Okay. Good afternoon, ladies and gentlemen. Thank you for attending the 2013 Annual Results Presentation of BOC Hong Kong Holdings Limited. I'm Ronnie 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. Gary He, Vice Chairman and Chief Executive. Mr. Gao Yingxin, Executive Director and Deputy Chief Executive. Mr. Zhuo Chengwen, Chief Financial Officer. Mr. Jason Yang, Deputy Chief Executive, and Mr. Wang Hong, Deputy Chief Executive. For today's agenda, Mr. He will start with the performance highlights, followed by Mr. Zhuo's financial results. After that, Mr. He will talk about the outlook and strategy. Then we shall open the floor for a Q&A session. Mr. He, please.
Okay. Thank you, Ronnie. Good afternoon, ladies and gentlemen. in 2013, global economy saw modest recovery. Despite weak external trade, steady economic development in the mainland, and resilient local labor market underpin a robust expansion of private consumption, driving GDP growth in Hong Kong. During the year, banks in Hong Kong faced a mixed operating environment with intense competition, sluggish property transactions, volatile financial markets, and a tighter capital regulation under Basel III Accord. On the bright side, offshore RMB business grew steadily with a number of new initiatives to promote the use of RMB in trade and investment activities. With strong demand from the mainland, there continue to be good opportunities for cross-border RMB businesses. Against this backdrop, I'm pleased to report that the group delivered a set of respectable results for 2013. Our profit reached a new height with enhanced earning quality.
During the year, we continued to proactively manage assets and liabilities. We effectively achieved better corporate loan yield and controlled deposit costs. Wary of the possible steepening of yield curve, we appropriately shortened the duration of our debt security portfolio. Our investments in various business platforms paid off well. A broad-based increase was seen in fee and commission income, with particularly strong growth in investment and insurance business. The group has been committed to becoming the premier bank of customers. We continue to offer tailored products and services to improve customer experience. During the year, we refined our customer segmentation by repackaging our i-Free Banking service and launching the Enrich Banking service, allowing us to conduct more effective marketing activities to meet customer needs. We also introduced an innovative and convenient mobile payment service, BoCHK e-wallet
We upgraded our corporate internet banking platform, the CBS Online, with a modern and user-friendly interface. In terms of products, we further broadened our offerings in areas such as trade finance, custody, and cash management service. The offshore RMB business provides us numerous opportunities to capture more business and enhance customer relationships. Riding on our strong RMB franchise, we have successfully secured new customer groups, including international companies, public organizations, and global financial institutions. In 2013, apart from being designated as the market maker of US dollar CNH futures by Chicago Mercantile Exchange Group and Hong Kong Futures Exchange, we launched the new FTSE-BOCHK Offshore RMB Bond Index Series. We're also appointed by Clearstream Banking S.A. as its cash correspondent bank for offshore RMB in Hong Kong. This appointment has reinforced the group's leading position in the RMB business.
As for the offshore RMB clearing bank in Hong Kong, we further enhanced our clearing services to cater for the needs of both local and global participating banks. Through closer collaboration with BOC, we capitalized on business potential from mainland enterprises going abroad, and foreign companies investing on the mainland. Leveraging our synergies and product advantages, we helped arrange a renowned acquisition related syndication and a number of debt issuances fulfilling the financial needs of our customers. On the back of the collaborative efforts, we provided the first two-way funds pool business to an enterprise in Shanghai Pilot Free Trade Zone, and achieved a notable performance in cross-border direct loan business. Together with BOC, we now serve a much larger number of customers around the world, and with wider coverage of geographical regions and fields of industry.
In 2013, our net operating income before impairment allowances rose by 13.2% to HKD 40.3 billion, driven mainly by core income growth. Operating profit before impairment allowances increased by 15.9% to HKD 28.2 billion. Despite smaller property revaluation gains, profit attributable to the equity holders increased by 6.3% to HKD 22.3 billion. Or an earning per share of HKD 2.105, reaching a new height for four consecutive years. Return on average shareholders' equity was 14.3%, while return on average total assets was 1.22%. Our strategic and proactive management of loans and deposit growth led to satisfactory results. Advances to customers grew healthily at 10.3%, supported by a deposit growth of 8%. Loan-to-deposit ratio increased slightly to 64.6%. Average liquidity ratio was 37.9%. Classified or impaired loan ratio was relatively stable and rose by two basis points to 0.28%, which stood below market average and indicated a sound loan quality.
