Good afternoon, ladies and gentlemen. Thank you for attending the 2010 annual results for presentation of BOC Hong Kong (Holdings) Limited. I'm Jamie Tan, Head of Investor Relations. Before we begin, may I draw your attention to this slide for our forward-looking statement disclaimer. Now, let me introduce our management team. With us today are Mr. Gary He, Vice Chairman and Chief Executive, Mr. Chengwen Zhuo, Chief Financial Officer, Mr. David Wong, Deputy Chief Executive, Mr. Jason Young, Acting Deputy Chief Executive, and Mr. Li Jiuzhong, Chief Risk Officer.
For today's agenda, Mr. He will first take you through our key performance highlights, followed by Mr. Zhuo's financial results presentation. After that, Mr. He will talk about the outlook. Then we shall open the floor for comments and questions. Please note that all the figures in this presentation are in Hong Kong dollars, unless otherwise stated. Mr. He, please.
Thank you, Jamie. Good evening, ladies and gentlemen. Before we begin, I would like to introduce you to our new executive management member, who is very familiar to all of you, I'm sure. Mr. Jason Young, who will succeed David Lam as the Group's Deputy Chief Executive overseeing our personal banking business. Now let's start the presentation. In 2010, overall operating environment continued to improve. Although the recovery of most Western economies was far from smooth, many Asian countries, in particular China, demonstrated strong growth.
During the year, banks in Hong Kong benefited from the extraordinary growth in loan demand. In addition, the further opening of RMB business has created a new horizon of development opportunities for the banking industry. Local RMB deposits and trade settlement recorded robust growth, especially in the second half of the year, following the expansion of the RMB trade settlement scheme.
While exploiting growth opportunities, we also stayed alert to various challenges and risks, including the volatilities in the global financial markets, excessive liquidity, persistently low interest rates, intense competition, and escalating costs. Apart from the financial results, I would like to take the opportunity to share with you our management philosophy behind the figures.
Being a forward-looking banking group aimed at delivering sustainable results, our management strategy is to stay ahead of the changes in market conditions, be they positive or negative, and take appropriate measures on a timely basis. This has proven successful with the decisive initiatives we took in 2009 to assess opportunities and to drive growth when the overall atmosphere was still bleak. The 2010 results once again reflected the effectiveness of our proactive management in response to the fast-changing environment and the unusual market trends.
Our results were solid and well-balanced, with continued growth in core businesses while maintaining strong financial position and sound risk management. Over the past years, we have taken significant steps to develop new business capabilities in the key strategic business areas, such as our transactional banking, wealth management business. We continue to make good progress in these developments. In transactional banking, our cash management and custody businesses continue to do well with enhanced service and product capabilities.
Our cash management platform was substantially enhanced with a series of new products launched and closer linkage with BOC and its overseas branches network. For our custody business, we have established our leading edge in the QDII business and continue to work closely with BOC to expand our customer base. Our insurance business also delivered remarkable results with improved market share and ranking.
The latest market figures showed that BOC Life moved up further to become top two life insurers in Hong Kong. In response to the strong market demand, it also established its leadership in RMB insurance products. 2010 was a year which saw accelerated pace in the expansion of offshore RMB market. Capitalizing on our competitive edges, we maintained leading market positions in our core RMB businesses.
During the period, our RMB deposits, trade settlement, exchange transactions, and bond issuance all recorded encouraging progress. We pioneered a number of new RMB services in trade settlement, treasury, and insurance products. We were also appointed by the People's Bank of China as the clearing bank for RMB banknotes business for the Taiwan region. In 2010, while capturing the business opportunities, we persisted in implementing a proactive yet prudent strategy to ensure that our business would grow in a balanced and sustainable manner.
We focused on maintaining good balance among growth, return, and risks. As shown in these charts, we delivered a set of well-balanced results. Our core businesses continue to perform well. Lending business sustained the growth momentum achieved in 2009 and grew by 19%. Against the backdrop of exceptionally high loan demand in the market, we stood firmly on our risk management principles and credit policy to ensure quality of our assets.
Overall loan quality remained sound with classified or impaired loan ratio further improved to 0.14%. We also took advantage of the growth opportunities to further optimize our business structure. To support healthy growth of our business, we took initiatives to expand our deposit base. Meanwhile, we closely monitor and manage our loan-to-deposit ratio and liquidity position with both ratios remain healthy. Since the financial crisis, banks' capital strength has become more important than ever.
