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CONFIDENTIAL
BANK OF CHINA LIMITED (A joint stock company incorporated in the People's Republic of China with limited liability) Global Offering of 25,568,590,000 Offer Shares
The Offer Shares are being offered by Bank of China Limited (the ""bank'' or ""we''): (i) outside the United States through BOCI Asia Limited, Goldman Sachs (Asia) L.L.C. and UBS AG acting through its business group, UBS Investment Bank, (in alphabetical order) and other purchasers named on page W-39 of this Offering Circular (collectively, the ""International Purchasers'') in accordance with Regulation S (""Regulation S'') under the U.S. Securities Act of 1933, as amended (the ""Securities Act''), and (ii) within the United States by certain of the International Purchasers through their respective selling agents to qualified institutional buyers as defined in Rule 144A under the Securities Act (""Rule 144A''). This International Offering (as defined on page W-11 of this Offering Circular) is part of a Global Offering (as defined on page W-11 of this Offering Circular) in which the bank is concurrently offering Offer Shares in Hong Kong through the Hong Kong Public Offering (as defined on page W-11 of this Offering Circular). The offer price per Offer Share is HK$2.95. The offer price excludes a brokerage fee, a trading fee imposed by The Stock Exchange of Hong Kong Limited (the ""Hong Kong Stock Exchange''), and a transaction levy imposed by the Securities and Futures Commission of Hong Kong (the ""SFC''), which together amount to 1.01% of the offer price, and which shall be payable by investors. Prior to the Global Offering, there has been no public trading market for H Shares. Application has been made for the listing of, and permission to deal in, the Offer Shares on the Hong Kong Stock Exchange. See ""Risk Factors'' on page W-21 herein and in the Hong Kong Prospectus incorporated herein to read about factors you should consider before making an investment in the Offer Shares.
The bank has granted the International Purchasers an option to require the bank to issue up to 3,835,288,000 additional Offer Shares at the Offer Price. See ""Plan of Distribution''.
The Offer Shares have not been registered under the Securities Act and are being offered and sold in the United States only to qualified institutional buyers as defined in Rule 144A under the Securities Act. Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the Offer Shares may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. The Offer Shares offered hereby are not transferrable except in accordance with the restrictions described under ""Transfer Restrictions''.
A copy of the final version of the Hong Kong Prospectus, together with the written consents specified in the paragraphs headed ""Independent Accountants'' and ""Experts'', has been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). The SFC and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this Offering Circular. The Hong Kong Stock Exchange and Hong Kong Securities Clearing Company Limited 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 in reliance upon the whole or any part of the contents of this Offering Circular. The International Purchasers are severally purchasing or procuring on behalf of the bank purchasers for the Offer Shares being offered. The International Purchasers expect to deliver the Offer Shares through the facilities of the Central Clearing and Settlement System in Hong Kong against payment on or about June 1, 2006. Joint Global Coordinators and Joint Bookrunners (in alphabetical order)
Offering Circular dated May 24, 2006.
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This Offering Circular incorporates the prospectus for the public offering of the Offer Shares in Hong Kong (the ""Hong Kong Prospectus''), save for certain sections and modifications. This Offering Circular should be read in conjunction with the Hong Kong Prospectus, which is included in this Offering Circular, and is qualified in its entirely by the more detailed information and financial information contained in the Hong Kong Prospectus. Terms used but not defined herein shall have the meanings given to them in the Hong Kong Prospectus incorporated herein.
IMPORTANT If you are in any doubt about this Offering Circular, you should consult your stockbroker, bank manager, solicitor, professional accountant or other professional adviser. This Offering Circular is confidential. You are authorized to use this Offering Circular solely for the purpose of considering the purchase of the Offer Shares, in the form of H Shares, of Bank of China Limited ( ) offered pursuant to this Offering Circular. The bank and the other sources identified herein have provided the information contained in the Offering Circular. The International Purchasers make no representation or warranty, express or implied, as to the accuracy or completeness of such information, and nothing contained in this Offering Circular is, or shall be relied upon as, a promise or representation by the International Purchasers. You may not reproduce or distribute this Offering Circular, in whole or in part, and you may not disclose any of the contents of this Offering Circular or use any information herein for any purpose other than considering an investment in the Offer Shares offered hereby. You hereby agree to the foregoing by accepting delivery of this Offering Circular.
The Offer Shares have not been and will not be registered under the Securities Act for offer or sale as part of their distribution and, subject to certain exceptions, may not be offered or sold in the United States or to U.S. persons. The H Shares are not transferable except in accordance with the restrictions described herein. See ""Transfer Restrictions'' and ""Plan of Distribution''.
No person has been authorized to give any information or to make any representations other than those contained in this Offering Circular and, if given or made, such information or representations must not be relied upon as having been authorized. This Offering Circular does not constitute an offer to sell or a solicitation of any offer to buy any securities other than the securities to which it relates or an offer to sell or a solicitation of an offer to buy such securities by any person in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Offering Circular nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the date hereof or that the information contained herein is correct as of any time subsequent to the date.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The distribution of this Offering Circular and the offering and sale of the Offer Shares in certain jurisdictions may be restricted by law. The bank and the International Purchasers require persons into whose possession this Offering Circular comes to inform themselves about and to observe any such restrictions. For a further description of certain restrictions on the offering and sale of the Offer Shares, see ""Transfer Restrictions'' and ""Plan of Distribution''. This Offering
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Circular does not constitute an offer of, or an invitation to purchase, any of the Offer Shares in any jurisdiction in which such offer or invitation would be unlawful. Each prospective purchaser of the Offer Shares must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells the Offer Shares or possesses or distributes this Offering Circular and must obtain any consents, approvals or permissions required for the purchase, offer or sale by it of the Offer Shares under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, and neither we nor the International Purchasers shall have any responsibility therefor.
THE INTERNATIONAL OFFERING IS BEING MADE ON THE BASIS OF THIS OFFERING CIRCULAR ONLY. ANY DECISION TO PURCHASE H SHARES IN THE INTERNATIONAL OFFERING MUST BE BASED ON THE INFORMATION CONTAINED HEREIN.
In this Offering Circular, references to ""US$'' and ""U.S. dollars'' are to United States dollars and references to ""HK$'' are to Hong Kong dollars; and all references to ""RMB'' or ""Renminbi'' are to Renminbi, the official currency of the People's Republic of China (the ""PRC'').
Unless otherwise stated in this Offering Circular, Renminbi amounts have been translated into U.S. dollars at the rate of RMB8.0702 to US$1.00 and Hong Kong dollars have been translated into U.S. dollars at the rate of HK$7.7533 to US$1.00, which were the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 30, 2005.
On May 23, 2006, the noon buying rate in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York was RMB8.0235 to US$1.00. On May 23, 2006, the noon buying rate in New York City for cable transfers in Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York was HK$7.7553 to US$1.00.
No representation is made that the U.S. dollar amounts have been, could have been or could be converted to Renminbi, or vice versa, or that the Hong Kong dollar amounts have been, could have been or could be converted to U.S. dollars, or vice versa, at that rate or at any other rate or at all.
Any discrepancies in any table or elsewhere in this Offering Circular between totals and sums of amounts listed herein are due to rounding.
Unless otherwise specified, statements contained in this Offering Circular assume the International Purchasers' Over-Allotment Option is not exercised. See ""Plan of Distribution''.
IN CONNECTION WITH THIS GLOBAL OFFERING, GOLDMAN SACHS (ASIA) L.L.C. OR ITS AFFILIATES (THE ""STABILIZING MANAGER''), OR ANY PERSON ACTING FOR THE STABILIZING MANAGER, ON BEHALF OF THE INTERNATIONAL PURCHASERS AND THE HONG KONG UNDERWRITERS, MAY OVER-ALLOCATE OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE OFFER SHARES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET FOR A LIMITED PERIOD OF TIME AFTER THE DATE ON WHICH DEALINGS IN THE OFFER SHARES COMMENCE ON THE HONG KONG STOCK EXCHANGE. HOWEVER, THERE IS NO OBLIGATION ON THE STABILIZING MANAGER OR ITS AGENT TO CONDUCT SUCH STABILIZING ACTIVITIES. SUCH TRANSACTIONS MAY BE EFFECTED ON THE HONG KONG STOCK EXCHANGE OR OTHERWISE SUBJECT TO COMPLIANCE WITH APPLICABLE LEGAL AND REGULATORY REQUIREMENTS. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME, AND MUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD. SEE ""PLAN OF DISTRIBUTION''.
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NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
AVAILABLE INFORMATION If at any time the bank is neither subject to the reporting requirements of Section 13 or 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the ""Exchange Act''), nor exempt from such reporting requirements pursuant to Rule 12g3-2(b) thereunder, it will furnish, upon request, to any owner of the Offer Shares purchased pursuant to Rule 144A or any prospective purchaser designated by any such owner, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
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TABLE OF CONTENTS
Page Page Enforceability of Civil Liabilities ÏÏÏÏÏÏÏ W-5 Our Strategic and Other Investors ÏÏÏÏ 102 Forward-Looking Statements ÏÏÏÏÏÏÏÏÏ W-6 Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120 Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-9 Risk Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 The Global OfferingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-11 Relationship with Our Promoter and Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-14 Connected Transactions ÏÏÏÏÏÏÏÏÏÏÏ 197 Summary Historical Consolidated Directors, Supervisors, Senior Financial and Operating Information W-15 Management and Employees ÏÏÏÏÏÏÏ 200 Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-19 Substantial ShareholdersÏÏÏÏÏÏÏÏÏÏÏÏÏ 213 Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-20 Share Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215 Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-21 Description of Our Assets and Profit Forecast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-22 Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220 The Hong Kong Stock Exchange ÏÏÏÏÏ W-23 Financial InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 Taxation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-26 Future Plans and Use of Proceeds Summary of Certain Differences from the Global Offering ÏÏÏÏÏÏÏÏÏÏÏ 316 between IFRS and US GAAP ÏÏÏÏÏÏÏ W-32 Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317 Transfer Restrictions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-35 Structure of the Global Offering ÏÏÏÏÏÏ 323 Deemed Representations from Investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-37 A Share Offering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 329 Plan of Distribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-39 Appendices Validity of Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-45 Appendix I Ì Accountants' ReportÏÏÏÏ I-1 Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏ W-45 Appendix II Ì Unaudited ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ W-45 Supplementary Financial Information II-1 Appendix III Ì Unaudited Pro Forma Hong Kong Prospectus Financial InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ III-1 Expected Timetable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ i Appendix IV Ì Profit ForecastÏÏÏÏÏÏÏÏ IV-1 ContentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ii Appendix V Ì Property Valuation Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 ReportÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ V-1 Definitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 Appendix VI Ì Taxation and Foreign Forward-Looking Statements ÏÏÏÏÏÏÏÏÏ 26 ExchangeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI-1 Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Appendix VII Ì Summary of Principal Legal and Regulatory ProvisionsÏÏÏÏ VII-1 Information About this Prospectus and the Global Offering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 Appendix VIII Ì Summary of Articles Parties Involved in the Global Offering 52 of AssociationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VIII-1 Corporate Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 Appendix IX Ì Statutory and General Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IX-1 Industry Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 Appendix X Ì Documents Delivered to Supervision and Regulation ÏÏÏÏÏÏÏÏÏÏ 73 the Registrar of Companies and Our Restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 Available for Inspection ÏÏÏÏÏÏÏÏÏÏÏÏ X-1
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ENFORCEABILITY OF CIVIL LIABILITIES The bank is a joint stock company incorporated in and under the laws of the PRC with limited liability. Most of the bank's directors, supervisors and officers and the experts named herein reside outside the United States (principally in the PRC and Hong Kong). All or a substantial portion of the assets of the bank and of such persons are or may be located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the bank or such persons, or to enforce against the bank or such persons judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the Federal securities laws of the United States. The bank has been advised by its Hong Kong counsel, Freshfields Bruckhaus Deringer, that there is doubt as to the enforceability in Hong Kong in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the Federal securities laws of the United States courts or the securities laws of any State or territory within the United States. The bank has also been advised by its PRC counsel, Jun He Law Offices, that there is doubt as to the enforceability in the PRC, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the Federal securities laws of the United States.
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FORWARD-LOOKING STATEMENTS This Offering Circular contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to:
‚ our business strategies and our various initiatives to implement these strategies;
‚ the future competitive environment in the PRC banking industry;
‚ our dividend policy;
‚ our business cooperation and relationship with our strategic investors;
‚ our capital expenditure plans, particularly plans relating to the upgrading of our information technology infrastructure;
‚ our development plans for our existing and new products;
‚ our existing risk management framework and our ability to improve such system;
‚ the regulatory environment as well as the general industry outlook for the PRC banking industry; and
‚ future developments in the PRC banking industry. The words ""anticipate'', ""believe'', ""could'', ""estimate'', ""predict'', ""potential'', ""continue'', ""expect'', ""intend'', ""may'', ""plan'', ""seek'', ""will'', ""would'', ""should'' and the negative of these terms and other similar expressions identify a number of these forward-looking statements. Some of these forward-looking statements relate to future events or our future financial, business or other performance and development and are subject to a number of uncertainties that may cause actual results to differ materially. We have highlighted these uncertainties in the ""Risk Factors'' section on page W-21 of this Offering Circular and in the Hong Kong Prospectus, including but not limited to:
‚ general economic, market and business conditions in the PRC, including the sustainability of high economic growth rates in the PRC;
‚ any changes to the laws, rules and regulations of the central and local governments in the PRC and the rules, regulations and policies of the CBRC, the PBOC and other relevant government authorities relating to all aspects of our business;
‚ macroeconomic policies of the PRC Government;
‚ changes or volatility in interest rates, inflation rates, foreign exchange rates, equity prices, commodity prices or other rates or prices;
‚ the effects of intensifying competition in the PRC banking industry on the demand for and price of our products and services, including potentially from foreign banks as a result of the PRC's entry into the WTO;
‚ our ability to identify, measure, monitor and control risks in our business, including our ability to improve our overall risk profile and risk management practices; and
‚ our ability to successfully implement our business strategy.
‚ the risk factors discussed in this Offering Circular as well as other factors beyond our control.
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Subject to the requirements of applicable laws, rules and regulations, we do not have any obligation to update or otherwise revise the forward-looking statements in this Offering Circular, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Offering Circular might not occur in the way we expect, or at all. Accordingly, you should not place undue reliance on any forward-looking information. All forward-looking statements contained in this Offering Circular are qualified by reference to the cautionary statements set out in this section.
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SUMMARY The following summary highlights information contained in, and is qualified in its entirety by, the more detailed information (including financial information and the notes thereto) appearing elsewhere in this Offering Circular. Since the following is a summary, it does not contain all of the information that you should consider before investing in the Offer Shares. You should read the entire Offering Circular, including the Hong Kong Prospectus, before you decide to invest in the Offer Shares. For a discussion of certain matters that should be considered by prospective investors, see ""Risk Factors'' beginning on page W-21 and in the Hong Kong Prospectus.
Overview We are one of the four largest commercial banks in the PRC in terms of total assets with the most extensive international branch network among PRC commercial banks. According to the Banker magazine, we were the 32nd largest bank in the world based on total assets as of December 31, 2004. Our core business is commercial banking, which primarily consists of corporate banking, personal banking and treasury operations and accounted for 92.7% of our operating profit in 2005. We also conduct investment banking and insurance activities through our subsidiaries. The combination of our commercial banking, investment banking and insurance businesses has created a universal banking platform that allows us to provide integrated services to our customers. We are headquartered in Beijing with operations in the Chinese Mainland, Hong Kong and Macau and other overseas regions. Our operating profit was RMB37,416 million, RMB37,122 million and RMB53,636 million in 2003, 2004 and 2005, respectively, of which RMB13,203 million, RMB17,786 million and RMB29,676 million, respectively, was derived from our domestic operations. As of December 31, 2005, our total assets were RMB4,740,048 million, of which 76.4% were derived from our domestic operations before inter-company balance elimination. We had one of the most extensive domestic distribution networks, with over 11,000 branches and outlets, 580 self-service centers and 11,600 automated service machines throughout the PRC as of December 31, 2005. We also have an extensive international network. As of December 31, 2005, our international network comprised over 600 overseas branches, subsidiaries and representative offices covering 27 countries and regions, and we had correspondent banking relationships with over 1,400 foreign banks. In addition, we offer electronic-banking services such as telephone banking and Internet banking. As of December 31, 2004, we had the highest total assets, customer deposits and outstanding loans and advances per branch among the Big Four according to data released by the Big Four. We are also a leading commercial bank in Hong Kong and Macau. Our Hong Kong and Macau operations together accounted for 19.8% of our total assets before inter-company balance elimination as of December 31, 2005 and 41.1% of our operating profit in 2005. Our subsidiary, BOCHK, was the second largest commercial bank in Hong Kong in terms of total assets as of December 31, 2005. BOCHK's direct holding company, BOCHK Holdings, is listed on the Hong Kong Stock Exchange. Our Macau branch was the largest commercial bank in Macau in terms of total assets as of June 30, 2005 based on data published by the Macau government. BOCHK and our Macau branch are each one of the few banks authorized to issue bank notes in their respective jurisdictions.
Our Strengths Our principal strengths include: ‚ well-recognized brand name; ‚ largest and rationally distributed overseas network complementing an extensive domestic network;
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‚ solid customer base and strong presence in attractive customer segments;
‚ universal banking platform;
‚ leader in non-interest income and foreign exchange businesses with strong product innovation capabilities; and
‚ experienced senior management team with proven track record.
For a more detailed discussion of our principal strengths, see the section headed ""Business Ì Our Strengths'' in the Hong Kong Prospectus.
Our Strategy
We strive to become the premier bank in the PRC by pursuing sustainable profitability and quality-driven growth. We intend to become the financial services provider of choice in the PRC for large corporations and affluent retail customers, as well as a leading international financial services company. We intend to achieve our objectives by focusing on the following strategies:
‚ strengthen corporate governance, risk management and financial management;
‚ focus on attractive customer groups;
‚ seek further diversification by enhancing our product offerings and strengthening our universal banking platform;
‚ focus on domestic strategic regions and further develop our international franchise to support cross-border businesses;
‚ implement infrastructure reform to streamline processes and increase efficiency;
‚ train and develop our employees to enhance our competitive advantage; and
‚ cooperate with our strategic investors to create synergies.
For a more detailed discussion of our strategy, see the section headed ""Business Ì Our Strategy'' in the Hong Kong Prospectus.
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THE GLOBAL OFFERING Global OfferingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Hong Kong Public Offering and the International Offering of an aggregate of 25,568,590,000 Offer Shares. International Offering ÏÏÏÏÏÏÏÏÏÏÏ The offering of 24,290,160,000 Offer Shares (i) within the United States to qualified institutional buyers as defined in Rule 144A and (ii) outside the United States in reliance on Regulation S by the International Purchasers or their respective selling agents. Hong Kong Public OfferingÏÏÏÏÏÏ The offering of initially 1,278,430,000 Offer Shares for subscription in Hong Kong on and subject to the terms and conditions described in the Hong Kong Prospectus and the application forms relating thereto. Clawback and Reallocation ÏÏÏÏÏÏÏ The allocation of the Offer Shares between the Hong Kong Public Offering and the International Offering is subject to adjustment. If the number of Offer Shares validly applied for under the Hong Kong Public Offering represents (i) 15 times or more but less than 50 times, (ii) 50 times or more but less than 100 times or (iii) 100 times or more than the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then there will be a reallocation of the Offer Shares to the Hong Kong Public Offering so that the total number of Offer Shares available for subscription under the Hong Kong Public Offering will be (i) 1,917,645,000 H Shares, representing approximately 7.5%, (ii) 2,556,859,000 H Shares, representing approximately 10%, or (iii) 5,113,718,000 H Shares, representing approximately 20% of the Offer Shares initially available under the Global Offering, respectively. In any such case, the number of Offer Shares allocated to the International Offering will be correspondingly reduced. If the Hong Kong Public Offering is not fully subscribed, the Joint Global Coordinators have the authority to reallocate all or any unsubscribed Offer Shares in the Hong Kong Public Offering to the International Offering. See the section headed ""Structure of the Global Offering'' in the Hong Kong Prospectus. Over-Allotment Option ÏÏÏÏÏÏÏÏÏÏÏÏ The option granted by the bank to the International Purchasers pursuant to the International Purchase Agreement, exercisable by the Joint Global Coordinators on behalf of the International Purchasers for up to 30 days from the last day for the lodging of applications under the Hong Kong Public Offering, to require the bank to issue up to an aggregate of 3,835,288,000 additional Offer Shares. See the section headed ""Plan of Distribution'' in this Offering Circular. Offer Price per Offer Share in the International Offering ÏÏÏÏÏÏÏÏÏÏÏÏÏ HK$2.95 per Offer Share, payable in Hong Kong dollars. In addition to the Offer Price, investors will be required to pay an aggregate amount equal to 1.01% of the Offer Price, which consists of brokerage of 1%, a transaction levy of
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0.005% imposed by the SFC, and a trading fee of 0.005% imposed by the Hong Kong Stock Exchange.
Voting Rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Generally, the holders of the H Shares will have one vote per H Share. Please see Appendix VIII Ì ""Summary of Articles of Association'' in the Hong Kong Prospectus.
Dividend Policy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ See the section headed ""Financial Information Ì Dividend Policy'' in the Hong Kong Prospectus.
Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ We estimate that we will receive net proceeds from the Global Offering of approximately HK$72,923 million (US$9,403 million, based on the exchange rate of HK$7.7553 to US$1.00, which is the May 23, 2006 Federal Reserve noon buying rate in New York City), after deducting the underwriting fees and estimated expenses payable by us in the Global Offering and assuming the Over-Allotment Option is not exercised. We intend to use these net proceeds to strengthen our capital base to support ongoing growth of our business. See the section headed ""Future Plans and Use of Proceeds from the Global Offering'' in the Hong Kong Prospectus.
Shares Outstanding After the Global OfferingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243,510,368,009 Shares (including the 25,568,590,000 Offer Shares offered in the Global Offering, which will represent approximately 10.5% of the bank's issued Shares) immediately following the completion of the Global Offering, assuming the Over-Allotment Option is not exercised.
Clearing and Settlement ÏÏÏÏÏÏÏÏÏÏ Subject to the granting of listing of, and permission to deal in, H Shares on the Hong Kong Stock Exchange as well as compliance with the stock admission requirements of the Hong Kong Securities Clearing Company Limited (""HKSCC''), H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS in Hong Kong with effect from the date of commencement of dealings in H Shares on the Hong Kong Stock Exchange or any other date as shall be determined by HKSCC. Settlement of transactions between participants of the Hong Kong Stock Exchange on any trading day is required to take place in CCASS on the second business day thereafter. A board lot is 1,000 H Shares. The International Purchasers expect to deliver the Offer Shares through CCASS in Hong Kong against payment in Hong Kong dollars in Hong Kong on or about May 30, 2006.
Trading MarketsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prior to the Global Offering, there has been no trading market for H Shares. An application has been made and an approval in principle has been granted for the listing of, and permission to deal in, H Shares on the Hong Kong Stock Exchange. Trading in H Shares on the Hong Kong Stock Exchange is expected to commence on or about June 1, 2006.
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Stock code for the H Shares on the Hong Kong Stock ExchangeÏÏÏ 3988
Lock-up Arrangements ÏÏÏÏÏÏÏÏÏÏÏ We have agreed with each of the International Purchasers that, during the period beginning from the date of the International Purchase Agreement and continuing to and including the date six months after the date on which dealings in the Offer Shares commence on the Hong Kong Stock Exchange, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, hedge or otherwise dispose of, any securities of the bank that are substantially similar to the Offer Shares, including but not limited to any options or warrants to purchase, or any securities that are convertible into or exchangeable or exercisable for, or that represent the right to receive, any Offer Shares or any such substantially similar securities (other than pursuant to employee stock option plans existing on the date of the International Purchase Agreement); provided, however, that the foregoing restrictions shall not apply (i) to the extent that any of the foregoing transactions is entered into by the bank or any of the bank's subsidiaries acting in the ordinary and usual course of its business as agent or nominee on behalf of a third party client or customer or (ii) pursuant to a public offering of domestic shares in the PRC. Five-day Gap between Pricing and Trading of the Offer Shares ÏÏÏÏÏÏÏ The Offer Shares will not commence trading on the Hong Kong Stock Exchange until the closing date of the International Offering, which is expected to be five business days after the date of the pricing of the Offer Shares. Purchasers of the Offer Shares will not be able to sell or otherwise deal in the Offer Shares prior to the commencement of trading on the Hong Kong Stock Exchange. Investment ConsiderationsÏÏÏÏÏÏÏÏ For a discussion of certain factors that should be considered in evaluating an investment in the Offer Shares, see ""Risk Factors'' beginning on page W-21 herein and in the Hong Kong Prospectus.
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DIVIDENDS We may pay dividends out of our distributable profits in accordance with applicable requirements of the PRC Company Law and our Articles of Association. Further details are set out in the section headed ""Financial Information Ì Dividend Policy'' in the Hong Kong Prospectus. The payment of any dividends by us must be approved by our shareholders in a shareholders meeting, generally based on a recommendation from the Board of Directors. See the section headed ""Financial Information Ì Dividend Policy'' in the Hong Kong Prospectus.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
Summary Historical Consolidated Financial Information You should read the summary consolidated financial information set forth below in conjunction with our consolidated financial statements included in Appendix I Ì ""Accountants' Report'' to the Hong Kong Prospectus, which are prepared in accordance with International Financial Reporting Standards (""IFRS''), and the section headed ""Financial Information'' in the Hong Kong Prospectus. The summary consolidated results for the years ended December 31, 2003, 2004 and 2005, and the summary balance sheet information as of December 31, 2003, 2004 and 2005, set forth below are derived from the Accountants' Report set forth in Appendix I to the Hong Kong Prospectus. The basis of presentation is set forth in note III.1 to our consolidated financial statements set forth in the Accountants' Report. We have prepared our consolidated financial statements in accordance with IFRS. IFRS differs in many material respects from generally accepted accounting principles in the United States (""US GAAP''). For a discussion of certain differences between IFRS and US GAAP that are applicable to us, see ""Summary of Certain Differences between IFRS and US GAAP.''
For the year ended December 31, 2003 2004 2005 (in millions of RMB, unless otherwise stated) Summary Historical Consolidated Income Statement Data Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,967 132,353 167,948 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40,370) (43,918) (66,940) Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008 Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,353 8,557 9,247 Net trading income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,303 8,882 4,283 Net gains/(losses) on investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,094 337 (582) Other operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,849 9,602 11,150 Net gains on sale of shares in a subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,400 Ì Ì Impairment losses on loans and advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,100) (23,812) (11,486) Other operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (46,080) (54,879) (59,984) Operating profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 37,122 53,636 Share of results of associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) 141 175 Profit before income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,162) (10,198) (22,253) Profit for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,185 27,065 31,558 Attributable to: Equity holders of our bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,015 22,301 25,921 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,170 4,764 5,637 34,185 27,065 31,558 Earnings per share for profit attributable to the equity holders of our bank during the year (Renminbi per ordinary share) Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.17 0.12 0.14
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As of December 31, 2003 2004 2005 (in millions of RMB) Summary Historical Consolidated Balance Sheet Data Assets Cash and due from banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,333 35,779 41,082 Balances with central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267,159 284,348 316,941 Placements with banks and other financial institutions ÏÏÏÏÏÏÏÏ 428,915 340,192 332,099 Government certificates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,789 38,440 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,596 26,105 26,974 Trading assets and other financial instruments at fair value through profit or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,144 92,124 111,782 Derivative financial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,162 16,076 16,808 Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 2,072,919 2,152,112 Investment securities Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 357,587 602,221 Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 457,994 607,459 Loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 413,941 361,851 Investment in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 1,227 5,061 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,614 65,012 62,417 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,837 6,288 8,511 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,111 21,614 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,443 35,575 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,181 111,788 134,217 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,815 66,738 30,055 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,836 38,570 35,731 Certificates of deposits and placements from banks and other financial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 157,243 141,087 212,626 Derivative financial instruments and liabilities at fair value through profit or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,977 93,760 91,174 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,338,448 3,699,464 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,823 26,253 60,179 Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77,229 69,549 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,949 19,588 23,459 Retirement benefit obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,669 4,274 7,052 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,951 2,399 2,136 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,397 124,860 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,751,434 4,037,314 4,484,529
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As of December 31, 2003 2004 2005 (in millions of RMB) Summary Historical Consolidated Balance Sheet Data (Continued) Equity Capital and reserves attributable to equity holders of our bank Share capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 186,390 209,427 Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,976 (10,432) (5,954) Statutory reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,140 5,987 General and regulatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 419 5,109 (Accumulated losses)/undistributed profits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,241) 16,547 10,188 Reserve for fair value changes of available-for-sale securities 4,078 2,730 1,899 Currency translation differences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,617 1,961 (237) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,820 200,755 226,419 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,026 27,152 29,100 Total equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221,846 227,907 255,519 Total equity and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048
As of or for the year ended December 31, 2003 2004 2005 Selected Financial Ratios Profitability ratios: Return on total assets(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.86% 0.63% 0.67% Return on average total assets(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.94% 0.66% 0.70% Return on equity(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.76% 11.11% 11.45% Return on average equity(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.76%(5) 11.22% 12.14% Net interest spread(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.08% 2.14% 2.21% Net interest margin(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.16% 2.24% 2.33% Non-interest income to operating income(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.61% 23.64% 19.26% Operating expenses to operating income(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.36% 47.39% 47.95% Operating expenses to operating income (excluding business and other taxes)(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41.45% 43.08% 43.41% Asset and credit quality ratios: Identified impaired loans to gross loans(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16.58% 5.51% 4.90% Total allowance for impairment losses to identified impaired loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66.73% 63.16% 75.92% Total allowance for impairment losses to gross loans(9) ÏÏÏÏÏÏÏÏ 11.06% 3.48% 3.72% Other Ratios Core capital adequacy ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A 8.48% 8.08% Capital adequacy ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A 10.04% 10.42% Total equity to total assets(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.58% 5.34% 5.39%
(1) Represents the profit for the year (including profit attributable to minority interest) as a percentage of the year end balance of total assets. (2) Represents the profit for the year (including profit attributable to minority interest) as a percentage of the average balance of total assets as of the beginning and end of the year. (3) Represents the profit attributable to equity holders of our bank as a percentage of the year end balance of total equity excluding minority interest. (4) Represents the profit attributable to equity holders of our bank as a percentage of the average balance of total equity excluding minority interest as of the beginning and end of the year.
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(5) The amount for 2003 was calculated using total equity excluding minority interest as of December 31, 2003, as total equity excluding minority interest as of January 1, 2003 was less than zero. (6) Calculated as the difference between the average yield on average interest-earning assets and the average cost on average interest-bearing liabilities. (7) Calculated by dividing net interest income by average interest-earning assets. (8) Operating income consists of net interest income, net fee and commission income, net trading income, net gains (losses) on investment securities, other operating income and net gains on sale of shares in a subsidiary. (9) Gross loans represent the total amount of loans and advances to customers before allowance for impairment losses. (10) Represents the consolidated ratios as of year end calculated in accordance with the CBRC guidelines and based on PRC GAAP financial data. (11) Represents the year end balance of total equity as a percentage of the balance of total assets as of the year end date.
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USE OF PROCEEDS We estimate that we will receive net proceeds from the Global Offering of approximately HK$72,923 million (US$9,403 million, based on the exchange rate of HK$7.7553 to US$1.00, which is the May 23, 2006 Federal Reserve noon buying rate in New York City), after deducting the underwriting fees and estimated expenses payable by us in the Global Offering, assuming the Over- Allotment Option is not exercised. We intend to use these net proceeds to strengthen our capital base to support the ongoing growth of our business.
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CAPITALIZATION The following table sets forth our actual consolidated debt and capitalization under IFRS as of December 31, 2005, and as adjusted to give effect to (i) the issue of the Offer Shares in this Global Offering (assuming no exercise of the Over-Allotment Option) and (ii) the receipt of the estimated net proceeds to us from the Global Offering, which we currently expect to be approximately HK$72,923 million (US$9,403 million, based on the exchange rate of HK$7.7553 to US$1.00, which is the May 23, 2006 Federal Reserve noon buying rate in New York City), after deducting the underwriting fees and estimated expenses payable by us in the Offering, using the Offer Price of HK$2.95 per Offer Share (assuming no exercise of the Over-Allotment Option). The as adjusted information below is illustrative only and does not take into account any changes in our net tangible assets after December 31, 2005 other than to give effect to the sale of our Offer Shares in this Global Offering, assuming no exercise of the Over-Allotment Option, as described above. The Renminbi amounts in the following table have been translated into U.S. dollars based on the exchange rate of RMB8.0235 to US$1.00, which is the May 23, 2006 Federal Reserve noon buying rate in New York City. You should read this table in conjunction with ""Financial Information'' and our audited financial statements included in Appendix I Ì ""Accountants' Report'' in the Hong Kong Prospectus. As of December 31, 2005 Actual As adjusted RMB US$ RMB US$ (in millions) Debt(1) Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,179 7,500 60,179 7,500 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,164 6,501 52,164 6,501 Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112,343 14,001 112,343 14,001 Equity Share capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 209,427 26,102 234,996 29,288 Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,954) (743) 43,921 5,474 Statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,987 746 5,987 746 General and regulatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,109 637 5,109 637 Undistributed profits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,188 1,270 10,188 1,270 Reserve for fair value changes of available-for- sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,899 237 1,899 237 Currency translation differencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (237) (30) (237) (30) 226,419 28,219 301,863 37,622 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,100 3,627 29,100 3,627 Total equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 255,519 31,846 330,963 41,249 Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 367,862 45,847 443,306 55,250
(1) In addition, as of December 31, 2005, we had borrowings from central banks, deposits and money market deposits from customers and other banks, certificates of deposits, securities sold under repurchase agreements, credit commitments, acceptances, issued letters of guarantee and letters of credit, other commitments and contingencies, including outstanding litigation that arise from our ordinary course of business. Except as disclosed in this Offering Circular, there have been no material adverse changes in our capitalization since December 31, 2005.
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RISK FACTORS The Global Offering involves certain risks associated with investing in the bank and the Offer Shares. For a discussion of additional risks that should be considered by prospective investors before investing in the bank and the Offer Shares, see the section headed ""Risk Factors'' in the Hong Kong Prospectus.
Holders of H Shares located in the United States may not be able to participate in rights offerings and may experience dilution of their holdings. We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. We cannot offer or sell securities in the United States unless we register those securities under the Securities Act or an exemption from the registration requirements of the Securities Act is available. We cannot assure you that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of H Shares located in the United States may be unable to participate in rights offerings and may experience dilution of their holdings as a result.
Accounting and corporate disclosure standards for public companies listed in Hong Kong differ from those applicable to public companies in the United States or elsewhere. The financial information as presented and included in the Accountants' Report set forth in Appendix I to the Hong Kong Prospectus and our other financial information which appears elsewhere in this Offering Circular were prepared in accordance with IFRS, which differs in certain significant respects from accounting principles generally accepted in certain other countries, including the United States. Certain differences between IFRS and US GAAP are discussed in ""Summary of Certain Differences Between IFRS and US GAAP''. However, we have made no attempt to quantify the impact of those differences. Had our financial statements and the other financial information been prepared in accordance with US GAAP, our results of operations and financial position could be materially different. Potential investors should consult their own professional advisors for an understanding of the differences between IFRS and US GAAP, and how those differences might affect the financial information herein. In addition, there may be less publicly available information about public companies listed in Hong Kong than is regularly made available by public companies in the United States or elsewhere. In addition, the profit forecast for the year ending December 31, 2006 set out in the section headed ""Financial Information Ì Profit Forecast'' in the Hong Kong Prospectus has been prepared in accordance with IFRS and differences in the profit forecast between IFRS and US GAAP have not been identified or quantified. Accordingly, potential investors who are not familiar with IFRS should not place undue reliance on the profit forecast.
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PROFIT FORECAST
In accordance with customary practice in Hong Kong public offerings, a profit forecast has been prepared in accordance with IFRS for inclusion in the Hong Kong Prospectus. The forecast of our profit attributable to our equity holders for the year ending December 31, 2006 is set out in the section headed ""Financial Information Ì Profit Forecast'' in the Hong Kong Prospectus. The profit forecast has been prepared based on our audited consolidated financial results for the year ended December 31, 2005 and a forecast of our consolidated results for the 12 months ending December 31, 2006. The profit forecast is presented in accordance with IFRS, consistent in all material respects with the accounting policies presently adopted by us as set out in Appendix I Ì ""Accountants' Report'' in the Hong Kong Prospectus. The Directors are currently not aware of any extraordinary items which have arisen or are likely to arise in respect of the year ending December 31, 2006. The principal bases of presentation and assumptions of the profit forecast are set forth in Appendix IV Ì ""Profit Forecast'' in the Hong Kong Prospectus.
The prospective financial information included in this Offering Circular was prepared by the bank's management for use in the Hong Kong Public Offering in accordance with local market practice in Hong Kong. Such information is the responsibility of the bank's management. PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, independent accountants, has neither examined nor compiled this prospective financial information for the purpose of its inclusion in an offering document to U.S. and international investors, and accordingly, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, does not provide any form of assurance with respect thereto for the purpose of this Offering Circular. The Accountants' Report set forth in Appendix I to the Hong Kong Prospectus relates only to our historical financial statements. It does not extend to the prospective financial information and should not be read to do so. We did not prepare this prospective financial information with a view towards compliance with published guidelines of the U.S. Securities and Exchange Commission (the ""Commission'') and the American Institute of Certified Public Accountants (the ""AICPA''), for the preparation and presentation of prospective financial information. Accordingly, this information does not include disclosures of all information required by the AICPA guideline on prospective financial information.
This prospective financial information has been prepared in accordance with IFRS, which differs in certain respects from US GAAP. The section headed ""Summary of Certain Differences Between IFRS and US GAAP'' discusses certain differences between IFRS and US GAAP, although we have made no attempt to identify or quantify the impact of those differences. We expect that certain of these differences could have a significant impact on our current and future results were they prepared in accordance with US GAAP. Furthermore, this prospective information necessarily is based upon a number of assumptions and estimates that, while presented with numerical specificity and considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and upon assumptions with respect to future business decisions which are subject to change. Accordingly, we cannot provide any assurance that these results will be realized. The profit forecast presented in the Hong Kong Prospectus may vary materially from actual results. We make no representation that these results will be achieved. You should not place undue reliance on this information.
We do not intend to furnish any updated or revised profit forecast.
The profit forecast contained in the Hong Kong Prospectus should be reviewed in conjunction with the description of the business, the historical financial information and the other information contained in this Offering Circular and in the Hong Kong Prospectus, including the information set forth in the section headed ""Risk Factors'' in this Offering Circular and in the Hong Kong Prospectus.
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THE HONG KONG STOCK EXCHANGE The Hong Kong Stock Exchange, which commenced trading on April 2, 1986, was formed upon the unification of the four stock exchanges then existing in Hong Kong and, as of April 30, 2006, listed the shares of 943 companies on the main board with a total market capitalization of approximately HK$9,670,012 million (US$1,247,212 million). During the month ended April 30, 2006, the average trading volume in value for the main board per trading day on the Hong Kong Stock Exchange was approximately HK$37,695 million (US$4,862 million). On March 3, 1999, the Financial Secretary of Hong Kong announced in his budget speech a comprehensive reform of the securities and futures markets in Hong Kong, which included the demutualization and merger of the five recognized and approved market operators in Hong Kong, namely the Hong Kong Stock Exchange, Hong Kong Futures Exchange Limited, HKSCC, The SEHK Options Clearing House Limited and HKFE Clearing Corporation Limited under a single holding company (which was subsequently incorporated under the name of Hong Kong Exchanges and Clearing Limited (""HKEx'')). The merger became effective on March 6, 2000. As a result of the merger, the former shareholders of the Hong Kong Stock Exchange and Hong Kong Futures Exchange Limited (together, the ""Exchanges'') effectively exchanged their ownership rights in the Exchanges for economic interests in HKEx and the conventional right to receive dividends, while retaining their existing rights to trade on the Exchanges. At the same time, certain of the regulatory functions performed by the Exchanges were passed over to the SFC. Shares in the HKEx were listed on the Hong Kong Stock Exchange on June 27, 2000. As a listed company on its own stock market, HKEx is regulated by the SFC to avoid any conflict of interest and to ensure a level playing field between HKEx and other listed companies which are subject to the Hong Kong Listing Rules. Regulation by the SFC is imposed through two sets of provisions. First, the Hong Kong Listing Rules have been amended to incorporate a new chapter (Chapter 38) relating specifically to the listing of HKEx and which sets out the requirements that must be satisfied for the securities of HKEx to be listed on the Hong Kong Stock Exchange. Secondly, a Memorandum of Understanding, dated June 19, 2000 (which was subsequently replaced and superseded by another Memorandum of Understanding dated August 22, 2001), has been entered into between the SFC, HKEx and the Hong Kong Stock Exchange which sets out the way the parties to it will relate to each other in relation to: ‚ HKEx's and other applicants' and issuers' compliance with the Hong Kong Listing Rules; ‚ the enforcement by the Hong Kong Stock Exchange of its rules in relation to HKEx's securities and those of other applicants and issuers; ‚ the SFC's supervision and regulation of HKEx as a listed issuer and, where a conflict of interest arises, other applicants and issuers; ‚ conflicts of interest which may arise between the interests of HKEx as a listed company and companies of which it is the controller, and the interests of the proper performance of regulatory functions by such companies; and ‚ market integrity. Trading on the Hong Kong Stock Exchange takes place on each business day with continuous trading being divided into morning and afternoon sessions. Trading is order-based using a computer-assisted trading system that conveys bid and ask prices for securities. Trades are then effected on a matched trade basis directly between buyers and sellers. All securities are traded in board lots. For most companies a board lot is 1,000 shares or 2,000 shares; odd lots are traded separately, usually at a small discount to the board lot prices. Settlement of trades on the Hong Kong Stock Exchange is required to take place on the second trading day after the day the trade takes place. All trades on the Hong Kong Stock Exchange are generally required to be settled between broker participants through CCASS, the central clearing and settlement system, operated
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by HKSCC. CCASS is the central depositary of share certificates and provides a computerized book-entry settlement of share transactions between its participants, which includes all broker participants of the Hong Kong Stock Exchange. Share certificates kept at CCASS are electronically recorded in the stock accounts of its participants. CCASS also facilitates money settlement between participants. It is also possible for settlement to take place outside CCASS (except in relation to trades between broker participants of the Hong Kong Stock Exchange). In such a case, share certificates, together with signed instruments of transfer, must be delivered on the second business day following the transaction and will typically be delivered against payment by check or bank cashier orders. There are no market-makers in the Hong Kong Stock Exchange except in the market for exchange-traded options, but exchange dealers may act as dual capacity broker-dealers. Short selling of securities at or through the Hong Kong Stock Exchange is currently proscribed except in respect of a limited group of securities. The SFC charges a transaction levy of 0.005% and an investor compensation levy of 0.002% (which has been waived pending further notice) of the consideration of each transaction and the Hong Kong Stock Exchange charges a trading fee of 0.005% of the consideration of each transaction, payable by both seller and buyer. In addition, member brokers charge brokerage commissions to either a buyer or a seller which are freely negotiated between such brokers and their clients. Additional administrative fees are also payable for trades settled through CCASS. Member brokers are required to make a contract note in respect of each transaction in securities. The contract note is required to be stamped with ad valorem stamp duty and to be delivered to the client not later than the end of the second trading day following the transaction. The SFC, an independent, non-government statutory body outside the civil service that provides a general regulatory framework of the securities and futures industries, was established by the Hong Kong government in 1989. The SFC administers certain elements of Hong Kong securities law, including the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) which regulates, among other things, activities in the securities market, requirements and conduct of intermediaries, investor compensation, market misconduct and disclosure of interests. The Hong Kong Stock Exchange promulgates its own rules governing share trading and disclosure of information to shareholders and investors. Companies listed on the Hong Kong Stock Exchange are required to comply with the provisions of the Hong Kong Listing Rules, which provide for, among other things, the issuance of interim and audited annual accounts to shareholders and the making of prompt public disclosure of material transactions and developments. In addition, the Hong Kong Codes on Takeovers and Mergers and Share Repurchases, which have been issued by the SFC but do not have the force of law, provide guidelines for the fair treatment of shareholders and preservation of an impartial trading market in connection with takeovers and mergers of public companies in Hong Kong and guidelines for share repurchases by such companies. Part XV of the Securities and Futures Ordinance also contains provisions which require certain persons interested (or deemed to be interested) in shares, underlying shares and short positions in listed companies in Hong Kong to disclose their interest in those shares in certain circumstances. Disclosure of the Directors' interest in the bank is set out in Appendix IX Ì ""Statutory and General Information Ì Further Information about our Directors and Supervisors'' in the Hong Kong Prospectus. The Hong Kong Stock Exchange imposes a requirement on us to keep the Hong Kong Stock Exchange, the Shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us, including information on any major new developments which are not public knowledge, which (1) is necessary to enable them and the public to appraise our position, (2) is necessary to avoid the establishment of a false market in our securities, or (3) might be reasonably expected materially to affect market activity in and the price of our securities.
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There are also requirements under the Hong Kong Listing Rules for us to obtain prior Shareholder's approval and/or to disclose to Shareholders details of certain acquisitions or disposal of assets and connected transactions. The Hang Seng Index is a capitalization-weighted index of 33 stocks listed on the Hong Kong Stock Exchange. The highest and lowest closing levels of the Hang Seng Index for the five years from 2001 to 2005 were as follows: Highest Lowest Year closing level closing level 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,163.99 8,934.20 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,974.61 8,858.69 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,594.42 8,409.01 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,266.38 10,967.65 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,466.06 13,355.23 The highest and lowest closing levels of the Hang Seng Index for the four months ended April 30, 2006 were 16,944.34 (on April 20, 2006) and 14,944.77 (on January 3, 2006), respectively.
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TAXATION
Hong Kong Taxation This section addresses the taxation of income and capital gains of holders of H Shares under the laws and practices of Hong Kong. The following summary of the tax position in Hong Kong is based on current law and practice, is subject to changes therein and does not constitute legal or tax advice to you. This summary provides a general outline of the material tax considerations that may be relevant to a decision to purchase, own or dispose of H Shares and does not deal with all possible Hong Kong tax consequences applicable to all categories of investors. Accordingly, each prospective investor, particularly those subject to special tax rules, such as banks, securities dealers, insurance companies and tax-exempt entities, should consult its own tax adviser regarding the Hong Kong or other tax consequences of an investment in the H Shares.
Tax Treaties There is no relevant tax treaty in effect between Hong Kong and the United States.
Tax on Dividends Under current practice of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends with respect to the H Shares, either by withholding or otherwise, unless such dividends are attributable to a trade, profession or business carried on in Hong Kong.
Tax on Gains from Sale No tax is imposed in Hong Kong in respect of capital gains. However, trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where the trading gains are derived from or arise in Hong Kong will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16% on individuals. Certain categories of taxpayers whose business consists of buying and selling shares are likely to be regarded as deriving trading gains rather than capital gains (e.g., financial institutions, insurance companies and securities dealers) unless these taxpayers could prove that the investment securities are held for long term investment purposes. Trading gains from sales of H Shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H Shares effected on the Hong Kong Stock Exchange realized by persons carrying on a business of trading or dealing in securities in Hong Kong.
Stamp Duty Hong Kong stamp duty, currently charged at the ad valorem rate of 0.1% on the higher of the consideration for or the value of the H Shares, will be payable by the purchaser on every purchase and by the seller on every sale of H Shares (i.e., a total of 0.2% is currently payable on a typical sale and purchase transaction involving H Shares). In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of H Shares. If one of the parties to the sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any) and the transferee will be liable for payment of such duty.
Estate Duty The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H Shares, whose deaths occur on or after February 11, 2006.
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United States Federal Income Taxation United States Internal Revenue Service Circular 230 Notice: To ensure compliance with Internal Revenue Service Circular 230, prospective investors are hereby notified that: (a) any discussion of U.S. Federal tax issues contained or referred to in this Offering Circular or any document referred to herein is not intended or written to be used, and cannot be used by prospective investors for the purpose of avoiding penalties that may be imposed on them under the United States Internal Revenue Code; (b) such discussion is written for use in connection with the promotion or marketing of the transactions or matters addressed herein; and (c) prospective investors should seek advice based on their particular circumstances from an independent tax advisor. This section describes the material United States Federal income tax consequences of owning H Shares. It applies to you only if you acquire your H Shares in this offering and you hold your H Shares as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including: ‚ a dealer in securities; ‚ a trader in securities that elects to use a mark-to-market method of accounting for securities holdings; ‚ a tax-exempt organization; ‚ a life insurance company; ‚ a person liable for alternative minimum tax; ‚ a person that actually or constructively owns 10% or more of our voting shares; ‚ a person that holds H Shares as part of a straddle or a hedging or conversion transaction; or ‚ a U.S. holder (as defined below) whose functional currency is not the U.S. dollar. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed United States Treasury regulations, published rulings and court decisions, all as currently in effect, as well as on the Agreement Between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the ""Treaty''). These laws are subject to change, possibly on a retroactive basis. You are a U.S. holder if you are a beneficial owner of H Shares and you are for United States Federal income tax purposes: ‚ a citizen or resident of the United States; ‚ a domestic corporation; ‚ an estate whose income is subject to United States Federal income tax regardless of its source; or ‚ a trust if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust. A ""non-U.S. holder'' is a beneficial owner of H Shares that is not a United States person for United States Federal income tax purposes. If a partnership holds H Shares, the United States Federal income tax treatment of a partner in the partnership will depend on the status of the partner and the activities of the partnership. If you are a partner in a partnership that holds H Shares, you should consult your own tax advisor regarding the United States Federal income tax consequences of owning and disposing of H Shares in your particular circumstances.
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You should consult your own tax advisor regarding the United States Federal, state and local and other tax consequences of owning and disposing of H Shares in your particular circumstances. This discussion addresses only United States Federal income taxation.
Taxation of Dividends U.S. Holders. Under the United States Federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States Federal income tax purposes) is subject to United States Federal income taxation. If you are a noncorporate U.S. holder, dividends paid to you in 2006 and in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the H Shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the H Shares generally will be qualified dividend income. The dividend is taxable to you when you receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Hong Kong dollar payments made, determined at the spot Hong Kong dollar/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States Federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the H Shares and thereafter as capital gain. Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be ""passive'' or ""financial services'' income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be ""passive'' or ""general'' income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you. Non-U.S. Holders. If you are a non-U.S. holder, dividends paid to you in respect of H Shares will not be subject to United States Federal income tax unless the dividends are ""effectively connected'' with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, ""effectively connected'' dividends may, under certain circumstances, be subject to an additional ""branch profits tax'' at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.
Taxation of Capital Gains U.S. Holders. Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your H Shares, you will recognize capital gain or loss for United States Federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your H Shares. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will
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generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Non-U.S. Holders. If you are a non-U.S. holder, you will not be subject to United States Federal income tax on gain recognized on the sale or other disposition of your H Shares unless: ‚ the gain is ""effectively connected'' with your conduct of a trade or business in the United States, and the gain is attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis, or ‚ you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist. If you are a corporate non-U.S. holder, ""effectively connected'' gains that you recognize may also, under certain circumstances, be subject to an additional ""branch profits tax'' at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.
Passive Foreign Investment Company Rules We believe that the H shares should not be treated as stock of a PFIC for United States Federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. In general, if you are a U.S. holder, we will be a PFIC with respect to you if for any taxable year in which you held the H Shares: ‚ at least 75% of our gross income for the taxable year is passive income; or ‚ at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation's income. If we are treated as a PFIC, and you are a U.S. holder that did not make a mark-to-market election, as described below, you will be subject to special rules with respect to: ‚ any gain you realize on the sale or other disposition of your H Shares; and ‚ any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of H Shares during the three preceding taxable years or, if shorter, your holding period for the H Shares). Under these rules: ‚ the gain or excess distribution will be allocated ratably over your holding period for the H Shares; ‚ the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income; ‚ the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and ‚ the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
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Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.
If you own shares in a PFIC that are treated as marketable stock, you may make a mark-to- market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your H Shares at the end of the taxable year over your adjusted basis in your H Shares. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your H Shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the H Shares will be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the H Shares, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your H Shares will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your H Shares, even if we are not currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to your H Shares, you will be treated as having a new holding period in your H Shares beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States Federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.
If you own H Shares during any year that we are a PFIC with respect to you, you must file Internal Revenue Service Form 8621.
U.S. Information Reporting and Backup Withholding Rules
If you are a noncorporate U.S. holder, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to:
‚ dividend payments or other taxable distributions made to you within the United States, and
‚ the payment of proceeds to you from the sale of H Shares effected at a United States office of a broker.
In addition, backup withholding may apply to such payments if you are a noncorporate U.S. holder that:
‚ fails to provide an accurate taxpayer identification number,
‚ is notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns, or
‚ in certain circumstances, fails to comply with applicable certification requirements.
If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to:
‚ dividend payments made to you outside the United States by us or another non-United States payor and
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‚ other dividend payments and the payment of the proceeds from the sale of H Shares effected at a United States office of a broker, as long as the income associated with such payments is otherwise exempt from United States federal income tax, and:
‚ the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished the payor or broker:
Ì an Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-United States person, or
Ì other documentation upon which it may rely to treat the payments as made to a non- United States person in accordance with United States Treasury regulations, or
‚ you otherwise establish an exemption.
Payment of the proceeds from the sale of H Shares effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of H Shares that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if:
‚ the proceeds are transferred to an account maintained by you in the United States,
‚ the payment of proceeds or the confirmation of the sale is mailed to you at a United States address, or
‚ the sale has some other specified connection with the United States as provided in United States Treasury regulations,
unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption.
In addition, a sale of H Shares effected at a foreign office of a broker will be subject to information reporting if the broker is:
‚ a United States person,
‚ a controlled foreign corporation for United States federal income tax purposes,
‚ a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, or
‚ a foreign partnership, if at any time during its tax year:
‚ one or more of its partners are ""U.S. persons'', as defined in United States Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or
‚ such foreign partnership is engaged in the conduct of a United States trade or business,
unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person.
You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the U.S. Internal Revenue Service.
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SUMMARY OF CERTAIN DIFFERENCES BETWEEN IFRS AND US GAAP
The financial information included herein is prepared and presented in accordance with IFRS. Certain differences exist between IFRS and US GAAP which might be material to the financial information herein. The matters described below summarize certain differences between IFRS and US GAAP that may be material. Management is responsible for preparing the summary below. Management has not prepared a complete reconciliation of its consolidated financial statements and related footnote disclosures between IFRS and US GAAP and has not quantified such differences. Accordingly, no assurance is provided that the following summary of differences between IFRS and US GAAP is complete. In addition, no attempt has been made to identify future differences between IFRS and US GAAP as the result of prescribed changes in accounting standards. Regulatory bodies that promulgate IFRS and US GAAP have significant projects ongoing that could affect future comparisons. Finally, no attempt has been made to identify future differences between IFRS and US GAAP that may affect the financial statements as a result of transactions or events that may occur in the future. In making an investment decision, investors must rely upon their own examination of the bank, the terms of the offering and the financial information. Potential investors should consult their own professional advisors for an understanding of the differences between IFRS and US GAAP, and how those differences might affect the financial information herein.
Consolidation of variable interest entities
Under IFRS, the Group is required to consolidate all entities over which it has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Under US GAAP, an entity is consolidated by the Group if the Group holds variable interests through which it is exposed to the majority of the financial risk, rewards, or both of that entity. Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of that entity's net assets. US GAAP requires consolidation of variable interest entities (""VIE''s) in which the Group is the primary beneficiary. A VIE is an entity in which equity investors hold an investment that does not possess the characteristics of a controlling financial interest or does not have sufficient equity at risk for the entity to finance its activities. The Group is the primary beneficiary of a VIE if its variable interests absorb a majority of the entity's expected losses, expected residual returns, or both of the entity.
Interest income on financial assets
Under IFRS, when there is objective evidence that a financial asset has been impaired, an allowance for impairment loss is recognized. From this point, interest income is recognized at the rate of interest used to discount the future estimated cash flows for the purpose of measuring the impairment loss.
Under US GAAP, from the point a financial asset is identified as impaired, generally no interest income is recognized. The change in the present value of estimated future cash flows, if below cost, is recognized as a change in the allowance for impairment loss in the respective reporting period.
Certain debt securities classified as loans and receivables
Under IFRS, certain debt securities with fixed or determinable payments that are not quoted in an active market, which the Group has neither the intention to sell immediately or in the short-term, are classified as loans and receivables. After initial recognition, these securities are carried at amortized cost using the effective interest method, less allowance for impairment losses.
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Under US GAAP, such debt securities are classified as either ""held-to-maturity'' or ""available- for-sale.'' Under US GAAP, held-to-maturity securities are carried at amortized cost and evaluated for other than temporary impairment, while available-for-sale securities are carried at fair value, with changes in the fair value recognized in other comprehensive income, a component of shareholders' equity, until the securities are derecognized or impaired, at which time the cumulative gain or loss previously recognized in equity is recognized in the consolidated income statement.
Reversal of impairment on debt securities
Under IFRS, when objective evidence that an impairment loss on financial assets classified as loans and receivables, held-to-maturity or available-for-sale has been identified and an impairment loss has been incurred, the amount of the loss shall be recognized in the consolidated income statement. If, in a subsequent period, the fair value of an investment in a debt security classified as available-for-sale increases, and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated income statement, the impairment loss shall be reversed, with the amount of the reversal recognized in the consolidated income statement.
Under US GAAP, reversals of impairment losses which have been recognized in the consolidated income statement on such securities are not permitted.
Financial assets and liabilities designated at fair value through profit or loss
Under IFRS, the Group is permitted to designate certain financial assets and liabilities, other than those held for trading, as financial assets and liabilities ""at fair value through profit or loss'', if certain criteria are met. These financial assets and liabilities are recognized initially at fair value, with transaction costs taken directly to the consolidated income statement on the trade date and are subsequently measured at fair value. The designation, once made, is irrevocable in respect of the financial assets and liabilities to which it relates.
Under US GAAP, there are no provisions for such designations at fair value through profit and loss. For financial assets to be measured at fair value with gains and losses recognized immediately in the consolidated income statement, they must meet the definition of trading securities. Financial liabilities are generally reported at amortized cost.
Foreign exchange gains and losses on monetary available for sale financial assets
Under IFRS, monetary assets and liabilities, including available for sale securities, denominated in foreign currencies are translated at the rate of exchange at the balance sheet date and the resulting differences arising from translation is recognized in the consolidated income statement.
Under US GAAP, changes in the value of foreign currency denominated available-for-sale securities resulting from movements in foreign exchange rates should be recognized in the separate component of shareholders' equity until realized.
Investment properties
Under IFRS, the Group's investment properties are carried at fair value, representing open market value determined periodically by independent appraisers. Changes in fair values are recorded in the consolidated income statements as part of other operating income. Investment properties are not depreciated.
Under US GAAP, property revaluations are not permitted. Realized gains or losses are recognized in the consolidated income statement only upon impairment or disposal of the property. Depreciation is charged on all properties based on cost.
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Acceptances
Under IFRS, the Group has elected to account for acceptances as off-balance sheet transactions and discloses these instruments as credit commitments.
Under US GAAP, acceptances are recognized on the balance sheet.
Non-cash collateral
Under IFRS, the financial assets received as collateral under reverse repurchase agreements are not recognized on the balance sheet.
Under US GAAP, if the Group has the right to sell or pledge financial assets received as collateral to a third party, the collateral is recognized on the balance sheet when certain criteria are met.
Deferred taxes
Under IFRS, deferred tax assets are recognized to the extent it is probable that future taxable profit will be available against which the temporary differences, unused tax losses, and unused tax credits can be utilized.
Under US GAAP, deferred tax assets are recognized in full, but are then reduced by a valuation allowance if it is more likely then not that some portion, or all, of the deferred tax asset will not be realized.
Minority interests
Under IFRS, minority interests are presented in equity. Under US GAAP, minority interests are presented between liabilities and equity.
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TRANSFER RESTRICTIONS
As a result of the following restrictions, investors are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of the Offer Shares offered hereby.
No actions have been taken to register or qualify the Offer Shares or otherwise to permit a public offering of the Offer Shares in any jurisdiction outside Hong Kong. The Global Offering may be made in accordance with Rule 144A and Regulation S under the Securities Act. The Offer Shares have not been and will not be registered under the Securities Act or with a securities regulatory authority of any state or other jurisdiction outside Hong Kong and, accordingly, may not be offered, sold, pledged or otherwise transferred or delivered within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except to qualified institutional buyers as defined in Rule 144A and to persons outside the United States in accordance with Regulation S.
Terms used in these ""Transfer Restrictions'' that are defined in Rule 144A or Regulation S are used herein as defined therein.
Limitations on ownership
The bank may restrict transfers of Offer Shares where such transfer might result in ownership of H Shares exceeding the prescribed limits under applicable law or the Articles of Association.
Offer Shares offered within the United States
Each purchaser of the Offer Shares offered within the United States will be deemed to have represented and agreed as follows:
(1) The purchaser (A) is a qualified institutional buyer, (B) is aware that the sale of the Offer Shares to it may be made in reliance on Rule 144A and (C) is acquiring such Offer Shares for its own account or for the account of a qualified institutional buyer with respect to which it invests on a discretionary basis, as the case may be.
(2) The purchaser understands that the Offer Shares have not been and will not be registered under the Securities Act or the securities laws of any State of the United States and may not be offered, resold, pledged or otherwise transferred except (A)(i) to a person whom the purchaser and any person acting on its behalf reasonably believes is a qualified institutional buyer within the meaning of Rule 144A purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A, (ii) in an offshore transaction complying with Regulation S or (iii) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) and (B) in accordance with all applicable securities laws of the States of the United States or any other jurisdiction. No representation can be made as to the availability of the exemption provided by Rule 144 for resales of the Offer Shares.
(3) The purchaser will not deposit the Offer Shares, or cause the Offer Shares to be deposited, into any unrestricted depositary receipt facility established or maintained by a depositary bank relating to such Shares, unless or until the Offer Shares are no longer deemed restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.
(4) The Offer Shares sold in the International Offering will constitute ""restricted securities'' within the meaning of Rule 144 under the Securities Act, and for so long as they remain ""restricted securities'', such Offer Shares may not be transferred except as described in paragraph (2) above.
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Offer Shares offered outside the United States Each purchaser of Offer Shares offered outside the United States will be deemed to have represented and agreed as follows: (1) The purchaser is a non-U.S. person (within the meaning of Regulation S) who is acquiring the Offer Shares in an offshore transaction in accordance with Regulation S. (2) The purchaser understands that such Offer Shares have not been and will not be registered under the Securities Act and, prior to the expiration of the period of 40 days after the later of the commencement of the International Offering and the date of closing of the International Offering, may not be offered, resold, pledged or transferred within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions in accordance with Rule 144A.
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DEEMED REPRESENTATIONS FROM INVESTORS In purchasing the Offer Shares under this Global Offering, each purchaser is deemed by making a purchase to have represented to us and the International Purchasers and the Hong Kong Underwriters that: (1) the purchaser is independent of, and not connected or acting in concert with, any directors, chief executive, promoters or substantial shareholders of the bank or any of its subsidiaries, or any of their respective associates (as such term is defined in the Hong Kong Listing Rules); (2) the purchaser is not an associate (as such term is defined in the Hong Kong Listing Rules) of any director or existing shareholder of the bank or a nominee of any of the foregoing; (3) the purchaser is not making, has not made and will not make offers or sales to, connected person(s) (as the term is defined in the Hong Kong Listing Rules) of the bank at the time of completion of this Global Offering; (4) the purchaser is not directly or indirectly funded or backed by us, our directors, promoters, substantial shareholders, chief executives or any of their respective associates (as defined in the Hong Kong Listing Rules) or any of the Hong Kong Underwriters; (5) the purchaser is not a person who is accustomed to take instructions from any of our connected persons (as defined in the Hong Kong Listing Rules) in relation to the acquisition, disposal, voting or any other disposition of our securities; (6) the purchaser is not an existing beneficial owner of any of our Offer Shares; (7) the purchaser acquires our Offer Shares on its own behalf and only for the purposes of investment; (8) the purchaser's business involves the acquisition and disposal, or the holding, of securities (whether as principal or agent) and the purchaser falls within the category of persons described as ""professional investors'' under the Securities and Futures (Professional Investor) Rules made under the SFO; (9) the purchaser has received a copy of this Offering Circular and has not relied on any information, representation or warranty provided or made by or on behalf of the International Purchasers, us, or any other party involved in this International Offering other than information contained in this Offering Circular, and that none of the International Purchasers, their respective affiliates, and their respective officers, agents and employees will be liable for any information or omission in this Offering Circular; (10) the purchaser will comply with all laws, regulations and restrictions (including the selling restrictions contained in this Offering Circular) which may be applicable in its jurisdiction and the purchaser has obtained or will obtain any consent, approval or authorization required for the purchaser to subscribe for and accept delivery of the Offer Shares, and the purchaser acknowledges and agrees that none of the bank and its affiliates and the International Purchasers and their affiliates shall have any responsibility in this regard; (11) save as disclosed in the prospectus, the purchaser is neither a legal person nor a natural person in the PRC; (12) the purchaser will comply with all guidelines issued by, and all requirements of, the SFC and the Hong Kong Stock Exchange in relation to placings and provide all information as may be required by the regulatory bodies, including, without limitation, the Hong Kong Stock Exchange and the SFC, and in particular, the details set out in the Placing
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Guidelines in the Hong Kong Listing Rules. The purchaser acknowledges that failure to provide information required by the regulatory bodies may be subject to prosecution and the purchaser undertakes to fully indemnify the International Purchasers and us for any non-compliance of the Hong Kong Listing Rules; (13) the purchaser will on demand indemnify and keep indemnified us, our affiliates, officers, agents and employees and the International Purchasers and their respective affiliates, officers, agents and employees for losses or liabilities incurred by any of the foregoing arising out of or in connection with any breach of either the selling restrictions, or its agreement to subscribe for or acquire its allocated Offer Shares, or any other breach of its obligations hereunder; (14) the purchaser has at all material times and still has full power and authority to enter into the contract to subscribe for or purchase our Offer Shares for its own account or for the account of one or more persons for whom the purchaser exercises investment discretion and its agreement to do so constitutes its valid and legally binding obligation and is enforceable in accordance with its terms; and (15) the purchaser will not copy or otherwise distribute this Offering Circular to any third party.
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PLAN OF DISTRIBUTION The bank and the initial purchasers named below (the ""International Purchasers'') have entered into a purchase agreement (the ""International Purchase Agreement'') with respect to the Offer Shares being offered in the International Offering. Subject to certain conditions, and the terms and conditions set forth in the International Purchase Agreement, the bank has agreed to sell to each of the International Purchasers, and each International Purchaser has severally agreed to purchase or procure on behalf of the bank purchasers to purchase from the bank, the respective number of Offer Shares indicated in the following table. BOCI Asia Limited, Goldman Sachs (Asia) L.L.C. and UBS AG acting through its business group, UBS Investment Bank (in alphabetical order) are the representatives of the International Purchasers. International Purchasers Number of Offer Shares BOCI Asia Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,270,854,560 Goldman Sachs (Asia) L.L.C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,270,854,560 UBS AG acting through its business group, UBS Investment Bank 7,270,854,560 ABN AMRO Bank N.V. , Hong Kong Branch and N M Rothschild & Sons (Hong Kong) Limited, each trading as ABN AMRO RothschildÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 BMO Nesbitt Burns Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 Daiwa Securities SMBC Hong Kong LimitedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 Fox-Pitt, Kelton N.V. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 ICEA Securities Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 J.P. Morgan Securities Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,627,000 Bcom Securities Company Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 BNP Paribas Peregrine Capital Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 China Everbright Securities (HK) Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 China Merchants Securities (HK) Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 CITIC Securities Corporate Finance (HK) Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 CSC Securities (HK) Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 DBS Asia Capital Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 Sandler O'Neill & Partners, L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,870,480 The Hongkong and Shanghai Banking Corporation Limited ÏÏÏÏÏÏÏÏ 72,870,480 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,290,160,000
The bank has granted to the International Purchasers an option to require the bank to issue up to an aggregate of 3,835,288,000 additional Offer Shares at the Offer Price in the International Offering. The Joint Global Coordinators (on behalf of the International Purchasers) may exercise this option within 30 days from the last day for lodging of applications under the Hong Kong Public Offering. The following table shows the per Offer Share and total gross commissions to be paid to the International Purchasers by the bank (excluding any incentive fee described below). These amounts are shown assuming both no exercise and full exercise of the International Purchasers' option to purchase up to an aggregate of 3,835,288,000 additional Offer Shares. Paid by the Bank No exercise Full exercise Per Offer ShareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ HK$0.07375 HK$0.07375 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ HK$1,791 million HK$2,074 million Under the terms and conditions of the International Purchase Agreement, the International Purchasers are committed to purchase or procure on behalf of the bank purchasers for all the Offer
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Shares to be offered in the International Offering. This obligation of the several International Purchasers is subject to the satisfaction of certain conditions, including the Listing Committee of the Hong Kong Stock Exchange granting the listing of, and permission to deal in, the Offer Shares offered in the Global Offering and upon the Hong Kong Public Offering (in the case of the International Offering) and the International Offering (in the case of the Hong Kong Public Offering) becoming unconditional and not having been terminated in accordance with their respective terms. Investors in both the International Offering and the Hong Kong Public Offering will be required to pay, in addition to the Offer Price, an aggregate amount equal to 1.01% of the Offer Price, which consists of brokerage of 1%, the SFC transaction levy of 0.005%, and the Hong Kong Stock Exchange trading fee of 0.005%. The International Purchasers will receive a gross commission per Offer Share of 2.5% of the aggregate Offer Price (which excludes brokerage, the SFC transaction levy, and the Hong Kong Stock Exchange trading fee) set forth on the cover page of this Offering Circular. The bank will also pay the Joint Global Coordinators an incentive fee of 0.15% per Offer Share in the Global Offering. The estimated expenses payable by the bank in respect of the Global Offering (not including the gross commission and incentive fee described above), which may include all or a portion of the expenses of the International Purchasers and the Hong Kong Underwriters, are estimated to amount to approximately HK$506 million. The bank and the Hong Kong Underwriters have entered into an underwriting agreement (the ""Hong Kong Underwriting Agreement'') for the sale of Shares to the public in Hong Kong through the Hong Kong Underwriters. The offering prices for the Offer Shares (without taking into account brokerage, the SFC transaction levy and the Hong Kong Stock Exchange trading fee) and the commissions are the same in the International Offering and the Hong Kong Public Offering. The allocation of the Offer Shares between the Hong Kong Public Offering and the International Offering is subject to adjustment. If the number of Offer Shares validly applied for under the Hong Kong Public Offering represents (i) 15 times or more but less than 50 times, (ii) 50 times or more but less than 100 times or (iii) 100 times or more than the number of the Offer Shares initially available under the Hong Kong Public Offering, then there will be a reallocation of the Offer Shares to the Hong Kong Public Offering so that the total number of Offer Shares available under the Hong Kong Public Offering will be (i) 1,917,645,000 H Shares, representing approximately 7.5%, (ii) 2,556,859,000 H Shares, representing approximately 10%, or (iii) 5,113,718,000 H Shares, representing approximately 20%, in each case of the Offer Shares initially available under the Global Offering, respectively. In any such case, the number of H Shares allocated to the International Offering will be correspondingly reduced. If the Hong Kong Public Offering is not fully subscribed, the Joint Global Coordinators have the authority to reallocate all or any unsubscribed H Shares in the Hong Kong Public Offering to the International Offering. The International Purchasers, in the case of the International Offering, and the Hong Kong Underwriters, in the case of the Hong Kong Offering, have entered into an agreement in which they agree to restrictions on where and to whom they and any dealer purchasing from them may offer Offer Shares as a part of the distribution. The International Purchasers and the Hong Kong Underwriters have also agreed that they may sell Offer Shares among each of the underwriting groups. We have agreed with each of the International Purchasers that, during the period beginning from the date of the International Purchase Agreement and continuing to and including the date six months after the date on which dealings in the Offer Shares commence on the Hong Kong Stock Exchange, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, hedge or otherwise dispose of, any securities of the bank that are substantially similar to the Offer Shares, including but not limited to any options or warrants to purchase, or any securities that are convertible into or exchangeable or exercisable for, or that represent the right to receive, any Offer Shares or any such substantially similar securities (other than pursuant to employee stock
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option plans existing on the date of the International Purchase Agreement); provided, however, that the foregoing restrictions shall not apply (i) to the extent that any of the foregoing transactions is entered into by the bank or any of the bank's subsidiaries acting in the ordinary and usual course of its business as agent or nominee on behalf of a third party client or customer or (ii) pursuant to a public offering of domestic shares in the PRC. Application has been made for the listing of, and permission to deal in, H Shares on the Hong Kong Stock Exchange. The Hong Kong Public Offering is conditional upon, among other things, the Listing Committee of the Hong Kong Stock Exchange granting the listing of, and permission to deal in, the Offer Shares offered in the Global Offering. Prior to the Global Offering, there has been no public trading market for H Shares. The Offer Price was fixed by agreement among the Joint Global Coordinators (on behalf of the International Purchasers and the Hong Kong Underwriters) and the bank. Among the factors considered in determining the Offer Price, in addition to prevailing market conditions, were the bank's historical performance, estimates of the bank's business potential and earnings prospects, an assessment of the bank's management and the consideration of the above factors in relation to the market valuation of companies in related businesses. The Offer Shares have not been 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 (as defined in Regulation S under the Securities Act) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The International Purchasers propose to place Offer Shares outside the United States in offshore transactions in reliance on Regulation S and in accordance with applicable law. Certain of the International Purchasers propose to place Offer Shares, through their respective U.S. selling agents, only to qualified institutional buyers in the United States. Any offer or sale of Offer Shares in the United States will be made by broker-dealers who are registered as such under the Exchange Act. Until the expiration of 40 days after the later of the commencement of the Global Offering and the date of the closing of the Global Offering, an offer or sale of Offer Shares within the United States by a dealer, whether or not participating in the Global Offering, may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A or pursuant to another exemption from registration under the Securities Act. In connection with the Global Offering, Goldman Sachs (Asia) L.L.C. (""the Stabilizing Manager'') and/or its affiliates and agents, on behalf of the International Purchasers and the Hong Kong Underwriters, may over-allocate or effect any other transactions with a view to stabilizing or maintaining the market price of the Offer Shares at a level higher than that which might otherwise prevail in the open market for a limited period after the commencement of trading in the Offer Shares. However, there is no obligation on the Stabilizing Manager or any person acting for it to do this. Such stabilizing action, if taken, may be discontinued at any time, and must be brought to an end after a limited period. The stabilizing action which may be taken by the Stabilizing Manager may include primary and ancillary stabilizing action such as purchasing or agreeing to purchase any of the Offer Shares, exercising the Over-Allotment Option, stock borrowing, establishing a short position in the Offer Shares, liquidating long positions in the Offer Shares or offering or attempting to do any such actions. The number of H Shares which can be over-allocated will not exceed the number of Offer Shares which may be issued or sold under the Over-Allotment Option, namely 3,835,288,000 Offer Shares, which is approximately 15% of the Offer Shares initially available under the Global Offering. Stabilizing action permitted in Hong Kong pursuant to the Securities and Futures (Price Stabilization) Rules includes (a) primary stabilization, including purchasing, or agreeing to purchase, any of the Offer Shares or offering or attempting to do so for the purpose of preventing or minimizing any reduction in the market price of the Offer Shares, and (b) ancillary stabilization in
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connection with any primary stabilizing action, including: (i) over-allocation for the purpose of preventing or minimizing any reduction in the market price; (ii) selling or agreeing to sell Shares so as to establish a short position in them for the purpose of preventing or minimizing any reduction in the market price; (iii) purchasing or subscribing, or agreeing to purchase or subscribe for shares pursuant to the Over-Allotment Option in order to close out any position established under (i) or (ii) above; (iv) selling or agreeing to sell Shares to liquidate a long position held as a result of those purchases or subscriptions; and (v) offering or attempting to do anything described in (ii), (iii) or (iv). The Stabilizing Manager may take any one or more of the stabilizing actions described above. The Stabilizing Manager may, in connection with the stabilizing action, maintain a long position in the Offer Shares. There is no certainty regarding the extent to which and the time period for which the Stabilizing Manager will maintain any such position. In the event of any liquidation of any such long position, there may be an impact on the market price of the Offer Shares. Stabilizing action cannot be taken to support the price of any Offer Shares for longer than the stabilizing period, which begins on the commencement of trading of the Offer Shares and ends 30 days from the last day for lodging of applications under the Hong Kong Public Offering. The stabilizing period is expected to expire on June 22, 2006, and after this date, demand for the Offer Shares and therefore their price, could fall. Investors should be aware that the price of the Offer Shares cannot be assured to stay at or above the Offer Price by the taking of any stabilizing action. Stabilizing bids may be made or transactions effected in the course of stabilizing action at any price below the Offer Price. Such transactions may be effected in all jurisdictions where it is permissible to do so, in each case in compliance with all applicable laws and regulatory requirements. Such transactions, if commenced, may be discontinued at any time. Stabilization is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilize, underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a specified period of time, to retard and, if possible, prevent a decline in the initial public offer price of the securities. In Hong Kong and certain other jurisdictions, the stabilization price is not permitted to exceed the Offer Price. Under the intersyndicate agreement, each International Purchaser has represented and agreed that: (i) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document (except this Offering Circular), other than (a) to ""professional investors'' as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong (the ""Securities and Futures Ordinance'') and any rules made under the Securities and Futures Ordinance, or (b) in other circumstances which do not result in the document being a ""prospectus'' as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of the Companies Ordinance; and (ii) has not issued or does not have in its possession for purposes of the Global Offering, and will not issue or have in its possession for purposes of the Global Offering, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Offer Shares 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 the Offer Shares 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 and any rules made under the Securities and Futures Ordinance. The Offer Shares to be sold in the International Offering may not be offered or sold, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada except pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made and therein only by persons permitted under applicable laws to sell the Offer Shares. Each International Purchaser has represented and agreed that: (a) it is a person who is a qualified investor within the meaning of Section 86(7) of the Financial Services and Markets Act 2000 (the ""FSMA''), being an investor whose ordinary
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activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell the Offer Shares other than to persons who are qualified investors within the meaning of Section 86(7) of the FSMA or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Offer Shares would otherwise constitute a contravention of Section 19 of the FSMA by us; (b) 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 FSMA) received by it in connection with the issue or sale of the Offer Shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and (c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Offer Shares in, from or otherwise involving the United Kingdom. It is expected that a public offering without a listing of the Offer Shares will be made in Japan. The Offer Shares may not be offered or sold, directly or indirectly, in Japan or to, or for the account of, any resident of Japan, except in accordance with the terms and conditions of a public offering without listing of Offer Shares in Japan stated in the securities registration statement filed on May 2, 2006 (as amended) with the Japanese authority under the Securities and Exchange Law of Japan, or pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law. As used in this paragraph, ""resident of Japan'' means any person residing in Japan, including any corporation or other entity organized under the laws of Japan. Each International Purchaser has represented and agreed that this offering circular has not been, and will not be, registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each International Purchaser has represented and agreed that this offering memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Offer Shares may not be circulated or distributed, nor may the Offer Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, 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, 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 Offer Shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) 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 is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the Offer Shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA;
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(2) where no consideration is given for the transfer; or (3) by operation of law. This Offering Circular does not constitute a public offer of the Offer Shares, whether by way of sale or subscription, in the PRC. The Offer Shares are not being offered and may not be offered or sold, directly or indirectly, in the PRC to or for the benefit of, legal or natural persons of the PRC. According to the laws and regulatory requirements of the PRC, the H Shares may, subject to the laws and regulations of the relevant jurisdictions, only be offered or sold to non-PRC natural or legal persons in Taiwan, Hong Kong or Macau or any country other than the PRC, whether by means of a prospectus or otherwise. The bank has agreed to indemnify the several International Purchasers against certain liabilities, including liabilities under the Securities Act. BOCI Asia Limited, Goldman Sachs (Asia) L.L.C. and UBS AG acting through its business group, UBS Investment Bank (in alphabetical order) are acting as the joint global coordinators and joint bookrunners for the Global Offering. Certain of the International Purchasers, the Hong Kong Underwriters or their respective affiliates have provided from time to time, and expect to provide in the future, investment banking and other services to the bank and its affiliates, for which such International Purchasers, Hong Kong Underwriters or their affiliates have received or will receive customary fees and commissions. BOCI Asia Limited, one of the joint global coordinators and joint bookrunners for the Global Offering, as well as a representative of the International Purchasers and a Hong Kong Underwriter, is an indirect wholly-owned subsidiary of the bank.
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VALIDITY OF SECURITIES
The validity of the Offer Shares and certain other legal matters as to PRC law will be passed upon for us by Jun He Law Offices, and for the International Purchasers by King & Wood. We are being represented by Sullivan & Cromwell LLP with respect to United States Federal and New York State law. Certain matters as to United States Federal and New York State law will be passed upon for the International Purchasers by Shearman & Sterling LLP. Certain matters as to Hong Kong law will be passed upon for us by Freshfields Bruckhaus Deringer, and for the International Purchasers by Allen & Overy.
INDEPENDENT ACCOUNTANTS
Our consolidated financial statements as of December 31, 2003, 2004 and 2005 and for each of the years ended December 31, 2003, 2004 and 2005 have been audited by PricewaterhouseCoopers Zhong Tian Certified Public Accountants Limited Company and included in the Accountants' Report set forth in Appendix I to the Hong Kong Prospectus prepared by PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, both our independent accountants.
For the purposes of complying with Section 342C of the Companies Ordinance of Hong Kong, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, has given and not withdrawn its written consent to the issue of the Hong Kong Prospectus with the inclusion herein of, and all references to (i) its name, (ii) itself as Experts and (iii) its Accountant's Report on our financial information for the years ended December 31, 2003, 2004 and 2005, in the form and context in which they are respectively presented in the Hong Kong Prospectus. A written consent under Section 342C of the Companies Ordinance of Hong Kong is different from a consent filed with the U.S. Securities and Exchange Commission under Section 7 of the Securities Act, which is applicable only to transactions involving securities registered under the Securities Act. The term ""Experts'' used in the Hong Kong Prospectus is different from that defined under the Securities Act. The reference to PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, as Experts in the Hong Kong Prospectus is not made in the context of the Securities Act but solely as the term is used in the context of the Hong Kong Public Offering.
EXPERTS
The property valuation report included in Appendix V to the Hong Kong Prospectus has been prepared by American Appraisal China Limited, an independent valuer. American Appraisal China Limited has given and not withdrawn its written consent to the issue of this Offering Circular with the inclusion of their report in the form and context in which it is included.
Jun He Law Offices, PRC Lawyers, has given and has not withdrawn its written consent to the issue of this Offering Circular with the inclusion of its letter and/or references to its name included herein in the form and context in which they are respectively included for purpose of complying with Section 342B of the Companies Ordinance of Hong Kong.
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IMPORTANT: If you are in any doubt about any of the contents of this prospectus, you should obtain s342 independent professional advice.
BANK OF CHINA LIMITED A1A(1) (A joint stock company incorporated in the People's Republic of China with limited liability) GLOBAL OFFERING
Number of OÅer Shares under the : 25,568,590,000 (subject to adjustment and the Over- A1A(15)(2)(a) Global OÅering Allotment Option) Number of Hong Kong OÅer Shares : 1,278,430,000 (subject to adjustment) Number of OÅer Shares under the : 24,290,160,000 (subject to adjustment and the Over- International OÅering Allotment Option)
Maximum OÅer Price : HK$3.00 per Hong Kong OÅer Share payable in full on A1A(15)(2)(c) application, subject to refund, plus brokerage of 1%, 3rd Sch 9 SFC transaction levy of 0.005% and Hong Kong Stock Exchange trading fee of 0.005% Nominal value : RMB1.00 each Stock code : 3988 Joint Global Coordinators, Joint Bookrunners, Joint Sponsors and Joint Lead Managers (in alphabetical order)
The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of LR11.20 this prospectus, make no representation as to its accuracy or completeness, and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus.
A copy of this prospectus, having attached thereto the documents speciÑed in Appendix X Ì ""Documents Delivered to the Registrar of s342C(1) Companies and Available for Inspection'' to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required s342C(2) by Section 342C of the Companies Ordinance, Chapter 32 of the Laws of Hong Kong. The Securities and Futures Commission of Hong Kong and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or any other document referred to above.
The OÅer Price is expected to be Ñxed by agreement between the Joint Global Coordinators (on behalf of the Hong Kong Underwriters) I.E. Note 9 and us on the Price Determination Date. The Price Determination Date is expected to be on or around May 24, 2006 and, in any event, not later than May 29, 2006. The OÅer Price will be not more than HK$3.00 and is currently expected to be not less than HK$2.50 unless otherwise announced. Applicants for Hong Kong OÅer Shares are required to pay, on application, the maximum OÅer Price of HK$3.00 for each Hong Kong OÅer Share together with brokerage of 1%, SFC transaction levy of 0.005% and Hong Kong Stock Exchange trading fee of 0.005% subject to refund if the OÅer Price should be lower than HK$3.00.
The Joint Global Coordinators (on behalf of the Underwriters, and with our consent) may reduce the number of OÅer Shares being I.E. Note 8 oÅered under the Global OÅering and/or the indicative OÅer Price range below that stated in this prospectus (which is HK$2.50 to I.E. Note 12 HK$3.00 per H Share) at any time prior to the morning of the last day for the lodging of applications under the Hong Kong Public OÅering. In such a case, notices of the reduction in the number of Hong Kong OÅer Shares and/or the indicative OÅer Price range will be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) not later than the morning of the last day for the lodging of applications under the Hong Kong Public OÅering. If applications for Hong Kong OÅer Shares have been submitted prior to the last day for the lodging of applications under the Hong Kong Public OÅering, then even if the number of Hong Kong OÅer Shares and/or the indicative OÅer Price range is so reduced, such applications cannot be subsequently withdrawn. Further details are set out in ""Structure of the Global OÅering''.
We are incorporated, and a signiÑcant portion of our businesses are located, in the PRC. Potential investors should be aware of the LR19A.42(63) diÅerences in the legal, economic and Ñnancial systems between the mainland of the PRC and Hong Kong, and that there are diÅerent risk factors relating to investments in PRC-incorporated companies. Potential investors should also be aware that the regulatory framework in the mainland of the PRC is diÅerent from the regulatory framework in Hong Kong, and should take into consideration the diÅerent market nature of our Shares. Such diÅerences and risk factors are set out in ""Risk Factors'', ""Supervision and Regulation'', Appendix VII Ì ""Summary of Principal Legal and Regulatory Provisions'' and Appendix VIII Ì ""Summary of Articles of Association''. May 18 2006 BOWNE OF HONG KONG 05/13/2006 20:02 NO MARKS NEXT PCN: 700.00.00.00 -- Page is valid, no graphics BOM H00426 635.00.00.00 15
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EXPECTED TIMETABLE(1)
(2) Application lists open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11:45 a.m. on Tuesday, May 23, 2006 A1A(15)(2)(f) Latest time for lodging White and Yellow Application 3rd Sch 8 Forms ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12:00 noon on Tuesday, May 23, 2006 Latest time to give electronic application instructions to HKSCC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12:00 noon on Tuesday, May 23, 2006 Application lists closeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12:00 noon on Tuesday, May 23, 2006 Expected price determination date(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wednesday, May 24, 2006 Announcement of: I.E. Note 13 ‚ the OÅer Price; ‚ the levels of indication of interest in the International OÅering; ‚ the results of applications in the Hong Kong Public OÅering (with successful applicants' identiÑcation document numbers, where appropriate); and ‚ the basis of allotment of the Hong Kong OÅer Shares to be published in South China Morning A1A(15)(2)(k) Post (in English) and Hong Kong Economic Times (in Chinese), on or before ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tuesday, May 30, 2006 Dispatch of H Share certiÑcates in respect of wholly or partially successful applications on or before(4) ÏÏÏÏÏ Tuesday, May 30, 2006 Dispatch of refund checks in respect of wholly or partially unsuccessful applications on or before(4)(5) Thursday, June 1, 2006 Dealings in the H Shares on the Hong Kong Stock Exchange expected to commence atÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9:30 a.m. on Thursday, June 1, 2006 A1A(22)
(1) All times refer to Hong Kong local time, except as otherwise stated. Details of the structure of the Global OÅering, including conditions of the Hong Kong Public OÅering, are set out in ""Structure of the Global OÅering''. (2) If there is a ""black'' rainstorm warning or a tropical cyclone warning signal number 8 or above in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Tuesday, May 23, 2006, the application lists will not open on that day. (3) The price determination date is expected to be on or about Wednesday, May 24, 2006 and in any event no later than Monday, May 29, 2006. If, for any reason, the OÅer Price is not agreed on or before Monday, May 29, 2006 between us and the Joint Global Coordinators (on behalf of the Hong Kong Underwriters), the Global OÅering (including the Hong Kong Public OÅering) will not proceed and will lapse. (4) Applicants who applied for 1,000,000 or more Hong Kong OÅer Shares and have indicated in their Application Forms their wish to collect refund checks (where applicable) and H Share certiÑcates (where applicable) in person may do so from our H Share registrar, Computershare Hong Kong Investor Services Limited, from 9:00 a.m. to 1:00 p.m. on the date notiÑed by the Company in the newspapers as the date of dispatch of share certiÑcate(s) and refund check(s). The date of dispatch of share certiÑcate(s) is expected to be Tuesday, May 30, 2006. The date of dispatch of refund check(s) is expected to be Thursday, June 1, 2006. Applicants being individuals who opt for personal collection must not authorize any other person to make collection on their behalf. Applicants being corporations who opt for personal collection must attend by their authorized representatives, each bearing a letter of authorization from his corporation stamped with the corporation's chop. Both individuals and authorized representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to Computershare Hong Kong Investor Services Limited. Uncollected refund checks and H Share certiÑcates will be dispatched by ordinary post to the addresses as speciÑed in the applicants' Application Forms at the applicants' own risk. (5) Refund will be made in respect of wholly or partially unsuccessful applications and in respect of successful applications if the OÅer Price is less than the price payable on application. H Share certiÑcates will become valid certiÑcates of title only if the Hong Kong Public OÅering has become unconditional in all respects and neither the Hong Kong Underwriting Agreement nor the International Purchase Agreement has been terminated in accordance with their respective terms. Investors who trade the H Shares on the basis of publicly available allocation details prior to the receipt of H Share certiÑcates or prior to the H Share certiÑcates becoming valid certiÑcates of title do so entirely at their own risk.
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CONTENTS
You should rely only on the information contained in this prospectus and the Application Forms to make your investment decision. We have not authorized anyone to provide you with information that is diÅerent from what is contained in this prospectus. Any information or representation not made in this prospectus must not be relied on by you as having been authorized by the Company, the Joint Global Coordinators, the Joint Sponsors, the Underwriters, any of their respective directors, or any other person or party involved in the Global OÅering.
Expected Timetable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ i Contents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ii Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 DeÑnitionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 Forward-Looking Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26 Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Information about this Prospectus and the Global OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 Parties Involved in the Global OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 Corporate Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 Industry OverviewÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 Supervision and RegulationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73 Our Restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 Our Strategic and Other InvestorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 102 Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120 Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120 Our Strengths ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121 Our Strategy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124 Our Principal Business ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127 Commercial BankingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 Investment BankingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146 Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148 Other BusinessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149 Product PricingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150 Distribution Network ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150 Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 CompetitionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153 EmployeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 Intellectual Property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155 Our Relationship with BOCHK Holdings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155 Legal and Regulatory ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 158 Special Events ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 Other Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 163 Risk ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 Risk Management Structure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 169
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CONTENTS
Credit Risk Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173 Market Risk Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 184 Liquidity Risk ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187 Operational Risk Management and Internal Controls ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 188 Anti-Money Laundering and Combating Financing of Terrorism Measures ÏÏÏÏÏÏÏÏÏÏÏÏ 189 Internal Audit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 190 Risk Management of BOCHKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 192 Relationship with Our Promoter and Connected Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 197 Directors, Supervisors, Senior Management and Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 200 Substantial Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 213 Share Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215 Description of Our Assets and Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220 AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220 Liabilities and Sources of Funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254 Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 Impact of Our Restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262 Results of OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264 Segmental Operating ResultsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 288 Financial PositionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 292 Critical Accounting PoliciesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 307 Indebtedness ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310 Rules 13.11 to 13.19 of the Hong Kong Listing RulesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 311 ProÑt Forecast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 311 Dividend PolicyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 312 Distributable Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 314 Unaudited Pro Forma Adjusted Net Tangible AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 314 No Material Adverse Change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 Working Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 Future Plans and Use of Proceeds from the Global OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 316 Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317 Structure of the Global OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 323 A Share OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 329 Appendices Appendix I Ì Accountants' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ I-1 Appendix II Ì Unaudited Supplementary Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ II-1 Appendix III Ì Unaudited Pro Forma Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ III-1 Appendix IV Ì ProÑt Forecast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IV-1 Appendix V Ì Property Valuation Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ V-1 Appendix VI Ì Taxation and Foreign ExchangeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI-1
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CONTENTS
Appendix VII Ì Summary of Principal Legal and Regulatory Provisions ÏÏÏÏÏÏÏÏÏÏÏÏÏ VII-1 Appendix VIII Ì Summary of Articles of Association ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VIII-1 Appendix IX Ì Statutory and General InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IX-1 Appendix X Ì Documents Delivered to the Registrar of Companies and Available for Inspection ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ X-1
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SUMMARY
This summary aims to give you an overview of the information contained in this prospectus. As it is a summary, it does not contain all the information that may be important to you. You should read the whole document before you decide to invest in the H Shares. There are risks associated with any investment. Some of the particular risks in investing in the H Shares are set forth in ""Risk Factors''. You should read that section carefully before you decide to invest in the H Shares. The market share and industry data in this prospectus were derived from data prepared in accordance with PRC GAAP or other applicable local GAAP, which diÅers from IFRS in certain signiÑcant respects.
OVERVIEW
We are one of the four largest commercial banks in the PRC in terms of total assets with the 3rd Sch 1 most extensive international branch network among PRC commercial banks. According to the Banker magazine, we were the 32nd largest bank in the world based on total assets as of December 31, 2004. Our core business is commercial banking, which primarily consists of corporate banking, personal banking and treasury operations and accounted for 92.7% of our operating proÑt in 2005. We also conduct investment banking and insurance activities through our subsidiaries. The combination of our commercial banking, investment banking and insurance businesses has created a universal banking platform that allows us to provide integrated services to our customers.
We are headquartered in Beijing with operations in the Chinese Mainland, Hong Kong and Macau and other overseas regions. Our operating proÑt was RMB37,416 million, RMB37,122 million and RMB53,636 million in 2003, 2004 and 2005, respectively, of which RMB13,203 million, RMB17,786 million and RMB29,676 million, respectively, was derived from our domestic operations. As of December 31, 2005, our total assets were RMB4,740,048 million, of which 76.4% were derived from our domestic operations before inter-company balance elimination.
We had one of the most extensive domestic distribution networks, with over 11,000 branches and outlets, 580 self-service centers and 11,600 automated service machines throughout the PRC as of December 31, 2005. We also have an extensive international network. As of December 31, 2005, our international network comprised over 600 overseas branches, subsidiaries and representative oÇces covering 27 countries and regions, and we had correspondent banking relationships with over 1,400 foreign banks. In addition, we oÅer electronic-banking services such as telephone banking and Internet banking. As of December 31, 2004, we had the highest total assets, customer deposits and outstanding loans and advances per branch among the Big Four according to data released by the Big Four.
We are also a leading commercial bank in Hong Kong and Macau. Our Hong Kong and Macau operations together accounted for 19.8% of our total assets before inter-company balance elimination as of December 31, 2005 and 41.1% of our operating proÑt in 2005. Our subsidiary, BOCHK, was the second largest commercial bank in Hong Kong in terms of total assets as of December 31, 2005. BOCHK's direct holding company, BOCHK Holdings, is listed on the Hong Kong Stock Exchange. Our Macau branch was the largest commercial bank in Macau in terms of total assets as of June 30, 2005 based on data published by the Macau government.
BOCHK and our Macau branch are each one of the few banks authorized to issue bank notes in their respective jurisdictions.
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SUMMARY
OUR STRENGTHS
Our principal strengths include:
¬ Well-recognized brand name. Established in 1912, we are one of the best-known commercial banks in the PRC. Over more than 90 years of history, we have built one of the most recognized brand names in the PRC through our contributions to the evolution of the PRC commercial banking industry.
¬ Largest and rationally distributed overseas network complementing an extensive domestic network. Our domestic branch network covers major geographic regions in the PRC. In addition, we have the largest overseas network among the PRC commercial banks, covering major international Ñnancial centers such as New York, London, Tokyo, Hong Kong, Frankfurt and Singapore.
¬ Solid customer base and strong presence in attractive customer segments. We have established and continue to maintain strong relationships with leading domestic and international corporations and Ñnancial institutions. We also have a strong presence in the aÉuent retail customer segment. Our relationship with these customers has enabled us to increase our product penetration.
¬ Universal banking platform. In addition to commercial banking, we provide investment banking, insurance and other services through our wholly owned subsidiaries, BOCI, BOCG Insurance and BOCG Investment. The combination of these businesses has created a universal banking platform that provides us with the ability to oÅer a broad range of Ñnancial products and services, which enables us to diversify our sources of income, establish stronger relationships with strategically targeted customers and strengthen customer loyalty.
¬ Leader in non-interest income and foreign exchange businesses with strong product innovation capabilities. In 2004, our non-interest income as a percentage of our total operating income based on PRC GAAP was the highest among the Big Four. We believe our ability to oÅer innovative Ñnancial solutions to our customers provides us with a competitive advantage over other PRC commercial banks. We are also a market leader in the PRC in the foreign currency-denominated deposit, lending, and trade-related services.
¬ Experienced senior management team with proven track record. Our senior management team has extensive experience in the banking and Ñnancial services, with an average of 21 years of relevant experience. In addition, over 40% of our management personnel at or above the level of assistant general manager in our head oÇce have overseas working experience.
OUR STRATEGY A1A(34)(1)(c)
We strive to become the premier bank in the PRC by pursuing sustainable proÑtability and quality-driven growth. We intend to become the Ñnancial services provider of choice in the PRC for large corporations and aÉuent retail customers, as well as a leading international Ñnancial services company. We intend to achieve our objectives by focusing on the following strategies:
¬ Strengthen corporate governance, risk management and Ñnancial management. We strive to achieve an appropriate balance between risk and return. We are in the process of building an integrated risk management framework covering credit risk, market risk, liquidity risk and operational risk. We seek to manage our capital base and improve our
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SUMMARY
asset and liability mix and pricing, and plan on further improving our Ñnancial and accounting controls.
¬ Focus on attractive customer groups. We seek to expand the scope of our business with large corporate customers by providing them with a broad range of treasury, investment banking and insurance services in addition to traditional banking products and services. We will continue to selectively seek small and medium-sized enterprise customer opportunities based on improved risk management tools, risk management and pricing policies and customized product oÅerings. We also intend to focus on the high-end retail segment by further developing our wealth management products and services.
¬ Seek further diversiÑcation by enhancing our product oÅerings and strengthening our universal banking platform. For the personal banking business, we will continue to focus on our mortgage lending. In particular, we have developed a direct-sale model to market our mortgage products directly to our retail customers in order to provide customized mortgage products and to improve our customer service. For the corporate banking and treasury operations, we seek to reinforce our leading position in trade related services, trade Ñnance and treasury products, and continue to develop fee-based businesses. We also intend to develop and promote globalized products and services based on our overseas network, and to develop our investment banking and insurance operations, leveraging our existing platform and customer relationships to promote and capture cross- selling opportunities.
¬ Focus on domestic strategic regions and further develop our international franchise to support cross-border businesses. We have identiÑed 10 Key Regions as well as 40 Key Cities in the PRC as our key strategic regions. We will allocate resources and prioritize our eÅorts accordingly. We will continue to develop our overseas network in order to support our domestic and international customers. Through better coordination and expanded cross-border services and products, we intend to capture business opportunities arising from the increasing globalization of the PRC economy.
¬ Implement infrastructure reform to streamline processes and increase eÇciency. We are in the process of transforming our organizational structure to centralize and streamline key decision-making processes. We expect our Board committees and senior management to continue to focus on reform, and we intend to strengthen the functions of our tier one branches as regional management centers. We are also in the process of streamlining and standardizing our operational processes and upgrading our information technology system.
¬ Train and develop our employees to enhance our competitive advantage. Our competitive advantage depends on our ability to attract, retain, train and motivate our employees. We will continue to enhance our strategic human resource management to align our employees' and shareholders' interests. In addition, we plan to introduce an equity-based incentive plan for our senior management.
¬ Cooperate with our strategic investors to create synergies. We believe our strategic investors have complementary areas of expertise that can assist us in our business and infrastructure development. Through cooperation agreements, we will seek to take advantage of the expertise of our strategic investors to enhance the business opportunities with our existing customers to increase market penetration. We believe cooperation with our strategic investors will enhance our competitiveness.
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SUMMARY
DIVIDEND POLICY Any dividend distribution plan may be proposed by our Board or any shareholder who holds, either alone or jointly with others, more than 3% of our Shares to a shareholders' meeting for approval. Alternatively, two or more shareholders who hold in the aggregate 10% or more of our Shares may request a special shareholders' meeting to review a proposal of dividend distribution. The decision to make a recommendation for the payment of any dividend and the amount of the dividend will depend on:
¬ our results of operations and cash Öows;
¬ our Ñnancial position;
¬ statutory capital adequacy requirements as determined under relevant regulations;
¬ the interests of all of our shareholders;
¬ general business conditions;
¬ our business prospects;
¬ statutory and regulatory restrictions on the payment of dividends by us; and
¬ any other factor that our Board deems relevant. Under PRC law, dividends may be paid only out of distributable proÑts as determined under PRC GAAP or IFRS, whichever is lower. Distributable proÑts mean our unconsolidated proÑt attributable to equity holders, after any replenishment of unconsolidated accumulated losses, allocations to statutory surplus reserve, general and regulatory reserve and discretionary surplus reserve that we are required to make. Any distributable proÑts that are not distributed in a given year are retained and available for distribution in subsequent years. Dividend distributions in the amount of RMB14,200 million for the year ended December 31, 2004, and RMB12,737 million to our shareholders on record as of December 29, 2005 for the six-month period ended June 30, 2005, were approved at the shareholders' meetings in September and December 2005, respectively. We paid such dividends in cash by December 31, 2005. In addition, dividend distributions in the amount of RMB1,375 million to our shareholders on record as of December 31, 2005 were approved by the shareholders in April 2006. The amount of dividends we paid historically is not indicative of the dividends we will pay in the future or our future payment ratio. In April 2006, the Board of Directors approved the dividend policy for the period beginning on the date of the Global OÅering and ending on December 31, 2008. See ""Financial Information Ì Dividend Policy''.
INFORMATION DISCLOSURE Under PRC law, our annual report shall disclose, among other things, audited consolidated Ñnancial statements prepared under PRC GAAP. PRC GAAP may be materially diÅerent from generally accepted accounting principles used by banks in other jurisdictions. Our consolidated Ñnancial statements included in this prospectus were prepared in accordance with IFRS. Please see ""Supervision and Regulation Ì Corporate Governance Ì Information Disclosure''.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION 3rd Sch 3 You should read the summary historical consolidated Ñnancial information below in conjunction with Appendix I Ì ""Accountants' Report'', which has been prepared in accordance with IFRS. The
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SUMMARY
summary historical consolidated income statement data for the years ended December 31, 2003, 2004 and 2005 and the summary historical consolidated balance sheet data as of December 31, 2003, 2004 and 2005 set forth below have been derived from the Accountants' Report issued by PricewaterhouseCoopers, CertiÑed Public Accountants, Hong Kong, and included in Appendix I to this prospectus.
For the year ended December 31, 2003 2004 2005 (in millions of RMB, unless otherwise stated) Summary Historical Consolidated Income Statement Data A1A(33)(1) 3rd Sch 27 Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,967 132,353 167,948 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40,370) (43,918) (66,940) Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008 Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,353 8,557 9,247 Net trading income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,303 8,882 4,283 Net gains/(losses) on investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,094 337 (582) Other operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,849 9,602 11,150 Net gains on sale of shares in a subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,400 Ì Ì Impairment losses on loans and advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,100) (23,812) (11,486) Other operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (46,080) (54,879) (59,984) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 37,122 53,636 Share of results of associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) 141 175 ProÑt before income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,162) (10,198) (22,253) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,185 27,065 31,558 Attributable to: Equity holders of our bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,015 22,301 25,921 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,170 4,764 5,637 34,185 27,065 31,558 Earnings per share for proÑt attributable to the equity holders of our bank during the year (Renminbi per ordinary share) Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.17 0.12 0.14
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As of December 31, 2003 2004 2005 (in millions of RMB) Summary Historical Consolidated Balance Sheet Data Assets Cash and due from banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,333 35,779 41,082 Balances with central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267,159 284,348 316,941 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏ 428,915 340,192 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,789 38,440 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,596 26,105 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,144 92,124 111,782 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,162 16,076 16,808 Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 2,072,919 2,152,112 Investment securities Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 357,587 602,221 Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 457,994 607,459 Loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 413,941 361,851 Investment in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 1,227 5,061 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,614 65,012 62,417 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,837 6,288 8,511 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,111 21,614 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,443 35,575 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,181 111,788 134,217 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,815 66,738 30,055 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,836 38,570 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 157,243 141,087 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,977 93,760 91,174 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,338,448 3,699,464 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,823 26,253 60,179 Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77,229 69,549 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,949 19,588 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,669 4,274 7,052 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,951 2,399 2,136 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,397 124,860 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,751,434 4,037,314 4,484,529 A1A(32)(2)
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As of December 31, 2003 2004 2005 (in millions of RMB) Summary Historical Consolidated Balance Sheet Data (Continued) Equity Capital and reserves attributable to equity holders of our bank Share capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 186,390 209,427 Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,976 (10,432) (5,954) Statutory reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,140 5,987 General and regulatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 419 5,109 (Accumulated losses)/undistributed proÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,241) 16,547 10,188 Reserve for fair value changes of available-for-sale securities 4,078 2,730 1,899 Currency translation diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,617 1,961 (237) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,820 200,755 226,419 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,026 27,152 29,100 Total equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221,846 227,907 255,519 Total equity and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048
As of or for the year ended December 31, 2003 2004 2005 Selected Financial Ratios ProÑtability ratios: Return on total assets(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.86% 0.63% 0.67% Return on average total assets(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.94% 0.66% 0.70% Return on equity(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.76% 11.11% 11.45% Return on average equity(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.76%(5) 11.22% 12.14% Net interest spread(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.08% 2.14% 2.21% Net interest margin(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.16% 2.24% 2.33% Non-interest income to operating income(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.61% 23.64% 19.26% Operating expenses to operating income(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.36% 47.39% 47.95% Operating expenses to operating income (excluding business and other taxes)(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41.45% 43.08% 43.41% Asset and credit quality ratios: IdentiÑed impaired loans to gross loans(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16.58% 5.51% 4.90% Total allowance for impairment losses to identiÑed impaired loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66.73% 63.16% 75.92% Total allowance for impairment losses to gross loans(9) ÏÏÏÏÏÏ 11.06% 3.48% 3.72% Other Ratios Core capital adequacy ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A 8.48% 8.08% Capital adequacy ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A 10.04% 10.42% Total equity to total assets(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.58% 5.34% 5.39%
(1) Represents the proÑt for the year (including proÑt attributable to minority interest) as a percentage of the year end balance of total assets. (2) Represents the proÑt for the year (including proÑt attributable to minority interest) as a percentage of the average balance of total assets as of the beginning and end of the year.
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(3) Represents the proÑt attributable to equity holders of our bank as a percentage of the year end balance of total equity excluding minority interest. (4) Represents the proÑt attributable to equity holders of our bank as a percentage of the average balance of total equity excluding minority interest as of the beginning and end of the year. (5) The amount for 2003 was calculated using total equity excluding minority interest as of December 31, 2003, as total equity excluding minority interest as of January 1, 2003 was less than zero. (6) Calculated as the diÅerence between the average yield on average interest-earning assets and the average cost on average interest-bearing liabilities. (7) Calculated by dividing net interest income by average interest-earning assets. (8) Operating income consists of net interest income, net fee and commission income, net trading income, net gains (losses) on investment securities, other operating income and net gains on sale of shares in a subsidiary. (9) Gross loans represent the total amount of loans and advances to customers before allowance for impairment losses. (10) Represents the consolidated ratios as of year end calculated in accordance with the CBRC guidelines and based on PRC GAAP Ñnancial data. (11) Represents the year end balance of total equity as a percentage of the balance of total assets as of the year end date.
RISK FACTORS There are certain risks and considerations relating to an investment in our Shares. These can be categorized into: (i) risks relating to our loan portfolio; (ii) risks relating to our business; (iii) risks relating to the PRC banking industry; (iv) risks relating to the PRC; and (v) risks relating to the Global OÅering. These risk factors and considerations are further described in ""Risk Factors'' and are summarized below.
Risks Relating to Our Loan Portfolio
¬ If we are unable to eÅectively control and reduce the level of impaired loans and advances in our current loan portfolio and in new loans we extend in the future, or if our allowance for impairment losses on loans and advances is insuÇcient to cover actual loan losses, our Ñnancial condition and results of operations may be materially and adversely aÅected.
¬ If we are unable to realize the collateral or guarantees securing our loans to cover the outstanding principal and interest balance of our loans, our Ñnancial condition and results of operations may be adversely aÅected.
¬ Loans due within one year account for a signiÑcant portion of our interest income, and any failure to maintain our position in the loan market may result in a signiÑcant decrease in our interest income.
¬ Our allowance for impairment losses on loans and advances is determined in accordance with IAS 39, and future amendment to IAS 39 or interpretive guidance on the application of IAS 39 may require us to signiÑcantly increase our allowance for impairment losses on loans and advances and materially aÅect our Ñnancial conditions and results of operations.
Risks Relating to Our Business
¬ We are in the process of improving our risk management and internal control systems and practices, but our implementation of and compliance with some of these improved systems and their eÅectiveness have not been fully tested. There are areas within our risk management and internal control system that require further improvements. Our business and prospects may be materially and adversely aÅected if our eÅorts to improve these systems prove to be ineÅective.
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¬ We may encounter diÇculties in eÅectively implementing centralized management and supervision of our branches and subsidiaries, as well as consistent application of our policies throughout our bank, and may not be able to timely detect or prevent fraud or other misconduct by our employees or third parties.
¬ We are subject to Öuctuations in interest rates and currency exchange rates and other market risks, which may materially and adversely aÅect our Ñnancial condition and results of operations.
¬ We derive a signiÑcant portion of our proÑts from our overseas operations, particularly from BOCHK, and any deterioration or disruption of these operations could materially and adversely aÅect our Ñnancial condition and results of operations.
¬ We are subject to credit risks relating to the ten-year bond issued by China Orient.
¬ We are subject to credit and funding risks with respect to certain oÅ-balance sheet arrangements.
¬ We are subject to risks associated with our derivative transactions.
¬ While we have experienced growth in recent years, our business, Ñnancial condition, results of operations and prospects could be adversely aÅected if we are unable to successfully manage our growth or otherwise obtain suÇcient resources to support such growth.
¬ Our liquidity may be adversely aÅected if we fail to maintain our deposit growth or if there is a signiÑcant decrease in our deposits.
¬ Any substantial failure to improve or upgrade our information technology infrastructure eÅectively or on a timely basis could materially and adversely aÅect our competitiveness, Ñnancial condition and results of operations.
¬ We are subject to PRC and overseas regulatory inspections, examinations, inquiries or audits, and future sanctions, Ñnes and other penalties, if any, could materially and adversely aÅect our business, Ñnancial condition, results of operations and our reputation.
¬ Our largest shareholder is able to exercise signiÑcant control over us.
¬ Although we own a majority of the issued share capital of BOCHK Holdings, our ability to exercise control over BOCHK Holdings may be limited in certain circumstances.
¬ We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and harm our business.
¬ We could be exposed to substantial penalties or other liabilities in the United States, and our business in the United States and our reputation may be adversely aÅected, if it were determined that business relationships resulted in prohibited transactions with countries and entities that are the subject of U.S. sanctions.
¬ We have not obtained formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties.
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Risks Relating to the PRC Banking Industry
¬ The increasingly competitive nature of the PRC banking industry, as well as competition for funds which may arise from the developing PRC capital markets, could adversely aÅect our business, Ñnancial condition, results of operations and prospects.
¬ Our operations are highly regulated and our business, Ñnancial condition, results of operations and prospects may be materially and adversely aÅected by regulatory changes or other governmental policies, including their interpretation and application.
¬ PRC regulations impose certain limitations on the types of investments we may make, and, as a result, our ability to seek optimal investment returns and our ability to diversify our investment portfolio or hedge the risks relating to our Renminbi-denominated assets are limited.
¬ Investments in PRC commercial banks are subject to ownership restrictions that may adversely aÅect the value of your investment.
¬ The eÅectiveness of our credit risk management function is aÅected by the quality and scope of information available in the PRC.
¬ Our loan classiÑcation guidelines are diÅerent from those applicable to banks in certain other countries or regions.
¬ The facts, forecasts and statistics contained in this prospectus with respect to the PRC, Hong Kong and Macau and their economies and banking industries are derived from various governmental sources and may not be accurate, reliable, complete or up to date.
¬ Our business, Ñnancial condition, results of operations, prospects, and the value of your investment may be adversely aÅected as a result of negative media coverage of the PRC banking industry.
Risks Relating to the PRC
¬ PRC economic, political and social conditions, as well as government policies, could aÅect our asset quality, results of operations, Ñnancial condition and prospects.
¬ We are subject to the PRC Government controls on currency conversion.
¬ The PRC legal system could limit the legal protections available to you.
¬ You may experience diÇculties in eÅecting service of legal process and enforcing judgments against us and our Directors and oÇcers.
¬ Holders of H Shares may be required to pay withholding tax on dividends.
¬ Payment of dividends is subject to restrictions under PRC laws.
Risks Relating to the Global OÅering
¬ Our actual Ñnancial performance could vary from the forecast Ñnancial information contained in this prospectus.
¬ An active trading market for our Shares may fail to develop or be sustained, which could have a material adverse eÅect on the market price and liquidity of our Shares.
¬ Future sales or perceived sales of substantial amounts of our securities in the public market, including any future A Share OÅering, sale of our H Shares by SSF or re-
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registration of Shares held on our domestic share register into H Shares, could have a material adverse eÅect on the prevailing market price of our H Shares and our ability to raise capital in the future, and may result in dilution of your shareholdings.
¬ Since the OÅer Price of our H Shares is higher than the net tangible asset value per Share, you will incur immediate dilution.
(1) PROFIT FORECAST FOR THE YEAR ENDING DECEMBER 31, 2006 LR11.18
Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏ not less than RMB33,000 million (HK$31,918 million) Forecast earnings per Share(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (a) Pro forma basis(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RMB0.136 (HK$0.132) (b) Weighted average basis(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RMB0.143 (HK$0.138)
(1) All statistics in this table are based on the assumption that the Over-Allotment Option is not exercised. (2) The bases and assumptions on which the above proÑt forecast has been prepared are set out in Appendix IV to this prospectus. (3) Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 and forecast earnings per Share are converted into Hong Kong dollars at the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006. (4) The forecast earnings per Share on a pro forma basis is calculated by dividing the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 by a weighted average of 241,854,139,211 Shares assumed to be issued and outstanding during the year ending December 31, 2006, assuming the Over-Allotment Option is not exercised. The weighted average of 241,854,139,211 Shares, assuming the Over- Allotment Option is not exercised, is calculated based on 209,427,362,357 Shares issued and outstanding as of December 31, 2005, 8,514,415,652 Shares issued on March 13, 2006 upon completion of the SSF Investment, and 25,568,590,000 Shares to be issued pursuant to the Global OÅering on an assumption that the Global OÅering was completed on January 1, 2006. (5) The forecast earnings per Share on a weighted average basis is calculated by dividing the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 by a weighted average of 231,276,448,553 Shares assumed to be issued and outstanding during the year ending December 31, 2006, assuming the Over-Allotment Option is not exercised. The weighted average of 231,276,448,553 Shares, assuming the Over- Allotment Option is not exercised, is calculated based on 209,427,362,357 Shares issued and outstanding as of December 31, 2005, 8,514,415,652 Shares issued on March 13, 2006 upon completion of the SSF Investment, and 25,568,590,000 Shares to be issued pursuant to the Global OÅering on an assumption that the Global OÅering was completed on June 1, 2006. If the Over-Allotment Option is exercised in full, the forecast earnings per Share on a pro forma basis and a weighted average basis, calculated on the basis set out above, will be diluted to approximately RMB0.134 (HK$0.130) and RMB0.141 (HK$0.137), respectively.
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OFFER STATISTICS A1A(21)
All statistics in this table are based on the assumption that the Over-Allotment Option is not exercised.
Based on an Based on an OÅer OÅer Price of HK$2.50 Price of HK$3.00 Market capitalization of the Shares(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ HK$608,776 HK$730,531 million million Prospective price/earnings multiple (a) Pro forma basis(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.94 times 22.73 times (b) Weighted average basis(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.11 times 21.74 times Pro forma adjusted net tangible asset value per Share(4)ÏÏ HK$1.189 HK$1.242
(1) The calculation of market capitalization is based on 243,510,368,009 Shares expected to be issued and outstanding following the Global OÅering.
(2) The calculation of the prospective price/earnings multiple on a pro forma basis is based on the forecast earnings per Share on a pro forma basis at the respective OÅer Prices of HK$2.50 and HK$3.00.
(3) The calculation of the prospective price/earnings multiple on a weighted average basis is based on the forecast earnings per Share on a weighted average basis at the respective OÅer Prices of HK$2.50 and HK$3.00.
(4) The pro forma adjusted net tangible asset value per Share is arrived at after the adjustments referred to in the section headed ""Financial Information Ì Unaudited Pro Forma Adjusted Net Tangible Assets'' in this prospectus and on the basis of 234,995,952,357 Shares in issue at the respective OÅer Prices of HK$2.50 and HK$3.00 per H Share. No adjustment has been made to reÖect any business operations or other transactions of the Group entered into subsequent to December 31, 2005 including, inter-alia, the subscription of 8,514,415,652 Shares by SSF on March 13, 2006 for a consideration of RMB10 billion and a dividend in the amount of RMB1,375 million approved on April 30, 2006 by our shareholders at a post-adjournment session of our annual general meeting.
If the Over-Allotment Option is exercised in full, assuming an OÅer Price of HK$2.75 (being the mid-point of the estimated OÅer Price range of HK$2.50 to HK$3.00), the pro forma adjusted net tangible asset value per Share, calculated on the basis set out above, will be approximately RMB1.281 (HK$1.239).
USE OF PROCEEDS OF THE GLOBAL OFFERING
We estimate that we will receive net proceeds from the Global OÅering of approximately HK$68,071 million (RMB70,379 million, based on the PBOC rate of HK$1.00 • RMB1.0339 prevailing on May 2, 2006), after deducting the estimated underwriting fees and expenses payable by us in the Global OÅering, assuming the Over-Allotment Option is not exercised, and assuming an OÅer Price of HK$2.75 per H Share, the mid-point of the estimated OÅer Price range of HK$2.50 to HK$3.00 per H Share. We intend to use these net proceeds to strengthen our capital base to support the ongoing growth of our business. See ""Future Plans and Use of Proceeds from the Global OÅering''.
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SUMMARY
PROPOSED A SHARE OFFERING We are in the process of preparing for an A Share OÅering and intend to pursue such oÅering as soon as practicable. Subject to obtaining the relevant approvals and market conditions, we may possibly undertake the A Share OÅering shortly after the Global OÅering. The proposed A Share OÅering will comprise not more than 10,000,000,000 A Shares, all of which will be newly issued shares, and will raise not more than RMB20,000 million, and will be within the limits approved by the relevant regulatory authorities. Assuming that we can complete our A Share OÅering by July 2007, no speciÑc approval by holders of our H Shares will be required. See ""A Share OÅering''.
There are risks associated with any investment. Some of the particular risks in investing in the OÅer Shares are set forth in ""Risk Factors''. You should read that section carefully before you decide to invest in the OÅer Shares.
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DEFINITIONS
In this prospectus, unless the context otherwise requires, the following words and expressions have the following meanings.
""10 Key Regions'' Beijing Municipality, Fujian Province, Guangdong Province, Jiangsu Province, Liaoning Province, Shandong Province, Shanghai Municipality, City of Shenzhen, Tianjin Municipality and Zhejiang Province
""40 Key Cities'' Beijing, Changchun, Changsha, Chengdu, Chongqing, Dalian, Dongguan, Foshan, Fuzhou, Guangzhou, Hangzhou, Harbin, Hefei, Jinan, Kunming, Lanzhou, Nanchang, Nanjing, Nantong, Ningbo, Qingdao, Quanzhou, Shanghai, Shaoxing, Shenyang, Shenzhen, Shijiazhuang, Suzhou, Taiyuan, Tianjin, Urumqi, Wenzhou, Wuhan, Wuxi, Xi'an, Xiamen, Yantai, Zhengzhou, Zhongshan and Zhuhai
""A Share OÅering'' the proposed oÅering of not more than 10,000,000,000 A Shares and raising not more than RMB20,000 million by the Company to the public in the PRC
""A Share(s)'' Domestic Share(s) listed on a PRC stock exchange and denominated in Renminbi
""ABC'' Agricultural Bank of China ( )
""ADB'' Asian Development Bank
""AFH'' Asia Financial Holdings Pte. Ltd.
""ATM'' automated teller machine
""Application Form(s)'' white application form(s) and yellow application form(s) or, where the context requires, any of them
""Articles of Association'' the articles of association of our bank, adopted on March 28, 2006
""Authoritative Interpretative the International Financial Reporting Interpretations Committee Bodies'' and other relevant accounting standards interpretative bodies
""B Share(s)'' share(s) listed on a PRC stock exchange and denominated in foreign currencies
""Banking Ordinance'' the Banking Ordinance (Chapter 155 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time
""Bank Secrecy Act'' the United States Bank Secrecy Act of 1970, as amended
""Big Four'' ABC, CCB, ICBC and our bank
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DEFINITIONS
""BOCHK'' Bank of China (Hong Kong) Limited ( ), a company incorporated under the laws of Hong Kong and a wholly- owned subsidiary of BOCHK Holdings
""BOCHK (BVI)'' BOC Hong Kong (BVI) Limited
""BOCHK Group'' BOC Hong Kong (Group) Limited ( )
""BOCHK Holdings'' BOC Hong Kong (Holdings) Limited ( ), a company incorporated under the laws of Hong Kong, in which we hold a 65.88% interest and the ordinary shares of which are listed on the Hong Kong Stock Exchange
""BOC Hong Kong Group'' BOCHK Holdings and its intermediate holding companies, BOCHK Group and BOCHK (BVI)
""BOCG Insurance'' Bank of China Group Insurance Company Limited ( )
""BOCG Investment'' Bank of China Group Investment Limited ( )
""BOCG Life'' BOC Group Life Assurance Company Limited ( )
""BOCI'' BOC International Holdings Limited ( )
""BOCI Asia'' BOCI Asia Limited ( )
""BOCI China'' BOC International (China) Limited ( )
""BOCI Group'' BOCI and its subsidiaries and associated companies
""BOCI-Prudential'' BOCI-Prudential Asset Management Limited ( )
""Board'' or ""Board of the board of directors of our bank Directors''
""Board of BOCHK'' the board of directors of BOCHK
""Board of Supervisors'' the supervisory committee of our bank established pursuant to the PRC Company Law, as described in ""Directors, Supervisors, Senior Management and Employees''
""Bohai Rim Economic Zone'' the area including, for the purpose of this prospectus, Beijing Municipality, Tianjin Municipality, Hebei Province, Shandong Province and our head oÇce
""CBRC'' China Banking Regulatory Commission ( )
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DEFINITIONS
""CCASS'' the Central Clearing and Settlement System established and operated by HKSCC
""CCASS Broker Participant'' a person admitted to participate in CCASS as a broker participant
""CCASS Custodian a person admitted to participate in CCASS as a custodian Participant'' participant
""CCASS Investor Participant'' a person or persons admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation
""CCASS Participant'' a CCASS Broker Participant or a CCASS Custodian Participant or a CCASS Investor Participant
""CCB'' China Construction Bank Corporation ( ) and its predecessors
""CDM'' cash deposit machine
""CEPA'' the Mainland and Hong Kong Closer Economic Partnership Arrangement
""CIRC'' China Insurance Regulatory Commission ( )
""CNAO'' National Audit OÇce of the PRC ( )
""CRS'' customer recycle system, which combines the functions of ATM and CDM
""CSRC'' China Securities Regulatory Commission ( )
""Central and Southern China'' the area including, for the purpose of this prospectus, Henan Province, Hubei Province, Hunan Province, Guangdong Province Guangxi Autonomous Region and Hainan Province
""China Orient'' China Orient Asset Management Corporation ( ), an asset management company established by the PRC Government for management and disposal of non-performing loans acquired from PRC commercial banks
""Cinda'' China Cinda Asset Management Corporation ( ) , an asset management company established by the PRC Government for management and disposal of non- performing loans acquired from PRC commercial banks
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DEFINITIONS
""Companies Ordinance'' the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), as amended, supplemented or otherwise modiÑed from time to time
""Connected Transactions'' as deÑned under Chapter 14A of the Hong Kong Listing Rules
""Corporate Governance the Corporate Governance Guidelines for Joint Stock Commercial Guidelines'' Banks ( ), as enacted by the PBOC on June 4, 2002 and eÅective on the same date
""Corporate Investors'' means the persons named in the section headed ""Our Strategic and Other Investors Ì Our Corporate Investors'' who have agreed to subscribe for an aggregate of approximately HK$17,521 million of H Shares at the OÅer Price
""Derivative Business the Provisional Administrative Measures on Derivative Measures'' Business of Financial Institutions ( ), as enacted by the CBRC on February 4, 2004 and eÅective on March 1, 2004
""Director(s)'' the director(s) of our bank
""domestic operations'' unless otherwise indicated, the operations of our head oÇce (including the treasury operations conducted in Hong Kong by our global markets department) and its branches and outlets in the PRC
""Domestic Shares'' ordinary shares issued by our bank, with a nominal value of RMB1.00 each, which are subscribed for or credited as paid in Renminbi
""Eastern China'' the area including, for the purpose of this prospectus, Shanghai Municipality, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province and Shandong Province
""Euros'' or ""EUR'' the lawful currency of the member states of the European Union that adopted the single currency in accordance with the Treaty establishing the European Community (signed in Rome on March 25, 1957), as amended by the Treaty on European Union (signed in Maastricht on February 7, 1992)
""FSMA'' Financial Services and Markets Act 2000
""Foreign Shares'' ordinary shares issued by our bank, with a nominal value denominated in Renminbi, which are subscribed for in a currency other than Renminbi
""Foreign-Invested Financial the PRC Administrative Regulations on Foreign-Invested Institutions Regulations'' Financial Institutions ( )
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DEFINITIONS
and the Implementing Rules of the PRC Administrative Regulations on Foreign-Invested Financial Institutions ( ), as enacted by the State Council on December 20, 2001 and by the CBRC on July 26, 2004, respectively, and eÅective on February 1, 2002 and September 1, 2004, respectively, as amended, supplemented or otherwise modiÑed from time to time
""GDP'' gross domestic product (all references to GDP growth rates are real as opposed to nominal rates of GDP growth)
""Global OÅering'' the Hong Kong Public OÅering and the International OÅering
""Goldman Sachs'' Goldman Sachs (Asia) L.L.C.
""Guidelines on Bank of the Guidelines on the Corporate Governance Reforms China and China and Supervision of Bank of China and China Construction Construction Bank'' Bank ( ), as promulgated by the CBRC on March 11, 2004, as superceded by the Guidelines on the Corporate Governance and Supervision of State-owned Commercial Banks, as promulgated by the CBRC, eÅective April 24, 2006
""H Shares'' ordinary shares of our bank, with a nominal value of RMB1.00 each, which are to be listed on the Hong Kong Stock Exchange and traded in Hong Kong dollars
""HK$'' or ""Hong Kong Hong Kong dollars, the lawful currency of Hong Kong dollars'' ""HKFRS'' Hong Kong Financial Reporting Standards promulgated by the HKICPA which include Hong Kong Accounting Standards and their interpretations
""HKGAAP'' generally accepted accounting principles in Hong Kong
""HKICPA'' Hong Kong Institute of CertiÑed Public Accountants
""HKMA Guidelines'' the Financial Disclosure by Locally Incorporated Authorized Institutions guideline and New Hong Kong Accounting Standards: Impact on Interim Financial Disclosure guideline issued by the HKMA
""HKSCC'' Hong Kong Securities Clearing Company Limited ( )
""HKSCC Nominees'' HKSCC Nominees Limited ( )
""Hong Kong'' or ""HK'' the Hong Kong Special Administrative Region of the PRC
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DEFINITIONS
""Hong Kong Listing Rules'' the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
""Hong Kong Monetary The Hong Kong Monetary Authority ( ) Authority'' or ""HKMA''
""Hong Kong OÅer Shares'' the 1,278,430,000 OÅer Shares initially being oÅered for subscription in the Hong Kong Public OÅering (subject to adjustment as described in ""Structure of the Global OÅering'')
""Hong Kong Public OÅering'' the oÅer for subscription of OÅer Shares in Hong Kong (subject to adjustment as described in ""Structure of the Global OÅering'') at the OÅer Price (plus brokerage, SFC transaction levy and Hong Kong Stock Exchange trading fee) and on and subject to the terms and conditions described in this prospectus and the Application Forms, as further described in ""Structure of the Global OÅering Ì The Hong Kong Public OÅering''
""Hong Kong Stock The Stock Exchange of Hong Kong Limited ( Exchange'' )
""Hong Kong Underwriters'' the Underwriters listed in ""Hong Kong Underwriters'' under ""Underwriting''
""Hong Kong Underwriting the underwriting agreement dated on or about May 17, 2006 Agreement'' relating to the Hong Kong Public OÅering entered into among us, the Joint Global Coordinators and the Hong Kong Underwriters
""Huijin'' Central SAFE Investments Limited ( )
""IAS 39'' International Accounting Standard 39 ""Financial Instruments: Recognition and Measurement'' and its interpretations by the IASB
""IASB'' the International Accounting Standards Board
""ICBC'' Industrial and Commercial Bank of China Limited ( ) and its predecessors
""IFRS'' International Financial Reporting Standards promulgated by the IASB, which include International Accounting Standards and their interpretations
""Information Disclosure the Provisional Measures on the Information Disclosure of Measures'' Commercial Banks ( ), as enacted by the PBOC on May 21, 2002 and eÅective on the same date
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DEFINITIONS
""Internal Control Guidelines'' the Internal Control Guidelines for Commercial Banks ( ), as enacted by the PBOC on September 18, 2002 and eÅective on the same date
""International OÅering'' the oÅer of certain OÅer Shares outside the United States (including to institutional and professional investors in Hong Kong (other than to retail investors in Hong Kong) and a public oÅering without listing to investors, including retail investors, in Japan), and in the United States to QIBs as deÑned in Rule 144A, as further described in ""Structure of the Global OÅering Ì The International OÅering''
""International OÅering a total of 24,290,160,000 H Shares initially being oÅered under the Shares'' International OÅering, subject to adjustment and the Over- Allotment Option
""International Purchase the international purchase agreement relating to the International Agreement'' OÅering, expected to be entered into between our bank and the Joint Global Coordinators as the representatives of the International Purchasers on or about May 24, 2006
""International Purchasers'' the group of initial purchasers led by BOCI Asia, Goldman Sachs and UBS (in alphabetical order) that is expected to enter into the International Purchase Agreement to underwrite the International OÅering
""Japanese yen'' the lawful currency of Japan
""Joint Bookrunners'' BOCI Asia, Goldman Sachs and UBS (in alphabetical order)
""Joint Global Coordinators'' BOCI Asia, Goldman Sachs and UBS (in alphabetical order)
""Joint Sponsors'' BOCI Asia, Goldman Sachs and UBS (in alphabetical order)
""Joint Stock Reform Plan'' Master Implementation Plan for the Joint Stock Reform approved by the State Council on December 30, 2003
""Latest Practicable Date'' May 2, 2006, being the latest practicable date for the purposes of ascertaining certain information contained in this prospectus
""LIBOR'' London Inter-Bank OÅered Rate
""Listing Committee'' the listing committee of the Hong Kong Stock Exchange
""Listing Date'' the date, expected to be on or about June 1, 2006, on which our H Shares are Ñrst listed and from which dealings therein are permitted to take place on the Hong Kong Stock Exchange
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DEFINITIONS
""Loan ClassiÑcation the Guiding Principles on the ClassiÑcation of Loan Risk Principles'' Management ( ) as promulgated by the PBOC on December 24, 2001 and eÅective on January 1, 2002
""MPF'' Hong Kong Mandatory Provident Fund Schemes
""Macau'' the Macau Special Administrative Region of the PRC
""Mandatory Provisions'' the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas ( ), for inclusion in the articles of association of companies incorporated in the PRC to be listed overseas, which were promulgated by the PRC Securities Commission and the State Restructuring Commission on August 27, 1994, as amended and supplemented from time to time
""Market Risk Management the Guidelines on Market Risk Management of Commercial Banks Guidelines'' ( ), as promulgated by the CBRC on December 29, 2004 and eÅective on March 1, 2005
""Ministry of Finance'' or the PRC Ministry of Finance ( ), which is ""MOF'' responsible for the administration of state revenues and expenditures, Ñnancial and taxation policies and overall supervision of Ñnancial institutions
""NDRC'' National Development and Reform Commission of the PRC ( )
""Net Regulatory Capital'' both core capital and supplementary capital, less certain deductions (including equity investments in other banks and enterprises, and investments in real estate not for self-use)
""New Capital Adequacy the Administrative Measures on the Capital Adequacy Ratio Regulations'' of Commercial Banks ( ), as promulgated by the CBRC on February 23, 2004 and eÅective on March 1, 2004
""Northeastern China'' the area including, for the purpose of this prospectus, Heilongjiang Province, Jilin Province and Liaoning Province
""Northern China'' the area including, for the purpose of this prospectus, Beijing Municipality, Tianjin Municipality, Hebei Province, Shanxi Province, Inner Mongolia Autonomous Region and our head oÇce
""NPC'' or ""National People's the PRC National People's Congress ( ) Congress''
""OCC'' the OÇce of the Comptroller of the Currency of the United States Department of the Treasury
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DEFINITIONS
""OFAC'' the OÇce of Foreign Assets Control of the United States Department of the Treasury
""OÅer Price'' the Ñnal Hong Kong dollar price per Hong Kong OÅer Share (exclusive of brokerage, SFC transaction levy and Hong Kong Stock Exchange trading fee) at which Hong Kong OÅer Shares are to be subscribed, to be determined in the manner described in ""Structure of the Global OÅering''
""OÅer Shares'' the H Shares oÅered in the Global OÅering, including any H Shares to be sold pursuant to the exercise of the Over-Allotment Option
""Operational Risk Control the Circular on Strengthening Control of Operational Risk Circular'' ( ) as issued by the CBRC on March 22, 2005 and eÅective on the same date
""Our bank'', the ""Company'', Bank of China Limited ( ) or its the ""Group'', ""we'', and predecessors and, except where the context otherwise requires, ""us'' all of the subsidiaries of Bank of China Limited
""Over-Allotment Option'' the option to be granted by us to the International Purchasers, exercisable by the Joint Global Coordinators on behalf of the International Purchasers for up to 30 days from the last day for lodging of applications under the Hong Kong Public OÅering, to require us to issue and sell up to an aggregate of 3,835,288,000 additional H Shares as described in ""Underwriting''
""overseas operations'' unless otherwise indicated, the operations of our branches and subsidiaries in Hong Kong, Macau and other overseas locations and their branches and subsidiaries, some of which are located in the PRC
""PBOC'' the People's Bank of China ( ), the central bank of the PRC
""Pearl River Delta'' the area including, for purposes of this prospectus only, Guangdong Province, Fujian Province and City of Shenzhen
""PRC'', ""China'' or ""Chinese the People's Republic of China, excluding, for purposes of this Mainland'' prospectus only, Hong Kong, Macau and Taiwan
""PRC Banking Regulatory the PRC Banking Regulatory Law ( Law'' ), which was enacted by the Standing Committee of the Eleventh NPC on December 27, 2003 and eÅective on February 1, 2004
""PRC Commercial Banking the Commercial Banking Law of the PRC ( Law'' ), as enacted by the Standing Committee of the
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DEFINITIONS
Eighth NPC on May 10, 1995 and eÅective on July 1, 1995, as amended, supplemented or otherwise modiÑed from time to time
""PRC Company Law'' the Company Law of the PRC ( ), as enacted by the Standing Committee of the Eighth NPC on December 29, 1993 and eÅective on July 1, 1994, as amended, supplemented or otherwise modiÑed from time to time
""PRC GAAP'' Accounting Standards for Business Enterprises and the Accounting System for Financial Institutions of the PRC
""PRC Government'' or the central government of the PRC including all governmental ""State'' subdivisions (including provincial, municipal and other regional or local government entities) and instrumentalities thereof or, where the context requires, any of them
""PRC People's Bank of the Law of the People's Bank of China ( China Law'' ), as enacted by the Eighth NPC on March 18, 1995 and eÅective on the same date, as amended, supplemented or otherwise modiÑed from time to time
""PRC Securities Law'' the Securities Law of the PRC ( ), as enacted by the Ninth NPC on December 29, 1998 and eÅective on July 1, 1999, as amended, supplemented or otherwise modiÑed from time to time
""Pre-Global OÅering Share our outstanding share capital before the completion of the Global Capital'' OÅering
""Price Determination Date'' the date, expected to be on or around May 24, 2006 but, in any event, not later than May 29, 2006 on which the OÅer Price will be Ñxed
""Provision Guidelines'' the Guidelines regarding the Loan Loss Provisions of Banks ( ), as promulgated by the PBOC on April 2, 2002 and eÅective on January 1, 2002
""QIBs'' qualiÑed institutional buyers as deÑned in Rule 144A under the U.S. Securities Act
""RBS Bank'' The Royal Bank of Scotland plc
""RBS China'' RBS China Investments S.afi r.l.
""RBS Group'' The Royal Bank of Scotland Group plc
""Regulation S'' Regulation S under the U.S. Securities Act
""Related Party Transactions the Administrative Measures on Transactions with Measures'' Insiders and Shareholders of Commercial Banks
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DEFINITIONS
( ), as promulgated by the CBRC on April 2, 2004 and eÅective on May 1, 2004
""RMB'' or ""Renminbi'' Renminbi, the lawful currency of the PRC
""Rule 144A'' Rule 144A under the U.S. Securities Act
""SAIC'' State Administration for Industry and Commerce ( )
""SARS'' Severe Acute Respiratory Syndrome
""SCMP'' South China Morning Post
""SFC'' the Securities and Futures Commission of Hong Kong ( )
""SFO'' the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modiÑed from time to time
""SSF'' National Council for Social Security Fund ( )
""Securities and Futures the rules governing listings and listed companies under the (Stock Market Listing) Securities and Futures Ordinance, as promulgated by the SFC on Rules'' April 1, 2003 and eÅective on the same date
""Shares'' ordinary shares in the capital of our bank with a nominal value of RMB1.00 each, comprising Domestic Shares, Unlisted Foreign Shares and H Shares
""Special Regulations'' the Special Regulations on the Overseas OÅering and Listing of Shares by Joint Stock Limited Companies ( ) issued by the State Council of the PRC on August 4, 1994, as amended, supplemented or otherwise modiÑed from time to time
""Stabilizing Manager'' Goldman Sachs (Asia) L.L.C.
""State Administration of the PRC State Administration of Foreign Exchange Foreign Exchange'' or ( ) ""SAFE''
""State Council'' the PRC State Council ( )
""Strategic Placement'' see ""Our Strategic and Other Investors''
""Supervisors'' the members of the Board of Supervisors of our bank
""Temasek'' Temasek Holdings (Pte.) Ltd.
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DEFINITIONS
""Trial Regulations on Core the Trial Regulations on Core Regulatory Ratios with respect to Regulatory Ratios'' Risk Supervision for the PRC Commercial Banks ( ), as promulgated by the CBRC, eÅective on January 1, 2006
""UBS'' UBS AG acting through its business group, UBS Investment Bank
""Underwriters'' the Hong Kong Underwriters and the International Purchasers
""Underwriting Agreements'' the Hong Kong Underwriting Agreement and the International Purchase Agreement
""Unlisted Foreign Shares'' ordinary shares issued by our bank, with a nominal value of RMB1.00 each, which are subscribed for in a currency other than Renminbi, or the consideration for which is the injection of assets, and are held by persons other than PRC nationals or PRC corporate entities and are not listed on any stock exchange
""United States'' the United States of America
""U.S. Exchange Act'' the United States Securities Exchange Act of 1934, as amended
""U.S. Securities Act'' the United States Securities Act of 1933, as amended
""US$'', or ""U.S. dollars'' United States dollars, the lawful currency of the United States
""Western China'' the area including, for the purpose of this prospectus, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Ningxia Autonomous Region, Qinghai Province, Tibet Autonomous Region and Xinjiang Autonomous Region
""WTO'' the World Trade Organization
""Yangtze River Delta'' the area including, for purposes of this prospectus, Shanghai Municipality, Jiangsu Province and Zhejiang Province
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are, by their nature, subject to signiÑcant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to:
¬ our business strategies and our various initiatives to implement these strategies;
¬ the future competitive environment in the PRC banking industry;
¬ our dividend policy;
¬ our business cooperation and relationship with our strategic investors;
¬ our capital expenditure plans, particularly plans relating to the upgrading of our information technology infrastructure;
¬ our development plans for our existing and new products;
¬ our existing risk management framework and our ability to improve such system;
¬ the regulatory environment as well as the general industry outlook for the PRC banking industry; and
¬ future developments in the PRC banking industry. The words ""anticipate'', ""believe'', ""could'', ""estimate'', ""predict'', ""potential'', ""continue'', ""expect'', ""intend'', ""may'', ""plan'', ""seek'', ""will'', ""would'', ""should'' and the negative of these terms and other similar expressions identify a number of these forward-looking statements. Some of these forward-looking statements relate to future events or our future Ñnancial, business or other performance and development and are subject to a number of uncertainties that may cause actual results to diÅer materially. We have highlighted these uncertainties in ""Risk Factors'', including but not limited to:
¬ general economic, market and business conditions in the PRC, including the sustainability of high economic growth rates in the PRC;
¬ any changes to the laws, rules and regulations of the central and local governments in the PRC and the rules, regulations and policies of the CBRC, the PBOC and other relevant government authorities relating to all aspects of our business;
¬ macroeconomic policies of the PRC Government;
¬ changes or volatility in interest rates, inÖation rates, foreign exchange rates, equity prices, commodity prices or other rates or prices;
¬ the eÅects of intensifying competition in the PRC banking industry on the demand for and price of our products and services, including potentially from foreign banks as a result of the PRC's entry into the WTO;
¬ our ability to identify, measure, monitor and control risks in our business, including our ability to improve our overall risk proÑle and risk management practices; and
¬ our ability to successfully implement our business strategy. Subject to the requirements of applicable laws, rules and regulations, we do not have any obligation to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus might not occur in the way we expect, or at all. Accordingly, you should not place undue reliance on any forward-looking information. All forward-looking statements contained in this prospectus are qualiÑed by reference to the cautionary statements set out in this section.
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RISK FACTORS
You should carefully consider all of the information in this prospectus, including the risks A1A(34)(1)(b) and uncertainties described below, before making an investment in our H Shares. Our LR11.07 business, Ñnancial condition or results of operations could be materially and adversely aÅected by any of these risks. The trading price of our H Shares could signiÑcantly decrease due to any of these risks, and you may lose all or part of your investment. You should also pay particular attention to the fact that we are a PRC company and are governed by a legal and regulatory environment which in some respects may diÅer from that which prevails in other countries. For more information concerning the PRC and certain related matters discussed below, see ""Supervision and Regulation'', Appendix VII Ì ""Summary of Principal Legal and Regulatory Provisions'' and Appendix VIII Ì ""Summary of Articles of Association''.
RISKS RELATING TO OUR LOAN PORTFOLIO If we are unable to eÅectively control and reduce the level of impaired loans and advances in our current loan portfolio and in new loans we extend in the future, or if our allowance for impairment losses on loans and advances is insuÇcient to cover actual loan losses, our Ñnancial condition and results of operations may be materially and adversely aÅected. Our results of operations have been, and will continue to be, negatively impacted by our impaired loans. Under IFRS, the accounting principles we have adopted, loans and advances are impaired if there is objective evidence that we will not be able to collect all amounts due according to the original contractual terms of the loans and advances. For a detailed discussion of the deÑnition of ""impaired loans and advances'' under IFRS, see Appendix I Ì ""Accountants' Report''. As of December 31, 2005, our identiÑed impaired loans and advances were RMB109,530 million. In 2004, we disposed of impaired loans and policy-related assets with a gross carrying value of RMB272,020 million through certain arrangements described under ""Our Restructuring''. Largely as a result of these disposals, the ratio of our identiÑed impaired loans and advances to our gross loans and advances to customers decreased from 16.6% as of December 31, 2003 to 5.5% as of December 31, 2004. Our historical data for identiÑed impaired loans and advances and related allowance for impairment losses on loans and advances may not reÖect the full extent of any deterioration in our asset quality and historical trends with respect to our impaired loans and advances must be viewed in light of these disposals. In particular, the ratio of our identiÑed impaired loans to our loans and advances to customers would have been signiÑcantly higher in the absence of these disposals. We may not be able to dispose of identiÑed impaired loans in such large amounts or on similar terms in the future. Moreover, like other commercial banks in the PRC, we currently have limited options for disposing of or restructuring non-performing loans due to regulatory constraints, and may not be able to renegotiate or otherwise restructure these loans in the same manner as commercial banks are able to do in other jurisdictions. In addition, we are subject to certain PRC regulations that may restrict our ability to write oÅ loans. We may not be able to eÅectively control and reduce the level of impaired loans and advances in our current loan portfolio or eÅectively control the level of new loans and advances that may become impaired in the future. In particular, the amount of our reported impaired loans may increase in the future as a result of deterioration in the quality of our loan portfolio. Such deterioration may occur for a variety of reasons, including factors which are beyond our control, such as a slowdown in economic growth and other adverse macroeconomic trends in the PRC, which may cause operational, Ñnancial and liquidity problems for our borrowers as well as materially and adversely aÅect their ability to service their outstanding debt. Also, certain contracts for our long-term loans may not include suÇcient Ñnancial and other covenants to allow us to eÅectively monitor, or timely
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detect or take action in light of any deterioration of our customers' credit worthiness. In addition, as of December 31, 2005, 34.6%, 18.0% and 6.8% of our domestic corporate loans and advances were concentrated in the manufacturing, commerce and services and real estate sectors, respectively. As of the same date, 35.7%, 27.4% and 13.7% of our identiÑed impaired domestic corporate loans and advances were concentrated in these sectors, respectively. In addition to reducing borrowing activities and proÑt attributable to these sectors, any signiÑcant or extended downturn in any of these sectors may increase our impaired loans and advances. Any increase in our impaired loans and advances would increase our impairment losses on loans and advances and materially and adversely aÅect our business, Ñnancial condition, results of operations and prospects.
As of December 31, 2005, our allowance for impairment losses on loans and advances to customers was RMB83,153 million, representing 75.9% of our total identiÑed impaired loans and advances to customers. Our allowance for impairment losses on loans and advances is aÅected by various factors, including the quality of our loan portfolio, our borrowers' Ñnancial condition, repayment ability and repayment intention, the realizable value of any collateral, the extent of any guarantees, the industry of the borrower, as well as economic and business conditions. Many of these factors are beyond our control. Furthermore, the adequacy of our allowance for impairment losses depends to a signiÑcant extent on the reliability of, and our skills in utilizing, our model for determining the level of allowance, as well as our system of data collection. The limitations of our model, our experience in using the model and our data collection system may result in inaccurate and insuÇcient allowance for impairment losses. As a result, our actual impairment losses could prove to be materially diÅerent from our estimates and could materially exceed our allowance. If our allowance for impairment losses on loans and advances proves insuÇcient to cover actual losses, we may need to make additional allowance for losses, which could signiÑcantly reduce our proÑt and materially and adversely aÅect our business, Ñnancial condition, results of operations and prospects.
If we are unable to realize the collateral or guarantees securing our loans to cover the outstanding principal and interest balance of our loans, our Ñnancial condition and results of operations may be adversely aÅected.
A substantial portion of our loans is secured by collateral. Our loan collateral primarily includes real estate and other Ñnancial and non-Ñnancial assets located in the PRC, the value of which may Öuctuate or decline due to factors beyond our control, including macroeconomic factors aÅecting the PRC economy. In particular, an economic slowdown in the PRC may lead to a downturn in the PRC real estate markets, which may in turn result in declines in the value of the collateral securing many of our loans to levels below the outstanding principal balance of such loans. Any signiÑcant decline in the value of the collateral securing our loans may result in a reduction in the amount we can recover from collateral realization and an increase in our impairment losses. For the foregoing reasons, we may be unable to realize the full value of the collateral or guarantees securing our loans in a timely manner or at all.
In addition, a substantial portion of our domestic loans and advances are backed by guarantees. As of December 31, 2005, approximately 33.3% of our loans and advances to customers of our domestic operation were guaranteed. Our exposure to guarantors is generally unsecured, and a signiÑcant deterioration in the Ñnancial condition of these guarantors increases the risk that we may not be able to recover the full amount of such guarantees if and when required.
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Loans due within one year account for a signiÑcant portion of our interest income, and any failure to maintain our position in the loan market may result in a signiÑcant decrease in our interest income. Interest income from loans and advances to customers represents a substantial portion of our total interest income. A signiÑcant portion of our outstanding loans consists of loans that are due within one year. As of December 31, 2005, these loans and advances represented 52.7% of our total loans and advances to customers. In our experience, a substantial portion of these loans is rolled over upon maturity. We cannot assure you that we will be able to maintain our position in the lending market, particularly if competition increases or alternative sources of funding at lower interest rates become available to our borrowers. If we are not able to retain these borrowers or attract new borrowers, our interest income could decline signiÑcantly.
Our allowance for impairment losses on loans and advances is determined in accordance with IAS 39, and future amendment to IAS 39 or interpretive guidance on the application of IAS 39 may require us to signiÑcantly increase our allowance for impairment losses on loans and advances and materially aÅect our Ñnancial conditions and results of operations. Our allowance for impairment losses on loans and advances is determined in accordance with IAS 39. The IASB has in the past issued authoritative amendments to IAS 39, and the IASB is currently considering other amendments to IAS 39. In addition, the International Financial Reporting Interpretations Committee and other relevant accounting standard-setters and regulators (collectively, the ""Authoritative Interpretative Bodies'') have been asked by their constituents to consider providing interpretive guidance relating to the application of IAS 39. The IASB may issue amendments to IAS 39 and the Authoritative Interpretive Bodies may issue authoritative interpretive guidance relating to IAS 39. Future amendments and interpretive guidance relating to IAS 39 may require us to change our current loan-provisioning practice and may signiÑcantly increase our allowance for impairment losses on loans and advances and may materially aÅect our Ñnancial condition and results of operations.
RISKS RELATING TO OUR BUSINESS LR19A.42 (64)(e) We are in the process of improving our risk management and internal control systems and practices, but our implementation of and compliance with some of these improved systems and their eÅectiveness have not been fully tested. There are areas within our risk management and internal control system that require further improvements. Our business and prospects may be materially and adversely aÅected if our eÅorts to improve these systems prove to be ineÅective. We have in the past suÅered from credit-quality problems, lapses in credit approval and control processes, internal control deÑciencies and operational problems as a result of weaknesses in our risk management. In particular, certain of our external advisors, including our independent auditors in connection with their audits of our Ñnancial statements, noted certain deÑciencies in our internal controls over Ñnancial reporting. These deÑciencies related to corporate governance, branch control and monitoring, credit assessment and monitoring, treasury and asset and liability management, custodian operations, Ñnancial reporting, human capital, information technology and our internal audit function. The deÑciencies in our systems and practices could adversely aÅect our ability to timely and accurately record, process, summarize and report Ñnancial and other data, as well as adversely impact our eÇciency, undermine the eÅectiveness of our risk management process and increase the potential for Ñnancial reporting errors and non-compliance with regulations. We have adopted initiatives, policies and procedures to improve our risk management and internal control systems and address these deÑciencies, such as strengthening the control of the departments at
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our headquarters over the corresponding departments at our branches, improving the information Öow to the Board of Directors and senior management, increasing the communications between our audit committee and the external auditors, management and internal audit department, and enhancing the independence of the internal audit function. However, as certain of these initiatives, policies and procedures are relatively new, additional time may be required to implement them and test their eÅectiveness. In addition, their implementation is ongoing and we may not be able to accurately predict the length of time required to successfully complete the adoption of these new systems or eÅectively monitor our compliance with them. Our employees may also require a longer period of time to adjust to these new or prospective controls and compliance practices, and we cannot assure you that these controls and compliance practices will be followed consistently. Moreover, there are areas within our risk management and internal control system that require further improvements to be initiated and we may face additional challenges to our risk management and internal controls as we expand the size of our operations and the range of our products and services. For example, apart from our commercial banking services, we also provide investment banking and insurance services. Risks associated with these business lines are signiÑcantly diÅerent from risks associated with our commercial banking businesses and we have limited prior experience in dealing with these risks. Our failure to address our internal control and other deÑciencies could result in loss and inaccuracies in our Ñnancial statements and could also impair our ability to comply with applicable Ñnancial reporting requirements and related regulatory Ñlings on a timely basis. Furthermore, if our risk management function is inadequate or ineÅective in managing the risks related to our existing and expanding products and services, our Ñnancial condition and results of operations could be materially and adversely aÅected. In addition, we are in the process of improving the quality of and standardizing our loan documentation. Failure to address the risks associated with incomplete or deÑcient loan documentation could limit the available remedies to protect our interests against defaulting borrowers. As an important initiative of our risk management, we employ an internal credit rating system to assess the particular risk profile of a corporate customer and the credit risk throughout our bank. As this process involves detailed analyses of the borrower's risk profile, taking into account both quantitative and qualitative factors, it is subject to judgment error. The accuracy and effectiveness of our ten-category customer credit rating system are subject to the availability of information and credit history of borrowers in the PRC. Our credit rating system is in certain respects different from international credit rating standards. See ""Risk Management Ì Credit Risk Management Ì Credit Origination and Assessment Ì Credit Rating''. We have been refining our credit policies and guidelines to address potential risks associated with particular industries, such as the real estate industry, or types of borrowers, such as affiliated entities and group borrowers. See ""Risk Management''. We may not be able, however, to timely detect these risks due to limited resources or tools available to us. Moreover, our staff may not be able to effectively implement our credit risk management policies and guidelines, such as the post-disbursement credit monitoring policies, and, as a result, our credit risk may increase. If we are unable to implement effectively, consistently follow or continuously refine our credit risk management functions and practices, our business, financial condition, results of operations and prospects may be materially and adversely affected.
We may encounter diÇculties in eÅectively implementing centralized management and supervision of our branches and subsidiaries, as well as consistent application of our policies throughout our bank, and may not be able to timely detect or prevent fraud or other misconduct by our employees or third parties. As of December 31, 2005, we had over 11,000 branches and outlets throughout the PRC, and over 600 overseas branches, subsidiaries and representative oÇces covering 27 countries and regions. Like many other PRC banks, our branches and subsidiaries historically had signiÑcant
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autonomy in their operation and management, and our head oÇce may not be able to ensure that various policies are implemented eÅectively and consistently across the organization. In addition, due to limitations in our information systems, we were not always able to eÅectively prevent or detect on a timely basis operational or management problems at these branches and subsidiaries.
There have recently been a number of highly publicized cases involving fraud and misconduct by employees or customers in the PRC Ñnancial services industry, and, like other banks, we are subject to fraud and other misconduct committed by our employees, customers or other third parties, which could adversely aÅect our business, reputation or prospects. See ""Business Ì Special Events''. Fraud and misconduct could take a variety of forms. For certain statistical data relating to misconduct by our employees, see ""Risk Management Ì Operational Risk Management and Internal Controls''. Common weaknesses that facilitate fraud include inadequate segregation of duties, insuÇcient access controls and certain actions taken by management not consistent with our internal control policies. While we are implementing measures aimed at detecting and preventing employees' and outside parties' misconduct and fraud, we may not always be able to timely detect or prevent such misconduct, and we may need to continue to improve our current, and implement new, policies and measures. If we are unable to eÅectively manage and supervise our branches and subsidiaries, we may not be able to timely detect or prevent fraud or other misconduct of our employees or third parties, which may result in damage to our reputation and an adverse eÅect on our business, Ñnancial condition, results of operations and prospects.
We are subject to Öuctuations in interest rates and currency exchange rates and other market risks, which may materially and adversely aÅect our Ñnancial condition and results of operations.
As with most commercial banks, our results of operations signiÑcantly depend on our net interest income. In 2004 and 2005, net interest income represented 76.4% and 80.7%, respectively, of our total operating income. Fluctuations in interest rates could adversely aÅect our Ñnancial condition and results of operations in diÅerent ways. For example, a decrease in interest rates may reduce our interest income. An increase in interest rates generally may decrease the value of our Ñxed rate debt securities and loans and raise our funding costs. In addition, an increase in interest rates may reduce overall demand for loans, and, accordingly, reduce new loan origination as well as potentially increase the risk of customer default. Furthermore, volatility in interest rates may also result in a gap between our interest rate-sensitive assets and interest rate-sensitive liabilities. As a result, we may be required to incur additional costs to adjust our interest rate-sensitive assets and interest rate-sensitive liabilities, and our net interest income may decrease. Moreover, the PRC Government has gradually liberalized the regulation of interest rates in recent years. Further liberalization may result in greater interest rate volatility as well as intensiÑed competition, both in deposit and lending businesses. Such competition could result in an increase in cost of funds and a decrease in pricing on loans, which in turn could lead to a decrease in our net interest income. In addition, despite the recent liberalization of interest rate regulation which allows us to charge diÅerent interest rates to borrowers with diÅerent credit ratings, we may not be able to beneÑt from such liberalization because it takes time for us to change our lending practice and culture. Moreover, we have limited experience in loan repricing in response to interest rate Öuctuations. The failure to appropriately reprice our loans and advances may aÅect our proÑtability. A signiÑcant portion of our outstanding interest-earning assets and, interest-bearing liabilities are denominated in foreign currencies. As a result, our Ñnancial condition and results of operations are also aÅected by Öuctuations in the interest rates associated with these foreign currencies.
A signiÑcant portion of our assets and liabilities are denominated in foreign currencies, including the capital contribution made by Huijin in December 2003. We also engage in a wide range of foreign
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exchange transactions and derive a signiÑcant amount of our income in foreign currencies. Our overseas operations also require capital in foreign currencies. For detailed information of our foreign currency exposure, please see note IV.5 to Appendix I Ì ""Accountants' Report''. Although we entered into an economic hedging transaction with Huijin covering US$18.0 billion of our capital injection on January 5, 2005, our ability to manage our foreign currency exposure is constrained by the limited market risk management and hedging tools available to us and the PRC Government's control on currency conversion.
The value of the Renminbi against the U.S. dollar and other foreign currencies Öuctuates and is aÅected by, among other things, changes in the PRC's and international political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous business day's inter-bank foreign exchange market rates and current exchange rates on the world Ñnancial markets. From 1994 to July 20, 2005, the oÇcial exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005, the PRC Government introduced a managed Öoating exchange rate system to allow the value of the Renminbi to Öuctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by approximately 2% against the U.S. dollar. The PRC Government has since made and in the future may make further adjustments to the exchange rate system.
When the Renminbi appreciates, the value of foreign currency-denominated assets and liabilities will decline against the Renminbi. To the extent our foreign currency-denominated assets and liabilities are not matched in the same currency or appropriately hedged, Öuctuations in foreign currency exchange rates against the Renminbi may materially and adversely aÅect our Ñnancial condition, including our capital adequacy ratios. Fluctuations in foreign exchange rates may create foreign currency translation gains or losses.
We derive a signiÑcant portion of our proÑts from our overseas operations, particularly from BOCHK, and any deterioration or disruption of these operations could materially and adversely aÅect our Ñnancial condition and results of operations.
Our operations in Hong Kong and Macau accounted for 19.8% of our total assets before inter- company balance elimination as of December 31, 2005 and 41.2% of our proÑt before income tax for the year ended December 31, 2005, and BOCHK accounts for a signiÑcant portion of the assets and proÑt of our Hong Kong operations. As a result, our ability to distribute dividends out of our distributable proÑt depends on, to a signiÑcant extent, the proÑtability of our operations in Hong Kong and Macau, particularly as they relate to dividends paid to us by BOCHK. Our other overseas operations accounted for 3.8% of our total assets before inter-company balance elimination as of December 31, 2005 and 3.6% of our proÑt before income tax as of December 31, 2005. However, our Hong Kong, Macau and other overseas operations may not continue to experience the same level of proÑtability. A variety of factors, many of which are beyond our control, could signiÑcantly reduce the proÑtability of these operations. In particular, the proÑtability of these operations are susceptible to changes in their respective local economic, political and regulatory environments. For example, the Hong Kong economy has experienced signiÑcant downturns in the past, including in connection with the Asian Ñnancial crisis in 1997 and the outbreak of SARS in 2003. These economic downturns resulted in reduced loan demand, narrower interest spreads and a signiÑcant deterioration in loan quality, which in turn adversely aÅected the proÑtability of our Hong Kong operations. Any signiÑcant deterioration or disruption in the operations of BOCHK or our other overseas operations would have a material adverse eÅect on our business, Ñnancial condition, results of operations and prospects.
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We are subject to credit risks relating to the ten-year bond issued by China Orient. In 2000, China Orient issued to us a ten-year bond with a principal amount of RMB160,000 million as consideration for our transfer of certain non-performing assets to China Orient. The ten-year China Orient bond bears interest at the rate of 2.25% per annum. China Orient is an asset management company established by the PRC Government for the management and disposal of non-performing assets, and is expected to service its obligations under the ten-year bond partly from proceeds generated from the disposal of the non-performing assets it holds. Moreover, the Ministry of Finance has indicated that it will provide Ñnancial support to China Orient in the event China Orient is unable to meet its payment obligations under the ten-year bond. In the event that China Orient is not able to meet its payment obligations when due and cannot obtain suÇcient Ñnancial support from the Ministry of Finance, our Ñnancial condition and results of operations will be materially and adversely aÅected.
We are subject to credit and funding risks with respect to certain oÅ-balance sheet arrangements. As part of our business, we make certain commitments and guarantees that are not reÖected as liabilities on our consolidated balance sheet, including providing acceptances, letters of guarantee and letters of credit and other credit commitments. As of December 31, 2005, we had a total outstanding amount of such credit commitments of RMB895,762 million, which was material compared to our total liabilities as of the same date. See ""Financial Information Ì Financial Position Ì OÅ-Balance Sheet Arrangements''. We are subject to credit exposures with respect to these commitments and guarantees and will be required to provide funding in the event of non- performance by our customers. For example, we may be required to make payments in respect of our letters of guarantee if the customer fails to pay the party to which the letter of guarantee has been issued. If we are not able to obtain payment from our customers in respect of these commitments and guarantees, our Ñnancial condition and results of operations may be adversely aÅected.
We are subject to risks associated with our derivative transactions. We enter into derivative transactions primarily for hedging purposes and, to a lesser extent, on behalf of our customers. We are subject to market and operational risks associated with these transactions. In addition, the market practice and documentation for derivative transactions currently are not well developed in the PRC, and the PRC courts have limited experience in dealing with issues related to derivative transactions. This may further increase the risks associated with these transactions. In addition, our ability to adequately monitor, analyze and report these derivative transactions is subject to the development of our information technology systems. As a result, our Ñnancial condition and results of operations may be adversely aÅected by these derivative transactions.
While we have experienced growth in recent years, our business, Ñnancial condition, results of operations and prospects could be adversely aÅected if we are unable to successfully manage our growth or otherwise obtain suÇcient resources to support such growth. Our rapid growth in recent years has placed signiÑcant demands on our managerial, operational and capital resources. We may be unable to accurately assess the risks relating to the growth of our business, such as risks attributable to our rapidly expanding mortgage loan portfolio. The expansion of our business activities also exposes us to a number of risks and challenges, including limited or no experience in certain new business activities, recruiting, training and retaining personnel with the proper experience and knowledge to handle new and existing business activities and adequately
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staÅ our back oÇce and support functions, and enhancing and expanding our risk management and information technology systems to eÅectively manage the risks associated with these new business activities, products and services. We have recently implemented or are planning to implement a variety of measures to improve our corporate structure, corporate governance and other aspects of our operations in order to support the future growth of our businesses. See ""Our Restructuring''. However, these measures are relatively new and additional time is required for our employees to implement and adjust to changes resulting from these new measures. In addition, these new measures may not have the desired eÅects on our corporate structure, corporate governance or other aspects of our operations. Continued growth in our business, including growth in new loans, requires additional capital, and we may not be able to secure suÇcient capital to support our business growth. We may also require additional capital in the event we experience signiÑcant loan losses in the future. Our ability to obtain additional capital in the future is subject to a variety of factors, including our future Ñnancial condition and results of operations, receipt of necessary government or regulatory approvals and general market conditions. We cannot assure you that we will continue to grow at our current rate or at all. In addition, we may not be able to achieve the intended results in these new business activities in all cases. To the extent that we continue to grow and we are not able to manage this growth successfully or otherwise obtain suÇcient resources to support such growth, our business, Ñnancial condition, results of operations and prospects may be adversely aÅected.
Our liquidity may be adversely aÅected if we fail to maintain our deposit growth or if there is a signiÑcant decrease in our deposits. Most of the funding requirements of our commercial banking operations are met through short- term funding, principally in the form of deposits, including customer and inter-bank deposits. As of December 31, 2005, 92.4% of our ""due to customers'' had current maturities of one year or less or were payable on demand. Although we have established a liquid assets investment portfolio to supplement our ongoing liquidity needs since 2004, we continue to rely primarily on customer deposits to meet our funding needs. While our short-term customer deposits have been a stable and predictable source of funding, we cannot assure you that we will always be able to rely on this source of funding. If we fail to maintain our deposit growth or if there is a signiÑcant decrease in our deposits, our liquidity could be materially and adversely aÅected, and we may be required to seek more expensive sources of short- or long-term funding to meet our funding needs. See ""Financial Information Ì Financial Position Ì Liquidity''.
Any substantial failure to improve or upgrade our information technology infrastructure eÅectively or on a timely basis could materially and adversely aÅect our competitiveness, Ñnancial condition and results of operations. We are highly dependent on our information technology infrastructure to deliver services to our customers, manage risks, implement our internal control systems and to manage and monitor our business operations. Historically, our branch oÇce information technology functions operated with reasonable autonomy from our head oÇce, and as a result, our branches use a number of diÅerent business applications as well as diÅerent versions of the same applications. In addition, we have in the past experienced diÇculties with integrating and sharing data and have to consolidate information manually in certain circumstances, which increases the risk of inaccuracies and limits our ability to make data available in a timely manner. Moreover, our existing database may not be suÇcient to support accurate and reliable analysis of our customer proÑles, and our management information systems cannot process and consolidate all business data throughout the entire bank.
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Moreover, there are limitations on our information system in measuring and reporting risks relating to oÅ-balance sheet arrangements and concentration risk for group borrowers, and we rely on certain manually-collected data from time to time to measure such risks. Our information system also has limitations in automatically processing and consolidating group borrower exposure across products, across related companies and across lending oÇces as well as measuring risks for oÅ- balance sheet arrangements, including measuring concentration risks relating to such arrangements. These limitations on detecting customer concentration risk could aÅect our ability to eÅectively monitor our group borrower concentration risk. Failure to address these and other issues may adversely aÅect our ability to centralize the management of our branches and subsidiaries, including the internal control systems at such branches and subsidiaries, manage risks of our branches and subsidiaries in a timely manner, and produce reliable operating and Ñnancial data. In addition, we have limited disaster recovery arrangements so that any disruption of our information technology system could adversely aÅect our ability to service customers as well as conduct our business, damage our reputation and could result in certain Ñnancial loss. We may not be able to upgrade our information technology infrastructure successfully and in a timely manner. For example, as part of our information technology blueprint project, we are in the process of upgrading our management information system, but we cannot assure you that the upgrading will be completed in time or successfully or that appropriate interim measures will be taken and be eÅective. Any failure to successfully upgrade, or any disruption in, our information technology infrastructure could materially and adversely aÅect our business, Ñnancial condition, results of operations and prospects.
We are subject to PRC and overseas regulatory inspections, examinations, inquiries or audits, and future sanctions, Ñnes and other penalties, if any, could materially and adversely aÅect our business, Ñnancial condition, results of operations and our reputation.
We are subject to various inspections, examinations, inquiries, audits and other regulatory requirements by the PRC and overseas regulatory authorities. These inspections, examinations, inquiries and audits have from time to time revealed weaknesses in certain areas of our operations, such as corporate governance and internal controls. See ""Business Ì Legal and Regulatory Proceedings Ì Regulatory Proceedings'' and ""Supervision and Regulation Ì Regulation and Supervision of Our Overseas Operations''. We have also in the past failed to meet CBRC capital adequacy requirements. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Capital Adequacy Ratio''.
The CNAO has announced that, as part of its annual audit plan, it will conduct audits of some branches of certain PRC commercial banks, including our bank, in 2006. We cannot predict the timing of completion or the outcome of this audit. If, as result of this audit, irregularities are found within our bank or our bank becomes the target of any negative publicity, there may be a material adverse eÅect on our corporate image, the reputation and credibility of our management, our business and Ñnancial condition. In addition, we may be the subject of other governmental or third party investigations or similar events if irregularities were found as a result of such audit by the CNAO and, depending on their outcome, these investigations or similar events could have a material adverse eÅect on our business and reputation, as well as our Ñnancial condition and results of operations.
We have been subject to Ñnes and penalties from time to time. From 2003 to February 28, 2006, the aggregate amount of individual Ñnes imposed on us by various PRC regulatory authorities exceeding RMB100,000 was approximately RMB30.9 million. These Ñnes covered violations relating to, among other things, violations of foreign exchange regulations, irregular loans, irregular accounting practice and tax violations. In addition, as we have extensive overseas operations
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through our overseas branches and subsidiaries, we are subject to numerous regulatory requirements in various jurisdictions as well as inspections, examinations, inquiries and audits by regulatory authorities in these jurisdictions. Moreover, the overseas regulatory requirements vary among jurisdictions, which presents additional challenges to our overseas operations. During the four years ended December 31, 2005, the aggregate amount of Ñnes imposed on us with respect to our overseas operations was approximately US$20 million. Although we are attempting to address the identiÑed weaknesses in our operations, future inspections, examinations, inquiries or audits by PRC or overseas regulatory authorities may result in Ñnes, other penalties or actions that could have a material adverse eÅect on our business, Ñnancial condition, results of operations and reputation.
Our largest shareholder is able to exercise signiÑcant control over us.
Immediately after the completion of the Global OÅering, assuming the Over-Allotment Option is not exercised, our largest shareholder, Huijin, will own approximately 70.51% of our outstanding Shares and will remain our largest shareholder. Accordingly, Huijin will continue to have the ability to exercise signiÑcant control over our business, including matters relating to:
¬ the issuance of new securities;
¬ the nomination and election of our Directors and Supervisors;
¬ our management, especially the composition of our senior management;
¬ our business strategies and policies;
¬ the timing and amount of the distribution of dividends;
¬ any plans relating to strategic investments, mergers, acquisitions, joint ventures, investments or divestitures;
¬ amendments to our Articles of Association; and
¬ resolutions of the Board of Directors which require a super-majority vote.
Our largest shareholder may take actions in relation to our business or dividend policy that are not in the best interests of our bank or our other shareholders.
Although we own a majority of the issued share capital of BOCHK Holdings, our ability to exercise control over BOCHK Holdings may be limited in certain circumstances.
BOCHK Holdings is a commercial banking group listed on the Hong Kong Stock Exchange and conducts its commercial banking business through BOCHK, its wholly-owned subsidiary. Although we own approximately 65.88% of the issued share capital of BOCHK Holdings, a majority of the board members of BOCHK Holdings is independent of our bank in that they are neither our Board members nor our senior management team members. Moreover, BOCHK Holdings is subject to the Hong Kong Listing Rules and other relevant rules and regulations that protect the interests of minority shareholders of BOCHK Holdings, including, among others, those relating to independent director and shareholder approvals of connected transactions. As a result, despite our shareholding interest and presence on the board, to the extent our interests are not aligned with the interests of the minority shareholders of BOCHK Holdings, the Hong Kong Listing Rules as well as other rules and regulations may limit our ability to exercise control over BOCHK Holdings and BOCHK, which account for a signiÑcant portion of our proÑts.
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We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and harm our business.
We are required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations in the PRC and other jurisdictions where we have operations. These laws and regulations require us, 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 diÅerent jurisdictions. We are in the process of implementing improvements to our anti-money laundering and anti-terrorism system. However, it is not clear when we will be able to fully implement such improvements and whether such improvements will be eÅective. While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures have in some cases only been recently adopted and may not completely eliminate instances where our bank may be used by other parties to engage in money laundering and other illegal or improper activities that may occur at our bank. To the extent we may fail to fully comply with applicable laws and regulations, the relevant government agencies to whom we report in the various jurisdictions have the power and authority to impose Ñnes and other penalties on us, and we have been subject to such Ñnes in the past. In addition, our business and reputation could suÅer if customers use our bank for money laundering or illegal or improper purposes.
We could be exposed to substantial penalties or other liabilities in the United States, and our business in the United States and our reputation may be adversely aÅected, if it were determined that business relationships resulted in prohibited transactions with countries and entities that are the subject of U.S. sanctions.
There have been allegations in press reports that certain countries and entities with which we maintained business relationships and that are subject to sanctions by the United States may have used our banking services in conducting Ñnancial transactions related to matters that are the subject of U.S. sanctions. These services related to, among other things, Ñnancial transactions denominated in U.S. dollars and other currencies. Even though we were not, and are currently not, aware of any inquiry by U.S. authorities regarding the bank, we have conducted internal inquiries in response to these allegations, in addition to the periodic inspections of our business that we conduct in the ordinary course. It also has been reported that the United States government is presently reviewing the practices of non-U.S. banks for compliance with its sanctions programs and other relevant laws.
Since the fourth quarter of 2005, we have reinforced our policies and procedures to prevent any prohibited transactions or other business relationships with U.S.-sanctioned countries and entities. Nevertheless, we, like a number of non-U.S. banks, could be exposed to signiÑcant risk if it were determined that business relationships resulted in prohibited transactions with countries and entities that are the subject of U.S. sanctions. In addition, if a bank is determined to have violated such laws, it could face substantial penalties or other liabilities, and such determination could have a material adverse eÅect on its U.S. operations, its ability to conduct further business in the United States or involving U.S. persons, and its reputation. At this time, we cannot predict whether additional information may be sought, whether there will be inquiries or investigations by any of our regulators or other authorities, or whether any action may be taken by any of our regulators or other authorities as a result of these relationships.
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We have not obtained formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties.
As of March 31, 2006, we held 11,598 properties with an aggregate gross Öoor area of approximately 14.0 million square meters, of which 10,239 properties with an aggregate gross Öoor area of approximately 13.4 million square meters were located in the PRC. We hold the relevant land use right certiÑcates and building ownership certiÑcates for all but 1,214 properties with an aggregate gross Öoor area of approximately 1.9 million square meters situated in the PRC. We are in the process of applying for the relevant land use right certiÑcates and building ownership certiÑcates that we do not yet hold. Upon obtaining the relevant certiÑcates for these properties, we will have the legal right to occupy, let, transfer and mortgage such property. See ""Business Ì Properties''. However, we may not be able to obtain all of the title deeds we currently lack, in which case our rights as owner or occupier of these properties and buildings may be adversely aÅected as a result of the absence of the formal title deeds as described above and we may be subject to lawsuits or other actions taken against us.
As of March 31, 2006, we also leased 8,158 properties with an aggregate gross Öoor area of approximately 1.9 million square meters, of which 7,732 properties with an aggregate gross Öoor area of approximately 1.8 million square meters were located in the PRC. In respect of 3,940 properties with an aggregate gross Öoor area of approximately 0.9 million square meters leased by us, our landlords do not possess the relevant building ownership certiÑcates for the properties leased to us or such leased properties do not have the relevant registration certiÑcates. These leases may be deemed invalid under PRC law. In addition, we cannot assure you that we will be able to renew our leases on terms acceptable to us upon their expiration. If any of our leases were terminated as a result of being challenged by third parties or failure of the lessors to renew upon expiration, we may be forced to seek alternative premises for these oÇces and incur additional costs relating to such relocations.
