Nippon Wealth Limited

Transcription

1 Nippon Wealth Limited 30 June P a g e

2 The Directors of Nippon Wealth Limited (the "Company") are pleased to present the unaudited interim results of the Company for the six months ended 30 June The interim results are prepared under the Banking (Disclosure) Rules (the BDR ) made pursuant to section 60A of the Hong Kong Banking Ordinance (the Ordinance ). General information The Company is a Restricted Licence Bank under the Hong Kong Banking Ordinance incorporated and domiciled in Hong Kong and has its registered office and principal place of business at Units & 13B, 11/F., One Harbourfront, 18 Tai Fung Street, Hum Hom, Kowloon, Hong Kong. The principal activities of the Company are the provision of wealth management services, dealing in securities and advising on securities. The Company was granted by Hong Kong Monetary Authority (the HKMA ) with a restricted banking licence on 2 April 2015, and was registered with the Securities and Futures Commission (the "SFC") to conduct the regulated activities of "dealing in securities" (Type 1) and "advising on securities" (Type 4) on 25 September The Company has executed an agency agreement with Massmutual Asia Limited dated 26 May 2014 and registered as an insurance agent of Massmutual Asia Limited. Also, the Company has been registered with the Insurance Agents Registration Board established by the Hong Kong Federation of Insurers as an insurance agent on 17 June The Company has commenced the restricted licence banking business and insurance agency business on 11 May Financial review, the Company recorded a pretax loss of 29.4 million, representing an increase of loss of 7.1 million or 31.8% as compared with the same period of last year. It was mainly due to increase in expenses incurred in new product to be launched in early As at 30 June 2018, the Company s total assets amounted to million, representing a decrease of 77.2 million or 25.1% over the last financial year end as at 31 December P a g e

3 Nippon Wealth Limited Statement of Profit or Loss and Other Comprehensive Income Notes Interest income 1(a) 788, ,913 Interest expense 1(b) (8,800) (16,534) Net interest income 779, ,379 Fees and commission income 2 5,920,603 5,420,674 Other income 3 199, ,035 Operating income 6,120,067 5,548,709 Operating expenses 4 (36,316,494) (28,238,203) Loss before taxation (29,416,431) (22,334,115) Taxation 5 (7,021) (5,019) Loss and total comprehensive expense for the period (29,423,452) (22,339,134) 3 P a g e

4 Nippon Wealth Limited Statement of Financial Position As at 30 June 2018 Notes (Audited) ASSETS Cash and balances with banks 6 96,396, ,368,582 Placements with banks and authorised institutions 6 101,933, ,468,457 Property and equipment 7 3,569,086 4,659,332 Intangible assets 8 9,852,574 12,539,640 Other assets 9 19,123,526 5,072,900 TOTAL ASSETS 230,875, ,108,911 EQUITY AND LIABILITIES Liabilities Deposits from customers 10 79,768, ,870,481 Obligation under a finance lease , ,204 Other liabilities 12 4,705,177 6,204,006 Total liabilities 85,089, ,933,691 Shareholder s equity Share capital ,000, ,000,000 Reserve for sharebased compensation 14 3,463,937 3,573,326 Accumulated losses (220,678,455) (191,398,106) Total equity 145,785, ,175,220 TOTAL EQUITY AND LIABILITIES 230,875, ,108,911 4 P a g e

5 1 Net interest income (a) Interest income For the six months ended 30 June Interest income on deposits to banks and other financial institutions 788, ,913 The interest income represents interest income on financial assets that are not at fair value through profit or loss. No interest income was recognized on impaired financial assets for the six months ended 30 June 2018 and 30 June (b) Interest expense For the six months ended 30 June Interest expense on deposits from customers 3,912 8,526 Finance cost under a finance lease 4,888 8,008 8,800 16,534 The interest expense represents interest expense on financial liabilities that are not at fair value through profit or loss. 5 P a g e