BOCHK remained well capitalized, which is essential for supporting our long-term development, as well as ensuring a stable dividend policy for our shareholders. In 2010, we achieved record highs in our net operating income before impairments allowances and profit attributable to shareholders. Despite pressure from low interest rate and intense competition, net operating income before impairments allowances increased by 5.6% to over HKD 27 billion, with growth momentum accelerated in the second half, up 19% compared to the first half.
Profit attributable to shareholders increased by 16% to over HKD 16 billion, or HKD 1.53 per share. The board has recommended a final dividend of HKD 0.572 per share. Together with the interim dividend of HKD 0.4 per share, this will mean a total dividend of HKD 0.972 per share, representing an increase of 14% and a payout ratio of 63.5%. I'll stop here for now and pass you to Mr. Zhuo, our CFO, for a more detailed financial review. Then I'll talk about the outlook after that. Mr. Zhuo, please.
Thank you, Gary. Good afternoon, ladies and gentlemen. Now let's go through our financial performance in greater detail. Let's begin with the group's income statement. As Gary highlighted, we achieved record high results in 2010. Profit attributable to shareholders increased by 16% to HKD 16.2 billion. The group's net operating income before impairment analysis increased by 5.6% to HKD 27.5 billion, driven by the improved net interest income, net fee and commission income, as well as the improved performance of the group's insurance segment.
Total operating expenses decreased by 21% from a high base last year. As for overall impairment analysis, we recorded a net reversal of HKD 315 million on the back of improved loan quality and right back on security provisions. The revaluation gain of the group's investment property dropped by 3% to HKD 1.51 billion. Now let's take a closer look at our income lines. Net interest income increased by 4.5% year-on-year to HKD 18.7 billion and up 9% in the second half compared to the first half. The increase was driven by 18.6% increase in the average interest earning asset.
Net interest margin was down 20 basis points to 1.49, mainly due to the narrowing of net interest spread. The lower interest rates and intense market competition continued to pose pressure on our margin. Average loan year of our book was also adversely affected by the increased proportion of HIBOR-based loans. At the same time, we strive to improve our return by optimizing our corporate loan portfolio. Average pricing of our corporate loan book improved compared to last year. Another factor affecting our NIM was the local RMB business in 2010, especially in the second half. Local RMB deposits grew significantly.
The use of RMB funds is still very limited, given its early stage of development. The lower yield of these RMB funds, therefore, had a diluting impact on the group's margin. But it did contribute positively to our net interest income. For BOCHK, we also act as a clearing bank to provide RMB clearing services in Hong Kong. If we exclude the estimated impact of BOCHK's RMB clearing function, the adjusted NIM would be revised up to 1.59% from 1.49%. The total non-interest income increased by 8%, driven mainly by net fee and commission income, which grew 8% to HKD 7 billion. Investment and life insurance fee income declined by 4%, mainly due to lower stockbroking fee income. The fee income from traditional banking business continued to perform well, up 23% with broad-based growth.
Credit cards did particularly well, driven by improved volume of cardholder spending and merchant acquiring by 23% and 41%, respectively. Bills commissions increased by 20% on the back of robust performance of Hong Kong's external trade. Non-commissions increased by 4%, with growth mainly achieved in the first half. Other operating income increased by 7%, mainly driven by the mark-to-market gain of certain debt securities investment of BOC Life, which was caused by the drop in market interest rates.
Net trading gain decreased by 8%, mainly caused by the cost of foreign exchange swap contracts, which were used for the group's liquidity and funding activity. Other foreign exchange activity recorded encouraging growth, which contributed positively to the net trading income. Now let's take a look at the performance of our investment and life insurance business.
Total investment and life insurance income increased by 5.6%, mainly driven by the strong growth achieved by the group's insurance business. In general, we saw stronger growth momentum in the second half of the year, especially for the stock broking business and BOC Life. Stock broking business declined by 10% year-on-year from a high base in 2009.
Despite a slow first half, the stock brokerage fee income recorded a strong rebound of 18% in the second half on back of the improved market sentiment. Sales of wealth management products also pick up compared to last year. BOC Life's income grew by 51%. Gross insurance premium income increased by 11%, with second half income doubling that of the first half. Product mix continued to improve with gross regular premium increased by 185% year-on-year.
