Good afternoon, ladies and gentlemen. Thank you for attending the 2014 annual results presentation of BOC Hong Kong (Holdings) Limited. I'm Ronick Chan, Board Secretary and Head of Investor Relations. Before we begin, may I draw your attention to this slide for the forward-looking statement disclaimer. Now, let me introduce our senior management team.
With us today are Mr. Yue Yi, Vice Chairman and Chief Executive, Mr. Li Jiuzhong, Chief Risk Officer, Ms. Sui Yang, Chief Financial Officer, Ms. Zhu Yanlai, Deputy Chief Executive, Mr. Huang Hong, Deputy Chief Executive, and Mrs. Ann Kung, Deputy Chief Executive. For today's agenda, Chief Executive Yue will start with the performance highlight, followed by Chief Financial Officer Sui's financial results. After that, Chief Executive Yue will talk about our outlook and strategy for the future. Then, we'll open the floor for a Q&A session. Chief Executive Yue, please.
Thank you, Ronick. Good afternoon, ladies and gentlemen. In 2014, the global economy continued to recover at a divergent pace. While the mainland economy grew at a more modest rate, Hong Kong GDP growth was affected by a subdued external and domestic demand. However, local property transactions picked up towards the end of last year. Although key market competition and more stringent regulatory environments continue to weigh on the Hong Kong banking industry, accelerated internationalization of the RMB opened up new opportunity for Hong Kong banks.
Last year, we also saw the official launch of the Shanghai-Hong Kong Stock Connect, a key development in the liberalization of the mainland's capital account. The increasing use of RMB in global trade, finance, and investment continue to drive the growth of offshore RMB business in Hong Kong. I'm pleased to report the group delivered a set of encouraging results for 2014. Our income and profit reached a new high. Our net operating income before impairment allowance rose by 9.8% to HKD 44.2 billion, driven by a growth in the net interest income and net fee income.
Net interest income went up by 14.3%, while net fee and commission income rose by 20.9% to more than HKD 10 billion. Profit attributable to the equity holders increased by 10.4% to HKD 24.5 billion, on an earning per share of HKD 2.325. Return on average shareholders' equity was 14.65%, up by 0.28 percentage points. The Board recommended a final dividend of HKD 0.575 per share. Including the interim dividend, our full-year dividend will amount to HKD 1.12 per share, a growth of 10.9%, and a payout ratio of 48.2%. The group's total asset grew at a healthy pace. Customer deposits and loans recorded double-digit growth.
Advances to customers grew healthy at 12%, supported by a deposit growth of 11.7%. Loan-to-deposit ratio was stable at 64.79%. Classified or impaired loan ratio rose slightly by 3 basis points to a low level of 0.31%, indicating benign loan quality. We stepped up the optimization of the risk-weighted assets management to improve capital efficiency. The total capital ratio was 17.51%, and the tier one capital ratio was 12.38%, both increased by 1.71 percentage points.
Average liquidity ratio was solid at 42.17%. The liquidity coverage ratio and the Basel III accords has been in place since this year. Our group has completed all the preparation work and ensured its effective implementation, including the launch of the U.S. commercial paper program in 2014 for enhancing liquidity management and diversifying our funding sources. During the year, the group continued to execute its strategy of substantial growth, which strengthened our competitive edge in franchise through deepened collaboration with the BOC branches on the mainland and overseas.
Our global services capabilities were reinforced in various business areas. We introduced a full range of one-stop cross-border financial solution to meet the wealth management needs for our customers. We also established a regular cooperation mechanism with the BOC entities in Guangdong, Hong Kong, Macau to enhance information exchange and business referrals. With the support of BOC Group's distribution network, we started distributing selected funds products overseas. From our base in Hong Kong, BOC Hong Kong is a clearing bank.
It is part of the first and the largest offshore RMB market. To enhance the quality of our clearing bank services and improve our infrastructures, in October 2014, we extended our RMB clearing services hours. We now offer the world's first clearing system with the longest operating hours, covering time zones in Europe, American, and Asia. Also during the year, BOC Hong Kong was designated as a premier liquidity provider to support liquidity in the market. With the distinctive advantage we enjoy our clearing bank role, we have created a positive impact on our business development.