6 2 Fees and commission income For the six months ended 30 June Mutual fund related fees and commission income 3,280,008 2,404,792 Bond trading related fees and commission income 689, ,851 Insurance agency related fees and commission income 1,719,067 1,873,413 Others 231, ,618 5,920,603 5,420,674 No fees and commission income and expense have arisen from financial assets or financial liabilities which are not measured at fair value through profit or loss for the six month ended 30 June 2018 and 30 June No fees and commission income and expense have arisen from trust and other fiduciary activities where the Company holds or invests of assets on behalf of its customers for the six month ended 30 June 2018 and 30 June Other income For the six months ended 30 June Net gain from foreign exchange trades 199, ,035 Others 199, ,035 Income arising from foreign exchange trades ( FX ) is mainly for assets and liabilities position accounts revaluation, spot FX profit or loss revaluation and spot FX market exchange. 6 P a g e

7 4 Operating expenses For the six months ended 30 June Staff costs 14,261,552 13,302,948 Salaries and other benefits 13,765,641 12,216,506 Contributions to the Mandatory Provident Funds 279, ,943 Sharebased payment expenses 33, ,917 Other staff costs 182,973 61,582 Depreciation Amortization Premises and equipment expenses 912,143 2,687,066 5,435,101 1,320,219 2,687,065 7,689,315 Property rental 1,199,468 2,795,966 Other premises and equipment expenses 4,235,633 4,893,349 Advertising expenses 929, ,096 Other sales promotion expenses 1,334, ,675 Other legal and professional fees 8,728, ,509 Licence fee 219,596 96,498 Travelling expenses 292,477 74,552 Entertainment expenses 14,051 19,818 Bank transaction charges 795, ,064 Other general and administrative expenses 706, ,444 36,316,494 28,238,203 Operating expenses for (i) salaries and other benefits, and (ii) other legal and professional fees were increased significantly in first half of 2018 because of business expansion and system enhancement for new product to be launched in early P a g e

8 5 Taxation Income tax and deferred tax expenses in the income statement represent: No provision for Hong Kong Profits Tax has been made as the income neither arises in, nor is derived from Hong Kong. For the six months ended 30 June Current tax Hong Kong Japan 7,021 5,019 Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit for the year. Japanese Withholding Tax is calculated at 10% of the interest income derived in Japan. No deferred tax asset has been recognized due to the unpredictability of future profit streams. 6 Placements with banks and authorised institutions (Audited) Placements with banks and authorised institutions with remaining maturity of within one month more than one month but not more than twelve months Interest receivable from placements with banks 152,699,440 45,413, , ,483,393 76,226, , ,329, ,837,039 8 P a g e

9 7 Property and equipment Leasehold improvements Office furniture and fittings System hardware Equipment under a finance lease Total Cost Balance at 1 January ,072, ,703 5,633,222 2,404,335 10,509,435 Additions 8,000 30,020 24,310 62,330 Balance at 30 June ,080, ,723 5,657,532 2,404,335 10,571,765 Accumulated depreciation Balance at 1 January , ,703 3,531,816 1,562,818 5,850,103 Depreciation expense 346,251 2, , ,434 1,152,576 Balance at 30 June , ,058 4,095,352 1,803,252 7,002,679 Carrying amounts Balance at 30 June ,378,158 27,665 1,562, ,083 3,569,086 Leasehold improvements (Audited) Office furniture and fittings (Audited) System hardware (Audited) Equipment under a finance lease (Audited) Total (Audited) Cost Balance at 1 January ,493, ,076 5,395,758 2,404,335 12,782,046 Additions Eliminated on disposal 2,072,175 (4,493,877) (88,373) 237,464 2,309,639 (4,582,250) Balance at 31 December ,072, ,703 5,633,222 2,404,335 10,509,435 Accumulated depreciation Balance at 1 January ,812, ,172 2,428,092 1,081,951 7,716,199 Depreciation Expense Eliminated on disposal 1,036,659 (4,493,877) 92,442 (85,911) 1,103, ,867 2,713,692 (4,579,788) Balance at 31 December , ,703 3,531,816 1,562,818 5,850,103 Carrying amounts Balance at 31 December ,716,409 2,101, ,517 4,659,332 The above property and equipment items are depreciated on a straightline basis at the following rates per annum: Leasehold improvements 33 1 /3% Office furniture and fittings 33 1 /3% System hardware 20% Equipment under a finance lease 20% There are no disposal of property and equipment as at 30 June P a g e