Growth of other operating income of BOC Life were mainly attributable to the gain from investment portfolio and higher net interest income. Now let's look at our expenses. The group's operating expenses decreased by 21% to HKD 9.6 billion from a high base in 2009, when significant expenses were incurred for mainland-related products. In 2010, we continued to focus on operational efficiency and cost control while deploying resources for business development.
Staff costs increased by 5.2% due to more human resources input for business growth. Compared to end of 2009, head count increased by 4%. The increase in staff costs also reflect the salary adjustment since April 2010, and higher performance-related incentives. Additional expenses were incurred for marketing and promotion, as well as business expansion in strategic focus areas such as the mainland operation and insurance business.
Premises and equipment expenses increased by 3.5%, mainly due to higher rental costs and IT investment. In 2010, loan impairment analysis recorded a net reversal of HKD 70 million. A net reversal of individual impairment analysis before recoveries were recorded under an improved economic environment. Net charge of collective impairment analysis before recoveries increased by 54% due to the expansion of loan portfolio and the refinement of our parameters in the collective assessment model.
For our security investment, we recorded a net reversal of impairment analysis of HKD 254 million. As at the end of 2010, our classified or impaired loan ratio improved further to a new low of 0.14%. Classified or impaired loan decreased by 51%, mainly due to collections and lower formation of new classified loans. The quality of the group's residential mortgage loans and card advances remained solid.
The combined delinquency and rescheduled mortgage loan ratio was at 0.02% at end of 2010. The charge-off ratio of card advances further improved from 2.7% to 1.4%. Total assets grew 37% to over HKD 1.66 trillion, driven by the development of our core banking business and expansion of RMB business in Hong Kong. Cash and balances with banks and other financial institutions rose strongly, mainly due to the strong growth in RMB deposits placed with the People's Bank of China by BOCHK's clearing business.
We continue to optimize the use of our funds by growing higher yielding assets, such as advances to customers and debt securities investments. Our deposit base continued to expand with a growth of 21.6%. Shareholders' funds increased by 10.6% due to higher profit for the year, improved reserves for both premise revaluation and available-for-sale securities revaluation. Total customer deposits increased by 21.6%.
The growth in our local RMB business was one of the key drivers. In addition, we have adopted a proactive deposit strategy to support the growth of our lending business, both in Hong Kong and for our mainland branches. Following our strong growth momentum achieved in 2009, we further grew our loans by 19%. Loans for use outside Hong Kong were the key driver, which increased by 29%.
We continue to capture opportunities arising from the overseas expansion of our corporate customers and the expansion of our mainland operation. During the year, we saw extraordinary demand for trade finance. Our trade finance loans surged strongly by 82%, backed up by our stringent lending principles and risk controls. Residential mortgage loans increased by 16% as a result of our effective marketing effort, coupled with the active market in 2010. The group's loan-to-deposit ratio stayed at around 60%.
We continue to manage our treasury investment prudently as the global market environment remains challenging. We remain focused on maintaining safety while maximizing return. We also controlled the overall duration of our investment portfolio to manage interest rate and liquidity risks. As at end of 2010, security investments increased by 20%. We increased our exposures to high-quality fixed-rate government-related bonds, financial institution bonds, and corporate bonds with solid fundamentals.
As for our U.S. non-agency RMBS portfolio, the carrying value was further reduced by 68% to $1.2 billion, accounting only for 0.3% of our total portfolio. Now let's look at our segmental performance. Personal banking business made good progress in 2010. We effectively expanded our high-potential customer base. Total number of wealth management customers grew by 16%. By collaborating with Bank of China, we further expanded our cross-border wealth management services and provided tailored services to customers in the Mainland and Hong Kong.
We have also enhanced our e-platform and optimized our distribution channels, such as launch our mobile phone banking, new stock brokerage features like 24-hour automatic security trading channel, and enhanced capacity. The number of internet banking customers increased by 12%, while stockbroking transactions through e-channels account for 77% of total transactions. Credit cards business experienced strong growth.
The total number of cards issued increased by 17%. Our corporate banking business delivered robust performance to capture the strong demand for cross-border loans and financial services in Hong Kong. We took full advantage of our unique market position and offered customized service and total solutions to our corporate clients. Benefiting from the implementation of Global Relationship Manager program, we strengthened our relationship with large corporate customers in the Mainland and Hong Kong.
