Good afternoon, ladies and gentlemen. Thank you for attending the 2013 interim results presentation of BOC Hong Kong Holdings Limited. I am Ronick Chan, Board Secretary and Head of Investor Relations. Before we begin, may I draw your attention to this slide for the forward-looking statement disclaimer. Now, let me introduce our 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 Cheng wen, Chief Financial Officer, Mr. Jason Yang, Deputy Chief Executive, and Mr. Huang Hong, Deputy Chief Executive. In today's presentation, Mr. He will start with performance highlights, followed by Mr. Zhuo's financial review. After that, Mr. He will talk about the outlook. Then we shall open the floor for comments and questions. Mr. He, please.
Thank you, Ronick. Can you hear me? Okay. Anyway, because the venue is different, so I hope there isn't too much echo. You can hear me all right. Okay. Thank you very much. Ladies and gentlemen, before I begin the formal presentation, I would like to introduce to you our new senior management member, Mr. Huang Hong, this person, who has just succeeded Mr. David Wang as the Group's Deputy Chief Executive, overseeing the financial market business. Now the presentation. In the first six months of this year, the Hong Kong banking sector faced a mixed operating environment. On the one hand, external demand remained weak, characterized by slowing China economic growth. In Hong Kong, sluggish growth momentum, coupled with prolonged low interest rate and intense competition, continued to pose challenges to banks.
Furthermore, after Basel III regulatory regime came into effect at the beginning of this year, banks are required to operate on more stringent capital requirements. On the bright side, further policy relaxation continued to offer increased opportunities for cross-border and offshore RMB businesses. For the first half of 2013, the Group delivered a satisfactory performance with net operating income and operating profit achieving interim highs, driven mainly by core income growth. During the period, we continued to pursue a balanced and sustainable growth strategy and proactively manage our assets and liabilities. Net interest margin widened on the back of improved loan spread and cautiously managed funding cost. We adopted a prudent approach to liquidity management amid the volatile market and maintained our loan and deposit growth at a comfortable pace. Our loan-to-deposit ratio and average liquidity ratio both stayed at healthy levels as a result.
Operating environment was challenging during the reporting period. Genuine loan demand was modest. Against this background, we cautiously allocate our assets to safeguard asset quality. Without compromising quality of growth, we continued to adhere to know your customer approach, especially in trade finance business, which experienced unusually vast market growth. We strengthened our customer screening process to ensure a healthy loan book. In managing our investment book while seeking good investment opportunities to enhance return, safety and liquidity remained our primary consideration. On the back of our rigorous risk management measures, we maintained a benign asset quality with consistently low NPL ratio. In the first half, various business platforms continued to drive our net fee and commission income growth. In particular, funds distribution sustained robust growth momentum. Our asset management business launched new retail funds, which received an overwhelming response from our customers.
This encouraging performance reflected the Group's ongoing efforts to upgrade our service platform and broaden our product offerings with the aim to enhance our customer experience. We continued to maintain our leading position in offshore RMB market. Both loans and deposits registered healthy growth. Capitalizing on emerging opportunities from Qianhai pilot scheme, we swiftly provided cross-border RMB loans to our customers. In custody, we continued to expand client base by securing mandates to provide custody services for RQFII related products. Our RMB insurance business achieved a strong sales performance and sustained its leading position in the local RMB insurance market. Starting from this year, the new Basel III requirements came into effect. We had planned and prepared for it well in advance.
After considering the Group's funding needs and cost, we repaid the Euro subdebt that we borrowed from BOC, our parent bank, about five years ago, which would no longer be recognized as Tier 2 capital under Basel III. Our total and Tier 1 capital ratio remained strong at the end of June. Here are the key financial highlights, which show the broad-based growth in core income and profit for the first half of 2013. Net operating income before impairments allowances grew by 9.4% year-on-year to HKD 19.8 billion, mainly driven by net interest income and net fee and commission income. Operating profit before impairments allowances rose by 10.4% year-on-year to HKD 14.1 billion. Despite the smaller gain in property revaluation and a higher net charge of impairment allowances, profit attributable to the equity holders increased slightly to HKD 11.3 billion. Earnings per share was HKD 1.064.
