A New Horizon Annual Report 2002 Contents BOC Hong Kong (Holdings) Limited (“the Company”) 1 Financial Highlights was incorporated in Hong Kong on 12 September 2001 2 Four-Year Financial Summary to hold the entire equity interest in Bank of China (Hong Kong) Limited (BOCHK), its principal operating 5 Chairman’s Statement subsidiary. 7 Chief Executive’s Report 15 Financial Review The Company is a leading commercial banking group in 23 Operations Review Hong Kong in terms of assets and customer deposits. With over 300 branches, more than 400 ATMs and 29 Corporate Information other delivery channels in Hong Kong, the Company 31 Board of Directors and offers a comprehensive range of financial products and Senior Management services to retail and corporate customers. BOCHK is one of the three bank note issuing banks in Hong Kong 39 Report of the Directors and serves as a Chairman Bank of the Hong Kong 47 Corporate Governance Association of Banks on a rotational basis. In addition, 53 Listing BOCHK has 14 branches and sub-branches in the 57 Our People Mainland of China to meet the cross-border banking needs of our Hong Kong and Mainland customers. 61 Good Corporate Citizenship 65 Report of the Auditors After a successful global IPO, the Company began 66 Financial Statements trading on the main board of the Stock Exchange of 138 Appendix I Hong Kong on 25 July 2002, with stock code “2388”. Subsidiaries of the Company 143 Shareholder Information 145 Definitions 148 Branch Network & Corporate Banking Centres A New Horizon With the accomplishment of the Restructuring and Merger in October 2001 and the subsequent successful listing in July 2002, the Company is entering a new horizon. Our annual report is in a thematic golden yellow colour, symbolising a bright future of the Company. It depicts our headquarters Bank of China Tower, which is a landmark in Hong Kong. The building’s unique A New design is inspired by the steady growth of bamboo and represents our Horizon commitment to forging ahead. We are geared towards maximizing Annual Report 2002 shareholder value and providing quality service to customers. 1 FINANCIAL HIGHLIGHTS 2002 2001 Change HK$’m HK$’m +/(-)% For the year Operating profit before provisions 12,089 13,162 (8.2) Operating profit after provisions 9,234 5,750 60.6 Profit before taxation 8,068 3,733 116.1 Profit after taxation 6,800 2,901 134.4 Profit attributable to shareholders 6,673 2,768 141.1 HK$ HK$ +/(-)% Per share Earnings per share1 63.11 cents 26.18 cents 141.1 Dividends per share 39.80 cents – N/A HK$’m HK$’m +/(-)% At year-end Shareholders’ funds 56,941 52,170 9.1 Issued and fully paid share capital 52,864 52,864 0.0 Total assets 735,489 766,140 (4.0) % % Financial ratios Return on average total assets2 0.91 0.36 Return on average shareholders’ funds3 12.23 7.31 Cost to income ratio 33.26 30.76 Non-performing loan ratio4 7.99 10.99 Loans to deposits ratio5 53.42 53.27 Average liquidity ratio6 41.17 39.88 Capital adequacy ratio7 13.99 14.38 1 Amount for 2001 has been restated due to the effect of the share consolidation as further described in note 13 and note 32 respectively. 2 Return on average total assets is calculated by dividing the profit after taxation with the daily average balance of total assets for the year. 3 Return on average shareholders’ funds is calculated by dividing the profit attributable to shareholders with the average shareholders’ funds. Average shareholders’ funds are calculated as the average of the opening and closing balance of shareholders’ funds for the year. Average shareholders’ funds for the year 2001 are calculated taking into account of certain capitalisation events. 4 On 26 June 2002, BOCHK disposed of loans with a gross book value of HK$11,401 million (net of specific provisions of HK$2,679 million) to BOC Cayman (note 42(a)). As at 31 December 2001, the outstanding balance of NPLs which were disposed of in 2002 amounted to HK$7,269 million and specific provisions made in respect of such NPLs amounted to HK$2,538 million. Had the disposal taken place as at 31 December 2001, the NPLs as a percentage of total advances to customers would have been 9.06%. 5 Loans to deposits ratio is for the year end. 6 Average liquidity ratio for the year ended 31 December 2002 is calculated as the simple average of each calendar month’s average liquidity ratio of BOCHK for the year. The average liquidity ratio of 2001 is calculated as the simple average of each calendar month’s average liquidity ratio of BOCHK for the 3 months from 1 October 2001 (the date of the Restructuring and Merger) to 31 December 2001. 