Good afternoon, ladies and gentlemen. Thank you for attending the 2011 annual results presentation of BOC Hong Kong Holdings Limited. I am Yami Tan, Head of Investor Relations. Before we begin, may I draw your attention to this disclaimer slide? Now let me introduce our 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. David Wong, Deputy Chief Executive, and Mr. Jason Yeung, Deputy Chief Executive. For today's agenda, Mr. He will start with the performance highlights, followed by Mr. Zhuo's financial presentation. After that, Mr. He will talk about the outlook. Then we shall open the floor for comments and questions. Mr. He, please.
Thank you, Yami. Good afternoon, ladies and gentlemen. In 2011, overall market conditions were mixed. Banks in Hong Kong were faced with opportunities, but also increasing challenges. Global markets continued to be overshadowed by the Eurozone debt crisis. Mounting inflationary pressure also affected economic growth around the world. Is it okay now? Okay. In Hong Kong, the banking sector was still able to benefit from the business opportunities arising from the strong loan demand and further expansion of the offshore RMB market. Loan growth remained robust, though slowed down in the second half. However, deposit competition intensified, driving up deposit costs and putting pressure on banks' margins. The offshore RMB market continued to expand. The demand for RMB trade settlement grew rapidly, while RMB deposits in Hong Kong saw considerable growth.
There were also more opportunities for the deployment of the offshore RMB funds, such as RMB lending and bond investments. 2011 marked another record year for the group. We attained a broad-based growth in income and profit, and our strong financial positions remained intact. Both our net operating income and profit attributable to the equity holders achieved new highs. Our consistently solid performance demonstrated once again the effectiveness of balanced strategy that we have adopted over the past years. During the year, good progress was made in growing our core businesses and developing new initiatives. We also further optimized our assets and liabilities mix to improve profitability and to contain risks. In a low interest rate and highly competitive environment, we have taken conscious efforts to mitigate margin pressure by enhancing loan pricing, managing our funding costs, and optimizing our asset allocation.
In view of the increasing market volatilities, we adjusted promptly our portfolio mix to focus on high-quality and low-risk investments. To contain the potential risks arising from the Eurozone debt crisis, we have actively reduced our exposure to Europe. Costs were carefully managed to mitigate the inflationary pressure while we continue to invest in our business for long-term growth. During the year, we further invested in our e-banking platform to enhance customer experience. Our trading system was upgraded to cater for the development of RMB-denominated securities business in Hong Kong. To better serve the banking needs of corporate and SME customers, we set up a flagship commercial center. We also continue to invest in our mainland operation, adding two sub-branches and enhancing service platform. The investments we made in the past years were also paying off and helped the group to capture more business opportunities.
For example, our custody business further expanded its customer base last year by capturing the opportunities from QDII, RMB QFII, and various types of fund clients. The custody volume of RMB investment instruments was also on the increase. Our cash management business continued to introduce new products and services, including a wide range of RMB payment and receivable products. Capitalizing on our strong RMB franchise, we captured the new business opportunities and delivered encouraging results. We maintain our leading position in the offshore RMB business, including deposits, trade settlements, credit cards and insurance, and et cetera. We actively increased the deployment of RMB funds to improve return on our RMB assets, increasing the contribution to the group's income. Despite the pressure from low interest rate environment and intense competition, our net operating income before impairments allowances increased by 12% to over HKD 30.8 billion.
The solid growth of our traditional businesses and better deployment of RMB funds contributed to the increase. Operating profit before impairments allowances increased by 28% to HKD 23 billion. The group's profit attributable to the equity holders increased by 26% to HKD 20.4 billion, or HKD 1.93 per share. The increase was driven by the growth of core businesses and Lehman Brothers -related recovery. Excluding the Lehman recovery, our profit attributable to the equity holders increased by 11.5% to HKD 18.1 billion, which is also a new high since our listing. Return on average shareholders' equity was 16.7%, while return on average total assets was 1.14%. Our prudent and proactive lending strategy continued to work well. We achieved a balanced growth in loans and deposits, which increased by 14% and 11.6% respectively. Overall loan-to-deposit ratio remained stable at 61%. Average liquidity ratio stood at 36%.
