Good afternoon, ladies and gentlemen.
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I am the Secretary to the Board, Fan Yaosheng.
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Welcome to Bank of China 2012 Annual Results presentation.
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This presentation is made in Beijing and audio and video links to our Hong Kong venue to ensure that Hong Kong analysts have equal access to our public disclosures.
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Before we proceed, please take note of the disclaimer on this side.
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This presentation, together with our 2012 annual report, is now available on our website for downloading.
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First of all, I would like to introduce our senior management team here with us today. Mr. Li Lihui, President.
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Mr. Wang Yongli, Executive Vice President.
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All the financials in our presentation here are prepared according to IFRS unless otherwise stated.
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If there is any questions, you are more than welcome to raise your questions after the presentation.
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We will allocate time equally between Beijing and Hong Kong. Now, I would like to turn the presentation over to President Li. Thank you.
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Good afternoon, ladies and gentlemen.
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Thank you very much for attending this meeting.
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You are all here, you are all analysts, and everyone is very sensitive to figures. I would like to spend a short time on presenting to you about our 2012 results, and then my colleague and I will answer your questions.
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Last year marks the 100th anniversary of the founding of the Bank of China, and the bank inherited and carried forward the fine traditions, adhered [with zeal] to focusing on profitability, and emphasizing and streamlining structure in managing risk, enhanced infrastructure construction. We have done very well facing the complex operating environment. The bank reported a profit after tax of CNY 145.5 billion, an increase of 11.5%, this represents an increase of 14.6% after eliminating the one-off impact of BOC (Hong Kong)'s Lehman Brothers-related products in 2011. ROA and ROE remained stable at 1.19% and 18.1%. The bank improved asset quality and further increased provision coverage ratio, as NPL ratio was 0.95% and NPL coverage ratio was 236.3% , up by 15.6 percentage points . Our capital adequacy ratio is 13.63%, and core capital ratio is 10.54%, increased by 0.65 percentage points and 0.46 percentage points.
The bank's ranking was further upgraded by 39 positions, and we were awarded Bank of the Year China by The Banker for the third time, and became the only bank from an emerging economy being enrolled as a Global Systemically Important Financial Institutions for two consecutive years. There are mainly the following areas for our results. First, we have optimized our liability structure, and the demands deposits percentage increased by 1.2 percentage points to 45.1%. Again, we also improved our liability management and enhanced the daily average deposits management, and the domestic daily average deposit grew by 7%. We have also controlled our funding costs very effectively. At the end of 2012, the balance of domestic structured deposits amounted to CNY 157.9 billion, down by CNY 400 billion. The proportion of structured deposits to the domestic customers' deposits decreased by 5.4 percentage points to 2.1%.
Our funding cost was effectively controlled, with average cost of both domestic RMB deposits and domestic FX deposits dropped by 11 basis points compared with the first half of 2012. The bank continued to optimize asset structure and increase the proportion of high-yield assets. At the end of 2012, the proportion of net loans plus investment securities to the total assets increased by 1 percentage point. The proportion of domestic RMB personal loans to total domestic RMB loans accounted for 31.9%, up 1.9 percentage points compared with the prior year-end . Small enterprises loans by the BOC Credit Factory grew 38%, 31 percentage points higher than the growth rate of domestic RMB corporate loans. Again, like I said, this is 31 percentage points higher than the growth rate of domestic RMB corporate loans. The bank increased the size of its investment securities.
Total amount of RMB investment securities increased 8%. Average yield of domestic RMB investment securities and group investment securities were enhanced by 32 basis points and 13 basis points , respectively. Our NIM is still very healthy and has been improved gradually. The NIM of the domestic RMB business expanded, and that of the domestic assets business rebounded. Again, we have done very well faced with an economic downturn in the market. As a result, the group's net interest margin increased 3 basis points to 2.15%. The bank vigorously developed capital-light, fee-based business and optimized the structure of net fees and commission income under the challenging market environment, such as bank card fees, custodian, other judiciary service fees, settlement and clearing fees grew by 39%, 31%, and 13% respectively. Seizing the opportunity of capital market recovery in the fourth quarter of 2012, the bank's agency commissions grew by 17%.