For our SME business, we continue to strengthen our platform and provide support to SME customers through various initiatives, such as introduction of cross-boundary usage of credit limit, participating in the government SME Financing Guarantee Scheme. For the treasury segment, apart from the management of our investment book, we also actively promote our traditional business, such as foreign exchange and precious metals related businesses. We have also introduced new treasury products to meet customer needs.
For our insurance business, as I have said earlier, we recorded a strong performance in 2010. During the year, we further enhanced our multi-channel distribution strategy and continued with product innovation as well as mix optimization. In recognition of its outstanding standards of service quality management, BOC Life was given the Silver Award under the Hong Kong Management Association Quality Award Scheme during the year.
The main emphasis of our Mainland business was to secure healthy growth in the balance sheet. Deposits surged by 133%, while advances to customers increased by 26%. As a result, our loan-to-deposit ratio improved substantially to 113% from 210% in 2010. We are confident in meeting the regulatory requirement by end of 2011 while continuing our business expansion. Asset quality of our Mainland book further improved with the classified loan ratio dropping to 0.23%.
Total operating income increased by 10%, driven by higher net interest income. Operating expenses increased by 18% as we continue to invest in expanding our Mainland operation. We also made progress in enhancing our product and services platform, such as closer collaboration with a number of insurers to provide a wide range of insurance products, launching different cross-border financial services to meet the increasing needs of our customers. That concludes my financial presentation, and I'll hand you back to Gary for the outlook. Thank you.
Thank you, Mr. Zhuo. Looking ahead, we're encouraged by the continuing recovery of the global economy. We believe that under the Mainland's 12th Five-Year Plan, the Chinese economy will continue its growth in a more balanced fashion, and Hong Kong, given its close integration, will continue to benefit. Having said that, we're fully aware of the uncertainties and risks in the operating and economic environment arising from the inflationary pressure, social unrests in the Middle East and North African region, and the aftermath of the tragic earthquake in Japan.
These may cause possible headwinds across the path to the recovery, and global financial markets is still subject to volatility. We indeed need to watch out closely. Taking into full account both the internal and external circumstances, we will continue to adopt a proactive management strategy to drive balanced, sustainable, and quality growth in 2011 and beyond.
In anticipation of managing inflationary pressure, we will take a prudent approach in managing our costs. While driving business growth, we will continue to exercise stringent risk management and internal control, as well as maintain our capital strength and liquidity position. Regarding our capital management, commencing in 2011, we are migrating to the Foundation Internal Ratings-Based approach to qualify the group's credit risk.
The migration to FIRB will form an important foundation for the group's credit business and risk management. It will help ensure more efficient capital management to better position the group for quality growth opportunities. Capitalizing on our capabilities of product innovation and service reinforcement, coupled with channel optimization, we will enhance our service and product offerings to better serve the diverse needs of customers through an integrated service platform. We will strive for continual improvement to enhance our franchise.
For example, in October 2010, we established an asset management platform with the aim to provide tailor-made investment solutions to customers and enhance the group's retail sales capability. In December, the asset management unit set up the BOCHK Offshore RMB Bond Index. This is the first offshore RMB bond index of its kind in Hong Kong. Recently, it has also launched the BOCHK RMB Bond Fund, which was distributed exclusively to BOCHK's clients.
We have received very positive responses. This asset management platform will enhance our product manufacturing capabilities for our wealth management business. We will also continue to capitalize on our collaboration with BOC, our parent bank, which has been gradually integrated into our core business platforms. We will create more business opportunities for the group and enables us to optimize our customer portfolio and to extend our presence outside Hong Kong.
Especially in the long term, RMB will continue to become a currency more widely used globally. We need to take a more global perspective in developing our RMB business, and our close collaboration with BOC will enable us to better position for these opportunities. RMB business is an important strategic focus of the group. Despite exceptional growth seen in the second half of 2010, we need to note that we are still at a very early stage of its long-term development.
The pace of expansion will depend on changes in policies and customer behaviors. We expect it will continue to expand in an orderly and gradual manner. Meanwhile, we will continue to solidify our RMB business platform as part of our total solution strategy. We will take advantage of the opportunities to expand our customer base and enhance customer penetration. In all, 2010 was another rewarding year, which reaffirmed once again our ability and determination to enhance our franchise and to deliver sustainable growth.