Our ROE and ROA were 14.87% and 1.27%, respectively. The board has declared an interim dividend of HKD 0.545 per share, representing a payout ratio of 51.2%. As shown in this slide, at the end of June, we maintained a solid financial position as reflected by different metrics. Our loans increased by 6.7% with broad-based growth in both corporate and personal loans. We grew our deposit by 2.9% to support our business growth. Loan-to-deposit ratio was 65.7% and increased by 2.39 percentage points. Our loan quality remained sound as reflected by the relatively low level of classified or impaired loan ratio of 0.26%, staying flat over last year-end. Our capital and liquidity positions were solid with total capital ratio of 16.4% and Tier 1 ratio of 11.17% under Basel III. Average liquidity ratio was 38.7%.
I will now turn you to Mr. Zhuo, our CFO, for a more detailed financial review. Mr. Zhuo, please.
Thank you, Gary. Now let's start with the income statement. In the first half of this year, our net operating income before impairment allowances increased by 9.4% year-on-year to HKD 19.8 billion. Total operating expenses increased by 7% as a result of the Group's business expansion. Overall impairment allowances recorded a net charge of HKD 371 million. Non-operating items saw an 81% drop due to a decrease in property revaluation gain. Compared to the same period last year, profit attributable to the equity holders amounted to HKD 11.3 billion, rising by a mild 0.1%.
Now let's move on to the net interest income. Net interest income increased to HKD 13.3 billion, up 5.6% year-on-year and up 10.3% half-on-half, driven by the growth in average interest-earning assets and the widening of the net interest margin. Average interest-earning assets increased by 4% year-on-year, with growth in loans as well as debt security investments.
Net interest margin expanded to 1.67%, up 3 basis points year-on-year and 11 basis points half-on-half due to improved loan-to-deposit spread. Compared with the first half of 2012, loan pricing on corporate lending was higher. The Group exercised cautious control on deposit costs. The positive impact was partly offset by lower returns on placements with banks and debt security investments as market interest rates lowered during the period. Total non-interest income increased by 17.9% year-on-year. Net fee and commission income grew by 16.1% to HKD 4.7 billion, reflecting a broad-based growth with particular strong performance in commission income from credit cards, funds distribution, securities brokerage, and insurance and loan. Performance of funds distribution was outstanding with 90% increase in commission income. Security brokerage fee income increased by 16.1%, supported by our continuous efforts enhancing business platform and a pickup in stock market transaction volume.
Commission income from insurance business increased by 18.8% on strong sales of RMB policies. Other operating income increased by 23.2%, mainly driven by the insurance segment, of which net trading gain increased by 2.3%. The growth was mainly driven by the increase in growing currency exchange activities and equity-linked products, but partly offset by negative mark-to-market changes of certain debt securities. The Group recorded a net loss of HKD 520 million on financial instruments designated at fair value through profit or loss, mainly from the mark-to-market changes of certain debt securities of BOC Life due to the market interest rate movements. Increase in others was mainly driven by the growth in net insurance premium income. Now to our expenses. In the first half of this year, our operating expenses increased by 7% year-on-year to HKD 5.7 billion.
Cost to income ratio improved to 28.8% from 29.4% of the same period last year. Staff costs grew by 6.8% due to the annual salary increment and the increase in performance related remuneration. Premises and equipment expenses increased by 9.3% with higher rental for branches in Hong Kong and the mainland. Depreciation rose by 12.2% due to larger depreciation charge on premises following the upward revaluation of property. Other operating expenses were up 1.5% due to higher marketing expenses and business taxes of Nanyang Commercial Bank China. Loan impairment analysis recorded a net charge of HKD 368 million. Net charge of collectively assessed loan impairment analysis amounted to HKD 476 million due to loan growth and a periodic update of the parameter values in the assessment model during the period.
Compared to the second half of 2012, net charge of loan impairment analysis decreased by 52%, mainly due to the lower net charge of individually assessed impairment analysis. Recoveries amounted to HKD 190 million. Despite an unstable external environment, the Group's loan quality remained sound with classified or impaired loan ratio of 0.26%. The formation of new classified or impaired loans remained at a low level and represented about 5 basis points of total loans outstanding. During the period, the Group continued to optimize its asset and liability mix to drive sustainable growth and profitability. Compared with last year, total asset increased by 0.2% to HKD 1.83 trillion. Cash and balances with banks and other financial institutions decreased by 8.2%, mainly due to the decrease in RMB funds placed with the PBOC by our clearing function.