The proportion of income from capital-light fee-based business accounted for 77.7% of total fee income, up 6 percentage points. Net interest income increased by 9%, while net fee and commission income increased by 8.1% year-on-year. In assisting branch operations, the bank strictly controlled administrative and operating expenditure and optimized its expense structure to improve cost efficiency. The business and administrative expenses of the bank reached CNY 116.4 billion, an increase of 8.9% compared to the prior year. The cost-to-income ratio was 31.81%, a decrease of 0.77% compared to the prior year. Seizing opportunities arising from China's Going Global Strategy and the rapid growth of its cross-border RMB business, the bank accelerated the construction of its integrated global service systems and focused on improving its global service, management and support capacities, as well as continuing to expand and optimize its global network.
As at the end of 2012, total overseas assets was $498.9 billion, an increase of 13.3% year-on-year, and accounted for 24% of the group's total assets. Overseas profit before tax was $5.53 billion, an increase of 11.7% year-on-year, accounted for 19% of the group's total profit before tax. Personal deposits and loans increased significantly. T he bank stepped up overseas network expansion with the establishment of 15 new overseas institutions in 2012. There are Tier 1 and Tier 2 institutions. Currently, the overseas institutions that covered Hong Kong, Macau, Taiwan, and 36 countries were actively pushing forward the integration of our domestic and overseas corporate banking services and the improved overseas personal financial products and service systems to enhance its global service capability. The bank's cross-border RMB business developed rapidly with a leading market position. You can refer to the figures on this slide.
The total cross-border RMB settlement transaction volume of the year reached CNY 2.49 trillion, up by 42% year-on-year, while the domestic operations conducted CNY 1.2 trillion, up by 54% year-on-year, with a market share of over 30%. The bank established a global clearance network. After our Taipei branch received approval to serve as the RMB clearing bank in Taiwan, the bank has been designated exclusive RMB clearing bank in Hong Kong, Macau, Taiwan, and Malaysia. The bank also became the main RMB clearing channel in Germany, France, Luxembourg, Japan, Korea, Indonesia, Philippines, and South Africa. The bank opened nearly CNY 900 clearing accounts for its corresponding banks and branches of the bank in over 80 countries and regions over five continents. Our customers are located across 200 countries and regions, with the number one market share in cross-border settlement volume and clearing account service.
The bank made full use of its competitive advantage of international and diversified platform, strengthened product innovation, and continuously enriched overseas RMB products and services. Offshore RMB products, including deposits, loans, and settlement, cash distributions, life cards, and bond underwriting, realized rapid growth. Looking forward, we will take full advantage of the favorable market conditions and our function as a regional RMB clearance and settlement center, further expand cross-border RMB products, and leverage on the cross-border synergies to effectively boost the development of our overseas RMB business. We fully leverage advantages of our diversified business platform to push forward customer development, business cooperation, cross-selling, and product innovation to enhance synergy of the group. BOCI became the only Chinese financial institution to hold multiple clearing memberships from the world's major commodity exchanges. BOCI financial business volume and profit grew against prevailing market trends.
BOCIM’s assets under management increased CNY 100 billion. BOC G Insurance and BOCG Life led the market in general insurance and RMB insurance market in Hong Kong, respectively. A gain, we are in a leading position. BOC Insurance's profit grew significantly.
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BOCG Investment optimized its investment portfolio. BOC Aviation's fleet expanded greatly with sustainable profit growth. The head office is in Singapore. Its credit rating meets global peers. The global ranking is number four, number five.
Next, risk control. The bank closely monitored macroeconomic developments, earnestly conducted regular risk investigations, risk classification re-inspection, risk early warning, and post-lending management, and intensified risk recognition and prevention. Thus, maintained a stable quality of credit assets. Our NPL ratio stood at 0.95%, a decrease of 0.05 percentage point from the prior year-end. The special mention loan ratio and overdue loan ratio remained stable at 3.02% and 1.09%, respectively. We continued to implement the prudent provision policy, with risk resistance capability further enhanced. The NPL coverage ratio was 236.3%, an increase of 15.6 percentage points from the prior year-end. Domestic institutions' ratio of allowance for loan impairment losses to total loans was 2.62%, an increase of 0.06 percentage points from the prior year-end. The credit cost remained stable at 0.02%, due to low new NPL formation ratio and the significant recovery from NPLs.