We strictly adhered to our credit disciplines with emphasis on quality growth and better returns. Our loan quality remains sound with classified or impaired loan ratio at 0.1%, among the lowest in the industry. Pricing on new loans improved for both corporate and mortgage loans. In view of the severe deposit competition, we adopted flexible deposit-taking strategies to attract deposits and manage our deposit costs. We also optimized our asset allocation to better deploy our funds to higher-yielding assets. As at the end of 2011, our capital adequacy ratio stood at 16.9% and core capital ratio was at 12.5% under the FIRB approach. Our strong capital base not only positions us well for business expansion, but also supports our consistent dividend policy. The board has recommended a final dividend of HKD 0.558 per share.
Together with the interim dividend, the total dividend will amount to HKD 1.188 per share, representing an increase of 22% and a payout ratio of 61.5%. With a view to proactively managing our capital and liquidity, the medium-term note program was set up to enhance the group's flexibility, diversity, and efficiency in funding from a medium to long-term perspective. We also successfully issued a senior note of $750 million to global investors under the program to diversify our sorts of funding. I'll stop here and let Mr. Zhuo, our CFO, give you a more detailed financial review. Then I'll talk about the outlook. Mr. Zhuo, please.
Thank you, Gary. Let's begin with the group's income statement. We achieved record high results in 2011, with profit attributable to equity holders increased by 26% to HKD 20.4 billion. Net operating income before impairment analysis increased by 12% to HKD 30.8 billion, mainly driven by the improvement in net interest income and net fee and commission income. Other operating income declined due to the investment loss on certain financial instruments. Total operating expenses decreased by 18%, driven by the Lehman mini-bonds-related recovery of about HKD 2.8 billion in 2011. Excluding such recovery, core operating expenses grew by 12%. As for overall impairment allowance, a net charge of HKD 506 million were recorded. The group's investment properties registered an increase in revaluation gain to HKD 2 billion. Now let's take a closer look at our income lines.
Net interest income increased by 17% year-on-year to over HKD 21.9 billion, driven by a 32% increase in average interest-earning assets despite a lower net interest margin. The increase in average interest-earning assets was driven by the group's customer deposits and the increase in RMB funds from the clearing bank business. Net interest margin was down 17 basis points to 1.32% due to the narrowing of net interest spread by 19 basis points, while contribution from net free funds rose by 2 basis points. Net interest income growth maintained good momentum in the second half, up 15% over the first half, driven by the NIM improvement. Overall NIM was 1.44% in the second half, up 23 basis points on the back of easing dilution of the RMB clearing bank business as balance declined.
Excluding the impact of the clearing business, the adjusted NIM improved by three basis points to 1.51% in the second half. The improvement was due to the higher return on our RMB business as we actively enhanced the deployment of our RMB funds, with notable contribution to our net interest income growth in 2011. Excluding the offshore RMB business, NIM was down year-on-year and half-on-half on a moderate pace, mainly driven by higher deposit costs and increased proportion of HIBOR-based loans. Average return on our loan book improved both year-on-year and half-on-half, thanks to the improved corporation loan pricing. Total non-interest income increased by 1% to HKD 8.87 billion as growth in core businesses were largely offset by a loss attributable to the investment portfolio of our insurance segment.
Net fee and commission income recorded satisfactory growth of 11% year-on-year, driven by the HKD 7.8 billion. Income from investment and insurance business increased by 3.9% year-on-year, driven by the fund distribution and insurance business, which increased by 110% and 95% respectively. The increase was largely offset by the lower income from the stockbroking business amid weak market environment. Fee income from traditional banking business continued to perform well, up 22% with broad-based growth. Credit cards, loans commission, trust and custodial services, as well as bill commissions were the key drivers. As for other operating income, net trading gain rose by 25%, mainly driven by the fast-growing currency exchange activity and a smaller foreign exchange loss on foreign exchange swap contracts. This was partly offset by the mark-to-market losses on certain interest rate instruments versus gain in the previous year.