Over the past years, you have witnessed our efforts in strengthening our business platform and enhancing our customer base. Our management philosophy proves to be effective and our efforts are delivering solid results. We will continue to leverage our strong foundations and capabilities to deliver growth, but more importantly, sustainable and quality growth. That concludes our presentation. My colleagues and I will be happy to take questions from you.
Please wait for the microphone before you start. The lady there, please.
Sorry, lady first.
Hi. Sophia Li from Deutsche Bank. Congratulations for very strong results. I have two questions. One is regarding your renminbi offshore deposit market share and the split between retail and corporate. The reason why I ask this is, I was told that the corporate side is much more profitable. I think this would be a good gauge as to assessing how profitable your renminbi deposits are being deployed.
My second question is regarding the new rule whereby the excess renminbi deposits will be put into Hong Kong and main custodian account going forward. I would like to understand how much of your deposit would be shifted into custodian account in the next result. The background to this is obviously, if you strip out your renminbi deposit, your NIM sequential movement was positive by 2 basis points. But if you include it is negative by 18 basis points. I would like to understand which figure is more appropriate for us to look for.
Okay. In terms of the NIM and impact of RMB business, I will ask our CFO to take that question. In terms of RMB deposits, actually, perhaps all of you must remember that since we ever started RMB business in 2004, we first started with retail business only. Until mid-last year, almost all deposits actually are retail deposits. The corporate deposits only increased after the further expansion of RMB trade settlement scheme in July.
Whether which one is more profitable, it is very hard to say. Of course, in terms of volume growth, of course, the second half saw tremendous growth in the corporate-related deposits. Our market share is still very solid, and we believe we still have a very strong leading market position here in Hong Kong. HKMA custody, I am sorry to correct you, has nothing to do with HKMA.
The custody account was proposed by us because some of our counterparties, especially those participating banks with tremendous growth in RMB deposits, because there is hardly any way to use the funds. So they had to place almost all their deposits with us, exposing them to huge, what they call counterparty risk to us. In order to solve that problem, we made a proposal to the regulators by using custody account, that kind of arrangement. Hopefully, that will remove the counterparty risk exposure. At the same time, of course, it is going to remove this part, the assets, off our balance sheet. I think it is going to be good to both the clearing and participating banks. NIM and RMB impact, I will ask our CFO to answer that question.
Okay. Thank you, Gary. The RMB have a negative impact on our NIM, I think because RMB now is still at its very early stage of the development. As I said, the RMB business itself has a positive contribution to our net interest income. Under the model of custody account, the NIM of our bank may be improved after this transition. But overall, I think RMB business is still a very good opportunity for BOCHK to expand our customer base to increase our market share of customers.
Well, in terms of the impact on our NIM, you may see we are two roads, clearing bank and participating bank. As a participating bank, as I said, we had leading market share position in Hong Kong. So our overall RMB deposits in proportion to our deposit base is much higher than our other parties. At the same time, of course, the negative impact is also caused by the clearing bank function because they all have to place the deposits with us.
The gentleman in the middle, please.
Thanks. It is Stephen Andrews from UBS. I have three questions, actually. The first is just on RMB deposit profitability again, and I am particularly interested in the participating bank. The clearing bank is relatively clear in terms of what you make there. It looks like 75% of your deposit growth in absolute terms in the second half was in RMB, and it looks like a lot of it was in corporate time deposits in RMB.
Can you perhaps let us know what spread you are making on corporate time deposits? Because the vast majority of those seem to be going straight through to PBoC Shenzhen. It sounds like you are not making much money on them. Because the margin in the second half, ex the clearing bank stuff, seems to have come down quite a bit. The second question is just to do with the balance sheet currency mix.
On the other side of the balance sheet, two-thirds of your loan growth last year was in U.S. dollars. So your U.S. dollar loan-to-deposit ratio has gone through 100% for the first time in the bank's history. Can you talk a bit about how you are managing the risk of having one side of your balance sheet re-denominating into RMB whilst the other is staying in U.S. dollars and Hong Kong dollars ?
Then, sorry for being long-winded, but the third question is quite an easy one. It is to do with the interest rate hedging issue you had in the first half. It looks like you got an interest rate hedging gain of HKD 686 million in the second half. I think you encouraged us to strip out the HKD 400 odd million when it was negative in the first half. Is this the same impact just reversing, so we should take out that HKD 686 million in the second half? Thanks.