The bank strictly controlled the loan balance to local government financing vehicles and strengthened risk control for real estate sector with overcapacity and others. For these sectors, their share of our total loans has decreased. Asset quality remains good. Rely on new IT platforms to strengthen infrastructure construction. The bank strengthened its channel construction and enhanced its intelligence level and service capabilities. Domestic middle- and large-sized fully functional outlets reached over 1,800, accounting for 17.6% of our total. More self-service facilities were installed, and e-banking businesses developed rapidly, and customer numbers of online banking, mobile banking, and telephone banking increased fast, and transaction volumes increased rapidly. The bank optimized functions of core banking system and launched the integration and transformation for the overseas information system in a comprehensive manner. The bank also implemented data mining on top of its global data platform.
For overseas core banking system and integration and transformation, it is expected that within this year the Asia-Pacific work can be completed. The bank enhanced operational service capability, including promoting centralized operation for intra-city businesses, optimizing internal control mechanisms for entire procedure, and accelerating the construction of the operating platform for unified payment, customer service, and logistics. In order to meet the developing needs of the intelligent, interactive, and internet-connected era, the bank actively promoted the smart bank construction, striving to provide customers with financial services access anytime, anywhere, and in any way to create the best customer experience. In 2013, we expect the national economy to maintain rapid growth. Meanwhile, the global economic recovery may continue to face uncertainty and instability. GDP growth is expected to be between 7% and 8%, roughly at 7.5%. CPI will be at around 3.5% or below. The overall national economy will be positive.
The global economic recovery may continue to face uncertainty and instability, while the domestic economy will continue to experience imbalances and unsynchronization. The bank will also encounter new challenges arising from the financial and technological [inaudible], and the banking industry's traditional business barriers. These are the new challenges that we will face. We are still at a very important stage of development opportunity. The bank will firmly seize this important strategic development opportunity to push forward the following key areas. One, focus on business transformation to improve operational efficiency. Two, accelerate smart bank construction to improve customer experience. Three, strengthen risk management and improve efficiency to improve development quality. The bank will fully leverage the competitive advantages of its international, diversified, and intellectual operations, and implement the development strategy adhering to the principle of delivering growth and excellence.
We will strive to maintain stable, augmented performance, and realize steady growth of profits and incomes by deepening business transformation and improving the pricing mechanism. We will strengthen financial management and improve resource allocation efficiency to control cost-to-income ratio. We will continue to reinforce risk management to maintain asset quality data. We are confident that we will achieve stable, healthy, and sustainable growth and bring long-term sustainable value to shareholders. That's my presentation. Now, I would like to see whether you have got any questions to ask.
Thank you, President Li. Now we come to the Q&A session. Let's invite the participants in Beijing to ask questions, followed by those in Hong Kong. Please put up your hand if you have any question. This gentleman in the front row, please.
Thank you, management, for your presentation. For BOC International, I got two questions. First one is on NIM. Actually, BOC has done very well in NIM, and it's actually gone up, contrary to your peers. I would like to ask for the management team to give us a forecast for 2013 for the RMB businesses. Perhaps it is very difficult to reduce the cost further. I n this perspective, how can you further control the funding cost in regards to RMB? I think 2013 might be better than last year for the management team. Do you expect a turning point for 2013 or for the future?
The second question for asset quality. There is still very good expectation for the asset quality in the market, and it is predicted that there will be a turning point this year. I don't know whether the bank agree with the asset quality view generally from the market.
Well, now let's welcome Mr. Wang to answer your first question. I'll answer the second one.
What I can tell you is now in 2012, BOC's NIM has improved. In 2012, we have made major restructuring. We were the first one to take measures to control the high-cost funding, and President Li has also talked about our structured debt securities, and it was reduced by CNY 400 billion. The deposit rate has also come down for this year.
We continue to demand that the deposit rates would remain low. Whether how do we achieve this in this challenging market? It needs a lot of hard work. First, in terms of strategy . H ow do we focus on the deposit area? We need to focus on the cash flow of deposits, whether it' s from personal or from corporate. This will help us with the precipitation of funds. We all know that this area of fund is quite low cost. Traditionally, this has been a weakness in our business. Our advantage has been international settlement. We believe that there is further room for us to improve in this area. We have taken many measures since 2012 to stimulate our staff to gain customers in this respect.