7 Capital adequacy ratio is computed on the consolidated basis which comprises the positions of BOCHK and certain subsidiaries specified by the HKMA for its regulatory purposes and in accordance with the Third Schedule of the Banking Ordinance. Annual Report 2002 2 FOUR-YEAR FINANCIAL SUMMARY The financial information of the Group for the last four years commencing from 1 January 1999 (being the earliest year of the track record period for the purpose of listing of the Company on 25 July 2002) is summarised below: 2002 2001 2000 1999 HK$’m HK$’m HK$’m HK$’m For the year Operating profit before provisions 12,089 13,162 14,964 13,147 Operating profit after provisions 9,234 5,750 6,371 3,181 Profit before taxation 8,068 3,733 6,376 3,771 Profit after taxation 6,800 2,901 5,198 3,221 Profit attributable to shareholders 6,673 2,768 5,047 3,067 HK$ HK$ HK$ HK$ Per share Earnings per share1 63.11 cents 26.18 cents 47.74 cents 29.01 cents HK$’m HK$’m HK$’m HK$’m At year-end Advances and other accounts 308,332 308,108 325,569 317,556 Total assets 735,489 766,140 839,370 772,954 Daily average balance of total assets 748,771 810,702 830,331 816,778 Deposits from customers 600,977 606,428 624,726 589,421 Total liabilities 677,434 712,904 804,493 740,492 Issued and fully paid share capital 52,864 52,864 52,864 52,864 Shareholders’ funds 56,941 52,170 33,345 31,006 % %% % Financial ratios Return on average total assets 0.91 0.36 0.63 0.39 Cost to income ratio 33.26 30.76 27.70 32.51 Non-performing loan ratio 7.99 10.99 10.19 12.73 Loans to deposits ratio 53.42 53.27 54.43 56.85 The Company was incorporated on 12 September 2001 and acquired the entire equity interests in BOCHK on 30 September 2001. The Company subsequently became the holding company of the Group. The financial information of the Group is prepared as if the group structure, capital structure and operations had been in existence from the beginning of the period presented. 1 Amounts for 1999 to 2001 have been restated due to the effect of the share consolidation as further described in note 13 and note 32 respectively. BOC Hong Kong (Holdings) Limited FOUR-YEAR FINANCIAL SUMMARY 3 Annual Report 2002 | Steering Forward | 5 CHAIRMAN’S STATEMENT Enhancing the corporate governance framework and maximising LIU Mingkang shareholder value Chairman and President, Bank of China Chairman, BOC Hong Kong (Holdings) Limited and became the Bank of China (Hong Kong) Limited cornerstones of our business development. The year 2002 was an extraordinary year for the Company. Thanks to the valuable With a solid financial support of investors and the dedication of our staff, the Company was successfully foundation, extensive listed on the Stock Exchange of Hong Kong on 25 July. Our global offering was 6.5 times customer base, over-subscribed despite deteriorating global equity market conditions. With our launch of one of the world’s largest public offerings in 2002, we received ten awards from a talented employees number of magazines including “Best Investor Relations for an IPO” by Investor and close cooperation Relations and “Deal of the Year” by FinanceAsia. Shortly after our listing, the Company with BOC, we will was admitted as a constituent stock in various indices, including the MSCI Hong Kong Index and Hang Seng Index. These achievements highlighted our status as a major benefit from an player in the international financial markets. economic recovery in Hong Kong and Our Restructuring and Merger in 2001 laid a solid foundation for the establishment of a sound corporate governance framework, an efficient management structure, a new economic development management philosophy and a new corporate culture. Our listing in 2002 further in the Mainland, confirmed the pledges we had made to investors. Enhancing the corporate bringing favourable governance framework and maximising shareholder value became the cornerstones of our business management. As a result of our dedicated efforts, we made returns to investors. encouraging progress in the areas of organisational restructuring, business development, risk management and information technology. We also devoted considerable resources to enhancing transparency under the scrutiny of the market, adapting promptly to comply with the various market practices and regulatory requirements applicable to listed companies. Annual Report 2002 6 CHAIRMAN’S STATEMENT We will continue to target for the full to improve our operations efficiency. Our business development, risk management implementation of our corporate adoption of a modern business and revenue enhancement, while governance framework. In this regard, philosophy will lead to better quality maintaining our commitment to the the Board of Directors is actively involved services for customers.