At the end of 2013, our capital remained well above regulatory requirements, with a total capital ratio of 15.8% and a Tier 1 capital ratio of 10.67%. Our faster increase in risk-weighted assets against the capital was mainly driven by the implementation of Basel III loan growth and increase in interbank exposures and optimization of our debt securities portfolio mix. On the other hand, profound changes have occurred in the regulatory environment over the past years. Specifically, more stringent capital requirements under Basel III Accord, including counter-cyclical capital buffer, capital conservation buffer, and other additional capital charges will be expected in coming years. We have to adopt proactive measures to manage our capital from a long-term perspective.
In view of the capital needs for meeting regulatory requirements and capturing business opportunities in the future, after taking into account both the short-term and long-term interests of shareholders, the board has set a target dividend payout range from 40%- 60%, unless under exceptional circumstances, so as to strengthen capital base through internal retention. The board recommended the final dividend of HKD 0.465 per share for 2013. Together with the interim dividend of HKD 0.545 per share, the full-year dividend per share will amount to HKD 1.01, representing a payout ratio of 48%. We will continue to maintain capital ratio at solid levels, which provides a firm footing to extend our success and enables us to withstand market uncertainties. I would like to stop here, and Mr. Zhuo, our CFO, will give you more details on the financial results. Mr. Zhuo, please.
Okay. Thank you, Gary. First, let me go through the income statement with you. In 2013, our profit attributable to the equity holders increased by 6.3% to HKD 22.3 billion. This is achieved on the back of higher earnings quality, driven by solid growth in net interest income and net fee income. Impairment analysis recorded a net charge of HKD 737 million, down 14.2%. Operating expenses increased by 7.3%. Operating profit after impairment analysis rose by 17% to HKD 27.5 billion. Net interest income was up by 13% to HKD 27.9 billion, driven by the growth of 7.4% in average interest-earning assets, coupled with 8 basis point net interest margin improvement. The growth of average interest-earning assets was mainly supported by the increase in customer deposits, though partly offset by the decrease in RMB funds from our clearing bank fund business.
Net interest margin expansion was largely attributable to the widening of loan and deposit spread. The average asset yield was also improved with the increase in higher yielding assets such as advances to customers, RMB bonds, as well as balances and placements with banks. Total non-interest income rose by 13.6% to HKD 12.4 billion, mainly driven by a 15.5% increase in net fee and commission income with broad-based growth. In particular, investment and insurance businesses performed strongly. Commission income from funds distribution surged by 52%. Securities brokerage income increased by 15%, and commission income from insurance business increased by 33%. Other traditional businesses also saw steady growth. Fee income from credit card business were up 11%, driven by increases in both card holding spending and merchant acquiring volume. Other operating income increased by 9.1%, supported by the robust growth in the insurance segment.
Net trading gain dropped by 5.5%, mainly due to the mark-to-market changes of certain data securities, while income from currency exchange transactions increased. A net loss of HKD 159 million were recorded on financial instruments designated at fair value through P&L. It was mainly due to the mark-to-market changes of debt securities of BOC Life caused by market interest rate movements. Other operating income was HKD 634 million compared to a loss of HKD 730 million in 2012. The change was driven mainly by an increase of 42% in net insurance premium income, while net insurance benefits and claims increased moderately by 8.8%, and there was a lower provision for insurance liabilities due to rising long-term interest rate. Now let's take a look at expenses. Operating expenses grew by 7.3% to HKD 12.1 billion. Cost-to-income ratio improved further to 30%, among the lowest in the local banking sector.
While maintaining cautious cost control to enhance operating efficiency, we continued to invest in new business platforms and the mainland business to support long-term growth. Staff costs increased by 6.4% due to annual salary increment and an increase in headcount in the mainland business. Premises and equipment expenses rose by 8.2% with higher rental for branches in Hong Kong and new branches in the mainland. Depreciation expenses rose by 11.4% due to larger charges on premise following the upward property revaluation in Hong Kong. Other operating expenses were up 6.4%, mainly due to higher business expenses incurred by mainland business and the group's credit card business. In 2013, loan impairment analysis recorded a net charge of HKD 730 million, down 14.5%. This was due to no net charge of individually assessed impairment analysis.