RISKS RELATING TO THE PRC BANKING INDUSTRY LR19A.42 (64)(e) The increasingly competitive nature of the PRC banking industry, as well as competition for funds which may arise from the developing PRC capital markets, could adversely aÅect our business, Ñnancial condition, results of operations and prospects.
The PRC banking industry is becoming increasingly competitive. See ""Industry Overview''. We face competition from the other members of the Big Four and other PRC commercial banks and Ñnancial institutions. In addition, we expect competition from foreign-invested commercial banks to increase in the future, as regulatory restrictions on their geographical presence, customer base and operating licenses in the PRC are scheduled to be removed by December 2006 as part of the PRC's commitments in its accession to the WTO. CEPA, which allows Hong Kong banks to operate in the PRC, may also increase competition in the PRC banking industry. Many of these banks compete with us for substantially the same loan, deposit and fee customers and some of them may have greater Ñnancial managerial and technical resources than we do.
Moreover, the PRC Government has, in recent years, implemented a series of measures designed to further liberalize the banking industry, including those relating to interest rates and fee- and commission-based products and services, which are changing the basis on which we compete with other banks for customers.
We may not be able to compete eÅectively and successfully in all the business areas in which we currently operate or plan to operate. In particular, the increased competitive pressures may
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adversely aÅect our business, Ñnancial condition, results of operations and prospects by, among other things:
¬ reducing our market share in our principal lines of business;
¬ reducing the size of our loan portfolio and deposit base;
¬ decreasing our net interest margins and spreads;
¬ decreasing our fee and commission income;
¬ increasing non-interest expenses, such as sales and marketing expenses;
¬ decreasing the quality of our assets; and
¬ increasing competition for qualiÑed employees.
We may also face competition for funds from other forms of investment alternatives as the PRC capital markets continue to develop. For example, as the PRC bond market continues to develop and become a more viable and attractive investment alternative, our deposit customers may elect to transfer their funds into bonds, which may reduce our deposit base and adversely aÅect our business, Ñnancial condition and results of operations.
Our operations are highly regulated and our business, Ñnancial condition, results of operations LR19A.42 and prospects may be materially and adversely aÅected by regulatory changes or other (64)(a) governmental policies, including their interpretation and application.
We are subject to many laws and regulations that apply to our business. The PRC banking regulatory regime is currently undergoing signiÑcant changes, including changes in the rules and regulations that are applicable to us. Some of these changes may result in additional costs or restrictions on our activities. For example, the Trial Regulation on Core Regulatory Ratios issued by the CBRC was eÅective on January 1, 2006. Such trial regulation has amended the requirements for certain regulatory ratios and introduced new regulatory ratios. This regulation is subject to amendments and will not take eÅect oÇcially until 2007. We are not certain what eÅect this new regulation will have on our business. Future laws, rules, regulations or policies, or the interpretation of existing or future laws, rules, regulations or policies, may have a material adverse eÅect on our business, Ñnancial condition, results of operations and prospects, including by increasing our costs of doing business. For example, prior to the enactment of provisions in the PRC Commercial Banking Law prohibiting PRC commercial banks from using funds to engage in activities outside the scope of normal banking operations, we had on occasion used our funds in a manner that is currently prohibited under such provisions. See ""Business Ì Other Matters''. Although we have either disposed of or are in the process of rectifying these previous investments and have not been subject to any material administrative sanctions, Ñnes and other penalties in connection with such activities, the relevant regulatory authorities may take additional actions against us in the future with respect to these activities.
In addition, there may be uncertainties regarding the interpretation and application of new rules and regulations. Failure to comply with applicable rules and regulations may result in Ñnes, restrictions on our activities or, in extreme cases, suspension or revocation of our business licenses. In addition, new regulations may have a signiÑcant impact on our businesses, such as our businesses that deal in foreign currencies.
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PRC regulations impose certain limitations on the types of investments we may make, and, as a result, our ability to seek optimal investment returns and our ability to diversify our investment portfolio or hedge the risks relating to our Renminbi-denominated assets are limited. As a result of the current PRC regulatory restrictions, substantially all of our Renminbi- denominated investment assets are concentrated in the limited number of investments permitted for PRC commercial banks, such as PRC treasury bonds, Ñnance bonds issued by PRC policy banks, notes issued by the PBOC and subordinated bonds. Restrictions on our ability to diversify our investment portfolio limit our ability to seek an optimal return. The restrictions also expose us to signiÑcantly greater risk of investment loss in the event a particular type of investment we hold suÅers a decrease in value. For example, we hold a substantial amount of Ñxed income debt securities that have Ñxed interest rates, and a general increase in interest rates may result in a signiÑcant decline in the value of these securities. In addition, due to the limited hedging tools available, our ability to manage market and credit risks relating to our Renminbi-denominated assets is limited, and any resulting decline in the value of our Renminbi-denominated assets will materially and adversely aÅect our Ñnancial condition and results of operations.
Investments in PRC commercial banks are subject to ownership restrictions that may adversely aÅect the value of your investment. Investments in PRC commercial banks are subject to a number of ownership restrictions. For example, prior approval from the CBRC is required for any person or entity to hold 5% or more of the registered capital or total issued shares of a PRC commercial bank. If a shareholder of a PRC commercial bank increases its shareholding in excess of the 5% threshold without obtaining the CBRC's prior approval, the shareholder will be subject to CBRC sanctions, which include, among other things, correction of such misconduct, Ñnes and conÑscation of related earnings. In addition, under the PRC Company Law, we may not accept any of our Shares as collateral to secure a loan from us, and any shareholder who owns 5% or more of our Shares must give prior notice to the Board of Directors if it wishes to pledge its Shares to any lender as collateral. See ""Supervision and Regulation Ì Licensing Requirements Ì Ownership and Shareholder Restrictions''. Future changes in ownership restrictions imposed by the PRC Government may materially and adversely aÅect the value of your investment.
The eÅectiveness of our credit risk management function is aÅected by the quality and scope of information available in the PRC. Due to limitations in the availability of information and the developing infrastructure of the PRC, nationwide credit information databases are generally undeveloped. In addition, Ñnancial statement disclosure and audit standards for corporate borrowers in the PRC may not be comparable to those in more developed countries. Therefore, our assessment of the credit risks associated with a particular customer may not be based on complete, accurate and reliable information. Without such information and until a uniÑed nationwide credit database on corporate and retail borrowers is fully implemented and eÅective, we must rely on other publicly available resources and our internal resources, which may not be as eÅective as a uniÑed, nationwide credit information system. As a result, our ability to eÅectively manage our credit risk may be materially and adversely aÅected.
Our loan classiÑcation guidelines are diÅerent from those applicable to banks in certain other countries or regions. We classify our loans and advances in accordance with the Loan ClassiÑcation Principles. Our loan classiÑcations are diÅerent in certain respects from those of banks in certain other countries or
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regions. For a detailed description of the loan classiÑcation in the PRC, see ""Supervision and Regulation Ì Prudent Operating Requirements Ì Loan ClassiÑcation''. As a result, our loans and advances as classiÑed under the Loan ClassiÑcation Principles may diÅer from the amount which would be reported if we were located in other jurisdictions. In addition, PRC commercial banks, including us, have limited experience in implementing the Loan ClassiÑcation Principles since the Loan ClassiÑcation Principles did not become eÅective until 2002.
The facts, forecasts and statistics contained in this prospectus with respect to the PRC, Hong Kong and Macau and their economies and banking industries are derived from various governmental sources and may not be accurate, reliable, complete or up to date.
Some of the facts, forecasts and statistics in this prospectus relating to the PRC, Hong Kong and Macau and their economies and banking industries are derived from various governmental sources. However, we cannot guarantee the quality and reliability of these sources. In addition, these facts, forecasts and statistics have not been independently veriÑed by us and therefore we make no representation as to the accuracy of such facts, forecasts and statistics, which may not be consistent with other information compiled within or outside these jurisdictions and may not be complete or up to date. Moreover, the statistics herein may be inaccurate or are less developed than statistics produced for other economies and should not be unduly relied upon.
Our business, Ñnancial condition, results of operations, prospects, and the value of your investment may be adversely aÅected as a result of negative media coverage of the PRC banking industry.
The PRC banking industry continues to be covered extensively and critically by various media, including with respect to incidents of fraud and issues relating to loan quality, capital adequacy, solvency and internal controls and management. Negative coverage, whether or not accurate and whether or not applicable to us, may have a material adverse eÅect on our reputation and, consequently, may undermine depositor and investor conÑdence. Our business, Ñnancial condition, results of operations and prospects and the value of your investment may also be materially and adversely aÅected as a result.
RISKS RELATING TO THE PRC LR19A.42 PRC economic, political and social conditions, as well as government policies, could aÅect our (64)(b) asset quality, results of operations, Ñnancial condition and prospects.
A signiÑcant majority of all of our business, assets and operations are located in the PRC. Accordingly, our business, Ñnancial condition, results of operations and prospects are, to a signiÑcant degree, subject to the economic, political and social developments in the PRC.
The PRC economy has historically been a planned economy. A substantial portion of productive assets in the PRC is still owned by the PRC Government. The PRC Government also exercises signiÑcant control over the PRC's economic growth through measures such as the allocation of resources, setting monetary policy and providing preferential treatment to particular industries or companies. In recent years, the PRC Government has implemented economic reform measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises. These economic reform measures may be adjusted or modiÑed or applied inconsistently from industry to industry, or across diÅerent regions of the country. As a result, we may not beneÑt from all such measures.
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The PRC Government has the power to implement macroeconomic policies aÅecting the PRC economy. The government has implemented various policies in an eÅort to control the growth rate of certain industries and limit inÖation. For example, beginning in the second half of 2003, the government implemented a series of macroeconomic policies, which included raising the benchmark interest rates, increasing the PBOC statutory deposit reserve ratio and imposing commercial bank lending guidelines that had the eÅect of restricting loans to certain industries. Certain of these macroeconomic policies may materially and adversely aÅect our asset quality, results of operations, Ñnancial condition and prospects. The PRC has been one of the world's fastest growing economies as measured by GDP in recent years. However, the PRC may not be able to sustain such a growth rate. In addition, any future calamities, including, among others, natural disasters and outbreak of contagious diseases may cause a decrease in the level of economic activity and adversely aÅect economic growth in the PRC, Asia and elsewhere in the world. If the PRC economy experiences a signiÑcant downturn for any of the foregoing reasons, our Ñnancial condition and results of operations, as well as our prospects, would be materially and adversely aÅected.
We are subject to the PRC Government controls on currency conversion. LR19A.42 (64)(c) The Renminbi currently is not a freely convertible currency, and any PRC commercial bank, including us, that plans to conduct foreign exchange settlement or oÅshore business is required to obtain prior approval from the SAFE. See ""Supervision and Regulation Ì Regulation of Principal Banking Activities''. In addition, we may on occasion need to convert our Renminbi income into LR19A.42(61) foreign currencies to meet our foreign exchange needs, such as paying foreign currency- denominated expenses and liabilities. Under the PRC's existing foreign exchange regulations, following the completion of the Global OÅering, we will be able to pay dividends in foreign currencies, without prior approval from the SAFE, by complying with certain procedural requirements. However, in the future, the PRC Government may take measures to restrict access to foreign currencies under certain circumstances, which may adversely aÅect our ability to pay dividends in foreign currencies to our shareholders. In addition, we are required to obtain the approval of the SAFE before converting capital funds in foreign currencies into Renminbi. All these factors could materially and adversely aÅect our Ñnancial condition, results of operations and compliance with capital adequacy ratios and operational ratios.
The PRC legal system could limit the legal protections available to you. LR19A.42 (64)(a), We are organized under the laws of the PRC. The PRC legal system is based on written (d), (f) statutes. Prior court decisions may be quoted for reference but have limited precedential value. Since 1979, the PRC Government has promulgated laws and regulations dealing with economic matters, such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view towards developing a comprehensive system of commercial law. However, as these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. Our Articles of Association provide that disputes between holders of H Shares and us, our Directors, Supervisors or senior oÇcers or holders of Domestic Shares, arising out of our Articles of Association or any rights or obligations conferred or imposed upon by the PRC Company Law and related rules and regulations concerning our aÅairs are to be resolved through arbitration rather
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than by a court of law. A claimant may elect to submit a dispute to arbitration organizations in Hong Kong or the PRC. Awards that are made by the PRC arbitral authorities recognized under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong. Hong Kong arbitration awards may be recognized and enforced by PRC courts, subject to the satisfaction of certain PRC legal requirements. However, to our knowledge, no action has been brought in the PRC by any holder of H Shares to enforce an arbitral award, and we cannot assure you as to the outcome of any action brought in the PRC by any holder of H Shares to enforce a Hong Kong arbitral award made in favor of holders of H Shares. Moreover, to our knowledge, there has not been any published report of judicial enforcement in the PRC by holders of H Shares of their rights under the Articles of Association of any PRC issuer or the PRC Company Law. Our Articles of Association provide that any change or abrogation of any rights of shareholders of a certain class resulting from a change of domestic or overseas laws, administrative regulations or the rules of the place of listing or any legally binding decisions or orders announced by domestic or overseas regulatory authorities does not need to be approved by shareholders and at separate shareholders' class meeting. Therefore, the rights of shareholders of any class may be changed or abolished by PRC or overseas laws and regulations beyond the control of the shareholders of our bank. In addition, our minority shareholders may not have the same protections enjoyed by shareholders of companies incorporated under the laws of certain other countries.
You may experience diÇculties in eÅecting service of legal process and enforcing judgments LR19A.42 against us and our Directors and oÇcers. (65)(f) We are a company incorporated under the laws of the PRC, and a signiÑcant portion of our assets are located in the PRC. In addition, most of our Directors and oÇcers reside within the PRC, and the assets of our Directors and oÇcers may also be located within the PRC. As a result, it may not be possible to eÅect service of process outside the PRC upon most of our Directors and oÇcers, including with respect to matters arising under applicable securities laws. Moreover, a judgment of a court of another jurisdiction may be reciprocally recognized or enforced if the jurisdiction has a treaty with the PRC or if judgments of PRC courts have been recognized before in that jurisdiction, subject to the satisfaction of other requirements. Our PRC counsel, Jun He Law OÇces, have advised us that the PRC does not have treaties providing for the reciprocal enforcement of judgments of courts with Japan, the United Kingdom, the United States and most other Western countries. In addition, Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in the PRC or Hong Kong of judgments of a court in these jurisdictions in relation to any matter not subject to a binding arbitration provision is subject to uncertainties. In addition, although we will be subject to the Hong Kong Listing Rules and the Hong Kong Takeovers Code upon the listing of our H Shares on the Hong Kong Stock Exchange, the holders of H Shares will not be able to bring actions on the basis of violations of the Hong Kong Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules. Furthermore, the Hong Kong Takeovers Code does not have the force of law and provides only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong.
Holders of H Shares may be required to pay withholding tax on dividends. Under the PRC's current tax laws, regulations and rulings, dividends paid by us to holders of H Shares outside the PRC are currently exempt from PRC income tax. In addition, gains realized by individuals or enterprises upon the sale or other disposition of H Shares are currently exempt from PRC income tax. If the exemptions are withdrawn in the future, holders of H Shares may be required to pay withholding tax on dividends, which is currently imposed at the rate of 20.0%, or capital gains
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tax, which is currently imposed upon individuals at the rate of 20.0%. See Appendix VI Ì ""Taxation and Foreign Exchange''.
Payment of dividends is subject to restrictions under PRC laws.
Under PRC law, dividends may be paid only out of distributable proÑts as determined under PRC GAAP or IFRS, whichever is lower. Distributable proÑts means our unconsolidated proÑts attributable to equity holders, after any replenishment of unconsolidated accumulated losses, allocations to statutory surplus reserve, general and regulatory reserve and discretionary surplus reserve that we are required to make. Any distributable proÑts that are not distributed in a given year are retained and available for distribution in subsequent years. As of December 31, 2005, our bank, excluding our subsidiaries, had an unconsolidated accumulated losses under IFRS of RMB8,709 million, which will need to be made up before dividends can be paid.
In addition, the CBRC has the discretionary authority to prohibit any bank that has a total capital adequacy ratio below 8% or a core capital adequacy ratio below 4% from paying dividends and other forms of distributions. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Capital Adequacy Ratio''.
The calculation of distributable proÑts for a bank under PRC GAAP diÅers in a few respects from the calculation under IFRS. As a result, we may not be able to pay any dividends in a given year if we do not have distributable proÑts as determined under PRC GAAP, even if we have proÑts in that year as determined under IFRS, or vice versa. Payment of dividends by us is also regulated by the relevant PRC banking regulations. See ""Financial Information Ì Dividend Policy''.
RISKS RELATING TO THE GLOBAL OFFERING
Our actual Ñnancial performance could vary from the forecast Ñnancial information contained in this prospectus.
The proÑt forecast included in ""Financial Information Ì ProÑt Forecast'' represents our projections as of the date of this prospectus based on our audited consolidated results for the year ended December 31, 2005 and a forecast of our consolidated results for the twelve months ending December 31, 2006. The proÑt forecast is based upon a number of assumptions, some of which may not materialize or may change. In addition, unanticipated events could adversely aÅect the results we achieve in 2006. As a result, our actual results may vary from these projections.
An active trading market for our Shares may fail to develop or be sustained, which could have a material adverse eÅect on the market price and liquidity of our Shares.
Prior to the Global OÅering, no public market for our Shares existed. Following the completion of the Global OÅering, the Hong Kong Stock Exchange will be the only market on which the H Shares are listed. However, an active trading market for our Shares may not develop or be sustained after the Global OÅering. In addition, our Shares may trade in the public market subsequent to the Global OÅering below the OÅer Price. The OÅer Price for the Shares is expected to be Ñxed by agreement among the Joint Global Coordinators (on behalf of the Hong Kong Underwriters and the International Purchasers) and us, and may not be indicative of the market price of the Shares following the completion of the Global OÅering. If an active trading market for our Shares does not develop or is not sustained after the Global OÅering, the market price and liquidity of our Shares could be materially and adversely aÅected. In addition, the trading price of our Shares could be subject to signiÑcant Öuctuation.
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Future sales or perceived sales of substantial amounts of our securities in the public market, including any future A Share OÅering, sale of our H Shares by SSF or re-registration of Shares held on our domestic share register into H Shares, could have a material adverse eÅect on the prevailing market price of our H Shares and our ability to raise capital in the future, and may result in dilution of your shareholdings.
The market price of our H Shares could decline as a result of future sales of substantial amounts of our H Shares or other securities relating to our H Shares in the public market or the issuance of new H Shares or other securities, or the perception that such sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of our securities, including any future oÅerings, could also materially and adversely aÅect our ability to raise capital in the future at a time and at a price which we deem appropriate. In addition, our shareholders may experience dilution in their holdings to the extent we issue additional securities in future oÅerings.
We are in the process of preparing for an A Share OÅering and intend to pursue such oÅering as soon as practicable. See ""A Share OÅering''. Such A Share OÅering could comprise up to 10,000,000,000 A Shares and will raise not more than RMB20,000 million, resulting in a substantial increase in the number of our securities in issue following the A Share OÅering.
Furthermore, the Shares owned by our strategic investors and SSF which will be converted to H Shares upon completion of the Global OÅering are subject to transfer restrictions, and H Shares to be acquired by our Corporate Investors pursuant to the Global OÅering will be subject to contractual restrictions on resale immediately after the Global OÅering. See ""Our Strategic and Other Investors Ì Other Rights and Obligations of The Strategic and Other Investors Ì Transfer Restrictions'', ""Our Strategic and Other Investors Ì Our Corporate Investors Ì Restrictions on Disposal by the Corporate Investors'' and ""Share Capital Ì Transfer of Shares Issued Prior to Listing Date''. Future sales of H Shares by these shareholders after the expiry of or in breach of such transfer restrictions will result in an increase in the number of H Shares available on the market and may aÅect the market price of our H Shares.
In addition, in accordance with relevant PRC regulations regarding disposal of state-owned shares, Huijin and SSF itself will transfer to SSF 2,437,663,935 H Shares and 119,195,065 H Shares, respectively, in aggregate representing approximately 1.05% of our total issued share capital immediately following completion of the Global OÅering (or 2,803,313,477 H Shares and 137,074,323 H Shares, respectively, in aggregate representing approximately 1.19% of our total issued share capital after the Over-Allotment Option is exercised in full). See ""Share Capital Ì Transfer of State-Owned Shares''. SSF has not entered into any undertaking restricting its disposal or resale of these H Shares. In addition, according to Jun He Law OÇces, our PRC legal counsel, these H Shares will not be subject to any legal restrictions on resale under the relevant PRC laws. In particular, the 119,195,065 Shares (prior to the exercise of the Over-Allotment Option) which were acquired by SSF as part of its investment in our bank and which are subject to restrictions on transfer prior to the Global OÅering until March 2009, will no longer be subject to any restrictions on transfer following the transfer in accordance with the relevant PRC regulations regarding disposal of state-owned shares.
Subject to the approval of the State Council securities regulatory authority, Shares held on our domestic share register may be transferred to overseas investors, and such transferred Shares may be listed or traded on an overseas stock exchange. Any listing or trading of the transferred Shares on an overseas stock exchange shall also comply with the regulatory procedures, rules and requirements of such stock exchange. No class shareholder voting is required for the listing and trading of the transferred Shares on an overseas stock exchange. However, the PRC Company Law provides that in relation to the public oÅering of a company, the shares of that company which are
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RISK FACTORS
issued prior to the public oÅering shall not be transferred within one year from the date of the listing. Therefore, potential re-registration of substantial amounts of Shares of our bank held on our domestic share register into H Shares after one year of the Global OÅering could further increase the supply of our H Shares in the market and could negatively impact the market price of our H Shares.
Since the OÅer Price of our H Shares is higher than the net tangible asset value per Share, you will incur immediate dilution. On the assumption that the Over-Allotment Option is not exercised and without taking into account any changes in our net tangible assets after December 31, 2005 other than to give eÅect to the sale of our H Shares pursuant to the Global OÅering, assuming an OÅer Price of HK$2.75 (being the mid-point of the estimated OÅer Price of HK$2.50 and HK$3.00), and after deduction of estimated underwriting fees and expenses, our pro forma adjusted net tangible assets of the Group attributable to the equity holders of our bank as of December 31, 2005 would have been approximately HK$285,728 million, or a pro forma adjusted net tangible asset value of HK$1.216 per Share. Therefore, purchasers of our H Shares in the Global OÅering will experience an immediate dilution of HK$1.534 per Share, representing the diÅerence between the OÅer Price and the pro forma adjusted net tangible assets per Share. If the Underwriters exercise their Over-Allotment Option or if we issue additional H Shares in the future, purchasers of our H Shares may experience further dilution.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
DIRECTORS' RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS
This prospectus includes particulars given in compliance with the Companies Ordinance, the A1A(2) Securities and Futures (Stock Market Listing) Rules and the Hong Kong Listing Rules for the purpose of giving information with regard to us. Our Directors collectively and individually accept full LR11.12 responsibility for the accuracy of the information contained in this prospectus and conÑrm, having LR19.08(1) made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement in this prospectus misleading.
APPROVAL OF THE CBRC AND THE CSRC
The CBRC and the CSRC gave their approval on March 14, 2006 and April 24, 2006, respectively, for the Global OÅering and the making of the application to list the H Shares on the Hong Kong Stock Exchange. In granting such approval, neither the CBRC nor the CSRC accepts any responsibility for the Ñnancial soundness of our bank or the accuracy of any of the statements made or opinions expressed in this prospectus or in the Application Forms.
UNDERWRITING
This prospectus is published solely in connection with the Hong Kong Public OÅering, which I.E. Note 11 forms part of the Global OÅering. For applicants under the Hong Kong Public OÅering, this prospectus and the Application Forms contain the terms and conditions of the Hong Kong Public OÅering. The listing of our H Shares on the Hong Kong Stock Exchange is sponsored by the Joint Sponsors. The International Purchase Agreement is expected to be entered into on or about May 24, 2006, subject to agreement on the OÅer Price between us and the Joint Global Coordinators (on behalf of the Hong Kong Underwriters). If for any reason the OÅer Price is not agreed between us and the Joint Global Coordinators (on behalf of the Hong Kong Underwriters), the Global OÅering will not proceed. The Hong Kong Public OÅering is underwritten by the Hong Kong Underwriters on a conditional basis. For further details about the Underwriters and the underwriting arrangements, see ""Underwriting''.
RESTRICTIONS ON THE OFFER AND SALE OF OFFER SHARES
Each person acquiring the Hong Kong OÅer Shares under the Hong Kong Public OÅering will be required to conÑrm, or be deemed by his acquisition of Hong Kong OÅer Shares to conÑrm, that he is aware of the restrictions on oÅers and sales of the OÅer Shares described in this prospectus.
No action has been taken to permit a public oÅering of the OÅer Shares, other than in Hong A1A(15)(2)(b) Kong and Japan, or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, and without limitation to the following, this prospectus may not be used for the purpose of, and does not constitute, an oÅer or invitation in any jurisdiction or in any circumstances in which such an oÅer or invitation is not authorized or to any person to whom it is unlawful to make such an oÅer or invitation.
United States of America
The OÅer Shares have not been registered under the U.S. Securities Act and may not be oÅered or sold within the United States or to, or for the account or beneÑt of, U.S. persons (as deÑned in Regulation S) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
The International Purchasers propose to place OÅer Shares outside of the United States in oÅshore transactions in reliance on Regulation S under the U.S. Securities Act and in accordance with applicable law. Certain of the International Purchasers propose to place OÅer Shares, through their respective U.S. selling agents, only to QIBs in the United States. Any oÅer or sale of OÅer Shares in the United States will be made by broker-dealers who are registered as such under the U.S. Exchange Act. Until the expiration of 40 days after the later of the commencement of the Global OÅering and the date of the closing of the Global OÅering, an oÅer or sale of OÅer Shares within the United States by a dealer, whether or not participating in the Global OÅering, may violate the registration requirements of the U.S. Securities Act if such oÅer or sale is made otherwise than in accordance with an exemption from, or in a transaction not subject to, such requirements or in accordance with Rule 144A. The OÅer Shares have not been approved or disapproved by the United States Securities and Exchange Commission, 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 Global OÅering or the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal oÅense in the United States.
The United Kingdom This prospectus has not been approved by an authorized person in the United Kingdom and has not been registered with the Registrar of Companies in the United Kingdom. The OÅer Shares have not been oÅered or sold, and prior to the expiry of a period of six months from the latest date of the issue of the OÅer Shares, the OÅer Shares may not be oÅered or sold to any persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses, or otherwise in circumstances which have not resulted and will not result in an oÅer to the public in the United Kingdom within the meaning of the Public OÅers of Securities Regulations 1995, as amended. In addition, no person may communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the ""FSMA'')) in connection with the issue or sale of any OÅer Shares except in circumstances in which section 21(l) of the FSMA does not apply.
Japan It is expected that a public oÅering without listing of the OÅer Shares will be made in Japan. The OÅer Shares may not be oÅered or sold directly or indirectly in Japan, or to or for the account of, any resident of Japan, except in accordance with the terms and conditions of a public oÅering without listing of OÅer Shares in Japan as stated in the securities registration statement Ñled on May 2, 2006 (as amended) with the Japanese authority under, or pursuant to any exemption from the registration requirements of, the Securities and Exchange Law of Japan and otherwise in compliance with any applicable laws and regulations of Japan. As used in this paragraph, ""resident of Japan'' means any person residing in Japan, including any corporation or other entity organized under the laws of Japan.
Singapore This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly this prospectus and any other document or material in connection with the oÅer or sale, or invitation for subscription or purchase of the Shares may not be circulated or
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
distributed, nor may the Shares be oÅered or sold, or be made the subject of an invitation for subscription or purchase, 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, or any person pursuant to Section 275(1A), and in accordance with the conditions, speciÑed 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 Shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) 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 beneÑciary is an accredited investor, shares debentures and units of shares and debentures of that corporation or the beneÑciaries' rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the Shares under Section 275 except (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, speciÑed in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
The Netherlands Each Underwriter has represented and agreed that it has not, directly or indirectly, oÅered or sold and will not, directly or indirectly, oÅer or sell in the Netherlands any OÅer Shares other than (i) OÅer Shares with a minimum denomination of Euro 50,000 (or the equivalent thereof in another currency), which OÅer Shares are fully paid up at their issuance, (ii) to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, investment undertakings, pension funds, other institutional investors and Ñnance companies and treasury departments of large enterprises) or (iii) in circumstances where one of the exceptions to or exemptions from the prohibition contained in article 3(1) of the Securities Transactions Supervision Act 1995 (Wet toezicht eÅectenverkeer 1995) applies.
Canada The OÅer Shares will not be qualiÑed for sale under the securities laws of any province or territory of Canada. Each Underwriter has represented and agreed that it has not oÅered, sold or distributed and will not oÅer, sell or distribute any securities, directly or indirectly, in Canada or to or for the beneÑt of any resident of Canada, other than in compliance with applicable securities laws. Each Underwriter has also represented and agreed that it has not distributed or delivered and will not distribute or deliver the prospectus or any other oÅering material in connection with any oÅering of the OÅer Shares, in Canada other than in compliance with applicable securities laws.
PRC This prospectus does not constitute a public oÅer of the OÅer Shares, whether by way of sale or subscription, in the PRC. The OÅer Shares are not being oÅered and may not be oÅered or sold
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
directly or indirectly in the PRC to or for the beneÑt of, legal or natural persons of the PRC. According to the laws and regulatory requirements of the PRC, unless otherwise approved by the relevant authorities, the H Shares may only be oÅered or sold to natural or legal persons in Taiwan, Hong Kong or Macau or any country other than the PRC, whether by means of this prospectus or otherwise.
APPLICATION FOR LISTING ON THE HONG KONG STOCK EXCHANGE
We have applied to the Listing Committee for listing of, and permission to deal in, the H Shares, A1A(14)(1) including any additional H Shares which may be issued pursuant to the exercise of the Over- Allotment Option, and dealings in the H Shares on the Hong Kong Stock Exchange are expected to commence on June 1, 2006. Additionally, we have made an application for the Shares held by Huijin to be authorized for listing. See ""Share Capital Ì Shares held by Huijin''.
Save as disclosed in this prospectus, no part of our share or loan capital is listed on or dealt in A1A(11) on any other stock exchange and no such listing or permission to list is being or proposed to be LR19A.42 sought in the near future. (55)(1)
PROFESSIONAL TAX ADVICE RECOMMENDED Applicants for the Hong Kong OÅer Shares are recommended to consult their professional advisors if they are in any doubt as to the taxation implications of subscription for, purchasing, holding or disposing of, and dealing in, the H Shares (or exercising rights attaching to them) under the laws of the place of their operations, domicile, residence, citizenship or incorporation. We emphasize that none of the Joint Global Coordinators, the Joint Sponsors, the Underwriters or us, any of our or their respective directors, oÇcers or any other person or party involved in the Global OÅering accepts responsibility for any tax eÅects or liability resulting from any applicant's subscription for, purchase, holding or disposing of, or dealing in, our H Shares or the exercise by any such applicant of any rights attaching to our H Shares.
H SHARE REGISTER AND STAMP DUTY
All H Shares issued by us pursuant to applications made in the Hong Kong Public OÅering will LR19A.13(3)(a) be registered in our H Share register of members to be maintained in Hong Kong. Our principal register of members is maintained at our head oÇce in the PRC. Dealings in the H Shares registered in our H Share register will be subject to Hong Kong stamp duty. See Appendix VI Ì ""Taxation and Foreign Exchange'' to this prospectus.
DIVIDEND PAYABLE TO HOLDERS OF H SHARES Unless we determine otherwise, dividends will be paid to our shareholders, as recorded in our H Share register, by ordinary post at the shareholders' risk to the registered address of each shareholder.
OVER-ALLOTMENT AND STABILIZATION Details of the arrangements relating to the Over-Allotment Option and stabilization are set out in ""Underwriting''.
STRUCTURE OF THE GLOBAL OFFERING Details of the structure of the Global OÅering, including its conditions, are set out in ""Structure of the Global OÅering''.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
EXCHANGE RATE CONVERSION
Solely for your convenience, this prospectus contains translations of certain Renminbi amounts into Hong Kong dollars and U.S. dollars at speciÑed rates. Unless otherwise stated, all translations of Renminbi amounts into Hong Kong dollars and of Renminbi amounts into U.S. dollars were made at the rate of RMB1.0403 to HK$1.00, the PBOC Rate prevailing on December 31, 2005, and RMB8.0702 to US$1.00, the noon buying rate in the City of New York for cable transfers as certiÑed for customs purposes by the Federal Reserve Bank of New York on December 30, 2005. Any discrepancy in any table between totals and sums of amounts listed therein are due to rounding. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Hong Kong dollars, as the case may be, at any particular rate or at all. Further information on exchange rates is set out in Appendix VI Ì ""Taxation and Foreign Exchange''.
REGISTRATION OF SUBSCRIPTION, PURCHASE AND TRANSFER OF H SHARES LR19A.42(62) LR19A.52 We have instructed Computershare Hong Kong Investor Services Limited, our H Share registrar, and Computershare Hong Kong Investor Services Limited has agreed, not to register the subscription, purchase or transfer of any H Shares in the name of any particular holder unless and until the holder delivers a signed form to our H Share registrar in respect of those H Shares bearing statements to the eÅect that the holder:
(i) agrees with us and each of our shareholders, and we agree with each shareholder, to observe and comply with the PRC Company Law, the Special Regulations and our Articles of Association;
(ii) agrees with us, each of our shareholders, Directors, Supervisors, managers and oÇcers, and we, acting for ourselves and for each of our Directors, Supervisors, managers and oÇcers, agree with each of our shareholders to refer all diÅerences and claims arising from our Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning our aÅairs to arbitration in accordance with our Articles of Association, and any reference to arbitration shall be deemed to authorize the arbitration tribunal to conduct hearings in open session and to publish its award, which arbitration shall be Ñnal and conclusive. See Appendix VIII Ì ""Summary of Articles of Association'';
(iii) agrees with us and each of our other shareholders that the H Shares are freely LR8.13 transferable by the holders thereof; and
(iv) authorizes us to enter into a contract on his or her behalf with each of our Directors and oÇcers whereby such Directors and oÇcers undertake to observe and comply with their obligations to our shareholders as stipulated in our Articles of Association.
Persons applying for or purchasing H Shares under the Global OÅering are deemed, by their making an application or purchase, to have represented that they are not associates (as such term is deÑned in the Hong Kong Listing Rules) of any of the Directors of our bank or an existing shareholder of our bank or a nominee of any of the foregoing.
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality
DIRECTORS A1A(41)(1) 3rd Sch 6 XIAO Gang Room 201, Door 1, Building No. 10 Chinese Fenghui Yuan Xicheng District, Beijing PRC
LI Lihui Room 2-601, Building No. 12 Chinese Fenghui Yuan Xicheng District, Beijing PRC
ZHANG Jinghua No. 96, Enjizhuang Chinese Haidian, Beijing PRC
YU Erniu Room 1501, No. 6 Building Chinese No. 11 Yard Wanshouyuan Xi Street Jia Wan Shou Road Haidian District, Beijing PRC
ZHU Yan Room 301-1-7, No. 1 Yard Chinese Cuihua Street Xicheng District, Beijing PRC
ZHANG Xinze No. 904, Building No. 23 Chinese Daoxiangyuan Haidian District, Beijing PRC
HONG Zhihua No. 2, Room 1003 Chinese Xizhimen North Street No. 45 Beijing PRC
HUANG Haibo Room 603, No. 6 Building Chinese Kangleli Xuanwu District, Beijing PRC
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality Sir Frederick Anderson GOODWIN Gogarpark House British Gogarburn Edinburgh, Scotland, EH12 1RB United Kingdom(1)
SEAH Lim Huat Peter(2) 45 Binjai Park Singaporean Singapore 589845
HUA Qingshan Room 401, Unit 5, Building No. 2 Chinese 33 Taipusi Street Xicheng District, Beijing PRC
LI Zaohang Room 401, 3-4 Building Chinese Fenghui Yuan Xicheng District, Beijing PRC
Independent Non-Executive Directors
Anthony Francis NEOH 22A, Block 4, Cavendish Heights Chinese Perkins Road, Hong Kong
William Peter COOKE Oak Lodge, Maltmans Lane British Gerrards Cross, Bucks SL9 8RP United Kingdom
Patrick de SAINT-AIGNAN 13 Seneca Trail American Harrison, New York 10528 USA
Alberto TOGNI(2) Schiedhaldenstrasse 16 Swiss Ch-8700 Kusnacht£ Switzerland
(1) Business address. We have applied for, and the SFC has granted, an exemption pursuant to Section 342A of the Companies Ordinance from strict compliance with Section 342(1)(b) and Paragraph 6 of Part I of the Third Schedule to the Companies Ordinance in relation to the disclosure of the residential address of Sir Frederick Goodwin on the basis that such disclosure would be unduly burdensome. Sir Frederick Goodwin is a well-established public Ñgure in the United Kingdom and has been granted a ConÑdentiality Order by the Department of Trade and Industry in the United Kingdom in connection with the disclosure of his residential address. As a result of this and his particular circumstances, the business address of Sir Frederick Goodwin is disclosed in place of his residential address.
(2) Subject to the approval of the CBRC.
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality SUPERVISORS
Supervisors
LIU Ziqiang Room 4-4-201, Picai Hutong Chinese Fenghui Yuan Xicheng District, Beijing PRC
WANG Xueqiang Room 708, Building Jia No. 56 Chinese Li Shi Road North Xicheng District, Beijing PRC
LIU Wanming Room 4-202, No. 1 Building Chinese No. 11 West Street, Wan Shou Road Haidian District, Beijing PRC
Employee Supervisors
LI Chunyu Room 22-6-301, Fa Hua South Lane Chinese Chongwen District, Beijing PRC
LIU Dun No. 29, Room 1-1-302, Zhangpu Road Chinese Qingdao PRC
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address PARTIES INVOLVED
Joint Global Coordinators, Joint BOCI Asia Limited A1A(15)(2)(h) Bookrunners, Joint Sponsors and 26th Floor A1A(3) Joint Lead Managers Bank of China Tower 1 Garden Road Hong Kong
Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong
UBS AG acting through its business group, UBS Investment Bank 52nd Floor Two International Finance Centre 8 Finance Street, Central Hong Kong
Reporting Accountants PricewaterhouseCoopers A1A(4) CertiÑed Public Accountants, Hong Kong 3rd Sch 18 22nd Floor Prince's Building Central Hong Kong
Auditors PricewaterhouseCoopers Zhong Tian CertiÑed Public Accountants Limited Company 11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021, PRC
Legal Advisers to Bank of China as to Hong Kong law: A1A(3) FreshÑelds Bruckhaus Deringer 11th Floor Two Exchange Square Hong Kong
as to United States law: Sullivan & Cromwell LLP 28th Floor Nine Queen's Road Central Hong Kong
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address as to PRC law: Jun He Law OÇces 20th Floor China Resources Building 8 Jianguomenbei Avenue Beijing 100005, PRC
Legal Advisers to the Underwriters as to Hong Kong law: A1A(3) Allen & Overy 9th Floor Three Exchange Square Central, Hong Kong
as to United States law: Shearman & Sterling LLP 12th Floor Gloucester Tower The Landmark, 11 Pedder Street Central, Hong Kong
as to PRC law: King & Wood 40th Floor, OÇce Tower A Beijing Fortune Plaza 7 Dongsanhuan Zhonglu, Chaoyang District Beijing 100020, PRC
Property Valuers American Appraisal China Limited Units 1506-1510, 15/F Dah Sing Financial Centre 108 Gloucester Road Wanchai, Hong Kong Grant Sherman Appraisal Limited Room 904 Harbour Centre 25 Harbour Road Wanchai, Hong Kong
Receiving Bankers Bank of China (Hong Kong) Limited A1A(15)(2)(f) Bank of China Tower 1 Garden Road Hong Kong
Bank of Communications Co., Ltd. Hong Kong Branch 20 Pedder Street Central Hong Kong
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PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address The Bank of East Asia, Limited 10 Des Voeux Road Central Hong Kong
The Hongkong and Shanghai Banking Corporation Limited Level 30 HSBC Main Building 1 Queen's Road Central Hong Kong
Industrial and Commercial Bank of China (Asia) Limited 33/F, ICBC Tower 3 Garden Road Central Hong Kong
Standard Chartered Bank (Hong Kong) Limited 13th Floor, 4-4A Des Voeux Road Central Hong Kong
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CORPORATE INFORMATION
Registered OÇce One Fuxingmen Nei Dajie A1A(43) Xicheng District, Beijing 100818 A1A(6) PRC
Place of Business in Hong Kong 8/F, Bank of China Tower A1A(6) One Garden Road s342 Central, Hong Kong
Company Secretary YEUNG Jason Chi Wai, Solicitor of the High A1A(42) Court of Hong Kong
QualiÑed Accountant LEUNG Frances Kim Lan, MBA, FCPA, FCCA, A1A(42) ACA
Authorized Representatives LI Lihui A1A(3) Room 2-601, Building No. 12 Fenghui Yuan Xicheng District, Beijing PRC
YEUNG Jason Chi Wai Flat 20A, Block 2 The Grand Panorama 10 Robinson Road Hong Kong LR8.16 H Share Registrar Computershare Hong Kong Investor Services A1A(3) Limited
Compliance Advisors Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong
UBS AG acting through its business group, UBS Investment Bank 52nd Floor Two International Finance Centre 8 Finance Street, Central Hong Kong
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INDUSTRY OVERVIEW
The information set forth below relates to the PRC, Hong Kong and Macau banking industries, which has been derived from oÇcial or publicly available sources. While we have compiled and A1A(28)(1)(a) reproduced the information, it has not been independently veriÑed by us, our Directors, the Underwriters or any of our or their respective aÇliates or advisers. This information may not be consistent with other information compiled within or outside the PRC, Hong Kong or Macau.
PRC BANKING INDUSTRY
Overview
The PRC economy has grown rapidly since the PRC Government adopted the national policy of ""reform and opening'' in the late 1970s and early 1980s. As a result of a series of economic reforms, particularly following the PRC's accession to the WTO, the PRC economy has demonstrated strong growth and signiÑcant potential. According to the National Bureau of Statistics of China, between 2000 and 2005, the PRC's GDP grew at an average annual growth rate of 11.7% and the country's total foreign trade volume increased at an average annual growth rate of 25.1%, reaching US$1,422 billion in 2005. The table below sets forth the GDP and GDP per capita in the PRC from 2000 and 2005:
Average annual growth rate 2000 2001 2002 2003 2004 2005 (2000-2005) GDP (RMB billion)(1) 9,921.5 10,965.5 12,033.3 13,582.3 15,987.8 18,232.1 11.7% GDP per capita (RMB)(2) ÏÏÏÏÏÏÏÏÏÏ 7,086 7,651 8,214 9,111 10,561 13,744 14.4%
(1) These are revised data based on the results of the Ñrst nationwide economic census and announced by the National Bureau of Statistics of China on January 9, 2006.
(2) With the exception of the 2005 GDP per capita Ñgure, these are data previously published by the National Bureau of Statistics of China based on unrevised GDP data. To the extent the National Bureau of Statistics of China has not revised certain data according to the revised GDP numbers, we continue to use data previously published by it in this section.
Source: National Bureau of Statistics of China, China Statistical Yearbook 2005.
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INDUSTRY OVERVIEW
As an important component to the country's overall economic system, the PRC banking industry has seen rapid growth in line with the economic development of the PRC. Banks have historically been, and continue to be, a signiÑcant source of capital for the economy and the primary choice for domestic savings. According to the Almanac of China's Finance and Banking 2005, bank loans accounted for 90.9% of total Ñnancing in 2004 with the remaining 9.1% raised through bonds and equity issuances. The table below sets forth total Renminbi-denominated and foreign currency- denominated loans and deposits in the PRC from 2000 to 2005:
As of December 31, Average annual growth rate 2000 2001 2002 2003 2004 2005 (2000-2005) (in billions of RMB) Total RMB-denominated deposits(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,380.4 14,361.7 17,091.7 20,805.6 24,052.5 28,717.0 18.3% Total RMB-denominated loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,937.1 11,231.5 13,129.4 15,899.6 17,736.3 19,469.0 14.5% Total foreign currency- denominated deposits(1) ÏÏ 1,061.2 1,115.7 1,247.1 1,230.8 1,266.3 1,303.9 4.3% Total foreign currency- denominated loans(1) ÏÏÏÏÏ 505.8 667.1 850.9 1,077.5 1,120.2 1,214.8 19.7%
Source: PBOC, PBOC Quarterly Statistical Reports. (1) Consists of the deposits or loans of the PBOC, the Big Four, other national commercial banks, city commercial banks, policy banks, rural commercial banks, foreign-invested commercial banks, urban credit cooperatives, rural credit cooperatives, Ñnance companies, trust and investment companies, Ñnancial leasing companies and the postal savings bureau. The PRC's eastern coastal areas, which consist of the Bohai Rim Economic Zone, the Yangtze River Delta and the Pearl River Delta, have been the more economically developed regions in the PRC and account for a high percentage of the GDP of the PRC. According to the China Statistical Yearbook, the eastern coastal areas accounted for 64.0% of the total GDP of the PRC in 2004, with a combined GDP of RMB8,766 billion. Residents in these areas are more aÉuent than those in the rest of the country as evidenced by a GDP per capita of RMB19,826 in 2004, compared to the national average of RMB10,561. In addition, the eastern coastal areas experienced faster growth between 2000 and 2004 than other parts of the nation, with combined GDP growing at an annual average rate of 14.9%, compared to the national average of 11.3%. The banking industry in the eastern coastal areas is also more developed compared to other parts of the PRC. According to the Almanac of China's Finance and Banking 2005, deposits and loans of banking institutions in these areas accounted for 60.7% and 58.3%, respectively, of total deposits and loans in the PRC in 2004. The banking industry in these areas also grew faster than the rest of the PRC between 2000 and 2004. Total deposits in these areas grew at an annual average rate of 21.4% during the period, compared to the national average of 19.7%, and total loans grew at an annual average rate of 20.7%, compared to the national average of 17.0%.
History and Development of the PRC Banking Sector Between 1949 and the late 1970s, the PRC banking industry functioned as part of the centrally planned economy and the PBOC was the PRC's central bank as well as the primary commercial bank engaging in deposit-taking and lending activities. Beginning in the late 1970s, as part of the PRC's economic reform, the banking industry underwent signiÑcant changes as some of the PBOC's commercial banking functions were separated from its central bank function. The People's Construction Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Bank of China became independent institutions specializing in construction and
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infrastructure Ñnancing, urban commercial Ñnancing, agriculture Ñnancing and foreign exchange and trade Ñnancing, respectively. These four institutions assumed the role of state-owned specialized banks, while the PBOC focused on acting as PRC's central bank and as the principal regulator and supervisor of the PRC banking system. In the early 1980s, as part of the PRC Government's eÅorts to commercialize the operations of the banking industry, these four state-owned specialized banks were permitted to expand into new commercial banking businesses outside their specialized functions. In addition, new commercial banks and non-bank Ñnancial institutions were established from the late 1980s. Some of these commercial banks were permitted to oÅer nationwide services, while others served only local markets. In the mid-1990s, the PRC Government took a series of measures to reform the commercial banking sector. To facilitate the Big Four's transition towards operating fully as commercial banks, three policy banks, the China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank of China, were established in 1994 to substantially undertake the policy lending functions of the Big Four. In 1995, the PRC Commercial Banking Law and the PRC People's Bank of China Law were enacted to deÑne more clearly the permitted scope of business of commercial banks and the functions and powers of the PBOC as the central bank and banking regulator of the PRC. In 2003, the CBRC was established to become the primary banking industry regulator and assumed the majority of the regulatory functions of the PBOC. In December 2003, in an eÅort to increase the competitiveness of state-owned commercial banks, the PRC Government, through Huijin, made a capital contribution of US$22.5 billion to each of CCB and our bank, and US$15 billion to ICBC in 2005. Subsequent to these equity contributions, CCB, our bank and ICBC underwent restructurings to become joint stock commercial banks.
Market Participants The PRC banking sector comprises seven broad categories of banking institutions, namely, the Big Four, other joint stock commercial banks, urban commercial banks, urban credit cooperatives, rural credit cooperatives, foreign-invested commercial banks and other Ñnancial institutions. The following table sets forth the number of banking institutions, total assets, total deposits and total loans for each category of banking institutions as of December 31, 2004:
As of December 31, 2004 Number of Total assets Total deposits Total loans institutions Amount % of total Amount % of total Amount % of total (in billions of RMB, except for number of institutions and percentages data) Big Four(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 17,859.5 54.8% 15,384.1 59.5% 10,667.5(4) 54.6% Joint stock commercial banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 4,803.4 14.7 4,143.6 16.0 2,926.1 15.0 Urban commercial banks 112 1,705.6 5.2 1,414.6 5.5 903.1 4.6 Rural credit cooperatives(2)ÏÏÏÏÏÏÏÏ 32,869 3,133.2 9.6 2,784.1 10.8 1,955.1 10.0 Urban credit cooperatives 623 178.7 0.5 158.9 0.6 101.5 0.5 Foreign-invested commercial banks ÏÏÏÏÏ 67 582.3 1.8 149.9 0.6 284.4 1.5 Others(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149 4,369.9 13.4 1,889.6 7.0 2,681.3 13.8 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,836 32,725.9 100.0% 25,849.9 100.0% 19,528.4 100.0%
Source: CBRC, banks' annual reports. (1) Amounts are on a consolidated basis.
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(2) Consist of rural commercial banks and rural credit cooperatives.
(3) Consist of policy banks, the postal savings bureau, Ñnance companies, trust and investment companies, and Ñnance leasing companies.
(4) Amounts for loans are before allowances for impairment losses.
Big Four
The Big Four play a major role in the PRC banking sector. As of December 31, 2004, the Big Four accounted for approximately 54.8% and 54.6% of the total assets and total loans, respectively, of the PRC banking institutions. The following table sets forth, for each of the Big Four, the number of branches as well as total assets, deposits and loans as of December 31, 2004 as calculated in accordance with PRC GAAP on a consolidated basis.
As of December 31, 2004
(1) Reported Total assets Total deposits Total loans number of Amount % of total Amount % of total Amount % of total branches (in billions of RMB, except for number of branches and percentages) ICBC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,670.5 31.8% 5,060.7 32.9% 3,705.3 34.7% 21,323 Our bankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,270.4 23.9 3,342.5 21.7 2,146.5 20.1 11,910 ABC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,013.8 22.5 3,491.5 22.7 2,590.1 24.3 31,004 CCB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,904.8 21.8 3,489.4 22.7 2,225.6 20.9 14,467 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,859.5 100.0% 15,384.1 100.0% 10,667.5 100.0% 78,704
Sources: The 2004 annual reports of ICBC, our bank, ABC and CCB.
(1) Amounts for loans are before allowances for impairment losses.
Other Joint Stock Commercial Banks
Most joint stock commercial banks were established in the late 1980s and early 1990s with nationwide banking licenses. They compete with the Big Four in many aspects of commercial banking activities nationwide. According to the CBRC, as of December 31, 2004, joint stock commercial banks accounted for approximately 14.7% of the total assets and 15.0% of the total loans made by PRC banking institutions.
Urban Commercial Banks
Urban commercial banks are permitted to engage in commercial banking activities within their designated geographic areas. According to the CBRC, as of December 31, 2004, urban commercial banks accounted for approximately 5.2% of total assets of, and 4.6% of total loans made by, PRC banking institutions.
Rural and Urban Credit Cooperatives
Urban credit cooperatives provide deposit-taking, lending and settlement services mainly for small and medium-sized enterprises and individuals in urban areas. Rural credit cooperatives are typically formed by local rural residents. According to the CBRC, as of December 31, 2004, rural and urban credit cooperatives accounted for approximately 10.1% of total assets of and 10.5% of loans made by PRC banking institutions.
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Foreign-invested Commercial Banks According to the CBRC, as of December 31, 2004, there were 211 operations of 67 foreign banks in the PRC, consisting of 186 branches, nine wholly-owned banks, 13 joint venture banks and three Ñnance companies. The operations of these foreign Ñnancial institutions are currently subject to certain geographical and customer restrictions. See ""Supervision and Regulation Ì Foreign Investment in the PRC Banking Industry''. According to the CBRC, as of December 31, 2004, foreign-invested commercial banks accounted for approximately 1.8% of total assets of, and 1.5% of total loans made by, PRC banking institutions.
Other Financial Institutions Other Ñnancial institutions include policy banks that engage in lending pursuant to state policies, Ñnance companies, trust and investment companies, Ñnance leasing companies and the postal savings bureau.
Industry Trends Sector Reform The PRC banking sector has been undergoing market-oriented reforms. In April 2003, the CBRC was established to assume the PBOC's functions as the primary regulator of the PRC banking sector. The PBOC and CBRC have undertaken a series of reform measures aimed at liberalizing the Ñnancial market, enhancing risk management and creating a healthy and competitive environment for commercial banks in the PRC. Some of these initiatives include:
¬ encouraging joint stock commercial banks to establish a corporate governance structure that includes a board of directors with independent directors and board committees such as a risk management committee, and requiring banks to create an independent internal audit function that is supported by clearly deÑned policies and procedures;
¬ promulgation of the Internal Control Guidelines, which require commercial banks to adopt a three-tiered structure to conduct eÅective management and supervision, as well as to improve credit approval procedures;
¬ the strengthening of supervision with respect to issues such as market entry, capitalization requirements, asset quality, liquidity and proÑtability;
¬ issuance of the new Guidelines on Loan Loss Provisions and the Ñve-category loan- classiÑcation system;
¬ the gradual liberalization of interest rates; and
¬ raising the 15% limit on individual foreign investment in domestic banks to 20%, with a 25% maximum limit on total foreign holdings, in an eÅort to encourage foreign investment in the PRC banking sector. See ""Supervision and Regulation''.
Development of Fee-based Products and Services Fee-based products and services have grown signiÑcantly in recent years. Historically, PRC commercial banks were highly restricted in their ability to charge fees for services. From 2001, the PRC Government began to relax such restrictions. Currently, certain services remain subject to government guidance prices, including basic Renminbi settlement services speciÑed by the CBRC and the NDRC. Fees for other products and services are determined by commercial banks based on
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market conditions. According to Fitch Ratings, the average ratio of non-interest income to total operating income for thirteen major PRC commercial banks calculated based on PRC GAAP Ñnancial statements has increased from 9.8% in 2002 to 12.6% in 2004. However, it remains substantially lower than the ratio in more mature markets. This ratio is expected to increase with the further relaxation of PRC regulations and as PRC commercial banks continue to develop and expand these services in response to demands for increasingly sophisticated Ñnancial products and services by corporate and retail customers.
Improvement in Asset Quality
The PRC banking sector has been historically burdened with large portfolios of non-performing loans. Since the late 1990s, the PRC Government took a number of initiatives to help relieve the Big Four of their burden of non-performing loans, including establishing four asset management companies in 1999 primarily to acquire and manage non-performing assets and loans of the Big Four. Pursuant to government directives, the Big Four adopted measures to enhance risk management and improve asset quality. According to the CBRC, the ratio of non-performing loans of the major commercial banks (i.e., the Big Four and other joint stock commercial banks), as calculated in accordance with PRC GAAP, fell to 8.9% at the end of 2005.
Bank Lending Remains the Most Important Source of Financing
The PRC economy has historically relied on bank loans as the primary source of Ñnancing. Despite the development of capital markets since the late 1980s, commercial banks remain the principal provider of Ñnancing to businesses in the PRC. The following table sets forth the relative proportion of bonds issued, equity raised through the equity market and new loans made by banks in the PRC in percentage terms between 2000 and 2004:
2000 2001 2002 2003 2004 Bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5% 1.1% 1.6% 1.2% 1.6% Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.5% 9.0% 4.7% 4.6% 7.5% Bank loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86.0% 89.9% 93.7% 94.2% 90.9%
Source: Almanac of China's Finance and Banking.
Increasing Demand for Personal Banking Products and Services
The continued rapid economic growth in the PRC fosters domestic wealth creation and accumulation. The following table sets forth certain personal income data (calculated at current prices) between 2000 and 2005:
Average annual For the year ended December 31, growth rate 2000 2001 2002 2003 2004 2005 (2000-2005) (in RMB, except percentages) Per capita GDP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,086 7,651 8,214 9,111 10,561 13,744 14.4% Per capita annual disposable income of urban households 6,280 6,860 7,703 8,472 9,422 10,493 10.8% Per capita annual net income of rural householdsÏÏÏÏÏÏÏÏÏ 2,253 2,366 2,476 2,622 2,936 3,255 7.7%
Sources: National Bureau of Statistics of China, China Statistical Yearbook 2005.
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With the increasing demand for goods and services, we expect customer demand for personal banking products and services to grow. Compared to other countries, the retail lending segment remains a relatively under-penetrated market in the PRC. The following table sets forth the proportion of personal loans to GDP of various countries and regions including the PRC for 2004:
Hong United United PRC Japan Kong Germany Australia Kingdom States Personal loans as a percentage of GDP ÏÏÏÏÏÏÏ 14.6% 33.9% 35.6% 50.3% 79.2% 84.3% 101.8%
Source: EIU As of December 31, 2004, the PRC had an aggregate principal amount in personal loans of over RMB2,000 billion, representing approximately 10.6% of total loans in the PRC and 14.6% of the PRC's GDP, according to the National Bureau of Statistics of China. Residential mortgage loans generally represent the majority of personal loans, as home ownership has increased in the PRC in response to the PRC Government's housing reform programs which began in the 1980s. Total residential mortgage loans have grown from approximately RMB332 billion in aggregate principal amount as of December 31, 2000 to approximately RMB1,600 billion in aggregate principal amount as of December 31, 2004, according to the National Bureau of Statistics of China. Although the PRC Government has adopted measures to tighten banking policies on lending to the real estate industry in certain areas starting in 2003 in an eÅort to curtail speculative activities, residential mortgage loans have continued to grow at a rapid pace. The bank card business in the PRC has also experienced rapid growth in recent years. The total number of cards outstanding increased from 383 million as of December 31, 2001 to 959 million as of December 31, 2005, according to the PBOC. The growth has also been accompanied by an expansion of the electronic banking terminal network. Debit cards remain the primary type of bank card and are in much wider use than credit cards in the PRC. As of December 31, 2005, there were 919 million debit cards and 40 million credit cards (including quasi-credit cards, which require a cash deposit balance and provide the cardholders with an interest-bearing overdraft line) issued in the PRC according to the PBOC. Despite the rapid growth of the credit card market in recent years, the PRC credit card industry as a whole is still at a preliminary stage and is underdeveloped compared to the developed countries. However, with the rising personal income level, the improvement of the domestic payment infrastructure, the gradual acceptance of the concept of consumption on credit and the improvement of the personal credit database, the credit card industry in the PRC is expected to grow rapidly in the future.
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The following table sets forth the number of credit cards in circulation in the PRC, Hong Kong and certain other developed economies as of the end of 2004:
As of December 31, 2004 Number of Number of credit cards Country/Region credit cards per person (in millions) PRC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 0.02 Australia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 1.04 United Kingdom ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73 1.23 Hong KongÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 1.68 United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654 2.23 Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127 1.77
Source: PBOC, Euromonitor, EIU country data.
Increasing Demand for Foreign Exchange Products and Services
According to the National Bureau of Statistics of China, from 2000 to 2005, the foreign trade volume of the PRC tripled, with a total volume of approximately US$1,422 billion as of the end of 2005, representing an average annual growth rate of 25.1%. The following table sets forth the PRC imports and exports growth since 2000:
Year on year growth Year Export Import Total Export Import (in billions of US$, except percentages) 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249.2 225.1 474.3 27.8% 35.8% 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266.1 243.6 509.7 6.8% 8.2% 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325.6 295.2 620.8 22.4% 21.2% 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 438.2 412.8 851.0 34.6% 39.8% 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593.3 561.2 1,154.6 35.4% 36.0% 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 762.0 660.1 1,422.1 28.4% 17.6%
Source: China Statistical Yearbook 2005, National Bureau of Statistics of China.
From 2000 to 2005, actual foreign direct investment into the PRC has grown at an average annual growth rate of 8.6% to US$60 billion in 2005. The table below sets forth actual foreign direct investment growth between 2000 and 2005:
Average annual growth rate Year 2000 2001 2002 2003 2004 2005 (2000-2005) (in billions of US$, except percentages) Actual foreign direct investment ÏÏÏÏÏÏÏÏÏ 40.7 46.9 52.7 53.5 60.6 60.3 8.6%
Source: China Statistical Yearbook, National Bureau of Statistics of China.
The PRC's growing foreign trade, the steady inÖow of foreign investment into the PRC and the PRC Government's policy to encourage PRC companies to conduct business overseas is expected to create greater demand for foreign exchange products and services in the future, such as foreign exchange loans, international trade settlement and trade Ñnance. In light of our historical
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specialization in foreign exchange-related business and our extensive overseas network, we expect to take the opportunity to strengthen our market position.
In 1997, our bank was selected to be the pilot bank to engage in foreign exchange forward sale and purchase business. Currently the other members of Big Four and three other joint stock commercial banks are also licensed to conduct foreign exchange forward sale and purchase business. According to the PBOC, the reform of the Renminbi exchange rate regime in July 2005 has created greater demand for exchange rate risk hedging services. As the PRC continues to deregulate the derivatives market and further reform the exchange rate regime, we expect demand for foreign exchange derivative products to grow.
Foreign Investment in PRC Banks
In December 2003, the CBRC increased the shareholding limit a single foreign investor may invest in a PRC commercial bank from 15% to 20%. See ""Supervision and Regulation Ì Foreign Investment in the PRC Banking Industry Ì Equity Investment by Foreign Financial Institutions in PRC Banks''. In recent years, investments by foreign investors in PRC commercial banks have increased. Some recent examples include:
‚ Hang Seng Bank's acquisition of a 15.98% equity interest in Industrial Bank in December 2003;
‚ The Hongkong and Shanghai Banking Corporation Limited's acquisition of a 19.9% equity interest in Bank of Communications in August 2004;
‚ Standard Chartered Bank's investment of a 19.99% equity interest in Bohai Bank in January 2005 as a promoter;
‚ ING's and International Finance Corporation's acquisitions of 19.9% and 5.0% equity interests, respectively, in Bank of Beijing in March 2005, amounting to an aggregate foreign investment of 24.9% in the bank;
‚ Bank of America's acquisition of a 9.0% equity interest and Temasek's acquisition (through its wholly-owned subsidiary, AFH) of a 5.1% equity interest in CCB in June and July of 2005, respectively; and
‚ Acquisition by RBS Group and others (through RBS China), Temasek (through AFH), UBS AG and ADB of 10%, 5.0%, 1.61% and 0.24% equity interests, respectively, in the then issued share capital of our bank in December 2005.
Besides making signiÑcant equity injections to help improve the capital base of PRC banks, foreign investors are generally also expected to provide assistance in corporate governance, risk management and various business areas thereby enhancing the overall competitiveness of the PRC banks. In return, foreign investors generally expect to develop and expand cooperation with PRC banks in areas of anticipated potential growth, such as credit card, wealth management and treasury services.
As more PRC banks take steps to improve their competitiveness in the face of increasing competition from their domestic and foreign peers and as more foreign investors take the opportunity to participate in the rapidly growing PRC banking sector, we expect foreign investments in PRC banks to continue to grow.
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Increasing Foreign Competition
We expect competition within the PRC from foreign banks to increase in the future as the PRC fulÑlls its obligations pursuant to the undertakings it made upon its accession into the WTO in December 2001. Currently, foreign banks conduct commercial banking activities in the PRC through branches, joint venture banks and wholly-owned banks. As of the beginning of December 2005, foreign banks were allowed to oÅer foreign currency-denominated products and services in the PRC without any geographic restrictions and Renminbi-denominated products and services in 25 major cities. Beginning in December 2006, foreign banks will be allowed to conduct commercial banking activities (both foreign currency-denominated and Renminbi-denominated) in the PRC without any geographic restrictions.
In addition, we expect more commercial banks from Hong Kong to enter into the PRC banking market in the coming years. Pursuant to CEPA, Hong Kong commercial banks with total assets of US$6 billion or more may apply to open branches in the PRC. Banks incorporated in other foreign jurisdictions, however, must have US$20 billion in total assets in order to open branches in the PRC.
Recently, a series of initiatives designed to further open the PRC banking industry to foreign participation have been implemented by the PRC Government. These initiatives include:
¬ allowing foreign participation in the automobile Ñnance sector;
¬ streamlining the procedures for foreign Ñnancial institutions to enter the PRC market; and
¬ encouraging qualiÑed overseas strategic investors to participate in the restructuring and reform of the PRC banking industry.
Demand for Investment Banking, Insurance and Asset Management Products and Services
In addition to the growth in traditional banking products and services, the PRC financial services industry has in recent years experienced growth in other financial products and services, such as investment banking, insurance and asset management. Demand for a broad range of investment banking products and services such as debt and equity underwriting, mergers and acquisitions, project finance and securitization has been on the rise. Although private equity investments in the PRC have increased significantly in recent years, private equity investments in the PRC remain relatively undeveloped. Insurance business has also grown rapidly in recent years. According to the CIRC, total insurance premiums of insurance companies in the PRC increased from RMB159.8 billion in 2000 to RMB431.8 billion in 2004. In the meantime, according to China Securities and Futures Statistical Yearbook 2005, the number of securities investment funds increased from 34 in 2000 to 161 in 2004 and assets under management have increased from RMB56.2 billion in 2000 to RMB330.9 billion in 2004.
However, compared to mature markets, the PRC market is still relatively undeveloped. The following table sets forth the amounts of insurance premiums and mutual funds under management
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and the market capitalization of domestic listed equity securities and their respective ratios to GDP, of PRC, Hong Kong and Ñve other mature economies as of December 31, 2004: Mutual funds Insurance under Market premium management capitalization* % of % of % of Country/Region GDP Amount GDP Amount GDP Amount GDP (in billions of US$, except percentages) PRC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,653.1 52.2 3.2 40.0 2.4 447.7 27.1 Germany ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,676.8 190.8 7.1 617 23.1 1,194.5 44.6 Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211.0 15.3 7.2 35 16.6 861.5 408.2 Australia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 540.6 49.4 9.1 322 59.6 776.4 143.6 Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,024.1 492.4 9.8 440 8.8 5,844.7 116.3 United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,094.4 1,097.8 10.9 7,563 74.9 16,323.5 161.7 United KingdomÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,499.7 294.8 19.7 530 35.3 2,865.2 191.1
Source: China Statistic Yearbook 2005, China Securities and Futures Statistical Yearbook 2005, EIU, Cerulli Global Update.
Note:
* Market capitalization is provided as an indicator of the size of the investment banking business.
As the PRC economy continues to develop, we expect customer demand for Ñnancial products and services to become more diverse and sophisticated. Although bank loans remain a major source of Ñnancing in the PRC, the development of capital markets provides alternative solutions for PRC companies to satisfy their Ñnancing needs. In addition, we expect demand for asset management and insurance products and services to increase with continued wealth accumulation.
THE HONG KONG BANKING INDUSTRY
We conduct commercial banking activities principally through BOCHK Holdings, a Hong Kong- based commercial banking group. BOCHK is the principal operating subsidiary of BOCHK Holdings. Set out below are some general characteristics of the Hong Kong banking industry.
Overview
The banking industry in Hong Kong maintains a three-tier system of authorized institutions, consisting of licensed banks, restricted license banks and deposit-taking companies. The Hong Kong Monetary Authority is the licensing authority for all three types of authorized institutions. The Hong Kong Monetary Authority is primarily responsible for the supervision of authorized institutions incorporated in Hong Kong, whereas authorized institutions incorporated outside Hong Kong are subject to both the Hong Kong Monetary Authority and home country supervision. Hong Kong dollar bank notes are issued by three commercial banks, namely, BOCHK, The Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank (Hong Kong) Limited.
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INDUSTRY OVERVIEW
Competitive Landscape of the Banking Industry in Hong Kong
As of December 31, 2005, there were 199 authorized institutions, of which 133 were licensed banks, 33 were restricted license banks and 33 were deposit-taking companies. The deposits from customers, loans and advances to customers and total assets of authorized institutions as of December 31, 2005 as calculated in accordance with Hong Kong GAAP were as follows:
Deposits Loans & from % of advances to % of % of customers(1) total customers(2) total Total assets total (in millions of HK$, except percentages) Licensed banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,043,434 99.4% 2,249,990 97.3% 7,100,799 98.0% Restricted license banksÏÏÏÏÏÏÏ 19,463 0.5 38,889 1.7 110,609 1.5 Deposit-taking companies ÏÏÏÏÏ 5,034 0.1 23,001 1.0 36,758 0.5 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,067,931 100.0% 2,311,880 100.0% 7,248,166 100.0%
Source: HKMA Monthly Statistical Bulletin (March 2006).
(1) Amounts are for Hong Kong dollar and foreign currency deposits (unadjusted for foreign currency swap deposits).
(2) Amounts are for Hong Kong dollar and foreign currency loans and advances.
Only licensed banks may conduct full banking services, including operating current and savings accounts and accepting deposits of any size and maturity from the public and paying or collecting checks drawn, or paid in, by customers. All licensed banks are required to be members of the Hong Kong Association of Banks. BOCHK is a licensed bank.
Restricted license banks, which are principally engaged in merchant banking and capital markets activities, may take call, notice or time deposits from the public in amounts of HK$500,000 or above without restriction on maturity.
Deposit-taking companies, which are mostly owned by or otherwise associated with banks and which may engage in a range of specialized activities, including consumer Ñnance and securities business, are restricted to taking deposits of HK$100,000 or above with an original term of at least three months.
The following table sets out the deposits from customers, loans and advances to customers and total assets of major licensed banks in Hong Kong as of December 31, 2005 as calculated in accordance with Hong Kong GAAP:
Net loans Deposits from and advances Total customers to customers assets (in millions of HK$) HSBC Holdings plc (excl. Hang Seng Bank)(1)ÏÏÏÏÏÏÏÏÏ 929,909 391,140 1,164,684 BOCHK Holdings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 633,091 335,355 822,105 Hang Seng BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 430,995 260,680 580,820 Standard Chartered Bank (Hong Kong) LimitedÏÏÏÏÏÏÏÏ 247,663 168,876 337,160 Bank of East AsiaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,895 144,837 238,799
Source: Banks' annual reports 2005.
(1) Amounts are for Hong Kong operations and exclude Hang Seng Bank.
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INDUSTRY OVERVIEW
Recent Industry Trends
Consolidation among Banks in Hong Kong
The Hong Kong banking industry has witnessed a number of consolidation cases in recent years where banks sought to increase their size and market position in Hong Kong through mergers and acquisitions. Examples include DBS Group Holdings Ltd.'s acquisition of Dao Heng Bank Group Limited in 2001, CITIC Ka Wah Bank Limited's acquisition of the Hongkong Chinese Bank Limited in 2001, Wing Hang Bank Limited's acquisition of Chekiang First Bank Limited, Industrial and Commercial Bank of China (Asia) Limited's acquisition of Fortis Bank Asia HK in 2003 and Fubon Financial Holding Co., Ltd's acquisition of International Bank of Asia Limited in 2004.
Increased Opportunities in the PRC
Hong Kong banks with a strong PRC presence have seen rapid growth in their PRC-related business in recent years. As one of the fastest growing economies in the world, the PRC presents increasing opportunities for Hong Kong banks to provide services and take advantage of both the inÖow of international business into the PRC and the opening of the domestic market to international Ñnancial institutions. These opportunities include:
¬ Mainland and Hong Kong Closer Economic Partnership Arrangement. Under CEPA, banks from Hong Kong with total assets of US$6 billion or more may apply to open branches in the PRC. See ""Ì Industry Trends Ì Increasing Foreign Competition''. Hong Kong incorporated banks are no longer required to set up representative oÇces in the PRC prior to establishing a branch in the PRC. Branches of Hong Kong banks operating in the PRC may apply to conduct Renminbi business in the PRC after operating proÑtably for more than two years; and
¬ Renminbi Business in Hong Kong. Since February 25, 2004 when PBOC started to provide Renminbi clearing services for banks in Hong Kong through BOCHK, the licensed banks in Hong Kong have been able to engage in certain types of Renminbi business, including deposit-taking, Renminbi currency exchange services, remittance in Renminbi and oÅering debit and credit cards denominated in RMB. RMB checking account service was launched on March 6, 2006.
THE MACAU BANKING INDUSTRY
We conduct commercial banking activities in Macau primarily through our Macau branch. According to data published by the Macau government, as of June 30, 2005, our Macau branch was the largest bank operating in Macau in terms of total assets. We are one of the two bank note- issuing banks in Macau and the only bank providing Hong Kong dollar bills and Renminbi clearing services to banks in Macau. Set out below are some general characteristics of the Macau banking industry.
Overview
The banking sector in Macau plays an important role in the Macau economy. The Monetary Authority of Macau (AMCM) was established in 1989 to supervise the Ñnancial system of Macau. Licenses to operate Ñnancial institutions in Macau are granted on a case by case basis with the special and prior authorization of the Chief Executive of Macau SAR, based on advice from the AMCM.
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INDUSTRY OVERVIEW
Competitive Landscape of the Banking Industry in Macau As of September 30, 2005, there were 27 banks operating in Macau, including four banks headquartered in Macau (including the postal savings oÇce), eight locally incorporated subsidiaries of overseas banks and 15 branches of overseas banks. With the exception of three oÅ-shore banks, all the banks in Macau are retail banks with full banking license.
Recent Industry Trends Rapid Growth in Line with Economic Growth The Macau economy has grown rapidly in recent years, primarily due to the expansion in the gaming and tourism sector as a result of the policy initiatives taken by the government. According to the Statistics and Census Service (DSEC) of Macau SAR, nominal GDP in Macau increased from 49.7 billion Macau patacas to 82.9 billion Macau patacas between 2001 and 2004, representing an average annual growth rate of 14.5%. The strong growth of the economy has resulted in an increase in proÑtability and signiÑcant improvement in asset quality of banks. According to the AMCM, operating proÑts of the banking industry increased 44.2% to 1.4 billion Macau patacas in 2004. The revival in the local property market in 2004 contributed to the reduction of the non-performing loans ratio of the banking industry from 11.6% in 2003 to 3.3% in 2004.
Increased Opportunities in Connection with the PRC The opening up and strong growth of the PRC economy presents opportunities for Macau banks. Beginning in September 2004, the PBOC, through our Macau branch as its agent, provides clearing services for banks in Macau that engage in certain types of personal Renminbi business, including Renminbi deposit taking, Renminbi currency exchange services, remittance in Renminbi and oÅering Renminbi-denominated debit and credit cards. The continued growth in demand for an increasing range of Renminbi services is expected to provide additional opportunities for commercial banks operating in Macau.
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SUPERVISION AND REGULATION
PRC SUPERVISION AND REGULATION
Principal Regulators LR19A.42(57)
Prior to April 2003, the PBOC acted both as the PRC central bank and as the principal supervisor and regulator of the PRC banking industry. In April 2003, the CBRC was established as the primary banking industry regulator and assumed the majority of the PBOC's regulatory functions. The PBOC retained its role as the central bank.
The CBRC
Functions and Powers
The CBRC is the primary supervisory authority and is responsible for the regulation of banking institutions operating in the PRC, including commercial banks, other deposit-taking institutions and policy banks, as well as certain non-banking Ñnancial institutions under its authority such as asset management companies, trust and investment companies, Ñnance companies and Ñnancial leasing companies. According to the PRC Banking Regulatory Law, the main responsibilities of the CBRC include:
¬ setting rules and regulations governing banking institutions and their activities;
¬ regulating the establishment, change and dissolution of banking institutions, as well as granting banking licenses for commercial banks and their branches;
¬ regulating the business activities of banking institutions, including the products and services they oÅer;
¬ setting qualiÑcation requirements for, and approving or overseeing the nomination of, directors and senior management personnel of banking institutions;
¬ setting guidelines and standards for internal controls and corporate governance of, and disclosure requirements for, banking institutions;
¬ conducting on-site inspection and oÅ-site surveillance of the business activities of banking institutions;
¬ monitoring the Ñnancial condition of banking institutions, including establishing standards or requirements for capital adequacy, asset quality and other Ñnancial metrics; and
¬ imposing corrective and punitive measures for violations of applicable banking regulations.
Examination and Supervision
The CBRC, through its head oÇce in Beijing and oÇces in each province, autonomous region and municipality, monitors the operations of commercial banks and their branches through on-site inspections and oÅ-site surveillance. On-site inspections generally include visiting the banks' premises, interviewing bank employees and, for signiÑcant issues relating to banks' operations or risk management, senior management and directors as well as reviewing documents and materials maintained by the banks. The CBRC also conducts oÅ-site surveillance by reviewing Ñnancial and other reports regularly submitted by the banks. If a banking institution is not in compliance with a regulation, in certain circumstances, the CBRC has the power to issue corrective and punitive measures, including Ñnes, suspension of certain business activities, restrictions on dividend distributions and asset transfers, and other penalties.
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SUPERVISION AND REGULATION
The PBOC As the central bank of the PRC, the PBOC is responsible for formulating and implementing monetary policies and maintaining the stability of the Ñnancial markets. According to the PRC People's Bank of China Law, the PBOC is empowered to:
¬ formulate and implement monetary policies by establishing benchmark interest rates, setting the deposit reserve ratios for commercial banks, extending loans to commercial banks, accepting discounted bills and conducting open market operations;
¬ issue PRC treasury bills and other government bonds to Ñnancial institutions, as the agent of the MOF;
¬ regulate the domestic inter-bank lending market and the trading by institutional investors in the inter-bank bond market of debt instruments issued by the PRC Government, its agencies and Ñnancial institutions;
¬ set foreign exchange rate policies and manage China's foreign exchange reserves and gold reserves;
¬ regulate and examine foreign exchange activities; and
¬ establish anti-money-laundering guidelines and monitor fund transfers for compliance with anti-money laundering regulations.
Licensing Requirements Basic Requirements The PRC Commercial Banking Law deÑnes the business scope of commercial banks and establishes licensing standards and other requirements. The establishment of a commercial bank requires the CBRC's approval and issuance of an operating license. In general, the CBRC will not approve an application for establishing a commercial bank unless certain conditions are satisÑed, among others:
¬ the articles of association of the proposed commercial bank comply with relevant requirements of the PRC Commercial Banking Law and the PRC Company Law;
¬ the registered capital of the proposed bank meets the minimum requirement under the PRC Commercial Banking Law. The minimum registered capital for a national commercial bank, city commercial bank and rural commercial bank is RMB1,000 million, RMB100 million and RMB50 million, respectively; and
¬ the directors and senior management of the proposed bank must possess the requisite professional skills and working experience.
Fundamental Changes Commercial banks are required to obtain the CBRC's approval if they undergo any fundamental change, including, among others:
¬ change of name;
¬ change of registered capital;
¬ change of the principal place of business for the head oÇce or for a branch;
¬ change of business scope as set forth in the business license;
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SUPERVISION AND REGULATION
¬ any purchase of an equity interest in the commercial bank that results in the purchaser becoming a holder of 5% or more of the commercial bank's shares and any change of shareholders holding 5% or more of the commercial bank's total capital or shares;
¬ amendment to the articles of association; and
¬ merger or demerger.
Establishment of Branches
Domestic Branches
A commercial bank must apply to the CBRC or its local oÇces for approval and issuance of an operating license to establish a branch. A branch must have suÇcient operating funds commensurate with its scale and must meet other operating requirements. The sum of the operating funds provided to all branches of a bank may not exceed 60% of the total capital of the commercial bank.
Overseas Branches
The establishment of overseas branches by PRC commercial banks is subject to the CBRC's approval in addition to all applicable local regulations. In general, the CBRC will not approve an application for establishment of an overseas branch, unless the applicant bank has been approved to engage in foreign exchange business, has engaged in foreign exchange business for more than 3 years and has a legitimate source of foreign exchange funds. In addition, the applicant bank is required to have a minimum of RMB80 million equivalent of foreign currency-denominated assets.
Ownership and Shareholder Restrictions
Under the current ownership restrictions imposed on investment in commercial banks in the PRC, prior approval from the CBRC is required for any person or entity to hold 5% or more of the registered capital or the total issued shares of a commercial bank.
The Corporate Governance Guidelines impose certain additional requirements on shareholders of joint stock commercial banks. For example:
¬ if a joint stock commercial bank encounters liquidity problems, where applicable, its shareholders are required to repay immediately all outstanding loans, whether due or not, to the bank;
¬ if a joint stock commercial bank fails to meet the required capital adequacy ratios as calculated in accordance with the formula promulgated by the PBOC and CBRC and based on PRC GAAP, its shareholders are obligated to endorse measures determined by the bank's board of directors that are aimed at increasing the capital adequacy level, regardless of whether or not such measures are in the best interests of shareholders; and
¬ if shareholders of a joint stock commercial bank fail to repay outstanding loans when due, their voting rights will be subject to certain restrictions for the period during which the relevant loans are overdue.
Shareholders of a joint stock commercial bank may not use their shares in the bank as collateral for obtaining loans from such bank. Moreover, there are legal limitations on the ability of
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SUPERVISION AND REGULATION
shareholders of a joint stock commercial bank to pledge their shares in the bank to any lender, including:
¬ if a shareholder of a joint stock commercial bank pledges its shares in the bank as collateral for itself or any other third party, it must give prior notice to the board of directors of the bank in which it holds shares; and
¬ the shareholder may not pledge its shares to any lender if the outstanding amount of the bank's loans to a shareholder exceeds the audited value of that shareholder's equity in the bank for the immediately preceding year, and if that shareholder has not pledged any government bonds or bank deposit certiÑcates as collateral for the outstanding loans.
Regulation of Principal Banking Activities
Lending Activities
The PRC Commercial Banking Law requires commercial banks to take into consideration government macroeconomic policies in making lending decisions. Accordingly, commercial banks are encouraged to restrict their lending to borrowers in certain industries in accordance with relevant government policies.
In order to control credit risks associated with credit operations, commercial banks are required to, among others: (i) establish a strict and centralized system for credit risk management; (ii) set out standard operating procedures; and (iii) arrange competent personnel at each stage of credit operations.
In addition, commercial banks are required to control market risk associated with loans and credit granted to various industry sectors and customers. The CBRC has issued several guidelines and measures to control market risk associated with group loans, real estate loans, automobile loans and loans to small and medium-sized enterprises. For example, under the Risk Management Guidelines for Credit Extension by Commercial Banks to Group Customers, a commercial bank is restricted from extending additional credit to a group customer if the total credit granted to the group customer accounts for 15% or more of the bank's net regulatory capital. Under the Administrative Measures on Automobile Loans, the amount of loans for personal-use automobiles cannot exceed 80% of the purchase price of such automobiles, while for commercial automobiles and second-hand automobiles, the amount of loans cannot exceed 70% and 50%, respectively, of the purchase price of such automobiles.
Foreign Exchange
Under the Administrative Measures of Foreign Exchange Business of Banks, commercial banks seeking to engage in foreign exchange settlement business are required to obtain prior approval from the SAFE and the PBOC. Commercial banks are also required to report to the SAFE on a regular basis, including submitting documents, such as a balance sheet of assets and liabilities denominated in foreign currencies, an income statement and other Ñnancial information. In addition, foreign exchange transactions under the capital account are subject to foreign exchange controls and require SAFE approval.
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SUPERVISION AND REGULATION
Securities and Asset Management Businesses Commercial banks in the PRC are generally prohibited from trading and underwriting equity securities. Commercial banks in the PRC are permitted to:
¬ underwrite and deal in PRC Government bonds and Ñnancial institutions bonds and commercial paper issued by qualiÑed non-Ñnancial institutions;
¬ act as agents in transactions involving securities, including bonds issued by the government, corporate entities and Ñnancial institutions;
¬ provide institutional and individual investors with comprehensive asset management advisory services;
¬ act as Ñnancial advisers in connection with large infrastructure projects, mergers and acquisitions, and bankruptcy reorganizations; and
¬ act as custodians for asset management companies and investment funds. Under the Trial Administrative Measures on Fund Management Companies Owned by Commercial Banks, the Big Four and the other national commercial banks are permitted to establish or acquire fund management companies, upon approval by the CBRC and the CSRC.
Insurance Commercial banks in the PRC are not permitted to underwrite insurance policies, but are permitted to act as agents to sell insurance products through their distribution networks. Commercial banks seeking to provide insurance agency services are required to comply with any applicable rules issued by the CIRC, the regulator of the PRC insurance industry.
Proprietary Investments In general, commercial banks in the PRC are prohibited from making domestic investments other than in debt instruments issued by the PRC Government, Ñnancial institutions, commercial paper issued by qualiÑed non-Ñnancial institutions, and derivative products. Unless approved by the PRC Government, commercial banks are prohibited from engaging in trust investment business, investing in real estate other than for their own use, investing in domestic corporate bonds, and making equity investments in entities other than commercial banks in the PRC.
Derivatives Under the Derivative Business Measures, commercial banks in the PRC seeking to conduct a derivatives business must obtain prior approval from the CBRC by meeting relevant qualiÑcation requirements, including, among others: (i) the establishment of a sound risk management system that monitors risk on a real-time basis; (ii) a sound internal control system; and (iii) an eÅective derivatives transaction processing system. Banks conducting derivatives business are required to strictly implement risk exposure authorization limits and stop loss limits.
Prudent Operating Requirements Loan ClassiÑcation According to the Loan ClassiÑcation Principles, all commercial banks are currently required to classify loans under a Ñve-category classiÑcation system based on the estimated likelihood of repayment and loss. The primary factors for evaluating the likelihood of repayment include the borrower's cash Öow, Ñnancial condition, credit history and collateral. Prior to the adoption of the
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SUPERVISION AND REGULATION
Ñve-category classiÑcation system, loans were generally classiÑed into four categories, namely normal, overdue, idle and loss. The following table sets forth the deÑnition of each category under the Loan ClassiÑcation Principles:
Category ClassiÑcation Pass ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans where the borrower has been performing its obligations and there are no signs that the borrower will default on principal or interest. Special-mentionÏÏÏÏÏÏÏ Loans where the borrower is currently able to make principal and interest payments, but is experiencing factors that may be prejudicial to repayment. Substandard ÏÏÏÏÏÏÏÏÏÏ Loans where the borrower is clearly experiencing factors jeopardizing its ability to meet payment obligations and it is clear that the borrower's income from its ordinary course of business does not allow it to make principal and interest payments in full. In addition, these loans may result in a loss even after the enforcement of collateral. Doubtful ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans where the borrower is unable to meet its payment obligations. These loans will result in a material loss even after the enforcement of collateral. Loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans where no, or only a minimal amount of, principal and interest are collectible after exhausting all collection eÅorts and all available legal proceedings. The CBRC monitors the quality of loans of commercial banks through on-site inspections or oÅ- site monitoring activities or both.
Provision Requirements Under the Provision Guidelines, commercial banks in the PRC are required to make provisions based on a reasonable estimate of the probability of loss on a prudent and timely basis. According to the Loan ClassiÑcation Principles, a loan classiÑed as substandard, doubtful or loss is considered to be non-performing. Allowance for impairment losses consists of general allowance, speciÑc allowance and special allowance. Banks are required to make provisions for impairment losses on a quarterly basis, and to have a general allowance of not less than 1% of the total loans outstanding as of December 31 of any year. The guidance on speciÑc allowance is as follows: for special- mention loans, 2%; for substandard loans, 25%; for doubtful loans, 50%; and for loss loans, 100%. For substandard and doubtful loans, banks have the discretion to maintain their speciÑc allowance for impairment losses at levels ranging from 20% below the guidance level to 20% above the guidance level, depending on the banks' own assessment of the risks relating to the relevant loans. Commercial banks may make special allowance on a quarterly basis in accordance with special risk factors (including risks in association with certain industries and countries), probable loss rates and historical experience. The allowance for impairment losses derived pursuant to the Provision Guidelines, however, is not used for our Ñnancial reporting purposes. The allowance for impairment losses disclosed in the prospectus is calculated in accordance with IAS 39. Pursuant to Administrative Measures on Allowances for Impairment Losses and a subsequent notice issued by the MOF, commercial banks and certain other Ñnancial institutions in the PRC are required to maintain adequate allowance for impairment losses against their assets. In addition to the allowance for impairment losses, Ñnancial institutions should also set up a general reserve through appropriation of proÑt after tax, to cover their potential losses that are not yet identiÑed. The
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SUPERVISION AND REGULATION
general reserve forms part of the equity of the Ñnancial institutions. Financial institutions are required to assess the risk proÑle of their assets in determining the general reserve level. The general reserve is made to cover the assets in respect of which the Ñnancial institutions bear risk, and is in principle not less than 1% of the aggregate amount of those assets before allowance for impairment losses as at the balance sheet date. Financial institutions are not allowed to make proÑt distribution to shareholders until adequate allowance for impairment losses and general reserve have been made. If a Ñnancial institution cannot meet the requirement of maintaining adequate general reserves as stipulated in these MOF regulations and notices as of July 1, 2005, the Ñnancial institution is required to take necessary steps to ensure that such requirement can be met in approximately three years but not more than Ñve years, from July 1, 2005. As of December 31, 2005, our balance of general reserve for such purpose was RMB2,603 million.
Capital Adequacy Ratio
According to the PRC Commercial Banking Law and the New Capital Adequacy Regulations, LR8.21A(2)(b) PRC commercial banks must maintain a minimum capital adequacy ratio of 8% and a minimum core capital adequacy ratio of 4%. As calculated in accordance with the formula promulgated by the CBRC, as of December 31, 2004 and 2005, our capital adequacy ratio was 10.04% and 10.42%, respectively, and our core capital adequacy ratio was 8.48% and 8.08%, respectively. Prior to March 1, 2004, a commercial bank's capital adequacy ratios were calculated as follows:
Net regulatory capital Capital adequacy ratio • On- and oÅ-balance-sheet risk-weighted assets Core capital Core capital adequacy ratio • On- and oÅ-balance-sheet risk-weighted assets The New Capital Adequacy Regulations set forth a new method for calculating the capital adequacy ratios for PRC commercial banks and provide a transition period, ending on December 31, 2006, for PRC commercial banks to meet their capital adequacy requirements progressively. However, according to the Guidelines on Bank of China and China Construction Bank, we are required to be in strict compliance with the New Capital Adequacy Regulations from 2004 and to maintain the capital adequacy ratio at 8% or above thereafter. See ""Ì Special Requirements Applicable to Us''. The new regime for calculating capital adequacy can be summarized as follows:
(Regulatory capital ¿ capital deductions) Capital adequacy ratio • (Risk-weighted assets ° (12.5 x market risk capital)) (Core capital ¿ core capital deductions) Core capital adequacy ratio • (Risk-weighted assets ° (12.5 x market risk capital)) In the preceding formula:
¬ Regulatory capital includes both core capital and supplementary capital.
¬ Core capital includes paid-in capital, capital reserves, surplus reserves, retained earnings and minority interests.
¬ Supplementary capital includes up to 70% of the reserve for revaluation, general provisions, preference shares, qualifying convertible bonds and qualifying long-term subordinated debt.
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SUPERVISION AND REGULATION
¬ Capital deductions include goodwill, 100% of equity investments in non- consolidated Ñnancial institutions, and 100% of equity investments in non-Ñnancial institutions and capital investment in real estate not for self-use.
¬ Core capital deductions include goodwill, 50% of equity investments in non- consolidated Ñnancial institutions, and 50% of equity investments in non-Ñnancial institutions and capital investment in real estate not for self-use.
¬ Risk-weighted assets refer to the assets calculated by multiplying the value of on- and oÅ-balance-sheet assets by their corresponding risk weightings, after taking into account risk-mitigating factors.
¬ Market risk capital refers to the capital reserve that a bank is required to maintain for the market risks relating to its assets. Compared to the capital adequacy ratio requirements prior to March 1, 2004, the new requirements under the New Capital Adequacy Regulations take into account market risks. The following table sets forth the current risk weightings for diÅerent assets under the New Capital Adequacy Regulations. In practice, market risks are taken into consideration in the calculation of capital adequacy ratios from January 1, 2005, pursuant to Yinjianbanfa ®2004© No. 374 ""Notice from China Banking Regulatory Commission on Guidance for the Calculation of Capital Requirement of Market Risks for Commercial Banks''.
Risk weighting of on-balance-sheet assets Items Risk weightings a. Cash i. Cash in vaultÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% ii. Gold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% iii. Deposits at the PBOC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% b. Claims on central government and central bank i. Claims on the PRC central government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% ii. Claims on the PBOC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% iii. Claims on the governments or central banks of other countries or jurisdictions, where the ratings for such countries or jurisdictions are AA¿ or higher(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% iv. Claims on the central governments or central banks of other countries or jurisdictions, where the ratings for such countries or jurisdictions are below AA¿ (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% c. Claims on public-sector entities (not including their aÇliated commercial enterprises) i. Claims on public-sector entities invested in by central governments of other countries or jurisdictions, where the ratings for such countries or jurisdictions are AA¿ or higher(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% ii. Claims on public-sector entities invested in by central governments of other countries or jurisdictions, where the ratings for such countries or jurisdictions are below AA¿ (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% iii. Claims on domestic public-sector entities invested in by the PRC central governmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% iv. Claims on other public-sector entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100%
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Risk weighting of on-balance-sheet assets Items Risk weightings
d. Claims on domestically incorporated Ñnancial institutions i. Claims on policy banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% ii. Claims on asset management companies invested in by the PRC central government 1. Claims on debts issued by the asset management companies by way of private placements to purchase the state-owned banks' non-performing loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 2. Other claims on asset management companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% iii. Claims on domestically incorporated commercial banks 1. With an original maturity of four months or shorterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 2. With an original maturity over four months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20% e. Claims on Ñnancial institutions incorporated in other countries or jurisdictions i. Claims on commercial banks or securities Ñrms where the ratings for such countries or jurisdictions are AA¿ or higher(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20% ii. Claims on commercial banks or securities Ñrms where the ratings for such countries or jurisdictions are below AA¿ (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% iii. Claims on multilateral development banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% iv. Claims on other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% f. Claims on enterprises and individuals i. Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% ii. Other claims on enterprises and individuals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% g. Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100%
(1) These ratings refer to credit ratings of Standard & Poor's or the equivalent thereof.
Commercial banks in the PRC are required to report to the CBRC their capital adequacy ratios quarterly on a non-consolidated basis and every six months on a consolidated basis. In addition, the CBRC conducts on-site inspections and oÅ-site monitoring activities to monitor commercial banks' capital adequacy ratios. The CBRC classiÑes commercial banks into three categories based on their respective capital adequacy ratios:
Capital Adequacy Core Capital Categories Ratio Adequacy Ratio Commercial banks with adequate capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն8% and Ն4% Commercial banks with inadequate capitalÏÏÏÏÏÏÏÏÏÏÏÏÏ G8% but Ն4% or G4% but Ն2% Commercial banks with severely inadequate capital ÏÏÏÏ G4% or G2%
The CBRC oversees each commercial bank individually in accordance with its capital adequacy ratio calculated in accordance with the formula promulgated by the PBOC and the CBRC and based on PRC GAAP. For commercial banks with inadequate capital, unless a waiver from the CBRC is obtained, the CBRC will take relevant corrective measures, including, among others, issuing regulatory opinions, requiring such bank to work out a feasible plan to eÅectively raise its capital adequacy ratios, reducing the scale of risk-weighted assets and/or restricting dividend and other income distribution. For commercial banks with severely inadequate capital, the CBRC may, in addition to the above corrective measures, require the removal of the bank's senior management, take over the bank as a receiver pursuant to relevant laws, facilitate the restructuring of the bank or, in the most severe cases, revoke the bank's Ñnancial institution permit.
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We are required by the CBRC to maintain a minimum core capital adequacy ratio of 4.0% and a capital adequacy ratio of 8.0% beginning in 2004. As a result of the transactions and signiÑcant Ñnancial support provided by the PRC Government described under ""Our Restructuring'', our core capital adequacy ratio has been enhanced. As of December 31, 2004 and 2005, our core capital ratio was 8.48% and 8.08%, respectively, and our capital adequacy ratio was 10.04% and 10.42%, respectively. We do not, however, expect the PRC Government to provide additional Ñnancial support to us. In particular, to the extent we continue to experience signiÑcant credit losses on our loan portfolio, our capital adequacy position may be severely eroded.
The Basel Capital Accord, or Basel I, was introduced by the Basel Committee on Banking Supervision, or Basel Committee, in 1988. Basel I is a capital measurement system for banks that provides for the implementation of a credit risk measurement framework with a minimum capital standard of 8%. Since 1999, the Basel Committee has issued certain proposals for a New Capital Adequacy Framework, or Basel II, to replace Basel I. Basel II retains the key elements of Basel I, including the general requirement for banks to hold total capital equivalent to at least 8% of their risk-weighted assets. Basel II provides for standards for supervisory review of an institution's internal assessment process and capital adequacy and makes use of eÅective disclosure to strengthen market discipline. Basel II will be available for implementation in its entirety as of the end of 2007. The CBRC has advised that the New Capital Adequacy Regulations are based on Basel I while taking into account certain aspects of Basel II.
Subordinated Debt and Subordinated Bonds
Since November 2003, PRC commercial banks have been permitted to issue subordinated debt, subject to the approval of the CBRC. A PRC commercial bank may include such Ñxed-term subordinated debt in the bank's supplementary capital, provided that minimum term of the subordinated debt is Ñve years and the proceeds are not used to oÅset a bank's operating losses. Subordinated debt can be issued only through private placements to certain institutions with legal person status. Moreover, subordinated debt cannot be issued to other commercial banks.
Since June 2004, PRC commercial banks have been permitted to issue subordinated bonds. A PRC commercial bank may, upon approval by the CBRC, include such subordinated bonds in the bank's supplementary capital. Subordinated bonds can be issued either in a public oÅering in the inter-bank bond market or in a private placement. A PRC commercial bank may not hold an aggregate amount of subordinated bonds issued by other banks in excess of 20% of its core capital.
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Liquidity and Other Operating Ratios
Before the Trial Regulations on Core Regulatory Ratios taking eÅect, commercial banks are required to calculate liquidity and other operating ratios in accordance with the PRC Commercial Banking Law and PBOC regulations issued in 1996. The following table sets forth, as of the dates indicated, certain required liquidity and loan-to-deposit ratios for commercial banks in the PRC under relevant regulations eÅective as of December 31, 2005, as well as the liquidity and loan-to- deposit ratios of our domestic banking operations. Unless otherwise indicated, such ratios are calculated in accordance with the formula promulgated by the PBOC in 1996 and based on our balance sheet data prepared in accordance with then applicable PRC GAAP:
As of December 31, Requirements 2003 2004 2005 Liquidity ratios Renminbi current assets to Renminbi current liabilities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն25% 33.8% 35.3% 48.9% Foreign currency current assets to foreign currency current liabilities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն60%(2) 72.2% 78.6% 87.4% Loan to deposit ratios Renminbi loans to Renminbi deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ͨ75% 68.9% 59.6% 51.7% Foreign currency loans to foreign currency deposits ͨ85% 77.8% 67.9% 70.4%
(1) Calculated on the basis of the banking operations of our bank.
(2) This requirement has been reduced to Ն25% from January 1, 2006.
The following table sets forth, as of the dates indicated, other operating ratios for commercial banks under the relevant PRC regulations eÅective as of December 31, 2005, together with the actual ratios for our domestic banking operations calculated in accordance with the formula promulgated by the PBOC in 1996 and based on our balance sheet data prepared in accordance with then applicable PRC GAAP:
As of December 31, Requirements 2003 2004 2005 Loan concentration ratios Total outstanding loans to one single customer to net regulatory capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ͨ10% (1) 3.4% 4.7% Total loans granted to top ten customers to net regulatory capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ͨ50% (1) 25.4% 25.6% Inter-bank ratios Total Renminbi inter-bank borrowings from other banks and Ñnancial institutions to total Renminbi depositsÏÏÏÏÏ ͨ4% 0.1% 0.1% 0.8% Total Renminbi inter-bank loans to other banks and Ñnancial institutions to total Renminbi depositsÏÏÏÏÏÏÏÏÏ ͨ8% 0.3% 0.3% 0.2% Reserve ratios Renminbi reserve deposits with the PBOC plus Renminbi cash to Renminbi deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն5% 11.6% 11.2% 10.3% Foreign currency deposits with other Ñnancial institutions plus cash in foreign currency to total deposits in foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն5% 15.6% 13.4% 16.9%
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(1) Our net regulatory capital as of December 31, 2003 was calculated in accordance with PBOC guidelines that were replaced by the New Capital Adequacy Regulations in March 2004.
On January 1, 2006, the Trial Regulations on Core Regulatory Ratios issued by the CBRC took eÅect. These regulations have amended certain of the above mentioned ratios and introduced certain new liquidity and other operating ratios. According to a public announcement of the CBRC, however, these regulations are still subject to necessary amendments and will oÇcially come into force in 2007.
Deposit Reserves with the PBOC PRC regulations require all commercial banks to maintain with the PBOC a deposit reserve, which shall amount to a certain percentage of the bank's total outstanding customer deposits. A commercial bank's current deposit reserve ratio for Renminbi-denominated deposits varies in accordance with its capital adequacy ratio calculated in accordance with the formula promulgated by the CBRC and based on PRC GAAP. If a commercial bank's capital adequacy ratio is 4% or above, its current deposit reserve ratio for Renminbi-denominated deposits is required to be 7.5%; otherwise, its current deposit reserve ratio is required to be 8%. For foreign currency-denominated deposits, the current deposit reserve ratio is 3% of the bank's total outstanding foreign currency- denominated customer deposits denominated in foreign currencies. There is no deposit insurance system in the PRC.
Interest Rates on Loans and Deposits Banks are required to set interest rates on Renminbi-denominated loans and deposits within permitted bands of the benchmark rates set by the PBOC. There are currently diÅerent PBOC benchmark rates set for diÅerent types of business. Commercial banks are allowed to set their own interest rates within the ranges as described below:
Product Since October 29, 2004 As of October 28, 2004 Renminbi Loans Term of less than one year ÏÏÏ No upper limit but cannot be 10% lower to 70% higher than lower than 90% of the PBOC the PBOC benchmark rate benchmark rate Term of one to Ñve yearsÏÏÏÏÏ No upper limit but cannot be 10% lower to 70% higher than lower than 90% of the PBOC the PBOC benchmark rate benchmark rate Term of over Ñve years ÏÏÏÏÏÏ No upper limit but cannot be 10% lower to 70% higher than lower than 90% of the PBOC the PBOC benchmark rate benchmark rate Discounted billsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Must be set no lower than the Must be set no lower than the PBOC's rediscount rate but PBOC's rediscount rate but cannot be set above the cannot be set above the lending rate band applicable to lending rate band applicable to loans with a comparable term loans with a comparable term Mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed by the PBOC as of Fixed by the PBOC March 16, 2005. No upper limit but cannot be lower than 90% of the PBOC benchmark rates since March 17, 2005
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Product Since October 29, 2004 As of October 28, 2004 Automobile and other loans to individualsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ No upper limit but cannot be 10% lower to 70% higher than lower than 90% of the PBOC the PBOC benchmark rate benchmark rate Foreign Currency Loans ÏÏÏÏÏ Not subject to restrictions Not subject to restrictions Deposits Renminbi deposits other than negotiated deposits ÏÏÏÏÏÏÏÏ No lower limit but cannot be Fixed by the PBOC higher than the PBOC benchmark rate Negotiated deposits(1) ÏÏÏÏÏÏÏ Not subject to restrictions Not subject to restrictions Foreign currency deposits denominated in U.S. dollars, Euros, Japanese yen and Hong Kong dollars in an amount less than US$3 million, other than inter-bank deposits or deposits by non-PRC residentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ No lower limit but cannot be No lower limit but cannot be higher than the ceiling set by higher than the ceiling set by the PBOC from time to time the PBOC from time to time All other foreign currency deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Not subject to restrictions Not subject to restrictions
(1) Negotiated deposits are deposits by insurance companies of RMB30 million or more, or deposits by the National Council for Social Security Fund of RMB500 million or more, both with a term greater than Ñve years, or deposits by China Post of RMB30 million or more with a term longer than three years. The following table sets forth the PBOC benchmark rates as of the dates indicated:
As of December 31, 1997 1998 1999 2000 2001 2002 2003 2004 2005 Interest Rates on Loans Short-term loans Six months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.65% 6.12% 5.58% 5.58% 5.58% 5.04% 5.04% 5.22% 5.22%(1) One year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.64% 6.39% 5.85% 5.85% 5.85% 5.31% 5.31% 5.58% 5.58%(1) Medium-and long-term loans Three years or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.36% 6.66% 5.94% 5.94% 5.94% 5.49% 5.49% 5.76% 5.76%(1) Five years or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.90% 7.20% 6.03% 6.03% 6.03% 5.58% 5.58% 5.85% 5.85%(1) Over Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.53% 7.56% 6.21% 6.21% 6.21% 5.76% 5.76% 6.12% 6.12%(1) Rediscount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) 3.96% 2.16% 2.16% 2.97% 2.97% 2.97% 3.24% 3.24% Mortgage rates(4) Five years or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) (3) 5.31% 5.31% 5.31% 4.77% 4.77% 4.95% 5.85% Over Ñve years and up to 30 years ÏÏÏÏ (3) (3) 5.58% 5.58% 5.58% 5.04% 5.04% 5.31% 6.12%
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As of December 31, 1997 1998 1999 2000 2001 2002 2003 2004 2005 Interest Rates on Deposits DemandÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.71% 1.44% 0.99% 0.99% 0.99% 0.72% 0.72% 0.72% 0.72% Time Three monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.88% 2.79% 1.98% 1.98% 1.98% 1.71% 1.71% 1.71% 1.71% Six months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.14% 3.33% 2.16% 2.16% 2.16% 1.89% 1.89% 2.07% 2.07% One year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.67% 3.78% 2.25% 2.25% 2.25% 1.98% 1.98% 2.25% 2.25% Two yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.94% 3.96% 2.43% 2.43% 2.43% 2.25% 2.25% 2.70% 2.70% Three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.21% 4.14% 2.70% 2.70% 2.70% 2.52% 2.52% 3.24% 3.24% Five years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.66% 4.50% 2.88% 2.88% 2.88% 2.79% 2.79% 3.60% 3.60%
Source: PBOC Quarterly Statistical Bulletin (1) EÅective April 28, 2006, the benchmark rates for loans with term of six months, one year, three years or less, Ñve years or less and over Ñve years have been enhanced to be 5.40%, 5.85%, 6.03%, 6.12% and 6.39%, respectively. (2) A Öoating rate 5-10% lower than the central bank lending rates of corresponding maturity. (3) Mortgage rates for 1997 and 1998 were set by the PBOC using diÅerent maturity periods and ranged from 5.58% for mortgage loans with a term of one year to 10.40% for mortgage loans with terms of over ten years and up to 20 years. (4) EÅective March 17, 2005, the PBOC benchmark mortgage rates began to peg to the regular PBOC benchmark rates for loans with the same term.
Interest Rates on Loans Starting from October 29, 2004, commercial banks in the PRC may set their interest rates on Renminbi-denominated loans at their own discretion so long as such interest rates are not less than 90% of the PBOC benchmark rates. Prior to January 1, 2004, commercial banks could re-price the interest rates for their Renminbi- denominated medium- and long-term loans (all loans with an original maturity longer than one year) except residential mortgage loans in accordance with the changes in the PBOC benchmark rates but only on the next anniversary date of the loan. Since January 1, 2004, in the event of a change in the PBOC benchmark rates, commercial banks may re-price the interest rates for their Renminbi- denominated medium-and long-term loans except residential mortgage loans on a monthly, quarterly or annual basis. For residential mortgage loans, personal educational loans and certain other speciÑed loans, Öoating interest rates were renegotiated on January 1 of the year following the date of the change in the applicable benchmark interest rate. Interest rates for residential mortgage loans granted on or after March 17, 2005 are subject to the same re-pricing mechanism as other commercial loans. However, commercial banks are not allowed to adjust the interest rates for their short-term loans (all loans with an original maturity of one year or less) even when the PBOC benchmark rates are adjusted during the term of these loans. Interest rates on foreign currency loans may be determined by commercial banks at their own discretion based on prevailing market conditions and other factors.
Interest Rates on Deposits Starting from October 29, 2004, commercial banks in the PRC may set their own interest rates on Renminbi deposits so long as such interest rates are not higher than the relevant PBOC benchmark rates. However, interest rates on negotiated deposits, which are deposits by insurance companies in amounts of RMB30 million or more or deposits by the National Council for Social Security Fund in amounts of RMB500 million or more, both with a term greater than Ñve years, or deposits by China Post in amounts of RMB30 million or more with a term greater than three years, are currently not subject to these restrictions.
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In addition, interest rates on foreign currency deposits in amount, of US$3 million or more or its equivalent, interest rates on foreign currency inter-bank deposits and interest rates on foreign currency deposits made by non-PRC residents have been relaxed. Interest rates on foreign currency deposits denominated in U.S. dollars, Euros, Japanese yen and Hong Kong dollars in amounts of less than US$3 million or its equivalent cannot be higher than the ceiling set by the PBOC from time to time.
Special Requirements Applicable to Us As part of a PRC Government pilot reform program, we were subject to certain operating targets under the Guidelines on Bank of China and China Construction Bank. The following table sets forth, as of the dates indicated, these operating targets and our respective results, which, unless otherwise speciÑed, were calculated based on our Ñnancial statements prepared in accordance with PRC GAAP.
As of December 31, Item Targets 2004 2005 Return on average total assets(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն0.6% by the end of 2005, 0.66% 0.70% subject to further increase beginning in 2007 Return on average equity(2) Ն11% by the end of 2005; 11.22% 12.14% Ն13% by the end of 2007 Cost to income ÏÏÏÏÏÏÏÏÏÏÏÏÏ 35% - 45% by the end of 40.0% 39.3% 2005 Capital adequacy ÏÏÏÏÏÏÏÏÏÏÏ Ն8% from 2004 10.0% 10.4% Total outstanding loans to one single borrower to net regulatory capital ÏÏÏÏÏÏÏÏÏ Յ10% by the end of 2005; 3.4% 4.7% Non-performing assets to total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3% - 5% by the end of 2004 3.4%(3) 2.8%(3) Allowance for impairment losses to non-performing loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ն60% by the end of 2005; 68.0% 80.6% continue to increase in 2007
(1) Represents the proÑt for the year (including proÑt attributable to minority interest) as a percentage of the average balance of total assets as of the beginning and end of the year which is calculated based on our Ñnancial statements prepared in accordance with IFRS. (2) Represents the proÑt attributable to equity holders of the bank as a percentage of the average balance of total equity excluding minority interest as of the beginning and end of the year which is calculated based on our Ñnancial statements prepared in accordance with IFRS. (3) This ratio is calculated on the basis of our domestic operations and the relevant information has been submitted to the CBRC. EÅective April 24, 2006, the Guidelines on the Corporate Governance and Supervision of State- owned Commercial Banks, as promulgated by the CBRC, have superceded the Guidelines on Bank of China and China Construction Bank. These newly issued guidelines are applicable to the Big Four and Bank of Communications Co., Ltd. and reiterate substantially all of the above operating targets.
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Risk Management Operational Risk Management On March 22, 2005, the CBRC issued the Operational Risk Control Circular, which requires commercial banks to strengthen their ability to identify operational risks and the risk management and control thereof. Under the Operational Risk Control Circular, commercial banks are required to establish internal rules and policies speciÑcally for management and control of operational risks. In particular, the internal audit departments and the business operation departments are required to conduct independent and ad hoc reviews and examinations of the business operations from time to time. For business areas involving higher operational risks, ongoing reviews and examinations are required to be conducted. Moreover, a commercial bank's head oÇce is required to assess the implementation and compliance of its internal policies and rules on operational risks from time to time. In addition, the Operational Risk Control Circular sets forth detailed requirements relating to, among others, establishing a system under which branch oÇcers in charge of business operations are required to rotate and take compulsory leave on a regular basis, establishing a system to encourage the full compliance with applicable regulations and internal rules and policies by all employees, improving reconciliation in a timely manner of the account statements between commercial banks and their customers and those between operational departments and accounting departments, segregating persons in charge of account keeping and persons in charge of account reconciliation, and establishing a system for the control and management of specimen signatures and banking transaction documents.
Market Risk Management In order to strengthen the market risk management of commercial banks in the PRC, the CBRC promulgated the Market Risk Management Guidelines under which commercial banks are required to establish formal written policies and procedures to manage market risks, which should cover, among others, (i) permitted business activities, such as the trading of, and investment in, certain Ñnancial instruments; (ii) the level of market risk that can be deemed acceptable to the commercial bank; (iii) the organizational structure for market risk management; (iv) a set of procedures for the detection, quantiÑcation, monitoring and control of market risk; and (v) an information system for market risk management.
Risk Rating System Applicable to Joint Stock Commercial Banks In February 2004, the CBRC announced a provisional risk rating system for joint stock commercial banks. Under this provisional risk rating system, capital adequacy, asset quality, management quality, proÑtability, liquidity and market risks of a joint stock commercial bank are evaluated by the CBRC on a continuous basis, and a rating score is determined by the CBRC for each joint stock commercial bank. Each joint stock commercial bank is classiÑed into one of the Ñve risk rating categories according to the rating score it receives from the CBRC. The CBRC determines the frequency and scope of its on-site inspections of each individual joint stock commercial bank based on the category to which such bank belongs. The risk rating of a commercial bank is one of the factors for the CBRC's evaluation of the bank's application for new business permits and the qualiÑcations of its senior management. These rating scores are not publicly available.
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Corporate Governance Internal Controls The Internal Control Guidelines require commercial banks in the PRC to establish a sound internal control system to ensure eÅective risk management and compliance with laws and regulations. The Internal Control Guidelines speciÑcally require commercial banks to establish a risk management department to monitor risks in all business aspects. In addition, commercial banks must establish an independent internal audit department to independently supervise and evaluate all aspects of the bank's operation. Under the PBOC regulations, commercial banks are advised to have a minimum of 2% of their employees devoted to internal auditing. Commercial banks are required to identify, monitor, control and prevent risks and to enhance their internal controls, all in accordance with the PBOC's or CBRC's guidelines.
Recent Inspection by CBRC CBRC conducts regular inspections to monitor our compliance with the above regulatory requirements. The CBRC evaluated the compliance of our internal control system with the regulatory requirements as of December 31, 2004. According to the resulting Inspection Report on Bank of China in 2004 issued by CBRC on May 31, 2005, the CBRC found that we have improved our internal control system, strengthened corporate governance and facilitated the process of restructuring in 2004. However, this inspection report also stated that, among other things, (i) there were certain deÑciencies in our internal control system; (ii) certain weaknesses still remain in the implementation of our internal control system; and (iii) our management of and supervision over branches needs improvement. As part of its inspection report, the CBRC made recommendations with respect to the improvement of our internal control system, control and monitoring of our branches and compliance with the regulatory requirements, and we have taken steps to implement these recommendations. See ""Business Ì Legal and Regulatory Proceedings''. The CBRC has not imposed any sanctions or penalties on our company in relation to its Ñndings and recommendations relating to our internal controls as described above. In addition, the CBRC also conducted an on-site examination of our bank in 2005, primarily with respect to our loan classiÑcation practice, credit extended to land and Ñxed-assets investment projects and personal consumer loans. As a result of the 2005 examination, the CBRC reported that we have made signiÑcant progress in improving our corporate governance, internal controls, business operations and risk management over our branches. As part of its examination report, the CBRC also made recommendations with respect to the improvement of our credit risk management, including the application of Loan ClassiÑcation Principles, internal control, control and monitoring of our branches and the independence of our internal audit function. See ""Business Ì Legal and Regulatory Proceedings''.
Related Party Transactions In order to regulate and supervise related party transactions of commercial banks, the CBRC issued the Corporate Governance Guidelines and the Related Party Transactions Measures, in addition to the PRC Commercial Banking Law. Under the above PRC laws and regulations, related parties include, among others, (i) shareholders holding 5% or more of the bank's outstanding shares; (ii) legal persons or other organizations under direct or indirect common control with the bank; (iii) such legal persons' or organizations' individual controlling shareholders, directors and executive oÇcers; (iv) directors, management, loan oÇcers and their respective close relatives, and organizations in which the above persons have investments or serve as executive oÇcers; and (v) other individuals, legal persons or
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SUPERVISION AND REGULATION
other organizations that have direct, indirect or joint control over the commercial banks or that may exert signiÑcant inÖuence over them. Transactions with related parties include, among other transactions, credit extensions, asset transfers, and the provision of services. Such transactions are required to be reported to the CBRC and published in their annual reports, if required. Commercial banks are required to adopt appropriate policies and procedures to manage related party transactions and to establish a related party transaction committee of the board of directors to supervise the implementation of, and compliance with, such policies and procedures and to examine proposed related party transactions. Transactions with related parties are subject to limitations. For example, when the amount of any single related party transaction represents more than 1% of the bank's net regulatory capital, or any single related party transaction will cause the total outstanding value of transactions with that related party to represent more than 5% of the bank's net regulatory capital, the transaction must be examined by the related party transaction control committee of the commercial bank and submitted to the board of directors for approval. It must also be reported to the supervisory board of the bank and the CBRC within ten business days after such board approval. In addition, commercial banks may not grant unsecured loans to related parties or extend credit secured by the bank's own equity. They may not provide security for the Ñnancing activities of related parties, unless such related parties provide adequate security in the form of deposit certiÑcates and treasury bonds. The credit facilities granted to a single related party may not exceed 10% of the commercial bank's net regulatory capital. The credit facilities granted to all aÇliates of a related party may not exceed 15% of the bank's net regulatory capital. The aggregate amount of credit facilities granted to all related parties may not exceed 50% of the bank's net regulatory capital. Commercial banks are required under the Related Party Transactions Measures to submit to the CBRC, on a quarterly basis, status reports regarding their related party transactions, and disclose matters relating to related parties and related party transactions in their Ñnancial statements. Moreover, the board of directors is required to report annually at the shareholders' meetings related party transactions and the implementation of mechanisms for monitoring and approving related party transactions. The CBRC has the power to request the rectiÑcation of transactions that violate the Related Party Transactions Measures and impose sanctions on the bank and/or the relevant parties. We have established the Connected Transaction Control Committee. We are in the process of setting up the related party transaction control regulations.
Information Disclosure Commercial banks in the PRC are generally required to submit regular reports to the PBOC or the CBRC, as applicable, on capital adequacy ratios, liquidity ratios and loss provisions. Under the Information Disclosure Measures, commercial banks are required to publish an annual report within four months after the end of each Ñscal year, in which the banks' Ñnancial condition and results of operations as of the end of the preceding Ñscal year must be provided. Furthermore, the annual report must also disclose, among other things, audited Ñnancial statements prepared under PRC GAAP, material related party transactions and capital adequacy ratios, risk management performance, corporate governance and other signiÑcant events such as any increase or decrease in registered capital during the year.
Anti-Money Laundering Regulation Pursuant to the PBOC's Anti-Money Laundering Regulations for Financial Institutions, commercial banks in the PRC are required to establish an internal anti-money laundering procedure
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SUPERVISION AND REGULATION
and Ñle it with the PBOC. In addition, the SAFE, as the PRC Government authority in charge of foreign exchange transactions, is responsible for supervising large and suspicious foreign exchange transactions. Commercial banks in the PRC are required to either establish an independent anti-money laundering department or designate a relevant department, in either case staÅed with qualiÑed personnel, to implement their anti-money laundering procedure. In addition, commercial banks are required to establish a system to record the identities of all customers and their respective deposits, settlement and other transactions with the bank. Upon the detection of any suspicious transactions or transactions involving large amounts, commercial banks are required to report the transactions to the PBOC or the SAFE, as applicable. Where necessary and pursuant to appropriate judicial proceedings, commercial banks are required to cooperate with government authorities in preventing money laundering activities and in freezing assets. The PBOC supervises commercial banks' anti-money laundering activities and imposes penalties on commercial banks that violate the PBOC's rules.
Foreign Investment in the PRC Banking Industry Foreign Invested Banks Under the Foreign-Invested Financial Institutions Regulations, foreign Ñnancial institutions may establish branches, joint venture banks or wholly foreign-owned banks in the PRC, subject to the approval of the CBRC. Foreign-invested commercial banks are permitted to engage in taking foreign currency-denominated deposits, making foreign currency-denominated loans, accepting and discounting Ñnancial instruments, dealing in government bonds, Ñnancial institution bonds and certain other approved activities. Currently, foreign-invested commercial banks, upon approval, may provide Renminbi-denominated banking services to corporate customers and non-PRC nationals in 25 cities. All geographical restrictions are expected to be removed by December 2006. In addition, foreign-invested commercial banks are expected to be permitted to provide Renminbi-denominated banking services to PRC nationals by December 2006.
Equity Investment by Foreign Financial Institutions in PRC Banks Under the Measures on Equity Investment by Overseas Financial Institutions issued on December 8, 2003, foreign equity investment in a PRC commercial bank is currently subject to the CBRC's approval. According to these Measures, the equity investment by a single foreign Ñnancial institution in a PRC commercial bank shall not exceed 20%. A non-listed PRC commercial bank with equity investment from foreign Ñnancial institutions of 25% or more shall be regulated as a foreign- invested bank, while a listed PRC commercial bank with equity investment from foreign Ñnancial institutions of 25% or more shall be regulated as a PRC commercial bank.
HONG KONG SUPERVISION AND REGULATION The main legislation governing banking activities in Hong Kong is the Banking Ordinance. The Hong Kong Monetary Authority is the supervisory and regulatory body of the banking industry in Hong Kong with powers, functions and duties granted by the Banking Ordinance. The principal function of the Hong Kong Monetary Authority is to promote the general stability and eÅective operation of the Hong Kong banking system. The Hong Kong Monetary Authority is also responsible for supervising compliance with the provisions of the Banking Ordinance and with the Hong Kong Monetary Authority's guidelines and legislation promulgated by the SFC. The Hong Kong Monetary Authority is responsible for regulating banking institutions and granting banking licenses, and has discretion to attach conditions to a bank's operating license. The Hong Kong Monetary Authority requires every authorized institution to implement a comprehensive
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risk management system to identify, measure, monitor and control the various types of risks that are inherent in its operations and, where appropriate, to hold capital against those risks.
The supervisory approach of the Hong Kong Monetary Authority is based on a policy of ""continuous supervision''. This involves on-site examinations, oÅ-site reviews, prudential meetings, cooperation with external auditors and sharing information with other supervisors. The Hong Kong Monetary Authority obtains regular returns from and sends examination teams to all authorized institutions. As a result of these examinations, the Hong Kong Monetary Authority will issue reports on their Ñndings and suggest recommendations for improvements. In addition, all fully licensed banks in Hong Kong, whether incorporated overseas or locally, are required to be members of the Hong Kong Association of Banks, which represents the banking industry in banking-related matters and promotes best practices for banks in Hong Kong.
BOCHK is under the supervision of the Hong Kong Monetary Authority. Based on the examinations the Hong Kong Monetary Authority has conducted in respect of BOCHK since its incorporation until the Latest Practicable Date, BOCHK is not aware of any material negative Ñndings which had or will have a signiÑcant impact on the Ñnancial position and results of operations of BOCHK or our bank. As to the recommendations raised by the Hong Kong Monetary Authority, BOCHK has implemented or will implement promptly the necessary remedial actions.
The Hong Kong Monetary Authority introduced its loan classiÑcation guidelines in 1994, which were further updated in 1999. The Hong Kong Monetary Authority's loan classiÑcation guidelines employ a Ñve-category classiÑcation system, namely, pass, special-mention, substandard, doubtful and loss. The Hong Kong Monetary Authority's Ñve-category classiÑcation system is substantially similar to the Ñve-category system under the Loan ClassiÑcation Principles. However, diÅerences do exist between the Hong Kong Monetary Authority's Ñve-category system and the Loan ClassiÑcation Principles. For example, the period of time for which the loan is overdue is a determining factor under the Hong Kong Monetary Authority's loan classiÑcation guidelines, but not under the Loan ClassiÑcation Principles. In addition, there are diÅerences in the loan provisioning policies under the Hong Kong Monetary Authority's loan classiÑcation guidelines and those under the Loan ClassiÑcation Principles. For example, the Hong Kong Monetary Authority suggests that provisions for individual loans be made in accordance with the following guidelines, which are diÅerent from the provisioning requirements under the Loan ClassiÑcation Principles as disclosed under ""Prudent Operating Requirements Ì Loan ClassiÑcation''.
Category Provisioning Ratio Pass ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1% Special-mention ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% Substandard ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20% - 25% against unsecured portion Doubtful ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% - 75% against unsecured portion Loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100%
The Banking Ordinance requires all banks in Hong Kong to report to the Hong Kong Monetary Authority certain periodic returns and other information and establishes certain minimum standards and ratios relating to capital adequacy, liquidity, capitalization, limitations on shareholdings, exposure to any one customer, unsecured advances to persons aÇliated with the bank and holdings of interests in land.
The Hong Kong Monetary Authority has also issued various guidelines on business practices of authorized institutions. Some of the guidelines (for example, Supervisory Policy Manual CG-1 ""Corporate Governance of Locally Incorporated Authorized Institutions'' and Supervisory Policy Manual FD-1 ""Financial Disclosure by Locally Incorporated Authorized Institutions'') apply only to
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SUPERVISION AND REGULATION
authorized institutions incorporated in Hong Kong, while others (for example, Supervisory Policy Manual FD-3 ""Financial Disclosure by Overseas Incorporated Authorized Institutions'') only apply to authorized institutions incorporated overseas.
Pursuant to Rule 4.10 of the Hong Kong Listing Rules, the Ñnancial information to be disclosed in our Accountants' Report must be in accordance with best practice, which is at least that required to be disclosed in respect of speciÑc matters in the accounts of a company under the Companies Ordinance, IFRS and guidelines issued by the Hong Kong Monetary Authority, namely, Financial Disclosure by Locally Incorporated Authorized Institutions guideline and New Hong Kong Accounting Standards: Impact on Interim Financial Disclosure guideline or the HKMA Guidelines.
We are currently unable to provide certain disclosures as required by the HKMA Guidelines and the Companies Ordinance as the relevant information is currently not available. Such disclosures are described below. We are endeavoring to collect the relevant information so that we will be in a position to provide such required disclosures under the HKMA Guidelines and the Companies Ordinance within a reasonable timeframe in the future, as outlined below. We have applied for and the Hong Kong Stock Exchange has granted a waiver from strict compliance with the requirement under Rule 4.10 of the Hong Kong Listing Rules to the extent that our disclosure does not fully comply with the HKMA Guidelines and the Companies Ordinance.
The HKMA Guidelines require the disclosure of the amount of new provisions for bad and doubtful debts and provisions released back to the income statement in the relevant period. We did not segregate the amount of provisions released from the amount of new provisions charged to the income statement during the relevant period, and in lieu of that, we disclosed the amount of new provisions net of releases as a single amount in Note VI.17 of Section 6 to Appendix I Ì ""Accountants' Report''. We expect to be able to make such disclosure by June 30, 2007.
The HKMA Guidelines require the disclosure of the movements in provisions for bad and doubtful debts by individually and collectively assessed loans. Such disclosure requires the tracking of the amount of the write-oÅs and recoveries by individually assessed loans and collectively assessed loans. Since our loan system and general ledger are not able to capture the related information for such disclosure during the relevant period, we disclosed the movements in provisions in its entire amount in Note VI.17 of Section 6 to Appendix I Ì ""Accountants' Report''. We expect to be able to make such disclosure by June 30, 2007.
The HKMA Guidelines require the disclosure of rescheduled advances to customers net of those which have been overdue for three months and the percentage of such advances to total advances to customers. Similar information on rescheduled advances to banks and other Ñnancial institutions are also required to be disclosed. As such information is not required to be disclosed under the local reporting standards or provided to local regulators, we did not maintain information related to rescheduled advances in our system during the relevant period. We expect to be able to make such disclosure by June 30, 2007.
The HKMA Guidelines require the disclosure of allowance for losses on trade bills if material, and of the amount of other assets, analysed by major categories of assets such as trade bills and debt securities, which have been overdue for over three months by overdue buckets. We did not segregate the allowance for impairment losses made on trade bills from the overall allowance for impairment losses on loans and advances, and in lieu of that, we disclosed the entire amount of allowance for impairment losses on loans and advances including trade bills in Note VI.17 of Section 6 to Appendix I Ì ""Accountants' Report''. In addition, we did not segregate the amount of overdue trade bills from the amount of overdue loans and advances, and in lieu of that, we disclosed the entire amount of overdue loans and advances including trade bills by overdue buckets in Note 6
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to Appendix II Ì ""Unaudited Supplementary Financial Information''. We expect to be able to make such disclosure by June 30, 2007. Paragraph 13(1)(g) of 10th Schedule to the Companies Ordinance requires separate disclosure of interest income from listed and unlisted investments. We did not segregate the amount of interest income as such, and in lieu of that, we disclosed the total amount of interest income from investment in Note VI.2 of Section 6 to Appendix I Ì ""Accountants' Report''. We expect to be able to make such disclosure by June 30, 2007.
REGULATION AND SUPERVISION OF OUR OVERSEAS OPERATIONS We have established a broad international network covering 27 countries and regions with over 600 overseas branches, subsidiaries and representative oÇces. In addition to Hong Kong, our most signiÑcant branches and subsidiaries are located in Macau, New York, London, Tokyo and Singapore. Our operations in Macau, New York, London, Tokyo and Singapore are respectively subject to the regulation of the Monetary Authority of Macau, the OCC, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company of the United States, the U.K. Financial Services Authority, the Financial Services Agency of Japan and the Monetary Authority of Singapore. They are also subject to the respective local banking regulatory requirements, including requirements with respect to internal controls, capital adequacy, and others. We have been duly licensed to operate in these jurisdictions by the respective banking regulatory authorities. Our branches, representative oÇces and subsidiaries in other overseas jurisdictions are subject to the applicable regulatory requirements of each of the relevant jurisdictions, and we have been duly licensed to operate in these jurisdictions by the respective banking regulatory authorities. In connection with alleged unsafe and unsound banking practices by former management at our New York branch during the period from 1991 through 1999, our New York branch paid a Ñne of US$10 million to the OCC in 2002 and we paid a Ñne of an equal amount to the PBOC in 2002. In addition, the OCC issued a consent order (the ""2002 Consent Order'') against our branches in the United States on January 17, 2002. The alleged unsafe and unsound banking practices included showing preferential treatment to certain customers of our New York branch who had personal relationships with some members of our New York branch's former management with respect to granting loans and letters of credit, and facilitating a loan fraud scheme and other suspicious and potentially fraudulent activities conducted by these customers. The 2002 Consent Order required our branches in the United States to adopt measures to comply with certain conditions set forth therein in relation to risk management, transaction security, account-opening and monitoring, prohibition of transactions with certain individuals and entities, safeguard of assets and some other aspects of our operations. To meet the requirements of the 2002 Consent Order, our branches in the United States took a number of remedial steps, including replacing members of the former management, establishing and Ñlling new positions dealing with risk management and compliance and hiring an external auditor with substantial review functions. On October 23, 2003, the OCC issued a modiÑed consent order (the ""2003 ModiÑed Consent Order''), which terminated the 2002 Consent Order. The 2003 ModiÑed Consent Order required, among other things, our branches in the United States to continue to:
¬ employ a qualiÑed chief risk oÇcer;
¬ conduct trade settlement and credit transactions in accordance with established policies and procedures;
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¬ refrain from purchasing low-quality assets from any of our other branches or aÇliates;
¬ improve our information technology system;
¬ comply with Bank Secrecy Act and OFAC regulations and adhere to anti-money laundering procedures;
¬ maintain both internal and external audit functions; and
¬ submit quarterly progress reports. Our branches in the United States devoted signiÑcant eÅorts to comply with the 2003 ModiÑed Consent Order. On September 7, 2005, the OCC further issued an amended consent order (the ""2005 Amended Consent Order''), which superseded the 2003 ModiÑed Consent Order. According to the 2005 Amended Consent Order, our branches in the United States were required to complete and submit to the OCC for review a project plan with respect to the implementation of a new information technology system, which was implemented on April 3, 2006. The 2005 Amended Consent Order also required the chief risk oÇcer to continue to assure the suÇciency of the risk management and internal control systems until the new information technology system and appropriate controls are in place. Furthermore, the 2005 Amended Consent Order required that any modiÑcations to risk-related policies, procedures and management practices of our branches in the United States, be reviewed and approved by the chief risk oÇcer and the general manager, U.S.A., and then sent to our head oÇce.
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OUR RESTRUCTURING
HISTORY AND OVERVIEW 3rd Sch 21
We were established in 1912 and served as China's central bank until 1928 and then as the nation's foreign exchange bank until 1949 when the PRC was founded. Between 1949 and the early 1990s, we continued to act as a commercial bank specializing in the foreign exchange business. Beginning in 1994, we gradually became a full service commercial bank. In addition to commercial banking business, we have also engaged in investment banking business and insurance business since 1983 and 1992, respectively, primarily through our Hong Kong-based subsidiaries.
We also have a long history of conducting banking business outside of the PRC. We commenced our operations in Hong Kong in 1917 and established our branches in London and New York in 1929 and 1981, respectively. We currently have the most extensive overseas branch network among PRC commercial banks, with a presence in Hong Kong, Macau and 25 foreign countries. We were involved in the restructuring and the initial public oÅering of BOCHK Holdings in July 2002 and have gained restructuring experience in the process. This experience has been helpful in our restructuring.
Since the late 1990s, the PRC Government has undertaken a number of reform initiatives to enhance the capital base and improve the asset quality of the Big Four. In 1998, we received RMB42,500 million in equity contribution from the PRC Government as part of the PRC Government's recapitalization program to enhance the capital base of the Big Four. In 1999, the PRC Government established four asset management companies primarily to acquire and manage non-performing assets and loans of the Big Four. In 1999 and 2000, we sold to China Orient, one of these four asset management companies, certain non-performing assets with an aggregate principal and interest receivable thereon of RMB267,400 million. As consideration, China Orient issued to us a bond with a face value of RMB160,000 million and paid us RMB107,400 million in cash.
In 2003, we were selected by the PRC Government as one of two state-owned commercial banks to engage in a number of pilot bank reform initiatives designed to further improve state- owned commercial banks' capital base and competitiveness. To implement these reform initiatives, the State Council approved the Joint Stock Reform Plan, pursuant to which we:
¬ implemented certain Ñnancial restructuring measures to improve our capital structure;
¬ were converted into a joint stock limited liability company; and
¬ implemented certain organizational and operational measures designed to improve our corporate governance and operations and strengthen our competitiveness, including the adoption of better corporate governance practices, the reÑnement of risk management and internal controls, the reengineering of business processes, human resource management reform and the roll-out of our information technology blueprint project.
FINANCIAL RESTRUCTURING
The following Ñnancial restructuring measures were implemented under the Joint Stock Reform Plan: Capital contribution from Huijin. In December 2003, the PRC Government, through Huijin, made a capital contribution of RMB186,390 million to us, in the form of US$19.6 billion in cash and bullion valued at approximately US$2,900 million at the time of contribution. In connection with the capital contribution, we transferred the pre-existing balances of our paid-in capital, capital reserve and statutory reserves in an aggregate amount of RMB203,462 million into our accumulated losses
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account to accommodate losses arising primarily from provisions for non-performing assets on December 31, 2003. Disposal of non-performing loans, policy-related assets and loss graded loans. In June 2004 and September 2004, we disposed of non-performing loans, policy-related assets and loss graded loans with an aggregate gross carrying value of RMB272,020 million in the following transactions:
¬ in June 2004, we sold on a non-recourse basis non-performing loans with a gross carrying value of RMB148,540 million (net carrying value of RMB73,430 million after allowance for impairment losses on loans and advances) to Cinda for consideration in the form of a Ñve- year special bill issued by the PBOC with a principal amount of RMB73,430 million;
¬ in June 2004, we sold on a non-recourse basis policy-related assets with a gross carrying value of RMB18,100 million (net carrying value of RMB18,100 million) to the PBOC for consideration in the form of a three-year special bill issued by the PBOC with a principal amount of RMB18,100 million; and
¬ in September 2004, we disposed of on a non-recourse basis loss graded loans with a gross carrying value of RMB105,380 million (net carrying value of zero) to China Orient. The original aggregate principal amount of these loans was RMB141,399 million. We did not receive any consideration in connection with the disposal. Issuance of subordinated bonds. In 2004 and 2005, we issued a series of subordinated bonds with an aggregate principal amount of RMB60,000 million which qualiÑed as supplementary capital for the purpose of strengthening our capital base. Principally as a result of our Ñnancial restructuring, our core capital adequacy ratio and capital adequacy ratio calculated in accordance with the CBRC regulations and based on PRC GAAP were 8.48% and 10.04%, respectively, as of December 31, 2004. See ""Financial Information Ì Impact of Our Restructuring''.
CORPORATE RESTRUCTURING Pursuant to the Joint Stock Reform Plan and the relevant approvals of the CBRC, we were converted from a wholly state-owned commercial bank into a joint stock limited liability company with Huijin being the sole promoter and shareholder on August 26, 2004, and changed our legal name from Bank of China to Bank of China Limited. As a result of the conversion, all of the businesses, assets and liabilities of Bank of China have been assumed by Bank of China Limited. In addition, all employees of Bank of China became employees of Bank of China Limited. In connection with our conversion, we issued 186,390,352,497 Shares to Huijin. Pursuant to regulations relating to the restructuring of state-owned enterprises, an independent appraiser was required to perform a valuation of our net assets in connection with our conversion into a joint stock limited liability company. Pursuant to the valuation, our net assets as of December 31, 2003 were valued at RMB203,752 million, which exceeded the amount of our share capital at the time of our conversion. The Ministry of Finance has notiÑed us that this excess belonged to the PRC Government and we are required to record as a liability payable to the Ministry of Finance the amount of the excess, which was RMB17,362 million. We have recorded this liability as ""other liabilities''. See Note II.4 to Appendix I Ì ""Accountants' Report''. In 2005, we and Huijin entered into certain agreements pursuant to which the strategic investors agreed to subscribe for newly issued Shares from us and/or purchase existing Shares from Huijin. The acquisitions of Shares by the strategic investors were completed by December 31, 2005. As of December 31, 2005, the strategic investors collectively owned an aggregate of approximately
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OUR RESTRUCTURING
16.85% of our issued and outstanding share capital. In addition, AFH has agreed, subject to certain conditions, to purchase US$500 million of our Shares in the Global OÅering. See ""Our Strategic and Other Investors''.
Set forth below are our major subsidiaries and shareholding structure as of May 8, 2006, A1A(28)(2) without taking into account the Global OÅering:
ADB UBS AG Huijin RBS China AFH SSF
0.232% 1.550% 79.897% 9.609% 4.805% 3.907%
Bank of China Limited
Domestic Operations: Other Overseas Operations:
Head office, 32 tier one branches and approximately Hong Kong and Macau Operations Branches and subsidiaries offices in 25 foreign 11,000 tier two branches, sub-branches and outlets countries
50.313% 100% 100% 100% 100%
Tai Fung Macau Branch BOCHK Group BOCGI BOCG Insurance BOCI Bank Limited
100% 49% 100%
Bank of China
BOCHK (BVI) BOCG Life Insurance Co., Ltd.(2)
65.77% 51%(3)
(1) 0.054% BOCHK Holdings 0.0539%
100%
BOCHK
(1) Listed on the Hong Kong Stock Exchange.
(2) Incorporated in the PRC.
(3) In April 2006, BOCG Insurance conditionally agreed to sell 51% of its equity interest in BOCG Life to BOCHK Holdings. The sale is subject to the satisfaction of certain conditions, including the approval of the independent shareholders of BOCHK Holdings and the Insurance Authority of Hong Kong. See ""Business Ì Insurance''.
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OUR RESTRUCTURING
Set forth below are our major subsidiaries and shareholding structure immediately after the A1A(28)(2) completion of the Global OÅering, assuming no exercise of the Over-Allotment Option:
ADB UBS AG Huijin RBS China AFH Other Public Shareholders SSF
0.208% 1.387% 70.507% 8.600% 4.879% 9.921%(4) 4.498%
Bank of China Limited
Domestic Operations: Other Overseas Operations:
Head office, 32 tier one branches and approximately Hong Kong and Macau Operations Branches and subsidiaries offices in 25 foreign 11,000 tier two branches, sub-branches and outlets countries
50.313% 100% 100% 100% 100%
Tai Fung Macau Branch BOCHK Group BOCGI BOCG Insurance BOCI Bank Limited
100% 49% 100%
Bank of China BOCHK (BVI) BOCG Life Insurance Co., Ltd.(2)
65.77% 51%(3)
BOCHK Holdings (1) 0.054% 0.0539%
100%
BOCHK
(1) Listed on the Hong Kong Stock Exchange.
(2) Incorporated in the PRC.
(3) In April 2006, BOCG Insurance conditionally agreed to sell 51% of its equity interests in BOCG Life to BOCHK Holdings. The sale is subject to the satisfaction of certain conditions, including the approval of the independent shareholders of BOCHK Holdings and the Insurance Authority of Hong Kong. See ""Business Ì Insurance''.
(4) Denotes the percentage of Shares that will be held by our public shareholders other than ADB, AFH, SSF (in respect of the H Shares that will be held by SSF as a result of the transfers by Huijin and by SSF itself to SSF pursuant to relevant PRC regulations regarding disposal of state-owned shares) and UBS AG.
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ORGANIZATIONAL AND OPERATIONAL MEASURES We have implemented or are in the process of implementing a number of organizational and operational measures in various areas, including corporate governance, risk management, internal controls, business process, human resources and information technology. Corporate governance. With our conversion into a joint stock limited liability company, we restructured our Board of Directors and Board of Supervisors in line with the requirements of our new articles of association and PRC laws and regulations. Our Board of Directors is accountable to the general meeting of shareholders and responsible for, among other things, approving our business strategy and operating plans, appointing senior management and establishing our organizational structure. A number of board committees have been established to perform functions designated by the board of directors. These board committees consist of strategic development committee, audit committee, risk policy committee, personnel and remuneration committee and connected transaction control committee. Our Board of Supervisors is accountable to the general meeting of shareholders and has the responsibility and power to, among other things, supervise our Board of Directors and senior management, inspect our Ñnancial activities and examine our decisions. See ""Directors, Supervisors, Senior Management and Employees''. Risk management. The management has implemented or is in the process of implementing a number of measures, including the following, to increase the eÅectiveness of our risk management framework and improve our asset quality:
¬ improving the independence and organizational structure of our risk management function;
¬ increasing centralized risk management supervision and monitoring at our domestic branches;
¬ improving our management and assessment of credit risk; and
¬ improving our risk monitoring and risk alert system. For more information about our risk management framework, see ""Risk Management'' and ""Description of our Assets and Liabilities''. Internal controls. The management has implemented or is in the process of implementing a number of initiatives, including the following, to enhance our internal controls:
¬ establishing an internal control committee;
¬ strengthening the independence of our internal audit function;
¬ deÑning the responsibilities of our employees in enforcing internal controls and complying with all applicable requirements;
¬ developing a more rigorous anti-money laundering system, including establishing the anti- money laundering working committee; and
¬ centralizing and enhancing the monitoring of, and establishing checks and balances relating to, our operating processes. For more information about our internal control system, see ""Risk Management Ì Operational Risk Management and Internal Controls''. Business process. We are in the process of streamlining our organizational structure by optimizing resource allocation among our front, middle and back oÇce desks to improve operational eÇciency. We are actively reengineering our operational processes to improve eÇciency and reduce organizational redundancy.
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Human resource management. Some of the measures we have adopted to improve our human resource management included:
¬ restructuring our employee promotion system along managerial, professional and operational lines and reforming our recruiting process by introducing quantitative examinations for applicants;
¬ establishing a new compensation system that links compensation to employees' contributions, competence and performance;
¬ establishing a merit-based performance management system that is based on various performance criteria including economic value-added and risk adjusted return on capital; and
¬ developing a comprehensive training program for all levels of employees that commenced in 2005 and will last to 2007, including a senior executive leadership program, a core talent development program and a series of training programs for banking professionals. For more information about our human resources management, see ""Business Ì Employees''. Information technology. We have completed a number of key projects to improve our system capabilities, including the real-time payment system, global trading system and credit card system. In addition, we launched the ""information technology blueprint project'' in 2004 and will implement a number of initiatives under this project in the next three years to improve the architecture, infrastructure, governance and security of our information technology. We have commenced implementing or are planning to implement certain elements of this project, including the following:
¬ developing a new core banking system designed to improve our business processing capacity, enhance our risk management and support our product packaging and innovation;
¬ upgrading the information technology systems relating to the general ledger, management information system, Internet banking services and trade Ñnancing services; and
¬ consolidating our domestic data centers into a single data center that will be backed by a disaster recovery center. For more information about our information technology system, see ""Business Ì Information Technology''.
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OVERVIEW In connection with our restructuring and our ongoing eÅorts to establish strategic cooperation with leading international Ñnancial institutions, improve our corporate governance and risk management, strengthen our operational infrastructure and explore new business opportunities, we have entered into strategic investment arrangements with RBS Group, RBS Bank, RBS China, AFH, UBS AG and ADB and investment agreements with SSF. We believe these arrangements and agreements will be long-term and mutually beneÑcial to the parties. RBS Group, which wholly owns RBS Bank and controls RBS China, is one of the world's largest banking and Ñnancial services groups. RBS Group is headquartered in Edinburgh, Scotland and operates in the United Kingdom, the United States and internationally. RBS Group has a large and diversiÑed customer base and provides a wide range of products and services to retail, commercial and large corporate and institutional customers. AFH is an investment company based in Singapore. AFH's investment portfolio includes investments in a number of Ñnancial institutions in the Asia-PaciÑc region. AFH is wholly owned by Temasek, an investment company wholly owned by the Singapore government. Temasek was established in 1974 and manages a diversiÑed global portfolio of investments in a range of industries, including banking and Ñnancial services. UBS AG is one of the world's leading Ñnancial Ñrms. UBS AG is headquartered in Zurich, Switzerland with worldwide operations. UBS AG has leading wealth management, asset management, and global investment banking and securities businesses, and is a market leader in Swiss retail and commercial banking. ADB is a multilateral development Ñnance institution dedicated to reducing poverty in the Asia- PaciÑc region. ADB was established in 1966 and is owned by 65 members, most of which are from the Asia-PaciÑc region. ADB is headquartered in Manila, the Philippines, and has 26 oÇces around the world. SSF, an entity directly under the State Council, is responsible for the management and operation of the National Social Security Fund of the PRC. The National Social Security Fund was set up in August 2000 and serves as a strategic reserve fund for the PRC Government to support social security expenditures. As part of the strategic arrangements, we and/or Huijin have entered into certain agreements pursuant to which RBS China, AFH, UBS AG and ADB subscribed for newly issued Shares from us and/or purchased existing Shares from Huijin (the ""Strategic Placement''). We and SSF have also entered into a share subscription agreement pursuant to which SSF subscribed for newly issued Shares from us (the ""SSF Investment''). As of March 13, 2006, RBS China, AFH, UBS AG, ADB and SSF collectively owned approximately 20.10% of our issued and outstanding share capital, consisting of 31,551,425,512 newly issued Shares and 12,261,634,280 existing Shares purchased from Huijin, representing approximately 14.47% and 5.63% of our Pre-Global OÅering Share Capital, respectively.
¬ In August 2005, RBS Group and RBS China entered into a share subscription agreement with us and a share purchase agreement with Huijin pursuant to which RBS China acquired in the aggregate approximately 9.61% of our Pre-Global OÅering Share Capital through the subscription of newly issued Shares from us and the purchase of existing Shares from Huijin. RBS China subscribed for and purchased an aggregate of 20,942,736,236 Shares for approximately US$3.048 billion. The number of Shares subscribed for and purchased by RBS China was determined by dividing US$3.048 billion by 1.17 times our book value per Share as of December 31, 2004, as determined by reference to our IFRS Ñnancial statements as of and for the year ended December 31, 2004 and converted into U.S. dollar
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on the basis of an agreed reference rate. In connection with the subscription and purchase of Shares by RBS China, we also entered into an investor rights agreement with Huijin, RBS Group and RBS China, which was subsequently amended, a master cooperation agreement with RBS Group and a credit card business cooperation agreement with RBS Bank. RBS China is controlled by RBS Group, which owns 51.6% of the issued share capital of RBS China. RBS China has Ñve other shareholders. We do not have any direct business relationships with the shareholders of RBS China other than RBS Group. For more information about RBS China, see ""Substantial Shareholders''.
¬ In August 2005, AFH entered into a share subscription agreement with us, pursuant to which, as amended and restated, AFH acquired in the aggregate approximately 4.80% of our Pre-Global OÅering Share Capital through the subscription of newly issued Shares from us. AFH subscribed for 10,471,368,118 Shares for approximately US$1.524 billion. The number of Shares subscribed for by AFH was determined by dividing US$1.524 billion by 1.17 times our book value per Share as of December 31, 2004, as determined by reference to our IFRS Ñnancial statements as of and for the year ended December 31, 2004 and converted into U.S. dollar on the basis of an agreed reference rate. In addition, AFH has committed to make an additional investment of US$500 million in the Shares of our bank in the Global OÅering. In connection with the subscription of Shares by AFH, we also entered into an investor rights agreement with Huijin and AFH, which was subsequently amended and restated.
¬ In September 2005, UBS AG entered into a share subscription agreement with us and a share purchase agreement with Huijin pursuant to which UBS AG acquired in the aggregate approximately 1.55% of our Pre-Global OÅering Share Capital through the subscription of newly issued Shares from us and the purchase of existing Shares from Huijin. UBS AG subscribed for and purchased an aggregate of 3,377,860,684 Shares for approximately US$491.57 million. The number of Shares subscribed for and purchased by UBS AG was determined by dividing US$491.57 million by 1.17 times our book value per Share as of December 31, 2004, as determined by reference to our IFRS Ñnancial statements as of and for the year ended December 31, 2004 and converted into U.S. dollar on the basis of an agreed reference rate. In connection with the subscription and purchase of Shares by UBS AG, we also entered into an investor rights agreement with Huijin and UBS AG, which was subsequently amended. UBS AG acting through its business group, UBS Investment Bank, is a Joint Sponsor, Joint Bookrunner and Joint Global Coordinator of the Global OÅering. See ""Underwriting''.
¬ In October 2005, ADB entered into a share subscription agreement with us and a share purchase agreement with Huijin pursuant to which ADB acquired in the aggregate approximately 0.23% of our Pre-Global OÅering Share Capital through the subscription of newly issued Shares from us and the purchase of existing Shares from Huijin. ADB subscribed for and purchased an aggregate of 506,679,102 Shares for approximately US$73.74 million. The number of Shares subscribed for and purchased by ADB was determined by dividing US$73.74 million by 1.17 times our book value per Share as of December 31, 2004, as determined by reference to our IFRS Ñnancial statements as of and for the year ended December 31, 2004 and converted into U.S. dollar on the basis of an agreed reference rate. In connection with the subscription and purchase of Shares by ADB, we also entered into an investor rights agreement with Huijin and ADB, which was subsequently amended.
¬ In March 2006, SSF entered into a share subscription agreement with us pursuant to which SSF acquired in the aggregate approximately 3.91% of our Pre-Global OÅering Share
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Capital through the subscription of newly issued Shares from us. SSF subscribed for 8,514,415,652 Shares for RMB10 billion. In connection with the subscription of Shares by SSF, we also entered into an investor rights agreement with SSF. Pursuant to the investor rights agreement, SSF has the right to purchase 10% of the Shares being oÅered in the Global OÅering at the OÅer Price. SSF has decided not to exercise this right. The Strategic Placement was completed by December 31, 2005. The SSF Investment was completed on March 13, 2006.
BUSINESS AND INFRASTRUCTURE COOPERATION ARRANGEMENTS RBS Group and RBS Bank As part of our strategic cooperation with RBS Group, on August 18, 2005, we entered into a master cooperation agreement with RBS Group (the ""Master Cooperation Agreement'') and a credit card business cooperation agreement (the ""Credit Card Agreement'') with RBS Bank.
Master Cooperation Agreement with RBS Group Under the Master Cooperation Agreement, our cooperation with RBS Group will be carried out under the guidance and supervision of a steering committee (the ""Steering Committee''). The Steering Committee held its Ñrst meeting in October 2005 and is comprised of eight members, four of whom are appointed by our bank and four of whom are appointed by RBS Group, with Mr. Li Lihui of our bank and Sir Frederick Goodwin of RBS Group as the co-chairmen. Under the Master Cooperation Agreement, subject to the terms described below, we and RBS Group will be each other's exclusive strategic partners in the following business areas conducted in the PRC: retail banking, corporate banking and general insurance (the ""Business Cooperation Areas''). We and RBS Group have identiÑed: (1) credit cards; (2) wealth management; (3) corporate banking in shipping and aircraft Ñnance, debt capital markets, and project and structured Ñnance; and (4) general insurance as the initial cooperation initiatives (collectively, the ""Designated Products and Services''). The exclusive strategic partnership in the area of credit cards between us and RBS Group will be conducted on the terms and conditions set forth in the Credit Card Agreement. For the Designated Products and Services other than credit cards, RBS Group has until six months after the completion of the Strategic Placement to notify the Steering Committee in writing as to whether it wishes to pursue discussions regarding potential business cooperation. If RBS Group conÑrms in writing that it wishes to pursue such discussions, we and RBS Group will use all reasonable eÅorts to agree on the scope and terms of the relevant business cooperation as soon as reasonably practicable, provided that, unless otherwise agreed by us and RBS Group, if no agreement is reached on the scope and terms of the relevant business cooperation by the end of the six-month period commencing from the date on which RBS Group conÑrms that it wishes to pursue such discussions or if RBS Group conÑrms that it does not wish to pursue discussions, each party will be free to pursue and carry out the business with respect to such Designated Products and Services either alone or jointly with any other person. We and RBS Group may also propose to the Steering Committee cooperation initiatives relating to other products and services in the Business Cooperation Areas, or certain other areas (the ""Other Products and Services''). Prior to entering into discussions with a third party in relation to possible strategic cooperation in respect of Other Products and Services, we or RBS Group will Ñrst propose the subject of such possible strategic cooperation as an area of business cooperation between our bank and RBS Group to the Steering Committee, which will make a decision within two months. If a proposal is adopted, the exclusivity arrangement set out in the paragraph immediately above applies. In addition, we and RBS Group may identify and discuss potential future areas of
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business cooperation in the PRC other than the Business Cooperation Areas at the Steering Committee, and we and RBS Group will be each other's preferred partner in such potential future areas of business cooperation. Under the Master Cooperation Agreement, RBS Group will, upon our request, share with us its skills, experience and know-how relating to certain business areas, risk management, Ñnancial management and operational support, and other agreed areas set forth in the Master Cooperation Agreement, on such terms and conditions as may be agreed between the parties. The Steering Committee has held a number of meetings to discuss the strategic cooperation between our bank and RBS Group, and identiÑed initial business cooperation areas, including credit cards; railway, aircraft and shipping Ñnance; project Ñnance; trade Ñnance; debt capital markets; wealth management and private banking; and general insurance. In addition, we have started the process for establishing the credit card Business Unit with RBS Bank. We and RBS Group have formed several working teams to further discuss potential cooperation projects in these initial areas. The Steering Committee has also identiÑed potential infrastructure cooperation projects, including those relating to operational, market and credit risk management; internal controls; Ñnancial management; asset and liability management; information technology and human resources management and training. We have also established work teams and plans relating to employee training and technology transfer in connection with our strategic cooperation with RBS Group.
Credit Card Business Cooperation Agreement with RBS Bank Overview Under the Credit Card Agreement, we and RBS Bank will establish and operate the Credit Card Business (as deÑned below) initially in the form of a stand-alone business unit (the ""Business Unit'') within our bank, and then in the form of a joint venture company to be established by our bank and RBS Bank (the ""Joint Venture Company'') when applicable PRC laws or the duly authorized government authorities permit the establishment of the Joint Venture Company. The business to be conducted by the Business Unit and the Joint Venture Company (the ""Credit Card Business'') will be: (1) the business of issuing, marketing, Ñnancing, servicing and managing credit cards denominated in Renminbi and credit cards denominated in Renminbi and one or more foreign currencies in the PRC; (2) the provision, marketing, Ñnancing, servicing and managing of unsecured consumer loans oÅered to holders of credit cards in the PRC; (3) the provision, marketing, Ñnancing, servicing and managing of products and services ancillary to credit cards in the PRC; and (4) other business in the PRC as may be agreed between the parties. For purposes of the Credit Card Agreement, credit cards include charge cards and revolving credit cards, but exclude debit cards and quasi-credit cards. Subject to certain exceptions, during the term of the Credit Card Agreement, we and RBS Bank are each required to conduct or engage in all or any part of the Credit Card Business exclusively through the Business Unit or the Joint Venture Company. In addition, we and RBS Bank may not merge with or consolidate with or into, or convey, transfer or lease all or any part of the Credit Card Business to, any other person.
Business Unit Stage Establishment of Business Unit. The Business Unit will be organized as soon as reasonably practicable as a functional department within our bank and not a legal person under PRC law. At the same time, the Business Unit will operate independently of our bank as if it were a stand-alone legal
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person with its own systems, procedures, books and records to enable separate accounting and earmarking of the Credit Card Business. The Business Unit will also have attributed to it its own costs, liabilities and expenses and its own income and assets in relation to the Credit Card Business. We will ensure that the Business Unit is provided with the personnel, assets, contracts, and accounts receivable as are necessary or reasonably required for the proper and eÇcient operation and development of the Credit Card Business. We will provide operating and all other funding required by the Business Unit in connection with the Credit Card Business at cost. Upon request, RBS Bank will use commercially reasonable eÅorts to provide to the Business Unit, at cost, services and technical assistance as may be agreed between the parties in the areas of risk management and internal control, distribution and marketing, business analysis and management, Ñnance, information technology support, operation and customer service, technical training and cooperation and coordination with international credit card associations. Management. The Business Unit will have a management committee responsible for providing leadership to the Business Unit's senior management and approving certain important matters such as approval of annual accounts, business plans, budgets and material contracts. The management committee is composed of three members appointed by us, including the chief executive oÇcer, or CEO, and three members appointed by RBS Bank, including the deputy CEO of the Business Unit. The day-to-day operations of the Business Unit will be managed by the Business Unit's senior management personnel, of which we are entitled to appoint the CEO of the Business Unit, the head of Ñnance, the head of marketing and the deputy head of risk, and RBS Bank is entitled to appoint the deputy CEO, the head of risk, the deputy head of Ñnance and the deputy head of marketing. Branding. Unless otherwise agreed, the Business Unit will conduct the Credit Card Business and market products and services using our brand name, trade name, logo, trademark and other related rights. In preparation for the establishment of the Business Unit, RBS Bank's working teams have completed preliminary on-site preparatory work with our credit card business operations. We and RBS Bank have jointly prepared a preliminary business plan for the Business Unit and have formed designated task forces in connection with the marketing, risk management, information technology and other operational aspects of the Credit Card Business.
Joint Venture Company Stage Under current PRC law, foreign investors are not permitted to establish joint venture credit card companies in the PRC. If applicable laws in the PRC or the duly authorized government authorities permit the establishment of the Joint Venture Company, our bank and RBS Bank will, substantially on the terms of the Credit Card Agreement, convert the Business Unit into the Joint Venture Company and transfer the Credit Card Business from the Business Unit to the Joint Venture Company. The Credit Card Agreement does not speciÑcally require the formation of the Joint Venture Company be subject to further shareholders' approval. Whether or not shareholders' approval is required at the time of formation of the Joint Venture Company will depend on the constituent documents of our bank and the nature of the transaction. Application for establishment of the Joint Venture Company. We and RBS Bank shall procure that an application for the establishment of the Joint Venture Company will be made: (1) if applicable laws in the PRC permit such establishment, as soon as reasonably practicable but in any event within 60 days after the promulgation of such laws or 30 days after such laws becoming eÅective, whichever is earlier; or (2) if there is no applicable laws in the PRC permitting such establishment, on December 11, 2006 and every 6 months thereafter during the term of the Credit Card Agreement until such application is approved.
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Shareholding of Joint Venture Company. Upon establishment of the Joint Venture Company, we will hold a 51% equity interest in the Joint Venture Company and RBS Bank will hold the remaining 49% equity interest. Initial Contribution and Business Transfer. RBS Bank will subscribe for an equity interest of 49% in the Joint Venture Company by way of a capital contribution to the Joint Venture Company in cash in an amount equal to 49% of the fair value of the Credit Card Business as of the date of completion of the Strategic Placement, plus interest (the ""RBS Bank Initial Contribution''). Subject to applicable laws, the fair value of the Credit Card Business will be determined by an independent investment bank, which will be jointly appointed by our bank and RBS Bank. We will, and will procure the Business Unit to, transfer to the Joint Venture Company all the assets and liabilities of the Credit Card Business. Subject to applicable laws, the transfer will be eÅected by way of contribution of part of the Credit Card Business in return for an equity interest of 51% in the Joint Venture Company upon its establishment, and by way of a sale of the remaining part of the Credit Card Business to the Joint Venture Company in return for a cash consideration equal to the RBS Bank Initial Contribution. If the Joint Venture Company does not satisfy minimum regulatory capital requirements under applicable PRC laws immediately after the transfer of the Credit Card Business, we and RBS Bank will, in proportion with our respective shareholdings in the Joint Venture Company, transfer to the Joint Venture Company such amount of cash as would permit the Joint Venture Company to meet such minimum regulatory capital requirements. Management and Operations. Subject to certain exceptions, including that the Joint Venture Company will have a board of directors rather than a management committee, operational arrangements in relation to the Business Unit set forth in the Credit Card Agreement will continue to apply to the Joint Venture Company.
AFH Under the investor rights agreement entered into among our bank, Huijin and AFH, we have agreed to use commercially reasonable eÅorts to propose from time to time that we and AFH enter into discussions regarding speciÑc business cooperation initiatives in the PRC Ñnancial services industry, or various business cooperation with any aÇliate of AFH in Singapore or elsewhere in Asia (each, an ""Eligible Opportunity''), which may relate to, among others, corporate governance, information technology and training. The foregoing agreement is subject to our contractual obligations to explore new business cooperation opportunities with certain other strategic investors in certain areas of the PRC Ñnancial services industry. If AFH agrees to enter into discussions with respect to an Eligible Opportunity, we and AFH will hold discussions in good faith and explore business cooperation initiatives regarding such Eligible Opportunity. Upon our request from time to time, AFH will share with us its experience, skills and know-how in the areas related to the cooperation in respect of the Eligible Opportunities on terms and conditions as may be agreed between AFH and us (the ""AFH Infrastructure Support''). Arrangements pursuant to the AFH Infrastructure Support may include periodic consultation, technical support, training and other cooperation arrangements that may be mutually agreed by AFH and us. We and AFH may form a working group to review and monitor the progress of the cooperation in respect of the Eligible Opportunities and various matters relating to the AFH Infrastructure Support. The working group may also discuss and identify Eligible Opportunities from time to time. Since entering into the investor rights agreement with AFH, we and AFH have discussed potential business cooperation initiatives relating to, among others, trade Ñnance, international settlement, client referrals, AFH's aÇliated banking network in Asia and a banking service platform
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for small and medium-sized enterprises. In addition, we and AFH have explored potential infrastructure cooperation projects with respect to areas including information technology, legal and compliance and human resources, and we have entered into a memorandum of understanding to explore cooperation in trade-related services with certain Ñnancial institutions that AFH has invested in.
UBS AG
Under the investor rights agreement entered into among our bank, Huijin and UBS AG, we and UBS AG may establish businesses and other initiatives in various investment banking and related securities business areas related to PRC investment banking clients and/or PRC capital markets as may be mutually agreed by us and UBS AG from time to time. We and UBS AG have identiÑed securities investment products and services, Ñxed income products and investment banking services as the initial areas for business cooperation. For a period of six months after the completion of the Strategic Placement, we and UBS AG will discuss and propose in good faith business frameworks for each of these initial areas. Prior to either us or UBS AG entering into an agreement with another person regarding a strategic alliance in any of the identiÑed areas, we or UBS AG must Ñrst notify the other party of such intention, providing such other party the opportunity to propose a strategic initiative between the parties. We and UBS AG are required to inform each other of its developments in the identiÑed areas on a timely basis. UBS AG has disclosed in the investor rights agreement its intention to establish a Sino-foreign joint venture enterprise in the PRC in the securities and fund management businesses. On terms to be mutually agreed from time to time, UBS AG may share with us its skills, experience and know-how in areas including risk management, valuation of complex Ñnancial instruments, accounting analysis and treatment of new Ñnancial products, asset and liability management and specialized investment products. Since entering into the investor rights agreement with UBS AG, we and UBS AG have held discussions with respect to potential strategic cooperation initiatives relating to investment banking, Ñxed income products and services, asset and liability portfolio management and market risk management.
ADB
Under the investor rights agreement entered into among our bank, Huijin and ADB, we and ADB may cooperate to establish initiatives in various areas related to our operations, which may include internal control and corporate governance and other areas as may be mutually agreed by us and ADB. Upon our request, ADB will also share with us its skills, experience and know-how with respect to anti-money laundering, combating terrorism Ñnancing, anti-corruption, environmental impact assessment in banking and other areas as may be requested by us from time to time. Since entering into the investor rights agreement with ADB, ADB has made certain cooperation proposals to us relating to project Ñnance in the infrastructure sector, anti-money laundering and environmental impact assessment. These proposals are currently under review by us.
SSF Under the investor rights agreement entered into between our bank and SSF, we and SSF may continue to expand our existing business cooperation, including with respect to the fund custody business. We and SSF have also agreed to use commercially reasonable eÅorts to explore new business cooperation areas.
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CORPORATE GOVERNANCE Our Articles of Association provide that our shareholders holding no less than 5% of the total number of issued and outstanding shares have the right to nominate persons for election to the Board of Directors. Each of RBS China and AFH has nominated one person for election to our Board of Directors (each, an ""Investor Director''). Under the relevant investor rights agreements, we and Huijin are required: (i) to procure that the Board of Directors and the relevant board committee recommends each such Investor Director to the Board of Directors; and (ii) to take all corporate action required under PRC law to cause each such Investor Director to be duly elected to serve as a member of the Board of Directors, subject to approval of the CBRC if required under PRC law, provided that all of our obligations described in this sentence will terminate upon the listing of our H Shares on the Hong Kong Stock Exchange. As required by our Articles of Association, any nominee for election to the Board of Directors is subject to review and approval by the shareholders. In addition, the Directors nominated by RBS China and AFH, once elected, will be subject to other applicable requirements under our Articles of Association as well as applicable laws and stock exchange requirements, including those requirements relating to directors' Ñduciary duties under the PRC Company Law and our Articles of Association. Our Board of Directors are also required under the relevant investors rights agreements to cause each such Investor Director, at the option of the strategic investor that has nominated such Investor Director, to be either appointed to the audit committee and risk policy committee of the Board of Directors, or entitled to attend meetings of these committees as an observer. Such rights of RBS China and AFH are subject to the rules of the stock exchange where the bank's ordinary shares are listed, applicable law and our Articles of Association, and our obligations are limited to administrative and procedural matters. RBS China and AFH have nominated Sir Frederick Goodwin and Mr. Seah Lim Huat Peter, respectively, for election to the Board of Directors and such nominations were approved by the shareholders. See ""Directors, Supervisors, Senior Management and Employees''. With respect to the representation and appointment rights of these investors, they are our internal matters and subject to the directors' Ñduciary duties. We have held discussions with AFH regarding the establishment of sound corporate governance systems as well as AFH's management experience arising from its strategic investments in certain other Asian Ñnancial institutions. We may request, and AFH may, if it deems appropriate, agree to have a person designated by AFH to serve in a senior management position at our bank. In addition, we are currently reviewing proposals made by ADB relating to internal control improvements. We intend to establish and implement further strategic cooperation initiatives with each of AFH and ADB to improve our corporate governance.
OTHER RIGHTS AND OBLIGATIONS OF THE STRATEGIC AND OTHER INVESTORS In connection with the subscription and/or purchase of Shares by RBS China, AFH, UBS AG and ADB, each such investor has entered into an investor rights agreement with us and Huijin. In connection with the subscription of Shares by SSF, SSF has entered into an investor rights agreement with us. Other than the rights disclosed in this section, the strategic and other investors are not entitled to any other material rights that are not generally available to the public shareholders of our bank. The strategic and other investors' rights and obligations under their respective investor rights agreement include the following:
Transfer Restrictions Under the relevant investor rights agreements, RBS China, AFH, UBS AG and ADB generally may not transfer Shares subscribed for or purchased in the Strategic Placement to unaÇliated third parties at any time prior to December 30, 2008 or December 31, 2008, as the case may be (the ""Lock-Up Period''). The CBRC has required in its approval of the Strategic Placement that the
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OUR STRATEGIC AND OTHER INVESTORS
strategic investors may not transfer any such Shares to any third party before the expiration of the Lock-Up Period. The CBRC approval was one of the closing conditions for the Strategic Placement. Our Articles of Association also provide that any transfer of our Shares and the register thereof are subject to applicable laws and regulations and the CBRC's requirements. In addition, subject to the approval of the Hong Kong Stock Exchange, AFH has agreed that the Shares purchased by it pursuant to its commitment to purchase US$500 million of Shares in the Global OÅering generally may not be transferred to unaÇliated third parties for a period of one year from the date of purchase in the Global OÅering.
SSF may not transfer Shares subscribed for by it to third parties until March 13, 2009.
After the expiration of the Lock-Up Period, RBS China, UBS AG and ADB are required to notify us prior to any sale or transfer of their Shares, while AFH and SSF are not required to make such notiÑcation unless the shares they wish to sell or transfer represent one percent or more of our total issued and outstanding Shares at the time.
Standstill
As of the date of its investor rights agreement with us and Huijin, each of RBS China, RBS Group, UBS AG and ADB acknowledged that it had no intention to increase its shareholding in us, subject to certain exceptions, such as anti-dilution rights expressly provided for in the investor rights agreement.
In addition, other than as expressly provided for in its investor rights agreement, each of RBS China and RBS Group has agreed that it will not directly or indirectly act in concert with any other shareholder(s) of our bank, including in relation to any agreements as to how to vote their respective Shares or in relation to any proposed or actual purchase of Shares that may result in an increase of the shareholding of RBS China or any of its aÇliates in our bank.
Exclusivity
We generally may not issue or oÅer to issue, seek, propose or agree to issue, directly or indirectly, any Shares or other shares of any other class, or any options, warrants, or other rights to acquire, or securities convertible into or exchangeable for, Shares to any direct competitor of RBS Group or AFH other than in a public oÅering. RBS Group, RBS China, AFH, UBS AG and ADB generally may not voluntarily acquire, oÅer to acquire, seek, propose or agree to acquire, any shares of, or any options, warrants or other rights to acquire, or securities convertible into or exchangeable for, shares of our direct material competitors other than in the ordinary course of business. In the case of AFH, the exclusivity provisions are subject to certain exceptions and expire upon the earlier of the third anniversary of the completion of AFH's investment in the Strategic Placement and the date upon which AFH (including its controlled investment vehicles) holds less than 5% of our Shares.
No More Favorable Terms
Subject to applicable law and applicable regulatory or stock exchange requirements and explicit policy directives of government entities for the issue of shares to an entity controlled by a PRC government entity, we undertook to each of RBS Group, RBS China, AFH, UBS AG and ADB that we would not issue any Shares to any other person on terms more favorable than the terms on which the Shares were issued to such strategic investor. Such terms are limited to: (i) price; (ii) class of shares; and (iii) terms relating to the conversion to securities that are freely tradable on a securities exchange.
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OUR STRATEGIC AND OTHER INVESTORS
Fiduciary Duties of the Directors The obligations described above under ""Ì Exclusivity'' do not override the Ñduciary duties of our Directors. In considering any future issue of Shares or other shares of any other class, or any options, warrants or other rights to acquire, or securities convertible into or exchangeable for, Shares, our Directors are to exercise their Ñduciary duties, acting in the best interests of our bank and taking into account all relevant circumstances, including the contractual agreements previously reached on exclusivity and their strategic value to our bank. In addition, the obligations described above under ""Ì No More Favorable Terms'' are subject to the requirements for our Directors to satisfy their Ñduciary duties under the PRC Company Law.
Dividend Limitation RBS China, AFH, UBS AG and ADB are not entitled to any dividends declared or paid in respect of distributable proÑts for any period prior to the date of the completion of each of the investments under the Strategic Placement. SSF is not entitled to any dividends declared or paid in respect of distributable proÑts for any period prior to the date of the completion of the SSF Investment.
Net Asset Value Protection from Huijin If our consolidated net asset value per Share as of December 31, 2005, 2006 or 2007 as determined under IFRS on a basis comparable to the determination of our consolidated net asset value per Share as of December 31, 2004 is lower than our consolidated net asset value per Share as of December 31, 2004, Huijin will generally compensate each of RBS China, AFH, UBS AG and ADB for the decrease in the value of its investment. Subject to limits on foreign ownership for determining our qualiÑcation as a domestic bank, Huijin may, at its discretion, elect to provide such compensation in Shares, cash or a combination thereof.
Parent Guarantee The obligations of RBS China to each of our bank and Huijin under the investor rights agreement are unconditionally and irrevocably guaranteed by RBS Group.
Information Rights Subject to applicable law and applicable regulatory or stock exchange requirements, we will furnish to RBS China, AFH, UBS AG and ADB certain information relating to our bank, including, among others: (i) reports, communications or documents disclosed or delivered to all the shareholders; (ii) details of any programs or plans that have the objective of enhancing our risk management framework, and any monthly report produced thereafter to track the progress of such programs or plans; (iii) a summary of the results of our regular disaster recovery tests at our data centers; and/or (iv) certain other relevant tax, management and operating data and other information. Subject to applicable law and applicable regulatory or stock exchange requirements, we will furnish to SSF certain information relating to our bank, including, among others: (i) consolidated annual and semi-annual Ñnancial statements; (ii) annual operating budget or business plan; (iii) details of any programs or plans that have the objective of enhancing our risk management framework, and any monthly report produced thereafter to track the progress of such programs or plans; (iv) a summary of the results of our regular disaster recovery tests at our data centers; and (v) certain other relevant Ñnancial, tax, management and operating data and other information. Notwithstanding the above, we are not required to furnish any information that is not publicly available.
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OUR STRATEGIC AND OTHER INVESTORS
Tag-Along Rights If we conduct a public oÅering after the expiration of the Lock-Up Period that includes a secondary oÅering tranche, we will assist AFH to include a certain number of Shares held by AFH for sale in such public oÅering. Consultation Rights Subject to applicable law and applicable regulatory and stock exchange requirements, we will consult with RBS China, AFH, UBS, ADB and SSF in respect of: (i) the transfer of the whole or substantially the whole of our share capital to another company; (ii) any form of reorganization including merger with any other company; (iii) any change to the Articles of Association that may materially and adversely affect the rights of the investors; and (iv) on all material aspects the dividend policy of our bank and the payment or declaration of any dividend on account of Shares. In addition, we will consult RBS China in respect of the sale or disposal of any material assets or property or the cessation of material operations of the Credit Card Business carried on by our bank or our bank card center. The consultation rights will not affect the proper functioning of the Board of Directors. Rights and Obligations that Lapse upon Completion of the Global OÅering Certain rights and obligations under each investor rights agreement have lapsed or will lapse upon the completion of the Global OÅering. These rights and obligations include the following: ¬ Registration rights. RBS China, AFH, UBS AG and ADB have certain registration rights in connection with our initial public oÅering to the extent such public oÅering involves the listing of Shares on a national stock exchange in the United States. ¬ Anti-dilution rights. RBS China, AFH, UBS AG, ADB and SSF have certain customary anti- dilution rights to purchase additional Shares to maintain its percentage shareholding in our bank in connection with our initial public oÅering. RBS China, AFH, UBS AG, ADB and SSF are not exercising their anti-dilution rights in connection with the Global OÅering. ¬ Price protection from Huijin. In connection with certain issuances of Shares by us at a price per Share below the price per Share paid by RBS China, AFH, UBS AG and ADB in the Strategic Placement (such diÅerence hereinafter referred to as the ""Shortfall Amount''), Huijin will provide compensation to each strategic investor based on the Shortfall Amount. Subject to limits on foreign ownership for determining our qualiÑcation as a domestic bank, Huijin may, at its discretion, elect to provide such compensation in Shares, cash or a combination thereof. ¬ Put option from Huijin. RBS China, AFH, UBS AG and ADB have the option to require Huijin to purchase all or a portion of the Shares held by them if, at the expiration of the Lock-Up Period: (i) our bank has not completed a public oÅering; or (ii) not all of the strategic investor's Shares have been converted into H Shares or other shares listed and freely traded on an eligible non-PRC securities exchange. The put option is exercisable within three months after the occurrence of either event. All Shares of RBS China, AFH, UBS AG, ADB and SSF are expected to be converted into H Shares on or before the completion of the Global OÅering. ¬ Right of Ñrst refusal/oÅer. After the expiration of the Lock-Up Period, if we have not completed a public oÅering, RBS China, AFH, UBS AG and ADB and SSF may not transfer Shares subscribed for or purchased in the Strategic Placement and SSF Investment without having Ñrst oÅered such Shares to Huijin and/or us in accordance with the procedures set forth in the relevant investor rights agreement. TERMINATION OF BUSINESS AND COOPERATION ARRANGEMENTS The investor rights agreements we have entered into with Huijin and each of the strategic and other investors, as well as the Credit Card Agreement with RBS Bank and the Master Cooperation
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OUR STRATEGIC AND OTHER INVESTORS
Agreement with RBS Group, contain termination provisions which generally allow termination by our bank or the investor if the shareholding of such investor decreases beyond certain thresholds as a result of certain voluntary transfers of our Shares. The Credit Card Agreement will be terminable by RBS Bank if the Joint Venture Company is not established by December 2008 substantially on the terms and conditions set forth in the Credit Card Agreement. In addition, the investor rights agreement with Huijin, RBS China and RBS Group, the Master Cooperation Agreement with RBS Group and the Credit Card Agreement with RBS Bank are generally not terminable by our bank if the aggregate number of Shares beneÑcially owned by RBS Group is or exceeds 2.5% of our issued and outstanding Shares or the total value of our Shares beneÑcially owned by RBS Group is worth US$750 million or more.
