Before we begin, may I draw your attention to this slide for the forward-looking statement disclaimer. Now, let me introduce our senior management team. With us today are Mr. Gary He, Vice Chairman and Chief Executive; Mr. Gao Yingxin, Executive Director and Deputy Chief Executive; Mr. Zhuo Chengwen, Chief Financial Officer; Mr. Jason Yeung, Deputy Chief Executive; and Mr. Huang Hong, Deputy Chief Executive. For today's agenda, Mr. He will start with the performance highlights, followed by Mr. Zhuo with the financial results. Mr. He will then talk about the outlook and strategy. Finally, we will open the floor to questions. Mr. He, please.
Thank you, Ronick. Good afternoon, ladies and gentlemen. The external economic environment remained mixed in the first half of the year. The modest growth of advanced economies sustained its momentum, while the GDP growth of mainland China decelerated. Locally, economic growth faced headwinds amid weak external demands and slower private consumption. The banking industry in Hong Kong is operating in an increasingly complex environment. On the one hand, competition in the market was keen with reduced activities in property markets that hampered mortgage business growth. On the other hand, banks captured new business opportunities from strong loan demand and further development of RMB internationalization. Against this backdrop, I am pleased to report that the group delivered a set of encouraging results for the first half of 2014. Our profit reached a new interim high with continued firm support from core income.
We proactively managed capital liquidity and risk to support long-term development of our business. Both capital strength and deployment efficiency were further enhanced. We continue to adopt stringent risk management and credit control to deliver quality growth. Optimizing our asset mix, we allocated more funds to loan business and RMB business in view of the market opportunities. In the first half, we met the emerging demands of customers with continuous enhancement of our business platforms. We further refined brand proposition, which led to promising growth in customer base. We also catered to customer needs with tailor-made investment products. Sales of our funds distribution increased steadily. Meanwhile, we continued to expand customer coverage by establishing new business relationships with overseas financial institutions and central banks.
During the period, we further expanded our RMB service capabilities, increasing our competitive advantage, and maintaining our relationship with major RMB businesses, maintaining our leadership in major RMB businesses in Hong Kong. Our offshore RMB loans and deposits sustained healthy growth. Capitalizing on opportunities created by Shanghai Free Trade Zone, we successfully helped corporates to set up cross-border funding pools and provided cross-border RMB loans to corporates established in the zone. We continue to collaborate closely with our parent bank, BOC, which has increased our competitive edge. Through organized efforts and systematic cooperation, we offer comprehensive banking solutions that meet the diversified demands of cross-border customers. As joint entities, we arranged cross-border direct loans that met the financing needs of mainland customers for mergers and acquisitions projects.
We broke new ground in the development of centralized RMB cross-border transaction management solutions, providing innovative cash management products and services to sizable multinational corporations. Together with BOC, we significantly increased our share of Hong Kong RMB bond markets as we benefited from corporate issuers raising funds through offshore RMB bond issuance. In the first half, our net operating income before impairment allowances rose by 9.4% year-on-year to HKD 21.6 billion, driven mainly by core income growth. Operating profit before impairments allowances increased by 9.5% to HKD 15.4 billion. Profit attributable to the equity holders increased by 7.4% to HKD 12.1 billion, or an earning per share of HKD 1.143. Return on average shareholders' equity was 14.75%, while return on average total assets was 1.2%. The board has declared an interim dividend of HKD 0.544 per share, representing a payout ratio of 47.7%.
We judiciously managed the growth of our loans and deposits in a balanced manner. Compared with last year-end, our advances to customers grew by 10.5%, which was well supported by a deposit growth of 8.5%. Loan to deposit ratio increased slightly to 65.9%. In the first half, our credit quality remained sound with a low classified or impaired loan ratio of 0.31%. Average liquidity ratio was 39.6%. We made conscious efforts to strengthen capital management for enhanced capital efficiency. As at the end of June, our total capital ratio was 16.9%, up 1.1 percentage point from the end of last year. Our Tier 1 capital ratio was 11.84%, up 1.17 percentage point. The philosophy behind our capital management is to be well prepared to meet increasing regulatory capital requirements and capture emerging business opportunities in the future.