Okay. You said the last question is easy, but I think we have to dig into numbers to find out. Why don't you try to see what happened to our hedging position? Well, in terms of RMB, as you said, majority of the growth actually came from corporate deposit. At the same time, retail deposit also grew at a steady rate. Well, the use of funds, actually, there are only a few options. A, you deposit with PBoC, you get 0.99%.
As a participating bank, of course, we place majority of our deposits with PBoC, earning less than 1%. Of course, at the same time, gradually, the People's Bank of China now have allowed the participating banks to use the domestic interbank market to place their funds. But of course, they wouldn't allow you to do all your deposits. They only give you quotas.
The third option, actually, is to make investment in the domestic RMB market, and they also give you quotas for that. So all in all, of course, in terms of use of RMB, it's still very limited. The majority of that, as a participating bank, actually, the majority of our deposit will have to be placed with PBoC . Of course, we also, on behalf of all the other participating banks, we place their deposits with PBoC Shenzhen as well. U.S. dollar LD ratio?
Yes.
Yes. Can you answer that?
Currently, actually, the regulator in Hong Kong, they don't have a specific requirement for single currency Loan-to-Deposit Ratio. For BOCHK, our overall Loan-to-Deposit Ratio is maintained around 60% for the end of last year. We are comfortable with that. I think this is a result of our balanced development, especially both the asset side and the deposit side. At the same time, we are very proactively manage our funding, especially in deposit taking, to support the business need, especially from our branches in Hong Kong and China.
We care much about the liquidity ratio, not because it is a regulatory requirement ratio. But it is important indicator of liquidity. Our liquidity now is maintained healthily at around 39%. I think that still provide a very solid foundation for our future business development. We will protect actively, take measures to manage the currency requirement out for different business needs. For the swap?
Yeah.
Yeah. For swap, I think you're talking about probably the foreign exchange swap instead of interest rate swap. But interest rate swap, we do see the notion amount increase year on year. That is because we have subordinated notes issued in early last year. For those subordinated notes, we conduct swap contract to hedge the interest rate risk. For foreign exchange swap, we are using those foreign exchange swap for funding and liquidity management purpose. Those are conducted in the normal business case to meet the business requirement of loans or security investment, and to make a higher yield of our funds.
Sorry, I think I might have not explained clearly. I think in the first half, there was HKD 424 million- , which you said was just a timing difference that would equal out. That's gone to a HKD 686 million + in the second half. You're saying that it's a different impact than the one you encouraged us to strip out in the first half?
Okay. You get that question.
Yeah. For the foreign exchange swap, there might be two parts that have impact in the P&L. The first is the swap cost. If you swap one currency into another currency, you have the swap cost. So that will be booked in a period, as it development. The second is the revaluation, which is according to the market value of the swap contract itself. So both those impact will be reflected in the P&L.
David, can you add anything to that? Currency swap is your area.
Yeah, I think Chengwen says correct in the sense that I do not know exactly your first half, second half. But actually you look at the effect of the funding swap so call.
Well, maybe, might propose
Yeah, maybe
you discuss it after the meeting.
Yeah. We can give you the specific numbers. Yeah.
In terms of LD actual, we are not too much concerned about the single currency LD ratio, as long as our overall foreign currency LD ratio is in a reasonable range. Because you can easily convert by doing foreign exchange swap from one currency into another, especially between Hong Kong and the U.S. dollar. So, you are right, our LD ratio for U.S. dollar is high, but our LD ratio for U.S. dollar and Hong Kong combined is still in a reasonable range.
I want to add, Stephen, for the U.S. dollar LD ratio you get from the annual report also include other accounts. So it is not just loans by U.S. dollars. So you have to strip out also the trade bills, and also advances to banks and FIs.
Thank you. Sally Ying from CICC. Congratulations on a pretty good quality set of results. I have, again, a question on net interest margin. You mentioned in your annual report that your second half NIM ex the RMB carrying function is 1.55%, if I am correct. And that is down about 9 basis points half and half, which is actually pretty commendable given that you suffer lower spread from RMB business and you were pretty disciplined in your loan growth.