Placement with banks and other financial institutions maturing between one and 12 months dropped by 17.4% as we redeployed funds for advances to customers. Securities investments decreased by 8.6%. Advances and other accounts rose by 8%. The total equity increased by 0.4%. This was mainly attributable to increase in retained earnings and premise revaluation, which were offset mostly by a decrease in the reserve for fair value changes of available-for-sale securities. The Group adopted a flexible deposit strategy to support its business growth while maintaining cautious control on funding costs. Our deposits increased by 2.9% compared to last year and driven by the increase in time deposits and demand deposits. In the first half, our loan growth grew by 6.7%. The growth was broad based across key categories. Corporate loans for use in Hong Kong increased by 6.8%, covering a wide range of industries.
Residential mortgage loans increased by 3%. Trade finance increased by 13.9%, while loans for use outside Hong Kong grew by 8%. Our loan-to-deposit ratio was 65.7%, up from 63.3% of last year end. During the reporting period, we continued to optimize our portfolio mix to enhance return in view of market changes. As we mentioned earlier, our total security investment decreased by 8.6% from last year end. The Group selectively increased its investments in high quality financial institutions and corporate bonds, and reduced investment in government related bonds. In terms of geographic exposure, the increased investments were made mainly in the U.S. and Asia. At the same time, the Group increased its holdings in high quality RMB corporate bonds. Our investment exposure remained largely stable with 70% to Asia and 30% to U.S. and the EU countries combined.
Looking at our portfolio mix, 28% of our investments was in government or government related papers, and 54% in high quality banks and financial institutions. 87% of our debt securities was rated A or above. This slide shows the operating income breakdown by segments. During the reporting period, our personal banking business recorded a strong growth driven by net interest income and net fee and commission income. The increase in net interest income was contributed by the growth in average balance of loans and deposits, coupled with improvements in loans and deposit spread. The increase in net fee and commission income was supported by higher commission income from security brokerage, funds distribution, insurance, credit cards, and loans. Despite the slowdown in residential mortgage market, the Group continued to innovate and provide customers with a wide range of products and services.
It enabled us to sustain our market leadership in new mortgage loans. As to our credit card business, we continued to deliver steady growth. Cardholder spending and merchant acquiring volume grew by 8.3% and 20.3% year-on-year respectively. Our Wealth Management platform was further enhanced while the new Private Banking service made good progress. Our corporate banking business continued to record satisfactory growth. The Group continued to implement total solutions for key customer and corporate service center was set up to further improve service efficiency. At the same time, we continued to expand our customer base and industry coverage. Our corporate loans grew satisfactorily with improved loan pricing. In the custody service, we further expanded client base from different geographic locations.
As for Cash Management business, we leveraged the cross-border fund sweeping services on BOC's Global Cash Management system and expanded our service spectrum with our domestic and liquidity management capabilities. The Treasury business recorded a 16.7% drop in profit before tax due to lower return on placement with banks and debt security investments. We closely monitored banks market changes and optimized investment portfolio to enhance return while staying vigilant of risks. The Group strive to enhance its core competitive edge by uplifting its transaction capacity, product response efficiency, and client marketing. We promptly responded to market condition and focused on promoting products and services, including structured deposits, equity-linked investment, and foreign exchange margin trading, which were well received by customers. Our insurance business recorded satisfactory growth. The Group continued to enrich its product offering. New products were introduced to meet customers' diverse needs.
It also actively explore new distribution channels and established partnership with brokerage houses to promote insurance products. This new distribution strategy helped us to recruit new customers. Finally, let's turn to our mainland business. Despite a challenging environment, our mainland business achieved encouraging growth as we optimized asset and liability structure to improve yields. Net operating income increased by 18.2% year-on-year. Customer deposits and loans grew by 8.8% and 6.8%, respectively, from last year end. Operating expenses increased by 25.2% year-on-year as we continue to invest in expanding our mainland operation. Overall loan quality remained healthy with classified or impaired loan ratio at 0.87%. At the end of June, we had 38 outlets in the China mainland. That concludes the financial review. I now hand you back to Gary for the outlook. Thank you.