I'm delighted to see that we're moving in the right direction. We are confident, and we'll strive to maintain capital ratios at sound levels, which provide a firm foundation for our success and enables us to withstand market uncertainties. I would like to stop here. Mr. Zhuo, our CFO, will now give more details of the financial results. Mr. Zhuo, please.
Thank you, Gary. First, let me go through the income statement with you. In the first half of 2014, our profit attributable to the equity holders increased by 7.4% year-on-year to HKD 12.1 billion. This is achieved on the back of core income growth, in particular, the net interest income. Net operating income before impairment analysis grows by 9.4% to HKD 21.6 billion. Impairment analysis recorded a net charge of HKD 379 million, up 2.2%. Operating expenses increased by 9.2% to HKD 6.2 billion. Net interest income was up 17.4% year-on-year to HKD 15.7 billion, driven by the growth in average interest earning assets and widening of net interest margin. The group's average interest earning assets grew by 12.9%, which were mainly supported by the increase in customer deposits, as well as deposits and balances from banks.
Net interest margin improved by 7 basis points as we deployed assets to higher yielding areas such as customer loans, RMB bonds, as well as balances and placements with banks. In the first half, our total non-interest income dropped by 7.2% year-on-year to HKD 6 billion, as it was undermined by the decline in other operating income, which more than offset the growth in net fee and commission income. We continued to broaden the source of income through our diversified business platform. During the period, the group's net fee and commission income increased by 2.9%. Income from funds distribution rose by 16.3% as we rolled out products and marketing campaigns to meet targeted customer needs. Meanwhile, other traditional fee businesses such as credit cards, loan commissions, bills, trust and custody services, currency exchange, recorded healthy growth.
Income from security brokerage was down by 3.6% amid a sluggish local stock market. Other operating income fell by 33.8%. Net trading gains decreased by 7.8%, mainly due to the mark-to-market changes of certain foreign exchange products and equity securities. Net gain of HKD 18 million was recorded on financial instruments designated at fair value through P&L, compared with the net loss in the same period last year. The change was mainly attributable to the mark-to-market changes of debt securities of BOC Life caused by market interest rate movements. The decrease in others was mainly due to the 60% increase in net insurance benefit and claims as a result of the decline in market interest rates, which more than offset the 31% increase in net insurance premium income. Now let's take a look at our expenses.
While maintaining conscious cost control, we continued to invest in our franchise to enhance competitive edge and to sustain growth. In the first half, the group's operating expenses were up by 9.2% year-on-year to HKD 6.2 billion. Cost-to-income ratio improved further to 28.7%, among the lowest in the local banking sector. Staff costs increased by 7.9%, mainly attributable to increase in salaries and performance-related pay. Premises and equipment expenses were up by 9.4% due to higher rental for branches in Hong Kong and on the mainland, as well as increase in IT costs. Depreciation expenses increased by 11.1% due to upward property revaluation in Hong Kong and higher expenses on IT equipment. Other operating expenses were up 12.1%, mainly due to higher expenses in connection with increasing business volume.
Loan impairment allowances recorded a net charge of HKD 377 million, up 2.4% year-on-year, driven mainly by the decrease in recoveries and higher net charge of individually assessed impairment allowances, which were partially offset by lower net charge of impairment allowances for collective assessment. The amount of recoveries was down by 47% in the period. The net charge of individually assessed impairment allowances were mainly due to the downgrade of a few corporate loans. The lower net charge of collectively assessed impairment allowances was primarily attributable to the periodic review of parameter values in the assessment model. The group's loan quality remained solid in the first half. Our classified or impaired loan ratio increased by 3 basis points to 0.31%, standing below market average. The increase of classified or impaired loans were mainly due to the downgrade of a few mainland-related loans.
We proactively optimized the asset mix to enhance returns in the first half of the year. At the end of June, the group's total assets were HKD 2.09 trillion, up 1.9% from last year-end. Cash and balances with banks and other financial institutions decreased by 3.7%, mainly due to the decrease in renminbi funds placed with the PBOC by our clearing business as participating banks reduced their renminbi deposits with the clearing bank. Placements with banks and other financial institutions decreased by 28.3% as we redeployed funds in other higher-yielding assets, such as advances to customers. Security investments decreased by 3.7%. Advances and other accounts increased by 9.6%, driven by the growth in advances to customers. The total equity grew by 6.4%, mainly attributable to increases in retained earnings and reserve for fair value changes of AFS securities.