Net charge of collectively assessed impairment analysis increased by 16%, largely due to loan growth and the periodical update of the parameters in the assessment model. Recoveries were HKD 288 million, up 9%. The formation of new classified or impaired loans were HKD 1.3 billion and represented 0.15% of total loan outstanding. The increase of classified or impaired loans was mainly due to the downgrade of a few corporate loans. Overall loan quality remained solid with the classified or impaired loan ratio standing below market average. The group's total assets increased by 11.8% to HKD 2.05 trillion. Cash and balances with banks and other financial institutions surged by 78%, mainly due to the increase in RMB funds placed with the PBoC by our clearing business. Balances and placements with banks and other financial institutions relating to the RMB business in Hong Kong also increased. Securities investments decreased by 8.9%.
Advances and other accounts increased by 12.8%, driven by the growth in advances to customers and trade bills. Total equity grew by 5%, mainly attributable to retained earnings and a rise in premises revaluation reserve. We maintain a flexible deposit strategy to support business growth while keeping cautious control on funding costs. Deposits from customers increased by 8%, with RMB deposits being the major driver. Advances to customers increased by 10.3%. Corporate loans for use in Hong Kong grew by 5.8% with growth across a range of key industries. Individual loans expanded by 5.5%, of which residential mortgage loans grew by 1.8%. The trade finance rose by 27.2%. We continued to adopt a prudent approach to conducting background check of transactions. Loans for use outside Hong Kong increased by 15%. The loan-to-deposit ratio moved up by 1.3 percentage point to 64.6%.
Securities investment fell by 8.9% with a reduction mainly made in lower yielding sovereign securities. We selectively increased positions in high quality financial institutions and corporate bonds. Holdings in RMB bonds issued by policy banks and high quality mainland corporates were also increased. 86% of our debt securities holding were rated A or above. We continued to deliver good performance across different business segments. Personal banking business increased its operating income by 18%. During the period, we remained the market leader in new mortgage loans and the UnionPay cards business. While the wealth management platform was further strengthened, the private banking service showed encouraging results. Corporate banking business recorded 16.7% growth in operating income on the back of the balanced growth in loans and deposits, as well as better loan pricing.
For treasury business, we closely monitored market changes and adjusted our investment portfolio to increase return within targeted risk appetite. Efforts were also spent in promoting treasury products and services, which were well received by customers. The income of insurance business increased by 66%. We continued to broaden product offering, actively developed new distribution channels, and established partnerships with brokerage houses to promote our products. As for mainland business, total operating income increased by 28.5% as we further optimize asset liability mix to improve return. We continue to enrich products and services and further strengthen the distribution channels. The number of branches increased to 41, while the e-banking function was further enhanced. Customer loans and deposits grew by 12.8% and 16%, respectively. Classified or impaired loan ratio dropped to 0.61%. The operating expenses increased by 28.4% as we further invest in mainland operation.
That concludes my financial review, and I now hand you back to Gary. Thank you.
Thank you, Mr. Zhuo. For 2014, we expect to see modest GDP growth in major developed countries. Against that backdrop, Hong Kong's economy is likely to be relatively stable. However, we need to be vigilant as macro uncertainties still exist. In particular, the pace of U.S. economic recovery and QE tapering will carry meaningful implications for the global markets, especially for the normalization of interest rates. Locally, banks are also facing tougher operating conditions with regard to various regulatory requirements. From a positive stance, the simplification of operating procedures for cross-border RMB business and continuous expansion of offshore RMB markets will create more business opportunities. The group's proactive strategies to pursue quality growth over the years have successfully put us in a strong position to continue our growth trajectory.
To cater to the global needs of leading corporate customers, we are constantly upgrading our global service capabilities in areas such as cross regional cash management, custody, treasury products, and trade related services. Our newly established corporate service center will further improve our service efficiency and quality. We also see great demand for cross-border wealth management solutions from personal customers, not only in Hong Kong, but also from the mainland and overseas. To capture these business opportunities, we will strengthen our product innovation and distribution channels to offer comprehensive investment solutions. Capitalizing on fast developing technology, we will drive efficiency and innovation, introducing new business capabilities to meet the evolving needs of customers. Recently, we launched a mobile application, Mortgage Expert, to provide one stop mortgage service to customers with real time online consultation and mortgage valuation alerts, which are the first of its kind in the market.