The group recorded a net loss of HKD 340 million on financial instruments designated at fair value through P&L in 2011 compared to a net gain recorded in the previous year. The net loss was mainly due to the investment portfolio of BOC Life amid the weak financial market. Now let's take a look at our expenses. This chart shows our core operating expenses excluding the impact of mainland-related recovery. The group's core operating expenses increased by 12% to HKD 10.7 billion. Cost-to-income ratio remained stable at around 34.6%. In 2011, we continued to focus on operational efficiency and cost control while deploying resources for business development. Staff costs increased by 12.7% due to annual salary increment, performance-related pay, and increased headcount for business expansion. Premises and equipment expenses were up 15.7%, mainly due to higher rental costs in Hong Kong and the Mainland, as well as IT investment.
Depreciation rose by 12.9% due to larger depreciation charge on premises following the upward revaluation. Other operating expenses were up by 8%, mainly due to higher expenses connected with the increased business volume. In 2011, loan impairment analysis recorded a net charge of HKD 379 million. Individual impairment analysis before recoveries recorded a modest net charge of HKD 12 million. Net charge of collective impairment analysis before recoveries increased by 36% due to higher loan balance and the refinement of our parameters in the collective assessment model. There was a net charge of impairment of HKD 117 million on securities investments arising mainly from the Irish and Italian FI papers, which had been disposed by the end of last year. At end of 2011, we had no exposures to GIIPS countries in our bond portfolio.
Our loan quality remains solid with classified or impaired loan ratio stayed at low level of 0.01% at end of 2011. Classified or impaired loans decreased by 18%, mainly due to collections and lower formation of new classified loans. New classified loans in 2011 was 0.07% of total loans outstanding. The quality of the group's residential mortgage loans and card advances remained solid. The combined delinquency and rescheduled mortgage loans ratio were at 0.01%, and the charge-off ratio of card advances further improved from 1.36% to 1.07%. Our total assets grew 4.7% to HKD 1.74 trillion, driven by the development of our core banking business. Cash and balances with banks and other financial institutions decreased by 33%. The drop was mainly caused by the decrease in RMB deposit balance of the participating banks maintained with the clearing bank.
Following the launch of the RMB fiduciary account scheme last April, participating banks can choose to place their RMB funds in the fiduciary account, which will not be included in the group's balance sheet. The further expansion of the use of RMB funds in the latter half of the year may also affect the level of participating banks deposits maintained with the clearing bank. We continued to optimize the use of our funds by growing the higher yielding assets. Placements with banks and other financial institutions increased by 173%, driven by the RMB related demand. Securities investment decreased by 1%. Advances in other accounts rose 17%, mainly driven by the growth in customer loans. Total equity increased by 12.6%, mainly attributable to profits for the period and improved premises revaluation reserve. Total customer deposits increased by 11.6%, mainly driven by growth of RMB and U.S. dollar deposits.
During the period, market competition for deposits intensified. Cautious measures were taken to optimize deposit mix to maintain a stable deposit growth. We continued to pursue our prudent and proactive lending strategy with focus on quality and profitability. Total customer loans increased by 14%, with broad-based growth. Corporate loans for use in Hong Kong grew by 14.8%, with growth covering a wide range of industries. Individual loans increased by 14.9%, mainly driven by the 15% increase in mortgage loans, as we well captured the growth opportunities in the first half of last year. Credit card advances increased by 17%, while other loans to individuals increased by 36%. Trade finance grew by 11%, while loans for use outside Hong Kong grew by 13%. Despite slow trade activities in the second half, our trade finance business remained stable compared to the first half. The group's loan-to-deposit ratio was 61%.
We managed our investment book with a high degree of prudence amid rising volatilities triggered by the Eurozone debt crisis, particularly in the second half of last year. We remained focused on maintaining safety while maximizing return. We actively reduced our Eurozone exposure, which was down by 25% compared to end of 2010. We increased our investments in government-related bonds, high quality FI bonds, and corporate bonds with solid fundamentals. Investments in RMB-denominated bonds also increased as we continued to enhance the use of our offshore RMB bonds. Looking at our portfolio mix, we maintain a solid portfolio with government or government-related papers increased from 37% to 44% of the total. Banks and financial institutions papers account for 46% of total, down from 56% a year ago. 92% of our debt securities were rated A or above. Now let's look at our segmental performance.