I was just wondering if you could help us to break down that driver of that NIM, the sort of key factors you mentioned just now, such as the HIBOR-based mortgage, corporate loan output repricing, RMB business. And how the NIM trend has been sort of trending year to date compared to second half of last year's trend. Because one thing I do notice is your Hong Kong dollar liquidity seems to be pretty good. Your Hong Kong dollar LD ratio is pretty low.
I think it is around below 70%, which is below industry average of 80%. You seem to still have a lot of room to leverage up that vis-à-vis your competitors. Just wondering that balance sheet management strategy. A related question on RMB deposit-taking businesses, how do you make this business more profitable in the sense that when you take RMB deposits, you consider other things like cross-sell ratios and et cetera. Could you share with us perhaps on that front? Thank you.
Okay. First, we talk about NIM.
I tried. As we introduced, our NIM decreased 20 basis points. But if we exclude the estimated impact of RMB clearing bank business, the NIM declined 15 basis points. This is year-on-year. Half on half, the adjusted NIM will decline 0.9 basis points. Sorry. Yeah. I think the major factors affecting the NIM is first, the low interest rate environment is still maintaining extended period, and also the market competition for deposits.
The third, as you mentioned, is more HIBOR-based. More mortgage loans was extended using the HIBOR base. Thirdly, the RMB business, especially in the second half. I think for year 2011, those factors still have pressure on our NIM. Especially as the development of RMB business. Also we have more RMB proportions in our deposit that may have a negative impact on our NIM as a ratio. But as I said, the overall contribution of RMB business is still quite positive to us.
Well, in terms of the LD ratio of Hong Kong dollars, I just want to let you know that we don't have a separate loan strategy for each individual currencies. We look at the overall LD ratio, overall liquidity ratio. Of course, our better LD ratio in Hong Kong dollars is result of our proactive deposit-taking strategy, actually. We saw tremendous increase in loan demand, actually, and also pressure on the deposits.
So we started this proactive initiative actually at the beginning of this year. That actually put us in favorable position if there is a further demand in the loan, in the lending market, say this year. We don't have a separate strategy. We look at overall and of course, just like U.S. dollars and things like that, because it's swappable between the two currencies. We just look at them in a combined manner.
Renminbi deposits, and you talk about the cost income ratio and things like that. Renminbi deposits is one of our strategic focus, and we think Renminbi business, even though we've seen substantial jump in last year, in the second half of last year. We still think that it's in its very early stage of development. With Renminbi being more widely used internationally, there will be more demand for Renminbi business.
Deposit actually is just one of the products. Deposits perhaps is one of the fundamental businesses among all the products. It certainly enjoys very strategic focus within the management. Even though now the return on deposits still very limited. We think we're still going to strive to growth this market as much as possible to establish the customer base and on which perhaps we can develop more products.
Hi Gary. This is Kevin Chen of CLSA. I would like to follow up on your loan growth strategy. You mentioned a few times, and also in your presentation, the sustainable and balanced growth. I think in a sense, we're actually quite happy to see your loan growth. What is your strategy going forward? Would you continue to implement that looking at relative to market, what would be your positioning, what be in terms of absolute growth? Because the fact is that I agree with you, overall, your balance sheet is very liquid. LD ratios still very low. So you still have a lot of room. Would you try to be a bit more aggressive this year, or you want to stay the same strategy? Thank you.
Well, if you look at your said our balance sheet is still liquid. Actually, that is the result of proactive management. Because we saw tremendous loan demand in the first half, and we grew our loans in 2009 by something like 11%, double digit. If I remember correctly. We continued to see this trend in 2010. At the same time, the deposit in the market actually grew very, very limitedly.
Very small. So we started this strategy from the very beginning of the year. Of course, if you look at half breakdown of the loan growth, the first half, I think was around 14%. The second half our loan growth was around 5%. That was a deliberate management strategy. We knew all the way all along that the market was growing at about 10%, 20%, 25%, 29%. But we said to ourselves, "Okay, enough is enough.
You only have this much money, this much capital, and you can only take this much deposit from the market in order to maintain a balanced, healthy ratios. This is all you can do. At the same time, by more selectively doing loans, we are able to really choose the better-quality clients and negotiate a higher margin. So in fact, our margin, our spread on loans improved slightly despite the deterioration of NIM for 2010. So we will continue this what we call balanced sustainable growth. By looking at capital base, by looking at deposit base, by looking at liquidity ratio, and of course, risk and return et cetera, and all those different moving parts so that we can achieve an appropriate result.