Our paperless branch teller model and electronic account opening platform will be extended to cover 180 branches from around 80 last year. We see considerable room for future growth, especially with increasing use of RMB globally. Riding on this favorable trend, we will seek to build customer relationships with large overseas financial institutions, including central banks and global banks. We will expand our RMB banknote business to different areas to form a global RMB banknote network. Being the sole clearing bank of the local RMB business, we are committed to enhancing our service capabilities and efficiencies to cope with the growing clearing volume. We will pursue seamless service delivery within this BOC Group to maximize the benefits of our collaboration.
We will promote our leading asset management products to more overseas customers, increase the sales efforts of syndicated loans business to Southeast Asian markets, and develop trade finance business abroad to satisfy the needs of large Chinese institutions expanding in foreign markets. Maintaining a strong financial position is a key priority of the group. We will step up initiatives in liquidity and capital management to support the group's mid to long term growth. We need to be forward looking and take proactive measures to strengthen capital base and ensure its efficient use when implementing business strategies. This also includes our ongoing efforts to invest in areas that boost the development of capital light businesses. That conclude our presentation here. My colleagues and I will be pleased to take questions from you. Thank you very much.
Okay. Steven, would you like to be the first? Please limit your questions to no more than two each time, so provide equal opportunity for all, okay?
Yep.
Thank you.
Okay. Thank you. Steven Chan, Maybank Kim Eng. The two question actually is correlated with each other. I think the key concern this time is about the core equity, the common equity Tier 1 CAR. It has already dropped to below 10.6%. Indeed today, we have another small bank in Hong Kong, which the common equity Tier 1 CAR was around 10.4%, and they start to do right issue. My concern is, how will that affect your future strategy in terms of loan growth, net interest margin, and indeed, you have lower your dividend payout target from 60%-70% now to 40%-60%. Do you think that you need to replenish your equity capital very soon? That's the first question.
Second question, on page 160 on your bank report, you also show your interest rate sensitivity analysis. It shows that actually, in case if there is a 100 basis point increase in both Hong Kong dollar and US dollar interest rate, your reserve will be reduced by around HKD 7 billion. Again, that is equivalent to around 7% of your core equity. In case if U.S. start to raise interest rate, how are you going to avoid your reserve being eroded by the interest rate high impact?
Could you please go through the question again?
Okay. Thank you for this question. The capital management is a critical job for banks in face of the new Basel requirement and the higher, more stringent requirement from regulator. The decrease of our CET1 for 2013, as we explained in the presentation, there are a couple of factors. First, the calculation method, and the risk weight requirement under Basel III is different from the calculation from 2012. Also in this year, the business growth, including the credit asset growth, the inter-placement, and balances derived from the RMB business also increased the risk-weighted asset. Beside that, the interest rate move, especially the rise of the treasury bond also result in valuation loss in our AFS securities. Considering all those factors, we think it is important to take some measures in managing the capital base.
Beside that, beside adjust the dividend payout ratio, we also take different kind of comprehensive measures, both the risk-weighted asset in managing the risk-weighted asset and the capital base. For example, we shortened our duration of our bond investment to mitigate the impact from the interest movement. At the meantime, we also optimize the customer or the distribution of the credit asset both the loan and the interbank placement to generate with reasonable return, but with acceptable risk weight from those counterparty. Going forward, there might be some other new requirements such as the countercyclical buffer, the capital conservation buffer, and the G-SIB buffer may be imposed by the regulator. We have to take proactive measures in the capital management.
Considering our current capital base actually is still well above the regulatory requirement. Our asset quality, especially the credit asset is still quite good. We didn't see the substantial deterioration of asset quality. We are confident with our capital base to support appropriate growth going forward. At the meantime, to maintain a stable capital ratio.
Still second question about interest rate sensitivity analysis.
Yeah. The interest rate analysis, this is disclosed based on the requirement of the regulator and the methodology, and the assumption itself actually is consistent. We consistently disclose and show the method. But according to in the past several years, we have taken a lot of measures to reduce the interest rate risk. As we said, we shortened the duration of some bond investment securities, and we also carefully manage the mismatch of the repricing of other assets beside bonds.
