Stock Code: 2388 BOC Hong Kong (Holdings) Limited Annual Report 2008 FORTIFYING OUR FOUNDATIONS 52/F Bank of China Tower, 1 Garden Road, Hong Kong Website: www.bochk.com in a challenging environment Annual Report 2008 Theme 2008 was a highly challenging year for both the Group and Hong Kong. Our major focus has been to safeguard the Group’s financial strength and competitiveness. The Group, just like our great mother nature, has the regenerative strength to face the challenges ahead of us. This provides the theme for our annual report – “Fortifying our Foundations in a Challenging Environment”. By riding on our solid foundation and strong franchise, the Group is able to proactively realign our development strategy to capture growing opportunities from the changing industry landscape, creating brighter prospects for our stakeholders. OUR VisioN OUR MissioN OUR CORE VALUES Build Social Responsibility TO BE customer satisfaction We care for and contribute to our communities and provide quality and professional Performance YOUR service We measure results and reward achievement Offer Integrity PREMIER rewarding career We uphold trustworthiness and business ethics opportunities and BANK cultivate staff Respect commitment We cherish every individual Combining the initials of mission Create Innovation and core values, we have values and deliver We encourage creativity superior returns to BOC SPIRIT shareholders Teamwork Be environmentally friendly for our better future We work together to succeed As a good corporate citizen, we do not use lamination and spot UV as normally adopted by the industry in our Annual Report 2008. Instead, we use varnishing, an environmentally friendly technique. The whole report is also printed on recyclable and elemental chlorine-free paper. This demonstrates our efforts in working for TdA – concept and design tda.com.hk the betterment of our future generations. Contents 2 Financial Highlights 3 Five-Year Financial Summary 6 Chairman’s Statement 8 Chief Executive’s Report 16 Management’s Discussion and Analysis 54 Corporate Information 55 Board of Directors and Senior Management 59 Report of the Directors 67 Corporate Governance 77 Investor Relations 84 Corporate Social Responsibility 88 Our People 92 Financial Section 227 Appendix – Subsidiaries of the Company 230 Definitions 233 Branch Network & Corporate Banking Centres BOC Hong Kong (Holdings) Limited (“the Company”) was incorporated in Hong Kong on 12 September 2001 to hold the entire equity interest in Bank of China (Hong Kong) Limited (“BOCHK”), its principal operating subsidiary. Bank of China Limited holds a substantial part of its interests in the shares of the Company through BOC Hong Kong (BVI) Limited, an indirect wholly owned subsidiary of Bank of China Limited. BOCHK is a leading commercial banking group in Hong Kong. With over 280 branches and 470 ATMs and other delivery channels in Hong Kong, BOCHK and its subsidiaries offer a comprehensive range of financial products and services to retail and corporate customers. BOCHK is one of the three note issuing banks in Hong Kong. In addition, BOCHK and its subsidiaries have 19 branches and sub-branches in the Mainland of China to provide cross-border banking services to customers in Hong Kong and the Mainland. BOCHK is appointed by the People’s Bank of China as the Clearing Bank for Renminbi (RMB) business in Hong Kong. The Company began trading on the main board of the Stock Exchange of Hong Kong on 25 July 2002, with stock code “2388”, ADR OTC Symbol: “BHKLY”. FINANCIAL HIGHLIGHTS 2008 2007 Change For the year HK$’m HK$’m +/(-)% Net operating income before impairment allowances 25,526 27,254 (6.34) Operating profit 4,182 18,033 (76.81) Profit before taxation 4,078 19,126 (78.68) Profit for the year 3,007 15,817 (80.99) Profit attributable to the equity holders of the Company 3,343 15,446 (78.36) Per share HK$ HK$ +/(-)% Earnings per share 0.3162 1.4609 (78.36) Dividend per share 0.4380 0.9150 (52.13) At year-end HK$m HK$m +/(-)% Capital and reserves attributable to the equity holders of the Company 82,719 92,842 (10.90) Issued and fully paid share capital 52,864 52,864 – Total assets 1,147,244 1,067,637 7.46 Financial ratios % % Return on average total assets1 0.27 1.53 Return on average capital and reserves attributable to the equity holders of the Company2 3.81 17.40 Cost to income ratio 34.36 28.52 Loan to deposit ratio3 56.74 51.66 Average liquidity ratio4 41.74 50.92 Capital adequacy ratio5 16.17 13.08 Profit for the year 1. Return on average total assets = Daily average balance of total assets 2. Return on average capital and reserves attributable to the equity holders of the Company Profit attributable to the equity holders of the Company = Average of the beginning and ending balance of capital and reserves attributable to the equity holders of the Company 3. Loan to deposit ratio is calculated as at year end. Loan represents gross advances to customers. Deposit also includes structured deposits reported as “Financial liabilities at fair value through profit or loss”. 