10 8 Intangible assets Software Cost Balance at 1 January ,870,657 Additions Balance at 30 June ,870,657 Accumulated amortization Balance at 1 January ,331,017 Amortization expense 2,687,066 Balance at 30 June ,018,083 Carrying amounts Balance at 30 June ,852,574 Software (Audited) Cost Balance at 1 January ,870,657 Additions Balance at 31 December ,870,657 Accumulated amortization Balance at 1 January ,956,886 Amortization expense 5,374,131 Balance at 31 December ,331,017 Carrying amounts Balance at 31 December ,539,640 Amortization is calculated to write off the cost of software on a straightline basis over its estimated useful life at 20% per annum. Amortization started in May 2015 when the Company commenced its business operation and the software is available for use. There are no disposal of intangible assets as at 30 June P a g e

11 9 Other assets (Audited) Prepaid expenses 17,416,047 2,853,838 Rental and utility deposits 1,511,324 1,513,459 Accounts receivable 196, ,192 Others 1,411 19,123,526 5,072,900 A significant increase in prepayment in first half of 2018 was caused by system enhancement costs for new product to be launched in early Deposits from customers (Audited) Overnight deposits from customers 79,768, ,947,658 Time deposits from customers 3,922,757 Interest payable to deposits from customers 66 79,768, ,870, Obligation under a finance lease Present value of Minimum lease payments minimum lease payments (Audited) (Audited) Amount payable under a finance lease: Within one year 496, , , ,599 Within a period of more than one year but not more than five years 124, , , , , , , ,204 Less: Future finance charges (5,308) (10,196) N/A N/A Present value of lease obligation 615, , , ,204 Less: Amount due for settlement within 12 months (491,758) (488,599) Amount due for settlement after 12 months 123, , P a g e

12 The Company leased its equipment under a finance lease. The average lease term is five years. The underlying interest rate of all obligations under the finance lease is fixed at a contract date at 1.29% per annum. 12 Other liabilities (Audited) Expenses payables 2,438,771 3,428,126 Settlement intransit 2,096,130 2,548,912 Deferred payment and other payables 170, ,968 4,705,177 6,204, Share capital Number of shares Share capital (Audited) (Audited) Issued and fully paid At beginning and end of the period 363,000, ,000, ,000, ,000, Reserve for sharebased compensation Equitysettled share option scheme of the Company The Company s share option scheme ( the Scheme ), was adopted pursuant to resolutions of the immediate holding company, OJBC Co. Ltd ( OJBC ), passed on 4 September 2014 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 28 April 2025, 25 May 2026 and 30 April Under the Scheme, the Board of Directors of the Company may grant options to eligible employees, including its subsidiaries, directors and manager of the Company, to subscribe for shares in OJBC. 12 P a g e

13 At 30 June 2018, the number of shares in respect of which options had been granted and remained outstanding under the Scheme was 1,895,920 (31 December 2017: 1,859,460), representing 1.96% (31 December 2017: 5.36%) of the shares of OJBC in issue at that date. The total number of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of OJBC in issue at any point in time, without prior approval from the OJBC's shareholders. The number of shares issued and to be issued in respect of which options granted and may be granted to any individual in any one year is not permitted to exceed 1% of the shares of OJBC in issue at any point in time, without prior approval from the OJBC's shareholders. No consideration is payable on the grant of an option. Options may be exercised at any time from 24 months from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price is determined by the directors of the Company. Year Date of grant Vesting period Exercise period Exercise price Apr Apr Apr Apr Apr 2025 US$ May May May May May 2026 US$ Apr Apr Apr Apr Apr 2028 US$1.10 The following table discloses movements of the Company s share options held by employee during the year ended 30 June 2018 and 31 December 2017: Option Type Outstanding at Granted during the period Exercised during the period Forfeited during the period Expired during the period Outstanding at Year ,786,540 (72,920) 1,713,620 Year ,920 72,920 Year , ,380 1,859, ,380 (72,920) 1,895,920 Exercisable at the end of the period Weighted average exercise price US$1.10 US$1.10 US$1.10 US$ P a g e