REGULATORY APPROVAL The investments by RBS China, AFH, UBS AG, ADB and SSF in our bank have been approved by applicable PRC and overseas regulatory authorities, including the CBRC, which was one of the closing conditions for the investments. No further PRC regulatory approvals are required for these investments.
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OUR STRATEGIC AND OTHER INVESTORS
OUR CORPORATE INVESTORS The Corporate Placing We have entered into placing agreements with 12 groups of corporate investors (the ""Corporate Investors'') which in aggregate have agreed to subscribe for approximately HK$17,521 million of our H Shares at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares subscribed by the Corporate Investors would be 6,371,391,000, which is approximately 2.62% of the Shares outstanding after the Global OÅering (assuming the Over-Allotment Option is not exercised). Each of the Corporate Investors is independent from the Company. The OÅer Shares to be subscribed by each of the Corporate Investors will not be aÅected by any reallocation of the OÅer Shares between the International OÅering and the Hong Kong Public OÅering in the event of over-subscription under the Hong Kong Public OÅering as described ""Underwriting Ì Hong Kong Public OÅering''.
Our Corporate Investors We set out below a brief description of our Corporate Investors:
China Life Group China Life Insurance (Group) Company (""China Life Group'') has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,162,920,000 at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that China Life would subscribe for would be 422,880,000, which is approximately 0.17% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised). China Life Group, headquartered in Beijing, is a large state-owned Ñnancial and insurance enterprise. The subsidiaries of China Life Group include China Life Insurance Company Limited (a company listed on the Hong Kong Stock Exchange and the New York Stock Exchange), China Life Insurance Asset Management Company Limited and China Life Insurance (Overseas) Company Limited. China Life Group and its subsidiaries constitute one of the largest commercial insurance groups in Mainland China. China Life Group has been a Global Fortune 500 company since 2003. Apart from strengthening and developing life insurance and related asset management business through its subsidiaries, China Life Group focuses on capital management and new business development. China Life Insurance Company Limited (""China Life Insurance'') has also agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,162,920,000 at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that China Life would subscribe for would be 422,880,000, which is approximately 0.17% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised). China Life Insurance is a company incorporated on June 30, 2003 in the People's Republic of China. The Company was successfully listed on the New York Stock Exchange and the Hong Kong Stock Exchange on December 17 and 18, 2003, respectively. China Life Insurance is one of the largest life insurance companies in China. China Life Insurance has an extensive distribution network in China, comprising exclusive agents, direct sales
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OUR STRATEGIC AND OTHER INVESTORS
representatives, and dedicated and non-dedicated agencies. China Life Insurance's products and services include individual life insurance, group life insurance, accident and health insurance. China Life Insurance is a leading provider of annuity products and life insurance for both individuals and groups, and a leading provider of accident and health insurance. China Life Insurance also provides both individual and group accident and short-term health insurance policies. Through its controlling shareholding in China Life Insurance Assets Management Co., Ltd., China Life Insurance is the one of largest insurance asset management company, and one of the largest institutional investors in China.
China Life Insurance has a long-term business cooperation relationship with us in areas such as custodian, bancassurance and cash management. China Life Insurance and we intend to strengthen and develop the existing business cooperation relationships.
The Bank of East Asia, Limited
The Bank of East Asia, Limited (""BEA'') and Manilink Company Limited (""Manilink'') have each agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$697,752,000 at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), each of BEA and Manilink would subscribe for 253,728,000 H Shares, which represent approximately 0.10% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised).
Incorporated in Hong Kong in 1918, BEA is dedicated to providing comprehensive retail and commercial banking services to its customers in Hong Kong, the PRC, and overseas. BEA is listed on the Hong Kong Stock Exchange and is one of the constituent stocks of the Hang Seng Index.
Currently, BEA operates more than 160 outlets worldwide, including Hong Kong, the PRC, and an extensive international network covering the United States, Canada, the United Kingdom, the British Virgin Islands and Southeast Asia. As one of the foreign banks with extensive branch coverage in the PRC, BEA's branch network in the PRC now consists of 25 outlets.
Manilink is an investment holding company which is a subsidiary of BEA.
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
The Bank of Tokyo-Mitsubishi UFJ, Ltd. (""BTMU'') through its Hong Kong branch has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,395,504,000 at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that BTMU would subscribe for would be 507,456,000, which is approximately 0.21% of the Shares outstanding upon completion of the Global OÅering (assuming the Over- Allotment Option is not exercised).
BTMU is a wholly-owned banking subsidiary of Mitsubishi UFJ Financial Group Ltd., one of the world's largest Ñnancial groups. BTMU is headquartered in Japan and has an extensive network both in Japan and overseas. BTMU provides a broad range of Ñnancial services to consumers and corporations through commercial banking, investment banking and other activities.
We regard BTMU as one of our important business partners. BTMU and we have agreed to continue to strengthen and develop existing relationships on various business segments.
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OUR STRATEGIC AND OTHER INVESTORS
Cheung Kong and Hutchison Best Sense Investments Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$697,752,000. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Best Sense Investments Limited would subscribe for would be 253,728,000 H Shares, which represents approximately 0.10% of the Shares outstanding upon the completion of the Global OÅering (assuming of the Over-Allotment Option is not exercised). Best Sense Investments Limited is an indirect wholly-owned subsidiary of Cheung Kong (Holdings) Limited (""Cheung Kong''). Cheung Kong has entered into the placing agreement as the investor parent for Best Sense Investments Limited. Cheung Kong is a company listed on the Main Board of the Hong Kong Stock Exchange, and its principal activities are property development and investment, investment holding and project management, hotel and serviced suite operation, property and project management and investment in securities. Turbo Top Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board of 1,000 Shares) which may be purchased for HK$697,752,000. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this Prospectus), the total number of H Shares that Turbo Top Limited would subscribe for would be 253,728,000 H Shares, which represents approximately 0.10% of the Shares outstanding upon the completion of the Global OÅering (assuming the Over-Allotment Option is not exercised). Turbo Top Limited is an indirect wholly-owned subsidiary of Hutchison Whampoa Limited (""Hutchison''). Hutchison has entered into the placing agreement as the investor parent for Turbo Top Limited. Hutchison is a Hong Kong-based multinational conglomerate whose securities are listed on the Main Board of the Hong Kong Stock Exchange. With operations in 54 countries and over 200,000 employees worldwide, Hutchison has Ñve core business Ì ports and related services; property and hotels; retail; energy, infrastructure, Ñnance & investments and others; and telecommunications.
Chow Tai Fook Nominee Limited Chow Tai Fook Nominee Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,395,504,000, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Chow Tai Fook Nominee Limited would subscribe for would be 507,456,000, which is approximately 0.21% of the Shares outstanding after the Global OÅering (assuming the Over-Allotment Option is not exercised). Chow Tai Fook Nominee Limited is a company incorporated in Hong Kong and is wholly beneÑcially owned by Dato Dr. Cheng Yu-Tung.
Dr. Lee Shau Kee Senasia Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,395,504,000, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Senasia Limited would subscribe for would be 507,456,000, which is approximately 0.21% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised).
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OUR STRATEGIC AND OTHER INVESTORS
Senasia Limited is a private company incorporated in the British Virgin Islands and is indirectly wholly owned by Shau Kee Financial Enterprises Limited which in turn is wholly-owned by Lee Financial (Cayman) Limited of which Dr. Lee Shau Kee is a substantial shareholder. Shau Kee Financial Enterprises Limited has entered into the agreement as the investor parent for Senasia Limited.
Kuok Group Timpano Holdings Limited, City Master Limited and Eastern Joy Limited have agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$426,404,000, HK$484,550,000 and HK$484,550,000, respectively, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Timpano Holdings Limited, City Master Limited and Eastern Joy Limited would subscribe for would be 155,056,000, 176,200,000 and 176,200,000, respectively, which is approximately 0.06%, 0.07% and 0.07%, respectively of the Shares outstanding upon completion of the Global OÅering (assuming the Over- Allotment Option is not exercised). Timpano Holdings Limited is a company incorporated in the British Virgin Islands and is owned by wholly-owned subsidiaries of Kuok (Singapore) Limited (""Kuok Singapore'') and Kuok Brothers Sdn. Berhad (""Kuok Brothers''). Kuok Singapore and Kuok Brothers have entered into the placing agreement as investor parents for Timpano Holdings Limited. City Master Limited and Eastern Joy Limited are companies incorporated in Hong Kong and are subsidiaries of Kerry Holdings Limited (""Kerry''). Kerry has entered into the placing agreement as investor parent for City Master Limited and Eastern Joy Limited. Timpano Holdings Limited, City Master Limited, Eastern Joy Limited, Kuok Singapore, Kuok Brothers and Kerry are all members of the Kuok Group, being a group of companies owned or controlled by Mr. Kuok Hock Nien and/or interests associated with him.
Nan Fung Group Gavast Estates Limited and Gentfull Investment Limited have agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,255,953,600 and HK$139,550,400, respectively, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this Prospectus), the total number of H Shares that Gavast Estates Limited and Gentfull Investment Limited would subscribe for would be 456,710,000 and 50,745,000, respectively, which is approximately 0.19% and 0.02%, respectively, of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised). Gavast Estates Limited and Gentfull Investment Limited are companies incorporated in Hong Kong. Gavast Estates Limited is indirectly wholly-owned by Mr. Chen Din Hwa and Gentfull Investment Limited is directly owned by Ms. Chen Wai Wai Vivien. Mr. Chen and Ms. Chen have entered into the agreement as the investor parent for Gavast Estates Limited and Gentfull Investment Limited respectively.
Ping An Insurance (Group) Company of China, Ltd. Ping An Insurance (Group) Company of China, Ltd. (""Ping An'') has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,395,504,000, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of
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OUR STRATEGIC AND OTHER INVESTORS
H Shares that Ping An would subscribe for would be 507,456,000, which is approximately 0.21% of the Shares outstanding after the Global OÅering (assuming the Over-Allotment Option is not exercised).
Ping An is a company incorporated in the PRC. It is the Ñrst PRC insurance company that integrates securities, trusts, banking, asset management and annuity services into a diversiÑed Ñnancial holding group. Ping An was founded in 1988 and is headquartered in Shenzhen. Ping An is listed on the Hong Kong Stock Exchange.
Sun Hung Kai Properties Group
Sharp Hero Limited and Opus Developments Limited have each agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$697,752,000 at OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that each of Sharp Hero Limited and Opus Developments Limited would subscribe for would be 253,728,000 H Shares which represents approximately 0.10% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised).
Sharp Hero Limited and Opus Developments Limited are companies incorporated in the British Virgin Islands. Sharp Hero Limited is wholly owned by Coins World Investment Limited, which in turn is wholly and ultimately owned by Sun Hung Kai Properties Limited (""SHKP''). Coins World Investment Limited has entered into the placing agreement as the investor parent for Sharp Hero Limited. Opus Developments Limited is wholly owned by Kerrisdale Company Limited, which in turn is wholly and ultimately owned by a family trust established for the beneÑt of the Kwok family, the controlling shareholders of SHKP. Kerrisdale Company Limited has entered into the placing agreement as the investor parent for Opus Developments Limited.
SHKP is one of the largest property companies in Hong Kong and is listed on the Hong Kong Stock Exchange. The SHKP group's core business is the development of property for sale and investment. The SHKP group also has investments in hotels, property management, telecommunications, transportation, infrastructure, logistics and others.
Sino Land Group
Wingreat International Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,240,448,000, at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Wingreat International Limited would subscribe would be 451,072,000, which is approximately 0.19% of the Shares outstanding upon completion of the Global OÅering (assuming the Over-Allotment Option is not exercised).
Wingreat International Limited is a company incorporated in the British Virgin Islands and is a wholly-owned subsidiary of Sino Land Company Limited, the shares of which are listed on the Hong Kong Stock Exchange and is one of the Hang Seng Index Constituent Stocks. Sino Land Company Limited has entered into the placing agreement as the investor parent for Wingreat International Limited. Sino Land Company Limited's principal activities are property development, property investment and property management in residential, commercial and industrial properties, car parks and hotels.
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OUR STRATEGIC AND OTHER INVESTORS
Woo Kwong Ching, Peter
Peace Avenue Investments Limited has agreed to subscribe for such number of H Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased for HK$1,395,504,000 at the OÅer Price. Assuming an OÅer Price of HK$2.75 (being the mid-point of the OÅer Price range set out in this prospectus), the total number of H Shares that Peace Avenue Investments Limited would subscribe for would be 507,456,000, which is approximately 0.21% of the Shares outstanding upon the Global OÅering (assuming the Over-Allotment Option is not exercised).
Peace Avenue Investments Limited is a company incorporated in the British Virgin Islands and is ultimately controlled by Mr. Woo Kwong Ching. Mr. Woo Kwong Ching has entered into the placing agreement as investor parent for Peace Avenue Investments Limited. Based on Wheelock and Company Limited's (""Wheelock'') latest interim report, as of September 30, 2005, Mr. Woo Kwong Ching is interested in 1,204,934,330 shares (59.30%) of Wheelock's issued capital.
Conditions Precedent
The subscription obligation of each Corporate Investor is conditional only upon: (i) the Hong Kong Underwriting Agreement and the International Purchase Agreement being entered into and becoming unconditional by no later than the date and time as speciÑed in those agreements; (ii) none of the underwriting agreements mentioned in (i) above having been terminated; and (iii) the Listing Committee having granted the listing of, and permission to deal in, the H Shares.
Restrictions on Disposals by the Corporate Investors
Each Corporate Investor and its respective investor parent (if any) has agreed that, without our prior written consent or that of the Joint Global Coordinators, it will not, whether directly or indirectly, at any time during the period of twelve months following the Listing Date, dispose of any H Shares subscribed pursuant to the International OÅering (or any interest in any company or entity holding any of the H Shares), other than transfers to another company which is and will remain wholly- owned by the Corporate Investor or its investor parent or, in certain cases, its holding company, and such transfer can only be made when the transferee agrees to be subject to the restrictions on disposals imposed on the Corporate Investor.
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BUSINESS
OVERVIEW A1A(28)(1)(a) A1A(34)(1)(a) We are one of the four largest commercial banks in the PRC in terms of total assets with the 3rd Sch 1 most extensive international branch network among PRC commercial banks. According to the LR1107 Banker magazine, we were the 32nd largest bank in the world based on total assets as of December 31, 2004. Our core business is commercial banking, which primarily consists of corporate LR8.04 banking, personal banking and treasury operations and accounted for 92.7% of our operating proÑt in 2005. We also conduct investment banking and insurance activities through our subsidiaries. The combination of our commercial banking, investment banking and insurance businesses has created a universal banking platform that allows us to provide integrated services to our customers. We are headquartered in Beijing with operations in the Chinese Mainland, Hong Kong and Macau and other overseas regions. Our operating proÑt was RMB37,416 million, RMB37,122 million and RMB53,636 million in 2003, 2004 and 2005, respectively, of which RMB13,203 million, RMB17,786 million and RMB29,676 million was derived from our domestic operations, respectively. As of December 31, 2005, our total assets were RMB4,740,048 million, of which 76.4% were derived from our domestic operations, before inter-company balance elimination. We are the market leader in the PRC in a number of areas. Based on data from PBOC, we were:
¬ the largest foreign currency-denominated loan provider and deposit taker in terms of outstanding balance among PRC commercial banks, with market shares of approximately 43.3% and 40.9%, respectively, as of December 31, 2005;
¬ the largest provider of international trade settlement services among PRC commercial banks, with a market share of approximately 32.6% in terms of transaction volume for the the year ended December 31, 2005, and the leader in trade Ñnance among the Big Four, with a market share of approximately 57.7% in terms of outstanding balance as of December 31, 2005;
¬ the bank among the Big Four with the highest non-interest income as a percentage of our total operating income as calculated based on PRC GAAP in 2004;
¬ the bank with the highest growth rate among the Big Four in total residential mortgage loans, which was 31.0% from 2003 to 2004 and 14.5% from 2004 to 2005; and
¬ the only bank among the Big Four which experienced growth in market share of Renminbi- denominated-deposits among PRC commercial banks in each of the year from 2003 to 2005. We had one of the most extensive domestic distribution networks, with over 11,000 branches and outlets, 580 self-service centers and 11,600 automated service machines throughout the PRC as of December 31, 2005. We also have an extensive international network. As of December 31, 2005, our international network comprised over 600 overseas branches, subsidiaries and representative oÇces covering 27 countries and regions, and we had correspondent banking relationships with over 1,400 foreign banks. In addition, we oÅer electronic-banking services such as telephone banking and Internet banking. As of December 31, 2004, we had the highest total assets, customer deposits and outstanding loans and advances per branch among the Big Four according to data released by the Big Four. We are also a leading commercial bank in Hong Kong and Macau. Our Hong Kong and Macau operations together accounted for 19.8% of our total assets before inter-company balance elimination as of December 31, 2005 and approximately 41.1% of our operating proÑt in 2005. Our subsidiary, BOCHK, was the second largest commercial bank in Hong Kong in terms of total assets as of December 31, 2005, and its direct holding company, BOCHK Holdings, is listed on the Hong
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Kong Stock Exchange. Our Macau branch was the largest commercial bank in Macau in terms of total assets as of June 30, 2005 based on data published by the Macau government. BOCHK and our Macau branch are each one of the few banks authorized to issue bank notes in their respective jurisdictions.
OUR STRENGTHS Our principal strengths include:
Well-Recognized Brand Name Established in 1912, we are one of the best-known commercial banks in the PRC. During more than 90 years of history, we have built one of the most recognized brand names in the PRC through our contributions to the evolution of the PRC commercial banking industry. We have made many signiÑcant achievements in the PRC commercial banking sector. For example, in 1929, we were the Ñrst PRC commercial bank to establish a foreign branch when we opened our London branch. In addition, in 1985, we oÅered the Ñrst bank card in the PRC. In 1994 and 1995, our Hong Kong branch and our Macau branch became bank note issuing banks in Hong Kong and Macau, respectively. Furthermore, in 1998, we arranged the Ñrst U.S. dollar- denominated syndicated loan for a PRC bank as the lead manager and agent. We have been a Global Fortune 500 company since 1990. Since 1992, we have been selected eight times as the ""Best Bank in the PRC'' or ""Best Domestic Bank in the PRC'' by EuroMoney, as well as ""Best at Commercial Banking (2005 Real Estate Awards)'' in the PRC and Hong Kong in 2005 by EuroMoney. In each of 2004 and 2005, we were named as the ""Best Trade Finance Bank in the PRC'' and ""Best Foreign Exchange Provider in the PRC'' by Global Finance. We are awarded the ""Well-Known Brand in the PRC'' recognition by the SAIC. In 2006, we were named as the ""Triple A Best Trade Finance Bank for China'' and ""Triple A Best Cash Management Bank for China'' by the Asset. According to the August 2005 survey conducted by the Financial Times, ""Bank of China'' was ranked as one of the top ten global brands in the PRC. We have also been appointed as the oÇcial banking partner of the Beijing 2008 Olympic Games, which further strengthens our brand recognition domestically and internationally.
Largest and Rationally Distributed Overseas Network Complementing an Extensive Domestic Network Our domestic branch network consisted of over 11,000 branches and outlets, 11,600 automated service machines and 585 self-service centers throughout the PRC as of December 31, 2005. As of the same date, approximately 46.5% of our domestic branches were located in the Yangtze River Delta, Pearl River Delta and Bohai Rim Economic Zone, which are among the more economically developed regions of the PRC. As of the same date, approximately 63.9% of our domestic branches were located in urban regions. We currently have the largest overseas network among the PRC commercial banks, with over 600 branches, subsidiaries and representative oÇces covering 27 countries and regions, including major international Ñnancial centers such as New York, London, Tokyo, Hong Kong, Frankfurt and Singapore. BOCHK had over 280 branches in Hong Kong, the largest branch network among the banks in Hong Kong as of December 31, 2005. BOCHK is well positioned to take advantage of the rapidly growing Öow of business between the PRC and Hong Kong. Our Macau branch had a market share of approximately 30% in terms of total assets as of June 30, 2005 according to data published by the Macau government.
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We believe we operate the most eÇcient branch network among the Big Four as measured by total assets, customer deposits and outstanding loans and advances per branch, which totaled approximately RMB359 million, RMB281 million and RMB180 million, respectively, as of December 31, 2004 based on data released by the Big Four. Our extensive domestic and overseas network enables us to structure and deliver products and services to serve our customers on a global basis, and allows us to capture the business opportunities arising from the increasing integration of the PRC into the global economy.
Solid Customer Base and Strong Presence in Attractive Customer Segments In the PRC, foreign exchange services tend to be utilized by larger corporate customers and more aÉuent individuals. Capitalizing on our position as one of the most experienced foreign exchange banks in the PRC and on our extensive global network, we have established and continue to maintain strong relationships with leading domestic and international corporations and Ñnancial institutions. We also have a strong presence in the aÉuent retail customer segment. We had business relationships with more than 220 of the Global Fortune 500 companies operating in the PRC and maintained lending relationships with more than 41,000 domestic corporate customers, including over 6,700 foreign-invested enterprises, as of December 31, 2005. Large corporate customers account for the majority of our overall business. As of December 31, 2005, approximately 66.3% of the aggregate balances of our domestic corporate loans and advances were made to corporate customers that had outstanding loans and advances with us in excess of RMB100 million. See ""Description of Our Assets and Liabilities Ì Assets Ì Loans and Advances by Size of Exposures to Single Corporate Borrowers for Our Domestic Operations''. In addition, we provide trade related services to over 370 of the leading 500 PRC import and export companies as ranked by the Ministry of Commerce of the PRC. Our relationships with these large corporate customers have enabled us to increase our product penetration in the most signiÑcant corporate customer segment in the PRC. As of December 31, 2005, we had approximately 3.3 million personal banking customers with deposit balances of RMB100,000 or more and approximately 334,800 personal banking customers with deposit balances of RMB500,000 or more. As of the same date, we had established over 200 wealth management centers that serve our wealth management customers under our global wealth management brand of ""BOC Wealth Management ( )''. We have achieved signiÑcant growth in the domestic residential mortgage loan market, with a compound annual growth rate of 34.2% from 2003 to 2005. As of December 31, 2005, we accounted for 33.2% of total new mortgage loans extended by the Big Four, according to data provided by the Big Four. As of December 31, 2005, we had RMB286,829 million of domestic mortgage loans outstanding, representing 75.5% of our total personal loans and advances. In addition, we were approved to establish the Ñrst automobile Ñnancing joint venture between a PRC commercial bank and a foreign automobile manufacturer in 2005.
Universal Banking Platform In addition to commercial banking, we provide investment banking, insurance and other services through our wholly owned subsidiaries, BOCI, BOCG Insurance and BOCG Investment. The combination of these businesses has created a universal banking platform that provides us with the ability to oÅer a broad range of Ñnancial products and services and enables us to establish stronger relationships with strategically targeted customers and strengthen customer loyalty. BOCI is one of the leading local investment banks based in Hong Kong. In 1999, BOCI Asset Management Limited, a wholly owned subsidiary of BOCI, established BOCI-Prudential Asset
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Management Limited, a joint venture with Prudential Corporation Holdings Limited, to conduct asset management operations in Hong Kong. In 2002, BOCI established BOCI China, a joint venture with other third parties, to engage in the domestic securities business. In 2004, BOCI established BOC International Investment Managers, a joint venture with BOCI China and Merrill Lynch Investment Managers Limited, to conduct fund management operations in the PRC. See ""Ì Investment Banking''. BOCG Insurance provides a broad range of insurance products. BOCG Insurance's net premiums from property and casualty insurance in Hong Kong ranked Ñrst for seven consecutive years from 1998 to 2004 according to data released by the OÇce of the Commissioner of Insurance of Hong Kong. Bank of China Insurance Co., Ltd., a wholly owned subsidiary of BOCG Insurance, began distributing property and casualty insurance products in Guangdong Province in 2005. In December 2005, Bank of China Insurance Co., Ltd. was approved by the CIRC to open its Ñrst domestic branch in Jiangsu Province. See ""Ì Insurance''. BOCG Investment was established in 1984 in Hong Kong as an investment management company focusing on strategic investment as well as distressed assets investment business. See ""Ì Other Business''. Through these subsidiaries, we believe we are well positioned to beneÑt from the signiÑcant growth potential in the investment banking and insurance businesses. In addition, this business structure enables us to diversify our sources of income. Leader in Non-Interest Income and Foreign Exchange Businesses with Strong Product Innovation Capabilities In 2004, our non-interest income as a percentage of our total operating income based on PRC GAAP was the highest among the Big Four. We believe our diversiÑed product and innovation capabilities have enabled us to generate a higher level of non-interest income compared with the other members of Big Four, thus reducing our reliance on traditional bank lending business. Through our global markets department, we oÅer a broad range of treasury products and services for diÅerent customer groups, and conduct treasury activities through our trading centers located in Hong Kong, London, New York, Beijing and Shanghai. As of December 31, 2005, we managed the largest foreign exchange portfolio among the PRC commercial banks according to data published by the PBOC. We believe our ability to oÅer innovative Ñnancial solutions to our customers provides us with a competitive advantage over other PRC commercial banks. We have also demonstrated our product innovation capabilities through the development of our retail product portfolio. We oÅer a variety of bank card services, with the largest number of quasi- credit cards issued in the PRC, as of December 31, 2005, according to the PBOC. In addition to being a market leader in the automobile loan market, we provide education loans and cross-border wealth management services in the PRC. We are a market leader in the foreign currency-denominated deposit, lending, and trade-service businesses in the PRC. According to the PBOC, as of December 31, 2005, we had a market share of approximately 43.3% in foreign currency-denominated loans among PRC commercial banks and a market share of approximately 40.9% in foreign currency-denominated deposits among PRC commercial banks. We had a market share of approximately 32.6% in international trade settlement in terms of transaction volume as of December 31, 2005 and a market share of approximately 57.7% in trade Ñnance in terms of outstanding balances among the Big Four as of December 31, 2005.
Experienced Senior Management Team with Proven Track Record Our senior management team has extensive experience in the banking and Ñnancial services, with an average of 21 years of relevant experience. In particular, our chairman, Mr. Xiao Gang, has
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over 24 years of banking industry experience and was a deputy governor of the PBOC prior to joining us. Our President, Mr. Li Lihui, has over 26 years of banking industry experience and has held a number of senior management positions in key Ñnancial institutions, including as Executive Vice President of ICBC. Over 40% of our management personnel at or above the level of assistant general manager in our head oÇce have overseas working experience. See ""Directors, Supervisors, Senior Management and Employees''.
In addition, our successful experience in restructuring our banking business in Hong Kong and the listing of BOCHK Holdings on the Hong Kong Stock Exchange in 2002 have provided us with knowledge and experience in the area of bank reform.
OUR STRATEGY A1A(34)(1)(c)
We strive to become the premier bank in the PRC by pursuing sustainable proÑtability and quality-driven growth. We intend to become the Ñnancial services provider of choice in the PRC for large corporations and aÉuent retail customers, as well as a leading international Ñnancial services company.
To achieve our strategic objectives, we intend to focus on the following:
Strengthen Corporate Governance, Risk Management and Financial Management
We have implemented a corporate governance framework to align our management practices with international best practices. Our corporate governance structure consists of our general meeting of shareholders, the Board of Directors and the Board of Supervisors. We intend to strengthen the functions of the Ñve Board of Directors committees, which were established to assist the Board of Directors to make decisions on, as well as supervise, strategic planning, audit, risk management, personnel and remuneration and related party transactions.
We strive to achieve an appropriate balance between risk and return. We recognize that it is essential to continue to improve our risk management and internal control in order to maintain our asset quality. We are in the process of building an integrated risk management framework covering credit risk, market risk, liquidity risk and operational risk. We intend to further improve our centralized credit approvals at our head oÇce and tier-one branches, as well as increase the role of our head oÇce in managing and evaluating authorized credit application approvers. We are also in the process of further upgrading our management information systems and other information technology systems to support more advanced risk management processes.
We will continue to enhance our loan provisioning strategies. We believe this will enhance our ability to manage credit risks and provide us with potential for future earnings growth. We seek to continue to enhance our procedures for on-going credit monitoring and intend to establish a more stringent process for managing non-performing loans that supports early identiÑcation, accurate and timely classiÑcation, adequate provisioning and eÅective collection.
We seek to manage our capital base, and improve our asset and liability mix and pricing. We are in the process of improving our system to regularly review our asset portfolio in order to maximize our returns while maintaining a suitable risk proÑle, and to optimize our deposit structure to lower our cost of funding. We plan to implement more advanced performance measures, such as merit- based performance management system for monitoring of economic value-added and risk-adjusted return on capital. In addition, we plan on further improving our Ñnancial and accounting controls.
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Focus on Attractive Customer Groups We seek to expand the scope of our business with large corporate customers by providing them with a broad range of treasury, investment banking and insurance services in addition to traditional banking products and services. We have developed a set of marketing standards for key domestic customers of our bank. These standards will be implemented throughout our bank to ensure high quality services are provided to our key customers and their subsidiaries on a timely basis. We are also seeking to enhance the coordination and integration between our specialized product manager teams and customer relationship manager teams. We believe the small and medium-sized enterprise segment will become a source of signiÑcant growth in the future. We will continue to selectively seek small and medium-sized enterprise customer opportunities based on improved risk management tools, risk management and pricing policies and customized product oÅerings. We also intend to focus on the mid- to high-end retail segment by further developing our wealth management products and services. We will continue to build on our Ñnancial advisors team and product oÅerings as well as improve our electronic distribution channels. We will also focus on delivering customized products and services to our mid- to high-end customers in order to enhance our service quality. We are developing a customer-centric culture that emphasizes the importance of service quality throughout our organization. We also intend to leverage our status as the oÇcial banking partner of the Beijing 2008 Olympic Games to expand our corporate and retail businesses by enhancing our brand awareness among corporate and retail customers in the global community.
Seek Further DiversiÑcation by Enhancing Our Product OÅerings and Strengthening Our Universal Banking Platform We believe our diversiÑed business structure is one of our core competencies. This competency is attributable to our product design capabilities and our universal banking platform. We seek to further enhance our product design capabilities and business platform by working with the strategic investors. For the personal banking business, we will continue to focus on our mortgage lending. In particular, we have developed a direct-sale model to market our mortgage products directly to our retail customers in order to provide customized mortgage products and to improve our customer service. By leveraging our partnership with various business alliances, we strive to solidify our market leading position in auto Ñnancing. We also seek to expand our credit card, wealth management and insurance by leveraging the support of and cooperation with our strategic investors. We plan to grow unsecured personal lending selectively, leveraging the experience and expertise of BOCHK. For the corporate banking and treasury operations, we will reinforce our leading position in trade related services, trade Ñnance and treasury products, and continue to develop fee-based businesses. We also intend to develop and promote globalized products and services based on our overseas network, and to develop our investment banking and insurance operations, leveraging our existing platform and customer relationships. We intend to promote and capture cross-selling opportunities by developing appropriate proÑt sharing and incentive schemes. We will continue to increase the contribution of non-interest income to our total income. We plan to achieve this by focusing on high-end retail customers, who we believe have a greater need for wealth management products and other value-added services. We will also focus on large corporate customers that require treasury, cash management, foreign exchange, custody and trade services
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and products. As the PRC continues to liberalize interest and exchange rates, we believe we will have additional opportunities to leverage our treasury capabilities to provide hedging and other treasury products for our customers. In addition, we plan to strengthen our overseas product oÅerings and develop products and services tailored to meet the demands of the local markets of our overseas network. Furthermore, as the only Ñnancial institution that is authorized to develop Olympic-related Ñnancial products, we intend to leverage this position and design more products to meet market demand.
Focus on Domestic Strategic Regions and Further Develop Our International Franchise to Support Cross-Border Businesses We have identiÑed 10 Key Regions and 40 Key Cities in the PRC as our key strategic regions. We will allocate resources and prioritize our eÅorts accordingly. These regions include the more developed geographic markets in the Yangtze River Delta, Pearl River Delta and Bohai Rim Economic Zone, and selected major capital cities of certain inland provinces. As of the end of 2005, these 10 Key Regions accounted for approximately 61.9% of our total domestic deposits and approximately 61.8% of our total domestic loans based on our operating data. As of the end of 2005, the 40 Key Cities accounted for approximately 58.3% of our total domestic deposits and approximately 64.6% of our total domestic loans based on our operating data. The identiÑcation of the domestic strategic regions also provides us with a base to facilitate further customer segmentation. As of December 31, 2003, 2004 and 2005, loans and advances to customers originated in Yangtze River Delta, Pearl River Delta and Bohai Rim regions accounted for approximately 60.6%, 60.8% and 65.3%, respectively, of loans and advances for our domestic operations. We will continue to develop our overseas network in order to support our domestic and international customers. Through better coordination and expanded cross-border services and products, we intend to capture business opportunities arising from the increasing globalization of the PRC economy. We will continue to strengthen risk management and develop information technology systems in our global network in order to eÅectively manage risks and facilitate information sharing.
Implement Infrastructure Reform to Streamline Processes and Increase EÇciency We are in the process of transforming our organizational structure to centralize and streamline key decision-making processes. We expect our Board committees and senior management to continue to focus on reform, and adopt a combination of matrix management, regional management and centralized vertical management according to the business development needs. We are also in the process of streamlining and standardizing our operational processes. Between 2003 and 2005, we rolled out a program on a bank-wide basis to improve our processing eÇciency and service quality, as well as to reduce our organizational redundancy. We plan to further implement such program in the next two years. We also intend to enhance existing distribution channels as well as develop new distribution channels, including improving our phone-banking and Internet banking services. We believe that the development and use of information technology plays a critical role in our business management and operations. In 2004, we launched the information technology blueprint project. This project aims to implement a number of initiatives including, among others, the development of a new core banking system and a new management information system. See ""Ì Information Technology''. By implementing the information technology blueprint project, we expect the information technology system will serve as a foundation for the sustainable and long-term growth of our businesses. The new core banking system is designed to enable our transformation to a customer-
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based management and service model, which will support product customization and bundling in accordance with targeted customer needs. The new management information system will support management decisions, such as assets and liabilities management, risk management and proÑtability analysis.
Train and Develop Our Employees to Enhance Our Competitive Advantage
Our competitive advantage depends on our ability to attract, retain, train and motivate our employees. Since 2003, we have been rolling out a bank-wide human resource reform program. We will continue to enhance our strategic human resource management to align our employees' and shareholders' interests. We will continue to provide our employees with extensive training and overseas rotation programs to improve and upgrade their skills and experience. We believe our commitment to facilitating the career development of our employees enables us to develop a high quality banking team. See ""Ì Employees''. In addition, we plan to introduce an equity-based incentive plan for our senior management. See ""Directors, Supervisors, Senior Management and Employees Ì Share Appreciation Rights Policy''.
Cooperate with Our Strategic Investors to Create Synergies
We have established strategic relationships with our strategic investors, who have invested an aggregate amount of approximately US$5.1 billion in the Shares of our bank. We believe our strategic investors have complementary areas of expertise that can assist us in our business and infrastructure development. The areas of cooperation with RBS Group include credit cards, wealth management, corporate banking and general insurance. We also intend to cooperate with RBS Group with respect to risk management, Ñnancial management and operational support. In the cooperation arrangement with AFH, we intend to share their expertise in corporate governance, corporate restructuring and technology development. We intend to work with UBS AG to further develop our investment banking and Ñxed income securities businesses. Our cooperation with ADB will be primarily related to anti-money laundering and internal controls. Our strategic investors are also expected to contribute their technologies and expertise in human resource management and training and other infrastructure development areas.
We have established working teams and plans with our strategic investors to cooperate on a number of projects. We have established action plans relating to employee training and technology transfer with the assistance of our strategic investors. RBS Bank and its aÇliates have seconded and will continue to second professionals to take management roles in our credit card operations and advisory roles in our operational risk and credit risk operations. Through cooperation agreements, we will seek to take advantage of the expertise of our strategic investors to enhance the business opportunities with our existing customers to increase market penetration. We believe our cooperation with our strategic investors will enhance our competitiveness.
OUR PRINCIPAL BUSINESS ACTIVITIES
Our three principal lines of business consist of commercial banking, investment banking and insurance. Our core business, commercial banking, accounted for 92.7% of our operating proÑt in 2005.
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The following table sets forth our operating proÑt attributable to each of our principal lines of business for the periods indicated:
For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Commercial banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,022 82.9% 34,902 94.0% 49,735 92.7% Investment banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 337 0.9 338 0.9 274 0.5 Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 0.5 266 0.7 334 0.6 Others(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,861 15.7 1,616 4.4 3,293 6.2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 100.0% 37,122 100.0% 53,636 100.0%
(1) Include investment holding and other miscellaneous activities.
We conduct our business in the PRC, Hong Kong and Macau and other overseas regions. Our domestic operations accounted for 55.3% of our total operating proÑt in 2005. The following table sets forth our operating proÑt attributable to our business in the PRC, Hong Kong and Macau and other overseas regions for the periods indicated:
For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Domestic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,203 35.2% 17,786 47.9% 29,676 55.3% Hong Kong & Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,797 58.3 18,014 48.5 22,035 41.1 Other overseas regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,416 6.5 1,322 3.6 1,925 3.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 100.0% 37,122 100.0% 53,636 100.0%
(1) Includes the operations of our head oÇce (including the treasury operations conducted in Hong Kong by the global markets department of our head oÇce) and its branches in the PRC.
COMMERCIAL BANKING
Our commercial banking business comprises three major lines of business: corporate banking, personal banking and treasury operations. Corporate banking accounted for 56.2% of our total commercial banking operating proÑt in 2005. Our personal banking operations experienced signiÑcant growth in the past three years in terms of operating proÑt, increasing from RMB4,050 million in 2003 to RMB6,990 million in 2004 and to RMB18,823 million in 2005. The following table sets forth our operating proÑt attributable to each of our principal lines of commercial banking business for the periods indicated:
For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Corporate banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,103 55.1% 17,215 49.3% 27,944 56.2% Personal banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,050 13.1 6,990 20.0 18,823 37.8 Treasury operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,869 31.8 10,697 30.7 2,968 6.0 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,022 100.0% 34,902 100.0% 49,735 100.0%
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Commercial Banking Business in the PRC Corporate Banking We oÅer a broad range of corporate banking products and services to our corporate customers, including state-owned enterprises, private enterprises, foreign-invested enterprises and Ñnancial institutions. As of December 31, 2005, corporate loans and advances of our domestic operations accounted for 78.9% of our total domestic gross loans and advances to customers. As of December 31, 2005, domestic corporate deposits accounted for 38.5% of our total domestic customer deposits.
Corporate Banking Products and Services We oÅer a broad range of corporate banking products and services in Renminbi and foreign currencies. These products and services include loans and advances, deposits, fee-based products and services and trade-related services and trade Ñnance.
Corporate Loans and Advances Our principal corporate loan products include Renminbi-denominated and foreign currency- denominated loans. These corporate loan products may take the form of Ñxed asset loans, working capital loans, bill discounting and trade Ñnance. We provide Ñxed asset loans to our corporate customers to meet their funding needs for infrastructure projects, acquisition of machinery and equipment and real property development. Working capital loans are extended to meet our corporate customers' working capital or cash Öow needs. Bill discounting involves providing our customers with short-term Ñnancing in exchange for their bills of exchange issued or accepted by other commercial banks and corporations. We may re-discount these bills with the PBOC or other authorized Ñnancial institutions. We also provide trade Ñnance to our customers. See ""Ì Trade- Related Services and Trade Finance Ì Trade Finance''.
Renminbi-Denominated Corporate Loans and Advances Leveraging our strength in foreign currency-denominated corporate loan market, we endeavor to expand our Renminbi-denominated corporate loan business. As of December 31, 2003, 2004 and 2005, our Renminbi-denominated corporate loans and advances for our domestic operations were RMB1,067,382 million, RMB1,027,269 million and RMB1,096,103 million, respectively, and accounted for 71.3%, 74.2% and 77.2%, respectively, of the corporate loans and advances for our domestic operations. As of December 31, 2005, our Renminbi-denominated corporate loans and advances for domestic operations represented a market share of approximately 9.5% among the PRC commercial banks according to data from the PBOC.
Foreign Currency-Denominated Corporate Loans and Advances We are the market leader in foreign currency-denominated corporate loans. As of December 31, 2005, our foreign currency-denominated corporate loans and advances for our domestic operations were RMB324,080 million, representing a market share of 43.3% among PRC commercial banks according to data from the PBOC. We acted as the specialized foreign exchange bank in the PRC before 1994 and among the Ñrst PRC commercial banks to engage in foreign currency-denominated loans, foreign currency-denominated on-lending loans, international syndicated loans, project Ñnance and export credit. Our strong market position in foreign currency-denominated corporate loans has helped us build up long-term relationships with leading corporations in energy, petroleum and chemicals, telecommunication, transportation and international trade industries.
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Corporate Deposits
We accept deposits from our corporate customers in Renminbi and major foreign currencies such as U.S. dollars, Hong Kong dollars, Euros, Japanese yen and British pounds. As of December 31, 2005, we had the largest amount of foreign currency-denominated corporate deposits among PRC commercial banks, with a market share of approximately 26.9%, based on data from the PBOC. As of the same date, we had RMB132,156 million of foreign currency-denominated corporate deposits for our domestic operations. As of December 31, 2003, 2004 and 2005, we had RMB698,657 million, RMB817,674 million and RMB995,378 million, respectively, of Renminbi- denominated domestic corporate deposits, representing a compound annual growth rate of 19.4% from 2003 to 2005.
Fee-Based Products and Services
Capitalizing on our product innovation capabilities, we oÅer a wide range of fee-based products and services, including settlement, guarantees, fund custody and cash management. We have strong market positions in a number of these businesses. We believe our fee-based products and services not only generate income, but also help us to build long-term relationships with our customers.
Settlement
We provide domestic and international settlement services to our customers. Our domestic settlement services include, among others, bank drafts, promissory notes, checks, foreign currency exchange, remittance, collection, collection and acceptance, bank-accepted drafts and domestic letters of credit. We were the Ñrst PRC commercial bank to provide domestic letters of credit. Our international settlement services primarily consist of trade services, including letters of credit, export collection, import collection and inward and outward remittance. For description of international trade settlement, see ""Ì Trade-Related Services and Trade Finance Ì International Trade Settlement Services''.
Guarantee Services
Our guarantee services to corporate customers include, among others, loan guarantees, credit facility guarantees, leasing guarantees, payment guarantees, tender and performance guarantees, maintenance guarantees, advance payment guarantees, customs guarantees and processing trade tariÅ payment guarantees. The balance of our outstanding guarantees increased from RMB134,380 million as of December 31, 2003 to RMB172,519 million as of December 31, 2004, and to RMB197,456 million as of December 31, 2005.
Custodian Services
According to the Comprehensive Handbook of Chinese Securities 2004-2005, we ranked second in the PRC in terms of total assets under custody in 2004, and were the largest custodian in the PRC in terms of the volume of institutional investors' assets under custody. We serve as custodian for securities investment funds, social security funds, insurance companies, trust companies, qualiÑed foreign institutional investors and securities companies. We also provide custodian services for pension funds and annuities. We receive fees for acting as custodian and provide services such as safekeeping, clearing and settlement, valuation, accounting, corporate action, compliance and performance measurement and risk analysis services to our clients. As of December 31, 2005, we had total domestic assets under custody of approximately RMB168,300 million.
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Cash Management Products and Services We oÅer a variety of value-added and customized cash management products and services, including Renminbi payment and collection, account services, clearing and settlement services, integrated receivables management and liquidity management. We also provide group companies with foreign exchange fund sweeping and management services. We were recognized as the ""Best Cash Management Bank in the PRC'' by AsiaMoney in 2005. We utilize our Internet banking platform to provide customized real-time cash management products and services. All our domestic branches provide online cash management services, such as online cash Öow and liquidity management, online banking service linking our internal banking system with our corporate customers' enterprise resource planning systems and online tariÅ payment services. We believe these products and services will enhance customer loyalty and provide cross-selling opportunities.
Other Fee-Based Services We act as agent for certain PRC policy banks and receive agency fees in connection with providing payment disbursement, clearance and other services. We also utilize our extensive branch network and other distribution channels to sell third party investment funds and insurance products in the PRC. We also oÅer other fee-based services to our corporate customers such as entrusted loans, syndicated loan arrangements, credit facility arrangements and credit reference services.
Trade-Related Services and Trade Finance We have been providing trade-related services since 1915. Our key products and services include international trade settlement, trade Ñnance, factoring and forfaiting. Our representatives occupy key positions of certain international industrial organizations in this business. Since 1999, our representative has been serving as the vice chairman of the Commission on Banking Technique and Practice of the International Chamber of Commerce, the industry association that promulgates many of the international trade Ñnance industry standards. In addition, our representative became the non-executive director of the International Forfaiting Association in 2005, the only director from Ñnancial institutions outside Europe. We believe our trade-related services and trade Ñnance has growth potential and we are well positioned to capture the growth opportunity from the expanding domestic and international trade.
International Trade Settlement Services As of December 31, 2005, we were the leading PRC commercial bank in international trade settlement business with a market share of approximately 32.6% in terms of transaction volume, based on data provided by the SAFE. We provide a broad range of international trade settlement services to exporters and importers, including letters of credit, inward and outward bill collections and remittances. In 2003, 2004 and 2005, transaction volumes for our international trade settlement business were US$254,487 million, US$353,299 million and US$413,383 million, respectively.
Trade Finance We are a market leader in the PRC trade Ñnancing business, with a market share of approximately 61.4% in terms of outstanding balances among the Big Four as of December 31, 2005, according to data from the PBOC. We provide our corporate customers in the import business with letters of credits, conÑrmation of letters of credits, import bill advances and shipping guarantees. For our customers who are engaged in the export business, we oÅer packing loans, export discounting, export invoice discounting and export bill purchasing to assist them in managing
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their liquidity. Our trade Ñnance business experienced rapid growth over the past three years. In 2003, 2004 and 2005, transaction volumes for our trade Ñnance business were US$12,344 million, US$21,684 million and US$26,326 million, respectively.
Factoring In 1992, we became the Ñrst PRC commercial bank to engage in factoring business. We provide factoring services by guaranteeing payments on receivables, providing customers with trade Ñnance, managing customers' sales accounts and collecting account receivables. Our factoring volume was US$2,351 million, US$4,214 million and US$6,321 million in 2003, 2004 and 2005, respectively. Our export factoring business ranked the fourth among 196 members of the Factors Chain International in 2004.
Forfaiting Forfaiting is the non-recourse purchase of receivables arising from trade-related transactions. The transaction volume of our forfaiting business increased from US$414 million in 2003 to US$650 million in 2004 and to US$1,182 million in 2005.
Other Trade-Related Services We also provide other trade-related services to our corporate customers such as processing trade account services, customer credit information and bill of lading information investigations. We are the Ñrst PRC commercial bank appointed by the State Council of the PRC to provide processing trade account services starting from 1995.
Customer Base In accordance with our strategy to focus on large corporate customers, we have built business relationships with many large PRC companies, Ñnancial institutions and leading multinational companies operating in the PRC. As of December 31, 2005, we maintained lending relationships with over 41,000 corporate customers, including over 6,700 foreign-invested enterprises. As of December 31, 2005, approximately 66.3% of the aggregate balances of our domestic corporate loans and advances were made to corporate customers that had outstanding loans and advances from us in excess of RMB100 million. We also maintain business relationships with over 220 of the Global Fortune 500 companies operating in the PRC. As of December 31, 2005, we had over 1,490 group Ñnancial institution customers. We currently provide trade-related services to over 370 of the leading 500 import and export companies ranked by the Ministry of Commerce of the PRC. In addition, we will continue to selectively seek small and medium-sized enterprise customer opportunities.
Marketing In line with our strategy to build a customer-centric culture, we have adopted a customer- oriented approach in organizing the marketing function within our bank. Our head oÇce is in charge of our overall marketing strategies and plans. Our branches are responsible for developing and implementing marketing initiatives in their respective regions, and collecting valuable information from customers that allows us to further enhance our sales and marketing programs. We are in the process of implementing a relationship manager system pursuant to which promotions and compensations of our relationship managers are linked to their performance. Under this system, the key corporate customer is usually served by a customer service team. A typical customer service team comprises relationship managers, product managers and supporting staÅ.
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Market Segmentation
We strategically focus on attractive customer groups. Our head oÇce is primarily responsible for the sales and marketing to our key corporate customers that hold leading positions in industries of strategic importance to us, with strong Ñnancial status and sound credit ratings and who we believe can make signiÑcant contributions to our business. We leverage resources throughout our banking platform to provide comprehensive services to these key corporate customers. Our branches are primarily responsible for the sales and marketing to our corporate customers within the areas covered by such branches. In particular, our branches serve their own key corporate customers as well as the key corporate customers identiÑed by our head oÇce in their respective area. Our head oÇce also establishes bank-wide marketing standards for the key corporate customers identiÑed by our head oÇce to ensure consistent and high quality Ñnancial services to these customers and their subsidiaries and branches.
We tailor our marketing strategies based on industries and regions. We have identiÑed the transportation, storage and postal industries, the electric power, gas and water industries, petroleum and chemicals industries and the telecommunications, computer and software industries as key industries of our corporate lending business. In addition, we have identiÑed 10 Key Regions as well as 40 Key Cities in the PRC.
We also have a Ñnancial institutions department responsible for marketing and customer service for our Ñnancial institution customers. Our Ñnancial institutions department has developed a set of marketing initiatives to promote our products and services that are tailored speciÑcally to Ñnancial institutions.
Cross Marketing
Capitalizing on our universal banking platform in the PRC, we utilize our resources in commercial banking, investment banking and insurance as well as our extensive global network to provide integrated and ""one-stop shop'' services to our corporate customers. For example, we oÅer our corporate customers a broad range of investment banking services through our wholly-owned subsidiary, BOCI, including equity and debt raising and underwriting, mergers and acquisitions, re- Ñnancings and asset management. We have focused and will continue to focus on cross-selling and synergies across various business and product lines within our bank. In particular, we seek to increase cross-referrals among our business lines, business departments, and domestic and overseas branches, representative oÇces and subsidiaries. For example, our corporate banking department works closely with our global markets department to provide asset management products and trading services to our corporate customers. See ""Ì Treasury Operations Ì Treasury Transactions on Behalf of Customers''.
Business Initiatives
We intend to further develop our corporate banking business by adopting the following business initiatives:
¬ Focus on Our Key Customers Based on a Customer-Centric Service Model. We are in the process of conducting a bank-wide review of our existing corporate customers to select a group of key customers at the head oÇce level and branch level based on the customers' proÑt contribution, strategic importance to our overall corporate banking business, Ñnancial performance and credit rating. We are also in the process of implementing marketing standards for key corporate customers throughout our bank.
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¬ Leverage Our Strong Product Platform to Increase Market Penetration. We plan to capitalize on our universal banking platform by developing proÑt sharing and incentive mechanisms to encourage cross-selling and product referrals among our business lines. We also plan to establish more dedicated customer service teams involving relationship managers and product managers to further develop our fee-based products and services and trade-related services based on our product platform.
¬ Improve Our Corporate Loan Portfolio Quality. We seek to improve the quality of our corporate loan portfolio by improving our lending practices and increasing our eÅorts to monitor the ongoing credit quality of our corporate customers. We also plan to conduct bank-wide customer credit rating evaluations based on a more advanced credit rating module which is currently under development.
¬ Selectively Exploit Small and Medium-Sized Enterprise Customer Opportunities in the Medium to Long Term. Given the relatively complicated risk proÑle of small and medium-sized enterprise customers, we are in the process of developing credit policy guidelines for small and medium-sized enterprise customers, as well as a risk-based pricing mechanism in order to enhance our risk-adjusted return on capital. Targeting the speciÑc needs of small and medium-sized enterprise customers, we intend to focus on providing standard products and services, including short-term Ñnancing, trade related services and other settlement products.
Personal Banking
Our personal banking business has experienced signiÑcant growth since we placed increasing emphasis on personal banking business in 2000. The operating proÑt derived from our overall personal banking business grew from RMB4,050 million in 2003 to RMB6,990 million in 2004 and to RMB18,823 million in 2005. Our personal loans and advances for our domestic operations grew from RMB254,019 million as of December 31, 2003, to RMB351,345 million as of December 31, 2004 and to RMB379,958 million as of December 31, 2005, representing a compound annual growth rate of 22.3%.
Personal Banking Products and Services
We oÅer a broad range of personal banking products and services, including loans, deposits, wealth management services, foreign exchange services and card services. We are the market leader for a number of these businesses. For example, as of December 31, 2005, we accounted for approximately 33.2% of the new mortgage loans among the Big Four according to data provided by the Big Four. As of December 31, 2005, we also had leading market shares of approximately 32.4% in automobile loans among the Big Four according to data provided by the Big Four, and 53.6% in total foreign currency-denominated personal deposits among the PRC commercial banks according to data from the PBOC. We are the largest issuer of quasi-credit cards in the PRC with a market share of over 24.0% according to data from the PBOC.
Personal Loans and Advances
Our personal loans and advances primarily consist of mortgage loans and other personal loans. Other personal loans include automobile loans, credit card loans, loans for business purposes, educational loans and revolving credit lines. Our personal loans and advances for our domestic operations accounted for 14.5%, 20.2% and 21.1% of the loans and advances for our domestic operations as of December 31, 2003, 2004 and 2005, respectively.
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Mortgage Loans We provide mortgage loans to Ñnance the purchase of properties with terms generally up to 30 years. We may lend up to 80% of the appraised value of the property based on our evaluation of a particular borrower's credit and risk proÑle. As of December 31, 2003, 2004 and 2005, we held market shares of approximately 18.6%, 21.8% and 22.9%, respectively, among the Big Four according to data provided by the Big Four. In recent years we have built cooperation relationships with key real estate developers nation wide. We are implementing a direct-sale model to market our mortgage products to customers, and oÅer ""one-stop shop'' services to our customers for mortgage loan-related procedures such as loan applications, property insurance, notarization and advisory services in connection with investment in real properties. We accounted for approximately 34.3% and 33.2% of the new mortgage loans among the Big Four in 2004 and 2005, respectively, based on data provided by the Big Four. We believe the secondary real estate market provides us with additional growth potential. As a result, we have started to oÅer mortgage loans in the secondary real estate market in relatively developed regions. As of December 31, 2005, we had RMB286,829 million in aggregate principal amount of mortgage loans outstanding, representing 75.5% of our total domestic personal loans and advances.
Other Personal Loans In addition to mortgage loans, we also provide individuals with automobile loans, credit card loans, loans for business purposes, educational loans and revolving credit lines. We held a leading position in automobile loans among the Big Four with a market share of approximately 32.4% as of December 31, 2005 according to data provided by the Big Four. To further promote our automobile loan business, we recently entered into cooperation arrangements with international and domestic automobile manufacturers and their aÇliates such as Dongfeng Peugeot Citroen Automobile, Beijing Hyundai and Volkswagen Finance (China), under which we provide Ñnancing to dealers and automobile purchasers. Although the PRC automobile sector has experienced a recent downturn, we consider automobile loans an important part of our personal banking business and have taken measures to manage our risk exposure to automobile loans. For example, we decreased the maximum loan to collateral ratio from 80% to 70% for our automobile loans. We also adopt a direct-sale model to market our automobile loans and oÅer ""one-stop shop'' service to automobile loan applicants at our designated sub-branches and stores of dealers with whom we entered into cooperation agreements. In addition, our personal loans may be extended to entrepreneurs in the relatively developed coastal region of the PRC and generally secured by real properties. We intend to provide personal loans to franchisees of well-recognized chain stores to further expand this business. In August 2004, we were selected through a competitive bidding process to be the exclusive provider of educational loans to students attending all of the 115 colleges and institutes directly aÇliated with the ministries of the PRC Government. As part of the cooperation arrangements with these colleges, many of them have agreed to gradually transfer their employees' payroll accounts to our bank. As of December 31, 2005, we had RMB6,785 million in aggregate principal amount of credit card loans outstanding for our operations in the Chinese Mainland, Hong Kong and Macau, representing 1.3% of our total personal loans and advances for the Chinese Mainland, Hong Kong and Macau.
Personal Deposits We accept deposits in Renminbi as well as certain major foreign currencies. The range of foreign currencies available for our deposit products is one of the most comprehensive among PRC commercial banks. We mainly oÅer demand deposits and time deposits to our personal banking
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customers. Our total domestic personal deposits grew from RMB1,392,190 million as of December 31, 2003 to RMB1,508,276 million as of December 31, 2004 and to RMB1,678,684 million as of December 31, 2005. As of December 31, 2005, we had a leading market share of approximately 53.6% in terms of total foreign currency-denominated personal deposits among PRC commercial banks in accordance with data from the PBOC. Our Renminbi-denominated domestic personal deposits grew from RMB992,216 million as of December 31, 2003 to RMB1,184,253 million as of December 31, 2004 and to RMB1,416,326 million as of December 31, 2005, representing a compound annual growth rate of 19.5%. See ""Description of Our Assets and Liabilities Ì Liabilities and Sources of Funds'' for a description of our deposit proÑle.
Wealth Management Services Wealth management services are the key focus of our personal banking business. We believe our long history of providing foreign exchange services traditionally required by more aÉuent customers, extensive international network, strong brand name and close relationships with many aÉuent customers provide us with advantages in attracting and retaining wealth management customers. As of December 31, 2005, we had approximately 503,000 wealth management customers. We oÅer a wide variety of wealth management products denominated in Renminbi and foreign currencies, mainly developed by our global markets department. See ""Ì Treasury Operations Ì Structuring of Asset Management Products''. We were the Ñrst PRC commercial bank approved by the PRC Government to oÅer bullion trading services to individuals. As of December 31, 2005, we had over 200 wealth management centers located at the major cities in the PRC. Our wealth management centers are managed by the personal banking departments of our tier one branches. To promote a consistent brand image, our wealth management centers have uniform appearances. All of our wealth management advisors are directly trained by our head oÇce to ensure consistent service quality. We believe human capital is a key strength of our wealth management services. We have a team of over 2,000 wealth management advisers focusing on the provision of customized wealth management services. Through cooperation with the Financial Planning Standard Committee of the PRC, or FPSCC, and a number of overseas training institutions, we have improved our training on wealth management advisors and wealth management relationship managers. As of December 31, 2005, 33.6% of the total number of certiÑed Ñnancial advisors with the associate Ñnancial planner certiÑcates issued by the FPSCC were our employees.
Foreign Exchange Services We acted as the specialized foreign exchange bank in the PRC before 1994. We were selected as the ""Best Foreign Exchange Services Provider in the PRC'' by Global Finance in 2005. We provide a broad range of foreign exchange products and services to our customers, including, among others, foreign currency trading services, deposits, remittance as well as structured products linked to interest rates, exchange rates, commodities or equities. We also provide entrusted trading and related customer inquiries services through our foreign exchange trading system, telephone banking and Internet banking facilities. Electronic-banking services channels have become the main platform on which we provide real-time foreign exchange services. To utilize our extensive international network and promote cross-border services, our domestic and overseas branches initiated cooperation programs in a number of areas such as remittance,
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account opening services and marketing. Our cross-border services mainly target overseas Chinese, frequent business travellers and tourists. We oÅer diÅerent foreign exchange products and services to these customers on a ""one-stop shop'' basis.
Bank Card Services
One of our key business initiatives in personal banking business is to continue strengthening our bank card business. We oÅer a wide range of card products to our customers, including single and dual-currency credit cards, quasi-credit cards and debit cards. We issued the Ñrst bank card in the PRC in 1985. As of December 31, 2005, we issued approximately 87 million cards. In 2005, our bank card business revenue reached RMB1,540 million, representing an increase of 40.6% from RMB1,095 million in 2004.
In 2004, we established a bank card operating platform and related information technology systems, which enabled us to issue the BOC dual-currency credit cards and streamline our card operating processes. This new operating platform has improved our processing capability and eÇciency and provided support for our future business expansion and product innovation.
Credit Cards
We oÅer a broad range of credit card products, including dual-currency credit cards and single- currency credit cards. Our credit card products can be settled in Renminbi, U.S. dollars, Hong Kong dollars, Euros and Japanese yen. Since we launched our BOC dual-currency credit card in October 2004, we have introduced a number of additional credit cards in cooperation with third parties, such as the BOC Visa Olympic credit card, the BOC Lenovo Visa Olympic credit card and the BOC JCB credit card. Our single-currency credit card, Great Wall international credit card, was issued through our cooperation with BOC Credit Card (International) Limited. PRC residents who study abroad or frequently travel overseas are the target customers of our Great Wall international credit cards. As of December 31, 2005, we had issued approximately 1.4 million credit cards in the PRC.
Quasi-Credit Cards
We were the Ñrst PRC commercial bank to issue quasi-credit cards. Our quasi-credit cards carry the ""Great Wall'' or "" '' brands that have been well-recognized brands in the PRC for nearly 20 years. Quasi-Credit Cards require a cash deposit balance, and provide the cardholders with an interest-bearing overdraft line. Quasi-credit cards are denominated in Renminbi and can be used for multiple purposes, such as savings, fund transfers and payments. Our branches may also add additional functions to our quasi-credit cards, such as installment payment and bill payment tailored to the needs of their respective quasi-credit cardholders. As of December 31, 2005, we issued approximately 6.7 million quasi-credit cards and, based on data from the PBOC, we were the largest issuer of quasi-credit cards in the PRC in terms of the number of cards issued, with a market share of over 24.0%.
Debit Cards
A debit card is directly linked to a cardholder's bank account. The cardholders cannot draw amounts in excess of the deposits in their respective bank accounts. Our debit cardholders may engage in trading in foreign exchange, bullion, fund, treasury bonds and other securities through their debit card accounts, and may also access telephone banking and Internet banking through their debit cards. As of December 31, 2005, we had issued approximately 79.1 million Renminbi- denominated debit cards which can be used in the PRC and certain overseas regions through the
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China UnionPay network. We oÅer U.S. dollar-denominated international debit cards that can be used abroad through the MasterCard network.
Merchant Acquiring Services We provide settlement services to merchants by processing credit card, quasi-credit card and debit card transactions. We charge the merchants a fee that is based on a percentage of the amount of each transaction processed. In the PRC, we had one of the most extensive merchant networks with 140,311 merchants as of December 31, 2005. We were also the largest foreign card acquiring bank in terms of transaction value according to data from the PBOC, with a market share of approximately 52.5% as of December 31, 2005.
Other Personal Banking Products and Services In addition to the products and services described above, we provide other products and services to our personal banking customers, including distribution of funds, insurance products and government bonds, securities trading services, payroll services, remittances, bill payment and safe deposit boxes. We have built up strategic cooperative relationships with fund companies and started to oÅer open-ended fund products to our personal banking customers through our extensive network in 2002. In 2004, we acted as the distribution agency for the Ñrst open-ended fund with an amount over RMB10 billion in the PRC. We oÅer a range of investment fund products, such as equity funds, index funds and money market funds. We also provide fund information inquiry services through our call centers and initiated online fund trading services through our Internet banking.
Customer Base As of December 31, 2005, we had approximately 118 million retail customers. We also had approximately 21 million foreign currency deposit accounts and 193 million Renminbi currency deposit accounts as of December 31, 2005. As of the same date, we had approximately 4.6 million personal loan accounts. Following our business initiative to focus on aÉuent customers, we have built a relatively aÉuent personal banking customer base including approximately 3.3 million customers with deposit balance of RMB100,000 or more and approximately 334,800 customers with deposit balance of RMB500,000 or more as of December 31, 2005. Marketing We conduct our personal banking activities through our personal banking department and card center. These department and center at our head oÇce generally formulate marketing initiatives and manage brands for our personal banking products and services, including, among others, personal loans, cards, wealth management and foreign exchange services. The relevant departments at our tier one and tier two branches develop detailed marketing plans to implement these initiatives. Our marketing activities are conducted through our extensive distribution network and multiple distribution channels including over 11,000 branches and outlets, 580 self-services banking centers and 11,600 automated service machines, as well as telephone banking and Internet banking. See ""Ì Distribution Network''. By rationalizing our back oÇce operation, we are in the process of re-allocating personnel from back oÇce functions to front-line marketing functions. To promote our wealth management service under our own brand, we introduced ""BOC Wealth Management ( )'' services in 2002. We currently market all of our wealth management services and products, including those provided by BOCI and BOCG Insurance, on a global basis under this brand. We are in the process of launching our ""BOC Wealth Management Global Service''
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program in the Asia-PaciÑc region, which includes wealth management, real estate advisory and travel services. We have also adopted a customer information system in the coastal region which enables us to identify potential wealth management customers.
Following our strategy to promote cross-selling and increase market penetration, we have recently increased our cross-selling eÅorts among our various products and with our corporate banking business. For example, we provide our premier credit cards, the ""Great Wall'' international platinum credit card and the BOC Visa Olympic credit card, to our wealth management customers. Through oÅering payroll services to employees of our corporate customers, we retain and enhance our business relationships with our corporate customers. We have developed the ""Ideal Home'' brand to market our personal loans and related value-added services such as real estate investment and automobile purchase advisory services.
Business Initiatives
We intend to further develop our personal banking business by adopting the following business initiatives:
¬ Focus on Wealth Management Segments and Increase Our Market Share and Penetration for Mid- to high-end Customers. We intend to develop an integrated wealth management platform targeting the aÉuent customer base. Through cooperation with our strategic investors, we plan to improve our ability to reÑne customer segmentation and further develop our wealth management business. We also plan to increase the number of our wealth management centers and provide customized products and services by leveraging the product design capabilities of our global markets department, BOCI and our strategic investors. We plan to expand our ""BOC Wealth Management Global Services'' beyond the Asia-PaciÑc region. We are also working with RBS Group and its aÇliate to set up private banking departments in our Beijing and Shanghai branches.
¬ Further Implement Our Direct-Sale Model to Capture Personal Loan Growth Opportunities. We plan to implement our direct-sale model to over 70% of our branches and outlets. We also plan to explore the secondary real estate market by applying the direct-sale model. We believe that these initiatives will enable us to capture the growth of new personal loans.
¬ Strengthen Our Bank Card Business. We intend to further strengthen our bank card business. With respect to quasi-credit cards, we intend to increase the number of card functions as well as the scope of related value-added service oÅerings. With respect to credit cards, we intend to cooperate with RBS Bank in Ñnance, marketing, risk management, information technology system and operations to enhance our product research and development, customer services and risk control. With respect to debit cards, we intend to gradually introduce service fees with enhanced features and value-added services. In addition, we plan to issue debit cards at some of our overseas branches.
¬ Enhance Risk Management. We intend to further improve our retail credit approval procedures and enhance the collection process of personal loans and advances. In addition, we plan to develop credit scoring systems to accelerate our retail credit approval process and improve the retail credit risk management. To ensure eÅective execution of our risk management measures, we have produced easy-to-understand training materials and brochures identifying the regulatory and other requirements for our credit risk, operational risk and compliance risk management.
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¬ Implement a Sales-Driven Service Model Throughout Our Outlets. We completed our pilot outlet reform program at selected outlets and intend to roll out such program throughout our organization. This program is designed to establish a sales-driven branch service model, streamline branch operations and promote standardized operating procedures to increase eÇciency, lower costs and reduce operating risks. As part of the outlet reform program, we plan to migrate more transactions involving small amounts and standard procedures to electronic-banking services channels.
¬ Capture Cross-Selling Opportunities. We plan to capture cross-selling opportunities by increasing the cooperation of our personal banking business with BOCHK, BOCI and BOCG Insurance as well as enhancing the cooperation between our domestic and overseas branches in cross referral and services.
Treasury Operations
We engage in treasury transactions on our proprietary accounts and provide treasury products and services to our corporate and retail customers. Our treasury operations primarily include the following business activities: liquidity management and inter-bank money market transactions, investment portfolio management, foreign exchange, bullion and derivatives trading, debt securities issuance and underwriting, treasury transactions on behalf of our customers and structuring of asset management products. Over the years, we have accumulated signiÑcant experience, trained skilled employees and established a strong market position among PRC commercial banks in foreign exchange treasury operations.
We conduct our treasury operations primarily through Ñve trading centers located in Beijing, Shanghai, Hong Kong, London and New York. These trading centers manage positions in relays and enable us to conduct treasury operations on a 24-hour basis.
Product design is one of our core competitiveness. We seek to further improve our skills in designing products, especially Renminbi-denominated derivatives, by leveraging our experience in the foreign exchange business and the expertise of our strategic investors. We intend to expand our customer base, especially to attract and retain more aÉuent customers by developing innovative and tailored products and services.
Liquidity Management and Inter-Bank Money Markets
We generally conduct money market transactions to manage our liquidity, including short-term security trading, and short-term borrowings from, and loans to, other domestic and foreign banks and non-bank Ñnancial institutions. As of December 31, 2005, we had an aggregate principal amount of placements with banks and other Ñnancial institutions of RMB332,645 million before allowance for impairment losses, representing 13.0% of our total loans and advances and placements with banks and other Ñnancial institutions before allowance for impairment losses, and certiÑcates of deposits and placements from banks and other Ñnancial institutions of RMB212,626 million, representing 4.7% of our total liabilities.
We also enter into repo and reverse repo transactions whereby we sell securities to or purchase securities from a counterparty with an obligation to repurchase them from or resell them to the counterparty at a pre-determined price on a speciÑed future date. Most of the securities underlying our repo and reverse repo transactions are bonds with high liquidity issued by governments or government agencies. The majority of our repo and reverse repo transactions have maturities ranging from one to fourteen days from the date of origination.
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Investment Portfolio Management
Prior to 1994, we were designated by the PRC Government to manage the PRC's foreign currency reserves and as a result, we have gained signiÑcant experience in foreign exchange investment portfolio management. Our investment portfolio consists principally of debt securities and derivatives. We generally invest in short-term, less than three years, to medium-term, between three and ten years, debt securities. Our Renminbi-denominated investment securities primarily include PRC Government bonds, Ñnance bonds issued by PRC policy banks, bills issued by the PBOC and bonds issued by PRC commercial banks. Our foreign currency-denominated investment securities primarily include foreign currency-denominated bonds issued by foreign governments, government agencies and supranational Ñnancial organizations. We also invest our foreign currency in corporate bonds, mortgage-backed securities and asset-backed securities. Our foreign currency- denominated securities generally have a Moody's credit rating of A or above. We also conduct forward, option, swap and other derivatives transactions to hedge our risk exposure or to meet our investment target. As of December 31, 2005, we manage the largest foreign exchange investment portfolio among PRC commercial banks according to data published by the PBOC. Our investment portfolio is managed according to the investment guidelines, which are reviewed and updated on an annual basis. See ""Risk Management Ì Market Risk Management''. These guidelines set forth the requirements with respect to the portfolio size, product mix, maturities, industry and country concentration and credit rating of our investment portfolio. We generally employ a top-down approach in managing our investment portfolio, pursuant to which we determine the asset allocation of the investment portfolio based on the assessment of economic conditions of relevant countries and growth prospects of relevant industries. Our portfolio managers then invest in individual securities on a relative value basis. From time to time, we analyze the market risk associated with our investment portfolio and adjust our investment strategy according to the prevailing investment environment and market conditions.
Foreign Exchange, Bullion and Derivatives Trading We are a leading foreign exchange bank in the PRC and were named as the ""Best Domestic Provider of Foreign Exchange Services in China'' by AsiaMoney in 2005. We conduct spot and forward foreign exchange trading, and enter into foreign currency swaps, foreign currency- denominated bond options, interest rate swaps and other derivatives transactions. We market retail foreign exchange services primarily through our extensive branch network. We have set up diÅerent teams to engage in proprietary trading as well as price quotation services. We provide 24-hour dealing and order execution services to our domestic branches as well as other banking institutions in the PRC. In July 2005, we upgraded our quotation system to enable us to quote foreign currency/Renminbi prices multiple times a day based on the inter-bank market changes for the regulated sale and purchase of foreign currencies against Renminbi between retail and corporate customers and PRC commercial banks. As a result, we can more eÅectively manage the exchange rate risk in this business. According to SAFE, we had the largest market shares in sales and purchases of foreign currencies against the Renminbi in the PRC in 2004 and 2005. Our trading systems are connected with our middle and back oÇce systems and enable real-time risk monitoring. The monitoring of risk exposure resulting from derivatives transactions is an integral part of our overall risk management framework, and is evaluated on a daily basis. For description of our risk management framework, see ""Risk Management''. Bullion trading is also one of our key treasury operation activities. As of December 31, 2005, we were the leader in bullion trading in the PRC with a market share of approximately 17.7% on the Shanghai Gold Exchange, the only gold exchange in the PRC. Our bullion trading volume has
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experienced consistent growth in recent years. The total volume of our bullion trading in the Shanghai Gold Exchange increased from 100.5 tons in 2003 to 131.8 tons in 2004 and to 160.2 tons in 2005.
Debt Securities Issuance and Underwriting We obtain Ñnancing for our bank and our corporate customers by issuing Renminbi and foreign currency-denominated bonds and arranging syndicated loans in the international and domestic markets. We issued our Ñrst overseas bond in 1984. Since then, we have made a total of 27 bond oÅerings in the international market. Among these oÅerings, the US$300 million Öoating rate notes we issued in April 1997 was awarded as ""Asian FRN of the Year'' by International Financial Review. In July 2004, we issued RMB14.07 billion subordinated bonds, which was the Ñrst Renminbi- denominated subordinated bond issued by a PRC commercial bank. In addition to obtaining Ñnancing for ourselves, we are one of the most active PRC banks arranging U.S. Dollar- denominated syndicated loans and bonds for our customers in the domestic market. We also actively engage in Renminbi-denominated bond and bill underwriting in the inter-bank market. We successfully arranged the Ñrst Renminbi-denominated short-term Ñnance bill issuance in the inter- bank market in 2005.
Treasury Transactions on Behalf of Customers In addition to conducting treasury transactions on our proprietary account, we trade bonds and bullion, and conduct spot and forward foreign exchange trading, interest rate swaps, currency swaps and options, and other Ñnancial derivatives transactions on behalf of our corporate customers. We engage in treasury transactions on behalf of our corporate customers for both liability hedging and asset management purposes. In conducting these transactions, we generally conduct back-to-back transactions to hedge our risk exposure.
Structuring of Asset Management Products Our treasury operations engage in the research and development of new asset management products for both our corporate banking and personal banking customers. For example, one of our corporate banking products is ""Season Forward'', a series of forward contracts that oÅers a Ñxed notional coupon on investment with Ñxed terms. This product enables our corporate customers to monitor changes in interest rates to identify the appropriate opportunity to trade or execute the forward contracts before expiration of the term. One of our personal banking customer products is ""Huijubao'', a series of wealth management products whose yield is linked to, among others, LIBOR, exchange rates or commodities prices. ""Huijubao'' was awarded as the ""Best Wealth Management Product'' in 2004 and 2005 by Hexun Information Technology Ltd., an online Ñnancial information provider in the PRC. We have devoted more eÅorts in developing and structuring Renminbi-denominated asset management products. We have performed research on the Renminbi market, the Renminbi bond yield curve, and pricing of Renminbi derivative products. Our research has facilitated the development and evaluation of new products. On June 3, 2002, we started to provide ""BOC Bond Index'', which was the Ñrst index product reÖecting the movements of the PRC inter-bank bond market. Our wealth management product linked to Renminbi-denominated bonds was awarded as the ""Best Wealth Management Product of 2005'' by Sina.com. In September 2005, we conducted the Ñrst Renminbi-foreign exchange swap among the PRC commercial banks. In addition, we conducted our Ñrst Renminbi-denominated interest rate swap in early 2006. We currently provide pricing services for Renminbi-foreign exchange swaps and Renminbi-denominated interest rate swaps for our customers.
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Customer Base and Marketing In addition to conducting treasury operations on our own behalf, we design and market our treasury products and services to corporate banking and personal banking customers. We have a marketing group within our treasury operations responsible for overall marketing strategies, promotional activities, customer origination and customer relationship management in connection with our treasury products and services. The marketing group of our treasury operations is responsible for serving our existing network of customers and developing new client relationships. Their marketing eÅorts are focused on strengthening existing customer relationships, developing new client contacts and generating opportunities for cross-selling our corporate banking products.
Commercial Banking Business in Hong Kong and Macau Hong Kong We conduct our commercial banking business in Hong Kong through our subsidiary, BOCHK. BOCHK oÅers a wide range of Ñnancial products and services to corporate and retail customers and is our most signiÑcant overseas operation in terms of assets and proÑt contributions. As of December 31, 2005, BOCHK had an approximately 13.6% market share among authorized institutions in Hong Kong in terms of total outstanding loans and an approximately 15.7% market share among authorized institutions in Hong Kong in terms of total deposits, in each case based on data released by the HKMA. BOCHK is one of the three banks authorized to issue bank notes in Hong Kong and its direct holding company, BOCHK Holdings, has been listed on the Hong Kong Stock Exchange since July 2002.
Business Operations of BOCHK BOCHK has a strong corporate banking business with an approximately 12.4% market share in Hong Kong in terms of total outstanding corporate loans and advances as of December 31, 2005 based on data published by the HKMA. In addition, BOCHK was ranked as the largest arranger in the Hong Kong and Macau syndicated loan market in 2005 by Basis Point. BOCHK oÅers to its corporate customers a variety of corporate banking products and services, including loan products, deposit products and fee-based services. BOCHK also provides special Ñnancial products and services that are tailored to the needs of small and medium-sized enterprise corporate customers. In February 2004, BOCHK launched Renminbi clearing services after its appointment by the PBOC as the only clearing bank for Renminbi business in Hong Kong. As of December 31, 2005, BOCHK's corporate banking business accounted for approximately 25.0% of BOCHK's total operating income. BOCHK is one of the leaders in personal banking in Hong Kong and oÅers a broad range of personal banking products and services, including deposits, mortgage loans, remittances, credit cards, investment product services and personal wealth management services. As of December 31, 2005, BOCHK had an approximately 18.3% market share in Hong Kong in terms of total outstanding mortgage loans based on data released by the HKMA. In addition to maintaining its leading positions in personal deposits and mortgage loans, BOCHK is increasingly focused on developing its wealth management and consumer lending. As of December 31, 2005, BOCHK's personal banking business accounted for approximately 49.3% of its total operating income. BOCHK's treasury operations engage in inter-bank money market, capital market, foreign exchange, derivatives and precious metals trading transactions. BOCHK is one of the most active participants in the inter-bank money market in Hong Kong. BOCHK provides treasury products and services to its customers and engages in treasury transactions on its proprietary account. As of December 31, 2005, BOCHK's treasury operations accounted for approximately 19.4% of BOCHK's total operating income.
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BOCHK delivers its products and services through a combination of its divisions, branch network and ATMs and other delivery channels such as commercial centers in Hong Kong, telephone banking and Internet banking. As of December 31, 2005, BOCHK had an aggregate of over 280 branches and more than 450 ATMs in Hong Kong, as well as 14 branches and sub- branches in the PRC to meet the cross-border banking needs of their customers. Customers can access their accounts, perform various transactions and obtain Ñnancial information through BOCHK's Internet banking service. BOCHK set up an online corporate banking services system that oÅers an Internet-based channel to corporate customers in 2004. A Credit WorkÖow Management System was also launched by BOCHK in 2004, which facilitates quick and eÇcient credit approval and management for personal banking.
BOCHK also provides banking products and services through its two subsidiaries in Hong Kong which are also full licensed banks: Nanyang Commercial Bank Limited (""Nanyang'') and Chiyu Banking Corporation Limited (""Chiyu''). Nanyang is a wholly-owned subsidiary of BOCHK. BOCHK owns approximately 70% of Chiyu, with Chip Bee Private Institution ( ) and Chip Bee Foundation ( ) owning approximately 14% and 11% of Chiyu's shares respectively. Both Nanyang and Chiyu have their own board of directors and management. Nanyang and Chiyu's business complements that of BOCHK.
Business Initiatives of BOCHK
BOCHK seeks to strengthen and grow its business in Hong Kong and the Chinese Mainland.
In Hong Kong, BOCHK intends to expand and diversify its income base, raise its net interest margin by developing and increasing the sale of high yield products and optimize its income structure by growing non-interest income.
On corporate banking, BOCHK intends to maintain the growth of its loan portfolio and expand cross-selling of its trade and treasury products to large corporations. Based on the capital strength and international network of both banks, BOCHK and our bank will cooperate in large Ñnancing projects. BOCHK will continue to develop small and medium-sized enterprise customer relationship and marketing capabilities, customize its services and products for both large and small and medium-sized enterprises and cross-sell trade Ñnance and other high margin products to small and medium-sized enterprise customers. BOCHK will also enhance its treasury business through expanding its product oÅerings and strengthening its treasury product manufacturing capabilities.
BOCHK will leverage its product innovation, customization, customer relationship and cross- selling capabilities to maintain its growth of wealth management business. It seeks to maintain its leading position in the residential mortgage business by developing products that are competitive and Öexible. It will expand its wealth management platform by adding sales team, upgrading network infrastructure and developing new in-house wealth management products. BOCHK also plans to expand its consumer lending and personal banking business and explore using structured Ñnancial instruments to expand this business without increasing capital risk.
As the clearing bank for Renminbi services in Hong Kong, BOCHK expects that its expertise and experience in Renminbi services will give it competitive advantages for the further extension of Renminbi banking business.
BOCHK considers the Chinese Mainland market as one of its major business focuses. It will leverage its branch network in the Chinese Mainland and its relationship with BOC. It intends to focus on the Yangtze and Pearl River Delta regions. BOCHK will also selectively exploit regional opportunities outside Hong Kong and the Chinese Mainland in the future.
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BOCHK intends to expand its business lines through organic growth and merger and acquisition to broaden product development capabilities in selective areas such as retail brokerage, asset management and life insurance.
Delineation of Business and Complementary Operations between our Bank and BOCHK
As one of Hong Kong's leading banks, BOCHK will continue to consolidate its strength in the Hong Kong market and leverage its strong base and platform to grow businesses both in the Chinese Mainland and elsewhere. In light of the substantial business opportunities in the Chinese Mainland's large and growing economy, we believe BOCHK's business strategy is complementary to our bank's business as we together seek to increase our combined market share in the Chinese Mainland banking market.
As BOCHK has the status of a foreign bank in the Chinese Mainland, our bank is able to take advantage of the latitude aÅorded by the PRC laws and regulations to both domestic and foreign banks in terms of products and services. In addition, BOCHK's extensive network and branches in Hong Kong enable our bank to better serve our Chinese Mainland-based customers who have banking needs in Hong Kong. On the other hand, our network of over 11,000 branches in the Chinese Mainland also provides BOCHK's Hong Kong-based customers access to a banking network that may serve their needs. BOCHK and our bank also cooperate in providing products and services such as loans, cash management, wealth management and Renminbi business in both the Chinese Mainland and Hong Kong.
Notwithstanding the complementary business operations that our bank and BOCHK have, there is also delineation in our respective banking business. BOCHK currently has a network of 14 branches in the Chinese Mainland mainly concentrated in the Yangtze and Pearl River Delta regions and certain major coastal cities. As a foreign bank in the PRC, BOCHK's Chinese Mainland branches have restricted scope of business. Any expansion of BOCHK branches and their location on the Chinese Mainland continues to be subject to regulatory approvals. Please refer to ""Supervision and Regulation Ì Regulation and Supervision of Our Overseas Operations'' for the restrictions imposed on foreign banks by the PRC government. Although the geographical restrictions and restrictions on business scope on foreign banks operating in the PRC will be removed in December 2006 pursuant to the PRC Government's commitment to the WTO, under the current legal framework, certain capital and Ñnancial requirements which are pre-requisites to setting up a branch will continue to apply to the licensing of foreign bank branches after 2006.
Recognizing that its competitive strength lies in cross-border banking business services, BOCHK's branches on the Chinese Mainland will continue to emphasise serving the cross-border needs of its Hong Kong customers as well as provide cross-border services to Chinese Mainland customers to meet its business needs in Hong Kong. BOCHK also intends to develop business in the Chinese Mainland with its strength in product and service capabilities that, as a whole, would complement our bank and enhance our combined market position in Chinese Mainland.
Given the cooperative nature of the business relationship and the clear delineation of business between our bank and BOCHK, and as both our bank and BOCHK are under the supervision of a number of regulators, we are of the view that minority shareholders of our bank and BOCHK are adequately protected when new business opportunities arise in the future. In addition, our bank has also provided a letter, dated January 18, 2002, to the Hong Kong Monetary Authority to inform the Hong Kong Monetary Authority that it is our bank's policy to provide BOCHK with support and assistance as may be required to ensure that BOCHK maintains capital and liquidity levels suÇcient to meet its obligations in conformity with standards or prudence generally accepted for its Ñeld of
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business. Please refer to ""Business Ì Our Relationship with BOCHK Holdings Ì Status of BOCHK Holdings Following our Listing''.
Macau We conduct our business in Macau through our Macau branch, which had 24 sub-branches with over 1,000 employees as of December 31, 2005. Our Macau branch provides commercial banking services to corporate and retail customers, including loans, deposits and fee-based products and services. Our Macau branch was the largest commercial bank in Macau with a market share of approximately 30% in terms of total assets as of June 30, 2005 based on data published by the Macau government. As of December 31, 2005, our Macau branch had total assets of HK$52,711 million, total loans and advances to customers of HK$14,300 million, total deposits of HK$43,671 million, and proÑt before tax of HK$1,196 million. Our Macau branch is one of the only two banks authorized to issue bank notes in Macau and one of the agents for the public cashier of the Macau government. We are also the only bank providing Renminbi clearing and Hong Kong dollar bill clearing services to banks in Macau. Our Macau branch has been the bank chairing the Macau Association of Banks since 2000. We also conduct commercial banking business in Macau through our 50.3% owned subsidiary, Tai Fung Bank. Tai Fung Bank had 21 branches and 544 employees as of December 31, 2005. As of the same date, Tai Fung Bank had total assets of HK$27,438 million, total loans and advances to customers of HK$8,939 million and total deposits of HK$24,851 million.
Commercial Banking Business in Other Overseas Regions In addition to our business operations in the Chinese Mainland, Hong Kong and Macau, we have the most extensive overseas branch network among PRC commercial banks, with operations in Europe, America, Africa and the Asia-PaciÑc region. As of December 31, 2005, we maintained correspondent relationships with over 1,400 foreign banks that collectively had over 46,900 branches. Our other overseas operations had RMB1,925 million operating proÑt in 2005. We provide a broad range of commercial banking services to our corporate and personal banking customers in overseas regions including loans, deposits and fee-based products and services. Our branches in New York, Frankfurt and Tokyo are our main clearing channels for U.S. dollar, Euro and Japanese yen transactions, respectively. These branches and our Singapore branch are all level one clearing banks that can directly clear transactions through the respective local banking systems. Our New York branch ranked 11th in terms of clearing volume in U.S. dollars in the Clearing House Interbank Payments System in 2004 according to the New York Clearing House. Our overseas operations have a long history of providing trade-related Ñnance and services. In light of the steady growth of foreign trade in the PRC, we believe that our overseas trade related services have signiÑcant growth potential. Our overseas branches in London, New York and Luxembourg also participate in the global syndicated loan market. Furthermore, we conduct our treasury operations on a 24-hour and global basis through Ñve centers in Beijing, Shanghai, Hong Kong, New York and London. In addition, as of December 31, 2005, eight of our overseas branches oÅered Internet banking services to our customers.
INVESTMENT BANKING We started to engage in investment banking business in 1983. We currently conduct our investment banking business through BOCI Group. BOCI Group provides a broad range of investment banking services for a diverse group of domestic and international companies, Ñnancial
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institutions, government agencies and individuals through its subsidiaries and branches in Hong Kong, Beijing, Shanghai, London and Singapore. BOCI Group engages in underwriting and Ñnancial advisory, sales and trading of securities, investment research, asset management and private equity investments. BOCI Group's PRC operations are conducted through BOCI China. BOCI China has 20 branches in 17 major cities in the PRC and has been an active participant in A Share initial public oÅerings and has acted as advisor in a number of mergers and acquisitions. It is also an active underwriter of PRC sovereign bond as well as PRC corporate and Ñnancial institution bonds. According to the MOF, BOCI China ranked second in 2004 and Ñrst in 2005 among all brokerage Ñrms in the PRC in terms of underwriting volume of PRC sovereign bonds. We believe our extensive corporate customer base provides a platform for BOCI China to further expand its business in the PRC.
Underwriting and Financial Advisory BOCI Group is engaged in the underwriting of equity securities oÅerings in Hong Kong and the PRC. As of December 31, 2004, BOCI Group acted as the global coordinator, sponsor or lead underwriter in over 27 global equity oÅerings and participated in over 150 initial public oÅerings, including the initial public oÅerings of some major companies in the PRC, raising an aggregate of over HK$400 billion. BOCI Group has also acted as a lead underwriter in a number of B Share and, through BOCI China, A Share public oÅerings. BOCI Group also secures a strong position in the underwriting of debt securities oÅering in Hong Kong and the PRC. In July 2004, BOCI Group acted as a joint global coordinator, lead manager and bookrunner of the Hong Kong Government's inaugural HK$20 billion sovereign issue of global Ñxed rate notes. This transaction was awarded the ""Best Quasi-Sovereign/Sovereign Bond Deal of 2004'' by AsiaMoney. BOCI Group, through BOCI China, is an active underwriter of PRC corporate, sovereign and Ñnancial institution bonds. BOCI Group provides Ñnancial advisory services with respect to mergers and acquisitions, restructurings and private placements of equity to corporations, Ñnancial institutions and government agencies in Hong Kong and the PRC. BOCI Group seeks to leverage its investment banking expertise and extensive reach in the PRC market to further expand its Ñnancial advisory business in the PRC. BOCI Group has advised on high proÑle transactions in Hong Kong such as the acquisition of Cable & Wireless HKT Limited, a 54%-owned subsidiary of Cable & Wireless plc, by a subsidiary of PaciÑc Century Cyberworks Limited and BOCHK's restructuring prior to its initial public oÅering.
Sales and Trading of Securities BOCI Group is one of the few investment banks owned by PRC entities that have a global institutional client base to support its sales and trading business. BOCI Group has an active business in sales and trading of equity derivatives and Ñxed income products. BOCI Group is active in the development of structured products in Hong Kong and provides a broad range of interest rate, currency, credit and equity structured products for corporations and institutional and retail investors. BOCHK acts as the distribution agent for BOCI Group's securities products, providing BOCI Group with access to BOCHK's extensive network of retail investors to facilitate sale and distribution of BOCI Group's securities products. In addition, BOCI Group has secured a leading position in Hong Kong and PRC brokerage markets. BOCI Group ranked the top brokerage house in Hong Kong in terms of stock transaction volume by 2005 Asset Equities Benchmark Research. BOCI Group was also recognized as the ""Best
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Local Brokerage in China'' in the 1990-2004 AsiaMoney Polls. BOCI Group has a strong brokerage business in trading of Hong Kong shares, futures and index options. BOCI Group cooperates with BOCHK by providing brokerage services with respect to order execution to BOCHK's customers, which secures a strong backing for BOCI Group's brokerage business. BOCI Group has also enhanced its relationships with brokerage houses in Hong Kong and provides integrated brokerage services for its retail customers via on-line and oÅ-line systems.
Investment Research BOCI Group has research teams located in Hong Kong, Beijing and Shanghai, covering important industry sectors and over 200 companies in the Chinese Mainland and Hong Kong. BOCI Group's research teams ranked third in the 2004 SCMP/StarMine Analyst Awards in terms of awards received by individual team members, and second in the 2005 SCMP/StarMine Hong Kong Broker Awards in terms of stock recommendations in H-shares (Hang Seng China Enterprise Index).
Asset Management BOCI Group oÅers a broad range of asset management services, including Hong Kong Mandatory Provident Fund Schemes (""MPF''), retirement schemes, retail unit trusts and institutional mandates through BOCI-Prudential. BOCI-Prudential was formed by BOCI's wholly- owned subsidiary and Prudential Corporation Holdings Limited. According to MPF Watch Annual Report 2004 published by Watson Wyatt, BOCI-Prudential is one of the top Ñve MPF asset management companies in Hong Kong in terms of total assets under management as of December 31, 2004. As of December 31, 2005, the total assets, including MPF, under the management of BOCI-Prudential were approximately HK$25,395 million. In addition, BOC International Investment Managers, which was established in the PRC jointly by BOCI, BOCI China and Merrill Lynch Investment Managers Limited in 2004, launched its Ñrst open-ended securities investment fund in 2004 which is listed on the Shenzhen Stock Exchange, and its second open-ended securities investment fund in 2005 which is unlisted and invests in the money market in the PRC.
Private Equity BOCI Group launched its private equity business in August 2004 to tap into the growing private equity market in the PRC and Asia. With our background and network in the PRC, Ñnancial capabilities and industry knowledge, deal structure and transaction experience in investment banking, we believe that BOCI Group is well positioned to assist foreign investors entering the China market. BOCI Group actively develops its equity investment business and is in the process of establishing a number of private equity funds in which BOCI Group will act as an independent manager and advisor.
INSURANCE We conduct our insurance business through our wholly-owned subsidiary, BOCG Insurance, which was established in Hong Kong in July 1992. BOCG Insurance conducts business through six branches and two subsidiaries, Bank of China Insurance Co., Ltd. and BOCG Life. BOCG Insurance provides a broad range of general insurance services, including accident and health, automobile, goods in transit, property damage, general liability and other insurance products. As one of BOCG Insurance's initiatives to develop its insurance business in the PRC, the Shenzhen branch of BOCG Insurance completed its restructuring and was incorporated as a wholly-
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owned subsidiary of BOCG Insurance, Bank of China Insurance Co., Ltd., in 2005. In December 2005, Bank of China Insurance Co., Ltd. was approved by the CIRC to open its Ñrst domestic branch in Jiangsu province. In 2004, BOCG Insurance had consolidated gross written premiums of HK$3.8 billion and consolidated pre-tax proÑt of HK$265.5 million. As of December 31, 2005, BOCG Insurance's consolidated total assets were HK$13.0 billion. BOCG Insurance ranked as the largest general insurance company in Hong Kong in terms of gross written premiums in 2004, and the net written premiums for its property and casualty insurance business ranked Ñrst in Hong Kong for seven consecutive years from 1998 to 2004 according to data published by the OÇce of the Commissioner of Insurance of Hong Kong. BOCG Insurance plans to expand its business overseas and expand its network into major cities, through Bank of China Insurance Co., Ltd., in the PRC where our bank has a presence. BOCG Life oÅers long-term life insurance products, including traditional and linked individual life insurance and group life insurance products. BOCG Life provides its insurance products through BOCHK's distribution network. BOCG Life oÅers life insurance products as wealth management products to BOCHK's retail customers. As of December 31, 2005, BOCG Life had gross written premiums of HK$3,639 million. In April 2006, BOCG Insurance conditionally agreed to sell 51% of its equity interests in BOCG Life to BOCHK Holdings at the purchase price of HK$900 million, payable in cash. The purchase price was negotiated on an arms-length basis, on normal commercial terms, having regard to the appraised value of BOCG Life as of December 31, 2005. The sale is subject to the satisfaction of a number of conditions, including the approval of the independent shareholders of BOCHK Holdings and the Insurance Authority of Hong Kong. After the completion of the transaction, BOCG Insurance will continue to own 49% of BOCG Life and BOCHK Holdings will own 51% of BOCG Life. The transaction will result in BOCG Life becoming a part of the BOCHK Holdings group, and will create more synergy and enhance cooperation between our insurance and banking businesses in Hong Kong. Furthermore, the transaction will enable BOCHK Holdings to develop insurance related products more eÅectively and contribute to BOCHK Holdings' goal of becoming a comprehensive Ñnancial services group with full product manufacturing capabilities, including insurance. The new structure will also enable BOCG Life to more eÅectively sell its insurance products through BOCHK's sales and marketing network by leveraging BOCHK's customer base.
OTHER BUSINESS We engage in other businesses, mainly direct investments through BOCG Investment, our wholly-owned subsidiary, which was incorporated in Hong Kong in December 1984. As an investment management company, BOCG Investment focuses on strategic investments and investments in distressed assets. BOCG Investment's strategic investments include equity investments in companies before their initial public oÅerings and investments in listed shares which BOCG Investment believes have long-term growth potential. BOCG Investment also invests in distressed assets, including the purchase and disposal of non-performing debts and equities. Leveraging its relationship with our bank, BOCG Investment has built up a network of domestic and international customers and participated in a number of infrastructure investment projects focusing on the energy, transportation, telecommunication, media and real estate industries. As of December 31, 2005, BOCG Investment had over 100 investment projects and the aggregate carrying value of its 20 largest outstanding investments, before consolidating adjustments, was HK$9,625 million.
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PRODUCT PRICING
Prices for certain commercial banking products and services are subject to regulation in the PRC. For example, under current PRC regulations, our Renminbi-denominated loans are generally subject to minimum, but not maximum interest rate requirements based on PBOC benchmark rates. Conversely, interest rates we oÅer on our Renminbi-denominated deposits generally may not exceed PBOC benchmark rates. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Interest Rates on Loans and Deposits''. The prices for products and services we oÅer overseas through our global network are also subject to the relevant local rules and regulations in various jurisdictions.
Subject to these applicable rules and regulations and to the extent we are able to, we set prices based upon our risk and return assessment and business judgment. When determining our pricing, we take into consideration factors including, among others, the risk proÑle, relevant clients' contribution to our business, cost of providing the products or services as well as the expected risk adjusted return. In addition, we consider general market conditions and prices for similar products and services oÅered by our competitors.
DISTRIBUTION NETWORK
We have established a broad distribution network including domestic and overseas branches and outlets as well as electronic banking services channels. We have the most extensive overseas branch and subsidiary network among PRC commercial banks. We intend to enhance and integrate both our traditional and electronic-banking services channels by:
¬ leveraging our electronic banking channels, such as telephone banking and Internet banking to provide convenient access to our customers and to attract potential customers;
¬ focusing on the development of our distribution in the more economically developed areas in the PRC;
¬ focusing on increasing the proÑtability and eÇciency of outlets rather than the absolute number of outlets; and
¬ improving coordination among diÅerent distribution channels.
Domestic Branch Network
As of December 31, 2005, we had 32 tier one branches, 288 tier two branches and 10,698 outlets in the PRC. We will continue to focus our resources on enhancing and expanding our branch network in the more economically developed areas, such as the Yangtze River Delta, the Bohai Rim Economic Zone and the Pearl River Delta, which accounted for approximately 11%, 22% and 3%, respectively, of the entire population of the PRC as of December 31, 2004 according to China Statistical Yearbook. Based on the same source, as of December 31, 2004, the GDPs of the Yangtze River Delta, the Bohai Rim Economic Zone and the Pearl River Delta accounted for approximately 32%, 25% and 12%, respectively, of the GDP of the PRC.
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The following table sets forth, as of the dates indicated, the number of domestic branches and outlets in our network by geographic region.
As of December 31, 2003 2004 2005 Branches Branches Branches and % of and % of and % of outlets total outlets total outlets total Yangtze River Delta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,824 15.7% 1,832 16.2% 1,840 16.7% Pearl River Delta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,556 13.4 1,536 13.6 1,512 13.7 Bohai Rim ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,895 16.3 1,788 15.8 1,773 16.1 Central China(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,920 25.2 2,785 24.6 2,680 24.3 Western China(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288 19.7 2,281 20.2 2,222 20.2 Northeastern China(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,125 9.7 1,084 9.6 991 9.0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,608 100.0% 11,306 100.0% 11,018 100.0%
(1) Includes Shanxi Province, Henan Province, Hubei Province, Anhui Province, Jiangxi Province, Hunan Province and Hainan Province. (2) Includes Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Ningxia Autonomous Region, Qinghai Province, Inner Mongolia Autonomous Region, Tibet Autonomous Region and Xinjiang Autonomous Region. (3) Includes Heilongjiang Province, Jilin Province and Liaoning Province.
Domestic Electronic-Banking Services Channels Our electronic-banking services channels include automated service machines, self-service centers, telephone banking and call centers and Internet banking. The accumulated transaction value conducted through our telephone and Internet banking services channels was approximately RMB4,218 billion as of December 31, 2005.
Automated Service Machines and Self-Service Banking Centers Our automated service machines include ATMs, CDMs, CRSs and automated service terminals. As of December 31, 2005, we had over 580 self-service centers and 11,600 automated service machines throughout the PRC. We have automated service machines located at a majority of our branches and outlets, as well as in numerous shopping centers, oÇce buildings and residential areas in the PRC. In 2005, 264 million cash withdrawal and deposit transactions were conducted through our self-service banking network with a total transaction value of RMB177.5 billion, representing increases of 23.9% and 25.5%, respectively, from 2004.
Telephone Banking and Call Center Our telephone banking services are available to all our domestic personal banking customers, and can perform balance and transaction inquiries, inter-account fund transfers, bill payment, credit card transaction inquiries and trading services such as foreign exchange and securities trading. Our telephone banking system also permits fund transfers between securities companies and our customers. Our branches modify and adjust the telephone banking services in their respective regions based on speciÑc local market demand. Our call center services currently cover 19 provinces. We may answer customer inquiries over the phone, provide advisory services and receive customer feedback and suggestions. We have also initiated the program to make outbound customer service calls to promote our products and
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services. We are in the process of establishing a nationwide call center system. Our new call center system is designed to reÖect our customer-oriented business model, increase the level of integration among our diÅerent distribution channels and improve the consistency of our service.
Internet Banking Services Our Internet banking service oÅers a number of cash management solutions to our corporate customers. As of December 31, 2005, all of our domestic branches and eight of our overseas branches were able to provide Internet banking services. We also oÅer Internet banking services to domestic retail customers in regions covered by all of our tier one branches except for Tibet. In addition to various payment and other account management services, our Internet banking oÅers trading services for foreign exchange, stocks, government bonds, open-end mutual funds and other investment products. Our branches customize their Internet banking services in order to meet speciÑc local market demand in their respective regions. We are in the process of developing a new Internet banking platform that will allow us to provide additional services and unify our services to all of our corporate and retail customers. The new platform has completed its initial testing in Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang, Fujian and Liaoning.
Overseas Branch Network We were the Ñrst PRC commercial bank to set up an overseas branch when we established our London operations in 1929. As of December 31, 2005, we had over 600 branches, subsidiaries and representative oÇces, including in Australia, Bahrain, Brazil, Canada, Cayman Islands, France, Germany, Hungary, Indonesia, Italy, Japan, Kazakhstan, Luxembourg, Macau, Hong Kong, Malaysia, Panama, the Philippines, Russia, Singapore, South Africa, South Korea, Thailand, the United Kingdom, the United States, Vietnam and Zambia. Our overseas operations in certain countries also utilize other distribution channels, including ATMs, telephone banking and Internet banking.
INFORMATION TECHNOLOGY Our information technology system provides critical support to our business operations, including customer services, transaction processing, risk management and Ñnancial management. Our information technology governance structure is designed to enhance our overall information technology management. Our governance structure focuses on establishing a cost- eÅective and integrated management system, as well as improving the supervision and guidance in the process of building our information technology infrastructure. As of December 31, 2005, we had 4,052 staÅ in information technology-related positions. Our information technology governance structure consists of the business development committee, information technology department, information center, software center, testing center and our branches' information technology divisions. Within the framework of our bank's overall information technology strategy established by our Board of Directors, our business development committee is responsible for reviewing and approving our information technology strategies, plans and projects initiated by our business departments and information technology department, overseeing and supervising the implementation of information technology plans and projects and providing guidance to our branches with respect to information technology development. In 2000, we initiated a data consolidation project and began consolidating our data and information processing systems into several data centers. As of December 31, 2005, we established Ñve data centers in the PRC and three overseas data centers in New York, London and Hong Kong.
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These data centers support various aspects of our business operations such as the processing of deposits, loans, remittance, clearing, settlement and treasury operations. We have also established a high-speed global network connecting our head oÇce, data centers and branches.
We have completed a number of key projects to improve our system capability, including the real-time payment system, credit card system, KONDOR° system and OPICS system. Our real-time payment system has an information exchange platform and a centralized clearing system, providing real-time payment and fund transfer services. Our credit card system has a centralized processing system with card issuance, acquiring, credit policy, fraud detection, customer service and other sub- systems. Our KONDOR° system and OPICS system have enabled us to conduct real-time monitoring of market risk and settle trading transactions in a timely manner, respectively. We are also in the process of establishing the consumer credit approval system which can process personal loan applications online and analyze customer records.
In 2004, we launched the ""information technology blueprint project''. Based on the advice of a leading international consulting Ñrm, we will implement a number of initiatives to improve the architecture, infrastructure, governance and security of our information technology system. We have commenced implementing this project, including developing a new core banking system and upgrading the management information system. The new core banking system is designed to improve our business processing capacity, enhance our risk management and support our product packaging and innovation. The new management information system will support management decisions, such as assets and liabilities management, risk management and proÑtability analysis. As part of the new management information system, we plan to launch phase 1 of our Ñnancial reporting management project in 2006 which is aimed to improve the collection, consolidation, sharing and processing of our Ñnancial data. In addition, we are planning to consolidate our domestic data centers into a single data center that will be backed by a disaster recovery center.
COMPETITION
The competitive landscape of the PRC commercial banking industry mainly consists of the Big Four, other joint stock commercial banks and urban commercial banks, as well as foreign-invested commercial banks. The Big Four generally have larger capital bases, wider distribution networks and more customers than other banks in the PRC. As of December 31, 2005, the aggregate banking assets of the Big Four and other joint stock commercial banks accounted for approximately 52.5% and 15.5%, respectively, of the total banking assets in the PRC based on data released by the CBRC. As of the same date, our domestic banking assets accounted for approximately 10.2% of the total banking assets in the PRC based on data released by the CBRC.
We face competition in all of our principal areas of business from commercial banks and other Ñnancial institutions in the PRC, especially from the other members of Big Four and other joint stock commercial banks. In recent years, the market shares of other joint stock commercial banks have been increasing signiÑcantly and they generally have less of a historical burden of non-performing loans and more Öexibility in their operations.
We compete for customer funds with other Ñnancial institutions, including the postal savings bureau and credit cooperatives. In addition, with the rapid development of the capital market and insurance industry in the PRC, the non-banking Ñnancial institutions such as securities Ñrms, fund management companies and insurance companies also impose competitive pressure on the PRC commercial banking industry.
In addition, as a result of the PRC joining the WTO in December 2001, the PRC Government is gradually phasing out restrictions on foreign participation in the PRC commercial banking market,
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which we expect will result in the further opening of the PRC commercial banking market to foreign Ñnancial institutions and could increase the competition in the PRC commercial banking industry. We believe that the competition in the PRC commercial banking industry will continue to intensify in the future. The principal competitive factors in the commercial banking industry include, among others, capital strength, risk management and asset quality, reach of distribution network and customer base, brand recognition and scope, quality and pricing of products and services. In response to the competitive environment, we intend to pursue our strategies to diÅerentiate us from our competitors and to enable us to compete eÅectively in the PRC commercial banking industry.
EMPLOYEES A1A(28)(7) As of December 31, 2005, we had 209,265 employees, consisting of 190,828 domestic employees and 18,437 overseas employees. The following table sets forth the total number of domestic employees by function as of December 31, 2005: As of December 31, 2005 Number of employees % of total Corporate banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,416 6.5% Personal banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,190 49.9 Treasury operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,697 0.9 Finance and accounting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,602 6.6 Risk management, internal audit, legal and complianceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,649 4.0 Information technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,052 2.1 Management(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,722 7.7 Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,500 22.3 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 190,828 100.0%
(1) Includes management at and above the level of deputy general manager of tier two branches. (2) Includes operation, administration and other supporting staÅ. We believe that our sustainable growth depends on the capability and dedication of our employees and we recognize the importance of human resources for improving our business and results of operation. Over 72% of our employees have received junior college or college degrees or above, and over 40% of our management personnel at or above the level of assistant general manager in our head oÇce have overseas working experience. As part of our Joint Stock Reform Plan, we have structured our employee promotion system along three lines, including managerial, professional and operational lines and reformed our recruiting process by introducing quantitative examinations for applicants. We have also established a new compensation system that links compensation with employee contributions, competence and performance. We have developed a merit-based performance management system that is based on various performance criteria, including economic value-added and risk adjusted return on capital. A balanced score card system is used to evaluate employee performance and progress under this system. In 2005, we were named as having the ""Best Human Resource Strategy in Line with Business'' by China StaÅ. We have devoted attention and resource to recruiting and training our employees and have a training program for all levels of employees, including a senior executive leadership program, a core talent development program and a series of training programs for banking professionals. We have also established a risk management training system, chartered Ñnancial planner training programs
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and an accreditation process that staÅ must pass for promotion to management positions. In order to ensure that proper training is available to our employees on a timely basis and to improve our training cost-eÇciency, we are developing a range of alternative on-the-job-training programs, such as our e-training program. In addition, we have undertaken measures to streamline and Öatten our management structure and to optimize resource allocation among our front, middle and back oÇces to improve eÇciency, reduce management costs and provide our customers with better services.
INTELLECTUAL PROPERTY A1A(28)(4) We conduct business under the ""Bank of China'', ""Bank of China Limited'', ""BOC'', "" '', "" '', "" '' and "" '' brand names and logos. Among them, ""BOC'', "" '' and "" '' are recognized by the Trademark Bureau of the SAIC as ""Well-Known Brand in the PRC''. We have registered 108 trademarks and 327 domain names in the PRC and overseas and are the registered owner of the domain name ""bank-of-china.com'', the name of our homepage website. Beginning on June 1, 2006, we will use a new domain name ""boc.cn''. The information contained in this website is not a part of this prospectus. Details of our intellectual property rights are set forth in ""Further Information about Our Business'' in Appendix IX to this prospectus.
OUR RELATIONSHIP WITH BOCHK HOLDINGS Management of BOCHK Holdings As of May 8, 2006, we owned 65.88% of the share capital of BOCHK Holdings, a company listed on the Hong Kong Stock Exchange under stock code ""2388''. BOCHK, through which we conduct our commercial banking business in Hong Kong, is a wholly-owned subsidiary of BOCHK Holdings. As at the Latest Practicable Date, the board of directors of BOCHK Holdings had 13 members, comprising a chairman, one executive director, Ñve non-executive directors and six independent non-executive directors. Mr. Xiao Gang serves as Chairman of both our bank and BOCHK Holdings. BOCHK Holdings' chief executive, Mr. He Guangbei, is neither a director of our bank nor a member of our senior management team. Prior to joining BOCHK Holdings, Mr. He Guangbei was a vice president of our bank. Four of BOCHK Holdings' non-executive directors are also members of our Board of Directors or senior management team. They are: Mr. Hua Qingshan, our vice-president and executive director; Mr. Li Zaohang, our vice-president and executive director; Mr. Zhou Zaiqun, our vice- president and Mdm. Zhang Yanling, our vice-president. The six independent non-executive directors of BOCHK Holdings and the remaining one non- executive director, Mr. Sun Changji, are neither directors nor senior management personnel of our bank. Prior to August 2004, Mr. Sun Changji was vice chairman and executive vice president of our bank. BOCHK Holdings' senior management team comprises seven members. They are: Mr. He Guangbei, vice-chairman and chief executive; Mr. Lam Yim Nam, deputy chief executive; Mr. Lee Raymond Wing Hung, Chief Financial OÇcer; Mr. Gao Yingxin, deputy chief executive; Mr. Cheung Alex Yau Shing, Chief Risk OÇcer; Mr. Liu Peter Yun Kwan, Chief Information OÇcer and Mr. Yeung Jason Chi Wai, Company Secretary. Save for Mr. Yeung Jason Chi Wai who is also our Company Secretary, none of BOCHK Holdings' senior management team is a member of our Board of Directors or senior management team.
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Although we had a controlling interest of 65.88% in the share capital of BOCHK Holdings as of May 8, 2006, a majority of the board of directors of BOCHK Holdings is independent of our bank in that they are neither our Board members nor our senior management team members. Accordingly, BOCHK Holdings is independently managed.
In circumstances where there are issues involving a conÖict of interest with our bank, those BOCHK Holdings' directors with involvement in our bank must disclose their interests to the board of BOCHK Holdings and a board meeting attended by independent non-executive directors who have no material interest in the matter shall be held to deliberate on the same.
Further, as required by the Hong Kong Listing Rules, BOCHK Holdings' Articles of Association provide that where any director or its associates has a material interest in a matter, he or she shall refrain from voting and shall not be counted in the quorum present at the meeting.
In addition, although BOCHK Holdings is not our connected person pursuant to the Hong Kong Listing Rules, as the controlling shareholder of BOCHK Holdings, we are BOCHK Holdings' connected person. Any transaction between BOCHK Holdings and us is subject to announcement, reporting and/or independent shareholder approval requirements pursuant to Chapter 14A of the Hong Kong Listing Rules on the part of BOCHK Holdings, with the exception of those transactions for which there are exemptions pursuant to the Hong Kong Listing Rules. Further, according to BOCHK Holdings' board mandate, a special committee, consisting of only independent non- executive directors, shall be authorised by the board to review, approve and monitor connected transactions, i.e., transactions with connected parties of our bank.
The following table sets forth the list of directors of our bank and BOCHK Holdings as of the Latest Practicable Date: Name of Directors Position held in BOC Position held in BOCHK Holdings XIAO GangÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chairman Chairman LI Lihui ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-Chairman and President None HUA Qingshan ÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-President and Executive Non-Executive Director Director LI Zaohang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-President and Executive Non-Executive Director Director ZHANG Jinghua ÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None YU ErniuÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None ZHU Yan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None ZHANG Xinze ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None HONG Zhihua ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None HUANG HaiboÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None Sir Frederick Anderson GOODWIN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None SEAH Lim Huat PeterÏÏÏÏÏÏÏ Non-Executive Director(1) None Anthony Francis NEOH ÏÏÏÏÏ Independent Non-Executive None Director William Peter COOKE ÏÏÏÏÏÏÏ Independent Non-Executive None Director Patrick de SAINT-AIGNAN ÏÏ Independent Non-Executive None Director Alberto TOGNI ÏÏÏÏÏÏÏÏÏÏÏÏÏ Independent Non-Executive None Director(1)
(1) Subject to approval of the CBRC
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Name of Directors Position held in BOC Position held in BOCHK Holdings SUN Changji ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Vice-Chairman and Non- Executive Director (Ex-director of BOC) HE GuangbeiÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Vice-Chairman, Chief Executive and Executive Director (Ex-director of BOC) ZHOU Zaiqun ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice President Non-Executive Director (Ex- director of BOC) ZHANG Yanling ÏÏÏÏÏÏÏÏÏÏÏÏ Vice President Non-Executive Director (Ex- director of BOC) FUNG Victor Kwok KingÏÏÏÏÏ None Independent Non-Executive Director KOH Beng SengÏÏÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director SHAN Weijian ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director TUNG Chee Chen ÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director TUNG Wai-Hok Savio ÏÏÏÏÏÏÏ None Independent Non-Executive Director YANG Linda Tsao ÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director The following table sets out the list of senior management personnel of BOCHK Holdings as of the Latest Practicable Date:
Name of senior management Position held in BOC Position held in BOCHK Holdings HE Guangbei ÏÏÏÏÏÏÏÏÏÏÏ None Chief Executive LAM Yim Nam ÏÏÏÏÏÏÏÏÏÏ None Deputy Chief Executive LEE Raymond Wing Hung None Chief Financial OÇcer GAO YingxinÏÏÏÏÏÏÏÏÏÏÏÏ None Deputy Chief Executive CHEUNG Alex Yau Shing None Chief Risk OÇcer LIU Peter Yun KwanÏÏÏÏÏ None Chief Information OÇcer YEUNG Jason Chi Wai ÏÏ Board and Company Secretary Company Secretary
Status of BOCHK Holdings Following Our Listing Following our bank's listing, BOCHK Holdings will continue to be our Öagship company in Hong Kong through which we will continue to conduct commercial banking business. We also operate a branch in Hong Kong, known as BOC Markets. Although BOC Markets is fully licensed to conduct commercial banking activities, it serves primarily as our overseas treasury operations and its activities include internal liquidity and investment portfolio management and asset management for our institutional clients. At or around the time of BOCHK Holdings' listing on the Hong Kong Stock Exchange, we advised the HKMA that we have no intention to engage in commercial banking business that may result in direct competition with BOCHK Holdings. In addition, we informed the HKMA in a letter dated January 18, 2002 that it is our policy to provide BOCHK with support and assistance as may be required to ensure that BOCHK maintains capital and liquidity levels suÇcient to meet its obligations in conformity with standards of prudence generally accepted for its Ñeld of business.
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LEGAL AND REGULATORY PROCEEDINGS A1A(40) Legal Proceedings We are involved in legal proceedings in the ordinary course of our business. We are not involved in any litigation, arbitration or administrative proceedings that could reasonably be expected to, individually or in the aggregate, if adversely determined, have a material adverse eÅect on our Ñnancial condition and results of operations. See note VI.41 to Appendix I Ì ""Accountants' Report''. In connection with the incident relating to our Hesongjie sub-branch in Heilongjiang as described below under ""Special Events'', several corporate and institutional customers whose accounts were aÅected have taken, or have threatened to take, legal action against us relating to their deposits with us. The relevant legal proceedings have not been concluded and we cannot estimate the exact amount of damages to our bank. In 2004, we made an adequate provision based on our best estimate with respect to potential losses from such legal proceedings and other potential claims relating to this incident. In connection with the incident relating to our Simalu sub- branch in Heilongjiang, several branches of two PRC commercial banks have recently Ñled legal claims against our Simalu sub-branch and the endorsors of certain bank acceptance bills to recover these unpaid bank acceptance bills. These legal proceedings are still ongoing and we cannot predict their outcome at this point in time. See ""Ì Special Events Ì Heilongjiang Incident''.
Regulatory Proceedings We are subject to both routine and unscheduled inspections and examinations by PRC regulatory authorities, including the PBOC, the CBRC, the MOF, the SAIC, the SAFE and the CNAO and their respective local oÇces.
CBRC The CBRC conducts annual examinations of our bank's operations. As a result of the 2004 annual examination, the CBRC noted in its report that we have made signiÑcant progress in meeting the examination targets set by the CBRC in the Guidelines on Bank of China and China Construction Bank, which are further described under ""Supervision and Regulation Ì PRC Supervision and Regulation Ì Prudent Operating Requirements Ì Special Requirements Applicable to Us''. In addition, the CBRC also conducted on-site examinations in 2003, 2004 and 2005. Each of these on- site examinations was conducted with respect to two or more areas of the following aspects of our bank's operations: loan classiÑcation practice, non-credit assets, oÅ-balance sheet transactions, internal controls, commercial paper transactions, credit extensions to certain kinds of projects and personal loans. As a result of the 2005 examination, the CBRC reported that we have made signiÑcant progress in improving our corporate governance, internal controls, risk management, business operations and information technology system development. As a result of the examinations, the CBRC also identiÑed certain weaknesses in our business operations, internal audit, internal controls and risk management function, including weaknesses relating to the quality of newly issued loans in certain of our domestic branches, the independence of our internal audit department, weakness in maintaining the independence of our internal audit function, control over certain of our branches, management of risks relating to credit extended by certain of our branches, level of reliance on interest income, write-oÅs of certain non-performing loans, coordination between our domestic and overseas branches, certain loans made for purposes prohibited by applicable PRC rules and inaccuracy of our loan classiÑcation. For example, in the 2005 examination, the CBRC identiÑed that certain of our loan classiÑcation did not fully follow the Loan ClassiÑcation Principles, our loan documentation system required further improvement, certain
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loans extended in connection with land and Ñxed-assets investment programs did not follow the land use planning and project approval procedures, and that certain personal loans were extended without suÇcient due diligence investigation. Following these examinations, the CBRC issued recommendations for measures intended, among other things, to prevent further incidents of non- compliance, improve the independence of our internal audit department, improve the independence of our internal audit function, improve our control and monitoring of our branches and strengthen our risk management and internal control system, and we have taken steps to implement these recommendations. Some of these steps include establishing special investigation teams at our head oÇce and tier one branches to review special events involving amounts meeting certain minimum thresholds, implementing improvements to our internal controls and risk management function, upgrading our information technology system, enhancing the authority and independence of our internal audit function, and integrating resources both at home and at our overseas branches in an eÅort to promote coordination between our domestic and overseas branches.
CNAO
In 2001, the CNAO conducted an audit of our asset quality and our PRC GAAP Ñnancial statements for the year ended December 31, 2000. The CNAO issued a report in March 2002 that identiÑed several issues relating to our business operations and accounting system, including accounting irregularities, write-oÅs in violation of applicable procedures, credit extensions to projects not in compliance with applicable PRC rules, purchase of real estate properties in violation of relevant laws and regulations, unauthorized use of proÑts of overseas branches, representative oÇces and subsidiaries, insuÇciency of our information technology system and untimely disposal of non-banking investments. We subsequently submitted a report to the CNAO setting forth the steps we had taken to correct these problems, including accounting adjustments and payment of relevant taxes, fees and Ñnes resulting from improper accounting. In particular, we have gradually centralized the accounting for capital expenditures and expenses, and strengthened our internal accounting policies and monitoring of the tier one branches' Ñnancial reports on a monthly basis. Subsequent to the report we submitted to the CNAO in response to its 2001 audit, we have consulted the CNAO from time to time, and CNAO has not raised any further issues in connection with the deÑciencies discovered in its 2001 audit or the Bank's remedial measures to address these deÑciencies. The CNAO has announced that, as part of its annual audit plan, it will conduct audits of some branches of certain PRC commercial banks, including our bank, in 2006.
Impact and Remedial Measures
To the extent any of the PRC regulatory authorities' Ñndings did suggest any such deÑciencies, we have implemented, or are in the process of implementing, necessary remedial measures, as described below and elsewhere in this prospectus. None of the Ñndings have resulted in any material adverse eÅect on our Ñnancial condition and results of operations.
We have undertaken a number of measures designed to prevent future violations of laws or regulations and to correct the deÑciencies identiÑed by the relevant PRC regulatory authorities, including those identiÑed in the above-mentioned examinations and inspections. For details of recent initiatives to reduce the occurrence of non-compliance and strengthen our internal controls, see ""Risk Management''. However, in some cases, these measures have not yet been fully or eÅectively implemented. See ""Risk Factors Ì Risk Relating to Our Business Ì We have implemented or are in the process of implementing improvements to our current risk management and internal control systems and practices, but our compliance with some of these improved systems and their eÅectiveness have not been fully tested. As a result, our business and prospects may be materially and adversely aÅected if our implementation of these systems proves to be
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ineÅective'' and ""Ì We may encounter diÇculties in eÅectively implementing centralized management and supervision of our branches and subsidiaries and may not be able to timely detect or prevent fraud or other misconduct by our employees or third parties''. Our overseas branches, representative oÇces and subsidiaries are also subject to regulation by governmental authorities in the jurisdictions in which they operate. See ""Supervision and Regulation Ì Regulation and Supervision of Our Overseas Operations'' for a discussion of certain consent orders issued by the United States Treasury Department's OÇce of the Comptroller of the Currency against our branches in the United States and the remedial measures we were required to adopt as a result.
SPECIAL EVENTS We and other commercial banks in the PRC have been, from time to time, subject to fraud and other misconduct committed by the employees, customers and other third parties. The misconduct our bank has been subject to include violations of our internal credit approval or foreclosure procedures and guidelines, forgery of loan or other documentation, embezzlement of customers' funds and unauthorized use of chops or other instruments evidencing bank or corporate approvals. Some incidents of misconduct have involved only one individual, while others have involved multiple persons both within and outside our bank. Some of these incidents have also involved employees in managerial positions within our head office, branches and subsidiaries. The most significant of these incidents in terms of amounts involved or other factors are discussed below. In each of these cases, we have dealt strictly with the perpetrators to the extent of our authority and adopted tailored corrective measures as necessary to address any operational or internal control- related weaknesses evidenced by these cases. We believe that the financial losses and other negative factors resulting from these irregular incidents have not had, either individually or in the aggregate, any material adverse effect on our business, financial condition and results of operations. Nevertheless, we will continue to focus on improving and strengthening our internal controls and risk management function with the goal of successfully preventing such irregular incidents or misconduct from recurring in the future. For more information regarding our internal controls and risk management function, including pending and planned improvements thereto, see ""Risk Management''.
Heilongjiang Incidents From 2001 to 2004, the former head of our Hesongjie sub-branch located in the city of Harbin, Heilongjiang Province, allegedly conspired with several of our employees and individuals outside our bank to transfer approximately RMB939 million in funds from certain corporate or institutional customer deposit accounts into accounts controlled by the alleged perpetrators. Certain of these individuals, including the former head of the Hesongjie sub-branch, fled PRC several days before the incident was discovered. This incident is currently under investigation by the relevant law enforcement authorities in the PRC. Several of the corporate or institutional customers whose accounts were affected have filed or threatened to file legal claims against us to recover their respective deposits placed with us. These claims are in the process of being resolved and it is difficult to predict their outcome at this time. See ""Ì Legal and Regulatory Proceedings Ì Legal Proceedings''. After this incident, we dismissed the employees allegedly involved, reorganized the senior management team at our Heilongjiang branch and took disciplinary actions against the responsible persons in managerial positions, including the head of our Heilongjiang branch and several other members of that branch's senior management. We also initiated several measures to strengthen our internal control system, such as establishing an internal control committee at our head office chaired by our President, further delineating our front, middle and back office functions, limiting the authority
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granted to our sub-branches, requiring our larger branches to undertake more frequent account- checking at their subordinate branches and sub-branches of corporate customers' accounts and making our internal audit system independent from our business operation departments. From March 2003 to December 2005, the former head of our Simalu sub-branch located in the city of Shuangyashan, Heilongjiang Province, allegedly conspired with several of our employees and individuals outside our bank to fraudulently obtain bank acceptance bills and cash them at the branches of other PRC commercial banks, mostly located in other provinces. The total amount of unpaid bank acceptance bills involved in this scheme was approximately RMB430 million based on information currently known to us. The individuals allegedly involved in this scheme, including our employees, were arrested by the relevant law enforcement authorities in the PRC. Several branches of two PRC commercial banks have filed legal claims against our Simalu sub-branch and the endorsors of the bank acceptance bills to recover the unpaid amount of RMB394.6 million of these bank acceptance bills. These legal proceedings are still ongoing and we cannot predict their outcome at this point in time. See ""Ì Legal and Regulatory Proceedings Ì Legal Proceedings''. After this incident, we conducted a comprehensive review of all aspects relating to our bank acceptance bills business, improved the clearing system for bank acceptance bills and began implementing a compulsory rotation system among the heads of local branches as well as among individuals holding important branch level positions at our bank. As these incidents are still under investigation by the relevant law enforcement authorities, their impact on us, including any potential regulatory fines, currently cannot be accurately estimated.
Beijing Huayunda Incident From December 2000 to June 2002, Beijing Huayunda Real Estate Development Co., Ltd., or Huayunda, with the assistance of several employees at our Beijing branch, used falsified housing purchase contracts and forged income certificates to apply for and obtain approximately RMB670 million in home mortgage loans from our Beijing branch in the names of Huayunda's employees for the Senhao Apartment project in Beijing. The loans were then diverted to unspecified accounts outside Beijing and the construction of the Senhao Apartment project was suspended. After our inspection and internal audit department discovered this incident, the employees responsible for approving these loans at our Beijing branch were dismissed and later arrested by the relevant law enforcement authorities in the PRC. These mortgage loans were part of the group of non-performing loans that we sold to Cinda on a non-recourse basis in connection with our financial restructuring in 2004. See ""Our Restructuring Ì Financial Restructuring''. As a result of this incident, we also initiated several measures to strengthen our personal loan credit risk management function, such as relying more upon independent investigations of the creditworthiness of the mortgage loan applicants, rather than on recommendations from real estate developers, and establishing personal loan centers with separate middle and back office functions. For a discussion of our personal loan credit risk management framework and the changes we are in the process of implementing, see ""Risk Management Ì Credit Risk Management Ì Credit Risk Management for Personal Loans''.
Wang Xuebing Incident Mr. Wang Xuebing, our former Chairman and President and the former general manager of our New York Branch, was convicted of accepting over RMB1 million in bribes in exchange for assisting certain companies with obtaining loan approvals. Mr. Wang was sentenced to 12 years in prison by the Beijing Second Intermediate Court and the Beijing High Court in 2004.
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Liu Jinbao Incident Mr. Liu Jinbao, our former Vice Chairman and the former Vice Chairman and Chief Executive of BOCHK Holdings, and three other employees of BOCHK Holdings, including Mr. Zhu Chi and Mr. Ding Yanshang, former Deputy Chief Executives of BOCHK Holdings, embezzled approximately RMB14 million through unauthorized transfers, fabrication of accounting records and other means from 1996 to 2003. Mr. Liu also accepted bribes in exchange for providing certain preferential treatment to several companies in 1997 and 1998. A former deputy general manager of our Shanghai branch was also implicated and has been sentenced to 16 years in prison. Mr. Liu was given a suspended death sentence with a two-year stay of execution. After this incident, BOCHK Holdings undertook a substantial reorganization of its management.
Zhao Ange Incident Mr. Zhao Ange, our former Vice President, accepted bribes of approximately RMB6 million and conspired with our former general manager of the finance department to misappropriate RMB50 million in funds. Mr. Zhao was sentenced to life imprisonment in 2004. The misappropriated funds have been recovered.
Kaiping Incident From 1993 through 2001, three successive heads of the Kaiping sub-branch of our Guangdong branch allegedly conspired to embezzle or misappropriate approximately US$482 million from that sub-branch. The suspected misconduct took various forms, including foreign exchange trading activity in violation of regulations, off-balance sheet loans, and the diversion of bank funds to third parties. We discovered these activities in the course of integrating such sub-branch's information technology infrastructure with our overall information technology system. After we commenced our investigation of these matters in October 2001, all three individuals fled the PRC. We have written off the receivables representing the full amount of the funds with which the alleged perpetrators are accused of embezzling. This incident is still under investigation by the relevant law enforcement authorities in the PRC. One of the three individuals was arrested in the United States and extradited to the PRC for trial in April 2004. This individual was sentenced to 12 years in prison by the People's Intermediate Court of Jiangmen, Guangdong Province in March 2006. The two other individuals were arrested by United States law enforcement authorities and have been indicted by a federal grand jury on charges of racketeering, money laundering and fraud. The trial of these individuals is expected to commence in September 2006 in the United States District Court of Nevada in Las Vegas. In response to this incident, we closed our inter-bank trading system and reconfigured our clearing and payment system in 2001.
OTHER MATTERS The PRC Commercial Banking Law, which became effective in July 1995, prohibits any investment by a PRC commercial bank in a non-bank entity in the PRC, unless otherwise approved by the government. Furthermore, on November 25, 1998, the PBOC and a governmental task force issued a joint release requiring financial institutions to dispose of their investments in non-bank entities. We had holdings or investments in non-bank entities in the PRC. As a result, we entered into a disposal arrangement with China Orient to dispose of such holdings and investments, which was approved in principle by the MOF in 2002. Beginning from 2002, our various branches have respectively entered into transfer agreements with China Orient in order to transfer our shareholding interests or investments in 906 non-bank entities in the PRC, and we further entered into an overall supplemental agreement with China Orient on December 30, 2005. Pursuant to the transfer
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agreements and the supplemental agreement, all economic benefits and liabilities related to interests or holdings in these 906 non-bank entities have been transferred to China Orient by us effective from the date of the supplemental agreement, notwithstanding that we are still in the process of effecting certain registration procedures with the SAIC. China Orient undertook that it would be responsible for all risks and consequences arising out of, among others, non registration of the investment in the 906 non-bank entities. As of March 2006, we still had holdings or investments in approximately 190 non-bank entities in the PRC which are not in compliance with the PRC Commercial Banking Law. On March 19, 2006, the CBRC granted us an approval to continue our investments in those non-bank entities temporarily, but required us to dispose of the investments within one year after the issuance date of the approval letter. According to the CBRC approval, failure to dispose of the holdings and investments before March 19, 2007 may subject us to fines or other regulatory actions. We have started to transfer the investments and holdings to other parties, and expect to enter into all the relevant agreements in the near future. Jun He Law Offices, our PRC legal counsel, is of the opinion that, with the CBRC approval, failure to dispose of these holdings and investments before the Global Offering will not have a material adverse impact on our business operations or financial condition.
PROPERTIES A1A(29)(2) Our head oÇce is located at One Fuxingmen Nei Dajie, Beijing 100818, China. As of March 31, 2006, we held 11,598 properties and leased 8,158 properties in the Chinese Mainland, Hong Kong and other overseas countries.
Land As of March 31, 2006, we owned and occupied 11,403 land lots with a total site area of approximately 8.9 million square meters to support our business activities and operations throughout China. These land lots consist of (i) 6,060 land lots with a total site area of approximately 3.89 million square meters for which we have the relevant granted land use rights; (ii) 3,470 land lots with a total site area of approximately 3.06 million square meters for which we held land use rights as authorized land; (iii) 794 land lots with a total site area of approximately 1.03 million square meters for which we held land use rights as allocated land; (iv) 38 land lots with a total site area of approximately 55,572 square meters for which we held land use rights as leased land; and (v) 1,041 land lots with a total site area of approximately 0.9 million square meters for which we have not obtained proper land use rights. The properties for which we have obtained granted land use rights above were valued at approximately RMB29 billion as of March 31, 2006, which are freely transferable by us without further payment of land grant fees to the PRC Government. The properties for which we have obtained land use rights as authorized land above were valued at approximately RMB12.8 billion as of March 31, 2006. Our PRC legal counsel, Jun He Law OÇces, has advised us that under PRC laws and regulations, for as long as we use these land lots for the purposes and during the period stated on their land use right certiÑcates, we will not be required to pay any land grant fees to the PRC Government. However, if we use these land lots for purposes other than their original purposes, or if we transfer any land use rights relating to these land lots to a third party other than our subsidiaries, we are required to pay land grant fees to land administration authorities for those land lots that are subject to the change of use or the transfer. Land grant fees are determined based on the land transfer price and the regulation of the local land administration authorities. We may transfer the land use rights of certain parcels or alter their use out of business necessity, and consequently we would be required to pay land grant fees for the aÅected land lots. As we have not obtained proper land use rights for the 1,041 land lots as stated in (v) above, no commercial value has been attributed to them.
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Owned Properties As of March 31, 2006, we owned 9,591 buildings, units and carparks, which are mainly used as oÇces and branches that support our business activities and operations throughout China. The total gross Öoor area of the completed buildings is approximately 13.4 million square meters. We do not have the relevant land use right certiÑcates or building ownership certiÑcates in respect of 1,214 buildings, units and carparks with a total gross Öoor area of approximately 1.94 million square meters. No commercial value has been attributed to such buildings and these properties can be, if necessary, replaced by other comparable alternative premises for the relevant uses without any material adverse eÅect to our business operations.
Properties under Construction As of March 31, 2006, we had 59 projects under construction in China, which, upon completion, will have an estimated total gross Öoor area of approximately 0.74 million square meters. We have not obtained the relevant land use rights certiÑcates and the relevant construction permits in respect of 41 properties with an estimated total gross Öoor area upon completion of approximately 487,935 square meters. As of March 31, 2006, no commercial value has been attributed to these properties.
Property Titles We changed our legal name from Bank of China to Bank of China Limited on August 26, 2004. As a result, we are in the process of applying for re-registration for name change of the relevant land use right certiÑcates and building ownership certiÑcates. Our PRC legal counsel, Jun He Law OÇces, has advised us that there is no legal impediment to our obtaining the registration in our name for the land use right certiÑcates and building ownership certiÑcates in respect of such land and buildings. In addition, in relation to those properties in China that are subject to legal defects in title the net book value of properties with title defects amounted to RMB5.57 billion, representing approximately 8.6% of the net book value of our total properties as of March 31, 2006. We are of the view that the absence of such title certiÑcates and the existence of such title defects will not have any material Ñnancial and operational impact on us as the relevant properties represent an insigniÑcant portion of the total value of our properties and the relevant properties, individually or collectively, are not crucial to our business operations. See, however, ""Risk Factors Ì Risks Relating to Our Business Ì We have not obtained formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties''.
Leased Properties As of 31 March 2006, we leased over 8,158 properties throughout the PRC and overseas. The total gross Öoor area of the leased properties is approximately 1.9 million square meters. No commercial value will be attributed to any leased properties, including those where the relevant lessors have not obtained requisite title certiÑcates. For the leased properties where the relevant lessors have not obtained requisite title certiÑcates, we are of the view that this will not have a material adverse eÅect on our business as our key operations, including the head oÇce and Ñrst tier branch headquarters, do not operate on leased properties where the lessors have not obtained the requisite title certiÑcates. Furthermore, such leased properties are located in 32 diÅerent provinces in the PRC, and we are of the view that the concentration risk of such leased properties is low. We do not foresee any diÇculty in seeking alternative premises for these leased properties if necessary. Accordingly, the absence of the requisite title certiÑcates by lessors of some of the properties leased will not have a material adverse impact on our business. For a description of risks relating to our properties, see ""Risk Factors Ì Risks Relating to Our Business Ì We have not obtained
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formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties''.
Property Valuation American Appraisal China Limited and Grant Sherman Appraisal Limited, both independent property valuers, have valued our owned property interests in the Chinese Mainland, Hong Kong and overseas as of March 31, 2006 at RMB72,790 million. The text of the valuation letter, a summary of values and the valuation certiÑcate jointly issued by American Appraisal China Limited and Grant Sherman Appraisal Limited for this prospectus, is set out in Appendix V.
Waivers from Certain Valuation Report Requirements According to the valuation report set out in Appendix V to this prospectus, we owned 11,403 land lots with an aggregate area of approximately 8.9 million square meters, 9,591 buildings, units and carparks with an aggregate gross Öoor area of approximately 13.4 million square meters, and 59 projects which are under construction with an aggregate gross Öoor area of approximately 0.74 million square meters upon completion in the PRC. We also leased 8,158 properties with an aggregate gross Öoor area of approximately 1.9 million square meters in the Chinese Mainland, Hong Kong and overseas. Owing to the substantial number of properties involved, we have applied to the SFC for an exemption and the Hong Kong Stock Exchange for a waiver from strict compliance with paragraph 34(2) of the Third Schedule to the Companies Ordinance and Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, respectively, on the grounds that (i) it would be unduly burdensome to include a fully compliant valuation report in this prospectus and the inclusion of such detailed information would be irrelevant to potential investors in a commercial bank and would not be material to a potential investor's investment decision; and (ii) it would be unduly burdensome to prepare an English translation of the report, as substantially all of the properties are located in the PRC and consequently the underlying valuation and title information is in Chinese. The SFC has granted an exemption under section 342A(1) of the Companies Ordinance and the Hong Kong Stock Exchange has granted a waiver from Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, subject to the following conditions: (i) a full valuation report in the Chinese language complying with the requirements under the Listing Rules and the Hong Kong Listing Rules and paragraph 34 of the Third Schedule will be made available for inspection in accordance with Appendix X Ì ""Documents Delivered to the Registrar of Companies and Available for Inspection''; (ii) the valuer's letter and the valuer's certiÑcates containing a summary valuation of all of our property interests of the Group, including particulars of occupancy, open market values and the title status thereof, based on the full valuation report will be included in this prospectus in the form set out in Appendix V to this prospectus; (iii) this prospectus must set out particulars of this exemption. In addition, as at March 31, 2006, we owned or leased 75 properties in 13 overseas developing countries. Of these properties, 40 properties with an aggregate Öoor area of approximately 10,151 square meters are owned and 35 properties with an aggregate Öoor area of approximately 12,416 square meters are leased by us, representing 0.34% and 0.43%, respectively, of the total number of properties, and 0.1% and 0.95%, respectively, of the total value of properties owned or total rental value of properties leased by us as of March 31, 2006.
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We have also applied for and the Hong Kong Stock Exchange has granted a waiver from strict compliance with paragraph 5.1 of Practice Note 12 of the Hong Kong Listing Rules on the grounds that it would be unduly burdensome to ascertain and include information on title to overseas properties owned or leased by us situated in various developing property markets and these properties are not crucial to our business operations. No commercial value was attributed to these properties in the valuation report set out in Appendix V Ì ""Property Valuation Report''. Instead, a comparable market value was disclosed in the property valuation report for investors' reference. We are of the view that the exemption from the SFC and the waivers from the Hong Kong Stock Exchange would not prejudice the interests of potential investors on the grounds mentioned above.
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RISK MANAGEMENT
OVERVIEW The primary risks we face are credit risk, market risk (including interest and exchange rate risks), liquidity risk and operational risk (including legal and compliance risks). We are also exposed to strategic risk and reputation risk. We seek to maintain a moderate risk appetite and a balance between risk and return in a rational, stable and prudent manner. Our primary risk management goals are to maximize value for our shareholders within acceptable risk parameters and satisfy the requirements of the Board of Directors, the relevant regulatory authorities, our depositors and other interest groups for our bank's prudent and stable development. The guiding principles in developing our risk management framework include: (1) complying with legal and regulatory requirements; (2) achieving an appropriate equilibrium between risk and return; (3) achieving and maintaining the independence of our risk management function; (4) holding responsible employees accountable; (5) aligning risk management and business development objectives; and (6) providing appropriate disclosure. Through our ongoing eÅorts to develop and enhance our risk management framework, we seek to achieve the following objectives: (1) extending our risk management framework to all of our business departments, branches and subsidiaries; (2) ensuring that risks inherent in our various lines of business are eÅectively managed; (3) establishing a pervasive risk management culture; (4) developing comprehensive and integrated risk management procedures, policies and processes; and (5) utilizing appropriate risk management tools to identify, monitor and quantify our risks. In order to achieve our risk management objectives, we have undertaken various initiatives in the past several years, including:
¬ improving the independence and organizational structure of our risk management function: Ì in 1999, we established an independent risk management department to monitor and manage credit risk; Ì in 2001, we established non-performing asset management departments to collect, dispose and manage non-performing assets; Ì in September 2004, we established a risk policy committee to assist our Board of Directors in risk management; Ì in November 2004, we restructured our non-performing asset management departments into credit administration departments to control the disbursement of funds and manage certain non-performing loans; and Ì in September 2005, we approved a new framework to strengthen the independence of the market risk management in accordance with CBRC rules and regulations;
¬ increasing centralized risk management supervision and monitoring at our domestic branches: Ì in July 2004, we began establishing more stringent and uniform qualiÑcation standards for the general managers of the risk management departments at our domestic tier one branches; Ì since 2004, our new corporate loans are required to be approved at either our domestic tier one branches or our head oÇce, and this policy has been extended to cover the renewal of existing corporate loans in 2005;
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RISK MANAGEMENT
Ì since 2005, we have centralized personal loan approvals at our domestic tier one branches;
Ì in September 2004, we initiated a credit approval veriÑcation procedure whereby the risk management department at our head oÇce veriÑes, analyzes and monitors the corporate lending decisions at our domestic branches;
Ì since 2005, any assignment of a ""B'' or higher credit rating under our ten-category customer rating system is required to be approved either at our domestic tier one branches or our head oÇce, as applicable;
Ì since the second quarter of 2005, we have enhanced the criteria for loan classiÑcations and built a team that specializes in classifying loans; and
Ì since the second quarter of 2005, we have centralized the review and approval of the classiÑcation of our corporate loans at the risk management departments of our head oÇce and domestic tier one branches;
¬ improving our management and assessment of credit risk:
Ì in 1999, we began using a ten-category customer rating system for our corporate customers;
Ì in 1999, we began implementing the Ñve-category loan classiÑcation system adopted by the PBOC to evaluate the credit risk associated with our corporate loans;
Ì in 1999, we began instituting integrated credit risk management of our corporate and Ñnancial institutional lending, retail lending, trade Ñnance and treasury operations;
Ì in 2000, we began implementing a ""three-in-one'' credit approval process for corporate loans, which consists of an independent due diligence investigation, an assessment by an independent credit review committee, and a credit extension decision by separate authorized credit application approvers; and
Ì in 2004, we began assessing loans for impairment under IFRS; and
¬ improving our risk monitoring and risk alert system:
Ì in 2002, we began implementing a credit management information system to monitor our corporate lending and collect information on customers, loan agreements, risk classiÑcation and accounting treatment relating to domestic corporate lending;
Ì in 2003, we established a major risk event reporting system requiring major risk events to be reported to the risk management department at our head oÇce; and
Ì in 2004, we began implementing an asset quality monitoring system to collect and analyze data on our outstanding domestic corporate loans and monitor our credit risk.
Although some of these initiatives have been implemented only recently and partially and their eÅectiveness has not been tested, we believe the implementation of these initiatives will increase the eÅectiveness of our risk management and improve our asset quality over time. For a description of certain risks applicable to our asset quality, see ""Risk Factors Ì Risks Relating to Our Loan Portfolio''.
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RISK MANAGEMENT STRUCTURE The chart below illustrates the organizational structure of the principal elements of our risk management framework.
Board of Directors
Board Level Risk Policy Committee
Internal Control Committee
Senior Management (1) Anti-Money Laundering President Working Committee
Asset-Liability Management Committee
Asset Disposal Committee
(2) Chief Credit Officer
Risk Management Related Departments Operational Risk Credit Risk Market Risk Liquidity Risk
Legal and Compliance Risk Management Risk Management Asset-Liability Management Department Department and Credit Department (3) Department Administration Department
Participation at the Vertical Task forces and board of directors control vertical control
Risk Management Subsidiaries Branches Business at our Business Departments Departments, Branches and Subsidiaries Domestic Overseas Domestic Overseas Business subsidiaries subsidiaries branches branches departments at our head office
(1) Some management decisions are made in the Presidents' meetings organized by our President with our Vice Presidents, Assistant Presidents and Chief Credit OÇcer. See ""Ì Senior Management and Special Management Committees''. (2) Our current Chief Credit OÇcer, Lonnie Dounn, has tendered his resignation notice and will resign from this position in September 2006. (3) We are in the process of integrating the market risk management function into the risk management department. Currently market risk is primarily managed by our global markets and asset-liability management departments.
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Board of Directors and Risk Policy Committee The Board of Directors is responsible for establishing our overall risk appetite and reviewing and approving our risk management objectives and strategies. The primary responsibilities of our risk policy committee include assessing and monitoring the implementation of our risk management and internal control policies, including credit policies, monitoring the exposure against established parameters, monitoring and evaluating our risk appetite, reviewing the eÅectiveness of our legal and compliance process and monitoring its implementation, and reviewing and approving credit decisions in excess of the credit authorization limits granted to our President. Our risk policy committee consists of Messrs. Anthony Neoh, Zhang Jinghua, Zhang Xinze, Hua Qingshan and Patrick de Saint-Aignan, with Mr. Anthony Neoh acting as the chairman. Our President or Chief Credit OÇcer (when authorized by our President) attends and reports to the risk policy committee. The risk policy committee is supported by the risk management department.
Senior Management and Special Management Committees Our senior management has overall management responsibility for managing all aspects of our risk, including implementing our risk management strategies and initiatives and credit policies and approving internal rules, measures and procedures related to risk management. Our President organizes Presidents' meetings with our Vice Presidents, Assistant Presidents and Chief Credit OÇcer. During these meetings, management decisions, including those relating to risk management, are made. Decisions with respect to management decisions that fall outside the authority of the senior management will be proposed to the Board of Directors. As part of our eÅorts to strengthen our risk management function, we established the Chief Credit OÇcer position in 2005. Our Chief Credit OÇcer, in conjunction with other members of senior management, supervises the risk management department and credit administration department. Our Chief Credit OÇcer is nominated by, and reports directly to, our President and is appointed by the Board of Directors. In April 2006, Lonnie Dounn tendered his resignation from our bank, eÅective in September 2006. We are currently seeking a replacement for Mr. Dounn as our Chief Credit OÇcer. We have also established the following special management committees with direct risk management responsibilities: the internal control committee, the asset-liability management committee, the asset disposal committee and the anti-money laundering working committee. The internal control committee was established in March 2005, and oversees the overall internal controls in our organization, determines the basic system for internal controls, evaluates the eÅectiveness of the internal control system and oversees actions taken to remedy deÑciencies that have been identiÑed in the internal control system. In particular, the internal control committee reviews and approves our major internal control policies and related implementation plans and establishes management and reporting systems in connection with identifying, assessing, monitoring, controlling, mitigating and quantifying operational risks. Furthermore, the internal control committee engages in-house or external experts from time to time to evaluate the eÅectiveness of internal controls and provide recommendations for improvements. The internal control committee consists of Messrs. Li Lihui, Zhou Zaiqun, Zhang Lin, Zhu Min, Zhu Xinqiang, Wang Yongli and, until the eÅectiveness of his resignation, Lonnie Dounn, with Mr. Li Lihui acting as the chairman. The internal control committee is supported by the legal and compliance department. The asset-liability management committee oversees the management of our overall assets and liabilities, in particular, our liquidity and market risks, and develops the relevant management policies in accordance with the general risk management policies adopted by the risk policy committee. In addition, since October 2005, the responsibilities of the asset-liability management
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committee have been further clariÑed to include overseeing the composition of assets and liabilities on our balance sheet, business planning and capital planning. See ""Ì Liquidity Risk Management'' and ""Ì Market Risk Management''. The asset-liability management committee consists of Messrs. Li Lihui, Zhou Zaiqun, Lonnie Dounn (until the eÅectiveness of his resignation), and the general manager of each of the following departments: the asset-liability management department, accounting department, risk management department, Ñnancial institutions department, global markets department, corporate banking department, personal banking department and banking department. The asset and liability management committee is supported by the asset-liability management department. The asset disposal committee reviews our strategies and policies relating to the disposal of non-performing loans, and is responsible for approving the proposals of the disposition, collection and recovery of non-performing loans with amounts in excess of the authorization limits of the domestic tier one branches and overseas branches. The asset disposal committee also evaluates write-oÅs of non-performing loans and disposition of other assets. The asset disposal committee consists of Mr. Zhou Zaiqun, acting as the chairman, and participating members, mainly deputy general managers and heads of divisions of our credit administration, internal audit and inspection, accounting, overseas business management, risk management, global trade services, corporate banking, personal banking and legal and compliance departments at our head oÇce. The asset disposal committee is supported by the credit administration department. For a description of the functions of our anti-money laundering working committee, see ""Ì Anti-Money Laundering and Combating Financing of Terrorism Measures''. The anti-money laundering working committee is supported by the legal and compliance department.
Risk Management Department The risk management department develops risk management strategies and working plans, and coordinates the development and management of risk management policies and procedures. In particular, the risk management department manages the credit risk of our businesses, formulates policies and procedures in credit authorization management and supervises their implementation, and coordinates in the implementation of the customer credit ratings and loan classiÑcations. The risk management department is also responsible for the due diligence and credit review of loan applications exceeding certain credit authorization limits and submitting these loan applications for further review and approval by authorized personnel. Moreover, the risk management department monitors the credit asset quality of our bank, and collects information and reports on our exposure to credit risk and the status of the risk management of our bank. To strengthen the independence of our market risk management function in accordance with CBRC rules and regulations, we are in the process of establishing a unit within our risk management department to be responsible for formulating market risk management policies and procedures and overseeing their implementation.
Asset-Liability Management Department The asset-liability management department manages our liquidity in accordance with the policies developed by the asset-liability management committee, develops projections on our liquidity needs and risks, and re-allocates funds internally to satisfy our liquidity requirements. In addition, the asset-liability management department works closely with the global markets department in executing our market risk management policy directives established by the risk policy committee, and manages the interest rate risk for our banking book and the exchange rate risk of our non-trading books.
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Credit Administration Department The credit administration department was established in November 2004 to oversee loan disbursements, monitor outstanding loans, evaluate collateral and foreclosed assets, manage credit Ñles, maintain customer information and recover and write oÅ non-performing assets.
Legal and Compliance Department The legal and compliance department is responsible for managing the legal and compliance risk and coordinating internal controls. The legal and compliance department designs and implements our legal and compliance procedures, and identiÑes, evaluates and monitors our legal and compliance risk, which primarily relates to non-compliance with the relevant laws, rules and regulations, including applicable anti-money laundering regulations. The legal and compliance department also oversees and coordinates operational risk management within our bank, and is responsible for drafting operational risk management policies for identifying, assessing and monitoring operational risk and coordinating and overseeing their implementation. In addition, the legal and compliance department assists the internal control committee in supervising the implementation of our internal control system, drafting major internal control policies and related implementation plans. Furthermore, the legal and compliance department provides overall guidance for the implementation of our internal control policies and plans by our business departments and branches.
Risk Management at Business Departments, Branches and Subsidiaries As part of our ongoing eÅorts to improve our overall risk management, as well as streamline and enhance risk monitoring and controls at our branches and subsidiaries, our head oÇce has implemented the risk management initiatives set forth below.
Business Department Risk Management Special risk management teams have been established at certain business departments to monitor and control risks. In particular, under the guidance of the risk management department at our head oÇce, these teams develop detailed rules, procedures and measures tailored to the operations of the relevant business department and monitor their implementation. In addition to reporting to the general manager in charge of the relevant business department, these teams are required to report to the risk management department at our head oÇce for credit risk and market risk-related matters. Furthermore, business departments are required to establish adequate procedures to manage their operational risk and collect related information, as well as report such information to the legal and compliance department.
Branch Risk Management Our head oÇce has overall oversight of our branch risk management. In particular, the risk management departments of our domestic tier one branches are currently supervised by the risk management department at our head oÇce, report both to the risk management department at our head oÇce and the branch general manager. The appointment of the general managers of the risk management departments at domestic tier one branches must be conÑrmed by the risk management department at our head oÇce. Each domestic tier one branch directly monitors and controls the risk management of its subordinate branches. In addition, we are in the process of identifying chief credit oÇcers for our domestic tier one branches, who will be primarily responsible for credit risk management and credit administration as well as independently approving loans within the authorization limits granted by the head oÇce.
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Each such chief credit oÇcer candidate must be approved by our senior management at the head oÇce. The branch general manager is directly responsible for the internal control system at the branch. Since 2005, we have established internal control committees at our domestic tier one branches that are responsible for establishing management and reporting systems in connection with identifying, monitoring, mitigating and quantifying operational risks and overseeing, evaluating the eÅectiveness of internal control systems and taking remedial actions to address any deÑciencies. In addition, the legal and compliance departments at these domestic tier one branches are responsible for overseeing and coordinating operational risk and the implementation of the internal control system at the branches, as well as reporting to the legal and compliance department at our head oÇce. Our head oÇce also oversees the risk management of our overseas branches. In particular, any credit application at the overseas branches exceeding the authorization limits is required to be submitted to the head oÇce for approval. Overseas branches with a signiÑcant loan business, such as our branches in Macau or London, are required to follow our ""three-in-one'' credit approval procedures for corporate loans. The overseas branches are also required to classify their loans in accordance with the standards established by our head oÇce unless the relevant overseas standards are more stringent, in which case the relevant overseas standards are followed. In addition, the overseas branches are required to Ñle reports with our head oÇce on any new non- performing loans exceeding certain thresholds and any loan classiÑcation upgrade from non- performing to ""pass'' or ""special-mention''. The head oÇce may also re-classify any loan that has been wrongly classiÑed. Our head oÇce guides and supervises the control of the asset quality of our overseas branches, periodically analyzes the asset quality and takes appropriate measures when any unusual change occurs in the asset quality of our overseas branches.
Subsidiary Risk Management We currently monitor and control the risk management at our subsidiaries by appointing certain members of the boards of directors or risk management committees of the subsidiaries. These appointees are responsible for implementing the risk management initiatives and requirements formulated by our head oÇce. For example, as of the date of this prospectus, Ñve of BOCHK's directors and two of four members of its risk committee are members of our Board of Directors or senior management. See also ""Ì Risk Management of BOCHK''.
CREDIT RISK MANAGEMENT Credit risk is the risk that a customer or counterparty may be unable or unwilling to meet an obligation that it has entered into with us. We are exposed to credit risk primarily through our loan portfolio, investment portfolio, guarantees and commitments, and other on- and oÅ-balance sheet credit exposures. In order to manage our exposure to credit risk, we have adopted credit approval policies and procedures that are reviewed and updated by the risk management department at our head oÇce in conjunction with other relevant departments. The credit approval process for both corporate loans and personal loans can be broadly divided into three stages: (1) credit origination and assessment; (2) credit review and approval; and (3) fund disbursement and post-disbursement management.
Credit Risk Management for Corporate Loans As part of our ongoing eÅorts to develop a centralized system of approving credit applications, we began implementing in 2000 a ""three-in-one'' credit approval process for corporate loans, which
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consists of the following credit approval procedures with clearly deÑned credit risk management responsibilities and accountability assigned at each level: (1) an independent due diligence investigation; (2) an assessment of credit applications by an independent credit review committee; and (3) Ñnal credit extension decision to be made by authorized credit application approvers. We also evaluate the eÅectiveness of this credit approval process on an ongoing basis.
Credit Origination and Assessment Credit Origination The relationship managers at our corporate banking department initiate the corporate credit approval process by either interviewing credit applicants who approach us or by proactively soliciting prospective borrowers. We solicit prospective customers that we believe present low credit risk primarily based on our assessment of the economic condition and prospects of the industries or regions within which the prospective customers operate. If an applicant passes a preliminary screening by the relationship managers, it is generally required to Ñle a formal credit application with applicable supporting documents, including organizational documents, audited Ñnancial statements for the most recent three years and material contracts. The relationship managers are responsible for compiling all information required for assessing the relevant credit risk, performing a preliminary assessment and analysis on credit applications based on pre- established guidelines and preparing a preliminary evaluation report.
Credit Assessment As part of our loan approval process, we assess the credit risk of loan applications submitted by corporate borrowers. The result of our credit risk assessment is a critical factor in determining whether the loan application is approved. Our analysis of the credit risk associated with corporate borrowers focuses on a number of factors, including:
¬ the probability of default by the borrower;
¬ the borrower's Ñnancial position, including an analysis of the borrower's Ñnancial statements and expected cash Öow;
¬ the quality of the borrower's business, including its history and current market position;
¬ the strength of the borrower's management;
¬ the business and Ñnancial relationships between the borrower and its parent or aÇliated companies;
¬ the borrower's guarantor and any collateral coverage;
¬ the purpose and structure of the loan; and
¬ the borrower's credit history and its repayment ability, including, any credit information provided by the PBOC's credit information database. In addition, we assess the industry risks associated with the corporate borrower by considering a number of factors, including:
¬ industry characteristics, such as the importance of the industry to the economy, its growth outlook and cyclical nature, as well as government policies relating to the industry;
¬ the competitiveness of the industry; and
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¬ Ñnancial and operating information relating to the industry, including return on capital, operating margins and earnings stability.
Credit Rating We began using a ten-category customer credit rating system in 1999 to improve our ability to identify and assess credit risk. Our ten-category customer credit rating system is based on an analysis of various criteria and indicators of creditworthiness. The following table illustrates the credit risk ratings of our corporate customers that are rated under this system:
Credit Rating AAA AA A BBB BB B CCC CC C D Credit ProÑle Ó borrowers with good Ó borrowers with Ó borrowers with Ó borrowers with credit relatively good credit relatively weak credit weak credit Ó good Ñnancial and Ó projected cash Öow Ó weak Ñnancial and Ó signiÑcant risk operating condition considered together operating condition of default Ó strong ability to repaywith existing assets Ó relatively signiÑcant Ó low risk of default and liabilities risk of default expected to be suÇcient for repayment Ó relatively low risk of default The credit rating of a corporate customer is subject to an annual review, and may be revised when there are signiÑcant changes to the customer's Ñnancial condition and business operations, including expected cash Öows, its performance of existing obligations, or the quality of its Ñnancial reporting. We generally do not conduct any internal credit rating for a corporate customer that is a Ñnancial institution or governmental agency. Any assignment of a ""B'' or higher credit rating at our domestic tier one branches is required to be reviewed and approved by the risk management department at our head oÇce. In addition, any assignment of a ""B'' or higher credit rating at our branches below tier one branches is required to be approved by the risk management department at the tier one branch responsible for overseeing such other branches. Branches below tier two branches do not have authority to approve any assignment of credit rating for corporate customers. As of December 31, 2005, borrowers with a credit rating of ""A'' or higher under our ten- category customer credit rating system accounted for approximately 20.3% of our total rated corporate borrowers, while the outstanding loans extended to these borrowers accounted for approximately 41.9% of our total loans outstanding of the rated corporate borrowers as of the same date. As of December 31, 2005, borrowers with a credit rating of ""B'' or higher under our ten- category customer credit rating system accounted for approximately 77.4% of our total rated corporate borrowers, and the outstanding loans extended to these borrowers accounted for approximately 88.9% of the total loans outstanding of the rated corporate borrowers as of the same date. We are in the process of developing a new statistically-based corporate borrower rating model, which we intend to introduce in 2006. This new rating model will focus on the probability of default by a borrower. We also intend to develop the capability to back-test the performance of our credit rating model in order to validate its accuracy and eÅectiveness, as well as improve its performance.
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Collateral Appraisal
As a general matter, the value of collateral for a new loan is determined by an independent appraiser at the time of loan origination. Collateralized loans are subject to loan-to-value ratio limits, based on the type of collateral, as follows:
Type of Collateral Maximum loan-to-value ratio Cash deposits with us ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90% PRC treasury bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90% PRC Ñnancial institution bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85% Publicly traded stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60% Rights to collect fees or operateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% Fixed assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70% Land use rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60% Vehicles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70%
For loans guaranteed by a third party guarantor, the guarantor's Ñnancial condition, credit history and ability to meet its obligations are evaluated according to the same procedures and criteria used for the primary obligor.
Credit Review and Approval
Due Diligence
We have due diligence teams at both our head oÇce and domestic tier one branches, which consist of staÅ from the risk management departments. Due diligence on loan applications is conducted by the due diligence team that is separate and diÅerent from the loan origination team. The due diligence teams are responsible for analyzing and recommending measures for mitigating risks relating to potential borrowers and their credit applications. The due diligence teams submit due diligence reports, which will include their analysis of the risk proÑle of, recommendations for further risk mitigation on and initial conclusion on the potential loan, directly to the credit review committees.
Credit Review
As part of our ongoing eÅorts to promote and develop a rigorous credit extension process, we have established credit review committees at our head oÇce and domestic tier one branches. These credit review committees consist of authorized credit reviewers who independently assess the credit applications and make recommendations regarding the credit applications to the authorized credit application approvers. Any recommendation to accept a credit application by the credit review committee must be approved by a simple majority of those present at the review meeting.
The credit review committees review credit applications to assess whether they comply with relevant laws, rules and regulations, are consistent with our business strategies and credit policies and meet our risk management criteria. The credit review committees also review the actions proposed by the due diligence teams to mitigate identiÑed risks.
In the past, qualiÑed personnel from various business departments were selected to serve on a part-time basis on the credit review committees. In 2004, we began requiring all credit reviewers to undergo a standardized qualiÑcation review and veriÑcation process established by the risk management department of our head oÇce. Furthermore, we began assigning qualiÑed credit reviewers to serve on a full-time basis on the credit review committees.
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As of December 31, 2005, we had approximately 30 authorized credit reviewers at our head oÇce and over nine authorized credit reviewers at each domestic tier one branch. The credit review committee at our head oÇce holds meetings at least three times a week, while the credit review committees at our domestic tier one branches generally hold meetings at least once a week. A quorum of the credit review committee at our head oÇce and domestic tier one branches requires nine and Ñve credit reviewers, respectively.
Credit Approval All credit applications for our corporate lending must be approved by the authorized credit application approvers at our domestic tier one branches and head oÇce, except for credit applications that are identiÑed as low risk, such as loans suÇciently secured by PRC treasury bonds, bills or pledged funds as collateral or loans supported by the credit of Ñnancial institutions that are within pre-approved credit limits. Authorized credit application approvers make Ñnal decisions regarding loan applications based on the uniform standards set by our head oÇce, after taking into account the reports from the business department and the due diligence team and the recommendations of the credit review committee. Authorized credit application approvers are independent of the credit review committee as well as the relationship oÇcers at our business departments, and they may overrule any application recommended by the credit review committee. However, authorized credit application approvers may not approve any application rejected by the credit review committee. Each authorized credit application approver may approve loan applications within their credit authorization limits set by our head oÇce. The credit approval authority delegated by our head oÇce varies according to the particular approver's background, including his or her industry experience, qualiÑcation and quality of work and the type of customer, including its credit rating and the type of loan, and is subject to review and adjustment by our head oÇce. The general managers of tier one branches may veto any loan application approved by the authorized credit application approvers at the relevant branches. Any loans exceeding the highest limit of the authorized credit application approvers at the tier one branches are required to be submitted to the risk management department at our head oÇce, and are then approved by the authorized credit application approvers at the head oÇces in accordance with their authorization limits. To further improve the quality of our credit approval procedure, we began in 2005 requiring credit application approvers at our domestic tier one branches to pass the relevant qualiÑcation tests conducted by the risk management department at our head oÇce. In addition, these approvers must be appointed by our head oÇce. We plan to require credit application approvers at all of our domestic tier one branches be so qualiÑed and appointed by the end of 2006. We are also in the process of identifying chief credit oÇcers at our domestic tier one branches, who will also function as authorized credit approvers with the highest credit authorization limits at the respective branches.
Approval VeriÑcation We implemented in 2004 a credit approval veriÑcation system at our head oÇce to enhance our compliance with our credit policies at our domestic branches. Under this system, after a corporate loan application at our domestic branches has been approved, it is transmitted to the risk management department at our head oÇce where a specialized team veriÑes, analyzes and monitors these applications for discrepancies or non-compliance with the required procedures or credit policies in a centralized manner. Generally, the Ñndings are communicated to the relevant branch within one business day.
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Fund Disbursement and Post-Disbursement Management
Fund Disbursement
The credit administration departments at our head oÇce and tier one branches have implemented controls at all of our tier one domestic branches and certain tier two domestic branches aimed at ensuring that funds are properly disbursed only after all conditions for disbursement have been satisÑed. Under this system, the credit administration department will deliver a disbursement notice authorizing the release of funds only after all conditions have been satisÑed. Failure to satisfy all conditions will result in the loan application either being returned to the corporate banking department for further action or to the risk management department for further review.
Ongoing Credit Monitoring
Loan monitoring is an integral part of our credit risk management. We monitor both the performance of individual loans as well as our overall loan portfolio. The corporate banking, risk management and credit administration departments are the principal departments involved in our loan monitoring eÅorts. Among these three departments, risk management departments also oversee the loan monitoring and management activities undertaken by the credit administration departments and corporate banking departments.
In the process of credit monitoring, we check each borrower's ongoing compliance with credit terms, maintain regular contact with borrowers through on-site visits and meetings, and promptly follow up on documentation deÑciencies to ensure that we have current information regarding each borrower's Ñnancial position, as well as the performance and repayment status of each of our loans, and that early indicators of delinquency are detected to facilitate prompt remedial action. We further enhanced the implementation of the credit monitoring process in 2005 and intend to continue enhancing this credit monitoring process, as well as recruiting additional staÅ to support the process.
The relationship managers at the corporate banking department function as the primary contact points with our borrowers, and we have recently established special post-disbursement loan management teams within the corporate banking departments to increase the monitoring of our corporate loans.
Loan classiÑcation is an important part of our ongoing loan monitoring. Beginning in the second quarter of 2005, we have centralized the responsibility for approving loan classiÑcations to our head oÇce and domestic tier one branches as well as increased the level of oversight of these decisions by our head oÇce. Currently, our head oÇce approves the classiÑcation of approximately 80% of our total outstanding corporate loans of our domestic operations. The loan classiÑcations are generally reviewed semi-annually and may be adjusted as required. See ""Description of Our Assets and Liabilities Ì Assets Ì Loan Quality Ì Loan ClassiÑcation''.
We have set up collateral management teams within our credit administration departments. We have recently commenced formalizing and improving our collateral management process and system, enhancing the management of third-party appraisal service providers, implementing internal valuation and review of collateral, and improving the documentation of collateral.
In the event we detect signs of delinquency, we will conduct a more detailed review of the credit risk and repayment ability of the borrower concerned, as well as take appropriate remedial measures. Outstanding loans that have been identiÑed as higher risk loans, are generally required to
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be managed by the credit administration department. These loans include loans from the following types of borrowers:
¬ borrowers who are not eligible for credit extensions under our risk policies or guidelines;
¬ borrowers whose substandard loans have not been restructured within 180 days since their loans have been initially classiÑed as substandard and who continue to have substandard loans outstanding;
¬ borrowers whose substandard loans have been restructured, but who continue to have substandard loans outstanding after one year or two payment periods; and
¬ borrowers who have doubtful or loss loans outstanding. In addition, we also monitor the overall quality of our loan portfolio, and regularly monitor the risk and return of our loan portfolio. In particular, we provide guidelines on our credit approval policies in terms of industry, type of customers, type of products and geographic area.
Risk Alerts We have initiated various risk alert systems for early detection and mitigation of credit risk. For example, under our major risk event reporting system, the risk management departments at our branches are required to immediately report any major risk event to the risk management department at our head oÇce. We employ risk alert tools, including industry or geography risk monitoring reports, Ñnancial alert reports and customer risk reports, to monitor our risk. Our risk-monitoring staÅ at the head oÇce monitors and analyzes such reports and, if necessary, the risk management department at our head oÇce issues risk alerts to our branches and provides instructions on remedial measures. The relationship managers at our corporate banking departments are required to take remedial measures based on such risk alerts if warranted. Furthermore, our head oÇce uses the information derived from these sources to develop high-risk customer databases and watch-lists, and our branches are required to report to the head oÇce any changes in the Ñnancial condition and related information of these borrowers, as well as our outstanding credit exposure.
Special-Mention Loan Management Since 2005, we have taken additional measures to improve our management of special-mention loans. In particular, we have established a database to monitor the special-mention loans of our domestic branches, including by compiling case proÑles of certain special-mention loans to facilitate our analysis of the movements of special-mention loans and our further classiÑcation of these loans. The risk management department at our head oÇce currently monitors the movements and deterioration of our special-mention loan portfolio on a monthly basis and reports to the senior management. At the same time, our corporate banking department also increased its management of the special-mention loans by requiring the relationship managers to take necessary actions whenever potential credit deterioration is detected. Based on the Ñnancial condition and the internal credit rating of the borrower, as well as the overdue days of the loans, we have further classiÑed special-mention loans into three categories for further action: Ì low risk special-mention loans: continue to monitor the total outstanding amount of these loans; Ì medium risk special-mention loans: risk mitigating actions to be taken; and
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Ì high risk special-mention loans: prompt action to be taken, with the speciÑc action varying on a case-by-case basis.
As part of these ongoing eÅorts, we reviewed certain of our special-mention loans during the third quarter of 2005. We have taken speciÑc actions for the high risk special-mention loans identiÑed during this review, including: (1) amendments to the terms of the loan, such as increased pricing; (2) reduction of a borrower's credit limit; (3) requests for additional security, primarily in the form of collateral; and (4) loan downgrades.
Non-Performing Loan Management and Recovery
Our credit administration departments work closely with managers and risk management departments at the branch level in connection with the management and recovery of non-performing loans. We also retain external legal advisors, accountants and specialized agents to expedite resolution of non-performing loans. The asset disposal teams within our credit administration departments initiate and design asset disposal plans. Our due diligence teams review these plans and issue due diligence reports based on their due diligence results. The asset disposal plans and due diligence reports are then submitted to the asset disposal committee at our branches for approval or to the asset disposal committee at our head oÇce if the amount involved exceeds the authorization limits of our branches. The chairmen of our asset disposal committees at our head oÇce and the branch level, as the case may be, will make the Ñnal approval regarding the proposed asset disposal plans.
Our primary recovery methods include demand for payment, negotiated settlement, legal proceedings, realization of collateral and restructuring. To the extent that amounts cannot be recovered after we have exhausted all legal and non-legal procedures, these unrecoverable amounts will be written oÅ.
Demand for payment. As an initial step in our collection eÅorts, a demand for payment will be sent to borrowers on a regular basis. These payment demands are not only a part of our collection eÅorts, but also help us gather information about the current status of the borrower's business and Ñnancial condition. Depending on the level of cooperation from the borrower, we may either pursue legal proceedings or negotiate with the borrower to resolve the non-performing loan.
Negotiated settlements. Our domestic operations may enter into negotiated settlements to permit borrowers to settle their liabilities without paying the full amount of the interest due, and our overseas operations may permit borrowers to settle their liabilities without paying the full amount of the principal and interest due. A negotiated settlement often takes the form of a restructuring, pursuant to which we may require additional collateral or guarantees. When we have made a determination that a borrower's Ñnancial condition is unlikely to improve and that the chances of repayment are remote, a negotiated settlement generally includes partial payment as well as the realization of collateral.
Legal proceedings. We may initiate legal proceedings to recover a non-performing loan when the borrower does not cooperate with us in our collection eÅorts or demonstrates no intention of repaying the loan, or when the Ñnancial condition of the borrower deteriorates to the extent that our ability to collect may be endangered if we do not take appropriate action quickly. Upon obtaining a court judgment, we may: (1) accept installment payments from the borrower and/or guarantor; (2) foreclose on the properties (including collateral, if any) of the borrower and/or guarantor; or (3) work with the borrower and/or guarantor to restructure the non-performing loan under the court's supervision, as applicable.
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Realization of collateral. We may realize collateral as the result of a negotiated settlement or a legal proceeding with judicial enforcement. We may sell, upon authorization by the borrower or the competent court, any collateral through public auctions or negotiated sales to maximize recovery. However, we may face diÇculties in enforcing our rights as a secured creditor. In particular, in certain areas in the PRC, deÑciencies regarding the enforcement of legal proceedings and local protectionism may make it diÇcult for us to implement foreclosures and enforce judgments, which may result in losses to us. Restructuring. Restructuring is a voluntary or, to a limited extent, court-supervised procedure, through which we and a borrower and/or its guarantor, if any, restructure credit terms generally as a result of deterioration in the borrower's Ñnancial condition or of the borrower's inability to make payments when due. We will restructure a non-performing loan only if the borrower's business has good prospects. In addition, prior to approving the restructuring of loans, we typically require additional guarantees, pledges and/or collateral, or the assumption of the loan by a borrower with better repayment ability. We classify all restructured loans as ""substandard'' or below. If the restructured loans fall overdue or if the borrower is still unable to demonstrate its repayment ability, these loans will be reclassiÑed to ""doubtful'' or below. All restructured loans are subject to a surveillance period up to one year. During the surveillance period, restructured loans remain as non- performing loans, and we closely monitor the borrower's business operations and loan repayment patterns. After the surveillance period, restructured loans may be upgraded to ""special-mention'' upon review if certain criteria are met. Write-oÅ. We write oÅ a non-performing loan only after we have exhausted all collection eÅorts and taken all available legal remedies. A loan write-oÅ requires the approval of the credit administration department and Ñnance department and must be reviewed by the asset disposal committee at our head oÇce or domestic tier one branches, as applicable. The asset disposal committee is responsible for reviewing the write-oÅs of credit and non-credit assets and the chairman of the asset disposal committee is responsible for approving write-oÅs. Loan write-oÅs exceeding certain thresholds are required to be approved by our head oÇce.