Last year, Hong Kong's offshore RMB business continued to grow at a robust pace. Leveraging our strong RMB franchise, we captured emerging opportunities that enhanced the earnings contribution of this business. With the launch of the Shanghai-Hong Kong Stock Connect, the group provided a comprehensive shares investment services, took the lead in the market to offer A-share margin services that helped customers' capital investment opportunities through our multiple trading channels, and solidified our position as the first mover in the offshore RMB business.
The group also launched a timely array of products and services following the removal of the daily RMB exchange quarter on Hong Kong residents. These include RMB exchange against other currencies, RMB currency linked investment, RMB mortgage loans, and RMB personal loan services to cater for the needs of our personal banking customers. We enhanced our professional and high quality total solution capabilities to cater for the increasingly diverse needs of our customers in personal banking. Our refined customer segmentation strategy promoted total relationship management, which enable us to provide tailored products and more personalized services.
On the corporate side, we captured opportunities arising from the accelerating demands for cross-border banking services. Both our customers base and geographical presence were expanded as a result. In the cash management business, the group further leveraged its competitive advantage and became the forerunner in the development of cross-border RMB cash pooling in the Shanghai Free Trade Zone. We also grew our assets under management and extended our asset management business to other countries.
In the custody business, we reinforced the group's position as one of the largest RQFII service providers in Hong Kong, and established business relationships with a number of new RQFII applicants overseas. For the development of our mobile banking, the group launched a brand new mobile application. We also upgraded our mobile banking services, providing a one-stop investment banking solution. In our credit card business, we extended our BOC e-Wallet mobile payment service to support UnionPay QuickPass payments.
This is the first of its kind of services in Hong Kong, allowing customers to enjoy a cross-border dual currency mobile payment services. Overall, the group achieved a satisfactory performance in business development last year, and it recorded an encouraging financial performance. I would like to stop here. CFO Sui will now give more details of the financial results. CFO Sui, please.
Thank you, Yue Yi. First, let me briefly go through the income statement with you. In 2014, our profit attributable to the equity holders increased by 10.4% to a record high of over HKD 24.5 billion. This is achieved through better earning quality and, at the same time, with the key financial resource staying at healthy levels. Both interest income and non-fee income registered double-digit growth. Operating expense increased by 7.4%. Operating profit after impairment allowances rose by 10.1% to over HKD 30.2 billion.
Non-operating items increased to HKD 403 million, which consisted of mainly revaluation gain on investment properties. Net interest income was up by 14.3% to HKD 31.9 billion, driven by the growth of 12.3% in average interest-earning assets, coupled with a widening of 4 basis points in net interest margin. The growth of average interest-earning assets was mainly supported by the increase in advance to customers, RMB bonds, and balances and placements with banks. Net interest margin improvement was largely attributed to the increase in higher yielding assets and average assets yields, partly offset by the rising deposit costs due to keen market competition.
Moving on to non-interest income. Net fee and commission income show a broad-based growth of 12.9%. In particular, investment and insurance business performed well. Commission income from funds distribution increased by 26%. Securities brokerage income grew by 10%, thanks to improved market sentiment in the second half of last year. The commission income from insurance business rose by 22%. Traditional businesses also show encouraging growth. Loan commission grew by 15%, trust and custody services grew by 16%, while currency exchange also grew 17%. Other operating income decreased by 34.7%.
Net trading gain dropped by 26.9%, mainly due to the higher net trading loss from foreign exchange swap contracts and mark-to-market changes of certain equity instruments. Other income dropped by 91.5%, mainly caused by a higher provision for insurance liabilities of our BOC Life as a result of declining market interest rates. This negative impact was partially offset by a higher net gain on other financial assets during the year. Now, let's look at expense. Operating expenses grew by 7.4% to HKD 13 billion. Cost-to-income ratio was at 29.3%, among the lowest in the local banking sector.
While maintaining controls cost control to enhance operating efficiency, we continue to invest in our new business to support long-term development. Staff costs increased by 6.6% due to annual salary increment and some increase in head count. Premises and equipment expenses were up by 6.5%, with higher rents for branches in Hong Kong and the mainland, as well as higher IT costs. Depreciation expense rose by 10% due to larger charges on premises following the upward property revaluation in Hong Kong and on our continuous deployment in IT infrastructure.