Thank you, Mr. Zhuo. Even though the global economy is recovering at a slow pace, we have started to see signs of improvement in the U.S. and European economies. The growth of the mainland economy is expected to moderate in a managed manner. While we expect some headwinds in the region in short term, Hong Kong will be able to benefit from the ongoing development of cross-border business and further policy relaxation of offshore RMB market. In addition to the challenging macro conditions, banks are also required to meet more stringent requirement in terms of capital and liquidity under Basel III. Furthermore, with the recent interest rate liberalization in the mainland, competition may intensify going forward. Increasing economic ties between Hong Kong and the mainland have been driving demand for cross-border banking services. For BOCHK, we see considerable growth potential given our diversified business platforms and close collaboration with BOC.
Over the years, considerable resources have been invested in enhancing our product and service capabilities for business growth opportunities. Capitalizing on the global relationship manager platform, we have been working closely with BOC to provide one-stop services to cater to the global needs of the leading corporate customers. This strategy enables us to capture new business and quality customers. The Group's Cash Management Services platform has been upgraded following our integration with BOC's network. This will greatly facilitate fund transfers between Hong Kong and the mainland, and the countries where our customers are located. We will continue to broaden our product and service scope to reinforce our competitive edge in the cross-border banking business.
The importance of RMB currency has been rising around the world, and we have witnessed significant developments in the offshore RMB markets, where our market leadership has been further entrenched after rigorous efforts in the past years. This is attributable to our enhanced business functions, professional service team, and continuous innovation in products. The coverage of our QFII scheme was expanded early this year. We have already been granted the RQFII status and plan to launch new RMB equity and bond funds in order to meet the strong demand for RMB investment products. Recently, PBOC announced simplified procedures for cross-border RMB transactions. Non-financial institutions in China are now allowed to offer RMB guarantees to offshore entities for financing activities. Riding on our solid customer base and strong BOC Group franchise, we are well positioned to capture the emerging opportunities from further RMB policy relaxation.
In an increasingly competitive environment, staying innovative and efficient will give us a relative advantage. Last year, we launched the first voice navigation ATM in our branch network, which is the first of its kind in Hong Kong. This brand new ATM converts the typical visual instruction into verbal form, enabling the visually impaired to use self-service banking conveniently. We also plan to launch our mobile payment service in the fourth quarter this year. Such new service will allow customers to conduct a payment in an easy and secure manner through their mobile phones. To support the more diversified growth in our long-term development, we will continue to make appropriate investments in upgrading technology to drive efficiency and innovation. In the remaining months of the year, market sentiment will continue to be dominated by the macroeconomic news and the direction of capital flows. Volatility may increase as a result.
Therefore, maintaining strong financial position and rigorous risk management will be a key priority for us. This will allow us to better withstand market uncertainties and support healthy business development while upholding long-term shareholders' interests. To achieve this, we will need to be watchful and stay vigilant. We will keep leveraging our robust financial capability, proactive asset and liability management, and stringent risk control to implement our consistent strategy for balanced and sustainable growth. This concludes our presentation. I and my colleagues will be happy to take questions from you. Thank you very much.
Okay. It is time for Q&As. Kindly raise your question, no more than two each time, please. Who would like to start? Gary?
Testing. Hello. It is Gary Lam from Citi. Two questions. Firstly, regarding your capital, could you walk us through the key changes thought about when you implement Basel III? Of course, we see the half-on-half deductions on the ratios. Just would also like to understand key change drivers, and have that also been affected by the mark-to-market reduction of AFS reserve? Also to confirm that, unlike some other banks locally, it seems that BOC Hong Kong do not recognize the declared but before payout dividend into the Tier 1 capital base. Can I just confirm that part as well? Thank you.
CFO, would you do that? Because this first half of this year, because of the implementation of Basel III, the change, the impacts on capital base is very complicated and confusing. I cannot give you a very clear answer. I will ask CFO to give that. I think he understands it better than me.