In 2011, corporate banking business delivered strong results with income growth of 27%. Corporate loans and customer deposits grew by 13.5% and 25% respectively. With improvement in the average pricing of lending and the deposit spread. We captured more business opportunity on the back of our strong cross-border capacities and close collaboration with BOC. We also focused on enhancing our services for SME customers by offering total solutions and participating actively in the government's guarantee schemes. For better customer segmentation, we refined our clientele management in different industries. This initiative not only enhances our customer service capability, but also steps up our credit and risk management. Personal banking business recorded a 2.5% decline in income as intensifying competition driven margin lower and income from securities brokerage decline amid a weak investment sentiment.
Despite the market challenges, we continued to make good progress in our business development, with solid growth in mortgages, finances, and credit card business. We effectively expand our high net worth customer base. Total number of wealth management customers grew by 17%. We further strengthened our investment product specialist team to better serve the high net worth customer group. For the treasury segment, income was up 24%, mainly driven by the improved interest spread of RMB funds and year on debt securities. The group continued to manage its banking book investments with a proactive approach to optimize risk-adjusted return. We also actively explored the RMB related business opportunity. During the year, the group act as a major market maker in the CNH market of Hong Kong and was an active participant in the RMB bond underwriting business.
Through our cooperation with BOC's overseas branches, we developed a global RMB banknote network, extending our services through those branches to senior banks and financial institutions in their host countries. Income of our insurance business declined by 47%, mainly caused by higher provision for insurance liability as a result of declining market interest rate. The decrease was also caused by the investment loss of its security portfolio. We continued to build up the insurance business by implementing a needs-based selling approach and expanding the product mix. Gross insurance premiums increased by 49%, with a sharp rise in regional premiums up 56%. The group's leading role in RMB insurance market was solidified through the development and innovation of RMB insurance products. Our RMB insurance products were well-received and attracted substantial new business. For our mainland operation, we further strengthened its deposit base to support long-term development. Customer deposits grew by 53%.
Loan balance declined by 8.9%, but loan mix improved with focus on higher union loans. Loan-to-deposit ratio of Nanyang Commercial Bank (China) was at 70% at the end of 2011. Total operating income increased by 42% year-on-year, mainly driven by the higher net interest income as a result of the increase in average interest earning assets. Operating expenses increased by 37% as we continued to invest in expanding our mainland operation. As at the end of 2011, we had 27 outlets in the mainland. That concludes my financial presentation. I'll hand you back to Gary for the outlook. Thank you.
Thank you, Mr. Zhuo. The outlook for the current year is expected to be more challenging as the European sovereign debt crisis may continue to threaten the stability and recovery pace of the global markets. Trade prospects may soften as demand weakens. The banking sector may face tougher operating environment. Business risks are likely to increase, and competition will remain intense while interest rate will stay low. Yet we believe that positive prospects still exist in Asia. In particular, the continued expansion of offshore RMB markets should create new business opportunities for banks with the right expertise and the capabilities. Taking into account the uncertainties and risks in the operating and economic environment, we need to watch out closely. It is our top priority to maintain stringent risk management and safeguard our strong financial position.
In 2011, we have really taken initiatives to optimize our assets and liability mix to better position ourselves in view of a more challenging environment this year. Our risk exposure is well contained with solid loan portfolio and a more conservative investment book. Our strong capital position is definitely a key competitive advantage in today's environment, especially with regard to the stricter requirements under Basel III. We have been working closely on the pre-implementation preparation, supported by a special task force led by the senior management. Given the quality and strength of our capital base, we'll be in a good position for the regulatory transition while continuing our growth and sustaining our dividend policy. We will maintain our consistent growth strategy by exploiting the group's core competencies and adhering to our strong business disciplines to drive balanced and quality growth.
