Hello, analyst friends. Good afternoon. Welcome to the 2017 annual result announcement of China Construction Bank. Now may I introduce to you the management who are with us today, Mr. Pang Xiusheng, our Vice President, and Mr. Zhang Gengsheng, also our Vice President. I am the secretary of the board. My name is Huang Zhiling. Today, we will first ask Mr. Zhang to walk you through 2017 business results of our bank, and then we will move into a question and answer session. Mr. Zhang, please.
Thank you, Mr. Huang, and also good afternoon, fellow friends. I'm delighted to be able to introduce to you our 2017 business results. 2017, facing a new era, new challenges, we have implemented our new development goals, and insist on stable, healthy, and compliant operations, and have gotten some good results.
Now, today, I will talk about financial performances, business development, risk management, social responsibilities, as well as our outlook for the coming year. This is the key financial results. I think you have already been exposed to these since we disclosed it last night. With our key financial results, you see that our key benchmark, they are up when they should be and down when they should be. We have a balanced and stable development, also enhancement in quality and efficiency. Now, overall, our gearing ratio has been very stable. Our total asset grew by 5.5%. Our loan and advances grew by 9.8%. Liabilities grew by 4.9%, and our deposit grew by 6.2%. Our core business grew very steadily. The net profit grew by 4.6%. Our NIM also grew, and reached 2.21% by end of year. Our net interest income has grown by 8.3% year-on-year.
We have tackled the challenges of regulatory as well as market situations, and our fees and commissions income has remained stable. We have a sound cost control. We have fully provided for asset impairment. Given that, our credit costs have gone up a little bit, and we have optimized our cost- to- income ratio, which has come down by 0.36 percentage points. Our operating expenses also came down by 2.6%. Now, let me walk you over the business development. In 2017, we are into a new era, a new age. We have accelerated our development into the blue sea area. While supporting enhancing our traditional businesses, we have moved into new areas such as FinTech and other new areas. We have grasped opportunities given to us by the property market policy to move into a blue sea area.
Now, moving from buying a flat to leasing a flat, taking this trend, we have built a property leasing platform, providing leasing indexes. That will support our long-term development. Now, using this as a cutting in point, we can push the development of a smart city, and allow finance services to be penetrated into each and every aspect of livelihood, and to build a big ecosphere. Also to enhance our service capabilities and to introduce new products and also communicate a new value system. You may all be aware that new technologies has a huge impact on the development of the banking industry. We have accelerated our innovation in new technologies, and that will support our capabilities and our products and services. In 2017, our new generation core banking systems has been completed, and that enables our capability to build new services and products.
We also make use of big data to support the efficiency and precision requirements of our operation. The speeding up of application of new technologies not only support our traditional businesses, but also our new ones. The big data and artificial intelligence, cloud computing, et cetera, has been deeply used in finance sectors to provide new services and products. Now, moving in from a corporate focus to an integrated solution, we will also use this as a base to build a smart city. We have innovated in providing new services and new efficiency. We use customer service to be a long-term strategy. Say, fast loan, quick loan grew by 441%. Long Pay also is an integrated payment method that can pay for various aspects of livelihoods, such as travel or daily life, and that actually enhances our profitability.
We have built internet banking and mobile banking services that are very efficient. The corporate internet banking volume grew from 26.8%. Mobile banking grew by 87.6%. Electronic banking and self-service channels is now contributing 99.19% of the revenue. I would like to say that the Xiaowei loan has been introduced and is very much adopted. This would bring us into a new age of services. It is digital, it is internet, it is smart, and the Xiaowei service has grew by 392% very quickly, and with an NPL ratio of only 0.16%. That goes to say that our risk management with popular financing is into a new age, and we are in compliance with the People's Bank of China's requirement to lower benchmark by two tiers. We would continue to push on our consumer finances and green finances.
That balance, the loan balance is beyond CNY 1 trillion, and the NPL ratio is below 0.3%. Our credit card customer balance as well is moving into a good quality asset. Our new business, meaning the underwriting for non-finance issuers bonds, that has gone to a breakthrough. Our services of our subsidiaries have been integrated with the mother company, and that would also enhance our overall capabilities. Our custodian business has breakthrough a volume of CNY 11 trillion.