Okay. Thank you for this question. As we know, this is the first year for the implementation of Basel III in Hong Kong. The number, the calculation of CAR ratio, is quite different from that of 2012 and before. Also, for the peer banks, I think every bank may have different situations. I do not want to comment. For our case, I think after the implementation of Basel III, there might be some specific impact on both our risk-weighted asset calculation and the capital base. Some items include the treatment of the revaluation of property. Also the risk weight for the financial institutions, and also the treatment for some of the Tier 2 instruments. But from the number overall, our risk-weighted asset, if you compare to the number of 2012 and also the number of the end of the June, our risk-weighted asset increased around 14%.
This is a result of, as I said, both the conversion of the Basel III, the additional or the new requirement from the regulator on the risk-weight of retail mortgage and our business development, and also some of the risk-weight change of certain customer. If you look at the impact of those factors, some of those items actually are one-off, such as the step up of the risk-weight of FIs. But some of the requirement may have a longer impact going forward. For example, the risk-weight of the retail mortgage we apply to the new generated, new developed mortgage loans. For the capital base, it also impact by the Basel III treatment on the revaluation reserve. Also, it's true, the mark-to-market change of certain items, such as Available-for-Sale security, may have impact on the Tier 1 capital base.
If you exclude some of those one-off item, overall, I think our growth, the increase in our risk-weighted asset is in general in line with our business growth, our credit asset growth. Going forward, I think we will proactively manage our capital base. We will actively manage the risk return on our asset. We were working on the prepare in implementing the advanced internal ratings -base d calculation. But that is subject to the approval from HKMA. But our current level of the CAR ratio and the Tier 1 ratio, I think is still adequate, still at a strong position to support our further business growth. You mentioned the comparison with our other peer banks. Since the calculation method for different banks may be different. Some banks are using IRB, some other banks are still using FIRB, including us.
We don't think we can compare directly with those numbers.
Okay. Steven, please.
Thank you. Steven Chan, CITIC Securities. Indeed, I would like to ask three questions, if I can. Just very quickly on three areas. One, on asset quality. Could you give us the trend of your special mention loans because you never disclose your special mention loans in June compared with December? Also, rough calculation is that the overdue loans within three months stay at around HKD 4 billion, which is the same level as December. Are you worrying that these overdue loans within three months may deteriorate in the second half? That is the question about asset quality. Second question on mainland business. Could you give us a rough idea for the loans and deposits in mainland business? What proportion of that is denominated in RMB? That is the second one. Finally, a follow-up question on Gary's question on capital.
Even after Basel III, your core Tier 1 CAR and total CAR remain very high. I should say very strong. Your dividend payout policy is somewhere around 60%-70%, but you usually pay it out at close to the 60%. After this Basel III, would you consider to move closer to the 70% dividend payout?
Let me answer the last question first, then ask my colleagues to try to explain the other two. Why don't you try the asset quality and the mainland business? The asset quality is your job. Okay. The mainland business is yours. 60%-70%, actually, the dividend policy has remained the same ever since the listing of BOCHK in 2002. Well, of course, as you correctly point out, even after the implementation of Basel III, the CAR ratio remained very strong. The question is now there are still certain measures that will be introduced by the regulators later, maybe this year, maybe early next year. The exact requirements is still unclear for us. We are waiting for the regulators to clarify the exact regulatory requirements in terms of implementation of Basel III. So we need to stay cautious.
Of course, in terms of payout ratio, the board did not discuss the payout ratio t his time. The intention is that we're going to keep the payout ratio, at least for the time being, the same as in the past. Asset quality?
Yeah. Okay. For the special mention, the loans ratio, actually, as a practice, we normally don't disclose the split number for the interim report. A general description is our special loan ratio remained stable compared with the end of 2012. As for the loan quality, I want to mention our total non-performing loan ratio is at around 0.26%, which is lower than the market average. The overall loan portfolio remains robust and sound. We are confident to maintain our strict risk control and customer selection process. Also, we are very closely monitoring the development of some specific industries. There might be some particular customers, in some case, our impaired loans. But overall, as I said, our loan asset quality is quite sound.