While cost management is a key priority, investments will be made to strengthen our business capabilities and establish new platforms. Capitalizing on our strong customer base, both corporate and individual, there are still a lot we can do to enhance penetration and customer experience, thereby creating new business opportunities. Over the past two years, we have witnessed major breakthroughs in the evolution of the offshore RMB business in Hong Kong. Riding on these opportunities, we have successfully enhanced our customer relationships and extended our global presence, laying a good foundation for future development. With the increasing significance of RMB in the global economy, the demand for RMB products and services will continue to grow. We will further deepen and broaden our platform for RMB products and services. Together with our parent, BOC, we are well positioned to provide high-quality RMB services to meet the global needs of BOC Group's customers.
This year, we are celebrating the 100th anniversary of BOC . For BOC HK , we are also entering the 10th year of the public listing in Hong Kong. We take great pride in seeing our solid development throughout the years. Looking forward, we will still strive to maximize the strength of BOC Group, especially in promoting the cross-border financial activities and the global capabilities in RMB business. Together, we are seeing considerable growth opportunities on the back of our close cooperation and a strong BOC Group franchise. That concludes our presentation. My colleagues and I will be pleased to take questions from you. Thank you.
The gentleman in the front, please.
Thank you. Stephen Andrews from UBS. Just three quick questions from me. Firstly, one to do with China. Obviously, the shrinkage of the China loan book in the mainland. What was driving that? Was that purely just to try and get down to the 75% loan-to-deposit ratio, so it was you reclassifying those loans off to somewhere else? The second question is just to do with asset quality. The NPLs obviously look fine, but there has been a big jump in special mention loans off a low base, especially on the commercial book. Can you give us a bit of flavor as to where that jump is coming from? Is it mainland-related business? We are at the end of Q1 now. How has that trended into Q1? Because obviously, every day there seems to be another stock suspended in Hong Kong because of problems.
The third question, obviously the real positive in the results was the NIM, the underlying NIM going up in the second half. Just how that is behaving as we have moved into this year. I think the second half adjusted NIM was about 151 basis points. Is that still heading up in the first half?
Okay. Well, the easy question I will take first. The drop in China, in Nanyang Commercial Bank (China) , the loan in China actually is basically because of the 75% LD ratio. We managed to grow our deposit in China by more than 50%, but it was still not enough actually to satisfy the regulatory requirements. So as a result of that, the management in China managed to reduce its loan portfolio. By the end of 2011, the LD ratio in China was 70%. Asset quality, there is substantial increase of special mention. I believe the reason for the increase of special mention is the tightening of the assessment criteria. In fact, special mention portfolio, they are still performing loans. They are all performing loans.
Just because we look at certain risky areas, certain risky industries, and we classify them as special mentions so that we can watch them more closely. The third question actually is the trend. Is that what you are talking about?
Yeah, sorry, just that obviously we have seen for the first time in a long time, margins are starting to go up in the second half—
Okay, I will leave that to our CFO.
—Year-to-date and whether—
Sure. I will leave that to our CFO. Shall I?
Thank you. The NIM for 2011 declined around 17 basis points from 2010. This mainly due to some factors such as the RMB dilution, the higher funding cost. That situation has been improved in second half, especially with the expansion of use of RMB and also the improvement of loan pricing. Those are the positive factors. Also especially after we introduced the fiduciary account of RMB for other participating banks. That also helped easing the NIM in the second half. Now we are seeing the NIM in a stable trend sequentially, but it is quite subject to market factors such as the competition for deposit and also the mortgage loans competition in the market. We will take our prudent strategy and principle in manage our asset liability structure and manage the funding cost on a cautious base.
But in fact, if you look at what happened last year, there were some positive factors supporting NIM widening. First of all, there was an increase in loan pricing. Then, of course, competition deposits is very intense. It is very intense, so cost funding increased. But at the same time, we managed to increase the use of RMB. So the deployment of RMB fund actually increased substantially. That helped us to improve the NIM. Especially from the RMB side, we saw RMB margin, RMB NIM improved by more than 40 basis points, I am sorry. 40 basis points. But coming into this year, it seems the loan pricing is softening slightly because decreased demand in loans. Whether we can further expand the deployment of RMB assets depends on the market situation. There is also some kind of softening in interest rate in China as well.