Other operating expenses were up 9.4%, mainly due to activities to support business growth and business tax incurred by mainland business. Loan impairment allowances had a net charge of HKD 1 billion, up 41%. This was due to higher net charge of individually assessed impairment allowances incurred by mainland business. Net charge of collectively assessed impairment allowances dropped by 31%. The lower net charge was largely due to update of the parameter values in the assessment model. Recoveries was HKD 202 million, dropped by 30%.
The formation of new classified or impaired loans was HKD 3.3 billion, about 0.35% of total loan outstanding. The increase of classified or impaired loans was mainly due to downgrade of our failed corporate loans. In view of the uncertainty in the economic environment, the group strictly adhered to prudent credit policy and managed its loan portfolio in a proactive manner. As a result, the group's loan quality remained strong, with classified or impaired loans ratio at 0.31%.
During the year, we continued to optimize our assets mix. The group's total assets increased by 7% to HKD 2.19 trillion. Cash and balances with banks and other financial institutions rose by 12.7%, mainly due to the increase in RMB balances and placements with banks. Placements with banks and other financial institutions decreased by 19.8% as the group redeployed its funds towards customer loans and securities investments. Securities investments increased by 1.8%.
Advances and other accounts rose by 9.6%, driven by the growth in customer loans. Total equity grew by 11.3%, largely attributable to the increase in the retained earnings. We maintained a flexible deposit strategy to support business growth while keeping cost control on funding costs. Deposits from customers increased by 11.7%, driven by the Hong Kong dollar. RMB deposits also grew at a healthy pace.
Advances to customers increased by 12% in 2014. Corporate loans for use in Hong Kong grew by 15.1%. Individual loans expanded by 11.2%, of which residential mortgage loans grew by 7.2%. Trade finance edged up by 1.1%. Loans for use outside Hong Kong grew by 13%. Loan-to-deposit ratio was stable at 64.8%. Securities investments was up by 1.8%. Portfolio mix was further optimized to enhance returns. We substantially increased investments in high-quality corporate bonds as well as RMB bonds.
In terms of issuer distribution, 27% of our investments were in government or government-related papers, 23% in corporate entities, and 15% in banks and other financial institutions. 87% of our debt security holdings were rated A or above. Now, let's look at our performance by business segment. In Personal Banking, we remained the market leader in new mortgage loans and the UnionPay card business.
Encouraging performance was seen in our wealth management business following refinement of our customer segmentation strategy. In Corporate Banking, we deepened collaboration with BOC and its overseas branches. This further enhanced our service capabilities. This enabled us to capture the increasing customer demand for cross-border banking services. We have been in the top mandate arranger in Hong Kong, Macau syndicated loan market now for 10 years in a row. Moving on to Treasury business.
Our proactive investment strategy has enabled us to enhance returns while maintaining alerts to risks. In view of the market changes, we promoted RMB foreign exchange product that were well received by customers. We continued to achieve solid progress in the bond underwriting business and increased our market share of dim sum bonds significantly. As for our insurance business, we focused on product innovation to provide support to the development of our multi-channel distribution network. We also consolidated our RMB leading position through diversified RMB product.
For mainland business, operating income increased by 18.8%, as we further optimized assets liability mix amid the challenging operating environment. The number of branches increased to 42, including the commencement of Shanghai Free Trade Zone sub-branch during the year. Several e-banking platforms were stabilized to facilitate cross-border transaction as well as additional online services. With the slowdown in the mainland economy and our prudent approach, our customer deposits and loans dropped by 4% and 7% respectively. This classified our impaired loan ratio rose to 1.99%. That conclude our financial review. Now I hand you back to Yue Yi. Thank you.