We maintained our flexible deposit strategy to support business growth and proactively managed funding cost. Our deposits from customers increased by 8.5% from last year-end, driven by the growth in time deposits. In currency terms, the growth was supported by broad-based increase in U.S. dollar, Hong Kong dollar, and renminbi deposits. We continued to capture robust loan demand while managing risks to deliver quality growth. In the first half, our advances to customers increased by 10.5% compared to last year. Corporate loans for use in Hong Kong rose by 16%, with growth across a range of key sectors. The major drivers are manufacturing, wholesale and retail trade, transport and transport equipment, as well as IT industries. Individual loans increased by 4.9%, of which residential mortgage loans were up by 2% as we strive to achieve a balance between market share and return.
Trade finance were up by 8.6% on the back of our prudent approach to conducting background check of transactions, where loans for use outside Hong Kong increased by 10.8%. Loan-to-deposit ratio increased slightly to 65.9% as we adopted a balanced and sustainable growth strategy. We took a proactive but prudent approach in managing our investment portfolio. In the first half, the balances of securities investments fell by 3.7% from last year-end. As part of our portfolio optimization strategy, we reduced exposure to lower-yielding securities. New investments were made in high-quality bonds issued by Mainland and Hong Kong corporates, as well as renminbi bonds issued by policy banks. 86.7% of our debt securities holding were rated A or above. We witnessed mixed performance across different business segments in the first half of the year. Personal banking business increased its income by 1.7% year-on-year.
We remained the market leader in new mortgage loans. Our funds distribution achieved favorable growth as we continue to strengthen our customer base with a wide range of products to meet their investment needs. Corporate banking business grew its income by 6.6% on the back of balanced growth in loans and deposits. In the custody business, we continue to expand business coverage over different geographic locations. We also further enhanced our service capabilities in cash management business. [Treasury] business grew its income by 36.1%. We closely monitored market changes and optimized investment portfolio to increase return within targeted risk appetite. We took advantage of renminbi currency movements to provide value protection solutions to customer, and achieved good growth in renminbi related foreign exchange businesses. Insurance business saw 40.3% drop in operating income, mainly affected by the increase in insurance liability caused by market interest rate movements.
In the period, we broadened the insurance product offerings and actively diversified distribution channels. Through product optimization and innovation, we maintain a leadership in the local renminbi insurance market. Our mainland business maintained a healthy growth amid a tough environment in the first half of the year. Operating income increased by 35.8% year-on-year, thanks to the strong growth in net interest income and fee income. Operating expenses rose by 18.3% due to the increase in business activities. Customer loans and deposits was up 4.5% and 0.2% respectively from last year. During the period, we continued to enrich products and services. We also developed different e-platform to improve online services and customer experience. Meanwhile, the economy of mainland China is slowing and ongoing structural adjustments, which created an adverse impact on the non-performing loan trend in the mainland market.
As a result, the classified or impaired loan ratio of our mainland business rose from 0.61% to 1.58% in the first half. We remain focused on—
Capability, which significantly reduces the time gap between processing and payment. Our credit card company introduced its WeChat marketing channel to promote business on a social network platform, providing customers with the latest information and electronic coupons to enhance their shopping and entertainment experiences. We will continue to introduce such initiatives as to deliver a premium banking service to our customers. Leveraging our strong RMB franchise, we have formulated plans and are gearing up to take advantage of the rapid development of RMB internationalization. A special task force had been set up to prepare for the formal launch of A-share trading services associated with Shanghai-Hong Kong Stock Connect. In order to better serve customers in Shanghai Free Trade Zone, a sub-branch of Nanyang Commercial Bank (China) commenced operation in July.