14 The estimated fair value of both option types: Year 2018 and Year 2016 granted this year and last year respectively was US$1.10. Whereas, the estimated fair value of the option (Option Type: Year 2015) granted on 28 April 2015 was US$1.96. These fair values were calculated using the Binomial model. The inputs into the model were as follows: Option Type Year 2018 Year 2016 Year 2015 Spot price US$ US$0.58 US$0.84 Exercise price US$1.10 US$1.10 US$1.10 Expected volatility 27.45% 45% 35% Expected dividend yield 0% 0% 0% Early exercise multiple Postvesting exit rate 0% 10% 6.12% Riskfree interest rate 2.95% 1.87% 2% Expected volatility was determined with reference to the historical volatility of some small or medium sized listed comparable companies in Hong Kong in similar industry. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of nontransferability, exercise restrictions and behavioral considerations. The Company recognized an expense of 33,714 (31 December 2017: 710,316), recorded a forfeiture of expense of 143,103 (31 December 2017: 620,115) and noted the equity reserve for share based compensation as at 30 June 2018 was 3,463,937 (31 December 2017: 3,573,326) in relation to its granted share options. The Binomial model has been used to estimate the fair value of the options. The variables and assumptions used in computing the fair value of the share options are based on the directors best estimate. The value of an option varies with different variables of certain subjective assumptions. 15 Loans and advances to customers There are no loans and advances to customers as at 30 June 2018 and 31 December P a g e

15 16 Impairment of financial assets There are no impaired assets, overdue or rescheduled assets or repossessed assets as at 30 June 2018 and 31 December Individual and collective provisions There are no impairment losses, individual provisions and collective provisions for the six months ended 30 June 2018 and 30 June Operating lease commitments At the end of the reporting period, the Company had commitments for future minimum lease payments under noncancellable operating leases for office premises, data center and IT software which fall due as follows: (Audited) Within one year 2,711,855 2,722,255 In the second to fifth years inclusive 1,854,491 3,205,219 4,566,346 5,927, International claims International claim means the international claim as described in the return of international banking statistics required to be submitted by an authorised institution to the HKMA under section 63(2) of the Ordinance, which is the sum of cross border claims in all currencies and local claims in foreign currencies. Crossborder claims refer to positions where the country in which the counterparty located is different from that where the Company that grants or extends the claim is located. 15 P a g e

16 Developed countries Banks Others Total million million million of which Switzerland 4 4 of which Japan of which United States Offshore centre of which Singapore 1 1 Developed countries Banks Others Total million million million of which Switzerland 1 1 of which Japan of which United States Offshore centre of which Singapore 1 1 Developing Asia and Pacific of which China Currency risk The Company has transactional currency exposures which arise from foreign exchange transactions. All foreign currency positions are managed by the treasury department within limits approved by the Board. The Company seeks to match closely its foreign currency denominated assets with corresponding liabilities in the same currencies. Currency risk exposures are measured and monitored against the established limits independently by risk management department on a daily basis. The net positions in foreign currencies are disclosed when each currency constitutes 10% or more of the respective total net position in all foreign currencies. 16 P a g e

17 Equivalents US Dollars Japanese Yen Others Total million million million million Spot assets Spot liabilities (59) (14) (3) (76) Forward purchases Forward sales Net options position Net long (short) position Equivalents US Dollars Japanese Yen Others Total million million million million Spot assets Spot liabilities (90) (30) (4) (124) Forward purchases Forward sales Net options position Net long (short) position 2 2 The Company does not have any net structural position in foreign currencies as at 30 June 2018 and 31 December P a g e