For the deposited loans in China mainland, our China business, as we mentioned in the first half of this year, our loan and the deposit increased. Sorry, the deposit from customers increased around 8.8% year to date. The customer loans increased 6.8%. Overall, the business development is quite balanced. The China business is a very important business for us. It gave us a platform to serve our customers in China and extended our services from Hong Kong. Also for the RMB, you mentioned the RMB business. Overall, the RMB loan growth is at a higher rate than our total loan growth. This is because the new business and because from the relatively lower base. The RMB business is a strategically important business for us. We will keep invest ing and keep expanding that business.
Can I presume that most of these loans and deposits are denominated in RMB? Over 70% or maybe close?
Yeah. For the mainland business, I would say a majority of our mainland loan and deposit are in RMB. Yeah.
I think you have a reason, actually, to ask that question because in the past, our loan portfolio in China, when in terms of foreign currency lending, there's a better part of that actually is in foreign currency. Now it's gradually switching into local currency, RMB. Because number one, of course, there is more demand over there. Number two, they are able to get more funding. Of course, certain perhaps more interesting reasons that you get high return from RMB lending. Even though we don't have a good detailed breakdown of those numbers, I can just give you a rough description of what's going on in our currency breakdown of our China business. It's certainly the majority part of that now it's in RMB.
Hey, Stephen.
Hello? Can you hear me? Sorry. Stephen Andrews from UBS. Just two quick questions first. Firstly, just on deposit growth. I think you're looking at the breakdown, your U.S. dollar and Hong Kong dollar deposit bases were down slightly in the first half against a market that saw mid-single digit growth. What was the funding strategy on Hong Kong dollar and U.S. dollar funding in the first half? How does that look into the second half? The second question is really related to your cross-border business and the volatility we saw in the interbank market in China towards the end of June, and into the start of the second half of the year. I would have thought that would have created a lot of interest rate arbitrage opportunities for your clients between Hong Kong and the mainland. How did it impact your cross-border RMB NIM?
I would have thought it would have been reasonably positive with people borrowing in U.S. dollars and depositing in the interbank market in the mainland. Can you give us an idea of how that volatility impacted your business in the cross-border business and flows that you saw? Thank you.
Okay. The first question actually is about our growth deposit. You want to know whether Hong Kong and U.S. dollar. Because you're talking too fast and of course with the echo in this, can't really-
Sorry.
Pick your question.
If I look at your, specifically your U.S. dollar deposits and your Hong Kong dollar deposits, both were actually down first half versus year-end 2012 levels. It was your RMB deposits that were up. What was going on with your U.S. dollar, Hong Kong dollar funding strategy, and what are you seeing in terms of cost of funds on those into the second half of the year?
Okay. Well, in fact, as you correctly point out, we've seen substantial increase in our RMB deposit in the first half. While in terms of other currency, there's a flat. Of course, we're seeing proportionally increase in U.S. dollar, but of course, in terms of Hong Kong dollar, a portion of the deposits has come down slightly, and that actually is in line with the general market development in the first half. I'm sorry, this camera is really because I can't really see your expressions. I don't know whether you pick up my answers or not. Where I was? Where am I?
Well, in terms of funding strategy, in fact, I think we're not too worried about the decline of the, well, between Hong Kong dollar and U.S. dollar, because the swap market is very active. Whenever there's a need, if we do have currencies in either currency, we'll be able to swap into the other one in order to support our funding. The overall concern actually is the loan-to-deposit rate change and the overall market change in deposit base. Because we're seeing a much slower growth in deposit in the local market, which is just roughly about 2%, but there's a much faster increase in lending, in loan. That activates that fact.
I would say personally as a CEO for BOCHK, I'm a bit more concerned about this overall change because if that goes on in the future, that will substantially reduce the funding ability of the banking industry and thus we won't be able to extend the lending to our customers. As a result of that, you may see that we have the 6.7% loan growth, which is slightly lower than the average market. That's the intentional management within the bank in order to manage both assets and liability at the same time, so we will be able to maintain appropriate loan-to-deposit ratio. The second question actually is, sorry.
Cross-border.
The cross-border. Can you repeat your question about cross-border transactions?