But we are definitely seeing a very market improvement in the second half, and we hope now we will be able to stabilize our NIM at a high level.
Gentleman in the front.
Thank you. Steven Chan, CITIC Securities. Two quick questions. First of all, could you share with us about the Hong Kong dollar and U.S. dollar loan deposit ratio by the end of 2011? Did you see any sort of improvement in the ratio in the first quarter of 2012? So that is the first question. Second question. Congratulations on your very good growth in the gross premium for insurance. But we can also see that you also cede a lot of your premium to reinsurers, and as a result, the net premium actually declined compared with 2010. So I just want to know whether this is the special feature of your RMB-related life policy. Is it because you have to put some of your funding to your reinsurer in order to make the investment return that you guarantee to your policyholder?
If this is the case, how do you see this business? Because you see that on one hand, the gross premium is growing, but on the other hand, the net premium is not growing. Is it worthwhile to continue to grow this business?
Well, I will ask David to take the question about insurance because he is in charge of that business. Well, LD ratio for Hong Kong dollars. For a long time, for those of you who followed us long enough should know that we have been bothered by trying to find investment opportunities for excess funds in Hong Kong dollars. Because it is not so easy to find deep enough market to invest Hong Kong dollars. Yet at the same time, loan demand in U.S. dollars is very strong. Our deliberate strategy for this year is to increase our U.S. dollar deposits, so we can reduce the LD ratio to support our loan growth, as well as reducing the amount of currency swaps that we have to do in order to support our investment book. We implemented that strategy very successfully last year. The market situation has not changed.
It is still very difficult to find Hong Kong dollar investments in the capital markets. As long as market permits, we are going to stick to this strategy. Hope that answers your question.
But if that is the case, will that affect your funding costs of your Hong Kong dollar deposits?
Actually, I want to say I don't think so, but I'm not so sure whether that's the case or not. Well, in fact, I don't think it's going to have a major impact on our overall funding costs, because when you translate Hong Kong dollars into U.S. dollars to invest in the market, you have to also pay the premium if there is in the market. You know what I mean?
Yeah.
Okay. The insurance business, I'll ask David to take that one.
Okay. If you look at the insurance business line, you actually have to look at a couple of things. I mean, the net premium, the income, you're right. Net premium income comprised of a couple of things. On the top line is really the single premium, regular premium, and renewal premium. Of course, then minus that you have the reinsurance premium that you got to pay the reinsurer. But on the other side of the balance sheet, you also look at the insurance benefit and claims. Then the recoverable or the reinsurance company as well. So the recovery from the insurance company actually balance off that. So from a net premium side, you see a reduction there, but actually from the insurance benefit on a net basis also there's a reduction. So actually that work out or balance each other. So you can't just look at one line.
To answer your question, I think the reinsurance business is really part and parcel of our insurance business. I think all insurance business company does reinsurance because risks that we do not want to take, we can actually reinsure out, and that is part of our daily operation. As to whether this pertains to the RMB policy, I would say yes, because a large part of it is due to the RMB policy, because there's a lack of investment alternative offshore, so it will have to be done onshore. I hope that answered your question.
Next, Sally.
Thank you. Congratulations on the pretty decent set of results. Just two questions. First is really on the offshore RMB business. The revenue makes me kind of curious to see whether you can give us a rough breakdown of how you generate your revenue from the offshore RMB business, whether it's how much of that, roughly, how much of that is trade settlement, FX, interbank, and deposits, clearing, et cetera. If you can give us just a very rough breakdown, that'd be really helpful. On second thing, really, if I look at just the half-on-half asset yield for your NIM drivers, it seems like your interbank yield actually went up quite significantly. It seems to be the main driver of your half-on-half increase in NII. At the same time, your average loan yield has actually been pretty flat half-on-half.
My question is, I guess, it would be two perspective. Firstly, how much of that increase in your yield on interbank assets was driven by the onshore RMB market and now that given that SHIBOR was softening alongside the CPI is falling, and whether that's sustainable going forward? Or whether you lent a lot of that during the heightened Eurozone debt crisis where you lent to some of the global banks at a premium in terms of interbank yield, and you capture that. Just curious on what drives that higher half-on-half increase in interbank yield. On the other hand, would we be seeing more increase in the average loan yield going forward, seeing that it was actually only just flat in second half of last year? Thank you.