From this year, and end of last year, and beginning of this year, we can see a very positive trend for NIM. Not only that we need to control the cost of deposits, another one is that we need to increase the asset yield. There are many areas of work to be done. For example, the forex business, the SME structures, and the microenterprise structures. In the past, our funding has mainly been granted to large enterprises. Now we may need to make some structure changes. However, for the SMEs lending, we need to have batching management within our group. In this area, we are also working very hard. For lending, we are trying our best to avoid to attract customers by pricing wars.
We aim to serve our customers and give them a consolidated and comprehensive service to gain more market share. Overall, for 2013, with the interest rate liberalization is going to continue to speed up and the competition will become more fierce, w e face a lot of pressure in this area, but we believe that we can maintain a very healthy interest spread.
For the asset quality issue, and from the report you can see, we have done a very comprehensive description. Last year, the NPL has come down by CNY 2 billion. It' s mainly for corporate NPLs.
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Now I will turn the floor to the Hong Kong venue. [Non-English content] Thank you. The lady to the left on the second row, please.
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Just now, Mr. Wang commented on NIM. He gave a very detailed answer.
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Now let me supplement.
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Thank you. We will take another question from Hong Kong. The lady on the right, second row.
[Non-English content] Because last year we have collected quite a lot of NPL, so this year if we do not have so much NPL but still have to work towards clear up and maybe it will not be as great as 2012.
Thank you for your question, Lucy. Last year, the total write-back of BOC was CNY 33.4 billion, and the new provision made was CNY 52.49 billion. There was a net increase of CNY 19.086 billion. In 2013, our plan for NPL recoveries is also well underway. We expect that there will be a certain degree of recoveries. This year, we plan to keep the credit cost at below 0.5%. There is still headroom compared to the current credit cost of 0.29%, so we have enough financial resources to meet the provision demand for this year. Just now you also mentioned about NIM. Lucy, did you mention about NIM?
I asked about the gross new NPL.
Last year, the new NPL, domestic NPL is CNY 32.2 billion, and this had an increase of 0.21% compared to the first half of 2012. The new NPL has grown by 0.2%, and it's 0.14% up compared to the first half of 2012, and this is mainly caused by the economic downturn in the market. Compared to our peers, we think that we are doing quite well. For 2013, we predict that we would be able to maintain this level, and it shouldn't fluctuate too much. We' re very confident about maintaining good asset quality. We do not believe the asset cost is going to go up. Thank you.
The gentleman on the first row.
Thank you for your presentation today. President Li, very soon you have to go according to the new capital accord to disclose the total and core capital adequacy ratio for BOC with the total assets. Now, you are a very important commercial bank, so I think people will show a lot of concern. I have a very detailed question for President Li, which is recently, I think the media have also asked this question concerning photovoltaic industry. Thank you.
I think I will defer to Mr. Wang to take your first question.
PBOC announced the capital management method for commercial banks, and all along, Bank of China has been working in accordance with the requirements to implement or to finalize some criteria or indicators on the new management method. According to the new method, our capital adequacy ratio will be affected. According to our calculation, the impact will be around 1%. Now we are doing further calculation. We are making comparison with other banks. For example, we will see whether there will be consistent risk assessment for similar types of enterprises to relax or to tighten the standard. We are now doing further calculations that the impact will be nearly 1%.
You just talked about the photovoltaic industry. Concerning our loan policy for this industry, all along we have been very prudent. Based on our studies and surveys, our loan outstanding balance for this industry and also the share in the industry is not on a high level. The share is rather small, the absolute amount is not big.
Now, I think you know the reasons behind in the past few years, the photovoltaic industry was subject to the U.S. and European double anti-dumping and anti-subsidy investigations. There was also a very serious excess capacity issue in some. For example, in Jiangsu, Suntech, in 2010 and 2011, for similar products, they came first in the sale of similar products in the world. In 2012, there was a big turnaround in the market because they focused on the overseas market, so they were subject to huge impact. A number of banks had also filed bankruptcy application. They are supported by China Resources, and now the bankruptcy application is still on the way. For enterprises like Suntech, talking about our loan portfolio or our loan strategy, in fact, we are more concerned to loan management for the whole industry. You are all analysts.