In developing new business drivers and new competitive advantages, we are also reinforcing our traditional advantage. For infrastructure role loans, the outstanding balance exceeded CNY 3.3 trillion, NPL ratio 0.65%, personal housing loan growth was 17.5%, NPL ratio 0.24%. So housing reform financial business competitive advantage has been reinforced. Besides, we step up risk management in building risk management system, adjusting credits structure, and also special area risk control and management, credit risk, liquidity risk, market risk, capital risk. All these have seen improvement. In 2017, we took initiative to enhance our risk management and risk management system building and technology building. So we rely on new generation core system and also building a comprehensive risk surveillance and alarm system. We have innovated on our retail risk assessment tool, and we have got external fraud risk management system and also remote control system.
In this way, we are better able to enhance our risk alert and vigilance ability. Our credit structure continues to improve, and we are moving towards those areas with better quality and with better competitive advantage, including personal housing loan and infrastructural loan. At the same time, we step up our investment in SME-related business, green financing, high technology, and strategic emerging industry, which are supported by the state. We strictly control industries in which there is overcapacity. At the same time, we want to make sure that business can develop in a stable way, and we enhance our ability of our overseas organization compliance and anti-money laundering capability. Our active risk management has achieved good results for us.
In terms of asset quality indicators, we got five downs and two ups, NPL ratio, overdue loan ratio, special loan ratio, newly discovered NPL ratio, and credit loss ratio. All these came down. Provision coverage has improved. The gap between overdue loan and NPL also expanded. In relation to prudent liquidity management, we adhere to very prudent and sound liquidity management. We improved our control of global transaction risk, and we also looked at different currency allocation and related risk management. We actively promoted integrated capital management. Capital adequacy ratio was 15.5% at a high level, and our ability to withstand risk is being further enhanced. We have good results and business development, and in this way, we are better able to discharge our social responsibility. There is good support to this.
In terms of green finance, low carbon operation, and precise poverty alleviation and right protection, we have done a lot of work. We have promoted the development of green finance and low carbon financing, and we are a leader in relation to a new lifestyle civilization. In terms of our social responsibility, we have been given good recognition by the external organizations. Let's look at this year's outlook. In 2018, for us, there are both opportunities and challenges. In fact, China has moved on to a new age of high-quality development. In terms of adjustment, there will be major economic policy adjustment. There may be external risk in relation to globalization and trade protectionism. There are risks in relation to international organizations. There is a rise in leveraging for households and enterprises. These bring about new challenges.
However, as I said, there are both opportunities and threats. There is global economic recovery. China is moving towards high-quality development. Supply-side structural reform has achieved good results, and removal of excess capacity and deleveraging has seen some effects. There are also controls in the property market as a result. We hope that we can turn threats into opportunities. Overall speaking, in the new era, in face of the new opportunities and all the new challenges, CCB will continue to adhere to stable development disciplines. We will seize market opportunities, and we will build modernized system, refine management system, and we will do a good job in terms of prudent risk management and integrate capital. By means of high quality developments driven by technology, we hope to deliver even better return to shareholders. That's all in my presentation. Thank you.
Thank you for your presentation. Now let's move into a session of discussion and exchange. Today, we have a large attendance. All of you are analysts, are professionals, and so is our management team. In the discussion to come, we will carry on a professional discussion about areas that you have interest in. Before you raise your question, please name yourself as well as your company. Because of time constraint, may I suggest that each of you try your best to ask only one question. Okay, let's begin.
Very thankful for the opportunity to ask the first question. I'm Xian from Morgan Stanley. I like to see your asset growth is at 6%, it's slowing down. What is your plan for next year as far as asset growth and with loans tightening?
Loans and credit resources, where will we place and how about pricing capacity and what do you see being the trend here?
We are not really after growth in size as well as size of our assets. We would like it to be somewhat similar to 2017 or maybe a bit lower. Given this, we will continue to optimize the structure of our asset. We will attach importance to popular finance services, inclusive finance. Because we have certain strength in here, because we rely not only on growth of our loan portfolio, but also we would move to securitize some of the assets, some of the business. We will accelerate our different loan portfolio, and we will also support the projects relating to the Belt and Road Initiative, as well as mainland infrastructure projects.