4. Average liquidity ratio is calculated as the simple average of each calendar month’s average liquidity ratio of BOCHK for the year. 5. Capital adequacy ratio is computed on the consolidated basis that comprises the positions of BOCHK and certain subsidiaries specified by the HKMA for its regulatory purposes and in accordance with the Banking (Capital) Rules. Capital and reserves Total assets Profit attributable to the attributable to the equity equity holders of the holders of the Company Company HK$’m HK$’m HK$’m 100,000 1,200,000 18,000 90,000 1,000,000 15,000 80,000 70,000 800,000 12,000 60,000 50,000 600,000 9,000 40,000 400,000 6,000 30,000 20,000 200,000 3,000 10,000 0 0 0 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 2 BOC Hong Kong (Holdings) Limited Annual Report 2008 FIVE-YEAR FINANCIAL SUMMARY The financial information of the Group for the last five years commencing from 1 January 2004 is summarised below: 2008 2007 2006 20053 20042,4 For the year HK$’m HK$’m HK$’m HK$’m HK$’m Net operating income before impairment allowances 25,526 27,254 21,309 18,158 15,909 Operating profit 4,182 18,033 16,545 15,052 12,184 Profit before taxation 4,078 19,126 17,139 16,502 14,252 Profit for the year 3,007 15,817 14,284 13,856 12,121 Profit attributable to the equity holders of the Company 3,343 15,446 14,007 13,596 11,963 Per share HK$ HK$ HK$ HK$ HK$ Earnings per share 0.3162 1.4609 1.3248 1.2859 1.1315 At year-end HK$’m HK$’m HK$’m HK$’m HK$’m Advances and other accounts 469,493 420,234 352,858 338,403 309,211 Total assets 1,147,244 1,067,637 928,953 831,002 796,776 Daily average balance of total assets 1,099,198 1,032,577 915,900 831,789 776,792 Deposits from customers1 811,516 799,565 703,776 639,031 631,330 Total liabilities 1,062,712 972,579 842,313 749,289 727,016 Issued and fully paid share capital 52,864 52,864 52,864 52,864 52,864 Capital and reserves attributable to the equity holders of the Company 82,719 92,842 84,655 79,935 68,521 Financial ratios % % % % % Return on average total assets 0.27 1.53 1.56 1.67 1.56 Cost to income ratio 34.36 28.52 30.78 31.75 34.72 Loan to deposit ratio1 56.74 51.66 49.32 52.27 49.61 1. Since 2005, deposits from customers also include structured deposits reported as “Financial liabilities at fair value through profit or loss”. 2. On 1 January 2005, a number of new and revised HKFRSs and HKASs came into effect. The resulting changes in accounting treatment and presentation of various income statement and balance sheet items may render certain comparative figures for the year 2004 not strictly comparable. 3. In June 2006, the Company acquired a 51% shareholding of an under common control entity, BOC Life. The financial statements have been prepared in accordance with the principles of merger accounting as set out in Accounting Guideline 5 “Merger accounting for common control combinations” issued by the HKICPA. The comparative amounts for the year 2005 have been restated in accordance with the principles for merger accounting to present the result and assets of the Group as if such combination had occurred from the date when the Company and BOC Life first came under common control. 4. The financial information of 2004 had not been restated to reflect the adoption of merger accounting upon the acquisition of BOC Life as the difference before and after restatement is insignificant. Advances and other accounts Deposits from customers HK$’m HK$’m 500,000 1,000,000 400,000 800,000 300,000 600,000 200,000 400,000 100,000 200,000 0 0 04 05 06 07 08 04 05 06 07 08 Annual Report 2008 BOC Hong Kong (Holdings) Limited 3 根 深 Solid Foundation Chairman’s STATEMENT 2008 was a highly challenging year with an unusual combination of exceptionally difficult events. We were faced with the extreme volatilities in major financial markets, particularly in the second half of the year, triggered by the collapse of Lehman Brothers.