and quoted debt instruments on major exchanges.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.
For financial instruments not traded in active markets, fair value is determined using appropriate valuation techniques. Valuation techniques include the use of recent transaction prices, discounted cash flow analysis, option pricing models and others commonly used by market participants. These valuation techniques include the use of observable and/or unobservable inputs.
8.6 De-recognition The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group continues to recognize the asset to the extent of its continuing involvement and recognizes an associated liability. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.
On de-recognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and, where applicable, the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in the consolidated income statement.
Financial liabilities are derecognized when the related obligation is discharged, is cancelled or expires. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in the consolidated income statement.
212
— F-228 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8 Financial instruments (Continued)
8.7 Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount presented in the consolidated statement of financial position when both of the following conditions are satisfied: (i) the Group has a legal right to set off the recognized amounts and the legal right is currently enforceable; and (ii) the Group intends either to settle on a net basis, or to realize the financial asset and settle the financial liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
8.8 Repurchase agreements and agreements to resell Financial assets transferred as collateral in connection with repurchase agreements, involving fixed repurchase dates and prices, are not derecognized. They continue to be recorded as investments classified as held-to-maturity investments, available-for-sale financial assets or debt instruments classified as receivables as appropriate. The corresponding liability is included in financial assets sold under repurchase agreements. The items which are not derecognized are disclosed in Note IV 47 Contingent Liabilities and Commitments — Collateral.
Consideration paid for financial assets held under agreements to resell are recorded as Financial assets held under resale agreements.
The difference between purchase and sale price is recognized as interest expense or income in the consolidated income statement over the term of the agreements using the effective interest method.
9 Insurance contracts
Insurance contract classification Insurance contracts are those contracts under which the Group has accepted significant insurance risk, relative to an insured event or occurrence. The Group issues primarily life insurance contracts, which insure events associated with mortality over a long duration. The Group also issues non-life insurance contracts, which cover short-term casualty and health insurance risk. When necessary, the Group enters into reinsurance contracts to transfer insurance risks to reinsurer. A significant insurance risk test is performed at inception of the insurance contracts.
Some insurance contracts contain both an insurance component and a deposit component. The Group unbundles those components, if the insurance component and the deposit component are separately measurable. The unbundled insurance component is accounted for according to IFRS 4 — Insurance Contracts and the unbundled deposit component is accounted for as a financial liability under investment contract liabilities.
Annual Report 2015 213
— F-229 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
9 Insurance contracts (Continued)
Insurance income recognition Premiums from long-term life insurance contracts are recognized as revenue when due from policyholders. Premiums related to short-term non-life insurance contracts are recognized when received at the inception of the policy, as unearned insurance premiums in the consolidated statement of financial position, and are amortized on a straight-line basis into the consolidated income statement over the term of the policy.
When the Group has transferred insurance risk through reinsurance contracts, the Group calculates the amount of premium ceded and the reinsurers’ share of expenses and recognizes them through the consolidated income statement in accordance with the terms of the reinsurance contracts.
Insurance contract liabilities Insurance contract liabilities are measured based on a reasonable estimate of the amount of payments that the Group will be required to make to fulfill its obligations under the insurance contracts, which represents the difference between expected future cash outflows and inflows related to such contracts. A reasonable estimate of expected future net cash flows is determined based on information currently available as at the end of the reporting period. The Group has considered the impact of time value in the liability calculation for long-term life insurance.
The Group performs liability adequacy tests based on information currently available, as at the reporting date. Additional insurance contract liabilities will be recorded if any deficiency exists.
10 Precious metals Precious metals comprise gold, silver and other precious metals.
Precious metals that are not related to the Group’s trading activities are initially measured at acquisition cost and subsequently measured at the lower of cost and net realizable value. Precious metals that are related to the Group’s trading activities are initially recognized at fair value, with changes in fair value arising from re-measurement recognized directly in the consolidated income statement in the period in which they arise.
214
— F-230 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
11 Property and equipment Property and equipment including buildings held for use in the supply of services, or for administrative purpose (other than construction in progress) are stated in the consolidated statement of financial position at cost less subsequent accumulated depreciation and accumulated impairment losses, if any. When the costs attributable to the land use rights cannot be reliably measured and separated from that of the building at inception, the costs are included in the cost of buildings and recorded in Property and Equipment.
Depreciation is recognized as a component of Operating Expenses in the consolidated income statement so as to recognize the consumption of the economic value of property and equipment (other than construction in progress), less their estimated residual values, over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation rates are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
The useful lives, estimated residual value rates and annual depreciation rates of each class of property and equipment are as follows:
Annual Estimated residual Depreciation Classes Useful lives Value rates rates Buildings 5–50 years 3% 1.94%–19.40% Electronic equipment, furniture and fixtures 3–11 years 3% 8.82%–32.33% Motor vehicles 5–8 years 3% 12.13%–19.40%
Properties in the course of construction for supply of services or administrative purposes are carried at cost, as construction in progress, less any impairment loss. Construction in progress is reclassified to the appropriate category of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property and equipment, commences when the assets are ready for their intended use.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from its continued use. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in Other Operating Income in the consolidated income statement. The accounting policies of impairment of property and equipment are included in Note II 18 Impairment of Tangible and Intangible Assets other than Goodwill.
Annual Report 2015 215
— F-231 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
12 Land use rights Land use rights are classified in other assets and amortized over a straight-line basis over their authorized useful lives.
13 Foreclosed assets Foreclosed assets are initially recognized at fair value and subsequently measured at the lower of their carrying amount and fair value, less costs to sell, at the end of each reporting period. When the fair value, less costs to sell, is lower than a foreclosed asset’s carrying amount, an impairment loss is recognized in the consolidated income statement.
Any gain or loss arising on the disposal of the foreclosed asset is included in the consolidated income statement in the period in which the item is disposed.
A foreclosed asset used by the Group is transferred to property and equipment at its net carrying amount.
14 Investment property Investment property is property held to earn rental income or for capital appreciation, or both.
Investment property is initially measured at its acquisition cost. Subsequent expenditures incurred for the investment property are included in the cost of the investment property if it is probable that economic benefits associated with the asset will flow to the Group and the subsequent expenditures can be measured reliably. Other subsequent expenditures are recognized in the consolidated income statement in the period in which they are incurred.
Investment properties are measured using the cost model. Depreciation and amortization is recognized the same way as property and equipment and land use rights.
At the end of the reporting period, the Group reviews the carrying amounts of its investment properties to determine whether there is any indication that the assets have suffered an impairment loss. If any such indication exists, the recoverable amount (the higher of fair value less costs to sell and value in use) of the property is estimated in order to determine the extent of the impairment loss, if any. If the recoverable amount of a property is estimated to be less than its carrying amount, the carrying amount of the property is reduced to its recoverable amount. An impairment loss is recognized in the consolidated income statement. The accounting policies of impairment of investment property are included in Note II 18 Impairment of Tangible and Intangible Assets other than Goodwill.
Where an impairment loss subsequently reverses, the carrying amount of the investment property is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount had no impairment loss been recognized. A reversal of an impairment loss is recognized in the consolidated income statement.
When an investment property is sold, transferred, retired or damaged, the Group recognizes the amount of any proceeds on disposal, net of the carrying amount and related expenses, in the consolidated income statement.
216
— F-232 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
15 Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The Group as lessor When the Group is the lessor in a finance lease, an amount representing the minimum lease payment receivables and unguaranteed residual value, net of initial direct costs, all discounted at the implicit lease rate (the “net lease investment”) is recorded in the consolidated statement of financial position as Loans and advances to customers. The difference between the net lease investment and the undiscounted amount is recorded as unearned finance income, amortizing over the term of the lease using the effective interest method and recognized in the consolidated income statement.
When the Group is the lessor in an operating lease, the assets subject to the operating lease continue to be recognized as the Group’s property and equipment. Rental income from operating leases is recognized as Other Operating Income in the consolidated income statement on a straight-line basis over the term of the related lease.
The Group as lessee When the Group is a lessee under finance leases, the leased assets are capitalized initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in Other Liabilities. Finance charges are charged over the term of the lease using the effective interest method and recognized in the consolidated income statement. The depreciation policy for depreciable leased assets is consistent with that for depreciable assets that are owned.
When the Group is the lessee in an operating lease, operating lease payments are recognized as an expense and charged to Operating Expenses in the consolidated income statement on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognized as expenses in the periods in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are considered in determining the amount to be recognized over the lease term.
16 Cash and cash equivalents Cash and cash equivalents are short-term and highly liquid assets, which are readily convertible into known amounts of cash and subject to an insignificant risk of changes in value. Cash and cash equivalents include Cash and assets with original maturity of three months or less under Balances with Central Banks, Deposits with Banks and Other Financial Institutions, Placements with and Loans to Banks and Other Financial Institutions and Financial Assets Held under Resale Agreements.
Annual Report 2015 217
— F-233 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
17 Intangible assets Intangible assets acquired separately and with finite useful lives are carried at cost less accumulated amortization and any accumulated impairment loss. Amortization for intangible assets with finite useful lives is recognized on a straight-line basis over their estimated useful lives which generally range from 5 to 20 years.
Intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment assessment.
Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated income statement.
18 Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized in the consolidated income statement.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount had no impairment loss been recognized. A reversal of an impairment loss is recognized in the consolidated income statement.
19 Dividend distribution Dividend distribution to the Bank’s ordinary shareholders is recognized as a liability in the Group’s and the Bank’s financial statements in the period in which the dividends are approved by the shareholders’ annual general meeting of the Bank.
As authorized by the shareholders’ annual general meeting, the Board of Directors has the sole discretion to declare and distribute dividends on preference shares. Preference share dividend distribution is recognized as a liability in the Group’s and the Bank’s financial statements in the period in which the dividends are approved by the Board of Directors of the Bank.
218
— F-234 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
20 Provision Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Provisions are measured at the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
21 Fiduciary activities The Group acts as a custodian, trustee and in other fiduciary capacities to safeguard assets for customers in accordance with custody agreements between the Group and securities investment funds, social security funds, insurance companies, trust companies, qualified foreign institutional investors, annuity schemes and other institutions and individuals. The Group receives fees in return for its services provided under the custody agreements and does not have any interest in the economic risks and rewards related to assets under custody. Therefore, assets under custody are not recognized in the Group’s consolidated statement of financial position.
The Group conducts entrusted lending arrangements for its customers. Under the terms of entrusted loan arrangements, the Group grants loans to borrowers, as an intermediary, according to the instruction of its customers who are the lenders providing the entrusted loans. The Group is responsible for the arrangement and collection of the entrusted loans and receives a commission for the services rendered. As the Group does not assume the economic risks and rewards of the entrusted loans and the funding for the corresponding entrusted funds, they are not recognized as assets and liabilities of the Group.
22 Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due, in accordance with the terms of a debt instrument.
Financial guarantees are initially recognized at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the initial amount, less amortization of guarantee fees recognized in accordance with the revenue recognition policy, and the best estimate of the expenditure required to settle the guarantee. These estimates are determined based on experience of similar transactions, historical losses and supplemented by the judgment of management. Any increase in the liability relating to guarantees is taken to the consolidated income statement.
Annual Report 2015 219
— F-235 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
23 Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognized, but disclosed, unless the possibility of an outflow of resources embodying economic benefits is probable. The Group’s contingent liabilities are disclosed in Note IV 47 Contingent Liabilities and Commitments.
A provision is recognized when it meets the criteria as set forth in Note II 20 Provision.
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES In the application of the Group’s accounting policies, which are described in Note II, management is required to make judgments, estimates and assumptions that affect the carrying amounts of assets and liabilities. The estimates and related assumptions are based on historical experience and other relevant factors including on the basis of reasonable expectations for future events.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the critical judgments and key estimates that the management has made in the process of applying the Group’s accounting policies and that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next twelve months.
1 Impairment losses on loans and advances to customers The Group reviews its loan portfolio to assess impairment on a periodic basis during the year. In determining whether an impairment loss should be recognized in the consolidated income statement, the Group makes estimates and judgments as to whether there is any observable data indicating that there is objective evidence of impairment and the extent, if any, to which it will have a measurable decrease in the estimated future cash flows related to individually significant loans or pools of loans with similar risk characteristics, as described in Note II 8.1 Impairment of Financial Assets Carried at Amortized Cost.
Significant judgments are made in the determination of whether objective evidence of impairment exists in individually significant loans or pools of smaller-balance loans with similar risk characteristics. Among other things, objective evidence of impairment includes deterioration in the financial condition of specific borrowers (or specific pools of borrowers) affecting their ability to meet their loan payment obligations, as well as increasing industry sector over-capacity or obsolescence, or deterioration in national or regional economic conditions that are correlated to increasing loan defaults. These judgments are made both during management’s regular assessments of loan quality and when other circumstances indicate the possibility that objective evidence of impairment may exist.
220
— F-236 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
1 Impairment losses on loans and advances to customers (Continued) Where it is determined that objective evidence of impairment exists, significant judgments and estimates are made in estimating the adverse impact on future cash flows related to individually significant impaired loans. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Factors affecting these estimates include the availability and granularity of information related to specific borrowers and the clarity of the correlation between qualitative factors, such as industry sector performance or changes in regional economic conditions and loan defaults of related borrowers.
When the decrease may not have been identified individually or the individual loan is not significant, management uses estimates based on historical loss experience on a collective basis on loans with similar credit risk characteristics to assess the impairment loss. Significant judgments are also applied to the calculation of collectively assessed impairment. Critical factors affecting these judgments include modeling assumptions (e.g., loss emergence period and loss given default) and levels of correlation between qualitative factors and loan default. The Group considers the impact of the changes and uncertainty in the macro-economic environment, in which the Group operates when assessing the methodology and assumptions used for loss estimation, as well as management’s capability in managing loan portfolio, and makes adjustments where appropriate.
2 Fair value of financial instruments The Group uses valuation techniques to estimate the fair value of financial instruments which are not quoted in an active market. These valuation techniques include the use of recent transaction prices of the same or similar instruments, discounted cash flow analysis and option pricing models. To the extent practical market observable inputs and data, such as interest rate yield curves, foreign currency rates and implied option volatilities, are used when estimating fair value through a valuation technique. Where market observable inputs are not available, they are estimated using assumptions that are calibrated as closely as possible to market observable data. However, areas such as the credit risk of the Group and the counterparty, volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the estimated fair value of financial instruments.
With respect to PRC government obligations related to large-scale policy directed financing transactions, fair value is determined using the stated terms of the related instrument and with reference to terms determined by the PRC government in similar transactions engaged in or directed by the PRC government. In this regard, there are no other relevant market prices or yields reflecting arm’s length transactions of a comparable size and tenor.
Annual Report 2015 221
— F-237 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
3 Held-to-maturity investments The Group classifies non-derivative financial assets, quoted in an active market, with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity as held-to-maturity investments. In assessing the Group’s intention and ability to hold such investments to maturity, management primarily considers the business purpose for acquiring a security, as well as the Group’s liquidity needs. This is a significant judgment because if the Group fails to hold these investments to maturity, other than for specific and limited circumstances (e.g., sale of an insignificant amount close to maturity), it will be required to reclassify the entire portfolio of held-to-maturity investments as available-for-sale financial assets and be precluded from classifying investments as held-to-maturity investments for two years.
4 Impairment of other financial assets For held-to-maturity investments and financial instruments classified as receivables, the determination of whether such an investment is impaired requires significant judgment. Objective evidence that a financial asset or group of financial assets is impaired includes a breach of contract, such as a default or delinquency in interest or principal payments or the disappearance of an active market for that financial asset because of significant financial difficulty of the issuer, etc. In making such judgment, the impact of objective evidence of impairment on expected future cash flows of the investment is taken into account.
For available-for-sale investments, the determination of whether such an investment is impaired requires significant judgment. In making this judgment, the Group considers the duration and extent to which the fair value of an investment is less than its cost; or whether other objective evidence of impairment exists based on the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, credit ratings, delinquency rates and counterparty risk.
5 Taxes There are certain transactions and activities in the ordinary course of the Group’s business for which the ultimate tax effect is uncertain. The Group made certain estimation and judgement for items of uncertainty in the application of tax legislations, taking into account existing tax legislation and past practice of tax authorities. Where the final tax outcome of these matters is different from the amounts that were initially estimated, based on management’s assessment, such differences will affect the current income tax, deferred income tax, and business tax during the period in which such a determination is made.
222
— F-238 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
III CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued)
6 Employee early retirement benefits obligations The Group recognizes liabilities in connection with early retirement benefits for employees in Domestic Institutions using the projected unit credit actuarial cost method based on various assumptions, including the discount rate, average medical expenses growth rate, pension benefit growth rate for early retirements and other factors. The present value of the liability is determined through discounting the estimated future cash outflows using interest rates of RMB treasury bonds which have terms to maturity approximating the terms of the related liability. Any difference arising from the actual result or changes in assumptions may affect the amount of expense recognized in the consolidated income statement in the period during which such changes take place and the corresponding liability recognized in the consolidated statement of financial position.
7 Control over structured entity Where the Group acts as asset manager of structured entities, the Group makes judgment on whether it is the principal or an agent to assess whether the Group controls the structured entities and should consolidate them. When performing this assessment, the Group considers several factors including, among other things, the scope of its decision-making authority over the structured entities, the rights held by other parties, the remuneration to which it is entitled in accordance with the related agreements for the assets management services, the Group’s exposure to variability of returns from other interests that it holds in the structured entities. The Group performs re-assessment periodically.
Annual Report 2015 223
— F-239 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 NET INTEREST INCOME Year ended 31 December 2015 2014 Interest income Loans and advances to customers 476,988 470,829 Including: Corporate loans and advances 321,040 326,541 Personal loans and advances 145,181 138,500 Discounted bills 10,767 5,788 Held-to-maturity investments 83,684 66,152 Available-for-sale financial assets 41,344 35,257 Balances with central banks 39,745 40,018 Deposits with banks and other financial institutions 25,409 22,784 Financial assets held under resale agreements 21,378 27,981 Debt instruments classified as receivables 20,507 21,644 Placements with and loans to banks and other financial institutions 14,391 12,516 Financial assets held for trading 1,999 1,923 Financial assets designated at fair value through profit or loss 348 185 Subtotal 725,793 699,289 Interest expense Due to customers (233,377) (221,706) Deposits from banks and other financial institutions (37,036) (26,681) Debt securities issued (10,988) (10,179) Placements from banks and other financial institutions (4,731) (7,318) Borrowings from central bank (1,890) (1,003) Financial assets sold under repurchase agreements (1,631) (2,511) Subtotal (289,653) (269,398) Net interest income 436,140 429,891 Interest income accrued on impaired financial assets (included within interest income) 1,765 1,002
224
— F-240 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2 NET FEE AND COMMISSION INCOME Year ended 31 December 2015 2014 Fee and commission income Agency services 28,628 22,945 Bank card 20,689 19,279 Settlement and clearing services 17,714 21,123 Electronic banking services 8,962 7,379 Consultancy and advisory services 8,892 11,031 Custodian and other fiduciary 2,857 3,114 Credit commitment 2,547 2,807 Others 205 205 Subtotal 90,494 87,883 Fee and commission expense Bank card (3,401) (3,127) Settlement and clearing services (1,921) (2,283) Electronic banking services (1,852) (1,766) Others (771) (584) Subtotal (7,945) (7,760) Net fee and commission income 82,549 80,123
3 NET TRADING GAIN Year ended 31 December 2015 2014 Net gain on held-for-trading debt securities 1,370 1,179 Net gain on precious metals (1) 829 667 Net gain on foreign exchange rate derivatives 1,489 115 Net loss on interest rate derivatives (126) (53) Total 3,562 1,908
(1) Net gain on precious metals consists of net gain on precious metals and precious metal related derivative products.
4 NET GAIN ON FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Year ended 31 December 2015 2014 Net gain on principal guaranteed wealth management products 1,693 1,507 Net (loss)/gain on debt securities (17) 12 Others 51 (14) Total 1,727 1,505
Annual Report 2015 225
— F-241 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5 OTHER OPERATING INCOME Year ended 31 December 2015 2014 Insurance premium 7,749 3,684 Government grant 3,237 1,969 Net gain on foreign exchange 2,842 2,915 Rental income 316 336 Gain on disposal of property and equipment 255 416 Others 1,628 1,044 Total 16,027 10,364
6 OPERATING EXPENSES Year ended 31 December 2015 2014 Staff costs (1) 110,349 111,469 General operating and administrative expenses (2) 48,461 49,195 Business tax and surcharges (3) 29,075 28,880 Depreciation and amortization 19,633 19,328 Insurance benefits and claims 7,984 3,904 Provision for guarantees and commitments 3,084 8,898 Provision for risk incidents and legal proceedings 5,509 471 Others 1,723 1,753 Total 225,818 223,898
(1) Staff costs Year ended 31 December 2015 2014 Short-term employee benefits Salaries, bonuses, allowance and subsidies 67,513 66,780 Housing funds 8,851 8,186 Social insurance 4,956 4,454 Including: Medical insurance 4,317 3,848 Maternity insurance 352 328 Employment injury insurance 287 278 Labor union fees and staff education expenses 3,026 2,977 Others 9,458 12,825 Subtotal 93,804 95,222 Defined contribution benefits 15,151 14,636 Early retirement benefits 1,394 1,611 Total 110,349 111,469
226
— F-242 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6 OPERATING EXPENSES (Continued) (2) Included in general operating and administrative expenses is auditor’s remuneration of RMB139 million for the year (2014: RMB132 million).
(3) Business tax for the Group’s Domestic Operations is generally calculated as 5% of taxable income, which was declared and paid to the local tax department by Domestic Operations.
In accordance with the “Circular regarding the Business Taxes Preferential Policies on Agriculture-related Loans Granted by the County Area Banking Division of Agricultural Bank of China Limited” (Cai Shui [2014] No. 5), jointly issued by the Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) on 10 January 2014, business tax of the Group’s county-level sub-branches in the 19 provinces for the pilot program would be levied at 3% on interest income from agriculture-related loans from 1 November 2013 to 31 December 2015.
In accordance with the “Circular regarding the Business Taxes Preferential Policies on Agriculture-related Loans Granted by the County Area Banking Division of Agricultural Bank of China Limited” (Cai Shui [2015] No. 67), jointly issued by the MOF and the SAT on 11 June 2015, the Group’s county-level sub-branches in all the provinces for the pilot program would benefit from the above business taxes preferential policies from 1 May 2015 to 31 December 2015. From the effective date of this new circular (Cai Shui [2015] No. 67), the then existing circular (Cai Shui [2014] No. 5) was superseded.
City construction and maintenance tax is calculated at 1%–7% of business tax for the Group’s Domestic Operations.
Education surcharge is calculated at 3%–5% of business tax for the Group’s Domestic Operations.
Annual Report 2015 227
— F-243 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7 BENEFITS AND INTERESTS OF DIRECTORS AND SUPERVISORS (1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB): Year ended 31 December 2015 Contribution Basic to Other salaries retirement benefits and benefit in kind Item Fees allowance schemes (xxi) Total Executive Directors Liu Shiyu — 448 66 53 567 Cai Huaxiang (i)(ii) — 403 66 53 522 Lou Wenlong (ii) — 403 66 53 522 Independent Non-Executive Directors Frederick Ma Si-hang 397 — — — 397 Wen Tiejun 399 — — — 399 Francis Yuen Tin-fan 376 — — — 376 Xiao Xing (iii) 292 — — — 292 Lu Jianping (iv) — — ——— Non-Executive Directors Zhao Chao (v) — — ——— Zhou Ke (v) — — ——— Zhang Dinglong (v)(vi) — — ——— Chen Jianbo (v)(vi) — — ——— Hu Xiaohui (v)(vii) — — ——— Xu Jiandong (v)(viii) — — ——— Supervisors Yuan Changqing (ix) — 261 40 32 333 Wang Xingchun (x) — — ——— Zheng Xin (xi) 30 — — — 30 Xia Zongyu (xi) 30 — — — 30 Xia Taili (xi) 30 — — — 30 Li Wang (xii) 143 — — — 143 Lv Shuqin (xii) 143 — — — 143 Senior Managements Gong Chao — 403 66 53 522 Wang Wei — 403 66 53 522 Li Zhenjiang — 403 66 53 522 Lin Xiaoxuan (xiii) — 202 34 28 264 Zhang Keqiu (xiv) — 405 58 98 561 Executive Director resigned Zhang Yun (xv) — 448 66 53 567 Independent Non-Executive Directors resigned Anthony Wu Ting-yuk (xvi) 157 — — — 157 Qiu Dong (xvi) 164 — — — 164 Non-executive Directors resigned Shen Bingxi (v)(xvii) — — ——— Cheng Fengchao (v)(xvii) — — ——— Xiao Shusheng (v)(xvii) — — ——— Supervisors resigned Che Yingxin (xviii) — 149 21 17 187 Jia Xiangsen (xix) 25 — — — 25 Dai Genyou (xii) 138 — — — 138 Senior Management resigned Zhu Gaoming (xx) — 491 40 59 590 Total 2,324 4,419 655 605 8,003
228
— F-244 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 BENEFITS AND INTERESTS OF DIRECTORS AND SUPERVISORS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior Managements’ emoluments are as follows (in thousands of RMB) (Continued): (i) Cai Huaxiang was elected Executive Director effective 7 September 2015.