Also another point, with the apartment leasing demands, reasonable demands coming out from here, we would support it, and however, overall, we remain prudent.
Thank you for giving me this opportunity. I am from UBS. Congratulations on your 2017 results, which are very good. I would like to follow up on the previous question. Asset growth and asset allocation, and then on the other side, there are liabilities. For deposits, it seems that competition is getting more and more intense, and we can see that major banks are issuing structured deposits. So this year, what do you think will be your growth in deposits in terms of structure? Will it be savings deposits or would it be financial in nature? Are you going to get some expensive deposits? Because there are some asset management new rules that are coming. Do you think that or what would you think would be the flow of funds?
Will there be some wealth management business leaving the bank, or will it become cheaper deposit business? What do you think would be the ratio or the split? Thank you.
Overall speaking, after the new asset management rules, I think, well, of course, the rules are still being adjusted. Of course, the state would like to maintain stability by taking into consideration market circumstances. They would like to avoid any blow to be dealt to any development of any industry. There will be some off-sheet assets and liabilities, which will be included in the balance sheet. For deposits, this is a good factor, a favorable factor. At the same time, there will be pressure on credit demand within our on-balance- sheet. We always stress de-leveraging. The government is de-leveraging. Financial institutions, enterprises, households, individuals are also gradually de-leveraging.
The growth rate in the past was 12%-14%, but now it came down to 8%-9%. There is a big pressure in deposit growth because there is strong capability of deposit to do categorization or streamlining. I think our deposit growth would be stable or there is a chance of slight decline. When there is bigger deposit pressure, liquidity is something we are very concerned about. As you all know, loan growth and the absolute amount of loan growth is very close to absolute deposit growth, but there is also the need for reserve and there are other requirements. We will be prudent in maintaining and balancing our liquidity. Given these circumstances, we will then adjust our asset liability balance. We will try our best to do that, but of course, there are areas we need to be more careful.
For example, for bonds, my forecast is that comparing with last year, there would be a clear decline. That's all in my answer. Thank you.
Thank you for the opportunity. My name is Fan Haishu from Deutsche Bank. My question is relating to leasing, property leasing, financing. You were talking about deployment in this area. Do you have a specific quantified target as to how big this business will be? How about the return and the risk of this sector, and what would its influence be to the other business sectors or business segments?
Allow me to take your question. Property leasing development, we do not consider this from the financing perspective. Rather, we look at it from the overall property market perspective, to enrich it from one that is lopsided to buying flats to one that is more balanced between buying and leasing. To lower this lopsided risk to the economy, there needs to be a solution to market needs. CCB has launched a strategy.
We support individuals to move from buying a flat to leasing a flat. Our support is both sided. One is the individual in the course of making this transformation, the financial needs that they have, and also to lower the cost. Also for the transformation of the properties sector, and based on the administration policy of the government, we will also apply some resources to the development of the leasing market. However, we will not fix a target on the size and the scale as yet. Depending on the development, we would enter this market via building a common platform, meaning apart from being a major supplier of finances, we will also be more deeply involved in this market. We are not only engaging in one platform, we have five that would serve the needs of the entire leasing sector. All the stakeholders would have a transparent environment.
Our emphasis is to provide a platform so that the society can come to a solution to satisfy long-term needs. In that process, if we use our FinTech as well as financial services and apply it, implement it into everyday life and the demand of the individual, that would be our targets.
Thank you for allowing me to ask question. My name is Huang Chen. My question is about your capital planning. As said just now by Mr. Pang Xiusheng, this year, the growth in deposit and loan will be more or less the same as last year. Maybe it will be slightly lower. Actually back then, CBRC required that there would be a three-year period, and 2017 should be the last year for this parallel arrangement. Now, has this parallel period ended or will it continue? If it will continue, for how long? Given this background, for your existing capital adequacy ratio, based on the current growth in deposits and loans, how long a duration can that last? Thank you.
Concerning that three-year period rule, well, it has ended, but it doesn't mean that after the three-year period, there won't be further assessment. Every year, there will still be assessment.