Credit Risk Management Information Technology We rely on our credit management information system as the primary data source for conducting credit analysis and reporting on our loan portfolio. In addition, we utilize an asset quality monitoring system that helps us collect and analyze data and monitor our credit risk. We have also acquired various information technologies to enhance our credit risk management and are in the process of further improving our current information technology system. We expect the combination of these systems will help enhance our ability to assess the credit of our corporate customers based on qualitative and quantitative measures and monitor the quality of our loan portfolio.
Credit Management Information System We launched our credit management information system in 2002 to monitor our domestic corporate lending. Our credit management information system collects information on customers, loan agreements, risk classiÑcation and accounting treatment, and is our primary data source for credit and related analysis. Our credit management information system also serves as the foundation for our portfolio management, risk monitoring and risk alert system.
Asset Quality Monitoring System We commenced implementing our asset quality monitoring system in 2004, and have completed the implementation of this system in all of our domestic branches. The asset quality monitoring
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system collects and analyzes data on our outstanding loans and monitors our credit risk. We can also conduct statistical analysis and inquiry based on the data collected. This system allows us, based on certain pre-set modules, to monitor the asset quality of our loans and non-performing loans, monitor our new loans and process certain forms automatically. Moreover, we can monitor and analyze our loan portfolio or customers by geography, industry, products or customer credit proÑle based on the data collected.
CreditEdge System We have been employing the CreditEdge System by Moody's KMV Company since May 2004, and we utilize its daily expected default frequency information on a global basis. This system enables us to better assess the credit rating of our customers and helps us with our credit approval and post-disbursement monitoring.
Credit Risk Management for Personal Loans Credit Origination and Assessment Our customer relationship oÇcers initiate the credit approval process by interviewing credit applicants and collecting required information from the applicants. In particular, customer relationship oÇcers are required to verify the information through the interview process and, in certain instances, on-site visits. In addition, they are required to consider credit information on individuals, if any, provided by the PBOC's national credit information system and assess applicants based on the relevant criteria that have been formulated by the risk management department at our head oÇce. If the applicant passes the preliminary screening conducted by our customer relationship oÇcers, the credit application, together with supporting documents, is required to be reviewed by reviewers at the branches. Upon approval by the reviewers, the customer relationship oÇcers will submit the application package to the personal loan centers at the domestic tier one branches for review and approval. Our analysis of the credit risk associated with personal loans focuses on a number of factors, including: (1) the borrower's income, net worth and source of funding for repayment; (2) the credit history of the borrower; (3) the value of any collateral; and (4) the purpose of the loan. We rely primarily on our credit evaluations as the basis for extending credit, and have adopted standardized credit approval procedures for our personal loans. The credit approval procedures generally focus on the credit risk of the applicants and the value of collateral securing the loans.
Credit Approval To improve the eÇciency and quality of our personal loan approval process, we began centralizing approval of personal loans at our domestic tier one branches in the third quarter of 2005, except for individual pledged loans and government-sponsored student loans, which may be approved at our branches below tier one branches. High risk personal loans such as personal loans for business purposes in excess of certain limits must be reviewed by the risk management department at our tier one branches and approved by the authorized credit application approvers at our tier one branches. Other personal loans may be approved by the personal loan centers at our tier one branches. We have started implementing a consumer credit approval system where loan applications may be submitted for approval electronically to the personal loan centers at our domestic tier one branches to improve eÇciency and reduce errors.
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In addition, to further improve our credit risk management for personal loans, in the second half of 2005, we established standardized credit approval criteria, documentation requirements and veriÑcation procedures for the personal loan applications at our branches. In July 2005, we engaged a third-party vendor to commence developing application score cards speciÑcally for mortgage loans and automobile loans of our branches located in Guangdong Province.
Disbursement and Post-Disbursement Management
Except for individual pledged loans and government-sponsored student loans, all personal loans are disbursed after the loans have been veriÑed by the personal loan centers at our domestic tier one branches.
The type and frequency of our personal loan monitoring vary according to the nature of the loan and the associated risk exposure. In particular, we conduct regular and special reviews of the Ñnancial status of the borrowers and guarantors, as well as on the value of collateral. We also monitor the source of funds for repayment and focus on major changes in the Ñnancial condition of borrowers and their respective relevant parties. For any loans with potential default risk identiÑed by these loan monitoring measures, we utilize a variety of measures to collect payment, including sending default and collection notice letters and initiating the necessary legal proceedings.
We have established asset quality and risk monitoring systems for our personal loan portfolio. We analyze our personal loan portfolio risk based on the type of loan and the region in which the borrower is located. Based on our risk analysis, we issue risk alerts and take other appropriate remedial actions. We also have special risk monitoring personnel at our tier one branches. The results of these branch level risk monitoring reviews are reported to our head oÇce on a regular basis. In addition, major risk events or emergencies are required to be reported to the head oÇce.
We are currently developing plans for the establishment of collection teams within the personal banking departments at our domestic tier one branches to improve collections as well as implement more standard procedures and collection methods.
Credit Risk Management for Credit Cards
We centrally manage our credit card business through our credit card center in Beijing. We have also adopted standardized credit card approval procedures and criteria. The maximum credit limit is RMB50,000 as set by the PBOC. Credit card applications are approved either at our head oÇce or at selected tier one branches, while credit cards are centrally distributed, managed and monitored by our head oÇce.
We monitor and analyze unusual credit card transactions to reduce the rate of fraud and intentional default, including using a predictive risk management framework and the PBOC's national credit information system for individuals. In particular, we use the predictive risk management framework to compare individual card usage with known patterns of fraud and identify suspicious transactions. For overdue credit card balances, our collection methods include sending short messages, making telephone calls, mailing collection letters, visiting the borrowers and initiating legal proceedings.
Credit Risk Management for Treasury Operations
Our treasury operations are exposed to credit risk through our investment activities and trading activities. We establish credit limits on a counterparty or securities issuer basis and review them annually. We also use various techniques or methods to monitor the credit limits.
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MARKET RISK MANAGEMENT
Market risk is the risk of potential loss to future earnings or future cash Öows that may result from changes in the value of a Ñnancial instrument as a result of changes in interest rates, exchange rates, equity prices, commodity prices and other market changes. The principal types of market risk for our bank are interest rate risk and exchange rate risk. Similar to our international peers, we are exposed to market risk arising from our international investment and trading transactions due to our extensive involvement in the foreign exchange business. We expect to be subject to increasing levels of market risk as the PRC Government continues to liberalize regulations governing interest and exchange rates.
We are exposed to market risk primarily through the assets and liabilities on our balance sheet, as well as our oÅ-balance sheet commitments and guarantees. For operational purposes, we categorize our assets and liabilities as belonging to either our investment book, trading book or banking book, which is diÅerent from the categorization used under Basel II. Our investment book primarily comprises Ñnancial instruments we purchased using our excess funds for investment purposes. Our trading book primarily consists of Ñnancial instruments we hold for short-term trading purposes. Our investment book and trading book are hereinafter collectively referred to as ""treasury operations''. Our banking book consists of the assets and liabilities on our balance sheet excluding those in the trading books and investment books.
The principal objective of our market risk management is to manage potential market losses within acceptable levels and contribute to earnings stability through independent identiÑcation, assessment and monitoring of the market risks inherent to our businesses.
Market Risk Management of the Investment Book and Trading Book (Treasury Operations)
Our risk policy committee reviews and approves our major market risk management policies, including authorization limits for our trading book, after taking into account our overall market risk management policy and risk preference. Based on the market risk management policies approved by the risk policy committee, the senior management annually reviews and approves the investment guidelines for our investment book. Our business departments are required to strictly comply with all approved investment guidelines and authorization limits. In addition, our risk control team monitors the implementation of these guidelines and authorization limits to ensure that our trading team does not exceed the limits or breach the guidelines. The investment guidelines and authorization limits are reviewed and updated annually to reÖect our overall market risk management policy and risk preference.
We manage the market risk of our investment book primarily by adopting investment guidelines. These guidelines set forth our requirements with respect to portfolio size, permissible investment products, duration of the investment portfolio, concentration of issuers and minimum credit rating. We have begun to use value-at-risk (""VAR'') to some extent and present value of a basis point limits to measure our risk exposure and help us make investment decisions. We manage the interest rate risk of our investment book primarily by monitoring the duration of the investment portfolio, which we believe provides a more useful indicator of the interest rate risk for our investment book than interest rate gap analysis. This is due to the fact that interest rate gap analysis only assesses the short-term impact on net income resulting from interest rate changes, while duration analysis evaluates the impact on market value of the assets and liabilities resulting from interest rate changes. As of December 31, 2005, the average duration of our Renminbi-denominated bond portfolio in our investment book was under 2.5 years, and the average duration of our foreign currency-denominated bond portfolio in our investment book was under two years.
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We manage the market risk of our trading book primarily by imposing position limits and stop- loss limits for each trader. Our traders are allowed to conduct trades only in Ñnancial instruments that meet certain pre-established criteria, such as the liquidity of a particular Ñnancial instrument. We employ a number of risk management techniques to monitor the market risks of our treasury operations. We also monitor and manage the open positions, stop-loss limits and VAR value of our traders on a daily basis. We generally calculate the VAR for our foreign currency- denominated portion of our trading book on a daily basis. We only apply VAR analysis to certain portion of our foreign currency-denominated investment portfolio. We also periodically conduct sensitivity and scenario analyses and stress testing for such foreign currency-denominated treasury operations. Sensitivity analysis is used to analyze a single transaction's or a portfolio's sensitivity to one particular type of risk and reÖect its impact on the portfolio. This analysis assists our management and control of our exposure to market risk. We currently use the present value of a basis point method when conducting our sensitivity analysis. Unlike VAR analysis, which sets a lower threshold of loss at a certain conÑdence interval on the basis of historical data but not the extent of such loss arising from very unusual events, scenario analysis and stress testing are able to analyze these potential risks. Stress testing is a tool that can measure an investment portfolio's potential loss under extreme market conditions. We stress test our foreign currency-denominated investment book portfolio assuming signiÑcant Öuctuations in U.S. dollar yield curve on a prospective basis. Scenario analysis generates forward-looking simulations for speciÑed changes in market factors, and measures the potential impact on the investment portfolio. We currently conduct scenario analysis of our foreign currency-denominated investment and trading portfolio assuming general market conditions that would normally prevail in times of economic turmoil, such as the 1997 Asian Ñnancial crisis. We also use information technology systems, such as Kondor°, Bloomberg PTS, DerivaTech, Summit, and RiskMetrics, to measure, analyze, monitor and manage the market risks of our treasury operations. Our Kondor° system currently covers our major overseas branches and most of our treasury products. In addition, we use the Bloomberg PTS system to monitor the positions and mark-to-market Ñxed income products and Ñxed income derivatives, the DerivaTech and Summit systems to price, value and monitor our risk exposure in derivative products, and the RiskMetrics system to generate VAR reports and stress testing reports. These systems have helped us monitor the market risk exposure in our treasury operations. We have established a global middle oÇce network to monitor market risk in our treasury operations. The treasury operations at our domestic branches are directly monitored by our head oÇce. We have also improved our back oÇce functions to enhance our evaluation of mark-to- market values of Ñnancial instruments.
Market Risk Management for the Banking Book Interest Rate Risk Management for the Banking Book The primary market risk for our banking book is interest rate risk. Interest rate risk is the risk that our interest income or the value of our assets may suÅer losses due to the volatility of interest rates, mainly arising from mismatches in the maturities or repricing periods of the assets and liabilities of our banking book. We manage the interest rate risk of the banking book of our domestic operations primarily by focusing on these repricing mismatches.
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We have started to use interest rate gap analysis to measure the exposure of the banking book of our domestic operations to interest rate risk. Gap analysis measures the diÅerence between the amount of interest-earning assets and interest-bearing liabilities that mature or must be re-priced within certain periods, and provides us with a static view of the maturity and repricing characteristics of our balance sheet positions. In addition, we also use the data generated by the gap analysis to perform stress tests, which provide us with guidance in adjusting the maturities of our interest- earning assets and interest-bearing liabilities. The gaps are measured through simulated interest rate scenarios. We provide a gap analysis report to our senior management at least once a month.
Exchange Rate Risk Management of the Banking Book
We are primarily exposed to exchange rate risk resulting from currency mismatches in our assets and liabilities and our foreign currency-denominated proÑts/losses. We are also exposed to exchange rate risks resulting from foreign currency transactions with our customers and for our own account.
We seek to manage the exchange rate risk resulting from mismatches in our assets and liabilities by matching the source and use of our funds on a currency-by-currency basis. We are considering managing the exchange rate risk resulting from foreign currency proÑts/losses and investments in overseas operations by entering into hedging transactions.
In addition, with respect to foreign currency transactions with our customers, we generally conduct back-to-back transactions to hedge our risk exposures.
Enhancements to Market Risk Management
In 2005, we adopted a new framework to strengthen the independence and centralize the process of our market risk management in accordance with CBRC rules and regulations. See ""Supervision and Regulation Ì Risk Management Ì Market Risk Management''.
We intend to take additional measures under this new framework to:
¬ more clearly deÑne the respective roles and responsibilities of our front, middle and back oÇce operations and improve their coordination;
¬ develop techniques and procedures for aggregation of our positions, including those of our branches and subsidiaries;
¬ identify, measure, monitor and control market risk; and
¬ establish independent and specialized teams to manage the market risk.
Under this new framework, our risk management department will be responsible for formulating our market risk management policies and procedures and overseeing their implementation. The Board of Directors will review and approve, or authorize the risk policy committee to review and approve, the market risk management policies and the overall risk exposure. Our global markets department and asset-liability management department will be responsible for executing and implementing the market risk controls on the investment book, trading book and banking book under certain policies and limits. Our global payment department will be responsible for evaluation of the market value, and the internal audit department will perform periodic audits. We are in the process of integrating the market risk management function into our risk management department. We intend to comply with the requirements of the CBRC Market Risk Management Guidelines by the end of 2007.
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LIQUIDITY RISK MANAGEMENT Liquidity risk arises in connection with lending, trading and investment activities. Liquidity risk includes risks of being unable to fulÑll our repayment obligations or being unable to fund our asset portfolio by liquidating our positions or obtaining funding in a timely manner and/or at a reasonable price. The objective of our liquidity risk management is to ensure the availability of adequate funding at all times in order to:
¬ meet the needs for repayment of deposits and other liabilities as they become due;
¬ satisfy loan disbursements, guarantees and other obligations; and
¬ take advantage of new lending and investment opportunities. The asset-liability management committee is responsible for establishing the policy directives relating to our liquidity risk management strategy. In addition, the asset-liability management department is responsible for overseeing the implementation of these policy directives. The implementation of these policy directives is carried out by the global markets department, which conducts transactions on behalf of the asset-liability management department. In developing our liquidity risk management strategy, we consider a number of factors, including our Ñnancial position, business development plans, market conditions and the convertibility of the currencies. We also seek to achieve an optimal return while balancing our liquidity and other needs. In particular, we have implemented various measures to:
¬ enhance our management information system to provide timely information on the movement of our liquid assets on a daily basis;
¬ monitor liquidity ratios in compliance with regulatory and internal requirements;
¬ prepare regular maturity gap analyses to enable management to review and monitor our liquidity position on a timely basis; and
¬ encourage diversiÑcation of liquid assets. We rely on a broad range of liquidity sources to meet our funding requirements. We fund our operations principally by accepting deposits from customers. In addition, we may borrow in the short-term inter-bank markets or enter into ""repurchase transactions'' whereby we sell securities to a counterparty with an obligation to repurchase them from the counterparty at a pre-determined price on a speciÑed future date (""Repurchase Transactions''), and may also raise funds through the sale of investment securities. We use the majority of the deposit funds from our customers to extend loans or make investments in debt securities. Generally, deposits are of shorter average maturity than loans or investments. We also maintain a portfolio of liquid and high quality securities that are managed by our global markets department. We are required under the applicable PRC law, rules and regulations to maintain a loan-to-deposit ratio of not more than 75% of our Renminbi-denominated assets and liabilities. We manage the liquidity of Renminbi-denominated assets primarily by maintaining approximately 2% of our deposits as excess reserves with the PBOC, in addition to the 7.5% required reserve, and by holding certain funds for inter-bank money market transactions and Repurchase Transactions. We are also required under the applicable PRC laws, rules and regulations to maintain a loan-to-deposit ratio of no more than 85% for our foreign currency- denominated assets and liabilities. We manage the liquidity risk of foreign currency-denominated assets primarily by holding such assets in the form of liquid debt securities. We conduct stress testing on an annual basis to analyze liquidity risk, and have developed contingency plans to ensure the availability of adequate liquidity under a variety of market
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conditions. In addition, we are developing a set of leading indicators to alert us to potential liquidity problems in our operations.
OPERATIONAL RISK MANAGEMENT AND INTERNAL CONTROLS Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, human errors or external events, including information technology system failures. Our internal control committee oversees the overall controls in our organization. See ""Ì Risk Management Structure Ì Senior Management and Special Management Committees''. Our legal and compliance department is primarily responsible for establishing rules and procedures for identifying, assessing, monitoring, controlling and mitigating operational risks and coordinating the implementation of our internal control policies. Our business departments are responsible for assessing their operational risks and implementing our operational risk management policies and procedures. We are focused on enhancing our internal controls and operational risk management. In particular, we have implemented the following procedures or initiatives:
¬ we have established monitoring centers at our domestic branches to independently review the transactional records at the outlets to detect and rectify any potential discrepancy or fraud and to ensure the accuracy of our accounting information;
¬ we have been compiling compliance manuals with respect to certain key positions within our bank;
¬ in June 2005, we began centralizing the personnel and accounting functions for county- level outlets to our domestic tier two branches;
¬ in August 2005, we issued our guidelines on the operational risk management of the business operations at our outlets, which identiÑed the particular operational risks within our bank;
¬ in August and October 2005, we revised the code of conduct and disciplinary rules for our employees, respectively;
¬ we recently commenced the procedures of sending oÇcers to inspect and evaluate the internal management of branches and outlets while the oÇcers in charge of the business operations at such branches and outlets are on their regular compulsory leaves; and
¬ We generally limit the terms of appointment of our management and oÇcers at key positions of our branches and outlets to between two to Ñve years, and these managers and oÇcers are generally required to rotate upon the expiration of their terms. In addition, we are in the process of implementing the following initiatives:
¬ developing a more rigorous anti-money laundering system;
¬ centralizing and enhancing the monitoring of, and establishing checks and balances relating to, our operating processes; and
¬ reviewing weaknesses in our information technology system, adopting measures to prevent system failures, and establishing a disaster recovery center.
Reporting and Monitoring of Non-Compliance We have established internal reporting procedures for employee misconduct that aÅects our business. Under our internal reporting system, statistical data relating to incidents of employee
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misconduct are required to be reported to our head oÇce periodically, and signiÑcant cases are required to be reported to our head oÇce within 24 hours of their discovery. In addition, we are required to report to the CBRC signiÑcant cases of employee misconduct. In 2003, 34 criminal oÅenses allegedly committed by our employees were reported to our head oÇce, involving a total amount of approximately RMB29 million. In 2004, 32 criminal oÅenses allegedly committed by our employees were reported to our head oÇce, involving a total amount of approximately RMB98 million. Of the oÅenses reported in 2004, eleven involved an amount of RMB1 million or more, compared to nine in 2003. In 2005, 75 criminal oÅenses allegedly committed by our employees were reported to our head oÇce, involving a total amount of approximately RMB1,176 million, of which 24 involved an amount of RMB1 million or more. In 2005, we enhanced our internal controls, which enable us to more eÅectively detect criminal oÅenses and other misconduct committed by our employees, including those committed in prior years. As part of the eÅorts, we conducted a comprehensive self-inspection in early 2005. These incidents of employee misconduct included, among other things, theft, embezzlement or misappropriation of customers' funds; mishandling of customer deposits and settlement of payment transactions; improper credit extensions; improper accounting; fraud; and acceptance of bribes. Some of these incidents implicated potential internal control weaknesses at certain of our branches. On occasion, incidents of employee misconduct have not been reported on a timely basis, or at all, and we have imposed severe penalties for intentional failures to report misconduct, including termination of employment. For risks relating to misconduct by our employees, see ""Risk Factors Ì Risks Relating to Our Business Ì We may encounter diÇculties in eÅectively implementing centralized management and supervision of our branches and subsidiaries and may not be able to timely detect or prevent fraud or other misconduct by our employees or third parties''. See also ""Business Ì Special Events''.
ANTI-MONEY LAUNDERING AND COMBATING FINANCING OF TERRORISM MEASURES We established an anti-money laundering working committee in 2001. The committee consists of Dr. Zhu Min, acting as chairman, and participating members, mainly general managers, deputy general managers and heads of divisions of the risk management, accounting, overseas business management, corporate banking, personal banking, global trade services, banking, Ñnancial institutions, internal audit and inspection, public security, information technology, E-banking, global markets, human resources and legal and compliance departments and bank card and clearing centers at our head oÇce. This committee is responsible for our anti-money laundering and combating Ñnancing of terrorism eÅorts, including establishing and evaluating the policies and procedures relating to our anti-money laundering eÅorts, monitoring the compliance with anti-money laundering laws and regulations, international cooperation on anti-money laundering and combating the Ñnancing of terrorism. Our head oÇce provides guidance on anti-money laundering and coordinates our bank-wide anti-money laundering eÅorts. We are still in the process of enhancing our anti-money laundering system. We have implemented the PBOC's anti-money laundering guidelines, including guidelines for ""know your customers'', record keeping, suspicious transaction and large transaction reporting and training program. Our bank's ""know your customers'' guidelines require us to verify and record the identities of customers to prevent or detect any suspicious money laundering activities and maintain the records for certain periods. We also follow the PBOC's guidelines to examine the background and purposes of transactions to detect and cease suspicious transactions. Particular caution is given to unusual changes in the scope and pattern of customers' business with us and transactions that are more likely to involve money laundering. These transactions include transactions involving a large sum cash, transactions involving deposits or remittances, safety deposit services, transactions by ""shell
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companies'' that have no deÑnite commercial or other reasonable purposes, and transactions carried out by companies that have no apparent business operations. Our business departments are required to report suspicious transactions to the legal and compliance departments of our head oÇce or tier one branches, which in turn decide whether to report such transactions to the PBOC, SAFE or their local agencies. We submit daily reports on large transactions of Renminbi and foreign currencies to the Chinese Anti-Money Laundering Monitoring and Analysis Center under the PBOC and monthly reports on large and suspicious foreign currency transactions to the SAFE. In 2005, we also established an electronic system that reports large transactions directly to the Chinese Anti-Money Laundering Monitoring and Analysis Center. We regularly conduct training to enhance our employees' understanding of their anti-money laundering responsibilities. We also provide speciÑc training courses on anti-money laundering procedures to our employees. We have also implemented internal anti-money laundering guidelines and reporting procedures, taking into account the diÅerent requirements of the various jurisdictions where our branches operate. We have established internal anti-money laundering guidelines for certain types of transactions, such as international trade settlement, trade Ñnance, bank card and other personal banking transactions. To further improve our anti-money laundering eÅorts, we issued new internal rules in December 2005 to further clarify the responsibilities of our anti-money laundering working committee and various departments involved in the anti-money laundering eÅorts and emphasize the importance of the enforcement of our anti-money laundering requirements and procedures. We require all of our operations to comply with local laws and regulations and international conventions relating to anti- money laundering and anti-terrorism, and closely monitor transactions in the countries or regions or with certain customers that are susceptible to money laundering activities. Our operations are also required to deny services to any entities or individuals who are suspected or identiÑed to be involved in money laundering or terrorism activities. We seek to improve our anti-money laundering controls and procedures by conducting research on the anti-money laundering systems in diÅerent countries, periodically reviewing and identifying areas for improvement and taking appropriate measures. See ""Risk Factors Ì Risks Relating to Our Business Ì We may not be able to detect money laundering and other illegal or improper activities, which could expose us to additional liabilities and harm our business''.
INTERNAL AUDIT We recognize the importance of the internal audit function at our bank. We initially established our internal audit function in 1983, which is currently carried out by the internal audit departments. Our internal audit function is designed to supervise and evaluate activities within our bank in an objective manner. Our internal audit function also seeks to evaluate the adequacy and effectiveness of compliance with our internal control policies. In addition, our internal audit function is responsible for following up on any issues detected and supervising remedial actions. The Board of Directors and the audit committee adopted an internal audit charter in November 2005, which further clarified that the internal audit function is to be separate and independent from the business departments and reports to the audit committee of the Board of Directors. As authorized by the Board of Directors, the audit committee nominates and evaluates our Chief Audit Officer, reviews and approves the audit policy, audit structure, annual audit plan and budget, and assesses the effectiveness of our internal audit function.
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We are in the process of recruiting a suitable candidate with the requisite internal audit experience in Ñnancial institutions to serve as our Chief Audit OÇcer. Our Chief Audit OÇcer will be in charge of our overall internal audit function, and will report functionally to the Board of Directors and the audit committee and administratively to our President. We have established internal audit departments at our domestic tier one branches and major overseas branches and subsidiaries. The person in charge of internal audit functions at each of our domestic tier one branches is appointed and evaluated by our head office, and reports to the internal audit department at our head office and the branch general managers. The following table sets forth the structure and reporting lines of our internal audit function, assuming the successful recruitment of a suitable candidate with the requisite internal audit experience in Ñnancial institutions to serve as our Chief Audit OÇcer.
Board of Directors
President Audit Committee
Chief Audit Officer(1)
Internal Audit Department at Head Office
Internal Audit Branch General Managers Departments at at Domestic Branches Domestic Branches
Internal Audit Branch General Managers Departments at at Overseas Branches Overseas Branches
(1) This position is currently vacant, and we are in the process of recruiting a Chief Audit Officer.
The internal audit department at our head office is primarily responsible for auditing the departments at the head office and our domestic tier one branches, overseas branches and subsidiaries, and also manages, guides and coordinates the internal audit function of the internal audit departments at domestic tier one branches and overseas branches. The internal audit departments at our domestic tier one branches and overseas branches are primarily responsible for auditing their own branches as well as their subordinate branches. We conduct various types of audits, including regular and special audits, on-site and oÅ-site examinations and case investigations. We have taken various measures to increase the frequency of audits while expanding the scope of our audits to further increase our oversight.
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We have formulated standardized audit manuals and procedures, including those for on-site and oÅ-site examinations, and criteria for the inspection and evaluation of various lines of business and entities to provide standard guidance on internal audit. We have established an accountability system where the responsibilities of the internal audit department and the audit personnel are clearly deÑned and the performance of the involved entities or personnel will be taken into account in their annual performance review. In addition, our internal audit staÅ are subject to speciÑc requirements under the relevant code of conduct and will be disciplined for failure to discharge their responsibilities. We endeavor to improve our internal audit function with a view to establishing a more independent, uniÑed and standard internal audit system. To this end, we are considering adopting the following measures:
¬ establishing internal audit policies, system and procedures more in line with international standards to improve the quality and eÇciency of our internal audits;
¬ improving its organizational and management structure to further enhance its independence;
¬ introducing risk-based audit plan for eÇcient use of internal audit resources;
¬ establishing independent Ñnancial budgets to ensure adequate resources for internal audits;
¬ establishing internal audit staÅ performance review system to enhance quality of our internal audits; and
¬ enhancing management of our internal audit staÅ and increasing their professional training.
RISK MANAGEMENT OF BOCHK Our subsidiary, BOCHK, has established its own risk management governance structure, policies and procedures to control exposures to the principal types of risks, including credit risk, market risk, interest rate risk, liquidity risk, operational risk, strategic risk, reputation risk and legal and compliance risk. The risk management goal of BOCHK is to enhance shareholder's value while maintaining risk exposures within acceptable limits.
Risk Management Governance Structure of BOCHK BOCHK's risk management governance structure is designed to cover the whole process of all businesses, and ensure that various risks are properly managed and controlled when carrying out business. The board of directors of BOCHK (the ""BOCHK Board'') is the highest decision making authority within BOCHK, and has the ultimate responsibility for risk management. The BOCHK Board with the assistance of its committees has the primary responsibility for the determination of risk management strategies, and ensures that BOCHK has established an eÅective risk management system to implement those risk management strategies. The risk committee, established by the Board of BOCHK as a standing committee, is responsible for approving BOCHK's major risk management policies and procedures and major asset and liability management policies. BOCHK's management includes chief executive and committees which have the responsibility for implementing the policies and procedures and various risk limits in accordance with the risk management strategies set by the BOCHK Board, and overseeing the eÅectiveness of managing
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and controlling risk in the day-to-day management. The chief risk oÇcer and chief Ñnancial oÇcer assist the chief executive to manage various types of risks. The chief risk oÇcer oversees the operation of the risk management department, the legal and compliance department and the special asset management department, and is responsible for reputation risk, legal and compliance risk, credit risk, market risk and operational risk. The chief Ñnancial oÇcer oversees the operation of the economics and strategic planning department and the Ñnance department, and is responsible for strategic risk, interest rate risk and liquidity risk.
BOCHK has various policies and procedures to identify, measure, monitor and control various risks across the organization, set appropriate risk limits, and continually monitor these risks and limits by means of administrative procedures and information systems. BOCHK continually updates and enhances its risk management policies and procedures to reÖect changes in market and business strategies.
Credit Risk Management of BOCHK
BOCHK's credit risk is the risk that Ñnancial loss arises from the failure of a customer or counterparty to meet its obligations under a contract entered into with BOCHK. Credit risk arises principally from BOCHK's lending, trade Ñnance and treasury activities.
BOCHK's risk management department provides centralized management of credit risk of BOCHK and its subsidiaries. The risk management department is headed by a general manager who reports to the chief risk oÇcer.
Credit policies and procedures are formulated by the risk management department and approved by the senior management, the risk committee and the BOCHK Board. The policies include setting controls over maximum level of BOCHK's exposure to customers and customer groups and other risk concentrations in selected market sectors, industries and products. These credit policies and procedures are regularly updated and provided to all credit and marketing executives, and provide guidance to business units as to the risk appetite of BOCHK from time to time.
BOCHK's risk management department undertakes independent reviews and objective assessments of credit facilities originated by business units. DiÅerent credit approval and control procedures are adopted for low-risk transactions and high-risk transactions. In particular, credit scoring system is used to process retail credit transactions including residential mortgage loans, personal loans and credit cards. High-risk credit facilities are subject to close review by risk management department before they can be committed to customers. For large credit facilities exceeding designated thresholds, additional review by the credit risk assessment committee is required before they can be approved by deputy chief executive, chief executive or risk committee. The credit risk assessment committee is a specialized committee which consists of experts from credit and other areas of BOCHK.
BOCHK adopts a facility grading structure which contains eight grades and are mapped to the Hong Kong Monetary Authority loan classiÑcation system. BOCHK's risk management department ensures that the loan grades are subject to frequent review and necessary amendments are undertaken promptly.
BOCHK's risk management department provides regular credit management information reports and special reports as speciÑcally requested to members of management committee, risk committee, audit committee and BOCHK Board for review. Advice and guidance are also provided by the risk management department to business units on credit-related matters.
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BOCHK pays special attention to problems loans. In particular, the special asset management department has been formed to maximize recoveries of doubtful debts. Based on the applicable Hong Kong accounting standards, BOCHK uses individual and collective assessment models to determine the impairment allowances for loans and advances. Moreover, procedures are established to ensure that the impairment allowances are promptly, adequately and prudently made.
Market Risk Management of BOCHK BOCHK's market risk management covers risk originated from its proprietary and client trading businesses. By breaking into components such as foreign exchange, interest rate, equity and commodity, market risk is identiÑed, measured and controlled through its respective risk characteristics. BOCHK makes use of layers of trading limits to control individual, portfolio, and aggregate market risks, and utilizes a consolidated platform to analyze market risk and manage the risk characteristics. The risk committee established by the BOCHK Board is responsible for approving market risk appetites, strategies and policies. The risk management department is an independent unit responsible for day-to-day monitoring and management of market risk. BOCHK's trading positions are subject to daily mark-to-market valuation. BOCHK also uses VAR to manage market risk related to trading portfolios. Market risk reports are prepared on a daily, weekly, monthly and quarterly basis for the BOCHK Board senior management and diÅerent level of business units. Escalation procedures have been deÑned and implemented to handle any unusual or extraordinary activity in business units or when market risk levels increase signiÑcantly.
Interest Rate Risk Management of BOCHK BOCHK's interest rate risk exposures mainly comprise: (1) repricing risk, which is attributable to mismatches in the maturity or repricing periods of assets and liabilities; and (2) basis risk, which is attributable to a diÅerent pricing basis for diÅerent transactions so that yield on assets and cost of liabilities may change by diÅerent amounts within the same repricing period. With respect to repricing risk, sensitivities of earnings and economic value to interest rate changes (earnings at risk and economic value at risk) are assessed through hypothetical interest rate Öuctuations of 200 basis points across the yield curve on both sides. Earnings at risk and economic value at risk are respectively controlled within an approved percentage of the projected net interest income for the year and the latest capital base as approved by BOCHK's risk committee. The result is reported to BOCHK's asset and liability management committee and risk committee on a regular basis. The impact of basis risk is gauged by the projected change in net interest income under scenarios of imperfect correlation in the adjustment of the rates earned and paid on diÅerent instruments. Ratios of asset and liability of similar pricing basis are set to monitor such risk. Stress tests on repricing risk and basis risk are also conducted regularly. BOCHK's asset and liability management committee monitors the results of stress tests against limits and decides whether remedial action should be taken.
Foreign Exchange Risk Management of BOCHK BOCHK manages foreign exchange risk by reviewing the nature of structural positions, setting and monitoring open position limits, and making use of stress-testing results to manage less liquid currencies. The BOCHK Board and senior management have ultimate responsibility for monitoring and controlling foreign exchange risk, while the risk management department is an independent unit
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to carry out day-to-day foreign exchange risk management activities. Foreign exchange businesses are controlled by a number of risk policies and procedures and diÅerent sets of limits and reporting requirements. Additional monitoring includes managing foreign exchange settlement risk, establishing counterparty's settlement limit and deÑning procedures and contingency plans in minimizing settlement risk under unusual circumstances. BOCHK also manages and measures the foreign exchange settlement exposure by setting foreign exchange settlement limits.
Liquidity Risk Management of BOCHK BOCHK manages and measures its liquidity through maintaining strong liquidity ratios, examining the stability of depositors and the respective concentration risk, monitoring the loan-to- deposit ratio, maintaining a portfolio of high-quality liquid securities and conducting regular stress tests. BOCHK also adjusts its liquidity by borrowing in the inter-bank markets on a short-term basis. The inter-bank markets generally provide an adequate amount of liquidity at borrowing rates that are subject to market conditions. BOCHK's asset and liability management committee is responsible for establishing the liquidity policy directives (including the liquidity contingency plan), and the risk committee approves these liquidity management policies. BOCHK's Ñnance department closely monitors the liquidity of BOCHK and reports to BOCHK's asset and liability management committee and risk committee regularly.
Operational Risk Management of BOCHK BOCHK maintains an operational risk management framework to identify, assess, monitor, control and report its operational risk. Operational risk may arise due to diÅerent causes, such as people, process, systems and external events. A bank-level policy with a clearly deÑned management structure is approved by the senior management and the risk committee governs the management of operational risk. In particular, each business line is responsible for managing and reporting operational risks speciÑc to its business units on a daily basis by establishing eÅective internal control processes, such as proper segregation of duties. The risk management department, independent of the business units, has responsibility for overseeing the entire operational risk management framework of BOCHK, and reports operational risk issues to the risk committee and senior management regularly. BOCHK implements a number of tools and methods to manage operational risk, including self- assessment, key risk indicator, collection and analysis of operational loss data, and regular monitoring of the progress of signiÑcant operational risk events. BOCHK has established business continuity plans to support business operations in the event of disasters. Adequate backup facilities are required to be maintained and periodic drills are conducted. BOCHK also arranges insurance coverage to mitigate potential losses that may arise from operational risk.
Reputation Risk Management of BOCHK Reputation risk is the risk that negative publicity regarding BOCHK's business practices, whether genuine or not, will cause a potential decline in the customer base or lead to costly litigation or revenue erosion. In order to mitigate reputation risk, BOCHK has formulated and implemented a reputation risk management policy. This policy establishes standards to prevent and to manage reputation risk proactively at an early stage. This policy also requires constant monitoring of external reputation risk incidents and published failures of risk incidents within the Ñnancial industry. In order to
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eliminate or alleviate the negative impact on BOCHK's reputation, incidents related to reputation risk are handled promptly in accordance with an emergency plan and special reporting system for special incidents.
Legal and Compliance Risk Management of BOCHK Legal risk is the risk that unenforceable contracts or adverse judgments may disrupt or otherwise negatively aÅect the operations or Ñnancial condition of BOCHK. The legal compliance department of BOCHK is responsible for proactively identifying, assessing and managing legal risk. Compliance risk is the risk of legal and regulatory sanctions, Ñnancial loss or loss to reputation that BOCHK may suÅer as a result of its failure to comply with all applicable laws, regulations, international practices, local trade standards, codes of conduct and standards of good practice. By establishing and maintaining appropriate policies and guidelines, the legal and compliance department ensures that BOCHK conducts its business in compliance with the requirements of relevant laws and regulations.
Strategic Risk Management Strategic risk generally refers to the risks that may induce some current or future negative impacts on the earnings, capital, reputation or market position of BOCHK because of poor strategic decisions, improper implementation of strategies and lack of response to the market. BOCHK has developed its strategic risk management policy that deÑnes the responsibilities of its board of directors and management when implementing its desired strategies.
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RELATIONSHIP WITH OUR PROMOTER AND CONNECTED TRANSACTIONS
OUR RELATIONSHIP WITH HUIJIN A1A(8)(1) A1A(27A) We were converted into a joint-stock company with limited liability on August 26, 2004 with Huijin as our sole promoter.
As of the Latest Practicable Date, Huijin owned 79.90% of our total issued shares and will own 70.51% of our total issued shares following the Global OÅering, assuming the Over-Allotment Option is not exercised, or 69.27% if the Over-Allotment Option is exercised in full.
Huijin was established on December 16, 2003 as a wholly state-owned investment company with the approval of the State Council. Huijin represents the PRC Government in exercising its investor's rights and obligations in certain Ñnancial institutions, including ICBC, CCB and us, and implements and executes PRC Government policy arrangements in relation to the reform of state- owned Ñnancial institutions. It does not engage in any commercial activities.
Other than its investment in us, as of March 8, 2006, Huijin had controlling interests in CCB and China Jianyin Investment Limited and had also made investments in ICBC, Bank of Communications Co., Ltd., China Galaxy Securities Co., Ltd., Shenyin & Wanguo Securities Co., Ltd., and Guotai Junan Securities Company, Ltd.
Huijin has undertaken to us that, so long as Huijin continues to hold any of our Shares and is deemed to be a controlling shareholder or a connected person of a controlling shareholder in accordance with the laws or listing rules of the PRC, or of the place where our Shares are listed, it will not engage or participate in any competing commercial banking activities, including but not limited to extending loans, taking deposits and providing settlement, fund custodian, bank card and currency exchange services. However, Huijin may, through its investments in other commercial banks, undertake or participate in certain competing businesses. In that connection, Huijin has undertaken that it will: (i) treat its investments in commercial banks on an equal footing and not take advantage of its status as a holder of our Shares or take advantage of the information obtained by virtue of such status to make decisions or judgments against us and in favor of other commercial banks; and (ii) exercise its shareholder's rights in our best interests.
Under our Articles of Association and applicable PRC laws and regulations, Huijin, as our controlling shareholder, is able to elect the majority of our directors and, through its control of our board of directors, is able to inÖuence our management and operations.
CONNECTED TRANSACTIONS
Upon the listing of our H Shares on the Hong Kong Stock Exchange, transactions between us and our connected persons (as deÑned under the Hong Kong Listing Rules) will constitute connected transactions for us under Chapter 14A of the Hong Kong Listing Rules. The deÑnition of connected persons under Chapter 14A of the Hong Kong Listing Rules is diÅerent from the deÑnition of related parties under International Accounting Standard 24, ""Related Party Disclosures'', and its interpretations by the IASB. Accordingly, connected transactions set out in this section, which are described and disclosed in accordance with Chapter 14A of the Hong Kong Listing Rules, diÅer from the related party transactions set out in Note VI.43 of Section 6 to Appendix I Ì ""Accountants' Report''. We set out below details of our connected transactions.
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RELATIONSHIP WITH OUR PROMOTER AND CONNECTED TRANSACTIONS
Exempt Continuing Connected Transactions
Commercial Banking Services and Products Provided by Us in the Ordinary and Usual Course of Business
We provide commercial banking services and products to our customers in the ordinary and usual course of our business. Such commercial banking services and products include the taking of deposits. Customers who place deposits with us may include our substantial shareholders, directors, supervisors and chief executive oÇcers, and ex-directors who were directors within 12 months preceding the Listing Date and their respective associates, each of whom is a connected person. We expect that our connected persons will continue to place deposits with us following the listing, which will constitute continuing connected transactions for us under Chapter 14A of the Hong Kong Listing Rules.
Furthermore, BOCHK has preferential interest rates for deposits placed by employees of BOCHK.
The deposits placed by our connected persons who are not our employees are at market rates and on normal commercial terms. To the extent staÅ rates are available for certain of our employees, the interest paid by us on deposits placed by our connected persons who are our employees are at staÅ rates, but such deposits are nevertheless on normal commercial terms as such terms are no more favorable than the staÅ rates applicable to our other employees who are not connected persons.
Our provision of commercial banking services and products to our connected persons in the ordinary and usual course of our business and on normal commercial terms that are comparable or no more favorable than those oÅered to independent third parties (including our other comparable employees who are not connected persons) will be exempt continuing connected transactions under Rule 14A.65(4) of the Hong Kong Listing Rules, namely Ñnancial assistance provided by a connected person in the form of deposits placed with a listed issuer for the beneÑt of a listed issuer on normal commercial terms (or better to the listed issuer) where no security over the assets of the listed issuer is granted in respect of the Ñnancial assistance, and thus will be exempt from the reporting, announcement and independent shareholders' approval requirements contained in Rules 14A.35 and 14A.45 to 14A.48 of the Hong Kong Listing Rules.
Loans and Credit Facilities Granted by Us to Connected Persons
We extend loans and credit facilities (including provision of long-term loans, short-term loans, consumer loans, credit card facilities, mortgages, guarantees, security for third party loans, comfort letters and billing discounting facilities) to our customers in the ordinary and usual course of our business on normal commercial terms with reference to prevailing market rates. Customers who utilize our loans and credit facilities include our substantial shareholders, directors, supervisors and chief executive oÇcers, ex-directors who were directors within 12 months preceding the Listing Date and their respective associates, each of whom is a connected person under Chapter 14A of the Hong Kong Listing Rules. We expect that we will continue to provide loans and credit facilities to our connected persons following the listing, which will constitute continuing connected transactions for us under Chapter 14A of the Hong Kong Listing Rules.
We have preferential staÅ rates for employees who utilize our Great Wall Renminbi credit cards and BOC credit cards. Such preferential rates include waiver of annual subscription fees and reduced administrative and handling fees. Furthermore, BOCHK has preferential staÅ rates for employees who utilize its credit cards.
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RELATIONSHIP WITH OUR PROMOTER AND CONNECTED TRANSACTIONS
We also have preferential staÅ rates for residential loans and mortgages taken out by our employees, and our head oÇce and branches have preferential staÅ rates for consumer loans taken out by our employees. These preferential staÅ rates are all within the range set by the PBOC. Furthermore, BOCHK has preferential staÅ rates for residential loans and mortgages taken out by its employees. The loans and credit facilities we provide to our connected persons who are not employees of our bank are on normal commercial terms with reference to prevailing market rates. To the extent staÅ rates are available for certain loans and credit facilities, the loans and credit facilities we provide to our connected persons who are our employees are provided at staÅ rates and are on normal commercial terms no more favorable than the staÅ rates applicable to our other employees who are not our connected persons. Our provision of loans and credit facilities to our connected persons in the ordinary and usual course of our business and on normal commercial terms that are comparable or no more favorable than those oÅered to independent third parties (which include our other comparable employees who are not connected persons) will be exempt continuing connected transactions under Rule 14A.65(1) of the Hong Kong Listing Rules, namely Ñnancial assistance provided by a listed issuer in its ordinary and usual course of business for the beneÑt of a connected person on normal commercial terms, and thus will be exempt from all reporting, announcement and independent shareholders' approval requirements contained in Rules 14A.35 and 14A.45 to 14A.48 of the Hong Kong Listing Rules.
Fund Distribution Transactions Prudential Corporation Holdings Limited owns 36% of BOCI-Prudential and 36% of BOCI- Prudential Trustee Limited (""BPTL''), both of which are our indirect subsidiaries. Accordingly, Prudential Corporation Holdings Limited and its associates, are our connected persons for the purposes of the Hong Kong Listing Rules. In particular, BOCI-Prudential and BPTL, being associates of Prudential Corporation Holdings Limited, are also our connected persons. BOCHK sells various fund products, including guaranteed fund and open-end fund products and mandatory provident fund (""MPF'') products, as an intermediary for BPTL and BOCI- Prudential. For the MPF products, BOCHK receives a commission based on the net asset value of the MPF schemes. For the guaranteed funds, BOCHK receives a commission rebate on the basis of a certain percentage of the initial charge received by BOCI-Prudential. For the open-end fund products, BOCHK receives a commission as a percentage of the fees received by BOCI-Prudential for units sold. These continuing connected transactions also constitute continuing connected transactions for BOCHK. We have applied for and the Hong Kong Stock Exchange has granted a waiver pursuant to Listing Rule 14A.42(3) from the announcement requirements for these transactions on the condition that the Directors (including the Independent Non-Executive Directors) and the Sponsors are of the view that the fund distribution transactions have been and shall be entered into in the ordinary and usual course of business of the Group, on normal commercial terms and on terms that are fair and reasonable as far as our shareholders as a whole are concerned. We will comply with the reporting and, if applicable, shareholders' approval requirements pursuant to Listing Rule 14A.42(3).
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DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
GENERAL
The Board of Directors consists of 16 members. Our Articles of Association provide that Directors who serve as the president, vice president or hold other senior management positions cannot exceed one third of the total number of Directors and that there must be at least three Directors that meet the independence requirements according to PRC laws, rules and regulations. Our Directors are elected at a shareholder meeting for a term of three years, which is renewable upon re-election. The Chairman and the Vice Chairman of the Board of Directors are elected by simple majority of the Board of Directors. According to the strategic arrangements we entered into with RBS China and AFH, each of RBS China and AFH has the ability to appoint a Director.
The functions and powers of the Board of Directors include, among others:
¬ convening shareholders' meetings and reporting its work to shareholders at such meetings;
¬ implementing shareholders' resolutions;
¬ approving our business strategies, business plans and material investment plans;
¬ formulating proposed annual Ñnancial budgets and Ñnal accounts;
¬ formulating proÑt distribution plans;
¬ approving plans related to capitalization and other signiÑcant activities;
¬ establishing the organizational structures, developing management rules and responsibilities and determining the appointment of senior management; and
¬ exercising any other powers conferred by shareholders' meetings or under the Articles of Association.
The PRC Company Law requires a joint-stock limited liability company to establish a board of supervisors. Our Board of Supervisors is responsible for monitoring and supervising the actions of the Board and senior management. Our Board of Supervisors consists of Ñve Supervisors, including two employee Supervisors elected by our employees. Pursuant to the PRC Company Law, at least one third of the members of our Board of Supervisors must be employee representatives elected by our employees, and the remaining members must be nominated by the Board of Supervisors or shareholders who own more than 5% of shares of the Company carrying voting rights and approved by shareholders at a shareholders meeting. The term of oÇce of the Supervisors is three years, which is renewable upon re-election or re-appointment.
The functions and powers of the Board of Supervisors include, among others:
¬ supervising the activities of the Board of Directors and senior management;
¬ inspecting and supervising our Ñnancial activities; and
¬ examining our business decisions, risk management, internal control and other management decisions.
According to relevant PRC laws, rules and regulations, the mandatory retirement age for our management staÅ is generally 60 years for men and 55 years for women.
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DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
Our current corporate governance structure is set forth below:
General Meeting of Shareholders
Board of Directors Board of Supervisors
Strategic Development Committee Board Secretariat Office of Board Supervisors Audit Committee
Risk Policy Committee
Personnel and Remuneration Committee
Connected Transaction Control Committee Business Development Committee
Internal Control Committee
Asset-Liabilities Management Committee Senior Management Procurement Review Committee
Asset Disposal Committee Internal Audit and Inspection Department Anti-Money Laundering Working Committee
Executive Office Financial Institutions Department Security Department
Human Resources Department Global Markets Department General Affairs Department
Asset-Liability Management Department Custody and Investor Services Department Party Affairs Department
Risk Management Department Corporate Banking Department Working Committee of the Labor Union
Accounting Department Credit Administration Department Retiree Department
Overseas Business Management Department Personal Banking Department International Finance Training Center
Information Technology Department Bank Card Center
Legal and Compliance Department Global Trade Services Department
Strategic Planning Department Banking Department International Finance Research Department
Listing Office Clearing Center
E-banking Department
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DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT A1A(41)(1) 3rd Sch 6 Directors LR11.07 The following table sets forth certain information concerning our Directors. The business LR8.15 address of each Director is care of Bank of China Limited, One Fuxingmen Nei Dajie, Beijing 100818, PRC.
Honorary Directors(1)
Name Age Position CHEN Muhua ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 Honorary Chairperson CHUANG Shih Ping ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95 Honorary Vice Chairman
Board of Directors
Name Age Position XIAO GangÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 Chairman LI Lihui ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Vice Chairman and President ZHANG Jinghua ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 Non-Executive Director YU Erniu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 Non-Executive Director ZHU YanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 Non-Executive Director ZHANG Xinze ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 Non-Executive Director HONG Zhihua ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Non-Executive Director HUANG Haibo ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Non-Executive Director Sir Frederick Anderson GOODWIN 47 Non-Executive Director SEAH Lim Huat Peter(2) ÏÏÏÏÏÏÏÏÏÏÏ 59 Non-Executive Director HUA Qingshan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 Executive Director; Vice President LI Zaohang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 Executive Director; Vice President Anthony Francis NEOHÏÏÏÏÏÏÏÏÏÏÏÏ 59 Independent Non-Executive Director William Peter COOKE ÏÏÏÏÏÏÏÏÏÏÏÏÏ 74 Independent Non-Executive Director Patrick de SAINT-AIGNANÏÏÏÏÏÏÏÏÏ 57 Independent Non-Executive Director Alberto TOGNI(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67 Independent Non-Executive Director
(1) Under the PRC law, the honorary directors are not members of the Board of Directors and do not have any power or right to vote on any matters considered by our Board under our Articles of Association. (2) Subject to the approval of the CBRC. CHEN Muhua, 84, has been the Honorary Chairperson of the Board of Directors since August 2004. Ms. Chen was formerly vice chairwoman of the Standing Committee of the National People's Congress. CHUANG Shih Ping, 95, has been the Honorary Vice Chairman of the Board of Directors since August 2004. Mr. Zhuang previously served as the Standing Commissioner of Chinese People's Political Consultative Conference, the chairman of Nanyang Commercial Bank as well as a director of our bank. XIAO Gang, 47, has served as Chairman of the Board of Directors since March 2003. He also served as our president from March 2003 to August 2004. From October 1996 until March 2003, Mr. Xiao served as assistant governor and deputy governor of the PBOC. During this period, he was also director of the Fund Planning Department and the Monetary Policy Department of the PBOC, governor of the Guangdong branch of the PBOC and governor of the Guangdong branch of the SAFE. From October 1989 to October 1996, Mr. Xiao held various positions at the PBOC, including
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director of the Policy Research OÇce, director of the China Foreign Exchange Trading Center and director general of the Fund and Planning Department. Mr. Xiao graduated from the Ñnance department of Hunan Institute of Finance and Economics in 1981 and was awarded a Master's degree in international economic law by China Renmin University in 1996. Since May 2003, Mr. Xiao has been serving as a director of BOCHK Holdings, one of our subsidiaries with shares listed on the Hong Kong Stock Exchange. LI Lihui, 53, has served as Vice Chairman of our Board of Directors, and our President since August 2004. From September 2002 to August 2004, Mr. Li served as deputy governor of Hainan Province, and from July 1994 to September 2002, Mr. Li was an executive vice president of ICBC. From 1988 to July 1994, he served in a number of positions at ICBC, including deputy general manager of the Fujian branch, chief representative of the Singapore Representative OÇce and general manager of the International Business Department. Mr. Li graduated from the Economics Department of Xiamen University in 1977 majoring in Ñnance. He also holds an economics Doctorate degree in Ñnance from the Guanghua School of Management at Peking University. HUA Qingshan, 52, has served as an Executive Director since August 2004. He joined our bank in 1994 and served as our assistant president from May 1994 to December 1998. Since December 1998, he has served as a Vice President. He is currently also a director of Visa International, Asia- PaciÑc. Mr. Hua obtained a Master's degree in engineering from Hunan University in 1996. Since June 2002, Mr. Hua has been serving as a non-executive director of BOCHK Holdings, one of our subsidiaries with shares listed on the Hong Kong Stock Exchange. LI Zaohang, 50, has served as an Executive Director since August 2004. He joined our bank in November 2000 and has served as a vice president since then. From November 1980 to November 2000, Mr. Li served in various capacities at CCB, including manager, branch manager, general manager of various departments of the Head OÇce and executive vice president. Mr. Li graduated from Nanjing University of Information Science and Technology in 1978. Since June 2002, Mr. Li has been serving as a non-executive director of BOCHK Holdings, one of our subsidiaries with shares listed on the Hong Kong Stock Exchange. ZHANG Jinghua, 49, has served as a Non-Executive Director since August 2004. Mr. Zhang worked for the CSRC from January 1993 to August 2004 in various capacities, including director of the Listed Companies Department, director of the Market Supervision Department, director of the Fund Supervision Department, director of International Cooperation and a member of the Planning and Development Commission. Mr. Zhang graduated from Northeast Forestry Institute in 1982 and obtained a Master of Business Administration degree from the State University of New York in 1988. YU Erniu, 56, has served as a Non-Executive Director since August 2004. Mr. Yu previously worked for the Ministry of Finance from October 1987 to August 2004 in various capacities, including director of the Personnel and Education Department, Mr. Yu attended a post-graduate program in economic law at the Capital University of Economics and Business and graduated in 2001. ZHU Yan, 49, has served as a Non-Executive Director of the Bank of China since August 2004. From August 1994 to August 2004, Ms. Zhu held numerous positions at the Ministry of Finance, including assistant inspector and deputy director general of the Surveillance Bureau, deputy director of the Department of Central Enterprises, director of Management Department II of the Dispatching Organ, director of Central Department I and director of Inspection Department I. From September 1993 to July 1994, Ms. Zhu worked as deputy head of the Liaoning Provincial Finance Department resident Ñnancial supervision team, where she oversaw state-owned enterprises in Anshan and reported directly to the Ministry of Finance. From March 1990 to September 1993, she worked as head of the resident Ñnancial supervision team of Anshan Finance Bureau overseeing Anshan Iron & Steel Group. Prior to that, Ms. Zhu served as the Finance Department head, deputy chief accountant
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and vice general manager at the Anshan Coach Automotive Factory from October 1983 to February 1990. Ms. Zhu attended a post-graduate program in investment management at the Chinese Academy of Social Sciences and graduated in 1998. She studied law at the Central Communist Party School and graduated in 2001. Ms. Zhu also attended a post-graduate program in world economy at the Central Communist Party School and graduated in January 2006. Ms. Zhu is a senior accountant and CertiÑed Public Accountant of the Chinese Institute of CertiÑed Public Accountants.
ZHANG Xinze, 59, has served as a Non-Executive Director since August 2004. Mr. Zhang worked for the PBOC from May 1975 to October 1978 and from September 1982 to August 2004, in various capacities, including deputy director and inspector of the Survey and Statistics Department, inspector of Credit Reporting Administration and deputy director of the Credit Reporting Center of Credit Reporting Administration. Mr. Zhang is a research fellow and received a Bachelor's degree in Ñnance from the Finance Department, China Renmin University in 1982.
HONG Zhihua, 53, has served as a Non-Executive Director since August 2004. Ms. Hong previously worked for SAFE from January 1982 to August 2004 in various capacities, including deputy director general of the Policy and Regulation Department, deputy director general of the International Balance Department and inspector of the General AÅairs Department. Ms. Hong is a senior economist and graduated from Yunnan University with a Bachelor's degree in Chinese literature in 1982.
HUANG Haibo, 53, has served as a Non-Executive Director since August 2004. Ms. Huang worked for the PBOC from August 1977 to August 2004 in various capacities, including deputy director general of the Treasury Bureau. Ms. Huang graduated from the accounting department of Shanxi Finance University. She is a senior accountant and CertiÑed Public Accountant of the Chinese Institute of CertiÑed Public Accountants.
Sir Frederick Anderson GOODWIN, 47, has served as a Non-Executive Director since January 2006. Sir Frederick Goodwin is the group chief executive of the RBS Group. Prior to joining the RBS Group in 1998, he served as the chief executive of Clydesdale Bank Plc from 1995 to 1998 and was a partner of Touche Ross from 1988 to 1995. Sir Frederick Goodwin currently is also the chairman of the Prince's Trust. Sir Frederick Goodwin graduated from the University of Glasgow with a Bachelor's degree in law in 1979. RBS China, one of our four strategic investors, is a subsidiary of RBS Group. Since August 1998, Sir Frederick Goodwin has been serving as a director of the RBS Group, the holding company of one of the world's largest banking and Ñnancial services groups with its primary listing on the London Stock Exchange. Headquartered in Edinburgh, Scotland, the RBS Group operates in the UK, US and internationally. For further information, please see ""Further Information relating to a Director'' in Appendix IX ""Statutory and General Information''.
SEAH Lim Huat Peter, 59, will, upon obtaining CBRC's approval to his appointment, be a Non- Executive Director. Mr. Seah is currently a member of the Temasek Advisory Panel of Temasek Holdings (Pte.) Ltd., and president commissioner of Bank International Indonesia. Mr. Seah served as president and chief executive officer of Singapore Technologies Pte Ltd. from 2001 to 2004. Prior to that, Mr. Seah built up his career in the banking industry over a 32-year period. Mr. Seah held various key positions at Singapore's Overseas Union Bank Limited, including as vice chairman and chief executive officer from 1991 to 2001, and general manager from 1982 to 1985. He was executive director and chief executive of International Bank of Singapore Ltd from 1985 to 1991. Mr. Seah graduated from the University of Singapore in 1968 with a Bachelor's degree (Honours) in business administration. Mr. Seah is also a director of Capitaland Limited since 2001, Chartered Semiconductor Manufacturing Ltd since 2002, SembCorp Industries Ltd since 1998, Siam Commercial Bank Public Company Limited since 1999, Star Hub Ltd since 2002, Global Crossing Limited since 2003, Singapore
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Computer Systems Limited since 2005, Stats ChipPAC Ltd since 2002, PT Bank Internasional Indonesia Tbk since 2004 and P T Indosat Tbk since 2004, all of which are companies listed on the securities exchanges of Singapore, Thailand, Indonesia and/or the United States.
Anthony Francis NEOH, 59, has served as an Independent Non-Executive Director since August 2004. Mr. Neoh currently serves as a member of the International Consultation Committee of CSRC and member of the Basic Law Committee of the Hong Kong Special Administrative Region under the Standing Committee of the National People's Congress. Mr. Neoh previously served as chief advisor to the CSRC, chairman of the SFC, a member of the Hong Kong Stock Exchange Council and its Listing Committee, deputy judge of the High Court of Hong Kong, and administrative oÇcer of the Hong Kong Government. Between 1996 and 1998, Mr. Neoh was chairman of the Technical Committee of the International Organization of Securities Commissions. Mr. Neoh was appointed in 1990 as Queen's Counsel (currently retitled to as Senior Counsel) in Hong Kong. Mr. Neoh graduated from the University of London with a Bachelor's degree in law in 1976. Mr. Neoh is a barrister of England and Wales and admitted to the State Bar of California. Mr. Neoh was a non- executive director of Global Digital Creations Holdings Limited from November 2002 to December 2005, and an independent non-executive director of The Link Management Limited, the manager of The Link Real Estate Investment Trust, from September 2004 to March 2006. Since November 2004, Mr. Neoh has been serving as an independent non-executive director of China Shenhua Energy Company Limited. The shares of Global Digital Creations Holdings Limited are listed on the Growth Enterprise Market of the Hong Kong Stock Exchange, and the units and shares of The Link Real Estate Investment Trust and China Shenhua Energy Company Limited, respectively, are listed on the Main Board of the Hong Kong Stock Exchange.
William Peter COOKE, 74, has served as an Independent Non-Executive Director since LR19A.18(1) December 2004. Mr. Cooke retired from the Bank of England in 1988 after a 33-year career. Prior to his retirement, Mr. Cooke was associate director and head of Banking Supervision at the Bank of England. From 1977 to 1988, he was also chairman of the Basel Committee of Banking Regulation and Supervisory Practices at the Bank for International Settlements, which formulated the Ñrst Basel Capital Accord. From 1989 to 2002, Mr. Cooke served as chairman of the Price Waterhouse World Regulatory Advisory Practice and adviser at PricewaterhouseCoopers. From 1996 to 1998, Mr. Cooke was a director of BOCI. Since 1992, 1998 and 1999, Mr. Cooke has respectively served as a non-executive director of Financial Security Assurance (U.K.) Ltd., State Street Bank (U.K.) Ltd. and Bank of China International (U.K.) Ltd. Mr. Cooke holds a Bachelor's and Master's degree in modern history from Merton College, Oxford.
Patrick de SAINT-AIGNAN, 57, has served as an Independent Non-Executive Director since January 2006. Mr. de Saint-Aignan is an advisory director and former managing director of Morgan Stanley. Since joining Morgan Stanley in 1974, he has served in various capacities at Morgan Stanley, including as Ñrm risk manager and chairman of Morgan Stanley SA, France, and head of debt capital market and head of the derivatives products group. From 1985 to 1992, Mr. de Saint-Aignan held various positions as a director and chairman of the International Swaps and Derivatives Association. Mr. de Saint-Aignan is also a statutory advisor to the Supervisory Board of IXIS Corporate and Investment Bank, the investment banking and securities arm of the Caisse d'Epargne Group. Mr. de Saint-Aignan graduated from the Ecole des Hautes Etudes Commerciales in 1971 and received a Master's degree with distinction in business administration from Harvard Business School in 1974.
Alberto TOGNI, 67, will, upon obtaining CBRC's approval to his appointment, be an Independent Non-Executive Director. Mr. Togni joined Swiss Bank Corporation, a predecessor of UBS AG in 1959 and after the merger between Swiss Bank Corporation and Union Bank of
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Switzerland in 1998, continued in UBS AG's employment until his retirement in April 2005. During his 46-year career with Swiss Bank Corporation and (after 1998) UBS AG, Mr. Togni served in various capacities. From 1998 to 2005, he was executive vice chairman of UBS AG overseeing the risk proÑle of the group. From 1994 to 1997, he was group chief credit oÇcer and group chief risk oÇcer at Swiss Bank Corporation. Prior to 1994, he held various positions at Swiss Bank Corporation in charge of the bank's worldwide credit portfolio. Mr. Togni held a banking certiÑcate from the Swiss Business School. He graduated in 1965 from the New York Institute of Finance with a degree in investment analysis.
Supervisors
The following table sets forth certain information concerning our Supervisors. The business address of each Supervisor is care of Bank of China Limited, One Fuxingmen Nei Dajie, Beijing 100818, PRC.
Name Age Position LIU Ziqiang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 Chairman of Board of Supervisors WANG XueqiangÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 Supervisor LIU WanmingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 Supervisor LI ChunyuÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 Employee Supervisor LIU Dun ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 Employee Supervisor
LIU Ziqiang, 57, has served as Chairman of our Board of Supervisors since August 2004. LR19A.18(2) Mr. Liu was chairman of the board of supervisors of our bank before our corporate restructuring from July 2003 to August 2004. He was chairman of the board of supervisors of Agricultural Development Bank of China from June 2000 to July 2003, vice president of CCB from April 1997 to June 2000 and head of Planning Department of CCB from February 1995 to April 1997. From November 1986 to May 1994, Mr. Liu held various positions in Ñnancial institutions in Shenzhen, including as chief of the Shenzhen Development Bank Preparation Team, deputy general manager of Shenzhen Agricultural Bank, acting president, board chairman and general manager of Shenzhen Development Bank. Mr. Liu received a Master's degree in economics from the Graduate School of the PBOC in 1984.
WANG Xueqiang, 48, has been a Supervisor since August 2004. Mr. Wang served as a director- general supervisor at our bank before our corporate restructuring from July 2003 to August 2004. From October 2001 to July 2003, Mr. Wang served as a deputy director-general supervisor designated directly by the State Council at the Agricultural Development Bank of China. Mr. Wang worked for the Ministry of Finance and the Central Financial Working Commission from April 1985 to October 2001. Mr. Wang obtained two Bachelor's degrees from Central University of Finance and Economics in 1996 and from China Renmin University in 1998. Mr. Wang is a CertiÑed Public Accountant qualiÑed by the Chinese Institute of CertiÑed Public Accountants.
LIU Wanming, 47, has been a Supervisor since August 2004. From November 2001 to August 2004, designated directly by the State Council, he served as a director supervisor at Bank of Communications and a deputy director-general supervisor at our bank. From August 1984 to November 2001, Mr. Liu worked with the National Audit OÇce, the Agricultural Development Bank of China and Bank of Communications. Mr. Liu received a Bachelor's degree in economics from Jiangxi University of Finance in 1984.
LI Chunyu, 46, has served as an employee Supervisor since December 2004. Since August 2000 Mr. Li has served as Chairman of the labor union of the head oÇce for our employees. From
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1992 to July 2000, he worked for our Human Resources Department. Mr. Li holds a secondary college diploma. LIU Dun, 42, has served as an employee Supervisor since December 2004. Since 1991, Mr. Liu has worked for the International Settlement Division, Credit Division and Corporate Business Division of our Shandong branch. Mr. Liu received a Master's degree in economics from the University of Science and Technology of China in 1991. All of our Supervisors, other than Mr. LI Chunyu and Mr. LIU Dun, were nominated by our controlling shareholder Huijin and approved by our shareholders meeting. Mr. LI Chunyu and Mr. LIU Dun are employee representatives on our Board of Supervisors and were elected by representatives of our employees.
Senior Management A1A(41)(5) LR8.05(1)(b) The following table sets forth certain information concerning members of our senior management. The business address of each member of our senior management is care of Bank of China Limited, One Fuxingmen Nei Dajie, Beijing 100818, PRC.
Name Age Position LI Lihui ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 President HUA Qingshan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 Executive Director; Vice President LI Zaohang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 Executive Director; Vice President ZHOU Zaiqun ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Vice President ZHANG Yanling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 Vice President ZHANG Lin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 Secretary of Party Discipline Committee ZHU Min ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Assistant President ZHU Xinqiang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Assistant President WANG Yongli ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 Assistant President Lonnie DOUNN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Chief Credit OÇcer(1) YEUNG Jason Chi Wai ÏÏÏÏÏÏÏÏÏÏÏÏ 50 Secretary to the Board of Directors
(1) Resignation tendered in April 2006, eÅective in September 2006. LI Lihui, see ""Ì Directors''. HUA Qingshan, see ""Ì Directors''. LI Zaohang, see ""Ì Directors''. ZHOU Zaiqun, 53, has served as a Vice President since November 2000. From November 2000 to August 2004, Mr. Zhou also concurrently served as vice president and director of MasterCard International, Asia-PaciÑc. Prior to joining us, Mr. Zhou was the general manager of the Beijing branch of ICBC from December 1999 to November 2000 and the general manager of the Accounting and Financial Planning Departments of ICBC from January 1997 to December 1999. Mr. Zhou received a Master's degree from the Northeast Institute of Finance and Economics in 1996. Since October 2001, Mr. Zhou has been serving as a non-executive director of BOCHK Holdings, one of our subsidiaries with shares listed on the Hong Kong Stock Exchange. ZHANG Yanling, 54, has served as a Vice President since March 2002. She joined our bank in 1977, and from October 2000 to March 2002, she was an assistant president of our bank. From April 1997 to August 2002, Ms. Zhang successively served as general manager of our Banking Department, general manager of our Milan branch and general manager of our Legal and Compliance Department. Ms. Zhang has also served as vice chairperson of the International
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Chamber of Commerce Banking Commission since July 2003. Ms. Zhang graduated from Liaoning University in 1977 and received a Master's degree from Wuhan University in 1999. Since October 2001, Ms. Zhang has been serving as a non-executive director of BOCHK Holdings, one of our subsidiaries with shares listed on the Hong Kong Stock Exchange.
ZHANG Lin, 49, has served as Secretary of our Party Discipline Committee since August 2004. Prior to joining our bank, Ms. Zhang held various positions in the Export-Import Bank of China, including assistant president from June 2002 to August 2004 and deputy director and director of its Personnel Education Division from August 1998 to July 2002. Ms. Zhang graduated from the Politics and Economy Department of the Party School of the Inner Mongolian Autonomous Region's Communist Party Committee in 1983.
ZHU Min, 53, has served as Assistant President since November 2003. He joined our bank in 1996 and from April 1998 to April 2003, Mr. Zhu was the general manager of the Institution of International Finance of our bank and headed the restructuring of BOCHK. From April 2003 to April 2005, he was general manager of our bank's Restructuring and Listing OÇce. From October 2001 to date, he also serves as general manager of the Board Secretariat of BOCHK. Mr. Zhu graduated from Fudan University with a Bachelor's degree in 1982. He also obtained a Master in Public AÅairs degree from Princeton University in 1988 and a Ph.D. degree from Johns Hopkins University in 1993.
ZHU Xinqiang, 53, has served as Assistant President since November 2003. He joined our bank in 1977. From September 1999 to March 2004, Mr. Zhu held various positions at our bank, including general manager of the Treasury Department and general manager of the Global Markets Department. Mr. Zhu graduated from Jilin University in 1977.
WANG Yongli, 41, has served as Assistant President of our bank since November 2003. He joined our bank in 1989. From April 1999 to January 2004, Mr. Wang held various positions in our bank, including general manager of the Asset-Liability Management Department, acting deputy general manager, general manager of our Fujian branch, and general manager of our Hebei branch. Mr. Wang graduated from China Renmin University and received a Master's degree in 1987. He also obtained a Doctor's degree from Xiamen University in 2005.
Lonnie DOUNN, 53, joined our bank and became our Chief Credit OÇcer in March 2005. Prior to that, he worked at the HSBC Group for over 30 years in diÅerent functions, including various credit and management positions at Marine Midland Bank (a U.S. subsidiary of HSBC) from 1974 to 1992, oversight of credit risk for HSBC (U.S.) corporate, treasury and investment banking from 1992 to 1998, and chief credit oÇcer of HSBC Asia-PaciÑc from 1998 to 2004. Mr. Dounn received his Bachelor of Science and Master of Business Administration degrees from Carnegie Mellon University in 1974, and obtained a Juris Doctor degree from Fordham University Law School in 1981. He is also a member of the Bar Association of the State of New York. In April 2006, Mr. Dounn tendered his resignation from our bank, eÅective in September 2006. We are currently seeking a replacement for Mr. Dounn as our Chief Credit OÇcer.
YEUNG Jason Chi Wai, 51, was appointed as our Board and Company Secretary in November 2005. He is also the company secretary and head of investor relations of BOCHK Holdings and BOCHK. Prior to joining BOCHK, Mr. Yeung was the general counsel and a director of China Everbright Limited and, before that, a partner of Woo, Kwan, Lee & Lo. He has also served at the Securities and Futures Commission in Hong Kong as a corporate Ñnance manager. Mr. Yeung graduated from the University of Hong Kong with a Bachelor's degree in social sciences in 1978. He also graduated from the College of Law, United Kingdom in 1985 and further obtained a Bachelor's degree in law from the University of Western Ontario, Canada in 1991 and a Master's degree in
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business administration from the Richard Ivey Business School, University of Western Ontario, Canada in 2001.
COMPANY SECRETARY YEUNG Jason Chi Wai, see ""Ì Senior Management''.
QUALIFIED ACCOUNTANT LEUNG Frances Kim Lan, 46, was appointed as our qualiÑed accountant in December 2005. Prior to this appointment, she held the position of deputy general manager of the Finance Department of BOCHK, a position she has held since 2001. Ms. Leung is a fellow member of the Hong Kong Institute of CertiÑed Public Accountants, a fellow of the Association of Chartered CertiÑed Accountants, UK, a member of the Institute of Chartered Accountants in England and Wales and a member of IT Accountants Association. Ms. Leung received a Master's degree in Ñnance and investment from the University of Hull and a Master's degree in corporate Ñnance from the Polytechnic University of Hong Kong.
BOARD COMMITTEES Our Board of Directors delegates certain responsibilities to various committees. The Board of Directors has established a strategic development committee, audit committee, risk policy committee, personnel and remuneration committee, and connected transaction control committee. These committees are constituted by certain Directors and report to the Board of Directors. As required by our Articles of Association, each committee must have at least three Directors.
Strategic Development Committee Our strategic development committee consists of nine Directors, namely, Xiao Gang, Li Lihui, Zhang Jinghua, Yu Erniu, Zhu Yan, Zhang Xinze, Hong Zhihua, Huang Haibo and Sir Frederick Goodwin. Xiao Gang currently serves as the chairman of our strategic development committee. The primary duty of the committee is to develop and evaluate the eÅectiveness of our strategic plan by reviewing and assessing proposals for consideration by our Board regarding the following:
¬ strategic development plans;
¬ annual budgets;
¬ capital allocation plans;
¬ merger and acquisition plans;
¬ signiÑcant investment and Ñnancing plans; and
¬ substantial internal reorganization and adjustment.
Audit Committee Our audit committee consists of Ñve Directors, namely, Patrick de Saint-Aignan, Zhu Yan, Huang Haibo, Anthony Neoh and Peter Cooke. Patrick de Saint-Aignan currently serves as the chairman of our audit committee. The primary responsibilities of our audit committee include:
¬ recommending the appointment and fees of the external auditor; and assessing its performance and independence;
¬ reviewing the external auditor's audit, internal control report and audit plan;
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¬ reviewing the Ñnancial reports, other Ñnancial disclosures and signiÑcant accounting and auditing policies and regulations;
¬ approving the internal audit charter and organizational structure and budget of the internal audit department, ensuring its independence and evaluating its performance;
¬ recommending the appointment of the chief audit oÇcer who reports directly to and is evaluated by the committee;
¬ overseeing the Bank's internal controls, including reviewing internal audit report Ñndings, management's responses and plans to address material weaknesses, and discussing the adequacy of internal controls with the chief audit oÇcer and the external auditor.
Risk Policy Committee
Our risk policy committee consists of Ñve Directors, namely, Anthony Neoh, Zhang Jinghua, Zhang Xinze, Hua Qingshan and Patrick de Saint-Aignan. Anthony Neoh currently serves as the chairman of our risk policy committee. For descriptions of the primary responsibilities of our risk policy committee, see ""Risk Management Ì Risk Management Structure Ì Board of Directors and Risk Policy Committee''.
Personnel and Remuneration Committee
Our personnel and remuneration committee consists of Ñve Directors, namely, Yu Erniu, Hong Zhihua, Peter Cooke, Patrick de Saint-Aignan and Anthony Neoh. Yu Erniu currently serves as the chairman of our personnel and remuneration committee.
The primary responsibilities of our personnel and remuneration committee include:
¬ reviewing our human resource and remuneration policies and monitoring their implementation;
¬ nominating members of our Directors and senior management;
¬ reviewing standards and procedures for selecting, nominating and appointing Directors, members of our special committees and our senior management;
¬ reviewing remuneration and compensation policies submitted by our management; and
¬ formulating standards for performance review of our senior management and evaluating performance of Directors and members of our senior management.
Connected Transaction Control Committee
Our connected transaction control committee consists of four Directors, namely, Peter Cooke, Hua Qingshan, Li Zaohang and Anthony Neoh. Peter Cooke currently serves as the chairman of our connected transaction control committee.
The primary responsibilities of our connected transaction control committee include:
¬ formulating policies and procedures on related party transactions;
¬ identifying and reporting to the Board of Directors and the Board of Supervisors on our related parties;
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¬ identifying related party transactions according to the relevant laws and regulations; and
¬ conducting a review of related party transactions in accordance with PRC laws and regulations.
COMPENSATION OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Our Executive Directors and Supervisors who are also our employees and our senior management personnel, receive compensation in the form of salaries, bonuses, beneÑts in cash, pension as well as through our contribution to their social insurance plans and housing funds. Our Independent Non-Executive Directors receive directors' fees. Our Non-Executive Directors do not receive any salary or directors' fees from us. The aggregate fees and compensation paid by us to all our Directors, Supervisors and senior management members in 2003, 2004 and 2005 were RMB13,847,150, RMB9,551,668 and RMB30,656,570, respectively. As required by PRC regulations, we participate in various pension, insurance plans and housing funds organized by provincial and municipal governments for our employees, including employees who are Directors, Supervisors and senior management members. We contributed RMB524,500 and RMB1,505,305 for our Directors, Supervisors and senior management members in 2004 and 2005, respectively. The aggregate amount of compensation we paid to our Ñve highest paid individuals in 2003, 2004 and 2005 were RMB28,118,170, RMB31,150,224 and RMB40,751,548, respectively. A1A(33)(3)(a) Under the remuneration and compensation arrangements currently in eÅect, the aggregate amount of basic salary of our directors, supervisors and senior management members payable in A1A(46)(3) 2005 was RMB16,247,398.
EMPLOYEES A1A(28)(7) As of December 31, 2003, 2004 and 2005, we employed 235,773, 224,774 and 209,265 employees, respectively. The following table sets forth a breakdown of our employees by age, educational background and seniority as of December 31, 2005:
Number of Category Sub-category employees Percentage Age Below 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,327 21.1% 31-40 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,195 55.1% 41-50 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,260 20.6% 51-60 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,650 3.0% Above 60 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 396 0.2% Educational background Graduate or above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,140 1.1% Undergraduate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,499 30.1% College and professional training school ÏÏÏÏÏ 79,457 41.7% Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,732 27.1%
SHARE APPRECIATION RIGHTS POLICY In order to motivate and incentivize our management and other key employees, our Board of Directors and shareholders have adopted a share appreciation rights policy, pursuant to which we will implement a shares appreciation rights plan. Our share appreciation rights policy provides that the eligible participants will include Directors, Supervisors, management and other personnel designated by the board. Eligible participants will be granted share appreciation rights, up to 25% of which will be exercisable each year beginning on the
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DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
third anniversary date from the date of the grant. The share appreciation rights will be valid for seven years from the date of grant. Eligible participants will be entitled to receive an amount equal to the diÅerence, if any, between the average closing market price of our H Shares in the ten days prior to the date of grant and the average closing market price of our H Shares in the 12 months prior to the date of exercise as adjusted for any change in our equity. Total shares represented by the share appreciation rights granted will not, in the Ñrst year of the plan, exceed 0.5% of our total share capital and will not, in the aggregate, exceed 3% of our total share capital at the relevant time. No shares will be issued under the share appreciation rights plan. Accordingly, the shareholding of the shareholders will not be diluted by any issuance of share appreciation rights under the plan.
WAIVER FROM STRICT COMPLIANCE WITH RULE 8.12 OF THE HONG KONG LISTING RULES According to Rules 8.12 and 19A.15 of the Hong Kong Listing Rules, an issuer must have suÇcient management presence in Hong Kong and, in normal circumstances, at least two of the issuer's executive directors must ordinarily be resident in Hong Kong. We are headquartered in the PRC and conduct substantially all of our operations in the PRC, and we do not and will not have suÇcient management presence in Hong Kong. Most of our Directors reside in the PRC. Our Hong Kong operations are conducted primarily through BOCHK Holdings which is listed on the Hong Kong Stock Exchange and itself meets such management presence criteria. Our bank has made certain internal arrangements to maintain eÅective communication with the Hong Kong Stock Exchange, including (i) appointing our President, Li Lihui and our board secretary and company secretary, Yeung Jason Chi Wai, as our principal channel of communication with the Hong Kong Stock Exchange; and (ii) retaining Goldman Sachs (Asia) L.L.C. and UBS as our compliance advisers and principal channel of communication with the Hong Kong Stock Exchange for the period commencing from the Listing Date and ending on the date that our bank publishes its Ñrst full year results pursuant to Rule 3A.19 of the Hong Kong Listing Rules. Li Lihui and Yeung Jason Chi Wai are our authorized representatives. Accordingly, we have applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock Exchange has granted a waiver from strict compliance with the requirements under Rules 8.12 and 19A.15 of the Hong Kong Listing Rules.
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SUBSTANTIAL SHAREHOLDERS
So far as our Directors are aware, as of the date of this prospectus, our entire issued share capital is owned as follows: 3rd Sch 30 Voting power (%) LR19A.42 Name Number of shares (approximate) (55)(4) HuijinÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,128,718,217 79.897% RBS ChinaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,942,736,236 9.609 AFH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,471,368,118 4.805 SSF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,514,415,652 3.907 UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,377,860,684 1.550 ADBÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,679,102 0.232 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 217,941,778,009 100.0%
RBS China is controlled by RBS Group which owns 51.6% of its issued share capital. There are Ñve other shareholders in RBS China: (a) Temmurgal HoldingCo AB (an aÇliate of Merrill Lynch & Co., Inc., one of the world's leading wealth management, capital markets and advisory companies), which owns a 9.0% equity interest; (b) Magnitico Holdings Limited (a subsidiary of Li Ka Shing Foundation Limited, a Hong Kong charitable foundation established by Mr. Li Ka Shing) which owns a 24.2% equity interest; (c) D.E. Shaw Oculus Investments (Cyprus) Limited and D.E. Shaw Composite Investments (Cyprus) Limited (both members of the D.E. Shaw group, a specialized investment and technology development Ñrm headquartered in New York), which together own a 5.5% equity interest; (d) Oaktree Cyprus Principal Investments Limited (a wholly-owned subsidiary of an entity managed by Oaktree Capital Management, LLC, the investment management Ñrm headquartered in Los Angeles with oÇces in the United States, Europe and Asia), which owns a 5.5% equity interest; and (e) OZ Sculptor (Cyprus) Limited (a member of the Och-ZiÅ Capital Management Group, the global investment management Ñrm with main headquarters in New York), which owns a 4.2% equity interest. We do not have any direct business relationship with the shareholders of RBS China other than RBS Group. The various agreements we entered into in connection with the subscription and purchase of Shares by RBS China were entered into with RBS China, RBS Bank and/or RBS Group, and not the other shareholders of RBS China. We have been informed by RBS Group that the consortium comprising themselves and the Ñve other shareholders of RBS China was formed solely for the purpose of the investment in our bank. In addition, we are informed by RBS Group that: (i) all the shareholders of RBS China approved the transfer restrictions applicable to RBS China's shares in our bank comprising the Strategic Placement as set out in the investor rights agreement; (ii) the shareholders of RBS China are not permitted to transfer their shares in RBS China to third parties (other than existing shareholders of RBS China) without the consent of all other shareholders (including RBS Group); (iii) subject to the foregoing, the shares in RBS China held by each shareholder of RBS China are required to be retained within the relevant corporate group or associated group of funds (as the case may be) of such shareholder; and (iv) RBS Group will at all times control RBS China. Further, pursuant to an undertaking given by RBS Group to us, RBS Group has undertaken that for so long as RBS China holds the Shares of our bank, RBS China will remain RBS Group's subsidiary and RBS Group will control the board of directors of, or otherwise control RBS China. We have been further informed by RBS Group that the board of RBS China has discretion as to how to vote its Shares in our bank.
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SUBSTANTIAL SHAREHOLDERS
Immediately following the completion of the Global OÅering (and assuming the Over-Allotment A1A(28)(2) Option is not exercised), the interest of our shareholders in our issued share capital will be as follows: Voting power (%) Name Number of shares (approximate) Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171,691,054,282 70.507% RBS China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,942,736,236 8.600 AFH(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,881,114,118 4.879 SSFÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,952,079,587 4.498 UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,377,860,684 1.387 ADB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,679,102 0.208 Investors who receive H Shares from the Global OÅeringÏÏ 24,158,844,000 9.921 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243,510,368,009 100.0%
(1) Assumes that AFH purchased US$500 million of Shares in the Global OÅering at the mid-point of the OÅer Price range.
If the Over-Allotment Option is exercised in full, the interests of our shareholders in our issued share capital will be as follows: Voting power (%) Name Number of shares (approximate) Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171,325,404,740 69.265% RBS China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,942,736,236 8.467 AFH(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,881,114,118 4.803 SSFÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,317,729,129 4.576 UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,377,860,684 1.366 ADB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,679,102 0.205 Investors who receive H Shares from the Global OÅeringÏÏ 27,994,132,000 11.318 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 247,345,656,009 100.0%
(1) Assumes that AFH purchased US$500 million of Shares in the Global OÅering at the mid-point of the OÅer Price range.
None of our Directors or Supervisors is a legal or beneÑcial owner of any of our Shares. We are not aware of any arrangement which may at a subsequent date result in a change of control of our bank.
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SHARE CAPITAL
As of the date of this prospectus, our share capital is as follows: A1A(23)(1) Approximate A1A(15)(1) Number of shares of percentage of total LR19A.42 RMB1.00 each issued share capital (55)(1) Domestic Shares in issue held by Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,128,718,217 79.897% LR19A.42 (1) Domestic Shares in issue held by SSF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,514,415,652 3.907 (55)(3) (2) Unlisted Foreign Shares in issue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,298,644,140 16.196 3rd Sch 2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 217,941,778,009 100.0% LR8.19(1)
(1) Domestic Shares currently held by SSF and all Unlisted Foreign Shares will be converted into H Shares, which will be listed on the Hong Kong Stock Exchange, upon completion of the Global OÅering. According to the PRC Securities Law and our Articles of Association, the conversion of our Unlisted Foreign Shares into H Shares requires the approval of our shareholders in a general meeting and is subject to the approval of the CSRC. The conversion of our Unlisted Foreign Shares into H Shares was approved by our shareholders in a general meeting held on November 22, 2005. We have also obtained the approvals of the CSRC for such conversion on April 24, 2006. We have been advised by our PRC legal counsel, Jun He Law OÇces, that, having received the relevant approval from the CSRC for the conversion of our Unlisted Foreign Shares into H Shares, such conversion is legal and valid under PRC law.
(2) Among all of our Unlisted Foreign Shares issued as of the date of this prospectus, RBS China held 20,942,736,236 Shares, which represented 9.61% of our total issued share capital, AFH held 10,471,368,118 Shares, which represented 4.80% of our total issued share capital, UBS AG held 3,377,860,684 Shares, which represented 1.55% of our share capital and ADB held 506,679,102 Shares, which represented 0.23% of our total issued share capital.
Immediately after completion of the Global OÅering, and assuming the Over-Allotment Option is not exercised, our share capital will be as follows: Approximate Number of Shares of percentage of total RMB1.00 each issued share capital Shares held by Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171,691,054,282 70.507% H Shares held by RBS China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,942,736,236 8.600 H Shares held by AFH(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,881,114,118 4.879 H Shares held by SSF(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,952,079,587 4.498 H Shares held by UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,377,860,684 1.387 H Shares held by ADB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,679,102 0.208 H Shares held by investors under the Global OÅering (other than RBS China, AFH, UBS AG, ADB and SSF) 24,158,844,000 9.921 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243,510,368,009 100.0%
(1) Assumes that AFH purchased US$500 million of Shares in the Global OÅering at the mid-point of the estimated OÅer Price range.
(2) Of the H Shares to be held by SSF, 2,556,859,000 H Shares representing 1.05% will be held by SSF as a result of the transfers by Huijin and SSF itself to SSF pursuant to relevant PRC regulations regarding reducing state-owned shares and raising of funds for the SSF.
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SHARE CAPITAL
Immediately after completion of the Global OÅering, and assuming the Over-Allotment Option is exercised in full, our share capital will be as follows: Approximate Number of Shares of percentage of total RMB1.00 each issued share capital Shares held by Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171,325,404,740 69.265% H Shares held by RBS China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,942,736,236 8.467 H Shares held by AFH(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,881,114,118 4.803 H Shares held by SSF(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,317,729,129 4.576 H Shares held by UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,377,860,684 1.366 H Shares held by ADB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,679,102 0.205 H Shares held by investors under the Global OÅering (other than RBS China, AFH, UBS AG, ADB and SSF) 27,994,132,000 11.318 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 247,345,656,009 100.0%
(1) Assumes that AFH purchased US$500 million of Shares in the Global OÅering at the mid-point of the OÅer Price range. (2) Of the H Shares to be held by SSF, 2,940,387,800 H Shares representing 1.19% will be held by SSF as a result of the transfers by Huijin and SSF itself to SSF pursuant to relevant PRC regulations regarding disposal of state-owned shares and the raising of funds for the SSF.
A1A(25)(2) RANKING Domestic Shares, Unlisted Foreign Shares and H Shares are ordinary shares in the share capital of our bank ranking pari passu with the same rights and beneÑts. In addition, under our Articles of Association, all shareholders holding ordinary shares of our bank, including Domestic Shares, Unlisted Foreign Shares or H Shares, are entitled to the rights and assume the obligations stipulated in our Articles of Association equally. All dividends in respect of the H Shares are to be declared in Renminbi and paid by us in Hong Kong dollars. The H Shares to be issued under the Global OÅering may only be subscribed for and traded in Hong Kong dollars. Generally, Domestic Shares and H Shares are deemed as diÅerent classes of Shares under our Articles of Association. Any change or abrogation of the rights of shareholders of diÅerent classes must be approved by shareholders by way of a special resolution and at separate shareholders' class meetings convened by the aÅected shareholders of diÅerent classes. However, any change or abrogation of any rights of shareholders of a certain class resulting from a change of domestic or overseas laws, administrative regulations or the rules of the place of listing or any legally binding decisions or orders announced by domestic or overseas regulatory authorities does not need to be approved by shareholders and at separate shareholders' class meeting. For details about rights of diÅerent class of shareholders, see ""Appendix VIII Ì Variation of Rights of Existing Shareholders of DiÅerent Categories''.
DOMESTIC SHARES Subject to the approval of the State Council securities regulatory authority, Shares of our bank held on our domestic share register may be transferred to overseas investors, and such transferred Shares may be listed or traded on an overseas stock exchange. Any listing or trading of the transferred Shares on an overseas stock exchange shall also comply with the regulatory procedures, rules and requirements of such stock exchange. No class shareholder voting is required for the listing and trading of the transferred Shares on an overseas stock exchange.
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SHARE CAPITAL
SHARES HELD BY HUIJIN
Upon completion of our Global OÅering, Huijin's Shares in our bank will be deposited with the China Securities Depository and Clearing Corporation Limited. As part of the Global OÅering, we have made an application to the Hong Kong Stock Exchange to authorize for listing on the Hong Kong Stock Exchange the Shares held by Huijin in our bank. Upon the Hong Kong Stock Exchange granting us approval for the listing of our H Shares as part of the Global OÅering, Huijin's Shares would then be authorized for listing on the Hong Kong Stock Exchange and would, subject to completion of certain procedural requirements, be listed on the Hong Kong Stock Exchange. The relevant procedural requirements are the withdrawal of such Shares from the China Securities Depository and Clearing Corporation Limited and re-registering such Shares on our share register maintained in Hong Kong, and on the conditions that (a) our Hong Kong share registrar lodges with the Hong Kong Stock Exchange a letter conÑrming the proper entry of the relevant Shares on the Hong Kong share register, and the due dispatch of share certiÑcates and (b) the admission of the Shares to trade in Hong Kong will comply with the Hong Kong Listing Rules and the CCASS Rules in force from time to time. Until such Shares are re-registered on our Hong Kong share register, such Shares would not be listed as H Shares, and Huijin would not be entitled to attend and vote at meetings of H shareholders in respect of such Shares. After completion of our Global OÅering, no further approval from the Hong Kong Stock Exchange or of our shareholders (including our H shareholders) would be required for the listing of such Shares as H Shares on the Hong Kong Stock Exchange. However, prior to Huijin's Shares becoming listed as H Shares on the Hong Kong Stock Exchange, Huijin would require the approval of the CSRC or any other authorized securities approval authority of the State Council. In order for Huijin to withdraw its Shares that are deposited with the China Securities Depository and Clearing Corporation Limited and re-register such Shares on our Hong Kong share register, Huijin may issue to us a removal request on a prescribed form in respect of a speciÑed number of Shares and attaching the relevant documents of title. Subject to our being satisÑed with authenticity, as well as obtaining the approval of our Board, we would then issue a notice to our Hong Kong share registrar with instructions that, with eÅect from an eÅective date, our Hong Kong share registrar is to issue Huijin with H Share certiÑcates for such speciÑed number of Shares and Huijin's shareholding interest deposited with the China Securities Depository and Clearing Corporation Limited will then be correspondingly reduced. In addition, we will comply with the Listing Rules in respect of the issuance of an announcement to inform shareholders and the public of such fact not less than three days prior to the proposed eÅective date. Any withdrawal of Huijin's Shares that are deposited with the China Securities Depository and Clearing Corporation Limited and the re-registration of such Shares on our Hong Kong share register would not aÅect any pre-existing restrictions on transfer applicable to Huijin's Shares. Huijin has undertaken to us that it will not re-register any of its Shares on our Hong Kong share register in the Ñrst year after the Listing Date.
TRANSFER OF SHARES ISSUED PRIOR TO LISTING DATE The PRC Company Law provides that in relation to the public oÅering of a company, the shares issued by a company prior to the public oÅering of shares shall not be transferred within a period of one year from the date on which the publicly oÅered shares are traded on any stock exchange. Accordingly, Shares issued by our bank prior to the Listing Date shall be subject to this statutory restriction and not be transferred within a period of one year from the Listing Date. However, the Shares to be transferred by Huijin and SSF, respectively, to SSF in accordance with relevant PRC regulations regarding disposal of state-owned shares are not subject to such statutory restrictions
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SHARE CAPITAL
on transfer following their transfer to SSF in accordance with the relevant PRC regulations regarding disposal of state-owned shares.
TRANSFER OF STATE-OWNED SHARES
In accordance with relevant PRC regulations regarding disposal of state-owned shares, our state-owned shareholders, namely Huijin and SSF, are required to transfer to SSF, in proportion to their respective holdings in our bank, such number of Domestic Shares as in aggregate equivalent to 10% of the number of the OÅer Shares (2,556,859,000 H Shares before the exercise of the Over- Allotment Option, and an additional 383,528,800 H Shares upon the exercise in full of the Over- Allotment Option). At the time of the listing of our H Shares on the Hong Kong Stock Exchange, such Domestic Shares will be converted into H Shares on a one-for-one basis. These H Shares will not be part of the Global OÅering. Our bank will not receive any proceeds from the transfer by our state-owned shareholders to SSF or any subsequent disposal of such H Shares by SSF.
The transfer of state-owned Shares by our state-owned shareholders to SSF has been approved by the Ministry of Finance on April 17, 2006. The conversion of those shares into H Shares has been approved by the CSRC on April 24, 2006. We have been advised that the transfer and the conversion, and the holding of H Shares by SSF following such transfer and conversion, have been approved by the relevant PRC authorities and are legal under PRC law.
PUBLIC FLOAT REQUIREMENTS
Rules 8.08(1)(a) and (b) of the Hong Kong Listing Rules require there to be an open market in LR8.08(1)(a) the securities for which listing is sought and for a suÇcient public Öoat of an issuer's listed securities to be maintained. This normally means that: (i) at least 25% of the issuer's total issued share capital must at all times be held by the public; and (ii) where an issuer has more than one class of securities apart from the class of securities for which listing is sought, the total securities of the issuer held by the public (on all regulated market(s) including the Hong Kong Stock Exchange) at the time of listing must be at least 25% of the issuer's total issued share capital. However, the class of securities for which listing is sought must not be less than 15% of the issuer's total issued share capital, and must have an expected market capitalisation at the time of listing of not less than HK$50 million.
We have applied to the Hong Kong Stock Exchange to request the Hong Kong Stock Exchange to exercise, and the Hong Kong Stock Exchange has exercised, its discretion under Rule 8.08(1)(d) of the Hong Kong Listing Rules to accept a lower minimum percentage of Shares to be held by the public as follows and on the following conditions:
¬ the minimum public Öoat should be the higher of:
Ì 15%; or
Ì the percentage of H Shares held by the public immediately after completion of the Global OÅering and the exercise of the Over-allotment Option, if exercised;
¬ the H Shares that will be held by RBS China will be treated as Shares held in ""non-public'' hands for purposes of Rule 8.08(1); and
¬ the H Shares that will be held by SSF at the time of listing (but excluding H Shares that will be held by SSF as a result of the transfers by Huijin and by SSF itself to SSF pursuant to
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SHARE CAPITAL
relevant PRC regulations regarding disposal of state-owned shares) will be treated as Shares held in ""non-public'' hands for purposes of Rule 8.08(1). In addition, we will make appropriate disclosure of the lower prescribed percentage of public Öoat and conÑrm suÇciency of public Öoat in successive annual reports after listing. Notwithstanding that H Shares to be held by RBS China are treated as held in ""non-public'' hands for public Öoat purposes, as RBS China will hold less than 10% of our issued share capital at the time of our listing, RBS China will not, upon completion of the Global OÅering, be our connected person and our bank is not required to treat RBS China and its associates as our connected persons for purposes of Chapter 14A of the Listing Rules. However, pursuant to the Credit Card Agreement, we and RBS Bank will establish and operate the credit card business initially as a stand-alone business unit within our bank, and then as a joint venture company to be established by our bank and RBS Bank, with our bank and RBS Bank holding 51% and 49% of the share capital of the joint venture company, respectively, when applicable PRC laws permit the establishment of such joint venture company. Upon the establishment of the joint venture company, RBS Bank and its associates, including RBS China, will become our connected persons. GENERAL MANDATE TO ISSUE SHARES Subject to the completion of the Global OÅering, our Directors have been granted a general mandate to allot and issue H Shares and Domestic Shares at any time, either separately or concurrently, within a period of 12 months from the Listing Date provided that, the aggregate number of H Shares or Domestic Shares to be issued shall not exceed 20% of the aggregate number of each of our H Shares and Domestic Shares in issue, respectively, as of the Listing Date. For further details of this general mandate, see the section headed ""Further information about the Company Ì Resolutions of our Shareholders'' in Appendix IX ""Statutory and General Information'' to this prospectus.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
You should read the discussion and analysis set forth in this section in conjunction with A1A(32)(5)(a) Appendix I Ì ""Accountants' Report'', which has been prepared in accordance with IFRS, A1A(32)(5)(b) and Appendix II Ì ""Unaudited Supplementary Financial Information''. LR11.07 In 2003, we began a Ñnancial restructuring pursuant to which we disposed of certain non- 3rd Sch 3 performing loans and policy-related assets to Cinda, the PBOC and China Orient in 2004. Therefore our historical data for loans and advances to customers must be viewed in light of these disposals. We may not be able to dispose of non-performing loans in such large amounts or on similar terms in the future. See ""Our Restructuring'' and ""Financial Information Ì Impact of Our Restructuring''. Unless otherwise indicated, ""domestic operations'' refers to the operations of our head oÇce (including the treasury operations conducted in Hong Kong by our global markets department) and its branches in the PRC, and ""overseas operations'' refers to the operations of our branches, and subsidiaries in Hong Kong, Macau and other overseas locations and their branches and subsidiaries, some of which are located in the PRC. In addition, unless otherwise indicated, all amounts of loans and advances to customers set forth in this section represent amounts before allowance for impairment losses on loans and advances.
ASSETS Our total assets as of December 31, 2003, 2004 and 2005 were RMB3,973,280 million, RMB4,265,221 million and 4,740,048 million, respectively. The two largest components of our assets are loans and advances to customers and investment securities. As of December 31, 2005, our loans and advances to customers net of allowance for impairment losses on loans and advances and our investment securities constituted 45.4% and 33.2%, respectively, of our total assets. The following table sets forth the balances of signiÑcant components of our total assets as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Loans and advances to customers, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 54.4% 2,147,688 50.4% 2,235,265 47.2% Allowance for impairment losses on loans and advances (239,039) (6.0) (74,769) (1.8) (83,153) (1.8) Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 48.4 2,072,919 48.6 2,152,112 45.4 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 988,961 24.9 1,229,522 28.8 1,571,531 33.2 Other assets(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,062,458 26.7 962,780 22.6 1,016,405 21.4 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 100.0% 4,265,221 100.0% 4,740,048 100.0%
(1) Include cash and due from banks, balances with central banks, placements with banks and other Ñnancial institutions, government certiÑcates of indebtedness for bank notes issued, precious metals, trading assets and other Ñnancial instruments at fair value through proÑt or loss, derivative Ñnancial instruments, investment in associates, property and equipment, investment property, deferred income tax assets and other assets.
Loans and Advances to Customers Loans and advances to customers represent a signiÑcant portion of our assets. Loans and advances to customers net of allowance for impairment losses on loans and advances accounted for 48.4%, 48.6% and 45.4% of our total assets as of December 31, 2003, 2004 and 2005, respectively.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Loans and Advances to Customers by Geography
The following table sets forth, as of the dates indicated, the geographic distribution of our loans and advances to customers based on the location of the operations where the loan was originated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 81.0% 1,735,528 80.8% 1,800,142 80.5% OverseasÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 410,829 19.0 412,160 19.2 435,123 19.5 Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100.0% 2,147,688 100.0% 2,235,265 100.0%
The following table sets forth, as of the dates indicated, the geographic distribution of our loans and advances to customers for our domestic operations based on the location of the operations where the loan was originated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 355,279 20.3% 314,843 18.1% 322,451 17.9% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139,263 8.0 128,600 7.4 131,649 7.3 Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 621,900 35.5 679,773 39.2 719,759 40.0 Central and southern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 453,863 25.9 433,860 25.0 444,869 24.7 Western China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 179,766 10.3 178,452 10.3 181,414 10.1 Total domestic loans and advances to customersÏÏÏÏÏÏÏÏ 1,750,071 100.0% 1,735,528 100.0% 1,800,142 100.0%
Loans and advances to customers for our domestic operations account for a signiÑcant majority of our total loans and advances to customers. As of December 31, 2003, 2004 and 2005, loans and advances to customers for our domestic operations represented 81.0%, 80.8% and 80.5%, respectively, of our total loans and advances to customers. Loans and advances to customers for our domestic operations grew by 3.7% from RMB1,735,528 million as of December 31, 2004 to RMB1,800,142 million as of December 31, 2005, and decreased by 0.8% from RMB1,750,071 million as of December 31, 2003 to RMB1,735,528 million as of December 31, 2004. The decrease in loans and advances to customers for our domestic operations in 2004 resulted primarily from the disposal of an aggregate gross carrying value of RMB269,323 million of domestic non-performing loans and policy-related loans in connection with our restructuring. Excluding such disposal, loans and advances to customers for our domestic operations increased RMB254,780 million in 2004 compared to 2003. While we continue to expand our business and as a result, our loans and advances to customers for our domestic operations increased in 2005, we improved our asset quality control, such as signiÑcantly reducing our exposure to special-mention loans.
Loans and advances to customers for our overseas operations primarily relate to BOCHK's lending business. Loans and advances to customers for our overseas operations increased by 5.6% from RMB412,160 million as of December 31, 2004 to RMB435,123 million as of December 31, 2005. This increase was partially due to the economic recovery in Hong Kong in 2005. Loans and advances to customers for our overseas operations increased from RMB410,829 million as of December 31, 2003 to RMB412,160 million as of December 31, 2004.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Loans and Advances to Customer by Customer Type Loans and advances to customers consist of corporate loans and advances, which include trade bills, and personal loans and advances. The following table sets forth our corporate and personal loans and advances as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages)
Corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,777,507 82.3% 1,653,647 77.0% 1,712,262 76.6% Include: trade bills(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,557 6.6 177,738 8.3 225,026 10.1 Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 383,393 17.7 494,041 23.0 523,003 23.4 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100.0% 2,147,688 100.0% 2,235,265 100.0%
(1) Include discounted bills and bills related to our trade Ñnance business. The following table sets forth our corporate and personal loans and advances for our domestic operations as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,496,052 85.5% 1,384,183 79.8% 1,420,184 78.9% Include: trade bills(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 117,252 6.7 148,832 8.6 195,311 10.8 Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254,019 14.5 351,345 20.2 379,958 21.1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 100.0% 1,735,528 100.0% 1,800,142 100.0%
(1) Include discounted bills and bills related to our trade Ñnance business. Corporate banking constitutes a signiÑcant part of our business. As of December 31, 2003, 2004 and 2005, we had corporate loans and advances of RMB1,777,507 million, RMB1,653,647 million and RMB1,712,262 million, respectively, accounting for 82.3%, 77.0% and 76.6%, respectively, of our total loans and advances to customers. The decrease in corporate loans and advances from 2003 to 2004 was principally the result of our disposal of non-performing loans and policy-related loans to Cinda, the PBOC and China Orient in 2004. See ""Our Restructuring''. The increase in corporate loans and advances from 2004 to 2005 was primarily due to our continued eÅorts to expand our corporate lending business. Corporate loans and advances for our domestic operations accounted for a signiÑcant portion of our total corporate loans and advances. As of December 31, 2003, 2004 and 2005, corporate loans and advances for our domestic operations were RMB1,496,052 million, RMB1,384,183 million and RMB1,420,184 million, respectively, representing 85.5%, 79.8% and 78.9%, respectively, of our total domestic loans and advances. As of December 31, 2003, 2004 and 2005, we had trade bills of RMB142,557 million, RMB177,738 million and RMB225,026 million, respectively, representing 6.6%, 8.3% and 10.1%, respectively, of our total loans and advances to customers. Trade bills increased by 24.7% from RMB142,557 million as of December 31, 2003 to RMB177,738 million as of December 31, 2004, and by 26.6% from RMB177,738 million as of December 31, 2004 to RMB225,026 million as of
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
December 31, 2005. The increase in trade bills in 2004 and 2005 was primarily the result of the growth of trade bills for our domestic operations, which increased by 26.9% from RMB117,252 million as of December 31, 2003 to RMB148,832 million as of December 31, 2004, and by 31.2% from RMB148,832 million as of December 31, 2004 to RMB195,311 million as of December 31, 2005. The growth of trade bills for our domestic operations was primarily due to increased market demand for discounted bills, as well as our focus on expanding our discounted bills, trade-related services and trade Ñnance business.
As of December 31, 2003, 2004 and 2005, personal loans and advances were RMB383,393 million, RMB494,041 million and RMB523,003 million, respectively, accounting for 17.7%, 23.0% and 23.4%, respectively, of our total loans and advances to customers. Personal loans and advances increased by 28.9% from RMB383,393 million as of December 31, 2003 to RMB494,041 million as of December 31, 2004, and increased by 5.9% from RMB494,041 million as of December 31, 2004 to RMB523,003 million as of December 31, 2005. The increase in our personal loans and advances was primarily the result of the growth of personal loans and advances for our domestic operations, which increased by 38.3% from RMB254,019 million as of December 31, 2003 to RMB351,345 million as of December 31, 2004, and by 8.1% from RMB351,345 million as of December 31, 2004 to RMB379,958 million as of December 31, 2005. The increase in personal loans and advances for our domestic operations was principally the result of our focus on enhancing and expanding our personal lending business and the continued growth of the PRC personal banking sector.
Personal loans and advances made by our overseas operations accounted for a signiÑcant portion of our total personal loans and advances. Personal loans and advances from our overseas operations primarily relate to BOCHK's lending business.
Loan Concentration by Industry and Product
Corporate Loans and Advances
Our corporate loans and advances consist of loans and advances to customers in a broad range of industries. Loans and advances to customers in the manufacturing, commerce and services, real estate, energy, mining and agriculture, and transportation and logistics sectors represent the largest components of our total corporate loans and advances. As of December 31, 2005, loans and advances in these Ñve sectors accounted for 84.5% of our total corporate loans and
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
advances and 85.8% of our corporate loans and advances for our domestic operations. The following table sets forth our corporate loans and advances by industry as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Manufacturing MetalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,631 4.2% 88,816 5.4% 97,465 5.7% TextilesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,567 4.3 60,834 3.7 62,097 3.6 Petroleum and chemicals ÏÏÏÏÏÏÏÏÏ 71,438 4.0 82,348 5.0 81,833 4.8 ElectronicsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,572 2.8 71,172 4.3 68,337 4.0 Machinery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,899 3.2 42,207 2.6 62,201 3.6 MedicalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,585 1.4 14,557 0.9 15,773 0.9 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205,656 11.6 163,798 9.9 143,704 8.4 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 559,348 31.5% 523,732 31.8% 531,410 31.0% Commerce and services ÏÏÏÏÏÏÏÏÏÏÏÏ 430,993 24.2 348,432 21.1 301,863 17.6 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 216,734 12.2 187,110 11.3 190,297 11.1 Energy, mining and agriculture ÏÏÏÏÏÏ 188,821 10.6 203,544 12.3 230,854 13.5 Transportation and logistics ÏÏÏÏÏÏÏÏÏ 177,664 10.0 185,449 11.2 193,428 11.3 Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,465 4.2 87,731 5.3 91,924 5.4 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,548 2.5 36,059 2.2 36,050 2.1 Financial services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,261 2.7 46,518 2.8 96,245 5.6 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,673 2.1 35,072 2.0 40,191 2.4% Total corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,777,507 100.0% 1,653,647 100.0% 1,712,262 100.0%
(1) Primarily include food, furniture, general appliance and transportation equipment manufacturing. The following table sets forth our corporate loans and advances by industry for our domestic operations as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Manufacturing MetalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,339 5.0% 88,662 6.4% 96,156 6.8% TextilesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,884 5.0 58,821 4.2 57,866 4.1 Petroleum and chemicals ÏÏÏÏÏÏÏÏÏ 69,289 4.6 80,116 5.8 78,557 5.5 ElectronicsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,204 3.1 65,856 4.8 61,077 4.3 Machinery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,740 3.7 42,028 3.0 60,547 4.3 MedicalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,585 1.6 14,557 1.1 15,773 1.1 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183,687 12.3 147,503 10.7 121,141 8.5 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 528,728 35.3% 497,543 36.0% 491,117 34.6%
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Commerce and services ÏÏÏÏÏÏÏÏÏÏÏÏ 366,279 24.5 284,772 20.6 255,460 18.0 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127,368 8.5 100,932 7.3 96,390 6.8 Energy, mining and agriculture ÏÏÏÏÏÏ 169,948 11.4 186,942 13.5 210,281 14.8 Transportation and logistics ÏÏÏÏÏÏÏÏÏ 152,575 10.2 158,762 11.5 165,396 11.6 Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,465 5.0 87,731 6.3 91,924 6.5 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,539 2.3 27,938 2.0 30,089 2.1 Financial services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,873 2.5 32,079 2.3 77,237 5.4 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,277 0.3 7,484 0.5 2,290 0.2 Total corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,496,052 100.0% 1,384,183 100.0% 1,420,184 100.0%
(1) Primarily include food, furniture, general appliance and transportation equipment manufacturing. Loans and advances to customers in the manufacturing sector represent the largest portion of our corporate loans and advances portfolio, accounting for 31.5%, 31.8%, and 31.0%, respectively, of our total corporate loans and advances as of December 31, 2003, 2004 and 2005. As of the same dates, loans and advances to customers in the manufacturing sector for our domestic operations accounted for 35.3%, 36.0% and 34.6%, respectively, of our corporate loans and advances to customers for our domestic operations. 92.4% of our loans and advances to customers in the manufacturing sector were contributed by our domestic operations as of December 31, 2005. Loans and advances to customers in the commerce and services sector account for a signiÑcant portion of our corporate loans and advances, reÖecting our traditional focus on foreign currency related businesses. As of December 31, 2003, 2004 and 2005, loans and advances to customers in the commerce and services sector accounted for 24.2%, 21.1% and 17.6%, respectively, of our total corporate loans and advances, and 24.5%, 20.6% and 18.0%, respectively, of our corporate loans and advances for our domestic operations. In recent years, we have been limiting our lending in the commerce and services sector in the PRC. As a result of our ongoing eÅorts to increase our lending to lower risk industries and control our exposure to higher risk industries, as of December 31, 2003, 2004 and 2005, loans and advances to the energy, mining and agriculture sector accounted for 10.6%, 12.3% and 13.5%, respectively, of our corporate loans and advances, while loans and advances to the transportation and logistics sector accounted for 10.0%, 11.2% and 11.3%, respectively, of our corporate loans and advances. In particular, loans and advances to the energy, mining and agriculture sector, accounted for 11.4%, 13.5% and 14.8%, respectively, of our corporate loans and advances for our domestic operations as of December 31, 2003, 2004 and 2005. See ""Ì Loan Quality Ì IdentiÑed Impaired Loans and Advances to Customers Ì IdentiÑed Impaired Loans and Advances by Industry and Product Type for Our Domestic Operations''. Loans and advances to the real estate sector accounted for 12.2%, 11.3% and 11.1%, respectively, of our corporate loans and advances. A signiÑcant portion of our real estate loans were contributed by our overseas operations, mainly BOCHK. Real estate loans in our domestic operations, accounted for 8.5%, 7.3% and 6.8% of our domestic corporate loans and advances as of December 31, 2003, 2004 and 2005. Since 2004, we have been limiting our lending in the real estate sector in the PRC in response to the PRC macroeconomic policies.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Loans and advances to Ñnancial services for our domestic operations increased from RMB 32,079 million as of December 31, 2004 to RMB 77,237 million as of December 31, 2005, largely as a result of the growth in bill re-discounting business.
Personal Loans and Advances
Our personal loans and advances primarily consist of residential mortgage loans, credit card loans and others. The following table sets forth our personal loans and advances by product type as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 275,303 71.8% 360,595 73.0% 413,007 79.0% Credit cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,944 1.3 5,973 1.2 6,785 1.3 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 103,146 26.9 127,473 25.8 103,211 19.7 Total personal loans and advances ÏÏ 383,393 100.0% 494,041 100.0% 523,003 100.0%
The following table sets forth our personal loans and advances for our domestic operations by product type as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159,314 62.7% 240,640 68.5% 286,829 75.5% Credit cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 931 0.4 1,441 0.4 1,929 0.5 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93,774 36.9 109,264 31.1 91,200 24.0 Total personal loans and advances ÏÏ 254,019 100.0% 351,345 100.0% 379,958 100.0%
Mortgage loans are one of our core personal banking products, representing 71.8%, 73.0% and 79.0%, respectively, of our total personal loans and advances as of December 31, 2003, 2004 and 2005. Our mortgage loans increased by 31.0% from RMB275,303 million as of December 31, 2003 to RMB360,595 million as of December 31, 2004, and by 14.5% from RMB360,595 million as of December 31, 2004 to RMB413,007 million as of December 31, 2005. The growth in mortgage loans was primarily due to the growth of mortgage loans for our domestic operations, which increased by 51.0% from RMB159,314 million as of December 31, 2003 to RMB240,640 million as of December 31, 2004, and by 19.2% from RMB240,640 million as of December 31, 2004 to RMB286,829 million as of December 31, 2005. Domestic mortgage loans increased primarily as a result of the continued growth in domestic residential mortgage market and our focus on expanding our domestic residential mortgage business. As of December 31, 2003, 2004 and 2005, mortgage loans for our domestic operations accounted for 62.7%, 68.5% and 75.5%, respectively, of total domestic personal loans and advances.
Mortgage loans for our overseas operations account for a signiÑcant portion of our total mortgage loans, which relates primarily to BOCHK's mortgage lending business.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Other personal loans primarily include automobile loans, loans to individuals for business purposes and education loans. Other loans accounted for 26.9% of our total personal loans and advances as of December 31, 2003, compared to 25.8% as of December 31, 2004, and 19.7% as of December 31, 2005. The decrease in other personal loans in 2005 was primarily due to the decrease in the outstanding balance of automobile loans. While we intend to continue to cautiously develop our automobile loan business, we have been taking measures to control our exposure to automobile loans in response to the recent unfavorable market environment in the PRC.
Loan Distribution by Currency We provide loans and advances to customers in Renminbi and certain foreign currencies. The following table sets forth our loans and advances to customers by currency as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,321,097 61.1% 1,378,760 64.2% 1,477,859 66.1% Foreign currency U.S. dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,981 19.3 353,001 16.4 358,497 16.0 Hong Kong dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 313,092 14.5 310,491 14.5 319,212 14.3 Euro ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,984 2.0 47,223 2.2 34,952 1.6 Japanese yen ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,307 1.9 37,059 1.7 25,419 1.1 British pound ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,161 0.2 4,970 0.2 4,228 0.2 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,278 1.0 16,184 0.8 15,098 0.7 Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 839,803 38.9 768,928 35.8 757,406 33.9 Loans and advances to customersÏÏ 2,160,900 100.0% 2,147,688 100.0% 2,235,265 100.0%
The following table sets forth our loans and advances to customers by currency for our domestic operations as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,320,843 75.5% 1,378,343 79.4% 1,475,821 82.0% Foreign currency U.S. dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 351,333 20.1 275,214 15.9 269,902 15.0 Hong Kong dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,059 0.3 10,386 0.6 5,705 0.3 Euro ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,234 2.0 36,911 2.1 24,799 1.4 Japanese yen ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,840 1.9 30,983 1.8 20,791 1.1 British pound ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,776 0.1 1,877 0.1 1,181 0.1 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,986 0.1 1,814 0.1 1,943 0.1 Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 429,228 24.5 357,185 20.6 324,321 18.0 Loans and advances to customersÏÏÏ 1,750,071 100.0% 1,735,528 100.0% 1,800,142 100.0%
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Substantially all of our Renminbi-denominated loans and advances to customers are derived from our domestic operations. These loans and advances have increased signiÑcantly in recent years due to our strategic focus on the Renminbi-denominated lending business. As of December 31, 2003, 2004 and 2005, Renminbi-denominated loans and advances to customers for our domestic operations were RMB1,320,843 million, RMB1,378,343 million and RMB1,475,821 million, respectively, representing 75.5%, 79.4% and 82.0%, respectively, of total loans and advances to customers for our domestic operations. Substantially all of our foreign currency-denominated loans and advances for our domestic operations are corporate loans and advances.
Maturity of Loans and Advances A signiÑcant portion of our loans and advances to customers consists of loans and advances that are due within one year. As of December 31, 2005, these loans and advances represented 52.7% of our total loans and advances to customers. The following table sets forth the scheduled maturities (time remaining until maturity) of our loans and advances to customers as of the date indicated.
As of December 31, 2005 Due less Due between Due more than 1 year 1 and 5 years than 5 years Overdue(1) Total (in millions of RMB) Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,177,420 518,316 461,684 77,845 2,235,265 Total loans and advances to customers for our domestic operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,062,790 340,366 324,149 72,837 1,800,142 Corporate loans and advances 988,230 214,389 154,709 62,856 1,420,184 Personal loans and advancesÏÏÏ 74,560 125,977 169,440 9,981 379,958
(1) For purposes of this table, loans and advances to customers are considered overdue only if principal payment is overdue. In addition, for loans and advances to customers that are repayable by installments, only the portion of the loan that is actually overdue is reported as overdue. Any part of the loan that is not due is reported according to residual maturity.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Borrower Concentration Under the current PRC banking regulations, the aggregate amount of our loan exposure to any borrower may not exceed 10% of our net regulatory capital, and the aggregate amount of our loan exposure to the top ten borrowers may not exceed 50% of our net regulatory capital. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Other Operating Ratios''. To comply with the relevant regulatory requirements and control our credit risks associated with borrower concentration, we have established a single consolidated credit limit for various lending products and services we provide to each of our customers. We are currently in compliance with the applicable regulatory requirements regarding borrower concentration. The following table sets forth our ten largest single borrowers as of the date indicated. All of our ten largest single borrowers are customers of our domestic operations.
As of December 31, 2005 Principal amount % of total loans Industry outstanding(1) and advances (in millions of RMB, except percentages) Customer A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 15,439 0.7% Customer B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy, mining and agriculture 10,462 0.5 Customer C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 9,056 0.4 Customer D ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 8,440 0.4 Customer E ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy, mining and agriculture 7,770 0.3 Customer F ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation logistics 7,542 0.3 Customer G ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation logistics 7,346 0.3 Customer H ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 6,850 0.3 Customer I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy, mining and agriculture 5,382 0.2 Customer J ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation logistics 5,155 0.2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,442 3.6%
(1) Does not include loans and advances to the borrower's aÇliated or associated entities.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Loans and Advances by Size of Exposures to Single Corporate Borrowers for Our Domestic Operations
As of December 31, 2005, 66.3% and 35.6% of the aggregate balances of corporate loans and advances for our domestic operations were made to single borrowers with aggregate outstanding loan amounts with us of over RMB100 million and RMB500 million, respectively. The following table sets forth the outstanding corporate loans and advances for our domestic operations by size of exposures to single borrowers as of the date indicated:
As of December 31, 2005 Amount % of total (in millions of RMB, except percentages) Domestic Outstanding loans and advances to corporate borrowers with aggregate outstanding loan amounts of: Up to and including RMB10 million ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,221 5.3% Above RMB10 million up to and including RMB50 million ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230,172 16.2 Above RMB50 million up to and including RMB100 millionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173,156 12.2 Above RMB100 million up to and including RMB500 millionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 435,668 30.7 Above RMB500 million up to and including RMB1,000 million ÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,724 11.3 Above RMB1,000 millionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,243 24.3 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,420,184 100.0%
Loans and Advances to Customers by Collateral Type for Our Domestic Operations
As of December 31, 2005, 33.3% of loans and advances to customers for our domestic operations were guaranteed. Guarantors are generally subject to the same credit approval process as borrowers.
As of December 31, 2005, 46.1% of loans and advances to customers for our domestic operations were secured by collateral. We generally only lend up to a certain percentage of the appraised value of the collateral, and such percentage depends on the type of collateral. See ""Risk Management Ì Credit Risk Management Ì Credit Origination and Assessment Ì Collateral Appraisal''.
As of December 31, 2005, 20.6% of loans and advances to customers for our domestic operations were unsecured.
Loan Quality
Overview
Our proÑtability has been signiÑcantly aÅected by the asset quality of our loan portfolio. For Ñnancial reporting purposes under IFRS, we test our loans and advances for impairment at least semi-annually in accordance with IAS 39. For asset quality management and for PRC regulatory reporting purposes, we classify our loans and advances as ""pass'', ""special-mention'', ""substandard'', ""doubtful'' or ""loss'' in accordance with the Ñve-category loan classiÑcation system under the Loan ClassiÑcation Principles. See ""Supervision and Regulation Ì PRC Supervision and Regulation Ì Prudent Operating Requirements Ì Loan ClassiÑcation''.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
IdentiÑed Impaired Loans and Advances to Customers
Under IAS 39, loans and advances to customers are considered impaired, and we recognize losses on loans and advances, if there is objective evidence of impairment resulting in a measurable decrease in estimated future cash Öows from loans and advances. IdentiÑed impaired loans and advances are those loans for which objective evidence of impairment has been identiÑed as of the balance sheet date. Impaired loans and advances also include those loans and advances that are impaired but had not yet been identiÑed as such as of the balance sheet date. We measure impairment losses on identiÑed impaired loans and advances on an individual, as well as a collective, basis. Impairment losses related to identiÑed impaired loans and advances that are individually signiÑcant are measured individually. Those related to identiÑed impaired loans and advances that are not individually signiÑcant, such as smaller-balance corporate loans and personal loans that have been identiÑed as impaired, are measured through a collective assessment. We measure the estimated impairment losses related to all other loans that are impaired but not yet identiÑed as such at the balance sheet date through a collective assessment. For a further description of our accounting policies with respect to impairment losses on loans and advances, see ""Financial Information Ì Critical Accounting Policies Ì Impairment Losses on Loans and Advances'' and notes III.11 and V.1 of Section 6 to Appendix I Ì ""Accountants' Report''.
Impairment losses under PRC GAAP and IFRS are calculated on the same basis. Under both PRC GAAP and IFRS, allowance for impairment losses on loans and advances consists of two components, individually assessed allowance and collectively assessed allowance. Allowance for impairment losses on loans and advances is individually assessed using the discounted cash Öow method and collectively assessed using migration models.
We assess impairment losses for individually signiÑcant identiÑed impaired corporate loans where objective evidence of impairment exists. The thresholds of signiÑcance adopted by us for this purpose were approximately RMB20 million, RMB15 million and RMB15 million (certain overseas operations used approximately RMB10 million for the year ended December 31, 2005) for each of the years ended 2003, 2004 and 2005, respectively. We may amend the threshold from time to time as circumstances related to the composition of the loan portfolio and our assessment of risk change.
The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Individually assessed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260,241 72.6% 89,768 75.8% 83,242 76.0% Collectively assessed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,977 27.4 28,615 24.2 26,288 24.0 Total identiÑed impaired loans and advances ÏÏÏÏÏ 358,218 100.0% 118,383 100.0% 109,530 100.0% Impaired loan ratios: Individually assessed identified impaired loans as a percentage of total loans and advancesÏÏÏÏÏÏ 12.1% 4.2% 3.7% Collectively assessed identified impaired loans as a percentage of total loans and advancesÏÏÏÏÏÏ 4.5% 1.3% 1.2% Impaired loan ratios(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16.6% 5.5% 4.9%
(1) Impaired loan ratios are calculated by dividing total identiÑed impaired loans and advances by outstanding loans and advances to customers.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances for our domestic operations: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Individually assessed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 241,200 74.4% 81,747 78.2% 78,309 76.5% Collectively assessed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,052 25.6 22,806 21.8 24,050 23.5 Total identiÑed impaired loans and advances ÏÏÏÏÏ 324,252 100.0% 104,553 100.0% 102,359 100.0% Impaired loan ratios: Individually assessed identified impaired loans as a percentage of total loans and advancesÏÏÏÏÏÏ 13.8% 4.7% 4.4% Collectively assessed identified impaired loans as a percentage of total loans and advancesÏÏÏÏÏÏ 4.7% 1.3% 1.3% Impaired loan ratios(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.5% 6.0% 5.7%
(1) Impaired loan ratios are calculated by dividing total identiÑed impaired loans and advances by outstanding loans and advances to customers. The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances, which are collectively assessed for our domestic operations: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Collectively assessed Corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,629 89.9% 15,022 65.9% 14,577 60.6% Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,423 10.1 7,784 34.1 9,473 39.4 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,052 100.0% 22,806 100.0% 24,050 100.0%
IdentiÑed Impaired Loans and Advances by Geography The following table sets forth, as of the dates indicated, the geographic breakdown of our identified impaired loans and advances based on the location of the operations that originated the loan: As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) DomesticÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324,252 90.5% 18.5% 104,553 88.3% 6.0% 102,359 93.5% 5.7% Overseas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,966 9.5 8.3% 13,830 11.7 3.4% 7,171 6.5 1.6% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 358,218 100.0% 16.6% 118,383 100.0% 5.5% 109,530 100.0% 4.9%
(1) Impaired loan ratios for each geographic region are calculated by dividing the amount of identiÑed impaired loans and advances by the total outstanding loans and advances for that geographic region.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances for our domestic operations by geography:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,140 20.7% 18.9% 22,600 21.6% 7.2% 17,699 17.3% 5.5% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,645 11.3 26.3% 13,396 12.8 10.4% 12,582 12.3 9.6% Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,087 28.1 14.6% 28,595 27.3 4.2% 27,811 27.2 3.9% Central and Southern China ÏÏÏÏÏ 98,759 30.5 21.8% 26,611 25.5 6.1% 30,611 29.9 6.9% Western ChinaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,621 9.4 17.0% 13,351 12.8 7.5% 13,656 13.3 7.5% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324,252 100.0% 18.5% 104,553 100.0% 6.0% 102,359 100.0% 5.7%
(1) Impaired loan ratios for each geographic region are calculated by dividing the amount of identiÑed impaired loans and advances by the total outstanding loans and advances for that geographic region. The following table sets forth, as of the dates indicated, the geographic distribution of our individually assessed identiÑed impaired loans and advances for our domestic operations based on the location of the operations that originated the loan:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,637 20.6% 14.0% 17,492 21.3% 5.6% 13,794 17.5% 4.3% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,654 12.7 22.0% 11,262 13.8 8.8% 8,848 11.3 6.7% Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,302 28.7 11.1% 21,238 26.0 3.1% 21,906 28.0 3.0% Central and Southern China ÏÏÏÏÏ 68,302 28.3 15.0% 22,128 27.1 5.1% 24,398 31.2 5.5% Western ChinaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,305 9.7 13.0% 9,627 11.8 5.4% 9,363 12.0 5.2% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 241,200 100.0% 13.8% 81,747 100.0% 4.7% 78,309 100.0% 4.4%
(1) Impaired loan ratios for each geographic region are calculated by dividing individually assessed identiÑed impaired loans and advances by total outstanding loans and advances for that geographic region.
Movements in IdentiÑed Impaired Loans and Advances The following table sets forth movements in identiÑed impaired loans and advances for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Balance at the beginning of the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 436,163 358,218 118,383 Increase during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,762 76,583 41,190 Reduction during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (123,707) (316,418) (50,043) Balance at the end of the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 358,218 118,383 109,530
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth movements in identiÑed impaired loans and advances for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic Balance at the beginning of the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 364,279 324,252 104,553 Increase during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,632 74,077 39,721 Reduction during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77,659) (293,776) (41,915) Balance at the end of the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324,252 104,553 102,359
Reduction of identiÑed impaired loans and advances during the year includes write-oÅs, disposals related to our restructuring, recoveries, upgrades and other disposals of impaired loans. In addition to write-oÅs and disposals of identiÑed impaired loans, recoveries through cash repayment also accounted for a portion of the reduction of the loans. The table below sets forth our write-oÅs and restructuring-related disposals for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB, except percentages) Write-oÅs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63,905) (9,455) (4,852) Restructuring-related disposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (270,636) Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63,905) (280,091) (4,852) As a percentage of reductionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51.7% 88.5% 9.7%
(1) In 2003, write-oÅs included the sale by one of our overseas branches of impaired loans and advances with an aggregate gross carrying value of RMB14,338 million. These impaired loans and advances were previously transferred by BOCHK to such overseas branch.
The table below sets forth our write-oÅs and restructuring-related disposals for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB, except percentages) Domestic Write-oÅsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37,573) (2,915) (3,527) Restructuring-related disposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (269,323) Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37,573) (272,238) (3,527) As a percentage of reductionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48.4% 92.7% 8.4% Our identiÑed impaired loans and advances decreased by 67.0% from RMB358,218 million as of December 31, 2003 to RMB118,383 million as of December 31, 2004. This decrease was primarily the result of a reduction during the year of RMB316,418 million in connection with our disposal of non-performing loans and policy-related loans with an aggregate gross carrying value of RMB270,636 million. We added RMB76,583 million of identiÑed impaired loans in 2004, compared to RMB45,762 million in 2003. This increase resulted primarily from certain macroeconomic policies in the PRC, which aÅected the Ñnancial status of borrowers in sectors such as steel and real estate, as
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
well as our improved risk management system, which enabled us to more eÅectively identify impaired loans and advances. Our identiÑed impaired loans and advances decreased by 7.5% from RMB118,383 million as of December 31, 2004 to RMB109,530 million as of December 31, 2005, reÖecting primarily a reduction of RMB50,043 million, which was partially oÅset by the addition of RMB41,190 million of identiÑed impaired loans during 2005, of which RMB39,721 million were from our domestic operations. The smaller increase in our identiÑed impaired loans and advances in 2005, as compared to 2004, was primarily due to our eÅorts to reduce our exposure to higher risk loans, for example, special- mention loans, through our increased focus on collections of special-mention loans. In 2005, we completed centralization of corporate loan classiÑcation, and the increase of identiÑed impaired loans and advances during 2005 reÖected the centralized classiÑcation of certain loans and advances as non-performing loans, which was subsequently included in our identiÑed impaired loans and advances.
IdentiÑed Impaired Loans and Advances by Customer Type The following table sets forth our identiÑed impaired loans and advances by customer type as of the dates indicated:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan Amount % of total ratio(1) Amount % of total ratio(1) Amount % of total ratio(1) (in millions of RMB, except percentages) Corporate loans and advancesÏÏÏÏ 345,778 96.5% 19.5% 108,230 91.4% 6.5% 98,888 90.3% 5.8% Personal loans and advances ÏÏÏÏÏ 12,440 3.5 3.2% 10,153 8.6 2.1% 10,642 9.7 2.0% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 358,218 100.0% 16.6% 118,383 100.0% 5.5% 109,530 100.0% 4.9%
(1) Impaired loan ratios for each customer type are calculated by dividing the amount of identiÑed impaired loans by the total outstanding loans and advances for that customer type.
The following table sets forth our identiÑed impaired loans and advances for our domestic operations by customer type as of the dates indicated:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan Amount % of total ratio(1) Amount % of total ratio(1) Amount % of total ratio(1) (in millions of RMB, except percentages) Domestic Corporate loans and advancesÏÏÏÏ 315,829 97.4% 21.1% 96,769 92.6% 7.0% 92,886 90.7% 6.5% Personal loans and advances ÏÏÏÏÏ 8,423 2.6 3.3% 7,784 7.4 2.2% 9,473 9.3 2.5% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324,252 100.0% 18.5% 104,553 100.0% 6.0% 102,359 100.0% 5.7%
(1) Impaired loan ratios for each customer type are calculated by dividing the amount of identiÑed impaired loans and advances by total outstanding loans and advances for that customer type. IdentiÑed impaired corporate loans and advances decreased signiÑcantly from RMB345,778 million as of December 31, 2003 to RMB108,230 million as of December 31, 2004, primarily as a result of our disposal of non-performing loans and policy-related loans to Cinda, the PBOC and China Orient in June 2004 and September 2004 in connection with our restructuring. IdentiÑed impaired corporate loans and advances continued to decrease by 8.6% from RMB108,230 million as of December 31, 2004 to RMB98,888 million as of December 31, 2005.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
IdentiÑed impaired personal loans and advances decreased by 18.4% from RMB12,440 million as of December 31, 2003 to RMB10,153 million as of December 31, 2004, primarily as a result of our disposal of non-performing loans in connection with our restructuring. IdentiÑed impaired personal loans and advances increased by 4.8% from RMB10,153 million as of December 31, 2004 to RMB10,642 million as of December 31, 2005, mainly due to an increase in impaired automobile loans.
IdentiÑed Impaired Loans and Advances by Industry and Product Type for Our Domestic Operations The following table sets forth, as of the dates indicated, our identiÑed impaired corporate loans and advances for our domestic operations by industry: As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentage) Domestic Manufacturing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127,175 40.3% 24.1% 32,444 33.5% 6.5% 33,188 35.7% 6.8% Commerce and servicesÏÏÏÏÏÏÏÏÏÏ 122,784 38.9 33.5% 26,344 27.2 9.3% 25,443 27.4 10.0% Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,060 7.0 17.3% 13,453 13.9 13.3% 12,763 13.7 13.2% Energy, mining and agricultureÏÏÏÏ 19,619 6.2 11.5% 6,588 6.8 3.5% 6,665 7.2 3.2% Transportation and logistics ÏÏÏÏÏÏ 7,349 2.3 4.8% 9,729 10.1 6.1% 7,759 8.4 4.7% Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,019 1.9 8.0% 5,564 5.7 6.3% 4,627 5.0 5.0% Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,190 1.6 15.0% 2,569 2.7 9.2% 2,226 2.4 7.4% Financial servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,618 1.1 9.8% 72 0.1 0.2% 215 0.2 0.3% Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,015 0.7 47.1% 6 0.0 0.1% Ì Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315,829 100.0% 21.1% 96,769 100.0% 7.0% 92,886 100.0% 6.5% Among which: Individually assessed ÏÏÏÏÏÏ 241,200 76.4% 16.1% 81,747 84.5% 5.9% 78,309 84.3% 5.5% Collectively assessed ÏÏÏÏÏÏ 74,629 23.6% 5.0% 15,022 15.5% 1.1% 14,577 15.7% 1.0%
(1) Impaired loan ratios are calculated by dividing the amount of identiÑed impaired loans by total outstanding loans and advances in the industry. As of December 31, 2005, a signiÑcant portion of our identiÑed impaired corporate loans and advances for our domestic operations were concentrated in the manufacturing, commerce and services, real estate and transportation and logistics sectors. As of December 31, 2005, the aggregate amount of our identiÑed impaired loans and advances in these sectors accounted for 85.2% of the total amount of our identiÑed impaired corporate loans and advances for our domestic operations. Of these sectors, the real estate and commerce and services sectors had the highest impaired loan ratios.
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The following table sets forth, as of the dates indicated, our individually assessed identiÑed impaired corporate loans and advances for our domestic operations by industry:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan % of loan Amount % of total ratio(1) Amount % of total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Manufacturing Metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,505 3.9% 12.8% 5,192 6.4% 5.9% 2,516 3.2% 2.6% Textiles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,553 9.8 31.5% 2,387 2.9 4.1% 4,323 5.5 7.5% Petroleum and chemicals ÏÏÏÏÏÏÏÏÏÏÏ 12,784 5.3 18.5% 3,260 4.0 4.1% 2,715 3.5 3.5% Electronics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,748 2.4 12.4% 3,986 4.9 6.1% 5,398 6.9 8.8% MachineryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,560 4.0 17.2% 2,883 3.5 6.9% 2,731 3.5 4.5% Medical ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77 0.0 0.3% 644 0.8 4.4% 1,042 1.3 6.6% Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,801 18.6 24.4% 8,700 10.6 5.9% 8,265 10.6 6.8% Sub-totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 106,028 44.0 20.1% 27,052 33.1 5.4% 26,990 34.5 5.5% Commerce and servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,659 35.9 23.7% 22,053 27.0 7.7% 21,115 27.0 8.3% Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,449 8.1 15.3% 12,182 14.9 12.1% 11,201 14.3 11.6% Energy, mining and agriculture ÏÏÏÏÏÏÏÏ 12,354 5.1 7.3% 4,168 5.1 2.2% 5,662 7.2 2.7% Transportation and logistics ÏÏÏÏÏÏÏÏÏÏ 6,758 2.8 4.4% 9,218 11.3 5.8% 7,493 9.6 4.5% Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,334 1.8 5.7% 4,927 6.0 5.6% 3,768 4.8 4.1% Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,092 1.7 11.8% 2,107 2.6 7.5% 1,883 2.4 6.3% Financial servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,526 0.6 4.1% 40 0.0 0.1% 197 0.2 0.3% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 241,200 100.0% 16.1% 81,747 100.0% 5.9% 78,309 100.0% 5.5%
(1) Impaired loan ratios are calculated by dividing the amount of individually assessed identiÑed impaired loans by total outstanding loans and advances in the industry.
The following table sets forth, as of the dates indicated, our identiÑed impaired personal loans and advances for our domestic operations by product type:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,003 35.7% 1.9% 3,608 46.4% 1.5% 3,837 40.5% 1.3% Credit card loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262 3.1 28.1% 218 2.8 15.1% 228 2.4 11.8% Others(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,158 61.2 5.5% 3,958 50.8 3.6% 5,408 57.1 5.9% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,423 100.0% 3.3% 7,784 100.0% 2.2% 9,473 100.0% 2.5%
(1) Impaired loan ratios are calculated by dividing the amount of identiÑed impaired loans by total outstanding loans and advances for the product type.
(2) Mainly includes automobile loans, loans to individuals for business purposes and education loans.
The impaired loan ratios of mortgage loans for our domestic operations continued to decrease from 1.9% as of December 31, 2003 to 1.5% as of December 31, 2004, and from 1.5% as of December 31, 2004 to 1.3% as of December 31, 2005.
As of December 31, 2003, 2004 and 2005, the impaired loan ratios for our credit card loans for our domestic operations continued to decrease from 28.1% as of December 31, 2003 to 15.1% as of December 31, 2004, and to 11.8% as of December 31, 2005. A signiÑcant portion of our impaired credit card loans is related to our quasi-credit cards.
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As of December 31, 2003, 2004 and 2005, the impaired loan ratios for our other personal loans and advances for our domestic operations were 5.5%, 3.6% and 5.9%, respectively. A signiÑcant portion of these identiÑed impaired loans and advances is associated with our automobile loans mainly due to the recent unfavorable market environment in the PRC.
IdentiÑed Impaired Loans and Advances by Currency The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances by currency:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 204,846 57.2% 15.5% 84,469 71.4% 6.1% 87,980 80.3% 6.0% Foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,372 42.8 18.3% 33,914 28.6 4.4% 21,550 19.7 2.8% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 358,218 100.0% 16.6% 118,383 100.0% 5.5% 109,530 100.0% 4.9%
(1) Impaired loan ratios for each currency category are calculated by dividing the amount of identiÑed impaired loans by total outstanding loans and advances in that currency category. The following table sets forth, as of the dates indicated, our identiÑed impaired loans and advances for our domestic operations by currency:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired % of loan % of loan % of loan Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 204,846 63.2% 15.5% 84,469 80.8% 6.1% 87,980 86.0% 6.0% Foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119,406 36.8 27.8% 20,084 19.2 5.6% 14,379 14.0 4.4% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324,252 100.0% 18.5% 104,553 100.0% 6.0% 102,359 100.0% 5.7%
(1) Impaired loan ratios for each currency category are calculated by dividing the amount of identiÑed impaired loans by total outstanding loans and advances in that currency category.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Borrowers with the Largest Amount of IdentiÑed Impaired Loans and Advances The following table sets forth the ten single borrowers with the largest amount of identiÑed impaired loans and advances as of the date indicated: As of December 31, 2005 % of total Principal amount identiÑed Industry outstanding(1) impaired loans (in millions of RMB, except percentages) Customer A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 2,208 2.0% Customer B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 2,155 2.0 Customer C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 1,174 1.1 Customer D ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 679 0.6 Customer E ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 619 0.6 Customer FÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 618 0.6 Customer G ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 595 0.5 Customer H ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate 587 0.5 Customer I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 586 0.5 Customer JÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 579 0.5 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,800 8.9%
(1) Does not include loans and advances to the borrower's aÇliated or associated entities. The following table sets forth the ten single borrowers with the largest amount of identiÑed impaired loans and advances for our domestic operations as of the date indicated:
As of December 31, 2005 % of total Principal amount identiÑed Industry outstanding(1) impaired loans (in millions of RMB, except percentages) Domestic Customer A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 2,208 2.1% Customer B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 1,174 1.1 Customer C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 679 0.7 Customer D ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 618 0.6 Customer E ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commerce and services 595 0.6 Customer FÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate 587 0.6 Customer G ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 586 0.6 Customer H ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing 579 0.6 Customer I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate 569 0.6 Customer JÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transportation and logistics 556 0.5 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,151 8.0%
(1) Does not include loans and advances to the borrower's aÇliated or associated entities.
Allowance for Impairment Losses on Loans and Advances to Customers Allowance for impairment losses on loans and advances consists of two components, individually assessed allowance and collectively assessed allowance. Allowance for impairment losses on loans and advances is individually assessed using the discounted cash Öow method and collectively assessed using migration models. For a further discussion of individually assessed
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
allowance and collectively assessed allowance, see ""Financial Information Ì Critical Accounting Policies Ì Impairment Losses on Loans and Advances''. The following table sets forth our allowance for impairment losses on loans and advances as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Allowance for individually assessed identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,810 64.3% 35,699 47.7% 45,738 55.0% Allowance for collectively assessed identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,748 26.7 12,614 16.9 12,009 14.4 Allowance for loans and advances excluding identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏÏ 21,481 9.0 26,456 35.4 25,406 30.6 Total allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 239,039 100.0% 74,769 100.0% 83,153 100.0% Impaired loan coverage ratios: A/DÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59.1% 39.8% 54.9% B/EÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65.1% 44.1% 45.7% C/FÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.2% 1.3% 1.2% (A°B°C)/(D°E) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66.7% 63.2% 75.9%
A: Allowance for individually assessed identiÑed impaired loans and advances B: Allowance for collectively assessed identiÑed impaired loans and advances C: Allowance for loans and advances excluding identiÑed impaired loans and advances D: Individually assessed identiÑed impaired loans and advances E: Collectively assessed identiÑed impaired loans and advances F: Loans and advances excluding identiÑed impaired loans and advances The following table sets forth our allowance for impairment losses on loans and advances for our domestic operations as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Allowance for individually assessed identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,924 63.9% 31,539 47.0% 42,720 54.6% Allowance for collectively assessed identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,079 27.7 10,861 16.2 11,379 14.6 Allowance for loans and advances excluding identiÑed impaired loans and advances ÏÏÏÏÏÏÏÏÏ 18,755 8.4 24,758 36.8 24,094 30.8 Total allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,758 100.0% 67,158 100.0% 78,193 100.0% Impaired loan coverage ratios: A/DÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59.3% 38.6% 54.6% B/EÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74.7% 47.6% 47.3% C/FÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.3% 1.5% 1.4% (A°B°C)/(D°E) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.0% 64.2% 76.4%
A: Allowance for individually assessed identiÑed impaired loans and advances B: Allowance for collectively assessed identiÑed impaired loans and advances C: Allowance for loans and advances excluding identiÑed impaired loans and advances
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
D: Individually assessed identiÑed impaired loans and advances E: Collectively assessed identiÑed impaired loans and advances F: Loans and advances excluding identiÑed impaired loans and advances
The following table sets forth, as of the dates indicated, our allowance for impaired losses on identiÑed impaired loans and advances, which is collectively assessed for our domestic operations:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Allowance for collectively assessed identiÑed impaired loans and advances Corporate loans and advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,055 91.9% 7,290 67.1% 5,844 51.4% Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,024 8.1 3,571 32.9 5,535 48.6 Total allowanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,079 100.0% 10,861 100.0% 11,379 100.0%
Allowance for Impairment Losses on Loans and Advances by Geography
The following table sets forth, as of the dates indicated, the geographic distribution of our allowance for impairment losses on loans and advances based on the location of the operations that originated the loan. As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan % of coverage % of coverage % of coverage Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,758 93.6% 69.0% 67,158 89.8% 64.2% 78,193 94.0% 76.4% Overseas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,281 6.4 45.0% 7,611 10.2 55.0% 4,960 6.0 69.2% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 239,039 100.0% 66.7% 74,769 100.0% 63.2% 83,153 100.0% 75.9%
(1) Impaired loan coverage ratios are calculated by dividing the allowance by the amount of identiÑed impaired loans and advances in the geographic region.
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The following table sets forth, as of the dates indicated, the geographic distribution of our allowance for impairment losses on identiÑed impaired loans and advances for our domestic operations based on the location of the operations that originated the loan:
As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan % of coverage % of coverage % of coverage Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,399 19.7% 60.2% 9,697 22.9% 42.9% 10,624 19.6% 60.0% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,789 11.6 64.9% 5,903 13.9 44.1% 7,020 13.0 55.8% Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,269 27.9 62.9% 10,803 25.5 37.8% 12,482 23.1 44.9% Central and Southern China ÏÏÏÏÏÏ 64,730 31.6 65.5% 10,675 25.2 40.1% 16,929 31.3 55.3% Western China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,816 9.2 61.4% 5,322 12.5 39.9% 7,044 13.0 51.6% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205,003 100.0% 63.2% 42,400 100.0% 40.6% 54,099 100.0% 52.9%
(1) Impaired loan coverage ratios are calculated by dividing the allowance by the amount of identiÑed impaired loans and advances for the geographic region. The following table sets forth, as of the dates indicated, the geographic distribution of our individually assessed allowance for impairment losses on corporate loans and advances for our domestic operations based on the location of the operations that originated the loan. As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan % of coverage % of coverage % of coverage Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,316 19.1% 55.0% 7,265 23.0% 41.5% 8,680 20.3% 62.9% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,311 13.5 63.0% 4,887 15.5 43.4% 4,963 11.6 56.1% Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,986 28.7 59.1% 7,299 23.1 34.4% 9,763 22.9 44.6% Central and Southern China ÏÏÏÏÏÏ 41,965 29.4 61.4% 8,540 27.1 38.6% 14,195 33.2 58.2% Western China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,346 9.3 57.3% 3,548 11.3 36.9% 5,119 12.0 54.7% TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,924 100.0% 59.3% 31,539 100.0% 38.6% 42,720 100.0% 54.6%
(1) Impaired loan coverage ratios are calculated by dividing allowance by the amount of individually assessed identiÑed impaired loans and advances for the geographic region.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Movements in Allowance for Impairment Losses on Loans and Advances to Customers
The following table sets forth the movements in allowance for impairment losses on loans and advances to customers for the periods indicated: Year ended December 31, 2003 2004 2005 (in millions of RMB) Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 318,443 239,039 74,769 Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,100 23,812 11,486 Loans and advances written oÅ or transferred excluding those related to our restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63,905) (9,455) (4,852) Loans and advances transferred in relation to our restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (180,490) Ì Amounts recovered of loans and balances written oÅ in previous yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 731 2,507 2,954 Unwind of discount on allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,354) (644) (529) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (675) Transfer to capital reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32,976) Ì Ì Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 239,039 74,769 83,153
The following table sets forth movements in allowance for impairment losses on loans and advances to customers for our domestic operations for the periods indicated: Year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276,212 223,758 67,158 Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,333 26,926 15,346 Loans and advances written oÅ or transferred excluding those related to our restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37,573) (2,915) (3,527) Loans and advances transferred in relation to our restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (180,490) Ì Amounts recovered of loans and balances written oÅ in previous yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116 523 120 Unwind of discount on allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,354) (644) (396) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (508) Transfer to capital reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32,976) Ì Ì Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,758 67,158 78,193
Allowance for impairment losses on loans and advances decreased by 24.9% from RMB318,443 million as of January 1, 2003 to RMB239,039 million as of December 31, 2003, while allowance for impairment losses on loans and advances for our domestic operations decreased by 19.0% from RMB276,212 million to RMB223,758 million as of those dates. The decrease in allowance for impairment losses on loans and advances was principally the result of a RMB63,905 million reduction in allowance related to loans and advances written oÅ or transferred in 2003, including a RMB37,573 million reduction in allowance related to loans and advances written oÅ or transferred in 2003 for our domestic operations. The decrease also reÖected a RMB32,976 million transfer to capital surplus. The transfer to capital reserve of RMB32,976 million in 2003 was due to adjustments to the net carrying value as of December 31, 2003 of non- performing loans that the PRC Government has committed us to transfer to Cinda, the PBOC and China Orient as part of our Ñnancial restructuring. See ""Our Restructuring Ì Financial
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Restructuring''. In 2003, we made provision for impairment losses of RMB18,100 million. The provision for impairment losses for our domestic operations in 2003 was greater than our total provision for impairment losses because of write-backs and releases of allowance for impairment losses related to the recovery of certain impaired loans and advances for our overseas operations. As of December 31, 2003, our ratio of allowance for impairment losses on loans and advances to total identiÑed impaired loans and advances was 66.7%.
Allowance for impairment losses on loans and advances decreased by 68.7% from RMB239,039 million as of January 1, 2004 to RMB74,769 million as of December 31, 2004, while allowance for impairment losses on loans and advances for our domestic operations decreased substantially from RMB223,758 million to RMB67,158 million as of those dates. The decrease in allowance for impairment losses on loans and advances for both our entire bank and domestic operations was mainly due to a RMB180,490 million reduction in allowance related to loans and advances transferred as part of our Ñnancial restructuring in 2004. See ""Our Restructuring Ì Financial Restructuring''. In 2004, we made provision for impairment losses of RMB23,812 million, compared to RMB18,100 million in 2003. The Ñnancing restrictions to certain industries, which arose as a result of the implementation of PRC macroeconomic policies during 2004 to control lending to these sectors, impacted the asset quality of a number of companies in those industries. In particular, the increase in the provision for impairment losses during this period was primarily due to the downgrade of exposures to these industries, speciÑcally real estate, cement and steel manufacturing industries. In addition, we improved our risk management system which enabled us to more eÅectively identify loan impairment. For our domestic operations, we made provision for impairment losses of RMB26,926 million in 2004, compared to RMB19,333 million in 2003. The provision for impairment losses for our domestic operations in 2004 was greater than our total provision for impairment losses because of write-backs and releases of allowance for impairment losses related to the recovery of certain impaired loans and advances for our overseas operations. As of December 31, 2004, our ratio of allowance for impairment losses on loans and advances to total identiÑed impaired loans and advances was 63.2%.
Allowance for impairment losses on loans and advances increased by 11.2% from RMB74,769 million as of January 1, 2005 to RMB83,153 million as of December 31, 2005, while allowance for impairment losses on loans and advances for our domestic operations increased by 16.4% from RMB67,158 million to RMB78,193 million as of those dates. The increase in allowance for impairment losses on loans and advances was primarily the result of RMB11,486 million of provisions for impairment losses made in 2005, including provisions for impairment losses of RMB15,346 million for our domestic operations. We made less provision in 2005 for impairment losses for our domestic operations, primarily due to less gross addition of the identiÑed impaired loans and advances in 2005, as compared to 2004. We had less gross addition of identiÑed impaired loans and advances in 2005 primarily as a result of our continuous improvement in credit risk management, in particular of higher risk corporate loans. The provision for impairment losses for our domestic operations in 2005 was greater than our total provision for impairment losses because of write-backs and releases of allowance for impairment losses relating to the recovery of certain identiÑed impaired loans and advances for our overseas operations. In addition, we made less provision for impairment losses for our domestic personal loans partly due to the decrease in our special-mention personal loans. We made less provision for impairment losses for our domestic personal loans also due to a recent judicial development that has relaxed the requirements of a judicial interpretation issued by the Supreme Court of the PRC, which prohibits courts from foreclosing residential properties in civil proceedings if these properties are the necessary residential properties of the relevant individuals. As of December 31, 2005, our ratio of allowance for impairment losses on loans and advances to total identiÑed impaired loans and advances was 75.9%.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Allowance for Impairment Losses on Loans and Advances by Industry and Product Type for Our Domestic Operations
The following table sets forth, as of the dates indicated, our allowance for impairment losses on loans and advances for our domestic operations: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Allowance for corporate loans and advances ÏÏÏÏÏÏÏÏ 209,572 93.7% 49,135 73.2% 60,267 77.1% Allowance for personal loans and advances ÏÏÏÏÏÏÏÏÏ 14,186 6.3 18,023 26.8 17,926 22.9 Total allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,758 100.0% 67,158 100.0% 78,193 100.0% Impaired loans coverage ratios: Allowance for corporate loans and advances(1) ÏÏÏÏ 66.4% 50.8% 64.9% Allowance for personal loans and advances(2) ÏÏÏÏÏ 168.4% 231.5% 189.2% Total allowance(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.0% 64.2% 76.4%
(1) Impaired loan coverage ratios for this item are calculated by dividing allowance by identiÑed impaired corporate loans for our domestic operations.
(2) Impaired loan coverage ratios for this item are calculated by dividing allowance by identiÑed impaired personal loans for our domestic operations.
(3) Impaired loan coverage ratios for this item are calculated by dividing allowance by identiÑed impaired loans for our domestic operations.
The following table sets forth, as of the dates indicated, our allowance for impairment losses on identiÑed impaired corporate loans and advances for our domestic operations. As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan % of coverage % of coverage % of coverage Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Manufacturing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,614 39.8% 62.6% 14,130 36.4% 43.6% 17,341 35.7% 52.3% Commerce and servicesÏÏÏÏÏÏÏÏÏÏ 82,282 41.1 67.0% 10,791 27.8 41.0% 13,630 28.1 53.6% Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,474 6.2 56.5% 3,310 8.5 24.6% 5,647 11.6 44.2% Energy, mining and agriculture ÏÏÏÏ 10,480 5.2 53.4% 2,726 7.0 41.4% 3,473 7.2 52.1% Transportation and logistics ÏÏÏÏÏÏ 3,444 1.7 46.9% 5,572 14.4 57.3% 5,500 11.3 70.9% Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,860 1.9 64.1% 1,635 4.2 29.4% 1,877 3.9 40.6% Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,545 1.8 68.3% 647 1.7 25.2% 1,003 2.0 45.1% Financial servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,741 1.4 75.8% 15 Ì 20.8% 93 0.2 43.3% Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,539 0.9 76.4% 3 Ì 50.0% Ì Ì Ì Total allowance for identiÑed impaired corporate loans ÏÏÏÏÏÏÏ 199,979 100.0% 63.3% 38,829 100.0% 40.1% 48,564 100.0% 52.3%
(1) Impaired loan coverage ratios are calculated by dividing allowance for our domestic operations by the amount of identiÑed impaired loans and advances.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth, as of the dates indicated, our individually assessed allowance for impairment losses on corporate loans and advances for our domestic operations by industry: As of December 31, 2003 2004 2005 Impaired Impaired Impaired loan loan loan % of coverage % of coverage % of coverage Amount total ratio(1) Amount total ratio(1) Amount total ratio(1) (in millions of RMB, except percentages) Domestic Manufacturing Metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,524 3.2% 47.6% 2,618 8.3% 50.4% 1,403 3.3% 55.8% Textiles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,051 10.5 63.9% 708 2.2 29.7% 2,233 5.2 51.7% Petroleum and chemicals ÏÏ 7,008 4.9 54.8% 1,020 3.2 31.3% 1,441 3.4 53.1% Electronics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,529 2.5 61.4% 1,937 6.1 48.6% 3,021 7.1 56.0% Machinery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,852 4.1 61.2% 956 3.0 33.2% 1,662 3.9 60.9% Medical ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 Ì 29.9% 214 0.7 33.2% 539 1.3 51.7% Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,459 19.2 61.3% 4,060 12.9 46.7% 4,512 10.6 54.6% Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,446 44.4% 59.8% 11,513 36.4% 42.6% 14,811 34.8% 54.9% Commerce and services ÏÏÏÏÏ 54,664 38.3 63.1% 8,708 27.8 39.5% 11,763 27.4 55.7% Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,478 7.3 53.9% 2,693 8.5 22.1% 5,041 11.8 45.0% Energy, mining and agriculture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,925 3.4 39.9% 1,552 4.9 37.2% 3,222 7.5 56.9% Transportation and logistics ÏÏ 2,992 2.1 44.3% 5,323 16.9 57.7% 5,394 12.6 72.0% Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572 1.8 59.3% 1,327 4.2 26.9% 1,569 3.7 41.6% Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,705 1.9 66.1% 423 1.3 20.1% 836 2.0 44.4% Financial services ÏÏÏÏÏÏÏÏÏÏÏ 1,142 0.8 74.8% Ì Ì Ì 84 0.2 42.6% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,924 100.0% 59.3% 31,539 100.0% 38.6% 42,720 100.0% 54.6%
(1) Impaired loan coverage ratios are calculated by dividing allowance by the amount of individually assessed identiÑed impaired loans and advances in the industry for our domestic operations. The following table sets forth, as of the dates indicated, our allowance for impairment losses on personal loans and advances for our domestic operations: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Allowance for identiÑed impaired personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,024 35.4% 3,571 19.8% 5,535 30.9% Allowance for personal loans and advances excluding identiÑed impaired personal loans and advances ÏÏÏ 9,162 64.6 14,452 80.2 12,391 69.1 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,186 100.0% 18,023 100.0% 17,926 100.0% Impaired loan coverage ratio: Allowance for identiÑed impaired personal loans and advances(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59.6% 45.9% 58.4% Allowance for personal loans and advances excluding identified impaired personal loans and advances(2) ÏÏÏ 3.7% 4.2% 3.3% Total allowance(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168.4% 231.5% 189.2%
(1) Impaired loan coverage ratios for this item are calculated by dividing allowance by identiÑed impaired personal loans and advances for our domestic operations. (2) Impaired loan coverage ratios for this item are calculated by dividing allowance by personal loans and advances excluding identiÑed impaired loans and advances for our domestic operations. (3) Impaired loan coverage ratios for this item are calculated by dividing total allowance by identiÑed impaired personal loans and advances for our domestic operations.
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Overdue Loans The following table sets forth, as of the dates indicated, our overdue loans and advances to customers: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Not overdue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,854,365 85.8% 2,025,487 94.3% 2,108,794 94.3% Overdue by:(1) 1 to 90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,086 1.1 65,540 3.1 50,450 2.3 91 to 180 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,448 0.5 15,842 0.7 14,012 0.6 More than 180 days ÏÏÏÏÏÏÏÏÏÏÏÏ 272,001 12.6 40,819 1.9 62,009 2.8 Total overdue loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 306,535 14.2% 122,201 5.7% 126,471 5.7% Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100.0% 2,147,688 100.0% 2,235,265 100.0% Overdue by more than 90 days ÏÏÏÏ 282,449 13.1% 56,661 2.6% 76,021 3.4%
(1) For purposes of this table, loans and advances are considered overdue if either principal or interest payment is overdue. For loans and advances to customers that are repayable in instalments, if any portion of the loan is overdue, the whole amount of that loan is classiÑed as overdue.
The following table sets forth, as of the dates indicated, our overdue loans and advances to customers for our domestic operations: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Not overdue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,468,309 83.9% 1,626,070 93.7% 1,682,110 93.4% Overdue by:(1) 1 to 90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,167 1.1 61,930 3.6 47,587 2.7 91 to 180 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,164 0.5 15,261 0.9 13,643 0.8 More than 180 days ÏÏÏÏÏÏÏÏÏÏÏÏ 253,431 14.5 32,267 1.8 56,802 3.1 Total overdue loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 281,762 16.1 109,458 6.3 118,032 6.6 Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 100.0% 1,735,528 100.0% 1,800,142 100.0% Overdue by more than 90 days ÏÏÏÏ 262,595 15.0% 47,528 2.7% 70,445 3.9%
(1) For purposes of this table, loans and advances are considered overdue if either principal or interest payment is overdue. For loans and advances to customers that are repayable in instalments, if any portion of the loan is overdue, the whole amount of that loan is classiÑed as overdue.
Loan ClassiÑcation We generally measure and manage the quality of our loans and advances to customers based on the Loan ClassiÑcation Principles. For our overseas operations, if applicable local regulations and requirements are more stringent than the Loan ClassiÑcation Principles, we classify our loans and advances according to the applicable local regulations and requirements. The Loan ClassiÑcation Principles require PRC commercial banks to classify their loans into the following Ñve asset quality categories: (1) ""pass''; (2) ""special-mention''; (3) ""substandard''; (4) ""doubtful'';
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
and (5) ""loss'' among which loans classiÑed in the ""Substandard'', ""Doubtful'' and ""Loss'' categories are non-performing loans. Certain loans which are classiÑed in a performing category (i.e., ""Pass'' or ""Special-Mention'') may be considered impaired under IAS 39. As of December 31, 2005, we reported non-performing loans of RMB 103,226 million and identiÑed impaired loans of RMB 109,530 million. The following table sets forth, as of the dates indicated, our loans and advances to customers in each category of the Ñve-category loan classiÑcation: As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Pass ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,494,275 69.1% 1,612,936 75.1% 1,847,991 82.7% Special-mention ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 314,968 14.6 424,606 19.8 284,048 12.7 Substandard ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,314 2.9 61,515 2.9 45,573 2.0 Doubtful ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,032 5.4 32,931 1.5 44,550 2.0 Loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 172,311 8.0 15,700 0.7 13,103 0.6 Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100.0% 2,147,688 100.0% 2,235,265 100.0% Non-performing loan ratio(1) ÏÏÏÏÏÏ 16.3% 5.1% 4.6%
(1) The aggregate amount of loans and advances to customers classiÑed as ""substandard'', ""doubtful'' and ""loss'' divided by total loans and advances to customers.
The following table sets forth, as of the dates indicated, loans and advances in each category of the Ñve-category loan classiÑcation for our domestic operations:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Pass ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,145,990 65.4% 1,228,414 70.8% 1,430,429 79.5% Special-mention ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 284,400 16.3 408,571 23.5 271,504 15.1 Substandard ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,386 3.2 57,882 3.4 44,056 2.4 Doubtful ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,159 6.3 29,787 1.7 42,852 2.4 LossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,136 8.8 10,874 0.6 11,301 0.6 Total loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 100.0% 1,735,528 100.0% 1,800,142 100.0% Non-performing loan ratio(1) ÏÏÏÏ 18.3% 5.7% 5.5%
(1) The aggregate amount of loans and advances to customers classiÑed as ""substandard'', ""doubtful'' and ""loss'' divided by total loans and advances to customers.
The Loan ClassiÑcation Principles provide that the principal determination in classifying a loan should be based on the assessment of the repayment ability of the borrower. Based on the Loan ClassiÑcation Principles, we have also developed our own set of more detailed guidelines for purposes of loan classiÑcation. In particular, we consider, in addition to the repayment ability of the borrower, factors such as the overdue status of the loan, the borrower's credit history, the borrower's intention to repay, the quality of the underlying collateral, and the prospect of collection
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
from a guarantor. For example, we generally classify loans and advances as ""substandard'' or lower when such loans are overdue for over ninety days. We generally classify loans and advances as ""doubtful'' or lower when such loans are overdue for over one hundred and eighty days. Pass. We classify loans and advances as ""pass'' if the borrower has been performing its obligations and there is no current evidence indicating that the borrower will default on principal or interest payments. As of December 31, 2005, our aggregate outstanding principal amount of pass loans was RMB1,847,991 million, representing approximately 82.7% of our total loans and advances to customers. As of the same date, the aggregate outstanding principal amount of pass loans for our domestic operations was RMB1,430,429 million, representing approximately 79.5% of our total domestic loans and advances to customers. Special-Mention. We classify loans and advances as ""special-mention'' if the borrower is currently able to make principal and interest payments, but there are potential weaknesses that may aÅect the borrower's ability to repay in the future. Ultimately loss is not expected at this stage, but a loss could occur if adverse conditions persist. As of December 31, 2005, the aggregate outstanding principal amount of our special-mention loans was RMB284,048 million, representing approximately 12.7% of our loans and advances to customers. As of the same date, the aggregate outstanding principal amount of special-mention loans for our domestic operations was RMB271,504 million, representing approximately 15.1% of our total domestic loans and advances to customers. Our domestic special-mention loans and advances for our domestic operations decreased from RMB408,571 million as of December 31, 2004 to RMB271,504 million as of December 31, 2005, partly attributable to our increased focus on collections of special-mention loans as a means of reducing our risk exposure to certain customers. When considering whether loans and advances should be classiÑed as special-mention, we consider, among others, the borrower's industry environment. For example, we took into account the impact of SARS on the PRC economy, particularly the tourism and airline industries, as well as the impact of recent PRC macroeconomic policies on the real estate and iron and steel industries. Since 2005, we have also taken additional measures to improve our management of special-mention loans. See ""Risk Management''. Substandard. We classify loans and advances as ""substandard'' if the borrower is clearly experiencing Ñnancial diÇculties jeopardizing its ability to meet payment obligations, and it is clear that the borrower's cash Öow from its primary repayment source will not allow it to make principal and interest payments as contracted. These loans may incur a loss even after the enforcement of collateral. As of December 31, 2005, the aggregate outstanding principal amount of our substandard loans was RMB45,573 million, representing approximately 2.0% of our loans and advances to customers. As of the same date, the aggregate outstanding principal amount of substandard loans for our domestic operations was RMB44,056 million, representing approximately 2.4% of our total domestic loans and advances to customers. Doubtful. We classify loans and advances as ""doubtful'' if the borrower is unable to meet its contractual obligations and a material loss is likely to result even after the enforcement of collateral. As of December 31, 2005, the aggregate outstanding principal amount of our doubtful loans was RMB44,550 million, representing approximately 2.0% of our loans and advances to customers. As of the same date, the aggregate outstanding principal amount of doubtful loans for our domestic operations was RMB42,852 million, representing approximately 2.4% of our total domestic loans and advances to customers. Loss. We classify loans and advances as ""loss'' if none, or only a minimal amount, of principal and interest is likely to be collectible after exhausting all collection eÅorts and taking advantage of all available legal remedies. As of December 31, 2005, our aggregate outstanding principal amount of loss loans was RMB13,103 million, representing approximately 0.6% of our total loans and
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
advances to customers. As of the same date, the aggregate outstanding principal amount of loss loans for our domestic operations was RMB11,301 million, representing approximately 0.6% of our total domestic loans and advances to customers.
Changes in the Asset Quality of Our Domestic Corporate Loans and Advances As of December 31, 2005, we had corporate loans and advances for our domestic operations of RMB1,420,184 million, accounting for 78.9% of the loans and advances to customers for our domestic operations. For purpose of this discussion, we categorize our corporate loans and advance for our domestic operations into ""New Loans'' and ""Old Loans'' based on date of the origination of such loans. If a corporate loan or any portion of such a loan is renewed, we consider, for purposes of this discussion, such loan to have been made on the origination date of the original loan. We classify our corporate loans originated before January 1, 2001 as ""Old Loans'' and loans originated on or after January 1, 2001 are ""New Loans''. In 2000, as one of the most important measures to improve our credit risk management, we started to implement the ""three-in-one'' credit approval process for corporate loans and advances. See ""Risk Management''. Accordingly, we believe that January 1, 2001 is an appropriate starting date for the purpose of assessing our enhanced credit risk management and its eÅect on our asset quality. The following table set forth, as of the dates indicated, the balances of Old Loans and New Loans and related non-performing loans: As of December 31, 2005(1) Amount of Non-Performing Non-Performing Loan Balance Loans(2) Loan Ratio (in millions of RMB, except percentages) Domestic Old Loans Ì Before January 1, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 224,304 45,111 20.1% New Loans Ì On or after January 1, 2001 ÏÏÏÏÏÏÏÏ 1,195,880 43,625 3.6%
(1) The data in the table reÖected the disposal of non-performing loans in connection with our restructuring in 2004.
(2) Loans classiÑed as ""substandard'', ""doubtful'' and ""loss''. The non-performing loan ratio of our New Loans is signiÑcantly lower than that of our Old Loans, reÖecting our improvements in credit risk management including, in particular, the implementation of ""three-in-one'' credit approval process for corporate loans and advances since 2000.
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Disposals Related to Our Restructuring In 2004, we disposed of certain non-performing loans and policy-related assets to Cinda, the PBOC and China Orient in connection with our restructuring. The following table sets forth our restructuring-related disposals by industry and product type: Amount % of total (in millions of RMB, except percentages) Corporate loans and advances Manufacturing Metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,695 2.5% MachineryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,680 3.9 Electronics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,276 2.3 Petroleum and chemicalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,043 6.3 Textiles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,478 8.6 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,014 15.8 Sub-totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107,186 39.4 Commerce and servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100,402 36.9 Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,066 5.5 Energy, mining and agricultureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,020 3.3 Transportation and logistics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,157 1.9 Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,665 1.7 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,263 1.9 Financial servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,647 0.7 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,580 0.6 Sub-totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249,986 91.9 Personal loans and advances Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,380 0.9 Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 0.0 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,540 0.6 Sub-totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,934 1.5 Total non-policy related assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 253,920 93.4 Policy-related assets(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,100 6.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 272,020 100.0%
(1) Include policy-related loans.
Investment Securities Overview As of December 31, 2003, 2004 and 2005, we had investment securities of RMB988,961 million, RMB1,229,522 million and RMB1,571,531 million, respectively, accounting for 24.9%, 28.8% and 33.2%, respectively, of our total assets. Our investment securities include available-for-sale securities, held-to-maturity securities and debt securities classiÑed as loans and receivables. For a discussion of our classiÑcation of investment securities, see ""Financial Information Ì Critical Accounting Policies''.
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The following table sets forth the principal components of our investment securities as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Debt securities issued by domestic issuerÏÏÏÏÏÏÏ 316,619 32.0% 492,254 40.0% 825,996 52.6% Debt securities issued by overseas issuerÏÏÏÏÏÏÏ 661,011 66.8 726,213 59.1 736,324 46.9 Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,331 1.2 11,055 0.9 9,211 0.5 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 988,961 100.0% 1,229,522 100.0% 1,571,531 100.0%
As of December 31, 2003, 2004 and 2005, we had debt securities issued by domestic issuers of RMB316,619 million, RMB492,254 million and RMB825,996 million, respectively, representing 32.0%, 40.0% and 52.6% of total investment securities. As of December 31, 2003, 2004 and 2005, we had debt securities issued by overseas issuers of RMB661,011 million, RMB726,213 million and RMB736,324 million, respectively, accounting for 66.8%, 59.1% and 46.9%, respectively, of our total investment securities. The general increase in investment securities resulted primarily from an increase in overall funding from customer deposits, capital injection and sale of non-performing loans.
Debt Securities Issued by Domestic Issuers The following table sets forth our debt securities issued by domestic issuers as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Debt securities issued by domestic issuer Debt securities classiÑed as loans and receivables China Orient bond ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,000 50.5% 160,000 32.5% 160,000 19.4% PBOC special billsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 91,530 18.6 91,530 11.1 Special-purpose treasury bond ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,500 13.4 42,500 8.6 42,500 5.1 CertiÑcate treasury bonds and others ÏÏÏÏÏÏÏÏÏÏ 6,076 1.9 10,047 2.0 11,888 1.4 Held-to-maturity debt securities GovernmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,135 11.4 90,672 18.4 226,648 27.4 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,327 7.7 28,339 5.8 49,567 6.0 CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 170 Ì 1,167 0.1 Available-for-sale debt securities GovernmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,473 11.2 44,564 9.1 158,519 19.2 Public sector and quasi-government ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 4,403 0.5 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,259 3.9 24,226 4.9 76,787 9.3 CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 417 0.1 384 0.1 3,143 0.5 Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (568) (0.1) (178) Ì (156) Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 316,619 100.0% 492,254 100.0% 825,996 100.0%
As of December 31, 2003, 2004 and 2005, we had debt securities issued by domestic issuers of RMB316,619 million, RMB492,254 million and RMB825,996 million, respectively, representing 32.4% 40.4% and 52.9%, respectively, of total debt securities.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
As of December 31, 2003, 2004 and 2005, debt securities classiÑed as loans and receivables before allowance for impairment losses amounted to RMB208,576 million, RMB304,077 million and RMB305,918 million, respectively, accounting for 65.8%, 61.7% and 37.0%, respectively, of investment securities issued by domestic issuers. Debt securities classiÑed as loans and receivables consist primarily of the China Orient bond, PBOC special bills and the MOF special- purpose treasury bond. The China Orient bond is a ten-year bond issued by China Orient in connection with our transfer of certain non-performing assets to China Orient in 1999 and 2000. The China Orient bond bears interest at 2.25% per annum. The PBOC special bills were issued to us in connection with our disposal of certain non-performing loans and policy-related assets in connection with our restructuring. The special-purpose treasury bond is a 30-year bond with a principal amount of RMB42,500 million issued by the Ministry of Finance to us in 1998 as a capital contribution. See note VI.18 to Appendix I Ì ""Accountants' Report''. Excluding debt securities classiÑed as loans and receivables, our debt securities issued by domestic issuers consist primarily of government and Ñnancial institution debt securities. As of December 31, 2003, 2004 and 2005, our government and Ñnancial institutions debt securities classiÑed as held-to-maturity and available-for-sale debt securities had an aggregate carrying value of RMB108,194 million, RMB187,801 million and RMB511,521 million, respectively, accounting for 34.2%, 38.2% and 61.9%, respectively, of our debt securities issued by domestic issuers.
Debt Securities Issued by Overseas Issuers The following table sets forth our debt securities issued by overseas issuers as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Debt securities issued by overseas issuers Debt securities classiÑed as loans and receivables Short-term bills and notes Public sector and quasi-governmentÏÏÏ 92,179 13.9% 44,364 6.1% 6,096 0.8% Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,540 7.3 63,550 8.8 49,993 6.8 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,951 0.4 1,601 0.2 Ì Ì Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 637 0.1 527 0.1 Ì Ì Held-to-maturity debt securities Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,628 3.3 17,835 2.5 4,508 0.6 Public sector and quasi-governmentÏÏÏÏÏ 48,629 7.4 151,978 20.9 135,002 18.3 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,893 9.5 141,034 19.4 154,157 20.9 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,577 3.3 27,980 3.9 36,410 4.9 Available-for-sale debt securities Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96,382 14.6 112,719 15.5 70,545 9.6 Public sector and quasi-governmentÏÏÏÏÏ 97,720 14.8 57,910 8.0 102,437 13.9 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,375 20.8 65,142 9.0 93,251 12.7 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,514 4.6 41,587 5.6 83,925 11.5 Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏ (14) Ì (14) Ì Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 661,011 100.0% 726,213 100.0% 736,324 100.0%
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Our debt securities issued by overseas issuers consist primarily of government, public sector and quasi-government and Ñnancial institution debt securities. As of December 31, 2003, 2004 and 2005, our government, public sector and quasi-government and Ñnancial institution debt securities issued by overseas issuers before allowance for impairment losses amounted to RMB605,346 million, RMB654,532 million and RMB615,989 million, respectively, representing 91.6%, 90.1% and 83.6%, respectively, of our debt securities issued by overseas issuers.