In addition, starting from this October, our RMB clearing service hours will be extended to run 20 and a half hours a day. It means our Hong Kong RMB clearing system will offer services with the longest operating hours globally, and it will become the world's first clearing system to cover time zones in Europe, America, and Asia, allowing us to provide cross-regional clearing services to participating banks and clearing banks in other regions. We have been working more closely with BOC Group's offices in Guangdong, Hong Kong, and Macau, as well as its overseas branches. This cohesive relationship enables us to not only capture increasing demand for cross-border banking services within the region, but also to introduce a wide range of compelling products to BOC Group's customers around the globe, generating mutual benefits and maximizing synergies within the entire organization.
While there have been abundant opportunities in the market, regulatory requirements and competition are escalating, too. In an increasingly complex operating environment, we will maintain our commitment to proactively manage capital assets and liabilities as well as liquidity, while strengthening in control on all types of risk. We will continue to invest in our franchise, including business platform and people. Investing in more advanced technology will also be a key focus to drive innovation and enhance customer experience. I conclude our presentation here. My colleagues and I will be pleased to take questions from you.
For the Q&A section, kindly ask not more than two questions each time. Thanks in advance. Stephen Andrews, you would like to be the first, right? Stephen, thank you.
Thank you very much. I got, [inaudible], just two questions. Firstly, it is on, I think my favorite bit of disclosure you give, which is page 15 in the release. It shows your average yields on different parts of the balance sheet. This is a question I have asked before, but I think it is still very relevant. The highest yielding part of your balance sheet is still your interbank assets, and the gap is getting wider and wider. If we look at the currency breakdown on your interbank assets, they are predominantly RMB. I guess this is an indication that you are just a big depositor into the mainland interbank market and rates went up. Rates have obviously subsequently come down.
Should we be thinking in terms of margin evolution for the second half that, we are probably looking more at what you did the first half of last year rather than what you did the first half of this year, given that your group cost of funds has come up? That is the first question. The second question is just on this corporate loan growth, which is very eye-catching for what is normally a very conservative bank. 16% half on half is just most unlike you. It does not look like it has come through, or reflected in the Risk-Weighted Assets growth. Can you give us a bit of characterization as to exactly what this type of lending is? Is it sort of cross-border trade finance-related stuff that is just not being booked in the trade finance line? Thanks.
Okay. You—
Yeah.
—Actually, you've answered your questions substantially. You provided answers to your question. I'll ask our CFO to provide more insights.
Okay. Thank you. In the first half, our interest margin improved, mostly driven by the improvement mix of our asset structure, especially we have more the renminbi related high yielding asset. For other currency, we increased the balance of customer loans while reduce some lower yielding asset items in the balance sheet. The asset mix changed significantly from the same period of last year. It's true, in the first half, we also take capture the market opportunity for the renminbi interest rate, very high and the change. I think, the overall funding costs are higher. Funding costs compared with last year may bring continued pressure on our interest margin. We will try to manage, firstly, the optimization of the structure of the balance sheet. Also we prudently manage the deposit and loan spread to maintain a relatively stable interest margin.
Continuously we will capture the opportunity for renminbi. I believe, along with the internationalization of the renminbi, the using channel for renminbi will be broader than before.
Well, in fact, if you look the first half last year, suddenly there's a shortage of liquidity in the RMB market back in China. In the following September, the same thing happened because of the change of behavior by PBOC. At that time, the deployment of the RMB actually was not as easy as it is now, and our security investment quota was not as large. Because there's an increase of securities investment quota from mainland China, and also easier to deploy our funds in China, we're able to take advantage of steady, strong RMB interest rates. But this is it, now the interest rate's coming down. Definitely our RMB portfolio is facing pressure. That is the main contribution for the RMB portfolio's main contributor to the improvement in NIM and to a large extent, to increase our NII.
Well, in terms of lending activities, I'll ask Mr. Gao, Deputy Chief Executive, who's in charge of corporate lending, to take that question.
Yeah. For the first half, we record 10.8% loan growth. I think that is mainly driven by corporate lending. For corporate lending, for use outside Hong Kong, it's also around 10.8%, but for loan use in Hong Kong is 16%. I think both of them are, I think most partly is due to the, for loan use in Hong Kong is partly due to the corporate motivation by from the corporate locking the lower lending rate before the rising interest rate environment. Beside that, I think maybe, in the first half in the mainland, they are relatively tight credit situation. So in Hong Kong, we have a robust demand from major, very high-quality Chinese big corporate. They take advantage of the Hong Kong interest rate environment. Because BOC Hong Kong, we are a major bank here, so we balance the liquidity risk and also our spread.