Thank you. Thank you. Steven Chen, MF Global. I have three questions. First of all, a clarification of the accounting treatment for that custodian account. Will that imply that once you adopt that treatment, we will see a decline in net interest income, and then you put it as like a custodian fees?
You are right.
What is your current trend of net interest margin in the first two months? Second question, if you strip out the investment income of the insurance business, actually, it is making underwriting laws. I use the term underwriting. So when should we start to see that even excluding the investment income part, the insurance income will be positive? Finally, what is the average duration of your bond securities at the moment?
Okay. David, could you take the insurance part of the question?
Okay.
You are right, actually. If we switch from now the clearing bank function to custodian account function, then, of course, our interest income will decrease. At the same time, of course, our fee income will increase. But how much impact it is going to have on our NIM, it is hard to say for the time being. The trend of the NIM for the first two months, I am sorry, I cannot really tell you precisely, but of course, it is stable.
Yeah. On the insurance side, you look at the gross premium actually increased by 11% last year. There is, of course, an increase of the benefit and claims, as you mentioned rightly, 9.6%. But there is actually two components there, because on one side, on the liability side, we have to keep more because the interest rate have gone down, so that you have to put more liability. But actually, the other corresponding income is actually in the investment side. So that come out, as our CFO mentioned, that net in term BOC Life last year, I think we have a 51% increase in terms of the contribution. So I think, and also especially last year when we did our renminbi life insurance policy, that actually went very well.
Also you look at our product mix for the insurance business in 2009, 2008, and prior to that, we used to just do single premium products. Whereas since 2009, we actually changed the mix and 2010 we do exactly the same and even more in the sense that we do more regular premiums products. That actually have given us a better second, what do you call a renewal premium in the second year and so on and so forth. That really will be a more sustainable business for us. You look at from an embedded value accounting purposes, the value of the company actually have gone up quite nicely over the last couple of years.
Average duration of our bond portfolio.
Yeah.
Oh.
The duration of the bond. Yeah.
Okay. Sorry, I missed that. Average duration is 1.7 years. You mean the investment portfolio?
Yeah.
Okay.
How does that compare with last year?
Slightly longer. Last year was around 1.32.
We take the last two. This gentleman here.
Hi. Anil Agarwal from Morgan Stanley. Just had one question on capital. You are migrating to Foundation IRB this year. Have you done any kind of pro forma analysis on what is the upside to your Tier 1 ratios in account of that? If you can share that, you would have done the analysis, but if you can share that number.
I will ask you to take that question. Our CFO. Who is managing our capital. Can I?
Yeah. After the implementation of FIRB, there will be some improvement in our CAR. I think more importantly, it's a very important foundation for our credit business and risk management. For the specific number of CAR improvement, we will share you the information in our interim report when we report you the results.
Just a follow-up question. Do you migrate to Advanced IRB one year later in 2012, or is it later?
According to local regulation, perhaps it takes more than one year to migrate. How long it's going to take, perhaps there's a negotiation with HKMA.
Okay.
I do think it will take more than one year.
Okay.
It's not as simple as that.
Okay, thanks.
Okay. The gentleman on the other side.
Gurpreet with Goldman. Sorry to harp on the loans growth again. Let's say hypothetically a question, if your Tier 1 CAR moves up by a couple of percentage points just by moving to FIRB, and you see corporate loan pricing in Hong Kong improve, does that change your appetite and you begin to grow in line with the sector, if not faster?
Well, in line, what kind of line are you talking about here? It is very hard to say. Whether we can grow our loans not only depends on our CAR ratio, but also it depends on availability of funds and liquidity ratios. We are looking at all those factors to decide what is the appropriate loan growth level for us. Last year we saw below 20%, 19% or something percent is appropriate for us.
This year, of course, in terms of CAR, especially after migration to FIRB, perhaps we have more room, but at the same time, really depends on the deposit side. We hope we can continue to grow our loans. Whether it is going to be in line with the market or not, we do not know because it is very hard to guess what market is doing. I heard from HKMA that the first two months the loan market was also very crazy, but whether it is going to continue into the second or the third quarter or not is very hard to say. Our philosophy is that we try to grow our deposits, we try to maintain a healthy liquidity ratio. On top of that, try to grow our loans as much as possible.
Okay, thank you. We will conclude the presentation today. Thank you for joining us again.
Thank you.
Thank you.