Carrying Value and Fair Value of Held-to-Maturity Securities and Debt Securities ClassiÑed as Loans and Receivables The following table sets forth the carrying value and fair value of our held-to-maturity securities and debt securities classiÑed as loans and receivables as of the dates indicated:
As of December 31, 2003 2004 2005 Net Net Net carrying Fair carrying Fair carrying Fair value value value value value value (in millions of RMB) Held-to-maturity securitiesÏÏÏÏÏÏÏÏÏÏÏ 215,175 216,035 457,994 453,416 607,459 605,287 Debt securities classiÑed as loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 352,576 413,941 413,942 361,851 361,613
Other Assets In addition to loans and advances to customers and investment securities, our total assets include cash and due from banks, balances with central banks, placements with banks and other Ñnancial institutions, government certiÑcates of indebtedness for bank notes issued, precious metals, trading assets and other Ñnancial instruments at fair value through proÑt or loss, derivative Ñnancial instruments, investment in associates, property and equipment, investment property, deferred income tax assets and other assets. As of December 31, 2003, 2004 and 2005, the aggregate amounts of our assets other than loans and advances to customers and investment securities were RMB1,062,458 million, RMB962,780 million and RMB1,016,405 million, respectively, representing 26.7%, 22.6% and 21.4%, respectively, of our total assets as of such dates. For a description of our other assets, see ""Financial Information Ì Financial Position Ì Assets''.
LIABILITIES AND SOURCES OF FUNDS 3rd Sch 23 3rd Sch 24 Our funding operations are designed to ensure both a stable source of funds and eÅective A1A(32)(5)(a) liquidity management. We continuously adjust our funding operations to minimize funding costs and A1A(32)(5)(b) also endeavor to match currencies and maturities with those of our asset portfolio. We obtain funding for our lending and investment activities primarily from our customer deposits, which are referred to in our consolidated Ñnancial information set forth in Appendix I Ì ""Accountants' Report'' as ""Due to customers''.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Our total liabilities as of December 31, 2003, 2004 and 2005 were RMB3,751,434 million, RMB4,037,314 million and RMB4,484,529 million, respectively. Customer deposits represent the largest portion of our total liabilities, accounting for 80.9%, 82.7% and 82.5% of our total liabilities as of December 31, 2003, 2004 and 2005, respectively. The following table sets forth the signiÑcant components of our liabilities as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,338,448 3,699,464 Other liabilities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 718,070 698,866 785,065 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,751,434 4,037,314 4,484,529
(1) Include due to banks, due to central banks, bank notes in circulation, certiÑcates of deposits and placements from banks and other Ñnancial institutions, derivative Ñnancial instruments and liabilities at fair value through proÑt or loss, bonds issued, special purpose borrowings, current tax liabilities, retirement beneÑt obligations, deferred income tax liabilities and other liabilities.
Customer Deposits by Geography The following tables set forth, as of the dates indicated, the geographic distribution of our customer deposits based on the location of the operations that took the deposits:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) DomesticÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288,354 75.4% 2,548,609 76.3% 2,927,562 79.1% Overseas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 745,010 24.6 789,839 23.7 771,902 20.9 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 100.0% 3,338,448 100.0% 3,699,464 100.0%
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentage) Domestic Northern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 489,667 21.4% 534,382 21.0% 640,856 21.9% Northeastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183,440 8.0 203,727 8.0 226,695 7.8 Eastern China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 735,308 32.1 824,746 32.4 955,325 32.6 Central and Southern China ÏÏÏÏÏÏÏÏÏÏÏÏ 644,504 28.2 714,551 28.0 791,382 27.0 Western ChinaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 235,435 10.3 271,203 10.6 313,304 10.7 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288,354 100.0% 2,548,609 100.0% 2,927,562 100.0%
Total customer deposits increased by 10.1% from RMB3,033,364 million as of December 31, 2003 to RMB3,338,448 million as of December 31, 2004, and by 10.8% from RMB3,338,448 million as of December 31, 2004 to RMB3,699,464 million as of December 31, 2005. Customer deposits for our domestic operations account for a majority of our total customer deposits. As of December 31, 2003, 2004 and 2005, customer deposits for our domestic operations
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
were RMB2,288,354 million, RMB2,548,609 million and RMB2,927,562 million, respectively, representing 75.4%, 76.3% and 79.1%, respectively, of our total customer deposits. Customer deposits for our domestic operations increased by 11.4% from RMB2,288,354 million as of December 31, 2003 to RMB2,548,609 million as of December 31, 2004, and by 14.9% from RMB2,548,609 million as of December 31, 2004 to RMB2,927,562 million as of December 31, 2005. The general increase in customer deposits for our domestic operations is primarily the result of the continued economic growth in the PRC and our focus on improving marketing and customer service in connection with our domestic deposit services. Customer deposits for our overseas operations have been relatively stable. As of December 31, 2003, 2004 and 2005, customer deposits for our overseas operations were RMB745,010 million, RMB789,839 million and RMB771,902 million, respectively.
Customer Deposits by Customer Type The following table sets forth the principal components of our customer deposits as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Corporate deposits Demand deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 679,524 22.4% 776,648 23.3% 836,763 22.6% Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 332,606 11.0 406,019 12.1 511,983 13.8 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,012,130 33.4 1,182,667 35.4 1,348,746 36.4 Personal deposits Demand deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,904 20.0 697,028 20.9 667,957 18.1 Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324,511 43.7 1,351,692 40.5 1,554,369 42.0 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,932,415 63.7 2,048,720 61.4 2,222,326 60.1 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,819 2.9 107,061 3.2 128,392 3.5 Total customer depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 100.0% 3,338,448 100.0% 3,699,464 100.0%
(1) Consist primarily of guarantee deposits.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth the principal components of customer deposits for our domestic operations as of the dates indicated:
As of December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Domestic Corporate deposits Demand deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 574,030 25.1% 657,481 25.8% 734,140 25.1% Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 240,824 10.5 283,435 11.1 393,394 13.4 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 814,854 35.6 940,916 36.9 1,127,534 38.5 Personal deposits Demand deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 351,875 15.4 416,516 16.4 470,508 16.1 Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,040,315 45.4 1,091,760 42.8 1,208,176 41.3 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,392,190 60.8 1,508,276 59.2 1,678,684 57.4 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81,310 3.6 99,417 3.9 121,344 4.1 Total customer depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288,354 100.0% 2,548,609 100.0% 2,927,562 100.0%
(1) Consist primarily of guarantee deposits.
Personal deposits account for a signiÑcant portion of our customer deposits. As of December 31, 2003, 2004 and 2005, we had personal deposits of RMB1,932,415 million, RMB2,048,720 million and RMB2,222,326 million, respectively, representing 63.7%, 61.4% and 60.1%, respectively, of our total customer deposits. A signiÑcant portion of our personal deposits is derived from our domestic operations. As of December 31, 2003, 2004 and 2005, personal deposits from our domestic operations were RMB1,392,190 million, RMB1,508,276 million and RMB1,678,684 million, respectively, representing 72.0%, 73.6% and 75.5%, respectively, of our total personal deposits. A signiÑcant portion of our personal deposits are time deposits, which accounted for 68.5%, 66.0% and 69.9%, respectively, of our total personal deposits as of December 31, 2003, 2004 and 2005.
As of December 31, 2003, 2004 and 2005, we had corporate deposits of RMB1,012,130 million, RMB1,182,667 million and RMB1,348,746 million, respectively, representing 33.4%, 35.4% and 36.4%, respectively, of our total customer deposits. A signiÑcant portion of our corporate deposits is derived from our domestic operations. As of December 31, 2003, 2004 and 2005, corporate deposits for our domestic operations were RMB814,854 million, RMB940,916 million and RMB1,127,534 million, respectively, representing 80.5%, 79.6% and 83.6%, respectively, of our total corporate deposits. The general increase in corporate deposits was primarily the result of our eÅorts to expand our corporate deposit business, particularly our domestic corporate deposit business, as well as the continued growth of the PRC economy. A large portion of our corporate deposits consists of demand deposits, which accounted for 67.1%, 65.7% and 62.0%, respectively, of our total corporate deposits as of December 31, 2003, 2004 and 2005.
Other deposits consist primarily of guarantee deposits, most of which relate to our issuance of letters of guarantee and letters of credit and our acceptance business. Other deposits increased by 20.5% from RMB88,819 million as of December 31, 2003 to RMB107,061 million as of December 31, 2004, and by 19.9% from RMB107,061 million as of December 31, 2004 to RMB128,392 million as of December 31, 2005.
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
Customer Deposits by Maturity A signiÑcant portion of our customer deposits matures in three months or less. The following table sets forth the distribution of our customer deposits by maturities as of the date indicated: As of December 31, 2005 Repayable Due less Due between Due between Due between on than 1 and 3 4 and 12 1 and 5 Due more demand 1 month months months years than 5 years Total % of % of % of % of % of % of % of Amount total Amount total Amount total Amount total Amount total Amount total Amount total (in millions of RMB, except percentages)
Corporate depositsÏÏÏÏÏÏÏÏÏÏ 846,047 62.7% 164,648 12.2% 71,483 5.3% 235,466 17.5% 30,018 2.2% 1,084 0.1% 1,348,746 100% Personal deposits ÏÏÏÏÏÏÏÏÏÏÏ 762,834 34.2% 316,828 14.3% 329,025 14.8% 599,432 27.0% 212,985 9.6% 1,222 0.1% 2,222,326 100% Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,756 5.3% 39,808 31.0% 40,960 31.9% 5,770 4.5% 35,095 27.3% 3 Ì% 128,392 100% Total customer deposits ÏÏÏ 1,615,637 43.7% 521,284 14.1% 441,468 11.9% 840,668 22.7% 278,098 7.5% 2,309 0.1% 3,699,464 100%
(1) Consist primarily of guarantee deposits. The following table sets forth the distribution of our customer deposits for our domestic operations by maturities as of the date indicated: As of December 31, 2005 Repayable Due less Due between Due between Due between on than 1 and 3 4 and 12 1 and 5 Due more demand 1 month months months years than 5 years Total % of % of % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total (in millions of RMB, except percentages) Domestic Corporate depositsÏÏÏÏÏÏÏÏÏÏ 735,700 65.3% 90,258 8.0% 45,160 4.0% 226,859 20.1% 29,101 2.6% 456 Ì% 1,127,534 100% Personal deposits ÏÏÏÏÏÏÏÏÏÏÏ 557,158 33.2% 142,310 8.5% 196,017 11.7% 573,243 34.1% 209,615 12.5% 341 Ì% 1,678,684 100% Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 Ì% 39,636 32.7% 40,929 33.7% 5,663 4.7% 35,091 28.9% Ì Ì% 121,344 100% Total customer deposits ÏÏÏ 1,292,883 44.2% 272,204 9.3% 282,106 9.6% 805,765 27.5% 273,807 9.4% 797 Ì% 2,927,562 100%
(1) Consist primarily of guarantee deposits. Customer Deposits by Currency The following table sets forth the distribution of our customer deposits by currency as of the dates indicated: As of December 31, 2005 Hong Kong Japanese British Renminbi U.S. dollar dollar Euro yen pound Others Total % of % of % of % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total (in millions of RMB, except percentages)
Corporate deposits ÏÏÏÏ 995,931 73.8% 195,349 14.5% 124,668 9.3% 10,915 0.8% 6,511 0.5% 4,001 0.3% 11,371 0.8% 1,348,746 100.0% Personal deposits ÏÏÏÏ 1,425,350 64.1% 234,959 10.6% 399,925 18.1% 34,306 1.5% 27,280 1.2% 22,445 1.0% 78,061 3.5% 2,222,326 100.0% Others ÏÏÏÏÏÏÏÏ 110,597 86.1% 8,573 6.7% 2,525 2.0% 1,633 1.3% 3,774 2.9% 188 0.1% 1,102 0.9% 128,392 100.0% Total customer deposits ÏÏ 2,531,878 68.4% 438,881 11.9% 527,118 14.3% 46,854 1.3% 37,565 1.0% 26,634 0.7% 90,534 2.4% 3,699,464 100.0%
The following table sets forth the distribution by currency of our customer deposits for our domestic operations as of the dates indicated: As of December 31, 2005 Hong Kong Japanese British Renminbi U.S. dollar dollar Euro yen pound Others Total % of % of % of % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total (in millions of RMB, except percentages) Domestic Corporate deposits ÏÏÏÏÏÏ 995,378 88.3% 110,716 9.8% 5,850 0.5% 7,490 0.7% 5,180 0.5% 2,668 0.2% 252 Ì% 1,127,534 100.0% Personal deposits 1,416,326 84.4% 157,152 9.4% 38,202 2.2% 25,308 1.5% 24,963 1.5% 7,129 0.4% 9,604 0.6% 1,678,684 100.0% Others ÏÏÏÏÏÏÏÏÏÏ 110,464 91.0% 5,550 4.6% 137 0.2% 1,452 1.2% 3,662 3.0% 33 Ì% 46 Ì% 121,344 100.0% Total customer deposits ÏÏÏÏ 2,522,168 86.1% 273,418 9.4% 44,189 1.5% 34,250 1.2% 33,805 1.2% 9,830 0.3% 9,902 0.3% 2,927,562 100.0%
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DESCRIPTION OF OUR ASSETS AND LIABILITIES
The following table sets forth, as of the dates indicated, the distribution by currency of our customer deposits for our domestic operations:
As of December 31, 2003 % of total 2004 % of total 2005 % of total (in millions of RMB, except percentages) Domestic Renminbi-denominated Corporate depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 698,657 30.5% 817,674 32.1% 995,378 34.0% Personal deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 992,216 43.4 1,184,253 46.4 1,416,326 48.3 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,922 3.0 85,940 3.4 110,464 3.8 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,760,795 76.9 2,087,867 81.9 2,522,168 86.1 Foreign currency-denominated Corporate depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,197 5.1 123,242 4.9 132,156 4.5 Personal deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 399,974 17.5 324,023 12.7 262,358 9.0 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,388 0.5 13,477 0.5 10,880 0.4 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 527,559 23.1 460,742 18.1 405,394 13.9 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288,354 100.0% 2,548,609 100.0% 2,927,562 100.0%
Substantially all of our Renminbi-denominated customer deposits are from our domestic operations. As of December 31, 2003, 2004 and 2005, Renminbi-denominated customer deposits for our domestic operations were RMB1,760,795 million, RMB2,087,867 million and RMB2,522,168 million, respectively, representing 76.9%, 81.9% and 86.1%, respectively, of total customer deposits for our domestic operations. The increase in Renminbi-denominated customer deposits was principally the result of our increased marketing focus on Renminbi-denominated deposit services. As of December 31, 2003, 2004 and 2005, customer deposits denominated in foreign currencies for our domestic operations were RMB527,559 million, RMB460,742 million and RMB405,394 million, respectively, representing 23.1%, 18.1% and 13.9%, respectively, of our total domestic customer deposits. The decrease was primarily due to the customers' expectation of Renminbi's appreciation against foreign currencies.
Other Liabilities In addition to customer deposits, our total liabilities include amounts due to banks, amounts due to central banks, bank notes in circulation, certiÑcates of deposits and placements from banks and other Ñnancial institutions, derivative Ñnancial instruments and liabilities at fair value through proÑt or loss, bonds issued, special-purpose borrowings, current tax liabilities, retirement beneÑt obligations, deferred income tax liabilities and other liabilities. As of December 31, 2003, 2004 and 2005, the aggregate amounts of our liabilities other than due to customers were RMB718,070 million, RMB698,866 million and RMB785,065 million, respectively, representing 19.1%, 17.3% and 17.5%, respectively, of our total liabilities as of such dates. For a more detailed description of our other liabilities, see ""Financial Information Ì Financial Position Ì Liabilities''.
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FINANCIAL INFORMATION
You should read the discussion and analysis set forth in this section in conjunction with Appendix I Ì ""Accountants' Report'', which has been prepared in accordance with IFRS, Appendix II Ì ""Unaudited Supplementary Financial Information'' and Appendix III Ì ""Unaudited Pro Forma Financial Information'', in each case together with the accompanying notes. Capital adequacy ratios discussed in this section are calculated in accordance with applicable CBRC guidelines and based on PRC GAAP Ñnancial information. The capital adequacy ratios discussed in this section are not part of the Accountants' Report and have not been audited. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results may diÅer from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in ""Forward-Looking Statements'' and ""Risk Factors''. Unless otherwise indicated, ""domestic operations'' refers to the operations of our head oÇce (including the treasury operations conducted in Hong Kong by our global markets department) and its branches in the PRC, and ""overseas operations'' refers to the operations of our branches and subsidiaries in Hong Kong, Macau and other overseas locations and their branches and subsidiaries, some of which are located in the PRC.
OVERVIEW General We are one of the four largest commercial banks in the PRC in terms of total assets with the most extensive international network among PRC commercial banks. In 2005, we had proÑt attributable to equity holders of the bank of RMB25,921 million. As of December 31, 2005, we had total assets of RMB4,740,048 million. Our primary business is commercial banking, which accounted for 92.4% of our proÑt before income tax in 2005. We also conduct investment banking, insurance and other businesses, which collectively accounted for 7.6% of our proÑt before income tax in 2005. Our commercial banking business primarily consists of corporate banking, personal banking and treasury operations. Our corporate banking business oÅers a wide range of products and services, such as loans, deposits, fee-based products and services, trade-related services and trade Ñnance. Our personal banking business oÅers a diverse set of products and services, such as deposits, mortgage loans, automobile loans, debit cards, quasi-credit cards, credit cards, foreign exchange services and wealth management. Our treasury operations include, among others, inter- bank money market transactions, foreign exchange and derivatives trading, bond trading, debt security issuance and underwriting, and investments as part of our asset and liability management.
Operating Environment in the PRC A signiÑcant portion of our business is located in the PRC. As a result, our Ñnancial condition and results of operations are aÅected by changes in various external factors relating to the operating environment in the PRC, including the rate of economic growth, general business and economic conditions, the regulatory environment, interest rates, foreign currency exchange rates and competition. The PRC has experienced rapid economic growth in recent years. Based on the China Statistical Yearbook 2005 and the National Bureau of Statistics of China, from 2000 to 2005, the PRC's GDP increased from RMB9,921.5 billion to RMB18,232.1 billion at an average annual
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FINANCIAL INFORMATION
growth rate of 11.7%. During the same period, loan growth in the PRC increased by 14.7%, based on data published by the PBOC. Our results of operations have been signiÑcantly aÅected by Öuctuations in the growth rate of the PRC economy. Although the PRC economy has been growing rapidly, the year to year growth rate has been subject to Öuctuation. For example, based on data published by the National Bureau of Statistics of China, GDP growth in the PRC decreased from approximately 11.0% in 1997 to approximately 6.9% in 1998. During the same period, loan growth in the PRC decreased from 22.5% to 15.5%, based on data published by the National Bureau of Statistics of China. We expect the rate of growth of our loan portfolio, as well as our Ñnancial condition and results of operations, to continue to be aÅected by the rate of economic growth as well as other external factors relating to the operating environment in the PRC. The PRC Government has in the past implemented various macroeconomic policies to manage the growth of the PRC economy. For example, in 2004, the PRC Government took various measures intended to prevent the economy from over-heating. These macroeconomic policies often have a signiÑcant impact on the PRC banking industry and commercial banks, including our bank. The PRC Government is expected to continue using macroeconomic policies, including monetary and Ñscal policies, to manage the growth of the PRC economy, and we expect our Ñnancial condition and results of operations to continue to be signiÑcantly aÅected by these policies.
Regulatory Environment The PRC banking regulatory regime is currently undergoing signiÑcant changes. For example, the PRC banking regulatory authorities have enhanced disclosure requirements, revised application and approval processes for banking products and services and implemented new asset quality and risk management requirements. In addition, in light of the legacy of non-performing loans faced by the PRC banking industry, the PRC Government has taken various measures to improve the Ñnancial condition of PRC commercial banks, including establishing asset management companies to facilitate non-performing loan disposals, injecting additional capital, encouraging PRC commercial banks to attract international investors and to access the international capital markets and setting more stringent capital adequacy requirements by, among other things, amending the formula for calculating capital adequacy ratios. See ""Supervision and Regulation''. We expect these regulatory reforms and governmental actions to continue to aÅect the PRC banking industry and our bank.
Interest Rates Interest rates on loans and deposits denominated in Renminbi are regulated by the PBOC and are set by commercial banks in the PRC in accordance with the oÇcial benchmark interest rates published and modiÑed by the PBOC from time to time. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Interest Rates on Loans and Deposits''. For example, the PBOC raised the one-year benchmark interest rate for Renminbi-denominated loans and deposits by 27 basis points in October 2004. In recent years, the PRC Government has signiÑcantly liberalized the regulation of interest rates, and a further liberalization may result in greater interest rate volatility in the PRC. We expect future changes in the interest rate environment, in particular, changes in PBOC benchmark interest rates or regulations of interest rates in the PRC, to continue to signiÑcantly aÅect our Ñnancial condition and results of operations. A signiÑcant portion of our outstanding interest-earning assets and interest-bearing liabilities are denominated in foreign currencies. As a result, our Ñnancial condition and results of operations are also aÅected by Öuctuations in the market interest rates associated with these foreign currencies.
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FINANCIAL INFORMATION
Foreign Currency Exchange Rates As of December 31, 2005, 43.1% of our total assets, including 34.4% of our net loans and advances to customers, and 34.7% of our total liabilities, including 31.6% of our customer deposits, were denominated in foreign currencies. For detailed information of our foreign currency exposure, please see note IV.5 to Appendix I Ì ""Accountants' Report''. As a result, Öuctuations of the value of the Renminbi could materially aÅect our Ñnancial condition and results of operations. The value of the Renminbi is subject to changes in the PRC's political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the PBOC changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to Öuctuate within a narrow band against a basket of foreign currencies including U.S. dollars.
Competition in the PRC Banking Industry The PRC banking industry is increasingly competitive. We face competition from other PRC commercial banks, including the other three Big Four commercial banks, other joint stock commercial banks, urban commercial banks as well as foreign-invested Ñnancial institutions. Many PRC commercial banks compete with us in substantially the same markets. In addition, as a result of the PRC's entry into the WTO, many foreign banks have opened branches in the PRC or invested in PRC commercial banks, and their presence in the PRC is expected to continue to grow. While the operations of foreign banks, including Hong Kong banks, are still limited in the PRC, the continuing expansion of foreign banks in the PRC will result in increasing competition in the PRC banking market. See ""Business Ì Competition''.
Overseas Operations Our overseas operations represent a signiÑcant part of our business. Our overseas operations accounted for 23.6% of our total assets before inter-company balance eliminations as of December 31, 2005 and 44.8% of our proÑt before income tax for 2005. Our overseas operations are conducted through branches and subsidiaries in Hong Kong, Macau and 25 foreign countries. Our overseas operations are signiÑcantly aÅected by the local economic, interest rate, regulatory and competitive environments. In particular, the Ñnancial condition and results of operations of our subsidiary in Hong Kong, BOCHK, have been signiÑcantly aÅected by the economic environment in Hong Kong. Since BOCHK Group accounted for 17.3% of our total assets before inter-company balance eliminations as of December 31, 2005 and 33.5% of our proÑt before income tax for 2005, we expect that changes in the economic, interest rate, regulatory or competitive environments in Hong Kong will continue to aÅect our Ñnancial condition and results of operations.
Asset Quality Our proÑtability has been signiÑcantly aÅected by the quality of our loan portfolio. In 2003, 2004 and 2005, we made provisions for impairment losses of RMB18,100 million, RMB23,812 million and RMB11,486 million, respectively. For a more detailed discussion of our asset quality, see ""Description of Our Assets and Liabilities''.
IMPACT OF OUR RESTRUCTURING In December 2003, the PRC Government, through Huijin, made a capital contribution of RMB186,390 million to us, in the form of US$19,600 million in cash as well as bullion valued at approximately US$2,900 million at the time of contribution. In connection with the capital contribution, we transferred the pre-existing balances of paid-in capital of RMB141,054 million,
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FINANCIAL INFORMATION
capital reserve of RMB13,033 million and statutory reserves of RMB49,375 million to our accumulated losses account on December 31, 2003 to accommodate losses arising principally from impairment losses for our non-performing assets. In December 2003, the PRC Government committed us to transfer certain of our non- performing loans and policy-related assets and, in principle, established the sales price. The aggregate carrying value of these non-performing loans and policy-related assets was RMB273,481 million. Accordingly, as of December 31, 2003, we adjusted the net carrying value of the loans to reÖect the commitment to sell such loans at the price established by the PRC Government. This resulted in a net release of allowance for impairment losses on loans and advances of RMB32,976 million (being the diÅerence between the aggregate net carrying value of the non-performing loans and policy-related assets of RMB60,015 million and the estimated consideration to be received of RMB92,991 million), which was recorded in the capital reserve. No adjustment was made to the carrying value of the policy-related assets. These non-performing loans and policy-related assets were ultimately transferred to Cinda, the PBOC and China Orient in 2004. These transfers were eÅected through three separate transactions in 2004 as described under ""Our Restructuring'', when the rights to receive the cash Öows were actually transferred to the transferees. The actual aggregate amount of non-performing loans and policy-related assets that were transferred was RMB272,020 million, reÖecting cash collections and resolutions subsequent to the transaction commitment date. As consideration for the disposal of the non-performing loans and policy-related assets, we received: (1) a Ñve-year special bill issued by the PBOC with a principal amount of RMB73,430 million and an interest rate of 1.89% per annum for the sale to Cinda; (2) a three-year special bill issued by the PBOC with a principal amount of RMB18,100 million and an interest rate of 1.89% per annum for the sale to the PBOC; and (3) zero consideration for the sale to China Orient. The PBOC has the option to settle these special bills in whole or in part prior to their maturity. Largely as a result of the disposal of non-performing loans and policy-related assets to Cinda, the PBOC and China Orient in June and September 2004, the ratio of our identiÑed impaired loans to total loans and advances to customers was reduced from 16.6% as of December 31, 2003 to 5.5% as of December 31, 2004. We may not be able to dispose of impaired loans in such large amounts or on similar terms in the future. Therefore, any historical trends with respect to our impaired loans must be viewed in light of these disposals. For a further discussion of our restructuring, see ""Our Restructuring''.
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FINANCIAL INFORMATION
RESULTS OF OPERATIONS Net Interest Income The table below sets forth, for the periods indicated, the principal components of our interest income and interest expense:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Interest income Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,193 92,174 110,313 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,891 32,132 44,938 Due from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,883 8,047 12,697 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,967 132,353 167,948 Interest expense Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (33,670) (36,883) (55,914) Due to banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,703) (4,259) (6,512) Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,997) (2,776) (4,514) Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40,370) (43,918) (66,940) Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008
Net interest income from our domestic operations accounts for a large portion of our net interest income. The table below sets forth, for the periods indicated, the principal components of our interest income and interest expense for our domestic operations:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic Interest income Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,372 80,430 92,004 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,490 24,439 33,224 Due from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,311 6,509 8,949 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93,173 111,378 134,177 Interest expense Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (27,842) (31,710) (41,074) Due to banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,092) (3,647) (5,506) Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,997) (2,776) (4,514) Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (33,931) (38,133) (51,094) Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,242 73,245 83,083
Our net interest income is aÅected by the diÅerence between the yields on our interest-earning assets and the costs of our interest-bearing liabilities, as well as the average balances of these assets and liabilities. For our domestic operations, the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities are signiÑcantly aÅected by the PBOC benchmark interest rates and PBOC's policies and regulations on interest rates. In particular, the PBOC establishes and modiÑes from time to time the benchmark interest rates for Renminbi- denominated loans to our customers and the Renminbi-denominated deposits from our customers, as well as foreign exchange deposits with balances below certain speciÑed amounts. The average
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FINANCIAL INFORMATION
yields on our interest-earning assets and the average costs of our interest-bearing liabilities for our domestic operations are also aÅected by other PRC monetary policies, market competition, and general economic, Ñnancial and liquidity conditions. In addition, a signiÑcant portion of our interest- earning assets and interest-bearing liabilities are denominated in foreign currencies. As a result, the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities are also aÅected by the interest rates associated with certain foreign currencies. The table below sets forth our interest income from loans and advances, interest income from investment securities and interest expense on due to customers by currency for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic Interest income Loans and advances to customers Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,756 69,768 78,271 Foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,616 10,662 13,733 66,372 80,430 92,004 Investment securities Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,102 11,000 15,852 Foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,388 13,439 17,372 21,490 24,439 33,224 Interest expense Due to customers Renminbi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23,328) (28,074) (35,495) Foreign currency ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,514) (3,636) (5,579) (27,842) (31,710) (41,074)
We have signiÑcant operations in Hong Kong, Macau and other overseas regions. For our overseas operations, average yields on interest-earning assets and average costs on interest- bearing liabilities are aÅected by local economic conditions, Ñnancial market conditions and monetary policies.
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FINANCIAL INFORMATION
The table below sets forth, for the periods indicated, the average balance of our assets and liabilities, the related interest income or expense and the related average yield or cost. The average balances of interest-earning assets and interest-bearing liabilities are the average of the daily balances derived from our management accounts and have not been audited. The average balance of non-interest-earning assets, non-interest-bearing liabilities and the allowance for impairment losses are the average of the balances as of January 1 and December 31 in 2003, 2004 and 2005.
For the year ended December 31, 2003 2004 2005 Interest Interest Interest Average income/ Average Average income/ Average Average income/ Average balance(1) expense yield/cost(2) balance(1) expense yield/cost(2) balance(1) expense yield/cost(2) (in millions of RMB, except percentages) ASSETS Loans and advances to customers ÏÏÏ 2,014,507 79,193 3.93% 2,176,344 92,174 4.24% 2,194,078 110,313 5.03% Investment securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 998,564 29,891 2.99% 1,142,227 32,132 2.81% 1,485,640 44,938 3.02% Due from banks and other Ñnancial institutions(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 530,401 7,883 1.49% 637,508 8,047 1.26% 655,359 12,697 1.94% Total interest-earning assetsÏÏÏÏÏÏÏÏÏ 3,543,472 116,967 3.30% 3,956,079 132,353 3.35% 4,335,077 167,948 3.87% Allowance for impairment losses ÏÏÏÏÏ (278,741) Ì Ì (156,904) Ì Ì (78,961) Ì Ì Non-interest-earning assets ÏÏÏÏÏÏÏÏÏ 238,538 Ì Ì 242,792 Ì Ì 243,662 Ì Ì Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,503,269 116,967 3.34% 4,041,967 132,353 3.27% 4,499,778 167,948 3.73% LIABILITIES Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,919,561 33,670 1.15% 3,231,439 36,883 1.14% 3,560,014 55,914 1.57% Due to banks and other Ñnancial institutions(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 306,295 3,703 1.21% 314,672 4,259 1.35% 355,856 6,512 1.83% Other borrowed funds(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,925 2,997 3.45% 82,253 2,776 3.37% 115,843 4,514 3.90% Total interest-bearing liabilities ÏÏÏÏÏÏÏ 3,312,781 40,370 1.22% 3,628,364 43,918 1.21% 4,031,713 66,940 1.66% Non-interest-bearing liabilitiesÏÏÏÏÏÏÏÏ 229,619 Ì Ì 259,611 Ì Ì 226,245 Ì Ì Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,542,400 40,370 1.14% 3,887,975 43,918 1.13% 4,257,958 66,940 1.57% Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008 Net interest margin(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.16% 2.24% 2.33% Net interest spread(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.08% 2.14% 2.21%
(1) Average balances of interest-earning assets and interest-bearing liabilities are derived from our management accounts. These amounts have not been audited. (2) The average yield/cost is calculated by dividing interest income/expense by average balance. (3) Includes investment securities classiÑed as loans and receivables, held-to-maturity securities and available-for-sale securities and trading debt securities. (4) Includes due from banks, balances with central banks and placements with banks and other Ñnancial institutions. (5) Includes due to banks, due to central banks and placements from banks and other Ñnancial institutions. (6) Includes bonds issued and special purpose borrowings. (7) Represents the ratio of net interest income to the average balance of total interest-earning assets. (8) Represents the diÅerence between the average yield on the average balance of our total interest-earning assets and the average cost of the average balance of our total interest-bearing liabilities.
The table below sets forth the changes in our interest income and interest expense due to changes in volume and rates for the periods indicated. Volume and rate variance have been calculated based on movements in average balances over these years and changes in interest rates
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FINANCIAL INFORMATION
on daily average interest-earning assets and interest-bearing liabilities. Variances caused by changes in both volume and rate have been allocated to rate.
Year ended December 31, 2004 vs. 2003 2005 vs. 2004 Increase/(decrease)Net Increase/(decrease) Net due toIncrease/ due to Increase/ Volume Rate (decrease) Volume Rate (decrease) (in millions of RMB) Assets Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,360 6,621 12,981 752 17,387 18,139 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,296 (2,055) 2,241 9,650 3,156 12,806 Due from banks and other Ñnancial institutions ÏÏÏÏ 1,596 (1,432) 164 225 4,425 4,650 Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,252 3,134 15,386 10,627 24,968 35,595 Liabilities Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,587 (374) 3,213 3,746 15,285 19,031 Due to banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 101 455 556 556 1,697 2,253 Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (161) (60) (221) 1,132 606 1,738 Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,527 21 3,548 5,434 17,588 23,022
The table below sets forth, for the periods indicated, the average balance of our assets and liabilities, the related interest income or expense and the related average yield or cost for our domestic operations. The average balances of interest-earning assets and interest-bearing liabilities for our domestic operations are the average of the daily balances derived from our management accounts and have not been audited. The average balance of non-interest-earning assets, non- interest-bearing liabilities and the allowance for impairment losses is the average of the balances as of January 1 and December 31 in 2003, 2004 and 2005.
For the year ended December 31, 2003 2004 2005 Interest Interest Interest Average income/ Average Average income/ Average Average income/ Average balance(1) expense yield/cost(2) balance(1) expense yield/cost(2) balance(1) expense yield/cost(2) (in millions of RMB, except percentages) Domestic Assets Loans and advances to customersÏÏÏÏÏÏ 1,565,644 66,372 4.24% 1,781,581 80,430 4.51% 1,782,625 92,004 5.16% Investment securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 711,938 21,490 3.02% 844,611 24,439 2.89% 1,144,331 33,224 2.90% Due from banks and other Ñnancial institutions(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 388,966 5,311 1.37% 492,721 6,509 1.32% 526,221 8,949 1.70% Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏ 2,666,548 93,173 3.49% 3,118,913 111,378 3.57% 3,453,177 134,177 3.89% Allowance for impairment losses ÏÏÏÏÏÏÏ (249,985) Ì Ì (145,458) Ì Ì (72,676) Ì Ì Non-interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏ 209,891 Ì Ì 209,774 Ì Ì 208,060 Ì Ì Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,626,454 93,173 3.55% 3,183,229 111,378 3.50% 3,588,561 134,177 3.74% Liabilities Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,174,007 27,842 1.28% 2,500,439 31,710 1.27% 2,808,231 41,074 1.46% Due to banks and other Ñnancial institutions(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 259,341 3,092 1.19% 280,504 3,647 1.30% 317,982 5,506 1.73% Other borrowed funds(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,925 2,997 3.45% 82,249 2,776 3.38% 113,363 4,514 3.98% Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏ 2,520,273 33,931 1.35% 2,863,192 38,133 1.33% 3,239,576 51,094 1.58% Non-interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏ 157,710 Ì Ì 180,480 Ì Ì 154,864 Ì Ì Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,677,983 33,931 1.27% 3,043,672 38,133 1.25% 3,394,440 51,094 1.51% Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,242 73,245 83,083 Net interest margin(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.22% 2.35% 2.41% Net interest spread(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.14% 2.24% 2.31%
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(1) Average balances of interest-earning assets and interest-bearing liabilities are derived from our management accounts. These amounts have not been audited. (2) The average yield/cost is calculated by dividing interest income/expense by average balance. (3) Includes investment securities classiÑed as loans and receivables, held-to-maturity securities and available-for-sale securities and trading debt securities. (4) Includes due from banks, balances with central banks and placements with banks and other Ñnancial institutions. (5) Includes due to banks, due to central banks and placements from banks and other Ñnancial institutions. (6) Includes bonds issued and special purpose borrowings. (7) Represents the ratio of net interest income to the average balance of total interest-earning assets. (8) Represents the diÅerence between the average yield on the average balance of our total interest-earning assets and the average cost of the average balance of our total interest-bearing liabilities. The table below sets forth, for the periods indicated, the changes in our interest income and interest expense due to changes in volume and rates for our domestic operations. Volume and rate variance have been calculated based on movements in average balances over these years and changes in interest rates on daily average interest-earning assets and interest-bearing liabilities. Variances caused by changes in both volume and rate have been allocated to rate.
Year ended December 31, 2004 vs. 2003 2005 vs. 2004 Increase/(decrease) Increase/(decrease) due toNet Increase/ due to Net Increase/ Volume Rate (decrease) Volume Rate (decrease) (in millions of RMB) Domestic Assets Loans and advances to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,156 4,902 14,058 47 11,527 11,574 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,007 (1,058) 2,949 8,662 123 8,785 Due from banks and other Ñnancial institutions ÏÏ 1,421 (223) 1,198 442 1,998 2,440 Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,584 3,621 18,205 9,151 13,648 22,799 Liabilities Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,178 (310) 3,868 3,909 5,455 9,364 Due to banks and other Ñnancial institutionsÏÏÏÏÏ 252 303 555 487 1,372 1,859 Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (161) (60) (221) 1,052 686 1,738 Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,269 (67) 4,202 5,448 7,513 12,961
Year ended December 31, 2005 compared to year ended December 31, 2004 Interest Income Interest income increased by 26.9% from RMB132,353 million in 2004 to RMB167,948 million in 2005. This increase was primarily due to the continued increase in the average yield on interest- earning assets from 3.35% in 2004 to 3.87% in 2005, as well as an increase in the average balance of our interest-earning assets from RMB3,956,079 million in 2004 to RMB4,335,077 million in 2005. Interest income from loans and advances to customers. Interest income from loans and advances to customers increased by 19.7% from RMB92,174 million in 2004 to RMB110,313 million in 2005, reÖecting a 79 basis point increase in average yield from 4.24% in 2004 to 5.03% in 2005 and a 0.8% increase in the average balance of our loans and advances to customers from RMB2,176,344 million in 2004 to RMB2,194,078 million in 2005. Interest income from loans and advances to customers increased primarily due to a 14.4% increase in such income for our domestic operations from RMB80,430 million in 2004 to
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FINANCIAL INFORMATION
RMB92,004 million in 2005. The increase in interest income from loans and advances to customers for our domestic operations primarily reÖected an increase in the average yield on loans and advances to customers. The increase in average yield was primarily due to the improvement in the quality of our loan portfolio resulting from the disposal of non-performing loans in 2004 and our enhanced credit risk management. The increase in average yield was also due to an increase in the PBOC benchmark interest rates on Renminbi-denominated loans and advances that became eÅective in October 2004, and also partially reÖected an increase in the yield on our foreign currency-denominated loans resulting from increased market interest rates for foreign currency- denominated assets. While we continue to expand our loan business, especially loans to higher quality customers, the average balance of our domestic loans and advances remained substantially unchanged at RMB1,782,625 million in 2005 as compared to RMB1,781,581 million in 2004, mainly reÖecting the disposal of non-performing loans in 2004 as well as our enhanced eÅorts to control our exposure to higher-risk loans. See ""Description of Our Assets and Liabilities Ì Assets Ì Loans and Advances to Customers''.
Income from loans and advances for our overseas operations also increased primarily due to an increase in the average yield as a result of the increased market interest rate in Hong Kong as well as an increase in the average balance of loans and advances as the economy continues to recover in Hong Kong.
Interest income from investment securities. Interest income from investment securities increased by 39.9% from RMB32,132 million in 2004 to RMB44,938 million in 2005, reÖecting a 30.1% increase in the average balance of our investment securities from RMB1,142,227 million in 2004 to RMB1,485,640 million in 2005, as well as a 21 basis point increase in the average yield from 2.81% in 2004 to 3.02% in 2005.
Interest income from investment securities increased mainly as a result of a 35.9% increase in such income for our domestic operations, from RMB24,439 million in 2004 to RMB33,224 million in 2005. The increase in such income for our domestic operations primarily reÖected an increase in the average balance of our investment securities. The increase in the average balance of our investment securities was primarily due to an increase in the amount of funds available for investment, which was largely attributable to the growth of our customer deposits as well as increased allocations of assets to investment securities. The average yield increased slightly in 2005, reÖecting an increase in the average yield on our foreign currency-denominated investment securities, which was largely oÅset by a decrease in the average yield on our Renminbi-denominated investment securities. The decrease in the average yield on our Renminbi-denominated investment securities in 2005 reÖected the decreased interest rate on special purpose treasury bonds in relation to the restructuring of such bonds. See note VI. 18(3) to Appendix I Ì ""Accountants' Report''. In addition, the decrease in the average yield of our Renminbi-denominated investment securities reÖected the full year impact in 2005 of the low interest rate on the PBOC's special bills we obtained on June 30, 2004 relating to our disposal of non-performing loans. Furthermore, the decrease reÖected the general decrease in prevailing interest rate of Renminbi-denominated investments as a result of liquidity surplus in the domestic banking sector.
Interest income from investment securities for our overseas operations also increased in 2005. This increase was primarily due to a general increase in market interest rates and increased allocations of assets to investment securities by our operations in Hong Kong.
Interest income from amounts due from banks and other Ñnancial institutions. Interest income from amounts due from banks and other Ñnancial institutions increased by 57.8% from RMB8,047 million in 2004 to RMB12,697 million in 2005, reÖecting a 68 basis point increase in the average yield from 1.26% in 2004 to 1.94% in 2005, as well as a 2.8% increase in the average balance of amounts
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FINANCIAL INFORMATION
due from banks and other Ñnancial institutions from RMB637,508 million in 2004 to RMB655,359 million in 2005.
Interest income from amounts due from banks and other Ñnancial institutions increased principally as a result of a 37.5% increase in such income for our domestic operations, from RMB6,509 million in 2004 to RMB8,949 million in 2005. The increase in such income for our domestic operations was due to an increase in the average balance of amounts due from banks and other Ñnancial institutions, as well as an increase in the average yield. The increase in the average balance of amounts due from banks and other Ñnancial institutions was primarily due to an increase in our customer deposits. The increase in the average yield was largely due to an increase in the prevailing interest rates on foreign currency-denominated assets.
Interest income from amounts due from banks and other Ñnancial institutions for our overseas operations also increased in 2005. This increase was primarily due to an increase in the average yield as a result of the increased market interest rate in Hong Kong, which was partially oÅset by the decrease in the average balance of due from banks and other Ñnancial institutions for our overseas operations. The decrease in the average balance of due from banks and other Ñnancial institutions for our overseas operations was largely attributable to increased allocations of assets to investment securities than to lending to banks and other Ñnancial institutions.
Interest Expense
Interest expense increased by 52.4%, from RMB43,918 million in 2004 to RMB66,940 million in 2005. This increase was primarily due to an 11.1% increase in the average balance of our interest- bearing liabilities from RMB3,628,364 million in 2004 to RMB4,031,713 million in 2005, as well as a 45 basis point increase in the average cost from 1.21% in 2004 to 1.66% in 2005.
Interest expense on amounts due to customers. Interest expense on amounts due to customers increased by 51.6% from RMB36,883 million in 2004 to RMB55,914 million in 2005, reÖecting a 10.2% increase in the average balance of amounts due to customers from RMB3,231,439 million in 2004 to RMB3,560,014 million in 2005, as well as a 43 basis point increase in the average cost from 1.14% in 2004 to 1.57% in 2005.
Interest expense on amounts due to customers increased principally as a result of a 29.5% increase in such expense for our domestic operations from RMB31,710 million in 2004 to RMB41,074 million in 2005. The increase in such expense for our domestic operations was primarily due to an increase in the average balance of domestic customer deposits, as well as an increase in the average cost of domestic customer deposits. The average balance of our domestic customer deposits increased mainly as a result of an increase in Renminbi-denominated deposits, which was attributable to the continued economic growth in the PRC and our eÅorts to expand our Renminbi- denominated business. The increase in the average balance of domestic customer deposits in Renminbi was partially oÅset by the decrease in foreign currency-denominated deposits as a result of the expectation of an appreciation in the value of the Renminbi against the U.S. dollar. The increase in the average cost was primarily due to the increased cost of Renminbi-denominated deposits as a result of the adjustment by the PBOC in October 2004 on the benchmark interest rates on Renminbi-denominated deposits. The average cost of foreign-currency denominated deposits also increased primarily due to adjustments by the PBOC on the benchmark interest rates on certain foreign-currency denominated deposits since the fourth quarter of 2004.
Interest expense on amounts due to customers for our overseas operations increased primarily as a result of an increase in the average cost of our customer deposits. The increase in average cost was mainly due to a general increase in market interest rates in Hong Kong.
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FINANCIAL INFORMATION
Interest expense on amounts due to banks and other Ñnancial institutions. Interest expense on amounts due to banks and other Ñnancial institutions increased by 52.9% from RMB4,259 million in 2004 to RMB6,512 million in 2005, reÖecting an 13.1% increase in the average balance of amounts due to banks and other Ñnancial institutions and a 48 basis point increase in the average cost from 1.35% in 2004 to 1.83% in 2005. Interest expense on amounts due to banks and other Ñnancial institutions increased primarily as a result of a 51% increase in such expense for our domestic operations, from RMB3,647 million in 2004 to RMB5,506 million in 2005. The increase in such expense for our domestic operations reÖected an increase in the average balance of amounts due to banks and other Ñnancial institutions, as well as an increase in the average cost. The increase in average balance was principally due to a general increase in the volume of our business with other Ñnancial institutions in the PRC, while the increase in the average cost was partially due to an increase in the prevailing interest rates on foreign-currency denominated liabilities. Interest expense on other borrowed funds. Other borrowed funds primarily consist of special- purpose borrowings and subordinated bonds. Special-purpose borrowings are long-term multi- currency borrowings from foreign governments or banks in the form of export credit loans, foreign government and Ñnancial institution loans. Interest expense on other borrowed funds increased by 62.6% from RMB2,776 million in 2004 to RMB4,514 million in 2005, primarily due to the full year impact in 2005 of the subordinated bonds totaling RMB26,070 million in aggregate principal amount issued in the second half of 2004, as well as the issuance of subordinated bonds totaling RMB33,930 million in aggregate principal amount in February 2005. The increase in interest expenses of subordinated bonds was partially oÅset by the decrease in the interest expenses of our special-purpose borrowing as the outstanding balance of such special-purpose borrowings continued to decrease.
Net interest income As a result of the foregoing, our net interest income increased by 14.2% from RMB88,435 million in 2004 to RMB101,008 million in 2005.
Net interest margin Our net interest margin was 2.33% in 2005, compared to 2.24% in 2004.
Year ended December 31, 2004 compared to year ended December 31, 2003 Interest Income Interest income increased by 13.2% from RMB116,967 million in 2003 to RMB132,353 million in 2004. This increase was primarily due to the continued increase in the average balance of our interest-earning assets from RMB3,543,472 million in 2003 to RMB3,956,079 million in 2004, as well as an increase in the average yield on interest-earning assets from 3.30% in 2003 to 3.35% in 2004 during this period. Interest income from loans and advances to customers. Interest income from loans and advances to customers increased by 16.4% from RMB79,193 million in 2003 to RMB92,174 million in 2004, reÖecting an 8.0% increase in the average balance of our loans and advances to customers from RMB2,014,507 million in 2003 to RMB2,176,344 million in 2004, and a 31 basis point increase in average yield from 3.93% in 2003 to 4.24% in 2004. Interest income from loans and advances to customers increased primarily due to a 21.2% increase in such income for our domestic operations from RMB66,372 million in 2003 to
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FINANCIAL INFORMATION
RMB80,430 million in 2004. The increase in such income for our domestic operations reÖected an increase in the average balance of our domestic loans and advances, as well as an increase in the average yield. The average balance of our domestic loans and advances increased principally due to the continued economic growth in the PRC and our eÅorts to expand our domestic Renminbi- denominated business and personal loan business, which were partially oÅset by the disposal of non-performing loans and the policy-related assets to Cinda, the PBOC and China Orient in connection with our restructuring in June and September 2004. The increase in average yield was primarily due to the improvement in the quality of our loan portfolio resulting from the disposal of non-performing loans in connection with our restructuring. To a lesser extent, the increase in average yield was also due to an increase in the PBOC benchmark interest rates on Renminbi- denominated loans that became eÅective in October 2004. These increases in average yield were partially oÅset by a decrease in the average yield of our foreign currency-denominated loans, mainly as the result of the low market interest rate environment, particularly in the Ñrst half of 2004.
The increase in interest income from domestic loans and advances was partially oÅset by a decrease in interest income from loans and advances for our overseas operations. This decrease was primarily due to the low market interest rate environment in Hong Kong and increased market competition.
Interest income from investment securities. Interest income from investment securities increased by 7.5% from RMB29,891 million in 2003 to RMB32,132 million in 2004, reÖecting a 14.4% increase in the average balance of our investment securities from RMB998,564 million in 2003 to RMB1,142,227 million in 2004, which was partially oÅset by an 18 basis point decrease in the average yield from 2.99% in 2003 to 2.81% in 2004.
Interest income from investment securities increased primarily as a result of a 13.7% increase in such income for our domestic operations, from RMB21,490 million in 2003 to RMB24,439 million in 2004. The increase in such income for our domestic operations reÖected an increase in the average balance of our investment securities, which was partially oÅset by lower average yields. The increase in the average balance of our investment securities was primarily due to an increase in the amount of funds available for investment, which in turn was largely attributable to the growth of our customer deposits and Huijin's capital contribution on December 30, 2003. The increase in average balance of our investment securities was also attributable to the special bills issued by the PBOC to us in 2004 in connection with our restructuring. The decrease in average yield was largely the result of the decrease in average yields on our foreign currency-denominated investment securities, which in turn was primarily due to the low market interest rates beginning in the second quarter of 2002. The decrease in average yield was also due in part to our holding of special bills issued by the PBOC in connection with our restructuring with an aggregate principal amount of RMB91,530 million and an interest rate of 1.89% per annum.
The increase in interest income from investment securities for our domestic operations was partially oÅset by a decrease in interest income from investment securities for our overseas operations. Interest income from investment securities for our overseas operations decreased primarily due to a decrease in average yield associated with low market interest rates, particularly in the Ñrst half of 2004, which was partially oÅset by an increase in the average balance of our investment securities.
Interest income from amounts due from banks and other Ñnancial institutions. Interest income from amounts due from banks and other Ñnancial institutions increased by 2.1% from RMB7,883 million in 2003 to RMB8,047 million in 2004, reÖecting a 20.2% increase in the average balance of our amounts due from banks and other Ñnancial institutions from RMB530,401 million in
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FINANCIAL INFORMATION
2003 to RMB637,508 million in 2004, which was partially oÅset by an 23 basis point decrease in the average yield from 1.49% in 2003 to 1.26% in 2004. Interest income from amounts due from banks and other Ñnancial institutions increased primarily as a result of a 22.6% increase in such income for our domestic operations, from RMB5,311 million in 2003 to RMB6,509 million in 2004. The increase in such income for our domestic operations was due to an increase in the average balance of amounts due from banks and other Ñnancial institutions for our domestic operations, partially oÅset by a decrease in the average yield. The increase in the average balance of amounts due from banks and other Ñnancial institutions was primarily due to an increase in our available funds as a result of increased customer deposits and Huijin's capital contribution, while the decrease in the average yield was largely due to the decrease in interest rates on excess reserve deposits with central banks that became eÅective in December 2003. The increase in interest income from amounts due from banks and other Ñnancial institutions from our domestic operations was partially oÅset by a decrease in such income for our overseas operations in 2004. This decrease was primarily due to the decrease in interest income from BOCHK associated with a decline in money market interest rates in Hong Kong.
Interest Expense Interest expense increased by 8.8% in 2004, from RMB40,370 million in 2003 to RMB43,918 million in 2004. This increase was primarily due to a 9.5% increase in the average balance of our interest-bearing liabilities from RMB3,312,781 million in 2003 to RMB3,628,364 million in 2004, partially oÅset by a one basis point decrease in the average cost from 1.22% in 2003 to 1.21% in 2004. Interest expense on amounts due to customers. Interest expense on amounts due to customers increased by 9.5% from RMB33,670 million in 2003 to RMB36,883 million in 2004, reÖecting a 10.7% increase in the average balance of amounts due to customers from RMB2,919,561 million in 2003 to RMB3,231,439 million in 2004, which was partially oÅset by a one basis point decrease in the average cost from 1.15% in 2003 to 1.14% in 2004. Interest expense on amounts due to customers increased primarily as a result of a 13.9% increase in such expense for our domestic operations from RMB27,842 million in 2003 to RMB31,710 million in 2004. The increase in such expense for our domestic operations was primarily due to an increase in the average balance of domestic customer deposits, which was partially oÅset by a decrease in the average cost of domestic customer deposits. The average balance of domestic customer deposits increased principally as a result of the continued economic growth in the PRC, as well as our eÅorts to expand our domestic business, especially our Renminbi-denominated deposit business. The decrease in the average cost was primarily the result of a decline in the interest rates on foreign currency-denominated deposits, which was in large part due to the low interest rate environment, as well as the increase in the proportion of demand deposits, which bear lower interest rates than time deposits. The increase in interest expense on amounts due to customers for our domestic operations was partially oÅset by a decrease in such expense for our overseas operations. This decrease was primarily the result of a decrease in the average cost of our customer deposits with respect to our overseas operations. The average cost decreased primarily due to a general decline in market interest rates in Hong Kong. Interest expense on amounts due to banks and other Ñnancial institutions. Interest expense on amounts due to banks and other Ñnancial institutions increased by 15.0% from RMB3,703 million in
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FINANCIAL INFORMATION
2003 to RMB4,259 million in 2004, reÖecting an 2.7% increase in the average balance of amounts due to banks and other Ñnancial institutions and a 14 basis point increase in the average cost. Interest expense on amounts due to banks and other Ñnancial institutions increased primarily due to a 17.9% increase in such expense for our domestic operations, from RMB3,092 million in 2003 to RMB3,647 million in 2004. The increase in such expense for our domestic operations reÖected an increase in the average balance of amounts due to banks and other Ñnancial institutions as well as an increase in the average cost. The increase in average balance was principally as a result of a general increase in the volume of our business with other Ñnancial institutions in the PRC, particularly insurance companies, while the increase in the average cost was largely due to higher interbank market interest rates that resulted from the increase in the PBOC rediscount rate and an increase in the PBOC mandatory reserve rate from 7% to 7.5% that became eÅective on April 25, 2004. Interest expense on other borrowed funds. Other borrowed funds primarily consist of special- purpose borrowings and subordinated bonds. Special-purpose borrowings are long-term multi- currency borrowings from foreign governments or banks in the form of export credit loans, foreign government and Ñnancial institution loans. Interest expense on other borrowed funds decreased by 7.4% from RMB2,997 million in 2003 to RMB2,776 million in 2004, primarily as the result of a decrease in interest expense on special-purpose borrowings, which was partially oÅset by an increase in interest expense on subordinated bonds. The decrease in interest expense on special- purpose borrowings was due to decreases in the average balance and the average cost of such borrowings, as certain of these borrowings, particularly those that bore higher interest rates, matured in 2004. Interest expense on subordinated bonds increased primarily because we issued two tranches of subordinated bonds with an aggregate principal amount of RMB26,070 million in 2004. In 2004, these two tranches of subordinated bonds bore interest at rates of 4.87% and 4.94% per annum, respectively.
Net interest income As a result of the foregoing, our net interest income increased by 15.5% from RMB76,597 million in 2003 to RMB88,435 million in 2004.
Net interest margin Our net interest margin was 2.24% in 2004, compared to 2.16% in 2003.
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FINANCIAL INFORMATION
Net Fee and Commission Income The table below sets forth the principal components of our net fee and commission income for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Settlement and clearing feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,237 2,626 2,941 Agency commissionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,137 2,690 2,735 Credit commitment fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,075 2,367 2,693 Bank card fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,340 1,840 2,340 Custodian and other Ñduciary service fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 275 394 483 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,504 1,471 1,506 Fee and commission incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,568 11,388 12,698 Fee and commission expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,215) (2,831) (3,451) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,353 8,557 9,247
The table below sets forth the principal components of our net fee and commission income for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic Settlement and clearing feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,395 1,681 1,745 Agency commissionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 425 647 823 Credit commitment fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,191 1,407 1,784 Bank card fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 776 1,095 1,540 Custodian and other Ñduciary service fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70 154 207 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 462 500 905 Fee and commission incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,319 5,484 7,004 Fee and commission expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,128) (1,432) (1,797) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,191 4,052 5,207
Year ended December 31, 2005 compared to year ended December 31, 2004 Our net fee and commission income increased by 8.1% from RMB8,557 million in 2004 to RMB9,247 million in 2005, primarily reÖecting increases in credit commitment fees, bank card fees, partially oÅset by an increase in fee and commission expense. Settlement and clearing fees. Settlement and clearing fees increased by 12.0% from RMB2,626 million in 2004 to RMB2,941 million in 2005. The increase in settlement and clearing fees was principally due to the increase of market demand of settlement and clearing services. Agency commissions. Agency commissions increased by 1.7% from RMB2,690 million in 2004 to RMB2,735 million in 2005. The increase in agency commissions was mainly due to a 27.2% increase in agency commissions for our domestic operations, from RMB647 million to RMB823 million. This increase was principally a result of the increase of sales of funds, insurance and securities products and services.
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FINANCIAL INFORMATION
Credit commitment fees. Credit commitment fees primarily include fees from our guarantee services, trade Ñnance arrangement fees, fees in connection with on-lending loans and syndicated loans. Credit commitment fees increased by 13.8% from RMB2,367 million in 2004 to RMB2,693 million in 2005. The increase in credit commitment fees was mainly due to a 26.8% increase in domestic credit commitment fees, from RMB1,407 million in 2004 to RMB1,784 million in 2005. The increase in domestic credit commitment fees was largely due to the continued growth of our trade Ñnance business as a result of the continued economic expansion in the PRC and the growth of foreign and domestic trade. Bank card fees. Bank card fees primarily consist of annual fees, cash advance fees, interchange fees and merchant services fees. Bank card fees increased by 27.2% from RMB1,840 million in 2004 to RMB2,340 million in 2005. The increase in bank card fees was principally the result of a 40.6% increase in card fees for our domestic operations, from RMB1,095 million in 2004 to RMB1,540 million in 2005, and a 7.4% increase in card fees for our overseas operations, from RMB745 million in 2004 to RMB800 million in 2005. The increase in bank card fees for our domestic operations was partially because we started to charge annual fees for debit card throughout our domestic operations in 2005. In addition, this increase reÖected increases in the usage and volume of bank cards. Custodian and other Ñduciary service fees. Custodian and other Ñduciary service fees increased by 22.6% from RMB394 million in 2004 to RMB483 million in 2005. The increase in custodian and other Ñduciary service fees was primarily due to a signiÑcant increase in domestic custodian and other Ñduciary service fees, from RMB154 million in 2004 to RMB207 million in 2005. The increase in domestic custodian and other Ñduciary service fees was mainly due to the continued growth in our custody operations in the PRC in terms of assets under custody, which was largely attributable to the continued growth of securities investment funds in the PRC and the increased volume of custodian services we provided to social security funds, insurance funds and other institutions. Other fee and commission income. Other fee and commission income, which include miscellaneous service charges such as account management fees, increased by 2.4% from RMB1,471 million in 2004 to RMB1,506 million in 2005. Other fee and commission income for our domestic operations increased from RMB500 million to RMB905 million. Prior to 2005, certain fee and commission charged relating to third party services, net of actual expenses paid to such third parties, were booked to oÅset other operating expenses. In 2005, we began to book such net income as other fee and commission income. The increase of other fee and income also reÖected an increase in the management fees charged to customer accounts. Fee and commission expense. Fee and commission expense increased by 21.9% from RMB2,831 million in 2004 to RMB3,451 million in 2005, representing 24.9% and 27.2%, respectively, of our fee and commission income in those periods. Fee and commission expense for our domestic operations increased by 25.5% from RMB1,432 million in 2004 to RMB1,797 million in 2005, representing 26.1% and 25.7% of our fee and commission income for our domestic operations in each of those periods. The increase in fee and commission expense for our domestic operations primarily reÖected the expansion of our non-interest income business, and the resulting increase in fees paid in this regard, such as charges paid on foreign currency settlement, as well as increases in fee and commission expenses paid in connection with our issuance of subordinated bonds totaling RMB33,930 million in aggregate principal amount in 2005, as compared to RMB26,070 million in 2004. Fee and commission expenses for overseas operations increased, reÖecting, among other things, an increase in the credit card processing fees charged by Mastercard and Visa.
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FINANCIAL INFORMATION
Year ended December 31, 2004 compared to year ended December 31, 2003 Our net fee and commission income increased by 16.4% from RMB7,353 million in 2003 to RMB8,557 million in 2004, primarily reÖecting increases in settlement and clearing fees, agency commissions, credit commitment fees and bank card fees, partially oÅset by an increase in fee and commission expense. Settlement and clearing fees. Settlement and clearing fees increased by 17.4% from RMB2,237 million in 2003 to RMB2,626 million in 2004. The increase in settlement and clearing fees was primarily the result of a 20.5% increase in settlement and clearing fees for our domestic operations, from RMB1,395 million in 2003 to RMB1,681 million in 2004. The increase in settlement and clearing fees for our domestic operations was principally due to the expansion of the trade- related services business for our domestic operations, which in turn resulted primarily from an increase in foreign trade. Agency commissions. Agency commissions increased by 25.9% from RMB2,137 million in 2003 to RMB2,690 million in 2004. This increase was principally a result of the growth of sales of funds and insurance, securities and futures products and services, including the securities and futures agency services of BOCI and BOCHK. Credit commitment fees. Credit commitment fees increased by 14.1% from RMB2,075 million in 2003 to RMB2,367 million in 2004. The increase in credit commitment fees was mainly due to an 18.1% increase in domestic credit commitment fees, from RMB1,191 million in 2003 to RMB1,407 million in 2004. The increase in domestic credit commitment fees was principally due to the continued growth of our guarantee services and trade Ñnance business as a result of the continued economic expansion in the PRC and the growth of foreign and domestic trade, which was partially oÅset by a decrease in fees from our on-lending loans business. Bank card fees. Bank card fees increased by 37.3% from RMB1,340 million in 2003 to RMB1,840 million in 2004. The increase in bank card fees was principally the result of a 41.1% increase in card fees for our domestic operations, from RMB776 million in 2003 to RMB1,095 million in 2004, and a 32.1% increase in card fees for our overseas operations, from RMB564 million in 2003 to RMB745 million in 2004, primarily attributable to the recovery of the bank card business of BOCHK following the end of the SARS outbreak. The increase in bank card fees for our domestic operations was principally the result of our ongoing eÅorts to expand our credit card and bank card businesses, particularly in the more economically developed provinces, and the increased usage of our cards. Custodian and other Ñduciary service fees. Custodian and other Ñduciary service fees increased by 43.3% from RMB275 million in 2003 to RMB394 million in 2004. The increase in custodian and other Ñduciary service fees was primarily due to a signiÑcant increase in domestic custodian and other Ñduciary service fees, from RMB70 million in 2003 to RMB154 million in 2004. The increase in domestic custodian and other Ñduciary service fees was mainly due to the continued growth in our custody operations in the PRC in terms of assets under custody, which was largely attributable to the continued growth of securities investment funds in the PRC and the increased volume of custodian services we provided to social security funds, insurance funds and other institutions. Other fee and commission income. Other fee and commission income decreased by 2.2% from RMB1,504 million in 2003 to RMB1,471 million in 2004. Fee and commission expense. Fee and commission expense increased by 27.8% from RMB2,215 million in 2003 to RMB2,831 million in 2004, representing 23.2% and 24.9%, respectively, of our fee and commission income in those periods. Fee and commission expense for our domestic
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FINANCIAL INFORMATION
operations increased by 27.0% from RMB1,128 million in 2003 to RMB1,432 million in 2004, representing 26.1% of our fee and commission income for our domestic operations in each of those periods. The increase in fees and commission expense primarily reÖected increases in brokerage fees paid by BOCG Insurance and fee and commission expenses paid to other Ñnancial institutions. The increase in fee and commission expense was also the result of expenses in connection with our issuance of subordinated bonds in 2004.
Net Trading Income Net trading income consists primarily of net gains or losses from foreign exchange and foreign exchange products, precious metal transactions and interest rate instruments. Net gains from foreign exchange and foreign exchange products principally consist of the spread income from our foreign exchange dealings, and currency translation gains. Net gains or losses from interest rate instruments principally relates to bond trading, up-front fees for certain foreign currency- denominated wealth management products, options and other derivative instruments. We enter into derivative transactions for hedging purposes and, to a lesser extent, on behalf of customers and for our proprietary trading. Derivative transactions entered into by the bank for economic hedging purposes do not qualify for hedge accounting under IAS 39, and the assets hedged by such transactions are primarily classiÑed as trading assets and other Ñnancial instruments at fair value through proÑt or loss. The change of value of such hedged assets is recorded as net trading income, which is often oÅset by the change in fair value of related derivatives to a substantial extent. See ""Ì Financial Position Ì OÅ-Balance Sheet Arrangements Ì Derivative Financial Instruments'' and note III.3 to Appendix I Ì ""Accountants' Report'' for a more detailed description of our hedging and other derivative Ñnancial instruments. The table below sets forth the principal components of our net trading income for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Net gains from foreign exchange and foreign exchange products ÏÏÏÏÏÏ 9,488 5,294 2,226 Net (losses)/gains from precious metal transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40) 1,271 150 Net (losses)/gains from interest rate instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,333) 2,294 1,753 Net gains/(losses) from trading equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 (178) 130 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 201 24 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,303 8,882 4,283
Year ended December 31, 2005 compared to year ended December 31, 2004 Net trading income decreased by 51.8% from RMB8,882 million in 2004 to RMB4,283 million in 2005. This decrease was primarily due to a decrease in net trading income for our domestic operations from RMB7,066 million in 2004 to RMB1,889 million in 2005. Due to the adjustment to the exchange rate system by the PRC Government in 2005, the value of Renminbi appreciated against the U.S. dollar and, as a result, we had a net loss in respect of our net long on-balance sheet foreign currency exposure. Our foreign currency exposure primarily consists of the capital injection by Huijin in 2003 and exchange positions resulting from our accumulated proÑts in foreign currencies. As of December 31, 2005, our foreign currency exposure also included the capital injection made by our strategic investors. In relation to these three types of foreign currency exposure, we had a loss of RMB8,317 million as a result of the appreciation of the value of the Renminbi in 2005. The
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FINANCIAL INFORMATION
conversion of our foreign currency-denominated assets into Renminbi-denominated assets is generally subject to approval by the PRC Government. On the other hand, on January 5, 2005, we entered into a foreign currency option agreement with Huijin whereby we acquired options to sell to Huijin no more than US$1,500 million at the beginning of each calendar month of 2007 at the exchange rate of RMB8.2769 to US$1.00. See note IV.5 to Appendix I Ì""Accountants' Report''. We had a net gain of RMB3,231 million on the fair value of these options. The net losses resulting from the appreciation of the value of Renminbi were partially oÅset by our continued growth in spread income from our domestic branches' Renminbi/foreign exchange operations, which increased from RMB3,527 million in 2004 to RMB4,861 million in 2005. The growth of spread income was partially due to higher volume of our foreign exchange dealing business as a result of rising volatility of Renminbi/foreign exchange rate.
Year ended December 31, 2004 compared to year ended December 31, 2003
Net trading income increased signiÑcantly from RMB4,303 million in 2003 to RMB8,882 million in 2004. This increase was mainly due to an increase in net trading income for our domestic operations from RMB2,324 million in 2003 to RMB7,066 million in 2004, reÖecting an increase in spread income from our domestic branches' Renminbi/foreign exchange operations from RMB2,842 million in 2003 to RMB3,527 million in 2004. We also had net gains from precious metal transactions of RMB1,271 million, principally as a result of the sale of a substantial portion of the bullion we received in connection with Huijin's capital contribution and an increase in the market price of bullion in 2004. In addition, this increase reÖected an increase in up-front fees from our foreign currency-denominated asset management products. We entered into certain interest-rate swap transactions to hedge the interest risk of our Ñxed rate investment securities, by which we received cash based on Öoating rates and paid cash based on Ñxed rates. As interest rates decreased in 2003, the diÅerence between the cash inÖow and cash outÖow was booked as a loss into our net trading income. Prior to 2002, we purchased certain Euro-denominated and Japanese yen-denominated debt securities which were funded by cross-currency interest rate swaps to hedge the exchange risks relating to such debt securities. When Euro and Japanese yen appreciated against the U.S. dollar in 2003 and 2004, we recorded net gains from foreign exchange and foreign exchange products and incurred losses from interest rate instruments related to such cross-currency interest rate swaps, which substantially oÅset each other. While Euro and Japanese yen appreciated against the U.S. dollar to a lesser extent in 2004 as compared to 2003 and some Euro-denominated and Japanese yen-denominated debt securities matured in 2004, we recorded less gains from foreign exchange and foreign exchange products as well as less losses from interest rate instruments relating to cross-currency interest rate swaps.
Net Gains on Investment Securities
The table below sets forth the principal components of our net gains on investment securities for the periods indicated: For the year ended December 31, 2003 2004 2005 (in millions of RMB) De-recognition of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,217 529 (606) (Charge)/write back for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (123) (192) 24 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,094 337 (582)
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FINANCIAL INFORMATION
Year ended December 31, 2005 compared to year ended December 31, 2004 We incurred net losses on investment securities of RMB582 million in 2005, compared to net gains on investment securities of RMB337 million in 2004. This decrease was primarily due to net losses from de-recognition of available-for-sale securities of RMB606 million in 2005, compared to net gains from de-recognition of available-for-sale securities of RMB529 million. Gains/losses from de-recognition of available-for-sale securities relate primarily to the disposal of debt securities, and reÖect the shortfall of the disposal price compared to the initial acquisition cost. The losses recognized from de-recognition of available-for-sale securities in 2005 was mainly attributable to increased interest rates on foreign currency-denominated assets.
Year ended December 31, 2004 compared to year ended December 31, 2003 Our net gains on investment securities decreased 69.2% from RMB1,094 million in 2003 to RMB337 million in 2004. This decrease was primarily due to a signiÑcant decrease in gains from de- recognition of available-for-sale securities from RMB1,217 million in 2003 to RMB529 million in 2004. Gains from de-recognition of available-for-sale securities relate primarily to the disposal of available-for-sale debt securities, and reÖect the excess of the disposal price over the initial acquisition cost. Gains recognized from de-recognition of available-for-sale securities decreased in 2004 primarily because we disposed of fewer available-for-sale securities in light of uncertainties over Öuctuating market interest rates.
Other Operating Income The table below sets forth the principal components of our other operating income for the periods indicated: For the year ended December 31, 2003 2004 2005 (in millions of RMB) Changes in fair value of investment properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (412) 1,280 1,697 Insurance premiumsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,225 4,057 5,237 Net gains on disposal of other subsidiaries and associates ÏÏÏÏÏÏÏÏÏÏÏÏ 130 760 320 Gains on disposal of property and equipment and other assets ÏÏÏÏÏÏÏÏ 157 420 870 Dividend income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122 264 194 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,627 2,821 2,832 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,849 9,602 11,150
(1) Include gains from recovery of assets and miscellaneous income, such as income from termination of inactive client accounts and penalty fees relating to our settlement services.
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FINANCIAL INFORMATION
The table below sets forth the principal components of our other operating income for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic(1) Net gains/(losses) on disposal of other subsidiaries and associatesÏÏÏ 302 334 (111) Gains on disposal of property and equipment and other assets ÏÏÏÏÏÏÏÏ 139 287 698 Dividend income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75 250 179 Others(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 777 2,261 1,326 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,293 3,132 2,092
(1) In the periods indicated, our domestic operations did not have any income from insurance premiums or changes in fair value of investment properties. (2) Include gains from recovery of assets and miscellaneous income, such as income from termination of inactive client accounts and penalty fees relating to our settlement services.
Year ended December 31, 2005 compared to year ended December 31, 2004 Other operating income increased by 16.1% from RMB9,602 million in 2004 to RMB11,150 million in 2005. This increase was primarily due to an increase in changes in fair value of investment properties from RMB1,280 million in 2004 to RMB1,697 million in 2005, insurance premiums from RMB4,057 million in 2004 to RMB5,237 million in 2005, and net gains on disposal of property and equipment and other assets from RMB420 million in 2004 to RMB870 million in 2005. These increases were partially oÅset by a decrease in our net gains on disposal of investments in other subsidiaries and associates from RMB760 million in 2004 to RMB320 million in 2005. In addition, our dividend income decreased from RMB264 million in 2004 to RMB194 million in 2005. The change in fair value of investment properties reÖected the increase in market value of our investment properties, which are primarily located in Hong Kong, resulting from the upturn in the Hong Kong real estate market in 2005. The increase in insurance premiums was principally a result of the continued expansion of our insurance business. The increase in gains on disposal of property and equipment and other assets was partially due to the disposal of idle assets of our domestic operations.
Year ended December 31, 2004 compared to year ended December 31, 2003 Other operating income increased by 98.0% from RMB4,849 million in 2003 to RMB9,602 million in 2004. This increase was primarily due to changes in fair value of investment properties of RMB1,280 million in 2004 compared to negative RMB412 million in 2003, a 25.8% increase in insurance premiums from RMB3,225 million in 2003 to RMB4,057 million in 2004, an increase in net gains on disposal of investments in other subsidiaries and associates from RMB130 million in 2003 to RMB760 million in 2004, an increase in net gains on disposal of property and equipment and other assets from RMB157 million in 2003 to RMB420 million in 2004, and a 73.4% increase in other income from RMB1,627 million in 2003 to RMB2,821 million in 2004. The change in fair value of investment properties reÖected the increase in market value of our investment properties, which are primarily located in Hong Kong, as a result of the recovery of the Hong Kong real estate market. The increase in insurance premiums was principally a result of the continued expansion of our insurance business. The increase in net gains on disposal of investments in other subsidiaries and associates was principally a result of the disposal by BOCG Investment of its interests in certain of its
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subsidiaries and associates. The increase in gains on disposal of property and equipment and other assets was partially due to the disposal by BOCHK of certain branches' Ñxed assets as a result of the reorganization of its branch network in 2004. The increase in other income was primarily due to certain non-recurring gains relating to asset recoveries in our domestic operations.
Net Gains on Sale of Shares in a Subsidiary Year ended December 31, 2005 compared to year ended December 31, 2004 We did not sell any shares in BOCHK Holdings in 2005.
Year ended December 31, 2004 compared to year ended December 31, 2003 We did not sell any shares in BOCHK Holdings in 2004. We recognized net gains on sale of shares in a subsidiary of RMB7,400 million in 2003 as a result of our disposal of 10.12% of the share capital of BOCHK Holdings for an aggregate consideration of RMB15,622 million in November 2003.
Impairment Losses on Loans and Advances Year ended December 31, 2005 compared to year ended December 31, 2004 Impairment losses on loans and advances decreased by 51.8% from RMB23,812 million in 2004 to RMB11,486 million in 2005. See ""Description of Our Assets and Liabilities'' for a more detailed discussion of our impairment losses on loans and advances.
Year ended December 31, 2004 compared to year ended December 31, 2003 Impairment losses on loans and advances increased by 31.6% from RMB18,100 million in 2003 to RMB23,812 million in 2004. The increase was primarily due to the impact of certain macroeconomic policies adopted by the PRC Government in 2004. See ""Description of Our Assets and Liabilities'' for a more detailed discussion of our impairment losses on loans and advances.
Other Operating Expenses The table below sets forth the principal components of our other operating expenses for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) StaÅ costs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,824 20,545 27,106 General operating and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,105 11,777 13,251 Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,614 6,664 6,314 Business and other taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,972 4,981 5,680 Special levy to the Ministry of Finance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,060 2,805 Ì Insurance claims expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,362 3,256 4,153 Operating lease rentalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,725 1,759 1,550 Impairment losses on other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 233 699 433 Losses on disposal of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 346 205 Provision for litigation losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 545 1,257 712 Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,232 790 580 Total other operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,080 54,879 59,984
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(1) Include salaries and beneÑts, social security costs, deÑned contribution plans, retirement beneÑts, housing funds and other costs. (2) Special levy to the Ministry of Finance relates to the 30-year special purpose treasury bond issued by the Ministry of Finance in 1998. See Note VI.7 and VI.18(3) to Appendix I Ì""Accountants' Report.'' The table below sets forth the principal components of our other operating expenses for our domestic operations for the periods indicated:
For the year ended December 31, 2003 2004 2005 (in millions of RMB) Domestic StaÅ costs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,935 15,510 21,789 General operating and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,145 9,809 10,601 Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,596 5,639 5,527 Business and other taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,911 4,922 5,592 Special levy to the Ministry of Finance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,060 2,805 Ì Operating lease rentalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,211 1,244 1,401 Impairment losses on other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249 743 399 Losses on disposal of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 346 205 Provision for litigation losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 545 1,257 712 Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 380 450 149 Total other operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,440 42,725 46,375
(1) Include salaries and beneÑts, social security costs, deÑned contribution plans, retirement beneÑts, housing funds and other costs. (2) Special levy to the Ministry of Finance relates to the 30-year special purpose treasury bond issued by the Ministry of Finance in 1998. See Notes VI.7 and VI.18(3) to Appendix I Ì ""Accountants' Report''.
Year ended December 31, 2005 compared to year ended December 31, 2004 Other operating expenses increased by 9.3% from RMB54,879 million in 2004 to RMB59,984 million in 2005. The increase in other operating expenses was principally the result of an 8.5% increase in other operating expenses for our domestic operations from RMB42,725 million in 2004 to RMB46,375 million in 2005. The increase in other operating expenses for our domestic operations was primarily due to increases in staÅ costs, general operating and administrative expenses and business and other taxes, which was partially oÅset by the decrease in special levy to the Ministry of Finance from RMB2,805 million in 2004 to nil in 2005. StaÅ costs increased by 31.9% from RMB20,545 million in 2004 to RMB27,106 million in 2005. While the number of our employees decreased from 224,774 in 2004 to 209,265 in 2005, staÅ costs per employee increased by 41.7% from RMB91,403 in 2004 to RMB129,530 in 2005. The increase in staÅ costs was primarily due to a 40.5% increase in staÅ costs for our domestic operations from RMB15,510 million in 2004 to RMB21,789 million in 2005. These cost increases reÖected our ongoing eÅorts to increase our employees' compensation and beneÑts to maintain our competitiveness. We also set up an annuity plan for our employees in 2005 and contributed RMB1,238 million to the plan in the year. The increase in staÅ costs was also partially attributable to the increase of retirement beneÑts for the early-retired employees from RMB1,135 million in 2004 to RMB3,064 million in 2005 as a result of our human resource restructuring in 2004 and 2005. See ""Our Restructuring Ì Organizational and Operational Measures Ì Human resource management''.
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General operating and administrative expenses include postage and telegraphic expenses, marketing expenses, water and electricity expenses, printing expenses, maintenance expenses, other miscellaneous oÇce expenses and regulatory fees. General operating and administrative expenses increased by 12.5% from RMB11,777 million in 2004 to RMB13,251 million in 2005. The increase in general operating and administrative expenses was primarily due to a 8.1% increase in general operating and administrative expenses for our domestic operations from RMB9,809 million in 2004 to RMB10,601 million in 2005. The increase in general operating and administrative expenses for our domestic operations was primarily due to expenses associated with continued business development. The general operating and administrative expenses include a regulatory fee of RMB926 million levied by the CBRC in 2005, compared to RMB874 million in 2004. Depreciation and amortization expenses relate primarily to our buildings, equipment, motor vehicles and leasehold improvement. Depreciation and amortization expenses were RMB6,314 million in 2005 and RMB6,664 million in 2004. Business and other taxes include business taxes on our income, city maintenance and construction taxes and education surcharges. Business and other tax expenses increased by 14.0% from RMB4,981 million in 2004 to RMB5,680 million in 2005, primarily as a result of a 13.6% increase in business and other tax expenses for our domestic operations from RMB4,922 million in 2004 to RMB5,592 million in 2005. The increase in business and other tax expenses for our domestic operations was primarily due to an increase in our taxable income. We did not pay any special levy to the Ministry of Finance in 2005. See note VI.18(3) to Appendix I Ì ""Accountants' Report''. Insurance claims expenses increased by 27.5% from RMB3,256 million in 2004 to RMB4,153 million in 2005. Operating lease rental expenses decreased by 11.9% from RMB1,759 million in 2004 to RMB1,550 million in 2005. Impairment losses on other assets decreased from RMB699 million in 2004 to RMB433 million in 2005. Losses on disposal of property and equipment decreased from RMB346 million in 2004 to RMB205 million in 2005. Provision for litigation losses decreased by 43.3% from RMB1,257 million in 2004 to RMB712 million in 2005.
Year ended December 31, 2004 compared to year ended December 31, 2003 Other operating expenses increased by 19.1% from RMB46,080 million in 2003 to RMB54,879 million in 2004. The increase in other operating expenses was principally the result of a 24.1% increase in other operating expenses for our domestic operations from RMB34,440 million in 2003 to RMB42,725 million in 2004. The increase in other operating expenses for our domestic operations was primarily due to increases in staÅ costs, general operating and administrative expenses and business and other taxes. StaÅ costs increased by 22.1% from RMB16,824 million in 2003 to RMB20,545 million in 2004. While the average number of our employees decreased from 235,773 in 2003 to 224,774 in 2004, staÅ costs per employee increased by 28.1% from RMB71,357 in 2003 to RMB91,403 in 2004. The increase in staÅ costs was primarily due to a 30.0% increase in staÅ costs for our domestic operations from RMB11,935 million in 2003 to RMB15,510 million in 2004. These cost increases
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FINANCIAL INFORMATION
reÖected our ongoing eÅorts to increase our employees' compensation and beneÑts to maintain our competitiveness.
General operating and administrative expenses increased by 29.3% from RMB9,105 million in 2003 to RMB11,777 million in 2004. The increase in general operating and administrative expenses was primarily due to a 37.3% increase in general operating and administrative expenses for our domestic operations from RMB7,145 million in 2003 to RMB9,809 million in 2004. The increase in general operating and administrative expenses for our domestic operations was primarily due to expenses associated with continued business development as market competition intensiÑed. This increase was also attributable to the new regulatory fees of RMB874 million levied by the CBRC beginning in 2004, as well as increased professional services fees incurred in connection with our restructuring.
Depreciation and amortization expenses were RMB6,664 million in 2004 and RMB6,614 million in 2003.
Business and other taxes include business taxes on our income, city maintenance and construction taxes and education surcharges. Business and other tax expenses increased by 25.4% from RMB3,972 million in 2003 to RMB4,981 million in 2004, primarily as a result of a 25.9% increase in business and other tax expenses for our domestic operations from RMB3,911 million in 2003 to RMB4,922 million in 2004. The increase in business and other tax expenses for our domestic operations was primarily due to an increase in our taxable income.
Special levy to the Ministry of Finance decreased by 8.3% from RMB3,060 million in 2003 to RMB2,805 million in 2004. This decrease was primarily due to the restructuring in December 2004 of the 30-year special purpose treasury bond issued by the Ministry of Finance in 1998, which resulted in, among other things, the reinstatement of cash interest payments and the cessation of the special levy that was previously payable to the Ministry of Finance. See note VI.18(3) to Appendix I Ì ""Accountants' Report''.
Insurance claims expenses increased by 37.8% from RMB2,362 million in 2003 to RMB3,256 million in 2004.
Operating lease rental expenses increased by 2.0% from RMB1,725 million in 2003 to RMB1,759 million in 2004.
Impairment losses on other assets increased from RMB233 million in 2003 to RMB699 million in 2004. This increase principally related to impairment losses recognized in respect of certain receivables, Ñxed assets and intangible assets.
Losses on disposal of property and equipment decreased from RMB408 million in 2003 to RMB346 million in 2004.
Provision for litigation losses increased by 130.6% from RMB545 million in 2003 to RMB1,257 million in 2004. This signiÑcant increase was primarily due to a provision for possible losses with respect to the Heilongjiang Incident. See ""Business Ì Special Events Ì Heilongjiang Incidents''.
Share of Results of Associates Year ended December 31, 2005 compared to year ended December 31, 2004
We recognized a gain of RMB175 million in 2005 from our share of results of associates, compared to RMB141 million in 2004.
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Year ended December 31, 2004 compared to year ended December 31, 2003 We recognized a gain of RMB141 million in 2004 from our share of results of associates, compared to a loss of RMB69 million in 2003. This increase was primarily due to an increase in gains in respect of certain associates of BOCG Investment.
ProÑt before Income Tax Year ended December 31, 2005 compared to year ended December 31, 2004 As a result of the foregoing, proÑt before income tax increased by 44.4% from RMB37,263 million in 2004 to RMB53,811 million in 2005.
Year ended December 31, 2004 compared to year ended December 31, 2003 As a result of the foregoing, proÑt before income tax decreased by 0.2% from RMB37,347 million in 2003 to RMB37,263 million in 2004.
Income Tax Our eÅective tax rate diÅers from the regulatory tax rate of 33%. The table below sets forth a reconciliation of our actual income tax expenses to the tax calculated at the basic tax rate of 33%.
For the Year Ended December 31, 2003 2004 2005 (in millions of RMB) ProÑt before income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Tax calculated at 33% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,325 12,297 17,758 EÅect of diÅerent tax rates in overseas operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,634) (2,865) (3,713) Supplementary tax on overseas income paid in the PRC ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,476 1,766 1,388 Prior year tax expenses adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,163) (506) 2,376 Income not subject to tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,723) (2,523) (1,862) Statutory asset revaluation surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,442) Ì Ì Expenses not deductible for tax purposesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,156 3,953 5,264 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,833) (1,924) 1,042 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,162 10,198 22,253
We had income tax expense of RMB22,253 million in 2005, which was higher than the tax expense calculated at the regulatory tax rate of 33%. This was principally attributable to expenses not deductible for tax purposes, prior year tax expenses adjustment, supplementary tax on overseas income paid in the PRC and other income tax expenses, which were partially oÅset by the eÅect of tax rates in overseas operations and certain income not subject to tax. Our income and the income of each of our subsidiaries established in the PRC are subject to the PRC statutory tax rate of 33%. Our Hong Kong branch and our Hong Kong subsidiaries pay Hong Kong proÑts tax at the rate of 17.5% in 2003, 2004 and 2005, and our other overseas branches and subsidiaries pay income tax in the respective jurisdictions in which they are located. The eÅect of diÅerent tax rates in the table above is a result of the diÅerence between the PRC statutory tax rate of 33% and the local tax rates in relevant jurisdictions. The eÅect of diÅerent tax rates in overseas operations was less negative in 2004 than in 2003 and in 2005. In 2003, this was primarily due to the higher proÑt before income tax in 2003 of our operations in Hong Kong, which was due in part to the recognition of certain investment gains from the disposal of shares of BOCHK Holdings. These
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investment gains are not taxable in Hong Kong, and the additional tax beneÑts were recorded under income not subject to tax in 2003. In 2005, the increase in the eÅect of diÅerent tax rates in overseas operations was primarily a result of the increase in proÑt for our overseas operations. Supplementary tax on overseas income paid in the PRC relates to a supplementary tax that is payable in respect of the taxable income of our overseas branches and subsidiaries. For our overseas branches and wholly-owned subsidiaries, taxable income was determined with reference to the tax regulations of the respective jurisdictions in which they are located in 2003 and 2004. For our non-wholly-owned subsidiaries, taxable income is determined based on the amount of dividend we receive from such subsidiaries in 2003, 2004 and 2005. In 2003, the supplementary tax rate was generally the PRC statutory tax rate of 33% less the local tax rate of the overseas subsidiary. In 2004, the supplementary tax rate was changed to a uniÑed rate of 16.5%, and this new rate is retroactively applicable to previous years. The additional supplementary tax for previous years was recorded in 2004 and reÖected as a prior year tax expense adjustment. In 2005, we conÑrmed with the tax authority in the PRC that supplementary tax on overseas income of our wholly-owned subsidiaries and overseas branches paid in the PRC should be based on proÑt before tax for our overseas operations, but adjusted for certain tax treatment under the PRC tax regulations such as tax treatment for allowance for impairment losses. As a result, proÑt for our overseas operations subject to supplementary tax in the PRC in 2005 was lower than 2004 after the adjustment. We also made retroactive adjustment based on such tax treatment at the amount of RMB690 million, which was recorded as a prior year tax expenses adjustment in 2005. Each year, we calculate taxes based on our estimated taxable income. Prior year tax expenses adjustments primarily relate to our tax refunds or additional tax payments when our actual taxable income diÅers from our previously estimated taxable income. Prior year tax expense adjustment was negative in 2003 and the absolute amount was larger in 2003 than in 2004. This was primarily because the Hong Kong Inland Revenue Department permitted us to make certain tax deductions in 2003 with respect of the losses of certain of BOCHK's branches in 2001. In 2004, our prior year tax expense adjustment also reÖected the additional supplementary taxes payable in connection with the retroactive application of the new supplementary tax rate in 2004. In 2005, our prior year tax expense adjustment was signiÑcantly higher than 2004. This prior year tax expense adjustment for 2005 includes RMB1,921 million related to the reversal in 2004 of certain provisions recorded in prior years. Although such reversals are typically non-taxable, the relevant domestic tax authorities determined that these reversals constituted taxable income because they related to the implementation of the Joint Stock Reform Plan. See note VI.10 to Appendix I Ì ""Accountants' Report''. Income not subject to tax principally consists of interest from treasury bonds, tax-exempted investment gains, certain income derived from overseas and, prior to 2005, interest from the ten- year bond issued by China Orient in connection with our transfer of certain non-performing assets in 1999 and 2000. The eÅects on income tax expense resulting from income not subject to tax decreased by 32.2% from RMB3,723 million in 2003 to RMB2,523 million in 2004, primarily because certain investment gains with respect to the disposal of shares in BOCHK Holdings in 2003 were not subject to tax. The eÅects on income tax expense resulting from income not subject to tax decreased by 26.2% from RMB2,523 million in 2004 to RMB1,862 million in 2005, primarily because the interest income from the RMB160,000 million ten-year bond issued by China Orient became subject to tax commencing in 2005. See note VI.18 to Appendix I Ì ""Accountants' Report''. In 2003, we recognized certain future tax beneÑts in connection with the assets statutory revaluation surplus.
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Expenses not deductible for tax purposes primarily include certain non-deductible staÅ costs for our domestic operations. Other items in 2004 primarily included deductions that were granted in connection with our restructuring. There were no such deductions in 2005. Other items in 2005 primarily included the eÅect of the de-recognition of deferred tax relating to allowance for impairment losses of certain non-performing loans that were disposed of in 2005. For related discussions regarding income tax expense, see note VI.10 of Section 6 to Appendix I Ì ""Accountants' Report''.
ProÑt for the Year Attributable to Equity Holders of the Bank Year ended December 31, 2005 compared to year ended December 31, 2004 As a result of the foregoing, proÑt in the year increased by 16.2% from RMB22,301 million in 2004 to RMB25,921 million in 2005.
Year ended December 31, 2004 compared to year ended December 31, 2003 As a result of the foregoing, proÑt in the year decreased by 28.1% from RMB31,015 million in 2003 to RMB22,301 million in 2004.
SEGMENTAL OPERATING RESULTS Results by Geographic Segments The proÑt before income tax for our domestic operations accounted for 35.3%, 47.6% and 55.2% of our proÑt before income tax in 2003, 2004 and 2005, respectively, while the assets of domestic operations accounted for 72.3%, 73.2% and 76.4% of our total assets before inter- company balance elimination as of December 31, 2003 and 2004 and 2005. Our domestic operations have a lower return on assets mainly due to higher impairment losses. The table below sets forth the proÑt before income tax of each of our geographic segments for the periods indicated:
For the Year Ended December 31, 2003 2004 2005 % of % of % of Amount Total Amount Total Amount Total (in millions of RMB, except percentages) Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,191 35.3% 17,729 47.6% 29,695 55.2% Hong Kong and MacauÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,740 58.2 18,212 48.9 22,191 41.2 Other overseas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,416 6.5 1,322 3.5 1,925 3.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 100.0% 37,263 100.0% 53,811 100.0% Including: BOCHK Group ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,231 51.5 15,813 42.4 18,052 33.5
Reconciliations of the Ñnancial information of BOCHK Holdings prepared under HKGAAP/HKFRS to the Ñnancial information of BOC Hong Kong Group prepared under IFRS Segment Information as detailed in Note VI.1 of Section 6 to Appendix I Ì ""Accountants' Report'' discloses the consolidated Ñnancial information of BOC Hong Kong Group for each of the three years ended December 31, 2005. BOC Hong Kong Group refers to BOCHK Holdings and its intermediate holding companies, BOCHK Group and BOCHK (BVI). BOCHK Group is our wholly-owned subsidiary, which through BOCHK (BVI), indirectly held approximately 66% of the equity interest in BOCHK Holdings as of December 31, 2003, 2004 and 2005.
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The consolidated Ñnancial information of BOC Hong Kong Group disclosed herein is diÅerent from the consolidated Ñnancial information of BOCHK Holdings previously published by BOCHK Holdings pursuant to applicable laws and regulations in Hong Kong for the following main reasons.
First, apart from BOCHK Holdings, BOC Hong Kong Group includes also BOCHK Group and BOCHK (BVI). Despite the diÅerence in the entities that are included in BOCHK Holdings and BOC Hong Kong Group, their Ñnancial results in 2004 and 2005 were substantially the same. This is because BOCHK Group and BOCHK (BVI) are holding companies only and have no substantive operations of their own. In 2003, there was a material diÅerence between the Ñnancial results of BOC Hong Kong Group and BOCHK Holdings. This was because BOCHK (BVI) disposed of 1,070,000,000 ordinary shares it held in BOCHK Holdings through a share placement in 2003 and the net gain that BOCHK (BVI) made on that disposal contributed to the Ñnancial results of BOC Hong Kong Group in 2003.
Second, the Ñnancial reporting standards adopted by BOCHK Holdings are diÅerent from those adopted by us in the preparation of the consolidated Ñnancial information of BOC Hong Kong Group. In particular, BOCHK Holdings adopted HKGAAP in preparing its Ñnancial statements for inclusion in its annual reports for each of the two years ended December 31, 2004, and adopted HKFRS for the year ended December 31, 2005, while the segment Ñnancial information of BOC Hong Kong Group for each of the three years ended December 31, 2005 as set out in Note VI.1 of Section 6 to Appendix I Ì ""Accountants' Report'', which include the Ñnancial information of BOCHK Holdings, have been prepared in accordance with IFRS.
Following the pronouncements of HKFRS issued by the HKICPA which conform in principle to IFRS, Ñnancial reporting standards in Hong Kong eÅectively converged to IFRS eÅective January 1, 2005. Despite HKFRS having been converged with IFRS, there are diÅerences arising from the diÅerence in the timing of adoption of HKFRS and IFRS as well as the election of diÅerent alternatives allowed under both HKFRS and IFRS by BOCHK Holdings in preparing its own Ñnancial statements for inclusion in the annual report and for the BOC Hong Kong Group consolidation purposes.
The major signiÑcant diÅerences between HKGAAP/HKFRS and IFRS, which arise from the diÅerence in measurement basis and the timing diÅerence in the initial adoption of HKFRS and IFRS, relate to the following:
‚ approaches in determining loan loss allowance;
‚ re-measurement of carrying value of treasury products, including classiÑcation and measurement of certain securities and measurement of non-trading derivatives;
‚ restatement of carrying value of bank premises; and
‚ deferred taxation impact arising from the above diÅerent measurement basis.
EÅective January 1, 2005, the approaches adopted in determining loan loss allowances under HKFRS and IFRS have converged and there will be no diÅerences going forward. The diÅerences arising from re-measurement of carrying value of treasury products under the two set of standards will gradually reverse in future. The diÅerences relating to the restatement of carrying value of bank premises as a result of the election of the diÅerent measurement basis allowed under both HKFRS and IFRS will be recurring in the future.
The following tables present the reconciliations of proÑt for the year/net assets of BOCHK Holdings prepared under HKGAAP/HKFRS, as extracted from its annual reports for the respective
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FINANCIAL INFORMATION
years, to those of the BOC Hong Kong Group prepared under IFRS, as extracted from Note VI.1 of Section 6 to Appendix I Ì ""Accountants' Report'': For the year ended and as of December 31, 2003 2004 2005 ProÑt after ProÑt after ProÑt after tax for the Net tax for the Net tax for the Net Note year assets year assets year assets (in millions of Hong Kong dollars) ProÑt for the year/net assets of BOCHK Holdings prepared under HKGAAP/HKFRS ÏÏÏÏÏÏ 8,102 61,417 12,121 69,760 13,658 80,733 IFRS adjustments: Loan loss allowance ÏÏÏÏÏÏÏÏÏÏÏ (1) 1,826 3,134 754 4,015 (172) Ì Re-measurement of carrying value of treasury products ÏÏÏÏ (2) 67 (850) 576 (448) 465 70 Restatement of carrying value of bank premisesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) 544 1,011 (797) (3,337) 439 (6,248) Deferred tax adjustmentsÏÏÏÏÏÏÏ (4) (437) (921) (288) (724) (69) 1,027 Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌ68Ì ProÑt for the year/net assets of BOCHK Holdings prepared under IFRSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,102 63,791 12,366 69,266 14,389 75,582
(in millions of RMB (equivalent))(a) ProÑt for the year/net assets of BOCHK Holdings prepared under IFRSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,766 67,982 13,154 73,678 15,127 78,628 ProÑt for the year/net assets of BOCHK Group and BOCHK (BVI)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) 7,487 13,789 120 (13) 45 37 ProÑt for the year/net assets of BOC Hong Kong Group prepared under IFRSÏÏÏÏÏÏÏÏÏ 18,253 81,771 13,274 73,665 15,172 78,665
(a) Applicable average exchange rates for the relevant year and exchange rates prevailing as of the relevant year end date are adopted in translating Hong Kong dollars into Renminbi for the proÑt for the year and net assets, respectively.
Note (1) Ì Loan loss allowance Such adjustments were mainly due to the diÅerent approaches used to determine loan loss allowance under diÅerent accounting standards. Before 2005, the provisioning approach adopted by BOCHK Holdings mainly followed the guidelines issued by the Hong Kong Monetary Authority. This approach was diÅerent from the requirements of IFRS under which impairment losses assessment is based on the estimated future cash Öows of the loans or group of loans as of each balance sheet date.
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EÅective January 1, 2005, the provisioning approach adopted under HKFRS and IFRS was aligned. Due to the diÅerence in the timing of Ñrst adoption of HKFRS and IFRS, impairment charges to the consolidated income statement under HKFRS and IFRS for 2005 were diÅerent.
Note (2) Ì Re-measurement of carrying value of treasury products
(i) Non-trading derivatives held for hedging purposes were not required to be marked to market under HKGAAP before 2005. Therefore, adjustments have been made to re-measure such non-trading derivatives held for hedging purposes at their fair value under IFRS.
(ii) ClassiÑcation and measurement of certain investment securities under HKGAAP and IFRS were diÅerent before 2005, in particular there was no available-for-sale category under HKGAAP. Therefore, investment securities were reclassiÑed and re-measured in accordance with IAS 39 and to align with our accounting policies for the relevant periods.
Note (3) Ì Restatement of carrying value of bank premises
BOCHK Holdings has elected revaluation basis rather than cost basis to account for bank premises under HKGAAP/HKFRS. On the contrary, we have elected the cost convention under IFRS. Therefore, adjustments have been made to restate the carrying value of bank premises as well as to re-calculate the depreciation charge and disposal gain/loss under IFRS.
Note (4) Ì Deferred tax adjustments
These represent the deferred tax eÅect of the aforesaid adjustments.
Note (5) Ì ProÑt for the year/net assets of BOCHK Group and BOCHK (BVI)
The proÑt of BOCHK Group and BOCHK (BVI) in 2003 mainly represents the gain on sale of shares in BOCHK Holdings by BOCHK (BVI). In particular, BOCHK (BVI) disposed 10.12% of the then issued share capital of BOCHK Holdings for an aggregate consideration of RMB 15.6 billion, resulting in a gain of approximately RMB 7.4 billion after deducting a payable to the SSF of RMB 1.5 billion.
Results by Principal Business Segments
We use an inter-segment fund transfer mechanism to assess the performance of our business segments. These funds are borrowed and lent between our business segments at inter-segment rates that are established by us. Inter-segment interest expense and interest income recognized through the fund transfer mechanism are eliminated in our consolidated results of operation. For each segment, the inter-segment net interest income/expense represents the diÅerence between the interest income generated from funds lent to other segments and the interest expense paid on funds borrowed from other segments.
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FINANCIAL INFORMATION
The following table sets forth the proÑt before income tax of each of our business segments for the periods indicated: For the Year Ended December 31, 2003 2004 2005 % of % of % of Amount total Amount total Amount total (in millions of RMB, except percentages) Commercial Banking Corporate banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,103 45.8% 17,215 46.2% 27,944 51.9% Personal banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,050 10.9 6,990 18.7 18,823 35.0 Treasury operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,869 26.4 10,697 28.7 2,968 5.5 Sub-totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,022 83.1 34,902 93.6 49,735 92.4 Investment banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 318 0.9 361 1.0 316 0.6 Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 0.5 266 0.7 334 0.6 Others(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,811 15.5 1,734 4.7 3,426 6.4 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 100.0% 37,263 100.0% 53,811 100.0%
(1) Include primarily the results of BOCG Investments and gains on sales of shares of BOCHK Holdings.
FINANCIAL POSITION
Assets
The following table sets forth the principal components of our asset as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,333 35,779 41,082 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267,159 284,348 316,941 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 428,915 340,192 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,789 38,440 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,596 26,105 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,144 92,124 111,782 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,162 16,076 16,808 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 2,072,919 2,152,112 Investment securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 988,961 1,229,522 1,571,531 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 1,227 5,061 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,614 65,012 62,417 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,837 6,288 8,511 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,111 21,614 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,443 35,575 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048
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FINANCIAL INFORMATION
Our total assets consist of the following:
¬ cash and due from banks, which include cash and deposits maintained at other banks to facilitate the daily business between banks;
¬ balances with central banks, which consist of mandatory reserve deposits we are required to place with the central banks and other deposits with central banks;
¬ placements with banks and other Ñnancial institutions, which consist of placements with domestic and overseas banks and other Ñnancial institutions and receivables under certain resale agreements relating to securities and bills, less allowance for impairment losses;
¬ government certiÑcates of indebtedness for bank notes issued, which are funds we are required to deposit with the Hong Kong and Macau governments to secure the Hong Kong and Macau currency notes BOCHK and our Macau branch have issued and that remain in circulation;
¬ precious metals, which primarily include bullion, including those we received from Huijin as part of its capital contribution to us before its disposal, as well as bullion deposited by our customers;
¬ trading assets and other Ñnancial instruments at fair value through proÑt or loss, which include debt securities held for trading purposes and other debt securities designated at fair value through proÑt or loss on initial recognition; see note III.7 of Section 6 to Appendix I Ì ""Accountants' Report'';
¬ derivative Ñnancial instruments, which include foreign exchange derivatives, interest rate derivatives, equity derivatives and commodities derivatives; see ""Ì OÅ-Balance Sheet Arrangements Ì Derivative Financial Instruments'';
¬ net loans and advances to customers, which are loans and advances to our corporate and retail customers, less allowance for impairment losses;
¬ investment securities, which consist of available-for-sale securities, held-to-maturity securities and securities classiÑed as loans and receivables, less allowance for impairment losses; see note III.7 of Section 6 to Appendix I Ì ""Accountants' Report'';
¬ investments in associates, which include investments in our principal associates, Huaneng International Power Development Corporation, BOCI China, CJM Insurance Brokers Limited and Joint Electronic Teller Services Limited, as well as other associates, some of which we are in the process of disposing;
¬ property and equipment, which include buildings and improvements, equipment, motor vehicles and construction in progress;
¬ investment property, which principally comprises buildings held to generate rental income, a signiÑcant portion of which are located in Hong Kong;
¬ deferred income tax assets; see note III.20 of Section 6 to Appendix I Ì ""Accountants' Report''; and
¬ other assets, which include accounts receivables and prepayments, interest receivables, foreclosed assets, land use rights, intangible assets and others.
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FINANCIAL INFORMATION
December 31, 2005 compared to December 31, 2004 Our total assets increased by 11.1% from RMB4,265,221 million as of December 31, 2004 to RMB4,740,048 million as of December 31, 2005. Cash and due from banks. Cash and due from banks increased by 14.8% from RMB35,779 million as of December 31, 2004 to RMB41,082 million as of December 31, 2005, principally as a result of an increase of 73.1% in due from banks from RMB7,187 million as of December 31, 2004 to RMB12,438 million as of December 31, 2005. The increase in due from banks was primarily due to an increase in business activities with other banks. Balances with central banks. Balances with central banks increased by 11.5% from RMB284,348 million as of December 31, 2004 to RMB316,941 million as of December 31, 2005, principally as a result of 20.5% increase in mandatory reserves from RMB167,662 million as of December 31, 2004 to RMB202,030 million as of December 31, 2005. The increase in mandatory reserves primarily reÖected an increase in our customer deposits, while other deposits with the central bank slightly decreased due to our allocation of funds to relatively higher yield interest- bearing assets. Placements with banks and other Ñnancial institutions. Placements with banks and other Ñnancial institutions decreased by 2.4% from RMB340,192 million as of December 31, 2004 to RMB332,099 million as of December 31, 2005. This decrease was principally a result of a decrease in placements with overseas banks and other Ñnancial institutions from RMB279,293 million as of December 31, 2004 to RMB253,904 million as of December 31, 2005, which was partially oÅset by an increase in placements with domestic banks from RMB49,839 million as of December 31, 2004 to RMB52,439 million as of December 31, 2005 and an increase in placements with other domestic Ñnancial institutions from RMB12,568 million as of December 31, 2004 to RMB26,302 million as of December 31, 2005. Net loans and advances to customers. Net loans and advances to customers increased by 3.8% from RMB2,072,919 million as of December 31, 2004 to 2,152,112 million as of December 31, 2005. Gross loans and advances increased by 4.1% from RMB2,147,688 million as of December 31, 2004 to 2,235,265 million as of December 31, 2005, and allowance for impairment losses on loans and advances increased from RMB74,769 million as of December 31, 2004 to RMB83,153 million as of December 31, 2005. For a further discussion of our loans and advances to customers, see ""Description of Our Assets and Liabilities''. Investment securities. Investment securities increased by 27.8% from RMB1,229,522 million as of December 31, 2004 to RMB1,571,531 million as of December 31, 2005, principally as a result of an increase in funds available for investment due to our deposit growth, a signiÑcant portion of which we invested in investment securities to increase our yields on investment. See ""Description of Our Assets and Liabilities''. Investments in Associates. Investments in associates increased signiÑcantly from RMB1,227 million in 2004 to RMB5,061 million in 2005, primarily as a result of the new investment by BOCG Investment in a domestic power-generating company.
December 31, 2004 compared to December 31, 2003 Our total assets increased by 7.3% from RMB3,973,280 million as of December 31, 2003 to RMB4,265,221 million as of December 31, 2004. Cash and due from banks. Cash and due from banks increased by 18.0% from RMB30,333 million as of December 31, 2003 to RMB35,779 million as of December 31, 2004,
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principally as a result of an 11.0% increase in cash from RMB25,748 million as of December 31, 2003 to RMB28,592 million as of December 31, 2004 and a 56.8% increase in due from banks from RMB4,585 million as of December 31, 2003 to RMB7,187 million as of December 31, 2004. Cash increased primarily because we maintained a higher level of cash balance in preparation of customer deposit withdrawals as our customer deposits increased. The increase in due from banks was primarily due to an increase in business activities with other banks.
Balances with central banks. Balances with central banks increased by 6.4% from RMB267,159 million as of December 31, 2003 to RMB284,348 million as of December 31, 2004, principally as a result of a 21.5% increase in mandatory reserves from RMB137,978 million as of December 31, 2003 to RMB167,662 million as of December 31, 2004. The increase in mandatory reserves primarily reÖected an increase in customer deposits placed with us and the increase of the mandatory reserve rate for Renminbi-denominated deposits from 7.0% to 7.5% that became eÅective on April 25, 2004.
Placements with banks and other Ñnancial institutions. Placements with banks and other Ñnancial institutions decreased by 20.7% from RMB428,915 million as of December 31, 2003 to RMB340,192 million as of December 31, 2004. This decrease was principally a result of a signiÑcant decrease in placements with other domestic Ñnancial institutions from RMB169,332 million as of December 31, 2003 to RMB12,568 million as of December 31, 2004, which was partially oÅset by a 15.0% increase in placements with overseas banks and other Ñnancial institutions from RMB242,933 million as of December 31, 2003 to RMB279,293 million as of December 31, 2004, and an increase in placement with domestic banks from RMB19,198 million as of December 2003 to RMB49,839 million as of December 31, 2004. The decrease in placements with other domestic Ñnancial institutions was primarily due to our withdrawal of placements with the SAFE in 2004, while the increase in placements with overseas banks and other Ñnancial institutions was primarily because we placed a portion of our withdrawals from the SAFE with overseas banks. As of December 31, 2003, the majority of our placements with the SAFE consisted of funds from Huijin's capital contribution.
Net loans and advances to customers. Net loans and advances to customers increased by 7.9% from RMB1,921,861 million as of December 31, 2003 to RMB2,072,919 million as of December 31, 2004. Gross loans and advances decreased by 0.6% from RMB2,160,900 million as of December 31, 2003 to RMB2,147,688 million as of December 31, 2004, and allowance for impairment losses on loans and advances decreased signiÑcantly from RMB239,039 million as of December 31, 2003 to RMB74,769 million as of December 31, 2004. In 2004, we disposed of non- performing loans and policy-related assets with an aggregate gross carrying value of RMB272,020 million in connection with our restructuring. For a further discussion of our loans and advances to customers, see ""Description of Our Assets and Liabilities''.
Investment securities. Investment securities increased by 24.3% from RMB988,961 million as of December 31, 2003 to RMB1,229,522 million as of December 31, 2004, principally as a result of an increase in funds available for investment due to our restructuring and our deposit growth, a signiÑcant portion of which we invested in investment securities to increase our yields on investment. The increase was also attributable to the special bills issued by the PBOC with an aggregate principal amount of RMB91,530 million that we received in exchange for our sale and transfer in 2004 of certain non-performing loans and policy-related assets to Cinda and the PBOC as described under ""Ì Impact of Our Restructuring''. See ""Description of Our Assets and Liabilities''.
Deferred income tax assets. Deferred income tax assets increased by 53.2% from RMB14,111 million as of December 31, 2003 to RMB21,614 million as of December 31, 2004,
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primarily because in 2004 we utilized less deferred income tax assets in relation to deductible loan write-oÅs in 2004 and accumulated more deferred income tax assets in connection with allowance for impairment losses provided on loans and advances.
Other assets. Other assets decreased by 37.0% from RMB56,443 million as of December 31, 2003 to RMB35,575 million as of December 31, 2004. This decrease was primarily due to a signiÑcant decrease in accounts receivables and prepayments from RMB23,492 million as of December 31, 2003 to RMB11,924 million as of December 31, 2004, as well as a signiÑcant decrease in foreclosed assets from RMB5,259 million as of December 31, 2003 to RMB2,184 million as of December 31, 2004. The decrease in accounts receivables and prepayments was mainly due to decreases in receivables associated with securities transactions pending settlement and receivables from government entities, and the decrease in foreclosed assets was primarily the result of substantial disposals of foreclosed assets.
Liabilities
The following table sets forth the principal components of our liabilities as of the dates A1A(32)(1),(2) indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,181 111,788 134,217 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,815 66,738 30,055 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,836 38,570 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 157,243 141,087 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,977 93,760 91,174 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,338,448 3,699,464 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,823 26,253 60,179 Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77,229 69,549 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,949 19,588 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,669 4,274 7,052 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,951 2,399 2,136 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,397 124,860 136,272 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,751,434 4,037,314 4,484,529
Our total liabilities consist of the following:
¬ due to banks, which primarily consists of deposits from other banks;
¬ due to central banks, which includes special foreign exchange deposits of government agencies and borrowings from central banks;
¬ bank notes in circulation, which represent the liability in respect of the Hong Kong dollar bank notes and Macau pataca bank notes in circulation issued by BOCHK and our Macau branch, respectively;
¬ certiÑcates of deposits and placements from banks and other Ñnancial institutions, which include certiÑcates of deposits issued primarily by our overseas operations, and placements from banks and other Ñnancial institutions, which include placements from
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domestic and overseas banks and other Ñnancial institutions and certain repurchase agreements relating to securities and bills;
¬ derivative Ñnancial instruments and liabilities at fair value through proÑt or loss, which include foreign exchange derivatives, interest rate derivatives, equity derivatives and commodities derivatives, as well as structured deposits and short positions in foreign currency debt securities and exchange fund bills; see ""Ì OÅ-Balance Sheet Arrangements Ì Derivative Financial Instruments'';
¬ due to customers, which consists of demand deposits and time deposits;
¬ bonds issued, which consist of U.S. dollar-denominated debt securities as well as Renminbi-denominated subordinated bonds;
¬ special purpose borrowings, consisting of long-term multi-currency borrowings from foreign governments and/or banks in the form of export credit loans, foreign government loans and other subsidized loans generally used to Ñnance projects in the PRC with special commercial purposes;
¬ current tax liabilities;
¬ retirement beneÑt obligations, which include obligations with respect to supplemental retirement beneÑts and early retirement beneÑts for retired or early retired employees as appropriate; see ""Ì Critical Accounting Policies'';
¬ deferred income tax liabilities; and
¬ other liabilities, which include items in the process of clearance and settlement, interest payable, salary and welfare payable, payable to the Ministry of Finance, payable to China Orient, allowance for litigation losses and others.
December 31, 2005 compared to December 31, 2004 Our total liabilities increased by 11.1% from RMB4,037,314 million as of December 31, 2004 to RMB4,484,529 million as of December 31, 2005. Due to banks. Due to banks increased by 20.1% from RMB111,788 million as of December 31, 2004 to RMB134,217 million as of December 31, 2005, principally as a result of increased volume in settlement with other banks. Due to central banks. Due to central banks decreased by 55.0% from RMB66,738 million as of December 31, 2004 to RMB30,055 million as of December 31, 2005, principally as a result of the shift of function from the PBOC to SAFE relating to the settlement of precious metal, which resulted in the shifting within our consolidated Ñnancial statements of certain liabilities from ""Due to central bank'' to ""CertiÑcates of deposits and placements from banks and other Ñnancial institutions''. CertiÑcates of deposits and placements from banks and other Ñnancial institutions. CertiÑcates of deposits and placements from banks and other Ñnancial institutions increased by 50.7% from RMB141,087 million as of December 31, 2004 to RMB212,626 million as of December 31, 2005. This increase was the result of, among other things, the increased deposits from insurance companies and other Ñnancial institutions, which was largely attributable to the increased liquidity in the domestic Ñnancial market in 2005. Due to customers. Due to customers increased by 10.8% from RMB3,338,448 million as of December 31, 2004 to RMB3,699,464 million as of December 31, 2005. Demand deposits increased by 3.3% from RMB1,580,737 million as of December 31, 2004 to RMB1,633,112 million as of
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December 31, 2005, and time deposits increased by 17.6% from RMB1,757,711 million as of December 31, 2004 to RMB2,066,352 million as of December 31, 2005. See ""Description of Our Assets and Liabilities Ì Liabilities and Sources of Funds'' for a further discussion of our customer deposits. Bonds issued. Bonds issued signiÑcantly increased from RMB26,253 million as of December 31, 2004 to RMB60,179 million as of December 31, 2005, principally as a result of our issuance of Renminbi-denominated subordinated bonds with an aggregate face value of RMB33,930 million in February 2005. Other liabilities. Other liabilities increased by 9.1% from RMB124,860 million as of December 31, 2004 to RMB136,272 million as of December 31, 2005. This increase was primarily due to an increase in interest payable from RMB22,674 million as of December 31, 2004 to RMB27,024 million as of December 31, 2005.
December 31, 2004 compared to December 31, 2003 Our total liabilities increased by 7.6% from RMB3,751,434 million as of December 31, 2003 to RMB4,037,314 million as of December 31, 2004. Due to banks. Due to banks increased by 17.4% from RMB95,181 million as of December 31, 2003 to RMB111,788 million as of December 31, 2004, principally as a result of a 17.7% increase in deposits from other banks from RMB93,974 million as of December 31, 2003 to RMB110,633 million as of December 31, 2004. Due to central banks. Due to central banks decreased by 13.1% from RMB76,815 million as of December 31, 2003 to RMB66,738 million as of December 31, 2004, principally as a result of a 30.7% decrease in special foreign exchange deposits of government agencies from RMB64,091 million as of December 31, 2003 to RMB44,444 million as of December 31, 2004. CertiÑcates of deposits and placements from banks and other Ñnancial institutions. CertiÑcates of deposits and placements from banks and other Ñnancial institutions decreased by 10.3% from RMB157,243 million as of December 31, 2003 to RMB141,087 million as of December 31, 2004, This decrease was the result of, among other things, a decrease in the volume of our repurchase transactions entered into in 2004. Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss. Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss increased by 83.9% from RMB50,977 million as of December 31, 2003 to RMB93,760 million as of December 31, 2004, principally as a result of the increase in structured deposits from RMB17,821 million as of December 31, 2003 to RMB54,188 million as of December 31, 2004. This increase in structured deposits was primarily due to sales of certain structured foreign exchange deposit products we introduced in 2004 for our personal wealth management business. Due to customers. Due to customers increased by 10.1% from RMB3,033,364 million as of December 31, 2003 to RMB3,338,448 million as of December 31, 2004. Demand deposits increased by 14.9% from RMB1,376,247 million as of December 31, 2003 to RMB1,580,737 million as of December 31, 2004, and time deposits increased by 6.1% from RMB1,657,117 million as of December 31, 2003 to RMB1,757,711 million as of December 31, 2004. See ""Description of Our Assets and Liabilities Ì Liabilities and Sources of Funds'' for a further discussion of our customer deposits. Bonds issued. Bonds issued signiÑcantly increased from RMB3,823 million as of December 31, 2003 to RMB26,253 million as of December 31, 2004, principally as a result of our
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FINANCIAL INFORMATION
issuance of Renminbi-denominated ten-year subordinated bonds with an aggregate face value of RMB26,070 million in July and October 2004. Other liabilities. Other liabilities decreased by 40.9% from RMB211,397 million as of December 31, 2003 to RMB124,860 million as of December 31, 2004. This decrease was primarily due to a signiÑcant decrease in securities in the process of settlement from RMB93,953 million as of December 31, 2003 to RMB1,089 million as of December 31, 2004. The signiÑcantly higher amount of securities in the process of settlement as of December 31, 2003 was largely attributable to our purchase of investment securities with the proceeds of Huijin's capital contribution on December 31, 2003. The decrease in other liabilities in 2004 was also attributable to decreases in other items in the process of clearance and settlement from RMB56,719 million as of December 31, 2003 to RMB49,364 million as of December 31, 2004, which was partially oÅset by recognition of a payable to the Ministry of Finance of RMB17,362 million as of December 31, 2004 as described in note II.4 of Section 6 to Appendix I Ì ""Accountants' Report''.
Total Equity The table below sets forth the components of our total equity as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Share capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 186,390 209,427 Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,976 (10,432) (5,954) Statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,140 5,987 General and regulatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 419 5,109 (Accumulated losses)/undistributed proÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,241) 16,547 10,188 Reserve for fair value changes of available-for-sale securitiesÏÏÏÏ 4,078 2,730 1,899 Currency translation diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,617 1,961 (237) 196,820 200,755 226,419 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,026 27,152 29,100 Total equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221,846 227,907 255,519
December 31, 2005 compared to December 31, 2004 Share capital. Our share capital was RMB186,390 million and RMB209,427 million as of December 31, 2004 and 2005. The increase of our share capital is due to the capital contributions from our strategic investors. Capital reserve. We had a negative capital reserve of RMB5,954 million as of December 31, 2005 compared to a negative capital reserve of RMB10,432 million as of December 31, 2004. The increase of our capital reserve is principally a result of the capital contribution of RMB3,964 million from our strategic investors. Statutory reserves. We had a statutory reserves of RMB5,987 million as of December 31, 2005 compared to RMB3,140 million as of December 31, 2004, reÖecting an appropriation of RMB2,847 million to statutory reserves in 2005. General and regulatory reserves. We had general and regulatory reserves of RMB5,109 million as of December 31, 2005 compared to RMB419 million as of December 31, 2004, reÖecting an appropriation of RMB4,690 million to regulatory reserves in 2005. According to the relevant Ministry of Finance regulations, we will be required to make general provisions and maintain a general
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FINANCIAL INFORMATION
reserve of not less than 1% of our risk-bearing assets. As of December 31, 2005, we had a general reserve for such purpose of RMB2,601 million. See ""Ì Dividend Policy''. The general and regulatory reserves as of December 31, 2005 also included RMB2,475 million set aside for general banking risks by Bank of China (Hong Kong) Limited in accordance with the requirements of Hong Kong Monetary Authority. (Accumulated losses)/undistributed proÑts. The change of undistributed proÑts in 2005 from RMB16,547 million as of December 31, 2004 to RMB10,188 million as of December 31, 2005 was primarily attributable to our proÑt in the year of RMB25,921 million, as well as the distribution of total dividends of RMB26,937 million on September 7, 2005 and December 31, 2005. See notes VI.38 and VI.39 to Appendix I Ì ""Accountants' Report''. Reserve for fair value changes of available-for-sale securities. Reserve for fair value changes of available-for-sale securities decreased by 30.4% from RMB2,730 million as of December 31, 2004 to RMB1,899 million as of December 31, 2005, which was mainly attributable to the reversal of cumulative changes in fair value gains totaling RMB2,254 million relating to an equity investment in Huaneng International Power Development Corporation as a result of the reclassiÑcation of this investment to investment in associates following the bank's further acquisition of equity shares in this company, which increased its shareholding from 15% to 20% during 2005. Such decrease was partially oÅset by an increase in fair value change of RMB813 million, largely arising from Renminbi- denominated available-for-sale securities held, as a result of the decrease in market interest rates of Renminbi-denominated assets. Currency translation diÅerences. Currency translation diÅerences decreased from RMB1,961 million as of December 31, 2004 to negative RMB237 million as of December 31, 2005. See note III.2(3) to Appendix I Ì ""Accountants' Report''. Minority interest. Minority interest primarily consists of the interests of the minority shareholders in BOCHK Holdings. Minority interest increased by 7.2% from RMB27,152 million as of December 31, 2004 to RMB29,100 million as of December 31, 2005. Total equity. As a result of the foregoing, total equity increased by 12.1% from RMB227,907 million as of December 31, 2004 to RMB255,519 million as of December 31, 2005.
December 31, 2004 compared to December 31, 2003 Share capital. Our share capital was RMB186,390 million as of December 31, 2003 and 2004. Capital reserve. We had a negative capital reserve of RMB10,432 million as of December 31, 2004 compared to a capital reserve of RMB32,976 million as of December 31, 2003. For a further discussion of our capital reserve, see notes II.4 and VI.37 to Appendix I Ì ""Accountants' Report''. Statutory reserves. We had a statutory reserves of RMB3,140 million as of December 31, 2004 compared to nil as of December 31, 2003, reÖecting transfers from undistributed proÑts to statutory surplus reserve of RMB2,093 million and to statutory welfare reserve of RMB1,047 million. General and regulatory reserves. We had general and regulatory reserves of RMB419 million as of December 31, 2004 compared to nil as of December 31, 2003, reÖecting an appropriation from undistributed proÑts to provide for unidentiÑed losses. See ""Ì Dividend Policy''. (Accumulated losses)/undistributed proÑts. The change of undistributed proÑts of RMB16,547 million as of December 31, 2004 from accumulated losses of RMB28,241 million as of December 31, 2003 was primarily attributable to our proÑt in the year of RMB22,301 million and the credit to undistributed proÑts of RMB26,046 million as a result of our Ñnancial restructuring, which were partially oÅset by the transfers to the statutory surplus reserve of RMB2,093 million and the
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FINANCIAL INFORMATION
statutory welfare reserve of RMB1,047 million. See notes II.4 and VI.39 to Appendix I Ì ""Accountants' Report''.
Reserve for fair value changes of available-for-sale securities. Reserve for fair value changes of available-for-sale securities decreased by 33.1% from RMB4,078 million as of December 31, 2003 to RMB2,730 million as of December 31, 2004, principally as a result of changes in fair value of available-for-sale securities.
Currency translation diÅerences. Currency translation diÅerences increased by 21.3% from RMB1,617 million as of December 31, 2003 to RMB1,961 million as of December 31, 2004, see note III.2(3) to Appendix I Ì ""Accountants' Report''.
Minority interest. Minority interest primarily consists of the interests of the minority shareholders in BOCHK Holdings. Minority interest increased by 8.5% from RMB25,026 million as of December 31, 2003 to RMB27,152 million as of December 31, 2004.
Total equity. As a result of the foregoing, total equity increased 2.7% from RMB221,846 million as of December 31, 2003 to RMB227,907 million as of December 31, 2004.
OÅ-Balance Sheet Arrangements
Our oÅ-balance sheet arrangements include contingent liabilities, commitments and derivative Ñnancial instruments.
Contingent Liabilities and Commitments
Our contingent liabilities and commitments include credit commitments, assets pledged, capital A1A(32)(4) commitments, operating leases, certiÑcate treasury bond redemption commitments and legal proceedings. For more information about our legal proceedings, see ""Business Ì Legal and Regulatory Proceedings''.
The largest portion of our contingent liabilities and commitments is attributable to credit commitments, which amounted to RMB895,762 million as of December 31, 2005. Credit commitments include acceptances, letters of guarantee, letters of credit and credit commitments and others. The table below sets forth a breakdown of our credit commitments as of the dates indicated:
Credit Commitments
As of December 31, 2003 2004 2005 (in millions of RMB) Acceptances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 147,251 166,869 195,234 Letters of guarantee issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,824 186,472 212,987 Letters of credit issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 103,837 104,204 101,195 Credit commitments and othersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,353 301,740 386,346 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746,265 759,285 895,762
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Assets Pledged
Assets pledged include assets pledged as collateral in connection with repurchase agreements and short positions with other banks and Ñnancial institutions. The table below sets forth a breakdown of our assets pledged as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,866 3,118 2,617 Bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,564 3,993 11,968 Debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,951 11,639 49,658 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,381 18,750 64,243
Assets pledged may Öuctuate signiÑcantly on a day-to-day basis in accordance with our asset and liability management operations.
Capital Commitments
Our capital commitments are our obligations under written agreements to purchase buildings and equipment. The following table sets forth our capital commitments as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Contracted but not provided for ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 838 564 1,893 Authorized but not contracted forÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,026 1,077 2,687 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,864 1,641 4,580
Operating Lease Commitments
Our operating lease commitments represent our minimum lease payment obligations under our operating leases. The table below sets forth our operating lease commitments as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) Within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,172 1,128 1,371 One to two years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 915 1,014 1,085 Two to three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 680 664 807 Above three yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,018 1,604 2,546 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,785 4,410 5,809
Our operating lease commitments have remained relatively stable in recent years.
CertiÑcate Treasury Bond Redemption Commitments
Our bank is entrusted by the Ministry of Finance to underwrite certain certiÑcate treasury bonds. CertiÑcate treasury bonds are redeemable at any time at the option of the holder at principal value plus unpaid interest, and the Bank is committed to redeeming those bonds. The original scheduled
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FINANCIAL INFORMATION
maturities of these bonds vary from one to Ñve years. The table below sets forth our certiÑcate treasury bond redemption commitments as of the dates indicated:
As of December 31, 2003 2004 2005 (in millions of RMB) CertiÑcate Treasury bond redemption commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,443 75,188 80,965 The PRC Government will not provide funding for early redemption of these certiÑcate treasury bonds on a back-to-back basis, but will pay interest through maturity and repay the outstanding principal at maturity. Derivative Financial Instruments We utilize forwards, futures, options, swaps and other derivatives for purposes of currency and interest rate economic hedging. These derivative transactions entered into by our bank for economic hedging purposes do not qualify for hedging instruments under IAS 39. See Note III.3 of Section 6 to Appendix I Ì ""Accountants Report''.
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FINANCIAL INFORMATION
The table below provides a breakdown of the contractual or notional amounts and the fair values of our derivative Ñnancial instruments outstanding as of the dates indicated.
Contractual/ notional Fair values amount Assets Liabilities (in millions of RMB) As of December 31, 2003 Exchange rate derivatives Currency forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 576,506 9,411 (9,515) OTC currency options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,579 198 (88) Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,609 (9,603) Interest rate derivatives Interest rate swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171,663 1,476 (4,425) Cross-currency interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,707 1,845 (10,739) OTC interest rate options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,723 2 (307) Interest rate futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,549 Ì (9) Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,323 (15,480) Equity derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,966 10 (7) Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,069 220 (101) Total derivative Ñnancial instruments assets/(liabilities)ÏÏÏÏÏÏ 13,162 (25,191) As of December 31, 2004 Exchange rate derivatives Currency forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582,953 10,972 (9,399) OTC currency options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,702 299 (163) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,271 (9,562) Interest rate derivatives Interest rate swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 301,820 2,283 (5,135) Cross-currency interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,639 2,136 (9,082) OTC interest rate options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,587 175 (111) Interest rate futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,858 3 (6) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,597 (14,334) Equity derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,080 7 (5) Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,474 201 (291) Total derivative Ñnancial instruments assets/(liabilities)ÏÏÏÏÏÏ 16,076 (24,192) As of December 31, 2005 Exchange rate derivatives Currency forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 563,397 6,991 (4,813) OTC currency options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,012 3,781 (374) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,772 (5,187) Interest rate derivatives Interest rate swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,332 3,132 (5,246) Cross-currency interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,427 1,735 (4,131) OTC interest rate options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,578 148 (215) Interest rate futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,939 28 (34) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,043 (9,626) Equity derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,442 14 (7) Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,008 979 (932) Total derivative Ñnancial instruments assets/(liabilities)ÏÏÏÏÏÏ 16,808 (15,752)
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FINANCIAL INFORMATION
Liquidity
Our funding operations are designed to ensure both a stable source of funds and eÅective liquidity management. We continuously adjust our funding operations to minimize funding costs and also endeavor to match currencies and maturities with those of our asset portfolio. We obtain funding for our lending and investment activities primarily from due to customers, which includes corporate and personal time and demand deposits. We believe we have suÇcient sources of funds to meet our funding needs for the foreseeable future.
See ""Description of Our Assets and Liabilities Ì Liabilities and Sources of Funds''. For a discussion of our liquidity risk management, see ""Risk Management'', and for a description of the maturity proÑle of our assets and liabilities, see note IV.7 to Appendix I Ì ""Accountants' Report''.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. For a discussion of our interest rate risk, see ""Risk Management'', and for a description of our asset and liability interest rate gap position, see note IV.6 to Appendix I Ì ""Accountants' Report''.
Exchange Rate Risk. The following table sets forth distribution by currency of certain of our balance sheet and oÅ-balance sheet items as of the date indicated:
As of December 31, 2005(1) Hong Kong U.S. dollar dollar Euro Japanese yen British pound Others (in millions of RMB) Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,086,823 653,304 101,359 67,977 18,137 115,579 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 657,011 624,312 69,479 55,292 28,917 122,438 Net open position(2) ÏÏÏÏÏÏÏÏÏ 429,812 28,992 31,880 12,685 (10,780) (6,859) Net oÅ-balance sheet position (229,776) 73,943 (29,586) (16,344) 15,331 15,197 Credit commitments ÏÏÏÏÏÏÏÏÏ 295,280 137,425 30,874 21,185 2,049 14,011
(1) Foreign currency amounts are translated into Renminbi amounts based on the applicable exchange rates at December 31, 2005.
(2) Equal to total assets minus total liabilities.
See ""Risk Management'' for a more detailed discussion of our exchange rate risk.
With respect to the foreign currency-denominated portion of our trading book, we use VAR analysis based on the Monte Carlo simulation model. For the categorization of our trading book, please see ""Risk Management Ì Market risk Management''. VAR is an estimate of the potential loss resulting from the market movements over a speciÑed time horizon and at a given conÑdence level. We currently calculate VAR using a one-day time horizon and a 95% conÑdence level for our foreign currency-denominated trading portfolio for our domestic operations, which means our bank's trading position has a 5% probability of losing more than the amount of VAR on a 1 day horizon period. VAR models have certain limitations: (i) they can only estimate potential loss under normal market conditions; (ii) they are more reliable during normal market conditions, and historical data may fail to predict the future; (iii) VAR does not take into account the amount of loss that might occur beyond the speciÑed level of conÑdence; and (iv) VAR is calculated on the basis of positions outstanding at the time of calculation and does not necessarily reÖect intra-day position changes. VAR results cannot, therefore, guarantee that actual risk will follow the statistical estimate.
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FINANCIAL INFORMATION
We currently do not calculate VAR on a consolidated basis within our bank. The following table sets forth, for the year ended December 31, 2005, the results of our VAR analysis on our foreign currency-denominated trading portfolio for our domestic operations, which does not cover our signiÑcant larger investment books or banking books:
For the year ended December 31, 2005 Period end Average High Low (in millions of U.S. dollars) Interest rate risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.77 3.27 11.94 0.20 Foreign exchange risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.39 2.70 18.69 0.34 Volatility risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.36 0.80 2.54 0.04 Total market risk(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.06 5.10 18.86 0.69
(1) The discrepancies between the aggregate amount of the three types of risks and the total market risk are due to the diversiÑcation eÅect.
Capital Adequacy PRC commercial banks are subject to a minimum capital adequacy ratio of 8% and a minimum core capital adequacy ratio of 4%. Pursuant to the Guidelines on Bank of China and China Construction Bank issued by the CBRC, which speciÑcally apply to our bank and CCB, we are required to meet the minimum capital adequacy ratio of 8% at all times beginning in 2004. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Capital Adequacy Ratio'' for a more detailed discussion. The following table sets forth a calculation of our core capital adequacy ratio and our capital adequacy ratio based on the applicable CBRC guidelines as of the dates indicated:
As of December 31, 2004 2005 (in millions of RMB, except percentages) Core capital: Share capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 209,427 Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,276 25,795 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,387 28,778 Total core capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 235,053 264,000 Supplementary capital: General provisionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,882 25,677 Long-term subordinated bonds issuedÏÏ 26,070 60,000 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,315) (1,380) Gross value of supplementary capital ÏÏ 48,637 84,297 Total capital base before deductions ÏÏÏÏÏ 283,690 348,297 Deductions: Investment in non-consolidated Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,399) (2,877) Investment properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,228) (5,697) Investment in non-Ñnancial institutions (6,585) (13,486) Total capital base after deductions ÏÏÏÏÏÏÏ 270,478 326,237 Core capital base after deductions(1) ÏÏÏÏÏ 228,447 252,970
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As of December 31, 2004 2005 (in millions of RMB, except percentages) Risk-weighted assets and market risk capital adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,693,503 3,131,002 Capital adequacy ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.04% 10.42% Core capital adequacy ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.48% 8.08%
(1) Pursuant to the relevant regulations, 50% of the total deductions was applied in deriving the core capital base. The above capital adequacy ratios were calculated in accordance with applicable CBRC guidelines and based on PRC GAAP. For a further discussion of our calculation of capital adequacy ratios, see Appendix II Ì ""Unaudited Supplementary Financial Information''.
CRITICAL ACCOUNTING POLICIES We make estimates and assumptions that aÅect the reported amounts of assets and liabilities within the next Ñnancial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Areas susceptible to changes in essential estimates and judgments, which aÅect the carrying value of assets and liabilities, are set out below. It is impracticable to determine the eÅect of changes to either the key assumptions discussed below or other uncertainties that relate to our estimates. It is possible that actual results may require material adjustments to the estimates referred to below.
Impairment Losses on Loans and Advances We review our loan portfolios to assess impairment at least on a semi-annual basis. Impairment exists if there is objective evidence that we will not be able to collect all amounts due according to the original contractual terms of loans and advances. Such objective evidence includes, among others:
¬ signiÑcant Ñnancial diÇculty incurred by the borrower;
¬ a breach of contract, such as a default or delinquency in interest or principal payment;
¬ for economic or legal reasons related to the borrower's Ñnancial diÇculty, our granting to the borrower a concession that we would not otherwise consider (e.g., restructured loans);
¬ it becoming probable that the borrower will become bankrupt or will undergo other Ñnancial re-organization; and
¬ other observable data indicating that there is a measurable decrease in the estimated future cash Öows from such loans and advances. The total allowance for impairment losses on loans and advances consists of two components, individually assessed allowance and collectively assessed allowance.
Individually Assessed Allowance For individually signiÑcant identiÑed impaired loans, we assess the impairment losses using the discounted cash Öow approach. The amount of the provision is the diÅerence between the carrying amount and the estimated recoverable amount which is the estimated present value of expected cash Öows, taking into account the repayment condition of the borrower or the guarantor and
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amounts recoverable from guarantees and collateral, discounted at the original eÅective interest rate of each loan. In estimating these cash Öows, management considers a number of factors, which include the following:
¬ borrower's future operating cash Öows;
¬ net realizable amount of collateral;
¬ potential/possible cash Öows from guarantors; and
¬ estimated timing of cash Öows. Each individually signiÑcant identiÑed impaired loan is assessed on its own merits with reference to our disposition strategy and estimated recoverable cash Öow.
Collectively Assessed Allowance Collectively assessed allowance relates to impairment losses inherent in portfolios of loans with similar economic characteristics where there is objective evidence to suggest that they contain impaired loans but the individually impaired loans cannot be identiÑed yet or where a loan has been identiÑed as impaired but is considered individually insigniÑcant. Loans and advances that are assessed for impairment losses on a collective basis include the following:
¬ homogeneous groups of corporate loans and advances that are considered individually insigniÑcant, and all of our personal loans and advances; and
¬ all corporate loans and advances that are individually signiÑcant and individually assessed but for which no impairment can yet be identiÑed.
Homogeneous groups of loans and advances not considered individually signiÑcant For homogeneous groups of loans and advances that are not considered individually signiÑcant, we use a migration model to assess impairment losses on a collective basis. Our methodology involves a statistical analysis of historical trends of probability of default and amount of consequential loss, as well as an evaluation of current economic conditions that may have a consequential impact on inherent losses in the portfolio. The following factors, among others, are considered in our assessment:
¬ historical loss patterns of each component of the loan portfolio based on the nature of the product, credit risk by borrowers' ownership structures, industry analysis as well as geographical comparison;
¬ loss or migration patterns/ratios of the loan grading allocated to the facilities;
¬ cash recovered from impaired loans and advances; and
¬ current macroeconomic environment, such as PRC Government's current development plan on certain types of industries.
Individually signiÑcant loans and advances with no objective evidence of impairment Where loans and advances are individually signiÑcant and therefore have been individually assessed but for which no impairment can be identiÑed, these loans and advances are grouped together in portfolios of similar credit risk characteristics for the purpose of assessing a collective impairment loss by migration model. See ""Ì Homogeneous groups of loans and advances not
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FINANCIAL INFORMATION
considered individually signiÑcant''. This loss covers those loans and advances that were impaired at the balance sheet date but which will not be individually identiÑed as impaired until some time in the future. Apart from those factors noted above, the loss identiÑcation period between the time of loss occurrence and the loss identiÑcation is considered by management based on the historical experience in the market in order to determine how soon those unidentiÑed impairment will become identiÑed in the migration model. As soon as information becomes available that an individual loan is impaired, an impairment loss is measured either individually or through a collective assessment with other identiÑed impaired loans. Loans and advances that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in our collective assessment for impairment.
OÅ-Balance Sheet Exposures We evaluate the credit risk for our oÅ-balance exposures in the same way as we do for the customer loans and advances. Our oÅ-balance sheet exposures consist primarily of credit commitments and letters of guarantee, letters of credit, acceptance and others. In the event that we are asked to honor an obligation under these oÅ-balance sheet exposures, all amounts advanced by us will be recorded as loans and advances and, are classiÑed in accordance with our loan classiÑcation principles.
Loan Write-OÅs When a loan is deemed by the management to be uncollectible, it is written oÅ against the related allowance for impairment losses on loans and advances. Subsequent recoveries are credited to the provision for impairment losses on loans and advances in the income statement.
Reversal of Impairment If the amount of impairment related to a loan or group of loans and advances subsequently decreases due to an event occurring after the provision, the release of the allowance is credited as a current reduction of the provision for impairment losses on loans and advances. The accuracy of the allowance is dependent on estimates of future cash Öows for individually assessed allowance and the model assumptions and parameters used in determining collectively assessed allowance. While this necessarily involves judgment, we believe that our allowance is reasonable and supportable. The methodology and assumptions used for estimating both the amount and timing of future cash Öows are reviewed regularly to reduce diÅerences between loss estimates and actual loss experience.
Fair Value of Financial Instruments The fair value of Ñnancial instruments that are not quoted on active markets are determined by using valuation techniques. Valuation techniques used include discounted cash Öows analysis and models. To the extent practical, models use only observable data; however, areas such as credit risk, volatilities and correlations require our management to make estimates. Changes in assumptions about these factors could aÅect the reported fair value of Ñnancial instruments. With respect to PRC Government obligations related to large-scale policy directed Ñnancing transactions, such as the one described in note VI.18(3) to Appendix I Ì ""Accountants' Report'', fair value is determined using the stated interest rate of the related instrument. In this regard, there are no relevant market prices or yields reÖecting arms' length transactions of comparable size and tenor available. Although a signiÑcant degree of judgment is, in some cases, required in establishing fair
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values, our management believes the fair values recorded in our consolidated balance sheet set forth in Appendix I Ì ""Accountants' Report'' and the changes in fair values recorded in our consolidated income statement set forth in Appendix I Ì ""Accountants' Report'' are appropriate and reÖective of the underlying economics.
Held-to-Maturity Investments We follow the guidance of IAS 39 in classifying non-derivative Ñnancial assets with Ñxed or determinable payments and Ñxed maturity as held-to-maturity. This classiÑcation requires signiÑcant judgment. In making this judgment, we evaluate our intention and ability to hold such investments to maturity. If we fail to keep these investments to maturity other than for the speciÑc circumstances Ì for example, selling an insigniÑcant amount close to maturity Ì we will be required to reclassify the entire class as available-for-sale.
Employee Retirement BeneÑt Obligations As described more fully in notes III.19(2) and VI.32 to Appendix I Ì ""Accountants' Report'', we have established liabilities in connection with beneÑts to be paid to certain retired and early retired employees. The amount of employee beneÑt expense and these liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, pension beneÑt inÖation rates, medical beneÑt inÖation rates, and other factors. Actual results that diÅer from the assumptions are recognized immediately and, therefore, aÅect recognized expenses in the year in which such diÅerences arise. While our management believes that its assumptions are appropriate, diÅerences in actual experience or changes in assumptions may aÅect our expenses related to our employee retirement beneÑt obligations.
Income Taxes We are subject to the income tax laws of the PRC, as well as those of the foreign jurisdictions in which we operate. These tax laws are complex and subject to diÅerent interpretations by us and the relevant tax authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when certain items will aÅect taxable income in the various domestic and foreign jurisdictions. Disputes over interpretation of the tax laws may be subject to review and/or adjudication in various jurisdictions or may be settled with the taxing authority upon examination or audit. Where the Ñnal tax outcome of these matters is diÅerent from the amounts that were initially recorded, such diÅerences will impact the income tax and deferred income tax provisions in the period in which determination was made.
INDEBTEDNESS A1A(32)(1) At the close of business on March 31, 2006, being the latest practicable date prior to the printing of this prospectus for the purpose of this indebtedness statement, our indebtedness includes: ‚ Subordinated bonds issued in 2004 and 2005 with an aggregate principal amount of RMB60,000 million. Subordinated bonds of RMB51,000 million have a maturity of 10 years and the remaining balance of RMB9,000 million has a maturity of 15 years. We have the option to redeem all or part of the bonds at face value prior to their respective maturity dates; and ‚ U.S. dollar-denominated bonds of RMB177 million; and
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‚ Special-purpose borrowings with an aggregate principal amount of RMB50,545 million, which are long-term borrowings in multiple currencies from foreign governments and/or banks in the form of export credit loans, foreign government loans and other subsidized loans. Special purpose borrowings are usually used to Ñnance projects with special commercial purpose in the PRC, and we are obligated to repay these borrowings when they are due. In addition, as of March 31, 2006, we had borrowings from central banks, deposits and money market deposits from customers and other banks, certiÑcates of deposits, securities sold under repurchase agreements, credit commitments, acceptances, issued letters of guarantee and letters of credit, other commitments and contingencies, including outstanding litigation that arise from our ordinary course of business.
Except as otherwise disclosed in this prospectus, we did not have at the close of business on A1A(32)(2),(3) March 31, 2006 any outstanding mortgages, charges, debentures or other loan capital (issued or 3rd Sch 23 agreed to be issued), bank overdrafts, loans, liabilities under acceptance or other similar 3rd Sch 24 indebtedness, hire purchase and Ñnance lease commitments or any guarantees or other material contingent liabilities. The Directors have conÑrmed that there has not been any material change in the indebtedness or contingent liabilities of the bank since March 31, 2006.
RULES 13.11 TO 13.19 OF THE HONG KONG LISTING RULES We conÑrm that we are not aware of any circumstances that will trigger disclosure requirements under Rule 13.11 to Rule 13.19 of the Hong Kong Listing Rules.
PROFIT FORECAST
(1) PROFIT FORECAST FOR THE YEAR ENDING DECEMBER 31, 2006 LR11.18
Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏ not less than RMB33,000 million (HK$31,918 million) Forecast earnings per Share(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (a) Pro forma basis(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RMB0.136 (HK$0.132) (b) Weighted average basis(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RMB0.143 (HK$0.138)
(1) All statistics in this table are based on the assumption that the Over-Allotment Option is not exercised. (2) The bases and assumptions on which the above proÑt forecast has been prepared are set out in Appendix IV to this prospectus. (3) Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 and forecast earnings per Share are converted into Hong Kong dollars at the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006. (4) The forecast earnings per Share on a pro forma basis is calculated by dividing the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 by a weighted average of 241,854,139,211 Shares assumed to be issued and outstanding during the year ending December 31, 2006, assuming the Over-Allotment Option is not exercised. The weighted average of 241,854,139,211 Shares, assuming the Over- Allotment Option is not exercised, is calculated based on 209,427,362,357 Shares issued and outstanding as of December 31, 2005, 8,514,415,652 Shares issued on March 13, 2006 upon completion of the SSF Investment, and 25,568,590,000 Shares to be issued pursuant to the Global OÅering on an assumption that the Global OÅering was completed on January 1, 2006. (5) The forecast earnings per Share on a weighted average basis is calculated by dividing the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 by a weighted average of
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FINANCIAL INFORMATION
231,276,448,553 Shares assumed to be issued and outstanding during the year ending December 31, 2006, assuming the Over-Allotment Option is not exercised. The weighted average of 231,276,448,553 Shares, assuming the Over- Allotment Option is not exercised, is calculated based on 209,427,362,357 Shares issued and outstanding as of December 31, 2005, 8,514,415,652 Shares issued on March 13, 2006 upon completion of the SSF Investment, and 25,568,590,000 Shares to be issued pursuant to the Global OÅering on an assumption that the Global OÅering was completed on June 1, 2006.
If the Over-Allotment Option is exercised in full, the forecast earnings per Share on a pro forma basis and a weighted average basis, calculated on the basis set out above, will be diluted to approximately RMB0.134 (HK$0.130) and RMB0.141 (HK$0.137), respectively.
DIVIDEND POLICY
According to our Articles of Association, any dividend distribution plan that has been approved by two thirds of our Directors may be proposed to the general shareholders' meeting for approval. Alternatively, two or more shareholders who hold in the aggregate 10% or more of our Shares may request the Board of Directors to convene a special shareholders' meeting to review a proposal of dividend distribution. In addition to the provisions of our Articles of Association, pursuant to Article 103 of the PRC Company Law, any shareholder who holds, either alone or jointly with others, more than 3% of our Shares may at least 10 days before a scheduled shareholders general meeting propose a resolution to be tabled for consideration at such shareholders' meeting. Any resolution on dividend distribution is required to be approved by more than one half of the voting power held by our shareholders, and we are obligated to make the dividend distribution within two months after the shareholders' approval. Holders of H Shares will be entitled to receive dividends in proportion to their shareholdings.
The decision of our Board to make a recommendation for the payment of any dividend and the amount of the dividend will depend on:
¬ our results of operations and cash Öows;
¬ our Ñnancial position;
¬ statutory capital adequacy requirements as determined under relevant regulations;
¬ the interests of all of our shareholders;
¬ general business conditions;
¬ our business prospects;
¬ statutory and regulatory restrictions on the payment of dividends by us; and
¬ any other factor that our Board deems relevant.
We will pay dividends only after we have made the following allowances and allocations:
¬ replenishment of unconsolidated accumulated losses, if any;
¬ allocations to the statutory surplus reserve equivalent to 10% of our net proÑt, as determined under PRC GAAP, although no further allocation to the statutory surplus reserve fund is required after it reaches an amount equal to 50% of our registered capital, as well as allocations to the statutory surplus reserve pursuant to overseas regulatory requirements;
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¬ allocations to general and regulatory reserves under PRC regulations and overseas regulatory requirements if such overseas regulatory requirements are applicable to our overseas operations; and
¬ allocations to a discretionary surplus reserve. Under PRC law, dividends may be paid only out of distributable proÑts as determined under PRC GAAP or IFRS, whichever is lower. Distributable proÑts means our unconsolidated proÑts attributable to equity holders, after any replenishment of accumulated losses and allocations to statutory surplus reserve, general and regulatory reserve and discretionary surplus reserve that we are required to make. Any distributable proÑts that are not distributed in a given year are retained and available for distribution in subsequent years. Under IFRS, our unconsolidated Ñnancial statements are prepared by using cost accounting method for our subsidiaries. Dividends from subsidiaries are accounted for as when declared by the subsidiaries, and when applicable, subject to shareholders' approval. As a result, our after-tax proÑts in our unconsolidated Ñnancial statements are aÅected by dividends paid or payable to us by subsidiaries and may diÅer signiÑcantly from those in our consolidated Ñnancial statements. Our unconsolidated accumulated loss/undistributed proÑts may also diÅer signiÑcantly from our consolidated accumulated losses/undistributed proÑts. As of December 31, 2005, our bank, excluding our subsidiaries, had accumulated losses of RMB8,709 million under IFRS, which would have to be made up before dividend is paid after the Global OÅering. According to the relevant Ministry of Finance regulations, we will be required to make and maintain a general reserve not less than 1% of our risk-bearing assets after allocating to the statutory surplus reserve and prior to allocating to discretionary surplus reserve and making a distribution. This general reserve will constitute part of our reserves. If a Ñnancial institution cannot meet the requirement of maintaining adequate general reserve as stipulated in the Ministry of Finance regulations as of July 1, 2005, the Ñnancial institution is required to take necessary steps to ensure that such requirement can be met in approximately 3 years but not more than 5 years, from July 1, 2005. We are in compliance with the Ministry of Finance regulations that provide for a transition period of up to Ñve years from July 1, 2005, and have a plan to meet the 1% requirement by the end of 2008. If we were required to meet such requirement by December 31, 2005, the amount would have been approximately RMB26 billion. Allocations to general reserve may aÅect our ability to pay dividends. Payment of dividends by us is also regulated by relevant PRC banking regulations. If we do not meet the minimum capital adequacy ratio required by the CBRC, we may be prohibited from paying dividends. See ""Supervision and Regulation Ì PRC Supervision and Regulation Ì Prudent Operating Requirements Ì Capital Adequacy Ratio''. Prior to the Global OÅering, as we were required to prepare our Ñnancial statements only under PRC GAAP, we had declared and distributed dividends for each year that we had distributable proÑts under PRC GAAP in accordance with applicable PRC law. Dividend distributions in the amount of RMB14,200 million for the year ended December 31, 2004 and RMB12,737 million to our shareholders on record as of December 29, 2005 for the six-month period ended June 30, 2005, were approved at the shareholders' meetings in September and December of 2005, respectively. We paid such dividends in cash by December 31, 2005. In addition, pursuant to a resolution proposed by Huijin, dividend distributions in the amount of RMB1,375 million to our shareholders on record as of December 31, 2005 were approved by the shareholders in April 2006.
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FINANCIAL INFORMATION
In April 2006, the Board of Directors approved the following dividend policy:
¬ in respect of the period beginning on the date of the Global OÅering and ending on June 30, 2006, no dividend will be distributed;
¬ in respect of the period beginning on July 1, 2006 and ending on December 31, 2006, it is anticipated that dividend will be distributed in an aggregate amount between 35% and 45% of our proÑt attributable to our equity holders for such period; and
¬ in respect of each of the years ending December 31, 2007 and 2008, it is anticipated that dividend will be distributed in an aggregate amount between 35% and 45% of our net proÑt for the relevant year. If we conduct an A Share OÅering in the second half of 2006, the holders of our A Shares, beginning from the time they became shareholders of our bank, will be entitled to receive dividends pro rata with our other shareholders.
DISTRIBUTABLE RESERVES
As of December 31, 2005, we had RMB12,585 million of reserves available for distribution to our shareholders, representing our retained proÑts as of that date as determined under PRC GAAP. After completion of the Global OÅering, our distributable reserves will be based on our unconsolidated retained proÑts as determined under IFRS or PRC GAAP, whichever is lower. As of December 31, 2005, we had unconsolidated accumulated losses of RMB8,709 million as determined under IFRS.
UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS
The following table of unaudited pro forma adjusted net tangible assets is based on the adjusted consolidated net tangible assets of the Group attributable to the equity holders of our bank as of December 31, 2005, as derived from the Accountants' Report set forth in Appendix I to this prospectus, and adjusted as described below. The unaudited pro forma adjusted net tangible assets is prepared for illustrative purposes only to provide investors with further information to assess our Ñnancial position after the completion of the Global OÅering. Because of its nature, it may not reÖect our actual net tangible assets, our net tangible assets per Share, or our Ñnancial position following the Global OÅering.
Adjusted consolidated net Unaudited tangible assets pro forma attributable to the adjusted net Unaudited equity holders of Estimated net tangible assets pro forma our bank as of proceeds from attributable to the adjusted net December 31, the Global equity holders of tangible assets 2005(1) OÅering(2) our bank per Share(3)(4) (in millions of RMB) RMB HK$ Based on an OÅer Price of HK$2.50 per ShareÏÏÏÏÏÏÏÏÏ 225,036 63,936 288,972 1.230 1.189 Based on an OÅer Price of HK$3.00 per ShareÏÏÏÏÏÏÏÏÏ 225,036 76,822 301,858 1.285 1.242
(1) The adjusted consolidated net tangible assets of the Group attributable to the equity holders of our bank as of December 31, 2005 is extracted from the Accountants' Report set out in Appendix I to the prospectus, which is based on the audited consolidated net assets of the Group attributable to the equity holders of our bank as of December 31, 2005 of RMB226,419 million with an adjustment for the intangible assets as of December 31, 2005 of RMB1,383 million.
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FINANCIAL INFORMATION
(2) The estimated net proceeds from the Global OÅering are based on the OÅer Price of HK$2.50 and HK$3.00 per Share, respectively, after deduction of estimated related fees and expenses, and do not take into account of any Shares that may be issued pursuant to the Over-Allotment Option. If the Over-Allotment Option is exercised, the unaudited pro forma adjusted net tangible assets attributable to the equity holders of our bank and unaudited pro forma adjusted net tangible assets per Share will increase.
(3) The unaudited pro forma adjusted net tangible assets per Share are determined after the adjustments as described in note (2) above and on the basis that 234,995,952,357 Shares are issued and outstanding and that the Over-Allotment Option has not been exercised.
(4) Unaudited pro forma adjusted net tangible assets per Share are converted into Hong Kong dollars at the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006.
(5) Our properties were revalued as of March 31, 2006. The net revaluation surplus of those properties classiÑed under the caption ""property and equipment'' in Appendix I Ì ""Accountants' Report'', representing the excess of market value of such properties over their carrying value, is approximately RMB9,395 million. In accordance with our accounting policy, such properties are stated at historical cost less accumulated depreciation and impairment. As such, the amount of such net revaluation surplus will not be included in our consolidated Ñnancial statements for the year ending December 31, 2006 nor the calculation of the above unaudited pro forma adjusted net tangible assets attributable to the equity holders of our bank. Had these properties been stated at such valuation, an additional depreciation of RMB206 million per annum would have been incurred.
(6) No adjustment has been made to reÖect any business operations or other transactions of our bank entered into subsequent to December 31, 2005 including, inter-alia, the subscription of 8,514,415,652 Shares by SSF on March 13, 2006 for a consideration of RMB10 billion and a dividend in the amount of RMB1,375 million approved on April 30, 2006 by our shareholders at a post-adjournment session of our annual general meeting.
NO MATERIAL ADVERSE CHANGE A1A(38)
Except as disclosed in this prospectus, the Directors believe that there has been no material adverse change in the Ñnancial or trading position of our bank since December 31, 2005.
WORKING CAPITAL A1A(36)
Rule 8.21A(1) and Paragraph 36 of Part A of Appendix 1A of the Hong Kong Listing Rules require this prospectus to include a statement by our Directors that, in their opinion, the working capital available to our bank is suÇcient or, if not, how it is proposed to provide the additional working capital our Directors consider to be necessary. We are of the view that the traditional concept of ""working capital'' does not apply to banking businesses such as ours. We are regulated in the PRC by, among others, the PBOC and the CBRC. These regulatory authorities impose minimum capital adequacy and liquidity requirements on commercial banks operating in the PRC. Rule 8.21A(2) of the Hong Kong Listing Rules provides that such a working capital statement will not be required to be made by an issuer whose business is entirely or substantially that of the provision of Ñnancial services, provided that the Hong Kong Stock Exchange is satisÑed that the inclusion of such a statement would not provide signiÑcant information for investors and that the issuer's solvency and capital adequacy are subject to prudential supervision by another regulatory body. In view of the above, pursuant to Rule 8.21A(2) of the Hong Kong Listing Rules, we are not required to include a working capital statement from the Directors in this prospectus.
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FUTURE PLANS AND USE OF PROCEEDS FROM THE GLOBAL OFFERING
FUTURE PLANS AND PROSPECTS See ""Business Ì Our Strategy'', ""Business Ì Our Principal Business Activities Ì Commercial Banking Ì Commercial Banking Business in the PRC Ì Corporate Banking Ì Business Initiatives'' and ""Business Ì Our Principal Business Activities Ì Commercial Banking Business in the PRC Ì Commercial Banking Ì Personal Banking Ì Business Initiatives'' for a detailed description of our future plans.
USE OF PROCEEDS FROM THE GLOBAL OFFERING A1A(48) A1A(17) We estimate that we will receive net proceeds from the Global OÅering of approximately 3rd Sch 7 HK$68,071 million (RMB70,379 million based on the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006), after deducting the estimated underwriting fees and expenses payable by us in the Global OÅering, assuming the Over-Allotment Option is not exercised and assuming an OÅer Price of HK$2.75 per H Share, the mid-point of the estimated oÅer price range. We intend to use these net proceeds to strengthen our capital base to support the ongoing growth of our business.
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UNDERWRITING
UNDERWRITERS I.E. Note 11 A1A(15) Hong Kong Underwriters (2)(h) BOCI Asia Limited Goldman Sachs (Asia) L.L.C. UBS AG acting through its business group, UBS Investment Bank BCOM Securities Company Limited BNP Paribas Peregrine Capital Limited China Everbright Securities (HK) Limited China Merchants Securities (HK) Co., Ltd. CITIC Securities Corporate Finance (HK) Limited Core PaciÑc - Yamaichi International (H.K.) Limited CSC Securities (HK) Limited Dao Heng Securities Limited DBS Asia Capital Limited First Shanghai Securities Limited Guotai Junan Securities (Hong Kong) Limited The Hongkong and Shanghai Banking Corporation Limited ICEA Securities Limited Kingston Securities Limited Kingsway Financial Services Group Limited Shenyin Wanguo Capital (H.K.) Limited Sun Hung Kai International Limited Tai Fook Securities Company Limited VC Brokerage Limited
HONG KONG PUBLIC OFFERING Hong Kong Underwriting Agreement Pursuant to the Hong Kong Underwriting Agreement, we are oÅering the Hong Kong OÅer Shares for subscription by the public in Hong Kong at the OÅer Price on, and subject to, the terms and conditions of this prospectus and the Application Forms. Subject to the Listing Committee granting listing of, and permission to deal in, the H Shares to be oÅered as mentioned herein, and to certain other conditions set out in the Hong Kong Underwriting Agreement, including the Joint Global Coordinators (on behalf of the Hong Kong Underwriters) and we agreeing to the OÅer Price, the Hong Kong Underwriters have agreed severally to subscribe or procure subscribers for the Hong Kong OÅer Shares which are being oÅered but are not taken up under the Hong Kong Public OÅering, on, and subject to, the terms and conditions of this prospectus and the Application Forms. The Hong Kong Underwriting Agreement is conditional upon (among other things) the International Purchase Agreement having been signed, becoming unconditional and not having been terminated.
Grounds for Termination A1A(15)(2)(i) The Joint Global Coordinators (on behalf of themselves and the Hong Kong Underwriters) may (after consultation with our bank, to the extent practicable) terminate the Hong Kong Underwriting Agreement with immediate eÅect by written notice to our bank at any time at or prior to 8:00 a.m. on the Listing Date if: (a) there has come to the notice of any of the Joint Global Coordinators or the Hong Kong Underwriters after the date of the Hong Kong Underwriting Agreement:
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UNDERWRITING
(i) that any of the representations and warranties given by our bank in the Hong Kong Underwriting Agreement is (or would if repeated at that time be) untrue, inaccurate, misleading or breached in a respect which has a material adverse eÅect on the Global OÅering; or
(ii) any breach of any of the obligations of any party (other than the Joint Global Coordinators or the Hong Kong Underwriters) to the Hong Kong Underwriting Agreement which has a material adverse eÅect on the Global OÅering; or
(b) there develops, occurs, exists or comes into force:
(i) any event or series of events resulting in or representing a change, or prospective change, in local, national, regional or international Ñnancial, political, military, industrial, economic, Ñscal or market conditions (including, without limitation, conditions in stock and bond markets, money and foreign exchange markets and inter-bank markets) in or aÅecting any of Hong Kong, the PRC, the United States, the United Kingdom or Japan (collectively, the ""Relevant Jurisdictions''); or
(ii) any new law or regulation or any change in existing law or regulation, or any change in the interpretation or application thereof by any court or other competent authority in or aÅecting any of the Relevant Jurisdictions; or
(iii) any event or series of events in the nature of force majeure (including, without limitation, acts of government, strikes, lock-outs, Ñre, explosion, Öooding, civil commotion, acts of war, acts of God, accident or interruption or delay in transportation) in or aÅecting any of the Relevant Jurisdictions; or
(iv) any local, national, regional or international outbreak or escalation of hostilities (whether or not war is or has been declared) or other state of emergency or calamity or crisis in or aÅecting any of the Relevant Jurisdictions; or
(v) the imposition or declaration of (A) any suspension or material limitation on trading in shares or securities generally on the Hong Kong Stock Exchange, the New York Stock Exchange, the London Stock Exchange or the Tokyo Stock Exchange or (B) any moratorium on banking activities or disruption in commercial banking activities or foreign exchange trading or securities settlement or clearance services in Hong Kong, the PRC, New York, London or Japan; or
(vi) any change or prospective change in taxation or exchange controls adversely aÅecting any of the Relevant Jurisdictions or aÅecting an investment in the H Shares; or
(vii) any material litigation or claim being threatened or instigated against our bank; or
(viii) any material adverse change in the business or in the Ñnancial or trading position of our bank, BOCHK Holdings and BOCHK taken as a whole, and which, in any such case and in the opinion of the Joint Global Coordinators, will or is likely to (A) be materially adverse to, or materially and prejudicially aÅect, the business, Ñnancial or trading position or prospects of our bank, BOCHK Holdings and BOCHK taken as a whole or (B) make it impracticable for any material part of the Hong Kong Underwriting Agreement, the Hong Kong Public OÅering or the Global OÅering to be performed or implemented as envisaged or (C) make it impracticable to proceed with the Hong Kong Public OÅering and/or the Global OÅering.
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UNDERWRITING
Undertakings
We have undertaken to the Joint Global Coordinators and the Hong Kong Underwriters that, except:
(a) pursuant to the Global OÅering (including the Over-Allotment Option); or
(b) pursuant to or in connection with the A Share OÅering as described in this prospectus; or
(c) with the prior written consent of the Joint Global Coordinators (on behalf of themselves and the Hong Kong Underwriters) and subject to the requirements of the Hong Kong Listing Rules,
we shall not, during a period of six months from the Listing Date, allot, issue, oÅer, sell, contract to sell, hedge, grant any option or right to subscribe or purchase, agree to allot or issue or otherwise dispose of any of our share capital or any securities exchangeable or convertible into such share capital or which carry rights to subscribe for or purchase such share capital or deposit any part of our share capital with a depositary outside Chinese Mainland in connection with the issue of depositary receipts, or (i) enter into a transaction (including, without limitation, a swap or other derivative transaction) that transfers, in whole or in part, any of the economic consequences of ownership of any such share capital or has an eÅect on the market in our share capital similar to that of a sale or (ii) oÅer or agree or announce any intention to do any of the foregoing. In the event of an issue or disposal of any H Shares or interest therein during the six month period falling six months from the Listing Date, we will take all reasonable steps to ensure that such an issue or disposal will not create a disorderly or false market for the H Shares.
Huijin has undertaken to the Hong Kong Stock Exchange that:
(a) in the period commencing on the date of this prospectus and ending on the date which is six months from the Listing Date (""First Six-month Period''), it shall not, without the prior written consent of the Hong Kong Stock Exchange and unless in compliance with the Hong Kong Listing Rules, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of our share capital in respect of which it is shown by this prospectus to be the beneÑcial owner;
(b) in the six-month period commencing from the expiry of the First Six-month Period (the ""Second Six-month Period''), it shall not dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any Shares and to such extent that, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, it would cease to be our controlling shareholder;
(c) it will, on disposal of such Shares during the Second Six-month Period, take all reasonable steps to ensure that any such disposal will not create a disorderly or false market.
In addition, Huijin has also undertaken to the Hong Kong Stock Exchange and to us that it will inform us if it: (i) pledges or charges any securities of ours beneÑcially owned by it; and (ii) receives any indications, either verbal or written, that any of the pledged or charged securities of ours will be disposed of pursuant to such pledging or charging arrangements within the period commencing on the date of this prospectus and ending on the date which is 12 months from the Listing Date. We will then immediately inform the Hong Kong Stock Exchange of such matters and also disclose such matters by way of a press notice which is published in the newspapers as soon as possible.
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UNDERWRITING
Commission and Expenses A1A(20)(2) 3rd Sch 14 The Hong Kong Underwriters will receive a commission of 2.5% of the aggregate OÅer Price 3rd Sch 15 payable for the Hong Kong OÅer Shares, out of which they will pay any sub-underwriting commissions. For unsubscribed Hong Kong OÅer Shares reallocated to the International OÅering, we will pay to the International Purchasers an underwriting commission at the rate applicable to the International OÅering. The aggregate fees and commissions in connection with the Hong Kong Public OÅering and the International OÅering, together with the Hong Kong Stock Exchange listing fees, the SFC transaction levy, Hong Kong Stock Exchange trading fee, legal, accounting and other professional fees, printing and other expenses relating to the Global OÅering, which are payable by our bank, are currently estimated to amount to approximately HK$2,243 million in aggregate (assuming an OÅer Price of HK$2.75, which is the mid-point of the estimate OÅer Price range of HK$2.50 to HK$3.00, and assuming that the Over-Allotment Option is not exercised). We have agreed to indemnify the Hong Kong Underwriters for certain losses which they may suÅer, including losses incurred arising from their performance of their obligations under the Hong Kong Underwriting Agreement and any breach by us of the Hong Kong Underwriting Agreement.
INTERNATIONAL OFFERING In connection with the International OÅering, it is expected that we will enter into the International Purchase Agreement with the International Purchasers. Under the International Purchase Agreement, the International Purchasers would, subject to certain conditions, severally agree to purchase the OÅer Shares being oÅered pursuant to the International OÅering or procure purchasers for such OÅer Shares under the International OÅering. We will grant to the International Purchasers the Over-Allotment Option, exercisable by the Joint Global Coordinators on behalf of the International Purchasers within 30 days from the last day for the lodging of applications under the Hong Kong Public OÅering, to require us to issue up to an aggregate of 3,835,288,000 additional Shares at the OÅer Price per Share. We will agree to indemnify the International Purchasers against certain liabilities, including liabilities under the U.S. Securities Act.
UNDERWRITING Ì HONG KONG UNDERWRITERS' INTEREST IN OUR BANK Save for each Hong Kong Underwriter's obligations under the relevant Underwriting Agreements, interests held by UBS AG as disclosed in this prospectus and interests disclosed in Appendix IX Ì ""Statutory and General Information'' to this prospectus, none of the Hong Kong Underwriters has any shareholding interests in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
OVER-ALLOTMENT AND STABILIZATION The Over-Allotment Option
In connection with the Global OÅering, we intend to grant the Over-Allotment Option to the Joint A1A(15)(3)(c) Global Coordinators (on behalf of the International Purchasers). The Over-Allotment Option gives PN18(4.3) the Joint Global Coordinators the right exercisable at any time from the date of the International I.E. Note 4 Purchase Agreement up to the 30th day after the last day for the lodging of applications under the Hong Kong Public OÅering to require us to issue up to an aggregate of 3,835,288,000 additional
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UNDERWRITING
OÅer Shares, representing approximately 15% of the initial size of the Global OÅering, at the OÅer Price on the same terms and conditions as the OÅer Shares that are subject to the Global OÅering. The Joint Global Coordinators may also cover over-allocations in the International OÅering by purchasing the OÅer Shares in the secondary market or by a combination of purchases in the secondary market and a partial exercise of the Over-Allotment Option. Any such secondary market purchase will be made in compliance with all applicable laws, rules and regulations. If the Joint Global Coordinators exercise the Over-Allotment Option in full, the additional OÅer Shares will represent approximately 1.55% of our enlarged issued Share capital following the completion of the Global OÅering and the exercise of the Over-Allotment Option. In the event that the Over-Allotment Option is exercised, a press announcement will be made.
Stabilizing Action I.E. Note 3
Stabilization is a practice used by underwriters in some markets to facilitate the distribution of A1A(15)(3)(b) securities. To stabilize, the underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a speciÑed period of time, to retard and, if possible, prevent a decline in the initial public oÅering prices of the securities. In Hong Kong and certain other jurisdictions, activity aimed at reducing the market price is prohibited, and the price at which stabilization is eÅected is not permitted to exceed the OÅer Price. Goldman Sachs (Asia) L.L.C. has been or will be appointed as Stabilizing Manager for the purposes of the Global OÅering in accordance with the Securities and Futures (Price Stabilizing) Rules made under the SFO and, should stabilizing transactions be eÅected in connection with the Global OÅering, this will be at the absolute discretion of the Stabilizing Manager. In connection with the Global OÅering, the Stabilizing Manager, or any person acting for it, may over-allocate or eÅect any other transactions with a view to stabilizing or maintaining the market price of the H Shares at a level higher than that which might otherwise prevail in the open market for a limited period after the Listing Date. Any market purchases of H Shares will be eÅected in compliance with all applicable laws and regulatory requirements. However, there is no obligation on the Stabilizing Manager or any person acting for it to conduct any such stabilizing activity, which, if commenced, may be discontinued at any time. The number of H Shares that may be over-allocated will not exceed the number of H Shares that may be issued under the Over-Allotment Option, namely 3,835,288,000 H Shares, which is approximately 15% of the number of H Shares initially available A1A(15)(3)(c) under the Global OÅering. Stabilizing action permitted in Hong Kong pursuant to the Securities and Futures (Price Stabilizing) Rules includes (a) primary stabilization, including purchasing, or agreeing to purchase, any of the H Shares or oÅering or attempting to do so for the sole purpose of preventing or minimizing any reduction in the market price of the H Shares, and (b) ancillary stabilization in connection with any primary stabilizing action, including: (i) over-allocation for the purpose of preventing or minimizing any reduction in the market price; (ii) selling or agreeing to sell H Shares so as to establish a short position in them for the purpose of preventing or minimizing any reduction in the market price; (iii) purchasing or subscribing, or agreeing to purchase or subscribe for H Shares pursuant to the Over-Allotment Option in order to close out any position established under (i) or (ii) above; (iv) selling or agreeing to sell H Shares to liquidate a long position held as a result of those purchases or subscriptions in the course of the primary stabilizing action; and (v) oÅering or attempting to do anything described in (ii), (iii) or (iv). Following any over-allotment of H Shares in connection with the Global OÅering, the Stabilizing Manager or any person acting for it may cover such over-allotment by (among other methods) making purchases in the secondary market, selling H Shares to liquidate a position held as a result
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UNDERWRITING
of those purchases, exercising the Over-Allotment Option in full or in part, stock borrowing or by any combination of any of the foregoing.
The Stabilizing Manager may take any one or more of the stabilizing actions described above. A1A(15)(3)(a) Any stabilizing activity will be made in compliance with all applicable laws, rules and regulations in Hong Kong on stabilization including the Securities and Futures (Price Stabilizing) Rules made under the SFO. SpeciÑcally, prospective applicants for and investors in OÅer Shares should note that:
¬ no stabilizing action can be taken to support the price of the H Shares for longer than the A1A(15)(3)(d) stabilizing period which will begin on the Listing Date, and is expected to expire on the 30th day after the last date for the lodging of applications under the Hong Kong Public OÅering. The stabilizing period is expected to end on June 22, 2006. After the end of the stabilizing period, when no further action may be taken to support the price of the H Shares, demand for the H Shares, and therefore the price of the H Shares, could fall;
¬ the Stabilizing Manager may, in connection with the stabilizing action, maintain a long position in the H Shares;
¬ there is no certainty regarding the extent to which and the time period for which the Stabilizing Manager will maintain such a position;
¬ liquidation of any such long position by the Stabilizing Manager, which may also take place during the stabilizing period, may have an adverse impact on the market price of the H Shares although the Stabilizing Manager will try to minimize such impact;
¬ the price of any security (including the H Shares) cannot be assured to stay at or above its oÅer price by the taking of any stabilizing action either during or after the stabilizing period; and
¬ stabilizing bids may be made or transactions eÅected in the course of the stabilizing action at any price at or below the OÅer Price, which means that stabilizing bids may be made or transactions eÅected at a price below the price paid by applicants for, or investors in, the H Shares. We will ensure or procure that a public announcement in compliance with the Securities and Futures (Price Stabilizing) Rules will be made within seven days of the expiration of the stabilizing period.
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STRUCTURE OF THE GLOBAL OFFERING
PRICE PAYABLE ON APPLICATION
The OÅer Price will not be more than HK$3.00 per OÅer Share and is expected to be not less A1A(15)(2)(c) than HK$2.50. If you apply for the OÅer Shares under the Hong Kong Public OÅering, you must pay A1A(15)(2)(d) the maximum OÅer Price of HK$3.00 per OÅer Share plus 1.0% brokerage fee, 0.005% SFC 3rd Sch 9 transaction levy and 0.005% Hong Kong Stock Exchange trading fee. This means that for every I.E. Note 8 board lot of 1,000 OÅer Shares, you should pay HK$3,030.30 at the time of your application.
If the OÅer Price, as Ñnally determined in the manner described below, is lower than HK$3.00, we will refund the respective diÅerence, including the brokerage fee, SFC transaction levy and Hong Kong Stock Exchange trading fee attributable to the surplus application monies. We will not pay interest on any refunded amounts.
DETERMINING THE OFFER PRICE
The OÅer Price is expected to be Ñxed by agreement between the Joint Global Coordinators I.E. Note 9 (on behalf of the Hong Kong Underwriters) and us on the Price Determination Date, when market demand for the OÅer Shares will be determined. The Price Determination Date is expected to be on or about May 24, 2006 and in any event, no later than May 29, 2006.
The OÅer Price will not be more than HK$3.00 per OÅer Share and is expected to be not less than HK$2.50 per OÅer Share. The OÅer Price will fall within the OÅer Price range as stated in this prospectus unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Hong Kong Public OÅering. The Joint Global Coordinators, on behalf of the Underwriters, may, where considered appropriate based on the level of interest expressed by prospective professional, institutional and other investors during a book-building process, and with our consent, reduce the indicative OÅer I.E. Note 12(a) Price range and/or the number of OÅer Shares below that stated in this prospectus prior to the morning of the last day for lodging applications under the Hong Kong Public OÅering. In such a case, we will as soon as practicable following the decision to make such reduction and in any event not later than the morning of the last day for lodging applications under the Hong Kong Public OÅering publish a notice in the South China Morning Post and the Hong Kong Economic Times of the reduction in the indicative OÅer Price range and/or number of OÅer Shares.