Thank you, CFO Sui. Looking ahead, the operating environments for banks will remain challenging as the global recovery may be uncertain and divergent across different economies. At the same time, deepening reform in mainland China and a new round of opening up in the economy will provide new business opportunities, which will give us promising future. We will be proactive in taking advantage of every opportunity that arises, such as implementation of the national strategy on One Belt, One Road, RMB internationalization, the going global of enterprises, the establishment of free trade zone on the mainland, and the enhancement of Hong Kong's status as a major hub for international financial services, trade, shipping, and offshore RMB business.
We will also deepen our collaboration with our parent bank, Bank of China, expanding our regional business scope, introduce innovative financial products and services, and expand the customer base in order to sustain our continuing business development and profit growth. Following our strategic target of serving society, delivering excellence, we will make every effort to contribute to the enhancement of Hong Kong as an international financial center and the long terms prosperity and the development of Hong Kong's economy.
In our corporate banking business, we are committed to providing a comprehensive range of quality financial services to local customers, government, and the public sectors, and expand our support to small and medium business with aim of becoming the main bank of our customers. We will reach out across Southeast Asia, strengthen synergy in our cross-border business and other business areas to enhance our global integration capabilities in financial services.
We will also actively participate in building a financial artery for the One Belt, One Road strategy and focus on key industries such as infrastructure construction, large scale equipments, and high tech products to support customers expansion in those market. Beyond this, we will further develop our core advantage, including the offshore RMB business, cross-border business, trade finance, overseas merge and acquisition finance, syndicated loans, treasury transactions, bond issues, and underwriting business to strengthen our offshore and onshore global financial services capabilities.
Our goal is to be the premier choice of providing cross-border services for mainland enterprise going global, as well as other regional and international enterprises. In our personal banking business, we have the most extensive branch network in Hong Kong with a robust customer base. We will further optimize our branch network, establish new concept branches and wealth management centers in strategic locations, and enrich our products and services offering to meet the needs of our personal customers for a wide range of personalized and diversified financial services.
Our aim with these initiatives is to enhance our brand image and brand recognitions among our customers. To stay abreast of trends in modern technology and the change in banking behaviors of our customers, we will further develop our electronic channels, including mobile banking, to provide a better customer experience and satisfaction. Finally, we will make use of a network advantage enjoyed by the Bank of China Group in mainland China, Hong Kong, and overseas to integrate our personal banking services with the aim of building the global brand value of BOC Group.
In our financial markets business, we will closely monitor market change and new policies while staying ahead of economic trends and the change in industries and exchanges in order to launch new products in a timely manner. We will also enhance our innovation and trading capabilities in treasury products, aiming to increase our customers' stickiness and satisfaction, strengthen our competitive position, and reinforce our market leadership.
As RMB business is the group's strategic focus, we will capitalize on our franchise, extensive experience in this business, and further launch RMB products and services in response to policy, to market changes. We are committed to becoming the best choice in RMB services for mainland, Hong Kong, and overseas financial institutions, as well as the corporate banking and personal customers. We fully understand that we must face the challenges to our risk management in the complex internal environment and meet stricter regulatory requirements.
In pursuit of our business development, we will cautiously manage our risk, with risk control as our premier consideration. As one of the domestic systemically important authorized institutions in Hong Kong, we will strictly comply with the Basel III requirements and proactively manage capital and liquidity while continually optimize our balance sheet mix to support business growth, fulfill regulatory requirements, and deliver stable shareholders' returns.
To ensure the healthy growth of credit business and asset quality better than market average, we will strengthen our credit risk management and adhere closely to our prudent lending policy. We are committed to strengthening our mechanism and the policies in managing the group's market risk, operational risk, and reputational risk. We will also step up our efforts in anti-money laundering in accordance with the regulatory requirements.
What's more, we will continuously strengthen our risk management and internal control to safeguard our healthy and continuous growth. Being under the Group's strong franchise, a solid foundation of nearly 100 years in Hong Kong. We are committed to enhancing our competitiveness in order to ensure our sustainable and better development. I conclude our presentation here. My colleague and I will be pleased to take your questions. Thank you.
Now we move on to the Q&A section. As I practice all along, kindly ask not more than two questions each time. Our senior management will answer your questions either in Chinese or in English. If in Chinese, we will arrange for translation accordingly. Please raise your hand if you want to ask questions, please. Gary, please.