We got that opportunity. So have a very good growth on that. But maybe, in the second half, due to the easing liquidity situation and also adjustment on the calculation of ADR in mainland China. The situation will change. The demanding from major Chinese corporate in Hong Kong slow down. So we expected our loan growth will also slow down in the second half. As you mentioned, for past several years, we are very conservative, and we have very stable, sustainable loan growth. We also try to, for the full year, we still want to keep that pace.
I just want to clarify. Our lending portfolio increased 10.5%.
Corporate.
Corporate in Hong Kong 16%.
Yeah.
Lending outside Hong Kong, 10.8%, that also include, if my understanding is correct, that also include our security investment in China and other parts of the world. Non-financial institutions security investment, not only lending to corporates. That 10.9%. Of course, there's an increase of our quotas for RMB. Naturally, that growth seems to be pretty fast, but that also includes security investment in China.
Okay.
Steven. Steven Chan.
Thank you.
Another Steven.
Two questions. One, a follow-up on this loan growth and Risk-Weighted Assets, as opposed to growth in Risk-Weighted Assets in first half is lower than loan growth. Just want to know what has caused a slower growth in Risk-Weighted Assets compared with the loan growth. Also now your CET1 capital has now returned to well above 11%. Just want to ask, when will you start to consider to raise your dividend payout closer to the 60% range rather than closer to the 40% range?
Lower. Come on.
Because your target range is 40%-60%. Just want to know when you are going to move towards the 60% range. Second big question is on asset quality. Again, two sub-questions on that. One, overdue loans remain much higher than the impaired loans. I think it is higher than the impaired loans by about HKD 2.2 billion. Are you worrying about that some of these overdue loans will continue to downgrade into NPL? Also for the increase in the impairment loans in China. Could you share with us what it is related to which sector? Are you worrying about that these impairment loan ratio in China will continue to rise in second half?
Do you—
Yeah. For the—
RWA increase. Yes.
Okay. In the first half, our loan increased 10.5%, while the total asset balance only increased 1.9% from the last year. We deliberately control the increase or decrease some items while we support the customer-related business. That is why our RWA only increased 2.4%, while the loan increased 10.5%. in the last several months, we also strengthened the management on the RWA internally, especially our business line, our front line people also carefully manage when they select the customer, select the product. They will justify the risk and return of this carefully managing the growth of the RWA for each segment. For the CET1
In the first half, beside the RWA management, we also took some measures in strengthening our capital base. We revised the dividend policy, so that bring up some residual dividend in the holding level and help increase the capital base. That will be a one-off item. But overall, I think if you look at the composition of our capital base, especially the Tier 1 base, we are in good position and we can ensure us for the future business growth. For the dividend policy, Justin will talk about it.
The payout ratio.
Yeah.
Now it is 40% - 60%, and I think in the foreseeable future, it will remain that way. But of course, that really gives us flexibility within that range to make adjustments in order to meet our capital demand and business growth demand. The answer, actually, to your question is very simple. It all depends on the profitability, regulatory requirements, and our business strategy. Now that regulatory requirements, as everyone knows, our CFO can explain in a much clearer way. There are so many different add-ons, actually. We are going to be a D-SIB for sure, and then you are going to need add-ons to that conclusion. And there is a countercyclical buffer, there is a capital conservation buffer, everything like that. All in all those additional requirements in capital will be fully implemented by the year 2019.
I guess, so far we still don't know exactly what kind of market requirements we're going to face. It's very hard for us to say. But I would say this 40%, 60%, that really provides the management enough flexibility. The policy will remain in the foreseeable future. The exact payout ratio will depends on these three factors. There are lending activities in China. I'll ask Mr. Gao of DCE in charge of corporate lending to give you some explanation.