I can share our views with you. For the photovoltaic industry, the share of special-mention loans is 24%. NPL ratio is 21.31%. Adding the two together, we have 45.38%, which is a rather high ratio. In fact, we are rather prudent in defining this asset quality. The definition of the asset quality and classification have been confirmed by external auditors. For the provision coverage ratio is 51.25% for this kind of special- mention loans. In the future, there may be further changes in the market. If NPL will experience changes for this industry, we will make downward adjustments, and make provision for this kind of loans. For 2013 and the financial position thereafter, there won't be further bigger impact.
We will communicate and work with other banks, as well as the authorities, to push forward the work. For [inaudible], I think there will be a restructuring out of bankruptcy, and we hope that they will have profit afterwards, and they will do something with their capacity to minimize the loss to bank. Thank you.
This gentleman on the front row.
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Let me answer your first wealth management question. For the wealth management question, wealth management, we may have on-balance-sheet and off-balance-sheet . In 2012, the government has had a policy to compress the cost of the on-balance-sheet Wealth Management Products. Because they have squeezed CNY 400 billion, s o in the end, the balance was CNY 157.9 billion. Our off-balance- sheet was CNY 540.7 billion, which is an increase of CNY 329 billion compared to the first half. Comparing with our peers, we used to have a large percentage of on-balance-sheet Wealth Management Products. This has changed. Now we 're very prudent with our both on- balance sheet and off-balance sheet products. This is the situation. Your second question is whether we have made provisions for our wealth management for our custodian services.
Some rating companies, they have done some research with regard to the risk-weighted assets, which is around 20%-25%. Again, I' m not sure how do you deal with this during your daily operations. With regards to the Wealth Management Products, let me ask. In Bank of China, our Wealth Management Products is very careful and very carefully designed.
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T he other 5,819 products, we have given the forecast yield , which have all been achieved. Secondly, last year, according to CBRC's requirements, we strengthened our interbank business and to further enhanced our products principles. We have also reported with the regulators. Our main business is mainly custodian business. We also require real accounting checks and real operations. We also control the access into this business of our customers. Currently, we have done very well with the asset quality in this area. Last year, this business is not very large. It' s around CNY 227.5 billion. We have also stopped our custodian business, s o we do not need to make any provisions in this regard. Thank you.
Now let's move back to our Beijing meeting. Please invite our colleagues in Beijing to ask questions.
Good afternoon. My name is Zhang Zhongwen. I have two questions. First, concerning fee-based business. In 2012, because of the macroeconomy and regulatory impact, fee income for the whole industry came down. For BOC, fee income rose by 8%. I don't know whether [fee income] rose in Q4 in 2012 because of various factors, and also some negative influence had slowed down. What will be your fee-based business in 2013? My next question is about Wealth Management Products. Some time ago, the regulator required that for your Wealth Management Products, at the end of April, a report had to be submitted. For your self-investigation work, what is the progress, and what is the conclusion up to now? For 2013, what will be the risk and focus of regulation for wealth management business?
All right. Mr. Wang will take your first question.
You just talked about fee-based business income. Last year, we grew rapidly in Q1, and in Q2, it slowed down. In Q3, it rebounded slightly, and in Q4, it picked up very significantly. Last year, there was a clearance of fee requirements, so this is a related factor. Last year, the capital market was not very good. I f you look at custodian business and agency business, these have been affected as well. If you look at this year, in Q1, we believe that on a year-on-year basis, there will be some impact. Last year in Q1, the fee-based business grew quite rapidly for the whole banking sector. In Q1 this year, there will be some impact on a year-on-year basis. If you compare with last quarter, perhaps it will be a reasonable level. BOC has attached importance to the development of fee-based business.
If you look at market reactions, our bank card fee income and our agency business or custodian business fee income, agency business fee income have grown quite well. In 2013, we think that we will continue to step up our effort to develop fee-based business so that we can see reasonable development of our fee income. We will continue to diversify our business development. For our investment banking, insurance, securities, leasing businesses, all these businesses will continue to show a good development trend. For 2013, fee-based income is something that we are confident in. About wealth management business, just now I gave some details. For our Wealth Management Products, we have actually kept our promise to customers. We have given undertaking on the recent return, and in those cases, we have not seen problem of not reaching the expected return rates.