18 21 Other offbalance sheet exposures Other than those disclosed in notes 11 and 18, there are no other off balance sheet exposures (including derivative transactions) as at 30 June 2018 and 31 December Nonbank mainland exposures There are no nonbank mainland exposures as at 30 June 2018 and 31 December Segmental analysis (i) By geographical area The Company s operations are entirely located in Hong Kong. (ii) By class of business The Company s classes of business are wealth management business and other miscellaneous business. 24 Liquidity maintenance ratio ("LMR") The purpose of liquidity management is to ensure sufficient cash flows to meet all financial commitments and to capitalize on opportunities for business expansion. For effective governance and management of liquidity risk, the Board has delegated authority to ALCO and senior management to oversee and monitor liquidity management respectively, but the Board retains the ultimate responsibility for liquidity risk of the Company. In order to ensure compliance with statutory liquidity requirements, the Company measures liquidity through liquidity maintenance ratio and maturity mismatch within its portfolio. Both treasury department and risk management department closely monitor the liquidity of the Company on a daily basis to confirm that the liquidity structure of Company's assets and liabilities can meet its funding needs. Therefore, the statutory liquidity maintenance ratio is always complied with; and the Company's average liquidity maintenance ratio for first half of the year was well above the statutory minimum requirement of 25%. 18 P a g e

19 The Company will perform cash flow projection under normal business conditions and regular stress tests based on severe but plausible scenarios which are suitable for the business model of the Company in order to identify potential sources of liquidity strain under stressed business conditions. The cash flow projection is to evaluate the normal cash flow projection and stresstesting results for formulating the appropriate funding strategy to ensure that sufficient and contingent funding instruments should be readily available at normal and stressed circumstances. For stresstesting purpose, the Company analyses the behavioral characteristics of assets and liabilities as well as offbalance sheet commitments and other contingent liabilities that are contractual and noncontractual in nature. The future cash flows projection is also to assess net funding gaps of a maturity profile and identify potential mismatches for better funding arrangement and taking immediate remedial actions. Therefore, both internal limits of liquidity management ratio and maturity mismatches are properly documented in the established NWB Liquidity Risk Control Manual ( the manual ) which are regularly reviewed by the management and the Board in ALCO meeting for the suitability of such limits; and the size and composition of liquidity cushion. The manual is expected to cover new requirements and to be clearly articulated and communicated to parties concerned. 30 Jun 2018 Average LMR for the current financial period % 31 Mar % The LMR for the financial period is the arithmetic mean of each calendar month's average liquidity maintenance ratio as reported in the return relating to the liquidity position submitted by the Company to the HKMA pursuant to section 63 of the Ordinance and section 30(B) of Part 3 of BDR. 25 Countercyclical capital buffer ratio The countercyclical capital buffer ratio for current period is calculated at JCCyB% for Hong Kong below and jurisdiction outside Hong Kong at 0% as per section 3P and section 3Q of the Banking (Capital) Rules (the BCR ). Applicable Year JCCyB% % % % % 2019 onwards 2.500% The countercyclical capital buffer ratio is calculated according to section 3O of the BCR. 19 P a g e

20 26 Specific disclosures In line with Part 2A of Banking (Disclosure) Rules, specific disclosures are made for semiannually reporting. Part III: Credit Risk for Nonsecuritization Exposures Template CR1: Credit quality of exposures 30 Jun 2018 In 000 (a) (b) (c) (d) Gross carrying amounts of Defaulted exposures Nondefaulted exposures Allowances / impairments Net values 1 Loans 0 198, ,330 2 Debt securities Offbalance sheet exposures Total 0 198, ,330 This table is to provide an overview of the credit quality of on and offbalance sheet exposures. The Company reported balances with banks and related accrued interest receivables only because it had no loans and advances business, holding of debt securities and incurring in guarantee and irrevocable loan commitment as at 30 Jun P a g e