Yeah. Major increase in the impairment charge are in the, we call the non-bank China related loan. As you know, that includes two parts. One is the loan extended by BOC Hong Kong itself, and another is the loan extended by Nanyang Commercial Bank (China). I think for loan extended by BOC Hong Kong, I think that increase in the impaired charge is just one specific customer in shipping industry. And for increase in the allowance charge in Nanyang Commercial Bank (China), I think that is major in the two regions. We call the Yangtze River Delta and the Pearl River Delta. As you know, those two region, for past years, major increase, the NPL rising area. So where our Nanyang Commercial Bank major operation located. So most of them, I think, are medium-sized corporate, mainly in the manufacturing and trading industry.
Gurpreet. Yeah, please.
Gurpreet from Goldman Sachs. One very small technical question for the CFO again. On the numerator of the equation for the core Tier 1 capital adequacy ratio, I see that the core Tier 1 capital increased by some HKD 13 billion half on half, and then you have retained earnings increased by roughly HKD 7 billion. AFS positive movement of roughly HKD 2 billion, so that makes HKD 9 billion. What makes for the remainder HKD 4 billion? Is it the holdco movement up streaming of dividend that you just mentioned?
Do you understand that question?
Yeah.
It's very technical.
Yeah, very technical. I don't have a chart on my hand, but anyway. I will explain the increase or improvement for the Tier 1 capital base in the first half, mainly composed by three items. One is our return earning. Secondly is the residual dividend we upstreamed last year end. But as we adjust the dividend policy, there's some saving in the holding level. The third item is some of the AFS reserve. We have a positive available-for-sale recognition reserve in the first half of this year. For the dividend payout, we also leverage the return earning of our holding company. So in the first half, as we have sufficient dividend distributable profit in the holding level, we don't need to upstream from the banking level to the holding level. So, there will be some one-off improvement in the first half.
As I said, the enhanced management on capital, enhanced management on the RWA growth will be maintained. That will bring us the long-term improvement in the capital control.
Have you got answer to your question? Okay, excellent.
Yes.
Chris? Chris. Please.
Thank you. Chris Lai from Merrill Lynch. A question on the tax. I see the overseas tax rate is higher, mainly due to expenses not deductible for taxation purposes. Is that a one-off, or can you just give us a little bit more color on that?
Yes. For the first half, our effective tax rate is around 18.5%, while the last year same period, around 16.5%. The increase mostly is several items. One is the increase. We classify some of the investment property to self-use property. So that result in a one-time recognition of the deferred tax asset on the revaluation gain of the investment property. Second item is some technical issue from our BOC [Life]. BOC [Life] had accumulated a loss in past several years. So up to last year, it has used up the loss credit. So for this year, I think, the loss deduction has been disappeared. So there is an increase. And also we have some China-related business. So we make some withholding tax for those items. At the same time, we are working with the Chinese tax authorities to accelerate the tax certificate.
By getting those certificate, we can get some extent of tax deduction in Hong Kong. To answer your question, I think, in the first half, there's some technique, one-off items. Long term, it will be even out for the effective tax rate.
Yeah. We're one of the major players in RMB business. One of the RMB business actually is lending to the financial institutions in RMB, to the domestic financial institutions. As you know, the interest we're going to make on your lending is subject to withholding tax. The more you lend, the more you have to really put in reserve until we get tax certificates from the counterparties.
There might be some time lag between the China tax and the Hong Kong tax credit deduction.
Gary? Yeah, please.
Thank you. It's Gary Lam from Citi. Just two questions related to your strategies. First, you mentioned about the RMB task force. We, of course, are aware of the potential launch of the Shanghai-Hong Kong Stock Connect. Could you just offer us more of your insight on thinking of on top of the pure stock market or brokerage income from this stream, what other potential business opportunities are you seeing from the scheme, and how does it impact the sector? Secondly, perhaps more focusing on the retail banking strategy. We are seeing a moderate increase in the other retail loans health and health, as well as some pickup in mortgage activities. Can you translate this into your read into the pickup of risk appetite or how do you address in the second half? Thank you.