(ii) Cai Huaxiang and Lou Wenlong are also the Senior Managements of the Group and their emoluments disclosed above include those for services rendered by them as the Senior Managements.
(iii) Xiao Xing was elected Independent Non-Executive Director effective 6 March 2015.
(iv) Lu Jianping was elected Independent Non-Executive Director effective 5 June 2015.
(v) These Non-Executive Directors of the Bank did not receive any fees from the Bank. Their emoluments were borne by the major Equity Holders of the Bank.
(vi) Zhang Dinglong and Chen Jianbo were elected Non-Executive Directors effective 15 January 2015.
(vii) Hu Xiaohui was elected Non-Executive Director effective 14 January 2015.
(viii) Xu Jiandong was elected Non-Executive Director effective 28 February 2015.
(ix) Yuan Changqing was elected Chairman of the Board of Supervisors effective 29 June 2015.
(x) Wang Xingchun did not receive any emoluments for his part-time position as shareholder representative supervisor from the Bank in 2015.
(xi) For Employee Representative Supervisors of the Bank, the amounts set forth above only included fees for their services as supervisors.
(xii) Li Wang and Lv Shuqin were elected External Supervisors effective 29 June 2015, and Dai Genyou ceased to be External Supervisor effective 29 June 2015.
(xiii) Lin Xiaoxuan was elected Executive Vice President effective 7 September 2015.
(xiv) Zhang Keqiu was elected Secretary to the Board of Directors effective 24 June 2015.
(xv) Zhang Yun ceased to be Executive Director and President effective 4 December 2015.
(xvi) Anthony Wu Ting-yuk and Qiu Dong ceased to be Independent Non-Executive Directors effective 5 June 2015.
(xvii) Shen Bingxi, Cheng Fengchao and Xiao Shusheng ceased to be Non-Executive Directors effective 16 January 2015.
(xviii) Che Yingxin ceased to be Chairman of the Board of Supervisors effective 28 April 2015.
(xix) Jia Xiangsen ceased to be Supervisor Representing Employees effective 26 October 2015.
(xx) Zhu Gaoming ceased to be Secretary to the Board of Directors effective 5 May 2015.
(xxi) Other benefits in kind include the Bank’s contributions to medical fund, housing fund and other social insurances, which are payable to labour and security authorities based on the lower of certain percentage of the salaries and allowance or the prescribed upper limits as required by the relevant regulations issued by the government authorities.
The total compensation packages for the above Executive Directors, Supervisors and Senior Managements for the year ended 31 December 2015 have not yet been finalized in accordance with regulations of the relevant authorities in the PRC at the date of this report. The final compensation will be disclosed in a separate announcement when determined.
Annual Report 2015 229
— F-245 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 BENEFITS AND INTERESTS OF DIRECTORS AND SUPERVISORS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior managements’ emoluments are as follows (in thousands of RMB) (Continued): Year ended 31 December 2014 (Restated) Contribution to Other Basic retirement benefits salaries and benefit in kind Item Fees allowance schemes (xv) Total Executive Directors Liu Shiyu (i) — 293 21 39 353 Zhang Yun (ii) — 1,581 113 216 1,910 Lou Wenlong (ii) — 1,492 109 206 1,807 Independent Non-Executive Directors Anthony Wu Ting-yuk 410 — — — 410 Qiu Dong 440 — — — 440 Frederick Ma Si-hang 350 — — — 350 Wen Tiejun 360 — — — 360 Francis Yuen Tin-fan 360 — — — 360 Non-Executive Directors Shen Bingxi (iii) — — ——— Cheng Fengchao (iii) — — ——— Xiao Shusheng (iii) — — ——— Zhao Chao (iii) — — ——— Zhou Ke (iii)(iv) — — ——— Supervisors Che Yingxin — 1,546 111 212 1,869 Wang Xingchun (v) — — ——— Jia Xiangsen (vi) 30 — — — 30 Zheng Xin (vi) 30 — — — 30 Xia Zongyu (vi) 30 — — — 30 Xia Taili (vi)(vii) — — ——— Dai Genyou 280 — — — 280 Senior Managements Cai Huaxiang — 1,491 109 206 1,806 Gong Chao — 1,491 109 206 1,806 Wang Wei — 1,491 109 206 1,806 Li Zhenjiang (viii) — 1,491 109 206 1,806 Zhu Gaoming (viii) — 839 71 66 976 Executive Directors resigned Jiang Chaoliang (ix) — 1,318 90 177 1,585 Guo Haoda (x) — 995 72 137 1,204 Non-executive Directors resigned Li Yelin (iii)(xi) — — ——— Lin Damao (iii)(xii) — — ——— Supervisors resigned Liu Hong (xiii) — — ——— Zhang Jianzhong (xiv) 30 — — — 30 Total 2,320 14,028 1,023 1,877 19,248
230
— F-246 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 BENEFITS AND INTERESTS OF DIRECTORS AND SUPERVISORS (Continued)
(1) Details of the Directors’, Supervisors’ and Senior Managements’ emoluments are as follows (in thousands of RMB) (Continued): (i) Liu Shiyu was elected Chairman of the Board of Directors effective 11 December 2014.
(ii) Zhang Yun and Lou Wenlong are also the Senior Managements of the Group and their emoluments disclosed above include those for services rendered by them as the Senior Managements.
(iii) These Non-Executive Directors of the Bank did not receive any fees from the Bank. Their emoluments were borne by the major Equity Holders of the Bank.
(iv) Zhou Ke was elected Non-Executive Director effective 31 July 2014.
(v) Wang Xingchun was elected Shareholder Representative Supervisor effective 23 June 2014. Wang Xingchun did not receive any emoluments for his part-time position as shareholder representative supervisor from the Bank in 2014.
(vi) For Employee Representative Supervisors of the Bank, the amounts set forth above only included fees for their services as supervisors.
(vii) Xia Taili was elected Supervisor representing employees of the Bank effective 2 December 2014 at the Employee Representatives Meeting.
(viii) Li Zhenjiang ceased to be Secretary to the Board of Directors effective 27 March 2014. Zhu Gaoming was elected Secretary to the Board of Directors effective 27 March 2014.
(ix) Jiang Chaoliang ceased to be Chairman of the Board of Directors effective 31 August 2014.
(x) Guo Haoda ceased to be Executive Director effective 9 September 2014. In his tenure, he was also the Senior Management of the Group and his emolument disclosed above include that for service rendered by him as the Senior Management.
(xi) Li Yelin ceased to be Non-Executive Director effective 28 July 2014.
(xii) Lin Damao ceased to be Non-Executive Director effective 5 August 2014.
(xiii) Liu Hong ceased to be Shareholder Representative Supervisor effective 24 April 2014. Liu Hong did not receive any emoluments for his part-time position as Shareholder Representative Supervisor from the Bank in 2014.
(xiv) Zhang Jianzhong ceased to be Employee Representative Supervisor effective 2 December 2014.
(xv) Other benefits in kind include the Bank’s contributions to medical fund, housing fund and other social insurances, which are payable to labour and security authorities based on the lower of certain percentage of the salaries and allowance or the prescribed upper limits as required by the relevant regulations issued by the government authorities.
As of the announcement date of 2014 consolidated financial statements, the above compensation package for the Directors, Supervisors and Senior Managements for the years ended 31 December 2014 have not been finalized and the amount of remuneration of Directors, Supervisors and Senior Managements recognized in the consolidated income statement for the year of 2014 was RMB11.73 million. Supplementary announcement on final compensation of RMB19.25 million was released by the Bank on 27 August 2015. The comparative figures for the year of 2014 have been restated accordingly.
Annual Report 2015 231
— F-247 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 BENEFITS AND INTERESTS OF DIRECTORS AND SUPERVISORS (Continued)
(2) Five individuals with the highest emoluments in the Group (i) Of the five individuals with the highest emoluments, none of them are directors or supervisors whose emoluments are disclosed above. The emoluments of the five individuals whose emoluments were the highest in the Group for the year ended 31 December 2015 and 31 December 2014 were as follows (in thousands of RMB):
Year ended 31 December 2015 2014 Basic salaries and allowance 10,075 7,435 Discretionary bonuses 8,271 7,682 Contribution to retirement benefit schemes and other 1,091 867 Total 19,437 15,984
(ii) The number of these five individuals whose emoluments fell within the following bands are as follows:
Year ended 31 December 2015 2014 RMB2,500,000 to RMB3,000,000 yuan — 1 RMB3,000,001 to RMB3,500,000 yuan — 3 RMB3,500,001 to RMB4,000,000 yuan 4 1 RMB4,000,001 to RMB4,500,000 yuan 1 —
(3) Other benefits and interests of Directors and Supervisors pursuant to the New Hong Kong Companies Ordinance (Cap.622) For the year ended 31 December 2015 and 31 December 2014, no emolument was paid by the Group to any of the Directors, Supervisors, Senior Managements or the five highest paid individuals as an inducement to join or upon joining the Group or as a compensation for loss of office. Except for the Annuity Scheme and Pension Scheme (Note II 7 Employee Benefits), there were no other retirement benefits for Directors or Supervisors, or consideration provided to third parties for making available directors’ or supervisors’ services; and none of the Directors or Supervisors waived any emolument, or had material interests, whether directly or indirectly, in any material transactions, arrangements or contracts in relation to the Group’s business for the year ended 31 December 2015 and 31 December 2014.
The Group enters into credit transactions with the Directors, Supervisors or certain controlled body corporates and connected entities of the Directors or Supervisors at arm’s length in the ordinary course of business. For the year ended 31 December 2015 and 31 December 2014, the balance of loans and advances from the Group to Directors, Supervisors or certain controlled body corporates and connected entities of the Directors or Supervisors was not significant; the Group did not provide any guarantee or security to the Directors, Supervisors or certain controlled body corporates and connected entities of the Directors or Supervisors in respect of their loans, quasi-loans or credit transactions.
232
— F-248 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8 IMPAIRMENT LOSSES ON ASSETS Year ended 31 December 2015 2014 Loans and advances to customers 81,897 65,063 Held-to-maturity investments 925 279 Debt instruments classified as receivables 841 861 Available-for-sale financial assets 78 (37) Placements with and loans to banks and other financial institutions (167) 1,181 Property and equipment — 27 Other 598 597 Total 84,172 67,971
9 INCOME TAX EXPENSE Year ended 31 December 2015 2014 Current income tax — PRC Enterprise Income Tax 58,661 65,291 — Hong Kong Profits Tax 410 386 — Other jurisdictions 301 222 Subtotal 59,372 65,899 Deferred tax (Note IV 26) (9,289) (13,152) Total 50,083 52,747
PRC Enterprise Income Tax is calculated at 25% of the estimated taxable profit for both years, and also includes supplementary PRC tax on Overseas Operations as determined in accordance with the relevant PRC income tax rules and regulations. Taxation arising in other jurisdictions (including Hong Kong) is calculated at the rates prevailing in the relevant jurisdictions. Pre-tax deduction items of enterprise income tax are governed by the relevant tax regulations in the PRC.
Annual Report 2015 233
— F-249 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9 INCOME TAX EXPENSE (Continued) The tax charges for the years ended 31 December 2015 and 31 December 2014 can be reconciled to the profit per the consolidated income statement as follows:
Year ended 31 December 2015 2014 Profit before tax 230,857 232,257 Tax calculated at applicable PRC statutory tax rate of 25% 57,714 58,064 Tax effect of income not taxable for tax purpose (1) (8,962) (7,083) Tax effect of items such as expenses not deductible for tax purpose 1,361 1,770 Effect of different tax rates in other jurisdictions (30) (4) Income tax expense 50,083 52,747
(1) Non-taxable income primarily includes interest income from PRC treasury bonds and municipal government bonds.
10 DIVIDENDS Year ended 31 December 2015 2014 Dividends on ordinary shares declared and paid Cash dividend related to 2014 (1) 59,113 — Cash dividend related to 2013 (2) — 57,489 59,113 57,489 Dividends on preference shares declared and paid Cash dividend related to the first tranche of preference shares (4) 2,400 —
(1) Distribution of final dividend for 2014
A cash dividend of RMB0.182 per ordinary share related to 2014, amounting to RMB59,113 million in total was approved, after the required appropriations for the statutory surplus reserve and the general reserve for 2014 as determined in accordance with the relevant accounting rules and financial regulations applicable to PRC enterprises (the “PRC GAAP”), at the annual general meeting held on 29 June 2015.
The above dividend was recognized as distribution and distributed during the year ended 31 December 2015.
(2) Distribution of final dividend for 2013
A cash dividend of RMB0.177 per ordinary share related to 2013, amounting to RMB57,489 million in total was approved, after the required appropriations for the statutory surplus reserve and the general reserve for 2013 as determined in accordance with the PRC GAAP, at the annual general meeting held on 23 June 2014.
The above dividend was recognized as distribution and distributed during the year ended 31 December 2014.
234
— F-250 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10 DIVIDENDS (Continued) (3) A final dividend of RMB0.1668 per ordinary share in respect of the year ended 31 December 2015 totalling RMB54,176 million has been proposed by the directors and is subject to approval by the ordinary shareholders in the annual general meeting.
(4) Distribution of dividend on preference shares
A cash dividend at the dividend rate of 6% per annum related to the first tranche of preference shares amounting to RMB2,400 million in total was approved at the Board of Directors’ Meeting held on 23 October 2015 and distributed on 5 November 2015.
11 EARNINGS PER SHARE Year ended 31 December 2015 2014 Earnings: Profit for the year attributable to equity holders of the Bank 180,582 179,461 Less: profit for the year attributable to preference shareholders of the Bank (2,400) — Profit for the year attributable to ordinary shareholders of the Bank 178,182 179,461 Number of shares: Weighted average number of ordinary shares in issue (million) 324,794 324,794 Basic and diluted earnings per share (RMB yuan) 0.55 0.55
The Bank issued non-cumulative preference shares during the year ended 31 December 2015 and 31 December 2014, respectively, under the terms and conditions as detailed in Note IV 38 Preference Shares.
For the purpose of calculating basic earnings per share, a cash dividend of RMB2,400 million on non-cumulative preference shares declared in respect of the year of 2015 was deducted from the amounts attributable to ordinary shareholders of the Bank.
The conversion feature of preference shares is considered to fall within contingently issuable ordinary shares. The triggering events of conversion did not occur as at 31 December 2015 and 31 December 2014, therefore the conversion feature of preference shares has no effect on the basic and diluted earnings per share calculation.
Annual Report 2015 235
— F-251 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12 CASH AND BALANCES WITH CENTRAL BANKS As at 31 December 2015 2014 Cash 116,390 111,962 Mandatory reserve deposits with central banks (1) 2,216,082 2,409,181 Surplus reserve deposits with central banks (2) 58,656 49,253 Other deposits with central banks (3) 195,929 172,669 Total 2,587,057 2,743,065
(1) The Group places mandatory reserve deposits with the PBOC and overseas regulatory bodies. These include RMB reserve deposits and foreign currency reserve deposits. These mandatory reserve deposits are not available for the Group’s daily operations.
Effective 12 March 2015, for Domestic Operations of the Bank which meet the requirements of “Notice on Differential Mandatory Reserve Deposits for the Sannong Banking Operations of Agricultural Bank of China Limited for 2015 issued by the People’s Bank of China” (Yinbanfa [2015] No. 67), as at 31 December 2015, RMB mandatory reserve deposits with the PBOC were based on 15% of qualified RMB deposits (31 December 2014: 18%). For the remaining Domestic Operations of the Bank, RMB mandatory reserve deposits were based on 17% of qualified RMB deposits (31 December 2014: 20%). Foreign currency mandatory reserve deposits were based on 5% (31 December 2014: 5%) of qualified foreign currency deposits from customers. Mandatory reserve deposits placed by the Bank’s Overseas Operations were determined based on respective overseas regulatory requirements. The foreign currency reserve deposits placed with the PBOC are non-interest bearing.
(2) Surplus reserve deposits primarily represent deposits maintained with the PBOC in addition to the mandatory reserve deposits and mainly for the purpose of clearing.
(3) Other deposits with central banks primarily represent fiscal deposits and foreign exchange reserve placed with the PBOC that are not available for use in the Group’s daily operations, these fiscal deposits and foreign exchange reserve are non-interest bearing. The foreign exchange reserve is maintained with the PBOC in accordance with the related Notice issued by the PBOC on 31 August 2015. The reserve is payable on a monthly basis at 20% of the total contract amount of customers driven forward transactions in the previous month. Such foreign exchange reserve will be repayable in 12 months according to the Notice.
13 DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS As at 31 December 2015 2014 Deposits with: Domestic banks 656,601 543,394 Other domestic financial institutions 2,748 2,021 Overseas banks 38,581 27,390 Gross amount 697,930 572,805 Allowance for impairment losses — collectively assessed (7) — Deposits with Banks and other financial institutions, net 697,923 572,805
As at 31 December 2015, the carrying amount of deposits with banks and other financial institutions which have been pledged as security was RMB3,240 million (31 December 2014: RMB1,833 million). These deposits were mainly security deposits pledged with exchanges.
236
— F-252 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14 PLACEMENTS WITH AND LOANS TO BANKS AND OTHER FINANCIAL INSTITUTIONS As at 31 December 2015 2014 Placements with and loans to: Domestic banks 129,493 124,060 Other domestic financial institutions 324,620 267,358 Overseas banks 51,743 17,400 Gross amount 505,856 408,818 Allowance for impairment losses — collectively assessed (1,604) (1,756) Placements with and loans to banks and other financial institutions, net 504,252 407,062
15 FINANCIAL ASSETS HELD FOR TRADING As at 31 December 2015 2014 Debt securities issued by: Governments 4,464 3,545 Public sector and quasi-governments 23,754 23,445 Financial institutions 26,793 1,112 Corporates 10,039 12,708 Subtotal 65,050 40,810 Precious metal contracts 14,732 17,615 Total 79,782 58,425 Analyzed as: Listed outside Hong Kong (1) 65,050 40,632 Unlisted 14,732 17,793 Total 79,782 58,425
(1) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
Annual Report 2015 237
— F-253 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16 FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS As at 31 December 2015 2014 Debt securities issued by: Governments 17,031 11,235 Public sector and quasi-governments 55,099 25,278 Financial institutions 22,063 2,899 Corporates 12,040 6,681 Subtotal 106,233 46,093 Interests in trust products (1) 201,583 248,794 Other debt instruments (1) 47,714 59,876 Equity instruments 3,949 1,472 Total 359,479 356,235 Analyzed as: Listed in Hong Kong 1,871 816 Listed outside Hong Kong (2) 75,656 31,963 Unlisted 281,952 323,456 Total 359,479 356,235
(1) Underlying assets of the trust products and other debt instruments held by the Group mainly include credit assets, deposits with domestic banks and other domestic financial institutions and debt securities. The trust products and other debt instruments have been disclosed in Note IV 46 Structured Entities.
(2) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
238
— F-254 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES The Group primarily enters into foreign exchange rate, interest rate and precious metal derivative contracts related to trading, asset and liability management, and customer initiated transactions.
The contractual/notional amounts and fair values of the derivative financial instruments entered into by the Group are set out in the following tables. The contractual/notional amounts of derivative financial instruments provide a basis for comparison with fair values of instruments recognized on the consolidated statement of financial position but do not necessarily indicate the amounts of future cash flows involved or the current fair values of the instruments and, therefore, do not indicate the Group’s exposure to credit or market risks. The fair value of derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market interest rates, foreign exchange rates or precious metal prices relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly.
Certain financial assets and financial liabilities of the Group are subject to enforceable master netting arrangements or similar agreements. The agreement between the Group and the counterparty generally allows for net settlement of the relevant financial assets and financial liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and financial liabilities will be settled on a gross basis. However, each party to the master netting arrangements or similar agreements will have the option to settle all such amounts on a net basis in the event of default of the other party. As at 31 December 2015 and 31 December 2014, the amount of the financial assets and financial liabilities subject to enforceable master netting arrangements or similar agreements are not material to the Group. The Group did not elect to settle these financial assets and financial liabilities on a net basis. The Group does not hold any other financial instruments, other than derivatives, that are subject to master netting arrangements or similar agreements.
Annual Report 2015 239
— F-255 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (Continued) 31 December 2015 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards and swaps, and cross-currency interest rate swaps 1,307,952 13,737 (11,102) Currency options 22,704 134 (92) Subtotal 13,871 (11,194) Interest rate derivatives Interest rate swaps 158,118 920 (961) Precious metal contracts 32,049 1,247 (37) Total derivative financial assets and liabilities 16,038 (12,192)
31 December 2014 Contractual/ notional Fair value amount Assets Liabilities Exchange rate derivatives Currency forwards and swaps, and cross-currency interest rate swaps 828,028 5,746 (6,167) Currency options 33,112 72 (79) Subtotal 5,818 (6,246) Interest rate derivatives Interest rate swaps 166,002 795 (936) Precious metal contracts 12,732 561 (58) Others 55 21 — Total derivatives financial assets and liabilities 7,195 (7,240)
Credit risk weighted amount for derivative transaction counterparties represents the counterparty credit risk associated with derivative transactions and is calculated in accordance with the “Capital Rules for Commercial Banks (Provisional)” issued by the CBRC which was effective 1 January 2013 and is dependent on, among other factors, creditworthiness of customers and maturity characteristics of each type of contract. As at 31 December 2015 and 31 December 2014, the credit risk weighted amount for derivative transaction counterparty was measured under the Internal Ratings — Based approach as disclosed in Note IV 50 Capital Management.
240
— F-256 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (Continued) As at 31 December 2015 2014 Credit risk weighted amount for counterparty 19,364 12,576
18 FINANCIAL ASSETS HELD UNDER RESALE AGREEMENTS As at 31 December 2015 2014 Analyzed by collateral type: Debt securities 179,068 209,160 Bills 292,741 300,258 Total 471,809 509,418
The collateral received in connection with financial assets under resale agreement is disclosed in Note IV 47 Contingent Liabilities and Commitments — Collateral.
19 LOANS AND ADVANCES TO CUSTOMERS Analysis of loans and advances to customers:
As at 31 December 2015 2014 Corporate loans and advances Loans and advances 5,818,306 5,516,854 Discounted bills 356,995 180,229 Subtotal 6,175,301 5,697,083 Personal loans and advances 2,734,617 2,400,984 Gross loans and advances 8,909,918 8,098,067 Allowance for impairment losses Individually assessed (133,900) (73,094) Collectively assessed (269,343) (284,977) Total allowance for impairment losses (403,243) (358,071) Loans and advances to customers, net 8,506,675 7,739,996
Annual Report 2015 241
— F-257 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS (Continued) Analysis of loans and advances to customers by collective and individual assessments:
Identified impaired Loans and Identified impaired loans and advances (2) gross loans advances and advances for which For which For which as a % of allowance is allowance is allowance is total gross collectively collectively individually loans and assessed (1) assessed assessed Subtotal Total advances 31 December 2015 Gross loans and advances 8,697,051 31,889 180,978 212,867 8,909,918 2.39 Allowance for impairment losses (247,294) (22,049) (133,900) (155,949) (403,243) Loans and advances to customers, net 8,449,757 9,840 47,078 56,918 8,506,675 31 December 2014 Gross loans and advances 7,973,097 21,063 103,907 124,970 8,098,067 1.54 Allowance for impairment losses (270,386) (14,591) (73,094) (87,685) (358,071) Loans and advances to customers, net 7,702,711 6,472 30,813 37,285 7,739,996
(1) Loans and advances for which allowance is collectively assessed consist of loans and advances which have not been specifically identified as impaired.
(2) Identified impaired loans and advances include loans for which objective evidence of impairment exists and which have been identified as bearing impairment losses, which are measured either individually (corporate loans and advances) or collectively (personal loans and advances).