From the regulator's point of view, they will continue to give us some views on optimization. We also will come up with our way of optimization. This kind of internal assessment is getting more and more strict, and this will be favorable to capital adequacy ratio. However, our CAR pressure is very big. For global systemically important banks in 2025, we have to reach 20% in this CAR, and then in the coming seven years, we have to approach this target gradually. Perhaps, this pace will have to be expedited by international organizations. There will be pressure on our capital adequacy. Concerning risk and also equity risk asset arrangement, we have to be very prudent in making allocation. Thank you.
Thank you. I am from HSBC. My name is Gary Lam. I would like to ask a question. The highlight this year is the NPL coverage. It has grown quite significantly. May I understand what is driving this? Is it because of the IFRS 9 implementation, or is it because we have become more prudent in future loan business? Looking forward, our future provision, do you see a very evident room for reduction?
You are talking about the provision that we did last year. The provision coverage is okay. However, with our loan and deposit ratio, we did not meet the standards. Emphasis is risk management in the mainland. We heard that in the future, if the coverage ratio or the provision loan ratio is not in line, it may impact the dividend payout. We must keep it within the regulatory requirement of 2.5. This is a basic requirement for us. All in all, you know that last year our provision level has already been quite high. Going forward, we will continue to be very careful and prudent in here to ensure that we have sufficient provision. This year is quite high. Therefore, with the coming year and the year after that, the pressure is relatively smaller.
We believe that to keep a relatively higher credit cost, we believe in that. However, provision absolute volume as well as the credit volume would face some pressure when compared to this year.
Thank you for giving me this opportunity. I am from Huatai Securities. My question is, you mentioned your provision policy. I have a question about risk. Looking at your annual report, your asset quality indicators have all improved, no matter whether you are talking about NPL ratio, overdue loan, and also special mention loan ratio, all have improved. Is it true that there are some risks that we have not discovered yet, or there are emerging risks? Concerning the gap between overdue and NPL in Q4 last year, you actually confirmed the overdue or the NPL. Concerning that gap, do you have a target as to how much it should reach?
I have a small question concerning your financials. For the whole year, for personal loan daily balance, comparing with first half of this year, it is lower than first half of this year. In Q3 and Q4, it has been increasing. Is it true that there are some adjustments in the way of calculation?
The point that you made in your last question would not happen. I think that is about the figures only. The increase rate has come down, but the increase itself is actually growing every year. For the credit market pressure to us, that is always the biggest pressure. We are always solving risk in relation to our credit portfolio. If you say there may be risk that we have not noticed, that is not possible. However, there are some newly discovered NPL that is always happening.
We will try our best to digest this pressure. As long as we are capable of doing so, we will digest some potential peaks to be formed. At present, based on my observation of the total loan balance, our asset quality trend will be such that we can have a peace of mind. Concerning that gap between overdue and NPL, actually, after listing, every year when we disclose information on our annual report, there has been a much bigger gap some years ago, and one, two years ago, there was no more that gap. At a certain point of time, we think that our NPL ratio being higher than overdue loan ratio is quite reasonable. We hope that we will move towards this direction.
However, for the whole management, of course, we have to judge based on actual circumstances as to how much that gap can be reduced. I cannot give any forecast. Of course, we do hope that we will be more prudent in categorizing the loans. Thank you.
Thank you. Thankful for the opportunity. I am from Guotai. My name is Chao Zhuo. I have a question for the management regarding the commission and fee income. We see that 2017, this number has come down slightly. At this point when the new asset management new rules are being implemented, and under a context of deleveraging of off-balance-sheet assets. What is the impact to our commissions and fee income? I also like to understand, what is your view about the commissions and fees development for the company in 2018? Do you see any room for growth? Or in the future, including 2018, 2019 to 2020, commission and fees income would be kept at the current stable level, or do you anticipate some growth? There is a factor in 2017 that had caused this income, which is value- added tax.
Value- added tax has become an off and out of price, cost, therefore, tax excluded in price, it had posed some pressure on it. Now this year, we can exclude this impact. The negative growth, the second reason is that the regulators in China have launched policies that would reduce tax payment. These policies, some have ended in 2017. Some will continue to be of effect in 2018. The departments, the regulators might continue to have policies that would lower the pressure for individuals or corporations tax-wise. This is something that CCB should be able to do, given its pursuit for long-term stable development. Apart from this factor, there are also some other market factors, say, factoring cost, that has come down last year, and also the asset management business has also come down. Given there are higher requirements, there has been some impact.