Yeah. There was obviously a lot of volatility in the interbank market in around the June, July time in the mainland where rates spiked up. We saw in the whole of the first half, we saw a huge spike in so-called trade finance activity in Hong Kong. A lot of which I think people suspect is more to do with interest rate arbitrage rather than real trade. I was just curious, in this sort of June, July period, where we saw this unusual spike in interest rates in the mainland, obviously the gap between U.S. dollar rates in Hong Kong and RMB rates in the mainland spiked. How does that impact your business in terms of what you see your clients doing and what you-
Okay. Now I understand.
Should be supported. Thank you.
Okay. Thank you. Mr. Gao will answer that question.
Yeah.
Okay.
I think you mentioned the, in June, the money market, interbank market in China. Because they have different reason. One reason they might be that they experienced very unusual increase in the trade financing in Hong Kong. A lot of people say they have maybe because the arbitrage transaction behind that. Because if you look at the real trade figures between Hong Kong and the mainland, it is just single digit growth. But Hong Kong experienced over 40% trade finance growth. I think that is because after June, Chinese authority, they take the measure and that lets trade finance coming down dramatically. I think for second half this year for trade finance, that will come back to the normal.
I think for interest rate, because of the high interbank lending rate in China, I think for Hong Kong Bank, I think they to some extent they benefit from that interest rate hike during short period. After that spike, now it is back to the normal and especially recently, People's Bank of China, they have announced new policy allow the mainland enterprise can provide direct guarantee for their overseas borrowing. I think that is very important measures for Hong Kong Bank can find more cross-border loans. But for gap, I mean the interest rate gap between these two area, we think nowaday it is back to the normal levels. Yeah.
In terms of the impact of the changes, especially on the trade finance side on our business, I do not know about the other, our competitors or peers in the market, but you may take a look at our growth of trade finance is about 13.9% growth in the first half. Way below the market changes. That actually, we actually adopted very stringent background check system. We want to stick to the real trade side of the business rather than the fake and controversial business background. I would say this change, this trade finance may slow down substantially. Personal lending is definitely not sustainable. About 40% trade finance growth in the first half is not sustainable. If it slows down, if we are able to maintain the same growth rate, I think the impact on us will be less compared to our peers.
Well, the market volatility in the first half, particularly in early June, as you know, Nanyang Commercial Bank (China), so loan-to-deposit ratio. The regulatory requirement is 75%. In our case, it is 73%. We would love to see higher rates in the market. If the interest rate maintain a high level, we are glad to take advantage of that. In our case, in terms of RMB, we have the largest market share in the local market, and loan-to-deposit ratio in RMB is ignorable. We hope that the rate will remain at reasonable levels that we can get a reasonable return out of our investment or lending or cross-border lending from it. No question is how the market is going to further development in the second half is still very hard to say. I would say higher rates will certainly benefit us in general.
Okay. Oh, mm-hmm.
Good evening. It is [Vishal ] from Merrill Lynch. Two questions really on capital. If we just look on page 72 of your financial risk management disclosure. If we look at the common equity Tier 1, there is one very large deduction to your capital, which is the fair value gains from the revaluation of land and buildings. It is about HKD 42 billion. Can you help us understand what does that arise from? Is that on this particular premises, or is there another premises that you are realizing this big loss?
The second question really is on your common equity Tier 1 and your total capital ratios. Given the correction we have seen, you are now just marginally better than some of the smaller Hong Kong banks, reporting 10.9%, 10.8% common equity Tier 1. The substantial improvement that you had or the substantial gain that you had versus your peers seems to have gone. Would there be any plans to look at the Tier 2 or Tier 1 market for new star Basel securities to try and reinstate that premium that you used to have above some of the smaller banks in Hong Kong?
To you. Go ahead.
For the number of HKD 42 billion, that is actually treatment required by HKMA. Since the revaluation gain, both the investment property and the self-use property have been included in the number of the upper part of this page, which is around HKD 141 billion. This is just a calculation adjustment. It does not mean any loss or any penalty or any kind of extraordinary deduction. This is a normal treatment. Also for the core equity capital, I think, we are not going to compare directly the numbers of other banks. As I said, some banks are using AIRB or we are using FIRB, so the number is not directly comparable. For the Tier 2 instrument, I think our current capital base is at a strong position. Also our Tier 1 is with high-quality capital. Currently, we don't have plan to issue additional Tier 2 instrument.