242
— F-258 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19 LOANS AND ADVANCES TO CUSTOMERS (Continued) Movements of the allowance for impairment losses on loans and advances to customers:
Year ended 31 December 2015 Individually Collectively assessed assessed allowance allowance Total 1 January 2015 73,094 284,977 358,071 Impairment allowance on loans charged 103,532 49,622 153,154 Reversal of impairment allowance (8,447) (62,810) (71,257) Net additions 95,085 (13,188) 81,897 Write-offs and transfer out (33,921) (7,408) (41,329) Recovery of loans and advances written off in previous years 805 425 1,230 Unwinding of discount on allowance (1,302) (463) (1,765) Transfer in — 4,626 4,626 Exchange difference 139 374 513 31 December 2015 133,900 269,343 403,243
Year ended 31 December 2014 Individually Collectively assessed assessed allowance allowance Total 1 January 2014 50,127 272,064 322,191 Impairment allowance on loans charged 58,579 59,031 117,610 Reversal of impairment allowance (9,976) (42,571) (52,547) Net additions 48,603 16,460 65,063 Write-offs and transfer out (25,772) (3,450) (29,222) Recovery of loans and advances written off in previous years 921 220 1,141 Unwinding of discount on allowance (688) (314) (1,002) Exchange difference (97) (3) (100) 31 December 2014 73,094 284,977 358,071
Annual Report 2015 243
— F-259 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20 AVAILABLE-FOR-SALE FINANCIAL ASSETS
As at 31 December 2015 2014 Debt securities issued by: Governments 333,537 147,513 Public sector and quasi-governments 465,630 449,232 Financial institutions 176,548 138,698 Corporates 226,882 186,574 Subtotal 1,202,597 922,017 Fund investments (1) 6,586 3,358 Equity instruments (1) 5,359 2,528 Total 1,214,542 927,903 Analyzed as: Debt securities Listed in Hong Kong 41,923 19,163 Listed outside Hong Kong (2) 1,148,771 892,466 Unlisted 11,903 10,388 Equity instruments and fund investments and others Listed in Hong Kong 396 79 Listed outside Hong Kong 7,687 4,307 Unlisted (3) 3,862 1,500 Total 1,214,542 927,903
(1) The Group’s available-for-sale fund investments and certain equity instruments have been disclosed in Note IV 46 Structured Entities.
(2) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
(3) As at 31 December 2015, unlisted equity instruments of the Group amounted to RMB314 million was measured at cost because their fair value cannot be reliably measured (31 December 2014: RMB284 million).
244
— F-260 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21 HELD-TO-MATURITY INVESTMENTS As at 31 December 2015 2014 Debt securities issued by: Governments 852,367 548,330 Public sector and quasi-governments 1,061,581 936,274 Financial institutions 202,729 67,878 Corporates 185,967 159,349 Gross amount 2,302,644 1,711,831 Allowance for impairment losses-collectively assessed (1,820) (881) Held-to-maturity investments, net 2,300,824 1,710,950 Analyzed as: Listed in Hong Kong 6,221 1,381 Listed outside Hong Kong (1) 2,278,021 1,700,044 Unlisted 16,582 9,525 Total 2,300,824 1,710,950
(1) Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.
22 DEBT INSTRUMENTS CLASSIFIED AS RECEIVABLES As at 31 December 2015 2014 Receivable from the MOF (1) 272,023 278,314 Special government bond (2) 93,300 93,300 Government bonds 42,841 — Public sector and quasi-government bonds 39,786 56,141 Financial institution bonds 57,339 45,334 Corporate bonds 32,514 35,020 Certificate treasury bonds and savings treasury bonds 2,929 3,590 Others (3) 18,733 11,621 Gross amount, unlisted 559,465 523,320 Allowance for impairment losses Individually assessed (1,470) (478) Collectively assessed (575) (725) Total allowance for impairment losses (2,045) (1,203) Debt instruments classified as receivables, net 557,420 522,117
(1) Pursuant to the “Notice on Relevant Issues Concerning the Disposal of Non-performing Assets of Agricultural Bank of China” (Caijin [2008] No. 138) issued by the MOF, receivable from the MOF is to be settled annually over a tentative period of 15 years starting from 1 January 2008 and bears interest at the rate of 3.3% per annum.
(2) Special government bond refers to the non-transferable bond issued by the MOF in 1998 in the aggregate principal amount of RMB93.3 billion to the Predecessor Entity for capital replenishment. The bond will mature in 2028 and bears interest at a fixed rate of 2.25% per annum, starting from 1 December 2008.
(3) Other debt instruments classified as receivables are primarily related to investment in unconsolidated structured entities held by the Group as disclosed in Note IV 46 Structured Entities.
Annual Report 2015 245
— F-261 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23 INVESTMENT IN SUBSIDIARIES (1) The following are the principal subsidiaries of the Bank as at 31 December 2015:
Date of Place of Percentage of Percentage of incorporation/ incorporation/ Authorized/ equity interest voting rights Principal Name of entity establishment establishment paid-in capital (%) (%) activities China Agricultural Finance 1 November 1988 Hong Kong, PRC HKD588,790,000 100.00 100.00 Investment holding Co., Ltd. ABC International 11 November 2009 Hong Kong, PRC HKD4,113,392,449 100.00 100.00 Investment holding Holdings Limited ABC Financial Leasing 29 September 2010 Shanghai, PRC RMB3,000,000,000 100.00 100.00 Financial leasing Co., Ltd. Agricultural Bank of 29 November 2011 London, USD100,000,000 100.00 100.00 Banking China (UK) Limited United Kingdom ABC-CA Fund 18 March 2008 Shanghai, PRC RMB200,000,001 51.67 51.67 Fund management Management Co., Ltd. ABC Hexigten Rural Bank 12 August 2008 Inner Mongolia, RMB19,600,000 51.02 51.02 Banking Limited Liability Company PRC ABC Hubei Hanchuan (i) 12 August 2008 Hubei, PRC RMB31,000,000 50.00 66.67 Banking Rural Bank Limited Liability Company ABC Jixi Rural Bank 25 May 2010 Anhui, PRC RMB29,400,000 51.02 51.02 Banking Limited Liability Company ABC Ansai Rural Bank 30 March 2010 Shaanxi, PRC RMB20,000,000 51.00 51.00 Banking Limited Liability Company ABC Zhejiang Yongkang 20 April 2012 Zhejiang, PRC RMB210,000,000 51.00 51.00 Banking Rural Bank Limited Liability Company ABC Xiamen Tong’an 24 May 2012 Fujian, PRC RMB100,000,000 51.00 51.00 Banking Rural Bank Limited Liability Company ABC Life Insurance Co., Ltd. (ii) 19 December 2005 Beijing, PRC RMB2,032,653,061 51.00 51.00 Life insurance Agricultural Bank of 26 November 2014 Luxembourg, EUR20,000,000 100.00 100.00 Banking China (Luxembourg) Luxembourg Limited Agricultural Bank of 23 December 2014 Moscow, Russia RUB1,400,000,000 100.00 100.00 Banking China (Moscow) Limited
246
— F-262 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23 INVESTMENT IN SUBSIDIARIES (Continued) (1) The following are the principal subsidiaries of the Bank as at 31 December 2015 (Continued):
During the year ended 31 December 2015, there were no changes in the proportion of equity interest or voting rights the Bank held in its subsidiaries.
(i) Two of the three directors on the board of ABC Hubei Hanchuan Rural Bank Limited Liability Company were appointed by the Bank. The Bank concluded that it has effective control over this entity and has included it in its consolidation scope.
(ii) On 31 December 2012, the Bank acquired 51% of the issued share capital of Jiahe Life Insurance Co., Ltd. and renamed it as ABC Life Insurance Co., Ltd., and the Group recognized goodwill of RMB1,381 million as a result of this acquisition. For the year ended 31 December 2015, there was no objective evidence noted for any goodwill impairment.
(2) In addition, the Group also consolidated structured entities, principally consist of Wealth Management Product (“WMP”) Vehicles sponsored and distributed by the Group whereby the Group has guaranteed principal investments and special purpose trusts founded by third party trust companies for asset backed securities issued by the Group (Note IV 46 Structured Entities). The Group controls these entities because the Group is exposed to, or has rights to, variable returns from its involvement with these entities and has the ability to affect returns through its power over these entities.
24 INVESTMENT IN ASSOCIATE 31 December 31 December 2015 2014 Carrying amount 273 —
On 28 May 2015, the Sino-Congolese Bank of Africa (La Banque Sino-Congolaise pour I’Afrique, herein referred to as BSCA.Bank), established by the Bank and other investors with authorized capital denominated in Central African CFA franc (“XAF”), was granted the required banking license by the local regulatory authority. The Bank holds 50% equity interest and voting rights in BSCA. Bank, and has the power to participate in the financial and operating policy decisions of BSCA.Bank, but does not constitute control or joint control over those policy decisions.
Annual Report 2015 247
— F-263 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25 PROPERTY AND EQUIPMENT Electronic equipment, furniture and Motor Construction Buildings fixtures vehicles in progress Total Cost 1 January 2015 142,795 56,048 4,814 23,885 227,542 Additions 2,686 7,963 8 8,008 18,665 Transfers 10,210 364 — (10,574) — Disposals (407) (1,828) (236) (486) (2,957) 31 December 2015 155,284 62,547 4,586 20,833 243,250 Accumulated depreciation 1 January 2015 (38,733) (30,788) (2,753) — (72,274) Charge for the year (8,129) (8,285) (329) — (16,743) Eliminated on disposals 244 1,795 224 — 2,263 31 December 2015 (46,618) (37,278) (2,858) — (86,754) Allowance for impairment losses 1 January 2015 (299) (9) (2) (8) (318) Impairment loss ————— Eliminated on disposals ————— 31 December 2015 (299) (9) (2) (8) (318) Carrying value 31 December 2015 108,367 25,260 1,726 20,825 156,178 1 January 2015 103,763 25,251 2,059 23,877 154,950 Cost 1 January 2014 124,294 55,314 4,746 28,682 213,036 Additions 1,526 7,703 604 13,263 23,096 Transfers 17,569 491 — (18,060) — Disposals (594) (7,460) (536) — (8,590) 31 December 2014 142,795 56,048 4,814 23,885 227,542 Accumulated depreciation 1 January 2014 (31,529) (27,400) (2,947) — (61,876) Charge for the year (7,574) (8,723) (318) — (16,615) Eliminated on disposals 370 5,335 512 — 6,217 31 December 2014 (38,733) (30,788) (2,753) — (72,274) Allowance for impairment losses 1 January 2014 (288) (10) (2) (1) (301) Impairment loss (20) — — (7) (27) Eliminated on disposals 9 1 — — 10 31 December 2014 (299) (9) (2) (8) (318) Carrying value 31 December 2014 103,763 25,251 2,059 23,877 154,950 1 January 2014 92,477 27,904 1,797 28,681 150,859
According to the relevant laws and regulations, subsequent to the Bank’s transformation into a joint stock company, the legal title of properties previously held by the Predecessor Entity are to be transferred to the Bank. As at 31 December 2015, the registration transfer process of certain properties has not been completed. Management believes that the incomplete registration transfer process does not affect the rights of the Bank as the legal successor to those assets.
248
— F-264 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26 DEFERRED TAXATION For the purpose of presentation in the consolidated statement of financial position, certain deferred tax assets and liabilities have been offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the deferred tax balances:
As at 31 December 2015 2014 Deferred tax assets 81,548 78,640 Deferred tax liabilities (111) (43) Net 81,437 78,597
(1) The following are the movements and major deferred tax assets and liabilities recognized:
Fair value Allowance Accrued changes of for but not Early financial impairment paid staff retirement instruments, losses cost benefits Provision net Others Total 1 January 2015 67,514 6,248 2,235 3,476 (900) 24 78,597 Credit/(charge) to the consolidated income statement 9,671 193 (304) 945 (1,258) 42 9,289 Charge to other comprehensive income ————(6,449) — (6,449) 31 December 2015 77,185 6,441 1,931 4,421 (8,607) 66 81,437
Fair value Allowance Accrued changes of for but not Early financial impairment paid staff retirement instruments, losses cost benefits Provision net Others Total 1 January 2014 56,137 6,165 2,589 1,181 8,011 (16) 74,067 Credit/(charge) to the consolidated income statement 11,377 83 (354) 2,295 (289) 40 13,152 Credit to other comprehensive income — — — — (8,622) — (8,622) 31 December 2014 67,514 6,248 2,235 3,476 (900) 24 78,597
Annual Report 2015 249
— F-265 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26 DEFERRED TAXATION (Continued) (2) Deferred income tax assets/(liabilities) and related temporary differences, before offsetting qualifying amounts, are attributable to the following items:
31 December 2015 31 December 2014 Deductible/ Deductible/ (taxable) Deferred (taxable) Deferred temporary tax assets/ temporary tax assets/ difference (liabilities) difference (liabilities) Deferred tax assets Allowance for impairment losses 308,741 77,185 270,124 67,514 Fair value changes of financial instruments 15,703 3,926 10,404 2,601 Accrued but not paid staff cost 25,765 6,441 24,992 6,248 Early retirement benefits 7,724 1,931 8,938 2,235 Provision 17,682 4,421 13,902 3,476 Others 392 97 228 57 Subtotal 376,007 94,001 328,588 82,131 Deferred tax liabilities Fair value changes of financial instruments (50,130) (12,533) (14,006) (3,501) Others (125) (31) (140) (33) Subtotal (50,255) (12,564) (14,146) (3,534) Net 325,752 81,437 314,442 78,597
250
— F-266 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
27 OTHER ASSETS As at 31 December 2015 2014 Interest receivable 104,775 97,948 Land use rights (1) 23,036 23,524 Accounts receivable and temporary payments (2) 44,576 16,708 Premiums receivable and reinsurance assets 27,001 13,532 Long-term deferred expenses 3,587 3,649 Investment property 2,997 2,846 Intangible assets 2,740 2,593 Foreclosed assets 1,699 487 Others 4,892 2,535 Total 215,303 163,822
(1) Land use rights According to the relevant laws and regulations, subsequent to the Bank’s transformation into a joint stock company, land use rights previously held by the Predecessor Entity are to be transferred to the Bank. As at 31 December 2015, the registration transfer process of certain land use rights has not been completed. Management believes that the incomplete registration transfer process does not affect the rights of the Bank as the legal successor to those land use rights.
(2) Accounts receivable and temporary payments primarily include items in the process of clearing and settlement.
28 BORROWINGS FROM CENTRAL BANK As at 31 December 2015, borrowings from central bank mainly include Medium-term Lending Facilities from PBOC amounting to RMB58,600 million(31 December 2014: RMB80,000 million).
Annual Report 2015 251
— F-267 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
29 DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS As at 31 December 2015 2014 Deposits from: Domestic banks 116,519 148,043 Other domestic financial institutions 1,091,258 666,905 Overseas banks 9,514 13,045 Other overseas financial institutions 4,610 3,148 Total 1,221,901 831,141
30 PLACEMENTS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS As at 31 December 2015 2014 Placements from: Domestic banks and other financial institutions 145,255 62,537 Overseas banks and other financial institutions 170,504 162,386 Total 315,759 224,923
31 FINANCIAL LIABILITIES HELD FOR TRADING The financial liabilities held for trading are liabilities related to precious metal contracts.
32 FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS As at 31 December 2015 2014 Principal guaranteed wealth management products 406,407 347,282
The Group designates wealth management products with principal guaranteed by the Group as financial liabilities at fair value through profit or loss. The corresponding investments are designated as financial assets at fair value through profit or loss. As at 31 December 2015 and 31 December 2014, the difference between the fair value of these products issued by the Group and the contractual amount payable to the holders of these products upon maturity was not material.
For the current and prior year, there were no significant changes in the fair value of the Group’s financial liabilities designated at fair value through profit or loss attributable to the changes in the Group’s own credit risk.
252
— F-268 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
33 FINANCIAL ASSETS SOLD UNDER REPURCHASE AGREEMENTS As at 31 December 2015 2014 Analyzed by type of collateral: Debt securities 88,333 131,021 Bills 471 — Total 88,804 131,021
The collateral pledged under repurchase agreement is disclosed in Note IV 47 Contingent Liabilities and Commitments — Collateral.
34 DUE TO CUSTOMERS As at 31 December 2015 2014 Demand deposits Corporate customers 3,229,703 3,012,527 Individual customers 3,898,806 3,546,541 Time deposits Corporate customers 1,662,658 1,485,274 Individual customers 4,174,684 3,882,102 Pledged deposits (1) 319,757 299,437 Others 252,752 307,516 Total 13,538,360 12,533,397
(1) Analyzed by activity to which pledged deposits are related to: As at 31 December 2015 2014 Bank acceptance 113,421 118,330 Trade finance 77,903 50,423 Guarantee and letters of guarantee 66,093 63,630 Letters of credit 16,739 21,567 Others 45,601 45,487 Total 319,757 299,437
Annual Report 2015 253
— F-269 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 DEBT SECURITIES ISSUED As at 31 December 2015 2014 Bonds issued (1) 198,476 191,994 Certificates of deposit issued (2) 165,508 113,388 Commercial papers issued (3) 11,586 11,800 Interbank certificates of deposit issued (4) 7,172 7,985 Total 382,742 325,167
As at 31 December 2015 and 31 December 2014, there was no default related to any debt securities issued.
(1) The carrying value of the Group’s bonds issued are as follows:
As at 31 December 2015 2014 4.15% RMB fixed rate Green Bonds maturing in October 2017 (i) 600 — 2.125% USD fixed rate Green Bonds maturing in October 2018 (ii) 2,597 — 4.0% subordinated fixed rate bonds maturing in May 2024 (iii) 25,000 25,000 5.8% Tier-two capital fixed rate bonds maturing in August 2024 (iv) 30,000 30,000 2.75% USD fixed rate Green Bonds maturing in October 2020 (v) 3,247 — 5.3% subordinated fixed rate bonds maturing in June 2026 (vi) 50,000 50,000 4.99% subordinated fixed rate bonds maturing in December 2027 (vii) 50,000 50,000 3.2% fixed rate RMB bonds maturing in November 2015 (viii) — 1,000 Medium term notes issued (ix) 37,164 36,125 Total nominal value 198,608 192,125 Less: Unamortized issuance cost and discounts (132) (131) Carrying value 198,476 191,994
254
— F-270 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 DEBT SECURITIES ISSUED (Continued)
(1) The carrying value of the Group’s bonds issued are as follows (Continued): Pursuant to the approval by relevant regulatory authorities, the bonds issued by the Group are set out as below:
(i) The RMB green bonds issued in London in October 2015 have a tenor of 2 years, with a fixed coupon rate 4.15%, payable semi-annually.
(ii) The USD green bonds issued in London in October 2015 have a tenor of 3 years, with a fixed coupon rate 2.125%, payable semi-annually.
(iii) The subordinated fixed rate bonds issued in May 2009 have a tenor of 15 years, with a fixed coupon rate of 4.0%, payable annually. The Bank has an option to redeem all of the bonds at face value on 20 May 2019. If the Bank did not exercise this option, the coupon rate of the bonds will increase to 7.0% per annum from 20 May 2019 onwards.
(iv) The Tier-two capital bonds issued in August 2014 have a tenor of 10 years, with a fixed coupon rate of 5.8% payable annually. The Bank has an option to redeem part or all of the bonds at face value on 17 August 2019 if specified redemption conditions as stipulated in the offering documents were met, subject to regulatory approval. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 5.8% per annum from 18 August 2019 onwards. These Tier-two capital bonds have the write-down feature of a Tier-two capital instrument, which allows the Bank to write down the entire principal of the bonds when regulatory triggering events as stipulated in the offering documents occur and any accumulated unpaid interest would become not payable, and; they are qualified as Tier-two Capital Instruments in accordance with the CBRC requirements.
(v) The USD green bonds issued in London in October 2015 have a tenor of 5 years, with a fixed coupon rate 2.75%, payable semi-annually.
(vi) The subordinated fixed rate bonds issued in June 2011 have a tenor of 15 years, with a fixed coupon rate of 5.3%, payable annually. The Bank has an option to redeem all of the bonds at face value on 7 June 2021. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 5.3% per annum from 7 June 2021 onwards.
(vii) The subordinated fixed rate bonds issued in December 2012 have a tenor of 15 years, with a fixed coupon rate of 4.99%, payable annually. The Bank has an option to redeem all of the bonds at face value on 20 December 2022. If the Bank did not exercise this option, the coupon rate of the bonds would remain at 4.99% per annum from 20 December 2022 onwards.
(viii) The RMB bonds issued in Hong Kong in November 2012 have a tenor of 3 years, with a fixed coupon rate 3.2%, payable semi-annually. These bonds matured in 2015.
Annual Report 2015 255
— F-271 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 DEBT SECURITIES ISSUED (Continued)
(1) The carrying value of the Group’s bonds issued are as follows (Continued): (ix) The medium term notes (“MTN”) were issued by the Overseas Operations of the Group and are measured at amortized cost. The details of medium term notes issued were as follows:
As at 31 December 2015 Maturity dates Coupon rates Outstanding ranging from (%) balance Fixed rate USD MTNs January 2016 to May 2020 0.5–2.875 27,055 Fixed rate RMB MTNs May 2016 to August 2019 3.23–3.80 6,091 Floating rate USD MTNs September 2016 to 3-month USD LIBOR May 2018 plus 0.43 to 1.33 2,500 Fixed rate EUR MTNs March 2016 to March 2017 0.31–0.48 497 Fixed rate HKD MTNs March 2016 to June 2016 1.0–1.15 413 Fixed rate JPY MTN March 2016 0.21 108 Zero coupon RMB MTN February 2016 — 500 Total 37,164
As at 31 December 2014 Maturity dates Coupon rates Outstanding ranging from (%) balance Fixed rate USD MTNs January 2015 to December 2018 0.21–2.875 18,774 Fixed rate RMB MTNs February 2015 to August 2019 2.70–3.80 11,683 Fixed rate CHF MTNs July 2015 to August 2015 0.85–1.00 1,743 Floating rate USD MTNs April 2015 to 3-month USD LIBOR March 2017 plus 0.88 to 1.35 1,626 Fixed rate EUR MTNs August 2015 to September 2015 0.99–1.12 895 Fixed rate HKD MTNs May 2015 to August 2015 1.35–1.49 600 Fixed rate JPY MTN August 2015 to November 2015 0.50–0.70 431 Zero coupon EUR MTN January 2015 — 373 Total 36,125
256
— F-272 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35 DEBT SECURITIES ISSUED (Continued) (2) As at 31 December 2015, the certificates of deposit were issued by the Overseas Operations of the Group and were measured at amortized cost. The terms of the certificates of deposit range from seven days to seven years, with interest rates ranging from 0% to 4.5%. As at 31 December 2014, the terms range from nine days to seven years with interest rates ranging from 0% to 4.20%.
(3) As at 31 December 2015, the commercial papers were issued by the Overseas Operations of the Group and were measured at amortized cost. The terms of the commercial papers range from seven days to one year, with interest rates ranging from 0% to 1.05 %. As at 31 December 2014, the terms range from seven days to one year, with interest rates ranging from 0.19% to 0.93%.
(4) As at 31 December 2015, the interbank certificates of deposit were issued by the Bank’s Head Office and Shanghai Branch in the free trade area. The terms of the interbank certificates of deposit range from three months to two years, with interest rates ranging from 0% to 3.32%. As at 31 December 2014, the terms ranging from three months to one year with interest rates ranging from 0% to 4.76%.
36 OTHER LIABILITIES As at 31 December 2015 2014 Interest payable 225,383 192,876 Insurance liabilities 69,589 42,789 Clearing and settlement 69,419 46,433 Staff costs payable (1) 39,890 40,511 Income taxes payable 38,097 41,338 Provision 17,682 13,902 Amount payable to the MOF (2) 7,330 3,275 Business and other taxes payable 7,117 7,535 Dormant accounts 1,576 1,616 Others 52,514 45,712 Total 528,597 435,987
Annual Report 2015 257
— F-273 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
36 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued) As at 31 December 2015 2014 Short-term employee benefits (i) 31,721 30,952 Defined contribution benefits (ii) 445 621 Early retirement benefits (iii) 7,724 8,938 Total 39,890 40,511
(i) Short-term employee benefits 2015 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 24,228 67,513 (67,968) 23,773 Housing funds (a) 183 8,851 (8,856) 178 Social insurance including: (a) 178 4,956 (5,010) 124 — Medical insurance 154 4,317 (4,364) 107 — Employment injury insurance 12 287 (291) 8 — Maternity insurance 12 352 (355) 9 Labor union fees and staff education expenses 3,183 3,026 (2,228) 3,981 Others 3,180 9,458 (8,973) 3,665 Total 30,952 93,804 (93,035) 31,721
2014 1 January Accrued Paid 31 December Salaries, bonuses, allowance and subsidies (a) 24,973 66,780 (67,525) 24,228 Housing funds (a) 245 8,186 (8,248) 183 Social insurance including: (a) 181 4,454 (4,457) 178 — Medical insurance 149 3,848 (3,843) 154 — Employment injury insurance 16 278 (282) 12 — Maternity insurance 16 328 (332) 12 Labor union fees and staff education expenses 2,726 2,977 (2,520) 3,183 Others 6,389 12,825 (16,034) 3,180 Total 34,514 95,222 (98,784) 30,952
(a) Salaries, bonuses, allowance and subsidies, housing funds and social insurance are timely distributed and paid in accordance with the relevant laws and regulations and the Group’s policy.