I'll ask Jason, our head of retail banking, to answer the second question. As to the first question, which is about Shanghai-Hong Kong Stock Connect. We, of course, are very actively participating in the preparation of this scheme. In terms of what kind of benefits it's going to bring to us, it's very hard for us to quantify for the time being. But of course, as far as we understand, stock brokerage is going to be helped. Foreign exchange transactions, because there will be need for investors to convert Hong Kong dollars into RMB when they want to make investment in A-share market, and then to convert back when they divest. Then of course, there might be some other services. For instance, margin lending, the securities that are going to buy, things like that. There are several possibilities.
But of course, at the same time, we are trying to prepare investors for the A-share investment. We have really organized a few seminars.
[inaudible] . We've organized a few seminars for our investors. We've also created a webpage which provide detailed information about some of the most prominent stocks listed in A-shares, and also includes some analytical tools on the webpage, on websites that investors can use it to do some simple analysis of A-share stocks. So these are the things that we've done or we're doing. Certainly, we expect this thing is going to come through sometime in October. But exact date, sorry, we don't know. We can't really disclose the details of our discussions with the relevant parties. Sorry.
On the question on retail lending for Zhou, there is no change in our risk appetite insofar as retail lending is concerned. We increased other retail lending by 30% in the first half of the year on a year-on-year basis. That is partly because of the fact that, as a result of the slowdown in mortgage activities, we refocused some of our resources to this part of the business, which is actually a lot less developed than our mortgage products.
The other thing is that we do have a sizable mortgage business and quite a significant number of borrowers have a pretty low loan-to-value ratio as a result of mortgage done in years before. As a result, there is room for us to increase things like top-up financing in this sector. The rollout of our private bank also help. We started our private bank operation slightly more than a year before. We have seen quite steady and healthy progress in that regard. As you know, private bank obviously involve portfolio lending for private bank customers. So that also contributes to the growth of that other retail lending business. We do see potential in that regard, but that, compared with the mortgage business, is still relatively small. So I would not count on it as a very significant growth driver. But we expect it will continue to grow.
Okay. Jamie?
Yeah. Hi, it is Jamie from JP Morgan. Also two questions. The first one is for the China asset quality. If you look at the presentation, 21. In terms of the deterioration, should we expect further deterioration for the impaired loan ratio for the NCB China in second half? In terms of the magnitude, would that be even worse than first half? The second one is if you do the math, a pursue increase in the impaired loan balance for NCB China is around CNY 600 million. But if you look at your financial statement, page 56, the impaired loan related to China actually increased by about CNY 1.2 billion. So the discrepancy is that any deterioration related to the cross-border businesses as well? That is one for the asset quality. The second one is the decline of the CASA ratio.
I think the significant increase in time deposit, is that part of your deposit-taking strategy for the Basel III related implementation? How should we expect this going forward in terms of your deposit structure? Thanks.
Yeah. Okay. Yeah.
For the first question, I think the upwards trend in classified loan in Mainland China is expected in the second half of the year. As part of it, I think the Nanyang Commercial Bank (China) could see the worsening asset quality in the second half. From the group, we are aware of the current situation in Nanyang Commercial Bank (China). We already enforce several measures to contain the risk, including upgrade our criteria for selection of customer and enhance the background check, and also limiting our exposure to vulnerable industry and regions. As I just mentioned, given the low base of loan balance, the impact to the group is expected to be not material. I think that is the first question.
For the second one, I think that difference you mentioned, the NPL classified loan is due to the, as I just answered the last question, is Non-bank China related loan include two parts. One is Nanyang Commercial Bank extended loan. Another is the loan extended by BOC Hong Kong. I think that amount you just mentioned is the one single credit provided by BOC Hong Kong in the shipping industry.
Yeah. Uh huh.
There is another question.
About CASA.
Yeah.
Our strategy actually, since the beginning of this year, is to extend our liabilities, maturity of liabilities. Because it seems at least, we are facing a rising interest rate environment. In order to prepare the bank, both in terms of liquidity, reducing the mismatch and things like that, we extended our maturity for liabilities. That is one thing. The other thing actually, we have the largest share RMB deposits among any of the Hong Kong banks. As everybody knows, there is hardly any savings and checking account balance for RMB because it is not very active currency that is being used for day-to-day payments here in Hong Kong. As a result of that, because of the increase of RMB transactions, because of the increase of RMB deposits, most of that, 95% of that, even higher actually, is in term deposits. Naturally, that has certain impacts on our CASA rates.