21 Template CR2: Changes in defaulted loans and debt securities 30 Jun 2018 In 000 (a) Amount 1 Defaulted loans and debt securities at end of the previous reporting period N/A 2 Loans and debt securities that have defaulted since the last reporting period N/A 3 Returned to nondefaulted status N/A 4 Amounts written off N/A 5 Other changes N/A 6 Defaulted loans and debt securities at end of the current reporting period N/A The Company reported N/A in template CR2 because it had no defaulted loans and debt securities at 30 Jun P a g e

22 Template CR3: Overview of recognized credit risk mitigation 30 Jun 2018 In 000 (a) (b1) (b) (d) (f) Exposures unsecured: carrying amount Exposures to be secured Exposures secured by recognized collateral Exposures secured by recognized guarantees Exposures secured by recognized credit derivative contracts 1 Loans 198, Debt securities Total 198, Of which defaulted The Company reported balances with banks and related accrued interest receivables in template CR3 only because it had no loans and advances business and debt securities holding at 30 Jun P a g e

23 Template CR4: Credit risk exposures and effects of recognized credit risk mitigation for STC approach or BSC approach Version for AIs using STC approach ( STC version ) Exposure classes 1 Sovereign exposures 2 PSE exposures 2a 2b Of which: domestic PSEs Of which: foreign PSEs 3 Multilateral development bank exposures (a) (b) (c) (d) (e) (f) Exposures preccf and precrm Onbalance sheet amount Offbalance sheet amount Exposures postccf and post CRM Onbalance sheet amount Offbalance sheet amount 30 Jun 2018 In 000 RWA and RWA density RWA RWA density 4 Bank exposures 198, , ,666 20% 5 Securities firm exposures 6 Corporate exposures 1, , , % 7 CIS exposures 8 Cash items 9 Exposures in respect of failed delivery on transactions entered into on a basis other than a deliveryversuspayment basis 10 Regulatory retail exposures 11 Residential mortgage loans 12 Other exposures which are not past due exposures 13 Past due exposures 26, , , % 14 Significant exposures to commercial entities 15 Total 226, , , % 23 P a g e

24 This table is to illustrate the effect of any recognised credit risk mitigation ( CRM ), including recognised collateral under both comprehensive and simple approaches, on the calculation of capital requirements; where the riskweighted asset ( RWA ) density provides a synthetic metric on riskiness of each portfolio. 30 Jun 2018 In 000 Version for AIs using BSC approach ( BSC version ) (a) (b) (c) (d) (e) (f) Exposures preccf and precrm Exposures postccf and post CRM RWA and RWA density Exposure classes Onbalance sheet amount Offbalance sheet amount Onbalance sheet amount Offbalance sheet amount RWA RWA density 1 Sovereign exposures 2 PSE exposures 3 Multilateral development bank exposures 4 Bank exposures 5 Cash items 6 Exposures in respect of failed delivery on transactions entered into on a basis other than a deliveryversuspayment basis 7 Residential mortgage loans 8 Other exposures 9 Significant exposures to commercial entities 10 Total N/A N/A N/A N/A N/A N/A 24 P a g e

25 The BSC approach is not applicable to the Company for calculating its credit risk exposures and effects of any recognized credit risk mitigation. Template CR5: Credit risk exposures by asset classes and by risk weights for STC approach or BSC approach 30 Jun 2018 In 000 Version for AIs using STC approach ( STC version ) (a) (b) (c) (d) (e) (f) (g) (h) (ha) (i) (j) Exposure class Risk Weight 0% 10% 20% 35% 50% 75% 100% 150% 250% Others Total credit risk exposures amount (post CCF and post CRM) 1 Sovereign exposures 2 PSE exposures 2a 2b Of which: domestic PSEs Of which: foreign PSEs 3 Multilateral development bank exposures 4 Bank exposures 198, ,330 5 Securities firm exposures 6 Corporate exposures 16 1,691 1,707 7 CIS exposures 8 Cash items 9 Exposures in respect of failed delivery on transactions entered into on a basis other than a deliveryversuspayment basis 10 Regulatory retail exposures 11 Residential mortgage loans 12 Other exposures which are not past due exposures 26,074 26, P a g e