258
— F-274 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
36 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(ii) Defined contribution benefits 2015 1 January Accrued Paid 31 December Basic pensions 541 11,150 (11,295) 396 Unemployment insurance 66 721 (743) 44 Annuity Scheme 14 3,280 (3,289) 5 Total 621 15,151 (15,327) 445
2014 1 January Accrued Paid 31 December Basic pensions 629 10,695 (10,783) 541 Unemployment insurance 65 804 (803) 66 Annuity Scheme 9 3,137 (3,132) 14 Total 703 14,636 (14,718) 621
The defined contribution benefits are timely distributed and paid in accordance with the relevant laws and regulations and the Group’s policy.
(iii) Early retirement benefits 2015 1 January Accrued Paid 31 December Early retirement benefits 8,938 1,394 (2,608) 7,724
2014 1 January Accrued Paid 31 December Early retirement benefits 10,356 1,611 (3,029) 8,938
Annual Report 2015 259
— F-275 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
36 OTHER LIABILITIES (Continued)
(1) Staff costs payable (Continued)
(iii) Early retirement benefits (Continued) The principal assumptions used for the purpose of the actuarial valuations were as follows:
As at 31 December 2015 2014 Discount rate 2.57% 3.41% Annual average medical expense growth rate 8.00% 8.00% Annual subsidies growth rate 8.00% 8.00% Normal retirement age — Male 60 60 — Female 55 55
Assumptions regarding future mortality experience are based on the China Life Insurance Mortality Table (year 2000–2003) (published historical statistics in China).
Any difference arising from the actual result or changes in assumptions may affect the amount of expense recognized in the consolidated income statement.
(2) Amount payable to the MOF Pursuant to the “Notice on Relevant Issues Concerning the Disposal of Non-performing Assets of Agricultural Bank of China” (Caijin [2008] No. 138) issued by the MOF, the MOF commissioned the Bank to manage and dispose of non-performing assets transferred. The amount payable to the MOF represents proceeds collected by the Bank from the disposal of these non-performing assets on behalf of the MOF.
260
— F-276 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
37 ORDINARY SHARES For the current and prior year, there was no change in the Bank’s ordinary share capital.
As at 31 December 2015 and 2014 Number of shares Nominal (millions) value Registered, issued and fully paid: A shares of RMB1 each 294,055 294,055 H shares of RMB1 each 30,739 30,739 Total 324,794 324,794
A share refers to the ordinary shares listed in the Mainland China. They are offered and traded in RMB. H share refers to the ordinary shares listed in Hong Kong. Their par value is denominated in RMB when they were initially offered and are currently traded in HKD.
As at 31 December 2015, all of the Bank’s A Shares and H Shares were not subject to lock-up restriction (31 December 2014: 9,892 million A Shares and none of the H Shares were subject to lock-up restriction).
38 PREFERENCE SHARES Issued Issued number nominal Financial instruments in Issued price of shares value Maturity issue Dividend rate (RMB yuan) (millions) (millions) date Conversions Preference shares 6% per annum for the first — first tranche five years after issuance, No conversion and re-priced every five years No maturity during as stated below 100 400 40,000 date the year
Preference shares 5.5% per annum for the first — second tranche five years after issuance, No conversion and re-priced every five years No maturity during as stated below 100 400 40,000 date the year
The Bank was authorized to issue 800 million preference shares of RMB100 each, pursuant to the approval by its ordinary shareholders and relevant regulatory authorities.
Annual Report 2015 261
— F-277 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
38 PREFERENCE SHARES (Continued) The first tranche of 400 million preference shares were issued at par in November 2014. The carrying amount, net of direct issuance expenses, was RMB39,944 million as at 31 December 2015. The first tranche preference shares bear a dividend rate of 6% per annum, dividends are non-cumulative and where payable, is paid annually, for the first five years from issuance. The dividend rate will be repriced every five years thereafter with reference to the five-year PRC treasury bonds yield plus a fixed premium of 2.29%.
The second tranche of 400 million preference shares were issued at par in March 2015. The carrying amount, net of direct issuance expenses, was RMB39,955 million as at 31 December 2015. The second tranche preference shares bear a dividend rate of 5.5% per annum, dividends are non-cumulative and where payable, is paid annually, for the first five years from issuance. The dividend rate will be re-priced every five years thereafter with reference to the five-year PRC treasury bonds yield plus a fixed premium of 2.24%.
There were no changes in the carrying amounts of the preference shares since issuance.
As authorized by the shareholders’ annual general meeting, the Board of Directors has the sole discretion to declare and distribute dividends on preference shares. The Bank shall not distribute any dividends to its ordinary shareholders before it declares such dividends to preference shareholders for the relevant period. The distribution of preference shares dividend is at the Bank’s discretion and is non-cumulative. Preference shareholders are not entitled to participate in the distribution of retained profits except for the dividends stated above.
The Bank has redemption option when specified conditions as stipulated in the offering documents are met, subject to regulatory approval, whereas preference shareholders have no right to require the Bank to redeem the preference shares.
Upon liquidation, the claims of preference shareholders have priority over ordinary shareholders on the residual assets of the Bank, but are subordinated to those of depositors, general creditors, Tier-Two Capital Instruments holders or any other subordinated debt holders with equivalent rights.
Upon occurrence of the triggering events as stipulated in paragraph 2(3) of the Guidance of the China Banking Regulatory Commission on Commercial Banks’ Innovation on Capital Instruments (CBRC No. 56 [2012]) and subject to regulatory approval, preference shares shall be mandatorily converted into ordinary A shares of the Bank at the conversion price of RMB2.43 yuan per share, partially or entirely. The conversion price of the preference shares will be adjusted where certain events occur including bonus issues, rights issue, capitalization of reserves and new issuances of ordinary shares, subject to terms and formulas provided for in the offering documents, to maintain the relative interests between preference shareholders and ordinary shareholders.
262
— F-278 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
38 PREFERENCE SHARES (Continued) These preference shares are classified as equity instruments, and presented as equity in the consolidated statement of financial position, and; are qualified as Additional Tier-one Capital Instruments in accordance with the CBRC requirements.
39 CAPITAL RESERVE The capital reserve represents the premium related to ordinary shares issued by the Bank in 2010. Share premium was recorded in the capital reserve after deducting direct issue expenses, which consisted primarily of underwriting fees and professional fees.
40 INVESTMENT REVALUATION RESERVE
2015 Gross amount Tax effect Net effect 1 January 2015 4,176 (1,058) 3,118 Fair value changes on available-for-sale financial assets — Amount of gains/(losses) recognized directly in other comprehensive income 26,218 (6,542) 19,676 — Amount removed from other comprehensive income and recognized in profit or loss (487) 122 (365) 31 December 2015 29,907 (7,478) 22,429
2014 Gross amount Tax effect Net effect 1 January 2014 (30,313) 7,541 (22,772) Fair value changes on available-for-sale financial assets — Amount of gains/(losses) recognized directly in other comprehensive income 34,722 (8,657) 26,065 — Amount removed from other comprehensive income and recognized in profit or loss (233) 58 (175) 31 December 2014 4,176 (1,058) 3,118
Annual Report 2015 263
— F-279 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
41 SURPLUS RESERVE Under PRC Law, the Bank is required to transfer 10% of its net profit determined under the PRC GAAP to a non-distributable statutory surplus reserve. Appropriation to the statutory surplus reserve may cease when the balance of this reserve has reached 50% of share capital. Pursuant to the resolution of the Board of Directors’ Meeting held on 31 March 2016, an appropriation of 10% of the profit for the current year, determined under the generally accepted accounting principles of the PRC, to the statutory surplus reserve, in the amount of RMB18,078 million (2014: RMB17,894 million) was approved. In addition, certain subsidiaries and overseas branches also appropriate surplus reserves in accordance with local requirements.
Subject to the approval of the equity holders, the statutory surplus reserves can be used for replenishing accumulated losses or increasing the Bank’s ordinary share capital. The statutory surplus reserves amount used to increase the ordinary share capital is limited to a level where the balance of the statutory surplus reserves after such capitalization is not less than 25% of the ordinary share capital.
42 GENERAL RESERVE Pursuant to Caijin [2012] No. 20 “Requirements on Impairment Allowance for Financial Institutions” (the “Requirement”) issued by the MOF, effective 1 July 2012, in addition to impairment allowance, the Bank establishes a general reserve within equity holders’ equity through the appropriation of profit to address unidentified potential impairment risks. The general reserve should not be less than 1.5% of the aggregate amount of risk assets as defined by the Requirement. The general reserve includes regulatory reserve appropriated by the Bank’s overseas branches (“Overseas Institutions”) pursuant to local regulatory requirements.
Pursuant to relevant PRC regulatory requirements, some domestic subsidiaries of the Bank are required to appropriate certain amounts of their net profit as general reserves.
During the year ended 31 December 2015, the Group transferred RMB18,899 million (2014: RMB17,503 million) to the General Reserve pursuant to the regulatory requirements in the PRC and overseas jurisdictions. Of this amount, RMB18,721 million (2014: RMB17,330 million) related to the appropriation proposed for the year ended 31 December 2014 which was approved in the annual general meeting held on 29 June 2015.
43 CASH AND CASH EQUIVALENTS For the purpose of the consolidated statement of cash flows, cash and cash equivalents include the following balances with an original maturity of three months or less:
As at 31 December 2015 2014 Cash 116,390 111,962 Balance with central banks 90,035 76,525 Deposits with banks and other financial institutions 128,173 68,355 Placements with and loans to banks and other financial institutions 234,139 197,151 Financial assets held under resale agreements 253,232 284,248 Total 821,969 738,241
264
— F-280 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS Operating segments are identified on the basis of internal management reports with respect to the components of the Group that are regularly reviewed by the Board and relevant management committees, which constitute the chief operating decision makers, for the purposes of allocating resources to segments and assessing their performance. The Group’s chief operating decision makers review three different sets of financial information based on (i) geographical locations, (ii) business activities and (iii) County Area and Urban Area banking business.
The measurement of segment assets and liabilities, as well as segment revenue, expense and results is based on the Group’s accounting policies. There is no difference between the accounting policies used in the preparation of the consolidated financial statements and those used in preparing the operating segment information.
Transactions between segments are conducted under normal commercial terms and conditions. Internal charges and transfer pricing are determined with reference to market rates and have been reflected in the performance of each segment.
Segment revenue, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Geographical operating segments The details of the geographical operating segments are as follows:
Head Office Yangtze River Delta: Shanghai, Jiangsu, Zhejiang, Ningbo Pearl River Delta: Guangdong, Shenzhen, Fujian, Xiamen Bohai Rim: Beijing, Tianjin, Hebei, Shandong, Qingdao Central China: Shanxi, Hubei, Henan, Hunan, Jiangxi, Hainan, Anhui Western China: Chongqing, Sichuan, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang (including Xinjiang Bingtuan), Tibet, Inner Mongolia, Guangxi Northeastern China: Liaoning, Heilongjiang, Jilin, Dalian Overseas and Others: Subsidiaries and overseas branches
Annual Report 2015 265
— F-281 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
Geographical operating segments (Continued)
For the year ended 31 December 2015
Head Yangtze Pearl Central Western Northeastern Overseas Consolidated Office River Delta River Delta Bohai Rim China China China and Others Eliminations total External interest income 233,765 116,679 73,291 83,188 67,071 113,792 20,485 17,522 — 725,793 External interest expense (19,204) (64,711) (34,978) (53,948) (43,216) (49,637) (15,026) (8,933) — (289,653) Inter-segment interest (expense)/income (178,365) 36,616 21,233 43,284 35,342 30,231 11,223 436 — — Net interest income 36,196 88,584 59,546 72,524 59,197 94,386 16,682 9,025 — 436,140 Fee and commission income 17,535 16,759 12,920 11,909 10,234 16,492 3,615 1,030 — 90,494 Fee and commission expense (757) (1,545) (1,443) (1,033) (1,293) (1,459) (322) (93) — (7,945) Net fee and commission income 16,778 15,214 11,477 10,876 8,941 15,033 3,293 937 — 82,549 Net trading gain 2,196 58 121 80 88 134 71 814 — 3,562 Net gain/(loss) on financial instruments designated at fair value through profit or loss 1,483 102 41 146 — (2) — (43) — 1,727 Net gain on investment securities 96 — — — — — — 761 — 857 Other operating income 2,172 1,127 895 593 576 3,800 196 6,668 — 16,027 Operating income 58,921 105,085 72,080 84,219 68,802 113,351 20,242 18,162 — 540,862 Operating expenses (9,677) (37,801) (26,731) (34,694) (34,793) (55,435) (15,113) (11,574) — (225,818) Impairment losses on assets (2,075) (27,785) (12,493) (12,113) (5,983) (24,435) 1,875 (1,163) — (84,172) Operating profit 47,169 39,499 32,856 37,412 28,026 33,481 7,004 5,425 — 230,872 Share of results of associates (15) — — — — — — — — (15) Profit before tax 47,154 39,499 32,856 37,412 28,026 33,481 7,004 5,425 — 230,857 Income tax expense (50,083) Profit for the year 180,774 Depreciation and amortization included in operating expenses 1,847 3,186 2,235 3,035 3,391 4,397 1,370 172 — 19,633 Capital expenditure 2,338 1,880 2,029 3,889 3,445 5,196 1,316 1,340 — 21,433 As at 31 December 2015 Segment assets 4,432,038 3,696,692 2,282,608 3,255,511 2,542,695 3,586,925 838,650 782,258 (3,707,532) 17,709,845 Including: Investment in associate 273 — — — — — — — — 273 Unallocated assets 81,548 Total assets 17,791,393 Include: non-current assets (1) 12,860 33,596 18,713 30,663 29,523 43,005 12,423 9,409 — 190,192 Segment liabilities (3,299,014) (3,699,920) (2,275,314) (3,251,913) (2,530,704) (3,593,727) (835,551) (762,690) 3,707,532 (16,541,301) Unallocated liabilities (38,207) Total liabilities (16,579,508) Credit commitments 29,972 440,928 199,864 306,640 155,778 226,098 65,815 58,619 — 1,483,714
266
— F-282 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
Geographical operating segments (Continued)
For the year ended 31 December 2014
Head Yangtze Pearl Central Western Northeastern Overseas Consolidated Office River Delta River Delta Bohai Rim China China China and Others Eliminations total External interest income 195,050 120,056 79,418 87,736 67,622 113,607 20,717 15,083 — 699,289 External interest expense (17,947) (59,107) (33,242) (50,234) (39,903) (46,172) (14,182) (8,611) — (269,398) Inter-segment interest (expense)/income (134,867) 24,333 11,247 33,126 29,229 27,096 9,455 381 — — Net interest income 42,236 85,282 57,423 70,628 56,948 94,531 15,990 6,853 — 429,891 Fee and commission income 12,679 17,100 12,959 12,321 11,849 16,651 3,350 974 — 87,883 Fee and commission expense (517) (1,542) (1,468) (1,146) (1,269) (1,427) (346) (45) — (7,760) Net fee and commission income 12,162 15,558 11,491 11,175 10,580 15,224 3,004 929 — 80,123 Net trading gain/(loss) 3,196 133 104 77 93 256 83 (2,034) — 1,908 Net gain/(loss) on financial instruments designated at fair value through profit or loss 1,383 22 54 91 — (1) — (44) — 1,505 Net (loss)/gain on investment securities (12) — — — — — — 347 — 335 Other operating (expenses)/income (435) 1,018 613 755 402 2,458 142 5,411 — 10,364 Operating income 58,530 102,013 69,685 82,726 68,023 112,468 19,219 11,462 — 524,126 Operating expenses (11,598) (39,131) (28,276) (35,222) (35,454) (52,093) (15,371) (6,753) — (223,898) Impairment losses on assets (2,569) (18,152) (10,182) (16,826) (7,285) (12,872) 464 (549) — (67,971) Profit before tax 44,363 44,730 31,227 30,678 25,284 47,503 4,312 4,160 — 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses 1,639 3,171 2,289 2,921 3,374 4,362 1,428 144 — 19,328 Capital expenditure 1,610 3,333 2,961 3,943 3,967 7,051 1,617 1,378 — 25,860 As at 31 December 2014 Segment assets 4,211,552 3,147,375 1,928,364 2,629,880 2,276,362 3,152,220 743,602 590,362 (2,784,205) 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Include: non-current assets (1) 10,481 36,833 18,919 29,870 29,437 42,106 12,531 8,766 — 188,943 Segment liabilities (3,254,625) (3,143,950) (1,923,067) (2,627,471) (2,267,258) (3,145,053) (745,298) (577,635) 2,784,205 (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 32,555 457,653 211,896 345,025 172,803 263,993 60,369 38,431 — 1,582,725
(1) Non-current assets include property and equipment, investment properties, land use rights, intangible assets and other long-term assets.
Annual Report 2015 267
— F-283 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
Business operating segments The details of the business operating segments are as follows:
Corporate banking The corporate banking segment provides financial products and services to corporations, government agencies and financial institutions. The range of products and services includes corporate loans and advances, trade finance, deposit products, corporate wealth management services and other types of corporate intermediary services.
Personal banking The personal banking segment provides financial products and services to individual customers. The range of products and services includes personal loans, deposit products, card business, personal wealth management services and other types of personal intermediary services.
Treasury operations The Group’s treasury operations conduct money market and repurchase transactions, debt instruments investments, precious metal transactions and derivative transactions for its own accounts or on behalf of customers.
Others Others comprise components of the Group that are not attributable to any of the above segments, along with certain assets, liabilities, income or expenses of the Head Office that could not be allocated on a reasonable basis.
268
— F-284 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
Business operating segments (Continued)
For the year ended 31 December 2015 Corporate Personal Treasury Consolidated banking banking operations Others total External interest income 349,680 145,375 226,730 4,008 725,793 External interest expense (98,642) (168,061) (21,541) (1,409) (289,653) Inter-segment interest (expense)/ income (19,707) 176,040 (156,333) — — Net interest income 231,331 153,354 48,856 2,599 436,140 Fee and commission income 43,764 45,529 — 1,201 90,494 Fee and commission expense (2,352) (5,528) — (65) (7,945) Net fee and commission income 41,412 40,001 — 1,136 82,549 Net trading gain/(loss) — — 3,602 (40) 3,562 Net gain on financial instruments designated at fair value through profit or loss 66 1,318 299 44 1,727 Net gain on investment securities — — 103 754 857 Other operating income 2,587 2,006 2,896 8,538 16,027 Operating income 275,396 196,679 55,756 13,031 540,862 Operating expenses (92,867) (96,439) (25,010) (11,502) (225,818) Impairment losses on assets (79,500) (1,924) (1,708) (1,040) (84,172) Operating profit 103,029 98,316 29,038 489 230,872 Share of results of associates — — — (15) (15) Profit before tax 103,029 98,316 29,038 474 230,857 Income tax expense (50,083) Profit for the year 180,774 Depreciation and amortization included in operating expenses 3,785 11,460 4,281 107 19,633 Capital expenditure 3,950 11,958 4,467 1,058 21,433 At 31 December 2015 Segment assets 6,086,284 3,181,175 8,300,506 141,880 17,709,845 Including: Investment in associate — — — 273 273 Unallocated assets 81,548 Total assets 17,791,393 Segment liabilities (6,155,984) (9,232,539) (1,024,999) (127,779) (16,541,301) Unallocated liabilities (38,207) Total liabilities (16,579,508) Credit commitments 1,148,227 335,487 — — 1,483,714
Annual Report 2015 269
— F-285 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
Business operating segments (Continued)
For the year ended 31 December 2014 Corporate Personal Treasury Consolidated banking banking operations Others total External interest income 351,644 138,133 205,715 3,797 699,289 External interest expense (93,897) (152,025) (21,908) (1,568) (269,398) Inter-segment interest (expense)/ income (22,285) 166,724 (144,439) — — Net interest income 235,462 152,832 39,368 2,229 429,891 Fee and commission income 45,921 40,857 23 1,082 87,883 Fee and commission expense (2,478) (5,240) (2) (40) (7,760) Net fee and commission income 43,443 35,617 21 1,042 80,123 Net trading gain — — 1,818 90 1,908 Net gain/(loss) on financial instruments designated at fair value through profit or loss — — 1,524 (19) 1,505 Net (loss)/gain on investment securities — — (8) 343 335 Other operating income 1,796 1,427 2,963 4,178 10,364 Operating income 280,701 189,876 45,686 7,863 524,126 Operating expenses (100,065) (97,354) (20,086) (6,393) (223,898) Impairment losses on assets (56,215) (9,491) (1,850) (415) (67,971) Profit before tax 124,421 83,031 23,750 1,055 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses 4,139 11,223 3,885 81 19,328 Capital expenditure 5,555 15,065 5,214 26 25,860 At 31 December 2014 Segment assets 5,571,140 2,826,973 7,388,768 108,631 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Segment liabilities (5,621,221) (8,214,892) (968,350) (95,689) (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 1,252,331 330,394 — — 1,582,725
270
— F-286 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments The Group’s operating segments organized by County Area and Urban Area banking business are set out as follows:
County Area banking business The Group’s County Area banking business provides a broad range of financial products and services to customers in designated County Area, through its operating branches in the counties or county-level cities throughout the PRC. The products and services mainly comprise loans, deposits, bank cards, and other types of intermediary services.
Urban Area banking business The Group’s Urban Area banking business comprises all banking activities outside of the County Area banking business, overseas branches and subsidiaries.
Annual Report 2015 271
— F-287 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments (Continued)
For the year ended 31 December 2015
County Area Urban Area banking banking Consolidated business business Eliminations total External interest income 166,863 558,930 — 725,793 External interest expense (100,263) (189,390) — (289,653) Inter-segment interest income/ (expense) 101,332 (101,332) — — Net interest income 167,932 268,208 — 436,140 Fee and commission income 31,289 59,205 — 90,494 Fee and commission expense (3,098) (4,847) — (7,945) Net fee and commission income 28,191 54,358 — 82,549 Net trading gain 210 3,352 — 3,562 Net gain on financial instruments designated at fair value through profit or loss 63 1,664 — 1,727 Net gain on investment securities — 857 — 857 Other operating income 4,483 11,544 — 16,027 Operating income 200,879 339,983 — 540,862 Operating expenses (91,828) (133,990) — (225,818) Impairment losses on assets (33,649) (50,523) — (84,172) Operating profit 75,402 155,470 — 230,872 Share of results of associates — (15) — (15) Profit before tax 75,402 155,455 — 230,857 Income tax expense (50,083) Profit for the year 180,774 Depreciation and amortization included in operating expenses 9,036 10,597 — 19,633 Capital expenditure 8,896 12,537 — 21,433 At 31 December 2015 Segment assets 6,379,322 11,432,038 (101,515) 17,709,845 Including: Investment in associate — 273 — 273 Unallocated assets 81,548 Total assets 17,791,393 Segment liabilities (5,992,911) (10,649,905) 101,515 (16,541,301) Unallocated liabilities (38,207) Total liabilities (16,579,508) Credit commitments 301,417 1,182,297 — 1,483,714
272
— F-288 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
44 OPERATING SEGMENTS (Continued)
County Area and Urban Area segments (Continued)
For the year ended 31 December 2014
County Area Urban Area banking banking Consolidated business business Eliminations total External interest income 166,526 532,763 — 699,289 External interest expense (93,707) (175,691) — (269,398) Inter-segment interest income/ (expense) 94,083 (94,083) — — Net interest income 166,902 262,989 — 429,891 Fee and commission income 31,348 56,535 — 87,883 Fee and commission expense (3,152) (4,608) — (7,760) Net fee and commission income 28,196 51,927 — 80,123 Net trading gain 222 1,686 — 1,908 Net gain on financial instruments designated at fair value through profit or loss 39 1,466 — 1,505 Net gain on investment securities — 335 — 335 Other operating income 2,719 7,645 — 10,364 Operating income 198,078 326,048 — 524,126 Operating expenses (93,018) (130,880) — (223,898) Impairment losses on assets (28,240) (39,731) — (67,971) Profit before tax 76,820 155,437 — 232,257 Income tax expense (52,747) Profit for the year 179,510 Depreciation and amortization included in operating expenses 8,865 10,463 — 19,328 Capital expenditure 8,210 17,650 — 25,860 At 31 December 2014 Segment assets 5,841,613 10,136,691 (82,792) 15,895,512 Unallocated assets 78,640 Total assets 15,974,152 Segment liabilities (5,509,147) (9,473,797) 82,792 (14,900,152) Unallocated liabilities (41,381) Total liabilities (14,941,533) Credit commitments 323,296 1,259,429 — 1,582,725
Annual Report 2015 273
— F-289 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 RELATED PARTY TRANSACTIONS
(1) The Group and the MOF As at 31 December 2015, the MOF directly owned 39.21% (31 December 2014: 39.21%) of the ordinary shares of the Bank.