In terms of interest rate sensitivity, in fact, it's a static analysis. It's not dynamic. In fact, in the second half of last year, not only that we shortened duration of our securities portfolio, we also hedged some of the interest rates by doing interest rate swaps, longer-term interest rate swaps. I'm confident. Of course, everybody expecting the rates to come up because of the tapering and perhaps tightening in the United States. Through dynamic and proactive management, I really personally don't expect that to happen. Rates may go up, but I don't think the kind of loss will happen to us. I guess, just the stagnant situation that time, the measures we've already taken and will take will certainly minimize the loss. In fact, we are all hoping that rates will be higher because we've been suffering at extremely low interest rates.
That has eaten up into our margin and the spread. We generally believe that the banks, especially in the case of Bank of China (Hong Kong), because of our cost-free funds, the large size of cost-free funds and low cost funds, high interest rate will benefit us instead of hurting us.
Okay. Who would like to be the next? Gary?
Thank you. Gary Lam from Citi. The question is on the potential implications of a changing RMB foreign exchange rate outlook. Clearly, we are seeing increase of volatility in the foreign exchange rate. Could you share with us your insights on how that could potentially first impact your client activity, both in the fee income side and also on the loan demand or deposit side? Secondly, how are you positioning on your balance sheet in terms of hedging the risk on the FX front? Thank you.
Of course, lately we've seen some sort of very dramatic fluctuation of exchange rate of RMB against US dollars as a result of the widening of the trading band by the Central Bank. Obviously, it will be not true if I say that the expectation of RMB's appreciation certainly boosts the RMB business. Of course, on the other side, it may certainly have some impact on the business volumes and the customer expectation, especially when customers come to the market to accumulate or intend to accumulate RMB assets. It might have some negative impact if RMB depreciated. The question is, personally, I believe, even though we've seen very drastic increase and growth of RMB business, personally, I still believe that RMB business is still at its very early stage of development.
If you look at the trade finance, as far as I know, perhaps only about 20% of the trade now is settled in RMB. China's trade is settled in RMB. That actually in the last few years we've seen dramatic increase, and it will continue to increase. That will certainly increase business volumes for trade-related activities as well as payments. We've seen very, very fast increases in our clearing volume. We're acting as a clearing bank for the local banks and foreign participating banks. I think that's one. The other thing is perhaps that both corporations and individual investors are still looking for RMB assets in order to diversify their investment portfolio.
We're seeing very quick increase in our RMB life insurance products in last year, even though it slowed down slightly in the second half, but year-on-year is still very satisfactory growth. We expect that to continue, and we expect more active trading in RMB related products, be it foreign exchange, be it money market, be it securities or bonds and things like that. Even though we're seeing sort of less strong appreciation expectation of RMB, but with more activities in the market, we think it will still be able to benefit from the increasing volumes and activities in RMB related transactions.
Okay. Yeah.
This is Gurpreet with Goldman Sachs. Thanks for taking my question. My question is regarding the risk weight density. If I look at the risk weighted assets to total assets, that increased this year maybe due to regulatory adjustments also. Would you say that those regulatory adjustments are ongoing? Would we see this density move up this half or stay at this level? The second question is, the dividend payout ratio band seems quite wide versus your previous band. This increases the uncertainty on the dividend. To the extent that you can guide towards a particularly narrower range, that would be helpful. Thanks.
Whether the regulators will change the regulations and result in higher risk weight. To tell the truth, I don't know. But the trend is quite obvious. For instance, last year, they increased the minimum risk weight for mortgage-related loans, and in general, increased the risk weight for financial institutions, things like that. It seems, especially after the implementation of IRB and things like that, the regulators becoming more and more conservative, imposing risk weight floors, rather than allowing the financial institutions to rely on the risk calculations from the models, internally developed models. So there's a risk, there is a possibility that regulators may impose more stringent risk weight on certain asset class.
The question is, if you look at our own risk weight changes with the growth of assets, other than those risk weight increase imposed by regulators, our other businesses, if you exclude increased elements of the risk weight increase by the regulators. In fact, our risk-weighted assets increase is more or less in line with our overall asset increase or loan growth. The second question is about the payout ratio. Is that?
Yeah. The target payout range is wide.