Actually, most of our products contain a certain undertaking on the rate of return. We have actively controlling and managing our Wealth Management Products. For on-balance-sheet products, they are mainly deposits, and the cost is relatively high. Last year, we compressed significantly the figure. Last year, it's CNY 400 billion, and it has been reduced to about [CNY 100-odd billion]. For our operation, we are in compliance with the requirements and regulation for off-balance-sheet products. Last year, CNY 542.7 billion is increased by CNY 329.9 billion. This is a big increase comparing with other counterparts. We do not really have a very big figure concerning off-balance-sheet assets.
For us, for off-balance-sheet wealth management, there is no principal guarantee. We will consider customers' requirements to develop such products. This is a unique characteristic of our off-balance-sheet products. We do not sell other companies' wealth management products. By the end of last year, concerning CNY 542.7 billion off-balance- sheet financial of Wealth Management Products, 64% was in bonds and monetary markets products, and for cash flow-based products, 22%.
Our structure is rather good. Within one- year term, that's the majority. Within half a year term, Wealth Management Products, our interest rate or our yield is at least 0.5%. The highest is 6.8%. Comparing with the market, comparing with comparable products, our interest rate is in the medium level. We have exercised stringent and prudent control. Recently, the state expressed clearly the management policy. The investor or the buyer pays. The risk of investment will have to be absorbed by the investor or the customer of these products, and the sellers also have responsibilities. Our bank is a seller. We do have the responsibility. Our responsibility is to make proper arrangement for these products, and we have to exercise stringent evaluation. These products should be sold to appropriate investors. We have stringently implemented these rules, and we will try to do a better job in the future. Thank you.
Thank you, President Li. Since we're running out of time, so I would like to give the opportunity to our colleagues in Beijing. Lady in the second row, please.
Good afternoon. I am [Jiahui from CICC]. Thank you very much for giving me the opportunity to ask the last question. I would like to ask a question about the credit to the local government financing vehicle. We have noticed that your credit given to local government financing vehicle has come down. Do you have any statistics in this area? In 2013, in the off-balance sheet products, what is your policy with regard to the local government financing vehicle?
Well, you are asking for one with regard to local government financing vehicle. Well, in this area, overall, last year, according to our statistics, the loan has come down by CNY 8.3 billion, and it has come down by 0.54%, so you can see we are controlling it very carefully. Second, our asset quality NPL ratio is 0.25%, which is CNY 994 million. The cash flow coverage ratio is 97%. With BOC, 93% of our local government financing goes to the provincial level and provincial capital cities. In 2013, just 10% will mature, and 63% will mature after beyond 2013. Provision is CNY 187 billion. All of these figures were above our peers. For the new year, we will be very strict with the local government financing vehicles.
We hope to maintain stable levels and to reduce the size of finance to local governments. On the other hand, through the improvement of local government financing vehicles, if they have improved and if they have met our requirements, we will be very happy to facilitate the development and to help them become a, t o operate as a normal enterprise, and another one in order to avoid the [default] of local government financing vehicles, because there is no guarantee for us as a bank. In these areas, again, we will be very stringent with our control and our requirements. In this area, we believe that we can control this.
You mentioned about off-balance business, and off-balance business takes up a large percentage of our business, and it is one of our advantages and one of our specialties. We have done quite a lot in this area, and we are going to continue on the same path. We hope through off-balance-sheet products and businesses, we will be able to provide lower-cost financing services to companies. Of course, we will pay attention to guarantee and collateral requirements. For off-balance- sheet business, the most important is that we need to see it is a real business and it is a real trading company. Currently, we are developing very well in this area. It has helped increase our fee-based business as well.
Well, we have reached our time for this session. Again, thank you very much for coming to our result announcement, and thank you very much for your support. This is the end of our result announcement. If you have any other questions, dear analysts, you are more than welcome to contact our investors relations department and to raise any questions to them. Our teams will answer your questions as soon as possible. Again, thank you very much for your time.