The MOF is a Chinese government ministry, primarily responsible for managing state fiscal revenue and expenditures, and establishing and enforcing taxation policies. It reports to the Chinese State Council.
The Group had the following balances and transactions with the MOF in its ordinary course of business under normal commercial terms:
As at 31 December 2015 2014 Assets Treasury bonds and special government bond 656,427 734,578 Receivable from the MOF (Note IV 22) 272,023 278,314 Interest receivable — treasury bonds and special government bond 7,734 9,366 — receivable from the MOF 25 26 Accounts receivable and temporary payments 3,665 272 Liabilities Amount payable to the MOF (Note IV 36) 7,330 3,275 Customer deposits 10,309 10,613 Interest payable 12 10 Other liability — redemption of treasury bonds on behalf of the MOF 103 105
Year ended 31 December 2015 2014 Interest income 41,987 38,623 Interest expense (126) (82) Fee and commission income 7,948 7,430
Interest rate ranges for transactions with the MOF during the year are as follows:
Year ended 31 December 2015 2014 %% Treasury bonds and receivable from the MOF 1.94–9.00 1.85–9.00 Customer deposits 0.01–3.06 0.01–3.25
The Group’s redemption commitment for treasury bonds underwriting is disclosed in Note IV 47 Contingent Liabilities and Commitments.
274
— F-290 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 RELATED PARTY TRANSACTIONS (Continued)
(2) The Group and Huijin Central Huijin Investment Ltd. (“Huijin”) is a wholly-owned subsidiary of China Investment Corporation Limited, which is incorporated in Beijing, PRC. Huijin was established to hold certain equity interests in state-owned financial institutions as authorized by the Chinese State Council and does not engage in other commercial activities. Huijin exercises its legal rights and assumes obligations related to the Bank on behalf of the PRC Government.
As at 31 December 2015, Huijin directly owned 40.03% (31 December 2014: 40.28%) of the ordinary shares of the Bank.
Transactions with Huijin The Group had the following balances and transactions with Huijin in its ordinary course of business under normal commercial terms:
As at 31 December 2015 2014 Assets Investment in debt securities 12,137 11,244 Interest receivable 145 134 Liabilities Principal guaranteed wealth management products issued by the Bank 20,500 — Customer deposits 8,001 3,829 Interest payable 537 —
Year ended 31 December 2015 2014 Interest income 391 429 Interest expense (956) (177)
Interest rate ranges for transactions with Huijin during the year are as follows:
Year ended 31 December 2015 2014 %% Investment in debt securities 3.16–4.20 3.14–4.20 Principal guaranteed wealth management products issued by the Bank 4.35–5.00 — Customer deposits 0.72–2.80 0.72–3.30
Annual Report 2015 275
— F-291 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 RELATED PARTY TRANSACTIONS (Continued)
(2) The Group and Huijin (Continued)
Transactions with companies under Huijin Huijin has equity interests in certain other banks and financial institutions under the direction of the Chinese government. The Group enters into transactions with these banks and financial institutions in the ordinary course of business under normal commercial terms. Corresponding balances with these banks and financial institutions were as follows:
As at 31 December 2015 2014 Assets Investment securities 817,653 769,490 Deposits with banks and other financial institutions 76,061 40,060 Placements with and loans to banks and other financial institutions 62,752 92,797 Derivative financial assets 1,111 451 Financial assets held under resale agreements 33,134 39,363 Loans and advances to customers 20,358 4,219 Liabilities Deposits from banks and other financial institutions 63,087 30,342 Placements from banks and other financial institutions 73,087 44,965 Derivative financial liabilities 1,444 465 Financial assets sold under repurchase agreements 83,000 110,300 Customer deposits — 1,000 Equity Preference shares 2,000 200 Off-balance sheet items Non-principal guaranteed wealth management products issued by the Bank 15,700 300
(3) The Group and other government related entities Other than disclosed above, a significant portion of the Group’s banking transactions are entered into with government authorities, agencies, affiliates and other State controlled entities. These transactions are entered into under normal commercial terms and conditions and mainly include provision of credit and guarantee, deposits, foreign exchange transactions, derivative transactions, agency services, underwriting and distribution of bonds issued by government agencies, purchase, sales and redemption of investment securities issued by government agencies.
Management considers that these transactions are activities conducted in the ordinary course of business, and that the dealings of the Group have not been significantly or unduly affected by the fact that the Group and those entities are government related. The Group has also established pricing policies for products and services and such pricing policies do not depend on whether or not the customers are government authorities, agencies, affiliates and other State controlled entities.
276
— F-292 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 RELATED PARTY TRANSACTIONS (Continued)
(4) The Bank and its subsidiaries The Bank entered into banking transactions with its subsidiaries at arm’s length in the ordinary course of business.
Management considers that transactions between the Bank and its subsidiaries are not significant.
(5) The Group and its associate The Group entered into banking transactions with its associate at arm’s length in the ordinary course of business.
Management considers that transactions between the Group and its associate are not significant.
(6) Key management personnel Key management personnel are those persons who have the authority and responsibility to plan, direct and control the activities of the Group.
The Group enters into banking transactions with key management personnel in the normal course of business. During the years ended 31 December 2015 and 31 December 2014, the Group had no material transactions with key management personnel.
The remuneration of directors and other members of key management during the years was as follows:
Year ended 31 December 2015 2014 (Restated) Salaries, bonuses and staff welfare 8.00 19.25
According to the regulations of the relevant authorities in the PRC, the key management personnel’s final emoluments for the year ended 31 December 2015 have not been finalized. Management of the Group believes that difference between the final emoluments and that disclosed above will not have significant impact on the consolidated financial statements of the Group. The final compensation will be disclosed in a separate announcement when determined.
The compensation of key management personnel for the year ended 31 December 2014 was not decided at the time when the Group’s 2014 consolidated financial statements were released and the amount of remuneration of directors and other members of key management recognized in the consolidated income statement for the year of 2014 was RMB11.73 million. Supplementary announcement on final compensation of RMB19.25 million was released by the Bank on 27 August 2015. The comparative figures for the year of 2014 have been restated accordingly.
Annual Report 2015 277
— F-293 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
45 RELATED PARTY TRANSACTIONS (Continued)
(7) The Group and the Annuity Scheme The Group had the following balances and transactions with the Annuity Scheme set up by the Bank apart from the obligation for defined contribution to the Annuity Scheme:
As at 31 December 2015 2014 Deposits from Annuity Scheme 8,050 8,050 Interest payable 15 15
Year ended 31 December 2015 2014 Interest expense 490 490
Interest rate range for transactions with the Annuity Scheme during the year is as follows:
Year ended 31 December 2015 2014 %% Deposits from Annuity Scheme 5.75–6.20 5.75–6.20
278
— F-294 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 STRUCTURED ENTITIES
(1) Unconsolidated structured entities managed by the Group The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid. The WMP Vehicles invest in a range of primarily fixed-rate assets, most typically money market instruments, debt securities and loan assets. As the manager of WMPs, the Group invests, on behalf of its customers, the funds raised in the assets as described in the investment plan related to each WMP and receives Fee and Commission Income. The variable return that the Group has in relation to the WMPs is not significant, therefore, the WMP Vehicles are not consolidated by the Group.
As at 31 December 2015, the outstanding WMPs issued by WMP Vehicles (excluding those with the principal guaranteed issued by the Group) amounted to RMB1,102,201 million (31 December 2014: RMB672,983 million). During the year ended 31 December 2015, the Group’s interest in the WMP Vehicles included Net Fee and Commission Income of RMB6,721 million (2014: RMB5,070 million) and Net Interest Income of RMB427 million (2014: RMB499 million), which related to placements transactions by the Group with these WMP Vehicles.
The Group has entered into placements transactions at market interest rates with the WMP Vehicles. The average balance during 2015 and the outstanding balance as at 31 December 2015 of these transactions were RMB18,742 million (weighted average outstanding period of 4.40 days) and RMB78,000 million, respectively. The average balance during the year of 2014 and the outstanding balance as at 31 December 2014 of these transactions were RMB19,788 million (weighted average outstanding period of 3.72 days) and RMB81,300 million, respectively. The Group was under no obligation to enter into these transactions. As at 31 December 2015 and 31 December 2014, the outstanding balance of these transactions was presented in placements with and loans to banks and other financial institutions and represented the Group’s maximum exposure to the WMP Vehicles.
There were no contractual liquidity arrangements, guarantees or other commitments among or between the Group, WMP Vehicles or any third parties that could increase the level of the Group’s risk from or reduce its interest in WMP Vehicles disclosed above during the years ended 31 December 2015 and 31 December 2014. The Group is not required to absorb any losses incurred by WMPs before other parties. In 2015 and 2014, no loss was incurred by the WMP Vehicles relating to the Group’s interests in the WMP Vehicles, and the WMP Vehicles did not experience difficulty in financing their activities.
Annual Report 2015 279
— F-295 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 STRUCTURED ENTITIES (Continued)
(2) Unconsolidated structured entities held by the Group The Group invests in other unconsolidated structured entities which are sponsored and managed by other entities for investment return, and records trading gains or losses and Interest Income therefrom. Unconsolidated structured entities are primarily underlying investments made by WMPs managed by the Group, and for which the Group has provided investors of the WMPs with a principal guarantee. As at 31 December 2015, the Group’s maximum exposure to these other unconsolidated structured entities is summarized in the table below.
As at 31 December 2015 Financial assets designated at fair value Debt through Available- Held-to- instruments profits for-sale maturity classified as or losses investments investment receivables Total Interest in trust products 201,583 — — — 201,583 Other debt instruments 47,714 — — — 47,714 Asset management products issued by other entities (i) 100 2,460 — 16,812 19,372 Asset-backed securities 675 2,253 — 24 2,952 Fund investments — 6,586 — — 6,586 Mortgage-backed securities — 41 36 — 77 Total 250,072 11,340 36 16,836 278,284
280
— F-296 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
46 STRUCTURED ENTITIES (Continued)
(2) Unconsolidated structured entities held by the Group (Continued) As at 31 December 2014 Financial assets designated at fair value Debt through Available- Held-to- instruments profits for-sale maturity classified as or losses investments investment receivables Total Interest in trust products 248,794 — — — 248,794 Other debt instruments 59,876 — — — 59,876 Asset management products issued by other entities (i) — — — 10,613 10,613 Asset-backed securities — 5,054 — — 5,054 Fund investments — 3,358 — — 3,358 Mortgage-backed securities — 48 40 — 88 Total 308,670 8,460 40 10,613 327,783
(i) The asset management products issued by other entities primarily consist of WMPs, asset management plans and debt investment plans.
The information of total size of the unconsolidated structured entities listed above is not readily available from the public domain.
(3) Consolidated structured entities The Group’s consolidated structured entities consist principally of WMP Vehicles that issue and distribute WMPs with respect to which the Group has guaranteed the investor’s principal investment, regardless of its actual performance; and a special purpose trust founded by a third party trust company for issuing asset backed securities by the Group. During the years ended 31 December 2015 and 31 December 2014, the Group did not provide financial support for any of these WMP Vehicles and the special purpose trust.
Annual Report 2015 281
— F-297 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
47 CONTINGENT LIABILITIES AND COMMITMENTS
Legal proceedings The Bank and its subsidiaries are involved as defendants in certain lawsuits arising from their normal business operations. Management of the Group believes that the final result of these lawsuits will not have a material impact on the financial position or operations of the Group.
Provision for risk incidents and legal proceedings were made by the Group based on court judgments or advice of internal and external legal counsel, and included in Note IV 36 Other Liabilities.
Capital commitments As at 31 December 2015 2014 Contracted but not provided for 4,836 5,302
In addition, as at 31 December 2015, the Group did not have outstanding equity investment commitments for its investee companies (31 December 2014: the Group had outstanding equity investment commitments for its investee’s companies to the capital payment of RMB306 million).
Credit commitments As at 31 December 2015 2014 Loan commitments — With an original maturity of less than 1 year 14,351 15,664 — With an original maturity of 1 year or above 436,082 425,394 Subtotal 450,433 441,058 Bank acceptance 382,255 418,937 Credit card commitments 258,745 254,222 Guarantee and letters of guarantee 233,376 241,171 Letters of credit 158,905 227,337 Total 1,483,714 1,582,725
Credit commitments represent credit cards and general credit facility limits granted to customers under non-cancellable agreements. These general credit facilities may be drawn in the form of loans or through the issuance of letters of credit, guarantee and letters of guarantee or bank acceptance.
Credit risk weighted amount for credit commitments Credit risk weighted amount for credit commitments represents the counterparty credit risk associated with credit commitments and is calculated in accordance with the “Capital Rules for Commercial Banks (Provisional)” issued by the CBRC which was effective 1 January 2013 and is dependent on, among other factors, creditworthiness of counterparties and maturity characteristics of each type of contract. As at 31 December 2015 and 31 December 2014, credit risk weighted amount for credit commitments was measured under the Internal Ratings — Based approach.
282
— F-298 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
47 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Credit risk weighted amount for credit commitments (Continued) As at 31 December 2015 2014 Credit commitments 774,925 800,383
Operating lease commitments At the end of each reporting period, the Group, as a lessee, had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:
As at 31 December 2015 2014 Within 1 year 4,107 4,206 1 to 2 years 3,169 3,153 2 to 3 years 2,473 2,525 3 to 5 years 2,969 3,193 Above 5 years 1,627 1,969 Total 14,345 15,046
During the year of 2015, operating lease expense recognized as operating expense by the Group was RMB5,115 million (2014: RMB4,743 million), and is included in Note IV 6 Operating Expenses.
Finance lease commitments As at 31 December 2015 and 31 December 2014, the Group, as a lessor, had no non-cancellable finance lease commitments.
As at 31 December 2015, the gross amount of finance lease receivables included in the Group’s loans and advances were RMB33,051 million (31 December 2014: RMB35,502 million), with the remaining maturity as follows:
As at 31 December 2015 2014 Overdue 3,794 1,991 Within 1 year 8,010 11,511 1 to 5 years 14,534 17,829 Above 5 years 6,713 4,171 Total 33,051 35,502
Annual Report 2015 283
— F-299 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
47 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Collateral
Assets pledged At the end of each reporting period, the carrying amounts of assets pledged as collateral under repurchase agreements are as follows:
As at 31 December 2015 2014 Debt securities 89,651 131,828 Bill 473 — Total 90,124 131,828
The carrying value of financial assets sold under repurchase agreements by the Group as at 31 December 2015 was RMB88,804 million (31 December 2014: RMB131,021 million) as set out in Note IV 33 Financial Assets Sold under Repurchase Agreements. Repurchase agreements are due within 12 months from the effective dates of these agreements.
Financial assets sold under repurchase agreements included certain transactions under which, title of the pledged securities has been transferred to counterparties. These transactions have been disclosed in Note IV 48 Transferred Financial Assets.
In addition, debt securities and deposits with banks and other financial institutions pledged in accordance with regulatory requirements or as collateral for derivative transactions by the Group as at 31 December 2015 amounted to RMB114,458 million in total (31 December 2014: RMB102,364 million).
Collateral accepted The Group received debt securities and bills as collateral in connection with the purchase of assets under resale agreements as set out in Note IV 18 Financial Assets Held Under Resale Agreements. The Group did not hold any collateral that can be resold or re-pledged as at 31 December 2015. As at 31 December 2014, the Group has accepted collateral that can be resold or re-pledged with a carrying amount of RMB3,055 million and the Group did not resell or re-pledge any of these collateral accepted.
Redemption commitment for treasury bonds The Group is entrusted by the MOF to underwrite certain treasury bonds. The investors of these treasury bonds have a right to redeem the bonds at par at any time prior to maturity and the Group is committed to honor such redemption requests. The redemption price is calculated as the par value of the bond plus unpaid interest in accordance with the terms of the related early redemption arrangement.
284
— F-300 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
47 CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
Redemption commitment for treasury bonds (Continued) As at 31 December 2015, the nominal value of treasury bonds the Group was obligated to redeem prior to maturity was RMB53,697 million (31 December 2014: RMB44,879 million). The original maturities of these bonds vary from 3 to 5 years. Management of the Group expects the amount of redemption before the maturity dates of these bonds will not be material.
The MOF will not provide funding for the early redemption of these bonds on a back-to-back basis, but will settle the principal and interest upon maturity.
48 TRANSFERRED FINANCIAL ASSETS The Group enters into transactions in the normal course of business whereby it transfers recognized financial assets to third parties or to structured vehicles. In some cases these transfers may give rise to full or partial de-recognition of the financial assets concerned. In other cases where the transferred assets do not qualify for de-recognition as the Group retains substantially all the risks and rewards of these assets, the Group continues to recognize the transferred assets.
Financial assets sold under repurchase agreements As disclosed under Note II 8.8 Repurchase Agreements and Agreements to Resell, the Group did not derecognize financial assets transferred as collateral in connection with repurchase agreements. As at 31 December 2015, of these collateral pledged disclosed in Note IV 47 Contingent Liabilities and Commitments — Collateral, RMB5,986 million (31 December 2014: RMB9,157 million) represented debt securities whereby legal title has been transferred to counterparties.
Securitization transactions The Group enters into securitization transactions in the normal course of business by which it transfers credit assets to structured entities which issue asset-backed securities to investors.
The Group may retain interests in the form of subordinated tranches which may give rise to the Group’s continuing involvement in the transferred assets. The Group determined whether or not to derecognize the transferred assets by evaluating the extent to which it retains the risks and rewards of the assets. For the part of continuing involvement, those financial assets are recognized on the consolidated statement of financial position to the extent of the Group’s continuing involvement. The extent of the Group’s continuing involvement is the extent to which the Group is exposed to changes in the value of the transferred assets.
As at 31 December 2015, the cumulative carrying amounts of loans under the Group’s outstanding securitization transactions where the Group had continuing involvements totaled RMB10,125 million (31 December 2014: RMB10,125 million). As at 31 December 2015, the Group continued to recognize assets of RMB844 million (31 December 2014: RMB967 million) under loans and advances to customers with the corresponding assets and liabilities under other assets and liabilities of the same amount arising from such continuing involvements.
Annual Report 2015 285
— F-301 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT
Overview The Group’s primary risk management objective is to maintain risk within acceptable parameters to meet the requirements of regulators, depositors and other stakeholders, as well as to maximize return for investors within an acceptable level of risk.
The Group has designed risk management policies, which address, among other things, the establishment of risk limits and controls to identify, analyze, monitor and report risks. Relevant and timely information used to conduct these risk management activities is provided through information systems maintained by the Group and intended to address the Group’s information needs in this area. The Group regularly reviews its risk management policies and systems to address changes in markets, products and emerging best practices.
The most significant types of risk to which the Group is exposed are credit risk, market risk and liquidity risk. Market risk includes foreign exchange rate risk, interest rate risk and other price risk.
Risk management framework The Board of Directors is responsible for establishing the overall risk appetite of the Group and reviewing and approving its risk management objectives and strategies.
Within this framework, the Group’s senior management has overall responsibility for managing all aspects of risk, including implementing risk management strategies, initiatives and credit policies and approving internal rules, measures and procedures related to risk management. The Risk Management Department of the Group implements procedures for managing the significant risks to which the Group is exposed.
286
— F-302 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk
Credit risk management Credit risk represents the potential loss that may arise from a customer or counterparty’s failure to meet its obligations when due. Credit risk can also arise from operational failures that result in an unauthorized or inappropriate advance, commitment or investment. The Group’s major credit risks arise from loans and receivables, treasury operations and off-balance sheet related credit risk exposures.
The Group’s credit risk management system is composed of the Board of Directors and its Risk Management Committee, Senior Management and its Risk Management Committee, Credit Approval Committee and Asset Disposal Committee, as well as the Risk Management Department, Credit Management Department, Credit Approval Department and related front-office customer departments. The Group’s credit risk management function operates under centralized management and authorization under a range of specified limits.
The Group performs standardized credit management procedures, including credit due diligence and proposal submission, credit underwriting review, loan disbursement, post-lending monitoring and non-performing loan management. The Group enhances its credit risk management by strictly complying with its credit management procedures; strengthening customer investigation, credit rating, lending approval and post-lending monitoring measures; enhancing risk mitigation effect of loans through collateral; accelerating disposal process of non-performing loans and continuously upgrading the credit management system.
For the year 2015, the Group strictly followed the strategy of macro-economic and related policies implemented by the government, continuously improved credit risk management and conscientiously adjusted and refined credit structure taking into consideration risk characteristics of the different industries and loan portfolios. The Group formulated risk mitigation policies on a timely basis and strengthened risk prevention of focused areas. The Group also accelerated the disposal of non-performing loans while controlling the level of non-performing loan increase.
Apart from the credit risk exposures on credit-related assets, deposits and placements with and loans to banks and other financial institutions, the credit risk arising from treasury business is managed by selecting counterparties with acceptable credit quality, balancing credit risk and return, referencing to both internal and external credit rating information where available and by applying appropriate limits subject to different level of management authority, and by timely reviewing and adjusting those limit in credit system. In addition, the Group also provides loan commitments and financial guarantee services to customers which may require the Group to make payments on behalf of customers upon their failure to perform under the terms of the related contract. Risks arising from loan commitments and financial guarantees are similar to those associated with loans and advances. These transactions are, therefore, subject to the same risk management policies and procedures.
Annual Report 2015 287
— F-303 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Impairment assessment
Key factors related to the Group’s impairment assessment In accordance with the “Guideline for Loan Credit Risk Classification” issued by the CBRC, the Group has established a loan credit risk classification system and performs credit risk management based on loan classification in one of five categories. The Group classifies loans into the following five categories: normal, special-mention, substandard, doubtful and loss. Loans classified as substandard, doubtful and loss are regarded as non-performing loans. The primary factors considered in loan impairment assessment include probability of loan repayment and recoverability of principal and interest, which reflect borrowers’ repayment ability, repayment record and intention, projected profitability, bank guarantees or collateral and legal responsibility of repayment. The allowance for impairment losses is assessed collectively or individually, as appropriate.
The five categories of loan classification into which the Group classifies its loans and advances to customers are set out below:
Normal Borrowers can honor the terms of their loans. There is no reason to doubt their ability to repay principal and interest in full on a timely basis.
Special-mention Borrowers are able to service their loans currently, although repayment may be adversely affected by specific factors.
Substandard Borrowers’ ability to service their loans is in question and they cannot rely entirely on normal operating revenues to repay principal and interest. Losses may ensue even when collateral or guarantees are invoked.
Doubtful Borrowers cannot repay principal and interest in full and significant losses will need to be recognized even when collateral or guarantees are invoked.
Loss Only a small portion or none of the principal and interest can be recovered after taking all possible measures and exhausting all legal remedies.
With respect to investments in debt securities other than held for trading or designated at fair value through profit or loss, the Group assesses for indicators of impairment at the end of each reporting period based on objective evidence and performs impairment assessment individually or collectively, as appropriate. For the impaired available-for-sale investments, the amount of the impairment allowance for available-for-sale investments is equal to the existing unrealized loss, which is recorded as a charge in the consolidated income statement.
288
— F-304 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Maximum exposure to credit risk before taking into account any collateral held or other credit enhancements The maximum exposure to credit risk represents the credit risk exposure to the Group at the end of each reporting period, without taking into account any collateral held or other credit enhancements. The exposure to credit risk at the end of each reporting period primarily arises from credit and treasury operations; as well as off-balance sheet items such as loan commitments, credit card commitments, bank acceptance, guarantee and letters of guarantee and letters of credit, as credit risks arising from these items are similar to those associated with loans and receivables.