Upon issue of such a notice, the revised OÅer Price range will be Ñnal and conclusive and the I.E. Note 12(b) OÅer Price, if agreed upon by us, will be Ñxed within such revised OÅer Price range. In this notice, we will also conÑrm or revise, as appropriate, the issue statistics as currently set out in ""Summary'', and any other Ñnancial information which may change as a result of such reduction. If you have already submitted an application for Hong Kong OÅer Shares before the last day for lodging applications under the Hong Kong Public OÅering, you will not be allowed to subsequently I.E. Note 12(c) withdraw your application, even if the number of OÅer Shares and/or the indicative OÅer Price range is reduced. If we do not publish a notice in the South China Morning Post and the Hong Kong Economic Times of a reduction in the indicative OÅer Price range stated in this prospectus on or before the morning of the last day for lodging applications under the Hong Kong Public OÅering, the OÅer Price, if agreed upon by us, will be within the OÅer Price range as stated in this prospectus.
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STRUCTURE OF THE GLOBAL OFFERING
If the Joint Global Coordinators (on behalf of the Hong Kong Underwriters) and we are I.E. Note 10 unable to reach agreement on the OÅer Price by May 29, 2006, the Global OÅering will lapse. We expect to publish an announcement of the OÅer Price, together with the level of interest in the International OÅering and the application results and basis of allotment of the Hong Kong OÅer Shares, on May 30, 2006.
CONDITIONS OF THE GLOBAL OFFERING Acceptance of all applications for the OÅer Shares will be conditional on, among other things:
¬ the Listing Committee granting the listing of and permission to deal in the H Shares being oÅered pursuant to the Global OÅering (including any additional Shares which may be made available pursuant to the exercise of the Over-Allotment Option), and such listing and permission not subsequently having been revoked prior to the commencement of dealings in the H Shares on the Hong Kong Stock Exchange;
¬ the OÅer Price having been duly determined and the execution and delivery of the International Purchase Agreement on or about the Price Determination Date; and
¬ the obligations of the Underwriters under the Underwriting Agreements becoming and remaining unconditional (including, if relevant, as a result of the waiver of any conditions by the Joint Global Coordinators, on behalf of the Underwriters) and such obligations not being terminated in accordance with the terms of the respective agreements, in each case, on or before the dates and times speciÑed in the Underwriting Agreements (unless and to the extent such conditions are validly waived on or before such dates and times) and in any event not later than the date which is 30 days after the date of this prospectus. The consummation of each of the International OÅering and the Hong Kong Public OÅering is conditional upon, among other things, the other becoming unconditional and not having been terminated in accordance with their respective terms. If the above conditions are not fulÑlled or waived prior to the times and dates speciÑed, the Global OÅering will lapse and the Hong Kong Stock Exchange will be notiÑed immediately. We will publish a notice of the lapse of the Global OÅering in the South China Morning Post and the Hong Kong Economic Times on the day after such lapse. In the above situation, we will return all application monies to the applicants, without interest. In the meantime, we will hold all application monies in a separate bank account or separate bank accounts with the receiving bankers or other bank(s) licensed under the Banking Ordinance (Cap. 155 of the Laws of Hong Kong). We expect to issue Share certiÑcates for the OÅer Shares on May 30, 2006. However, these Share certiÑcates will only become valid certiÑcates of title at 8:00 a.m. on the Listing Date (currently expected to be June 1, 2006), provided that (i) the Global OÅering has become unconditional in all respects and (ii) the right of termination as described in ""Underwriting'' has not been exercised.
THE GLOBAL OFFERING Our Global OÅering consists of the Hong Kong Public OÅering and the International OÅering. We intend to initially make available up to 25,568,590,000 OÅer Shares under the Global OÅering, of which 24,290,160,000 OÅer Shares will be conditionally placed pursuant to the International OÅering and the remaining 1,278,430,000 OÅer Shares will be oÅered to the public in Hong Kong at the OÅer
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STRUCTURE OF THE GLOBAL OFFERING
Price under the Hong Kong Public OÅering (subject, in each case, to reallocation on the basis described below under ""Ì The Hong Kong Public OÅering'').
You may apply for OÅer Shares under the Hong Kong Public OÅering or indicate an interest for OÅer Shares under the International OÅering, but you may not apply under both of these methods for the OÅer Shares. In other words, you may only receive OÅer Shares under either the International OÅering or the Hong Kong Public OÅering, but not under both of these methods. The Hong Kong Public OÅering is open to members of the public in Hong Kong, as well as to institutional and professional investors in Hong Kong. The International OÅering will involve selective marketing of the OÅer Shares to institutional and professional investors and other investors anticipated to have a sizeable demand for our OÅer Shares. Professional investors generally include brokers, dealers, companies (including fund managers) whose ordinary business involves dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Prospective professional, institutional and other investors will be required to specify the number of the OÅer Shares under the International OÅering they would be prepared to acquire either at diÅerent prices or at a particular price. The International OÅering will also include a public oÅering without listing in Japan. This process, known as ""book-building'', is expected to continue up to the Price Determination Date.
Allocation of the OÅer Shares pursuant to the International OÅering will be determined by the I.E. Note 5 Joint Global Coordinators and will be based on a number of factors including the level and timing of demand, total size of the relevant investor's invested assets or equity assets in the relevant sector and whether or not it is expected that the relevant investor is likely to buy further Shares, and/or hold or sell its OÅer Shares, after the listing of the OÅer Shares on the Hong Kong Stock Exchange. Such allocation is intended to result in a distribution of the International OÅering Shares on a basis which would lead to the establishment of a solid shareholder base beneÑcial to us and our shareholders as a whole.
Allocation of Hong Kong OÅer Shares to investors under the Hong Kong Public OÅering will be based on the level of valid applications received under the Hong Kong Public OÅering. The basis of allocation may vary depending on the number of Hong Kong OÅer Shares validly applied for by applicants. We may, if necessary, allocate the Hong Kong OÅer Shares on the basis of balloting, which would mean that some applicants may receive a higher allocation than others who have applied for the same number of Hong Kong OÅer Shares and those applicants who are not successful in the ballot may not receive any Hong Kong OÅer Shares.
The 25,568,590,000 OÅer Shares initially being oÅered in the Global OÅering will represent approximately 10.50% of our enlarged share capital immediately after completion of the Global OÅering, without taking into account the exercise of the Over-Allotment Option. If the Joint Global Coordinators exercise the Over-Allotment Option in full, the OÅer Shares will represent approximately 11.89% of our enlarged share capital immediately after completion of the Global OÅering and the exercise of the Over-Allotment Option.
The Hong Kong Public OÅering is fully underwritten by the Hong Kong Underwriters and the International OÅering is expected to be fully underwritten by the International Purchasers, in each case on a several basis. The Hong Kong Public OÅering and the International OÅering are subject to the conditions set out in ""Ì Conditions of the Global OÅering'' herein. In particular, the Joint Global Coordinators (on behalf of the Hong Kong Underwriters) and we must agree on the OÅer Price. The Hong Kong Underwriting Agreement was entered into on May 17, 2006 and, subject to an agreement on the OÅer Price between the Joint Global Coordinators (on behalf of the Hong Kong Underwriters) and us, the International Purchase Agreement is expected to be entered into on
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STRUCTURE OF THE GLOBAL OFFERING
May 24, 2006. The Hong Kong Underwriting Agreement and the International Purchase Agreement are expected to be conditional upon each other.
THE HONG KONG PUBLIC OFFERING
The Hong Kong Public OÅering is a fully underwritten public oÅering (subject to agreement as A1A(15)(1) to pricing and satisfaction or waiver of the other conditions set out in the Hong Kong Underwriting A1A(15)(2)(a) Agreement and described above in ""Ì Conditions of the Global OÅering'') for the subscription in A1A(15)(2)(b) Hong Kong of, initially, 1,278,430,000 OÅer Shares at the OÅer Price (representing approximately PN18(3.1) 5% of the total number of the OÅer Shares initially available under the Global OÅering). Subject to the reallocation of OÅer Shares between the International OÅering and the Hong Kong Public OÅering, the Hong Kong OÅer Shares will represent approximately 0.53% of our enlarged issued share capital immediately after completion of the Global OÅering assuming that the Over-Allotment Option is not exercised.
The total number of the OÅer Shares available under the Hong Kong Public OÅering is to be divided into two pools of initially 639,215,000 OÅer Shares for each of pool A and pool B, respectively, for allocation purposes:
¬ Pool A: The OÅer Shares in pool A will be allocated on an equitable basis to applicants who have applied for the OÅer Shares with an aggregate subscription price of HK$5 million (excluding the brokerage, the Hong Kong Stock Exchange trading fee and the SFC transaction levy payable) or less; and
¬ Pool B: The OÅer Shares in pool B will be allocated on an equitable basis to applicants who have applied for the OÅer Shares with an aggregate subscription price of more than HK$5 million (excluding the brokerage, the Hong Kong Stock Exchange trading fee and the SFC transaction levy payable) and up to the value of pool B.
Investors should be aware that applications in pool A and applications in pool B may receive diÅerent allocation ratios. If the OÅer Shares in one (but not both) of the pools are under- subscribed, the surplus OÅer Shares will be transferred to the other pool to satisfy demand in the pool and be allocated accordingly. For the purpose of this subsection only, the ""subscription price'' for the OÅer Shares means the price payable on application therefor (without regard to the OÅer Price as Ñnally determined).
Applicants can only receive an allocation of the OÅer Shares from either pool A or pool B but not from both pools. Multiple or suspected multiple applications and any application for more than 50% of the 1,278,430,000 OÅer Shares initially included in the Hong Kong Public OÅering (639,215,000 OÅer Shares) will be rejected. Each applicant under the Hong Kong Public OÅering will also be required to give an undertaking and conÑrmation in the Application Form submitted by him or her that he or she and any person(s) for whose beneÑt he or she is making the application have not indicated an interest for or taken up and will not indicate an interest for or take up any OÅer Shares under the International OÅering, and such applicant's application will be rejected if the said undertaking and/or conÑrmation is breached and/or untrue (as the case may be).
Paragraph 4.2 of Practice Note 18 of the Hong Kong Listing Rules requires a clawback PN18(4.2) mechanism to be put in place which would have the eÅect of increasing the number of OÅer Shares under the Hong Kong Public OÅering to certain percentage of the total number of OÅer Shares oÅered in the Global OÅering if certain prescribed total demand levels are reached. An application has been made for, and the Hong Kong Stock Exchange has granted, a waiver from strict compliance with paragraph 4.2 of Practice Note 18 of the Hong Kong Listing Rules such that, in the
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STRUCTURE OF THE GLOBAL OFFERING
event of over-applications, the Joint Global Coordinators, after consultation with us, shall apply a clawback mechanism following the closing of the application lists on the following basis:
¬ if the number of OÅer Shares validly applied for under the Hong Kong Public OÅering represents 15 times or more but less than 50 times the number of OÅer Shares initially available for subscription under the Hong Kong Public OÅering, then Shares will be reallocated to the Hong Kong Public OÅering from the International OÅering, so that the total number of OÅer Shares available under the Hong Kong Public OÅering will be 1,917,645,000 OÅer Shares, representing approximately 7.5% of the OÅer Shares initially available under the Global OÅering;
¬ if the number of OÅer Shares validly applied for under the Hong Kong Public OÅering represents 50 times or more but less than 100 times the number of OÅer Shares initially available for subscription under the Hong Kong Public OÅering, then the number of Shares to be reallocated to the Hong Kong Public OÅering from the International OÅering will be increased so that the total number of OÅer Shares available under the Hong Kong Public OÅering will be 2,556,859,000 OÅer Shares, representing approximately 10% of the OÅer Shares initially available under the Global OÅering; and
¬ if the number of OÅer Shares validly applied for under the Hong Kong Public OÅering represents 100 times or more the number of OÅer Shares initially available for subscription under the Hong Kong Public OÅering, then the number of Shares to be reallocated to the Hong Kong Public OÅering from the International OÅering will be increased, so that the total number of OÅer Shares available under the Hong Kong Public OÅering will be 5,113,718,000 OÅer Shares, representing approximately 20% of the OÅer Shares initially available under the Global OÅering.
In each of the above cases, the additional H Shares reallocated to the Hong Kong Public OÅering will be allocated between pool A and pool B and the number of H Shares allocated to the International OÅering will be correspondingly reduced in such manner as the Joint Global Coordinators deem appropriate.
We will reject multiple applications within pool A or pool B, and between the two pools. Our Directors, the Hong Kong Underwriters and us will take reasonable steps to identify and reject applicants under the Hong Kong Public OÅering from investors who have received OÅer Shares in the International OÅering, and to identify and reject indications of interest in the International OÅering from investors who have received OÅer Shares in the Hong Kong Public OÅering.
The Joint Global Coordinators also have the discretion to reallocate OÅer Shares from the International OÅering to the Hong Kong Public OÅering to satisfy valid applications under the Hong Kong Public OÅering.
In addition, if the Hong Kong Public OÅering is not fully subscribed, the Joint Global Coordinators may reallocate to the International OÅering all or any unsubscribed Hong Kong OÅer Shares in such numbers as they deem appropriate.
References in this prospectus to applications, Application Forms, application or subscription monies or the procedure for application relate solely to the Hong Kong Public OÅering.
THE INTERNATIONAL OFFERING
The number of the OÅer Shares to be initially oÅered under the International OÅering will be A1A(15)(1) 24,290,160,000 OÅer Shares, representing approximately 95% of the OÅer Shares under the Global A1A(15)(2)(a) A1A(15)(2)(b) 327 BOWNE OF HONG KONG 05/13/2006 15:46 NO MARKS NEXT PCN: 335.00.00.00 -- Page is valid, no graphics BOM H00426 334.00.00.00 11
STRUCTURE OF THE GLOBAL OFFERING
OÅering and approximately 9.98% of our enlarged issued share capital immediately after completion of the Global OÅering assuming the Over-Allotment Option is not exercised. Pursuant to the International OÅering, the International OÅering Shares will be conditionally placed on behalf of us by the International Purchasers or through selling agents appointed by them. International OÅering Shares will be placed with certain professional and institutional investors and other investors anticipated to have a sizeable demand for the International OÅering Shares in Hong Kong, Europe and other jurisdictions outside the United States (other than the PRC) in oÅshore transactions in reliance on Regulation S and in the United States to QIBs as deÑned in Rule 144A. The International OÅering will also include a public oÅering without listing to investors in Japan. The International OÅering is subject to the Hong Kong Public OÅering becoming unconditional.
OVER-ALLOTMENT AND STABILIZATION Details of the arrangements relating to the Over-Allotment Option and stabilization are set out in ""Underwriting''.
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A SHARE OFFERING
The proposed A Share OÅering
We are in the process of preparing for an A Share OÅering and intend to pursue such oÅering as soon as practicable, and possibly shortly after the Global OÅering. However, we have not made any application to any recognized stock exchange in the PRC for approval for the listing of any A Shares. The precise timing of the A Share OÅering would depend on a number of factors, including the need to increase our core capital and market conditions. We would require a number of additional regulatory approvals and consents to allow us to proceed with the A Share OÅering. We are working with our A Share Ñnancial advisors on the A Share OÅering plan. However, we have not obtained any commitment from any underwriter to underwrite or to purchase the A Shares to be oÅered. We currently expect our A Share OÅering to be made on the following conditions: (a) the proposed A Share OÅering will comprise not more than 10,000,000,000 A Shares, all of which will be newly issued shares, and will raise not more than RMB20,000 million, and will be within the limits approved by the relevant regulatory authorities; (b) the oÅer price for the proposed A Share OÅering will be determined based on market conditions at the time when the A Share OÅering takes place and in accordance with domestic customary pricing consultation mechanism, taking into consideration the H Share OÅer Price; (c) the A Shares will be listed on a recognized stock exchange in the PRC; and (d) subject to obtaining the relevant approvals and market conditions, the A Share OÅering will be completed no later than July 2007. We will inform the Hong Kong Stock Exchange and our shareholders as soon as the details of the proposed A Share OÅering are Ñnalized. At the time of our conversion into and establishment as a joint stock commercial bank with limited liability in August 2004, we had plans to issue A Shares and H Shares. Accordingly, assuming that we complete our A Share OÅering by July 2007, we intend to issue A Shares pursuant to our Articles of Association and Rule 13.36(2)(b) of the Listing Rules as amended by Rule 19A.38 applicable to PRC incorporated issuers without the speciÑc approval of holders of our H Shares in a class meeting. In the event that we undertake our A Share OÅering after July 2007, we would be required to obtain the approval of our shareholders in a general meeting and the approval of our H shareholders in a class meeting pursuant to our Articles of Association and Rule 13.36(1) of the Listing Rules as amended by Rule 19A.38 applicable to PRC incorporated issuers. We have applied for and the Hong Kong Stock Exchange has granted a waiver from strict compliance with Rule 10.08, which will allow us to make the A Share OÅering within six months after the completion of the Global OÅering. You should note that the Global OÅering is not conditional on the completion of the A Share OÅering. Because of the factors and uncertainty described above, we may not be able to complete the A Share OÅering and the size and other details in respect of the A Share OÅering set out above may change. The A Shares that we intend to oÅer in the A Share OÅering will be identical in all respects to the H Shares except that the A Shares will be listed and traded on a recognized stock exchange in the PRC and may only be held by PRC investors and/or qualiÑed foreign institutional investors and dividends on A Shares will be payable in Renminbi. The two classes of Shares will not be fungible.
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APPENDIX I ACCOUNTANTS' REPORT
The following is the text of a report, prepared for the purpose of incorporation in this prospectus, A1A(9)(3) received from our reporting accountants, PricewaterhouseCoopers, CertiÑed Public Accountants, A1A(37) Hong Kong: 3rd Sch 31
PricewaterhouseCoopers 22nd Floor, Prince’s Building Central, Hong Kong
May 18, 2006 LR4.08(5) The Directors Bank of China Limited
BOCI Asia Limited Goldman Sachs (Asia) L.L.C. UBS AG Dear Sirs, We set out below our report on the Ñnancial information relating to Bank of China Limited (the ""Bank'') and its subsidiaries (the ""Group'') for each of the years ended December 31, 2003, 2004 and 2005 (the ""Relevant Periods'') for inclusion in the prospectus of the Bank dated May 18, 2006 (the ""Prospectus'') in connection with the initial listing of the shares of the Bank on the Main Board of The Stock Exchange of Hong Kong Limited. The Bank was founded on February 5, 1912 in China and was converted into a joint stock national commercial bank on August 26, 2004, with approval from the State Council of the People's Republic of China (""PRC'') and the China Banking Regulatory Commission (the ""CBRC''). Details of the Bank's direct and indirect interests in its principal subsidiaries as of the date of this report are set out in Note VI.20 of Section 6 below. All companies comprising the Group have adopted December 31 as their Ñnancial year end date.
The directors of the Bank (the ""Directors'') have prepared the consolidated Ñnancial LR4.08(1)(a) statements of the Group for the year ended December 31, 2003 in accordance with the Accounting Standards for Business Enterprises, the Accounting System for Financial Institutions (1993 version) and other relevant accounting regulations issued by the Ministry of Finance (the ""MOF''), the People's Bank of China (the ""PBOC'') and the CBRC applicable to the Group, and for each of the years ended December 31, 2004 and 2005 in accordance with the Accounting Standards for Business Enterprises, the Accounting System for Financial Institutions (2001 version) and other relevant accounting regulations issued by the MOF, the PBOC and the CBRC applicable to the Group (the ""PRC GAAP Financial Statements''). The PRC GAAP Financial Statements for each of the years ended December 31, 2003, 2004 and 2005 were audited by PricewaterhouseCoopers Zhong Tian CertiÑed Public Accountants Limited Company . The Ñnancial statements of the principal subsidiaries of the Bank were audited by independent auditors as set out in Note VI.20 of Section 6.
The Directors have also prepared the consolidated Ñnancial statements of the Group (the LR4.08(1)(a) ""IFRS Financial Statements'') for each of the years ended December 31, 2003, 2004 and 2005 in LR4.11 accordance with International Financial Reporting Standards (""IFRS'') and were audited by
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APPENDIX I ACCOUNTANTS' REPORT
PricewaterhouseCoopers Zhong Tian CertiÑed Public Accountants Limited Company . The directors of the respective companies now comprising the Group and its associates, at the Relevant Periods, are responsible for preparing Ñnancial statements which give a true and fair view. In preparing these Ñnancial statements, it is fundamental that appropriate accounting policies are selected and applied consistently.
The Ñnancial information as set out in Sections 1 to 7 below (the ""Financial Information'') has LR4.08(3) been prepared based on the IFRS Financial Statements and, where appropriate, unaudited LR4.14 management accounts of the Bank. For the purpose of this report, we have examined the Financial Information for each of the years ended December 31, 2003, 2004 and 2005 and carried out such additional procedures as are necessary in accordance with the Auditing Guideline ""Prospectuses and the Reporting Accountant'' issued by the Hong Kong Institute of CertiÑed Public Accountants. The Directors are responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.
In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view LR4.08(2) of the state of aÅairs of the Group and the Bank as of December 31, 2003, 2004 and 2005, and of the A1A(35) Group's results and cash Öows for the Relevant Periods.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 1: CONSOLIDATED INCOME STATEMENTS (Amounts in millions of Renminbi, unless otherwise stated)
LR4.04(1) Section 6 Year ended December 31, LR4.04(7) Note 2003 2004 2005 LR4.09(1) Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.2 116,967 132,353 167,948 A16(35)(1)(g) Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.2 (40,370) (43,918) (66,940)LR8.05(1)(a) 3rd Sch 27 Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008 Fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.3 9,568 11,388 12,698 Fee and commission expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.3 (2,215) (2,831) (3,451) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,353 8,557 9,247 Net trading income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.4 4,303 8,882 4,283 Net gains/(losses) on investment securities ÏÏÏÏÏÏÏÏ VI.5 1,094 337 (582) Other operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.6 4,849 9,602 11,150 Net gains on sale of shares in a subsidiary ÏÏÏÏÏÏÏÏÏÏ VI.20 7,400 Ì Ì Impairment losses on loans and advancesÏÏÏÏÏÏÏÏÏÏÏ VI.17 (18,100) (23,812) (11,486) Other operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.7 (46,080) (54,879) (59,984) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 37,122 53,636 Share of results of associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.21 (69) 141 175 ProÑt before income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.10 (3,162) (10,198) (22,253) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,185 27,065 31,558 Attributable to: Equity holders of the Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,015 22,301 25,921 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,170 4,764 5,637 34,185 27,065 31,558 Dividends VI.39(3) Ì Dividend declared and paid during the year Ì Ì 12,737 Ì Dividend declared and paid after the balance sheet date Ì 14,200 1,375 Ì 14,200 14,112 LR4.04(8) A16(4)(1)(g) Earnings per share for proÑt attributable to the equity holders of the Bank during the year (Renminbi per ordinary share) Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.11 0.17 0.12 0.14
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 2: CONSOLIDATED BALANCE SHEETS (Amounts in millions of Renminbi, unless otherwise stated)
LR4.04(3)(a)&(b) LR4.04(7) Section 6 As of December 31, LR4.09(1) Note 2003 2004 2005 ASSETS Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.12 30,333 35,779 41,082 Balances with central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.13 267,159 284,348 316,941 Placements with banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.14 428,915 340,192 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.26 34,789 38,440 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,596 26,105 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.15 115,144 92,124 111,782 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.16 13,162 16,076 16,808 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏ VI.17 1,921,861 2,072,919 2,152,112 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.18 Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 357,587 602,221 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 457,994 607,459 Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 413,941 361,851 Investment in associatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.21 1,355 1,227 5,061 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.22 66,614 65,012 62,417 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.23 5,837 6,288 8,511 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.34 14,111 21,614 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.24 56,443 35,575 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048 LIABILITIES Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,181 111,788 134,217 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.25 76,815 66,738 30,055 Bank notes in circulationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.26 34,836 38,570 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏ 157,243 141,087 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.27 50,977 93,760 91,174 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.28 3,033,364 3,338,448 3,699,464 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.29 3,823 26,253 60,179 Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.30 77,229 69,549 52,164 Current tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,949 19,588 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.32 3,669 4,274 7,052 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.34 1,951 2,399 2,136 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.35 211,397 124,860 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,751,434 4,037,314 4,484,529
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 2: CONSOLIDATED BALANCE SHEETS (CONTINUED) (Amounts in millions of Renminbi, unless otherwise stated) Section 6 As of December 31, Note 2003 2004 2005 EQUITY Capital and reserves attributable to equity holders of the Bank Share capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.36 186,390 186,390 209,427 Capital reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.37 32,976 (10,432) (5,954) Statutory reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì 3,140 5,987 General and regulatory reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì 419 5,109 (Accumulated losses)/undistributed proÑts ÏÏÏÏÏ VI.39 (28,241) 16,547 10,188 Reserve for fair value changes of available-for- sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.40 4,078 2,730 1,899 Currency translation diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,617 1,961 (237) 196,820 200,755 226,419 Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,026 27,152 29,100 Total equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221,846 227,907 255,519 Total equity and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973,280 4,265,221 4,740,048
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 3: BALANCE SHEETS LR4.04(3)(a)&(b) (Amounts in millions of Renminbi, unless otherwise stated)
Section 6 As of December 31, Note 2003 2004 2005 ASSETS Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.12 28,450 32,373 38,275 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.13 237,117 264,620 284,373 Placements with banks and other Ñnancial institutions ÏÏÏÏÏ VI.14 324,210 211,115 243,654 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.26 1,262 1,466 1,641 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,901 24,620 25,238 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.15 90,578 68,027 82,082 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.16 6,863 9,112 11,329 Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.17 1,589,611 1,729,235 1,788,742 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.18 Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,332 349,453 542,142 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,656 252,254 415,143 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 326,457 383,680 343,910 Investment in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.20 50,683 45,018 45,080 Investment in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.21 141 131 45 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.22 49,407 48,633 48,061 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.23 515 467 461 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.34 14,103 21,588 20,389 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.24 43,333 24,141 25,837 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,221,619 3,465,933 3,916,402 LIABILITIES Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,048 105,341 124,948 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.25 71,857 66,738 30,030 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.26 1,309 1,596 1,786 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,617 165,142 215,923 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.27 41,063 83,532 76,323 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.28 2,377,488 2,637,229 3,009,187 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.29 4,071 26,253 60,179 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.30 77,229 69,549 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,806 18,334 22,440 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.32 3,669 4,274 7,052 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.34 107 70 23 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.35 190,886 105,085 112,534 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,047,150 3,283,143 3,712,589 EQUITY Capital and reserves attributable to equity holders of the Bank Share capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.36 186,390 186,390 209,427 Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.37 32,897 (10,511) (6,054) Statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 (359) 2,766 5,465 General and regulatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì 417 2,618 (Accumulated losses)/undistributed proÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.39 (46,642) 2,943 (8,709) Reserve for fair value changes of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.40 970 (815) 280 Currency translation diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,213 1,600 786 Total equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,469 182,790 203,813 Total equity and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,221,619 3,465,933 3,916,402
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 4: CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in millions of Renminbi, unless otherwise stated)
LR4.04(6) Attributable to equity holders of the Bank Reserve for (Accumulated fair value General and losses)/ changes of Currency Section 6 Share Capital Statutory regulatory undistributed available-for-sale translation Minority Note capital reserve reserves reserves proÑts securities diÅerences interest Total As of January 1, 2003 ÏÏÏÏÏÏÏ 142,100 12,955 49,259 Ì (262,524) 3,702 653 16,644 (37,211) Net proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 31,015 Ì Ì 3,170 34,185 Sale of shares in a subsidiary Ì Ì Ì Ì Ì Ì Ì 6,398 6,398 Exercise of subsidiary share options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.33 Ì Ì Ì Ì Ì Ì Ì 10 10 Appropriation to statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì Ì 28 Ì (28) Ì Ì Ì Ì Reduction in capitalÏÏÏÏÏÏÏÏÏÏ VI.36 (1,046) Ì Ì Ì Ì Ì Ì Ì (1,046) Financial restructuring adjustments Ì Capital contribution ÏÏÏÏÏ II.1 186,390 Ì Ì Ì Ì Ì Ì Ì 186,390 Ì Capital restructuringÏÏÏÏÏ II.1 (141,054) (13,033) (49,375) Ì 203,462 Ì Ì Ì Ì Ì Excess of net realisable value over net carrying value of non-performing loans committed to transfer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ II.2 Ì 32,976 Ì Ì Ì Ì Ì Ì 32,976 Net change in fair value of available-for-sale securities, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.40 Ì Ì Ì Ì Ì 376 Ì Ì 376 Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì (1,302) (1,302) Translation diÅerences ÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 964 106 1,070 ReclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 78 88 Ì (166) Ì Ì Ì Ì As of December 31, 2003 ÏÏÏÏ 186,390 32,976 Ì Ì (28,241) 4,078 1,617 25,026 221,846 Financial restructuring adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ II.4 Ì (43,408) Ì Ì 26,046 Ì Ì Ì (17,362) Net proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 22,301 Ì Ì 4,764 27,065 Exercise of subsidiary share options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.33 Ì Ì Ì Ì Ì Ì Ì 14 14 Appropriation to statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì Ì 3,140 Ì (3,140) Ì Ì Ì Ì Appropriation to general and regulatory reserves ÏÏÏÏÏÏÏÏ VI.38 Ì Ì Ì 419 (419) Ì Ì Ì Ì Net change in fair value of available-for-sale securities, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.40 Ì Ì Ì Ì Ì (1,348) Ì (53) (1,401) Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì (2,545) (2,545) Translation diÅerences ÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 344 (54) 290 As of December 31, 2004 ÏÏÏÏ 186,390 (10,432) 3,140 419 16,547 2,730 1,961 27,152 227,907 Issue of ordinary shares ÏÏÏÏÏ VI.36 & VI.37 23,037 3,964 Ì Ì Ì Ì Ì Ì 27,001 Net proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 25,921 Ì Ì 5,637 31,558 Appropriation to statutory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.38 Ì Ì 2,847 Ì (2,847) Ì Ì Ì Ì Appropriation to general and regulatory reserves ÏÏÏÏÏÏÏÏ VI.38 Ì Ì Ì 4,690 (4,690) Ì Ì Ì Ì Net change in fair value of available-for-sale investments, net of tax ÏÏÏÏÏ VI.40 Ì Ì Ì Ì Ì 1,423 Ì (110) 1,313 Exercise of subsidiary share options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.33 Ì Ì Ì Ì Ì Ì Ì 17 17 Capital contribution from Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.37 Ì 500 Ì Ì Ì Ì Ì Ì 500 Adoption of equity accounting for investment in associates VI.21 & VI.40 Ì Ì Ì Ì 2,194 (2,254) Ì Ì (60) Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (26,937) Ì Ì (2,954) (29,891) Translation diÅerences ÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì (2,198) (642) (2,840) Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 14 Ì Ì Ì Ì Ì Ì 14 As of December 31, 2005 ÏÏÏÏ 209,427 (5,954) 5,987 5,109 10,188 1,899 (237) 29,100 255,519
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 5: CONSOLIDATED CASH FLOW STATEMENTS (Amounts in millions of Renminbi, unless otherwise stated)
LR4.04(5) Section 6 Year ended December 31, Note 2003 2004 2005 Cash Öows from operating activities ProÑt before income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Adjustments: Impairment losses on loans and advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,100 23,812 11,486 Impairment losses/(reversal) on other assets ÏÏÏÏÏÏÏÏÏÏ 356 892 (457) Depreciation of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,174 6,088 5,186 Amortization of intangible assets and other long term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 440 576 1,128 Net losses/(gains) on disposal of property and equipment and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 251 574 (665) Net gains on sale of shares in a subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,400) Ì Ì Net gains on disposal of investments in other subsidiaries and associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (130) (760) (320) Share of results of associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69 (141) (175) Interest expenses arising from bonds issued ÏÏÏÏÏÏÏÏÏÏÏ 147 478 2,611 Net changes in operating assets and liabilities: Net increase in mandatory reserves with central banks ÏÏ (41,345) (29,684) (41,130) Net decrease in due from banks and placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,312 2,765 56,168 Net increase in loans and advances to customers ÏÏÏÏÏÏÏ (419,271) (266,400) (90,679) Net increase in investment securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,441) (223,274) (375,150) Net decrease in other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,222 12,118 1,139 Net increase in due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 798 16,607 22,429 Net decrease in due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,571) (10,077) (36,683) Net increase/(decrease) in certiÑcates of deposits and placements from banks and other Ñnancial institutions 5,584 (16,156) 71,539 Net increase in due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 321,033 305,084 361,016 Net increase/(decrease) in other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,512 41,938 (10,274) Cash (paid)/received in operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (55,813) (98,297) 30,980 Income tax paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,139) (1,756) (17,249) Net cash (outÖow)/inÖow from operating activities ÏÏÏÏÏÏÏ (59,952) (100,053) 13,731
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 5: CONSOLIDATED CASH FLOW STATEMENTS (CONTINUED) (Amounts in millions of Renminbi, unless otherwise stated)
Section 6 Year ended December 31, Note 2003 2004 2005 Cash Öows from investing activities Cash received from sale of shares in a subsidiaryÏÏÏÏÏÏÏÏÏ 15,284 Ì Ì Cash received from disposal of investments in other subsidiaries and associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,067 1,237 2,264 Cash received from disposal of property and equipment, intangible assets and other long term assets ÏÏÏÏÏÏÏÏÏÏÏ 2,609 2,963 4,291 Dividends received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 126 340 310 Cash paid for increase of investments in subsidiaries and associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (629) (891) (3,187) Cash paid for purchase of property and equipment, intangible assets and other long term assets ÏÏÏÏÏÏÏÏÏÏÏ (5,938) (6,757) (5,951) Net cash inÖow/(outÖow) from investing activities ÏÏÏÏÏÏÏÏ 12,519 (3,108) (2,273) Cash Öows from Ñnancing activities Capital contribution from equity holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,239 Ì 27,001 Cash received from issuance of subordinated bonds ÏÏÏÏÏÏ Ì 26,070 33,930 Cash received from minority equity holders of a subsidiary upon exercise of subsidiary share options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 15 17 Cash payments upon redemption of bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (3,640) Ì Cash payments for interest on bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140) (104) (1,485) Dividend payments to equity holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,176) (2,545) (29,891) Net cash inÖow from Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,934 19,796 29,572 EÅect of exchange rate changes on cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,823 557 (10,060) Net increase/(decrease) in cash and cash equivalents ÏÏ 120,324 (82,808) 30,970 Cash and cash equivalents as of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ VI.42 328,626 448,950 366,142 Cash and cash equivalents as of December 31 ÏÏÏÏÏÏÏÏÏÏÏ VI.42 448,950 366,142 397,112 SigniÑcant non-cash transactions Transfer of non-performing loans and policy-related assets Ì 91,530 Ì OÅsetting of payable to China Orient Asset Management Corporation against the bond interest receivable from China Orient Asset Management Corporation ÏÏÏÏÏÏÏÏÏÏÏ Ì 3,416 Ì Capital contribution in the form of gold bullion ÏÏÏÏÏÏÏÏÏÏÏÏ 24,151 Ì Ì OÅsetting of interest receivable from the MOF against levy payable to the MOF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,060 2,805 Ì
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION 3rd Sch 42
I GENERAL INFORMATION AND PRINCIPAL ACTIVITIES
The Bank, formerly known as Bank of China, was founded on February 5, 1912. From its formation until 1949, the Bank performed various functions of a central bank, foreign exchange bank and commercial bank specialising in trade Ñnance. Following the founding of the People's Republic of China (the ""PRC'') in 1949, the Bank was designated as a specialized foreign exchange bank. Since 1994, the Bank has evolved into a state-owned commercial bank. In this regard, in accordance with the Master Implementation Plan for the Joint Stock Reform (""Joint Stock Reform Plan'') approved by the State Council of the PRC, the Bank was converted into a joint stock commercial bank on August 26, 2004 and its name was changed from Bank of China to Bank of China Limited. Among other things the Joint Stock Reform Plan provided that the Bank retains all rights to the assets of and assumes all obligations relating to the liabilities of Bank of China.
The PRC Government through Central SAFE Investments Limited (""Huijin'') owned 83.15% of the ordinary shares of the Bank as of December 31, 2005. As disclosed in Note VI.45(1), the National Council for Social Security Fund (""SSF'') subscribed for 8,514,415,652 ordinary shares of the Bank in March 2006 for consideration totaling Renminbi (""RMB'') 10 billion. Huijin owns 79.90% of the ordinary shares of the Bank after this transaction.
The Bank is licensed as a Ñnancial institution by the CBRC ®No. B10311000H0001© and is registered as a business enterprise with the State Administration of Industry and Commerce of the PRC ®No. 1000001000134©.
The Group provides a full range of corporate banking, personal banking, treasury operations, investment banking, insurance and related Ñnancial services to its customers in the PRC, Hong Kong Special Administrative Region of the PRC (""Hong Kong''), Macau Special Administrative Region of the PRC (""Macau'') and other major international Ñnancial centers.
The Head OÇce of the Bank and its branches operating in the PRC are referred to as Domestic Operations. Branches and subsidiaries domiciled outside the PRC, including those located in Hong Kong and Macau, are referred to as Overseas Operations.
The Bank's principal regulator is the CBRC. The Overseas Operations of the Group are subject to the supervision of local regulators.
II FINANCIAL RESTRUCTURING
The Bank is one of the two state-owned commercial banks selected by the PRC Government in 2003 to proceed with a number of bank reform initiatives, including the conversion of its form of ownership into a joint stock limited liability company pursuant to the Joint Stock Reform Plan. In accordance with the Joint Stock Reform Plan, the Bank completed the following signiÑcant government directed Ñnancial restructuring arrangements.
1 On December 30, 2003, the PRC Government, through Huijin, contributed RMB 186,390 million in capital, comprised of United States dollars (""USD'') 19,602 million (equivalent to RMB 162,239 million) in cash and 7,008,861.81 ounces of gold, to the Bank. Pursuant to the Joint Stock Reform Plan, the Bank transferred pre-existing balances in certain of its equity accounts to accumulated losses to accommodate losses arising principally from provision for non-performing assets. These balances consisted of paid-in capital of RMB 141,054 million, the capital reserve of RMB 13,033 million and statutory surplus reserve of RMB 49,375 million.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
II FINANCIAL RESTRUCTURING (CONTINUED)
2 In December 2003, the PRC Government committed the Bank to the transfer of certain of its non-performing loans and policy-related assets and, in principle, established the sales price. The aggregate carrying value of these non-performing loans and policy-related assets was RMB 273,481 million. They were ultimately transferred to China Cinda Asset Management Corporation (""Cinda''), the PBOC and China Orient Asset Management Corporation (""China Orient'') in 2004. Accordingly, as of December 31, 2003, the Bank adjusted the net carrying value of the loans to reÖect the commitment to sell the loans at the price established by the PRC Government. This resulted in a net release of allowance for impairment losses on loans and advances of RMB 32,976 million (being the diÅerence between the aggregate net carrying value of the non-performing loans and policy-related assets of RMB 60,015 million and the estimated consideration to be received of RMB 92,991 million) which was recorded in the capital reserve, as the transactions giving rise to this amount were integral to the Joint Stock Reform Plan. These transfers were eÅected through three separate transactions in 2004 as detailed below, when the rights to receive the cashÖows were actually transferred to the transferees. The actual aggregate amount of non-performing loans and policy-related assets transferred was RMB 272,020 million, which reÖects cash collections and resolutions subsequent to the transaction commitment date. In June 2004, the Bank sold, on a non-recourse basis, non-performing loans with a carrying value of RMB 148,540 million (RMB 73,430 million, net of the related allowance for impairment losses) to Cinda. The Bank received consideration in the form of a Special Bill issued by the PBOC, with a par value of RMB 73,430 million. Details are set out in Note VI.18 (2) of this section. In June 2004, the Bank sold, on a non-recourse basis, policy-related assets with a carrying value of RMB 18,100 million for which no allowance for impairment losses had been provided to the PBOC. The Bank received consideration of RMB 18,100 million in the form of a Special Bill issued by the PBOC, with a par value of RMB 18,100 million. Details are set out in Note VI.18 (2) of this section. In September 2004, the Bank also transferred, on a non-recourse basis, loss graded loans with a carrying value of RMB105,380 million (RMB Nil, net of the related allowance for impairment losses of RMB 105,380 million) to China Orient for no consideration. The original principal amount of these loans was RMB 141,399 million. 3 On August 26, 2004, in accordance with Caijin ®2004© No. 76, ""Approval on Bank of China State Shares Administration Related Matter'' issued by the MOF, the Bank converted its form of ownership into a joint stock limited liability company and issued 186,390,352,497 ordinary shares at RMB 1 per share to Huijin as the sole equity holder. In accordance with the State Council's approval referred to in Yinfa ®2004© No. 178, ""Report on the restructuring of Bank of China into Bank of China Limited and related issues submitted by the PBOC, MOF, CBRC and China Securities Regulatory Commission'', the name of the Bank was changed from Bank of China to Bank of China Limited. 4 Pursuant to statutes and regulations governing the restructuring of state-owned enterprises, the Bank engaged an independent appraiser to perform a valuation of the net assets of Bank of China as of December 31, 2003. The Bank is required to submit the result of this valuation presented in an appraisal report (the ""Appraisal Report'') to the MOF for approval and direction of
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
II FINANCIAL RESTRUCTURING (CONTINUED)
the disposition of any excess or deÑcit relative to the amount of share capital of the Bank on August 26, 2004 equal to RMB186,390 million. The Bank commenced the appraisal exercise and submitted the approval request to the MOF in 2004. The value of the net assets of the Bank as of December 31, 2003, stated in the Appraisal Report, was RMB 203,752 million, which reÖects, among other things, the results of the Ñxed assets revaluation surplus of RMB 10,432 million. Pursuant to Caijinhan ®2005© No. 164 ""NotiÑcation on the treatment of Bank of China's state equity surplus for the year 2003 and proÑt appropriation for the year 2004'', the MOF, the Bank's then sole equity holder, on behalf of the PRC Government and the authority in charge of administration of state- owned assets of commercial banks, has notiÑed the Bank that (i) it had concluded that the excess of the appraised value over share capital was RMB 17,362 million; (ii) this excess belonged to the PRC Government, and (iii) a payable to the MOF should be established in the amount of the excess, which is payable by the Bank to the MOF in four annual installments before December 31, 2008. Pursuant to the Joint Stock Reform Plan, the balances on capital reserve and accumulated losses, as recorded in the statutory accounts, prepared in accordance with PRC Generally Accepted Accounting Principles (""PRC GAAP''), were reset to zero upon restructuring. The Bank recorded a liability under other liabilities to reflect the payable due to its then sole equity holder, the MOF. However, under IFRS, the revaluation surplus of property and equipment is not recognized, therefore this amount is recorded as a debit to the capital reserves as of December 31, 2004. As of December 31, 2004 and 2005, the balance in the capital reserve in the statutory accounts of both the Group and the Bank were greater than zero. Under relevant PRC laws and regulations, capital reserve balances of less than zero reported under IFRS are not prohibited.
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
1 Basis of presentation LR4.04(11) LR4.11 The principal accounting policies adopted in the preparation of the Financial Information are set LR4.13 out below. These policies have been applied consistently to all periods presented.
The Financial Information has been prepared in accordance with IFRS and has been prepared under the historical cost convention as modiÑed by the revaluation of available-for-sale investment securities, investment property, Ñnancial assets and Ñnancial liabilities at fair value through proÑt or loss and derivative Ñnancial instruments.
During 2005, the International Accounting Standards Board issued an amendment to International Accounting Standard No. 21 (""IAS 21''), the EÅects of Changes in Foreign Exchange Rates, which is eÅective for the year beginning January 1, 2006. This amendment Ñnalized treatment for the net investment in a foreign entity. The Group is assessing the impact of this amendment, but does not believe its adoption will have any material eÅect on its results of operations or Ñnancial position.
During 2005, the International Accounting Standards Board issued amendments to International Accounting Standard No. 39 (""IAS 39''), Financial Instruments: Recognition and Measurement, on the Fair Value Option and accounting for Guarantees, which are effective for the year beginning January 1, 2006. The group has early adopted these amendments. These amendments provided additional guidance on selected matters such as the circumstances under which financial assets and financial liabilities may be measured at fair value and the accounting treatment of financial guarantees.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
1 Basis of presentation (Continued)
The adoption of these amendments did not have a material impact on the Group's current results of operations or financial position. In August 2005, the International Accounting Standards Board issued International Financial Reporting Standard No. 7, Financial Instruments: Disclosures (""IFRS 7''), which is eÅective for accounting periods commencing on or after January 1, 2007. IFRS 7 requires more detailed qualitative and quantitative disclosure primarily related to fair value information and risk management. The Group is currently assessing the impact of IFRS 7 but does not believe its adoption will have any material eÅect on its results of operations or Ñnancial position. The preparation of the Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiÑcant to the Financial Information, are disclosed in sub-section V of this section.
2 Group accounts (1) Consolidation (a) Subsidiaries Subsidiaries, are all entities (including special purpose entities) over which the Group has the power to govern the Ñnancial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and eÅect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed as of the date of exchange, plus costs directly attributable to the acquisition. IdentiÑable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values as of the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identiÑable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the diÅerence is recognized directly in the consolidated income statements. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized losses are also eliminated unless the transaction provides evidence of impairment of the assets transferred. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2 Group accounts (Continued)
The results and Ñnancial position of all group entities that have a functional currency diÅerent from RMB are translated into RMB as follows: i assets and liabilities are translated at the balance sheet date exchange rates; ii income and expenses are translated at average exchange rates; and iii the resulting exchange diÅerences are recognized in currency translation diÅerences in equity. On consolidation, exchange diÅerences arising from the translation of the net investment in foreign entities and monetary items that are part of the net investment in foreign entities are recognized in equity. When a foreign entity is sold, these exchange diÅerences are recognized in the consolidated income statements, as part of the gain or loss on sale of foreign entities. In the Bank's balance sheets the investments in subsidiaries are stated at cost less allowance for impairment losses. The results of subsidiaries are accounted for by the Bank on the basis of dividend accrued.
(b) Associates Associates are all entities over which the Group has signiÑcant inÖuence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group's investment in associates includes goodwill, net of accumulated impairment loss. The Group's share of the post-acquisition proÑts or losses of associates is recognized in the consolidated income statements, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognize further losses unless the Group has incurred obligations or made payments on behalf of the associates. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. In the Bank's balance sheets the investments in associated companies are stated at cost less allowance for impairment losses. The results of associated companies are accounted for by the Bank on the basis of dividend accrued.
(2) Segment reporting A business segment is a group of assets and operations engaged in providing products and services that are subject to risks and returns that are diÅerent from those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns that are diÅerent from those of segments operating in other economic environments.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
3 Derivative Ñnancial instruments
Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and through the use of valuation techniques, including discounted cash Öow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modiÑcation or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognizes proÑts on day one.
Certain derivatives embedded in other Ñnancial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through proÑt or loss. These embedded derivatives are measured at fair value with changes in fair value recognized in the consolidated income statements.
While certain derivative transactions are intended to provide eÅective economic hedges of speciÑc interest rate and foreign exchange risks, they do not qualify for hedge accounting under the speciÑc requirements of IAS 39 and are treated as derivatives held for trading with changes in fair value reported as net trading income. The Group has no derivative positions that are designated as hedging instruments.
4 Foreign currency translation
Items included in the Ñnancial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the ""functional currency''). The Financial Information is presented in RMB, the legal currency of the PRC.
Foreign exchange gains and losses resulting from the settlement of foreign currency transactions are recognized directly in the consolidated income statements. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date. Non-monetary assets and liabilities that are measured in terms of historical cost are translated using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value are translated using the rate of exchange at the date the fair value was determined. Income and expenses denominated in foreign currencies are translated at average exchange rates. The diÅerences arising from translation are recognized in the consolidated income statements.
5 Interest income and expense
Interest income and expense are recognized in the consolidated income statements for all instruments measured at amortized cost using the eÅective interest method.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
5 Interest income and expense (Continued)
The eÅective interest method is a method of calculating the amortized cost of a Ñnancial asset or a Ñnancial liability and of allocating the interest income or interest expense over the relevant period. The eÅective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the Ñnancial instrument or, when appropriate, a shorter period to the net carrying amount of the Ñnancial asset or Ñnancial liability. When calculating the eÅective interest rate, the Group estimates cash Öows considering all contractual terms of the Ñnancial instrument (e.g. prepayment options) but does not consider future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the eÅective interest rate, including transaction costs and all other premiums or discounts. Once a Ñnancial asset or a group of similar Ñnancial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash Öows for the purpose of measuring the impairment loss.
6 Fee and commission income Fees and commissions are recognized on an accrual basis when the related service has been provided. Fee and commission income related to credit commitments are amortized on a straight-line basis over the commitment period. Loan syndication fees are recognized as revenue when the related syndication arrangement has been completed and the Group has retained no part of the loan package for itself or has retained a part at the same eÅective interest rate as that of other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party, such as the arrangement of shares and other securities or the purchase or sale of businesses, are generally recognized on completion of the underlying transaction. Portfolio and other management advisory service fees are typically recognized based on a time proportionate basis. Fund management fees and custodian service fees are recognized ratably over the period that the service is provided.
7 Financial assets The Group classiÑes its Ñnancial assets into the following categories: Ñnancial assets at fair value through proÑt or loss; loans and receivables; held-to-maturity investments and available-for- sale Ñnancial assets. Management determines the classiÑcation of its investment at initial recognition.
(1) Financial assets at fair value through proÑt or loss This category has two sub-categories: Ñnancial assets held for trading, and those designated at fair value through proÑt or loss at inception. A Ñnancial asset which has been acquired or incurred principally for the purpose of selling or repurchasing in the near term or is part of a portfolio of identiÑed Ñnancial instruments that are
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
7 Financial assets (Continued)
managed together and for which there is evidence of a recent actual pattern of short-term proÑt- taking is classiÑed as held-for-trading. All derivatives are also classiÑed as held for trading. A Ñnancial asset, other than one held for trading, may be designated as Ñnancial assets at fair value through proÑt or loss, if it meets the criteria set out below, and is so designated by management:
¬ eliminates or signiÑcantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring the Ñnancial assets or Ñnancial liabilities or recognizing the gains and losses on them on diÅerent bases; or
¬ applies to a group of Ñnancial assets, Ñnancial liabilities or both that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and where information about that group of Ñnancial instruments is provided internally on that basis to key management personnel; or
¬ relates to Ñnancial instruments containing one or more embedded derivative that signiÑcantly modiÑes the cash Öow resulting from those Ñnancial instruments. These assets are recognized initially at fair value, with transaction costs taken directly to the consolidated income statement on the trade date, the date on which the Group commits to purchase or sell the asset, and are subsequently remeasured at fair value. Gains and losses from changes in the fair value of such assets (excluding interest accruals) are reported in net trading income. The accrual of interest is reported in interest income.
(2) Loans and receivables Loans and receivables are non-derivative Ñnancial assets with Ñxed or determinable payments that are not quoted in an active market, including balances with central banks, placements with banks and other Ñnancial institutions, investment securities classiÑed as loans and receivables and loans and advances to customers. They arise when the Group advances cash directly to a borrower with no intention of trading the receivable. Loans and receivables are recognized when cash is advanced to borrowers. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortized cost using the eÅective interest rate, less allowances for impairment losses. The Group transfers (or ""re-discounts'') certain trade bills to banks and other Ñnancial institutions. These trade bills are de-recognized when all risks and rewards have been transferred. When the criteria for de-recognition have not been met, the related transactions are accounted for as secured borrowings and an obligation is recorded as placements from banks and other Ñnancial institutions or due to central banks, as appropriate.
(3) Held-to-maturity Financial assets classiÑed as held-to-maturity are those traded in active markets, with Ñxed or determinable payments and Ñxed maturities that the Group's management has both the positive intention and the ability to hold to maturity. Were the Group to sell other than an insigniÑcant amount
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
7 Financial assets (Continued)
of held-to-maturity assets, the entire category would be tainted and reclassiÑed as available-for- sale. They are initially recorded at fair value plus any directly attributable transaction costs on the trade date, the date on which the Group commits to purchase the asset, and are subsequently measured at amortized cost using the eÅective interest rate, less allowance for impairment losses.
(4) Available-for-sale Financial assets classiÑed as available-for-sale are those that are either designated as such or are not classiÑed in any of the other categories. They are intended to be held for an indeÑnite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Available-for-sale Ñnancial assets are initially recorded at fair value plus any directly attributable transaction costs on the trade date, the date on which the Group commits to purchase the asset and are subsequently measured at fair value. Gains and losses arising from changes in the fair value of Ñnancial assets classiÑed as available-for-sale are recognized directly in equity, until the Ñnancial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in proÑt or loss. Interest calculated using the eÅective interest method is recognized in the consolidated income statement. Dividends on equity instruments classiÑed as available-for-sale are recognized in the consolidated income statement when the Group's right to receive payment is established.
(5) De-recognition of Ñnancial assets Financial assets are derecognized when the rights to receive cash Öows from the Ñnancial assets have expired or where the Group has transferred substantially all risks and rewards of ownership.
(6) Determination of fair value The fair values of quoted investments in active markets are based on current bid prices. If the market for a Ñnancial asset is not active (such as unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, discounted cash Öow analysis, option pricing models and other valuation techniques commonly used by market participants.
(7) OÅsetting Ñnancial instruments Financial assets and liabilities are oÅset and the net amount reported in the balance sheets when there is a legally enforceable right to set oÅ the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
8 Insurance contracts (1) Insurance contracts classiÑcation, recognition and measurement The Group's insurance subsidiaries issue insurance contracts that transfer signiÑcant insurance risk. As a general guideline, the Group deÑnes as signiÑcant insurance risk the possibility of having
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
8 Insurance contracts (Continued)
to pay beneÑts on the occurrence of an insured event that are at least 10% more than the beneÑt payable if the insured event did not occur. The Group issues general insurance contracts, which cover casualty and property insurance risk, and long term business insurance contracts, which insure events associated with human life (for example death, or survival) over a long duration. The Group does not separately measure embedded derivatives that meet the deÑnition of an insurance contract or options to surrender insurance contracts for a Ñxed amount (or an amount based on a Ñxed amount and an interest rate). Premiums on general insurance contracts are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability. Premiums are recognized before the deduction of commissions. Claims and loss adjustment expenses are charged to the consolidated income statement as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. Premiums on long-term business insurance contracts are recognised as revenue when they become payable by the contract holders. Premiums are recognized before the deduction of commissions. BeneÑts and claims are recorded as an expense when they are incurred. A liability for contractual beneÑts that are expected to be incurred in the future is recorded when premiums are recognized. For certain long-term insurance contracts (linked long term insurance contracts) with embedded derivatives linking payments on the contract to units of an investment fund set up by the Group with the consideration received from the contract holders, the liability is adjusted for all changes in the fair value of the underlying assets, and includes a liability for contractual beneÑts that are expected to be incurred in the future which is recorded when the premiums are recognized.
(2) Deferred policy acquisition costs (""DAC'') Commissions and other acquisition costs for general insurance contracts that vary with and are related to securing new contracts and renewing existing contracts are capitalized as DAC, an intangible asset. All other costs are recognized as expenses when incurred. The DAC is subsequently amortised over the terms of the policies as premiums are earned.
(3) Liability adequacy test At each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the insurance contract liabilities (including unearned premium in the case of general insurance contracts). Any deÑciency is immediately charged to the consolidated income statement, with a provision established for losses arising from the liability adequacy test.
9 Resale and repurchase agreements Securities and bills sold to a counter-party with an obligation to repurchase at a pre-determined price on a speciÑed future date under a repurchase agreement are referred to as Repos. Securities and bills purchased from a counter-party with an obligation to re-sell to the counter-party at a pre-
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
9 Resale and repurchase agreements (Continued)
determined price on a speciÑed future date under a resale agreement are referred to as Reverse repos. Repos are initially recorded as placements from banks and other Ñnancial institutions or due to central banks, as appropriate, at the actual amount of cash received from the counter-party. The Ñnancial assets used to collateralize repurchase agreements are recorded as investment securities or loans and advances to customers, net. Reverse repos are initially recorded as placements with banks and other Ñnancial institutions, as appropriate, at the actual amount of cash paid to the counter-party. The Ñnancial assets received as collateral under Reverse repos are not recognized on the balance sheets. The diÅerences between sale and repurchase price is recognized as interest income or interest expense over the life of the agreements using the eÅective interest method.
10 Precious metals and precious metals swap Precious metals comprise gold, silver and other precious metals. Precious metals that are not related to the Group's precious metals trading activities are carried at cost. Precious metals that are related to the Group's trading activities are initially recognized at cost and subsequently re- measured at their respective market prices as of the balance sheet date. Mark-to-market gains or losses on precious metals related to the Group's trading activities are included in net trading income. The Group receives all risks and rewards of ownership related to bullion deposited with the Group as bullion deposits, including the right to freely pledge or transfer, and it records the gold bullion received as an asset. A liability to return the amount of gold bullion deposited is also recognized. This obligation is measured at cost unless the Group does not posses suÇcient gold bullion to meet the obligation giving rise to the liability. To the extent the liability exceeds the related asset, the open position is marked to market. Gold bullion and other precious metals sold subject to linked repurchase agreements are not de-recognized and the related counter-party liability is recorded as placements from banks and other Ñnancial institutions or due to central bank, as appropriate.
11 Impairment of Ñnancial assets (1) Assets carried at amortized cost The Group assesses as of each balance sheet date whether there is objective evidence that a Ñnancial asset or group of Ñnancial assets is impaired. A Ñnancial asset or a group of Ñnancial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ""loss event'') and that loss event (or events) has an impact on the estimated future cash Öows of the Ñnancial asset or group of Ñnancial assets that can be reliably estimated. The Group Ñrst assesses whether objective evidence of impairment exists individually for Ñnancial assets that are individually signiÑcant. The Group then performs a collective assessment for all other Ñnancial assets that are not individually signiÑcant or for which impairment has not yet been identiÑed. If the Group determines that no objective evidence of impairment exists for an
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
11 Impairment of Ñnancial assets (Continued)
individually assessed Ñnancial asset, it includes the asset in a group of Ñnancial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivables or held-to- maturity investments has been incurred, the amount of the loss is measured as the diÅerence between the asset's carrying amount and the present value of estimated future cash Öows (excluding future credit losses that have not been incurred) discounted at the Ñnancial asset's original eÅective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated income statements. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current eÅective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. The calculation of the present value of the estimated future cash Öows of a collateralized Ñnancial asset reÖects the cash Öows that may result from foreclosure less costs for obtaining and selling the collateral. For the purposes of a collective assessment of impairment, Ñnancial assets are grouped on the basis of similar and relevant credit risk characteristics. Those characteristics are relevant to the estimation of future cash Öows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash Öows in a group of Ñnancial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash Öows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reÖect the eÅects of current conditions that did not aÅect the period on which the historical loss experience is based and to remove the eÅects of conditions in the historical period that do not exist currently. When a loan is uncollectible, it is written oÅ against the related allowance for impairment losses. Such loans are written oÅ after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written oÅ decrease the amount of impairment losses in the consolidated income statements. If, in a subsequent period, the amount of allowance for impairment losses decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the consolidated income statements.
(2) Assets carried at fair value The Group assesses as of each balance sheet date whether there is objective evidence that a Ñnancial asset or a group of Ñnancial assets is impaired. In the case of equity investments classiÑed
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
11 Impairment of Ñnancial assets (Continued)
as available-for-sale, a signiÑcant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale Ñnancial assets, the cumulative losses, measured as the diÅerence between the acquisition cost (net of any principal repayment and amortization) and the current fair value, less any impairment loss on that Ñnancial asset previously recognized in proÑt or loss, is removed from equity and recognized in the consolidated income statements. If, in a subsequent period, the fair value of a debt instrument classiÑed as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated income statements, the impairment loss is reversed through the consolidated income statements. With respect to equity instruments, such reversals are made through the reserve for fair value change of available-for-sale securities within equity.
12 Intangible assets Intangible assets principally comprise computer software. Intangible assets are stated at cost less accumulated amortization and impairment. Amortization for intangible assets is calculated on a straight-line basis from the month of acquisition over the shorter of their eÅective beneÑcial lives or estimated useful period and is recognized in the consolidated income statements. When the estimated recoverable amount of a speciÑc intangible asset is lower than its carrying amount as a result of the progress of new technology, an impairment loss is recognized in the consolidated income statements.
13 Property and equipment (1) Buildings, improvements, equipment and motor vehicles Buildings comprise primarily branch and oÇce premises. All buildings, improvements, equipment and motor vehicles are stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in an asset's carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic beneÑts associated with the item will Öow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the consolidated income statements during the Ñnancial period in which they are incurred. Depreciation is calculated on the straight-line method to write down the cost of such assets to their residual values over their estimated useful lives as follows:
Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15-50 years Improvements ÏÏÏÏÏÏÏÏÏÏ Shorter of economic useful life or remaining lease term EquipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3-11 years Motor vehicles ÏÏÏÏÏÏÏÏÏÏ 4-6 years The residual values and useful lives of assets are reviewed, and adjusted if appropriate, as of each balance sheet date.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
13 Property and equipment (Continued)
Buildings, improvements, equipment and motor vehicles are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and value in use.
Gains and losses on disposals are determined by comparing proceeds with carrying amount, relevant taxes and expenses. These are included in the consolidated income statements.
(2) Construction in progress
Construction in progress consists of assets under construction or being installed and is stated at cost. Cost includes equipment cost, cost of construction, installation and other direct costs. Items classiÑed as construction in progress are transferred to property and equipment when such assets are ready for their intended use, and the depreciation charge commences from the following month after such assets are transferred to property and equipment.
Impairment losses are recognized for idle projects with respect to which management has determined that resumption in the foreseeable future is not probable, including those projects that are the subject of litigation. The impairment loss is equal to the extent to which the estimated recoverable amount of a speciÑc project is less than its carrying amount. Impairment losses are charged to the consolidated income statements.
14 Investment property
Investment property, principally consisting of oÇce buildings, is held to generate rental income over the long term or earn capital gains and is not occupied by the Group. Investment property is carried at fair value, representing open market value determined periodically by independent appraisers. Changes in fair values are recorded in the consolidated income statements as part of other operating income.
15 Leases
Leases in which a signiÑcant portion of the risks and rewards of ownership are retained by the lessor are classiÑed as operating leases. The total payments made under operating leases which include land use rights with payments that are separately identiÑable at inception of the lease are charged to the consolidated income statements on a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.
Where the Group is the lessor, the assets subject to the operating lease are accounted for as investment property. Rental income from operating leases is recognized on a straight-line basis over the lease term.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
16 Cash and cash equivalents For the purposes of the cash Öow statement, cash and cash equivalents comprise balances with original maturity less than three months, including cash, non-restricted balances with central banks, due from banks, placements with banks and other Ñnancial institutions, and short-term bills and notes classiÑed as investment securities.
17 Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outÖow of resources embodying economic beneÑts will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Employee entitlements to housing and certain other allowances are recognized when they accrue to employees.
18 Financial liabilities designated at fair value through proÑt or loss Financial liabilities are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortized cost using the eÅective interest rate. The Group designated certain structured deposit liabilities as ""liabilities at fair value through proÑt or loss''. Gains and losses from changes in the fair value of such liabilities are reported in net trading income. The accrual of interest is reported in interest expense. Gains and losses arising from the changes in the fair value of derivatives that are managed in conjunction with Ñnancial liabilities designated at fair value through proÑt or loss are reported in Net trading income.
19 Employee beneÑts A1A(33)(4)(a) (1) DeÑned contribution plans A1A(33)(4)(b) In accordance with the policies of relevant state and local governments, domestic employees participate in various deÑned contribution retirement schemes administered by local Labour and Social Security Bureaus. Domestic Operations contribute to pension and insurance schemes administered by the local pension and insurance agencies using applicable contribution rates stipulated in the relevant local regulations. Upon retirement, the local Labour and Social Security Bureaus are responsible for the payment of the basic retirement beneÑts to the retired employees. In addition to these basic staÅ pension schemes, domestic employees can also voluntarily participate in a contribution retirement beneÑt program established by the Bank during 2005 (the ""Annuity Plan''). All eligible employees in Overseas Operations participate in local deÑned contribution schemes. Overseas Operations contribute to these deÑned contribution plans based on a certain percentage of the employees' basic salaries. Contributions made by the Group to the retirement schemes described above are recorded as an expense in the consolidated income statements as accrued. Forfeited contributions by those A1A(33)(4)(d) employees who leave the scheme prior to the full vesting of their contributions are used by the
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
19 Employee beneÑts (Continued)
Group to reduce the existing level of contributions in accordance with local requirements. The Group has no further legal obligation to pay additional pensions even if the deÑned contribution schemes in which the Group's employees participate are not suÇcient to fund withdrawals by participants.
(2) Retirement beneÑt obligations
Historically, the Group has paid supplemental retirement beneÑts to all retired domestic employees and early retirement beneÑts to those employees who accepted an early retirement arrangement. Supplemental retirement beneÑts include supplemental pension income payments and medical expense coverage. The amounts of supplemental pension income payments and medical expense payments are calculated based on the diÅerence between the beneÑts received and enhanced beneÑt levels determined by management from time to time. Early retirement beneÑts have been paid to those employees who accept voluntary retirement before the normal retirement date, as approved by the management. The related beneÑt payments are made from the date of early retirement through the normal retirement date.
The Group has recorded a liability for its obligation related to supplemental and early retirement obligations to retired and early retired employees. No liability has been recorded related to beneÑts that current domestic employees may receive in the future, as the Group has not incurred a constructive obligation to pay such beneÑts. In connection with the implementation of the Joint Stock Reform Plan, management has undertaken a comprehensive re-design of its employee compensation including establishing the Annuity Plan. A number of the elements of this re-design are consistent with and reinforce management's position that the Group has had no obligation to pay supplemental retirement beneÑts to current domestic employees. These include relevant amendments to the domestic employee policy handbook and a written acknowledgement by domestic employees of a clariÑcation of the Group's obligations only to fund the mandatory payments to State administered deÑned contribution.
All employees who retired after January 1, 2004 are eligible to make withdrawals from the Annuity Plan fund from January 1, 2006. The expense related to the funding of the Annuity Plan was recognized in the consolidated income statements in 2005.
The liability related to the supplemental beneÑt obligation for employees who retired prior to December 31, 2003 and early retirement obligations existing at each year-end with respect to retired employees is calculated by the Group's actuaries using the projected unit credit method and recorded as a liability under retirement beneÑt obligations in the balance sheets. The present value of the liability is determined through estimated future cash outÖows using interest rates of RMB treasury bills which have terms to maturity approximating the terms of the related liability. Actuarial gains and losses, changes in actuarial assumptions and amendments to pension plans are charged or credited to the consolidated income statements immediately as they occur. Past-service costs are recognized immediately in the consolidated income statements.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
19 Employee beneÑts (Continued)
(3) Housing subsidies and housing funds
Housing subsidies
Pursuant to Caijin ®2001© No. 28 ""Regulation Addressing Financial Issues in Relation to the Housing System Reform of Financial Institutions'' issued by the MOF, cash subsidies should be made to employees to compensate for the withdrawal of their previous entitlement to the allocation of staÅ quarters. The Group has adopted cash subsidy plans, whereby, for those eligible domestic employees who joined the Bank before December 31, 1998 and have either not been allocated staÅ quarters or have been allocated staÅ quarters below the appropriate standards to which they should have been entitled before the staÅ quarters allocation scheme was terminated, such employees are paid one-oÅ cash subsidies. The amounts of such payments are based on years of service, positions and other criteria. A liability has been established based on the estimated amounts to be paid pursuant to the Housing System Reform Subsidy policy and guidelines established by local Labour and Social Security Bureaus. In certain provincial jurisdictions, such guidelines have not yet been Ñnalized. The housing subsidy amounts to be paid have been estimated with reference to the housing reform guidelines established in neighbouring jurisdictions.
Housing funds
Pursuant to local government regulations, all domestic employees participate in various local housing funds administered by local governments. Domestic Operations contribute on a monthly basis to these funds based on certain percentages of the salaries of the employees. These payments are expensed as incurred.
(4) Share-based compensation
The Group operates an equity-settled, share-based compensation scheme to certain of the Bank's directors, senior management personnel and employees of BOC Hong Kong (Holdings) Limited (""BOCHK Holdings''), the Group's principal banking subsidiary, and its subsidiaries. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. A corresponding increase in equity is recognized. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, proÑtability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity over the remaining vesting period.
The proceeds received net of any directly attributable transaction costs are credited to share capital(nominal value) and share premium when the options are exercised.
The Group applies the transitional provision of IFRS 2 with respect to the share options granted prior to November 7, 2002. This Share Option Scheme is described in Note VI.33.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
20 Deferred income taxes Deferred income tax is provided in full, using the balance sheet liability method, on temporary diÅerences arising between the tax bases of assets and liabilities and their carrying amounts in the Ñnancial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The principal temporary diÅerences arise from asset impairment provisions, depreciation of property and equipment, revaluation of certain Ñnancial assets and liabilities including derivative contracts, provisions for pension and beneÑt costs and tax losses carried forward. However, the deferred income tax is not recognized if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction aÅects neither accounting nor taxable proÑt or loss. Deferred income tax assets are recognized to the extent that it is probable that future taxable proÑt will be available against which the temporary diÅerences can be utilized and that temporary diÅerences are deductible. Deferred income tax is provided on temporary diÅerences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary diÅerence can be controlled and it is probable that the diÅerence will not reverse in the foreseeable future. Income tax payable on proÑts, based on the applicable tax law in each jurisdiction, is recognized as an expense in the period in which proÑts arise. The tax eÅects of income tax losses available for carry forward are recognized as an asset when it is probable that future taxable proÑts will be available against which these losses can be utilized. Deferred income tax related to fair value re-measurement of available-for-sale investments which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognized in the consolidated income statements together with the deferred gain and loss.
21 Borrowings Borrowings are recognized initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any diÅerence between proceeds net of transaction costs and the redemption value is recognized in the consolidated income statements over the period of the borrowings using the eÅective interest method. If the Group purchases its own debt, it is removed from the balance sheets, and the diÅerence between the carrying amount of a liability and the consideration paid is included in net trading income.
22 Share capital Shares are classiÑed as equity when there is no contractual obligation to transfer cash or other Ñnancial assets. Consideration received on the issuance of shares in excess of the share cost is reported in the capital reserve.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
22 Share capital (Continued)
(1) Share issue costs Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.
(2) Dividends on ordinary shares Dividends on ordinary shares are recognized in equity in the period in which they are approved by the Bank's equity holders. Dividends for the year that are declared after the balance sheet date are addressed in the subsequent event note to the Financial Information.
23 Acceptances Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be settled simultaneously with the reimbursement from the customers. Acceptances are accounted for as oÅ-balance sheet transactions and are disclosed as credit commitments in Note VI.41(6).
24 Fiduciary activities The Group commonly acts as a trustee, or in other Ñduciary capacities, that result in its holding or managing assets on behalf of individuals, trusts, retirement beneÑt plans and other institutions. These assets and any income or losses arising thereon are excluded from these Ñnancial statements, as they are not assets of the Group. The Group also administers entrusted loans on behalf of third-party lenders. In this regard, the Group grants loans to borrowers, as agent, at the direction of third-party lenders, who fund these loans. The Group has been contracted by these third-party lenders to manage the administration and collection of these loans on their behalf. The third-party lenders determine both the underwriting criteria for and all terms of the entrusted loans, including their purposes, amounts, interest rates, and repayment schedule. The Group charges a commission related to its activities in connection with the entrusted loans, but the risk of loss is borne by the third-party lenders. Entrusted loans are not recognized in the Ñnancial statements of the Group.
25 Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will only be conÑrmed 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 outÖow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognized as a provision but is disclosed in the notes to the Financial Information. When a change in the probability of an outÖow occurs so that outÖow is probable, it will then be recognized as a provision.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
III SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
26 Financial guarantee contracts The Group issues letters of credit and letters of guarantee. These Ñnancial guarantee contracts provide for speciÑed payments to be made to reimburse the holder for a loss it incurs when a guaranteed party defaults under the original or modiÑed terms of a debt instrument, loan or other obligation. The Group initially measures all Ñnancial contracts at fair value. This amount is recognized ratably over the period of the contract to fee and commission income. Subsequently, the liabilities are measured as the higher of the initial fair value less cumulative amortization and the fair value of the provision related to the Group's obligation under the contract. The change in fair value of the provision due to impairment is recognized in the consolidated income statement as impairment. The contractual amounts of Ñnancial guarantee contracts are disclosed as credit commitments in Note VI.41(6).
IV FINANCIAL RISK MANAGEMENT
1 Strategy in using Ñnancial instruments A16(35)(4)(a) This section presents information about the Group's exposure to and its management and control of risks, in particular the primary risks associated with its use of Ñnancial instruments: Ó credit risk is the risk of loss resulting from client or counterparty default and arises on credit exposure in all forms, including settlement risk; Ó market risk is exposure to observable market variables such as interest rates, exchange rates and equity markets; Ó funding and liquidity risk is the risk that the Group is unable to meet its payment obligations when due, or that it is unable, on an ongoing basis, to borrow funds in the market on an unsecured, or even secured basis at an acceptable price to fund actual or proposed commitments.
2 Credit risk A16(35)(4)(a) Credit risk is increased when counterparties are concentrated in the same industries or geographical regions. The Group operates in the PRC, Hong Kong and Macau, and other international locations. Each of these has its own unique characteristics in terms of economic development and of its Ñnancial markets. Therefore, each area presents diÅerent credit risks. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to individual borrowers. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and guarantees. The primary purpose of credit-related commitments is to ensure that funds are available to a customer, as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
2 Credit risk (Continued)
obligations to third parties, carry the same credit risk as loans and advances. Guarantee deposits are received by the Group to lessen the credit risks related to certain of these commitments provided by the Group. When received, such deposits are typically established as a certain percentage of the notional amount of a guarantee, standby letter of credit or other credit related commitment. The percentage of such deposits over the related credit commitments is determined by the creditworthiness of the related customer.
3 Concentrations of assets, liabilities and oÅ-balance sheet items A16(35)(4)(b) The following incorporates both IAS 32 (revised 2003) risk disclosures and IAS 30 disclosures related to geographical concentrations of risk. The amounts and balances of the Bank presented below include inter-company transactions and balances which are eliminated on consolidation.
As of and for the year ended December 31, 2003 Group Total Total Total Credit operating Capital assets liabilities commitments income expenditure Chinese Mainland(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,087,230 2,908,507 561,388 66,976 4,797 Hong Kong and MacauÏÏÏÏÏÏÏÏÏÏÏ 925,022 831,310 170,311 31,340 1,009 Other overseas locations ÏÏÏÏÏÏÏÏÏ 238,428 232,503 41,634 3,280 132 Elimination(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (277,400) (220,886) (27,068) Ì Ì 3,973,280 3,751,434 746,265 101,596 5,938
Bank Total Total Credit Capital assets liabilities commitments expenditure Chinese Mainland(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,086,014 2,909,246 561,388 4,797 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,669 46,462 1,440 22 Other overseas locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245,169 240,630 38,658 126 Elimination ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (156,233) (149,188) (21,958) Ì 3,221,619 3,047,150 579,528 4,945
As of and for the year ended December 31, 2004 Group Total Total Total Credit operating Capital assets liabilities commitments income expenditure Chinese Mainland(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,325,621 3,137,124 572,320 87,436 5,975 Hong Kong and MacauÏÏÏÏÏÏÏÏÏÏÏ 965,079 877,096 173,565 25,846 663 Other overseas locations ÏÏÏÏÏÏÏÏÏ 234,584 226,455 42,459 2,531 119 Elimination(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (260,063) (203,361) (29,059) Ì Ì 4,265,221 4,037,314 759,285 115,813 6,757
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
3 Concentrations of assets, liabilities and oÅ-balance sheet items (Continued)
Bank Total Total Credit Capital assets liabilities commitments expenditure Chinese Mainland(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,325,381 3,143,425 572,320 5,975 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,066 51,475 1,401 39 Other overseas locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229,007 222,434 39,631 116 Elimination ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140,521) (134,191) (26,412) Ì 3,465,933 3,283,143 586,940 6,130
As of and for the year ended December 31, 2005 Group Total Total Total Credit operating Capital assets liabilities commitments income expenditure Chinese Mainland(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,797,520 3,586,428 699,066 91,396 5,379 Hong Kong and MacauÏÏÏÏÏÏÏÏÏÏÏ 969,872 872,995 182,334 30,590 660 Other overseas locations ÏÏÏÏÏÏÏÏÏ 186,995 178,855 52,434 3,120 67 Elimination(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (214,339) (153,749) (38,072) Ì Ì 4,740,048 4,484,529 895,762 125,106 6,106
Bank
Total Total Credit Capital assets liabilities commitments expenditure Chinese Mainland(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,787,665 3,586,158 699,066 5,371 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,414 50,992 7,092 46 Other overseas locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,586 172,448 49,715 60 EliminationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (103,263) (97,009) (31,909) Ì 3,916,402 3,712,589 723,964 5,477
(1) Includes investments in subsidiaries and related elimination. These are excluded in the presentation of segment asset disclosure and related elimination in Note VI.1. Total operating income includes net interest income, net fee and commission income, net trading income, net gains on investment securities, net gains on sale of shares in a subsidiary and other operating income.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
3 Concentrations of assets, liabilities and oÅ-balance sheet items (Continued)
Geographical concentrations of risk for loans and advances to customers (gross) are as follows:
Group
As of December 31, 2003 2004 2005 %%% Chinese Mainland ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 81 1,735,528 81 1,800,142 81 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 359,191 17 360,841 17 379,071 17 Other overseas locationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,638 2 51,319 2 56,052 2 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100 2,147,688 100 2,235,265 100
Bank
As of December 31, 2003 2004 2005 %%% Chinese Mainland ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,751,623 96 1,736,083 97 1,800,142 96 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,498 1 13,222 1 14,866 1 Other overseas locationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,470 3 49,039 2 53,315 3 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,818,591 100 1,798,344 100 1,868,323 100
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
3 Concentrations of assets, liabilities and oÅ-balance sheet items (Continued)
The economic sector concentration of risk for loans and advances to customers (gross) are as A16(35)(4)(b) follows: Group
As of December 31, 2003 2004 2005 %%% Chinese Mainland Corporate loans ManufacturingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 528,728 24 497,543 23 491,117 22 Commerce and services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 366,279 17 284,772 13 255,460 12 Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127,368 6 100,932 5 96,390 4 Energy, mineral and agriculture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 169,948 8 186,942 9 210,281 10 Transportation and logistics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,575 7 158,762 8 165,396 8 Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,465 4 87,731 4 91,924 4 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,539 2 27,938 1 30,089 1 Financial services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,873 2 32,079 2 77,237 3 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,277 Ì 7,484 Ì 2,290 Ì Corporate loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,496,052 70 1,384,183 65 1,420,184 64 Personal loans Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159,314 7 240,640 11 286,829 13 Credit card advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 931 Ì 1,441 Ì 1,929 Ì OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93,774 4 109,264 5 91,200 4 Personal loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254,019 11 351,345 16 379,958 17 Total for Chinese MainlandÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,750,071 81 1,735,528 81 1,800,142 81 Hong Kong and Macau Corporate loans ManufacturingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,441 1 22,356 1 34,285 2 Commerce and services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,862 2 41,142 2 35,137 2 Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,530 4 80,641 4 86,419 3 Energy, mineral and agriculture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,887 1 12,695 1 12,429 1 Transportation and logistics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,979 1 20,696 1 21,783 1 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,582 Ì 6,982 Ì 4,874 Ì Financial services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,949 1 11,890 Ì 14,367 1 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,534 1 22,615 1 27,613 1 Corporate loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230,764 11 219,017 10 236,907 11 Personal loans Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,989 6 119,955 6 125,514 6 Credit card advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,013 Ì 4,532 Ì 4,856 Ì OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,425 Ì 17,337 1 11,794 Ì Personal loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128,427 6 141,824 7 142,164 6 Total for Hong Kong and MacauÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 359,191 17 360,841 17 379,071 17 Other overseas locationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,638 2 51,319 2 56,052 2 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 100 2,147,688 100 2,235,265 100
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
3 Concentrations of assets, liabilities and oÅ-balance sheet items (Continued)
Bank
As of December 31, 2003 2004 2005 %%% Corporate loans ManufacturingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 537,604 29 504,352 28 498,363 26 Commerce and services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 393,939 22 302,402 17 267,967 14 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,136 8 108,198 6 105,794 6 Energy, mineral and agricultureÏÏÏÏÏÏÏÏÏÏÏÏÏ 172,924 10 190,021 11 218,777 12 Transportation and logistics ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 161,284 9 166,524 9 173,003 9 Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,575 4 87,857 5 91,924 5 Construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,197 2 29,360 2 31,203 2 Financial services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,812 2 35,150 2 82,566 4 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,567 Ì 18,918 1 14,336 1 Corporate loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,560,038 86 1,442,782 81 1,483,933 79 Personal loans Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159,314 9 240,640 13 290,342 16 Credit card advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 931 Ì 1,441 Ì 1,929 Ì OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98,308 5 113,481 6 92,119 5 Personal loan total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 258,553 14 355,562 19 384,390 21 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏ 1,818,591 100 1,798,344 100 1,868,323 100
Over 90% of the Bank's gross balances of loans and advances are attributable to the Chinese Mainland segment and therefore no geographical segment analysis is presented. The economic sector risk concentration analysis for loans and advances to customers is based on the Group's internal classiÑcation system.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
3 Concentrations of assets, liabilities and oÅ-balance sheet items (Continued)
Gross loans and advances to customers analyzed by customer type:
Group As of December 31, 2003 2004 2005 Chinese Mainland Corporate entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,378,800 1,235,351 1,224,873 Individuals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254,019 351,345 379,958 Trade bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 117,252 148,832 195,311 1,750,071 1,735,528 1,800,142 Hong Kong, Macau and other overseas Corporate entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 256,150 240,558 262,363 Individuals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,374 142,696 143,045 Trade bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,305 28,906 29,715 410,829 412,160 435,123 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,160,900 2,147,688 2,235,265
Bank As of December 31, 2003 2004 2005 Chinese Mainland Corporate entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,380,352 1,235,906 1,224,873 Individuals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254,019 351,345 379,958 Trade bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 117,252 148,832 195,311 1,751,623 1,736,083 1,800,142 Hong Kong, Macau and other overseas Corporate entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,175 46,022 53,893 Individuals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,534 4,217 4,432 Trade bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,259 12,022 9,856 66,968 62,261 68,181 Gross amounts of loans and advances before allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,818,591 1,798,344 1,868,323
4 Market risk A16(35)(4)(a)
The Group takes on exposure to market risks. Market risks principally arise from open positions in interest rate and currency products, which are exposed to general and speciÑc market movements. The management of the speciÑc market risks is summarized below in Note IV.5 and Note IV.6.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk A16(35)(4)(a)
The Group conducts the majority of its business in RMB, with certain transactions denominated in USD, Hong Kong dollars (""HKD'') and, to a much lesser extent, other currencies. The exchange rates of the RMB to the USD and HKD respectively are set by the PBOC and have historically Öuctuated within a narrow band of less than 1% prior to July 2005. On July 21, 2005, the PRC Government introduced a managed Öoating exchange rate system to allow the value of the RMB to Öuctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the RMB appreciated by approximately 2% against the USD. The PRC Government in the future may make further adjustments to the exchange rate system. The Group's objective in controlling its exchange rate risk is to match its assets and liabilities in each currency. The Group also manages its sources and uses of foreign currencies to minimize potential mismatches. The Group's ability to manage its foreign currency exposure to speciÑc foreign currency denominated items (""Restricted Foreign Currency Capital Items'') against RMB is limited, among other things, to transactions specially approved by the PRC Government. According to the current applicable foreign currency policies of PRC Government, the conversion of foreign currency is subject to certain application and approval processes. As a result, the Group's process to manage its foreign currency exposure is executed within this approval timeframe. Such Restricted Foreign Currency Capital Items represent the foreign currency items arising from the USD capital injection from Huijin, the foreign currency surplus arising from the Bank's foreign currency operations and related accumulated proÑts and losses. Furthermore, there is a lack of active market in foreign currency exchange instruments that can be used to hedge against RMB in the PRC. The Group exercises strict control over its foreign currency transactions. Foreign currency denominated investment and trading products include bonds, inter-bank lending, foreign currency trading and derivative transactions. To control exchange rate risk, the Group follows investment guidelines approved by the Risk Policy Committee. These guidelines, among other things, impose an overall stop loss limit. Based on the diÅerent characteristics of speciÑc products, the qualiÑcations of the dealers and position amounts, stop loss limits are set for each trading desk and each dealer. On each trading day, the position and proÑt or loss of all trading desks are monitored to identify transactions that are in excess of authorized limits. Any limit excess case will be reported to and dealt with by management according to the established procedures. As of January 5, 2005, USD 18 billion of this exposure was economically hedged with a Foreign Currency Option Agreement entered into with Huijin. Under this agreement, the Bank has acquired the option to sell to Huijin USD, totaling USD 18 billion, of no more than USD1,500 million at the beginning of each calendar month during the year ending December 31, 2007 at a Ñxed exchange rate of USD1 to RMB8.2769. The related option premium totaled RMB 4,469 million is payable by the Bank to Huijin in 12 equal monthly installments at the beginning of each calendar month during the year ending December 31, 2007. The intent of the transaction was to create an eÅective economic hedge against a portion of the USD exposure arising as a result of the capital contribution. The foreign currency translation loss related to the Restricted Foreign Currency Capital Items recognized during 2005 as a result of the approximately 2% appreciation of the exchange rate of the RMB relative to the USD was approximately RMB 8 billion. This foreign currency translation loss was partially oÅset by a gain on the Foreign Currency Option Agreement of RMB 3.2 billion.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
The table below summarizes the Group's exposure to foreign currency exchange rate risk as of December 31, 2003, 2004 and 2005. Included in the table are the carrying amounts of the assets and liabilities of the Group and the Bank along with oÅ-balance sheet positions and credit commitments in RMB, categorized by the original currency. Option products are included in net oÅ-balance sheet position using notional amounts. Group As of December 31, 2003 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏ 13,955 5,684 4,209 2,042 2,185 535 1,723 30,333 Balances with central banks ÏÏÏÏÏÏÏÏÏ 198,507 12,149 29,303 865 24,481 Ì 1,854 267,159 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,372 268,091 111,260 5,225 10,302 6,144 16,521 428,915 Government certiÑcates of indebtedness for bank notes issued Ì Ì 33,527 Ì Ì Ì 1,262 34,789 Precious metalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ28,596 28,596 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,200 53,955 11,207 24,796 17,824 88 3,074 115,144 Derivative Ñnancial instruments ÏÏÏÏÏÏ Ì 12,601 381 26 139 1 14 13,162 Loans and advances to customers, net 1,183,010 338,151 301,159 38,445 36,893 4,416 19,787 1,921,861 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,880 258,754 36,848 48,778 11,746 6,646 23,819 421,471 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,268 89,112 51,046 7,560 1,945 2,434 5,810 215,175 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏ 208,008 101,952 22,184 1,109 Ì 642 18,420 352,315 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏ 604 268 483 Ì Ì Ì Ì 1,355 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,684 279 14,797 138 1,277 518 1,921 66,614 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 5,510 6 Ì Ì 321 5,837 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏ 13,462 43 22 Ì Ì Ì 584 14,111 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,383 21,937 9,207 2,441 595 252 1,628 56,443 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,793,333 1,162,976 631,143 131,431 107,387 21,676 125,334 3,973,280 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,356 19,046 5,694 1,655 8,903 228 299 95,181 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,083 67,696 254 522 Ì 190 6,070 76,815 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 33,527 Ì Ì Ì 1,309 34,836 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,107 75,705 17,239 3,294 819 1,138 2,941 157,243 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 47,706 2,293 303 162 459 54 50,977 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,761,256 556,757 534,666 38,631 23,343 25,108 93,603 3,033,364 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,823ÌÌÌÌÌ3,823 Special purpose borrowings ÏÏÏÏÏÏÏÏÏ Ì 37,958 Ì 23,293 12,471 2,044 1,463 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,241 25 1,192 45 Ì 41 405 4,949 Retirement beneÑt obligationsÏÏÏÏÏÏÏÏ 3,669 ÌÌÌÌÌÌ3,669 Deferred income tax liabilities ÏÏÏÏÏÏÏÏ Ì Ì 1,844 35 Ì 72 Ì 1,951 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,398 114,978 19,051 2,467 547 478 2,478 211,397 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,957,110 923,694 615,760 70,245 46,245 29,758 108,622 3,751,434 Net on-balance sheet position ÏÏÏÏÏÏÏ (163,777) 239,282 15,383 61,186 61,142 (8,082) 16,712 221,846 Net oÅ-balance sheet position ÏÏÏÏÏÏÏ (36,801) 46,857 39,475 (53,866) (28,501) 11,496 13,967 (7,373) Credit commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325,146 211,565 131,568 42,961 23,853 1,996 9,176 746,265
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
Bank
As of December 31, 2003 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏ 13,739 7,562 1,913 1,927 2,127 433 749 28,450 Balances with central banks ÏÏÏÏÏÏÏÏÏÏ 198,209 12,069 222 865 24,481 Ì 1,271 237,117 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,372 245,121 46,610 4,537 1,281 4,042 11,247 324,210 Government certiÑcates of indebtedness for bank notes issued Ì ÌÌÌÌÌ1,262 1,262 Precious metalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ26,901 26,901 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,200 39,519 4,606 22,890 17,824 88 1,451 90,578 Derivative Ñnancial instrumentsÏÏÏÏÏÏÏÏ Ì 6,655 42 26 139 1 Ì 6,863 Loans and advances to customers, net 1,169,484 311,564 22,007 34,190 34,090 4,132 14,144 1,589,611 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,757 237,476 6,148 40,731 11,746 6,498 7,976 345,332 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,268 17,854 7,552 1,705 650 Ì 1,627 86,656 Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏ 208,008 96,358 13,316 Ì Ì Ì 8,775 326,457 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏ 270 910 48,236 64 Ì Ì 1,203 50,683 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏ 2 139ÌÌÌÌÌ141 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,009 278 Ì 138 1,277 518 1,187 49,407 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 6 Ì Ì 509 515 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏ 13,462 43ÌÌÌÌ59814,103 Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,338 18,369 849 2,065 524 161 1,027 43,333 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,777,118 993,917 151,501 109,144 94,139 15,873 79,927 3,221,619 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,704 19,368 5,954 1,643 8,853 227 299 97,048 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,083 65,965 142 Ì Ì 190 3,477 71,857 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ1,309 1,309 CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,099 82,537 25,945 2,494 8,731 1,290 1,521 178,617 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 39,559 689 172 162 436 45 41,063 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,761,842 427,986 88,838 29,783 21,770 10,696 36,573 2,377,488 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4,071 Ì Ì Ì Ì Ì 4,071 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏ Ì 37,958 Ì 23,293 12,471 2,044 1,463 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,241 Ì 53 43 Ì 41 428 3,806 Retirement beneÑt obligationsÏÏÏÏÏÏÏÏÏ 3,669 Ì Ì Ì Ì Ì Ì 3,669 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏ Ì Ì Ì 35 Ì 72 Ì 107 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,025 111,606 3,946 2,176 523 339 1,271 190,886 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,958,663 789,050 125,567 59,639 52,510 15,335 46,386 3,047,150 Net on-balance sheet positionÏÏÏÏÏÏÏÏÏ (181,545) 204,867 25,934 49,505 41,629 538 33,541 174,469 Net oÅ-balance sheet positionÏÏÏÏÏÏÏÏÏ (36,801) 77,855 7,081 (42,473) (14,190) 4,084 (2,796) (7,240) Credit commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325,464 185,676 1,672 36,717 22,408 1,948 5,643 579,528
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
Group
As of December 31, 2004 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏ 16,575 8,002 4,319 2,129 2,645 619 1,490 35,779 Balances with central banks ÏÏÏÏÏÏÏÏÏ 239,285 12,143 6,942 561 23,588 Ì 1,829 284,348 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,510 157,498 96,845 3,255 15,242 5,991 18,851 340,192 Government certiÑcates of indebtedness for bank notes issued Ì Ì 36,974 Ì Ì Ì 1,466 38,440 Precious metalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ26,105 26,105 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,599 45,355 11,620 15,398 10,423 83 5,646 92,124 Derivative Ñnancial instruments ÏÏÏÏÏÏ Ì 15,408 354 26 278 Ì 10 16,076 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,326,629 339,771 304,395 45,973 35,500 4,863 15,788 2,072,919 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,674 209,085 5,049 43,470 30,095 3,356 5,858 357,587 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,446 226,800 78,581 14,702 1,778 5,004 17,683 457,994 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏ 303,899 21,946 68,353 1,453 Ì Ì 18,290 413,941 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏ 617 190 420 Ì Ì Ì Ì 1,227 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,671 294 14,119 169 1,309 550 1,900 65,012 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 5,998 7 Ì Ì 283 6,288 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏ 21,187 9 23 Ì Ì Ì 395 21,614 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,908 7,544 8,517 2,029 618 276 1,683 35,575 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,190,000 1,044,045 642,509 129,172 121,476 20,742 117,277 4,265,221 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,381 21,590 8,165 2,976 10,999 232 445 111,788 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 637 45,748 40 Ì Ì 1,139 19,174 66,738 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 36,974 Ì Ì Ì 1,596 38,570 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,026 43,611 13,460 850 17,086 144 1,910 141,087 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 86,146 6,662 302 288 335 27 93,760 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,093,272 517,923 558,349 35,139 24,960 24,274 84,531 3,338,448 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,070 183ÌÌÌÌÌ26,253 Special purpose borrowings ÏÏÏÏÏÏÏÏÏ Ì 33,594 Ì 22,506 10,098 1,711 1,640 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,612 6 1,217 13 105 22 613 19,588 Retirement beneÑt obligationsÏÏÏÏÏÏÏÏ 4,274 ÌÌÌÌÌÌ4,274 Deferred income tax liabilities ÏÏÏÏÏÏÏÏ Ì Ì 2,329 27 Ì 43 Ì 2,399 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,091 19,174 16,373 2,025 828 529 840 124,860 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,358,363 767,975 643,569 63,838 64,364 28,429 110,776 4,037,314 Net on-balance sheet position ÏÏÏÏÏÏÏ (168,363) 276,070 (1,060) 65,334 57,112 (7,687) 6,501 227,907 Net oÅ-balance sheet position ÏÏÏÏÏÏÏ (18,992) 10,770 83,539 (64,484) (43,766) 10,505 17,919 (4,509) Credit commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 301,171 251,478 129,973 42,802 25,222 2,461 6,178 759,285
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
Bank
As of December 31, 2004 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,059 6,054 3,835 2,021 2,514 565 1,325 32,373 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏ 227,006 12,063 226 561 23,588 Ì 1,176 264,620 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,510 104,800 25,372 4,069 11,554 6,473 16,337 211,115 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌÌÌ1,466 1,466 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌÌÌ24,620 24,620 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,772 37,906 Ì 12,906 10,423 Ì 4,020 68,027 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏ Ì 8,747 59 26 278 Ì 2 9,112 Loans and advances to customers, net ÏÏ 1,326,219 293,715 21,818 41,438 32,236 3,798 10,011 1,729,235 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,608 202,290 4,792 43,470 30,095 3,356 4,842 349,453 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,446 127,217 3,327 4,558 987 1,673 1,046 252,254 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏ 303,899 12,885 55,172 1,453 Ì Ì 10,271 383,680 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏ 604 185 43,094 67 Ì Ì 1,068 45,018 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 47ÌÌÌÌÌ131 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,121 292 Ì 169 1,309 550 1,192 48,633 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 7 Ì Ì 460 467 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏ 21,187 9ÌÌÌÌ39221,588 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,173 5,277 878 1,643 560 142 468 24,141 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,174,688 811,487 158,573 112,388 113,544 16,557 78,696 3,465,933 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,126 23,654 4,995 2,958 10,932 232 444 105,341 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 637 45,748 40 Ì Ì 1,139 19,174 66,738 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌÌÌ1,596 1,596 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,002 47,440 19,587 980 31,497 330 1,306 165,142 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 78,543 4,202 158 288 329 12 83,532 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,088,454 366,274 81,582 28,707 23,215 11,592 37,405 2,637,229 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,070 183 Ì Ì Ì Ì Ì 26,253 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏ Ì 33,594 Ì 22,506 10,098 1,711 1,640 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,612 6 Ì 13 105 22 576 18,334 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏ 4,274ÌÌÌÌ Ì Ì 4,274 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌ27Ì43Ì 70 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84,705 14,877 2,184 1,649 717 392 561 105,085 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,347,880 610,319 112,590 56,998 76,852 15,790 62,714 3,283,143 Net on-balance sheet position ÏÏÏÏÏÏÏÏÏÏ (173,192) 201,168 45,983 55,390 36,692 767 15,982 182,790 Net oÅ-balance sheet position ÏÏÏÏÏÏÏÏÏÏ (18,992) 84,754 (3,114) (54,411) (24,102) 4,473 6,652 (4,740) Credit commitmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 299,034 216,720 2,605 39,579 24,970 1,685 2,347 586,940
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
Group As of December 31, 2005 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏ 17,632 12,507 5,016 1,688 1,422 540 2,277 41,082 Balances with central banks ÏÏÏÏÏÏÏÏ 274,107 13,503 10,655 852 15,826 Ì 1,998 316,941 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,563 124,632 95,603 13,023 474 5,573 21,231 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 33,945ÌÌÌ1,641 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,736ÌÌÌ25,238 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,051 41,333 15,592 12,061 8,260 143 5,342 111,782 Derivative Ñnancial instruments ÏÏÏÏÏ Ì 11,493 4,552 149 548 57 9 16,808 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,411,382 346,718 315,727 34,443 24,866 4,192 14,784 2,152,112 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230,512 284,807 29,829 28,884 13,891 5,128 9,170 602,221 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 271,612 232,005 78,267 7,376 921 1,777 15,501 607,459 Ì loans and receivables ÏÏÏÏÏÏÏÏÏ 305,762 8,230 31,166 1,723 Ì Ì 14,970 361,851 Investments in associates ÏÏÏÏÏÏÏÏÏÏ 4,547 31 483ÌÌÌÌ5,061 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏ 46,004 289 12,850 135 1,121 480 1,538 62,417 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 8,040ÌÌÌ4718,511 Deferred income tax assetsÏÏÏÏÏÏÏÏÏ 20,177 24 86 Ì 30 Ì 187 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,520 11,251 9,757 1,025 618 247 1,222 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,696,869 1,086,823 653,304 101,359 67,977 18,137 115,579 4,740,048 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,518 22,498 8,351 2,319 7,571 236 25,724 134,217 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,084 24,162 4,650 29 Ì 32 98 30,055 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 33,945ÌÌÌ1,786 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,106 55,077 8,065 2,081 3,968 278 1,051 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 70,625 19,552 420 384 117 76 91,174 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,531,878 438,881 527,118 46,854 37,565 26,634 90,534 3,699,464 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,000 179ÌÌÌÌÌ60,179 Special purpose borrowings ÏÏÏÏÏÏÏÏ Ì 28,370 Ì 16,251 4,665 1,092 1,786 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,728 191 946 15 Ì 10 569 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏ 7,052 ÌÌÌÌÌÌ7,052 Deferred income tax liabilitiesÏÏÏÏÏÏÏ Ì Ì 2,114ÌÌÌ222,136 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,714 17,028 19,571 1,510 1,139 518 792 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,927,080 657,011 624,312 69,479 55,292 28,917 122,438 4,484,529 Net on-balance sheet position ÏÏÏÏÏÏ (230,211) 429,812 28,992 31,880 12,685 (10,780) (6,859) 255,519 Net oÅ-balance sheet position ÏÏÏÏÏÏ 173,666 (229,776) 73,943 (29,586) (16,344) 15,331 15,197 2,431 Credit commitmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 394,938 295,280 137,425 30,874 21,185 2,049 14,011 895,762
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
5 Currency risk (Continued)
Bank As of December 31, 2005 RMB USD HKD EURO JPY GBP Others Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,167 9,617 6,046 1,593 1,256 489 2,107 38,275 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏ 251,430 13,415 1,787 852 15,826 Ì 1,063 284,373 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,014 101,144 34,644 14,326 3,909 2,497 15,120 243,654 Government certiÑcates of indebtedness for bank notes issuedÏÏ Ì ÌÌÌÌÌ1,641 1,641 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ25,238 25,238 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,069 33,978 Ì 9,881 8,260 71 1,823 82,082 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏ Ì 10,449 156 118 540 57 9 11,329 Loans and advances to customers, net 1,409,349 295,757 19,143 30,114 22,347 3,346 8,686 1,788,742 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌÌ Ì Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230,361 255,249 6,740 26,286 13,891 4,089 5,526 542,142 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 271,612 125,084 13,268 3,125 670 452 932 415,143 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏ 305,762 6,428 20,994 1,723 Ì Ì 9,003 343,910 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏ 17 404 42,762 45 Ì Ì 1,852 45,080 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1ÌÌÌÌ4445 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,991 288 Ì 135 1,121 480 1,046 48,061 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ461461 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏ 20,177 24ÌÌ30Ì15820,389 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,649 8,132 850 855 289 101 961 25,837 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,665,598 859,970 146,390 89,053 68,139 11,582 75,670 3,916,402 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,790 24,790 9,149 2,159 7,979 304 25,777 124,948 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,084 24,137 4,650 29 Ì 32 98 30,030 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ1,786 1,786 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,669 52,839 14,013 2,310 3,958 548 586 215,923 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 67,509 7,828 418 382 117 69 76,323 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,522,232 295,557 68,398 39,533 34,625 12,568 36,274 3,009,187 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,000 179 Ì Ì Ì Ì Ì 60,179 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏ Ì 28,370 Ì 16,251 4,665 1,092 1,786 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,723 191 1 13 Ì 10 502 22,440 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏ 7,052 Ì Ì Ì Ì Ì Ì 7,052 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌÌ2323 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94,645 12,913 1,543 1,336 784 338 975 112,534 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,903,195 506,485 105,582 62,049 52,393 15,009 67,876 3,712,589 Net on-balance sheet position ÏÏÏÏÏÏÏÏÏ (237,597) 353,485 40,808 27,004 15,746 (3,427) 7,794 203,813 Net oÅ-balance sheet position ÏÏÏÏÏÏÏÏÏ 173,671 (163,490) 28,235 (24,826) (19,716) 7,902 (1,654) 122 Credit commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 393,498 263,040 5,588 28,823 20,340 1,997 10,678 723,964
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk A16(35)(4)(a) The Group takes on exposure to the eÅects of changes in the prevailing level of market interest rates on its Ñnancial position and cash Öows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. Currently, interest rates for RMB loans and deposits in the PRC are set by the PBOC. The PBOC establishes RMB benchmark interest rates, which create a Öoor for RMB loan rates and a cap for RMB deposit rates. The Group's Domestic Operations are subject to an interest rate scheme regulated by the PBOC. It is normal practice for the interest rates of both interest-bearing assets and liabilities to move in tandem. This signiÑcantly mitigates the exposure of the Group to RMB interest rate risk. However, there is no guarantee that the PBOC will continue this practice in future. The Group is proactive in managing its exposure to foreign currency interest rates. It monitors changes in foreign currency interest rates closely. In order to control its foreign currency interest rate risk exposure, the Group will adjust foreign currency interest levels on loans and deposits where necessary. It may also use Ñnancial instruments as economic hedges against this exposure. The tables below summarize the Group's exposure to interest rates, showing the carrying amounts of the assets and liabilities of the Group and the Bank, categorized by the earlier of contractual re- pricing or maturity dates at the carrying amounts.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Group
As of December 31, 2003 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years bearing Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,122 Ì Ì Ì Ì 28,211 30,333 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,671 Ì Ì Ì Ì 43,488 267,159 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 329,145 79,941 17,053 2,464 15 297 428,915 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 34,789 34,789 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 28,596 28,596 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 5,605 21,830 12,867 51,342 22,913 587 115,144 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 13,162 13,162 Loans and advances to customers, net ÏÏÏÏÏÏÏ 754,707 237,324 884,105 24,700 17,588 3,437 1,921,861 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,090 63,419 37,660 190,940 77,031 11,331 421,471 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,939 31,319 44,098 93,354 20,465 Ì 215,175 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,061 85,212 16,033 5,459 202,500 50 352,315 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,355 1,355 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 66,614 66,614 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 5,837 5,837 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 14,111 14,111 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 56,443 56,443 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,425,340 519,045 1,011,816 368,259 340,512 308,308 3,973,280 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,781 Ì Ì Ì Ì 6,400 95,181 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,113 6,009 36,901 Ì 584 7,208 76,815 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 34,836 34,836 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 101,319 18,500 30,300 5,953 33 1,138 157,243 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 13,882 3,140 2,460 966 5,421 25,108 50,977 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,852,178 372,904 569,379 198,847 2,094 37,962 3,033,364 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2,996 Ì 827 Ì 3,823 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,035 2,413 22,947 23,992 19,165 4,677 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 4,949 4,949 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 3,669 3,669 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,951 1,951 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 211,397 211,397 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,086,308 402,966 664,983 229,758 28,124 339,295 3,751,434 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (660,968) 116,079 346,833 138,501 312,388 (30,987) 221,846
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank
As of December 31, 2003 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years bearing Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,095 Ì Ì Ì Ì 24,355 28,450 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 198,432 Ì Ì Ì Ì 38,685 237,117 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 278,536 33,715 9,191 2,457 15 296 324,210 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,262 1,262 Precious metalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 26,901 26,901 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏ 1,928 16,211 10,375 44,299 17,765 Ì 90,578 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 6,863 6,863 Loans and advances to customers, net ÏÏÏÏÏÏÏ 487,595 194,502 867,261 21,708 15,108 3,437 1,589,611 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,323 30,142 27,989 180,872 76,328 3,678 345,332 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,771 1,964 29,445 38,628 14,848 Ì 86,656 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,038 70,664 12,746 5,459 202,500 50 326,457 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 50,683 50,683 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 141 141 Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 49,407 49,407 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 515 515 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 14,103 14,103 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 43,333 43,333 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,033,718 347,198 957,007 293,423 326,564 263,709 3,221,619 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90,473 Ì Ì Ì Ì 6,575 97,048 Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,155 6,009 36,901 Ì 584 7,208 71,857 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,309 1,309 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 119,776 21,989 32,352 3,361 33 1,106 178,617 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏ 12,818 1,350 1,089 966 5,421 19,419 41,063 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,296,821 303,799 571,969 196,730 2,094 6,075 2,377,488 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 3,244 Ì 827 Ì 4,071 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,035 2,413 22,947 23,992 19,165 4,677 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 3,806 3,806 Retirement beneÑt obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 3,669 3,669 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 107 107 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 190,886 190,886 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,545,078 335,560 668,502 225,049 28,124 244,837 3,047,150 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (511,360) 11,638 288,505 68,374 298,440 18,872 174,469
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Group
As of December 31, 2004 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years bearing Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,225 Ì Ì Ì Ì 30,554 35,779 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏ 234,733 Ì Ì Ì Ì 49,615 284,348 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187,500 89,305 63,321 66 Ì Ì 340,192 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 38,440 38,440 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 26,105 26,105 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,843 11,849 10,581 40,235 24,504 1,112 92,124 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 16,076 16,076 Loans and advances to customers, net 759,845 302,474 953,429 25,167 28,310 3,694 2,072,919 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,808 33,044 53,136 146,125 65,419 11,055 357,587 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,587 89,931 97,526 159,709 63,240 1 457,994 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏ 35,269 57,405 20,099 98,669 202,499 Ì 413,941 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,227 1,227 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 65,012 65,012 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 6,288 6,288 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 21,614 21,614 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 35,575 35,575 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,322,810 584,008 1,198,092 469,971 383,972 306,368 4,265,221 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,810 Ì Ì Ì Ì 978 111,788 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,066 8,933 15,061 Ì Ì 19,678 66,738 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 38,570 38,570 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,203 26,799 26,449 5,961 5,675 Ì 141,087 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,097 9,182 12,287 23,228 8,050 24,916 93,760 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,046,621 367,852 666,483 218,754 1,196 37,542 3,338,448 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 26,070 183 Ì 26,253 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏ 3,542 1,801 15,676 22,320 21,665 4,545 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 19,588 19,588 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 4,274 4,274 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 2,399 2,399 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 124,860 124,860 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,276,339 414,567 735,956 296,333 36,769 277,350 4,037,314 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏ (953,529) 169,441 462,136 173,638 347,203 29,018 227,907
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank
As of December 31, 2004 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years Bearing Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,774 Ì Ì Ì Ì 26,599 32,373 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227,808 Ì Ì Ì Ì 36,812 264,620 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 144,119 48,422 18,508 66 Ì Ì 211,115 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,466 1,466 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 24,620 24,620 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 70 6,324 6,091 37,218 18,324 Ì 68,027 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 9,112 9,112 Loans and advances to customers, net ÏÏÏÏÏÏÏ 483,086 258,368 933,453 24,184 26,450 3,694 1,729,235 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,692 33,038 53,129 146,125 65,419 3,050 349,453 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,408 20,554 63,583 101,986 53,723 Ì 252,254 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,928 44,998 5,441 99,814 202,499 Ì 383,680 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 45,018 45,018 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 131 131 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 48,633 48,633 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 467 467 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 21,588 21,588 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 24,141 24,141 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 952,885 411,704 1,080,205 409,393 366,415 245,331 3,465,933 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104,457 Ì Ì Ì Ì 884 105,341 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,066 8,933 15,061 Ì Ì 19,678 66,738 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,596 1,596 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 99,284 29,302 26,769 4,112 5,675 Ì 165,142 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 14,562 8,050 12,021 23,228 8,050 17,621 83,532 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,457,653 308,290 651,721 213,660 1,196 4,709 2,637,229 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 26,070 183 Ì 26,253 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,542 1,801 15,676 22,320 21,665 4,545 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 18,334 18,334 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 4,274 4,274 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì ÌÌÌ7070 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 105,085 105,085 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,702,564 356,376 721,248 289,390 36,769 176,796 3,283,143 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (749,679) 55,328 358,957 120,003 329,646 68,535 182,790
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Group
As of December 31, 2005 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years bearing Total Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,624 Ì Ì Ì Ì 29,458 41,082 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 282,601 1,019 20 Ì Ì 33,301 316,941 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 219,459 95,367 17,224 49 Ì Ì 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 35,586 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 26,974 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 6,678 13,594 20,951 44,592 21,456 4,511 111,782 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 16,808 16,808 Loans and advances to customers, net ÏÏÏÏÏÏÏ 739,411 309,707 1,046,662 30,557 21,685 4,090 2,152,112 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,297 39,436 132,426 222,989 114,862 9,211 602,221 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,197 120,609 184,638 155,890 73,125 Ì 607,459 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,505 16,996 12,965 259,785 42,600 Ì 361,851 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 5,061 5,061 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 62,417 62,417 Investment propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 8,511 8,511 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 20,504 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 38,640 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,445,772 596,728 1,414,886 713,862 273,728 295,072 4,740,048 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,902 Ì Ì Ì Ì 28,315 134,217 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,911 20 Ì Ì Ì 124 30,055 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 35,731 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏ 78,728 51,316 75,595 3,899 Ì 3,088 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏ 12,207 22,678 26,291 8,151 5,609 16,238 91,174 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,111,931 478,588 835,252 240,849 1,279 31,565 3,699,464 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9,000 Ì 42,000 9,179 Ì 60,179 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,827 1,283 13,096 15,978 15,790 4,190 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 23,459 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 7,052 7,052 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 2,136 2,136 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 136,272 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,340,506 562,885 950,234 310,877 31,857 288,170 4,484,529 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (894,734) 33,843 464,652 402,985 241,871 6,902 255,519
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank
As of December 31, 2005 Between Between Between Non- Less than 1 to 4 to 1 to Over interest 1 month 3 months 12 months 5 years 5 years bearing Total Assets Cash and due from banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,963 Ì Ì Ì Ì 25,312 38,275 Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 251,351 Ì Ì Ì Ì 33,022 284,373 Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,496 64,610 13,197 5,351 Ì Ì 243,654 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,641 1,641 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 25,238 25,238 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,587 7,675 17,506 40,731 13,583 Ì 82,082 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 11,329 11,329 Loans and advances to customers, netÏÏÏÏÏÏ 447,603 265,919 1,032,329 21,545 17,256 4,090 1,788,742 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78,067 31,481 130,426 201,875 97,088 3,205 542,142 Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,279 70,698 147,654 98,065 56,447 Ì 415,143 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,763 11,368 5,393 259,785 42,601 Ì 343,910 Investments in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 45,080 45,080 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì ÌÌÌ4545 Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 48,061 48,061 Investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 461 461 Deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 20,389 20,389 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 25,837 25,837 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,020,109 451,751 1,346,505 627,352 226,975 243,710 3,916,402 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,279 Ì Ì Ì Ì 27,669 124,948 Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,910 20 Ì Ì Ì 100 30,030 Bank notes in circulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,786 1,786 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏ 83,104 53,078 75,041 2,524 Ì 2,176 215,923 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏ 10,384 20,494 24,783 5,309 5,609 9,744 76,323 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,625,628 327,602 810,211 237,830 720 7,196 3,009,187 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9,000 Ì 42,000 9,179 Ì 60,179 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,827 1,283 13,096 15,978 15,790 4,190 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 22,440 22,440 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 7,052 7,052 Deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì ÌÌÌ2323 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 112,534 112,534 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,848,132 411,477 923,131 303,641 31,298 194,910 3,712,589 Total interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (828,023) 40,274 423,374 323,711 195,677 48,800 203,813
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
The tables below summarize the eÅective interest rate by major currencies for monetary Ñnancial instruments not carried at fair value through proÑt or loss:
Group
As of December 31, 2003 RMB USD HKD EURO JPY GBP Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.17% 0.22% 0.11% 0.11% Ì 0.01% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.76% 0.02% 0.20% 2.02% Ì NA Placements with banks and other Ñnancial institutions 2.35% 0.99% 0.33% 2.37% Ì 3.87% Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.70% 3.13% 2.58% 4.20% 1.78% 5.12% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.68% 2.83% 1.24% 3.03% 0.89% 4.14% Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.89% 3.18% 1.17% 4.10% 2.29% 5.38% Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.27% 1.04% 0.18% 2.11% NA 3.88% Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.57% 0.51% 0.25% 0.37% Ì 0.44% Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.71% 0.56% 0.01% 0.04% NA 2.95% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.31% 1.23% 0.34% 2.47% 0.01% 3.76% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.44% 0.47% 0.19% 1.07% 0.01% 2.01% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.29% NA NA NA NA Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 2.87% NA 4.40% 2.29% 4.21%
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank
As of December 31, 2003 RMB USD HKD EURO JPY GBP Assets Cash and due from banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.12% 0.23% Ì 0.12% Ì 0.02% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.76% 0.02% 0.10% 2.02% Ì NA Placements with banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.35% 0.97% 0.23% 2.11% 0.11% 3.76% Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏ 5.70% 3.18% 1.93% 4.37% 1.82% 5.24% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.68% 2.90% 1.83% 2.97% 0.89% 4.15% Ì held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.89% 3.10% 0.85% 3.19% 2.37% NA Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.27% 1.05% 0.23% NA NA NA Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.57% 0.47% 0.05% 0.37% Ì 0.44% Due to central banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.71% 0.57% 0.01% NA NA 2.95% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.31% 1.09% 0.35% 1.98% 0.01% 3.76% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.44% 0.47% 0.49% 1.08% 0.01% 2.09% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.29% NA NA NA NA Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 2.87% NA 4.40% 2.29% 4.21%
Group
As of December 31, 2004 RMB USD HKD EURO JPY GBP Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.17% 0.71% 0.09% 0.13% Ì 0.04% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.69% 0.03% 0.91% 2.07% Ì NA Placements with banks and other Ñnancial institutions 1.96% 2.24% 0.82% 2.19% 0.01% 4.85% Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.72% 3.38% 2.57% 4.13% 1.47% 5.33% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.28% 3.33% 2.48% 2.92% 0.61% 4.65% Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.92% 3.44% 1.13% 3.51% 2.01% 4.62% Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.17% 2.39% 0.54% 2.08% NA NA Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.56% 0.45% 0.51% 0.38% Ì 0.56% Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.18% 0.90% Ì NA NA 4.47% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.98% 2.34% 0.54% 2.16% Ì 4.66% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.54% 0.82% 0.22% 0.86% Ì 2.70% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.90% 8.42% NA NA NA NA Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.25% NA 4.24% 2.15% 4.12%
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank
As of December 31, 2004 RMB USD HKD EURO JPY GBP Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.11% 0.30% Ì 0.13% Ì 0.01% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.78% 0.03% Ì 2.07% Ì NA Placements with banks and other Ñnancial institutions 1.96% 2.25% 1.23% 2.23% 0.01% 4.82% Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.72% 3.33% 1.90% 4.25% 1.49% 5.28% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.28% 3.33% 2.53% 2.92% 0.61% 4.65% Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.92% 3.35% 1.53% 3.12% 1.73% 3.12% Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.17% 2.37% 0.54% 2.08% NA NA Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.64% 0.45% Ì 0.39% Ì 0.56% Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.18% 0.90% Ì NA NA 4.47% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.98% 2.34% 0.53% 2.16% Ì 4.66% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.54% 0.66% 0.19% 0.85% Ì 2.27% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.90% 8.42% NA NA NA NA Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.25% NA 4.24% 2.15% 4.12%
Group As of December 31, 2005 RMB USD HKD EURO JPY GBP Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.04% 1.93% 0.57% 0.24% Ì 0.14% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.58% 0.09% 3.21% 2.28% Ì NA Placements with banks and other Ñnancial institutions 1.56% 4.18% 4.04% 2.29% 0.14% 4.57% Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.60% 4.79% 5.27% 2.60% 1.05% 4.64% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.53% 4.52% 3.51% 3.11% 1.20% 4.72% Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.05% 3.90% 3.92% 2.86% 1.59% 4.79% Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.17% 4.27% 3.82% 2.30% NA NA Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.12% 1.39% 1.31% 0.32% Ì 0.50% Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.45% 1.15% 1.00% 2.36% NA 4.16% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.52% 3.99% 3.89% 2.38% 0.19% 4.16% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.59% 2.13% 2.83% 0.79% Ì 2.64% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.60% 8.42% NA NA NA NA Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.70% NA 4.13% 2.00% 4.11%
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
6 Interest rate risk (Continued)
Bank As of December 31, 2005 RMB USD HKD EURO JPY GBP Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.07% 1.81% 2.65% 0.23% Ì 0.07% Balances with central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.63% 0.08% 0.09% 2.28% Ì NA Placements with banks and other Ñnancial institutions 1.56% 4.15% 4.08% 2.29% 0.05% 4.54% Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.60% 4.73% 4.91% 2.52% 1.01% 4.58% Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.53% 4.51% 4.27% 3.12% 1.20% 4.73% Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.05% 3.68% 3.44% 2.64% 2.10% 4.95% Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.17% 4.30% 3.77% 2.30% NA NA Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.19% 1.33% 0.97% 0.32% Ì 0.50% Due to central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.45% 1.15% 1.00% 2.36% NA 4.16% CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.52% 3.98% 4.09% 2.37% 0.19% 4.47% Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.60% 1.79% 1.63% 0.73% Ì 2.23% Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.60% 8.42% NA NA NA NA Special purpose borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 3.70% NA 4.13% 2.00% 4.11%
7 Liquidity risk A16(35)(2)(g) A16(35)(4)(a) The Group's objective in liquidity management is to ensure the availability of adequate funding at all times, to meet the needs for deposit withdrawals and other liabilities as they fall due, as well as being able to meet obligations for funding loan originations and commitments and to take advantage of new investment opportunities. In developing its liquidity management strategy, the Group has considered its Ñnancing position, business development plans, market conditions and convertibility of currencies in the local market, and developed a liquidity management plan in accordance with prudent principles. This plan addresses the Group's liquidity needs in multiple currencies and regions. The Group's liquidity management policies related to assets encourage diversiÑcation and maintenance of suÇcient levels of liquid assets. The Group's policies related to liabilities focus on the stability of liabilities and growth of the core deposits base. In addition, the Group limits its loan to deposit ratio to 75%, as required by the PBOC. As of December 31, 2003, 2004 and 2005, the Domestic Operations of the Group are required to maintain reserves equal to 7.0%, 7.5% and 7.5%, respectively, of total RMB denominated deposits and 2.0%, 2.0% and 3.0%, respectively, of total foreign currency denominated deposits with the PBOC. Details are set out in Note VI.13.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
The tables below summarize the assets and liabilities of the Group and the Bank by relevant maturity groupings based on the remaining period as of the balance sheet date to the contractual maturity date. For the purposes of these tables, loans and advances to customers are considered overdue only if principal payment is overdue. In addition, for loans and advances to customers that are repayable by installments, only the portion of the loan that is actually overdue is reported as overdue. Any part of the loan that is not due is reported according to residual maturity. Group As of December 31, 2003 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏÏ Ì 30,269 26 8 30 Ì Ì 30,333 Balances with central banks ÏÏ Ì Ì 267,159 Ì Ì Ì Ì 267,159 Placements with banks and other Ñnancial institutions ÏÏ 74 297 328,189 81,601 16,274 2,464 16 428,915 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 34,789 Ì Ì Ì Ì Ì 34,789 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 28,596 Ì Ì Ì Ì Ì 28,596 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì 1,104 2,305 14,470 11,976 59,873 25,416 115,144 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4 7,319 589 1,564 1,424 2,262 13,162 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏ 142,505 41,003 138,561 201,651 665,145 418,974 314,022 1,921,861 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏ Ì Ì 6,525 14,791 40,510 257,242 102,403 421,471 Ì held-to-maturityÏÏÏÏÏÏÏÏÏ Ì Ì 12,532 14,897 18,360 130,645 38,741 215,175 Ì loans and receivables ÏÏÏ 51 Ì 43,068 67,354 33,883 5,459 202,500 352,315 Investments in associates ÏÏÏÏ Ì Ì Ì Ì Ì 627 728 1,355 Property and equipmentÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 66,614 66,614 Investment property ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 5,837 5,837 Deferred income tax assets ÏÏ Ì Ì Ì Ì 7 14,104 Ì 14,111 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 606 3,607 13,364 1,747 25,828 3,607 7,684 56,443 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143,236 139,669 819,048 397,108 813,577 894,419 766,223 3,973,280 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 94,976 188 17 Ì Ì Ì 95,181 Due to central banksÏÏÏÏÏÏÏÏÏ Ì 23,859 7,295 8,260 37,401 Ì Ì 76,815 Bank notes in circulation ÏÏÏÏÏ Ì 34,836 Ì Ì Ì Ì Ì 34,836 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏ Ì 1,437 78,461 17,688 14,182 40,262 5,213 157,243 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 20,566 7,831 4,944 8,398 9,238 50,977 Due to customers ÏÏÏÏÏÏÏÏÏÏÏ Ì 1,431,002 458,028 373,266 567,490 201,632 1,946 3,033,364 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2,996 Ì 827 3,823 Special purpose borrowings ÏÏ Ì Ì 3,012 1,486 14,231 29,723 28,777 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 4,949 Ì Ì 4,949 Retirement beneÑt obligations Ì Ì 33 65 286 1,264 2,021 3,669 Deferred income tax liabilities Ì Ì Ì Ì 1,132 819 Ì 1,951 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 921 73,540 104,396 4,365 17,423 10,341 411 211,397 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 921 1,659,650 671,979 412,978 665,034 292,439 48,433 3,751,434 Net liquidity gap ÏÏÏÏÏÏÏÏÏÏÏÏ 142,315 (1,519,981) 147,069 (15,870) 148,543 601,980 717,790 221,846
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
Bank As of December 31, 2003 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏÏ Ì 28,051 397 2 Ì Ì Ì 28,450 Balances with central banks ÏÏ Ì Ì 237,117 Ì Ì Ì Ì 237,117 Placements with banks and other Ñnancial institutions ÏÏ 74 298 278,492 34,507 8,366 2,457 16 324,210 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,262 Ì Ì Ì Ì Ì 1,262 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26,901 Ì Ì Ì Ì Ì 26,901 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì 1,087 479 11,795 10,412 46,619 20,186 90,578 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,318 437 1,376 1,493 2,239 6,863 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏÏ 131,376 5,300 134,073 188,664 634,813 281,885 213,500 1,589,611 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏ Ì Ì 4,978 10,837 26,630 201,262 101,625 345,332 Ì held-to-maturityÏÏÏÏÏÏÏÏÏ Ì Ì 848 2,609 6,092 46,469 30,638 86,656 Ì loans and receivables ÏÏÏ 51 Ì 35,038 52,813 30,595 5,459 202,501 326,457 Investment in subsidiaries ÏÏÏÏ Ì Ì Ì Ì Ì 928 49,755 50,683 Investments in associates ÏÏÏÏ Ì Ì Ì Ì Ì 141 Ì 141 Property and equipmentÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 49,407 49,407 Investment property ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 515 515 Deferred income tax assets ÏÏ Ì Ì Ì Ì Ì 14,103 Ì 14,103 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283 158 10,122 1,028 24,468 3,423 3,851 43,333 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131,784 63,057 702,862 302,692 742,752 604,239 674,233 3,221,619 Liabilities Due to banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 96,843 188 17 Ì Ì Ì 97,048 Due to central banksÏÏÏÏÏÏÏÏÏ Ì 23,859 2,337 8,260 37,401 Ì Ì 71,857 Bank notes in circulation ÏÏÏÏÏ Ì 1,309 Ì Ì Ì Ì Ì 1,309 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏ Ì 24,468 74,306 20,594 16,389 37,646 5,214 178,617 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 15,701 6,286 3,496 6,922 8,658 41,063 Due to customers ÏÏÏÏÏÏÏÏÏÏÏ Ì 1,062,205 239,522 304,184 570,102 199,529 1,946 2,377,488 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,244 Ì 827 4,071 Special purpose borrowings ÏÏ Ì Ì 3,012 1,486 14,231 29,723 28,777 77,229 Current tax liabilities ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,806 Ì Ì 3,806 Retirement beneÑt obligations Ì Ì 33 65 286 1,264 2,021 3,669 Deferred income tax liabilities Ì Ì Ì Ì Ì 107 Ì 107 Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 64,119 96,526 3,783 16,270 9,777 411 190,886 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,272,803 431,625 344,675 665,225 284,968 47,854 3,047,150 Net liquidity gap ÏÏÏÏÏÏÏÏÏÏÏÏ 131,784 (1,209,746) 271,237 (41,983) 77,527 319,271 626,379 174,469
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
Group As of December 31, 2004 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏ Ì 35,321 228 152 78 Ì Ì 35,779 Balances with central banks Ì Ì 284,348 Ì Ì Ì Ì 284,348 Placements with banks and other Ñnancial institutions 29 2,375 185,642 87,006 65,066 66 8 340,192 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 38,440 Ì Ì Ì Ì Ì 38,440 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26,105 Ì Ì Ì Ì Ì 26,105 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì Ì 2,934 3,579 11,180 47,772 26,659 92,124 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 7,674 1,139 1,912 1,903 3,448 16,076 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏ 29,240 38,372 127,209 222,051 828,100 452,619 375,328 2,072,919 Investment securities Ì available-for-saleÏÏÏÏÏÏÏ Ì 6 17,803 10,948 46,896 176,936 104,998 357,587 Ì held-to-maturity ÏÏÏÏÏÏÏÏ Ì Ì 18,046 44,426 74,746 235,008 85,768 457,994 Ì loans and receivables ÏÏ Ì Ì 35,269 57,404 18,954 98,669 203,645 413,941 Investments in associates ÏÏÏ Ì Ì Ì Ì Ì 548 679 1,227 Property and equipment ÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 65,012 65,012 Investment propertyÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 6,288 6,288 Deferred income tax assetsÏÏ Ì Ì Ì Ì 9 21,605 Ì 21,614 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 273 8,087 6,192 1,372 13,253 2,557 3,841 35,575 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,542 148,706 685,345 428,077 1,060,194 1,037,683 875,674 4,265,221 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 108,878 2,910 Ì Ì Ì Ì 111,788 Due to central banks ÏÏÏÏÏÏÏÏ Ì 40,184 77 11,416 15,061 Ì Ì 66,738 Bank notes in circulation ÏÏÏÏ Ì 38,570 Ì Ì Ì Ì Ì 38,570 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,736 48,527 15,679 19,604 48,866 5,675 141,087 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 13,976 22,122 26,761 15,621 15,280 93,760 Due to customersÏÏÏÏÏÏÏÏÏÏÏ Ì 1,611,155 460,643 373,265 660,407 230,303 2,675 3,338,448 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 26,253 26,253 Special purpose borrowings Ì Ì 2,581 1,053 6,586 27,646 31,683 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 19,588 Ì Ì 19,588 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 43 88 382 1,639 2,122 4,274 Deferred income tax liabilities Ì Ì Ì Ì 1,524 875 Ì 2,399 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215 90,557 5,637 4,968 19,202 4,146 135 124,860 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 215 1,892,080 534,394 428,591 769,115 329,096 83,823 4,037,314 Net liquidity gapÏÏÏÏÏÏÏÏÏÏÏÏ 29,327 (1,743,374) 150,951 (514) 291,079 708,587 791,851 227,907
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
Bank As of December 31, 2004 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏÏ Ì 32,043 100 152 78 Ì Ì 32,373 Balances with central banks ÏÏ Ì Ì 264,620 Ì Ì Ì Ì 264,620 Placements with banks and other Ñnancial institutionsÏÏÏ 29 2,375 141,552 49,305 17,780 66 8 211,115 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,466 Ì Ì Ì Ì Ì 1,466 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 24,620 Ì Ì Ì Ì Ì 24,620 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì Ì 937 1,771 8,015 36,645 20,659 68,027 Derivative Ñnancial instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 726 709 1,596 2,480 3,601 9,112 Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,846 2,758 116,751 205,714 800,530 311,859 268,777 1,729,235 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏ Ì Ì 17,796 10,948 46,896 170,211 103,602 349,453 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏ Ì Ì 9,039 19,635 36,674 112,792 74,114 252,254 Ì loans and receivables ÏÏÏ Ì Ì 30,926 44,998 5,442 98,669 203,645 383,680 Investment in subsidiaries ÏÏÏÏ Ì Ì Ì Ì Ì 612 44,406 45,018 Investments in associates ÏÏÏÏ Ì Ì Ì Ì Ì 103 28 131 Property and equipment ÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 48,633 48,633 Investment propertyÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 467 467 Deferred income tax assetsÏÏÏ Ì Ì Ì Ì Ì 21,588 Ì 21,588 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205 2,181 3,238 2,011 12,280 490 3,736 24,141 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,080 65,443 585,685 335,243 929,291 755,515 771,676 3,465,933 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 102,819 2,522 Ì Ì Ì Ì 105,341 Due to central banks ÏÏÏÏÏÏÏÏÏ Ì 40,184 77 11,416 15,061 Ì Ì 66,738 Bank notes in circulation ÏÏÏÏÏ Ì 1,596 Ì Ì Ì Ì Ì 1,596 CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏ Ì 3,692 71,825 19,018 19,148 45,784 5,675 165,142 Derivative Ñnancial instruments and liabilities at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 8,167 20,389 25,858 14,702 14,416 83,532 Due to customersÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,208,819 242,551 314,656 643,656 225,210 2,337 2,637,229 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 26,253 26,253 Special purpose borrowings ÏÏ Ì Ì 2,581 1,053 6,586 27,646 31,683 69,549 Current tax liabilities ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 18,334 Ì Ì 18,334 Retirement beneÑt obligations Ì Ì 43 88 382 1,639 2,122 4,274 Deferred income tax liabilities Ì Ì Ì Ì Ì 70 Ì 70 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 73,859 4,209 3,567 18,205 4,567 678 105,085 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,430,969 331,975 370,187 747,230 319,618 83,164 3,283,143 Net liquidity gapÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,080 (1,365,526) 253,710 (34,944) 182,061 435,897 688,512 182,790
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
Group As of December 31, 2005 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏ Ì 41,082 Ì Ì Ì Ì Ì 41,082 Balances with central banks Ì 113,872 202,030 1,019 20 Ì Ì 316,941 Placements with banks and other Ñnancial institutions Ì Ì 220,629 92,650 18,707 113 Ì 332,099 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 35,586 Ì Ì Ì Ì Ì 35,586 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26,974 Ì Ì Ì Ì Ì 26,974 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì Ì 6,301 3,113 15,287 56,028 31,053 111,782 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,890 2,042 753 1,583 5,347 3,193 16,808 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏ 40,150 28,363 107,549 220,426 795,450 506,258 453,916 2,152,112 Investment securities Ì available-for-saleÏÏÏÏÏÏÏ Ì 292 6,926 17,622 128,532 255,548 193,301 602,221 Ì held-to-maturity ÏÏÏÏÏÏÏÏ Ì Ì 31,360 70,239 160,474 247,593 97,793 607,459 Ì loans and receivables ÏÏ Ì Ì 29,505 16,996 11,520 260,085 43,745 361,851 Investments in associates ÏÏÏ Ì Ì Ì Ì Ì 407 4,654 5,061 Property and equipment ÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 62,417 62,417 Investment propertyÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 8,511 8,511 Deferred income tax assetsÏÏ Ì Ì Ì Ì 2 20,502 Ì 20,504 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 302 4,418 7,823 6,743 10,145 3,812 5,397 38,640 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,452 254,477 614,165 429,561 1,141,720 1,355,693 903,980 4,740,048 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 134,217 Ì Ì Ì Ì Ì 134,217 Due to central banks ÏÏÏÏÏÏÏÏ Ì 29,506 529 20 Ì Ì Ì 30,055 Bank notes in circulation ÏÏÏÏ Ì 35,731 Ì Ì Ì Ì Ì 35,731 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 640 79,584 47,363 50,464 34,575 Ì 212,626 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,805 9,124 9,301 22,996 38,091 9,857 91,174 Due to customersÏÏÏÏÏÏÏÏÏÏÏ Ì 1,615,637 521,284 441,468 840,668 278,098 2,309 3,699,464 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 60,179 60,179 Special purpose borrowings Ì Ì 1,046 816 5,361 20,840 24,101 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏ Ì 13 Ì Ì 23,446 Ì Ì 23,459 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 76 151 661 2,883 3,281 7,052 Deferred income tax liabilities Ì Ì Ì Ì 1,782 354 Ì 2,136 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 74,494 14,906 5,585 28,384 12,170 733 136,272 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,892,043 626,549 504,704 973,762 387,011 100,460 4,484,529 Net liquidity gapÏÏÏÏÏÏÏÏÏÏÏÏ 40,452 (1,637,566) (12,384) (75,143) 167,958 968,682 803,520 255,519
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
Bank As of December 31, 2005 On Less than Between Between Between Over Overdue demand 1 month 1-3 months 4-12 months 1-5 years 5 years Total Assets Cash and due from banks ÏÏÏ Ì 38,275 Ì Ì Ì Ì Ì 38,275 Balances with central banks Ì 82,936 201,437 Ì Ì Ì Ì 284,373 Placements with banks and other Ñnancial institutions Ì Ì 160,496 62,996 14,748 5,414 Ì 243,654 Government certiÑcates of indebtedness for bank notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,641 Ì Ì Ì Ì Ì 1,641 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏ Ì 25,238 Ì Ì Ì Ì Ì 25,238 Trading assets and other Ñnancial instruments at fair value through proÑt or loss Ì Ì 1,229 1,972 12,465 44,796 21,620 82,082 Derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 798 521 1,587 5,263 3,160 11,329 Loans and advances to customers, net ÏÏÏÏÏÏÏÏÏÏÏ 38,671 837 98,739 200,848 760,911 362,141 326,595 1,788,742 Investment securities Ì available-for-saleÏÏÏÏÏÏÏ Ì Ì 5,132 14,716 126,386 221,832 174,076 542,142 Ì held-to-maturity ÏÏÏÏÏÏÏÏ Ì Ì 29,117 59,606 126,218 122,175 78,027 415,143 Ì loans and receivables ÏÏ Ì Ì 24,763 11,368 3,948 260,085 43,746 343,910 Investment in subsidiaries ÏÏÏ Ì Ì Ì Ì Ì 421 44,659 45,080 Investments in associates ÏÏÏ Ì Ì Ì Ì Ì 1 44 45 Property and equipment ÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 48,061 48,061 Investment propertyÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 461 461 Deferred income tax assetsÏÏ Ì Ì Ì Ì Ì 20,389 Ì 20,389 Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 291 2,689 1,782 6,485 9,399 558 4,633 25,837 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,962 151,616 523,493 358,512 1,055,662 1,043,075 745,082 3,916,402 Liabilities Due to banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 124,948 Ì Ì Ì Ì Ì 124,948 Due to central banks ÏÏÏÏÏÏÏÏ Ì 29,481 529 20 Ì Ì Ì 30,030 Bank notes in circulation ÏÏÏÏ Ì 1,786 Ì Ì Ì Ì Ì 1,786 CertiÑcates of deposits and placements from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 535 82,241 49,993 50,320 32,834 Ì 215,923 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 6,937 7,460 20,048 32,766 9,112 76,323 Due to customersÏÏÏÏÏÏÏÏÏÏÏ Ì 1,323,694 301,258 292,438 815,485 274,519 1,793 3,009,187 Bonds issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 60,179 60,179 Special purpose borrowings Ì Ì 1,046 816 5,361 20,840 24,101 52,164 Current tax liabilities ÏÏÏÏÏÏÏÏ Ì 13 Ì Ì 22,427 Ì Ì 22,440 Retirement beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 76 151 661 2,883 3,281 7,052 Deferred income tax liabilities Ì Ì Ì Ì Ì 23 Ì 23 Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 61,151 6,366 5,238 27,494 11,722 563 112,534 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,541,608 398,453 356,116 941,796 375,587 99,029 3,712,589 Net liquidity gapÏÏÏÏÏÏÏÏÏÏÏÏ 38,962 (1,389,992) 125,040 2,396 113,866 667,488 646,053 203,813
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
7 Liquidity risk (Continued)
The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group's business. It is unusual for a banks' asset and liability exposures to be completely matched, as transactions vary in nature and have diÅerent settlement terms. An unmatched position potentially enhances proÑtability, but also increases the risk of losses.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest- bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.
Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, as many of these commitments will expire or terminate without being funded.
8 Insurance risk
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. This risk is inherently random and, therefore, unpredictable. The Group manages its portfolio of insurance risks through its underwriting policies, portfolio management techniques, and claims processing.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and beneÑt payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and beneÑts are greater than estimated. Insurance events are random and the actual number and amount of claims and beneÑts will vary from year to year from the level established using statistical techniques.
The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy attempts to ensure that the underwritten risks are well diversiÑed in terms of type and amount of risk and industry.
Uncertainty in the estimation of future beneÑt payments and premium receipts for long-term insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality. In order to assess the uncertainty due to the mortality assumption and lapse assumption, the Group conducted mortality studies and lapse studies in order to determine the appropriate assumptions. These studies reÖect consistent results in both assumptions with appropriate margin.
9 Fair values of Ñnancial assets and liabilities A16(35)(4)(a)
Fair value estimates are made at a speciÑc point in time based on relevant market information and information about the various Ñnancial instruments. The following methods and assumptions were used to estimate the fair value of each class of Ñnancial instruments for which it is practicable to estimate that value.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
9 Fair values of Ñnancial assets and liabilities (Continued)
Cash and due from banks, balances with central banks, placements with banks and other Ñnancial institutions, due to banks and due to central banks
These Ñnancial assets and liabilities generally have a maturity or repricing of less than one year and the carrying value approximates fair value.
Loans and advances to customers and investment securities classiÑed as loans and receivables
Loans and advances are recorded net of allowance for impairment losses. The estimated fair value of loans and advances represents the discounted amount of estimated future cash Öows expected to be received. Expected cash Öows are discounted at current market rates to determine fair value (Note V.2).
Held-to-maturity investment securities
Fair value for held-to-maturity investment securities is based on ""bid'' market prices or broker/ dealer price quotations. Where this information is not available, fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics.
CertiÑcates of deposits and placements from banks and other Ñnancial institutions
The estimated fair value of Ñxed interest-bearing deposits and placements without a quoted market price is based on discounted cash Öow using interest rates for new debts issuances with similar remaining maturity.
Bonds issued and special purpose borrowings
Fair values of these instruments are calculated based on quoted ""ask'' market prices. For those instruments where quoted market prices are not available, a discounted cash Öow model is used based on a current market rate appropriate for the nature of the obligation and the remaining term to maturity.
The following tables summarize the carrying amounts and the approximate fair values of those Ñnancial assets and liabilities not presented on the Group's and the Bank's balance sheets at their fair value.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
9 Fair values of Ñnancial assets and liabilities (Continued)
As of December 31, 2003
Group Bank Net Net carrying carrying value Fair value value Fair value Financial assets Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 1,921,890 1,589,611 1,589,633 Investment securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 216,035 86,656 86,503 loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 352,576 326,457 326,709 Financial liabilities CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏ 157,243 157,219 178,617 178,617 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,034,074 2,377,488 2,378,198 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,823 3,974 4,071 4,222 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77,229 63,242 77,229 63,242
As of December 31, 2004
Group Bank Net Net carrying carrying value Fair value value Fair value Financial assets Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏ 2,072,919 2,072,848 1,729,235 1,729,232 Investment securities Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 457,994 453,416 252,254 247,812 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 413,941 413,942 383,680 383,663 Financial liabilities CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏ 141,087 141,158 165,142 165,193 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,338,448 3,337,982 2,637,229 2,636,763 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,253 26,200 26,253 26,200 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,549 55,852 69,549 55,852
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
IV FINANCIAL RISK MANAGEMENT (CONTINUED)
9 Fair values of Ñnancial assets and liabilities (Continued)
As of December 31, 2005
Group Bank Net Net carrying carrying value Fair value value Fair value Financial assets Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏ 2,152,112 2,152,232 1,788,742 1,788,873 Investment securities Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,459 605,287 415,143 414,341 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,851 361,613 343,910 343,692 Financial liabilities CertiÑcates of deposits and placements from banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏ 212,626 212,689 215,923 215,988 Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,699,464 3,700,445 3,009,187 3,010,241 Bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,179 62,071 60,179 62,071 Special purpose borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,164 42,547 52,164 42,547
10 Fiduciary activities The Group provides custody, entrusted loan administration, trustee and investment management services to third parties. Assets that are held in a Ñduciary capacity are not included in the Ñnancial statements. As of December 31, 2003, 2004 and 2005, the balances of securities and other Ñnancial instruments held in custody accounts amounted to approximately RMB 388,130 million, RMB 502,045 million and RMB 562,823 million, respectively, and entrusted loans amounted to approximately RMB 34,876 million, RMB 47,863 million and RMB 51,626 million, respectively.
V CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Group makes estimates and assumptions that aÅect the reported amounts of assets and liabilities within the next Ñnancial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Areas susceptible to changes in essential estimates and judgements, which aÅect the carrying value of assets and liabilities, are set out below. It is impracticable to determine the eÅect of changes to either the key assumptions discussed below or other estimation uncertainties. It is possible that actual results may require material adjustments to the estimates referred to below.
1 Impairment losses on loans and advances The Group reviews its loan portfolios to assess impairment on a semi-annual basis, unless known circumstances indicate that impairment may have occurred as of an interim date. In determining whether an impairment loss should be recorded in the consolidated income statements, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash Öows from a portfolio of loans and advances
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
V CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUED)
1 Impairment losses on loans and advances (Continued)
before the decrease can be identiÑed with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group (e.g. payment delinquency or default), or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating expected future cash Öows. The methodology and assumptions used for estimating both the amount and timing of future cash Öows are reviewed regularly to reduce any diÅerences between loss estimates and actual loss experience.
2 Fair value of Ñnancial instruments
The fair values of Ñnancial instruments that are not quoted in active markets are determined by using valuation techniques. Valuation techniques used include discounted cash Öows analysis and models. To the extent practical, models use only observable data, however areas such as credit risk (both own and counterparty's), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could aÅect reported fair value of Ñnancial instruments. With respect to PRC Government obligations related to large-scale policy directed Ñnancing transactions, such as the one described in Note VI.18(3), fair value is determined using the stated interest rate of the related instrument. In this regard, there are no relevant market prices or yields, reÖecting arm's length transactions of a comparable size and tenor, available.
3 Held-to-maturity investments
The Group follows the guidance of IAS 39 (revised) on classifying non-derivative Ñnancial assets with Ñxed or determinable payments and Ñxed maturity as held-to-maturity. This classiÑcation requires signiÑcant judgement. In making this judgement, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to hold these investments to maturity other than for speciÑc circumstances deÑned in IAS 39, such as selling an insigniÑcant amount close to maturity, it will be required to reclassify the entire portfolio of assets as available- for-sale.
4 Employee retirement beneÑt obligations
As described more fully in Notes III.19(2) and VI.32, the Bank has established liabilities in connection with beneÑts paid to certain retired and early retired employees. The amounts of employee beneÑt expense and these liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, pension beneÑt inÖation rates, medical beneÑt inÖation rates, and other factors. Actual results that diÅer from the assumptions are recognized immediately and, therefore, aÅect recognized expense in the year in which such diÅerences arise. While management believes that its assumptions are appropriate, diÅerences in actual experience or changes in assumptions may aÅect the Bank's expense related to its employee retirement beneÑt obligations.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
V CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUED)
5 Income taxes
The Group is subject to income taxes in numerous jurisdictions; principally, however in the Chinese Mainland and Hong Kong. SigniÑcant estimates are required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. In particular, the deductibility of certain items in Chinese Mainland is subject to government approval. Where the Ñnal tax outcome of these matters is diÅerent from the amounts that were initially recorded, such diÅerences will impact the income tax and deferred income tax provisions in the period during which such a determination is made.
VI NOTES TO THE FINANCIAL INFORMATION
1 Segment information LR4.05(4)(b) A15(1)(III)(b) The Group's businesses operate in three principal geographical areas: the Chinese Mainland, Hong Kong and Macau, and other overseas locations. SigniÑcant other overseas locations include New York, London, Singapore and Tokyo. Within Hong Kong and Macau, BOCHK Holdings and its intermediate holding companies, collectively referred to as BOC Hong Kong Group, account for the majority of the Group's operating activities.
The geographical analysis of revenues, segment results, segment assets, segment liabilities and capital expenditure reÖects the process through which the Group's operating activities are managed. In accordance with the Group's organisational structure and its internal Ñnancial reporting process, the Group has determined that geographical segments should be presented as its primary segment.
Interest and fee income, total assets, total liabilities, credit commitments and capital expenditure have generally been based on the country in which the branch or subsidiary is located.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2003
Hong Kong & Macau Other Chinese BOC overseas Mainland Hong Kong Group Others Sub-total locations Elimination Total
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93,173 18,999 2,002 21,001 3,822 (1,029) 116,967 Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (33,931) (5,233) (358) (5,591) (1,877) 1,029 (40,370) Net interest income ÏÏÏÏÏÏÏÏÏÏ 59,242 13,766 1,644 15,410 1,945 Ì 76,597 Fee and commission incomeÏÏÏ 4,319 3,596 801 4,397 884 (32) 9,568 Fee and commission expense (1,128) (594) (446) (1,040) (79) 32 (2,215) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,191 3,002 355 3,357 805 Ì 7,353 Net trading incomeÏÏÏÏÏÏÏÏÏÏÏÏ 2,324 1,635 202 1,837 142 Ì 4,303 Net gains/(losses) on investment securitiesÏÏÏÏÏÏÏÏ 926 (291) 318 27 141 Ì 1,094 Other operating income/(expense) ÏÏÏÏÏÏÏÏÏ 1,293 (119) 3,428 3,309 247 Ì 4,849 Net gains/(losses) on sale of shares in a subsidiaryÏÏÏÏÏÏÏ Ì 7,406 (6) 7,400 Ì Ì 7,400 Impairment (losses)/write back on loans and advances (19,333) (6) 713 707 526 Ì (18,100) Other operating expenses ÏÏÏÏÏ (34,440) (6,158) (4,092) (10,250) (1,390) Ì (46,080) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,203 19,235 2,562 21,797 2,416 Ì 37,416 Share of results of associates (12) (4) (53) (57) Ì Ì (69) ProÑt before income tax ÏÏÏÏÏÏ 13,191 19,231 2,509 21,740 2,416 Ì 37,347 Income tax expense ÏÏÏÏÏÏÏÏÏÏ (1,481) (978) (295) (1,273) (408) Ì (3,162) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏ 11,710 18,253 2,214 20,467 2,008 Ì 34,185 Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,030,559 822,686 101,138 923,824 238,428 (220,886) 3,971,925 Investments in associates ÏÏÏÏÏ 157 147 1,051 1,198 Ì Ì 1,355 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,030,716 822,833 102,189 925,022 238,428 (220,886) 3,973,280 Segment liabilities ÏÏÏÏÏÏÏÏÏÏÏÏ 2,908,507 741,062 90,248 831,310 232,503 (220,886) 3,751,434 Segment net assetsÏÏÏÏÏÏÏÏÏÏÏ 122,209 81,771 11,941 93,712 5,925 Ì 221,846 Other segment items: Capital expenditure ÏÏÏÏÏÏÏÏÏÏÏ 4,797 393 616 1,009 132 Ì 5,938 Depreciation and amortization 5,597 781 125 906 111 Ì 6,614 Credit commitmentsÏÏÏÏÏÏÏÏÏÏÏ 561,388 158,937 11,374 170,311 41,634 (27,068) 746,265
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2004
Hong Kong & Macau Other Chinese BOC overseas Mainland Hong Kong Group Others Sub-total locations Elimination Total
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111,378 16,513 2,034 18,547 4,061 (1,633) 132,353 Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (38,133) (4,771) (572) (5,343) (2,075) 1,633 (43,918) Net interest income ÏÏÏÏÏÏÏÏÏÏ 73,245 11,742 1,462 13,204 1,986 Ì 88,435 Fee and commission incomeÏÏÏ 5,484 4,142 873 5,015 925 (36) 11,388 Fee and commission expense (1,432) (824) (527) (1,351) (84) 36 (2,831) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,052 3,318 346 3,664 841 Ì 8,557 Net trading income/(losses) ÏÏ 7,066 1,999 236 2,235 (419) Ì 8,882 Net (losses)/gains on investment securitiesÏÏÏÏÏÏÏÏ (59) 168 311 479 (83) Ì 337 Other operating income ÏÏÏÏÏÏÏ 3,132 1,794 4,470 6,264 206 Ì 9,602 Impairment (losses)/write back on loans and advances (26,925) 2,766 86 2,852 261 Ì (23,812) Other operating expenses ÏÏÏÏÏ (42,725) (5,967) (4,717) (10,684) (1,470) Ì (54,879) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,786 15,820 2,194 18,014 1,322 Ì 37,122 Share of results of associates (57) (7) 205 198 Ì Ì 141 ProÑt before income tax ÏÏÏÏÏÏ 17,729 15,813 2,399 18,212 1,322 Ì 37,263 Income tax expense ÏÏÏÏÏÏÏÏÏÏ (6,995) (2,539) (293) (2,832) (371) Ì (10,198) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏ 10,734 13,274 2,106 15,380 951 Ì 27,065 Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,268,758 853,314 110,699 964,013 234,584 (203,361) 4,263,994 Investments in associates ÏÏÏÏÏ 161 66 1,000 1,066 Ì Ì 1,227 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,268,919 853,380 111,699 965,079 234,584 (203,361) 4,265,221 Segment liabilities ÏÏÏÏÏÏÏÏÏÏÏÏ 3,137,124 779,715 97,381 877,096 226,455 (203,361) 4,037,314 Segment net assetsÏÏÏÏÏÏÏÏÏÏÏ 131,795 73,665 14,318 87,983 8,129 Ì 227,907 Other segment items: Capital expenditure ÏÏÏÏÏÏÏÏÏÏÏ 5,975 479 184 663 119 Ì 6,757 Depreciation and amortization 5,639 778 126 904 121 Ì 6,664 Credit commitmentsÏÏÏÏÏÏÏÏÏÏÏ 572,320 164,291 9,274 173,565 42,459 (29,059) 759,285
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2005
Hong Kong & Macau Other Chinese BOC overseas Mainland Hong Kong Group Others Sub-total locations Elimination Total
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 134,177 27,873 3,687 31,560 5,526 (3,315) 167,948 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏ (51,094) (13,675) (1,651) (15,326) (3,835) 3,315 (66,940) Net interest income ÏÏÏÏÏÏÏÏÏ 83,083 14,198 2,036 16,234 1,691 Ì 101,008 Fee and commission income 7,004 4,119 715 4,834 889 (29) 12,698 Fee and commission expense (1,797) (1,110) (498) (1,608) (75) 29 (3,451) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,207 3,009 217 3,226 814 Ì 9,247 Net trading income ÏÏÏÏÏÏÏÏÏÏ 1,889 1,878 126 2,004 390 Ì 4,283 Net (losses)/gains on investment securities ÏÏÏÏÏÏ (875) (86) 376 290 3 Ì (582) Other operating income ÏÏÏÏÏÏ 2,092 2,402 6,434 8,836 222 Ì 11,150 Impairment (losses)/write back on loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15,345) 2,635 641 3,276 583 Ì (11,486) Other operating expensesÏÏÏÏ (46,375) (5,986) (5,845) (11,831) (1,778) Ì (59,984) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,676 18,050 3,985 22,035 1,925 Ì 53,636 Share of results of associates 19 2 154 156 Ì Ì 175 ProÑt before income tax ÏÏÏÏÏ 29,695 18,052 4,139 22,191 1,925 Ì 53,811 Income tax expense ÏÏÏÏÏÏÏÏÏ (18,911) (2,880) (142) (3,022) (320) Ì (22,253) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏ 10,784 15,172 3,997 19,169 1,605 Ì 31,558 Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,736,929 848,767 116,045 964,812 186,995 (153,749) 4,734,987 Investments in associates ÏÏÏÏ 1 64 4,996 5,060 Ì Ì 5,061 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,736,930 848,831 121,041 969,872 186,995 (153,749) 4,740,048 Segment liabilities ÏÏÏÏÏÏÏÏÏÏÏ 3,586,428 770,166 102,829 872,995 178,855 (153,749) 4,484,529 Segment net assets ÏÏÏÏÏÏÏÏÏ 150,502 78,665 18,212 96,877 8,140 Ì 255,519 Other segment items: Capital expenditure ÏÏÏÏÏÏÏÏÏÏ 5,379 592 68 660 67 Ì 6,106 Depreciation and amortization 5,528 543 127 670 116 Ì 6,314 Credit commitments ÏÏÏÏÏÏÏÏÏ 699,066 168,203 14,131 182,334 52,434 (38,072) 895,762
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
Business segments comprise the Group's secondary segment. The Group provides services through six main business segments: corporate banking, personal banking, treasury operations, investment banking, insurance and other operations. Segment revenues, segment results, segment assets and capital expenditure presented in business segments include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Funding is provided to and from individual business segments through the Treasury operations as part of the asset and liability management process. The pricing of these transactions is based on management's assessment of its average cost of funding and growth in interest bearing assets and liabilities. The transactions are eliminated on consolidation. Corporate banking Ì providing services to corporate customers including current accounts, deposits, overdrafts, lending, trade related products and other credit facilities, foreign currency and derivative products. Personal banking Ì providing services to personal customers including current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages and wealth management. Treasury operations Ì consisting of foreign exchange transactions, customer-based interest rate and foreign exchange derivative transactions, money market transactions and proprietary trading and asset-liability management. The results of this segment include the inter-company net funding debit or credit resulting from variations in the growth of interest bearing assets and liabilities and foreign currency translation gains and losses. Investment banking Ì consisting of debt and equity underwriting and Ñnancial advisory, sales and trading of securities, stock brokerage, investment research and asset management services, and private equity investment services. Insurance Ì underwriting of general and life insurance business and insurance agency services. Other operations of the Group comprise investment holding and other miscellaneous activities, none of which constitutes a separately reportable segment or can be allocated on a reasonable basis.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2003
Corporate Personal Treasury Investment banking banking operations banking Insurance Others Elimination Total Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,215 48,876 37,159 237 303 250 (33,073) 116,967 Interest expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,587) (22,407) (21,835) (17) Ì (597) 33,073 (40,370) Net interest income/(expense) 34,628 26,469 15,324 220 303 (347) Ì 76,597 Fee and commission income ÏÏÏÏÏ 3,610 4,442 882 1,041 3 123 (533) 9,568 Fee and commission expense ÏÏÏÏ (221) (1,260) (260) (493) (463) (51) 533 (2,215) Net fee and commission income/(expense) ÏÏÏÏÏÏÏÏÏÏÏ 3,389 3,182 622 548 (460) 72 Ì 7,353 Net trading income/(expense) ÏÏÏ 2,354 1,117 828 6 Ì (2) Ì 4,303 Net gains on investment securities Ì Ì 953 22 Ì 119 Ì 1,094 Other operating income/(expense) ÏÏÏÏÏÏÏÏÏÏÏÏ 230 208 (53) (8) 3,309 1,817 (654) 4,849 Net gains on sale of shares in a subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 7,400 Ì 7,400 Impairment (losses)/write back on loans and advances ÏÏÏÏÏÏÏÏ (9,356) (9,052) Ì (29) 337 Ì (18,100) Other operating expensesÏÏÏÏÏÏÏÏ (14,142) (17,874) (7,805) (422) (2,956) (3,535) 654 (46,080) Operating proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,103 4,050 9,869 337 196 5,861 Ì 37,416 Share of results of associates ÏÏÏÏ Ì Ì Ì (19) Ì (50) Ì (69) ProÑt before income taxÏÏÏÏÏÏÏÏÏ 17,103 4,050 9,869 318 196 5,811 Ì 37,347 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,162) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,185 Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,578,313 453,665 1,860,575 13,076 7,397 79,800 (20,901) 3,971,925 Investments in associatesÏÏÏÏÏÏÏÏ Ì Ì Ì 578 Ì 777 Ì 1,355 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,578,313 453,665 1,860,575 13,654 7,397 80,577 (20,901) 3,973,280 Capital expenditureÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,084 2,301 101 10 229 2,213 Ì 5,938
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2004
Corporate Personal Treasury Investment banking banking operations banking Insurance Others Elimination Total
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,553 53,574 40,117 306 305 241 (32,743) 132,353 Interest expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,266) (23,426) (26,532) (82) Ì (355) 32,743 (43,918) Net interest income/(expense) ÏÏÏÏÏ 44,287 30,148 13,585 224 305 (114) Ì 88,435 Fee and commission incomeÏÏÏÏÏÏÏÏÏ 4,553 5,249 943 1,158 5 147 (667) 11,388 Fee and commission expense ÏÏÏÏÏÏÏ (205) (1,717) (350) (666) (501) (59) 667 (2,831) Net fee and commission income/(expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,348 3,532 593 492 (496) 88 Ì 8,557 Net trading income/(expense) ÏÏÏÏÏÏ 2,692 1,314 4,830 (55) 95 6 Ì 8,882 Net gains/(losses) on investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 9 113 (18) 233 Ì 337 Other operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏ 148 242 248 9 4,040 5,483 (568) 9,602 Impairment (losses)/write back on loans and advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16,189) (7,654) Ì 28 Ì 3 Ì (23,812) Other operating expenses ÏÏÏÏÏÏÏÏÏÏÏ (18,071) (20,592) (8,568) (473) (3,660) (4,083) 568 (54,879) Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,215 6,990 10,697 338 266 1,616 Ì 37,122 Share of results of associates ÏÏÏÏÏÏÏ Ì Ì Ì 23 Ì 118 Ì 141 ProÑt before income tax ÏÏÏÏÏÏÏÏÏÏÏÏ 17,215 6,990 10,697 361 266 1,734 Ì 37,263 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10,198) ProÑt for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,065 Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,608,781 556,066 2,019,737 14,078 9,465 76,333 (20,466) 4,263,994 Investments in associates ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 612 Ì 615 Ì 1,227 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,608,781 556,066 2,019,737 14,690 9,465 76,948 (20,466) 4,265,221 Capital expenditure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,321 2,569 124 35 6 2,702 Ì 6,757
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
1 Segment information (Continued)
As of and for the year ended December 31, 2005
Corporate Personal Treasury Investment banking banking operations(1) banking Insurance Others Elimination Total
Interest income ÏÏÏÏÏÏÏÏÏÏ 83,083 73,177 56,653 478 407 359 (46,209) 167,948 Interest expenseÏÏÏÏÏÏÏÏÏ (30,868) (36,169) (44,217) (371) Ì (1,524) 46,209 (66,940) Net interest income/(expense) ÏÏÏÏ 52,215 37,008 12,436 107 407 (1,165) Ì 101,008 Fee and commission incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,447 5,876 898 573 3 131 (230) 12,698 Fee and commission expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (314) (2,167) (366) (205) (497) (132) 230 (3,451) Net fee and commission income/(expense) ÏÏÏÏ 5,133 3,709 532 368 (494) (1) Ì 9,247 Net trading income/(expense) ÏÏÏÏ 4,278 2,067 (2,024) 262 (309) 9 Ì 4,283 Net (losses)/gains on investment securitiesÏÏÏ Ì Ì (880) Ì Ì 298 Ì (582) Other operating income ÏÏ 153 400 9 75 5,395 6,109 (991) 11,150 Impairment (losses)/ write back on loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,708) 1,147 Ì (14) Ì 89 Ì (11,486) Other operating expenses (21,127) (25,508) (7,105) (524) (4,665) (2,046) 991 (59,984) Operating proÑt ÏÏÏÏÏÏÏÏÏ 27,944 18,823 2,968 274 334 3,293 Ì 53,636 Share of results of associates ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 42 Ì 133 Ì 175 ProÑt before income tax 27,944 18,823 2,968 316 334 3,426 Ì 53,811 Income tax expense ÏÏÏÏÏ (22,253) ProÑt for the year ÏÏÏÏÏÏÏ 31,558 Segment assets ÏÏÏÏÏÏÏÏÏ 1,655,351 599,263 2,397,839 14,418 12,316 74,224 (18,424) 4,734,987 Investment in associates Ì Ì Ì 668 Ì 4,393 Ì 5,061 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,655,351 599,263 2,397,839 15,086 12,316 78,617 (18,424) 4,740,048 Capital expenditure ÏÏÏÏÏÏ 1,296 2,628 86 Ì 7 2,089 Ì 6,106
(1) The results for the Treasury operations segment include the translation loss on Restricted Foreign Currency Capital Items of RMB 8.3 billion and the RMB 3.2 billion gain on the Foreign Currency Option Agreement with Huijin, discussed in Note IV.5.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
2 Net interest income
Year ended December 31, A16(35)(1) 2003 2004 2005 (a)&(b) Interest income Loans and advances to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,193 92,174 110,313 Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,891 32,132 44,938 Due from banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,883 8,047 12,697 Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116,967 132,353 167,948 Interest expense Due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (33,670) (36,883) (55,914) Due to banks and other Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,703) (4,259) (6,512) Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,997) (2,776) (4,514) Sub-total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40,370) (43,918) (66,940) Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76,597 88,435 101,008
Included in interest income is RMB 1,354 million, RMB 644 million and RMB 529 million with respect to unwind of discount on allowance for identiÑed impaired loans for the years ended December 31, 2003, 2004 and 2005, respectively (Note VI.17).
3 Net fee and commission income
Year ended December 31, 2003 2004 2005 Settlement and clearing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,237 2,626 2,941 Agency commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,137 2,690 2,735 Credit commitment feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,075 2,367 2,693 Bank card feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,340 1,840 2,340 Custodian and other Ñduciary service feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 275 394 483 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,504 1,471 1,506 Fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,568 11,388 12,698 Fee and commission expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,215) (2,831) (3,451) Net fee and commission income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,353 8,557 9,247
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4 Net trading income
Year ended December 31, A16(35)(1)(c), 2003 2004 2005 (d), (e)&(f) Net gains from foreign exchange and foreign exchange products(1) ÏÏÏÏ 9,488 5,294 2,226 Net (losses)/gains from precious metal transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40) 1,271 150 Net (losses)/gains from interest rate instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,333) 2,294 1,753 Net gains/(losses) from trading equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 (178) 130 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 201 24 4,303 8,882 4,283
(1) The net gains from foreign exchange and foreign exchange products in 2005 include the translation loss on Restricted Foreign Currency Capital Items of RMB8.3 billion and the RMB3.2 billion gain on the Foreign Currency Option Agreement with Huijin discussed in Note IV.5.
5 Net gains/(losses) on investment securities
Year ended December 31, A16(35)(1)(h) 2003 2004 2005 De-recognition of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,217 529 (606) (Charge)/write back for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (123) (192) 24 1,094 337 (582)
6 Other operating income A15(1)(I)(c)
Year ended December 31, 2003 2004 2005 Changes in fair value of investment properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (412) 1,280 1,697 Insurance premiums(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,225 4,057 5,237 Net gains on disposal of other subsidiaries and associates ÏÏÏÏÏÏÏÏÏÏÏÏ 130 760 320 Gains on disposal of property and equipment and other assets ÏÏÏÏÏÏÏÏ 157 420 870 Dividend income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122 264 194 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,627 2,821 2,832 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,849 9,602 11,150
(1) Insurance premiums for the Relevant Periods arising from insurance contracts consist of the following:
Year ended December 31, 2003 2004 2005
Long-term insurance contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,650 2,474 3,807 General insurance contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,575 1,583 1,430 Premium revenue arising from insurance contracts issued, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,225 4,057 5,237
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
7 Other operating expenses A15(1)(I)(d)
Year ended December 31, 2003 2004 2005 StaÅ costs (Note VI.8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,824 20,545 27,106 General operating and administrative expenses(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,105 11,777 13,251 Depreciation and amortisation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,614 6,664 6,314 Business and other taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,972 4,981 5,680 Special levy to the MOF (Note VI.18 (3)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,060 2,805 Ì Insurance claims expenses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,362 3,256 4,153 Operating lease rentalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,725 1,759 1,550 Impairment losses on other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 233 699 433 Losses on disposal of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 346 205 Provision for litigation losses (Note VI.35)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 545 1,257 712 Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,232 790 580 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,080 54,879 59,984
(1) Included in the general operating and administrative expenses are principal auditors' remuneration of RMB93 million, RMB129 million and RMB154 million for each of the years ended December 31, 2003, 2004 and 2005. (2) Insurance claims expenses for the Relevant Periods arising from insurance contracts consist of the following: Year ended December 31, 2003 2004 2005
Long-term insurance contracts - death, maturity and surrender beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,995 1,186 554 - (decrease)/increase in liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (240) 1,378 2,943 1,755 2,564 3,497 General insurance contracts - Insurance claims paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 410 468 509 - movement in provisionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 197 224 147 607 692 656 Insurance claims expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,362 3,256 4,153
8 StaÅ costs A1A(28)(7)
Year ended December 31, 2003 2004 2005 Salaries and beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,573 15,038 18,096 DeÑned contribution plans(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,084 1,231 2,753 Retirement beneÑts (Note VI.32) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809 1,141 3,358 Housing funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 550 661 1,000 Social security costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 581 851 464 A1A(33)(4)(c) Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,227 1,623 1,435 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,824 20,545 27,106
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
8 StaÅ costs (Continued)
(1) Contributions to deÑned contribution plans for each of the years ended December 31, 2003, 2004 and 2005 include the A1A(33)(4)(d) eÅect of deduction of forfeited contributions of approximately RMB 25 million, RMB 25 million and RMB 27 million, respectively. The amounts of unutilized forfeited contributions available for further deduction are not material as of December 31, 2003, 2004 and 2005 respectively.
(2) In 2005, the Group established the Annuity Plan (Note III.19), a deÑned contribution plan, in addition to local labour and social security bureau contribution plans. The expense recorded in the consolidated income statement for 2005 includes the initial funding for the Annuity Plan of RMB 1.2 billion, which included a contribution of RMB 500 million made by Huijin (Note VI.37).
9 Directors', supervisors' and senior management's emoluments A1A(33)(2)(a)-(d) A1A(46)(2) The total remuneration of the directors and supervisors for each of the years ended December 31, 2003, 2004 and 2005 are approximately RMB 12 million, RMB 7 million and RMB 11 million, respectively.
Details of the directors' and supervisors' emoluments are as follows:
Year ended December 31, 2003 2004 2005 FeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 2 3 Basic salaries and allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 4 7 Discretionary bonusesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Ì Ì Contributions to pension schemes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 1 12 7 11
Emoluments of the individuals were within the following bands:
Year ended December 31, Amounts in RMB 2003 2004 2005 nil Ì 1,000,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 22 15 1,000,001 Ì 1,500,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 3 1,500,001 Ì 2,000,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2 3,000,001 Ì 3,500,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì 3,500,001 Ì 4,000,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì
The Bank Ñrst appointed independent non-executive directors in August 2004. RMB 337,740 and RMB 1,571,619 were paid to independent non-executive directors for each of the years ended December 31, 2004 and 2005 respectively.
In July 2002, options to purchase shares of BOCHK Holdings were granted to several directors of the Bank under the Pre-Listing Share Option Scheme (as more fully described in Note VI.33). During the Relevant Periods, certain options were exercised, but no beneÑts arising from the granting of these share options were included in the directors' emoluments disclosed above or recognized in the consolidated income statements.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9 Directors', supervisors' and senior management's emoluments (Continued)
Five highest paid individuals A1A(33)(3)(a)-(c) The emoluments payable to the Ñve individuals whose emoluments were the highest in the Group for the years ended December 31, 2003, 2004 and 2005 respectively are as follows:
Year ended December 31, 2003 2004 2005 Basic salaries and allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 8 20 Discretionary bonusesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 23 20 Contributions to pension schemes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì 28 31 40
Emoluments of the individuals were within the following bands:
Year ended December 31, Amounts in RMB 2003 2004 2005 4,000,001 Ì 4,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì 4,500,001 Ì 5,000,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì 5,000,001 Ì 5,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 2 Ì 5,500,001 Ì 6,000,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 Ì 6,000,001 Ì 6,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 1 6,500,001 Ì 7,000,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1 7,000,001 Ì 7,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1 7,500,001 Ì 8,000,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì 8,000,001 Ì 8,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì 9,000,001 Ì 9,500,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1 11,500,001 Ì 12,000,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1
Certain executive directors of the Bank, who are also directors of BOCHK Holdings, waived A1A(33)(2)(e)-(g) emoluments amounting to RMB 2 million, RMB 1 million and RMB 1 million for the year ended A1A(33)(3)(d),(e) December 31, 2003, 2004 and 2005, respectively, which were paid as discretionary bonuses to certain employees of the Group who support the operations of the board of directors of the Bank's subsidiaries. In addition, the Group had not paid any emoluments to the directors, supervisors or any of the Ñve highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of oÇce.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10 Income tax expense A15(1)(I)(j)
Year ended December 31, 2003 2004 2005 Current income tax Mainland China income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,702 13,843 18,536 Hong Kong proÑts taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 646 2,127 2,453 Overseas taxationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 360 404 302 2,708 16,374 21,291 Deferred income taxes (Note VI.34)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454 (6,176) 962 3,162 10,198 22,253
The provision for Mainland China income tax is calculated based on the statutory rate of 33% of the assessable income of the Bank and each of the subsidiaries established in Mainland China as determined in accordance with the relevant PRC income tax rules and regulations during the Relevant Periods.
The Group's operations in Hong Kong are subject to Hong Kong proÑts tax at the rate of 17.5% on the estimated assessable income for each of the years ended December 31, 2003, 2004 and 2005.
Taxation on overseas proÑts has been calculated on the estimated assessable proÑt at the rates of taxation prevailing in the countries or regions in which the Group operates during the Relevant Periods.
The tax on the Group's proÑt before tax diÅers from the theoretical amount that would arise using the basic domestic tax rate of the Bank as follows:
Year ended December 31, 2003 2004 2005 ProÑt before income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,347 37,263 53,811 Tax calculated at 33%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,325 12,297 17,758 EÅect of diÅerent tax rates in overseas operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,634) (2,865) (3,713) Supplementary tax on overseas income paid in the PRC ÏÏÏÏÏÏÏÏÏÏÏ 1,476 1,766 1,388 Prior year tax expenses adjustment(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,163) (506) 2,376 Income not subject to taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,723) (2,523) (1,862) Statutory asset revaluation surplus (Note II.4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,442) Ì Ì Expenses not deductible for tax purposes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,156 3,953 5,264 Others(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,833) (1,924) 1,042 Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,162 10,198 22,253
(1) The prior year tax expense adjustment for 2005 includes RMB1,921 million related to the reversal in 2004 of certain provisions recorded in prior years. Such reversals are typically non-taxable. The relevant domestic tax authorities determined that these reversals constituted taxable income as they related to the implementation of the Joint Stock Reform Plan. (2) Non-deductible expenses primarily include staÅ salary costs in excess of those permitted to be deducted.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10 Income tax expense (Continued)
(3) Others primarily include: (i) In 2005, the Bank sold certain non-performing loans. The deferred income tax assets arising from the associated loan loss provisions were de-recognised; (ii) In 2004, the PRC Tax Authority approved an one-oÅ deduction of RMB5,800 million related to impairment losses written oÅ by the Bank. Its tax impact was RMB1,914 million; and (iii) In 2003, the Bank deducted amounts related to losses incurred on the disposition of non-performing assets. The tax eÅect of this deduction was RMB1,183 million.
11 Earnings per share (Basic & diluted)
Basic and diluted earnings per share for the Relevant Periods have been computed by dividing LR4.04(8) the proÑt for each year by the weighted average number of ordinary shares in issue on the assumption that the 186,390 million ordinary shares issued in connection with the execution of the Joint Stock Reform Plan (Note VI.36), as if these shares had been issued on January 1, 2003.
The Group has no dilutive potential ordinary shares as of December 31, 2003, 2004 and 2005, and therefore the diluted earnings per share is equal to the basic earnings per share.
Year ended December 31, 2003 2004 2005 ProÑt attributable to equity holders of the Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,015 22,301 25,921 Weighted average number of ordinary shares in issue (millions) 186,390 186,390 186,425 Basic and diluted earnings per share (in RMB)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.17 0.12 0.14
12 Cash and due from banks A16(35)(2)(a) Group
As of December 31, 2003 2004 2005 Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,748 28,592 28,644 Due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,585 7,187 12,438 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,333 35,779 41,082
As of December 31, 2003, 2004 and 2005, the Group's cash and due from banks included in the Group's cash and cash equivalents amounted to RMB 30,159 million, RMB 34,865 million, and RMB 40,087 million, respectively (Note VI.42).
Bank
As of December 31, 2003 2004 2005 Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,613 25,416 25,144 Due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,837 6,957 13,131 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,450 32,373 38,275
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
12 Cash and due from banks (Continued)
As of December 31, 2003, 2004 and 2005, the Bank's cash and due from banks included in the Bank's cash and cash equivalents amounted to RMB 28,370 million, RMB 31,458 million and RMB 37,335 million, respectively (Note VI.42).
13 Balances with central banks A16(35)(2)(a) Group
As of December 31, 2003 2004 2005 Mandatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,978 167,662 202,030 Other deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,181 116,686 114,911 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267,159 284,348 316,941
Bank
As of December 31, 2003 2004 2005 Mandatory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,458 167,128 201,437 Other deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99,659 97,492 82,936 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 237,117 264,620 284,373
The Group places mandatory reserve funds with the PBOC and the central banks of other countries or regions where it has operations. Mandatory reserve funds placed with the PBOC were calculated at 7% of eligible RMB deposits from customers of domestic branches of the Bank prior to April 25, 2004. This has been increased to 7.5% since then. The Group is also required to deposit 2% of its foreign currency deposits from customers of domestic branches as mandatory reserve funds prior to January 15, 2005. This has been increased to 3% since then. The amounts of mandatory reserve funds placed with the central banks of other countries are determined by local jurisdiction. The mandatory reserve funds are not available for use in the Group's day to day operations. As of December 31, 2003, 2004 and 2005, the Group's balances with central banks included in cash and cash equivalents amounted to RMB 129,181 million, RMB 116,686 million and RMB 108,149 million respectively. As of December 31, 2003, 2004 and 2005, the Bank's balances with central banks included in cash and cash equivalents amounted to RMB 99,659 million, RMB 97,492 million and RMB 82,936 million, respectively (Note VI.42).
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
14 Placements with banks and other Ñnancial institutions A16(35)(2)(a) &(c) Group
As of December 31, 2003 2004 2005 Placements with domestic banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,198 49,839 52,439 Placements with other domestic Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏ 169,332 12,568 26,302 Placements with overseas banks and other Ñnancial institutions 242,933 279,293 253,904 431,463 341,700 332,645 Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,548) (1,508) (546) 428,915 340,192 332,099 Impaired placementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,622 1,537 546 Percentage of impaired placements to total placements with banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.61% 0.45% 0.16% Included in placements with other domestic Ñnancial institutions was RMB 162,239 million with the State Administration of Foreign Exchange as of December 31, 2003. As of December 31, 2003, 2004 and 2005, the Group's placements with banks and other Ñnancial institutions included in cash and cash equivalents amounted to RMB 270,363 million, RMB 185,145 million and RMB 233,301 million, respectively (Note VI.42).