This year, the pressure continued to be high. One uncertainty is the impact of the new regulations for asset management. If timing is too tight, then it may have some pressure that is beyond our expectation for our commission and fees income. However, overall, our judgment is that fees and commissions income increase can be kept stable. Looking into a longer term in the future, with our boost of leasing and other services, there are good rooms for our commission and fees incomes to rise in the future.
Thank you for giving me this chance to ask question. In the past few years, CCB's cost of debts has been kept under good control. For example, SME loan, you enjoyed good growth rates, and I believe that this is related to your investment in IT and your core system. CCB has made little mention of this all along to external parties. By making use of new technology to create scenarios, given CCB being such a large bank, how can that enhance your operating efficiency? From investors' point of view, what should we pay attention to? In order to better visualize things.
For new generation system, actually, it is such that most investments have already been made concerning our IT system, and it is a major infrastructure for our informatization. After we complete its building, we will have more resources and energy to do other things.
After the new generation IT system is launched, many business results are good. For example, personal and also SME quick loans, there is a growth of 4x . For these two loans, they are the products with the best growth rate among all our loan products. Last year, there are also some concessionary policies being launched. In terms of our financial, because we see favorable factors. So for these two products, growth rates may be slower than last year. Last year, growth rate was 4x . For this year, I think the absolute amount of growth will be positive. These are two typical products. In fact, we will continue to launch some of the new products. You may not have paid attention to our customers. In fact, it is a service product, not a financial product. It is to serve SME customers.
The growth rate is fast in the completed transaction volume. It can greatly reduce our wage increase pressure. There are other merits as well. For example, because of personal integrity, and also trust, we are gradually develop similar products and also the house rental index. In 18 tier one, two cities, this has been launched, and this year in June, we may cover all tier two cities. In other words, we can issue the home price index and home rental index. There are other factors related to our traditional deposit and loan business, and there are other businesses or products that will be launched. They will be conducive to our development, and we can also improve our customer quality. Perhaps you have heard about the home leasing market building. So actually, the home leasing market also needs financial services.
At the same time, we are building the home leasing scenarios. We are giving support to such operation. We think that, as in FinTech, it has good prospect. Our FinTech subsidiary has not started operation yet, but with a few dozen financial institutions, we have already signed cooperation MOU. They will share our new generation system capability. We are asked to provide the advisory support for their building of their IT system. There are good prospects on many fronts. Of course, our own requirement is high. We want to have a certain volume in order to make it a financial indicator. That is difficult. There are a lot of things that we still need to examine. Thank you very much.
Good afternoon. I am from Huatai, Asia analyst, Shen Juan. Congratulations for your excellent results. What I would like to understand is that with asset management, as one can see, with the new regulations, despite that it is not yet implemented, it has a very big impact to the overall market. With the technologies that you have, how is the bank planning to deploy resources or adjust resources deployment to the asset management business? What would be the positioning of the asset management business for the bank?
Your question is very closely related to the current development. First of all, the new regulation definitely would be launched. It is a matter of time only. Because I have been part of that discussion from beginning to end. For China Construction Bank, the asset management business, regardless whether it is before or after the new regulation, it definitely is a core business for us. It is also one of the key development in the future for our bank. From a certain perspective, this new regulation of asset management, it has a positive impact to the asset management sector. We have had very stable business in this area in the past. However, we still have some mismatch to address once the new regulation is implemented. We do anticipate. We are already taking some measures to adjust, considering the launch of this new regulation. You are talking about term.
We are studying the launching of alternative asset management products because there are also demand for non-standardized products. Looking at it from the product aspect, if we extend our loan portfolio, we will be stretching on the use of capital, meaning the new regulations would allow for an off-balance- sheet set of portfolio, and there would be a grace period, definitely. You will see that the grace period is about 18 months, and there has been comments that the grace period had better be longer. My anticipation is that it would not be lengthened for too long. With the new regulation of asset management, its impact possibly will be evident to our on-balance- sheet business. It may also be impacting our liability side of the balance sheet. However, we do see a positive result.