A summary of the maximum exposure to credit risk is as follows:
As at 31 December 2015 2014 Balances with central banks 2,470,667 2,631,103 Deposits with banks and other financial institutions 697,923 572,805 Placements with and loans to banks and other financial institutions 504,252 407,062 Financial assets held for trading 79,762 58,404 Financial assets designated at fair value through profit or loss 355,530 354,763 Derivative financial assets 16,038 7,195 Financial assets held under resale agreements 471,809 509,418 Loans and advances to customers 8,506,675 7,739,996 Available-for-sale financial assets 1,202,597 922,017 Held-to-maturity investments 2,300,824 1,710,950 Debt instruments classified as receivables 557,420 522,117 Other financial assets 176,352 128,188 Subtotal 17,339,849 15,564,018 Credit commitments 1,483,714 1,582,725 Total 18,823,563 17,146,743
The Group has implemented specific policies and credit enhancement practices to mitigate credit risk exposure to an acceptable level. The most typical practice is obtaining guarantee deposits, collateral and guarantees. The amount and type of acceptable collateral are determined by credit risk evaluations of borrowers or counterparties. The Group implements guidelines on the acceptability of specific classes of collateral and evaluation parameters.
Annual Report 2015 289
— F-305 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Maximum exposure to credit risk before taking into account any collateral held or other credit enhancements (Continued) The main types of collateral obtained are as follows:
— Mortgage loans to retail customers are generally collateralized by mortgages over residential properties;
— Other personal lending and corporate loans and advances are primarily collateralized by charges over land and properties or other assets of the borrowers; and
— Financial assets held under resale agreements transactions are primarily collateralized by debt securities and bills.
The Group monitors the market value of collateral periodically and requests for additional collateral in accordance with the underlying agreement when necessary.
290
— F-306 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers The following tables set out the concentration of risk for loans and advances to customers by geographical area and industry.
(1) The composition of loans and advances to customers by geographical area is analyzed as follows: As at 31 December 2015 2014 Amount % of total Amount % of total Corporate loans and advances Head Office 215,317 3.5 147,614 2.6 Yangtze River Delta 1,355,458 22.0 1,312,497 23.0 Pearl River Delta 724,691 11.7 669,532 11.8 Bohai Rim 1,062,323 17.2 1,036,523 18.2 Central China 774,559 12.5 684,153 12.0 Western China 1,346,434 21.8 1,236,514 21.7 Northeastern China 256,614 4.2 217,926 3.8 Overseas and Others 439,905 7.1 392,324 6.9 Subtotal 6,175,301 100.0 5,697,083 100.0 Personal loans and advances Head Office 101 — 107 — Yangtze River Delta 692,935 25.4 606,026 25.2 Pearl River Delta 538,353 19.7 440,572 18.3 Bohai Rim 401,251 14.7 345,542 14.4 Central China 357,957 13.1 335,059 14.0 Western China 629,495 23.0 573,220 23.9 Northeastern China 107,798 3.9 96,113 4.0 Overseas and Others 6,727 0.2 4,345 0.2 Subtotal 2,734,617 100.0 2,400,984 100.0 Gross loans and advances to customers 8,909,918 8,098,067
Annual Report 2015 291
— F-307 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(2) The composition of loans and advances to customers by industry is analyzed as follows: As at 31 December 2015 2014 Amount % of total Amount % of total Corporate loans and advances Manufacturing 1,481,883 24.0 1,459,857 25.6 Transportation, logistics and postal services 924,356 15.0 779,230 13.7 Retail and wholesale 650,670 10.5 629,609 11.1 Production and supply of power, heat, gas and water 604,313 9.8 551,929 9.7 Real estate 548,388 8.9 587,916 10.3 Leasing and commercial services 461,772 7.5 399,910 7.0 Finance 457,823 7.4 218,286 3.8 Mining 260,558 4.2 261,932 4.6 Construction 216,636 3.5 212,961 3.7 Water, environment and public utilities management 205,797 3.3 209,769 3.7 Others 363,105 5.9 385,684 6.8 Subtotal 6,175,301 100.0 5,697,083 100.0 Personal loans and advances Residential mortgage 1,927,049 70.5 1,550,702 64.6 Personal business 230,424 8.4 266,913 11.1 Personal consumption 185,531 6.8 204,102 8.5 Credit cards 222,206 8.1 222,865 9.3 Others 169,407 6.2 156,402 6.5 Subtotal 2,734,617 100.0 2,400,984 100.0 Gross loans and advances to customers 8,909,918 8,098,067
292
— F-308 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(3) The composition of loans and advances to customers by contractual maturity and security type is analyzed as follows: 31 December 2015 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 916,995 340,169 839,763 2,096,927 Guaranteed loans 692,293 263,559 393,338 1,349,190 Loans secured by collateral 1,127,445 649,224 2,489,132 4,265,801 Pledged loans 623,149 71,132 503,719 1,198,000 Total 3,359,882 1,324,084 4,225,952 8,909,918
31 December 2014 Less than 1 to Over 1 year 5 years 5 years Total Unsecured loans 794,488 295,993 705,780 1,796,261 Guaranteed loans 785,858 285,079 317,351 1,388,288 Loans secured by collateral 1,164,594 668,884 2,105,571 3,939,049 Pledged loans 476,414 52,629 445,426 974,469 Total 3,221,354 1,302,585 3,574,128 8,098,067
Annual Report 2015 293
— F-309 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(4) Past due loans 31 December 2015 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 7,311 8,522 2,190 271 18,294 Guaranteed loans 21,478 26,103 18,134 4,143 69,858 Loans secured by collateral 67,076 63,271 37,878 6,716 174,941 Pledged loans 2,600 7,202 5,049 1,568 16,419 Total 98,465 105,098 63,251 12,698 279,512
31 December 2014 Up to 91–360 361 days Over 90 days days to 3 years 3 years Total Unsecured loans 9,442 4,744 616 371 15,173 Guaranteed loans 19,103 14,380 7,639 4,559 45,681 Loans secured by collateral 40,740 32,292 13,845 7,585 94,462 Pledged loans 3,854 5,041 721 1,688 11,304 Total 73,139 56,457 22,821 14,203 166,620
When either loan principal or interest is past due by one day in any period, the whole loan is classified as past due loan.
(5) Credit quality of loans and advances to customers
As at 31 December 2015 2014 Neither past due nor impaired (i) 8,623,179 7,923,816 Past due but not impaired (ii) 73,872 49,281 Impaired (iii) 212,867 124,970 Subtotal 8,909,918 8,098,067 Allowance for impairment losses of loans and advances to customers (403,243) (358,071) Loans and advances to customers, net 8,506,675 7,739,996
294
— F-310 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued)
(i) Loans and advances neither past due nor impaired 31 December 2015 Special- Normal mention Total Corporate loans and advances 5,648,447 303,383 5,951,830 Personal loans and advances 2,669,491 1,858 2,671,349 Total 8,317,938 305,241 8,623,179
31 December 2014 Special- Normal mention Total Corporate loans and advances 5,303,893 265,154 5,569,047 Personal loans and advances 2,352,828 1,941 2,354,769 Total 7,656,721 267,095 7,923,816
(ii) Loans and advances past due but not impaired 31 December 2015 Up to 31–60 61–90 91–360 Fair value 30 days days days days Total of collateral Corporate loans and advances 22,914 11,599 7,981 — 42,494 38,567 Personal loans and advances 18,080 7,716 5,582 — 31,378 20,059 Total 40,994 19,315 13,563 — 73,872 58,626
31 December 2014 Up to 31–60 61–90 91–360 Fair value 30 days days days days Total of collateral Corporate loans and advances 15,280 3,978 3,575 1,290 24,123 23,606 Personal loans and advances 15,662 5,440 4,053 3 25,158 33,285 Total 30,942 9,418 7,628 1,293 49,281 56,891
Annual Report 2015 295
— F-311 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued)
(iii) Impaired loans and advances 31 December 2015 Allowance for impairment Net book Book value losses value Individually assessed 180,978 (133,900) 47,078 Collectively assessed 31,889 (22,049) 9,840 Total 212,867 (155,949) 56,918
31 December 2014 Allowance for impairment Net book Book value losses value Individually assessed 103,907 (73,094) 30,813 Collectively assessed 21,063 (14,591) 6,472 Total 124,970 (87,685) 37,285
Including:
As at 31 December 2015 2014 Individually assessed and impaired 180,978 103,907 Individually assessed and impaired as a percentage of gross loans and advances of the Group 2.03% 1.28% Fair value of collateral 29,319 14,697
296
— F-312 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Loans and advances to customers (Continued)
(5) Credit quality of loans and advances to customers (Continued)
(iii) Impaired loans and advances (Continued) The composition of impaired loans and advances to customers by geographical area is analyzed as follows:
31 December 2015 31 December 2014 Amount % of total Amount % of total Head Office 7 — 7 — Yangtze River Delta 41,684 19.6 26,242 21.0 Pearl River Delta 29,600 13.9 16,790 13.4 Bohai Rim 40,005 18.8 26,727 21.4 Central China 28,084 13.2 18,656 14.9 Western China 63,921 30.0 30,332 24.3 Northeastern China 6,036 2.8 5,368 4.3 Overseas and Others 3,530 1.7 848 0.7 Total 212,867 100.0 124,970 100.0
(6) Rescheduled loans and advances Rescheduled loans and advances arise from renegotiating terms of contract, and such loans and advances require continuous monitoring. Rescheduled loans and advances of the Group as at 31 December 2015 amounted to RMB27,919 million (31 December 2014: RMB26,403 million).
(7) Assets foreclosed under credit enhancement arrangement Such assets are disclosed as foreclosed assets in Note IV 27 Other Assets.
Annual Report 2015 297
— F-313 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments
Credit quality of debt instruments The table below represents the carrying value and accumulated impairment charges of held-to-maturity investments and debt instruments classified as receivables:
As at 31 December 2015 2014 Neither past due nor impaired (1) 2,858,931 2,233,960 Impaired (2) 3,178 1,191 Subtotal 2,862,109 2,235,151 Individually assessed (1,470) (478) Collectively assessed (2,395) (1,606) Allowance for impairment losses (3,865) (2,084) Total held-to-maturity investments and debt instruments classified as receivables, net 2,858,244 2,233,067
298
— F-314 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued)
(1) Debt instruments neither past due nor impaired 31 December 2015 Financial assets at Available- Debt fair value for-sale Held-to- instruments through financial maturity classified as profit or loss assets investments receivables Total Debt securities issued by: — Governments 21,495 333,537 852,367 42,841 1,250,240 — Public sector and quasi- governments 78,853 465,589 1,061,581 39,786 1,645,809 — Financial institutions 48,856 176,073 202,729 57,339 484,997 — Corporates 22,079 226,882 185,967 31,971 466,899 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 272,023 272,023 Certificate treasury bonds and savings treasury bonds — — — 2,929 2,929 Interests in trust products 201,583 — — — 201,583 Other debt instruments 47,714 — — 16,098 63,812 Total 420,580 1,202,081 2,302,644 556,287 4,481,592
Annual Report 2015 299
— F-315 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued)
(1) Debt instruments neither past due nor impaired (Continued) 31 December 2014 Financial assets at Available- Debt fair value for-sale Held-to- instruments through financial maturity classified as profit or loss assets investments receivables Total Debt securities issued by: — Governments 14,780 147,513 548,330 — 710,623 — Public sector and quasi- governments 48,723 449,183 936,274 56,141 1,490,321 — Financial institutions 4,011 137,730 67,878 45,334 254,953 — Corporates 19,389 186,574 159,349 34,475 399,787 Special government bond — — — 93,300 93,300 Receivable from the MOF — — — 278,314 278,314 Certificate treasury bonds and savings treasury bonds — — — 3,590 3,590 Interests in trust products 248,794 — — — 248,794 Other debt instruments 59,876 — — 10,975 70,851 Total 395,573 921,000 1,711,831 522,129 3,550,533
300
— F-316 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued)
(2) Impaired debt instruments
31 December 2015 Debt Held-to- instruments maturity classified as investments receivables Total Corporate bonds — 543 543 Others — 2,635 2,635 Subtotal — 3,178 3,178 Allowance for impairment losses — (1,470) (1,470) Impaired held-to-maturity investments and debt instruments classified as receivables, net — 1,708 1,708
31 December 2014 Debt Held-to- instruments maturity classified as investments receivables Total Corporate bonds — 545 545 Others — 646 646 Subtotal — 1,191 1,191 Allowance for impairment losses — (478) (478) Impaired held-to-maturity investments and debt instruments classified as receivables, net — 713 713
The Group’s available-for-sale debt instruments were individually assessed for impairment. As at 31 December 2015, the carrying amount of the impaired available-for-sale debt instruments of the Group was RMB516 million (31 December 2014: RMB1,017 million), among which the total impairment losses recognized for these impaired available-for-sale debt instruments by the Group as at 31 December 2015 was RMB312 million (31 December 2014: RMB295 million).
Annual Report 2015 301
— F-317 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued)
(3) Debt instruments analyzed by credit rating The Group adopts a credit rating approach to manage the credit risk of the debt securities portfolio held. The ratings are obtained from major rating agencies where the issuers of the securities are located. The carrying amounts of debt securities investments analyzed by rating as at the end of the reporting period are as follows:
31 December 2015 Unrated (i) AAA AA A Below A Total Debt securities issued by: — Governments 940,929 300,747 7,607 119 362 1,249,764 — Public sector and quasi-governments 1,495,085 143,007 4,227 3,121 — 1,645,440 — Financial institutions 314,173 100,889 24,517 30,081 14,803 484,463 — Corporates (ii) 53,854 353,589 11,833 35,404 12,203 466,883 Special government bond 93,300 — — — — 93,300 Receivable from the MOF 272,023 ————272,023 Certificate treasury bonds and savings treasury bonds 2,929 — — — — 2,929 Interests in trust products (iii) 201,583 — — — — 201,583 Other debt instruments (iii) 65,036 — — — — 65,036 Total 3,438,912 898,232 48,184 68,725 27,368 4,481,421
31 December 2014 Unrated (i) AAA AA A Below A Total Debt securities issued by: — Governments 694,230 10,297 809 5,287 — 710,623 — Public sector and quasi-governments 1,372,558 110,807 3,044 3,783 — 1,490,192 — Financial institutions 170,221 48,639 15,686 13,636 6,958 255,140 — Corporates (ii) 51,096 289,920 11,875 42,033 4,701 399,625 Special government bond 93,300 ————93,300 Receivable from the MOF 278,314 — — — — 278,314 Certificate treasury bonds and savings treasury bonds 3,590 — — — — 3,590 Interests in trust products (iii) 248,794 ————248,794 Other debt instruments (iii) 71,079 ————71,079 Total 2,983,182 459,663 31,414 64,739 11,659 3,550,657
302
— F-318 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.1 Credit risk (Continued)
Debt instruments (Continued)
Credit quality of debt instruments (Continued)
(3) Debt instruments analyzed by credit rating (Continued) (i) Unrated debt investments held by the Group are bonds issued primarily by policy banks, the Chinese government, municipal government bonds and receivable from the MOF.
(ii) The ratings of super short-term commercial papers of the Group amounted to RMB51,553 million (31 December 2014: RMB31,704 million), as included in corporate bonds above are based on issuer rating for this credit risk analysis.
(iii) The trust products and other debt instruments are classified within Level 3 of the fair value measurement hierarch and the related credit risk is described in Note IV 51 Fair Value of Financial Instruments.
49.2 Liquidity risk Liquidity risk is the risk that funds will not be available to meet liabilities as they fall due. This may arise from cash flows or maturity mismatches of assets and liabilities.
The Group’s Assets and Liabilities Management Department manages its liquidity risk through:
— Optimizing asset and liability structure;
— Maintaining stability of deposit base;
— Making projections of future cash flows, and evaluating the appropriate liquid asset position;
— Maintaining an efficient internal funds transfer mechanism within the Group; and
— Performing stress testing on a regular basis.
Annual Report 2015 303
— F-319 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities The tables below summarize the maturity analysis of financial assets and financial liabilities by remaining contractual maturities based on the carrying amount at the end of each reporting period.
31 December 2015 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 175,046 31,379 — 3,147 — — 2,377,485 2,587,057 Deposits with banks and other financial institutions — 62,223 67,391 106,999 460,050 1,260 — — 697,923 Placements with and loans to banks and other financial institutions — — 228,400 60,359 206,024 9,469 — — 504,252 Financial assets held for trading — 20 9,188 16,872 33,146 16,580 3,976 — 79,782 Financial assets designated at fair value through profit or loss — — 28,991 49,415 181,918 62,543 32,663 3,949 359,479 Derivative financial assets — — 1,512 2,047 11,164 1,224 91 — 16,038 Financial assets held under resale agreements — — 275,867 127,105 68,837 — — — 471,809 Loans and advances to customers 46,176 — 436,319 758,211 2,520,971 1,764,276 2,980,722 — 8,506,675 Available-for-sale financial assets — — 30,086 40,705 214,175 608,815 308,816 11,945 1,214,542 Held-to-maturity investments — — 28,330 37,773 297,731 1,109,860 827,130 — 2,300,824 Debt instruments classified as receivables 1 72 1,537 4,568 28,219 100,398 422,625 — 557,420 Other financial assets 1,930 41,439 26,254 53,739 52,574 367 49 — 176,352 Total financial assets 48,107 278,800 1,165,254 1,257,793 4,077,956 3,674,792 4,576,072 2,393,379 17,472,153 Borrowings from central bank — (30) (1,257) (14,510) (44,199) (603) — — (60,599) Deposits from banks and other financial institutions — (654,627) (97,631) (71,036) (196,999) (201,608) — — (1,221,901) Placements from banks and other financial institutions — — (148,032) (81,136) (82,884) (1,981) (1,726) — (315,759) Financial liabilities held for trading — (11,541) (4,165) (5,628) (2,702) — — — (24,036) Financial liabilities designated at fair value through profit or loss — — (99,066) (94,230) (186,697) (26,378) (36) — (406,407) Derivative financial liabilities — — (1,055) (1,869) (7,915) (1,169) (184) — (12,192) Financial assets sold under repurchase agreements — — (83,138) (255) (5,411) — — — (88,804) Due to customers — (7,673,376) (549,963) (1,131,857) (2,553,458) (1,629,705) (1) — (13,538,360) Debt securities issued — — (38,732) (53,909) (98,423) (36,746) (154,932) — (382,742) Other financial liabilities — (133,606) (15,678) (66,889) (74,176) (95,149) (34,182) — (419,680) Total financial liabilities — (8,473,180) (1,038,717) (1,521,319) (3,252,864) (1,993,339) (191,061) — (16,470,480) Net position 48,107 (8,194,380) 126,537 (263,526) 825,092 1,681,453 4,385,011 2,393,379 1,001,673
304
— F-320 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Analysis of the remaining contractual maturity of financial assets and financial liabilities (Continued)
31 December 2014 On Less than 1–3 3–12 1–5 Over Past due demand 1 month months months years 5 years Undated Total Cash and balances with central banks — 161,215 27,272 — — — — 2,554,578 2,743,065 Deposits with banks and other financial institutions — 42,452 37,201 130,547 360,405 2,200 — — 572,805 Placements with and loans to banks and other financial institutions — — 193,149 38,487 136,584 38,842 — — 407,062 Financial assets held for trading — 21 4,628 8,816 23,580 16,446 4,934 — 58,425 Financial assets designated at fair value through profit or loss — — 32,860 63,158 173,300 67,672 17,773 1,472 356,235 Derivative financial assets — — 924 1,419 3,358 1,264 230 — 7,195 Financial assets held under resale agreements — — 355,523 106,487 47,408 — — — 509,418 Loans and advances to customers 29,656 — 426,767 742,945 2,326,006 1,673,235 2,541,387 — 7,739,996 Available-for-sale financial assets — — 14,821 42,862 175,149 492,102 197,083 5,886 927,903 Held-to-maturity investments — — 8,571 62,181 167,984 860,252 611,962 — 1,710,950 Debt instruments classified as receivables 1 88 — 2,388 25,085 88,789 405,766 — 522,117 Other financial assets 1,542 14,184 26,099 42,044 44,055 219 45 — 128,188 Total financial assets 31,199 217,960 1,127,815 1,241,334 3,482,914 3,241,021 3,779,180 2,561,936 15,683,359 Borrowings from central bank — (30) — (80,011) (80) — — — (80,121) Deposits from banks and other financial institutions — (284,412) (16,656) (52,011) (189,971) (288,091) — — (831,141) Placements from banks and other financial institutions — — (95,431) (72,370) (53,337) (2,667) (1,118) — (224,923) Financial liabilities held for trading — (10,085) (6,074) (6,789) (2,263) — — — (25,211) Financial liabilities designated at fair value through profit or loss — — (155,596) (85,497) (80,022) (26,131) (36) — (347,282) Derivative financial liabilities — — (1,846) (1,150) (2,867) (1,013) (364) — (7,240) Financial assets sold under repurchase agreements — — (113,805) (14,229) (2,987) — — — (131,021) Due to customers — (7,046,736) (604,561) (1,105,613) (2,363,672) (1,412,631) (184) — (12,533,397) Debt securities issued — — (21,203) (37,911) (85,934) (80,168) (99,951) — (325,167) Other financial liabilities — (96,209) (19,113) (54,347) (58,660) (73,596) (24,276) — (326,201) Total financial liabilities — (7,437,472) (1,034,285) (1,509,928) (2,839,793) (1,884,297) (125,929) — (14,831,704) Net position 31,199 (7,219,512) 93,530 (268,594) 643,121 1,356,724 3,653,251 2,561,936 851,655
Annual Report 2015 305
— F-321 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows Assets available to meet obligations related to the Group’s liabilities and outstanding credit commitments primarily include cash and balances with central banks, deposits with banks and other financial institutions, placements with and loans to banks and other financial institutions, financial assets at fair value through profit or loss, and financial assets held under resale agreements. In the normal course of business, the majority of customer deposits repayable on demand or on maturity are expected to be retained. In addition, the Group is able to sell the available-for-sale financial assets to repay matured liabilities, if necessary.