Okay. I think compared to some of our peers who did not declare any ranges, perhaps ours can give clearer guidelines for investors and analysts like you. 40%-60%, it's a tough decision. But if you look at the market, most of the financial institutions, listed companies here in Hong Kong, their payout ratio are actually around 40-something, that kind of payout ratio. For us, we're traditionally high dividend band. I know a lot of investors are still expecting us to pay high dividend. But because of regulatory requirements, because of the development potential, and also because of the balancing between the short-term, long-term expectation investors, we adopted this 40%-60% range to allow us enough flexibility to comply with the regulatory requirements.
At the same time, allow us enough capital base to capture the potential business growth. Because we are experiencing a lot of business demands, and from Chinese companies going abroad. We are doing a lot of collaborations, not only with BOC on the mainland, but directly with the overseas branches of BOC in the Southeast Asian countries and other parts of the world. We hope, with this kind of payout ratio, we will be able to save enough capital to really enable us to capture the business opportunities generated in China, generated in other parts of the world, so that we can really give investors a reasonable return in the longer run, that we will be able to maintain the expected return to our shareholders.
Okay. Sharnie?
Hi. It's Sharnie Wong from Barclays. Just to follow up on the capital question. How much loan growth or RWA growth are you expecting for this year, given that it seems capital is under a bit of pressure? Or will you scale back on those growth opportunities to conserve capital for this year?
CFO, do you have a number in your mind?
The adjustment for the dividend payout ratio to 40%-60% will give us more flexibility for the business growth, not just the loan growth. We may have other opportunities to deploy our asset. We are not going to use up all those savings in one year. If you look back in the past five to six years, we maintain our double-digit growth in loan side, and at the same time, we maintain a sustainable and balanced growth in deposit side. When we decide our loan growth target, we will look at our funding side, the overall pricing of the loans, and also the customer quality. If the business come up with the refined capital dividend payout ratio, it will enable us to have more flexibility to capture those business opportunity.
Jemmy?
Yeah. Hi, it's Jemmy Huang from JP Morgan. I have two questions. First one, also follow-up on the capital front. I think if my understanding is correct, you are still using the foundation IRB. I'm not sure if moving to advanced IRB will be part of the capital management this year. The second question is on the net interest margin. If I look at page 22, most of the improvement of the ACU actually comes from the short-term interbank placements. Just want to get a sense of what's your view on this sustainability over the net interest margin outlook for this year? Thanks.
Okay. Yes, we are still on FIRB, and we're trying to achieve AIRB. As you know, AIRB is much more complicated. We need a lot of modifications of the current models. We're still working on it. Hopefully, after the implementation of AIRB, we might be able to achieve some capital saving. But now the operating environment is changing. For the time being, it's really hard to say.
NIM. You are right, actually. To a certain extent, the improvement of the NIM, especially in the second half, particularly in the fourth quarter, was the result of the short-term asset placement, especially as a result of the interest rate spike in China. But on the other hand, if you look at the larger pool of our assets, our total loan yield has gone up by 6 basis points. We effectively manage our funding cost and our deposit cost, which increased by only 1 basis point.
If you look at our investment portfolios, we managed to improve the yield from our investment portfolios. I cannot really remember the exact numbers, but at least a few basis points. These are actually long-term placements of our assets. Even if the short-term interest rates in China or other parts of the world, especially in China, might go lower, I do not think the negative impact on our entire NIM will be limited. Of course, low interest rate environment throughout the world, particularly in the United States and Europe, certainly have pressure on our NIM. We would say, in the last year, we achieved very interesting results in our NIM improvement, and we will continue to make all the efforts in order to maintain our NIM so that we can generate a good return to our investors.
Due to the time limit. Todd? The last questions.
Hi, it is Todd Donovan with HSBC. Just looking at a couple of different data points here in the slide deck that you provided. If I look at page 19, the trade finance and the loans used outside Hong Kong, that accounts for roughly two-thirds of the total new loans in the year. Then if I look also on page 21, when I look at the operating income by segment, presuming that most of those are in the corporate segment that you got from a corporate business. The corporate business, in terms of the aggregate amount of change, only accounted for 48%. Is this a trend that we could expect-
Can you repeat your question, please, so that we can pick-
Yes.
exactly what you are talking about.
I was getting to that.
Yes, please.
If I look at this, you have two-thirds of the lending that is coming into corporate. But you only have 48% of the increase in operating income from corporate.
Okay.
How do we look at that? Or how should we look at that, particularly in the capital constraint situation that it seems that banks in Hong Kong are in, particularly Bank of China in Hong Kong, given some of the changes in dividends. How should we think about that from an ongoing return and the allocation of capital?