When you— If you carve out the additional part, if you just normalize the RMB deposits or just make comparison with other major banks in Hong Kong, I would say our CASA ratio would be somewhere around close to their levels.
Okay.
If I may also add on that CASA question. I think from our past experience, if you are in a rising interest rate cycle, when the difference between term deposits and saving deposits widens, there is a tendency for CASA to decrease. As far as we are concerned, I think the key is for us to continue to increase the main bank relationship with our customers. That would enable us to capture the surplus funds and CASA deposits from our customer base.
James, could you wait until Pahad? Because he had been raising his hand for many times.
Standard Chartered.
Yeah.
Pahad from Standard Chartered Bank. Sorry for coming back on RWA growth. I am still trying to understand, can we get an attribution of the 2.4% growth in RWAs as to how much of that is because of loan growth, how much is that because of the change in asset mix, and how much of that is because of model changes or assumption changes? The second question is, for the RWA loan growth, how should we think about it going forward? Should we assume it to be lower than the loan growth, or should we assume it to be in line with the loan growth in second half and in 2015? Thank you.
I think he will give all the numbers. Not right now.
Yeah, sure.
We should work out late.
Actually, in the appendix of our financial statement, we have a full set of the composition of both the capital base component and the RWA items, from the risk-weighted asset, from the revaluation, et cetera. But in general, I think we will continue as a strategy. We will continue to optimize our balance sheet and prudently manage our risk-weighted asset growth. There will be some restraint, if you had increased or adjusted the balance sheet structure to some extent. For the increase of customer, I think we will optimize our income structure going forward. We have more fee-related income, instead of merely relying on the interest income. So that will also help us to increase the capital base, to increase the efficiency of capital using. For the specific numbers, I think we can offline discuss from the schedules we provided.
The second part of your question is about RWA or loan portfolio, which one will grow faster. We certainly hope the RWA will grow slower than the lending portfolio. Actually, what we did in the first half was selection of customers is certainly very important. Because now we use internal rating, the high rating, the lower the RWA consumption. So of course, throughout the first half of this year, we've really implemented this target actually to all the frontline business units, so that when they extend lending, not only look at the volume, they also look at the risk weights. Every major units have their own risk-weighted assets targets and retail risk-weighted asset targets. So this conscious management actually has contributed to the improvement in terms of relationship between RWA and the loan.
The other one actually, if you remember, sometime last year, [Non-English content] SAFE relaxed its control on guarantees that corporates can provide against their overseas borrowing. We took advantage of that, actually. We requested some of the customers to provide guarantees from their parent companies, and that substantially increased not only the cushions and the protections of our exposure, but also reduced our RWA. That may be a one-off. Because there is only certain number of customers you can do that with. But the first part of the enhancement, especially the RWA targets and things like that, will continue. We certainly hope RWA will grow slower than our lending portfolio.
Due to time constraint, probably we only have time for the last questions, and that chance goes to James, please.
Thank you. I'm just wondering about I hate to beat a dead horse here, but you mentioned in March that you're going to the advanced IRB method of calculation. Is that in any way reflected in the current results? What's the timeframe, and what do you think the impact might be on your ratios, moving from the method that you've used recently to the advanced method? Thank you.
I'll ask our CFO to answer that question. Too technical for me.
Currently, we're still using the FIRB. All those numbers may not compare directly with some other banks in Hong Kong, because they're using AIRB. For our AIRB project, we keep close discussion with HKMA, especially addressing some specific requirement on the model validation, model parameter setting, et cetera. Currently, we don't have the specific time target for the implementation of the AIRB. But as we discussed with you earlier this year, the saving from AIRB may be lower than people expected. As you know, regulator are becoming more and more prudent in giving, relax the control.
The general trend is like this. The regulators are adding flaws in terms of how much capital saving you can get out of implementation of AIRB. So the benefits you can get out of that actually is diminishing.
Okay. Thanks all for coming. Look forward to seeing you all next time. Thank you.