Just repeat the last part of your question.
Just the average loan yield. I noticed the second half average loan yield was actually pretty flat, half-on-half. We'll just be curious whether that's just a matter of a lot of your repricing will take place over time, and we should see that higher going forward.
Okay. Well, first of all, about offshore RMB. We do not give detailed breakdown of line by line, business by business, that kind of thing. But I can give you some flavor. For instance, our interest revenue generated on RMB increased 5x ?
Yes.
But do not expect too much out of that, actually. Trade finance, of course, increased. I do not know how many. Well, our RMB-related business did have very noticeable increase: foreign exchange, commissions, and trade finance, things like that. But I want to emphasize that RMB business may very possibly be a substitution of existing business. You know what I mean? In other words, our customers may originally want to do the business in U.S. dollars or Hong Kong dollars. But because of the opportunities in RMB, they chose RMB as the nominating currency rather than the Hong Kong dollar or U.S. dollars. As a result of that, also as a result of our leading position in the offshore market, perhaps we are able to attract more business from our customers in RMB. Originally, perhaps, should be in other currencies. So, this, I would just want to emphasize.
This 5% or 5x increase in our revenue, interest revenue, actually, does not really tell us that much in terms of whether it is just net increase or it is just substitution of existing business. But what I want to say, bring out of this is that because of our leading position, because of the market recognition of RMB position in the market. So when it comes to the business where the customers want to switch out of other currencies into RMB, we are in a better competitive position. The interbank increase. Yes, it increased substantially in the second half, and it is mostly because of the increases of our offshore RMB interbank placement. As you know, with the further expansion of RMB, people are able really to deploy the RMB funds, either by granting loans or by doing trade finance. So we are seeing more interbank placement demands in the market.
As a major liquidity provider and a major deposit taker in RMB in the local market, we are very, very active in the offshore RMB interbank placement market. The other one is.
Loan pricing.
Loan pricing. You want to take that question?
Okay. For the second half, loan pricing overall improved, especially for corporate loans and the residential mortgage loans. This is a good trend and also help improve our interest margin for the second half compared with the first half. At the same time, as the percentage of HIBOR-based mortgage loans increased, it also diluted the overall return, the average return of our loan book. This is a combined effect of the loan pricing. You look at the movement of our loan returns in the book.
Can I just quick follow-up in this interbank yield. Most of your interbank placements of the offshore RMB deposits are in Hong Kong or onshore in China? Does the rate differ notably now that the China rates are actually going down?
Well, I would say most of the increase actually is the offshore market outside mainland. But of course, the mainland placement in the mainland bank actually also increased, but not as much as the offshore interbank placement.
Okay. Thank you. Thank you very much.
Is that right? Yeah.
Next, will you please pass to this gentleman in the second row?
Thank you, and congratulations on the results. This is Gary Lam from Citi. Two questions, if I may. The first regarding loan growth expectations. On the backdrop of slowing down our macro economy, how does the management team currently see the demand in loans? One backdrop for this question is, in your trade bill business, that was also growing quite fast over the last year from about HKD 32 billion to HKD 50+ billion. Are you expecting some of those to reverse? The second question is regarding capital and Basel III. With the HKMA consultations out, could you offer some color on the bank's preparation and impact assessments on Basel III? Can we expect additional disclosures in the coming future? Thank you.
Okay. I will ask Mr. Gao to take the questions on loan growth and trade bill business growth. Then perhaps our CFO will talk about Basel III.
Okay. I think for general loan growth for the market, we see that because the slowdown in the economy in the mainland outside China. We see there might be, I think loan growth will be affected. But I think for specific bank, it might be different, especially for Bank of China (Hong Kong) . You can see for past several years, we have very balanced growth. Actually, for past two years, we are even below the market. We believe that even in the general situation, there might be a slowdown, but for Bank of China (Hong Kong) , because our client base and also since the RMB business, we still can keep our pace of growth for our very sustainable stable growth.