Let me try to answer your questions. You said two-thirds of the growth in our loans came from our-
Trade finance.
Trade finance.
They are in trade finance and loans for use outside Hong Kong.
Okay.
In an aggregate absolute amount, two-thirds came from that.
But in proportion, you are expecting higher revenue from the corporate side.
The corporate revenue on an operating income basis was only accounted for 48% of the absolute improvement in operating income. It seems that there's a greater proportion of assets contributing a smaller proportion of growth in operating income. I'm assuming that's also a fairly heavy capital weight as well.
I'm not so sure where the conclusions got wrecked, but I'm trying to figure out the answer for it. Yes, last year, we've seen a faster growth in our loans to use outside Hong Kong, both corporate loans and trade finance. As a China bank, it's inevitable, and that's our market. We have to do things. But then the question is whether we generate proportionally the same amount of revenue from our corporate banking. So that actually is your question, actually. This disproportionate relationship between the loan growth .
Oh yeah. That pattern has been a consistent downstroke in terms of the contribution of revenue over time. How should we think about that now that you have cut dividend, you're trying to manage capital in a much more different regulatory environment. How should we think about that?
Can I say?
Yes.
Yeah. Thank you for your question. As a commercial bank, we have the individual banking, the personal banking, and the corporate banking. In personal banking, we have around 300 branches in Hong Kong. Most of our deposit, more than half our deposit actually is from our personal banking. For the asset use of personal banking, mostly is retail mortgage. Even though currently we have the biggest market share of the retail mortgage, the proportion of personal loan compared with our total loan outstanding is only around one-fourth. That is the business model. For the corporate business, corporate banking business, the operating style, the revenue generating source is a little bit different from retail banking. We have to look at the details of the business model.
You are right. Going forward, there might be more requirement and also the regulator will expect banks rely much on the retail and demand deposit instead of the wholesale funding in both of the liquidity requirement and the capital requirement. Corporate banking, on the other side, is a major business for a commercial bank. The overall operating efficiency were much higher than the traditional personal banking business. We cannot just compare the income for both sectors. We have to look at they are actually being supplementary to each other, and especially as we are going to enhance our business platform. We are moving from traditionally personal banking, corporate banking to more comprehensive product line, product platform, such as the cash management, the trustee services, and the private banking.
All those new business platform, I think the corporate banking business can help a lot, in give comprehensive services to those new business products or new customers.
Okay. I want some comments on that issue. I think you are right. In recent years, the major loan demanding driver is mainly related to the corporate clients and also relate to the cross-border trade finance from mainland. That is why I think the banking in Hong Kong needs to be very carefully find some balance among the capital and the risk and the growth. If you compare the BOC Hong Kong's, our corporate lending, and the trade finance growth with our peer bank, you can find we are very conservative.
For example, for last year, for trade finance, our growth is far below the market. We are just experienced about 27%, so market is about 40%. Because BOC Hong Kong, we are a large player in the trade finance, so if we are just 20%, the market is over 40%, you can see we have very conservative. Even for total loan growth, BOC Hong Kong is also below the market.
From RAROC' s point of view, corporate banking business certainly generate lower return compared to personal banking. But the question is, personal banking or individual businesses and corporate banking perhaps sometimes can promote each other. If you don't do corporate banking, you may not get the personal banking business from the senior management people of those corporates and their workers. I guess, they on the one hand promote each other and also supplement each other.
If you look at our overall revenue from different businesses, our personal banking and corporate banking are roughly the same level, about HKD 140 something. Oh, no, about HKD 14 billion, HKD 14 billion- HKD 15 billion. The other part actually is the treasury operation. We hope we will be able to maintain a proper revenue structure so that will be able to help us weather any uncertainties in the future.
Even though, from RAROC's perspective, you may want to do more retail business. But Hong Kong is such a small and limited market and you can't really. Because we've already got 20% in mortgage lending, and it's very hard actually to expand market share. In terms of other businesses, our retail deposits also captures a large market share. Perhaps it's not realistic to put all your money, all your capital into some one business. So you have to really diversify to maintain a balanced revenue structure.
Sorry. Due to the time constraint, we have to stop here. I understand that you may have many questions. Feel free to contact us to arrange a one-on-one meeting. Thanks for coming. See you next time. Thank you.