Thank you and congratulations on the results. This is Gary Lam from Citi [Non-English content ] Two questions, if I may. Firstly, can I ask a bigger picture question since Mr. Yue you joined as Executive Vice President from the BOC Group. How do you see strategically BOC Hong Kong's importance to the Group? Specifically on BOC Hong Kong, where would you see its strength and certain areas of improvement? Secondly, if I may also get some color on your thinking about your loan growth and the segments of growth that you would focus given the strategic considerations. Thank you.
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First, I would like to thank your questions. Your question is to ask me about the feelings and my perspective on BOCHK. Firstly, I would like to say Bank of China is a century old bank. It is also the Chinese bank with the highest degree of internationalization and diversification in mainland China. Overseas market expansions is both a distinctive feature and advantage of Bank of China.
BOC HK at the same time is the largest institution in BOC Group's overseas operations, contributing more than 10% of its profits. This well reflects BOCHK's unique and important position, especially in BOC's global expansion strategy. We will further leverage our advantages with the aim of achieving a bigger contribution to the BOC Group.
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I'm pleased to share with you some of BOC's competitive advantages. We have a well-established base, and we've a long operating history in Hong Kong as a note issuing bank. We are also the RMB clearing bank in Hong Kong. Most recently, we were designated as a D-SIB in Hong Kong. We have the largest and most diversified distribution channels in Hong Kong, with more than 260 branches that cover prime locations all across the city.
We also have extensive ATM network. At the same time, we have a strong customer base of more than 4 million retail customers and over 220 corporate customers. More importantly, we have the strong support from our parent bank, especially in Hong Kong, including the institutions such as BOC International, BOC Investment Company and BOC Insurance .
Those supports will give us a very strong hand to increase our competitiveness locally and also help us to develop our business in the future in the directions of getting into other markets such as Southeast Asia. Also at the same time, Hong Kong being the largest offshore RMB clearing center, more than 60% of the offshore RMB transactions is completed through Hong Kong's platform, according to SWIFT. For BOC, they have more than 10,000 branches or institutions in the mainland China, and their overseas customer base covers more than 40 countries and regions, with service spectrum spanning almost all financial business areas. These are--
Where--
Sorry. These are the major competitive advantage and all the strengths we can enjoy from our BOC.
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We see there are also challenges and area improvement. The global economic recovery remains uncertain. At the same time, we see market competition is intense, especially in the areas of offshore RMB business. We will undoubtedly be challenged by the emergence of other offshore RMB centers. But I am very confident in the BOC HK future, especially for mainland China. Now the government is implementing a number of major strategic initiatives. For example, the One Belt, One Road, the development of the faster internationalization of RMB, and the further development of free trade zones. All these major developments will give us enormous opportunities.
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For all the opportunities mentioned about, I believe that our asset growth, especially in loan business, will continue to have very good potential. For example, our loan to deposit ratio is only at 64.8%, which is below the market average. We have very strong levels of capital ratio with respect to CET1 total capital ratio, etc. I think these are the financial strength that help us to develop our loan business in the future with a better growth potential.
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I would like to emphasize that under the leadership of our previous Chief Executive, Mr. He Guangbei , BOCHK has continuously achieved outstanding results. My colleagues and I would like to pay our utmost respect to him. We also strive to maintain the sustainability of our operations and management while building BOCHK into a more vibrant bank with even higher growth potential.
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Now please let me make a few more points about our overall development strategy. Firstly, with a nearly 100-year history in Hong Kong, we will remain highly committed to providing better service to our customers and supporting Hong Kong's development as an international financial center. We also will shoulder the social responsibilities and to serve better our community.
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Secondly, we will also look for opportunities based on the new national strategies and development trends. In particular, the closer economic integration in the region, and we will also leverage our own competitive advantages to expand our business coverage into areas such as Southeast Asia. We will also seek to become a large regional bank with our leading advantage in the cross-border business.
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BOC HK as an independent listed company will strive to balance the interests of our stakeholders, including shareholders, customers, and staff. We also strive to fulfill our social responsibility, meet the regulatory requirements, and build an excellent brand with a view to pursuing the sustainable growth strategy of the company. Thank you.