306
— F-322 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued) The tables below present the undiscounted cash flows of non-derivative financial assets and financial liabilities by remaining contractual maturities at the end of each reporting period:
31 December 2015 Less than 3–12 Over Past due On demand 1 month 1–3 months months 1–5 years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 175,046 31,379 1,119 3,147 — — 2,377,485 2,588,176 Deposits with banks and other financial institutions — 62,223 68,581 109,926 475,100 1,260 — — 717,090 Placements with and loans to banks and other financial institutions — — 228,910 61,759 211,832 9,784 — — 512,285 Financial assets held for trading — 20 9,551 17,411 34,679 18,282 4,259 — 84,202 Financial assets designated at fair value through profit or loss — — 29,554 50,581 191,501 74,777 37,021 3,949 387,383 Financial assets held under resale agreements — — 277,186 128,996 69,936 — — — 476,118 Loans and advances to customers 166,750 — 502,630 862,665 2,884,375 2,670,681 4,395,705 — 11,482,806 Available-for-sale financial assets — — 33,422 46,435 249,273 698,678 351,672 11,945 1,391,425 Held-to-maturity investments — — 35,186 53,011 369,374 1,359,459 1,020,861 — 2,837,891 Debt instruments classified as receivables 44 72 10,760 6,084 37,651 166,206 475,672 — 696,489 Other financial assets — 41,390 1,749 26,911 1,479 41 7 — 71,577 Total non-derivative financial assets 166,794 278,751 1,228,908 1,364,898 4,528,347 4,999,168 6,285,197 2,393,379 21,245,442 Non-derivative financial liabilities Borrowings from central bank — (30) (1,257) (14,760) (44,945) (604) — — (61,596) Deposits from banks and other financial institutions — (654,628) (98,736) (78,983) (205,693) (226,850) — — (1,264,890) Placements from banks and other financial institutions — — (148,500) (81,584) (83,887) (2,261) (1,898) — (318,130) Financial liabilities held for trading — (11,541) (4,183) (5,654) (2,722) — — — (24,100) Financial liabilities designated at fair value through profit or loss — — (99,503) (95,377) (193,554) (27,487) (41) — (415,962) Financial assets sold under repurchase agreements — — (83,173) (256) (5,436) — — — (88,865) Due to customers — (7,677,719) (563,857) (1,167,656) (2,655,301) (1,875,275) (1) — (13,939,809) Debt securities issued — — (38,829) (54,443) (108,277) (70,347) (201,846) — (473,742) Other financial liabilities — (129,421) (812) (28,189) (1,313) (388) (34,174) — (194,297) Total non-derivative financial liabilities — (8,473,339) (1,038,850) (1,526,902) (3,301,128) (2,203,212) (237,960) — (16,781,391) Net position 166,794 (8,194,588) 190,058 (162,004) 1,227,219 2,795,956 6,047,237 2,393,379 4,464,051
Annual Report 2015 307
— F-323 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Analysis of the undiscounted contractual cash flows (Continued)
31 December 2014 Less than 1–3 3–12 1–5 Over Past due On demand 1 month months months years 5 years Undated Total Non-derivative financial assets Cash and balances with central banks — 161,215 27,272 1,214———2,554,578 2,744,279 Deposits with banks and other financial institutions — 42,452 38,239 136,039 375,953 2,405 — — 595,088 Placements with and loans to banks and other financial institutions — — 193,395 41,169 143,735 39,889 — — 418,188 Financial assets held for trading — 21 4,969 9,157 25,016 18,631 5,382 — 63,176 Financial assets designated at fair value through profit or loss — — 33,893 65,871 183,564 79,102 21,326 1,472 385,228 Financial assets held under resale agreements — — 358,139 108,674 48,451 — — — 515,264 Loans and advances to customers 91,690 — 496,444 853,270 2,695,148 2,570,241 3,875,869 — 10,582,662 Available-for-sale financial assets — — 17,235 48,402 211,037 572,898 233,973 5,886 1,089,431 Held-to-maturity investments — — 13,085 75,141 217,912 1,058,738 765,378 — 2,130,254 Debt instruments classified as receivables 45 88 50 3,744 31,868 111,405 429,642 — 576,842 Other financial assets — 13,993 1,530 13,198 1,512 — 7 — 30,240 Total non-derivative financial assets 91,735 217,769 1,184,251 1,355,879 3,934,196 4,453,309 5,331,577 2,561,936 19,130,652 Non-derivative financial liabilities Borrowings from central bank — (30) — (80,711) (80) — — — (80,821) Deposits from banks and other financial institutions — (284,415) (17,993) (60,647) (197,047) (324,822) — — (884,924) Placements from banks and other financial institutions — — (96,160) (73,017) (54,152) (2,940) (1,251) — (227,520) Financial liabilities held for trading — (10,085) (6,100) (6,816) (2,279) — — — (25,280) Financial liabilities designated at fair value through profit or loss — — (157,088) (87,454) (83,150) (28,104) (44) — (355,840) Financial assets sold under repurchase agreements — — (114,138) (14,354) (2,997) — — — (131,489) Due to customers — (7,050,998) (620,383) (1,142,823) (2,461,528) (1,628,319) (184) — (12,904,235) Debt securities issued — — (21,271) (38,484) (95,599) (113,036) (115,305) — (383,695) Other financial liabilities — (91,631) (871) (14,125) (2,070) (352) (24,276) — (133,325) Total non-derivative financial liabilities — (7,437,159) (1,034,004) (1,518,431) (2,898,902) (2,097,573) (141,060) — (15,127,129) Net position 91,735 (7,219,390) 150,247 (162,552) 1,035,294 2,355,736 5,190,517 2,561,936 4,003,523
308
— F-324 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Derivative cash flows
Derivatives settled on a net basis The fair values of the Group’s derivatives that will be settled on a net basis are primarily interest rates products. The tables below present the undiscounted contractual cash flows of the Group’s net derivative positions based on their remaining contractual maturities:
31 December 2015 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Interest rate derivatives (18) 5 49 (28) (227) (219)
31 December 2014 Less than 1–3 3–12 1–5 Over 5 1 month months months years years Total Interest rate derivatives (3) 18 14 (59) (102) (132)
Annual Report 2015 309
— F-325 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Derivative cash flows (Continued)
Derivatives settled on a gross basis The fair values of the Group’s derivatives that will be settled on a gross basis are primarily foreign exchange rates and precious metal products. The tables below present the undiscounted contractual cash flows of the Group’s gross derivative positions based on their remaining contractual maturities:
31 December 2015 Less than 1–3 3–12 1–5 Over 1 month months months years 5 years Total Derivatives settled on a gross basis — Cash inflow 229,711 213,739 867,746 50,092 815 1,362,103 — Cash outflow (229,673) (213,507) (863,714) (49,965) (815) (1,357,674) Total 38 232 4,032 127 — 4,429
31 December 2014 Less than 1–3 3–12 1–5 Over 5 1 month months months years years Total Derivatives settled on a gross basis — Cash inflow 270,824 174,010 400,347 62,974 2,050 910,205 — Cash outflow (271,642) (173,741) (399,764) (62,679) (2,050) (909,876) Total (818) 269 583 295 — 329
310
— F-326 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.2 Liquidity risk (Continued)
Credit Commitments The tables below summarize the amounts of credit commitments by remaining maturity.
31 December 2015 Less than Over 1 year 1–5 years 5 years Total Loan commitments 56,515 134,021 259,897 450,433 Bank acceptance 382,255 — — 382,255 Credit card commitments 258,745 — — 258,745 Guarantee and letters of guarantee 102,829 97,027 33,520 233,376 Letters of credit 151,193 7,712 — 158,905 Total 951,537 238,760 293,417 1,483,714
31 December 2014 Less than Over 1 year 1–5 years 5 years Total Loan commitments 57,799 135,864 247,395 441,058 Bank acceptance 418,937 — — 418,937 Credit card commitments 254,222 — — 254,222 Guarantee and letters of guarantee 102,668 104,440 34,063 241,171 Letters of credit 219,359 7,978 — 227,337 Total 1,052,985 248,282 281,458 1,582,725
Annual Report 2015 311
— F-327 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk Market risk represents the potential loss arising from changes in market rates of interest and foreign exchange, as well as commodity and equity prices. Market risk arises from both the Group’s proprietary positions and customer driven transactions, in both cases related to on- and off-balance sheet activities.
The Group is primarily exposed to interest rate risk through its lending, fixed-income and funding activities. Interest rate risk is inherent in many of the Group’s businesses and this situation is common among large banks. It fundamentally arises through mismatches between the maturity and re-pricing dates of interest-earning assets and interest-bearing liabilities. As discussed further below, interest rate risk is actively managed.
Foreign exchange rate risk is the potential loss related to changes in foreign exchange rates affecting the translation of foreign currency denominated monetary assets and liabilities. The risk of loss results from movements in foreign currency exchange rates.
The Group is also exposed to commodity risk, primarily related to gold and other precious metals. The risk of loss results from movements in commodity price. The Group manages the risk related to gold price together with foreign exchange rate risk.
The Group has determined that the levels of market risk related to changes in equity prices and commodity prices other than gold, with respect to the related exposures in its trading and investment portfolios, are immaterial.
Segregation of Trading Book and Banking Book To enhance the effectiveness of market risk management, as well as the accuracy of determining the levels of regulatory capital required related to market risk, the Group segregates all financial instruments and commodities, both on- and off-balance sheet, into either the trading book or banking book. The trading book is comprised of financial instruments and commodity positions held for trading, including all derivatives instruments. Any other financial instruments are included in the banking book.
312
— F-328 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Market Risk Management for Trading Book The Group manages market risk in the trading book through methodologies that include Value at Risk (VaR), monitoring and management of established limits, sensitivity analysis, duration analysis, exposure analysis and stress testing.
The Group has formulated policies, which are subject to review annually or as circumstances otherwise dictate, to manage market risk. Further, in this regard, the Group’s market risk management is focused on movements in domestic and global financial markets, as well as the composition of the trading book and management’s trading strategies, within approved limits. Moreover, the Group has implemented more specific policies for financial instruments, closely monitoring the exposure to specific issuers and counterparties, as well as the tenor of individual positions and trading strategies. The foundation of the Group’s limit and risk monitoring system is based on VaR, which is used consistently to monitor all classes of financial instruments in the trading book.
The Bank has adopted an historical simulation method, with a confidence level of 99% based on holding period of 1 day and historical data for 250 days to calculate the VaR of the trading books, which includes the Head Office, domestic branches and overseas branches. Based on the differences between domestic and overseas markets, the Bank selected applicable parameters for model and risk factors in order to reflect the actual market risk levels. The Bank verified the accuracy and reliability of market risk measurements through data analysis, parallel modeling and back-testing of the market risk measurements.
Annual Report 2015 313
— F-329 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Market Risk Management for Trading Book (Continued)
VaR Analysis for the Trading Book Bank 2015 At the end of the year Average Maximum Minimum Interest rate risk 50 76 103 50 Exchange rate risk (1) 82 74 151 32 Commodity risk 18 29 53 9 Overall VaR 82 119 183 68
2014 At the end of the year Average Maximum Minimum Interest rate risk 73 69 98 50 Exchange rate risk (1) 32 92 247 31 Commodity risk 36 21 36 2 Overall VaR 88 135 289 57
The Bank calculates VaR for its trading book (excluding RMB foreign currency settlement contracts with customers under relevant regulations). The Bank conducts stress testing for its trading book quarterly. The specific areas subject to this testing include the major areas of exposure, such as bonds, interest rate derivatives, foreign exchange derivatives and gold. The stress testing uses a range of scenarios, to assess the potential impact on profit and loss.
(1) VaR related to gold is recognized as a component of foreign exchange rate risk.
314
— F-330 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Market Risk Management for Banking Book The Group manages market risk related to the banking book by consistently applying techniques across the Group that include exposure limit management, stress testing, scenario analysis and gap analysis.
Interest Rate Risk Management The interest rate risk existing in the banking book broadly relates to the mismatch of the maturity or re-pricing dates of interest rate-sensitive financial assets and financial liabilities, as well as inconsistencies in the change of the benchmark interest rates on which most domestic interest rate-sensitive financial assets and financial liabilities are based.
The Group closely monitors changes in the macro-economic environment and the monetary policies of the PBOC, enabling it to timely and flexibly adjusts its pricing strategy. The Group establishes comprehensive interest rate risk management policies and protocols and has improved the consistency of interest rate risk measurement, monitoring, analysis and management of interest rate risk across the Group.
The Group regularly measures and analyzes the Group’s interest rate risk by conducting gap analysis, sensitivity analysis, scenario analysis and stress testing to manage interest rate risk within established limits.
Foreign Exchange Rate Risk Management Foreign exchange rate risk relates to the mismatch of foreign currency denominated monetary assets and liabilities, and the potential loss related to changes in foreign exchange rates, which largely arises through operational activities.
The Group performs monitoring and sensitivity analysis of foreign exchange rate risk exposure, manages the mismatch of foreign currency denominated assets and liabilities to effectively manage foreign exchange rate risk exposure within acceptable limits.
Market Risk Exposure Limit Management Market risk exposure limits are classified as either directive limits or indicative limits, based on the character of the underlying instruments or transactions, including exposure limit monitoring, enforcement of stop-loss limit, VaR limits, and stress testing limits.
The Group is committed to continuous improvement of its market risk exposure limit management. The Group establishes exposure limits reflecting its risk appetite and continuously refines the categorization of market risk exposure limits. Further, it regularly monitors, reports, refines, and implements improvements to the market risk exposure limit process.
Annual Report 2015 315
— F-331 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Foreign exchange rate risk The Group primarily conducts its business activities in RMB, with certain transactions denominated in USD, HKD and, to a lesser extent, other currencies.
The composition of all financial assets and liabilities at the end of each reporting period analyzed by currency is as follows:
31 December 2015 Other currencies USD (RMB HKD (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,533,407 47,748 1,500 4,402 2,587,057 Deposits with banks and other financial institutions 642,108 36,844 8,803 10,168 697,923 Placements with and loans to banks and other financial institutions 412,437 87,171 838 3,806 504,252 Financial assets held for trading 79,782———79,782 Financial assets designated at fair value through profit or loss 331,966 10,216 14,134 3,163 359,479 Derivative financial assets 2,952 12,399 79 608 16,038 Financial assets held under resale agreements 471,809 — — — 471,809 Loans and advances to customers 8,098,472 336,998 47,918 23,287 8,506,675 Available-for-sale financial assets 1,124,517 69,605 1,667 18,753 1,214,542 Held-to-maturity investments 2,274,171 24,410 — 2,243 2,300,824 Debt instruments classified as receivables 557,418 — 1 1 557,420 Other financial assets 146,462 27,797 1,250 843 176,352 Total financial assets 16,675,501 653,188 76,190 67,274 17,472,153 Borrowings from central bank (58,739) — (1,257) (603) (60,599) Deposits from banks and other financial institutions (1,145,912) (69,892) (5,667) (430) (1,221,901) Placements from banks and other financial institutions (66,808) (188,588) (45,674) (14,689) (315,759) Financial liabilities held for trading (24,036) — — — (24,036) Financial liabilities designated at fair value through profit or loss (403,328) (3,044) — (35) (406,407) Derivative financial liabilities (10,074) (897) (13) (1,208) (12,192) Financial assets sold under repurchase agreements (83,471) (5,333) — — (88,804) Due to customers (13,253,507) (220,929) (31,161) (32,763) (13,538,360) Debt securities issued (230,650) (127,703) (18,287) (6,102) (382,742) Other financial liabilities (384,409) (32,190) (1,680) (1,401) (419,680) Total financial liabilities (15,660,934) (648,576) (103,739) (57,231) (16,470,480) Net on-balance sheet position 1,014,567 4,612 (27,549) 10,043 1,001,673 Net notional amount of derivatives 22,179 (5,342) 31,748 (37,060) 11,525 Credit commitments 1,307,939 158,487 4,312 12,976 1,483,714
316
— F-332 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Foreign exchange rate risk (Continued) 31 December 2014 Other currencies USD (RMB HKD (RMB (RMB RMB equivalent) equivalent) equivalent) Total Cash and balances with central banks 2,702,760 38,745 892 668 2,743,065 Deposits with banks and other financial institutions 532,320 27,498 6,780 6,207 572,805 Placements with and loans to banks and other financial institutions 346,830 59,933 — 299 407,062 Financial assets held for trading 58,425 — — — 58,425 Financial assets designated at fair value through profit or loss 343,566 2,208 10,461 — 356,235 Derivative financial assets 2,810 4,203 21 161 7,195 Financial assets held under resale agreements 509,418 — — — 509,418 Loans and advances to customers 7,335,891 349,456 40,546 14,103 7,739,996 Available-for-sale financial assets 878,428 43,910 1,247 4,318 927,903 Held-to-maturity investments 1,701,059 9,428 — 463 1,710,950 Debt instruments classified as receivables 522,054 62 — 1 522,117 Other financial assets 120,380 5,373 1,464 971 128,188 Total financial assets 15,053,941 540,816 61,411 27,191 15,683,359 Borrowings from central bank (80,121) — — — (80,121) Deposits from banks and other financial institutions (694,023) (135,707) (703) (708) (831,141) Placements from banks and other financial institutions (57,575) (118,923) (36,431) (11,994) (224,923) Financial liabilities held for trading (25,211) — — — (25,211) Financial liabilities designated at fair value through profit or loss (347,012) (179) — (91) (347,282) Derivative financial liabilities (2,924) (2,278) (45) (1,993) (7,240) Financial assets sold under repurchase agreements (122,632) (8,389) — — (131,021) Due to customers (12,296,462) (194,887) (26,645) (15,403) (12,533,397) Debt securities issued (205,846) (96,943) (15,720) (6,658) (325,167) Other financial liabilities (312,235) (9,392) (2,660) (1,914) (326,201) Total financial liabilities (14,144,041) (566,698) (82,204) (38,761) (14,831,704) Net on-balance sheet position 909,900 (25,882) (20,793) (11,570) 851,655 Net notional amount of derivatives (103,658) 60,135 25,844 16,029 (1,650) Credit commitments 1,412,973 153,012 7,566 9,174 1,582,725
Annual Report 2015 317
— F-333 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Foreign exchange rate risk (Continued) The table below indicates the potential effect on profit before tax and other comprehensive income arising from a 5% appreciation or depreciation of RMB spot and forward foreign exchange rates against a basket of all other currencies on the net positions of foreign currency monetary assets and liabilities and derivative instruments in the consolidated statement of financial position.
31 December 2015 31 December 2014 Other Other Profit comprehensive Profit comprehensive before tax income before tax income 5% appreciation 1,753 (22) (2,150) (31) 5% depreciation (1,753) 22 2,150 31
The effect on profit before tax and other comprehensive income is calculated based on the assumption that the Group’s foreign currency sensitive exposures and foreign currency derivative instruments net position at the end of each reporting period remain unchanged. The Group mitigates its foreign exchange rate risk through active management of its foreign currency exposures and the appropriate use of derivative instruments, based on management expectation of future foreign currency exchange rate movements. Such analysis does not take into account the correlation effect of changes in different foreign currencies, nor any further actions that could be taken by management to mitigate the effect of foreign exchange differences. Therefore, the sensitivity analysis above may differ from actual results occurring through changes in foreign exchange rates.
318
— F-334 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Interest rate risk The Group’s interest rate risk arises from the mismatches between contractual maturities or re-pricing dates of interest-generating assets and interest-bearing liabilities. The Group’s interest-generating assets and interest-bearing liabilities are primarily denominated in RMB. The PBOC established RMB benchmark interest rates for loans whereby financial institutions are in a position to price their loans based on credit risk; commercial and market factors. The deposit interest rate floating ceiling was removed by the PBOC with effect from 24 October 2015 for commercial banks.
The Group manages its interest rate risk by:
— Regularly monitoring the macro-economic factors that potentially impact the PBOC benchmark interest rates;
— Optimizing the management over the differences in timing between contractual maturities or re-pricing dates of interest-generating assets and interest-bearing liabilities; and
— Enhancing the interest rate margin on interest-generating assets and interest-bearing liabilities, with reference to the prevailing PBOC benchmark interest rates where appropriate.
Annual Report 2015 319
— F-335 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Interest rate risk (Continued) The tables below summarize the contractual maturity or re-pricing date, whichever is earlier, of the Group’s financial assets and liabilities at the end of each reporting period.
31 December 2015 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,294,237 — 3,147 — — 289,673 2,587,057 Deposits with banks and other financial institutions 128,136 107,123 460,250 1,260 — 1,154 697,923 Placements with and loans to banks and other financial institutions 229,809 61,016 205,958 7,469 — — 504,252 Financial assets held for trading 9,797 17,012 32,645 16,332 3,976 20 79,782 Financial assets designated at fair value through profit or loss 33,264 57,213 174,531 57,860 32,662 3,949 359,479 Derivative financial assets — — — — — 16,038 16,038 Financial assets held under resale agreements 275,867 127,105 68,837 — — — 471,809 Loans and advances to customers 3,130,605 1,497,927 3,530,381 145,347 202,415 — 8,506,675 Available-for-sale financial assets 57,958 77,438 220,340 544,478 302,383 11,945 1,214,542 Held-to-maturity investments 31,061 60,847 312,703 1,075,252 820,961 — 2,300,824 Debt instruments classified as receivables 3,154 8,264 37,690 87,908 420,404 — 557,420 Other financial assets — — — — — 176,352 176,352 Total financial assets 6,193,888 2,013,945 5,046,482 1,935,906 1,782,801 499,131 17,472,153 Borrowings from central bank (1,257) (14,510) (44,199) (603) — (30) (60,599) Deposits from banks and other financial institutions (752,048) (71,036) (196,999) (201,598) — (220) (1,221,901) Placements from banks and other financial institutions (149,848) (83,250) (82,130) (531) — — (315,759) Financial liabilities held for trading (4,165) (5,628) (2,702) — — (11,541) (24,036) Financial liabilities designated at fair value through profit or loss (99,066) (94,230) (186,697) (26,378) (36) — (406,407) Derivative financial liabilities — — — — — (12,192) (12,192) Financial assets sold under repurchase agreements (83,138) (255) (5,411) — — — (88,804) Due to customers (8,031,571) (1,132,862) (2,553,742) (1,630,591) (1) (189,593) (13,538,360) Debt securities issued (40,930) (57,921) (95,626) (33,331) (154,934) — (382,742) Other financial liabilities — — — — — (419,680) (419,680) Total financial liabilities (9,162,023) (1,459,692) (3,167,506) (1,893,032) (154,971) (633,256) (16,470,480) Interest rate gap (2,968,135) 554,253 1,878,976 42,874 1,627,830 (134,125) 1,001,673
320
— F-336 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Interest rate risk (Continued)
31 December 2014 Non- Less than 1 to 3 3 to 12 1 to 5 Over interest 1 month months months years 5 years bearing Total Cash and balances with central banks 2,475,672 — — — — 267,393 2,743,065 Deposits with banks and other financial institutions 106,337 115,347 347,054 2,200 — 1,867 572,805 Placements with and loans to banks and other financial institutions 194,417 38,624 136,089 37,932 — — 407,062 Financial assets held for trading 5,791 10,549 23,439 13,691 4,934 21 58,425 Financial assets designated at fair value through profit or loss 41,513 79,998 164,045 51,442 17,765 1,472 356,235 Derivative financial assets — — — — — 7,195 7,195 Financial assets held under resale agreements 355,523 106,487 47,408 — — — 509,418 Loans and advances to customers 2,646,120 1,412,923 3,364,374 133,099 183,480 — 7,739,996 Available-for-sale financial assets 42,447 85,587 203,966 411,264 178,753 5,886 927,903 Held-to-maturity investments 11,192 81,195 192,417 823,752 602,394 — 1,710,950 Debt instruments classified as receivables 1 2,388 35,064 78,810 405,766 88 522,117 Other financial assets — — — — — 128,188 128,188 Total financial assets 5,879,013 1,933,098 4,513,856 1,552,190 1,393,092 412,110 15,683,359 Borrowings from central bank — (80,011) (80) — — (30) (80,121) Deposits from banks and other financial institutions (309,021) (50,908) (187,588) (283,479) — (145) (831,141) Placements from banks and other financial institutions (96,461) (73,279) (53,152) (2,031) — — (224,923) Financial liabilities held for trading (6,074) (6,789) (2,263) — — (10,085) (25,211) Financial liabilities designated at fair value through profit or loss (155,596) (85,497) (80,022) (26,131) (36) — (347,282) Derivative financial liabilities — — — — — (7,240) (7,240) Financial assets sold under repurchase agreements (113,805) (14,229) (2,987) — — — (131,021) Due to customers (7,477,195) (1,105,613) (2,363,672) (1,412,631) (184) (174,102) (12,533,397) Debt securities issued (25,646) (44,772) (76,427) (23,409) (154,913) — (325,167) Other financial liabilities — — — — — (326,201) (326,201) Total financial liabilities (8,183,798) (1,461,098) (2,766,191) (1,747,681) (155,133) (517,803) (14,831,704) Interest rate gap (2,304,785) 472,000 1,747,665 (195,491) 1,237,959 (105,693) 851,655
Annual Report 2015 321
— F-337 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.3 Market risk (Continued)
Interest rate risk (Continued) The following table illustrates the potential pre-tax impact, of a parallel upward or downward shift of 100 basis points in relevant interest rate curves on the Group’s net Interest Income and other comprehensive income for the next twelve months from the reporting date, based on the Group’s positions of interest-earning assets and interest-bearing liabilities at the end of each reporting period. This analysis assumes that interest rates of all maturities move by the same amount, and does not reflect the potential impact of unparalleled yield curve movements.
The sensitivity analysis on net interest income is based on reasonably possible changes in interest rates with the assumption that the structure of financial assets and financial liabilities held at the period end remains unchanged, and does not take changes in customer behavior, basis risk or any prepayment options on debt securities into consideration.
The sensitivity analysis on other comprehensive income reflects only the effect of changes in fair value of those financial instruments classified as available-for-sale financial assets held, whose fair value changes are recorded as an element of other comprehensive income.
31 December 2015 31 December 2014 Other Other Net interest comprehensive Net interest comprehensive income income income income +100 basis points (16,780) (38,949) (11,600) (23,485) –100 basis points 16,780 38,949 11,600 23,485
The assumptions do not reflect actions that might be taken under the Group’s capital and interest rate risk management policy to mitigate changes to the Group’s interest rate risk. Therefore the above analysis may differ from the actual situation.
In addition, the presentation of interest rate sensitivity above is for illustration purposes only, showing the potential impact on net interest income and other comprehensive income of the Group under different parallel yield curve movements, relative to their position at period-end, excluding the derivative positions.
322
— F-338 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
49 FINANCIAL RISK MANAGEMENT (Continued)
49.4 Insurance risk The Group engages in its insurance business primarily in Mainland China. Insurance risk refers to the financial impact resulting from the unexpected occurrence of insured events. These risks are actively managed by the Group through effective sales management, underwriting control, reinsurance management and claim management. Through effective sales management, the risk of mis-selling could be reduced and the accuracy of information used for underwriting is improved. Through underwriting control, risk of adverse selection could be reduced and moreover differential pricing policy based on the level of each kind of risk could be utilized. Through reinsurance, the Group’s insurance capacity could be enhanced and targeted risks could be mitigated. Effective claims management is designed to ensure that insurance payments are controlled according to established criteria.