However, for our asset allocation, because in the structural reform, there are some good demand for asset management. Our overall allocation has already considered the impact of the new regulations on our balance sheet. China Construction Bank would definitely follow the footsteps of market development. In our management of asset, we definitely target to be a key player. This will be an important part of our new development, and it will be a main source of intermediary income for us.
Next, please.
Thank you. I am from JPMorgan Chase. I have two questions. First, about asset quality. Overall speaking, loan quality has improved, but for some industries, like manufacturing industry in the second half, it seems that NPL has gone up. Is this because you have increased some confirmation of some NPL, or is it because of the macro environment or environmental protection requirements, so some SMEs in this sector faced some pressure? My second question is about NIM. In Q4, NIM on a quarter-to-quarter basis increased quite a lot. In Q1, do you think you can continue the dividend payment, and what about your outlook or judgment of NIM for 2018? For 2018, in Q1, the market, the NIM may be higher than Q4 last year.
Overall speaking for the whole year, actually last year, there is an increase of a few basis points, but in Q4 last year and the whole year of last year, there is really a big increase in Q4, so 2018 NIM is a relatively more positive factor. As regards loans to different industries and also change in the loan quality, there is volatility among different quarters, and there are different factors. Some are industry-related factors, some are seasonal factors. If you look from an objective point of view, banks now are more stringent in implementing the categorization. There are different factors. If you read the reports by quarter in detail, you will see that there is really volatility in the quality.
Thank you for the opportunity to ask a question. I am Chen Mingsheng from Haitong International. I have two questions. The first one is relating to IFRS 9. How would it impact our net asset? My second question is, apart from loan provision, how about this non-loan provision? 2017 has seen an increase versus 2016. What was the major reason for that?
IFRS 9's implementation would cause the net asset to lower by 1 percentage point, and our provision coverage would increase by 0.8%. I believe that this is quite healthy and prudent when compared to our peers, and this is based on professional information. All in all, we remain stable, and we just strictly follow the implement according to IFRS 9 regulations. What is the second question? Sorry.
The second question is relating to non-loan provision. If you compare 2017 to 2016, there has been some increase. What is the main reason causing that, and what is the outlook?
I have not been paying attention to this. Huang Zhiling, can you provide some information?
I really don't know what the reason is. The non-loan business, does it include the on-sheet or off-sheet assets? It may be some of the asset management, off-balance- sheet asset management products facing high requirement for provision that we are increasing the overall provision level. Now, the credit loans have come down evidently, and their provision is not high. I believe that it is because of the off-balance- sheet provision.
Because of time constraint, we will take one last question.
Sanjay Jain from Credit Suisse. Two questions if I may, actually. First is on debt-to-equity swap. Somebody will have to translate that.
This is an analyst from Credit Suisse. His question is about the debt-to-equity swap.
You had a plan for CNY 200 billion of market-based debt-to-equity swap business, and you were supposed to be floating asset management subsidiary for that. Can you share your latest thoughts and the situation development on that? That is my first question.
What is the next question?
The second question is on operating costs. For the last three years, you have controlled the costs very, very tightly. Very impressive. Not only the administrative expenses, but also salaries and wages. With now revenues improving, margins coming back, what is your outlook expectation for operating costs in 2018 and beyond? Thank you.
Let me give an answer. Concerning our cost- to- income ratio, it will be stable. Concerning debt-to-equity swap, well, in the first half of last year, we reached that level and at the end of last year, the value approached CNY 600 billion . As you know, for debt-to-equity ratio, in order to complete the swap procedure, there is the need for quite some time. So at the end of last year, the swap achieved or realized was CNY 100 billion . In the debt-to-equity swap market in China, these numbers account for quite a big share, some 30%, some 50%, so quite a high percentage. We are still pushing forward this business, and we also adhere to the central government's supply-side structural reform requirements and also all the increase and decrease requirements. This business is being challenged on many fronts.
For example, source of funds, exit channel, cities to enter and related policy. We are working hard to implement it, but its prospect relies on a lot of issues. Our implementation is market-oriented. It is in line with-