Okay. Let us shift the attention to the left-hand side. Dominic, please.
Thank you, Ronick. It's Dominic Chan from BNP Paribas. I have two questions. My first question is, can you talk about the profitability outlook of your RMB business in the current year, specifically on the CNH funding costs and loan growth outlook, given the fact that the forward currency market is pricing in a 4% depreciation of the RMB in the coming 12 months?
Also on the full train business, can you also talk about your growth expectation of your foreign exchange and also the custodian business growth in the current year? My second question is on the RWA. Given the rising hurdle rates in Hong Kong at the moment for end point CET1 ratio, can you also talk about your specific measures to manage your RWA growth going forward? Thank you.
Okay. First question, may I invite Zhu, our Vice President who is in charge of RMB, International business. Mr. Huang will add additional details. Second question, Ms. Sui, our CFO will answer you. Please.
Okay. I will answer the question about RMB business. I think RMB business, especially recently, I think it is kind of tricky. The markets, I mean, the funding costs are rising very substantially. I think many reasons cause this situation. Maybe I do not want to talk in details. Basically, I think the profitability outlook for this year, I think it should be positive because there have been so many new opportunities created by some major China government policy initiatives like One Belt, One Road and the free trade zones. I mean, further opening up of capital markets and financial market.
There will be more and more opportunity growing. So many potential areas to grow our business, especially corporate banking, wealth management and insurance and just what you said, also custodian and many business opportunities. At the same time, I think the funding cost now is the focal issue. Everyone, I think, is kind of interested. I think it very much depends on how the situation going forward. As I understand, I think because for recently, RMB funding cost rise, I think primarily because CNH pool is still not deep enough, so it is very easy to be affected by some market behaviors and the arbitrage activities.
For Hong Kong banks, it is kind of challenging how to deal with this kind of a situation. On one hand, there will be more opportunity, like increasing better channels, and you can deploy your RMB funds both in onshore markets or offshore markets. Now there have been a number of offshore markets also. Banks have to learn, or it has become a new normal to do a better liquidity management and as a liability management. Given this, honestly, I think that the profit will be under pressure.
It depends on the cost of our funding in the RMB. For Bank of China Hong Kong, I think we have one of biggest retail franchise, and we have very large corporate client base. I think it is relatively easier for us to get cheaper funding. Also for the asset side, I think the market right now have expectation for RMB depreciation. If the depreciation does persist, we think maybe it will create a stronger loan demand this year in the offshore market for RMB. Also create with all the opportunities by One Belt, One Road and the free trade zone, not only Shanghai, but also more coming out like Tianjin, Guangdong, and Fujian.
I think on the asset side, RMB loans and some other opportunities will come along. We will still huge potential opportunities. RMB business, RMB products now also create a lot of potential fee-based incomes, through foreign exchange conversions and hedging and derivative products, and also investment funds. Those also create pretty good income. We foresee that. I think basically, I think it should be okay this year for the profit prospect. I have to say that the whole situation will depend on the NIM. It is very clearly under pressure, so we have to think about that. Thank you.
Sui, could you say something about RWA?
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In 2014, our RWA increased by 3% year-on-year, below the asset growth of 7%, and was much lower than the 12% loan growth. Our capital position further enhanced with our CET1, tier one, and total capital ratio increased by around 1.7 percentage points.
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We have been making use of RORWA to continuously enhance our RWA management. In our daily operations, our frontline units take into account capital consumptions in the process of customer and product selection, realizing RWA management into our business development. We consistently reviewed our assets and their returns through RORAC. In 2014, we reduced our holdings in CDs and CPs, which were not only lower yielding, but also higher capital consuming. That led to a reduction in our related RWA by less than HKD 10 billion. We further enhanced our RWA management by conducting regular reviews on our customers' ratings.
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Being a D-SIB, we will maintain our current target dividend payout range and our strong capital position. We expect to maintain both our business and RWA growth rates at a normal and reasonable level, meeting regulatory requirements and striving for the right balance between risk, return, and capital. Thank you.
Time flies. I am afraid it's time to end today's analyst briefing section. Hope to see you all in coming August, and thanks for attending this presentation. Thank you.