But we will look at the market opportunity and our future business development opportunity.
I'll ask two question. First, [Gurpreet], please.
Thanks. [Gurpreet] with Goldman. Two questions. First is, if I just look at page 114, there was a marked decline in the public sector enterprises in China cross-border claims. My question is, has there been a change in the risk appetite of the Group towards China SOEs? That is the first question. The second one, if I look at the yield and the cost of liability disclosure that you have, I think, in one of the beginning pages. You saw very beneficial movements in the first six months. So the yield on loans increased. I assume that is because of the repricing up on residential mortgages. The cost of funds, the deposit cost fell down. So that might be due to the dollar and the RMB deposit cost going down.
Can you talk about the latest movements in the last few months on these two, the yield on loans and the cost of funds, and what is the Group's outlook in the second half for that? Thank you.
Do you understand that question?
I think better you-
Sorry. There is a noise actually over here. I am sorry.
Can you just repeat the question? I did not look at the page you mentioned.
Page 114?
114. Right.
114, yes.
There's this cross-border claim disclosure, and then for mainland China-
Cross-border
Cross-border claims.
Claims. Okay. Sorry.
For mainland China, you have public sector enterprises. From the end of last year, you have a big decrease. I am not focused on this. I just generally want to ask the question: has the Group's appetite towards lending to China SOEs changed in the last few months, or is it the same?
Is that because of the decreases of our clearing bank balance?
Yes.
Is that-
Yes.
Okay. Well, I just guessed because I really did not quite catch you. I guess, year on year, there is a huge decrease in the clearing bank balance, which used to be deposits in the mainland central bank, PBOC. Because of the relaxation of regulatory change, the participating banks are able to use their funds in other assets. So they substantially reduced their balance in the clearing bank accounts. So perhaps that is the main reason why there is a decrease in the cross-border claims versus China, in China. Is that what you are-
Yes.
Okay.
I confused it, sorry. Shouldn't that have been in the bank side? There are three columns. First is banks, where I am not focused on the changes. Then it is the public sector enterprises. The decrease is in the public sector entities. Shouldn't these be in the non-banks?
I think, as Gary just mentioned, this mostly relates to the-
I understand.
Adjustment of the asset mix compared with the last year end.
There is no change in our risk appetite or lending policies to major Chinese enterprises.
I understand.
I just want to confirm that.
The second question on the yield on loans and the cost of funds, how you are seeing that trend?
Say it again. Terribly sorry.
The yield on the loans, the loan yield.
The loan yield.
The loan yield.
Loan return.
The deposit cost.
Okay.
The loan yield and the deposit cost.
Loan yield and deposit cost.
Yeah.
Go ahead.
Okay. Thank you for the question. I think in the first half, our net interest margin improved. This is a result of a lot of our efforts. We captured the market opportunity, and we successfully increased our loan pricing. Also for the deposit side, we took the market opportunity when the market fund at the second half of last year was quite adequate. So we maintained the flexible deposit strategy. Our deposits grows at a higher rate than the market average. But our deposit costs maintained stable compared with the same period of last year and actually improved compared with the second half of last year. So I think this is an effort of our proactive and balanced strategy in growing our business.
Okay. I think the last questions. Anil, would you like to?
Thanks. Hi, this is Anil Agarwal from Morgan Stanley. One quick question on bond book. Given that long bond yields have gone up quite a bit in U.S., is there any appetite for you to increase the duration of the bond portfolio, or do you think it is too risky right now?
Mr. Huang?
Thank you for the questions. Actually, we are expecting a tapering in the fourth quarter of this year. A further rise in U.S. Treasury bond is expected, with 10 years yield could be reached 3.3%-3.5% by the end of next year. The first rise in the Fed funds will not happen before 2015. Currently, our strategy for the investment is really on the short end of U.S. curve. Thank you.
Well, it's almost certain that interest rates are going to rise. But when it's going to happen, everybody's keeping very watchful eyes on the actions of the Fed. We are very cautiously managing our investment. If we have to invest, it's going to be in the short.
Okay. Thanks for attending this session. Because we are running out of time, thanks again, and hope to see you next time. Thank you.
Thank you very much.