Bank
As of December 31, 2003 2004 2005 Placements with domestic banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,940 46,862 50,480 Placements with other domestic Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏ 169,332 12,568 26,302 Placements with overseas banks and other Ñnancial institutions 140,486 153,193 167,418 326,758 212,623 244,200 Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,548) (1,508) (546) 324,210 211,115 243,654 Impaired placementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,622 1,537 546 Percentage of impaired placements to total placements with banks and other Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.80% 0.72% 0.22% As of December 31, 2003, 2004 and 2005, the Bank's placements with banks and other Ñnancial institutions included in cash and cash equivalents amounted to RMB 194,977 million, RMB 121,450 million and RMB 142,158 million, respectively (Note VI.42).
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
14 Placements with banks and other Ñnancial institutions (Continued)
Movements of allowance for impairment losses on placements with banks and other Ñnancial institutions are as follows:
Group and Bank 2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,833 2,548 1,508 Write-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (285) (1,040) (1,001) Addition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 39 As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,548 1,508 546
15 Trading assets and other Ñnancial instruments at fair value through proÑt or loss
Group A16(35)(2)(b) As of December 31, 2003 2004 2005 Trading debt securities GovernmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,179 6,125 19,116 Public sector and quasi-government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,412 1,123 2,095 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,903 12,641 30,599 CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,425 4,260 4,179 46,919 24,149 55,989 Other debt securities at fair value through proÑt or loss (designated at initial recognition) GovernmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,893 14,413 10,704 Public sector and quasi government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,238 19,608 12,974 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,447 24,571 19,979 CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,060 8,271 7,625 67,638 66,863 51,282 Trading equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 587 1,112 4,511 115,144 92,124 111,782 Analyzed as follows: Ì Listed in Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,676 3,115 7,648 Ì Listed outside Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,321 63,203 82,895 Ì UnlistedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,147 25,806 21,239 115,144 92,124 111,782
Included in the balances above are treasury bills held by the Group amounting to RMB3,404 million, RMB 3,983 million and RMB7,298 million as of December 31, 2003, 2004 and 2005, respectively.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
15 Trading assets and other Ñnancial instruments at fair value through proÑt or loss (Continued)
Bank
As of December 31, 2003 2004 2005 Trading debt securities Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,141 3,444 16,072 Public sector and quasi-governmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,283 825 100 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,724 3,296 14,439 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,701 1,002 1,149 31,849 8,567 31,760 Other debt securities at fair value through proÑt or loss (designated at initial recognition) Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,111 13,641 10,704 Public sector and quasi government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,275 17,874 12,974 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,785 20,115 19,666 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,558 7,830 6,978 58,729 59,460 50,322 90,578 68,027 82,082 Analyzed as follows: Ì Listed in Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,640 1,950 3,004 Ì Listed outside Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,174 54,117 71,902 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,764 11,960 7,176 90,578 68,027 82,082
Included in the balance above are treasury bills held by the Bank amounting to RMB 523 million, RMB 2,027 million and RMB 5,621 million as of December 31, 2003, 2004 and 2005, respectively. Included in other debt securities designated at fair value through proÑt or loss are certain non- trading debt securities which are economically hedged with derivative instruments. Gains and losses arising on the related derivative instruments are intended to substantially oÅset the gains and losses arising on these securities.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments A16(35)(3)(b) -(d) The Group enters into the following foreign exchange rate or interest rate related derivative Ñnancial instruments for trading and risk management purposes: Currency forwards represent commitments to purchase and sell foreign currency on a future date. Foreign currency and interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or interest rates or buy or sell a foreign currency or interest rate Ñnancial instrument on a future date at an agreed price in the Ñnancial market under the administration of the stock exchange. Forward rate agreements are individually negotiated interest rate futures that call for a cash settlement at a future date for the diÅerence between a contracted rate of interest and the current market rate, based on a notional principal amount. Currency and interest rate swaps are commitments to exchange one set of cash Öows for another. Swaps result in an exchange of currencies or interest rates (for example, Ñxed rate for Öoating rate) or a combination of all these (i.e. cross-currency interest rate swaps). Except for certain currency swaps contracts, no exchange of principal takes place. Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a speciÑc amount of a foreign currency or a Ñnancial instrument at a predetermined price. In consideration for the assumption of foreign exchange or interest rate risk, the seller receives a premium from the purchaser. Options are negotiated over-the-counter (""OTC'') between the Group and its counterparty. The contractual/notional amounts and fair values of derivative instruments held by the Group and the Bank are set out in the following table. The contractual/notional amounts of Ñnancial instruments provide a basis for comparison with fair value instruments recognized on the balance sheets but do not necessarily indicate the amounts of future cash Öows involved or the current fair value of the instruments and, therefore, do not indicate the Group's exposure to credit or market risks. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of Öuctuations in market interest rates or foreign exchange rates or equity/commodity prices relative to their terms. The aggregate fair values of derivative Ñnancial assets and liabilities can Öuctuate signiÑcantly from time to time.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments (Continued)
As of December 31, 2003
Group Bank Contractual/ Contractual/ notional amount Fair values notional amount Fair values Assets Liabilities Assets Liabilities Exchange rate derivatives Currency forwards ÏÏÏÏ 576,506 9,411 (9,515) 275,627 3,364 (5,234) Currency options purchasedÏÏÏÏÏÏÏÏÏÏ 11,807 198 Ì 10,233 194 Ì Currency options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,772 Ó (88) 6,046 Ì (75) 9,609 (9,603) 3,558 (5,309) Interest rate derivatives Interest rate swaps ÏÏÏ 171,663 1,476 (4,425) 147,991 1,388 (2,890) Cross-currency interest rate swaps ÏÏÏÏÏÏÏÏÏ 49,707 1,845 (10,739) 44,144 1,917 (9,713) Interest rate options purchasedÏÏÏÏÏÏÏÏÏÏ 1,616 2 Ì 1,616 Ì Ì Interest rate options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,107 Ó (307) 70,566 Ì (271) Interest rate futures ÏÏÏ 2,549 Ì (9) 2,549 Ì (9) 3,323 (15,480) 3,305 (12,883) Equity derivatives ÏÏÏÏÏÏÏ 1,966 10 (7) Ì Ì Ì Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏ 5,069 220 (101) 220 Ì Ì Total derivative Ñnancial instruments assets/(liabilities) (Note VI.27) ÏÏÏÏÏÏÏÏÏ 13,162 (25,191) 6,863 (18,192)
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments (Continued)
As of December 31, 2004
Group Bank Contractual/ Contractual/ notional amount Fair values notional amount Fair values Assets Liabilities Assets Liabilities Exchange rate derivatives Currency forwards ÏÏÏÏ 582,953 10,972 (9,399) 271,052 4,168 (4,685) Currency options purchasedÏÏÏÏÏÏÏÏÏÏ 18,099 299 Ì 16,592 293 Ì Currency options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,603 Ì (163) 10,571 Ì (148) 11,271 (9,562) 4,461 (4,833) Interest rate derivatives Interest rate swaps ÏÏÏ 301,820 2,283 (5,135) 276,978 2,230 (3,996) Cross-currency interest rate swaps 45,639 2,136 (9,082) 42,542 2,233 (8,429) Interest rate options purchasedÏÏÏÏÏÏÏÏÏÏ 12,194 175 Ó 11,695 159 Ì Interest rate options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,393 Ó (111) 37,046 Ì (95) Interest rate futures ÏÏÏ 14,858 3 (6) 14,444 3 (6) 4,597 (14,334) 4,625 (12,526) Equity derivatives ÏÏÏÏÏÏÏ 1,080 7 (5) Ì Ì Ì Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏ 12,474 201 (291) 5,098 26 (197) Total derivative Ñnancial instruments assets/(liabilities) (Note VI.27) ÏÏÏÏÏÏÏÏÏ 16,076 (24,192) 9,112 (17,556)
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments (Continued)
As of December 31, 2005 Group Bank Contractual/ Contractual/ notional amount Fair values notional amount Fair values Assets Liabilities Assets Liabilities Exchange rate derivatives Currency forwards(1) ÏÏ 563,397 6,991 (4,813) 286,268 2,515 (2,391) Currency options purchased(2) ÏÏÏÏÏÏÏ 176,643 3,781 Ì 173,993 3,759 Ì Currency options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,369 Ì (374) 17,866 Ì (346) 10,772 (5,187) 6,274 (2,737) Interest rate derivatives Interest rate swaps ÏÏÏ 361,332 3,132 (5,246) 328,245 3,050 (4,559) Cross-currency interest rate swaps ÏÏÏÏÏÏÏÏÏ 39,427 1,735 (4,131) 37,786 1,785 (4,062) Interest rate options purchasedÏÏÏÏÏÏÏÏÏÏ 11,584 148 Ì 11,377 148 Ì Interest rate options written ÏÏÏÏÏÏÏÏÏÏÏÏÏ 98,994 Ì (215) 96,950 Ì (180) Interest rate futures ÏÏÏ 14,939 28 (34) 9,701 1 (4) 5,043 (9,626) 4,984 (8,805) Equity derivatives ÏÏÏÏÏÏÏ 15,442 14 (7) Ì Ì Precious metals derivatives ÏÏÏÏÏÏÏÏÏÏÏ 21,008 979 (932) 2,482 71 (64) Total derivative Ñnancial instruments assets/(liabilities) (Note VI.27) ÏÏÏÏÏÏÏÏÏ 16,808 (15,752) 11,329 (11,606)
(1) In 2005, the PBOC selected certain domestic banks, including the Bank, to conduct Foreign Exchange Swap transactions. Under these agreements, the PBOC sold USD to the Bank in spot transactions for RMB and agreed to buy back the USD after one year at agreed exchange rates, which reÖect the interest rate diÅerentials between USD and RMB at the respective inception date of the transactions.
(2) On January 5, 2005, the Bank entered into a Foreign Currency Option Agreement with Huijin whereby the Bank acquired options to sell to Huijin USD, totalling USD 18 billion, of no more than USD1,500 million at the beginning of each calendar month during the year ending December 31, 2007 at a Ñxed exchange rate of USD1 to RMB 8.2769. The related option premium amounted to RMB 4,469 million is payable by the Bank to Huijin in 12 equal monthly instalments at the beginning of each calendar month during the year ending December 31, 2007. The tables above provide a breakdown of the contractual or notional amounts and the fair values of the Group's and the Bank's derivative Ñnancial instruments outstanding at each year end. These instruments, comprising foreign exchange and interest rate derivatives are intended to enable
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments (Continued)
the Group and the Bank and its customers to transfer, modify or reduce their foreign exchange and interest rate risks. The Group and the Bank primarily undertake transactions in foreign exchange and interest rate contracts with other Ñnancial institutions. Management has established notional limits of these contracts by counterparties. Actual credit exposures and limits are regularly monitored and controlled by management.
Credit risk weighted amounts Group
As of December 31, 2003 2004 2005 Derivatives Ì Exchange rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,567 3,783 3,744 Ì Interest rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,656 3,611 3,543 Ì Other derivative contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 24 45 5,262 7,418 7,332
Bank
As of December 31, 2003 2004 2005 Derivatives Ì Exchange rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,850 3,047 3,208 Ì Interest rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,595 3,549 3,469 4,445 6,596 6,677
Replacement costs Group
As of December 31, 2003 2004 2005 Derivatives Ì Exchange rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,609 11,271 10,772 Ì Interest rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,323 4,597 5,043 Ì Other derivative contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230 208 993 13,162 16,076 16,808
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16 Derivative Ñnancial instruments (Continued)
Bank
As of December 31, 2003 2004 2005 Derivatives Ì Exchange rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,558 4,461 6,274 Ì Interest rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,305 4,625 4,984 Ì Other derivative contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26 71 6,863 9,112 11,329
The credit risk weighted amounts are the amounts calculated with reference to the guidelines issued by the CBRC and are dependent on, among other factors, the creditworthiness of the counterparty and the maturity characteristics of each type of contract.
Replacement cost is the cost of replacing all contracts which have a positive value when marked to market (should the counterparty default on its obligations) and is obtained by marking contracts to market. Replacement cost is a close approximation of the credit risk for these contracts as of the balance sheet date.
The credit risk weighted amounts and replacement costs stated above have not taken the eÅects of netting arrangements into account.
Notional amounts of derivative Ñnancial instruments by original currency in RMB equivalent (net position)
Group
RMB USD HKD EURO JPY GBP Others Total As of December 31, 2003ÏÏ (36,801) 46,857 39,475 (53,866) (28,501) 11,496 13,967 (7,373) December 31, 2004ÏÏ (18,992) 10,770 83,539 (64,484) (43,766) 10,505 17,919 (4,509) December 31, 2005ÏÏ 173,666 (229,776) 73,943 (29,586) (16,344) 15,331 15,197 2,431
Bank RMB USD HKD EURO JPY GBP Others Total As of December 31, 2003ÏÏ (36,801) 77,855 7,081 (42,473) (14,190) 4,084 (2,796) (7,240) December 31, 2004ÏÏ (18,992) 84,754 (3,114) (54,411) (24,102) 4,473 6,652 (4,740) December 31, 2005ÏÏ 173,671 (163,490) 28,235 (24,826) (19,716) 7,902 (1,654) 122
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
17 Loans and advances to customers, net
Group A16(35)(2)(c)
As of December 31, 2003 2004 2005 Corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,777,507 1,653,647 1,712,262 Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 383,393 494,041 523,003 2,160,900 2,147,688 2,235,265 Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (239,039) (74,769) (83,153) Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,921,861 2,072,919 2,152,112 Fair value of listed securities accepted as collateral ÏÏÏÏÏÏÏÏ 18,408 14,299 19,474
Bank
As of December 31, 2003 2004 2005 Corporate loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,560,038 1,442,782 1,483,933 Personal loans and advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 258,553 355,562 384,390 1,818,591 1,798,344 1,868,323 Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (228,980) (69,109) (79,581) Loans and advances to customers, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,589,611 1,729,235 1,788,742 Fair value of listed securities accepted as collateral ÏÏÏÏÏÏÏÏ 18,051 13,235 18,128 The Group and the Bank accepted listed securities as collateral for commercial loans which the Group and the Bank are permitted to sell or re-pledge, none of which was re-pledged or lent to third parties as at December 31, 2003, 2004 and 2005.
As of December 31, 2003, 2004 and 2005, loans and advances to customers of the Group and A16(35)(2)(f) the Bank include bills pledged as collateral under repurchase agreements amounting to RMB 1,564 million, RMB 3,993 million and RMB 11,968 million, respectively (Note VI.41(2)).
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
17 Loans and advances to customers, net (Continued)
Group
IdentiÑed impaired loans (2) and advances IdentiÑed impaired Loans and advances for which for which loans and advances for which allowance allowance is allowance is as a % of gross is collectively collectively individually total loans and assessed(1) assessed assessed Sub-total Total advances As of December 31, 2003 Gross loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 1,802,682 97,977 260,241 358,218 2,160,900 16.6% Allowance for impairment losses ÏÏÏ (21,481) (63,748) (153,810) (217,558) (239,039) Net loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 1,781,201 34,229 106,431 140,660 1,921,861 As of December 31, 2004 Gross loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 2,029,305 28,615 89,768 118,383 2,147,688 5.5% Allowance for impairment losses ÏÏÏ (26,456) (12,614) (35,699) (48,313) (74,769) Net loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 2,002,849 16,001 54,069 70,070 2,072,919 As of December 31, 2005 Gross loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 2,125,735 26,288 83,242 109,530 2,235,265 4.9% Allowance for impairment losses ÏÏÏ (25,406) (12,009) (45,738) (57,747) (83,153) Net loans and advances ÏÏÏÏÏÏÏÏÏÏÏ 2,100,329 14,279 37,504 51,783 2,152,112
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
17 Loans and advances to customers, net (Continued)
Bank
IdentiÑed impaired loans (2) and advances IdentiÑed impaired Loans and advances for which for which loans and advances for which allowance allowance is allowance is as a % of gross is collectively collectively individually total loans and assessed(1) assessed assessed Sub-total Total advances As of December 31, 2003 Gross loans and advances ÏÏÏÏÏÏÏÏÏ 1,482,517 88,474 247,600 336,074 1,818,591 18.5% Allowance for impairment losses (19,526) (60,523) (148,931) (209,454) (228,980) Net loans and advances ÏÏÏÏÏÏÏÏÏ 1,462,991 27,951 98,669 126,620 1,589,611 As of December 31, 2004 Gross loans and advances ÏÏÏÏÏÏÏÏÏ 1,692,154 23,454 82,736 106,190 1,798,344 5.9% Allowance for impairment losses (25,511) (11,445) (32,153) (43,598) (69,109) Net loans and advances ÏÏÏÏÏÏÏÏÏ 1,666,643 12,009 50,583 62,592 1,729,235 As of December 31, 2005 Gross loans and advances ÏÏÏÏÏÏÏÏÏ 1,765,174 24,116 79,033 103,149 1,868,323 5.5% Allowance for impairment losses (24,813) (11,644) (43,124) (54,768) (79,581) Net loans and advances ÏÏÏÏÏÏÏÏÏ 1,740,361 12,472 35,909 48,381 1,788,742
(1) Loans and advances for which allowance is collectively assessed consists of loans and advances which have not been identiÑed as impaired i.e. primarily loans graded pass and special-mention.
(2) IdentiÑed impaired loans and advances include loans for which objective evidence of impairment exists and which have been assessed as bearing an impairment loss. These include loans for which objective evidence of impairment has been identiÑed and are assessed either:
‚ individually (including mainly signiÑcant corporate loans and advances which are graded substandard, doubtful or loss over a certain amount); or
‚ collectively i.e. portfolios of insigniÑcant homogenous loans, which includes insigniÑcant corporate loans and advances and all personal loans which are graded substandard, doubtful or loss.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
17 Loans and advances to customers, net (Continued)
Movements of allowance for impairment losses on loans and advances are as follows:
Group
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 318,443 239,039 74,769 Impairment losses for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,100 23,812 11,486 Loans and advances written oÅ and transferred (excluding loans referred to in (1) below)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63,905) (9,455) (4,852) Loans and advances transferred(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (180,490) Ì Amounts recovered of loan and advances written oÅ in previous years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 731 2,507 2,954 Release related to disposal of impaired loans and advances, transferred to capital reserve(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32,976) Ì Ì Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (675) Unwind of discount on allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,354) (644) (529) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 239,039 74,769 83,153
Bank
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 307,564 228,980 69,109 Impairment losses for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,578 26,354 14,235 Loans and advances written oÅ and transferred (excluding loans referred to in (1) below)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (62,082) (6,107) (3,781) Loans and advances transferred(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (180,490) Ì Amounts recovered of loan and advances written oÅ in previous years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250 1,016 972 Release related to disposal of impaired loans and advances, transferred to capital reserve(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32,976) Ì Ì Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (558) Unwind of discount on allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,354) (644) (396) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,980 69,109 79,581
(1) As discussed in sub-section II, in December 2003, the PRC Government committed the Bank to transfer certain of its non-performing loans and policy-related assets, with an aggregate carrying value of RMB 273,481 million to Cinda, the PBOC and China Orient in 2004 and established the sales price. Accordingly, as of December 31, 2003, the Bank adjusted the net carrying value of the loans which resulted in a net release of allowance for impairment losses on loans and advances of RMB 32,976 million which was recorded in the capital reserve. The transfer agreements for these loans and policy related assets were consummated in 2004, at which point all risks and rewards of the assets were transferred, meeting the de-recognition criteria of IAS39. At the time of the transaction, the net carrying value of these assets was RMB91,530 million and the related allowance for impairment losses amounted to RMB 180,490 million.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities A16(35)(2)(d) Group As of December 31, 2003 2004 2005 Debt securities available-for-sale (at fair value) Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131,855 157,283 229,064 Public sector and quasi government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,720 57,910 106,840 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,634 89,368 170,038 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,931 41,971 87,068 410,140 346,532 593,010 Equity securities (at fair value) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,331 11,055 9,211 Total securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 357,587 602,221 Debt securities held-to-maturity (at amortized cost) Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,763 108,507 231,156 Public sector and quasi government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,629 151,978 135,002 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87,220 169,373 203,724 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,577 28,150 37,577 215,189 458,008 607,459 Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14) (14) Ì Total securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 457,994 607,459 Debt securities classiÑed as loans and receivables (at amortized cost) China Orient Bond(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,000 160,000 160,000 PBOC Special Bills(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 91,530 91,530 Special Purpose Treasury Bond(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,500 42,500 42,500 Short term bills and notes(4) Public sector and quasi government bondsÏÏÏÏÏÏÏÏÏÏÏÏÏ 92,179 44,364 6,096 Financial institution bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,540 63,550 49,993 Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,951 1,601 Ì CertiÑcate Treasury Bonds and others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,713 10,574 11,888 352,883 414,119 362,007 Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (568) (178) (156) 352,315 413,941 361,851 Total(6), (8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 988,961 1,229,522 1,571,531
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
As of December 31, 2003 2004 2005 Analyzed as follows:
Securities available-for-sale Debt securities Ì Listed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 177,071 206,909 344,872 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 233,069 139,623 248,138 410,140 346,532 593,010 Equity securities Ì Listed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454 788 1,757 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,877 10,267 7,454 11,331 11,055 9,211 Total securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 357,587 602,221 Debt securities held-to-maturity Ì Listed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,917 211,738 332,841 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104,258 246,256 274,618 Total securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215,175 457,994 607,459 Debt securities classiÑed as loans and receivables Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 352,315 413,941 361,851 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 988,961 1,229,522 1,571,531
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
Bank As of December 31, 2003 2004 2005 Debt securities available-for-sale (at fair value) Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,127 157,258 219,566 Public sector and quasi governmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,003 57,910 102,200 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,166 89,270 146,373 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,358 41,965 70,798 341,654 346,403 538,937 Equity securities (at fair value) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,678 3,050 3,205 Total securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,332 349,453 542,142 Debt securities held-to-maturity (at amortized cost) Government ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,245 94,662 227,718 Public sector and quasi governmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,923 109,501 103,074 Financial institution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,864 43,230 74,791 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,624 4,861 9,560 Total securities held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,656 252,254 415,143 Debt securities classiÑed as loans and receivables (at amortized cost) China Orient Bond(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,000 160,000 160,000 PBOC Special Bills(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 91,530 91,530 Special Purpose Treasury Bond(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,500 42,500 42,500 Short term bills and notes(5) Ì Public sector and quasi government bonds ÏÏÏÏÏÏÏÏÏÏÏ 92,179 44,364 5,992 Ì Financial institution bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,303 34,160 32,156 Ì Corporate bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,330 730 Ì CertiÑcate Treasury Bonds and othersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,713 10,574 11,888 327,025 383,858 344,066 Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (568) (178) (156) 326,457 383,680 343,910 Total(7), (9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 758,445 985,387 1,301,195
As of December 31, 2003 2004 2005 Analyzed as follows:
Securities available-for-sale Debt securities Ì ListedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155,725 206,786 332,413 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185,929 139,617 206,524 341,654 346,403 538,937
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
As of December 31, 2003 2004 2005 Equity securities Ì ListedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,678 3,050 3,204 3,678 3,050 3,205 Total securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,332 349,453 542,142 Debt securities held-to-maturity Ì ListedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,187 151,306 296,266 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,469 100,948 118,877 Total securities held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,656 252,254 415,143 Debt securities classiÑed as loans and receivables Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 326,457 383,680 343,910 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 758,445 985,387 1,301,195
The market values of the above listed held-to-maturity securities are set out below:
Group
As of December 31, 2003 2004 2005 Carrying Market Carrying Market Carrying Market value value value value value value Investment securities Ì held-to- maturity Ì Listed in Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,436 4,169 5,262 5,454 5,129 5,107 Ì Listed outside Hong Kong ÏÏÏÏÏÏÏÏÏ 106,481 107,608 206,476 201,706 327,712 329,128
Bank
As of December 31, 2003 2004 2005 Carrying Market Carrying Market Carrying Market value value value value value value Investment securities Ì held-to- maturity Ì Listed in Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 360 374 427 420 Ì Listed outside Hong Kong ÏÏÏÏÏÏÏÏÏ 67,187 67,034 150,946 146,490 295,839 297,360
(1) The Bank transferred certain non-performing assets to China Orient in 1999 and 2000. On July 1, 2000, China Orient issued a ten-year bond with a par value of RMB 160,000 million to the Bank as consideration. The interest rate of the bonds is 2.25% per annum. Pursuant to Caijin ®2004© No. 87 ""Notice of the MOF regarding Relevant Issues relating to the Principal and Interest of Debt Securities of Financial Asset Management Companies Held by Bank of China and China Construction Bank'', from January 1, 2005, should China Orient fail to pay in full the interest on the debt securities or repay the principal in full according to the contractual terms of the bond, the MOF shall provide funding support to enable China Orient to fulÑl its obligations.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
(2) On June 30, 2004, the PBOC issued a Special Bill with a par value of RMB 18,100 million in exchange for certain policy- related assets of the Bank. The tenor of the bill is 3 years, with an interest rate of 1.89% per annum. The Bank has also been appointed as an agent to collect the policy-related assets (Note II.2).
On June 30, 2004, the Bank sold a portfolio of non-performing loans to Cinda and received consideration in the form of a Special Bill issued by the PBOC, with a par value of RMB 73,430 million. The tenor of the bill is 5 years, with an interest rate of 1.89% per annum (Note II.2).
Without the approval of the PBOC, the special PBOC Bills referred to above are non-transferable and may not be used as collateral for borrowings. The PBOC has the option to settle these bills in whole or in part before their maturity. (3) On August 18, 1998, the MOF issued a Special Purpose Treasury Bond with a par value of RMB 42,500 million to the Bank. This bond was issued with a tenor of 30 years and an annual coupon interest rate of 7.2%. The bond was Ñnanced primarily through a short term loan from the PBOC of RMB 12.2 billion and the release of mandatory reserve in the Bank's account with the PBOC of RMB 30.3 billion. At the same time, RMB 42,500 million in funding loans from the PBOC to the Bank, bearing interest at a weighted average rate of approximately 8.0% were extinguished in exchange for an equivalent amount of equity capital in the Bank. Interest on the Special Purpose Treasury Bond was accrued but not paid, as the related receivable was oÅset with a payable to the MOF on each interest payment date. The payable to the MOF related to the accrual of a levy of an equal amount imposed on the Bank by the MOF, consistent with the circumstances under which the funding loans were extinguished. In accordance with Ren Da Chang Hui Zi ®2004© No. 25 ""Resolution of the Standing Committee of the National People's Congress on the Approval of the Report of the State Council on the Payment of Interest on the Special Purpose Treasury Bond of 1998'', the Special Purpose Treasury Bond was restructured to, among other things, reduce the annual coupon interest rate to 2.25%, the rate established by the PRC Government for use in connection with large-scale policy directed Ñnancing transactions, and reinstate cash interest payments from December 1, 2004. In addition, the levy previously imposed by the MOF ceased. This restructuring was accounted for as the de-recognition of the original Special Purpose Treasury Bond yielding 7.2% and recognition of a restructured Special Purpose Treasury Bond yielding 2.25%, with a remaining maturity equal to that of the original Special Purpose Treasury Bond. No gain or loss was recognized in connection with (i) the de-recognition of the original Special Purpose Treasury bond, as it was carried at par value before the restructuring and (ii) the initial recognition of the restructured Special Purpose Treasury Bond, as it pays a rate consistent with the Ñnancing rate of other large PRC Government-directed Ñnancing arrangements.
The transactions related to the Special Purpose Treasury Bond described above were accounted for with reference to rates determined by the PRC Government in similar transactions engaged in or directed by the PRC Government, the sole owner of the Bank's equity capital at the time of the transaction. As discussed in Note V.2, there were no relevant market prices or yields, reÖecting arm's length transactions of a comparable size and tenor available. (4) As of December 31, 2003, 2004 and 2005, the Group's short term bills and notes included in cash and cash equivalents amounted to RMB 19,247 million, RMB 29,446 million and RMB 15,575 million, respectively (Note VI.42). (5) As of December 31, 2003, 2004 and 2005, the Bank's short term bills and notes included in cash and cash equivalents amounted to RMB 8,195 million, RMB 23,815 million and RMB 13,194 million, respectively (Note VI.42). (6) Included in the balance are treasury bills held by the Group amounting to RMB 38,568 million, RMB 91,006 million and RMB 228,154 million as of December 31, 2003, 2004 and 2005, respectively. (7) Included in the balance are treasury bills held by the Bank amounting to RMB 15,369 million, RMB 77,471 million and RMB 222,625 million as of December 31, 2003, 2004 and 2005, respectively.
(8) As of December 31, 2003, 2004 and 2005, the Group's debt securities of RMB 33,951 million, RMB 11,639 million and A16(35)(2)(f) RMB 49,658 million, respectively, were pledged as collateral to third parties under agreement to repurchase (Note VI.41 (2)). (9) As of December 31, 2003, 2004 and 2005, the Bank's debt securities of RMB 30,841 million, RMB 9,331 million and RMB 45,106 million, respectively, were pledged as collateral to third parties under agreement to repurchase (Note VI.41 (2)).
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
Movements of investment securities during the Relevant Periods are as follows: Group A16(35)(1)(i) Available- Held-to- Loans and for-sale maturity receivables Total As of January 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371,486 178,193 328,658 878,337 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 628,314 160,491 232,458 1,021,263 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (582,815) (130,149) (213,246) (926,210) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (828) 251 743 166 Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,385 Ì Ì 2,385 Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,865 2,423 3,632 12,920 ReclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,936) 3,936 Ì Ì Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 30 70 100 As of December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,471 215,175 352,315 988,961 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 366,669 308,024 307,567 982,260 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (355,326) (142,804) (247,002) (745,132) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (697) (483) 779 (401) Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,235) Ì Ì (2,235) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,857 2,930 (108) 5,679 ReclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (75,152) 75,152 Ì Ì Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 390 390 As of December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 357,587 457,994 413,941 1,229,522 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 927,624 515,344 133,328 1,576,296 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (662,363) (356,715) (184,540) (1,203,618) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (634) 1,412 697 1,475 Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 796 Ì Ì 796 Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,979) (10,590) (1,598) (30,167) ReclassiÑcation (Note VI. 21) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,810) Ì Ì (2,810) Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 14 23 37 As of December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 602,221 607,459 361,851 1,571,531
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18 Investment securities (Continued)
Bank
Available- Held-to- Loans and for-sale maturity receivables Total As of January 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 319,889 50,493 299,887 670,269 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 568,295 38,178 119,142 725,615 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (546,242) (6,881) (93,106) (646,229) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (822) (24) 150 (696) Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (146) Ì Ì (146) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,294 954 314 9,562 ReclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,936) 3,936 Ì Ì Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 70 70 As of December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,332 86,656 326,457 758,445 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 366,098 168,360 220,029 754,487 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (350,918) (13,807) (163,599) (528,324) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (697) 94 360 (243) Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,639) Ì Ì (2,639) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,971 257 43 3,271 ReclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10,694) 10,694 Ì Ì Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 390 390 As of December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 349,453 252,254 383,680 985,387 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 847,842 432,940 93,543 1,374,325 Sale and redemption ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (638,541) (267,575) (132,561) (1,038,677) (Amortization)/accretion, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (496) 2,061 226 1,791 Fair value changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 835 Ì Ì 835 Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16,951) (4,537) (1,001) (22,489) Impairment losses for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 23 23 As of December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 542,142 415,143 343,910 1,301,195
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
19 CertiÑcates of deposits held
CertiÑcates of deposits held are included within the following balance sheet captions:
Group
As of December 31, 2003 2004 2005 Trading assets and other Ñnancial instruments at fair value through proÑt or loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,475 1,725 3,147 Investment securities Ì available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,961 199 4,540 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,614 26,813 18,817 Ì loans and receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 606 414 460 24,656 29,151 26,964 Analyzed as follows: Ì Listed in Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 163 Ì Listed outside Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 190 1,008 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,588 28,961 25,793 24,656 29,151 26,964 Market value of listed certiÑcates of deposits heldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 190 1,169
Bank
As of December 31, 2003 2004 2005 Trading assets and other Ñnancial instruments at fair value through proÑt or lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 154 Investment securities Ì available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 199 239 Ì held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 490 771 405 Ì loans and receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 606 414 460 1,247 1,384 1,258 Analyzed as follows: Ì Listed in Hong KongÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Listed outside Hong KongÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 158 154 Ì Unlisted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,179 1,226 1,104 1,247 1,384 1,258 Market value of listed certiÑcates of deposits held ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 158 154
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20 Investment in subsidiaries A1A(29)(1) 3rd Sch 29 As of December 31, 2003 2004 2005 Investments at cost: Ì Unlisted shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,683 45,018 45,080
Details of the Bank's principal subsidiaries as at the date of this report are set out below. These principal subsidiaries are private companies except otherwise stated. All holdings are in the ordinary share capital of the undertaking concerned.
Place of Date of incorporation incorporation/ Paid-in Equity Principal Name and operation establishment capital held business (in millions) (%) Directly held BOC Hong Kong (Group) Hong Kong September 12, HKD34,806 100.00 Holding Limited 2001 company BOC International Holdings Hong Kong July 10, HKD3,539 100.00 Investment Limited 1998 banking Bank of China Group Insurance Hong Kong July 23, HKD969 100.00 Insurance Company Limited 1992 services Bank of China Group Hong Kong May 18, HKD200 100.00 Investment Investment Limited 1993 holding Tai Fung Bank Limited Macau 1942 MOP1,000 50.31 Commercial banking Indirectly held BOC Hong Kong (Holdings) Hong Kong September 12, HKD52,864 65.88 Holding Limited (""BOCHK 2001 company Holdings'')(1) Bank of China (Hong Kong) Hong Kong October 16, HKD43,043 65.88 Commercial Limited(2)(3) 1964 banking Nanyang Commercial Bank, Hong Kong February 2, HKD600 65.88 Commercial Limited(3) 1948 banking Chiyu Banking Corporation Hong Kong April 24, HKD300 46.44 Commercial Limited(2)(3) 1947 banking BOC Credit Card (International) Hong Kong September 9, HKD480 65.88 Credit card Limited 1980 services BOC Group Trustee Company Hong Kong December 1, HKD200 76.31 Provision of Limited(3) 1997 trustee services
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20 Investment in subsidiaries (Continued)
(1) BOCHK Holdings is listed on The Stock Exchange of Hong Kong Limited. In December 2003, the Bank disposed of 10.12% of the share capital of BOCHK Holdings for an aggregate consideration of RMB 15,622 million, resulting in a gain of RMB 7,400 million after deducting a payable to the social welfare fund of RMB 1,528 million. (2) Bank of China (Hong Kong) Limited, in which the Group holds a 65.88% equity interest, holds 70.49% of the voting shares of Chiyu Banking Corporation Limited. (3) Bank of China (Hong Kong) Limited, Nanyang Commercial Bank Limited, Chiyu Banking Corporation Limited and BOC International Holdings Limited, in which the Group holds 65.88%, 65.88%, 46.44% and 100% of their equity interests respectively, hold 54%, 6%, 6% and 34% shares of BOC Group Trustee Company Limited, respectively. (4) For the years ended December 31, 2003, 2004 and 2005, the Ñnancial statements of all principal subsidiaries as stated LR4.08(1)(a) above were audited by PricewaterhouseCoopers except for Bank of China Group Investment Limited, the Ñnancial statements of which were audited by Tai Kong CPA Limited.
21 Investment in associates Group
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,994 1,355 1,227 Investment cost addition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 360 215 1,547 Transferred from available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 556 Adoption of equity accounting for investment in associates (Note VI.39)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2,194 Disposal of investment in associatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (937) (477) (529) Share of results after tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) 141 175 Write back of impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 69 7 Dividends received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (76) (116) As of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 1,227 5,061
(1) On September 22, 2005, the Group entered into a contract with an independent third party to acquired a further 5% of the equity shares of Huaneng International Power Development Corporation. The carrying value of this investment on purchase was RMB 1,255 million and is included in investment securities cost additions for 2005. As a result of this transaction, the Group holds 20% of the equity of Huaneng International Power Development Corporation and accounts for the investment using the equity method. Consequently, the then existing 15% investment in Huaneng International Power Development Corporation was reclassiÑed from available-for-sale securities to investment in associates, resulting in a reclassiÑcation of RMB 2,810 million from investment securities (Note VI.18) representing the original cost of RMB 556 million and the reversal of the cumulative change in fair value recorded in the reserve for fair value changes of available-for-sale securities of RMB 2,254 million (Note VI.40). The cumulative impact resulting from the adoption of the equity method of RMB 2,194 million representing the post acquisition share of net proÑts, has been credited to undistributed proÑts.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
21 Investment in associates (Continued)
Bank As of December 31, 2003 2004 2005 Investment at cost: Ì Unlisted shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141 131 45
Particulars of the principal associates of the Group are set out as follows:
Place of incorporation/ Equity Paid-in establishment held capital Principal business (%) (in millions) Huaneng International PRC 20 USD450 Power plants Power Development Corporation BOC International PRC 49 RMB1,500 Security underwriting, investment (China) Limited advisory, and brokerage services CJM Insurance Brokers Hong Kong 33 HKD6 Insurance broker Limited Joint Electronic Teller Hong Kong 19.96 HKD10 Private inter-bank message Services Limited switching network and ATM services
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22 Property and equipment Group
Buildings and Equipment and Construction improvements motor vehicles in process Total As of January 1, 2003 Cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,198 26,583 3,883 102,664 Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10,407) (17,089) Ì (27,496) Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏ (5,727) Ì (729) (6,456) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,064 9,494 3,154 68,712 As of December 31, 2003 Cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,138 27,525 3,912 102,575 Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,764) (18,685) Ì (31,449) Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏ (3,825) Ì (687) (4,512) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,549 8,840 3,225 66,614 As of December 31, 2004 Cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,398 28,189 3,338 101,925 Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15,099) (19,389) Ì (34,488) Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏ (1,787) (2) (636) (2,425) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,512 8,798 2,702 65,012 As of December 31, 2005 Cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,216 29,739 3,861 100,816 Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15,066) (21,306) Ì (36,372) Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏ (1,494) (2) (531) (2,027) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,656 8,431 3,330 62,417
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22 Property and equipment (Continued)
Group Buildings and Equipment and Construction improvements motor vehicles in process Total Year ended December 31, 2003 Opening net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,064 9,494 3,154 68,712 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,961 2,983 1,110 6,054 Transfer to investment property, net (Note VI.23)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (433) Ì Ì (433) ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 728 1 (729) Ì DisposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,387) (208) (310) (1,905) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,697) (3,477) Ì (6,174) Exchange diÅerencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 313 47 Ì 360 Closing net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,549 8,840 3,225 66,614 Year ended December 31, 2004 Opening net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,549 8,840 3,225 66,614 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,177 3,352 1,340 6,869 Transfer to investment property, net (Note VI.23)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (99) Ì Ì (99) ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,680 44 (1,724) Ì DisposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,880) (240) (106) (2,226) Impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (148) (6) (33) (187) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,888) (3,200) Ì (6,088) Exchange diÅerencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121 8 Ì 129 Closing net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,512 8,798 2,702 65,012 Year ended December 31, 2005 Opening net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,512 8,798 2,702 65,012 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,781 2,789 1,701 6,271 Transfer to investment property, net (Note VI.23)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (937) Ì Ì (937) ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 656 10 (666) Ì DisposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,210) (382) (405) (1,997) Impairment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (100) Ì (1) (101) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,428) (2,758) Ì (5,186) Exchange diÅerencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (618) (26) (1) (645) Closing net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,656 8,431 3,330 62,417
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22 Property and equipment (Continued)
Bank Buildings and Equipment and Construction improvements motor vehicles in process Total As of January 1, 2003 CostÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,902 22,013 3,830 78,745 Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,024) (13,757) Ì (22,781) Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏ (5,662) Ì (722) (6,384) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,216 8,256 3,108 49,580 As of December 31, 2003 CostÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,250 22,858 3,871 79,979 Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10,773) (15,311) Ì (26,084) Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏ (3,808) Ì (680) (4,488) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,669 7,547 3,191 49,407 As of December 31, 2004 CostÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,842 23,383 3,296 79,521 Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,489) (15,995) Ì (28,484) Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏ (1,772) (2) (630) (2,404) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,581 7,386 2,666 48,633 As of December 31, 2005 CostÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,885 24,922 3,842 80,649 Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,656) (17,922) Ì (30,578) Allowance for impairment lossesÏÏÏÏÏÏÏÏÏÏÏ (1,485) (2) (523) (2,010) Net book amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,744 6,998 3,319 48,061
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22 Property and equipment (Continued)
Buildings and Equipment and Construction improvements motor vehicles in process Total Bank Year ended December 31, 2003 Opening net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,216 8,256 3,108 49,580 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,384 2,596 1,110 6,090 ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 716 1 (717) Ì Disposals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (865) (184) (310) (1,359) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,034) (3,149) Ì (5,183) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 252 27 Ì 279 Closing net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,669 7,547 3,191 49,407 Year ended December 31, 2004 Opening net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,669 7,547 3,191 49,407 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,112 2,880 1,339 6,331 Transfer from investment property, net (Note VI.23) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 Ì Ì 21 ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,680 44 (1,724) Ì Disposals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,640) (229) (107) (1,976) Impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (148) (6) (33) (187) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,267) (2,858) Ì (5,125) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 8 Ì 162 Closing net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,581 7,386 2,666 48,633 Year ended December 31, 2005 Opening net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,581 7,386 2,666 48,633 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,697 2,346 1,700 5,743 ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 657 9 (666) Ì Disposals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (691) (377) (381) (1,449) Impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (100) Ì Ì (100) Depreciation charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,082) (2,368) Ì (4,450) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (318) 2 Ì (316) Closing net book amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,744 6,998 3,319 48,061
According to the relevant PRC laws and regulations, after conversion into a joint stock limited liability company, the Bank is required to re-register its Ñxed assets under the name of Bank of China Limited. As of December 31, 2005, the process of re-registration has not been completed. However, this registration process does not aÅect the rights of Bank of China Limited to these assets.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22 Property and equipment (Continued)
The carrying value of buildings and improvements is analyzed based on the remaining terms of the leases as follows:
Group
As of December 31, 2003 2004 2005 Held in Hong Kong Ì on long-term lease (over 50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,732 8,128 7,041 Ì on medium-term lease (10-50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,729 4,579 4,030 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 1 1 13,463 12,708 11,072 Held outside Hong Kong Ì on long-term lease (over 50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,610 4,462 3,719 Ì on medium-term lease (10-50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,109 35,957 35,338 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 367 385 527 41,086 40,804 39,584 54,549 53,512 50,656
Bank
As of December 31, 2003 2004 2005 Held outside Hong Kong Ì on long-term lease (over 50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,206 4,075 2,911 Ì on medium-term lease (10-50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,126 34,150 34,384 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 337 356 449 38,669 38,581 37,744
23 Investment property
Group
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,654 5,837 6,288 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 Ì 45 Transfer from property and equipment, net (Note VI.22) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 433 99 937 DisposalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (892) (908) (312) Fair value changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (412) 1,280 1,697 Exchange diÅerencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 (20) (144) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,837 6,288 8,511
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23 Investment property (Continued)
Bank
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 515 515 467 Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 45 Transfer to property and equipment, net (Note VI.22) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (21) Ì Disposals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (23) Fair value changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (7) (12) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (20) (16) As of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 515 467 461
Investment properties held by BOCHK Holdings, a subsidiary of the Group, are included in the consolidated balance sheets at valuation determined on the basis of the their open market value as estimated by an independent Ñrm of chartered surveyors, Chesterton Petty Limited. The carrying value as of December 31, 2003, 2004 and 2005 amounted to RMB 5,322 million, RMB 5,724 million and RMB 7,843 million, respectively, based on valuations performed as of October 31, 2003, 2004 and 2005, respectively. Chesterton Petty Limited also conÑrmed that there had been no material changes in valuation as of December 31, 2003, 2004 and 2005 as compared to the valuation at October 31, 2003, 2004 and 2005, respectively. The carrying value of investment properties is analyzed based on the remaining terms of the leases as follows:
Group
As of December 31, 2003 2004 2005 Held in Hong Kong Ì on long-term lease (over 50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,337 4,945 7,042 Ì on medium-term lease (10-50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 844 725 794 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 41 5,181 5,670 7,877 Held outside Hong Kong Ì on long-term lease (over 50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 438 401 414 Ì on medium-term lease (10-50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 36 149 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 182 181 71 656 618 634 5,837 6,288 8,511
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23 Investment property (Continued)
Bank
As of December 31, 2003 2004 2005 Held outside Hong Kong Ì on long-term lease (over 50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 437 391 390 Ì on medium-term lease (10-50 years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 76 71 515 467 461
24 Other assets Group
As of December 31, 2003 2004 2005 Accounts receivable and prepayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,492 11,924 10,397 Interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,387 15,101 20,483 Foreclosed assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,259 2,184 2,051 Land use rights(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,522 2,006 1,850 Intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 475 1,647 1,383 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,308 2,713 2,476 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,443 35,575 38,640
Bank
As of December 31, 2003 2004 2005 Accounts receivable and prepayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,728 4,702 3,380 Interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,801 12,301 16,107 Foreclosed assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,341 2,128 1,767 Land use rights(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,522 2,006 1,850 Intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 475 1,591 1,329 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,466 1,413 1,404 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,333 24,141 25,837
(1) Land use rights represent the right to use land appropriated by the PRC Government. According to MLR ®2004© No. 253 ""Response Concerning the Disposal of Land Assets in the Restructuring of Bank of China'' and MLR ®2005© No. 165 ""Response Concerning the Additional Disposal of Land Assets of Bank of China Limited'' issued by the Ministry of Land and Resources, the rights to use 4,032 pieces of land originally appropriated by the PRC Government have been transferred to the Bank. The land must be used for the purposes originally approved by the PRC Government. Upon obtaining the rights to the use of the lands appropriated by the PRC Government for speciÑed uses, the Bank can allocate the land in the form of capital contributions (through equity investment) or leases to direct investees of the Bank. If the use of the land is altered or the land is allocated to parties other than those mentioned above, applications
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
24 Other assets (Continued)
for approval must be Ñled with the related municipal and county level land and resources authorities where the underlying pieces of land are located, and the fees for land assignments should be paid as required.
These land use rights are primarily used by the Bank for its operating activities. There were no signiÑcant alterations to the use of the land and no signiÑcant disposals to third parties during the years ended December 31, 2003, 2004 and 2005.
The carrying value of land use rights is analyzed based on the remaining terms of the leases as follows:
Group and Bank
As of December 31, 2003 2004 2005
Held outside Hong Kong Ì on long-term lease (over 50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194 57 21 Ì on medium-term lease (10-50 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,324 1,944 1,823 Ì on short-term lease (less than 10 years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 5 6 2,522 2,006 1,850
25 Due to central banks
Group As of December 31, 2003 2004 2005 Special foreign exchange deposits from PRC Government agencies 64,091 44,444 28,873 Borrowings from central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,248 3,120 520 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,476 19,174 662 76,815 66,738 30,055
Bank As of December 31, 2003 2004 2005 Special foreign exchange deposits from PRC Government agencies 64,091 44,444 28,848 Borrowings from central banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,290 3,120 520 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,476 19,174 662 71,857 66,738 30,030
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
26 Government certiÑcates of indebtedness for bank notes issued and bank notes in circulation Bank of China (Hong Kong) Limited and Bank of China Macau Branch are note issuing banks for Hong Kong dollar and Macau Pataca notes in Hong Kong and Macau, respectively. Under local regulations, these two entities are required to place deposits of funds to the Hong Kong and Macau Governments respectively to secure the currency notes in circulation. Bank notes in circulation represent the liabilities in respect of Hong Kong Dollar notes and Macau Pataca notes in circulation, issued respectively by Bank of China (Hong Kong) Limited and Bank of China Macau branch.
27 Derivative Ñnancial instruments and liabilities at fair value through proÑt or loss A16(35)(2)(f) Group As of December 31, 2003 2004 2005 Derivative Ñnancial instruments liabilities (Note VI.16) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,191 24,192 15,752 Liabilities at fair value through proÑt or loss Structured deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,821 54,188 70,069 Short positions in foreign currency debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,049 13,272 3,740 Short position in exchange fund bills ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,916 2,108 1,613 25,786 69,568 75,422 50,977 93,760 91,174
Bank As of December 31, 2003 2004 2005 Derivative Ñnancial instruments liabilities (Note VI.16) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,192 17,556 11,606 Liabilities at fair value through proÑt or loss Structured deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,822 52,704 63,507 Short positions in foreign currency debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,049 13,272 1,210 22,871 65,976 64,717 41,063 83,532 76,323
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
28 Due to customers Group
As of December 31, 2003 2004 2005 Demand deposits Ì Corporate customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 679,524 776,648 836,763 Ì Individual customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,904 697,028 667,957 Ì Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,819 107,061 128,392 1,376,247 1,580,737 1,633,112 Time deposits Ì Corporate customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 332,606 406,019 511,983 Ì Individual customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324,511 1,351,692 1,554,369 1,657,117 1,757,711 2,066,352 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,033,364 3,338,448 3,699,464
Bank
As of December 31, 2003 2004 2005 Demand deposits Ì Corporate customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 586,795 670,346 747,059 Ì Individual customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 373,781 441,188 492,876 Ì Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82,068 100,347 122,083 1,042,644 1,211,881 1,362,018 Time deposits Ì Corporate customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 269,534 296,953 404,500 Ì Individual customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,065,310 1,128,395 1,242,669 1,334,844 1,425,348 1,647,169 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,377,488 2,637,229 3,009,187
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
29 Bonds issued A16(35)(2)(e) Group
Issue Maturity Interest As of December 31, date date rate 2003 2004 2005
Bonds issued 1994 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ March 10, March 15, 8.25% 827 183 179 1994 2014 1997 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ April 23, April 23, 6 month LIBOR 1,962 Ì Ì 1997 2004 °0.375% 1999 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ May 4, June 4, 6 month LIBOR 1,034 Ì Ì 1999 2004 °1.2% 3,823 183 179 Subordinated bonds issued 2004 RMB Debt Securities(1) Ì First Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 7, 2004 July 20, 4.87% Ì 14,070 14,070 2014 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 22, November 16, 4.94% Ì 12,000 12,000 2004 2014 2005 RMB Debt Securities(2) Ì First Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, 4.83% Ì Ì 15,930 2005 2015 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, 5.18% Ì Ì 9,000 2005 2020 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, Öoating rate Ì Ì 9,000 2005 2015 Ì 26,070 60,000 3,823 26,253 60,179
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
29 Bonds issued (Continued)
Bank
As of December 31, Issue date Maturity date Interest rate 2003 2004 2005
Bonds issued 1994 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ March 10, March 15, 8.25% 827 183 179 1994 2014 1997 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ April 23, April 23, 2004 6 month LIBOR 2,053 Ì Ì 1997 °0.375% 1999 US Dollar Debt Securities ÏÏÏÏÏÏÏÏÏÏÏ May 4, 1999 June 4, 2004 6 month LIBOR 1,191 Ì Ì °1.2% 4,071 183 179 Subordinated bonds issued 2004 RMB Debt Securities(1) Ì First Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 7, 2004 July 20, 2014 4.87% Ì 14,070 14,070 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 22, November 16, 4.94% Ì 12,000 12,000 2004 2014 2005 RMB Debt Securities(2) Ì First Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, 4.83% Ì Ì 15,930 2005 2015 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, 5.18% Ì Ì 9,000 2005 2020 Ì Second Tranche ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 18, March 4, Öoating rate Ì Ì 9,000 2005 2015 Ì 26,070 60,000 4,071 26,253 60,179
(1) Pursuant to Yinfu ®2004© No. 35 ""Response of the PBOC on the Issuance of Subordinated Bonds by Bank of China'' and Yinjianfu ®2004© No. 81 ""Response of the CBRC on the Issuance of Subordinated Bonds by Bank of China'', the Bank issued the following subordinated bonds: The Ñrst tranche of subordinated bonds issued on July 7, 2004 has a maturity of 10 years, with a Ñxed coupon rate of 4.87%, paid annually. The Bank has the option to redeem all or part of the bonds at face value on July 20, 2009. If the Bank does not exercise this option, the annual coupon rate of the bonds for the second 5-year period shall be the original coupon rate plus 2.8%, and shall remain Ñxed for the remaining term of the bonds. The second tranche of subordinated bonds issued on October 22, 2004 has a maturity of 10 years, with a Ñxed coupon rate of 4.94%, paid annually. The holders have the option to convert, at face value, all or part of the bonds to Öoating rate debt of an equivalent amount on November 16, 2005 or November 16, 2006, and the coupon rate of the Öoating rate bonds shall be the speciÑed ""Base Rate'' plus 1.8%. The Base Rate shall be the rate for 1-year time deposits established by the PBOC that is in eÅect on November 16 of each year from the conversion date through maturity, with an annual reset. The Bank has the option to redeem all or part of the bonds at face value on November 16, 2009. If the Bank does not exercise this option, the coupon rate for the second 5-year period shall be the original coupon rate plus 3%, and shall be Ñxed for the remaining term of the bonds. For those bonds that have been converted to Öoating rate, the spread for the second 5-year period is 2.8%. (2) The Ñrst tranche of subordinated bonds issued on February 18, 2005 has a maturity of 10 years, with a Ñxed coupon rate of 4.83%, paid annually. The Bank has the option to redeem all or part of the bonds at face value on March 4, 2010. If the Bank does not exercise this option, the annual coupon rate of the bonds for the second 5-year period shall be the original coupon rate plus 3%, and shall remain Ñxed for the remaining term of the bonds. The second tranche of subordinated bonds issued on February 18, 2005 comprises a Ñxed rate portion and a Öoating rate portion.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
29 Bonds issued (Continued)
The second tranche of Ñxed rate subordinated bonds issued on February 18, 2005 has a maturity of 15 years, with a Ñxed coupon rate of 5.18%, paid annually. The Bank has the option to redeem all or part of the bonds at face value on March 4, 2015. If the Bank does not exercise this option, the annual coupon rate of the bonds for the third 5-year period shall be the original coupon rate plus 3%, and shall remain Ñxed through the maturity date. The second tranche of Öoating rate subordinated bonds issued on February 18, 2005 has a maturity of 10 years, with a Öoating rate based on a 7-day domestic money market rate, paid semi-annually. The Bank has the option to redeem all or part of the bonds at face value on March 4, 2010. If the Bank does not exercise this option, the Öoating rate for the second 5-year period shall be the original Öoating rate plus 1%. These RMB denominated bonds are subordinated to all other claims on the assets of the Bank, except those of the equity holders. In the calculation of the Group's capital adequacy ratio, these bonds qualify for inclusion as supplementary capital in accordance with the relevant CBRC's guidelines.
30 Special purpose borrowings A16(35)(2)(e) Group and Bank
As of December 31, 2003 2004 2005 Export credit loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,941 23,530 17,147 Foreign government loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,956 21,025 18,414 Other subsidized loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,332 24,994 16,603 77,229 69,549 52,164
Special purpose borrowings are long-term borrowings in multiple currencies from foreign governments and/or banks in the form of export credit loans, foreign government loans and other subsidized loans. These special purpose loans are normally used to Ñnance projects of special commercial purpose in the PRC and the Bank is obliged to repay these loans when they fall due. As of December 31, 2005, the maturity of special purpose borrowings ranges from within 1 month to 37 years, with Öoating and Ñxed interest rates range from 0.2% to 9.2%, which are consistent with those related to similar development loans from these entities.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
31 Summary of indebtedness
The maturity of issued bonds and special purpose borrowings are analyzed as follows: LR4.04(10)
Group
Special Issued purpose bonds borrowings Total As of December 31, 2003 On demand or within a period not exceeding one year ÏÏÏÏÏÏÏÏÏÏ 2,996 18,729 21,725 Between 1 to 2 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 7,659 7,659 Between 2 to 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 22,064 22,064 Over 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 827 28,777 29,604 3,823 77,229 81,052 As of December 31, 2004 On demand or within a period not exceeding one year ÏÏÏÏÏÏÏÏÏÏ Ì 10,220 10,220 Between 1 to 2 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 7,123 7,123 Between 2 to 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 20,523 20,523 Over 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,253 31,683 57,936 26,253 69,549 95,802 As of December 31, 2005 On demand or within a period not exceeding one year ÏÏÏÏÏÏÏÏÏÏ Ì 7,223 7,223 Between 1 to 2 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6,867 6,867 Between 2 to 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 13,973 13,973 Over 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,179 24,101 84,280 60,179 52,164 112,343
32 Retirement beneÑt obligations A1A(33)(4)(e)(i)-(iv)
The Group recognises a liability for the present value of the unfunded obligation relating to retirement beneÑts payable to certain retired and early retired employees in the balanced sheets. The liability related to the supplemental beneÑt obligation for employees who retired prior to December 31, 2003 and early retirement obligation existing at the year-end is calculated by the actuarial department of BOC Group Life Assurance Company Limited, a subsidiary of the Bank, using the projected unit credit actuarial cost method. The actuarial department of BOC Group Life Assurance Company Limited employs professional actuaries who are members of Society of Actuaries of the United States of America. As of December 31, 2003, 2004 and 2005, the actuarial liabilities are RMB 3,669 million, RMB 4,274 million and RMB 7,052 million, respectively.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
32 Retirement beneÑt obligations (Continued)
The amounts of retirement beneÑt costs recognized in the income statements comprise:
Group and Bank Year ended December 31, 2003 2004 2005 Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139 180 274 Net actuarial loss recognized in the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 670 961 3,084 Total (Note VI.8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809 1,141 3,358
Movements of the net liabilities recognized in the balance sheets are as follows:
Group and Bank 2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,259 3,669 4,274 Amounts recognized in the income statements as above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809 1,141 3,358 BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (399) (536) (580) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,669 4,274 7,052
Primary assumptions used: As of December 31, 2003 2004 2005 Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.00% 5.00% 4.60% Pension BeneÑt InÖation rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.00% 2.00% 2.00% Medical BeneÑt InÖation rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.12% 7.12% 7.12%
33 Share option schemes of a subsidiary
(1) Share Option Scheme and Sharesave Plan On July 10, 2002, the shareholders of BOCHK Holdings approved and adopted two share option schemes, namely, the Share Option Scheme and the Sharesave Plan. No options were granted pursuant to the Share Option Scheme or the Sharesave Plan during the period from July 10, 2002 to December 31, 2005. A1A(27)
(2) BOCHK Holdings Pre-listing Share Option Scheme On July 5, 2002, certain of the Bank's directors, senior management personnel and employees of the Group were granted options by BOC Hong Kong (BVI) Limited (""BOCHK (BVI)''), the immediate holding company of BOCHK Holdings, pursuant to a Pre-listing Share Option Scheme to purchase from BOCHK (BVI) an aggregate of 31,132,600 previously issued and outstanding shares of BOCHK Holdings for HKD 8.50 per share. These options, with a ten year term, vest ratably over four years from July 25, 2002. No further oÅers to grant any options under the Pre-listing Share
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
33 Share option schemes of a subsidiary (Continued)
Option Scheme will be made. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Details of the movements of share options outstanding are as follows: Directors and key Other Total number of management employees Others(1) share options As of January 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,737,000 17,221,600 Ì 30,958,600 Less: Share options exercised during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (119,500) (1,471,500) Ì (1,591,000) Less: Share options surrendered during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (1,735,200) (1,735,200) Less: Share options lapsed during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (924,900) Ì (924,900) Transfer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,438,400) (478,000) 4,916,400 Ì As of December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,179,100 14,347,200 3,181,200 26,707,500 Less: Share options exercised during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,175,500) Ì (2,175,500) Less: Share options lapsed during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,359,000) (1,735,200) (4,094,200) Transfer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,036,600) 3,036,600 Ì Ì As of December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,142,500 12,849,300 1,446,000 20,437,800 Less: Share options exercised during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,121,550) Ì (2,121,550) Less: Share options lapsed during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (108,500) Ì (108,500) As of December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,142,500 10,619,250 1,446,000 18,207,750
(1) These represent share options held by former directors or former employees of the BOCHK Holdings. Regarding the share options exercised during the Relevant Periods, the weighted average share price of BOCHK Holdings' shares at the time of exercise for the years ended December 31, 2003, 2004 and 2005 are HKD 13.34 (equivalent to RMB 14.19), HKD 14.14 (equivalent to RMB 15.05) and HKD 15.01 (equivalent to RMB 15.61), respectively.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
34 Deferred income taxes
Deferred income tax assets and liabilities are oÅset when there is a legally enforceable right to oÅset current tax assets against current tax liabilities and when the deferred income taxes related to the same Ñscal authority. The table below includes the deferred income tax assets and liabilities of the Group and the Bank after oÅsetting qualifying amounts:
Group
As of December 31, 2003 2004 2005 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,111 21,614 20,504 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,951) (2,399) (2,136) 12,160 19,215 18,368
Bank
As of December 31, 2003 2004 2005 Deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,103 21,588 20,389 Deferred income tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (107) (70) (23) 13,996 21,518 20,366
The movements of the deferred income tax account are as follows:
Group
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,054 12,160 19,215 (Charge)/credited to consolidated income statementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (454) 6,176 (962) Available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 551 847 94 Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 32 21 As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,160 19,215 18,368
Bank
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,121 13,996 21,518 (Charge)/credited to consolidated income statementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40) 6,620 (636) Available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 907 876 (498) Exchange diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 26 (18) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,996 21,518 20,366
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
34 Deferred income taxes (Continued)
Deferred income tax assets and liabilities are attributable to the following items:
Group
As of December 31, 2003 2004 2005 Deferred income tax assets Asset impairment provisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,140 16,280 17,744 Fair value changes of trading assets and other Ñnancial instruments at fair value through proÑt or loss and derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,292 2,874 3,204 Statutory asset revaluation surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,442 2,780 2,640 Pension and other beneÑt costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345 395 578 Other temporary diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 206 349 311 15,425 22,678 24,477 Deferred income tax liabilities Fair value changes of trading assets and other Ñnancial instruments at fair value through proÑt or loss and derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,087) (1,179) (3,643) Depreciation of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (433) (417) (442) Fair value changes of investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,680) (1,848) (1,978) Other temporary diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (65) (19) (46) (3,265) (3,463) (6,109) 12,160 19,215 18,368
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
34 Deferred income taxes (Continued)
Bank
As of December 31, 2003 2004 2005 Deferred income tax assets Asset impairment provisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,631 15,982 17,596 Fair value changes of trading assets and other Ñnancial instruments at fair value through proÑt or loss and derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,178 2,859 3,159 Statutory asset revaluation surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,442 2,780 2,640 Pension and other beneÑts costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345 395 578 Other temporary diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 152 131 14,648 22,168 24,104 Deferred income tax liabilities Fair value changes of trading assets and other Ñnancial instruments at fair value through proÑt or loss and derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (558) (576) (3,643) Depreciation of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (76) (74) (63) Other temporary diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) Ì (32) (652) (650) (3,738) 13,996 21,518 20,366
The deferred income tax (charge)/credit in the consolidated income statements comprises the following temporary diÅerences:
Group
Year ended December 31, 2003 2004 2005 Asset impairment provisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,161) 8,123 1,466 Fair value changes of trading assets and other Ñnancial instruments at fair value through proÑt or loss and derivative Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,525 (1,361) (2,229) Pension and other beneÑts costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 109 50 183 Statutory asset revaluation surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,442 (662) (140) Fair value changes of investment property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (170) (172) Other temporary diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (367) 196 (70) (454) 6,176 (962)
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
35 Other liabilities A16(35)(2)(f) Group
As of December 31, 2003 2004 2005 Items in the process of clearance and settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150,672 50,453 52,957 Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,766 22,674 27,024 Salary and welfare payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,800 5,121 6,031 Payable to the MOF (Note II.4)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 17,362 17,362 Payable to China OrientÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,947 Ì Ì Allowance for litigation losses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 820 1,310 1,516 Insurance liabilities, net(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,917 7,467 10,462 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,475 20,473 20,920 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,397 124,860 136,272
Bank
As of December 31, 2003 2004 2005 Items in the process of clearance and settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,959 44,441 48,829 Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,838 21,693 25,291 Salary and welfare payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,349 4,675 5,389 Payable to the MOF (Note II.4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 17,362 17,362 Payable to China OrientÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,947 Ì Ì Allowance for litigation losses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 820 1,310 1,516 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,973 15,604 14,147 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 190,886 105,085 112,534
(1) After the initial recognition of this payable, the MOF modiÑed the repayment terms in September 2005 to provide for repayment in four annual installments ending on December 31, 2008. The discounted present value of the cashÖows due to the MOF under the revised repayment terms did not change by more than 10% from that of the liability under the original repayment terms and, therefore, did not constitute a ""substantial modiÑcation''. Accordingly, no adjustment was made to the carrying value of liability. (2) Movements of allowance for litigation losses are as follows: Group and Bank 2003 2004 2005
As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 728 820 1,310 Provision for the year (Note VI.7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 545 1,257 712 Utilized/reversed during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (453) (767) (506) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 820 1,310 1,516
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
35 Other liabilities (Continued)
(3) Insurance liabilities as of December 31, 2003, 2004 and 2005 arising from insurance contracts consist of the following: As of December 31, 2003 2004 2005
Long-term insurance contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,083 5,471 8,383 General insurance contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,834 1,996 2,079 Total insurance liabilities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,917 7,467 10,462
36 Share capital
Group and Bank
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,100 186,390 186,390 Ordinary shares issued(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 23,037 Reduction in capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,046) Ì Ì Capital contribution (Note II.1)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 Ì Ì Capital restructuring (Note II.1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (141,054) Ì Ì As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 186,390 209,427
(1) In accordance with (Yinjianfu ®2005© No. 332) ""Approval of the Introduction of Strategic Investors into Bank of China Limited'', the Bank issued at a premium, 23,037,009,860 ordinary shares at RMB 1 per share to RBS China Investments S.a.fi r.l., Asia Financial Holdings Pte. Ltd., UBS AG and Asian Development Bank (collectively, the ""Investors'') in December 2005 for aggregate consideration of USD3,353 million (RMB27,057 million). The capital contributions included a share premium of RMB 3,964 million. The payment of the consideration was veriÑed by PricewaterhouseCoopers Zhong Tian CertiÑed Public Accountants Limited Company in its ""VeriÑcation Report on the Capital Contributions to Bank of China Limited'' (PwC ZT YZ ®2006© No. 2) issued on March 9, 2006. As at December 31, 2005, the shares issued by the Bank are held as follows: As of December 31, 2003 2004 2005
Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390,352,497 186,390,352,497 174,128,718,217 RBS China Investments S.afi r.l. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 20,942,736,236 Asia Financial Holdings Pte. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 10,471,368,118 UBS AG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 3,377,860,684 Asian Development BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 506,679,102 186,390,352,497 186,390,352,497 209,427,362,357
In connection with the subscription and purchase of shares by the Investors, each Investor has entered into investor rights agreements with the Bank and Huijin. The Investors' rights and obligations under their respective investor rights agreement include the following:
Net asset value protection
If the Group's consolidated net asset value per share as of December 31, 2005, 2006 or 2007 as determined under IFRS on a basis comparable to the net asset value per share as of December 31, 2004 is lower than the consolidated net asset
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
36 Share capital (Continued)
value per share as of December 31, 2004, Huijin will compensate each investor for the decrease in the value of its investment in the form of shares, cash or a combination thereof.
Price protection
In the event of the issuance of shares by the Bank at a price per share below that paid by the Investors (the ""Shortfall Amount''), Huijin will provide compensation to each Investor based on the Shortfall Amount in the form of shares, cash or a combination thereof. This right lapses on completion of a public oÅering.
Put option
The Investors have the option to require Huijin to purchase all or a portion of the shares they hold if, at the expiration of the Lock-Up Period on December 30, 2008 or December 31, 2008, as the case may be, the Bank has not completed a public oÅering or not all of the Investors' shares have been converted into shares listed and freely traded on an eligible non-PRC securities exchange. This right lapses on completion of a public oÅering.
The Bank has no obligation to Huijin to meet the settlement of these rights and obligations. Consequently no obligations have been recognized in the Group's Ñnancial statements and these shares have been classiÑed as equity instruments.
(2) Pursuant to Caijin ®2000© No. 112 ""Letter Concerning the Disposal and Asset Transfer of China Orient Trust & Investment Corporation'' issued by the MOF, the Bank transferred the net assets of its security brokerage and industrial investment businesses of China Orient Trust & Investment Corporation, with an aggregate net carrying value of RMB 1,046 million, to China Galaxy Securities Company Limited and China Orient. Pursuant to Caijin ®2000© No. 112 and the Joint Stock Reform Plan, the transfer was recorded as a reduction in paid-in capital.
(3) In accordance with Caijin ®2004© No. 76 ""Approval on the Bank of China State Shares Administration Related Matters'' issued by the MOF, the Bank was converted into a joint stock commercial bank with Huijin as the sole equity holder on August 26, 2004. Huijin's capital contribution to the Bank in the form of US dollars and bullion, totalling RMB 186,390 million, was used to subscribe to 186,390,352,497 ordinary shares of the Bank, with par value of RMB 1.00 per share. All ordinary shares held by Huijin in the Bank are, in fact, state shares controlled by the PRC Government. The payment of the capital contribution in the amount of RMB 186,390 million was veriÑed by PricewaterhouseCoopers Zhong Tian CertiÑed Public Accountants Limited Company in its ""VeriÑcation Report of Capital Contribution to Bank of China'' (PwC ZT YZ ®2004© No. 158) issued on August 23, 2004.
37 Capital reserve LR4.04(9)
Group
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,955 32,976 (10,432) Financial restructuring adjustment (Note II.1 and Note II.4) ÏÏÏ (13,033) (43,408) Ì Share premium(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 3,964 Capital contribution from Huijin(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 500 Excess of net realizable value over net carrying value of non- performing loans committed to transfer (Note II.2)ÏÏÏÏÏÏÏÏÏ 32,976 Ì Ì ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 Ì Ì OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 14 As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,976 (10,432) (5,954)
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
37 Capital reserve (Continued)
Bank
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,876 32,897 (10,511) Financial restructuring adjustment (Note II.1 and Note II.4) ÏÏÏÏÏ (13,033) (43,408) Ì Share premium(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 3,964 Capital contribution from Huijin(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 500 Excess of net realizable value over net carrying value of non- performing loans committed to transfer (Note II.2)ÏÏÏÏÏÏÏÏÏÏÏ 32,976 Ì Ì ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 Ì Ì OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (7) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,897 (10,511) (6,054)
(1) As described in Note 36, the Bank issued 23,037,009,860 ordinary shares at RMB1 per share to its Investors. The amount of the related share premium after deduction of issuance expenses of RMB55.73 million is recorded in the capital reserve. (2) In accordance with the resolution of the second extraordinary meeting of the shareholder in 2005, Huijin agreed to make a payment of RMB500 million, funded by a speciÑc dividend paid by the Bank relating to 2004 undistributed proÑts, as initial funding for the Bank's Annuity Plan. This payment has been recorded as a capital contribution in the capital reserve and as an operating expense in the consolidated income statement in 2005 (Note VI.8).
38 Statutory reserves, general and regulatory reserves LR4.04(9) (1) Statutory reserves Group
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,259 Ì 3,140 Appropriation in the year (Note VI.39) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 3,140 2,847 Capital restructuring (Note II.1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49,375) Ì Ì ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88 Ì Ì As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,140 5,987
Bank
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,910 (359) 2,766 Appropriation in the year (Note VI.39) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 3,125 2,699 Capital restructuring (Note II.1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49,375) Ì Ì ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88 Ì Ì As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (359) 2,766 5,465
Under relevant PRC Laws, the Bank is required to transfer 10% of its net proÑt, as determined under PRC GAAP, to a non-distributable statutory surplus reserve. Appropriation to the statutory surplus reserve may cease when the balance of such reserve has reached 50% of the share capital.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
38 Statutory reserves, general and regulatory reserves (Continued)
Subject to the approval of the shareholders, the statutory surplus reserve can be used for replenishing the accumulated loss or increasing the Bank's share capital. The statutory surplus reserve amount used to increase the share capital is limited to a level where the balance of statutory surplus reserve after such capitalization is not less than 25% of the share capital.
The statutory welfare reserve can be used for funding employees' collective welfare activities upon approval by the PRC Government. According to the conclusions of the fourth temporary shareholders' meeting in 2006, from 2005 the Bank will no longer appropriate amounts to the statutory welfare reserve.
In addition, some overseas branches and subsidiaries are required to transfer certain percentage of its net proÑt to the statutory surplus reserve as stipulated by local banking authorities.
(2) General and regulatory reserves
General Regulatory reserve reserve Total Group As of January 1, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Appropriation in the year (Note VI.39)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 419 Ì 419 As of December 31, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 419 Ì 419 Appropriation in the year (Note VI.39)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,184 2,506 4,690 As of December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,603 2,506 5,109
Bank As of January 1, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Appropriation in the year (Note VI.39)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 417 Ì 417 As of December 31, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 417 Ì 417 Appropriation in the year (Note VI.39)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,184 17 2,201 As of December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,601 17 2,618
Pursuant to Caijin ®2005© No. 49 ""Measures on General Provision for Bad and Doubtful Debts for Financial Institutions'' issued by MOF on May 17, 2005, banks and certain other Ñnancial institutions in the PRC are required to maintain an adequate allowance for impairment losses against their risk assets as deÑned. In addition to the speciÑc allowance for impairment losses, Ñnancial institutions are required to establish and maintain a general reserve within shareholders' equity, through the appropriation of income to address unidentiÑed potential impairment losses. According to Caijin ®2005© No. 49, the general reserve should not be less than 1% of the aggregate amount of risk assets as deÑned by this policy, before any allowance for impairment losses at the balance sheet date. The Bank intends to achieve the required reserve level within 3 years.
The regulatory reserve mainly refers to the reserve amount set aside by Bank of China (Hong Kong) Limited a subsidiary of the Group, for general banking risks, including future losses or other unforeseeable risks.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
39 (Accumulated losses)/undistributed proÑts LR4.04(9) A15(1)(I)(k) Group
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (262,524) (28,241) 16,547 Capital restructuring (Note II.1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 203,462 Ì Ì Financial restructuring adjustment (Note II.4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26,046 Ì Net proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,015 22,301 25,921 Appropriation to statutory reserves (Note VI.38)(1) ÏÏÏÏÏÏÏÏÏÏÏÏ (28) (3,140) (2,847) Appropriation to general and regulatory reserves (Note VI.38)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (419) (4,690) Adoption of equity accounting for investment in associates (Note VI.21) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2,194 Dividends(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (26,937) ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (166) Ì Ì As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,241) 16,547 10,188
Bank
2003 2004 2005 As of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (267,654) (46,642) 2,943 Capital restructuring (Note II.1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 203,462 Ì Ì Financial restructuring adjustment (Note II.4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 26,046 Ì Net proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,734 27,081 20,185 Appropriation to statutory reserves (Note VI.38)(1) ÏÏÏÏÏÏÏÏÏÏÏÏ (18) (3,125) (2,699) Appropriation to general and regulatory reserves (Note VI.38)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (417) (2,201) Dividends(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (26,937) ReclassiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (166) Ì Ì As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (46,642) 2,943 (8,709)
(1) Appropriation to the statutory reserves
In accordance with the resolution of the fourth temporary shareholders' meeting in 2006, the Bank appropriated 10% of the net proÑt in 2005 as reported in the PRC statutory Ñnancial statements to the statutory surplus reserve, totalling RMB2,749 million.
As approved by the Board of Directors on May 31, 2005, the Bank appropriated 10% (RMB2,093 million)and 5% (RMB1,047 million) respectively of the net proÑt in 2004 as reported in the PRC statutory Ñnancial statements to the statutory surplus reserve and statutory welfare reserve.
(2) Appropriation to general and regulatory reserves
In accordance with the resolution of the fourth temporary shareholders' meeting in 2006, the Bank appropriated RMB2,184 million to general reserve. In addition in 2005, RMB 2,475 million have been set aside by Bank of China (Hong Kong) Limited, a subsidiary of the Group, for general banking risks, including future losses or other unforeseeable risks in accordance with the requirements of Hong Kong Monetary Authority, in addition to the loan impairment allowances on advances.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
39 (Accumulated losses)/undistributed proÑts/ (Continued)
(3) Dividends
According to the 2004 proÑt distribution plan approved at the second extraordinary general shareholder's meeting held on September 7, 2005, the Bank distributed a cash dividend of RMB 0.076 per ordinary share totalled RMB 14,200 million. This dividend is reÖected in the Financial Information as an appropriation of undistributed proÑts for the year ended December 31, 2005.
According to the proÑt distribution plan for the Ñrst half of 2005 approved at the seventh extraordinary general shareholders' meeting held on December 31, 2005, the Bank distributed a cash dividend of RMB 0.068 per ordinary share totalled RMB 12,737 million to the equity holder of the Bank as of December 29, 2005.
On April 30, 2006, a dividend of RMB0.0066 per ordinary share totalled RMB1,375 million to the equity holders of the Bank as of December 31, 2005, in respect of 2005 proÑts, was approved by shareholders at a post-adjournment session of the Annual General Meeting. This dividend is reÖected as a subsequent event in the Financial Information (Note VI.45(2)) and will be reÖected as an appropriation of undistributed proÑts for the year ending December 31, 2006. The Investors' (see Note VI.36(1)) entitlements to the aforesaid dividend declared are governed by their respective investment agreements based on the number of days between respective completion dates and December 31, 2005.
40 Reserve for fair value changes of available-for-sale securities LR4.04(9) Group
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,702 4,078 2,730 Net gains/(losses) from changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,352 (2,359) 813 Net (gains)/losses transferred to net proÑt on disposal ÏÏÏÏÏÏÏÏÏÏÏÏ (2,533) 174 525 Reversal of fair value changes of Huaneng International Power Development Corporation (Note VI.21) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (2,254) Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 557 837 85 As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,078 2,730 1,899
Bank
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,831 970 (815) Net (losses)/gains from changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (146) (2,660) 835 Net (gains)/losses transferred to net proÑt on disposal ÏÏÏÏÏÏÏÏÏÏÏ (2,622) (1) 758 Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 907 876 (498) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 970 (815) 280
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
41 Contingent liabilities and commitments A16(35)(3)(a)&(b)
(1) Legal proceedings A1A(40) As of December 31, 2005, the Group was involved in certain lawsuits as defendants arising from its normal business operations. As of December 31, 2005, provisions of RMB 1,516 million were made based on court judgments or the advice of counsel. After consulting legal professionals, management of the Group believes that the ultimate outcome of these lawsuits will not have a material impact on the Ñnancial position or operations of the Group. Allowances for litigation losses based on the opinions of the Group's internal and external legal counsel are set forth in Note VI.35.
(2) Assets pledged Assets pledged as collateral for repurchase and short positions with other banks and Ñnancial institutions are set forth in the tables below. As of December 31, 2003, 2004 and 2005, the Group and the Bank had such repo agreements and short positions amounting to RMB 48,435 million, RMB 18,378 million and RMB 62,108 million, and RMB 45,520 million, RMB 16,270 million and RMB 59,340 million, respectively. All such agreements mature within twelve months from inception.
Group
As of December 31, 2003 2004 2005 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,866 3,118 2,617 Bills (Note VI.17)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,564 3,993 11,968 Debt securities (Note VI.18(8)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,951 11,639 49,658 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,381 18,750 64,243
Bank As of December 31, 2003 2004 2005 Precious metals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,866 3,118 2,617 Bills (Note VI.17)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,564 3,993 11,968 Debt securities (Note VI.18(9)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,841 9,331 45,106 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,271 16,442 59,691
The Group has accepted collateral that it is permitted to sell or re-pledge in connection with its Reverse repo agreements. The fair value of the collateral accepted by the Group and the Bank is RMB 34,353 million, RMB 39,138 million and RMB 69,789 million, as of December 31, 2003, 2004 and 2005, respectively. Both the Group and the Bank had an obligation to return collateral that it has sold with a fair value of RMB 4,969 million, RMB 280 million and RMB 1,130 million as of December 31, 2003, 2004 and 2005 respectively.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
41 Contingent liabilities and commitments (Continued)
(3) Capital commitments
Group As of December 31, 2003 2004 2005 Contracted but not provided for ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 838 564 1,893 Authorized but not contracted forÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,026 1,077 2,687 1,864 1,641 4,580
Bank As of December 31, 2003 2004 2005 Contracted but not provided for ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 714 344 1,731 Authorized but not contracted forÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,026 1,059 2,671 1,740 1,403 4,402
(4) Operating leases
According to the irrevocable operating lease contracts, the minimum rental payments that should be paid by the Group and the Bank in the future are summarized as follows:
Group As of December 31, 2003 2004 2005 Within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,172 1,128 1,371 One to two years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 915 1,014 1,085 Two to three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 680 664 807 Above three yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,018 1,604 2,546 4,785 4,410 5,809
Bank
As of December 31, 2003 2004 2005 Within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 976 914 1,157 One to two years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 785 884 949 Two to three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 643 609 756 Above three yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,982 1,586 2,532 4,386 3,993 5,394
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
41 Contingent liabilities and commitments (Continued)
(5) CertiÑcate Treasury Bond redemption commitments
The Bank is entrusted by the MOF to underwrite certain CertiÑcate Treasury Bonds. The investors of CertiÑcate Treasury Bonds have a right to redeem the bonds at par any time prior to maturity and the Bank is committed to redeem those bonds. The redemption price is the principal value of the CertiÑcate Treasury Bonds plus unpaid interest.
The Bank's redemption commitments, representing the principal value of the bonds underwritten and sold by the Bank, amounted to RMB 70,443 million, RMB 75,188 million and RMB 80,965 million as of December 31, 2003, 2004 and 2005, respectively. The original maturities of these bonds vary from 1 to 5 years. As the deposits base rate established by the PBOC is currently lower than the yields on all issues of CertiÑcate Treasury Bonds, management expects the amount of redemption before the maturity dates of those bonds through the Bank will not be material.
The MOF will not provide funding for the early redemption of these CertiÑcate Treasury Bonds on a back-to-back basis but will pay interest and repay the principal at maturity.
(6) Credit commitments A16(35)(3)(a)&(c)
Group
As of December 31, 2003 2004 2005 Credit commitments(1) Ì with an original maturity of under one year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 208,542 187,070 182,965 Ì with an original maturity of one year or over ÏÏÏÏÏÏÏÏÏÏÏÏ 133,066 110,269 201,745 Acceptances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 147,251 166,869 195,234 Letters of guarantee issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,824 186,472 212,987 Letters of credit issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 103,837 104,204 101,195 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,745 4,401 1,636 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746,265 759,285 895,762
Bank
As of December 31, 2003 2004 2005 Credit commitments(1) Ì with an original maturity of under one year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,461 90,140 72,359 Ì with an original maturity of one year or over ÏÏÏÏÏÏÏÏÏÏÏÏ 79,489 64,390 169,322 Acceptances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143,222 162,308 191,034 Letters of guarantee issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,358 174,018 202,994 Letters of credit issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,537 91,977 86,824 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,461 4,107 1,431 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 579,528 586,940 723,964
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
41 Contingent liabilities and commitments (Continued)
(1) Credit commitments represent general credit facility limits for our corporate customers. These credit facilities may be drawn in the form of cash advances or the issuance of letters of credit, acceptances or letters of guarantee.
(7) Credit risk weighted amounts of credit commitments Group
As of December 31, 2003 2004 2005 Credit commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245,073 263,238 329,697 The credit risk weighted amounts are the amounts calculated in accordance with the guidelines issued by the CBRC and are dependent on, among other factors, the creditworthiness of the counterparty and the maturity characteristics. The risk weights used range from 0% to 100% for contingent liabilities and commitments. The credit risk weighted amounts stated above have not taken into account the eÅects of netting arrangements.
42 Cash and cash equivalents For the purposes of the cash Öow statement, cash and cash equivalents comprise the following balances with original maturity less than three months:
Group
As of December 31, 2003 2004 2005 Cash and due from banks (Note VI.12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,159 34,865 40,087 Balances with central banks (Note VI.13) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,181 116,686 108,149 Placements with banks and other Ñnancial institutions (Note VI.14) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 270,363 185,145 233,301 Short term bills and notes (Note VI.18(4))ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,247 29,446 15,575 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 448,950 366,142 397,112
Bank
As of December 31, 2003 2004 2005 Cash and due from banks (Note VI.12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,370 31,458 37,335 Balances with central banks (Note VI.13) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99,659 97,492 82,936 Placements with banks and other Ñnancial institutions (Note VI.14) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,977 121,450 142,158 Short term bills and notes (Note VI.18(5))ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,195 23,815 13,194 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 331,201 274,215 275,623
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions
Related parties are those parties that have the ability to control the other party or exercise signiÑcant inÖuence over the other party in making Ñnancial or operational decisions. Parties are also considered to be related if they are subject to common control. The Group is subject to the control of the State Council of the PRC Government through Huijin.
(1) Financial restructuring arrangements with the MOF
As discussed in Note II, the Bank completed the following signiÑcant government directed Ñnancial restructuring arrangements which are considered to be related party transactions:
(i) Contribution of capital by the PRC Government, through Huijin on December 30, 2003.
(ii) Sale of non-performing loans to Cinda in June 2004.
(iii) Sale of policy related assets to PBOC in June 2004.
(iv) Transfer of loss graded loans to China Orient in September 2004.
(v) Subscription of capital by Huijin in August 2004 consequent upon the Bank's conversion into a joint stock limited liability company.
(vi) Recognition of a liability of RMB 17,362 million to the MOF in respect of the excess of the appraised value of the net assets of Bank of China as of December 31, 2003 over the amount of share capital of the Bank on the restructuring date.
Details of these signiÑcant restructuring arrangements are set out in Note II of this section.
(2) Transactions with the MOF and the PBOC
The Group enters into banking transactions with the MOF and the PBOC in the normal course of business. These include purchase and redemption of investment securities issued by the MOF and the PBOC; maintenance of mandatory reserves, other deposits and amounts due to the PBOC; underwriting and distribution of CertiÑcate Treasury Bonds issued by the MOF through the Group's branch network and earning commission income based on such bonds sold. In addition, the Bank paid special levy to the MOF as detailed in Note VI.7 and VI.18(3). Details of mandatory reserves and other deposits with the PBOC are set out in Note VI.13. Details of Foreign Exchange Swap transactions with the PBOC are set out in Note VI.16. Details of balances due to the PBOC are set out in Note VI.25. Details of other transactions and balances are set forth below.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(i) Treasury bonds and PBOC bonds
The Group purchases and redeems bonds issued by the MOF and PBOC. The volume of such transactions and related interest rate range for the Relevant Periods and the outstanding balances as of the respective year end dates are set out below:
Year ended December 31, 2003 2004 2005 Purchases during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,559 395,166 642,574 Redemption/sales during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89,745 242,205 384,559 Interest rate range (Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏ 1.72%-7.90% 1.26%-7.90% 0.41%-9.00%
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏ 113,873 116,692 271,120 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏ 116,692 271,120 533,625
(ii) Transactions with the MOF in relation to the underwriting and distribution of CertiÑcate Treasury Bonds
The Group underwrites CertiÑcate Treasury Bonds issued by the MOF and undertakes the role of a distributor of these bonds through its branch network and earns commission income based on the amount of such bonds sold.
Year ended December 31, 2003 2004 2005 Total distribution of CertiÑcate Treasury Bonds in the year ÏÏÏÏÏÏÏÏÏ 28,000 31,427 26,000 Commission income earned in the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 182 231 252
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,793 5,457 8,717 Outstanding balance as of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,457 8,717 10,185
(3) Transactions with Huijin
As discussed in Note II.1, Huijin became the shareholder of the Bank from December 30, 2003. As further discussed in Note II.3, Huijin became the then sole equity holder of the Bank since August 26, 2004. As of December 31, 2005, Huijin owned 83.15% equity interest in the Bank.
As discussed in Note IV.5, on January 5, 2005, the Bank entered into a Foreign Currency Option Agreement with Huijin whereby the Bank acquired options to sell to Huijin USD, totalling USD18 billion, of no more than USD1,500 million at the beginning of each calendar month during the year ending December 31, 2007 at the exchange rate of USD1 to RMB8.2769. The related option premium totalled RMB 4,469 million, which is payable by the Bank to Huijin in 12 equal monthly instalments at the beginning of each calendar month during the year ending December 31, 2007.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
On September 7, 2005, a dividend to Huijin of RMB 14,200 million was approved by the second extraordinary meeting of the shareholder and was paid on September 12, 2005. On December 31, 2005, a dividend to Huijin of RMB12,737 million was approved by the seventh extraordinary meeting of the shareholders and was paid on the same date.
In accordance with the resolution of the second extraordinary meeting of the shareholder in 2005, Huijin agreed to make a payment of RMB 500 million, funded by a speciÑc dividend paid by the Bank relating to 2004 undistributed proÑts, as initial funding for the Bank's new Annuity Plan, discussed in Note III.19. This payment has been recorded as a capital contribution in the capital reserve and as an operating expense in the consolidated income statement for the year ended December 31, 2005 (Note VI.8).
Huijin Deposit movement
2003 2004 2005 As of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Deposits received during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 42,972 Deposits repaid during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (4,103) As of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 38,869
(4) Transactions with other companies controlled by Huijin
Huijin also has controlling equity interests in certain other bank and non-bank entities in the PRC. The Group enters into banking transactions with these companies in the normal course of its business. These include trading assets, investment securities and money market transactions. Transactions with these companies prior to December 30, 2003, before Huijin became the Bank's shareholder, are included in Note VI.43(5).
The volume of such transactions and related interest rate range for the Relevant Periods and the outstanding balances with these companies as of the respective year end dates are as follows:
(i) Trading assets and investment securities
Year ended December 31, 2003 2004 2005 Purchases during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4,706 1,499 Redemption/sales during the yearÏÏÏÏÏÏÏÏÏÏÏ Ì 4,256 1,218 Interest rate range(Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏ 0.12%-6.88% 0.12%-5.73% 0.26%-5.90%
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,731 2,183 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,731 2,183 2,400
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(ii) Due from banks
Year ended December 31, 2003 2004 2005 Interest rate range(Note VI.43(7))ÏÏÏÏÏÏÏÏÏÏ 0.00%-8.00% 0.00%-1.62% 0.00%-3.74%
2003 2004 2005 Outstanding balance as of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 68 94 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 94 88
(iii) Placements with banks and other Ñnancial institutions
Year ended December 31, 2003 2004 2005 Interest rate range(Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.10%-1.60% 0.00%-5.45% 0.37%-5.50% 2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,512 3,537 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,512 3,537 2,318
(iv) Due to banks Year ended December 31, 2003 2004 2005 Interest rate range(Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00%-1.89% 0.00%-1.62% 0.00%-2.50% 2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,036 1,895 Outstanding balance as of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,036 1,895 2,076
(v) Placements from banks and other Ñnancial institutions Year ended December 31, 2003 2004 2005 Interest rate range(Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.09%-1.38% 0.10%-0.13% 0.09%-4.50% 2003 2004 2005 Outstanding balance as of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 243
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(5) Transactions with other state controlled entities
The Bank is subject to the control of the State Council of the PRC Government through Huijin, which also directly and indirectly controls a signiÑcant number of entities through its Government authorities, agencies and aÇliates. Accordingly, the Group has extensive transactions with other state controlled entities. These transactions, conducted in the ordinary course of business, may include, but are not limited to, the following:
¬ lending, provision of credits and guarantees and deposit taking;
¬ inter-bank balance taking and placing;
¬ sale, purchase, underwriting and redemption of bonds issued by other state-controlled entities;
¬ rendering of foreign exchange, remittance, investment related services;
¬ entrusted lending and provision of other custody services; and
¬ purchase of utilities, telecommunication and postal services.
Utilities, telecommunication and postal services are charged by service providers at normal commercial rates. Management believes that, based on their assessment, the amounts of such related party transactions are insigniÑcant for the Relevant Periods and therefore are not disclosed below. Details of other transactions are set forth below.
The volume of such transactions with these entities, and respective ranges of interest rate, outstanding balances and related impairment losses for each period are as follows:
(i) Due from banks Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7)) ÏÏ 0.00%-8.00% 0.00%-8.13% 0.00%-4.67% 2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 806 1,404 2,085 Outstanding balance December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,404 2,085 3,547
No allowance for impairment losses on amounts due from banks has been recognized during the Relevant Periods.
(ii) Placements with banks and other Ñnancial institutions Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00%-5.80% 0.00%-6.60% 0.00%-6.09%
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,562 182,685 55,747 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 182,685 55,747 68,794 Allowance for impairment losses as of December 31ÏÏÏÏÏ (2,335) (1,412) (546) Impairment losses on placements with banks and other Ñnancial institutions recognized during the Relevant Periods are immaterial.
(iii) Loans and advances to customers As of December 31, 2003, 2004 and 2005, corporate loans accounted for 82%, 77% and 77%, respectively of the total loans and advances to customers. The remaining balances comprise personal loans primarily to individuals which are not individually signiÑcant. The Group's 3,000 largest outstanding corporate loans to single customers as of December 31, 2003, 2004 and 2005 (those with balances exceeding RMB 85 million) accounted for 53.5%, 59.8% and 58.6%, respectively of the total outstanding corporate loans, amounting to RMB950,328 million, RMB988,718 million and RMB1,003,638 million, respectively. Given that these large loans accounted for the majority of the Group's total corporate loan balances, the management is of the opinion that disclosure of related party transactions of these large borrowers as identiÑed by management set forth below demonstrates the potential eÅect of the Group's lending to other state controlled entities. Further, management believes that this disclosure provides suÇcient information to achieve the objective of disclosing the potential eÅect of related parties on the Group's lending activities. Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.58%-15.00% 0.47%-14.99% 0.72%-16.99% Impairment losses on individually assessed loans and advances for the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,091 5,376 4,741 2003 2004 2005 Outstanding balance as of January 1(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 439,542 487,265 547,416 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 621,815 625,730 638,460 Allowance for impairment losses on individually assessed loans and advances as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,563 11,359 14,308
(1) For each of the years ended December 31, 2003, 2004 and 2005, the population of accounts was based on balances as of December 31 in the respective year. The maturity analysis set out in Note IV.7 gives an overview of the average turnover of the loan portfolio which provides a basis for assessing the average turnover of the loans and advances to related parties.
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(iv) Trading assets and investment securities
Year ended December 31, 2003 2004 2005 Purchases during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,337 84,925 192,532 Redemption/sales during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,769 63,702 95,920 Interest rate range (Note VI.43(7))ÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.48%-9.20% 0.33%-9.20% 0.39%-9.20% Impairment losses on trading assets and investment securities recognized during the Relevant Periods are immaterial.
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191,505 202,264 222,084 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202,264 222,084 319,039 Allowance for impairment losses as of December 31 ÏÏÏÏÏÏÏÏ (568) (178) (156)
(v) Due to banks
Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7)) ÏÏÏÏÏÏÏÏ 0.00%-1.89% 0.00%-1.62% 0.00%-3.75%
2003 2004 2005 Outstanding balance as of January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,535 61,058 54,802 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,058 54,802 87,033
(vi) Placements from banks and other Ñnancial institutions
Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7))ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00%- 0.00%- 0.00%- 5.89% 7.55% 7.08%
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,341 66,974 84,813 Outstanding balance as of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,974 84,813 152,409
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(vii) Due to customers As of December 31, 2003, 2004 and 2005, approximately 64%, 61% and 60%, respectively of the balances due to customers are represented by balances due to personal customers which are not individually signiÑcant. Of the remaining 36%, 39% and 40% of the balances due to customers as of December 31, 2003, 2004 and 2005 respectively, 55%, 51% and 50% are represented by the Group's 4,000 largest corporate deposits amounting to RMB602,704 million, RMB660,155 million and RMB728,475 million, respectively. Given that these deposits accounted for a signiÑcant portion of the Group's total corporate deposit balances, the management is of the opinion that disclosure of related party transactions of these large deposits as identiÑed by the Group's management as set forth below demonstrate the potential eÅect of the Group's deposits from other state controlled entities. Further, management believes that this disclosure provides suÇcient information to achieve the objective of disclosing the potential eÅect of related parties on the Group's deposit-taking activities. Year ended December 31, 2003 2004 2005 Interest rate range (Note VI.43(7))ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00%- 0.00%- 0.00%- 5.44% 6.34% 6.40%
2003 2004 2005 Outstanding balance as of January 1(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 277,123 308,089 299,827 Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 416,369 412,894 463,980
(1) For each of the years ended December 31, 2003, 2004 and 2005, the population of accounts was based on balances as of December 31 in the respective year.
(6) Transactions with associates The Group enters into banking transactions with associates in the normal course of business under commercial terms and at market rates. These include loans and advances, deposit taking and such other normal banking businesses. The outstanding balances with associates and related allowance for impairment losses as of the respective year end dates, and the volume of transactions for the Relevant Periods are stated below. The related interest income and expense amounts are not considered signiÑcant.
(i) Loans and advances
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,065 5,525 1,246 Granted during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,040 2,728 8,128 Repaid during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,246) (3,092) (989) Write-oÅ and other changes during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,334) (3,915) (1,145) Outstanding balance as of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,525 1,246 7,240 Allowance for impairment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,796) (418) (119)
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
(ii) Deposits
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,194 1,336 1,227 Received during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,879 3,433 3,879 Repaid and other changes during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,737) (3,542) (4,250) Outstanding balance as of December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,336 1,227 856
(iii) Trading assets and investment securities 2003 2004 2005 Purchases during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,307 Redemption/sales during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (1,123) Interest rate range (Note VI.43(7)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1.61-2.92%
2003 2004 2005 Outstanding balance as of January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Outstanding balance as of December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 188
(7) Interest rates Interest rates disclosed in Note VI.43(2) to (6) vary across product groups and transactions depending on maturity, credit risk of counterparty and currency. In particular, given local market conditions, the spread of certain signiÑcant or long dated transactions can vary across the market.
(8) Transactions with key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including Directors and executive oÇcers. The Group enters into banking transactions with key management personnel in the normal course of business. During the Relevant Periods, there were no material transactions and balances with key management personnel in excess of RMB 1,000,000 on an individual basis. The key management compensation for the Relevant Periods is detailed as follows:
Year ended December 31, 2003 2004 2005 Short-term employment beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 9 30 Post-employment beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 10 31
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APPENDIX I ACCOUNTANTS' REPORT
SECTION 6: NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
VI NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
43 Related party transactions (Continued)
Included in the above key management compensation are RMB 0.74 million and RMB 3.34 million paid by Huijin in 2004 and 2005, respectively.
44 Balances with subsidiaries
Included in the following captions of the Bank's balance sheets are balances with subsidiaries:
As of December 31, 2003 2004 2005 Due from banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,837 2,433 5,154 Placements with other banks and Ñnancial institutionsÏÏÏÏÏÏÏÏ 31,753 28,284 27,128 Due to other banksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,974) (5,512) (6,787) Placements from other banks and Ñnancial institutions ÏÏÏÏÏÏÏ (38,112) (32,762) (13,441)
45 Events after the balance sheet date LR4.04(12)
(1) On March 8, 2006, the Bank entered into a share subscription agreement with the National Council for Social Security Fund (""SSF''), pursuant to which SSF contributed RMB10 billion as the consideration to subscribe for 8,514,415,652 ordinary shares of the Bank. The transaction was approved by the CBRC on March 10, 2006 and completed on March 13, 2006.
(2) On April 30, 2006, a dividend in the amount of RMB1,375 million, in respect of 2005 proÑts, was approved by shareholders at a post-adjournment session of the Annual General Meeting.
SECTION 7: SUBSEQUENT ACCOUNTS
No audited accounts of the Group or the Bank have been prepared in respect of any period LR4.08 subsequent to December 31, 2005 up to the date of this report. Saved as disclosed in this report, no (1)(b) dividend or other distribution has been declared, made or paid by the Bank in respect of any period subsequent to December 31, 2005.
Yours faithfully,
PricewaterhouseCoopers LR4.08(4) CertiÑed Public Accountants 3rd Sch 43 Hong Kong
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
The information set out below does not form part of the Accountants' Report prepared by our reporting accountants, PricewaterhouseCoopers, CertiÑed Public Accountants, Hong Kong, as set out in Appendix I, and is included herein for information purposes only.
UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION (All amounts expressed in millions of RMB unless otherwise stated)
Supplementary Financial Information
¬ Liquidity Ratios ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 ¬ Capital Adequacy RatiosÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 ¬ Capital Adequacy Ratio Related Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 ¬ Currency Concentrations other than RMB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 ¬ Cross-border Claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 ¬ Overdue AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
1 Liquidity ratios As of December 31, 2003 2004 2005 RMB current assets to RMB current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.81% 35.25% 48.92% Foreign currency current assets to foreign currency current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72.22% 78.62% 87.36%
The above liquidity ratios are calculated in accordance with the formula promulgated by the PBOC and CBRC and based on the Ñnancial information prepared in accordance with 1993 version of PRC GAAP for December 31, 2003 and 2001 version of PRC GAAP for December 31, 2004 and 2005.
2 Capital adequacy ratios As of December 31, 2004 2005 Core capital adequacy ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.48% 8.08% Capital adequacy ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.04% 10.42%
The Group calculates and reports the above capital adequacy ratios based on the New Capital Adequacy Regulation and Yinjianbanfa ®2004© No. 374 ""Notice from China Banking Regulatory Commission on Guidance for the Calculation of Capital Requirement of Market Risks for Commercial Banks'', issued by the CBRC on February 23, 2004 and December 30, 2004, respectively. The requirements pursuant to these guidelines may have signiÑcant diÅerences compared to those applicable in Hong Kong or other countries. In addition, pursuant to Yinjianbanfa ®2004© No. 374 ""Notice from China Banking Regulatory Commission on Guidance for the Calculation of Capital Requirement of Market Risks for Commercial Banks'' issued by the CBRC on December 30, 2004, which is eÅective from January 1, 2005, market risks have been taken into account when calculating the capital adequacy ratios as of December 31, 2005. The capital adequacy ratios as of December 31, 2003 reported by the Bank to the PBOC and CBRC were calculated using the Ñnancial information prepared in accordance with the 1993 version of PRC GAAP, and based on Yinfa ®1996© No. 450 ""Notice on the Management, Supervision Guidance and Review of the Ratios of Assets to Liabilities of Commercial Banks'' and Yinfa ®1997© No. 549 ""Notice on the Completion Instruction on Return of OÅsite Supervision and Report of Commercial Banks'' issued by the PBOC, and therefore, are not comparable to the capital adequacy ratios presented above. Such ratios are not presented as the Directors are of the opinion that the presentation of such ratios provides no real value to the shareholders.
3 Capital adequacy ratio related components The capital adequacy ratio related components used in the calculation of the adequacy ratios as of December 31, 2004 and 2005 presented in note 2 above, calculated based on the Ñnancial
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
information prepared in accordance with the 2001 version of PRC GAAP, are analyzed as below. All Ñgures included in the calculation are extracted from PRC GAAP Ñnancial statements of the Group.
As of December 31, 2004 2005 Components of capital base Core capital: Share capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390 209,427 Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,276 25,795 Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,387 28,778 Total core capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 235,053 264,000 Supplementary capital: General provisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,882 25,677 Long-term subordinated bonds issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,070 60,000 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,315) (1,380) Gross value of supplementary capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,637 84,297 Total capital base before deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283,690 348,297 Deductions: Investments in non-consolidated Ñnancial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,399) (2,877) Investment propertiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,228) (5,697) Investments in non-Ñnancial institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,585) (13,486) Total capital base after deductionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 270,478 326,237 Core capital base after deductions(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,447 252,970
Risk-weighted assets and market risk capital adjustment Risk-weighted assets and market risk capital adjustment (note 2) ÏÏÏÏÏ 2,693,503 3,131,002
(1) Pursuant to the relevant regulations, 50% of total deductions was applied in deriving the core capital base.
4 Currency concentrations other than RMB
Equivalent in million of RMB USD HK$ Others Total As of December 31, 2003 Spot assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,242,971 622,567 392,859 2,258,397 Spot liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,004,236) (627,974) (266,082) (1,898,292) Forward purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320,776 117,240 163,139 601,155 Forward salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (268,345) (77,631) (227,369) (573,345) Net options position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (606) (1,453) 1,133 (926) Net long position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 290,560 32,749 63,680 386,989 Net structural position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 547 20,790 4,181 25,518
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
Equivalent in million of RMB USD HK$ Others Total As of December 31, 2004 Spot assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,057,001 628,427 387,816 2,073,244 Spot liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (781,415) (650,024) (270,774) (1,702,213) Forward purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300,636 140,441 172,300 613,377 Forward salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (293,696) (74,104) (228,797) (596,597) Net options position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 745 (302) (350) 93 Net long position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283,271 44,438 60,195 387,904 Net structural position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 484 20,537 4,218 25,239 As of December 31, 2005 Spot assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,098,680 635,734 300,855 2,035,269 Spot liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (669,188) (628,115) (277,674) (1,574,977) Forward purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276,202 141,283 160,668 578,153 Forward salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (367,380) (65,733) (172,536) (605,649) Net options position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (141,639) (1,637) (1,834) (145,110) Net long position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,675 81,532 9,479 287,686 Net structural position ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320 21,373 3,745 25,438
The net options position is calculated using the delta equivalent approach as set out in the requirements of the banking return of the Hong Kong Monetary Authority. The net structural position of the Group includes the structural positions of the Bank's overseas branches, banking subsidiaries and other subsidiaries substantially involved in foreign exchange. Structural assets and liabilities include:
¬ Investments in Ñxed assets and premises, net of depreciation charges;
¬ Capital and statutory reserves of overseas branches;
¬ Investments in overseas subsidiaries and related companies; and
¬ Loan capital.
5 Cross-border claims
The Group is principally engaged in business operations within Mainland China, and regards all claims on third parties outside Mainland China as cross-border claims.
Cross-border claims include balances with central banks, placements with banks and other Ñnancial institutions, government certiÑcates of indebtedness for bank notes issued, trading assets and other Ñnancial instruments at fair value through proÑt or loss, loans and advances to customers and investment securities.
Cross-border claims have been disclosed by diÅerent country or geographical areas. A country or geographical area is reported where it constitutes 10% or more of the aggregate amount of cross-border claims, after taking into account any risk transfers. Risk transfer is only made if the
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
claims are guaranteed by a party in a country which is diÅerent from that of the counterparty or if the claims are on an overseas branch of a bank whose head oÇce is located in another country.
Banks and other Public Ñnancial sector institutions entities Others Total As of December 31, 2003 Asia PaciÑc excluding Mainland China Ì Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,859 52,673 340,106 419,638 Ì Other Asia PaciÑc locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,555 44,884 44,040 194,479 132,414 97,557 384,146 614,117 North and South America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94,636 301,640 59,093 455,369 Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 290,232 33,155 41,080 364,467 Middle East and Africa ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,001 1,905 1,044 3,950 518,283 434,257 485,363 1,437,903 As of December 31, 2004 Asia PaciÑc excluding Mainland China Ì Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,519 25,990 332,985 385,494 Ì Other Asia PaciÑc locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120,806 56,702 47,285 224,793 147,325 82,692 380,270 610,287 North and South America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,021 309,538 70,324 445,883 Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 357,698 40,902 46,691 445,291 Middle East and Africa ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,315 2,039 1,431 4,785 572,359 435,171 498,716 1,506,246 As of December 31, 2005 Asia PaciÑc excluding Mainland China Ì Hong Kong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,914 28,355 346,806 402,075 Ì Other Asia PaciÑc locations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,010 49,388 52,757 215,155 139,924 77,743 399,563 617,230 North and South America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99,082 247,242 157,515 503,839 Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 327,745 14,108 58,315 400,168 Middle East and Africa ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,463 977 3,494 5,934 568,214 340,070 618,887 1,527,171
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
6 Overdue assets
(a) Loans and advances
For the purposes of the tables below, loans and advances to customers and placements with banks and other Ñnancial institutions are considered overdue if either principal or interest payment is overdue.
(i) Gross amount of overdue loans and advances to customers
As of December 31, 2003 2004 2005 Gross loans and advances to customers which have been overdue for: Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,448 15,842 14,012 Ì between 6 and 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,740 12,665 21,778 Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 257,261 28,154 40,231 282,449 56,661 76,021 Percentage: Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.48% 0.74% 0.63% Ì between 6 and 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.68% 0.59% 0.97% Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.91% 1.31% 1.80% 13.07% 2.64% 3.40%
(ii) Gross amount of overdue placements with banks and other Ñnancial institutions
As of December 31, 2003 2004 2005 Gross placements with banks and other Ñnancial institutions which have been overdue for: Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì between 6 and 12 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,622 1,537 546 2,622 1,537 546 Percentage: Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% Ì% Ì% Ì between 6 and 12 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% Ì% Ì% Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.61% 0.45% 0.16% 0.61% 0.45% 0.16%
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APPENDIX II UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
(iii) Overdue loans and advances to customers by geographical area
As of December 31, 2003 2004 2005 Mainland China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 281,762 109,458 118,032 Hong Kong and Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,637 12,318 8,260 Other overseas locationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,136 425 179 306,535 122,201 126,471 Less: gross loans and advances to customers which have been overdue for less than 3 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (24,086) (65,540) (50,450) 282,449 56,661 76,021
(b) Investment securities (i) Held-to-maturity As of December 31, 2003 2004 2005 Overdue with respect to either principal or interest for: Ì three months or lessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì between 6 and 12 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì ÌÌÌ
(ii) Loans and receivables As of December 31, 2003 2004 2005 Overdue with respect to either principal or interest for: Ì three months or lessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì between 3 and 6 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì between 6 and 12 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì over 12 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 619 178 156 619 178 156
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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION
The information set out in this Appendix does not form part of the Accountants' Report prepared by PricewaterhouseCoopers, CertiÑed Public Accountants, Hong Kong, the reporting accountants of the Bank as set out in Appendix I to the prospectus, and is included herein for information only.
(A) Unaudited Pro Forma Adjusted Net Tangible Assets
The unaudited pro forma adjusted net tangible assets prepared in accordance with Rule 4.29 of LR4.29(1)&(2) the Listing Rules are set out below to illustrate the eÅect of the Global OÅering on the net tangible assets of the Group as of December 31, 2005 as if they had taken place on that date. The unaudited pro forma net tangible assets have been prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the Ñnancial position of the Group had the Global OÅering been completed as of December 31, 2005 or any future date. LR4.29(4)(b) The following unaudited pro forma adjusted net tangible assets is based on the audited LR4.29(5)(a) consolidated net tangible assets of the Group attributable to the equity holders of our bank as of December 31, 2005, as shown in the Accountants' Report set forth in Appendix I to this prospectus, adjusted as described below.
Adjusted consolidated net tangible assets of the Group Unaudited attributable to the Estimated pro forma adjusted equity holders of net proceeds net tangible assets Unaudited pro forma our bank as of from the attributable to the adjusted net tangible December 31, Global equity holders of assets per 2005(1) OÅering(2) our bank Share(3)(4) (in millions of RMB) RMB HK$ Based on an OÅer Price of HK$2.50 per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 225,036 63,936 288,972 1.230 1.189 Based on an OÅer Price of HK$3.00 per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 225,036 76,822 301,858 1.285 1.242
(1) The adjusted consolidated net tangible assets of the Group attributable to the equity holders of our bank as of December 31, 2005 is extracted from the Accountants' Report set out in Appendix I to the prospectus, which is based on the audited consolidated net assets of the Group attributable to the equity holders of our bank as of December 31, 2005 of RMB226,419 million with an adjustment for the intangible assets as of December 31, 2005 of RMB1,383 million. (2) The estimated net proceeds from the Global OÅering are based on the OÅer Price of HK$2.50 and HK$3.00 per Share, respectively, after deduction of estimated related fees and expenses, and do not take into account of any Shares that may be issued pursuant to the Over-Allotment Option. If the Over-Allotment Option is exercised, the unaudited pro forma adjusted net tangible assets attributable to the equity holders of our bank and unaudited pro forma adjusted net tangible assets per Share will increase. (3) The unaudited pro forma adjusted net tangible assets per Share are determined after the adjustments as described in note 2 above and on the basis that 234,995,952,357 Shares are issued and outstanding, and that the Over-Allotment Option has not been exercised. (4) Unaudited pro forma adjusted net tangible assets per Share are converted into Hong Kong dollars at the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006. (5) Our properties were revalued as of March 31, 2006. The net revaluation surplus of those properties classiÑed under the caption ""property and equipment'' in Appendix I Ó ""Accountants' Report'', representing the excess of market value of such properties over their carrying value, is approximately RMB9,395 million. In accordance with our accounting policy, such properties are stated at historical cost less accumulated depreciation and impairment. As such, the amount of such net revaluation surplus will not be included in our consolidated Ñnancial statements for the year ending December 31, 2006 nor the calculation of the above unaudited pro forma adjusted net tangible assets attributable to the equity holders of our bank. Had these properties been stated at such valuation, an additional depreciation of RMB206 million per annum would have been incurred.
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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION
(6) No adjustment has been made to reÖect any business operations or other transactions of the Group entered into subsequent to December 31, 2005 including, inter-alia, the subscription of 8,514,415,652 Shares by SSF on March 13, 2006 for a consideration of RMB10 billion and a dividend in the amount of RMB1,375 million approved on April 30, 2006 by our shareholders at a post-adjournment session of our annual general meeting.
(B) Unaudited Pro Forma Forecast Earnings Per Share LR4.29(1)&(2)
The unaudited pro forma forecast earnings per Share prepared in accordance with Rule 4.29 of LR4.29(8) the Listing Rules is set out below for the purpose of illustrating the eÅect of the Global OÅering as if it had taken place on January 1, 2006. The unaudited pro forma forecast earnings per Share has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the Ñnancial results of the Group following the Global OÅering.
Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006(1)&(3)ÏÏÏÏÏ not less than RMB33,000 million (HK$31,918 million) Unaudited pro forma forecast earnings per Share(2)&(3) ÏÏÏÏÏÏ RMB0.136 (HK$0.132)
(1) The forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 is LR4.29(5)(d) extracted from the section headed ""Financial Information Ì ProÑt Forecast'' in the prospectus. The bases and assumptions on which the above proÑt forecast for the year ending December 31, 2006 has been prepared are summarized in Appendix IV to this prospectus. Our Directors have prepared the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 based on the audited consolidated results of the Group for the year ended December 31, 2005 and a forecast of the consolidated results of the Group for the twelve months ending December 31, 2006. The forecast has been prepared on a basis consistent in all material respects with the accounting policies presently adopted by the Group as set out in sub-section III of Section 6 of the Accountants' Report, the text of which is set out in Appendix I to the prospectus. (2) The unaudited pro forma forecast earnings per Share is calculated by dividing the forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 by a weighted average of 241,854,139,211 Shares assumed to be issued and outstanding during the year ending December 31, 2006. The weighted average of 241,854,139,211 Shares is calculated based on 209,427,362,357 Shares issued and outstanding as of December 31, 2005, 8,514,415,652 Shares issued on March 13, 2006 upon completion of the SSF Investment, and 25,568,590,000 Shares to be issued pursuant to the Global OÅering on an assumption that the Global OÅering had been completed on January 1, 2006. This calculation does not take into account of any Shares that may be issued pursuant to the Over-Allotment Option. (3) Forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 and unaudited pro forma forecast earnings per Share are converted into Hong Kong dollars at the PBOC rate of HK$1.00 to RMB1.0339 prevailing on May 2, 2006.
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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION
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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION
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APPENDIX IV PROFIT FORECAST
The forecast consolidated proÑt attributable to equity holders of our bank for the year ending December 31, 2006 is set out in the section headed ""Financial Information Ì ProÑt Forecast''.
A. BASES AND ASSUMPTIONS
Our Directors have prepared the forecast consolidated proÑt attributable to equity holders of A1A(34)(2) our bank for the year ending December 31, 2006 based on the audited consolidated results of the LR11.17 Group for the year ended December 31, 2005 and a forecast of the consolidated results of the Group for the twelve months ending December 31, 2006. The proÑt forecast has been prepared on a basis consistent in all material respects with the accounting policies presently adopted by us as set out in sub-section III of Section 6 of the Accountants' Report, the text of which is set out in Appendix I to this prospectus, and on the following principal bases and assumptions:
¬ There will be no material changes in the existing political, legal, Ñscal, market or economic conditions in the PRC, Hong Kong or any other countries or territories in which the Group currently operates or which are otherwise material to our business;
¬ there will be no changes in legislation, regulations or rules in the PRC, Hong Kong or any other countries or territories in which the Group operates or with which the Group has arrangements or agreements, which may materially adversely aÅect the Group's business or operations;
¬ there will be no material changes in inÖation rates, interest rates or foreign exchange rates from those currently prevailing in the context of the Group's operations;
¬ there will be no material changes in the bases or applicable rates of taxation, surcharges or other government levies in the countries or territories in which the Group operates, except as otherwise disclosed in this prospectus;
¬ there will be no material adverse changes in the real estate market in the PRC, Hong Kong or any other countries or territories in which the Group currently operates, which may materially adversely aÅect the carrying value of the properties owned by the Group or the real estate collaterals securing loans and advances to our customers;
¬ there will be no wars, military incidents, pandemic diseases or natural disasters that would have a material impact on the Group's business and operating activities;
¬ the Group's operations will not be adversely aÅected by occurrences such as labor shortages and disputes, or any other factors outside the control of its management. In addition, the Group will be able to recruit enough employees to meet its operating requirements during the forecast period; and
¬ the PRC Government will continue to adopt a moderate macroeconomic and monetary policies similar to those of 2005, in order to maintain a consistent rate of economic growth.
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APPENDIX IV PROFIT FORECAST
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APPENDIX IV PROFIT FORECAST
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APPENDIX V PROPERTY VALUATION REPORT
The following is the text of a document, summary of values and valuation certiÑcate, prepared for the purpose of incorporation in this prospectus and received from American Appraisal China Limited and Grant Sherman Appraisal Limited, independent valuers, in connection with their valuations as at March 31, 2006 of the property interests of our Group. As described in the section ""Documents Delivered to the Registrar of Companies and Available for Inspection'' in Appendix X, a copy of the full valuation report is available for inspection.
May 18, 2006 A1A(9)(3) A1A(39) The Board of Directors 3rd Sch 34 Bank of China Limited Beijing The People's Republic of China Dear Sirs
In accordance with your instructions to us to value the property interests held by Bank of China Limited (hereinafter referred to as the ""Company'') and its subsidiaries (together referred to as the ""Group'') in the People's Republic of China (the ""PRC'') and in various overseas countries, we conÑrm that American Appraisal China Limited, Grant Sherman Appraisal Limited and their associates have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the Rule 5.06(8) market values of these property interests as at March 31, 2006 (the ""valuation date'').
Basis of Valuation Rule 5.05 Our valuation is our opinion of the market value which we would deÑne as intended to mean ""the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.'' The market value is the best price reasonably obtainable in the market by the seller and the most advantageous price reasonably obtainable in the market by the buyer. This estimate speciÑcally excludes an estimated price inÖated or deÖated by special terms or circumstances such as atypical Ñnancing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of special value. The market value of a property is also estimated without regard to costs of sale and purchase, and without oÅset for any associated taxes.
Valuation Methodology We have valued the property interests in Group I and III by using the ""Direct Comparison Approach'' whenever market comparable transactions are available. However, for a portion of the properties in Group I and III, due to the fact that speciÑc uses for these properties have been restricted, there are no readily identiÑable market comparable and these properties cannot be
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APPENDIX V PROPERTY VALUATION REPORT
valued on the basis of direct comparison. Therefore, our valuation has been based on the depreciated replacement cost of the properties which is deÑned as ""our opinion of the land value in its existing use and an estimate of the new replacement costs of the buildings, including fees and Ñnance charges, from which deductions are then made to allow for age, condition, economic/ external and functional obsolescence and environmental factors etc. All of these might result in the existing buildings and structures being worth less to the undertaking in occupation than would a new replacement.'' The depreciated replacement cost approach generally provides the most reliable indication of value for property in the absence of a known market based on comparable sales.
For the property interests in Group II which are currently under construction, we have valued such property interests with regard to their prevailing cost levels and status of constructions as at the valuation date. We have assumed that all consents, approvals and licences from the relevant Government authorities for these developments have been granted without any onerous conditions or undue delay which might aÅect their values.
The properties interests in Group IV which are leased by the Group have no commercial value due to the prohibition against assignment, sub-letting or lack of substantial proÑt rent.
Assumptions Rule 5.06(1)(l) Our valuation has been made on the assumption that the owner sells the property interests on the market without the beneÑt of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the value of the property. In addition, no account has been taken of any option or right of pre-emption concerning or aÅecting the sale of the property and no forced sale situation in any manner is assumed in our valuation.
No allowance has been made in our valuation for any charges, mortgages or amounts owing on any of the property valued nor for any expenses or taxation which may be incurred in eÅecting a sale. Unless otherwise stated, it is assumed that all the interests are free from encumbrances, restrictions and outgoings of an onerous nature which could aÅect its value.
For the property interests held under long term land use rights in the PRC, we have assumed that the owner of the property interests has free and uninterrupted rights to use the property interests for the whole of the unexpired term of its respective land use rights.
We have assumed that all consents, approvals and licences from relevant government authorities for the buildings and structures erected or to be erected thereon have been granted. Also, we have assumed that unless otherwise stated, all buildings and structures erected on the site are held by the owners or permitted to be occupied by the owner.
We have not carried out investigations on site in respect of the property interests in Group II to determine the suitability of the ground conditions and the services, etc. for further development. Our valuations are prepared on the assumptions that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period.
It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless a non-conformity has been stated, deÑned and considered in the valuation certiÑcate. Further, it is assumed that the utilization of the land and improvements is within the boundaries of the properties described and that no encroachment or trespass exists unless noted in the valuation certiÑcate.
Other special assumptions and qualiÑcations for each property, if any, have been stated in the footnotes of the valuation certiÑcate for the respective property.
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APPENDIX V PROPERTY VALUATION REPORT
Title Investigation
For the property interests which were held by the Group in the PRC, the Company has acquired the requisite approvals from relevant authorities and obtained the relevant Granted Land Use Right CertiÑcates, Allocated Land Use Right CertiÑcates or other land title proofs. For the land use rights which were held under the land title proofs, the Company is in the process of the land use rights registration to obtain the relevant Land Use Right CertiÑcates.
We have been provided with copies of various title documents relating to the property interests held by the Group in the PRC. However, we have not inspected the original documents to verify ownership or to verify any amendments which may not appear on the copies handed to us. In our valuation, we have relied to a considerable extent on the information given by the Company and the legal opinion provided by its PRC legal adviser, Jun He Law OÇces (the ""PRC legal adviser''), regarding titles to the property interests of the Group in the PRC.
We have made relevant searches for the property interests held by the Group in Hong Kong and overseas.
All legal documents disclosed in this letter and valuation certiÑcate are for reference only and no responsibility is assumed for any legal matters concerning the legal title to the property interests set out in this letter and valuation certiÑcate.
Limiting Conditions
We have relied to a very considerable extent on the information given by the Group and the legal opinion of the Group's legal advisers. We have no reason to doubt the truth and accuracy of the information provided to us by the Group and/or its legal advisers which is material to the valuations. We have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, leases, particulars of occupancy, identiÑcation of properties, site and Öoor areas, construction costs incurred and all other relevant information. Dimensions, measurements and areas included in the valuation certiÑcate are based on information provided by the Company and are therefore only approximations. No on-site measurements have been made. We have been advised by the Group that no material facts have been omitted from the information supplied.
We have inspected the exterior and where possible, the interior of the property interests included in the attached valuation certiÑcate. In the course of our inspection, we did not notice any serious defects. However, no structural survey has been made and we are therefore unable to report that the properties are free from rot, infestation or any other structural defects. No tests were carried out on any of the services.
We have not carried out investigations on site in respect of the properties to determine the suitability of the ground conditions and the services, etc. Our valuations are prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period.
In preparing our valuation report, we have complied with the requirements contained within the relevant provisions the Companies Ordinance and of those stipulated in Chapter 5 and Practice Notes 12 and 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ""Listing Rules'') except in respect of which exemptions and waivers have been applied for and granted in respect of paragraphs 34(2) of the Third Schedule to the Companies Ordinance and Rules 5.01, 5.06(1), 5.06(3), paragraph 5.1 of Practice Note 12 and paragraph 3(a) of Practice Note 16 to the Listing Rules.
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APPENDIX V PROPERTY VALUATION REPORT
Unless otherwise speciÑed, all amounts are denominated in Renminbi (""RMB''). In valuing PN12 14 property interests in Group III and IV, we have adopted exchange rates of Australian Dollar 1 to RMB5.71, Bahrain Dinar 1 to RMB21.4, Brazilian Real 1 to RMB3.66, British Pound 1 to RMB14, Canadian Dollar 1 to RMB6.88, Cayman Islands Dollar 1 to RMB9.84, Euro 1 to RMB9.7, Hong Kong Dollar 1 to RMB1.04, Hungarian Forint 100 to RMB3.67, Indonesian Rupiah 10,000 to RMB8.85, Japanese Yen 100 to RMB6.84, Kazakhstan Tenge 100 to RMB6.54, Korean Won 100 to RMB0.836, Macau Pataca 1 to RMB1.037, Malaysian Ringgit 1 to RMB2.12, New Zealand Dollar 1 to RMB5.84, Panamanian Balboa 1 to RMB 8.33, Philippines Peso 1 to RMB0.157, Russian Rouble 1 to RMB0.29, Singaporean Dollar 1 to RMB4.96, South Africa Rand 1 to RMB1.29, Thail Baht 1 to RMB0.207, United State Dollar 1 to RMB8.035, Vietnamese Dong 10,000 to RMB5.16, Zambian Kwacha 1,000 to RMB2.6, which were prevailing as at the date of valuation. Our summary of valuation and valuation certiÑcate are attached herewith. Yours faithfully Yours faithfully For and on behalf of For and on behalf of American Appraisal China Limited Grant Sherman Appraisal Limited
3rd Sch 46
Leo C. Ho Peggy Y. Y. Lai BSc. MTP MBA MRICS MHKIS RPS BSc. MRICS MHKIS RPS Vice President Associate Director Encl.
Note: Mr. Leo Ho is a Chartered Surveyor since March 1989, he has 15 years' experience in Rule 5.06(7), valuation of properties in Hong Kong, the PRC and the Asian PaciÑc region. Our valuation on 5.08(1)(a)(b), the property interests in overseas is supported by the overseas oÇces of American Appraisal 5.08(2)(a)(b), Associates. PN12 4.1&4.2 Ms. Peggy Lai is a Chartered Surveyor since December 1996, she has extensive experience in valuation of properties in Hong Kong and the PRC.
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APPENDIX V PROPERTY VALUATION REPORT
Summary of Valuation
Group I Ì Property interests held by the Group in the PRC
Capital value in Value attributable existing state as at to the Group as at No. Property 31 March 2006 31 March 2006 Rule 5.06(1)(i) RMB RMB 1. Various properties located in Beijing Municipality, 9,010,000,000 8,759,000,000 Tianjin Municipality, Heibei Province, Shanxi Province and Inner Mongolia Autonomous Region of the Northern Region of the PRC 2. Various properties located in Liaoning Province, Jilin 3,545,000,000 3,544,000,000 Province, Heilongjiang Province of the Northeastern Regions of the PRC 3. Various properties located in Shanghai Municipality, 15,307,000,000 14,511,000,000 Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province and Shandong Province of the Eastern Regions of the PRC 4. Various properties located in Henan Province, 8,494,000,000 8,415,000,000 Hunan Province, Hubei Province, Guangdong Province, Guangxi Autonomous Region and Hainan Province of the Central and Southern Regions of the PRC 5. Various properties located in Chongqing 3,752,000,000 3,752,000,000 Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Ningxia Autonomous Region, Qinghai Province, Tibet Autonomous Region and Xinjiang Autonomous Region of the Western Regions of the PRC Sub-total: 40,108,000,000 38,981,000,000
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APPENDIX V PROPERTY VALUATION REPORT
Group II Ì Property interests held by the Group under development in the PRC
Capital value in Value attributable existing state as at to the Group as at No. Property 31 March 2006 31 March 2006 RMB RMB 6. Various properties located in Beijing Municipality, 39,000,000 28,000,000 Tianjin Municipality, Heibei Province, Shanxi Province and Inner Mongolia Autonomous Region of the Northern Region of the PRC 7. Various properties located in Shanghai Municipality, 259,000,000 202,000,000 Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province and Shandong Province of the Eastern Regions of the PRC 8. Various properties located in Henan Province, 107,000,000 107,000,000 Hunan Province, Hubei Province, Guangdong Province, Guangxi Autonomous Region and Hainan Province of the Central and Southern Regions of the PRC 9. Various properties located in Chongqing 39,000,000 39,000,000 Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Ningxia Autonomous Region, Qinghai Province, Tibet Autonomous Region and Xinjiang Autonomous Region of the Western Regions of the PRC Sub-total: 444,000,000 376,000,000
Group III Ì Property interests held by the Group in Hong Kong, Macau and Overseas
Capital value in Value attributable existing state as at to the Group as at No. Property 31 March 2006 31 March 2006 RMB RMB 10. Various properties located in Hong Kong 25,966,000,000 17,380,000,000 11. Various properties located in Macau and overseas 6,272,000,000 5,850,000,000 Sub-total: 32,238,000,000 23,230,000,000
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APPENDIX V PROPERTY VALUATION REPORT
Group IV Ì Property interests leased by the Group
Capital value in Value attributable existing state as at to the Group as at No. Property 31 March 2006 31 March 2006 Rule 5.06(1)(i) RMB RMB 12. Various properties located in the PRC No Commercial Value No Commercial Value 13. Various properties located in Hong Kong No Commercial Value No Commercial Value 14. Various properties located in Macau and No Commercial Value No Commercial Value overseas Sub-total: No Commercial Value No Commercial Value Grand Total 72,790,000,000 62,587,000,000
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APPENDIX V PROPERTY VALUATION REPORT
VALUATION CERTIFICATE
Group I Ì Property interests held by the Group in the PRC
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 1. Various properties The properties comprise 934 land lots with a The properties are 9,010,000,000 located in Beijing total site area of approximately 1,171,366 currently occupied (Value attributable Municipality, sq.m., 733 commercial buildings and units, 202 by the Group for to the Group: Tianjin residential buildings and units, and 33 other commercial, 8,759,000,000) Municipality, Hebei buildings and units with a total gross Öoor area residential, car Province, Shanxi of approximately 2,106,075 sq.m., mainly parking and other Province and Inner completed between 1975 and 2005 (the ancillary uses. Mongolia ""Completed Properties''). Autonomous Region of the Details of types of land and the approximate Northern Region of site areas are shown as follows: the PRC
Type Site Area (sq.m.) Authorized land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 441,253 Allocated landÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65,649 Granted land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 599,668 Leased land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,717 Without title land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,079 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,171,366
Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,733,423 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 224,598 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,054 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,106,075
Notes: 1. The land use rights of the properties can be classiÑed into Ñve categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), the land held under land leases (""leased land'') and the land without any title proofs (""without title land''). 2. The Group has obtained proper title for 342 land lots of authorized land with a total area of approximately 441,253 sq.m., 61 land lots of allocated land with a total area of approximately 65,649 sq.m., and 385 land lots of granted land with a total area of approximately 599,668 sq.m., 2 land lots of leased land with a total area of approximately 15,717 sq.m. The remaining 144 land lots of without title land with a total area of approximately 49,079 sq.m. are without any title proof. 3. The properties have 968 buildings, units and carparks with a total Öoor area of approximately 2,106,075 sq.m. Among these, 361 buildings, units and carparks with a total Öoor area of approximately 610,494 sq.m. were erected on authorized land, 84 buildings, units and carparks with a total gross Öoor area of approximately 70,428 sq.m. were erected on allocated land, 374 buildings, units and carparks with a total gross Öoor area of approximately 1,185,137 sq.m. were erected on granted land, 3 buildings with a total gross Öoor area of approximately 28,159 sq.m.
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APPENDIX V PROPERTY VALUATION REPORT
were erected on leased land and 146 buildings, units and carparks with a total Öoor area of approximately 213,857 sq.m. were erected on without title land. 4. The Group has obtained proper title for 854 buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 1,818,849 sq.m. 5. We have attributed no commercial value to the land, buildings, units and carparks of the Completed Properties with a Öoor area of approximately 383,713 sq.m. due to insuÇcient title proof to these land, buildings, units and carparks. We have also attributed no commercial value to the land, buildings, units, carparks on the leased land and allocated land as mentioned in Note 3 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. We are of the opinion that the market value of these properties as at the valuation date would be RMB1,548,000,000 assuming all relevant title certiÑcates have been obtained by the Group and the Group has legal rights to occupy, lease, mortgage or transfer these properties. 6. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:- PN12 7&8.2 Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Leased Land The Company has obtained the land use rights in respect of the leased land of the properties. The Company has the rights to occupy and use the leased land within the validity periods as prescribed in the land use rights certiÑcates. The Company is entitled to transfer, let, mortgage or deal with the such land use rights by other means upon obtaining approval from the relevant land administration authorities or in accordance with the relevant lease contracts, provided the required land premium has been paid and the relevant construction work has been completed. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties. Buildings Buildings with Proper Title Proof on Granted Land The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the buildings on the granted land by other means in according to the PRC law. For the buildings held by the Company, the Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate
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APPENDIX V PROPERTY VALUATION REPORT
ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Authorized Land The Company has the rights to deal with the buildings on the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of the Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Allocated Land The Company has the rights to occupy and use the buildings on the allocated land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Leased Land The Company has the rights to occupy and use the buildings on the leased land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Without Title Land The Company or its subsidiaries have the rights to occupy and use the buildings on the without title land in according to the usages as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings without Proper Title Proof The Company or its subsidiaries can occupy, use, transfer, let, mortgage or otherwise deal with these buildings if the Company or its subsidiaries obtain the building ownership certiÑcates or real estate ownership certiÑcates and their corresponding land use rights in according to the PRC law.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 2. Various properties The properties comprise 885 land lots with a The properties are 3,545,000,000 located in Liaoning total site area of approximately 468,401 sq.m., currently occupied (Value attributable Province, Jilin 833 commercial buildings and units, 44 by the Group for to the Group) Province residential buildings and units, and 21 other commercial, 3,544,000,000 Heilongjiang buildings and units with a total gross Öoor area residential and Province of the of approximately 1,118,487 sq.m., mainly other ancillary Northeastern completed between 1984 and 2005 (the uses. Regions of the ""Completed Properties''). PRC
Details of types of land and the approximate site areas are shown as follows:
Type Site Area (sq.m.) Authorized land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183,606 Allocated land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,984 Granted land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,432 Leased land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,241 Without title land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,138 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 468,401
Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,075,712 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,268 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,507 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,118,487
Notes:
1. The land use rights of the properties can be classiÑed into Ñve categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), the land held under land leases (""leased land'') and the land without any title proofs (""without title land'').
2. The Group has obtained proper title for 323 land lots of authorized land with a total area of approximately 183,606 sq.m., 11 land lots of allocated land with a total area of approximately 12,984 sq.m., 460 land lots of granted land with a total area of approximately 228,432 sq.m. and 9 land lots of leased land with a total area of approximately 14,241 sq.m. The remaining 82 land lots of without title land with a total area of approximately 29,138 sq.m. are without any title proof.
3. The properties have 898 buildings, units and carparks with a total Öoor area of approximately 1,118,487 sq.m. Among these, 331 buildings, units and carparks with a total Öoor area of approximately 360,369 sq.m. were erected on authorized land, 12 buildings and units with a total gross Öoor area of approximately 25,717 sq.m. were erected on allocated land, 463 buildings, units and carparks with a total gross Öoor area of approximately 616,357 sq.m. were erected on granted land, 9 buildings and units with a total gross Öoor area of approximately 39,587 sq.m. were erected on leased land and 83 buildings, units and carparks with a total Öoor area of approximately 76,457 sq.m. were erected on without title land.
4. The Group has obtained proper title for 848 buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 1,064,919 sq.m.
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APPENDIX V PROPERTY VALUATION REPORT
5. We have attributed no commercial value to the land, buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 83,084 sq.m. due to insuÇcient title proof to these land, buildings, units and carparks. We have also attributed no commercial value to the land, buildings, units, carparks on the leased land and allocated land as mentioned in Note 3 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. We are of the opinion that the market value of these properties as at the valuation date would be RMB594,000,000 assuming all relevant title certiÑcates have been obtained by the Group and the Group has legal rights to occupy, lease, mortgage or transfer these properties. 6. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, PN12 7&8.2 inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Leased Land The Company has obtained the land use rights in respect of the leased land of the properties. The Company has the rights to occupy and use the leased land within the validity periods as prescribed in the land use rights certiÑcates. The Company is entitled to transfer, let, mortgage or deal with the such land use rights by other means upon obtaining approval from the relevant land administration authorities or in accordance with the relevant lease contracts, provided the required land premium has been paid and the relevant construction work has been completed. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties. Buildings Buildings with Proper Title Proof on Granted Land The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the buildings on the granted land by other means in according to the PRC law. For the buildings held by the Company, the Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
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APPENDIX V PROPERTY VALUATION REPORT
Buildings with Proper Title Proof on Authorized Land The Company has the rights to deal with the buildings on the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of the Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Allocated Land The Company has the rights to occupy and use the buildings on the allocated land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Leased Land The Company has the rights to occupy and use the buildings on the leased land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Without Title Land The Company or its subsidiaries have the rights to occupy and use the buildings on the without title land in according to the usages as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings without Proper Title Proof The Company or its subsidiaries can occupy, use, transfer, let, mortgage or otherwise deal with these buildings if the Company or its subsidiaries obtain the building ownership certiÑcates or real estate ownership certiÑcates and their corresponding land use rights in according to the PRC law.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 3. Various properties The properties comprise 3,484 land lots with a The properties are 15,307,000,000 located in Shanghai total site area of approximately currently occupied (Value attributable Municipality, 2,296,168 sq.m., 2,404 commercial buildings by the Group for to the Group Jiangsu Province, and units, 723 residential buildings and units, commercial, 14,511,000,000) Zhejiang Province, and 105 other buildings and units with a total residential and Anhui Province, gross Öoor area of approximately other ancillary Fujian Province, 4,557,311 sq.m., mainly completed between uses. Jiangxi Province 1936 and 2005 (the ""Completed Properties''). and Shandong Province of the Details of types of land and the approximate Eastern Regions of site areas are shown as follows: the PRC Type Site Area (sq.m.) Authorized land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 866,192 Allocated landÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 177,211 Granted landÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,122,870 Leased land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,646 Without title land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,249 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,296,168
Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,167,763 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 269,357 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120,191 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,557,311
Notes: 1. The land use rights of the properties can be classiÑed into Ñve categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), the land held under land leases (""leased land'') and the land without any title proofs (""without title land''). 2. The Group has obtained proper title for 1,121 land lots of authorized land with a total area of approximately 866,192 sq.m., 221 land lots of allocated land with a total area of approximately 177,211 sq.m., 1,783 land lots of granted land with a total area of approximately 1,122,870 sq.m. and 13 land lots of leased land with a total area of approximately 16,646 sq.m. The remaining 346 land lots of without title land with a total area of approximately 113,249 sq.m. are without any title proof. 3. The properties have 3,232 buildings, units and carparks with a total Öoor area of approximately 4,557,311 sq.m. Among these, 1,079 buildings, units and carparks with a total Öoor area of approximately 1,682,924 sq.m. were erected on authorized land, 203 buildings, units and carparks with a total gross Öoor area of approximately 186,716 sq.m. were erected on allocated land, 1,593 buildings, units and carparks with a total gross Öoor area of approximately 2,369,948 sq.m. were erected on granted land, 13 buildings and units with a total gross Öoor area of approximately 30,686 sq.m. were erected on leased land and 344 buildings, units and carparks with a total Öoor area of approximately 287,037 sq.m. were erected on without title land. 4. The Group has obtained proper title for 2,993 buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 4,315,545 sq.m. 5. We have attributed no commercial value to the land, buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 404,406 sq.m. due to insuÇcient title proof to these land, buildings, units and carparks.
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APPENDIX V PROPERTY VALUATION REPORT
We have also attributed no commercial value to the land, buildings, units, carparks on the leased land and allocated land as mentioned in Note 3 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. We are of the opinion that the market value of these properties as at the valuation date would be RMB2,084,000,000 assuming all relevant title certiÑcates have been obtained by the Group and the Group has legal rights to occupy, lease, mortgage or transfer these properties. 6. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, PN12 7&8.2 inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Leased Land The Company has obtained the land use rights in respect of the leased land of the properties. The Company has the rights to occupy and use the leased land within the validity periods as prescribed in the land use rights certiÑcates. The Company is entitled to transfer, let, mortgage or deal with the such land use rights by other means upon obtaining approval from the relevant land administration authorities or in accordance with the relevant lease contracts, provided the required land premium has been paid and the relevant construction work has been completed. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties. Buildings Buildings with Proper Title Proof on Granted Land The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the buildings on the granted land by other means in according to the PRC law. For the buildings held by the Company, the Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Authorized Land The Company has the rights to deal with the buildings on the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate
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APPENDIX V PROPERTY VALUATION REPORT
ownership certiÑcates in the name of the Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Allocated Land
The Company has the rights to occupy and use the buildings on the allocated land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Leased Land
The Company has the rights to occupy and use the buildings on the leased land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Without Title Land
The Company or its subsidiaries have the rights to occupy and use the buildings on the without title land in according to the usages as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings without Proper Title Proof
The Company or its subsidiaries can occupy, use, transfer, let, mortgage or otherwise deal with these buildings if the Company or its subsidiaries obtain the building ownership certiÑcates or real estate ownership certiÑcates and their corresponding land use rights in according to the PRC law.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 4. Various properties The properties comprise 4,658 land lots with a The properties are 8,494,000,000 located in Henan total site area of approximately currently occupied (Value attributable Province, Hunan 4,079,804 sq.m., 1,749 commercial buildings by the Group for to the Group: Province, Hubei and units, 1,253 residential buildings and units, commercial, 8,415,000,000) Province, and 142 other buildings and units with a total residential and Guangdong gross Öoor area of approximately other ancillary Province, Guangxi 4,026,227 sq.m., mainly completed between uses. Autonomous 1908 and 2005 (the ""Completed Properties''). Region and Hainan Province of the Details of types of land and the approximate Central and site areas are shown as follows: Southern Regions Type Site Area of the PRC (sq.m.) Authorized land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,173,385 Allocated landÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 689,028 Granted land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,649,526 Leased land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,249 Without title land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 561,616 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,079,804
Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,353,231 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 546,636 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 126,360 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,026,227
Notes: 1. The land use rights of the properties can be classiÑed into Ñve categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), the land held under land leases (""Leased Land'') and the land without any title proofs (""without title land''). 2. The Group has obtained proper title for 1,196 land lots of authorized land with a total area of approximately 1,173,385 sq.m., 428 land lots of allocated land with a total area of approximately 689,028 sq.m., 2,696 land lots of granted land with a total area of approximately 1,649,526 sq.m. and 7 land lots of leased land with a total area of approximately 6,249 sq.m. The remaining 330 land lots of without title land with a total area of approximately 561,616 sq.m. are without any title proof. 3. The Group has 3,144 buildings, units and carparks with a total Öoor area of approximately 4,026,227 sq.m. Among these, 926 buildings, units and carparks with a total Öoor area of approximately 1,445,176 sq.m. were erected on authorized land, 362 buildings, units and carparks with a total gross Öoor area of approximately 401,227 sq.m. were erected on allocated land, 1,507 buildings, units and carparks with a total gross Öoor area of approximately 1,683,941 sq.m. were erected on granted land, 5 buildings and units with a total gross Öoor area of approximately 4,586 sq.m. were erected on leased land and 344 buildings, units and carparks with a total Öoor area of approximately 491,297 sq.m. were erected on without title land. 4. The Group has obtained proper title for 2,885 buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 3,488,522 sq.m. 5. We have attributed no commercial value to the land, buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 852,410 sq.m. due to insuÇcient title proof to these land, buildings, units and carparks.
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APPENDIX V PROPERTY VALUATION REPORT
We have also attributed no commercial value to the land, buildings, units, carparks on the leased land and allocated land as mentioned in Note 3 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. We are of the opinion that the market value of these properties as at the valuation date would be RMB2,730,000,000 assuming all relevant title certiÑcates have been obtained by the Group and the Group has legal rights to occupy, lease, mortgage or transfer these properties. 6. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, PN12 7&8.2 inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Leased Land The Company has obtained the land use rights in respect of the leased land of the properties. The Company has the rights to occupy and use the leased land within the validity periods as prescribed in the land use rights certiÑcates. The Company is entitled to transfer, let, mortgage or deal with the such land use rights by other means upon obtaining approval from the relevant land administration authorities or in accordance with the relevant lease contracts, provided the required land premium has been paid and the relevant construction work has been completed. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties. Buildings Buildings with Proper Title Proof on Granted Land The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the buildings on the granted land by other means in according to the PRC law. For the buildings held by the Company, the Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Authorized Land The Company has the rights to deal with the buildings on the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate
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APPENDIX V PROPERTY VALUATION REPORT
ownership certiÑcates in the name of the Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Allocated Land
The Company has the rights to occupy and use the buildings on the allocated land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Leased Land
The Company has the rights to occupy and use the buildings on the leased land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings with Proper Title Proof on Without Title Land
The Company or its subsidiaries have the rights to occupy and use the buildings on the without title land in according to the usages as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
Buildings without Proper Title Proof
The Company or its subsidiaries can occupy, use, transfer, let, mortgage or otherwise deal with these buildings if the Company or its subsidiaries obtain the building ownership certiÑcates or real estate ownership certiÑcates and their corresponding land use rights in according to the PRC law.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 5. Various properties The properties comprise 1,442 land lots with The properties are 3,752,000,000 located in Chongqing a total site area of approximately 921,370 currently occupied (Value attributable Municipality, Sichuan sq.m., 994 commercial buildings and units, by the Group for to the Group Province, Guizhou 314 residential buildings and units, and 41 commercial, 3,752,000,000) Province, Yunnan other buildings and units with a total gross residential and Province, Shaanxi Öoor area of approximately 1,613,300 sq.m., other ancillary Province, Gansu mainly completed between 1980 and 2005 uses. Province, Ningxia (the ""Completed Properties''). Autonomous Region, Qinghai Province, Details of types of land and the approximate Tibet Autonomous site areas are shown as follows: Region and Xinjiang Autonomous Region Type Site Area of the Western (sq.m.) Regions of the PRC Authorized land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 397,723 Allocated land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,970 Granted land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 285,924 Leased landÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,720 Without title land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146,033 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 921,370
Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,425,895 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 172,060 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,345 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,613,300
Notes:
1. The land use rights of the properties can be classiÑed into Ñve categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), the land held under land leases (""leased land'') and the land without any title proofs (""without title land'').
2. The Group has obtained proper title for 488 land lots of authorized land with a total area of approximately 397,723 sq.m., 73 land lots of allocated land with a total area of approximately 88,970 sq.m., 736 land lots of granted land with a total area of approximately 285,924 sq.m. and 7 land lots of leased land with a total area of approximately 2,720 sq.m. The remaining 138 land lots of without title land with a total area of approximately 146,033 sq.m. are without any title proof.
3. The properties have 1,349 buildings, units and carparks with a total Öoor area of approximately 1,613,300 sq.m. Among these, 479 buildings, units and carparks with a total Öoor area of approximately 700,884 sq.m. were erected on authorized land, 78 buildings, units and carparks with a total gross Öoor area of approximately 33,011 sq.m. were erected on allocated land, 647 buildings, units and carparks with a total gross Öoor area of approximately 774,833 sq.m. were erected on granted land, 5 buildings and units with a total gross Öoor area of approximately 28,669 sq.m. were erected on leased land and 140 buildings, units and carparks with a total Öoor area of approximately 60,084 sq.m. were erected on without title land.
4. The Group has obtained proper title for 1,252 buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 1,426,265 sq.m.
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APPENDIX V PROPERTY VALUATION REPORT
5. We have attributed no commercial value to the land, buildings, units and carparks of the Completed Properties with a total Öoor area of approximately 216,177 sq.m. due to insuÇcient title proof to these land, buildings, units and carparks. We have also attributed no commercial value to the land, buildings, units, carparks on the leased land and allocated land as mentioned in Note 3 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. We are of the opinion that the market value of these properties as at the valuation date would be RMB1,240,000,000 assuming all relevant title certiÑcates have been obtained by the Group and the Group has legal rights to occupy, lease, mortgage or transfer these properties. 6. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, PN12 7&8.2 inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Leased Land The Company has obtained the land use rights in respect of the leased land of the properties. The Company has the rights to occupy and use the leased land within the validity periods as prescribed in the land use rights certiÑcates. The Company is entitled to transfer, let, mortgage or deal with the such land use rights by other means upon obtaining approval from the relevant land administration authorities or in accordance with the relevant lease contracts, provided the required land premium has been paid and the relevant construction work has been completed. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties. Buildings Buildings with Proper Title Proof on Granted Land The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the buildings on the granted land by other means in according to the PRC law. For the buildings held by the Company, the Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration.
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APPENDIX V PROPERTY VALUATION REPORT
Buildings with Proper Title Proof on Authorized Land The Company has the rights to deal with the buildings on the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of the Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Allocated Land The Company has the rights to occupy and use the buildings on the allocated land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Leased Land The Company has the rights to occupy and use the buildings on the leased land in according to their usage as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings with Proper Title Proof on Without Title Land The Company or its subsidiaries have the rights to occupy and use the buildings on the without title land in according to the usages as stipulated in the building ownership certiÑcates or real estate ownership certiÑcates. In order for the Company to transfer, let or mortgage the buildings, the Company should obtain the corresponding granted land use rights or leased land use rights in according to the PRC law. The Company has completed or is currently applying for registration of the relevant building ownership certiÑcates and real estate ownership certiÑcates in the name of Bank of China Limited. There should be no material legal impediment for such registration. Buildings without Proper Title Proof The Company or its subsidiaries can occupy, use, transfer, let, mortgage or otherwise deal with these buildings if the Company or its subsidiaries obtain the building ownership certiÑcates or real estate ownership certiÑcates and their corresponding land use rights in according to the PRC law.
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APPENDIX V PROPERTY VALUATION REPORT
Group II Ì Property interest held by the Group under development in the PRC
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 6. Various properties The properties comprise 13 properties or The properties are 39,000,000 located in Beijing projects under construction (CIP Properties). currently under Municipality, Upon completion, the total gross Öoor area of construction. (Value attributable Tianjin the buildings will be 91,607 sq.m. As at the to the Group: Municipality, Heibei valuation date, a total construction cost of Upon completion, 28,000,000) Province, Shanxi approximately RMB536,000,000 has been the properties will Province and Inner incurred. They are scheduled to be completed be occupied by the Mongolia in 2006. Group for Autonomous commercial, Region of the Upon completion, details of the uses and the residential, car Northern Region of approximate Öoor areas of CIP Properties are parking and other the PRC shown as follows: ancillary uses. Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,863 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,745 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,999 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,607
Notes: 1. The land use rights of the properties can be classiÑed into four categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), and the land without any title proofs (""without title land''). 2. According to the information provided, the Group has 13 projects with a total gross Öoor area of approximately 91,607 sq.m. Among the projects, there are 2 buildings with a total gross Öoor area of 33,990 sq m erected on authorized Land, 1 building with a total gross Öoor area of 3,010 sq m erected on the allocated land, 3 buildings with a total gross Öoor area of 26,357 sq m erected on the granted land,and the remaining portion of 7 buildings with a total gross Öoor area of approximately 28,250 sq.m. was erected on without title land. 3. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for the Company to apply for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated
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APPENDIX V PROPERTY VALUATION REPORT
land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties.
Construction Works The Group has obtained construction land planning permits, construction project planning permits and state-owned land use rights certiÑcates (""Construction Approval Document'') for 3 projects of the CIP Properties. There should be no material legal impediment for the Group to obtain the title proofs of the aforesaid properties upon the completion of the construction works. The Group has not provided with a completed set of the Construction Approval Document for 10 projects of the CIP Properties. Such projects are subject to the legal risk of suspension, amendments or penalty ordered by the relevant authorities. There should be no material legal impediment for the Group to obtain the title proofs of these properties if the Group has obtained the aforesaid Construction Approval Document. 4. We have attributed no commercial value to the aforesaid construction works with a total proposed Öoor area of approximately 28,250 sq.m erected on without title land due to insuÇcient title proof to these properties. We have also attributed no commercial value to the construction works on the allocated land as mentioned in Note 2 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. Finally, we have attributed no commercial value to the construction works on which the Group did not obtain a full set of the Construction Approval Document as mentioned in Note 3 as the Group may have legal impediment in obtaining title proof of the properties on completion of these projects. We are of the opinion that the market value of these properties as at the valuation date would be RMB497,000,000 assuming all relevant title certiÑcates and Construction Approval Document have been obtained by the Group and the Group has legal rights to occupy, use, let, mortgage or transfer these properties.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 7. Various properties The properties comprise 18 properties or The properties are 259,000,000 located in projects under construction (CIP Properties). currently under Shanghai Upon completion, the total gross Öoor area of construction. (Value attributable Municipality, the buildings will be 371,074 sq.m. As at the to the Group: Jiangsu Province, valuation date, a total construction cost of Upon completion, 202,000,000) Zhejiang Province, approximately RMB666,000,000 has been the properties will Anhui Province, incurred. They are scheduled to be completed be occupied by the Fujian Province, in 2006. Group for Jiangxi Province commercial, and Shandong Upon completion, details of the uses and the residential, car Province of the approximate Öoor areas of CIP Properties are parking and other Eastern Regions of shown as follows: ancillary uses. the PRC Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371,074 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371,074
Notes: 1. The land use rights of the properties can be classiÑed into four categories, which comprise the land that has been authorized by the MLR for the Group to manage and operate (""authorized land''), the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), and the land without any title proofs (""without title land''). 2. According to the information provided, the Group has 18 projects with a total gross Öoor area of approximately 371,074 sq.m. Among the projects, there are 1 building with a total gross Öoor area of 465 sq m erected on authorized Land, 11 buildings with a total gross Öoor area of 187,200 sq m erected on the granted land, 1 building with a total gross Öoor area of 5,458 sq m erected on the allocated land, and the remaining portion of 5 buildings with a total gross Öoor area of approximately 177,951 sq.m. was erected on without title land. 3. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Authorized Land The Company has obtained the land use rights in respect of the authorized land of the properties. The Company has the rights to deal with the authorized land by way of capital contribution to its directly held enterprises, subsidiaries and associated enterprises or let within the validity period as prescribed in the land use right certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let,
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APPENDIX V PROPERTY VALUATION REPORT
mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities.
Without Title Land
The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties.
Construction Works
The Group has obtained construction land planning permits, construction project planning permits and state-owned land use rights certiÑcates (""Construction Approval Document'') for 6 projects of the CIP Properties. There should be no material legal impediment for the Group to obtain the title proofs of the aforesaid properties upon the completion of the construction works.
The Group has not provided with a completed set of the Construction Approval Document for 12 projects of the CIP Properties. Such projects are subject to the legal risk of suspension, amendments or penalty ordered by the relevant authorities. There should be no material legal impediment for the Group to obtain the title proofs of these properties if the Group has obtained the aforesaid Construction Approval Document.
4. We have attributed no commercial value to the aforesaid construction works with a total proposed Öoor area of approximately 177,951 sq.m erected on without title land due to insuÇcient title proof to these properties. We have also attributed no commercial value to the construction works on the allocated land as mentioned in Note 2 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. Finally, we have attributed no commercial value to the construction works which the Group did not obtain a full set of the Construction Approval Document as mentioned in Note 3 as the Group may have legal impediment in obtaining title proof of the properties on completion of these projects. We are of the opinion that the market value of these properties as at the valuation date would be RMB407,000,000 assuming all relevant title certiÑcates and Construction Approval Document have been obtained by the Group and the Group has legal rights to occupy, use, let, mortgage or transfer these properties.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 8. Various properties The properties comprise 19 properties or The properties are 107,000,000 located in Henan projects under construction (CIP Properties). currently under Province, Hunan Upon completion, the total gross Öoor area of construction. (Value attributable Province, Hubei the buildings will be 160,919 sq.m. As at the to the Group: Province, valuation date, a total construction cost of Upon completion, 107,000,000) Guangdong approximately RMB237,000,000 has been the properties will Province, Guangxi incurred. They are scheduled to be completed be occupied by the Autonomous in 2006. Group for Region and Hainan commercial, Province of the Upon completion, details of the uses and the residential, car Central and approximate Öoor areas of CIP Properties are parking and other Southern Regions shown as follows: ancillary uses. of the PRC Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,443 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,644 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,832 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,919
Notes: 1. The land use rights of the properties can be classiÑed into three categories, which comprise the land held with allocated land use rights certiÑcates (""allocated land''), the land held with granted land use rights certiÑcates (""granted land''), and the land without any title proofs (""without title land''). 2. According to the information provided, the Group has 19 projects with a total gross Öoor area of approximately 160,919 sq.m. Among the projects, there are 8 buildings with a total gross Öoor area of 94,490 sq m erected on the granted land, 3 buildings with a total gross Öoor area of 19,639 sq m erected on the allocated land, and the remaining portion of 8 buildings with a total gross Öoor area of approximately 46,790 sq.m. was erected on without title land. 3. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:- Land Use Rights Granted Land The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration. Allocated Land The Company has obtained the land use rights in respect of the allocated land of the properties. The use of the allocated land by the Company is not in compliance with the relevant government rules and regulations. The allocated land use rights certiÑcates can be converted to granted land use rights certiÑcates by application and paying the required land premium to the relevant land administration authorities and the Company is entitled to freely transfer, let, mortgage or otherwise deal with such land use rights within the validity period as prescribed in the land use rights certiÑcates upon completion of the above procedures. The Company may also entitle to occupy and use the allocated land if the Company leases the land use rights and apply for the leased land use rights certiÑcates from the relevant land administration authorities. There should be no material legal impediment for the above conversion of title certiÑcates with the approval of the relevant land administration authorities. Without Title Land The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties.
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APPENDIX V PROPERTY VALUATION REPORT
Construction Works The Group has obtained construction land planning permits, construction project planning permits and state-owned land use rights certiÑcates (""Construction Approval Document'') for 5 projects of the CIP Properties. There should be no material legal impediment for the Group to obtain the title proofs of the aforesaid properties upon the completion of the construction works. The Group has not provided with a completed set of the Construction Approval Document for 14 projects of the CIP Properties. Such projects are subject to the legal risk of suspension, amendments or penalty ordered by the relevant authorities. There should be no material legal impediment for the Group to obtain the title proofs of these properties if the Group has obtained the aforesaid Construction Approval Document. 4. We have attributed no commercial value to the aforesaid construction works with a total proposed Öoor area of approximately 46,790 sq.m erected on without title land due to insuÇcient title proof to these properties. We have also attributed no commercial value to the construction works on the allocated land as mentioned in Note 2 above for the reason that these properties are not allowed to be transferred to other parties without the approval from the relevant local authorities. Finally, we have attributed no commercial value to the construction works which the Group did not obtain a full set of the Construction Approval Document as mentioned in Note 3 as the Group may have legal impediment in obtaining title proof of the properties on completion of these projects. We are of the opinion that the market value of these properties as at the valuation date would be RMB130,000,000 assuming all relevant title certiÑcates and Construction Approval Document have been obtained by the Group and the Group has legal rights to occupy, use, let, mortgage or transfer these properties.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 9. Various properties The properties comprise 9 properties or The properties are 39,000,000 located in projects under construction (CIP Properties). currently under Chongqing Upon completion, the total gross Öoor area of construction. (Value attributable Municipality, the buildings will be 56,714 sq.m. As at the to the Group: Sichuan Province, valuation date, a total construction cost of Upon completion, 39,000,000) Guizhou Province, approximately RMB163,000,000 has been the properties will Yunnan Province, incurred. They are scheduled to be completed be occupied by the Shaanxi Province, in 2006. Group for Gansu Province, commercial, Ningxia Automous Upon completion, details of the uses and the residential, car Region, Qinghai approximate Öoor areas of CIP Properties are parking and other Province, Tibet shown as follows: ancillary uses. Autonomous Use Floor Area Region and (sq.m.) Xinjiang CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,106 Autonomous ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,608 Region of the OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 Western Regions of the PRC TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,714
Notes:
1. The land use rights of the properties can be classiÑed into two categories, which comprise the land held with granted land use rights certiÑcates (""granted land'') and the land without any title proofs (""without title land'').
2. According to the information provided, the Group has 9 projects with a total gross Öoor area of approximately 56,714 sq.m. Among the projects, there are 2 buildings with a total gross Öoor area of 30,400 sq m erected on the granted land, and the remaining portion of 7 buildings with a total gross Öoor area of approximately 26,314 sq.m. was erected on without title land.
3. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:-
Land Use Rights
Granted Land
The Company or its subsidiaries have obtained the land use rights in respect of the granted land of the properties. The Company or its subsidiaries have the rights to occupy, use, transfer, let, mortgage or deal with the granted land by other means in according to the PRC law within the validity periods as prescribed in the land use rights certiÑcates or real estate ownership certiÑcates. The Company has changed its legal name from Bank of China to Bank of China Limited and the Company has completed or is currently applying for registration of the new name in the relevant land use right certiÑcates and real estate ownership certiÑcates. There should be no material legal impediment for such registration.
Without Title Land
The Company or its subsidiaries have not obtained proper title certiÑcates in respect of the without title land of the properties.
Construction Works
The Group has obtained construction land planning permits, construction project planning permits and state-owned land use rights certiÑcates (""Construction Approval Document'') for 2 projects of the CIP Properties. There should be no material legal impediment for the Group to obtain the title proofs of the aforesaid properties upon the completion of the construction works.
The Group has not provided with a completed set of the Construction Approval Document for 7 projects of the CIP Properties. Such projects are subject to the legal risk of suspension, amendments or penalty ordered by the relevant authorities. There should be no material legal impediment for the Group to obtain the title proofs of these properties if the Group has obtained the aforesaid Construction Approval Document.
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APPENDIX V PROPERTY VALUATION REPORT
4. We have attributed no commercial value to the aforesaid construction works with a total proposed Öoor area of approximately 26,314 sq.m erected on without title land due to insuÇcient title proof to these properties. We have also attributed no commercial value to the construction works which the Group did not obtain full set of the Construction Approval Document as mentioned in Note 3 as the Group may have legal impediment in obtaining title proof of the properties on completion of these projects. We are of the opinion that the market value of these properties as at the valuation date would be RMB124,000,000 assuming all relevant title certiÑcates and Construction Approval Document have been obtained by the Group and the Group has legal rights to occupy, use, let, mortgage or transfer these properties.
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APPENDIX V PROPERTY VALUATION REPORT
Group III Ì Property interests held by the Group in Hong Kong, Macau and Overseas
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 10. Various properties The properties comprise 25 buildings, 590 272 units with a 25,966,000,000 located in Hong oÇce units, 303 residential units, and various total Öoor area of (Value attributable Kong ancillary spaces completed between 1953 and approximately to the Group: 2005. 50,890 sq.m. are 17,380,000,000) subject to various The properties have a total gross Öoor area of lease agreements approximately 379,533 sq.m. and the as stated in approximate Öoor areas of the properties are Note 2. The shown as follows: remaining portions Use Floor Area of the properties (sq.m.) are currently occupied by the CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325,826 Group for Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,036 commercial, Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,671 residential and Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 379,533 other ancillary uses.
Notes: 1. The registered owner of 18 buildings, 422 commercial units, 273 residential units, and various ancillary spaces of the properties is Bank of China (Hong Kong) Limited. For the remaining portion of the properties, the registered owners include Nanyang Commercial Bank Limited, Chiyu Banking Corporation Limited, BOC Group Life Assurance Company Limited, Bank of China Group Insurance Company Limited, Bank of China Group Investment Company Limited, which are subsidiaries of the Group. 2. 216 commercial units, 58 residential units and 91 car parking spaces of the properties with a total Öoor area of approximately 55,100 sq.m. are leased to various independent third parties from the Group for various terms at a total monthly rental of HK$15,260,917. These leases will be expired from 2006 to 2008.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 11. Various properties The properties comprise various properties in The properties are 6,272,000,000 located in Macau Thailand, United Kingdom, United State of currently occupied (Value attributable and overseas America, Panama, France, South Korea, by the Group for to the Group: Singapore, Australia, Japan, Canada, commercial, 5,850,000,000) Luxembourg, Kazakhstan, Russia and Macau. residential and other ancillary The properties include 26 commercial uses. buildings, 107 commercial units, 12 residential houses, 107 residential units, and various ancillary spaces completed between 1899 and 2003. The properties have a total gross Öoor area of approximately 229,995 sq.m. and the approximate Öoor areas of the properties are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,817 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,782 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,396 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229,995
Notes: 1. The registered owner of 2 commercial buildings, 18 commercial units and one ancillary space of the properties are held by Tai Fung Bank Limited, a 50.31% owned subsidiary of the Company. 1 commercial building and 3 residential buildings are held by BOC (Luxembourg) SA, a 99.98% owned subsidiary of the Company. 56 commercial units, 2 residential units and 16 ancillary spaces of the properties are held by Nan Tung (Macau) Investment Limited, a 75% owned subsidiary of the Company. The remaining portion of the properties is held by the Company. 2. As the legal titles of the properties in Panama, Russia, Thailand and Kazakhstan are uncertain, we have attributed no commercial value to these properties. We are of opinion that the market value of these properties as of the valuation date is RMB72,000,000 assuming the Group has proper legal title of these properties.
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APPENDIX V PROPERTY VALUATION REPORT
Group IV Ì Property interests leased by the Group
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 12. Various properties The properties comprise 13 land lots with a The properties are No Commercial PN16(3)(b)(4) located in the PRC total site area of approximately 38,222 sq.m., currently occupied Value 7,190 commercial buildings and units, 275 by the Group for residential buildings and units, and 254 other commercial, buildings and units with a total gross Öoor area residential and of approximately 1,816,292 sq.m., mainly other ancillary completed between 1921 and 2006. uses. Details of the uses and the approximate Öoor areas of the buildings and units are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,674,802 ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,988 OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99,502 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,816,292
The properties are subject to various lease agreements for various terms at a total monthly rental of approximately RMB123,693,398.
Notes:
1. 13 land lots of vacant land with a total site area of approximately 38,222 sq.m., 7,190 commercial buildings and units, 275 residential buildings and units and 254 other buildings, units and car parking spaces of the properties with a total gross Öoor area of approximately 1,816,292 sq.m. are leased to the Group from various independent third parties for various terms at a total monthly rental equivalent to RMB123,693,398. The leases will be expired from 2006 to 2065.
2. We have been provided with a legal opinion on the title to the properties issued by Jun He Law OÇces, which contains, inter alia, the following information:-
a. According to the lease agreements provided by the Group, the Group has leased a total area of about 0.94 million sq.m. from the lessors who have obtained the building ownership certiÑcates or lease registration certiÑcates/lease permits and/or the consent document for assignment of leases given by the owners of the properties. These lease agreements are valid and legally enforceable.
b. According to the lease agreements provided by the Group, the Group has leased a total Öoor area of about 0.91 million sq.m. from the lessors that the Group cannot provide the building ownership certiÑcates or lease registration certiÑcates/lease permits and/or the consent document for assign of leases given by the owners of the properties. The PRC Lawyer is unable to determine the validity and legality of such lease agreements.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 RMB 13. Various properties The properties comprise 171 commercial units, The properties are No Commercial PN16(3)(b)(4) located in Hong 1 residential unit, 9 car parking spaces, currently occupied Value Kong various ancillary spaces and 138 ATMS by the Group for completed between 1960s and 2000s. commercial, residential and The properties have a total Öoor area of other ancillary approximately 67,352 sq.m. and the uses. approximate Öoor areas of the properties are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,864 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,388 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,352
The properties are subject to various lease agreements for various terms at a total monthly rental of approximately HK$27,587,217.
Note: 171 commercial units, 1 residential unit 9 car parking spaces, various ancillary spaces and 138 ATMs of the properties with a total Öoor area of approximately 67,352 sq.m. are leased to the Group from various independent third parties for various terms at a total monthly rental of HK$27,587,217. The leases will be expired from 2006 to 2011.
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APPENDIX V PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at No. Property Description and tenure occupancy 31 March 2006 PN16(3)(b)(4) RMB 14. Various properties The properties comprise various properties in The properties are No Commercial located in Macau Thailand, Germany, Grand Cayman, Vietnam, currently occupied Value and overseas Indonesia, South Africa, United Kingdom, by the Group for Luxembourg, Philippines, Italy, United State of commercial, America, France, South Korea, Australia, residential and Japan, Brazil, Canada, Russia, Hungary, other ancillary Kazakhstan, Malaysia, Zambia, Bahrain and uses. Macau. The properties comprise 5 commercial buildings, 39 commercial units, 35 residential units, and various ancillary spaces completed between 1900 and 2004. The properties have a total gross Öoor area of approximately 35,129 sq.m. and the approximate Öoor areas of the properties are shown as follows:
Use Floor Area (sq.m.) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,123 Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,779 Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,227 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,129
The properties are subject to various lease agreements for various terms at a total monthly rental equivalent to RMB6,557,632.
Note: 5 commercial buildings, 39 commercial units, 35 residential units and various car parking spaces of the properties with a total gross Öoor area of approximately 35,129 sq.m. are leased to the Group from various independent third parties for various terms at a total monthly rental equivalent to RMB6,557,632. The leases will be expired from 2006 to 2034.
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APPENDIX VI TAXATION AND FOREIGN EXCHANGE
TAXATION OF SECURITY HOLDERS
The taxation of income and capital gains of holders of H Shares is subject to the laws and LR19A.42(60) practices of China and of jurisdictions in which holders of H Shares are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the H Shares. Accordingly, you should consult your own tax adviser regarding the tax consequences of an investment in the H Shares. The discussion is based upon laws and relevant interpretations in eÅect as of the date of this prospectus, all of which are subject to change.
PRC The following is a discussion of certain PRC tax provisions relating to the ownership and disposition of H Shares purchased in connection with the Global OÅering and held by the investors as capital assets. This summary does not purport to address all material tax consequences of the ownership of H Shares, and does not take into account the speciÑc circumstances of any particular investors. This summary is based on the PRC tax laws as in eÅect on the date of this prospectus, as well as on the Agreement between the United States of America and the People's Republic of China for the Avoidance of Double Taxation (the ""Treaty''), all of which are subject to change (or changes in interpretation), possibly with retroactive eÅect. This discussion does not address any aspects of PRC taxation other than income taxation, capital tax, stamp duty and estate duty. Prospective investors are urged to consult their tax advisors regarding PRC, Hong Kong and other tax consequences of owning and disposing of H Shares.
Taxation of dividends Individual investors. According to the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System (the ""Provisional Regulations''), and the Individual Income Tax Law of the PRC, as amended on October 31, 1993 and eÅective January 1, 1994, amended on August 30, 1999 and further amended on October 27, 2005 and eÅective on January 1, 2006, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a Öat rate of 20%. For a foreign individual who is not a PRC resident, the receipt of dividends from a company in China is normally subject to a withholding tax of 20% unless reduced by an applicable tax treaty. However, the Chinese Administration of Taxation (the ""SAT''), the PRC central government tax authority which succeeded the State Tax Bureau, issued, on July 21, 1993, a Notice of the Chinese Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Share (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals (the ""Tax Notice''), which states that dividends paid by a PRC company to individuals with respect to shares listed on an overseas stock exchange (the ""Overseas Shares''), such as H shares, are not subject, to Chinese withholding tax. The relevant tax authority has not collected withholding tax on dividend payments on Overseas Shares, including H shares. The Amendments to the Individual Income Tax Law of China (the ""Amendments''), were promulgated on October 31, 1993 and became eÅective on January 1, 1994. The Amendments state that they shall supersede the provisions of any contradictory prior administrative regulations concerning individual income tax. Under the requirements of the Amendments and the amended Individual Income Tax Law, foreign individuals are subject to withholding tax on dividends paid by a PRC company at a rate of 20% unless speciÑcally exempted by the tax authority of the State Council. However, in a letter dated July 26, 1994 to the former State Commission for Restructuring
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APPENDIX VI TAXATION AND FOREIGN EXCHANGE
the Economic System, the former State Council Securities Commission and the China Securities Regulatory Commission, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a PRC company listed overseas. In the event that this letter is withdrawn, a 20% tax may be withheld on dividends in accordance with the Provisional Regulations, the Amendments and the Individual Income Tax Law. The withholding tax may be reduced under an applicable double taxation treaty. To date, the relevant tax authorities have not collected withholding tax from dividend payments on the shares exempted under the Tax Notice.
Enterprises. According to the Income Tax Law of China Concerning Foreign Investment Enterprises and Foreign Enterprises, dividends paid by PRC companies to enterprises are ordinarily subject to a PRC withholding tax levied at a Öat rate of 20%. However, according to the Tax Notice, a foreign enterprise with no permanent establishment in China receiving dividends paid with respect to a PRC company's Overseas Shares will temporarily not be subject to the 20% withholding tax. If the withholding tax becomes applicable in the future, the rate could be reduced under an applicable double-taxation treaty.
Tax treaties. Investors who do not reside in the PRC but reside in countries that have entered into treaties for the avoidance of double-taxation with the PRC may be entitled to a reduction of the withholding tax imposed on the payment of dividends to investors of the a PRC company who do not reside in the PRC. China currently has treaties for the avoidance of double-taxation with a number of other countries, which include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
Under the treaty between China and the United States (the ""PRC-US Treaty''), China may tax a dividend paid by us to an Eligible U.S. Holder up to a maximum of 10% of the gross amount of the dividend. For the purposes of this Appendix, an ""Eligible U.S. Holder'' is a U.S. holder that (i) is a resident of the United States for the purposes of the PRC-US Treaty, (ii) does not maintain a permanent establishment or Ñxed base in China to which H shares are attributable and through which the beneÑcial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services) and (iii) is not otherwise ineligible for beneÑts under the PRC-US Treaty with respect to income and gains derived in connection with the H Shares.
Taxation of capital gains
The Tax Notice provides that gains realized by enterprises that are holders of Overseas Shares would, temporarily, not be subject to capital gains taxes. With respect to individual holders of H Shares, the Provisions for Implementation of Individual Income Tax Law of China (the ""Provisions''), issued on January 28, 1994, stipulated that gains realized on the sale of equity shares would be subject to income tax at a rate of 20% on the gains, and empowered the Ministry of Finance to draft detailed tax rules on the mechanism for collecting such tax. However, no income tax on gains realized on the sale of equity shares has been collected. Gains on the sale of shares by individuals were temporarily exempted from individual income tax pursuant to notices issued by the SAT dated February 9, 1996 and March 30, 1998. In the event this temporary exemption is withdrawn or ceases to be eÅective, individual holders of H shares may be subject to capital gains tax at the rate of 20% unless such tax is reduced or eliminated by an applicable double taxation treaty. If tax on capital gains from the sale of H Shares become applicable, it is arguable that under the PRC-US Treaty, China may only tax gains from the sale or disposition by an Eligible U.S. Holder of H Shares representing an interest in us of 25% or more, but this position is uncertain and the Chinese authorities may take a diÅerent position.
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APPENDIX VI TAXATION AND FOREIGN EXCHANGE
On November 18, 2000, the State Council issued a notice entitled ""State Council Notice on the Income Tax Reduction for Interest and Other Income that Foreign Enterprises Derive in China'' (the ""Tax Reduction Notice''). Under the Tax Reduction Notice, beginning January 1, 2001, enterprise income tax at a reduced 10% rate will apply to interest, rental, license fees and other income obtained in China by foreign enterprises without agencies or establishment in China, or by foreign enterprises without any substantive relationship with their agency or establishment in China. Therefore, if the exemption as described in the preceding paragraph does not apply or is not renewed, and the Tax Reduction Notice is found not to apply, a foreign enterprise shareholder may be subject to a 20% tax on capital gains, unless reduced by an applicable double-taxation treaty.
Additional PRC tax considerations
The PRC stamp duty. The PRC stamp duty imposed on the transfer of shares of PRC publicly traded companies under the Provisional Regulations should not apply to the acquisition and disposal by non-Chinese investors of H shares outside of China by virtue of the Provisional Regulations of China Concerning Stamp Duty, which became eÅective on October 1, 1988 and which provide that PRC stamp duty is imposed only on documents executed or received within China that are legally binding in China and are protected under PRC law.
Estate duty. No liability for estate duty under PRC law will arise from non-Chinese nationals holding H shares.
Hong Kong
Tax on dividends
Under current practice of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us.