Uncertainty in the estimation of future benefit payments and premium receipts for long-term life insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality. The Group conducts experience analysis of mortality rate and surrender rate, in order to improve its risk assessment and as a basis for reasonable estimates.
50 CAPITAL MANAGEMENT The Group’s capital management objectives are as follows:
— maintain an adequate capital base to support the development of its business;
— support the Group’s financial stability and profitable growth;
— allocate capital through an efficient and risk based approach to optimize risk-adjusted return to shareholders; and
— Safeguard the long-term sustainability of the Group’s franchise so that it can continue to provide sufficient shareholder returns and benefits for other stakeholders.
In 2012, the CBRC issued the “Capital Rules for Commercial Banks (Provisional)” which took effect from 1 January 2013. Upon the effectiveness of this new regulation, the then existing “Measures for the Management of Capital Adequacy Ratio of Commercial Banks”, issued by the CBRC, was superseded in full.
Annual Report 2015 323
— F-339 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 CAPITAL MANAGEMENT (Continued) The “Capital Rules for Commercial Banks (Provisional)” includes, among other things, requirements for minimum capital, capital conservation buffer, additional capital surcharge for systemically important banks, countercyclical buffer and Pillar II capital as follows:
— minimum regulatory requirements for Common Equity Tier-one Capital Adequacy Ratio, Tier- one Capital Adequacy Ratio and Capital Adequacy Ratio are 5%, 6% and 8%, respectively;
— capital conservation buffer requires additional 2.5% of Common Equity Tier-one Capital Adequacy Ratio;
— additional capital surcharge for systemically important banks requires additional 1% of Common Equity Tier-one Capital Adequacy Ratio;
— should the regulators require countercyclical buffer under particular circumstances or regulators impose additional Pillar II capital requirements for specific banks, these requirements shall be met within the specified time limits.
In April 2014, the CBRC has officially approved the Group to adopt the Internal Ratings — Based approach to measure its Credit Risk-weighted Assets for both retail and non-retail risk exposures and the Standardized approach to measure its Operational Risk-weighted Assets, respectively. Before that, the Group has been using the Weighted approach and the Basic Indicator approach to measure its Credit Risk-weighted Assets and Operational Risk-weighted Assets, respectively, for the purpose of calculating its Capital Adequacy Ratios. The CBRC will determine the parallel run period for the Group, which should last for at least three years. During the parallel run period, the Group should calculate its Capital Adequacy Ratios under the above two approaches, and should conform to the capital floor requirements as stipulated in the “Capital Rules for Commercial Banks (Provisional)”.
As at 31 December 2015 and 31 December 2014, the Group adopted the Standardized approach for Market Risk-weighted Assets measurement.
Capital adequacy and the utilization of regulatory capital are closely monitored by the Group’s management in accordance with the guidelines developed by the Basel Committee and relevant regulations promulgated by the CBRC. Required information related to capital levels and utilization is filed quarterly with the CBRC.
324
— F-340 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 CAPITAL MANAGEMENT (Continued) The table below summarizes the Capital Adequacy Ratios and capital composition as at 31 December 2015 calculated pursuant to the “Capital Rules for Commercial Banks (Provisional)” and under the Internal Ratings — Based approach for Credit Risk-weighted Asset and the Standardized approach for Market Risk-weighted Assets and Operational Risk-weighted Assets, respectively, as approved by the CBRC in April 2014.
31 December 31 December 2015 2014 Common Equity Tier-one Capital Adequacy Ratio (1) 10.24% 9.09% Tier-one Capital Adequacy Ratio (1) 10.96% 9.46% Capital Adequacy Ratio (1) 13.40% 12.82% Common Equity Tier-one Capital (2) 1,130,285 991,429 Deductible Items from Common Equity Tier-one Capital (3) (5,595) (5,223) Net Common Equity Tier-one Capital 1,124,690 986,206 Additional Tier-one Capital (4) 79,902 39,946 Net Tier-one Capital 1,204,592 1,026,152 Tier-two Capital (5) 267,028 365,407 Net Capital 1,471,620 1,391,559 Risk-weighted Assets (6) 10,986,302 10,852,619
Annual Report 2015 325
— F-341 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
50 CAPITAL MANAGEMENT (Continued) Pursuant to the “Capital Rules for Commercial Banks (Provisional)”:
(1) The scope of consolidation related to the calculation of the Group’s Capital Adequacy Ratios includes Domestic Institutions, Overseas Institutions and affiliated financial subsidiaries specified in the Regulation.
The Common Equity Tier-one Capital Adequacy Ratio is calculated as Net Common Equity Tier-one Capital divided by Risk-weighted Assets. The Tier-one Capital Adequacy Ratio is calculated as Net Tier-one Capital divided by Risk-weighted Assets. The Capital Adequacy Ratio is calculated as Net Capital divided by Risk-weighted Assets.
(2) The Group’s Common Equity Tier-one Capital includes: ordinary share capital, capital reserve (subject to regulatory limitations), surplus reserve, general reserve, retained earnings, non-controlling interests (to the extent permitted in the Common Equity Tier-one Capital under the Regulation), and the foreign currency translation reserve.
(3) The Group’s Deductible Items from Common Equity Tier-one Capital include: other intangible assets (excluding land-use rights), and Common Equity Tier-one Capital investments made in financial institutions over which the Group has control but are outside the regulatory consolidation scope for the Capital Adequacy Ratios calculation.
(4) The Group’s Additional Tier-one Capital includes: preference shares issued and non-controlling interests (to the extent permitted in the Additional Tier-one Capital definition under the Regulation).
(5) The Group’s Tier-two Capital includes: Tier-two capital instruments and related premium (to the extent allowed under the Regulation), excessive allowance for loan losses, and minority interests (to the extent permitted in the Tier-two Capital definition under the Regulation).
(6) Risk-weighted Assets include Credit Risk-weighted Assets, Market Risk-weighted Assets and Operational Risk-weighted Assets.
51 FAIR VALUE OF FINANCIAL INSTRUMENTS The majority of the Group’s assets and liabilities in the consolidated statement of financial position are financial assets and financial liabilities. Fair value measurement of non-financial assets and non-financial liabilities do not have a material impact on the Group’s financial position and operations, taken as a whole.
The Group does not have any financial assets or financial liabilities subject to non-recurring fair value measurements for the years ended 31 December 2015 and 31 December 2014.
326
— F-342 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.1 Valuation technique, input and process The fair value of the Group’s financial assets and financial liabilities are determined as follows:
— If traded in active markets, fair values of financial assets and financial liabilities with standard terms and conditions are determined with reference to quoted market bid prices and ask prices, respectively;
— If not traded in active markets, fair values of financial assets and financial liabilities are determined in accordance with generally accepted pricing models or discounted cash flow analysis using prices from observable current market transactions for similar instruments. If there were no available observable current market transactions prices for similar instruments, quoted prices from counterparty is used for the valuation, and management performs analysis on these prices. Discounted cash flow analysis using the applicable yield curve for the duration of the instruments is used for derivatives other than options, and option pricing models are used for option derivatives.
The Group has established an independent valuation process for financial assets and financial liabilities. The Finance Market Department is responsible for the valuation of financial assets and financial liabilities, and the Risk Management Department performs an independent review of the valuation methodologies, inputs, assumptions and valuation results. The Operations Department records the accounting for these items and prepares the disclosure of the financial assets and financial liabilities, based on the independently reviewed valuation.
The Group’s valuation policies and procedures for different types of financial instruments are approved by the Risk Management Committee. Any change to the valuation policies, or the related procedures, must be reported to the Risk Management Committee for approval before they are implemented.
For the year ended 31 December 2015, there was no significant change in the valuation techniques or inputs used to determine fair value measurements.
51.2 Fair value hierarchy The Group classifies financial assets and financial liabilities into the following three levels based on the extent to which inputs to valuation techniques used to measure fair value of the financial assets and financial liabilities are observable.
Level 1: fair value measurements are those derived from quoted prices (unadjusted) in an active market for identical assets or liabilities;
Level 2: fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and
Level 3: fair value measurements are not based on observable market data (that is, unobservable inputs).
Annual Report 2015 327
— F-343 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.3 Financial assets and financial liabilities not measured at fair value on the consolidated statement of financial position The tables below summarize the carrying amounts and fair values of those financial assets and financial liabilities not measured in the consolidated statement of financial position at their fair value. Financial assets and financial liabilities for which the carrying amounts approximate fair value, such as Balances with Central Banks, Deposits with Banks and Other Financial Institutions, Placements with and Loans to Banks and Other Financial Institutions, Financial Assets Held under Resale Agreements, Loans and Advances to Customers, Receivable from the MOF, Special Government Bond, Borrowings from Central Bank, Deposits and Placements from Banks and Other Financial Institutions, Due to Customers, Financial Assets Sold under Repurchase Agreements and Certificates of Deposit Issued, Interbank Certificate of Deposits Issued and Commercial Papers Issued are not included in the tables below.
31 December 2015 31 December 2014 Carrying Carrying amount Fair value amount Fair value Financial assets Held-to-maturity investments (1) 2,300,824 2,387,518 1,710,950 1,725,227 Debt instruments classified as receivables (2) 192,097 196,282 150,503 150,690 Total 2,492,921 2,583,800 1,861,453 1,875,917 Financial liabilities Bonds issued (3) 198,476 199,289 191,994 193,493
Other than these stated below, financial assets and financial liabilities as set out above were classified within Level 2 of the fair value measurement hierarchy.
(1) As at 31 December 2015, included in the Group’s held-to-maturity investments, RMB2,048 million were classified within Level 1 of the fair value measurement hierarchy.
(2) As at 31 December 2015, included in the Group’s debt instruments classified as receivables, RMB60,854 million were classified within Level 3 of the fair value measurement hierarchy (31 December 2014: RMB11,204 million).
(3) As at 31 December 2015, included in the Group’s bonds issued RMB9,724 million were classified within Level 1 of the fair value measurement hierarchy (31 December 2014: RMB3,055 million).
328
— F-344 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position The tables below summarize the fair values of the financial assets and financial liabilities measured in the consolidated statement of financial position at their fair value.
31 December 2015 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 65,050 — 65,050 — Precious metal contracts — 14,732 — 14,732 Subtotal — 79,782 — 79,782 Financial assets designated at fair value through profit or loss — Debt securities — 105,584 649 106,233 — Interest in trust products — — 201,583 201,583 — Other debt instruments — — 47,714 47,714 — Equity instruments 1,019 700 2,230 3,949 Subtotal 1,019 106,284 252,176 359,479 Derivative financial assets — Exchange rate derivatives — 13,833 38 13,871 — Interest rate derivatives — 900 20 920 — Precious metal contracts — 1,247 — 1,247 Subtotal — 15,980 58 16,038 Available-for-sale financial assets — Debt securities 15,138 1,187,375 84 1,202,597 — Equity instruments 1,498 — 3,547 5,045 — Fund investments 6,586 — — 6,586 Subtotal 23,222 1,187,375 3,631 1,214,228 Total assets 24,241 1,389,421 255,865 1,669,527 Financial liabilities held for trading — Financial liabilities related to precious metals — (24,036) — (24,036) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (406,407) (406,407) Derivative financial liabilities — Exchange rate derivatives — (11,129) (65) (11,194) — Interest rate derivatives — (935) (26) (961) — Precious metal contracts — (37) — (37) Subtotal — (12,101) (91) (12,192) Total liabilities — (36,137) (406,498) (442,635)
Annual Report 2015 329
— F-345 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued)
31 December 2014 Level 1 Level 2 Level 3 Total Financial assets held for trading — Debt securities — 40,810 — 40,810 — Precious metal contracts — 17,615 — 17,615 Subtotal — 58,425 — 58,425 Financial assets designated at fair value through profit or loss — Debt securities 122 45,971 — 46,093 — Interest in trust products — — 248,794 248,794 — Other debt instruments — — 59,876 59,876 — Equity instruments 3 633 836 1,472 Subtotal 125 46,604 309,506 356,235 Derivative financial assets — Exchange rate derivatives — 5,654 164 5,818 — Interest rate derivatives — 757 38 795 — Precious metal contracts — 561 — 561 — Others — — 21 21 Subtotal — 6,972 223 7,195 Available-for-sale financial assets — Debt securities 19,098 902,804 115 922,017 — Equity instruments 919 — 1,325 2,244 — Fund investments 3,358 — — 3,358 Subtotal 23,375 902,804 1,440 927,619 Total assets 23,500 1,014,805 311,169 1,349,474 Financial liabilities held for trading — Financial liabilities related to precious metals — (25,211) — (25,211) Financial liabilities designated at fair value through profit or loss — Principal guaranteed wealth management products — — (347,282) (347,282) Derivative financial liabilities — Exchange rate derivatives — (6,020) (226) (6,246) — Interest rate derivatives — (866) (70) (936) — Precious metal contracts — (58) — (58) Subtotal — (6,944) (296) (7,240) Total liabilities — (32,155) (347,578) (379,733)
330
— F-346 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) Substantially all financial instruments classified within Level 2 of the fair value hierarchy are debt investments, currency forwards, currency swaps, interest rate swaps, currency options and precious metal contracts. Fair value of debt investments denominated in RMB is determined based upon the valuation published by the China Central Depository & Clearing Co., Ltd. Fair value of debt investments denominated in foreign currencies is determined based upon the valuation results published by Bloomberg. The fair value of currency forwards, currency swaps, interest rate swaps and currency options are calculated by applying discounted cash flow analysis or the Black Scholes Pricing Model. The fair value of precious metal contracts is determined with reference to the closing spot price of gold of the Shanghai Gold Exchange. All significant inputs are observable in the market.
Substantially all financial assets and financial liabilities classified within Level 3 of the fair value hierarchy are trust products and other financial assets and financial Liabilities Designated at Fair Value through Profit or Loss. Generally, these assets are the investments into which wealth management products have invested, and for which the Group has provided investors with a principal. The related liability, the wealth management product itself, is also designated at fair value through profit or loss. These designations offset the accounting mismatch.
The nature of the assets classified within Level 3 of the fair value measurement hierarchy is primarily investment products issued by domestic trust companies or other financial institutions, underlying assets of which include credit assets, deposits with financial institutions and debt securities. The counterparties of the underlying deposits are primarily commercial banks in Mainland China. The credit assets and debt securities are loans and advances to corporate customers and, plain vanilla bonds or notes issued by corporates or financial institutions in Mainland China. As not all of the inputs needed to estimate the fair value of deposits, credit assets and debt securities in the investment products are observable, the Group classified the investment product as a whole within Level 3 of the fair value measurement hierarchy. The significant unobservable inputs related to the credit assets are those around credit risk and liquidity risk. This largely relates to the lack of historical default and liquidity information through one or more economic cycles, which Mainland China has not experienced. Management has made assumptions, based on observed indicators of impairment or significant changes in yield, but the actual value realized from these underlying assets in a current arm’s length sale could differ from those disclosed.
There were no significant transfers between levels of the fair value hierarchy during the years ended 31 December 2015 and 31 December 2014.
Annual Report 2015 331
— F-347 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) The reconciliation of Level 3 classified financial assets and financial liabilities presented at fair value on the consolidated statement of financial position is as follows:
2015 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2015 309,506 223 1,440 (347,282) (296) Purchases 384,359 — 2,599 — — Issues — — — (3,007,928) — Settlements/disposals (458,126) (131) (408) 2,963,544 144 Total gains/(losses) recognized in — Profit or loss 16,437 (34) 3 (14,741) 61 — Other comprehensive income — — (3) — — 31 December 2015 252,176 58 3,631 (406,407) (91) Change in unrealized gains/(losses) for the year included in profit or loss for assets/liabilities held at the end of the year 962 (177) — 9 190
2014 Financial Financial assets liabilities designated Available- designated at fair value Derivative for-sale at fair value Derivative through financial financial through financial profit or loss assets assets profit or loss liabilities 1 January 2014 211,011 347 225 (285,454) (692) Purchases 367,322 21 1,325 — — Issues — — — (3,084,325) — Settlements/disposals (285,313) (17) (110) 3,036,734 36 Total gains/(losses) recognized in — Profit or loss 16,486 (128) 2 (14,237) 360 — Other comprehensive income — — (2) — — 31 December 2014 309,506 223 1,440 (347,282) (296) Change in unrealized (losses)/gains for the year included in profit or loss for assets/liabilities held at the end of the year (787) (128) — 439 360
332
— F-348 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
51 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
51.4 Financial assets and financial liabilities measured at fair value on the consolidated statement of financial position (Continued) In Level 3 of the fair value hierarchy, total gains or losses included in profit or loss for the year are presented in Net Gain on Financial Instruments Designated at fair value through profit or loss of the consolidated income statement.
52 EVENTS AFTER THE REPORTING PERIOD
52.1 Profit appropriation Pursuant to the meeting of Board of Directors on 21 January 2016, a cash dividend at the dividend rate of 5.5% per annum related to the second tranche of preference shares amounting to RMB2,200 million in total was approved and the dividend was distributed on 11 March 2016.
Pursuant to the meeting of the Board of Directors on 31 March 2016, the proposal for profit appropriations of the Bank for the year ended 31 December 2015 is set forth as follows:
(i) An appropriation of RMB18,078 million to the statutory surplus reserve;
(ii) An appropriation of RMB22,464 million to the general reserve;
(iii) A cash dividend of RMB0.1668 per ordinary share in respect of the year ended 31 December 2015 based on the number of ordinary shares issued as at 31 December 2015 totaling RMB54,176 million (Note IV 10 Dividends).
As at 31 December 2015, the statutory surplus reserve had been recognized as appropriation. The other two items will be recognized on the Group’s financial statements after approval by shareholders in the forthcoming general meeting.
Annual Report 2015 333
— F-349 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
52 EVENTS AFTER THE REPORTING PERIOD (Continued)
52.2 Capital injection The Board of Directors approved capital injection to ABC International Holdings Limited of HKD4,250 million on 21 January 2016. As at 31 March 2016, the capital injection was still subject to approval of the CBRC.
52.3 Business Taxes to Value Added Taxes Reform Pursuant to the “Circular regarding the Pilot Program on Comprehensive Implementation of Value Added Taxes from Business Taxes Reform”(Cai Shui [2016] No. 36) issued by the MOF and the SAT on 23 March 2016, effective 1 May 2016 taxpayers across the country in the financial industries will be required to pay value added taxes instead of business taxes. Value added tax and related underlying value of the invoice for value added taxable income and expenses shall be stated and accounted for separately. Such changes will have impacts on both the Group’s consolidated financial statements and related financial indicators.
53 COMPARATIVES Certain comparative amounts have been reclassified to conform with the current year’s presentation.
334
— F-350 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
54 STATEMENT OF FINANCIAL POSITION OF THE BANK As at 31 December 2015 2014 Assets Cash and balances with central banks 2,586,843 2,742,797 Deposits with banks and other financial institutions 690,230 562,792 Precious metals 40,909 20,188 Placements with and loans to banks and other financial institutions 511,969 412,825 Financial assets held for trading 79,777 58,425 Financial assets designated at fair value through profit or loss 355,550 355,763 Derivative financial assets 15,803 6,950 Financial assets held under resale agreements 470,182 509,412 Loans and advances to customers 8,473,314 7,700,348 Available-for-sale financial assets 1,195,554 917,381 Held-to-maturity investments 2,293,949 1,703,508 Debt instruments classified as receivables 541,252 511,174 Investment in subsidiaries 10,660 10,564 Investments in associates 273 — Property and equipment 153,184 152,374 Deferred tax assets 81,213 78,368 Other assets 185,575 148,290 Total assets 17,686,237 15,891,159 Liabilities Borrowings from central bank 60,489 80,030 Deposits from banks and other financial institutions 1,226,793 834,765 Placements from banks and other financial institutions 290,389 197,803 Financial liabilities held for trading 24,036 25,211 Financial liabilities designated at fair value through profit or loss 406,414 347,286 Derivative financial liabilities 11,972 7,072 Financial assets sold under repurchase agreements 88,804 126,950 Due to customers 13,535,613 12,530,169 Debt securities issued 379,728 323,336 Other liabilities 453,468 389,088 Total liabilities 16,477,706 14,861,710
Annual Report 2015 335
— F-351 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
54 STATEMENT OF FINANCIAL POSITION OF THE BANK (Continued) As at 31 December Notes IV 2015 2014 Equity Ordinary shares 37 324,794 324,794 Preference shares 38 79,899 39,944 Capital reserve 39 98,574 98,574 Investment revaluation reserve 22,258 3,043 Surplus reserve 41 96,567 78,445 General reserve 42 175,021 156,145 Retained earnings 411,401 329,133 Foreign currency translation reserve 17 (629) Total equity 1,208,531 1,029,449 Total equity and liabilities 17,686,237 15,891,159
Approved and authorized for issue by the Board of Directors on 31 March 2016.
Vice Chairman Executive Director
336
— F-352 — Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (Amounts in millions of Renminbi, unless otherwise stated)
IV NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
55 STATEMENT OF CHANGES IN EQUITY OF THE BANK
Foreign Investment currency Ordinary Preference Capital revaluation Surplus General Retained translation Note IV shares shares reserve reserve reserve reserve earnings reserve Total As at 1 January 2015 324,794 39,944 98,574 3,043 78,445 156,145 329,133 (629) 1,029,449 Profit for the year — — — — — — 180,779 — 180,779 Other comprehensive income — — — 19,215 — — — 646 19,861 Total comprehensive income for the year — — — 19,215 — — 180,779 646 200,640 Issuance of preference shares 38 — 39,955 — —————39,955 Appropriation to surplus reserve 41 — — — — 18,122 — (18,122) — — Appropriation to general reserve 42 — — — — — 18,876 (18,876) — — Dividends to ordinary shareholders 10 — — — — — — (59,113) — (59,113) Dividends to preference shareholders 10 — — — — — — (2,400) — (2,400) As at 31 December 2015 324,794 79,899 98,574 22,258 96,567 175,021 411,401 17 1,208,531
Foreign Investment currency Ordinary Preference Capital revaluation Surplus General Retained translation Note IV shares shares reserve reserve reserve reserve earnings reserve Total As at 1 January 2014 324,794 — 98,574 (22,750) 60,542 138,751 242,980 (779) 842,112 Profit for the year — — ————178,939 — 178,939 Other comprehensive income — — — 25,793 — — — 150 25,943 Total comprehensive income for the year — — — 25,793 — — 178,939 150 204,882 Issuance of preference shares 38 — 39,944 ——————39,944 Appropriation to surplus reserve 41 — — — — 17,903 — (17,903) — — Appropriation to general reserve 42 — — — — — 17,394 (17,394) — — Dividends to ordinary shareholders 10 — — ————(57,489) — (57,489) As at 31 December 2014 324,794 39,944 98,574 3,043 78,445 156,145 329,133 (629) 1,029,449
Annual Report 2015 337
— F-353 — ISSUER GUARANTOR
ABCL Glory Capital Limited Agricultural Bank of China Limited P.O. Box 957 Hong Kong Branch Offshore Incorporations Centre 25/F., Agricultural Bank of China Tower Road Town 50 Connaught Road Tortola Central British Virgin Islands Hong Kong
FISCAL AGENT, PAYING AGENT, REGISTRAR AND TRANSFER AGENT
Agricultural Bank of China Limited Hong Kong branch 25/F., Agricultural Bank of China Tower 50 Connaught Road Central Hong Kong
LEGAL ADVISERS TO THE ISSUER AND THE GUARANTOR
As to English and Hong Kong law As to PRC law As to British Virgin Islands law
Linklaters Haiwen & Partners Ogier 10th Floor Unit 2605 11/F Central Tower Alexandra House Jing An Kerry Center Tower 1 28 Queen’s Road Central Chater Road No.1515 Nan Jing West Road Central Hong Kong Jing’an District Hong Kong Shanghai 200040 People’s Republic of China
LEGAL ADVISERS TO THE JOINT LEAD MANAGERS
As to English law As to PRC law
King & Wood Mallesons DeHeng Law Offices 13/F, Gloucester Tower 12/F, Tower B, Focus Place The Landmark No. 19 Finance Street 15 Queen’s Road Central Xicheng District Central Beijing Hong Kong People’s Republic of China
INDEPENDENT AUDITOR TO THE BANK
PricewaterhouseCoopers 22/F Prince’s Building Central Hong Kong