For trade bill, I think you are right. For the past two years for Hong Kong, it is dramatic growth. But since the middle of last year, Hong Kong, they adjust the statistic measures and also give some guidance on the very prudent, stringent measure to evaluate, to assess the background of trade. I think generally there might be a slowdown. But for Bank of China (Hong Kong) , actually, compared with the market, we are below the market growth. I think that for this year, because trade bill is already not accounted in the trade finance. I think there might be also a slowdown in the trade bill business. That doesn't have any impact on the trade finance, because it was already excluded from the trade finance business.
Well, in terms of loan growth, if you follow us long enough, you may know in the last two to three years, we've managed double-digit, mid-teen, that kind of loan growth rate consistently. If you look at our car ratios, look at our liquidity ratios, look at our LD ratio, I think those financial ratios are showing that they're strong enough to support double-digit growth in the next few years continuously. But whether that will happen or not depends on the market. As Mr. Gao mentioned, definitely we're seeing a slowdown in the loan demand. But it now comes to the Basel III question.
Okay. Thank you. We have set up a special task force to assess the impact of Basel III on us and to prepare for the implementation of Basel III. Basel III will require strict standards for capital and liquidity. That's quite true, especially on the high liquid asset. But given our quality and the strength of capital and our healthy liquidity ratio level, we will be in a good position for the regulatory transition. We are committed to continue our growth, and also to maintain our sustainable dividend policy.
Actually, we're anxiously waiting for the guidelines from HKMA, and we're certainly aware of the general requirements of Basel III, but local requirements, very specific requirements suitable for Hong Kong banks, we're waiting for the guidelines from HKMA. So when that comes out, we will be able to calculate our costs in the future, and see what kind of measures we should adopt in terms of our capital management.
We will take the last two questions, and it goes to Edwin.
Hi, this is Edwin from Bank of America Merrill Lynch. One question just to clarify on the margins. Of the 22-23 basis points pickup half on half, could you give us a flavor of how much was due to the transfer from fiduciary to placement account, how much was due to the higher reinvestment yields on the RMB, and how much was due to repricing?
That's a very complicated question.
But would you be able to give us the answer?
Perhaps it will take few guys to make calculations for a day and then give you an answer.
That is true.
I do not know whether CFO is ready for that question or not.
Try to give you some color on this.
Okay.
The overall NIM for the second half increased 23 basis points from second half. But adjusted NIM, meaning if we exclude the impact of clearing bank function, the NIM for the second half was 1.51 basis points, increased 3%.
Three.
3 basis points. The introduction of the fiduciary account and also our enhancement for the use of RMB fund, offshore RMB funds, both from ourselves and also the clearing bank actually contribute a lot for the improvement of NIM in the second half.
Thank you very much. A second more general question for the managers. Can you give us a sense of how the year has started for you in the first three months from an income and profitability perspective?
Perhaps, that is a question too general for us to take. Sorry that I cannot give you a concrete business forecast. As I said earlier, and also Mr. Gao said, we are seeing a slowdown in loan demand. We are seeing a slowdown in economic activities in general. As you all know that the National People's Congress in China, at the end of that, the government forecasting a 7.5% growth rate for China, economic growth rate for China, and Europe is not doing fine. U.S., we are seeing recovery, but what kind of positive impact that is going to have on us is very hard to say. If you followed my outlook, I am not that optimistic in my outlook.
Perhaps to add some color to the personal banking business, particularly on loan growth. As you would expect, bulk of growth on personal lending is mortgage. After a fairly quiet January and early part of February, we have seen a very significant pickup in mortgage applications towards the latter part of February and into March, which currently are maintaining at a higher level than the early part of the year. Of course, this is very much driven by market activities. What we have seen is pickup in secondary market transactions and also seems to be increased plans by developers on the primary market. I think it is too early to draw any conclusion on mortgage growth this year, but we are cautiously expecting still some growth. Certainly not as much as you would expect from last year.
Well, that ends our presentation. Thanks again for attending.
Thank you very much.
Thank you.