Tax on gains from sale
No tax is imposed in Hong Kong in respect of capital gains from the sale of property such as the H Shares. However, trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where the gains are derived from or arising in Hong Kong from the trade, profession or business will be chargeable to Hong Kong proÑts tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16% on individuals. Gains from sales of H Shares eÅected on the Hong Kong Stock Exchange will be considered to be derived from or arising in Hong Kong. Liability for Hong Kong proÑts tax would thus arise in respect of trading gains from sales of H Shares realized by persons carrying on a business of trading or dealing in securities in Hong Kong.
Stamp duty
Hong Kong stamp duty will be payable by the purchaser on every purchase and by the seller on every sale of H Shares. With eÅect from September 1, 2001, the duty is charged at the rate of 0.2% of the value of the H Shares transferred (the buyer and seller each paying half of such stamp duty). In addition, a Ñxed duty of HK$5 is currently payable on any instrument of transfer of shares. If one of the parties to the sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such duty.
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APPENDIX VI TAXATION AND FOREIGN EXCHANGE
Estate duty The Revenue (Abolition of Estate Duty) Ordinance 2005 came into eÅect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H Shares whose deaths occur on or after February 11, 2006.
FOREIGN EXCHANGE CONTROLS A1A(31) The lawful currency of the PRC is the Renminbi, which is subject to foreign exchange controls and is not freely convertible into foreign exchange. The SAFE, under the authority of the PBOC, is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations. In 1994, the conditional convertibility of Renminbi in current account items was implemented and the oÇcial Renminbi exchange rate and the market rate for Renminbi was uniÑed. On January 29, 1996, the State Council promulgated new Regulations of the People's Republic of China for the Control of Foreign Exchange (""Control of Foreign Exchange Regulations''') which became eÅective from April 1, 1996. The Control of Foreign Exchange Regulations classify all international payments and transfers into current account items and capital account items. Current account items are no longer subject to SAFE approval while capital account items still are. The Control of Foreign Exchange Regulations were subsequently amended on January 14, 1997. This latest amendment aÇrmatively states that the State shall not restrict international current account payments and transfers. On June 20, 1996, the PBOC promulgated the Regulations for Administration of Settlement, Sale and Payment of Foreign Exchange (the ""Settlement Regulations'') which became eÅective on July 1, 1996. The Settlement Regulations abolish the remaining restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items. On January 1, 1994, the former dual exchange rate system for Renminbi has been abolished and replaced by a controlled Öoating exchange rate system, which is determined by demand and supply. The PBOC sets and publishes daily the Renminbi-US dollar base exchange rate. This exchange rate is determined with reference to the transaction price for Renminbi-US dollar in the inter-bank foreign exchange market on the previous day. The PBOC will also, with reference to exchange rates in the international foreign exchange market, announce the exchange rates of Renminbi against other major currencies. In foreign exchange transactions, designated foreign exchange banks may, within a speciÑed range, freely determine the applicable exchange rate in accordance with the exchange rate announced by the PBOC. The PBOC has announced that, beginning from July 21, 2005, China will implement a regulated and managed Öoating exchange rate system based on market supply and demand and by reference to a package of currencies. The Renminbi exchange rate is no longer pegged to the single US dollar. The PBOC will announce the closing price of a foreign currency such as the US dollar traded against the Renminbi in the inter- bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the Renminbi on the following working day. All foreign exchange income (except such amount of foreign exchange income which is permitted to be retained and deposited into foreign exchange accounts at the designated foreign exchange banks) generated from current account transactions of PRC enterprises (including foreign-invested enterprises) should be sold to designated foreign exchange banks. Foreign exchange income from loans issued by organizations outside the territory or from the issuance of bonds and shares (for example foreign exchange income received by us from the sale of shares
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APPENDIX VI TAXATION AND FOREIGN EXCHANGE
overseas) is not required to be sold to designated foreign exchange banks, but may be deposited into foreign exchange accounts at the designated foreign exchange banks.
PRC enterprises (including foreign-invested enterprises) which require foreign exchange for LR19A.42(61) transactions relating to current account items, may, without the approval of SAFE, eÅect payment from their foreign exchange accounts at the designated foreign exchange banks, on the strength of valid receipts and proof. Foreign-invested enterprises which need foreign exchange for the distribution of proÑts to their shareholders, and PRC enterprises which in accordance with regulations are required to pay dividends to shareholders in foreign exchange(like us), may on the strength of board resolutions on the distribution of proÑts, eÅect payment from their foreign exchange accounts or convert and pay at the designated foreign exchange banks. Convertibility of foreign exchange in respect of capital account items, like direct investment and capital contribution, is still subject to restriction, and prior approval from SAFE and the relevant branch must be sought. Dividends to holders of H Shares are declared in Renminbi but must be paid in Hong Kong dollars.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
This Appendix contains a summary of PRC company and securities laws and LR19.08(3) regulations, certain material diÅerences between the PRC Company Law and LR19.10(3) Hong Kong Companies Ordinance and additional regulatory provisions introduced by LR19A.27(3) the Hong Kong Stock Exchange in relation to PRC joint stock limited companies. The principal objective is to provide potential investors with an overview of the principal legal and regulatory provisions applicable to our Company.
PRC LEGAL SYSTEM
The PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, directives and local laws, laws of Special Administrative Regions and laws resulting from international treaties entered into by the PRC government. Court case verdicts do not constitute binding precedents. However, they may be used for the purposes of judicial reference and guidance.
The NPC and the Standing Committee of the NPC are empowered by the PRC Constitution to exercise the legislative power of the State. The NPC has the power to amend the PRC Constitution and enact and amend basic laws governing State agencies and civil and criminal matters. The Standing Committee of the NPC is empowered to enact and amend all laws except for the laws that are required to be enacted and amended by the NPC.
The State Council is the highest organ of the State administration and has the power to enact administrative rules and regulations. The ministries and commissions under the State Council are also vested with the power to issue orders, directives and regulations within the jurisdiction of their respective departments. All administrative rules, regulations, directives and orders promulgated by the State Council and its ministries and commissions must be consistent with the PRC Constitution and the national laws enacted by the NPC. In the event that a conÖict arises, the Standing Committee of the NPC has the power to annul administrative rules, regulations, directives and orders.
At the regional level, the provincial and municipal congresses and their respective standing committees may enact local rules and regulations and the people's governments may promulgate administrative rules and directives applicable to their own administrative areas. These local laws and regulations must be consistent with the PRC Constitution, the national laws and the administrative rules and regulations promulgated by the State Council.
The State Council, provincial and municipal governments may also enact or issue rules, regulations or directives in new areas of the law for experimental purposes. After gaining suÇcient experience with experimental measures, the State Council may submit legislative proposals to be considered by the NPC or the Standing Committee of the NPC for enactment at the national level.
The PRC Constitution vests the power to interpret laws in the Standing Committee of the NPC. According to the Decision of the Standing Committee of the NPC Regarding the Strengthening of Interpretation of Laws passed on June 10, 1981, the Supreme People's Court, in addition to its power to give general interpretation on the application of laws in judicial proceedings, also has the power to interpret speciÑc cases. The State Council and its ministries and commissions are also vested with the power to interpret rules and regulations that they have promulgated. At the regional level, the power to interpret regional laws is vested in the regional legislative and administrative bodies which promulgate such laws.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
PRC JUDICIAL SYSTEM
Under the PRC Constitution and the Law of Organization of the People's Courts of the PRC, the judicial system is made up of the Supreme People's Court, the local people's courts, military courts and other special people's courts. The local people's courts are comprised of the basic people's courts, the intermediate people's courts and the higher people's courts. The basic people's courts are organized into civil, criminal, economic and administrative divisions. The intermediate people's courts are organized into divisions similar to those of the basic people's courts, and are further organized into other special divisions, such as the intellectual property division. The higher level people's courts supervise the basic and intermediate people's courts. The people's procuratorates also have the right to exercise legal supervision over the civil proceedings of people's courts of the same level and lower levels. The Supreme People's Court is the highest judicial body in the PRC. It supervises the administration of justice by all of the people's courts.
The people's courts employ a ""second instance as Ñnal'' appellate system. A party may appeal against a judgment or order of the people's court of Ñrst instance to the people's court at the next higher level. Second judgments or orders given at the same level and at the next higher level are Ñnal. First judgments or orders of the Supreme People's Court are also Ñnal. If, however, the Supreme People's Court or a people's court at a higher level Ñnds an error in a judgment which has been given in any people's court at a lower level, or the presiding judge of a people's court Ñnds an error in a judgment which has been given in the court over which he presides, the case may then be retried according to the judicial supervision procedures.
The Civil Procedure Law of the PRC, which was adopted on April 9, 1991, sets forth the criteria for instituting a civil action, the jurisdiction of the people's courts, the procedures to be followed for conducting a civil action and the procedures for enforcement of a civil judgment or order. All parties to a civil action conducted within the PRC must comply with the Civil Procedure Law. Generally, a civil case is initially heard by a local court of the municipality or province in which the defendant resides. The parties to a contract may, by express agreement, select a jurisdiction where civil actions may be brought, provided that the jurisdiction is either the plaintiÅ's or the defendant's place of residence, the place of execution or implementation of the contract or the object of the action. However, such selection can not violate the stipulations of grade jurisdiction and exclusive jurisdiction in any case.
A foreign individual or enterprise generally has the same litigation rights and obligations as a citizen or legal person of the PRC. If a foreign country's judicial system limits the litigation rights of PRC citizens and enterprises, the PRC courts may apply the same limitations to the citizens and enterprises of that foreign country within the PRC. If any party to a civil action refuses to comply with a judgment or order made by a people's court or an award granted by an arbitration panel in the PRC, the aggrieved party may apply to the people's court to request for enforcement of the judgment, order or award. There are time limits imposed on the right to apply for such enforcement. If at least one of the parties to the dispute is an individual, the time limit is one year. If both parties to the dispute are legal persons or other institutions, the time limit is six months. If a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.
A party seeking to enforce a judgment or order of a people's court against a party who is not located within the PRC and does not own any property in the PRC, may apply to a foreign court with proper jurisdiction for recognition and enforcement of the judgment or order. A foreign judgment or ruling may also be recognized and enforced by the people's court according to the PRC enforcement procedures if the PRC has entered into, or acceded to, an international treaty with the
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
relevant foreign country, which provides for such recognition and enforcement, or if the judgment or ruling satisÑes the court's examination according to the principle of reciprocity, unless the people's court Ñnds that the recognition or enforcement of such judgment or ruling will result in a violation of the basic legal principles of the PRC, its sovereignty or security, or for reasons of social and public interests.
THE PRC COMPANY LAW, SPECIAL REGULATIONS AND MANDATORY PROVISIONS As a joint stock limited liability company incorporated in the PRC, and seeking a listing on the Hong Kong Stock Exchange, we are primarily subject to the following three PRC laws and regulations:
¬ The PRC Company Law, which was promulgated by the Standing Committee of the NPC on December 29, 1993, took eÅect on July 1, 1994 and was revised as of December 25, 1999, August 28, 2004 and October 27, 2005;
¬ The Special Regulations, which were passed by the State Council on August 4, 1994; and
¬ The Mandatory Provisions, which were jointly promulgated by the Securities Committee and the State Restructuring Commission on August 27, 1994, and which we, as a joint stock limited liability company seeking an overseas listing, must incorporate into our Articles of Association. Set out below is a summary of the provisions of the PRC Company Law, the Special Regulations and the Mandatory Provisions applicable to us.
Incorporation LR19A.42(57) A company limited by shares may be incorporated by a minimum of two and a maximum of two hundred promoters, and at least half of the promoters must reside within the PRC. According to the Special Regulations, State-owned enterprises or enterprises with the majority of their assets owned by the PRC government can be restructured in accordance with the relevant regulations to become joint stock limited companies which may issue shares to overseas investors by one promoter. We are incorporated under the PRC Company Law as a joint stock limited liability company. This means that we are a legal entity and that our registered capital is divided into Shares of equal par value. The liability of our shareholders is limited to the amount of Shares held by them and we are liable to our creditors for an amount equal to the total value of our assets. Under the PRC Company Law, we may invest in other enterprises in the PRC pursuant to law and our articles of association. The promoters shall convene an inaugural meeting within 30 days after the issued shares have been fully paid up, and shall give notice to all subscribers or make an announcement of the date of the inaugural meeting 15 days before the meeting. The inaugural meeting may be convened only with the presence of shareholders holding shares representing more than 50% of the share capital of the company. At the inaugural meeting, matters including the adoption of draft articles of association proposed by the promoter(s) and the election of the board of directors and the supervisory committee of the company will be dealt with. All resolutions of the meeting require the approval of subscribers with more than half of the voting rights present at the meeting. Within 30 days after the conclusion of the inaugural meeting, the board of directors shall apply to the registration authority for registration of the establishment of the company. A company is formally established, and has the status of a legal person, after the business license has been
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
issued by the relevant administration bureau for industry and commerce. Companies established by the public subscription method shall Ñle the approval of the securities administration department of the State Council with relevant administration bureau for industry and commerce for record. A company's promoters shall be liable for: (i) the payment of all expenses and liabilities incurred in the incorporation process jointly and severally if the company cannot be incorporated; (ii) the repayment of subscription monies to the subscribers, together with interest, at bank rates for a deposit of the same term jointly and severally if the company cannot be incorporated; and (iii) damages suÅered by the company as a result of the default of the promoters in the course of incorporation of the company. According to the Provisional Regulations Concerning the Issuance and Trading of Shares promulgated by the State Council on April 22, 1993 (which is only applicable to issuance and trading of shares in the PRC and their related activities) (the ""Securities provisional Regulations''), if a company is established by means of public subscription, the promoters of such company are required to assume joint responsibility for the accuracy of the contents of the prospectus and to ensure that the prospectus does not contain any misleading statement or omit any material information.
Registered Capital Our registered capital is equal to the amount of our paid-in capital as recorded at the State Administration of Industry and Commerce. According to PRC Company Law, where a joint stock limited company is established by promotion, its registered capital equals to the total capital stock subscribed by all promoters as registered in the company registration authority. The minimum amount of initial capital contributions to be made by all promoters shall be not less than 20% of the total registered capital, while the remaining amount shall be paid of by the promoters within 2 years from the day when the company is established. The minimum registered capital of a joint stock limited liability company is RMB 5,000,000.
Allotment and Issue of Shares All of our Share issues are based on the principles of equality and fairness. The same class of shares must carry equal rights. For each Share issue, the terms of allotment for individual shares, including the subscription price, must be identical to other Shares of the same class. We may issue Shares at par value or at a premium, but we may not issue Shares below the par value. We must obtain the approval of the CSRC to oÅer our Shares to the overseas public. Under the Special Regulations, upon approval of the CSRC the company may agree, in the underwriting agreement with respect to an issue of overseas listed foreign invested shares, to retain not more than 15% of the aggregate number of overseas listed foreign invested shares proposed to be issued after accounting for the number of underwritten shares.
Registered or Bearer Shares The promoters may make capital contributions in cash, in kind or by way of injection of assets, industrial property rights, non-patented technology, land use rights or any other properties which could be legally transferred and be appraised in cash based on their appraised value. The amount of investment made in cash shall not be less than 30% of the registered capital of the company. Shares that we issue to foreign investors and Shares that are listed overseas must be in registered form, denominated in Renminbi and subscribed for in a foreign currency. Shares that are purchased by investors from the territories of Hong Kong, Macau and Taiwan and listed in Hong Kong are known as ""overseas listed foreign shares''. Within the PRC, all Shares that we issue to a Promoter, State-
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
designated investment institution or legal person must be in registered form. Shares that we issue to the public in China, however, may be in either registered or bearer form. We are required to maintain a register of shareholders for all Shares issued in registered form. Information such as our shareholders' particulars, number of Shares held by each shareholder and the dates on which the shareholders became holders of the relevant Shares are required to be entered into the register. We are also required to record the amount of bearer shares issued, the number designated to each bearer share and the date of issue of each bearer share.
Increase of Share Capital We may increase our share capital by issuing new Shares with approval of our shareholders' general meeting on the following things:
¬ number and types of the new shares;
¬ oÅering price;
¬ commencing and ending date of the new oÅering; and
¬ number and types of new shares to be oÅered to existing shareholders. If we carry out a public oÅering of shares as approved by the relevant securities administrative authority, we must publish a prospectus and Ñnancial report, and make a subscription book. After we complete a subscription of new Shares, we must register the increase in registered capital with the State Administration of Industry and Commerce and issue a public notice.
Reduction of Share Capital Subject to minimum registered capital requirements, we may reduce our registered capital in accordance with the following procedures:
¬ we must prepare a current balance sheet and a list of its assets;
¬ our shareholders must approve the reduction of registered capital in a general meeting;
¬ once the resolution approving the reduction has been passed, we must inform our creditors of the reduction in capital within 10 days and publish an announcement of the reduction in a newspaper within 30 days;
¬ our creditors may, within the statutory prescribed time limit, require us to pay our debts or provide guarantees covering such debts;
¬ we must register the reduction in registered capital with the State Administration of Industry and Commerce; and
¬ we must obtain necessary approvals from all relevant supervisory authorities.
Repurchase of Shares We may only repurchase our Shares to (i) reduce our registered share capital, (ii) to merge with another company that holds our Shares, (iii) to grant our shares to employees as an encouragement or (iv) shareholders require us to do so, if vote against a resolution approving our merger or division. The Mandatory Provisions stipulate that we must act in accordance with our Articles of Association and that we must obtain necessary approvals from any relevant supervisory
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
authorities. We may repurchase our Shares by making a general oÅer to our shareholders, by purchasing our Shares on a stock exchange or by purchasing our Shares through an oÅ-market contract. If the repurchase of our Shares is carried out as a result of the above (i), we are required to cancel the portion of our Shares that have been repurchased within ten days; if the repurchase is caused by reason of above (ii) or (iv), we are required to transfer or cancel the portion of our Shares within six months. When we repurchase our shares for the reason of above (iii), the Shares bought back by us shall not exceed 5% of our total issued shares and shall be transferred to employees within one year.
Transfer of Shares Our Shares may be transferred in accordance with any applicable laws and regulations, such as the PRC Company Law, the PRC Securities Law and the Special Regulations. Our Directors, Supervisors and senior oÇcers must declare to us the Shares held by them and the changes thereof. During the term of oÇce, the shares transferred by any of them each year shall not exceed 25% of total shares they hold. Any Shares that are held by the aforesaid persons shall not be transferred within one year from the day when the Shares are listed and traded on a stock exchange. Within half year after any of the aforesaid persons is removed from his or her post, he or she shall not transfer the Shares. The PRC Company Law does not limit the shareholding percentage of an individual shareholder. As required by the Mandatory Provisions, transfers of Shares may not be entered in the register of shareholders within 30 days before the date of a shareholders' meeting or within Ñve days before the record date set for the purpose of distribution of dividends.
Shareholders Under the PRC Company Law and the Mandatory Provisions, our shareholders are entitled to the following rights:
¬ to attend and vote in person or to appoint a proxy to attend and vote on his or her behalf at a general meeting;
¬ to receive dividends and distributable beneÑts in other forms in proportion to his or her shareholding;
¬ to inspect our Articles of Association, minutes of shareholders' meetings and Ñnancial reports and to put forward proposals and to ask questions relating to our operations;
¬ to transfer our Shares on the Hong Kong Stock Exchange in accordance with any applicable laws;
¬ to receive surplus assets of the company upon its termination in proportion to his or her shareholding; and
¬ any other shareholders' rights speciÑed in the company's articles of association. The obligations of a shareholder include (i) the obligation to abide by the company's articles of association, (ii) to pay the subscription monies in respect of the shares subscribed for, (iii) to be liable for the company's debts and liabilities to the extent of the amount of subscription monies
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
agreed to be paid in respect of the shares taken up by such shareholder and (iv) any of the shareholders' obligations speciÑed in the company's articles of association. Our shareholder's liability is limited to the amount of Shares each shareholder holds.
Shareholders' General Meetings Our shareholders may exercise the following powers in a general meeting:
¬ determine our business policies and investment plans;
¬ elect or remove our Directors and Ñx the remuneration of our Directors;
¬ elect or remove our Supervisors who are representatives of the shareholders and Ñx the remuneration of our Supervisors;
¬ consider and approve the reports of our Board and our Supervisory Committee;
¬ consider and approve our proposed annual Ñnancial budget and Ñnal accounts;
¬ consider and approve our proÑt distribution plan and plans for recovery of losses;
¬ approve an increase or reduction in our registered capital;
¬ approve an issue of bonds;
¬ approve a merger, division, dissolution or liquidation;
¬ approve the appointment and removal of our auditors;
¬ consider and approve resolutions submitted by shareholders holding 3% or more of our voting rights;
¬ approve amendments to our Articles of Association. Shareholders' general meetings are divided into annual general meetings and extraordinary shareholders' general meetings. An annual general meeting must be held once every year. Our Board is required to convene an extraordinary shareholders' general meeting within two months after the occurrence of any of the following circumstances:
¬ the number of Directors on our Board is less than the number required under the PRC Company Law or two-thirds of the number required under our Articles of Association;
¬ the amount of our accumulated losses that have not been made-up reaches one-third of our total paid-in share capital;
¬ upon a request by shareholder(s) who separately or jointly hold(s) not less than 10% of our voting Shares; or
¬ the Board or the Supervisory Committee considers such a meeting necessary. A shareholders' general meeting is convened by the Board and presided over by the chairman of the Board. Under the Special Regulations and the Mandatory Provisions, we are required to give 45 days' notice of a shareholders' general meeting and this notice must specify the matters to be considered and the date and place of the meeting. If we have bearer Shares in issue, we must make a public announcement of the shareholders' general meeting at least 45 days prior to the meeting being held. Under the Special Regulations and the Mandatory Provisions, shareholders who plan to attend a shareholders' general meeting are required to provide us with a written conÑrmation of their intentions 20 days prior to the meeting. Shareholders holding 5% or more of our voting rights are
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
entitled, under the Special Regulations, to submit written resolutions to be considered at an annual general meeting. Any proposed resolutions that can be decided at a shareholders' general meeting must be included in the agenda of that meeting. The Special Regulations and the Mandatory Provisions provide that a general meeting of our shareholders may be held if shareholders holding 50% or more of the voting rights in respect of all of our Shares have conÑrmed in writing 20 days prior to the proposed date of the meeting that they intend to attend the meeting. If this 50% minimum is not attained, a shareholders' general meeting may only be held if, within Ñve days after the deadline for conÑrming attendance, we notify the shareholders by public announcement of the matters to be considered and the date and place of the meeting. Each shareholder present at a shareholders' general meeting is entitled to one vote for each Share held. A shareholder may appoint a proxy to attend and vote on his behalf at a shareholders' general meeting. Ordinary resolutions proposed at a shareholders' general meeting generally must be passed by more than half of the votes cast by shareholders present in person or by proxy. However, special resolutions and the following actions must be approved by two-thirds or more of the votes cast by shareholders present in person or by proxy: (i) amendments to our Articles of Association; (ii) a merger, division or dissolution; (iii) an increase or reduction of capital or the issue of any class of Shares, bonds and securities; and (iv) other matters which the shareholders' general meeting has resolved by way of ordinary resolution as having a potential material eÅect on us as a company and should be approved by special resolution. In the event of a variation or abrogation of the rights of a particular class of shareholders, the Mandatory Provisions require us to hold a special class meeting. Holders of our Domestic Shares and holders of our H Shares are deemed to be diÅerent classes of shareholders.
Board A company shall have a board of directors, which shall consist of 5 to 19 members. Under the PRC Company Law, the term of oÇce of a director shall not exceed three years. A director may serve consecutive terms if re-elected. Under the PRC Company Law, the board of directors may exercise the following powers:
¬ convene shareholders' meetings and report to the shareholders;
¬ implement resolutions passed by shareholders in general meetings;
¬ decide on our business plans and investment plans;
¬ formulate proposed annual budgets and Ñnal accounts;
¬ formulate proÑt distribution plans and plans for recovery of losses;
¬ formulate plans for a merger, demerger or dissolution;
¬ formulate plans for the increase or decrease in our registered capital or plans for the issue of bonds;
¬ decide on our internal management structure;
¬ appoint or dismiss our managers, and at the recommendation of a manager, employ or dismiss deputy managers and Ñnancial controllers and to Ñx their remuneration; and
¬ decide on our basic management system.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
In addition, the Mandatory Provisions provide that our Board is also responsible for formulating proposals for amending our Articles of Association.
Board Meetings Under PRC Company Law, our Board is required to hold regular meetings at least twice every year. Notice of the regular board meetings is given at least 10 days before the date of the meeting. Our Board may determine the notice period and manner for extraordinary Board meetings. Our Articles of Association require that more than half of our Directors must be present to convene a meeting. A Director may attend a Board meeting personally or may appoint another Director to attend on his behalf. All Board resolutions must be passed by the aÇrmative votes of more than half of the Directors. All resolutions passed at a board meeting must be recorded in the minutes of the relevant meeting and the minutes must be signed by the Directors in attendance at the meeting and the person who recorded the minutes. If a Board resolution contravenes any applicable laws or regulations or our Articles of Association or resolutions of shareholders' General Meeting and results in substantial damages to us as a company, the Directors who participated in passing the resolution (except those who voted against the resolution and whose dissenting vote was recorded in the relevant minutes) are personally liable to us.
Chairman of our Board Our chairman is elected by a vote of our Board and must be approved by more than half of the Directors. The chairman is our legal representative and may exercise the following powers:
¬ preside over shareholders' general meetings and convene and preside over the Board meetings;
¬ examine the implementation of resolutions of the Board; and
¬ sign Share certiÑcates and bonds issued by us.
QualiÑcation of Directors The PRC Company Law provides that the following persons may not serve as one of our Directors:
¬ a person who is unable or has limited ability to undertake any civil liability;
¬ a person who has been convicted of an oÅence relating to bribery, corruption, appropriation of property, or the destruction of social economic order, where less than Ñve years have elapsed since the date of completion of the sentence;
¬ a person who has been deprived of his political rights, where less than Ñve years have elapsed since the completion of such deprivation;
¬ a person who is a director, factory manager or manager of a company or enterprise that has become bankrupt and has been liquidated due to mismanagement, and who is personally liable for the bankruptcy or liquidation of such company or enterprise, where less than three years have elapsed since the date of the completion of the liquidation of the company or enterprise;
¬ a person who has been a legal representative of an enterprise that has had its business license revoked because of unlawful operations and who is personally responsible for such revocation, where less than three years has elapsed since the date of such revocation; or
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
¬ a person who is liable for a relatively large amount of debt which has not been repaid when due. Other circumstances under which a person is disqualiÑed from acting as a Director are set out in our Articles of Association and the Mandatory Provisions.
Supervisory Committee We are required to establish a Supervisory Committee comprised of at least three members. The Supervisory Committee is responsible for the following matters:
¬ examining our Ñnancial aÅairs;
¬ supervising our Directors and senior oÇcers to ensure that they carry out their duties in compliance with the relevant laws and regulations and our Articles of Association;
¬ requiring our Directors and senior oÇcers to rectify any action which adversely aÅects our interests;
¬ proposing the convening of extraordinary shareholders' general meetings;
¬ submitting proposals to the shareholders' general meeting;
¬ Ñling a lawsuit against Directors or senior oÇcers if the acts of the Directors or senior oÇcers are in violation of laws, regulations or our Articles of Association; and
¬ carrying out other duties as speciÑed in our Articles of Association. Members of the Supervisory Committee include representatives elected by our workers and representatives elected by our shareholders in a general meeting. Our Directors and senior oÇcers may not serve as a Supervisor. The term of oÇce for our Supervisors is three years and a Supervisor may serve consecutive terms if re-elected. The circumstances under which a person is disqualiÑed from acting as a Director under the PRC Company Law and the Mandatory Provisions also apply to a Supervisor.
Manager and OÇcers Companies are required to have a manager who is appointed, and may be removed, by the Board. A company's manager is accountable to the Board and may exercise the following powers:
¬ supervise the production, business and administration and implement resolutions of the Board;
¬ organize the implementation of the business and investment plans;
¬ draft plans for the establishment of the internal management structure;
¬ formulate the basic administration system;
¬ formulate the internal rules;
¬ recommend the appointment and dismissal of deputy managers and the Ñnancial controller and appoint or dismiss other administrative oÇcers (other than those required to be appointed or dismissed by the Board or the Board Committees); and
¬ other powers conferred by the Board or the Articles of Association.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
The Special Regulations require us to employ other corporate oÇcers, including a Ñnancial controller and company secretary.
The circumstances under which a person is disqualiÑed from acting as a Director under the PRC Company Law and the Mandatory Provisions also apply to our manager and other senior oÇcers.
The articles of association of a company shall have binding eÅect on the company, shareholders, directors, supervisors, managers and other executives of the company. Such persons shall be entitled to exercise their rights, apply for arbitration and issue legal proceedings according to the articles of association of the company. The provisions of the Mandatory Provisions regarding the senior management of a company have been incorporated in the Articles of Association (a summary of which is set out in Appendix VIII).
Duties of Directors, Supervisors and Senior OÇcers
A company's Directors, Supervisors, managers and oÇcers are required under the PRC Company Law to comply with the relevant laws and regulations, to comply with the Articles of Association, and to bear duty of loyalty and duty of care to the company. The Special Regulations and the mandatory Provisions provide that the Directors, Supervisors, managers and oÇcers owe a Ñduciary duty to the company, and require them to perform their duties faithfully, protect the corporate interests and not abuse their positions for personal gain. A company's Directors, Supervisors, managers and oÇcers are also under a duty of conÑdentiality and are prohibited from divulging certain information unless required by applicable laws or regulations or by the shareholders.
If a Director, Supervisor, manager or oÇcer contravenes any law, regulation or a company's Articles of Association in the performance of his duties and such contravention results in a loss to the company, the respective individual will be held personally liable to the company for such loss.
Finance and Accounting
We are required to establish a Ñnancial and accounting system which must comply with relevant laws and regulations as well as rules stipulated by the Ministry of Finance and the State Council.
We are also required to prepare Ñnancial statements at the end of each Ñnancial year. We are required to make our Ñnancial statements available for inspection by our shareholders at least 20 days prior to our annual general meeting. We must also publish our Ñnancial statements by way of public announcement.
We are required by PRC law and regulations to make the following transfers from our after-tax proÑt before we distribute any proÑts to our shareholders:
¬ 10% of our after-tax proÑt must be transferred to our statutory common reserve fund, provided that no transfer is required if our accumulated statutory common reserve fund reaches 50% of our registered capital;
¬ subject to our shareholders' approval in a general meeting and after transfer of the requisite amount to the statutory common reserve fund, a discretionary amount from our after-tax proÑt may be transferred to the discretionary common reserve; and
¬ a general reserve not less than 1% of our risk-bearing assets.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Any balance of the after-tax proÑt after making-up losses and transfers to the common reserve and general reserves may be distributed to our shareholders in proportion to their respective shareholdings. If the amount in our statutory common reserve fund is insuÇcient to make up for losses from the previous year, our proÑts in the current year must be applied to make up for such losses before we make allocations to the statutory common reserve fund. Our common reserve consists of the statutory common reserve fund, discretionary common reserve fund and the capital common reserve fund. Our capital common reserve fund is made up of the premium over the nominal value of our Shares. Other amounts required by the relevant governmental Ñnancial authority are to be treated as the capital common reserve fund. Our common reserve must be applied for the following purposes:
¬ to make up for any losses;
¬ to expand our business operations; and
¬ to pay up our registered share capital by new Share, provided that if the statutory common reserve is converted into registered capital, the balance of the statutory common reserve after such conversion may not be less than 25% of our registered capital.
Appointment and Retirement of Auditors The Special Regulations require us to employ an independent PRC qualiÑed Ñrm of accountants to audit our annual Ñnancial statements and review certain other Ñnancial reports. The auditors are to be appointed for a term commencing from their appointment at an annual general meeting to the close of the next annual general meeting. If we remove or fail to renew the appointment of our existing auditors, we are required by the Special Regulations to give prior notice to the auditors and the auditors are entitled to make representations before our shareholders in a general meeting. If our auditors resign, they are obligated to make a statement to the shareholders stating whether or not we have undertaken any inappropriate transactions. The appointment, removal or nonrenewal of appointment of auditors is decided by our shareholders and must be recorded with the CSRC.
Distribution of ProÑts The Special Regulations provide that dividends and other distributions payable to holders of our H Shares must be declared and calculated in Renminbi and paid in a foreign currency. Under the Mandatory Provisions, the payment of dividends and other distributions in foreign currency to these shareholders must be made through a receiving agent appointed by us for holders of H Shares.
Amendments to Articles of Association Our Articles of Association may only be amended by an aÇrmative vote of shareholders representing two-thirds or more of the voting shares. An amendment to our Articles of Association will only take eÅect after we have obtained any necessary approvals from relevant regulatory and administrative agencies. If an amendment to our Articles of Association aÅects the information in our business registration, we must apply to the related government department to change the relevant details in the license.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Merger and Division Our shareholders must approve all mergers and divisions. We may also need to seek government approval for a merger or division. In the PRC, a merger may be eÅected either by way of absorption followed by the dissolution of the company being absorbed or by the establishment of a new entity followed by the dissolution of the original entities. If our shareholders approve a proposed merger, we are required to sign a merger agreement and to prepare our balance sheet and an inventory of assets. We must notify our creditors of the merger within 10 days and publicly announce the merger in newspapers within 30 days after the resolution approving the merger has been passed. Our creditors are allowed, within a certain time period, to request us to repay any outstanding indebtedness or provide guarantees covering such indebtedness. In the case of a division, we are likewise required to prepare our balance sheet and an inventory of assets and to notify our creditors. Our creditors are again entitled to ask us to repay or guarantee any outstanding indebtedness.
Dissolution and Liquidation Under the PRC Company Law and Mandatory Provisions, we will be dissolved and liquidated if any of the following events occur: (i) our term of operations as stipulated in our Articles of Association has expired; (ii) the occurrence of any event in our Articles of Association which speciÑcally triggers our dissolution; (iii) our shareholders in a general meeting agree to our dissolution by special resolution; (iv) a merger or division that requires our dissolution; (v) we experience any serious diÇculty in the operations or management so that the interests of the shareholders will face heavy loss if our bank continues to exist and such diÇculty cannot be resolved by any other means; and (vi) we have been ordered to close down as a result of a violation of the law or administrative regulations. If we are dissolved in the circumstances referred to in (i), (ii), (iii) and (vi) above, in a general meeting our shareholders must, within 15 days of the occurrence of the event, appoint the members of a liquidation committee. If the liquidation committee is not established within the speciÑed time, our creditors may apply to the people's court to appoint the members of the liquidation committee. The people's court will then organize a liquidation committee to conduct the liquidation. A liquidation committee is required to notify our creditors of our dissolution within 10 days after its establishment and issue a public announcement of our dissolution on a newspaper within 60 days after its establishment. A creditor is required to lodge its claim with the liquidation committee within the statutory time limit. The liquidation committee shall exercise the following powers during the liquidation period:
¬ sort out the company's assets and to prepare a balance sheet and an inventory of the assets;
¬ notify creditors or issue public notices;
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
¬ dispose of and liquidate any unÑnished businesses of the company;
¬ pay all outstanding taxes;
¬ settle the company's Ñnancial claims and liabilities;
¬ deal with the surplus assets of the company after its debts have been paid oÅ; and
¬ represent the company in civil lawsuits. In the event of a dissolution, our assets will be applied to pay all expenses incurred in connection with the liquidation, employee wages, employees' insurance and statutory compensation, tax overdue and our general indebtedness. Any surplus assets will be distributed to our shareholders in proportion to their respective shareholdings. If our assets are insuÇcient to repay or discharge our indebtedness, the liquidation committee will apply to the people's court for a declaration of insolvency and will transfer the liquidation proceedings to the people's court. If we are involved in liquidation proceedings, we will not be allowed to engage in any new business operations. Upon completion of the liquidation process, the liquidation committee is required to submit a liquidation report to our shareholders' general meeting and to the people's court for conÑrmation. The liquidation committee is also required to apply to the Administration of Industry and Commerce for the cancellation of our registration and to make a public announcement of our dissolution following such cancellation. Members of the liquidation committee are required to discharge their duties honestly and in compliance with laws. A member of the liquidation committee is liable to us and our creditors in respect of any loss arising from his willful or material default.
Overseas Listing We must obtain the approval of the CSRC to list our Shares overseas. An overseas listing of our Shares must comply with the Special Regulations. According to the Special Regulations, our plan to issue listed foreign invested shares and domestic shares which has been approved by the CSRC may be implemented by the Board of Directors by way of separate issues within 15 months after the CSRC has approved our application.
Loss of Share CertiÑcates If a Share certiÑcate in registered form of our domestic shares is either lost, stolen or destroyed, the respective shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to a people's court for a declaration that such certiÑcate will no longer be valid. After obtaining the declaration, the shareholder may apply to us for a replacement certiÑcate. A separate procedure regarding the loss of H Share certiÑcates is provided for in the Mandatory Provisions, which has been incorporated into our Articles of Association, a summary of which is set out in Appendix VIII to this prospectus. In order to further promote strict compliance of ""companies listed outside China'' (""Listed Companies'') with the relevant domestic and foreign laws and regulations, the conscientious performance of their continuing obligations toward investors and the establishment of a good corporate image on domestic and foreign capital markets, the State Economic and Trade
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Commission and the CSRC jointly issued ""Further Standardizing Operations and Reform of Companies Listed Outside China Opinion'' (""Standardizing Opinion'') on March 29, 1999. The Standardizing Opinion sets out regulations governing the relationship between the Listed Companies and their controlling entities (hereafter ""controlling entities'' refers to companies or enterprises with legal person status that have a controlling interest in a Listed Company) and the operations of the administrative organizations of the Listed Companies. Restrictions imposed by the Standardising Opinion to ensure the independence of the Listed Company from its controlling entity includes:
¬ no more than two members of the senior management of the controlling entity may serve as chairman, vice chairman or executive director of the Listed Company, no member of the executive management of the controlling entity may serve as the listed company's manager, deputy manager, chief Ñnancial oÇcer, chief marketing oÇcer or board secretary;
¬ the Listed Company must terminate any semi-governmental administrative functions;
¬ the supervisory board of the Listed Company must have at least two independent supervisors. The Standardising Opinion, although is not law in its strict sense, nonetheless have binding eÅect on all overseas listed companies in China, as the PRC Government must be satisÑed with the compliance with the Standardising Opinion before it approves the application for overseas listing by any PRC company. Given the controlling entity of a Listed Company in the PRC is usually a stateowned entity closely associated with the PRC Government, the PRC Government will from time to time conduct internal audit on the controlling entities to ensure the Standardising Opinion is being observed.
PRC SECURITIES LAW AND REGULATIONS The PRC has promulgated a number of regulations that relate to the issue and trading of our Shares and disclosure of information by us. In October 1992, the State Council established the Securities Committee and the CSRC. The Securities Committee is responsible for co-coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities-related institutions in the PRC and administering the CSRC. The CSRC is the regulatory arm of the Securities Committee and is responsible for the drafting of regulatory provisions of securities markets, supervising securities companies, regulating public oÅers of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities-related statistics and undertaking research and analysis. On April 22, 1993, the State Council promulgated the Securities Provisional Regulations. These regulations deal with the application and approval procedures for public oÅerings of equity securities, trading in equity securities, the acquisition of listed companies, deposit, settlement, clearing and transfer of listed equity securities, the disclosure of information with respect to a listed company, investigation and penalties and dispute settlement. According to these regulations, we must obtain the approval of the Securities Committee to oÅer our Shares outside the PRC. In addition, if we propose to issue Renminbi denominated ordinary shares as well as special Renminbi- denominated shares, we must comply with the Securities Provisional Regulations. Provisions of these regulations in relation to acquisitions of listed companies and disclosure of information expressly apply to listed companies in general without being conÑned to listed companies on any particular stock exchange.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
On September 2, 1993, the Securities Committee promulgated the Provisional Measures Prohibiting Fraudulent Conduct Relating to Securities. The prohibitions imposed by these measures include the use of insider information in connection with the issuance of, or trading in, securities (insider information being deÑned to include undisclosed material information known to any insider, which may aÅect the market price of securities); the use of funds or information or through an abuse of power in creating a false or disorderly market or inÖuencing the market price of securities or inducing investors to make investment decisions without knowledge of actual circumstances; and the making of any statement in connection with the issue of, and trading in, securities which is false or materially misleading, or in respect of which there is any material omission. Penalties imposed for contravening any of the provisions of the measures include Ñnes, conÑscation of proÑts and suspension of trading. In serious cases, criminal liability may be imposed.
On December 25, 1995, the State Council promulgated the Regulations of the State Council Concerning Domestic Listed Foreign Shares of Joint Stock Limited Liability Companies. These regulations deal mainly with the issue, subscription, trading and declaration of dividends and other distributions of domestic listed foreign shares and disclosure of information of joint stock limited liability companies having domestic listed foreign shares.
The PRC Securities Law took eÅect on July 1, 1999 and was revised as of August 28, 2004 and October 27, 2005, respectively. This is the Ñrst national securities law in the PRC, and it is divided into 12 chapters and 240 articles regulating, among other things, the issue and trading of securities, takeovers by listed companies, securities exchanges, securities companies and the duties and responsibilities of the State Council's securities regulatory authorities. The PRC Securities Law comprehensively regulates activities in the PRC securities market. Article 238 of the PRC Securities Law provides that we must obtain prior approval from the State Council's regulatory authorities to list our Shares outside the PRC. Currently, the issue and trading of foreign issued shares (including H Shares) are mainly governed by the rules and regulations promulgated by the State Council and the CSRC.
ARBITRATION AND ENFORCEMENT OF ARBITRAL AWARDS LR19A.42(65)(e)
The Arbitration Law of the People's Republic of China (the ""Arbitration Law'') was passed by the Standing Committee of the NPC on August 31, 1994 and became eÅective on September 1, 1995. It is applicable to contract disputes and other property disputes between natural person, legal person and other organizations where the parties have entered into a written agreement to refer the matter to arbitration before an arbitration committee constituted in accordance with the Arbitration Law. Under the Arbitration Law, an arbitration committee may, before the promulgation by the PRC Arbitration Association of arbitration regulations, formulate interim arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have by agreement provided arbitration as the method for dispute resolution, the people's court will refuse to handle the case.
The Hong Kong Listing Rules and the Mandatory Provisions require an arbitration clause to be included in our Articles of Association and, in the case of the Hong Kong Listing Rules, also in contracts with each of our Directors and Supervisors, to the eÅect that whenever any disputes or claims arise between holders of our H Shares and us; holders of our H Shares and our Directors, Supervisors, manager or other senior oÇcers; or holders of our H Shares and holders of Domestic Shares, in respect of any disputes or claims in relation to our aÅairs or as a result of any rights or obligations arising under our Articles of Association, the PRC Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred to arbitration.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall comply with the arbitration. Disputes in respect of the deÑnition of shareholders and disputes in relation to our register of shareholders need not be resolved by arbitration. A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If the claimant elects for arbitration to be carried out at the Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center. Under the Arbitration Law and PRC Civil Procedure Law, an arbitral award is Ñnal and binding on the parties. If a party fails to comply with an award, the other party to the award may apply to the people's court for enforcement. A people's court may refuse to enforce an arbitral award made by an arbitration commission if there is any procedural or membership irregularity speciÑed by law or the award exceeds the scope of the arbitration agreement or is outside the jurisdiction of the arbitration commission. A party seeking to enforce an arbitral award of PRC arbitration panel against a party who, or whose property, is not within the PRC, may apply to a foreign court with jurisdiction over the case for enforcement. Similarly, an arbitral award made by a foreign arbitration body may be recognized and enforced by the PRC courts in accordance with the principles of reciprocity or any international treaty concluded or acceded to by the PRC. The PRC acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ""New York Convention'') adopted on June 10, 1958 pursuant to a resolution of the Standing Committee of the NPC passed on December 2, 1986. The New York Convention provides that all arbitral awards made in a state which is a party to the New York Convention shall be recognized and enforced by other parties to the New York Convention, subject to their right to refuse enforcement under certain circumstances, including where the enforcement of the arbitral award is against the public policy of the state to which the application for enforcement is made. It was declared by the Standing Committee of the NPC simultaneously with the accession of the PRC that (i) the PRC will only recognize and enforce foreign arbitral awards on the principle of reciprocity and (ii) the PRC will only apply the New York Convention in disputes considered under PRC laws to arise from contractual and non-contractual mercantile legal relations. On June 18, 1999, an arrangement was made between Hong Kong and the Supreme People's Court of the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People's Court of the PRC and the Hong Kong Legislative Council, and became eÅective on February 1, 2000. The arrangement is made in accordance with the spirit of the New York Convention. Under the arrangement, awards made by PRC arbitral authorities recognized under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong. Hong Kong arbitration awards are also enforceable in China.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN HONG KONG AND PRC COMPANY LAW The Hong Kong law applicable to a company incorporated in Hong Kong is based on the Companies Ordinance and supplemented by common law and the rules of equity that apply to Hong Kong. As a joint stock limited liability company established in the PRC that is seeking a listing
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
of H Shares on the Hong Kong Stock Exchange, we are governed by the PRC Company Law and all other rules and regulations promulgated pursuant to the PRC Company Law. In the following sections, we summarize certain material diÅerences between Hong Kong company law applicable to a company incorporated in Hong Kong and the PRC Company Law applicable to a joint stock limited liability company incorporated and existing under the PRC Company Law. This summary is, however, not intended to be an exhaustive comparison.
Share Capital Under Hong Kong law, the authorized share capital of a Hong Kong company is the amount of share capital that the company is authorized to issue. A company is not bound to issue the entire amount of its authorized share capital. The authorized share capital of a Hong Kong company may be larger than the issued share capital. Hence, the directors of a Hong Kong company may, with the prior approval of the shareholders if required, cause the company to issue new shares. The PRC Company Law does not provide for authorized share capital. Our registered capital is the amount of our issued share capital. Any increase in our registered capital must be approved by our shareholders' general meeting and the relevant PRC governmental and regulatory authorities. Under the PRC Company Law, the shares subscribed for in the form of cash may not less than 30% of a joint stock limited company's registered capital. There is no such restriction on a Hong Kong company under Hong Kong law.
Restrictions on Shareholding and Transfer of Shares Under PRC law, our Domestic Shares, which are denominated and subscribed for in Renminbi, may only be subscribed for or traded by the State, PRC legal persons and natural persons. Our overseas listed H Shares, which are denominated in Renminbi and subscribed for in a currency other than Renminbi, may only be subscribed for, and traded by, investors from Hong Kong, Macau and Taiwan or any country and territory outside the PRC. Under the PRC Company Law, our promoter is not allowed to transfer the Shares they hold for a period of one year after the date of our establishment. Similarly, our Directors, Supervisors and manager cannot transfer their Shares within one year from the day when the Shares are listed and traded on a stock exchange. There are no such restrictions on shareholdings and transfer of shares under Hong Kong law.
Financial Assistance for Acquisition of Shares Although the PRC Company Law does not prohibit or restrict us or our subsidiaries from providing Ñnancial assistance for the purpose of an acquisition of our Shares, the Mandatory Provisions contain restrictions on a company and its subsidiaries providing such Ñnancial assistance similar to those under the Hong Kong company law.
Variation of Class Rights The PRC Company Law makes no speciÑc provision relating to variation of class rights. However, the PRC Company Law states that the State Council can promulgate regulations relating to other kinds of shares. The Mandatory Provisions contain elaborate provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedures required to be followed in respect thereof. These provisions have been incorporated in the Articles of Association, which are summarized in Appendix VIII.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Under the Companies Ordinance, no rights attached to any class of shares can be varied except (i) with the approval of a special resolution of the holders of the relevant class at a separate meeting, (ii) with the consent in writing of the holders of three-fourths in nominal value of the issued shares of the class in question, (iii) by agreement of all the members of the Company or (iv) if there are provisions in the articles of association relating to the variation of those rights, then in accordance with those provisions. We (as required by the Hong Kong Listing Rules and the Mandatory Provisions) have adopted in the Articles of Association provisions protecting class rights in a similar manner to those found in Hong Kong law. Holders of overseas listed foreign invested shares and domestic invested shares are deÑned in the Articles of Association as diÅerent classes, except where (i) the Company issues and allots, in any 12-month period, pursuant to a shareholders' special resolution, not more than 20% of each of the issued overseas listed foreign invested shares and the issued domestic invested shares existing as at the date of the shareholders' special resolution; and (ii) the plan for the issue of domestic invested shares and listed foreign invested shares upon its establishment is implemented within 15 months following the date of approval by the CSRC. The Mandatory Provisions contain detailed provisions relating to circumstances which are deemed to constitute a variation of class rights.
Directors, OÇcers and Supervisors The PRC Company Law, unlike Hong Kong company law, does not contain any requirements relating to the declaration of directors' interests in material contracts, restrictions on directors' authority in making major dispositions, restrictions on companies providing certain beneÑts, to directors and guarantees in respect of directors' liability and prohibitions against compensation for loss of oÇce without shareholders' approval. The Mandatory Provisions, however, contain certain restrictions on major dispositions and specify the circumstances under which a director may receive compensation for loss of oÇce, all of which provisions have been incorporated in the Articles of Association, a summary of which is set out in Appendix VIII.
Supervisory Committee Under the PRC Company Law, a company's directors and managers are subject to the supervision of a Supervisory Committee. There is no mandatory requirement for the establishment of a supervisory committee for a company incorporated in Hong Kong. The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of his powers, to act in good faith and honestly in what he considers to be our best interests and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Derivative Action by Minority Shareholders LR19A.42(65)(d) LR19A.42(65)(f) Hong Kong law permits minority shareholders to start a derivative action on behalf of all shareholders against directors who have committed a breach of their Ñduciary duties to the company if the directors control a majority of votes at a general meeting, thereby eÅectively preventing a company from suing the directors in breach of their duties in its own name. Although the PRC Company Law gives our shareholders the right to initiate proceedings in the people's court to restrain the implementation of any resolution passed by our shareholders in a general meeting, or by the Board, that violates any law, administrative rules or articles of association or if the directors, supervisors or senior managers violate laws, administrative rules or articles of association when performing their duties and cause losses to the company, there is no form of proceedings equal to a derivative action. The Mandatory Provisions, however, provide us with certain remedies against the
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Directors, Supervisors and oÇcers who breach their duties to us. In addition, as a condition to the listing of our H Shares on the Hong Kong Stock Exchange and in accordance with our Articles of Association, each of our Directors and Supervisors is required to give an undertaking in favor of us acting as agent for each of our shareholders. This allows minority shareholders to act against our Directors and Supervisors in default.
Protection of Minorities Under Hong Kong law, a shareholder who complains that the aÅairs of a company incorporated in Hong Kong are conducted in a manner unfairly prejudicial to his interests may petition to the court to either wind up the company or make an appropriate order regulating the aÅairs of the company. In addition, on the application of a speciÑed number of members, the Financial Secretary may appoint inspectors who are given extensive statutory powers to investigate the aÅairs of a company incorporated in Hong Kong. There is no speciÑc provision in the PRC Company Law to guard against oppression by the majority shareholders of minority shareholders' but the Company, as required by the Mandatory Provisions, has adopted in its Articles of Association minority protection provisions similar to (though not as comprehensive as) those available under the Hong Kong law. These provisions state that a controlling shareholder may not exercise its voting rights in a manner prejudicial to the interests of our shareholders, may not relieve a Director or Supervisor of his duty to act honestly in our best interests or may not approve the expropriation by a Director or Supervisor of our assets or the individual rights of other shareholders.
Notice of Shareholders' Meetings Under the PRC Company Law, notice of a shareholders' annual general meeting must be given not less than 20 days before the meeting. Under the Special Regulations and the Mandatory Provisions, 45 days' written notice must be given to all our shareholders and shareholders who wish to attend the meeting must reply in writing 20 days before the date of the meeting. For a Hong Kong limited company, the minimum period of notice of a general meeting where convened for the purpose of considering ordinary resolutions is 14 days and where convened for the purpose of considering special resolutions, is 21 days. The notice period for an annual general meeting is also 21 days.
Quorum for Shareholders' Meetings LR19A.42(65)(a) Under Hong Kong law, the quorum for a meeting of a company is provided for in the articles of association of a company, but must be at least two members. The PRC Company Law does not specify any quorum requirement for a shareholders' general meeting, but the Special Regulations and the Mandatory Provisions provide that our general meeting may only be convened when replies to the notice of that meeting have been received from shareholders whose Shares represent 50% of the voting rights at least 20 days before the proposed date of the meeting, or if that 50% level is not achieved, we must within Ñve days notify our shareholders by way of a public announcement and we may hold the shareholders' general meeting thereafter.
Voting LR19A.42(65)(a) Under Hong Kong law, an ordinary resolution is passed by a simple majority of votes cast by members present in person or by proxy at a general meeting and a special resolution is passed by a majority of not less than three quarters of votes cast by members present in person or by proxy at a general meeting. Under the PRC Company Law, the passing of any resolution requires aÇrmative votes of our shareholders representing half or more of our voting rights except in cases of proposed
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
amendments to our Articles of Association, merger, division or dissolution, which require aÇrmative votes of our shareholders representing two-thirds or more of our voting rights.
Financial Disclosure We are required under the PRC Company Law to make available at our oÇce for inspection by shareholders our annual balance sheet, proÑt and loss account, statement of changes in Ñnancial position and other relevant annexes 20 days before our shareholders' annual general meeting. In addition, we must publish our Ñnancial statements and our annual balance sheet must be veriÑed by registered accountants. The Companies Ordinance requires a company incorporated in Hong Kong to send to every shareholder a copy of its balance sheet, auditors' report and directors' report, which are to be laid before the company in its annual general meeting, not less than 21 days before such meeting. We are required under PRC law to prepare our Ñnancial statements in accordance with PRC accounting standards. The Mandatory Provisions require that we must, in addition to preparing our accounts according to PRC standards, have our accounts prepared and audited in accordance with international or Hong Kong accounting standards and our Ñnancial statements must also contain a statement of the Ñnancial eÅect of the material diÅerences (if any) from the Ñnancial statements prepared in accordance with the PRC accounting standards. The Company is required to publish its interim and annual accounts within 60 days from the end of the Ñrst six months of a Ñnancial year and within 120 days from the end of a Ñnancial year, respectively. The Special Regulations require that there should not be any inconsistency between the information disclosed within and outside the PRC and that, to the extent that there are diÅerences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such diÅerences should also be disclosed simultaneously.
Information on Directors and Shareholders The PRC Company Law gives our shareholders the right to inspect our Articles of Association, minutes of the shareholders' general meetings and Ñnancial and accounting reports. Under the Articles of Association, shareholders have the right to inspect and copy (at reasonable charges) certain information on shareholders and on directors similar to that available to shareholders of Hong Kong companies under Hong Kong law.
Receiving Agent Under the PRC Company Law and Hong Kong law, dividends once declared are debts payable to shareholders. The limitation period for debt recovery action under Hong Kong law is six years, while under the PRC law this limitation period is two years. The Mandatory Provisions require us to appoint a trust company registered under the Hong Kong Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) as a receiving agent to receive on behalf of holders of H Shares dividends declared and all other monies owed by us in respect of our Shares.
Corporate Reorganization Corporate reorganizations involving a company incorporated in Hong Kong may be eÅected in a number of ways, such as a transfer of the whole or part of the business or property of the company to another company in the course of being wound up voluntarily, pursuant to section 237 of the Companies Ordinance or a compromise or arrangement between the company and its creditors or
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
between the company and its members pursuant to section 166 of the Companies Ordinance, which requires the sanction of the court. For PRC companies, such reorganizations are administratively considered and sanctioned under the PRC Company Law.
Dispute Arbitration LR19A.42(65)(e) In Hong Kong, disputes between shareholders on the one hand, and a company incorporated in Hong Kong or its directors on the other, may be resolved through the courts. The Mandatory Provisions provide that such disputes should be submitted to arbitration at either the Hong Kong International Arbitration Centre (""HKIAC'') or the China International Economic and Trade Arbitration Commission (""CIETAC''), at the claimant's choice.
Mandatory Deductions Under the PRC Company Law, after tax proÑts of a company are subject to deductions of contributions to the statutory common reserve fund of a company before they can be distributed to shareholders. There are prescribed limits under the PRC Company Law for such deductions. There are no corresponding provisions under the Companies Ordinance.
Remedies of the Company Under the PRC Company Law, if a director, supervisor or manager in carrying out his duties infringes any law, administrative regulation or the articles of association of a company, which results in damage to the company, that director, supervisor or manager should be responsible to the company for such damages. In addition, in compliance with the Hong Kong Listing Rules, remedies of the Company similar to those available under the Hong Kong law (including rescission of the relevant contract and recovery of proÑts made by a Director, Supervisor or oÇcer) have been set out in the Articles of Association.
Dividends The Articles of Association empower the Company to withhold, and pay to the relevant tax authorities, any tax payable under PRC law on any dividends or other distributions payable to a shareholder. Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws, the relevant limitation period is two years. The Company shall not exercise its powers to forfeit any unclaimed dividend in respect of H Shares until after the expiry of the applicable limitation period.
Fiduciary Duties In Hong Kong, there is the common law concept of the Ñduciary duty of directors. Under the PRC Company Law and the Special Regulations, directors, supervisors, oÇcers, and managers owe a Ñduciary duty towards their company and are not permitted to engage in any activities which compete with or damage the interests of their company.
Closure of Register of Shareholders The Companies Ordinance requires that the register of shareholders of a company must not generally be closed for the registration of transfers of shares for more than 30 days (extendable to 60 days in certain circumstances) in a year, whereas, as required by the Mandatory Provisions, that share transfers may not be registered within 30 days before the date of a shareholders' meeting or within Ñve days before the record date set for the purpose of distribution of dividends.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
HONG KONG LISTING RULES The Hong Kong Listing Rules provide additional requirements which apply to us as an issuer incorporated in the PRC as a joint stock limited liability company and seeking a primary listing or whose primary listing is on the Hong Kong Stock Exchange. Set out below is a summary of the principal provisions containing the additional requirements which apply to us.
Compliance adviser We are required to retain for at least one year following our listing, or such shorter period as the Hong Kong Stock Exchange may in its absolute discretion permit, the services of a compliance adviser which is acceptable to the Hong Kong Stock Exchange, to provide us with professional advice on continuous compliance with the Hong Kong Listing Rules, and to act at all times, in addition to our two authorized representatives, as our principal channel of communication with the Hong Kong Stock Exchange. The appointment of the compliance adviser may not be terminated until a replacement acceptable to the Hong Kong Stock Exchange has been appointed. If the Hong Kong Stock Exchange is not satisÑed that the compliance adviser is fulÑlling its responsibilities adequately, it may require us to terminate the compliance adviser's appointment and appoint a replacement. The compliance adviser must keep the Company informed on a timely basis of changes in the Hong Kong Listing Rules and any new or amended law, regulation or code in Hong Kong applicable to the Company. It must act as the Company's principal channel of communication with the Hong Kong Stock Exchange if the authorized representatives of the Company are expected to be frequently outside Hong Kong.
Accountants' Report An accountants' report will not normally be regarded as acceptable by the Hong Kong Stock Exchange unless the relevant accounts have been audited to a standard comparable to that required in Hong Kong. Such report will normally be required to conform to either Hong Kong Financial Reporting Standards or International Financial Reporting Standards.
Process Agent We are required to appoint and maintain a person authorized to accept service of process and notices on our behalf in Hong Kong throughout the period during which our securities are listed on the Hong Kong Stock Exchange and must notify the Hong Kong Stock Exchange of his, her or its appointment, the termination of his, her or its appointment and his, her or its contact particulars.
Public Shareholding If at any time we issue securities other than the H Shares which are listed on the Hong Kong Stock Exchange, the Hong Kong Listing Rules require that all of our H Shares must be held by the public, the H Shares must represent not less than 10% of our issued share capital and the aggregate number of our H Shares and other securities held by the public must constitute not less than 25% of our issued share capital.
Independent Non-Executive Directors and Supervisors Independent non-executive Directors are required to demonstrate an acceptable standard of competence and adequate commercial or professional expertise to ensure that the interests of our
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
general body of shareholders will be adequately represented. Supervisors must have the character, expertise and integrity and be able to demonstrate a standard of competence commensurate with their position as Supervisors.
Restrictions on Purchase of its Own Securities Subject to governmental approvals and the Articles of Association, we may repurchase our own H Shares on the Hong Kong Stock Exchange in accordance with the provisions of the Hong Kong Listing Rules. Approval by way of special resolution of the holders of Domestic Shares and the holders of H Shares at separate class meetings conducted in accordance with the Articles of Association is required for share repurchases. In seeking approvals, we are required to provide information on any proposed or actual purchases of all or any of our equity securities, whether or not listed or traded on the Hong Kong Stock Exchange. We must also state the consequences of any purchases which will arise under either or both of the Hong Kong Takeovers Code and any similar PRC law of which Directors are aware, if any. Any general mandate given to Directors to repurchase H Shares must not exceed 10% of the total number of our existing issued H Shares.
Redeemable Shares We must not issue any redeemable shares unless the Hong Kong Stock Exchange is satisÑed that the relative rights of the holders of our H Shares are adequately protected.
Pre-emptive Rights Except in the circumstances mentioned below, Directors are required to obtain the approval by a special resolution of shareholders in general meeting, and the approvals by special resolutions of the holders of Domestic Shares and H Shares (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with the Articles of Association, prior to: (i) authorizing, allotting, issuing or granting Shares or securities convertible into Shares, options, warrants or similar rights to subscribe for any Shares or such convertible securities; or (ii) any major subsidiary making any such authorization, allotment, issue or grant so as materially to dilute the percentage of our equity interest in such subsidiary.
No such approval will be required, except to the extent that our existing shareholders have by LR19A.42(65)(b) special resolution in general meeting given a mandate to Directors, either unconditionally or subject LR19A.42(65)(c) to such terms and conditions as may be speciÑed in the resolution, to authorize, allot or issue, either separately or concurrently once every 12 months, not more than 20% of each of the existing issued Domestic Shares and H Shares as at the date of the passing of the relevant special resolution or, such Shares as are part of our plan at the time of our establishment, to issue Domestic Shares and H Shares and which plan is implemented within 15 months from the date of approval by the State Council Securities Policy Committee.
Amendment to Articles of Association We may not permit or cause any amendment to our Articles of Association which would cause them to cease to comply with the PRC Company Law, the Mandatory Provisions or the Hong Kong Listing Rules.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Documents for Inspection We are required to make available at a place in Hong Kong for inspection by the public and our shareholders free of charge, and for copying by our shareholders at reasonable charges the following:
¬ complete duplicate register of shareholders;
¬ report showing the state of our issued share capital;
¬ our latest audited Ñnancial statements and the reports of the Directors, auditors and (if any) Supervisors, if any, thereon;
¬ special resolutions;
¬ reports showing the number and nominal value of securities repurchased by us since the end of the last Ñnancial year, the aggregate amount paid for such securities and the maximum and minimum prices paid in respect of each class of securities repurchased (with a breakdown between Domestic Shares and H Shares);
¬ copy of the latest annual return Ñled with the PRC State Administration for Industry and Commerce or other competent PRC authority; and
¬ for shareholders only, copies of minutes of meetings of shareholders.
Receiving Agents Under Hong Kong law, we are required to appoint one or more receiving agents in Hong Kong and pay to such agents dividends declared and other monies owed in respect of the H Shares to be held, pending payment, in trust for the holders of such H Shares.
Statements in Share CertiÑcates We are required to ensure that all our listing documents and share certiÑcates include the statements stipulated below and to instruct and cause each of our share registrars not to register the subscription, purchase or transfer of any of our Shares in the name of any particular holder unless and until such holder delivers to the share registrar a signed form in respect of those Shares bearing statements to the following eÅect, that the acquirer of Shares:
¬ agrees with us and each shareholder, and we agree with each shareholder, to observe and comply with the PRC Company Law, the Special Regulations and the Articles of Association;
¬ agrees with us, each shareholder, Director, Supervisor, manager and other oÇcer and we acting both for the company and for each Director, Supervisor, manager and other oÇcer, agree with each shareholder to refer all diÅerences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning our aÅairs to arbitration in accordance with the Articles of Association. Any reference to arbitration will be deemed to authorize the arbitration tribunal to conduct its hearing in open session and to publish its award. Such arbitration will be Ñnal and conclusive;
¬ agrees with us and each shareholder that Shares are freely transferable by the holder thereof; and
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
¬ authorizes us to enter into a contract on his behalf with each Director and oÇcer whereby such Directors and oÇcers undertake to observe and comply with their obligations to shareholders as stipulated in the Articles of Association.
COMPLIANCE WITH THE PRC COMPANY LAW, THE SPECIAL REGULATIONS AND THE ARTICLES OF ASSOCIATION We are required to observe and comply with the PRC Company Law, the Special Regulations and the Articles of Association.
Contract between Us and Directors, OÇcers and Supervisors We are required to enter into a contract in writing with every Director and oÇcer containing at least the following provisions:
¬ an undertaking by the Director or oÇcer to us to observe and comply with the PRC Company Law, the Special Regulations, the Articles of Association, the Hong Kong Takeovers Code and an agreement that we shall have the remedies provided in the Articles of Association and that neither the contract nor his oÇce is capable of assignment;
¬ an undertaking by the Director or oÇcer to us acting as agent for each shareholder to observe and comply with his obligations to our shareholders as stipulated in the Articles of Association; and
¬ an arbitration clause which provides that whenever any diÅerences or claims arise from the contract, our Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant law and administrative regulations concerning aÅairs between us and our Directors or oÇcers and between a holder of H Shares and a Director or oÇcer, such diÅerences or claims will be referred to arbitration at either the CIETAC in accordance with its rules or the HKIAC in accordance with its Securities Arbitration Rules, at the election of the claimant and that once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. Such arbitration will be Ñnal and conclusive. We are also required to enter into a contract in writing with every Supervisor containing terms substantially similar to those for Directors. If the party seeking arbitration elects to arbitrate the dispute or claim at HKIAC, then either party may apply to have such arbitration conducted in Shenzhen, according to the Securities Arbitration Rules of HKIAC. PRC laws shall govern the arbitration of disputes or claims referred to above, unless otherwise provided by law or administrative regulations. The award of the arbitral body is Ñnal and shall be binding on the parties thereto. Disputes over who is a shareholder and over the share register do not have to be resolved through arbitration.
Subsequent Listing We must not apply for the listing of our H Shares on a PRC stock exchange unless the Hong Kong Stock Exchange is satisÑed that the relative rights of the holders of our H Shares are adequately protected.
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APPENDIX VII SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
GENERAL
If any change in the PRC law or market practices materially alters the validity or accuracy of any basis upon which the additional requirements have been prepared, the Hong Kong Stock Exchange may impose additional requirements or make listing of our H Shares subject to special conditions as the Hong Kong Stock Exchange may consider appropriate. Whether or not any such changes in the PRC law or market practices occur, the Hong Kong Stock Exchange retains its general power under the Hong Kong Listing Rules to impose additional requirements and make special conditions in respect of our listing. Upon our listing on the Hong Kong Stock Exchange, the provisions of the Hong Kong Securities and Futures Ordinance, the Hong Kong Takeovers Code and such other relevant ordinances and regulations as may be applicable to companies listed on the Hong Kong Stock Exchange will apply to us.
SECURITIES ARBITRATION RULES
The Articles of Association provide that certain claims arising from the Articles of Association or the PRC Company Law shall be arbitrated at either the CIETAC or the HKIAC in accordance with their respective rules.
The Securities Arbitration Rules of the HKIAC contain provisions allowing, upon application by any party, an arbitral tribunal to conduct a hearing in Shenzhen for cases involving the aÅairs of companies incorporated in the PRC and listed on the Hong Kong Stock Exchange so that PRC parties and witnesses may attend. Where any party applies for a hearing to take place in Shenzhen, the tribunal shall, where satisÑed that such application is based on bona Ñde grounds, order the hearing to take place in Shenzhen conditional upon all parties, including witnesses and the arbitrators, being permitted to enter Shenzhen for the purpose of the hearing. Where a party, other than a PRC party or any of its witnesses or any arbitrator, is not permitted to enter Shenzhen, then the tribunal shall order that the hearing be conducted in any practicable manner, including the use of electronic media. For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRC other than the territories of Hong Kong, Macau and Taiwan.
PRC LEGAL MATTERS
Jun He Law OÇces, our legal adviser on PRC law, has sent to us a legal opinion dated May 15, 2006 conÑrming that it has reviewed the summaries of relevant PRC laws and regulations as contained in this Appendix and that, in its opinion, such summaries are correct summaries relevant to PRC laws and regulations. This letter is available for inspection as referred to in the section headed ""Documents Delivered to the Registrar of Companies and Available for Inspection'' in Appendix X.
Any person wishing to have detailed advice on PRC law and the laws of any jurisdiction is recommended to seek independent legal advice.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Set out below is a summary of the principal provisions of our Articles of Association, the LR 19.08(3) principal objective of which is to provide investors with an overview of the Articles of LR 19.10(2) Association. As the information contained below is in summary form, it does not contain all the information that may be important to potential investors. Copies of the full English and Chinese texts of the Articles of Association are available for inspection as mentioned in Appendix X Ì ""Documents Delivered to the Registrar of Companies and Available for Inspection''.
The Articles of Association were adopted by our shareholders on March 28, 2006, and shall S342 enter into force on the day on which our bank's overseas-listed foreign shares become tradable on Hong Kong Stock Exchange upon the approval by the CBRC on April 12, 2006.
The Articles of Association comply with the Mandatory Provisions, except for certain provisions, LR 19A.27(2) which are diÅerent from the Mandatory Provisions but in compliance with the laws or regulations that supersede the Mandatory Provisions in terms of legislative superiority, or were amended based on the actual situations of our bank with necessary approvals from the relevant regulatory authorities. We have been advised by our PRC legal counsel, Jun He Law OÇces, that those exceptions do not violate the applicable PRC laws and regulations.
Directors and other senior oÇcers Power to allot and issue shares There is no provision in the Articles of Association empowering the directors to allot and issue shares.
Proposals to increase capital of our bank must be submitted for approval by the shareholders' A1A(7)(6) meeting. Any such increase is subject to prior approval of relevant regulatory authorities of PRC.
Power to dispose of Ñxed assets of our bank Without the prior approval of the general shareholders' meeting, the board of directors may not dispose or agree to dispose the Ñxed assets where the sum of the expected value of the consideration for the proposed disposal and the value of the consideration for disposed Ñxed assets in the four months period immediately preceding the proposed disposal exceeds 33% of the value of the Ñxed assets shown in the last balance sheet presented at the general shareholders' meeting. A disposal of Ñxed assets in this context shall include the assignment of certain interest in assets other than by way of providing security interest by using Ñxed assets as collaterals. The validity of transactions whereby our bank disposes of Ñxed assets shall not be aÅected by the breach of the above paragraph hereof.
Emoluments, compensation or payments for loss of oÇce Our bank shall execute a written contract with each director and supervisor of our bank concerning his/her emoluments. Such a contract shall be approved by the shareholders' meeting before it is entered into. The above-mentioned emoluments shall include:
¬ emoluments in respect of his/her service as a director, supervisor or senior management personnel of our bank;
¬ emoluments in respect of his/her service as a director, supervisor or senior management personnel of a subsidiary of our bank;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ emoluments otherwise in connection with the provision of management or other services to our bank or any subsidiary thereof; and
¬ funds as compensation for his/her loss of oÇce or retirement to the aforementioned directors and supervisors.
A director or supervisor may not sue our bank for his/her beneÑts due to him/her on the basis of the above-mentioned matters, except under a contract as mentioned above.
The contract concerning the emoluments between our bank and each director or supervisor of our bank should provide that in the event of a takeover of our bank, a director or supervisor of our bank shall, subject to prior approval of the shareholders' general meeting, have the right to receive the compensation or other funds obtainable for loss of oÇce or retirement.
For the purposes of this paragraph, the term ""a takeover of our bank ""shall refer to any of the following circumstances:
¬ anyone makes a tender oÅer to all the shareholders; or
¬ anyone makes a tender oÅer so that the oÅeror becomes a controlling shareholder as deÑned in the Articles of Association.
If the relevant director or supervisor has failed to comply with this Article of Association, any fund received by him/her shall belong to those persons that have sold their shares as a result of their acceptance of the above-mentioned oÅer, and the expenses incurred in distribution of such fund on a pro rata basis shall be borne by the relevant director or supervisor and may not be paid out of such fund.
Loans to Directors, Supervisors, the President and other senior oÇcers
Our bank may provide loans, loan guarantee to its related parties, provided such provisions of loans and loan guarantees are preconditioned on ordinary commercial terms; our bank shall not provide loans to its related parties on terms and conditions more favorable than the similar types of loans provided to other borrowers.
The related parties stated above shall mean:
¬ the directors, supervisors, management personnel, credit/borrowing staÅs of our bank and their respective lineal relatives;
¬ companies, enterprises and other economic entities in which the above mentioned persons invest in or hold senior management positions.
Financial assistance for the acquisition of our shares
Our bank or its subsidiaries shall not at any time provide any Ñnancial assistance in any form to purchasers or prospective purchasers of the shares in our bank. Such purchasers of our bank's shares referred to above shall include persons that directly or indirectly undertake obligations for the purpose of purchasing shares in our bank.
Our bank or its subsidiaries shall not at any time provide any Ñnancial assistance in any form to the above obligators in order to reduce or discharge their obligations.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
However, the acts listed below are not prohibited:
¬ where our bank provides the relevant Ñnancial assistance truthfully for the beneÑt of our bank and the main purpose of the Ñnancial assistance is not to purchase shares in our bank, or the Ñnancial assistance is an incidental part of an overall plan of our bank;
¬ lawful distribution of our bank's property in the form of dividends;
¬ distribution of dividends in the form of shares;
¬ reduction of registered capital, buy-back of shares, shareholding structure adjustment, etc., in accordance with the Articles of Association of our bank;
¬ provision of a loan by our bank within its scope of business and in the ordinary course of its business (provided that the same does not lead to a reduction in the net assets of our bank or that if the same constitutes a reduction, the Ñnancial assistance is paid out of our bank 's distributable proÑts); and
¬ the provision of funds by our bank for an employee shareholding plan (provided that the same does not lead to a reduction in the net assets of our bank or that if the same constitutes a reduction, the Ñnancial assistance is paid out of our bank 's distributable proÑts). For these purposes:
¬ ""Ñnancial assistance'' shall include but not limited to: Ì gift; Ì guarantee (including the undertaking of liability or provisions of property by the guarantor in order to secure the performance of the obligation by the obligator), indemnity (not including, however, indemnity arising from our bank 's own fault) and release or waiver of rights; Ì provision of a loan or conclusion of a contract under which the obligations of our bank are to be fulÑlled prior to the obligation of performance by the other party to the contract, or a change in the party to such loan or contract as well as the assignment of rights under such loan or contract; and Ì Ñnancial assistance in any other form when our bank is insolvent or has no net assets or when such assistance would lead to a major reduction in our bank 's net assets.
¬ ""undertake obligations'' shall include the undertaking of an obligation by the obligator by concluding a contract or making an arrangement (whether or not such contract or arrangement is enforceable and whether or not such obligation is undertaken by the obligator individually or jointly with any other person) or by changing its Ñnancial position in any other way.
Disclosure of contractual interests with us A1A(7)(1) In cases where a director of our bank, a supervisor, the president and other senior management personnel has directly or indirectly vested a material interest in any contract, transaction or arrangement concluded or planned by our bank (except his/her engagement contract with our bank), he/she shall disclose the nature and extent of his/her interest to the board of directors and the board of supervisors at the earliest opportunity, whether or not the matter is normally subject to the approval of the board of directors.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Unless the interested director, supervisor, president or other senior management personnel of our bank has disclosed such interest to the board of directors as required under the preceding paragraph hereof and the matter has been approved by the board of directors at a meeting in which he/she was not counted in the quorum and was abstained from voting, our bank shall have the right to revoke the contract, transaction or arrangement, except the other party is a bona Ñde party acting without knowledge of the breach of obligation by the director, supervisor, president or other senior management personnel concerned. If a director, a supervisor, president or other senior management personnel of our bank gives a written notice to the board of directors before the conclusion of the contract, transaction or arrangement is Ñrst considered by our bank, stating that due to the contents of the notice, he/she has an interest in the contract, transaction or arrangement that may subsequently be made by our bank, such director, supervisor, president or other senior management personnel shall be deemed for the purposes of the above paragraphs hereof to have declared his/her interest, insofar as attributable to the scope stated in the notice.
Remuneration 3rd Sch 5 A1A(7)(2) The remuneration of Directors shall be approved by shareholders at the shareholders' general meeting, as referred to under the paragraph headed ""Emoluments, Compensation or Payments for loss of oÇce'' above.
Retirement, appointment and removal Our bank shall establish a board of directors. The Board shall be composed of Ñve to 17 directors, where not less than three of the directors shall be independent directors and no more than one-third of the directors shall serve as the president, vice president or hold other management positions. The Board shall have one chairman of the Board and one vice chairman. Directors shall be elected or replaced by the shareholders' meeting and serve a term of oÇce of three years. A director may serve consecutive terms if re-elected upon the expiration of his/her term. The shareholders' meeting may remove by ordinary resolution any directors (but without prejudice to any claims for damages under any contracts) prior to the expiration of the term of such directors.
Directors are not required to hold shares of our bank. A1A(7)(5) None of the following persons may serve as a director, supervisor, president or other senior management personnel of our bank:
¬ persons without capacity or with limited capacity for civil acts;
¬ persons who have been sentenced for crimes for corruption, bribery, encroachment or embezzlement of property or disruption of the social or economic order where Ñve years have not lapsed following the serving of the sentence, or persons who were deprived of their political rights for committing a crime where Ñve years have not lapsed following the serving of the sentence;
¬ directors, or factory directors or managers who bear personal liability for the bankruptcy or liquidation of their companies or enterprises due to mismanagement where three years have not lapse of following the date of completion of such bankruptcy or liquidation;
¬ the legal representatives of companies or enterprises that had their business licenses revoked for breaking the law, where such representatives bear individual liability therefor and three years have not lapsed following the date of revocation of such business licenses;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ persons that have been removed from oÇce by any other commercial banks or institutions for failure to perform their Ñduciary duty and to honestly and diligently perform their duties;
¬ persons that used to serve as principal oÇcers of high-risk Ñnancial institutions and that are unable to prove they are not liable for the cancellation or loss of assets of such Ñnancial institutions;
¬ individuals or employees of enterprises that have failed to repay their overdue loans to our bank;
¬ persons with relatively heavy individual debts that have not been settled upon maturity;
¬ persons whose cases have been established for investigation by the judicial authorities as a result of violation of the criminal law, and have not been closed;
¬ persons who may not act as leaders of enterprises by virtue of laws and administrative regulations;
¬ non-natural persons;
¬ persons who are banned by CBRC to serve as a director, supervisor, president or other senior management personnel of banking and Ñnancial entities;
¬ persons who are currently banned from the market by the securities regulatory authority of the State Council and have not been released yet; and
¬ persons who have been ruled by relevant competent authority as having violated securities-related laws or regulations, where such violation involved fraudulent or dishonest acts and Ñve years have not lapsed following the date of the ruling. The validity of an act of a director, president or other senior management personnel of our bank on behalf of our bank towards a bona Ñde third party shall not be aÅected by any irregularity in his/her current position, election or qualiÑcations. Any shareholder, who holds by himself or jointly with others 5% or more of the total number of voting shares of our bank may recommend candidates for directors by submitting a written proposal to the shareholders' meeting, provided the number of candidates nominated shall be in accordance with the provisions of the Articles of Association and not exceed the number to be elected. Shareholders' meeting shall vote on each candidate for director separately. A director shall attend personally at least two thirds of the meeting of the board of directors' each year. The director shall be deemed to be incapable of fulÑlling his/her duty if he/she fails to attend the board meeting either personally or by entrusting other directors to attend on his/her behalf twice consecutively, the board of directors shall propose to the shareholders' meeting to replace such directors.
There is no provision in the Articles of Association regarding retirement or non-retirement of A1A(7)(4) directors under an age limit. The following persons shall be prohibited from holding the position of an independent director:
¬ persons holding a position in our bank or entities in which our bank controls majority shares or is the de facto controller;
¬ shareholders who hold 1% or more of all the voting shares of our bank, or such shareholders' controlling shareholder or de facto controller, or any persons holding a position in the aforesaid entity shareholders (excluding the position of independent director);
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ persons who hold a position (excluding the position of independent director) in our bank or entities in which our bank controls majority shares or has de facto control in a three-year period prior to being appointed to such position;
¬ persons who hold a position in enterprises owing overdue loans to our bank;
¬ persons who hold a position in entities that have business connection or interests with our bank in areas of law, accounting, audit and management consultation, etc.;
¬ other persons who may be controlled or materially inÖuenced through various ways by our bank;
¬ the close relatives of the above persons (the term ""close relatives'' refers to spouses, parents, children, grandparents and siblings);
¬ other persons speciÑed or determined by CBRC, the regulatory authorities of the place of listing and other regulatory authorities. The term of oÇce of independent directors shall be three (3) years. An independent director may serve no more than two consecutive terms if re-elected upon the expiration of his/her term. If an independent director fails to attend the board meeting personally for three times consecutively, the board of directors shall propose to the shareholders' meeting to replace such independent director. Independent directors shall be elected through methods set forth below:
¬ Our bank's board of directors, board of supervisors and shareholders who severally or jointly hold no less than 1% of the voting shares in our bank may nominate candidates for independent director. The independent directors shall be decided through election by shareholders' meeting;
¬ The consent of the nominees shall be obtained before nominating such persons as independent directors. The nominator shall be fully aware of such details of the nominee as his/her occupation, educational background, professional title, career details, and all concurrent positions, etc., and shall declare his/her opinion on the nominee's qualiÑcation and independence for holding the position as an independent director. The nominee shall make a public statement that no relationship between himself and our bank will aÅect his/her independent decision making and objective judgment.
¬ Our bank's board of directors shall make the afore-mentioned information public in accordance with applicable regulations and stipulations before the convening of the shareholders' meeting at which the independent directors is to be elected.
¬ Our bank shall simultaneously submit relevant materials of all the nominees to CBRC after the convening of the shareholders' meeting at which the independent director is to be elected.
Duties In addition to obligations imposed by laws, administrative regulations or listing rules of the stock exchange(s) on which shares of our bank are listed, our bank's directors, supervisors, president and other senior management personnel shall have the following obligations to each shareholder in the exercise of the functions and powers granted to them by our bank:
¬ not to cause our bank to act beyond the scope of business stipulated in its business license;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ to act honestly in the best interests of our bank;
¬ not to deprive our bank of its property in any way, including (but not limited to) any opportunities that are favorable to our bank; and
¬ not to deprive any shareholders of their individual rights or interests, including (but not limited to) rights to distributions and voting rights, unless pursuant to a restructuring of our bank submitted to and adopted by the shareholders' general meeting in accordance with the Articles of Association.
Our bank's directors, supervisors, president and other senior management personnel shall have an obligation, in the exercise of their rights or discharge of their obligations, to perform their acts with due care, diligence and skills as a reasonable and prudent person should do under similar circumstances.
Our bank's directors, supervisors, president and other senior management personnel must, in the exercise of their duties, abide by the principles of honesty and credibility and shall not place themselves in a position where there is a conÖict between their personal interests and their duties. This principle shall include (but not limited to) the fulÑllment of the following obligations:
¬ to act honestly in the best interests of our bank;
¬ to exercise powers within the scope of their functions and powers and not to act beyond such powers;
¬ to personally exercise the discretion invested to him/her, not to allow himself/herself to be manipulated by another person and, not to delegate the exercise of his/her discretion to another party unless permitted by laws and administrative regulations or with the consent of the shareholders' general meeting that has been informed;
¬ to be impartial to shareholders of the same category and fair to shareholders of diÅerent categories;
¬ not to conclude a contract or enter into a transaction or arrangement with our bank except as otherwise provided in the Articles of Association or with the consent of the shareholders' general meeting that has been informed, except for those falling within our bank's ordinary business scope and in compliance with our bank's rules for management of related-party transactions;
¬ not to use our bank's property for his/her own beneÑt in any way without the consent of the shareholders' general meeting that has been informed;
¬ not to use his/her functions and powers as a means to accept bribes or other forms of illegal income, and not to illegally appropriate our bank's property in any way, including (but not limited to) any opportunities that are favorable to our bank;
¬ not to accept commissions in connection with our bank's transactions without the consent of the shareholders' general meeting that has been informed;
¬ to abide by the Articles of Association, perform his/her duties faithfully, protect the interests of our bank and not to seek personal gain with his position, functions and powers in our bank;
¬ not to compete with our bank in any way without the consent of the shareholders' general meeting that has been informed;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ not to embezzle our bank's funds or lend them to others in violation of applicable regulations, not to deposit our bank's assets in accounts opened in his/her own or in another's name, not to illegally use our bank's assets to provide security interest for the debts of our bank shareholders or other individuals; and
¬ not to disclose conÑdential information relating to our bank that was acquired by him/her during his/her term of oÇce without the consent of the shareholders' general meeting that has been informed, and not to use such information except for the interests of our bank; however, such information may be disclosed to the court or other government authorities if: Ì required by law; Ì required in the public interest; or Ì required in the own interest of such director, supervisor, president or other senior management personnel. A director, a supervisor, the president or other senior management personnel of our bank may not procure the following persons or organizations (""Connected Persons'') to do what such director, supervisor, president or other senior management personnel may not do:
¬ the spouse or minor children of such director, supervisor, president or other senior management personnel of our bank;
¬ the trustee of a director, supervisor, president or other senior management personnel of our bank or of any person referred in the aforesaid item hereof;
¬ the partner of a director, supervisor, president or other senior management personnel of our bank or of any person referred in aforesaid two items hereof;
¬ a company over which a director, supervisor, president or other senior management personnel of our bank, individually or jointly with any person referred to in aforesaid three items hereof or any other director, supervisor, president or other senior management personnel of our bank, has actual control; and
¬ a director, a supervisor, the president or other senior management personnel of the company being controlled as referred to in aforesaid item hereof. The obligation and credibility of our bank's directors, supervisors, president and other senior management personnel does not necessarily cease with the termination of their term of oÇce. Their conÑdentiality obligation in relation to our bank's trade secrets shall remain upon termination of their term of oÇce. The term for continuance of other obligations shall be decided upon in accordance with the principle of fairness, depending on the time lapse between the termination and the occurrence of the matter as well as the circumstances and conditions under which the relationship with our bank terminates. If a director, a supervisor, the president or other senior management personnel of our bank breaches his/her obligations to our bank, our bank shall, in addition to any rights and remedies provided by laws and administrative regulations, have a right to:
¬ require the relevant director, supervisor, president or other senior management personnel to compensate for the losses sustained by our bank as a consequence of his/her dereliction of duty;
¬ rescind any contract or transaction concluded by our bank with the relevant director, supervisor, president or other senior management personnel and contracts or with a third party (where such third party is aware or should be aware that the director, supervisor,
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
president or other senior management personnel representing our bank was in breach of his/her obligations to our bank);
¬ require the relevant director, supervisor, president or other senior management personnel to surrender the gains derived from the breach of his/her obligations;
¬ recover any funds received by the relevant director, supervisor, president or other senior management personnel that should have been received by our bank, including (but not limited to) commissions; and
¬ require the relevant director, supervisor, president or other senior management personnel to return the interest earned or possibly earned on the funds that should have been given to our bank.
A director, a supervisor, president or other senior management personnel of our bank may be relieved from liability for a speciÑc breach of obligations by the shareholders' general meeting which has been fully informed, except the circumstances as speciÑed in the Articles of Association.
Borrowing powers A1A(7)(3) 3rd Sch 22 The Articles of Association do not speciÑcally provide for the manner in which borrowing powers may be exercised nor do they contain any speciÑc provision in respect of the manner in which such borrowing powers may be amended, except for:
¬ provisions which authorize directors to formulate proposals for the issuance of debentures and other securities by our bank; and
¬ provisions which provide that the issuance of debentures and other securities shall be approved by the shareholders' meeting by a special resolution.
Amendment of constitutional documents
Our bank may amend the Articles of Association in accordance with laws, administrative regulations and the provisions of the Articles of Association.
Our bank shall amend the Articles of Association if any of the following circumstances occurs:
¬ if any terms contained in the Articles of Association becomes inconsistent with the provisions of the amended laws and administrative regulations after the PRC Company Law, PRC Commercial Banking Law or other relevant laws and regulations are amended;
¬ if certain changes of our bank occur resulting in the inconsistence with certain terms speciÑed in the Articles of Association; or
¬ if the shareholders' meeting adopts a resolution to amend the Articles of Association.
Amendments of the Articles of Association passed by the resolution of shareholders' meeting shall be subject to the approval of relevant authorities. Where an amendment involves matters provided for in the Mandatory Provisions, it shall be subject to the approval of the approval authority for corporate matters authorized by the State Council and the securities regulatory authority of the State Council. Where an amendment in the Articles of Association shall be subject to registration, our bank shall register the amendment according to law.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Variation of rights of existing shareholders of diÅerent categories A1A(25)(3) 3rd Sch 20 Shareholders who hold diÅerent categories of shares in our bank shall be shareholders of diÅerent categories. Shareholders of diÅerent categories shall enjoy rights and assume obligations in accordance with laws, administrative regulations and the Articles of Association. In addition to shareholders of other categories of shares, shareholders of domestic investment shares and foreign investment shares listed outside the PRC shall be deemed as shareholders of diÅerent categories of shares. The shares of our bank held by the founding shareholder(s) are ordinary shares that may be tradable both onshore and oÅshore and enjoy the same and equal rights with all other shares. Upon the approval of the State Council or its authorized approving authorities, such ordinary shares may be totally or partially transferred or converted to foreign investment shares and become publicly tradable on overseas stock exchange. The transfer or conversion of the shares of our bank held by the founding shareholder(s) to foreign investment shares does not need the approval from the regulatory authorities of the place of listing or the approval of other shareholders of our bank. Any proposal by us to change or abrogate the rights of shareholders of diÅerent categories, shall be approved by the shareholders' meeting by a special resolution and by a separate shareholders' meeting convened by the aÅected shareholders of diÅerent categories in accordance with the Articles of Association. However, any change or abolition of any right of shareholders of certain category resulting from a change of domestic or overseas laws, administrative regulations, or rules of the place of listing or any decisions or orders announced by domestic or overseas regulatory authorities does not need to be approved by shareholders meeting or at separate meeting of categorized shareholders. The rights of shareholders of a certain category shall be deemed to have been changed or abrogated in the following conditions:
¬ an increase or decrease in the number of shares of such category or an increase or A1A(25)(1) decease in the number of shares of a category having voting rights, distribution rights or other privileges equal or superior to those of the shares of such category;
¬ a change of all or part of the shares of such category into shares of another category, a change of all or part of the shares of another category into shares of such category or the grant of the right to such change;
¬ a removal or reduction of rights to accrued dividends or cumulative dividends attached to shares of such category;
¬ a reduction or removal of a dividend preference or property distribution preference during liquidation of our bank, attached to shares of such category;
¬ an addition, removal or reduction of share conversion rights, options, voting rights, transfer A1A(25)(1) rights, preemptive rights to rights issues or rights to acquire securities of our bank attached to shares of such category;
¬ a removal or reduction of rights to receive amounts payable by our bank in a particular currency attached to shares of such category;
¬ a creation of a new category of shares with voting rights, distribution rights or other A1A(25)(1) privileges equal or superior to those of the shares of that category;
¬ an imposition of restrictions or additional restrictions on the transfer or ownership of shares of such category;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ an issuance of rights to subscribe for, or convert into, shares of such category or other categories;
¬ an increase in the rights and privileges of shares of other categories;
¬ restructuring of our bank causes shareholders of diÅerent categories to bear liability to diÅerent extents during the restructuring; or
¬ an amendment or cancellation of ""special voting procedures for shareholders of diÅerent categories'' as contained in the Articles of Association. Interested shareholders(as deÑned below) shall not have the right to vote at meetings of shareholders of diÅerent categories.
Resolutions of a meeting of shareholders of diÅerent categories may be passed only by two- LR 19A.42(56) thirds or more of the voting rights of that category represented at the meeting who are entitled to vote at meetings of shareholders of diÅerent categories. When our bank is to convene a meeting of shareholders of diÅerent categories, it shall issue a written notice 45 days prior to the meeting informing all the registered shareholders of that category of the matters to be examined at the meeting as well as the date and place of the meeting. Shareholders that intend to attend the meeting shall, within 20 days prior to the day of the meeting, deliver a written reply to our bank on meeting attendance. The notice of a meeting of shareholders of diÅerent categories needs to be delivered only to the shareholders entitled to vote thereat. The procedures according to which a meeting of shareholders of diÅerent categories is held shall, to the extent possible, be identical to the procedures according to which a shareholders' meeting is held. Provisions of the Articles of Association relevant to procedures for the holding of a shareholders' meeting shall be applicable to meetings of shareholders of diÅerent categories. The special voting procedures for shareholders of diÅerent categories shall not apply in the following circumstances:
¬ where, as approved by way of a special resolution of the shareholders' meeting, our bank issues, either separately or concurrently, domestic investment shares and foreign investment shares listed outside the PRC every 12 months, and the number of the domestic investment shares and foreign investment shares listed outside the PRC intended to be issued does not exceed 20% of the issued and outstanding shares of the respective categories; or
¬ where the plan for issuance of domestic investment shares and foreign investment shares listed outside the PRC is completed within 15 months since being approved by the securities regulatory authorities of the State Council;
¬ the shares of our bank held by founding shareholder(s) are transferred or converted to foreign investment shares upon the approval of the State Council or its authorized approving authorities and publicly tradable on overseas stock exchange. For the purposes of the provisions of the rights of shareholders of diÅerent categories, the ""interested shareholders'' shall have the following meanings:
¬ if our bank has made a buy-back oÅer to all shareholders in the same proportion or has bought back its own shares through open transactions on a stock exchange in accordance with the Articles of Association, the controlling shareholders as deÑned in the Articles shall be ""interested shareholders'';
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ if our bank has bought back its own shares by an agreement outside a stock exchange in accordance with the Articles of Association, shareholders of share in relation to such agreement shall be ""interested shareholders''; or
¬ under a restructuring proposal of our bank, shareholders who will bear liability in a proportion smaller than that of the liability borne by other shareholders of the same category, or shareholders who have an interest in a restructuring proposal of our bank that is diÅerent from the interest in such restructuring proposal of other shareholders of the same category shall be ""interested shareholders''.
Resolutions-majority required Resolutions of shareholders' meeting are divided into ordinary resolutions and special resolutions. Ordinary resolutions made by shareholders' meeting shall be adopted by more than half of voting shares represented by the shareholders attending the shareholders' meeting (including their proxies). Special resolutions made by shareholders' meeting shall be adopted by two-thirds(2/3) or more of voting shares represented by the shareholders attending the shareholders' meeting (including their proxies).
Voting rights (generally, on a poll and right to demand a poll) A1A(13A) A1A(25)(1) Shareholders (including their proxies) exercise voting rights according to the voting shares they hold, and each share shall have one voting right. But the shares of our bank held by our bank shall not carry voting right. Votes of the shareholders' meeting shall be taken by raising hands for resolutions, unless requested by the listing rules of the place where our banks' shares are listed or the following persons require voting by poll before or after any vote by raising hands for resolutions:
¬ the chairman of the meeting;
¬ at least two shareholders with voting rights or their proxies; or
¬ one or several shareholders (including proxies) holding jointly or separately 10% or more of the shares carrying the right to vote at the meeting. Unless somebody proposes voting by ballot, the chairman of the meeting shall declare whether the proposal has been adopted according to the results of the vote by raising hands, and shall record the same in the minutes of the meeting, which shall serve as the Ñnal evidence without having to state the number or proportion of the votes for or against resolution adopted at the meeting. The demand for a vote by ballot may be withdrawn by the person who made it. If the matter demanded to be voted by ballot is the election of the chairman or the adjournment of the meeting, a ballot shall be taken immediately. If a ballot is demanded for any other matters, such ballot shall be taken at the time decided upon by the chairman and the meeting may proceed with the discussion of other matters; the result of the ballot shall still be regarded as a resolution passed at that meeting.
When a ballot is held, shareholders (including proxies) having the right to two or more votes LR 19A.42(56) need not use all of their voting rights in the same way.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
When the number of votes for and against a resolution is equal, regardless whether the vote is taken by raising hands or by ballot, the chairman of the meeting shall be entitled to one additional vote.
Requirements for annual shareholders' meeting Annual shareholders' meeting shall be held once a year within six months after the end of the last Ñscal year and shall be convened and presided over by the chairman of the Board.
Accounts and audit Our bank shall formulate its accounting system in compliance with laws, administrative regulations and relevant stipulations in the general accepted accounting principles of China formulated by the Ñnancial regulatory authorities and the regulations promulgated by the CBRC. The board of directors of our bank shall submit to the shareholders at each shareholders' general meeting such Ñnancial reports as relevant laws, administrative regulations and normative documents promulgated by the local government and the authorities-in-charge require our bank to prepare. The Ñnancial reports of our bank shall be made available for inspection by shareholders 20 days prior to an annual shareholders' meeting. Each shareholder of our bank shall have the right to obtain a copy of the Ñnancial reports. The Ñnancial statements of our bank shall be prepared not only in accordance with the PRC general accepted accounting principles, laws and regulations but also in accordance with IFRS or the accounting standards of the place(s) outside the PRC where shares of our bank are listed. If there are major diÅerences in the Ñnancial statements prepared in accordance with these two sets of accounting principles, such diÅerences shall be stated in the notes appended to such Ñnancial statements. For purposes of our bank's distribution of after-tax proÑts in a given Ñscal year, the smaller amount of after-tax proÑts shown in the above-mentioned two kinds of Ñnancial statements shall govern. Interim results or Ñnancial information published or disclosed by our bank shall be prepared in accordance with PRC GAAP, laws and regulations as well as IFRS or the accounting standards of the place(s) outside the PRC where shares of our bank are listed. Our bank shall publish two Ñnancial reports each Ñscal year, namely an interim Ñnancial report within 60 days after the end of the Ñrst six months of the Ñscal year and an annual Ñnancial report within 120 days after the end of the Ñscal year.
Notice of meetings and business to be conducted thereat There are two types of shareholders' meetings: the annual shareholders' meetings and the extraordinary shareholders' meetings. The extraordinary shareholders' meeting shall be convened within two (2) months upon the occurrence of any of the following events:
¬ the number of directors is less than the number stipulated by PRC Company Law or less than two-third of the number required by the Articles of Association;
¬ the outstanding balance of our bank's loss that had not been made-up reaches one-third of our bank's total paid-in share capital;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ shareholder(s) who holds (or hold) severally or jointly with others ten percent (10%) or more of our bank's shares presents a request to convene an extraordinary shareholders' meeting;
¬ the board of directors deems it as necessary or the board of supervisors proposes that the meeting be convened;
¬ at least half (no less than two) of independent directors propose that the meeting be convened;
¬ at least half (no less than two) of external supervisors propose that the meeting be convened. Any shareholders who hold, severally or jointly with others, 3% or more voting shares of our bank shall have the right to propose and submit in writing to the board of directors special proposals 10 days prior to the convening of shareholders' meeting. Our bank shall notify other shareholders within 2 days of receipt of such proposals and include in the agenda for the meeting the matters in the proposals that fall within the scope of duties of the shareholders' meeting. When our bank is to convene a shareholders' meeting, it shall issue a written notice 45 days prior to the meeting, informing all the registered shareholders of the matters to be examined at the meeting as well as the date and place of the meeting. Shareholders that intend to attend the shareholders' meeting shall, within 20 days prior to the meeting, deliver a written reply to our bank on the meeting attendance. The notice of a shareholders' meeting shall be delivered to the shareholders (whether or not entitled to vote on the shareholders' meeting) by courier or per-paid mail to the recipient's address shown in the register of shareholders. For shareholders of domestic investment shares, the notice of a shareholders' meeting may also be given by public announcement. The public announcement referred to in the preceding paragraph shall be published in one or more newspapers or periodicals or other recognized mass media designated by the securities regulatory authorities of the State Council or the securities regulatory authorities of the place of listing during the period between 45 and 50 days before the meeting is held. Once the announcement is made, all shareholders of domestic investment shares shall be deemed to have received the notice of the relevant shareholders' meeting. A meeting and the resolutions adopted to thereof shall not be invalidated as a result of accidental omission to give notice of the meeting to, or the failure of receiving such notice by, a person entitled to receive such notice. The notice of a shareholders' meeting shall meet the following requirements:
¬ it shall be made in writing;
¬ it shall specify the place, date and time of the meeting;
¬ it shall state the date on which equity of shareholders entitled to attend shareholders' meeting is registered;
¬ it shall describe the matters to be discussed at the meeting;
¬ it shall provide necessary information and explanations to the shareholders so as to enable them fully understand the matters to be discussed and make decisions accordingly. This principal shall apply (but not limited to) when our bank proposes a merger, buy-back of shares, reorganization of share capital or other restructuring, it shall provide the speciÑc
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
conditions and contracts (if any) of the transaction under discussions and earnestly explain the cause and result of the transaction;
¬ it shall disclose the nature and extent of conÖict of interests, if any, of any director, supervisor, president or other senior management personnel in any matter to be discussed; and provide an explanation of the diÅerences, if any, between the way in which the matter to be discussed would aÅect such director, supervisor, president or other senior management personnel in his/her capacity as shareholders and the way in which such matter would aÅect other shareholders of the same category;
¬ it shall contain the full text of any special resolutions proposed to be adopted at the meeting;
¬ it shall contain a conspicuous statement that shareholders entitled to attend and vote have the right to entrust one or more proxies to attend and vote on their behalf and that such proxy need not be a shareholder;
¬ it shall state the time and place for the delivery of the meeting's proxy's forms; and
¬ the name and telephone number of the permanent contact person for the meeting. Based on the written replies received 20 days prior to a shareholders' meeting, our bank shall calculate the number of voting shares represented by the shareholders intending to attend the meeting. If the number of voting shares represented by the shareholders intending to attend the meeting is half or more of the total number of our bank's voting shares, our bank may convene the shareholders' meeting. If not, our bank shall within Ñve days inform the shareholders once again of the matters to be examined at the meeting as well as the date and place of the meeting in the form of a public announcement. Upon notiÑcation by public announcement, our bank may convene the shareholders' meeting. Relevant public announcement shall be published in newspaper in compliance with relevant provisions. Extraordinary shareholders' meeting may not decide on matters not speciÑed in the notice or announcement. Without the prior approval of the shareholders' meeting by means of special resolution, our bank may not conclude any contract with any person other than a director, supervisor, president or other senior management personnel of our bank for the delegation of the whole business management or part of the important business management of our bank to such person. Resolutions on the following items shall be adopted in the form of ordinary resolutions by a shareholders' meeting:
¬ Working report of the board of directors and the board of supervisors;
¬ Plans made by the board of directors on proÑt distribution and loss make-up;
¬ Nomination and removal of members of the board of directors and the board of supervisors (except for the employee representative supervisors), and their remunerations and methods of payment;
¬ Annual budget, Ñnal accounts, balance sheet, proÑt statement and other Ñnancial statements of our bank;
¬ Engagement or dismissal or cessation of engagement of accounting Ñrms; and
¬ Items other than those stipulated by laws, administrative regulations or the Articles of Association to be adopted by special resolutions.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
The following items shall be adopted in the form of special resolutions:
¬ Increase or reduction of our bank's registered capital or issuance of any category of A1A(7)(6) shares, warrants of share subscription or other similar securities;
¬ Issuance of our bank's bonds;
¬ Plans of issuance of other securities or public listing;
¬ Purchase or sale of material assets or provision of security interest with an amount of more than 30% of our bank's total assets value within one year period;
¬ Division, merger, dissolution, liquidation or change of organizational form of our bank;
¬ Amendment to the Articles of Association;
¬ Repurchase of shares of our bank; and
¬ Other matters stipulated by the Articles of Association and decided in ordinary resolutions adopted by the shareholders' meeting as having signiÑcant impact on our bank and requiring adoption by way of special resolutions.
Transfer of shares
Unless otherwise provided by laws and administrative regulations or required by the CBRC, our A1A(7)(8) bank's shares may be transferred according to law free of any encumbrances. For all fully-paid H- A1A(7)(9) shares listed on the Hong Kong Stock Exchange, if the conditions stipulated in the Articles of Association are not met, the board of directors may refuse to accept any transfer instrument without stating any reasons. Any changes to or correction of any parts of the register of shareholders shall be conducted in accordance with the laws of the place where such parts of the register of shareholders are kept. No changes resulting from share transfers may be made to the register of shareholders within 30 days prior to a shareholders' general meeting or 5 days prior to the record date set by our bank for the purpose of distribution of dividends. If any entity or individual purchases Ñve percent (5%) or more of the total outstanding shares of our bank, the approval from CBRC shall be obtained in advance.
Power of our bank to purchase our own shares If permitted under applicable laws, administrative regulations and the listing rules of the place of listing, after being approved under the procedures stipulated by the Articles of Association and obtaining approvals from CBRC and other relevant regulatory authorities, our bank may repurchase shares of our bank in the following circumstances:
¬ To cancel the shares for the purpose of reducing the registered capital of our bank;
¬ To merge with other companies holding the shares of our bank.
¬ To give the shares to employees as awards;
¬ To be requested to repurchase the shares held by the shareholders who object to the resolutions adopted at the shareholders' meeting concerning consolidation and division of our bank;
¬ Other circumstances where laws and administrative regulations so permit.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
The repurchase of our bank's shares, upon the approval by relevant State authorities, may be conducted in any of the following manners:
¬ making a buy-back oÅer pro rata to all shareholders;
¬ buy-back through open transactions in a stock exchange; or
¬ buy-back through contractual arrangements outside a stock exchange. When our bank is to buy back shares through contractual arrangements outside a stock exchange, prior approval shall be obtained from the shareholders' general meeting in accordance with the procedures provided in the Articles of Association. Upon prior approval of the shareholders' general meeting obtained in the same manner, our bank may rescind or change contracts concluded in the manner set forth above or waive any of its rights under such contracts. For the purposes of the above paragraph, contracts for the buy-back of shares shall include (but not limited to) agreements whereby buy-back obligations are undertaken and buy-back rights are acquired. Our bank may not assign contracts for the buy-back of its own shares or any of its rights thereunder. Our bank shall apply to the SAIC for the change of the registered capital registration in the event that the repurchased shares are cancelled due to the repurchase thereof. The amount of our bank's registered capital shall be reduced by the total par value of the shares so cancelled. Unless our bank has already entered the liquidation stage, it must comply with the following provisions in buying back its issued and outstanding shares:
¬ where our bank buys back shares at their par value, the amount thereof shall be deducted from the book balance of distributable proÑt and/or from the proceeds of a new share issuance made to buy back the old shares;
¬ where our bank buy backs shares at a price higher than their par value, the portion corresponding to their par value shall be deducted from the book balance of distributable proÑt and/or from the proceeds of a new share issuance made to buy back the old shares; and the portion in excess of the par value shall be handled according to the following methods: Ì where the shares bought back were issued at their par value, the amount shall be deducted from the book balance of distributable proÑt; Ì where the shares bought back were issued at a price higher than their par value, the amount shall be deducted from the book balance of distributable proÑt and/or from the proceeds of a new share issuance made to buy back the old shares; however, the amount deducted from the proceeds of the new share issuance may not exceed the total premium obtained at the time of issuance of the old shares nor may it exceed the amount in our bank 's capital reserve funds account (including the premiums from the new share issuance) at the time of buy-back;
¬ the amount paid by our bank for the purposes set forth below shall be paid out of our bank's distributable proÑts: Ì acquisition of the right to buy back its own shares; Ì modiÑcation of any contract for buy-back of its own shares;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Ì release from any of its obligations under any buy-back contracts.
¬ After the par value of the cancelled shares has been deducted from the registered capital of our bank in accordance with relevant regulations, that portion of the amount deducted from the distributable proÑt and used to buy back shares at the par value shall be included in our bank's capital reserve account.
Power for our subsidiaries to own shares in our bank There are no provisions in the Articles of Association restricting the ownership of shares in us by any of our subsidiaries.
Dividends and other methods of proÑts distribution Our bank may distribute the dividends in the form of cash or shares. After our bank's shareholders' meeting adopts resolution of proÑt-distribution scheme, our bank shall eÅect the distribution of the dividends (or the shares) within two months after the shareholders' meeting. If the dividend is to be distributed in the form of shares, the distribution shall be eÅected within two months after the resolution has been adopted by the shareholders' meeting and reported to CBRC for approval. Any amount paid up in advance of calls on any shares may carry interest but shall not entitle the shareholder of the share to participate in the relevant dividend distribution subsequently declared. Our bank shall appoint recipient agents for shareholders of foreign investment shares listed outside the PRC to collect on behalf of the relevant shareholders the dividends distributed and other funds payable in respect of foreign investment shares listed outside the PRC. The recipient agents appointed by our bank for shareholders of foreign investment shares listed in Hong Kong shall be a company which is registered as a trust company under the Trustee Ordinance of Hong Kong.
After complying with relevant PRC laws, administrative regulations and rules, our bank may A1A(7)(7) expropriate dividends no one claimed for, but such right of expropriation shall only be exercised upon the expiration of six years or longer period after the date of announcement of such dividends, or the expiration of any other shorter applicable statutory limitation.
Proxies
Any shareholders entitled to attend and vote at a shareholders' meeting shall have the right to LR 19A.42(56) appoint one or more persons (who need not be shareholders) as his/her proxies to attend and vote on his/her behalf. Such proxy may exercise the following rights according to his/her entrustment by the shareholder:
¬ the shareholder's right to speak at the shareholders' meeting;
¬ the right to demand a ballot by himself/herself or in conjunction with others; and
¬ the right to vote by hand or by ballot, except that if a shareholder has appointed more than one proxy, the proxies may only exercise the voting rights by ballot. Shareholders shall entrust the proxy in writing, which shall be signed by the entrusting party or the agent authorized by the shareholders in writing. If the entrusting party is a legal person, the
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
instrument shall be sealed with the legal person's stamp or signed by its director or formally authorized agent. Legal person shareholders shall be represented by its legal representative or proxy entrusted by its legal representative to attend the meeting. Legal representative attending the meeting shall present his/her identiÑcation card, eÅective proof to his/her qualiÑcation as a legal representative and certiÑcate of shareholding. When a proxy is entrusted to attend the meeting, he/she shall present his/her identiÑcation card, written proxy or authorization letter issued by the legal representative of the legal person shareholder and certiÑcate of shareholding. The proxy letter issued by a shareholder to entrust proxy to attend shareholders' meeting shall contain the following contents:
¬ Name of the proxy;
¬ Proxy's voting right;
¬ Instructions on each item to be discussed on the agenda of shareholders' meeting, stating whether the shareholder agrees to, object to or abstain from voting the resolution respectively;
¬ Whether the proxy has voting right on special motions possibly to be put on the agenda of shareholders' meeting; if he/she has, speciÑc instructions on what kind of voting right he/she shall exercise;
¬ The issuing date of proxy letter and its eÅective period; and
¬ Signature or seal of the entrusting party or the proxy entrusted by it in writing; if the entrusting party is legal person, the proxy letter shall be sealed by it or signed by its director or duly authorized proxy. Any form issued by the board of directors of our bank to the shareholders for the appointment of proxies shall give the shareholders free choice to instruct their proxies to cast an aÇrmative or negative vote and enable the shareholders to give separate instructions on each matter to be voted during discussions at the meeting. The proxy letter shall specify that in the absence of instructions from the shareholder, the proxy may vote as he/she thinks Ñt. Where the entrusting party has died, lost capacity for acts, revocated the proxy or the signed instrument of appointment prior to the voting, or the relevant shares have been transferred prior to the voting, a vote given in accordance with the terms of proxy letter shall remain valid as long as our bank did not receive a written notice of the event before the commencement of the relevant meeting.
Calls on shares and forfeiture of shares There are no provisions in our Articles of Association relating to the making of calls on shares. Subject to certain conditions, our bank has right to sell the H Shares held by a shareholder, with whom we are unable to get into contact for a prescribed period of time.
Rights of shareholders (including inspection of register) Shareholders of ordinary shares of our bank shall enjoy rights as follows:
¬ Collect dividends and other kinds of interests distributed based on the number of shares held by them;
¬ Attend or entrust a proxy to attend shareholders' meetings;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ Exercise voting rights based on the number of shares held by them;
¬ Supervise the business operation of our bank, and make suggestions and enquiries accordingly;
¬ Transfer, donate or pledge shares held by the shareholders in compliance with laws, administrative regulations and the Articles of Association;
¬ Obtain relevant information in accordance with laws, regulations and the Articles of Association, including: Ì obtaining the Articles of Association after paying relevant cost; Ì inspecting and making copies of the following documents after paying reasonable costs: 1. Minutes of shareholders' meetings; 2. Status of share capital and counterfoil of bonds of our bank; 3. Financial and accounting reports and interim reports as well as annual reports which have been publicly announced by our bank; 4. all parts of the register of shareholders; 5. reports of the aggregate par value, number of shares, and highest and lowest prices of each category of shares bought back by our bank since the last Ñscal year as well as all the expenses paid by our bank therefor;
¬ Participate in the distribution of our bank's remaining assets based on the number of shares held by the shareholders when our bank is terminated or liquidated; and
¬ Other rights permitted by laws, administrative regulations and the Articles of Association.
Quorum for meetings and separate category meetings
Based on the written replies received 20 days prior to a shareholders' meeting, our bank shall LR 19A.42(56) calculate the number of voting shares represented by the shareholders intending to attend the meeting. If the number of voting shares represented by the shareholders intending to attend the meeting is more than half of the total number of our bank's voting shares, our bank may convene the shareholders' meeting. If not, our bank shall within Ñve days inform the shareholders once again of the matters to be examined at the meeting as well as the date and place of the meeting in the form of a public announcement. Upon notiÑcation by public announcement, our bank may convene the shareholders' meeting. Relevant public announcement shall be published in newspaper in compliance with relevant provisions. If the number of share carrying the right to vote at the meeting represented by the shareholders intending to attend the meeting is more than half of the total number of shares of that category carrying the right to vote at the meeting, our bank may hold the meeting of shareholders of diÅerent categories. If not, our bank shall within Ñve days inform the shareholders once again of the matters to be examined at the meeting and the date and place of the meeting in the form of a public announcement. Upon notiÑcation by public announcement, our bank may hold the meeting of shareholders of diÅerent categories. Relevant public announcement shall be published in newspapers in compliance with relevant provisions.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Rights of minority shareholders in relation to fraud or oppression In addition to obligations imposed by laws, administrative regulations or the listing rules of the stock exchange(s) on which the shares of our bank are listed, while exercising voting rights, the controlling shareholders shall not make such decisions to the detriment of all or part of the shareholders' interests as below:
¬ relieving a director or supervisor of the responsibility to act honestly in the best interest of our bank;
¬ approving a director or a supervisor (for his/her own or other person's beneÑt) to deprive our bank of its property in any form, including (but not limited to) any opportunities that are favourable to our bank; or
¬ approving a director or a supervisor (for his/her own or other person's beneÑt) to deprive other shareholders of their rights or interests, including (but not limited to) rights to distributions and voting rights, unless pursuant to a restructuring of our bank submitted to and adopted by the shareholders' meeting in accordance with the Articles of Association. The term ""controlling shareholder(s)'' in the Articles of Association shall refer to the person(s) satisfying any of the following conditions:
¬ Acting alone or in concert with others, has the power to elect half or more number of the directors;
¬ Acting alone or in concert with others, has the power to exercise or control the exercise of 30% or more of our bank's voting rights;
¬ Acting alone or in concert with others, hold 30% or more of shares of our bank; or
¬ Acting alone or in concert with others, can obtain actual control of our bank in any other manner.
Procedures on liquidation Should any of the following circumstances occur, our bank shall be dissolved and liquidated pursuant to law:
¬ if the shareholders' meeting resolves to dissolve our bank;
¬ if a dissolution is necessary as a result of the merger or division of our bank;
¬ if our bank is declared bankruptcy pursuant to law because it is unable to pay oÅ matured debts;
¬ if our bank is dissolved by the court at the request of shareholders holding 10% or more of our bank's total voting shares to dissolve our bank if no other solutions can be pursued When the company has serious diÇculties in its operation and management, and its continued existence will cause great loss to the shareholders' interests; or
¬ if our bank is lawfully declared to be closed as a result of violation of laws and administrative regulations. If the board of directors decides that our bank should be liquidated (except the liquidation as a result of our bank's declaration of bankruptcy), the notice of the general shareholders' meeting convened for such purpose shall include a statement to the eÅect that the board of directors has made full investigation into the position of our bank and that the board holds the opinion that our bank can pay its debts in full within 12 months after the announcement of liquidation.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Dissolution and liquidation of our bank shall be in compliance with the relevant provisions stipulated under the PRC Company Law and the PRC Commercial Banking Law. The functions and powers of the board of directors shall terminate immediately after the general shareholders' meeting has adopted a resolution to carry out liquidation. Our bank shall not engage in any new business activities during the period of liquidation. The liquidation committee shall follow the instructions from the general shareholders' meeting, and report to the general shareholders' meeting at least once a year on the committee's income and expenditure, the business of our bank and the progress of the liquidation. It shall make a Ñnal report to the general shareholders' meeting when the liquidation is completed.
Other provisions material to our bank or our shareholders General provisions Our bank is a joint stock limited company having perpetual existence. From the date on which the Articles of Association came into eÅect, the Articles of Association constitute a legally binding public document regulating our organization and activities, and the rights and obligations between us and each shareholder and among the shareholders themselves. Our bank may invest in other limited liability enterprises and joint stock enterprises in accordance with law and shall be held responsible for the invested enterprises within the limitation of the amount of our bank's capital contribution. In light of the demands of operation and business development and based on relevant laws and administrative regulations, after obtaining separate resolutions of the shareholders' meeting and the approval of CBRC, our bank may increase its capital through the following ways:
¬ oÅering new shares to non-speciÑc investors;
¬ issuing new shares to existing shareholders;
¬ allotting new shares to existing shareholders;
¬ transferring capital reserve funds;
¬ issuing convertible bonds;
¬ other methods permitted by competent supervisory authorities or by laws and administrative regulations. Our bank's increase of its capital by issuing new shares shall be handled in accordance with the procedures provided for in relevant State laws and administrative regulations after having been approved in accordance with the Articles of Association. Our bank may reduce its registered capital in accordance with the provisions of the Articles of Association. The reduction of registered capital shall follow the procedures set forth in the PRC Company Law, the PRC Commercial Banking Law and other laws, administrative regulations and provisions of the Articles of Association. When our bank is to reduce its registered capital, it must prepare a balance sheet and an inventory of assets. Our bank shall notify its creditors within 10 days of adopting the resolution to reduce its registered capital and shall publish a public announcement of the resolution in newspapers at least three times within 30 days of the said date. Creditors shall, within 30 days since receiving a written
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
notice or within 90 days since the date of the Ñrst public announcement for those who have not received a written notice, be entitled to require our bank to pay oÅ its debts in full or to provide a corresponding guarantee for repayment. Relevant public announcements shall be published in newspapers qualiÑed for requirements of relevant provisions. The reduced registered capital of our bank may not be less than the statutory minimum. Shareholders of ordinary shares of our bank shall undertake the following obligations:
¬ Abide by the Articles of Association;
¬ Contribute share capital according to the number of shares subscribed by them and the methods of capital contribution;
¬ Unless otherwise stipulated by laws and administrative regulations, shareholders shall not withdraw their share capital; and
¬ Other obligations imposed by laws, administrative regulations and the Articles of Association. Other than the conditions agreed by the subscribers of shares at the time of subscription, shareholders shall not be liable to subscribe for any additional share capitals subsequently.
Secretary of Board The Board has a secretary and the board secretary is a senior management personnel of our bank. The major duties of the board secretary shall be:
¬ To assist the directors in dealing with daily work of the board; to be responsible for communications between the directors and relevant departments of our bank; to ensure the directors be provided necessary information and documents for their fulÑllment of their authority and functions; to continuously provide, remind and ensure the directors to acquaint with the regulations, policies and requirements by relevant regulatory authorities regarding bank operations; to assist directors and the president to abide by laws, regulations, rules, relevant provisions by the securities regulatory authorities of the place of listing, this Articles of Association and other relevant provisions in their exercise of authority and functions;
¬ To be responsible for relevant organization and preparation work for the board of directors meeting and the shareholders' meeting; to be responsible for taking minutes of the meetings; to ensure the resolution and the decisions made in the meeting in compliance with legal procedures; to monitor the implementation of the board resolutions and to reply to directors in respect of questions concerning relevant meeting procedures and applicable rules;
¬ To ensure that our bank keeps complete organizational documents and records;
¬ To ensure that our bank prepares and submits according to law the documents and reports required by relevant authorities;
¬ To keep the list of shareholders, the seal of the board of directors and other relevant information and to handle matters related to management of the equity shares of our bank and registration of trusteeship; to ensure that our bank's register of shareholders is properly established and that persons entitled to relevant records and documents of our bank could obtain such records and documents in a timely manner;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ To be responsible for information disclosure of our bank and to assure our bank's information disclosures are timely accurate, legal, true and complete information;
¬ To assist the special committees established under the board of directors to exercise their delegated authorities;
¬ To be responsible for organization of market promotion; to coordinate with visits and reception work; to deal with investors' relationship; to maintain relationship with regulatory authorities, investors and intermediate agencies; to coordinate public relationship;
¬ To consult and advise on signiÑcant strategic decisions of our bank;
¬ Other duties set forth in the Articles of Association.
Board of Supervisors Our bank shall have a board of supervisors. The board of supervisors shall be composed of Ñve (5) to nine (9) supervisors, one of whom shall be elected as the chairman of the board of supervisors. The chairman of the board of supervisors shall be elected and replaced by two thirds or more of all the supervisors. The term of oÇce of each supervisor shall be three (3) years. A supervisor may serve consecutive terms if reelected upon the expiration of his/her term. Directors, president and other senior management personnel may not serve as supervisors concurrently. The board of supervisors is the supervisory authority of our bank, and shall be responsible to the shareholders' meeting and perform the following duties:
¬ to examine and supervise the Ñnancial activities of our bank;
¬ to supervise the performance of duties by the directors and senior management personnel of our bank, and to propose the employment and dismissal of the directors and senior management personnel who violate laws, administrative regulations, the Articles of Association or resolutions of the general shareholders' meeting;
¬ to require the directors, the president, and other senior management personnel to correct any act that is harmful to our bank' interests;
¬ to audit the directors and senior management personnel who intend to leave their posts, if necessary;
¬ to audit the business decision-making, risk management and internal control of our bank if necessary;
¬ to verify Ñnancial information such as Ñnancial reports, business reports, proÑt distribution plans, etc. that the board of directors intents to submit to the shareholders' meeting and, if in doubt, to be able to appoint, in the name of our bank, a certiÑed accountant or practicing auditor to assist in reviewing such information;
¬ to query the directors, the chairman of the board of directors, and senior management personnel;
¬ to propose to hold an extraordinary shareholders' meeting, and to convene and preside over a shareholders' meeting when the board of directors fails to perform its duty of convening and presiding over such meeting under the PRC Company Law;
¬ to make proposals to the shareholders' meetings;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ to represent our bank in negotiating with or instituting legal proceedings against a director or senior management personnel; and
¬ other duties provided for in laws, administrative regulations and the Articles of Association or authorized by the shareholders' meetings. A supervisor can attend the board meetings as a non-voting attendee and shall have the right to express its opinions. A supervisor can attend the meetings of senior management as a non-voting attendee.
President of our bank The president of our bank shall be accountable to the Board and shall have the right to exercise the following powers:
¬ in charge of daily administration, business operation and accounting management, and report to the board of director;
¬ organize the implementation of our bank's annual business plans and investment plans;
¬ organize the implementation of resolutions of the board of directors;
¬ submit operation and signiÑcant investment plans to the board of directors on behalf of senior management personnel, and carry out implementation of such plans upon the approval of the board of directors;
¬ formulate the annual Ñnancial budget plan and Ñnal accounts of our bank and propose to the board of directors;
¬ formulate the plans for proÑt distribution and loss make-up plan of our bank and propose to the board of directors;
¬ formulate plans for the increase or reduction in the registered capital of our bank, the issuance of other securities, public listing and the issuing of bonds of our bank and propose to the board of directors;
¬ formulate the draft of the basic administrative system, internal management framework and important sub-entities establishment structure of our bank and report to the board of directors for approval;
¬ draft the legal and compliance policy of our bank and relevant basic management rules and report to the board of directors for approval; formulate the basic rules and regulations of the Company;
¬ propose to the board of directors for the appointment or dismissal of Vice President, Assistant President, Chief Financial OÇcer, Chief Risk Control OÇcer and other senior management personnel of our bank;
¬ appoint or dismiss oÇcers of all internal departments and branches; however, the engagement or dismissal of the in-charge person of our bank's audit departments shall be reviewed and approved by the Audit Committee under the board of directors of our bank;
¬ review and determine wages, welfares, rewards and punishment plan of employees; decide on or authorize subordinated oÇcers according to their power and authorization scope to appointment and dismissal of employees;
¬ propose the convening of special meeting of board of directors;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ authorize senior management personnel, oÇcers in-charge of internal departments and branches to conduct business activities under the authorization of the board of directors;
¬ actively cooperate with special committees under the board of directors, implement decisions made by special committees in accordance with the Articles of Association;
¬ exercise the special authority at his disposal in relation to our bank's aÅairs in accordance with laws and our bank's interests upon the occurrence of signiÑcant contingency situations or other urgent circumstances, and report to the board of directors and shareholders' meeting thereafter.
¬ other powers authorized by the Articles or the board of directors. The president and the management team shall abide by laws, administrative regulations and the Articles of Association and perform his duties faithfully, honestly and diligently.
Board The Board shall exercise the following functions and powers:
¬ to be responsible for convening shareholders' meeting and to report its work to shareholders' meeting;
¬ to implement the resolutions of shareholders' meeting;
¬ to decide on strategic polices, business plans and material investment plans of our bank except for those material investment plans that are subject to shareholders' meeting approval as speciÑed in this Articles of Association;
¬ to formulate the proposed annual Ñnancial budgets and Ñnal accounts of our bank;
¬ to formulate the plans for proÑt distribution, loss making-up and risk capital distribution of our bank;
¬ to formulate plans for the increase or reduction in the registered capital of our bank, the issuance of other securities, public listing and for the issuing of bonds;
¬ to draft plans for substantial acquisition, repurchase of our bank's stocks or plans for merger, division, dissolution or change of incorporation nature of our bank;
¬ to examine and approve connected transactions which required for board approvals under laws, administrative regulations and other relevant governing rules;
¬ to review and decide on the establishment of our bank's basic administrative system, internal management framework and important sub-entities;
¬ to appoint or dismiss our bank's president, the board secretary and the chairmen of the special committees; to appoint or dismiss our bank's vice president, assistant president, chief Ñnancial oÇcer, chief risk oÇcer and other senior management personnel according to the president's nomination; to appoint or dismiss the chief audit oÇcer according to the nomination of the Audit Committee and decide on his/her remuneration and awards and punishment; to appoint or dismiss members of the special committees according to the nomination by the Human Resources and Remuneration Committee;
¬ to examine and approve the policies regarding laws and regulation compliance and the relative basic management system of our bank;
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
¬ to formulate proposals for amendment of the Articles of Association of our bank, and report to the shareholders' meeting for approval;
¬ to examine the human resources and remuneration strategies of our bank; to review and determine the remuneration strategies for our bank's senior management personnel; to be responsible for performance evaluation of senior management personnel; to decide on the material rewards and punishment matters for senior management personnel;
¬ to review and approve the information disclosure policy and system of our bank;
¬ to propose to shareholders' meeting to appoint, re-appoint or change the accounting Ñrm that audits our bank;
¬ to hear work report from the President and the management team of our bank and examine their work;
¬ to report the rectiÑcation opinion regarding our bank issued by relevant regulatory authorities and the execution status of rectiÑcation by our bank;
¬ to hear the report by external auditors on a regular or irregular basis;
¬ to review and approve our bank's annual report;
¬ to exercise other functions and powers prescribed by laws, administrative regulations or the Articles of Association of our bank, and those granted by shareholders' meeting. Meetings of the board of directors shall be held at least four times a year. Meetings of the board of directors shall be convened by the chairman of the board. Meeting notice shall be served in writing fourteen (14) days and other relevant documents shall be served ten (10) days before the meeting is held to all the directors and supervisors. The chairman of the board shall convene and preside a special board meeting within Ñve (5) working days under one of the following circumstances:
¬ shareholders representing one tenth or more voting rights propose;
¬ the chairman of the board considers necessary;
¬ one third or more of the directors propose jointly;
¬ half or more of the independent directors propose;
¬ the board of supervisors proposes;
¬ the president of our bank proposes; Meetings of the Board may be held only if more than half of the directors (including proxies) attend. Resolutions of the Board shall be adopted by the aÇrmative votes of more than half of all the directors. Each director shall have one vote. The special committees set up under the board of directors include without limitation: Strategy Development Committee, Audit Committee, Risk Policy Committee, Human Resources and Remuneration Committee, and Connected Transaction Control Committee, etc.
Appointment of an accounting Ñrm Our bank shall engage an independent accounting Ñrm that complies with relevant State regulations to audit the annual Ñnancial reports, Ñnancial statements and other Ñnancial reports of
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
our bank, and to perform net assets veriÑcation and to provide other relevant consultation services. The term of engagement of an accounting Ñrm engaged by our bank shall be between the end of the annual shareholders' meeting of our bank and the end of the next annual shareholders' meeting. The general shareholders' meeting may, by means of an ordinary resolution, dismiss any accounting Ñrm prior to the expiration of its term of engagement, notwithstanding any provisions in the engagement contract between the accounting Ñrm and our bank, without prejudice to such accounting Ñrm's right, if any, to claim damages from our bank in respect of such dismissal. The engagement, dismissal or refusal of the renewal of the engagement of an accounting Ñrm shall be decided upon by the shareholders' general meeting and reported to the securities regulatory authorities of the State Council. The remuneration or method of remuneration of an accounting Ñrm shall be decided upon by the shareholders' general meeting. The payment scheme to an accounting Ñrm appointed by the board of directors shall be determined by the board of directors and approved by the shareholders' meeting.
Loans to Shareholders Our bank shall not provide more preferential conditions to its shareholders than other borrowers who apply for the same type of loans. When our bank is having liquidity diÇculty as prescribed by valid laws and administrative regulations and relevant provisions concerning settlement risks of commercial bank by the CBRC, shareholders who have borrowed from our bank and hold Ñve(5) percent or more voting shares of our bank shall immediately repay the loans that are due, and the loans that are not yet due should also be repaid in advance. Shareholders who hold Ñve(5) percent or more voting shares of our bank and owe overdue loans to our bank shall be disqualiÑed from exercising voting right during the loan overdue period and shall not be included in the quorum of the shareholders' meeting. Our bank shall have the right to withhold the dividends of such shareholders as the repayment of their overdue loans. Any assets to be distributed to such shareholders in our bank's liquidation process shall also be used in priority for the repayment of our bank's outstanding loans. Shareholders who hold Ñve(5) percent or more voting shares of our bank shall not pledge our bank's shares if the outstanding balance of the loans they borrowed from our bank exceeds the audited net book value of the shares held by them in the previous year, and they have not provided other security interest with bank deposit receipts or treasury bonds.
Major Investment and Disposal of Assets The scope of authorization to the board of directors regarding decision power on equity investment, bond investment, assets purchase, assets disposal, assets write-oÅ, mortgage or other non-commercial-banking-business regarding security interest matters shall be determined by the shareholders' meeting. The board of directors shall establish stringent examination and decision making procedure in respect of its exercise of the aforesaid authorization; The Strategic Development Committee shall organize relevant experts and professionals to examine and evaluate material equity investment, bond investment, assets purchase, assets disposal, assets write-oÅ, mortgage or other non-commercial-banking-business regarding security interest matters and report to shareholders' meeting for approval in accordance with laws, administrative regulations and the listing rules of the place of listing.
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APPENDIX VIII SUMMARY OF ARTICLES OF ASSOCIATION
Dispute resolution
If any disputes or claims related to our bank's business based on the rights or obligations provided in the Articles of Association, the PRC Company Law and other relevant laws or administrative regulations arise between the shareholders of foreign investment shares listed outside the PRC and our bank, between the shareholders of foreign investment shares listed outside the PRC and the directors, supervisors and other senior management personnel of our bank or between the shareholders of foreign investment shares listed outside the PRC and other shareholders, the parties concerned may submit such dispute or claim for arbitration.
A dispute or claim submitted for arbitration may be arbitrated, at the option of the arbitration applicant, by either the China International Economic and Trade Arbitration Commission in accordance with its arbitration rules or the Hong Kong International Arbitration Centre in accordance with its securities arbitration rules. After the arbitration applicant has submitted the dispute or claim for arbitration, the other party must carry out arbitration in the arbitration institution selected by the applicant.
If the arbitration applicant opts for arbitration by the Hong Kong International Arbitration Centre, either party may request arbitration to be conducted in Shenzhen in accordance with the securities arbitration rules of the Hong Kong International Arbitration Centre.
Unless otherwise provided by laws or administrative regulations, the laws of the PRC shall apply to the settlement by means of arbitration of disputes or claims referred in the above paragraph.
When such disputes or claims as described above are submitted for arbitration, such disputes or claims they shall be submitted in their entirety, and all persons that have a cause of action due to the same events or whose participation is necessary for the settlement of such disputes or claims, and if such persons being our bank shareholders, directors, supervisors, the president or other senior management personnel of our bank, shall abide by the arbitration result.
Disputes concerning the deÑnition of shareholders and the register of shareholders shall not be required to be settled by means of arbitration.
The award of the arbitration institution shall be Ñnal and binding upon each party.
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
1. FURTHER INFORMATION ABOUT US A. Incorporation
We were incorporated under the PRC laws as a joint stock limited company with limited liability A1A(5) on August 26, 2004. We established a place of business in Hong Kong at Bank of China Tower, A1A(6) 1 Garden Road, Central, Hong Kong and have been registered as an oversea company under Part XI s342 of the Hong Kong Companies Ordinance. Mr. Yeung Jason Chi Wai, care of 52/F, Bank of China LR8.02 Tower, 1 Garden Road, Central, Hong Kong, has been appointed as our agent for the acceptance of service of process in Hong Kong.
B. Changes in share capital
(a) Our bank A1A(26)(1),(2) A1A(23)(1) At the time of the establishment as a joint stock limited company, our registered capital was LR19A.42(55)(1) RMB 186,390,352,497.83, divided into 186,390,352,497 Shares, all of which were fully paid up or LR19A.42(55)(3) credited as fully paid up and were held by our promoter as follows: LR19A.42(55)(4) Percentage 3rd Sch 2 of shareholding in the Number of share capital of Name of promoter Domestic Shares our Company HuijinÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,390,352,497 100% During the two years prior to the date of this prospectus, we recorded the following changes in our share capital:
¬ on December 31, 2005, Huijin transferred 10,471,368,118 Shares to RBS China for the consideration of US$1.52 billion;
¬ on December 31, 2005, Huijin transferred 1,688,930,342 Shares to UBS AG for the consideration of US$246 million; and
¬ on December 31, 2005, Huijin transferred 101,335,820 Shares to ADB for the consideration of US$15 million.
¬ on December 31, 2005, RBS China subscribed for 10,471,368,118 Shares for the consideration of US$1.52 billion;
¬ on December 30, 2005, AFH subscribed for 10,471,368,118 Shares for the consideration of US$1.52 billion;
¬ on December 31, 2005, UBS AG subscribed for 1,688,930,342 Shares for the consideration of US$246 million; and
¬ on December 31, 2005, ADB subscribed for 405,343,282 Shares for the consideration of US$59 million; and
¬ on March 8, 2006, SSF subscribed for 8,514,415,652 Shares for the consideration of RMB10 billion. Following these transactions, our registered capital was increased to RMB 217,941,778,009 divided into 217,941,778,009 Shares of RMB 1.00 each. Immediately after the Global OÅering, our registered capital will be RMB 246,962,127,209, made up of 246,962,127,209 Shares of RMB 1.00 each (assuming the Over-Allotment Option is not exercised).
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(b) Our subsidiaries A1A(26) 3rd Sch 29 Our principal subsidiaries are referred to in the Accountants' Report, the text of which is set out in Appendix I to this prospectus. The following alterations in the registered share capital of our principal subsidiaries have taken place within the two years preceding the date of this prospectus:
¬ On September 28, 2004, the authorized capital of Bank of China Group Insurance Limited was increased from HK$700,000,000 divided into 70,000,000 shares of HK$10 each to HK$1,000,000,000 divided into 100,000,000 of HK$10 each by the creation of 30,000,000 shares of HK$10 each, such new shares to rank in all respects pari passu with the existing shares of the company;
¬ On February 16, 2004, BOC Hong Kong (Group) Limited purchased 5,350,000,000 of its own shares of HK$1.00 each from our bank, and consequently, the paid-in capital of BOC Hong Kong (Group) Limited was reduced from HK$40,155,603,955 divided into 40,155,603,955 shares of HK$1.00 each to HK$34,805,603,955 divided into 34,805,603,955 shares of HK$1.00 each; and
¬ On July 22, 2004, the authorized capital of BOCI Credit Card (International) Limited was increased from HK$100,000,000 divided into 1,000,000 shares of HK$100 each to HK$1,000,000,000 divided into 10,000,000 shares of HK$100 each by the creation of 9,000,000 shares of HK$100 each, each ranking pari passu with the existing shares in its share capital and its paid-in capital was increased from HK$100,000,000 divided into 1,000,000 shares of HK$100 each to HK$480,000,000 divided into 4,800,000 shares of HK$100 each.
C. Resolutions of our Shareholders (a) Resolutions were passed by our shareholders on November 22, 2005, pursuant to which, among other matters, our shareholders:
¬ approved the conversion of our bank into an overseas subscription joint stock company with limited liability;
¬ approved an application for the listing of H Shares on the Hong Kong Stock Exchange; and
¬ authorized the board to approve matters in relation to the proposed listing of H Shares. (b) Resolutions were passed by our shareholders on March 28, 2006, pursuant to which, among other matters, our shareholders approved amendments to our Articles of Association to among others conform with the requirements of the Hong Kong Listing Rules and other applicable laws and regulations and our Directors were authorized to further amend our Articles of Association in accordance with any comments from the relevant regulatory authorities in the PRC and the Hong Kong Stock Exchange. (c) Resolutions were passed by our shareholders on April 21, 2006, pursuant to which, among other matters, our shareholders granted, subject to the completion of the Global OÅering, a general mandate to our Directors to allot and issue H Shares and Domestic Shares at any time, either separately or concurrently, within a period of 12 months from the Listing Date upon such terms and conditions and for such purposes and to such persons as our Directors in their absolute discretion deem Ñt, and to make necessary amendments to the Articles of Association and, in accordance with relevant laws and regulations, submit such amendments and other documents relating to the exercise of the general mandate to the relevant regulatory
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
authorities for veriÑcation, approval, Ñling or registration, provided that, the aggregate number of H Shares or Domestic Shares to be issued shall not exceed 20% of the aggregate number of each of our H Shares and Domestic Shares in issue, respectively, as at the Listing Date.
2. FURTHER INFORMATION ABOUT OUR BUSINESS
A. Summary of material contracts A1A(52) 3rd Sch 17 Except for the contracts described below, there has been no contract entered into by any member of our group other than in the ordinary course of business, (i) within the two years immediately preceding the publication of this prospectus that is, or may be, material; or (ii) that contains any provision under which any member of our group has any obligation or entitlement which is material to our group as at the date of this prospectus:
(a) a sale and purchase agreement and a supplemental agreement both dated June 25, 2004 and entered into between the bank and Cinda in relation to the disposal of non-performing loans with a face value of approximately RMB 148.54 billion as of December 31, 2003 together with relevant interest thereof to Cinda for a consideration of RMB 73.43 billion;
(b) a sale and purchase agreement dated September 7, 2004 and entered into between the bank and China Orient in relation to the disposal of non-performing loans with a face value of approximately RMB 142,325,869,400 as of December 31, 2003 and non-performing loans with a face value of approximately RMB 141,398,867,900 as of August 17, 2004 together with the respective relevant interest thereof to China Orient for nil consideration;
(c) a foreign exchange options transaction agreement dated January 5, 2005 entered into between us and Huijin in respect of the amount of US$18,000,000,000 for the period between January and December, 2007 for the total consideration of RMB 4,469,526,000;
(d) a property transfer agreement dated August 9, 2005 entered into between us and China Orient for the transfer of certain premises of a provincial branch of us to China Orient for the consideration of RMB 151,946,210;
(e) in connection with the issuance of subordinated bonds in the total amount of RMB 60 billion in 2004 and 2005, we entered into the following contracts in June 2004:
(i) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and CCB ( );
(ii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Life Asset Management Limited ( );
(iii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Bank of Communications ( );
(iv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and CITIC Securities Co., Ltd. ( );
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(v) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Guotai Junan Securities Co., Ltd. ( );
(vi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and BOC International Securities Co., Ltd. ( );
(vii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and ABC ( );
(viii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Eagle Securities Co., Ltd. ( );
(ix) a 2004 Bank of China Bond Underwriting Main Agreement and a supplemental agreement both dated June 30, 2004 and entered into between us and CITIC Industrial Bank ( );
(x) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Galaxy Securities Co., Ltd. ( );
(xi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shenyin & Wanguo Securities Co., Ltd. ( );
(xii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and ICBC ( );
(xiii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Merchants Bank Co., Ltd. ( );
(xiv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Ping An Life Insurance Co., Ltd. ( );
(xv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Luoyang City Commercial Bank ( );
(xvi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shenzhen Development Bank ( );
(xvii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Great Wall Securities Co., Ltd. ( );
(xviii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shijiazhuang City Commercial Bank ( );
(xix) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Beijing Commercial Bank ( );
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(xx) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Chongqing City Commercial Bank ( ); (xxi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shanghai Pudong Development Bank ( ); (xxii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Industrial Bank Co., Ltd. ( ); (xxiii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shenzhen City Commercial Bank ( ); (xxiv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Minsheng Banking Corp. Ltd. ( ); (xxv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China Everbright Bank ( ); (xxvi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Bank of Shanghai ( ); (xxvii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Nanjing City Commercial Bank ( ); (xxviii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Hua Xia Bank Co., Ltd. ( ); (xxix) a 2004 Bank of China Bond Underwriting Main Agreement undated and entered into between us and Wuhan City Commercial Bank ( ); (xxx) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and China PaciÑc Insurance (Group) Co., Ltd. ( ); (xxxi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Guangdong Development Bank Co. Ltd. ( ); (xxxii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Tianjin City Commercial Bank ( ); (xxxiii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Changsha City Commercial Bank ( ); (xxxiv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Chinalion Securities Co., Ltd. ( );
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(xxxv) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Hua Xia Securities Co., Ltd. ( ); (xxxvi) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Shenzhen City Agricultural Credit Cooperative ( ); and (xxxvii) a 2004 Bank of China Bond Underwriting Main Agreement dated June 30, 2004 and entered into between us and Jingzhou City Agricultural Credit Cooperative ( ); (f) a share subscription agreement dated August 18, 2005 between us, RBS China and RBS Group in relation to the subscription of Shares for a consideration of US$1.55 billion subject to adjustment in connection with our net assets; (g) an investor rights agreement dated August 18, 2005 among us, Huijin and RBS China and RBS Group in relation to certain investor rights of RBS China, including rights relating to board matters, price protection, transfer restrictions and minority protection, in consideration of covenants contained therein; (h) a letter of undertaking dated August 18, 2005 from RBS Group to us; (i) an Amendment No. 1 to investor rights agreement dated December 20, 2005 among us, Huijin, RBS China and RBS Group in relation to certain amendments to the investor rights agreement dated August 18, 2005 among the parties; (j) an Amendment No. 2 to investor rights agreement dated December 26, 2005 among us, Huijin, RBS China and RBS Group in relation to certain amendments to the investor rights agreement dated August 18, 2005 among the parties; (k) an Amendment No. 3 to investor rights agreement dated January 6, 2006 among us, Huijin, RBS China and RBS Group in relation to certain amendments to the investor rights agreement dated August 18, 2005 among the parties; (l) an Amendment No. 4 to investor rights agreement dated as of May 6, 2006 among us, Huijin, RBS China and RBS Group in relation to certain amendments to the investor rights agreement dated August 18, 2005, among the parties; (m) a master cooperation agreement dated August 18, 2005 entered into between us and RBS Group in relation to the strategic investment of RBS China in us and certain business cooperation between RBS Group and us; (n) a credit card business cooperation agreement dated August 18, 2005 between RBS Bank and us in relation to certain cooperation between the parties with respect to the credit card business, which shall initially take place through our stand-alone business unit and then through a joint venture company between the parties; (o) a share subscription agreement dated August 31, 2005 between us and AFH in relation to the subscription of Shares for a consideration of US$1.55 billion subject to adjustment in connection with our net assets; (p) an amended and restated share subscription agreement dated December 20, 2005 between us and AFH in relation to the subscription of Shares for a consideration of US$1.55 billion subject to adjustment in connection with our net assets;
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(q) an investor rights agreement dated August 31, 2005 among us, Huijin and AFH in relation to certain investor rights of AFH, including rights relating to board matters, price protection, transfer restrictions and minority protection, in consideration of covenants contained therein; (r) an amended and restated investor rights agreement dated December 20, 2005 among us, Huijin and AFH in relation to certain investor rights of AFH, including rights relating to board matters, price protection, transfer restrictions and minority protection, in consideration of covenants contained therein; (s) an Amendment No. 1 to amended and restated investor rights agreement dated December 26, 2005 among us, Huijin and AFH in relation to certain amendments to the amended and restated investor rights agreement dated December 20, 2005 among the parties; (t) an Amendment No. 2 to amended and restated investor rights agreement dated January 6, 2006 among us, Huijin and AFH in relation to certain amendments to the amended and restated investor rights agreement dated December 20, 2005 among the parties; (u) an Amendment No. 3 to amended and restated investor rights agreement dated May 8, 2006 among us, Huijin and AFH in relation to certain amendments to the amended and restated investor rights agreement dated December 20, 2005 among the parties; (v) a letter agreement entered into between us and AFH dated May 7, 2006 whereby AFH agreed not to transfer any ordinary shares purchased at the time of the Global OÅering pursuant to the amended and restated investor rights agreement dated December 20, 2005 among us, Huijin and AFH for a period of one year from the date of acquisition of such shares; (w) a share subscription agreement dated September 26, 2005 entered into between us and UBS AG in relation to the subscription of Shares for a consideration of US$250 million subject to adjustment in connection with our net assets; (x) an investor rights agreement dated September 26, 2005 entered into among us, Huijin and UBS AG in relation to certain investor rights of UBS AG, including arrangements relating to long-term strategic co-operation, price protection, transfer restrictions and minority protection, in consideration of the mutual covenants and undertakings contained therein; (y) an Amendment No. 1 to the investor rights agreement dated December 20, 2005 entered into among us, Huijin and UBS AG in relation to certain amendments to the investor rights agreement dated September 26, 2005 between the parties; (z) an Amendment No. 2 to the investor rights agreement dated May 8, 2006 among us, Huijin and UBS AG in relation to certain amendments to the investor rights agreement dated September 26, 2005 between the parties; (aa) a share subscription agreement dated October 5, 2005 entered into between us and ADB in relation to the subscription of Shares for a consideration of US$60 million subject to adjustment in connection with our net assets; (ab) an investor rights agreement dated October 5, 2005 entered into among us, Huijin and ADB in relation to certain investor rights of ADB, including arrangements regarding on-going co-operation in various areas of the operations, price protection rights, transfer restrictions and minority protection, in consideration of the mutual covenants and undertakings contained therein;
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(ac) an Amendment No. 1 to investor rights agreement entered into among us, Huijin and ADB on December 20, 2005 in relation to certain amendments to the investor rights agreement dated October 5, 2005 among the parties; (ad) an Amendment No. 2 to investor rights agreement entered into among us, Huijin and ADB on December 26, 2005 in relation to certain amendments to the investor rights agreement dated October 5, 2005 among the parties; (ae) an Amendment No. 3 to investor rights agreement entered into among us, Huijin and ADB on January 6, 2006 in relation to certain amendments to the investor rights agreement dated October 5, 2005 among the parties; (af) an Amendment No. 4 to investor rights agreement entered into among us, Huijin and ADB on May 8, 2006 in relation to certain amendments to the investor rights agreement dated October 5, 2005 among the parties; (ag) a share subscription agreement dated March 8, 2006 entered into between us and SSF in relation to the subscription of 8,514,415,652 Shares for a consideration of RMB10 billion; (ah) an investor rights agreement dated March 8, 2006 entered into between us and SSF in relation to certain investor rights of SSF including transfer restrictions and minority protection, in consideration of the mutual covenants and undertakings contained therein; (ai) an Amendment No. 1 to the investor rights agreement dated May 2006 entered into among us and SSF in relation to certain amendments to the investor rights agreement dated March 8, 2006 among the parties; (aj) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS and China Life Insurance Company Limited pursuant to which China Life Insurance Company Limited agreed to subscribe for our H Shares in the amount of HK$1,162,920,000; (ak) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS and China Life Insurance (Group) Company pursuant to which China Life Insurance (Group) Company agreed to subscribe for our H Shares in the amount of HK$1,162,920,000; (al) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, The Bank of East Asia, Limited and Manilink Company Limited pursuant to which each of The Bank of East Asia, Limited and Manilink Company Limited agreed to subscribe for our H Shares in the amount of HK$697,752,000; (am)a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS and The Bank of Tokyo-Mitsubishi UFJ, Ltd. pursuant to which The Bank of Tokyo-Mitsubishi UFJ, Ltd. agreed to subscribe for our H Shares in the amount of HK$1,395,504,000; (an) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS and Chow Tai Fook Nominee Limited pursuant to which Chow Tai Fook Nominee Limited agreed to subscribe for our H Shares in the amount of HK$1,395,504,000; (ao) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Senasia Limited and Shau Kee Financial Enterprises Limited pursuant to which Senasia Limited agreed to subscribe for our H Shares in the amount of HK$1,395,504,000 and Shau Kee Financial Enterprises Limited has entered into the agreement as the investor parent for Senasia Limited; (ap) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Timpano Holdings Limited, City Master Limited, Eastern Joy Limited, Kerry Holdings
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
Limited, Kuok (Singapore) Limited and Kuok Brothers Sdn. Berhad. Pursuant to this agreement, Timpano Holdings Limited agreed to subscribe for our H Shares in the amount of HK$426,404,000; and each of City Master Limited and Eastern Joy Limited agreed to subscribe for our H Shares in the amount of HK$484,550,000. Kuok (Singapore) Limited and Kuok Brothers Sdn. Berhad have entered into the agreement as the investor parents for Timpano Holdings Limited, and Kerry Holdings Limited has entered into the agreement as the investor parent for each of City Master Limited and Eastern Joy Limited; (aq) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Gavast Estates Limited, Gentfull Investment Limited, Mr. Chen Din Hwa and Ms. Chen Wai Wai Vivien. Pursuant to this agreement, Gavast Estates Limited has agreed to subscribe for our H Shares in the amount of HK$1,255,953,600; and Gentfull Investment Limited has agreed to subscribe for our H Shares in the amount of HK$139,550,400. Mr. Chen Din Hwa has entered into the agreement as the investor parent for Gavast Estates Limited; and Ms. Chen Wai Wai Vivien has entered into the agreement as the investor parent for Gentfull Investment Limited; (ar) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS and Ping An Insurance (Group) Company of China, Ltd. pursuant to which Ping An Insurance (Group) Company of China, Ltd. agreed to subscribe for our H Shares in the amount of HK$1,395,504,000; (as) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Sharp Hero Limited and Coins World Investment Limited pursuant to which Sharp Hero Limited agreed to subscribe for our H Shares in the amount of HK$697,752,000. Coins World Investment Limited has entered into the agreement as the investor parent for Sharp Hero Limited; (at) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Opus Developments Limited and Kerrisdale Company Limited pursuant to which Opus Developments Limited agreed to subscribe for our H Shares in the amount of HK$697,752,000. Kerrisdale Company Limited has entered into the agreement as the investor parent for Opus Developments Limited; (au) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Wingreat International Limited and Sino Land Company Limited pursuant to which Wingreat International Limited agreed to subscribe for our H Shares in the amount of HK$1,240,448,000. Sino Land Company Limited has entered into the agreement as the investor parent for Wingreat International Limited; (av) a placing agreement dated May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Peace Avenue Investments Limited and Mr. Woo Kwong Ching pursuant to which Peace Avenue Investments Limited agreed to subscribe for our H Shares in the amount of HK$1,395,504,000. Mr. Woo Kwong Ching has entered into the agreement as the investor parent for Peace Avenue Investments Limited. (aw)a placing agreement dated as of May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Best Sense Investments Limited and Cheung Kong (Holdings) Limited pursuant to which Best Sense Investments Limited agreed to subscribe for our H Shares in the amount of HK$697,752,000. Cheung Kong (Holdings) Limited has entered into the agreement as the investor parent for Best Sense Investments Limited; and (ax) a placing agreement dated as of May 9, 2006 among us, BOCI Asia, Goldman Sachs, UBS, Turbo Top Limited and Hutchison Whampoa Limited pursuant to which Turbo Top Limited
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
agreed to subscribe for our H Shares in the amount of HK$697,752,000. Hutchison Whampoa Limited has entered into the agreement as the investor parent for Turbo Top Limited; and (ay) the Hong Kong Underwriting Agreement dated May 17, 2006 entered into among us, BOCI Asia, Goldman Sachs, UBS and the Hong Kong Underwriters.
B. Intellectual property
(a) As at the Latest Practicable Date, we were the registered owner of the following material patents:
CertiÑcate Patent Patent Number Number Type Expiry Date ZL 033350280 362271 February 17, 2013 The Counter External design
ZL 2004 3 417352 April 22, 2014 Card (Silver Card) 0008688.5 External design
ZL 2004 3 417312 April 22, 2014 Card 0008689.X External design
ZL 2004 3 417436 April 22, 2014 Card (Gold Card) 0008690.2 External design
(b) As at the Latest Practicable Date, we were the registered owner of the following material A1A(28)(4) trademarks:
Class Place of Registration Name (Note) registration Registration Date Expiry Date Number
ÏÏÏÏÏÏÏÏÏÏÏ 36 PRC October 21, 1994 October 24, 2014 770107 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC December 7, 1996 December 6, 2006 911702 BANK OF CHINAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC December 7, 1996 December 6, 2006 911703 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC December 7, 1996 December 6, 2006 911704 BOC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC November 14, 1996 November 13, 2006 899794
36 PRC November 21, 1996 November 20, 2006 903821
ÏÏÏÏÏÏÏÏÏÏÏ 36 PRC March 14, 1996 March 13, 2016 823845
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
Class Place of Registration Name (Note) registration Registration Date Expiry Date Number
36 PRC September 28, 1997 September 27, 2007 1115372 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC October 14, 1998 October 13, 2008 1215903 BOC CARD
36 PRC September 28, 2000 September 27, 2010 1451989 ÏÏÏÏÏÏÏÏÏÏ 36 PRC November 21, 1997 November 20, 2007 1129710 GREATWALL CARD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC September 28, 2000 September 27, 2010 1451990 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 PRC September 28, 2000 September 27, 2010 1451991
ÏÏÏÏÏÏÏÏÏÏÏ 36 Germany June 8, 1990 June 24, 2009 1159836
ÏÏÏÏÏÏÏÏÏÏÏ 36 Luxembourg October 31, 1989 October 31, 2009 470858
ÏÏÏÏÏÏÏÏÏÏÏ 36 U.S. April 24, 1990 November 28, 2010 1593419
ÏÏÏÏÏÏÏÏÏÏÏ 36 Singapore March 1, 1991 February 28, 2011 T91/01621Z
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
Class Place of Registration Name (Note) registration Registration Date Expiry Date Number
ÏÏÏÏÏÏÏÏÏÏÏ 36 Hong March 29, 1994 March 2, 2013 199401892 Kong
ÏÏÏÏ 36 Hong December 6, 1995 March 2, 2013 1995B10163 Kong
36 Hong August 8, 1996 March 2, 2013 199607401 Kong
ÏÏÏ 36 Hong December 4, 1996 March 2, 2013 199610922 Kong (c) As at the Latest Practicable Date, we were the registered proprietor of the following material domain names:
Domain name Date of registration bank-of-china.com ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 18, 1997 Greatwallcard.net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 19, 2005 Greatwallcard.com ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 25, 2005 bank-of-china.cn ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 17, 2003 95566.cn ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 17, 2003 bank-of-china.com.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 14, 2000 95566.com.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 14, 2000 95566.net.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 14, 2000 bank-of-china.net.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ December 17, 2004 Greatwallcard.com.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 19, 2005 Greatwallcard.cn ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 19, 2005 Greatwallcard.net.cnÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 19, 2005 bocÅm.com ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 18, 2000 bocmacau.comÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 29, 2000 bochk.com ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 8, 1996 boci.com.hk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 3, 1997 bocgroup.com ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ November 15, 1996
C. Our customers
Our Ñve largest borrowers accounted for less than 30% of the total balance of the borrowing as A1A(28) at December 31, 2005. (1)(b)(vii)
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
3. FURTHER INFORMATION ABOUT OUR DIRECTORS AND SUPERVISORS
A. Particulars of Directors' and Supervisors' Service Contracts A1A(46)(1)
None of our Directors or Supervisors has entered or proposed to enter into a service contract with us other than contracts expiring or terminable by us within one year without the payment of compensation (other than statutory compensation).
B. Directors' and Supervisors' remuneration
The aggregate remuneration paid and beneÑts in kind granted to the Directors and Supervisors for the year ended December 31, 2005 amounted to approximately RMB 11,334,800.
Under the arrangements currently in force, the aggregate remuneration payable to, and beneÑts in kind receivable by, our Directors and Supervisors for the year ending December 31, 2006 are estimated to be approximately RMB 11,938,700.
C. Directors' and Supervisors' Interests and Short Positions in the Share Capital and Debenture A1A(41) of our company and its Associated Corporations A1A(45)(1)(a)-(c) A1A(45)(1A)(a)-(b) The following table sets forth the information on Directors' and Supervisors' interests and short positions of each Director and Supervisor in the shares, underlying shares or debentures of us or any of our associated corporations immediately following the completion of the Global OÅering: Number of Approximate shares percentage of Name of interested party Name of Group Member interested shareholding Hua Qingshan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BOC Hong Kong (Holdings) 1,446,000 0.01% Limited Li Zaohang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BOC Hong Kong (Holdings) 1,446,000 0.01% Limited
Save as disclosed above, immediately following the completion of the Global OÅering, none of our Directors and Supervisors will have any interest or short position in our shares, underlying shares or debentures of us or any of our associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance, or SFO) which will have to be notiÑed to us and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), or which will be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which will be required to be notiÑed to us and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, in each case once the H shares are listed on the Hong Kong Stock Exchange. For this purpose, the relevant provisions of the SFO will be interpreted as if they applied to our Supervisors.
A1A(45)(2) D. Substantial Shareholders and Persons Who Have an Interest or Short Position Disclosable Under Division 2 and 3 of Part XV of the SFO
So far as our Directors are aware, the following persons will, immediately following the completion of the Global OÅering (assuming that the Over-Allotment Option is not exercised), have an interest or short position in the Shares or underlying shares of our bank which would fall to be disclosed to us and the Hong Kong Stock Exchange under the provisions of Divisions 2 and 3 of
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
Part XV of the SFO, or control directly or indirectly or are entitled to exercise, or control the exercise of, 10% or more of our total issued share capital:
Number of shares Percentage of in which the interested party shareholding in the has or is deemed share capital of Name of interested party Capacity to have interest in our company Huijin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 171,691,254,282 Shares 70.51% RBS GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest of controlled 20,942,736,236 H Shares 8.60% corporation RBS China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 20,942,736,236 H Shares 8.60% RBS CI Limited ÏÏÏÏÏÏÏÏÏÏÏ Interest of controlled 20,942,736,236 H Shares 8.60% corporation Temasek(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 11,881,114,118 H Shares 4.498% UBS AGÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 3,377,860,684 H Shares 1.39% ADB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 506,679,102 H Shares 0.21% SSF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑcial interest 10,952,079,587 H Shares 4.50%
(1) Temasek is interested in the H Shares of our bank through its wholly-owned subsidiary AFH. (2) Assumes that AFH purchased US$500 million of H Shares in the Global OÅering at the mid-point of the estimated OÅer Price range. So far as our Directors are aware, as at the date of the prospectus, the persons who were directly or indirectly interested in 10% or more of the issued and outstanding share capital of our principal subsidiaries, other than us and our controlling shareholders then in issue carrying rights to vote in all circumstances at general meetings of each relevant principal subsidiary, were as follows:
Equity/Capital Ratio Name of Our Subsidiary Name of interested party in the Subsidiary Chiyu Banking Corporation Limited ÏÏÏÏÏÏÏÏÏÏÏ Chip Bee Private 13.88% Institution(1) ( ) Chiyu Banking Corporation Limited ÏÏÏÏÏÏÏÏÏÏÏ Chip Bee Foundation(1) 11.14% ( )
(1) English translation of Chinese name Save as disclosed in this prospectus, but not taking into account any Shares which may be taken up under the Global OÅering, our Directors are not aware of any legal person or individual (not being a Director or chief executive of our bank) who will, immediately following the completion of the Global OÅering, have any interest or short position in our Shares or underlying Shares of our bank which would fall to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO or be directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at a general meeting of any other principal member of our group.
E. Further Information relating to a Director The Investor Director nominated by RBS China and elected to the Board of Directors is Sir Frederick Anderson Goodwin. Sir Frederick Goodwin is the group chief executive of the RBS Group and has been serving as a director of the RBS Group since August 1998. The RBS Group is the holding company of RBS Bank. In May 2002, RBS Bank was Ñned 27,460 for failing to settle equities which resulted from the exercise of equity options on the London International Financial Futures Exchange, being a transaction in the ordinary and usual course of the
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
business of RBS Bank. RBS Group does not consider that the penalty imposed was material in the context of the RBS Group.
4. OTHER INFORMATION A. Estate Duty
We have been advised that no material liability for estate duty under PRC law is likely to fall A1A(10) upon us, on the basis that there is no estate duty under the PRC law.
B. Litigation
Save as disclosed in the sections headed ""Business Ì Legal and Regulatory Proceedings'' and ""Special Events'' of this prospectus, and, so far as our Directors are aware, no member of our group is involved in any material litigation, arbitration or administrative proceedings that could individually or in the aggregate, if adversely determined, have a material adverse aÅect on our Ñnancial condition or results of operations.
C. Joint Sponsors
The listing of our H Shares on the Hong Kong Stock Exchange is sponsored by BOCI Asia, Goldman Sachs and UBS AG.
Goldman Sachs has declared pursuant to Rule 3A.08 of the Hong Kong Listing Rules that it is independent pursuant to Rule 3A.07 of the Hong Kong Listing Rules.
As described in the section headed ""Our Strategic and Other Investors'' in this prospectus, UBS AG is one of the strategic investors holding not more than 1.39% of our Shares immediately after the Global OÅering (assuming the Over-Allotment Option is not exercised). UBS has declared pursuant to Rule 3A.08 of the Hong Kong Listing Rules that it is independent pursuant to Rule 3A.07 of the Hong Kong Listing Rules.
BOCI Asia is our indirect wholly-owned subsidiary and accordingly is not considered independent pursuant to Rule 3A.07 of the Hong Kong Listing Rules.
The Joint Sponsors have made an application on our behalf to the Listing Committee of the Hong Kong Stock Exchange for the listing of, and permission to deal in, our H Shares and for the Shares held by Huijin to be authorized for listing Ì See ""Share Capital Ì Shares held by Huijin''. All necessary arrangements have been made enabling the H Shares to be admitted into CCASS.
D. Preliminary expenses
Our preliminary expenses are estimated to be approximately RMB 161 million and are payable A1A(20)(1) by us. 3rd Sch 15
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
E. QualiÑcation and consents of experts A1A(9)(1)
The qualiÑcations of the experts who have given opinions in this prospectus are as follows:
BOCI Asia Limited Licensed under the SFO for type 1 (dealing in securities) and type 6 (advising on corporate Ñnance) as deÑned under the SFO Goldman Sachs (Asia) L.L.C. Licensed under the SFO for type 1 (dealing in securities), type 4 (advising on securities), type 5 (advising on futures contracts), type 6 (advising on corporate Ñnance) and type 9 (asset management) as deÑned under the SFO UBS AG Licensed under the SFO for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate Ñnance), type 7 (providing automated trading service) and type 9 (asset management) as deÑned under the SFO PricewaterhouseCoopers CertiÑed Public Accountants, Hong Kong Jun He Law OÇces Registered law Ñrm in the PRC American Appraisal China Limited Chartered Surveyors and Valuers Grant Sherman Appraisal Limited Chartered Surveyors and Valuers
Each of the Joint Sponsors, PricewaterhouseCoopers, CertiÑed Public Accountants, Hong A1A(9)(2) Kong, Jun He Law OÇces, American Appraisal China Limited and Grant Sherman Appraisal Limited s342B has given and has not withdrawn their respective written consents to the issue of this prospectus with the inclusion of their reports and/or letters and/or valuation certiÑcates and/or the references to their names included herein in the form and context in which they are respectively included.
F. No material adverse change
Save as disclosed in this prospectus, we believe that there has been no material adverse change in our group's Ñnancial or trading position since December 31, 2005.
G. Binding eÅect
This prospectus shall have the eÅect, if an application is made in pursuance hereof, of s342B rendering all persons concerned bound by all the provisions (other than the penal provisions) of sections 44A and 44B of the Hong Kong Companies Ordinance so far as applicable.
H. Miscellaneous
Save as disclosed in this prospectus, as at the Latest Practicable Date:
(a) none of our Directors, Supervisors or any of the parties listed in paragraph 4E of this A1A(47)(1) Appendix is interested in our promotion, or in any assets which have, within the two years 3rd Sch 19 immediately preceding the issue of this prospectus, been acquired or disposed of by or leased to us, or are proposed to be acquired or disposed of by or leased to any member of our Group;
(b) none of our Directors, Supervisors or any of the parties listed in paragraph 4E of this A1A(47)(2) Appendix is materially interested in any contract or arrangement subsisting at the date of this prospectus which is signiÑcant in relation to our business;
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(c) save in connection with the Hong Kong Underwriting Agreement and the International A1A(9)(1) Purchase Agreement and interests held by UBS AG as disclosed in this prospectus, none of the parties listed in paragraph 4E of this Appendix: (i) is interested legally or beneÑcially in any of our shares or any shares in any of our subsidiaries; or (ii) has any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for our securities, other than: (A) in the case of BOCI Asia Limited, 5,291,000 shares (including borrowed shares, shares held in a custodial capacity (other than purely non-discretionary holdings), discretionary managed portfolios and rights to subscribe for shares) in BOCHK Holdings; and (B) in the case of UBS AG, 113,521,670 shares (including borrowed shares, shares held in a custodial capacity (other than purely non-discretionary holdings), discretionary managed portfolios and rights to subscribe for shares) in BOCHK Holdings;
(d) no amount or securities or beneÑt has been paid or allotted or given within the two years A1A(8)(2) preceding the date of this prospectus to our promoter nor is any such securities or amount 3rd Sch 16 or beneÑt intended to be paid or allotted or given; (e) none of our Directors or their respective associates has any interest in our top Ñve borrowers or our top Ñve depositors;
(f) no authorized debentures of our bank and its subsidiaries has been issued; 3rd Sch 25
(g) there is no arrangement under which any Director has waived or agreed to waive future A1A(33)(2)(g) emoluments, nor has there been any waiver of emoluments during the current Ñnancial year; (h) save as those in the ordinary and usual course of our commercial banking business, there are no outstanding loans or guarantees granted or provided by any subsidiaries of our bank to, or for the beneÑt of, any of our Directors; (i) no Director has or has had any interest in any transaction which is or was unusual in its nature or conditions or is or was signiÑcant to the business of our bank and our subsidiaries and which was eÅected by any subsidiaries of our bank in the current or immediately preceding Ñnancial year of our bank or which was eÅected during an earlier Ñnancial year and remains in any respect outstanding or unperformed;
(j) within the two years preceding the date of this prospectus, we have neither issued nor A1A(26)(1),(2) agreed to issue any share or loan capital fully or partly paid either for cash or for a 3rd Sch 11 consideration other than cash;
(k) no share or loan capital of our bank is under option or is agreed conditionally or A1A(27) unconditionally to be put under option; 3rd Sch 10
(l) we have not issued nor agreed to issue any founder shares, management shares or A1A(24) deferred shares; 3rd Sch 4
(m) none of the equity and debt securities of our company is listed or dealt with in any other LR19A.42(55)(2) stock exchange nor is any listing or permission to deal being or proposed to be sought;
(n) we have no outstanding convertible debt securities; A1A(32)(1)
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(o) our bank does not intend to apply for the status of a sino-foreign investment joint stock LR19A.42(59) limited company and does not expect to be subject to the PRC Sino-foreign Joint Venture Law;
(p) within two years immediately preceding the date of this prospectus, no commissions, A1A(13) discounts, brokerages or other special items have been granted or paid to any director, 3rd Sch 14 proposed director, supervisor, promoter, any of the parties listed in paragraph 4E of this Appendix or any other person in connection with the issue or sale of any share or loan capital of our bank or any of our subsidiaries;
(q) there are no arrangements in existence under which future dividends are to be waived or A1A(12) agreed to be waived;
(r) there have been no interruptions in our business which may have or have had a signiÑcant A1A(28)(6) eÅect on our Ñnancial position in the last 12 months; and
(s) there are no restrictions aÅecting the remittance of proÑts or repatriation of capital by us A1A(31) into Hong Kong or from outside Hong Kong.
I. Exemptions from Hong Kong Companies Ordinance
Property Valuation Report
According to the valuation report set out in Appendix V to this Prospectus, as of March 31, 2006, we owned 11,403 land lots with an aggregate area of approximately 8.9 million square meters, 9,591 buildings, units and carparks with an aggregate gross Öoor area of approximately 13.4 million square meters and 59 buildings which are under construction with an aggregate gross Öoor area of approximately 0.74 million square meters upon completion in the PRC. As of March 31, 2006, we also leased 8,158 properties with an aggregate gross Öoor area of approximately 1.9 million square meters in the PRC, Hong Kong and overseas. Owing to the substantial number of properties involved, we have applied to the SFC for an exemption and the Hong Kong Stock Exchange for a waiver from strict compliance with paragraph 34(2) of the Third Schedule to the Hong Kong Companies Ordinance and Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, respectively, on the grounds that:
(a) it would be unduly burdensome to include a fully compliant valuation report in this prospectus and the inclusion of such detailed information would be irrelevant to potential investors in a commercial bank and would not be material to a potential investor's investment decisions; and
(b) it would be unduly burdensome to prepare an English translation of the report, as substantially all of the properties are located in the PRC and consequently the underlying valuation and title information is in Chinese.
The SFC has granted an exemption under section 342A(1) of the Hong Kong Companies Ordinance and the Hong Kong Stock Exchange has granted a waiver from Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, subject to the following conditions: (i) a full valuation report in the Chinese language complying with the requirements under the Listing Rules and paragraph 34 of the Third Schedule must be made available for inspection in accordance with Appendix X Ì ""Documents Delivered to the Registrar of Companies and Available for Inspection'';
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(ii) the valuer's letter and the valuer's certiÑcate containing a summary valuation of all the Group's property interests of the Group, including particulars of occupancy, open market values and their title status thereof, based on the full valuation report must be included in this prospectus in the form set out in Appendix V to this prospectus; (iii) this prospectus must set out particulars of this exemption. We are of the view that the exemption from the SFC would not prejudice the interests of potential investors on the grounds mentioned above.
Residential Address
We have applied for, and the SFC has granted, an exemption pursuant to Section 342A of the Companies Ordinance from strict compliance with Section 342(1)(b) and Paragraph 6 of Part I of the Third Schedule to the Companies Ordinance in relation to the disclosure of the residential address of Sir Frederick Goodwin on the basis that such disclosure would be unduly burdensome. Sir Frederick Goodwin is a well-established public Ñgure in the United Kingdom and has been granted a ConÑdentiality Order by the Department of Trade and Industry in the United Kingdom in connection with the disclosure of his residential address. As a result of this and his particular circumstances, the business address of Sir Frederick Goodwin is disclosed in place of his residential address.
Bilingual Prospectus
The English language and Chinese language versions of this prospectus are being published separately, in reliance upon the exemption provided under section 4 of the Company Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
J. Joint Compliance Advisers
We will appoint Goldman Sachs (Asia) L.L.C. and UBS AG as our joint compliance advisers (the ""Compliance Advisers'') upon listing in compliance with Rule 3A.19 of the Hong Kong Listing Rules. We expect to enter into a compliance advisers' agreement with the Compliance Advisers, the material terms of which we expect to be as follows: (a) we will appoint the Compliance Advisers as our joint compliance advisers for the purpose of Rule 3A.19 of the Hong Kong Listing Rules for a period commencing on the Listing Date and ending on the date on which we comply with Rule 13.46 of the Hong Kong Listing Rules in respect of our Ñnancial results for the Ñrst full Ñnancial year commencing after the Listing Date, or until the agreement is terminated, whichever is earlier; (b) the Compliance Advisers shall provide us with services, including guidance and advice as to compliance with the requirements under the Hong Kong Listing Rules and other applicable laws, regulations and codes, and to act as one of our principal channels of communication with the Hong Kong Stock Exchange; (c) we will agree to indemnify the Compliance Advisers for certain actions against and losses incurred by the Compliance Advisers arising out of or in connection with the performance by the Compliance Advisers of its duties under the agreement, or any material breach or alleged breach by us of the provisions of the agreement; and
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APPENDIX IX STATUTORY AND GENERAL INFORMATION
(d) we may terminate the appointment of any Compliance Adviser if the Compliance Adviser's work is of an unacceptable standard as permitted by Rule 3A.26 of the Hong Kong Listing Rules. Each of the Compliance Advisers may resign or terminate its appointment by service of three months' notice to us.
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APPENDIX X DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES AND AVAILABLE FOR INSPECTION
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES
The documents attached to the copy of this prospectus and delivered to the Registrar of S342C Companies in Hong Kong for registration were copies of the application forms, the written consents 3rd Sch 17 referred to in Appendix IX ""Statutory and General Information Ì QualiÑcations of Experts and Consents'' and copies of the material contracts referred to in Appendix IX ""Statutory and General Information Ì Summary of Material Contracts''.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the oÇces of FreshÑelds s342 Bruckhaus Deringer at 11/F, Two Exchange Square, Central, Hong Kong during normal business LR19A.27(4) hours up to and including June 1, 2006: LR19.10(6)
(a) our Articles of Association; A1A(53)(1)
(b) the accountants' report prepared by PricewaterhouseCoopers, CertiÑed Public A1A(53)(3) Accountants, Hong Kong, the text of which is set out in Appendix I and the consolidated A1A(53)(5) audited accounts of the Bank for each of the three Ñnancial years ended December 31, 2005;
(c) the letter relating to the unaudited pro forma Ñnancial information, the text of which is set A1A(53)(3) out in Appendix III;
(d) the letters relating to the proÑt forecast, the texts of which are set out in Appendix IV; A1A(53)(3)
(e) the letter dated May 18, 2006, summary of values and valuation certiÑcate relating to the A1A(53)(3) property interests of our group prepared by American Appraisal China Limited and Grant Sherman Appraisal Limited, the texts of which are set out in Appendix V, and the full valuation report of American Appraisal China Limited and Grant Sherman Appraisal Limited referred to in Appendix V;
(f) the material contracts referred to in Appendix IX; A1A(53)(2) (g) the written consents referred to in Appendix IX;
(h) the PRC legal opinion issued by Jun He Law OÇces, our legal advisers on PRC law, dated A1A(53)(3) May 18, 2006 as described in Appendix VII; and (i) copies of the following PRC laws, together with unoÇcial English translation thereof: (i) the PRC Company Law, the Special Regulations, the Mandatory Provisions; (ii) the PRC Banking Regulatory Law; (iii) the PRC Commercial Banking Law; (iv) the PRC People's Bank of China Law; (v) the Securities Provisional Regulations promulgated by the State Council on April 22, 1993; (vi) the Regulations of the State Council concerning Domestic Listed Foreign Shares of Joint Stock Limited Liability Companies promulgated on December 25, 1995; (vii) the PRC Securities Law;
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APPENDIX X DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES AND AVAILABLE FOR INSPECTION (viii) the Provisional Measures Prohibiting Fraudulent Conduct Relating to Securities promulgated by the Securities Committee on September 2, 1993; (ix) the Arbitration Law; and (x) the Civil Procedure Law of the PRC enacted by the Seventh NPC on April 9, 1991 and eÅective on the same date.
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