26 Version for AIs using STC approach ( STC version ) (a) (b) (c) (d) (e) (f) (g) (h) (ha) (i) (j) Exposure class Risk Weight 0% 10% 20% 35% 50% 75% 100% 150% 250% Others Total credit risk exposures amount (post CCF and post CRM) 13 Past due exposures 14 Significant exposures to commercial entities 15 Total 198, , , Jun 2018 In 000 Version for AIs using BSC approach ( BSC version ) (a) (b) (c) (d) (e) (f) (g) (h) (i) Exposure class Risk Weight 0% 10% 20% 35% 50% 100% 250% Others Total credit risk exposures amount (post CCF and post CRM) 1 Sovereign exposures 2 PSE exposures 3 Multilateral development bank exposures 4 Bank exposures 5 Cash items 6 Exposures in respect of failed delivery on transactions entered into on a basis other than a deliveryversuspayment basis 7 Residential mortgage loans 26 P a g e

27 Version for AIs using BSC approach ( BSC version ) (a) (b) (c) (d) (e) (f) (g) (h) (i) Exposure class Risk Weight 0% 10% 20% 35% 50% 100% 250% Others Total credit risk exposures amount (post CCF and post CRM) 8 Other exposures 9 Significant exposures to commercial entities 10 Total N/A N/A N/A N/A N/A N/A N/A N/A N/A The BSC approach is not applicable to the Company for calculating its credit risk exposures by asset classes and by risk weights. Template CR6: Credit risk exposures by portfolio and PD ranges for IRB approach 30 Jun 2018 In 000 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) PD scale Original onbalance sheet gross exposure Offbalance sheet exposures preccf Average CCF EAD post CRM and postccf Average PD Number of obligors Average LGD Average maturity RWA RWA density EL Provisions Portfolio (i) Sovereign 0.00 to < to < to < to < P a g e

28 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) PD scale Original onbalance sheet gross exposure Offbalance sheet exposures preccf Average CCF EAD post CRM and postccf Average PD Number of obligors Average LGD Average maturity RWA RWA density EL Provisions 0.75 to < to < to < (Default) Subtotal Portfolio (ii) Bank 0.00 to < to < to < to < to < to < to < (Default) Subtotal Portfolio (iii) Portfolio (iv) Total (sum of all portfolios) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A The IRB approach is not applicable to the Company for calculating its credit risk exposures by portfolio and PD ranges. 28 P a g e

29 Template CR7: Effects on RWA of recognized credit derivative contracts used as recognized credit risk mitigation for IRB approach 30 Jun 2018 In 000 (a) Precredit derivatives RWA (b) Actual RWA 1 Corporate Specialized lending under supervisory slotting criteria approach (project finance) 2 Corporate Specialized lending under supervisory slotting criteria approach (object finance) 3 Corporate Specialized lending under supervisory slotting criteria approach (commodities finance) 4 Corporate Specialized lending under supervisory slotting criteria approach (incomeproducing real estate) 5 Corporate Specialized lending (highvolatility commercial real estate) 6 Corporate Smallandmedium sized corporates 7 Corporate Other corporates 8 Sovereigns 9 Sovereign foreign public sector entities 10 Multilateral development banks 11 Bank exposures Banks 12 Bank exposures Securities firms 13 Bank exposures Public sector entities (excluding sovereign foreign public sector entities) 14 Retail Small business retail exposures 15 Retail Residential mortgages to individuals 16 Retail Residential mortgages to propertyholding shell companies 17 Retail Qualifying revolving retail exposures (QRRE) 18 Retail Other retail exposures to individuals 29 P a g e

30 19 Equity Equity exposures under marketbased approach (simple riskweight method) 20 Equity Equity exposures under marketbased approach (internal models method) 21 Equity Equity exposures under PD/LGD approach (publicly traded equity exposures held for longterm investment) 22 Equity Equity exposures under PD/LGD approach (privately owned equity exposures held for longterm investment) 23 Equity Equity exposures under PD/LGD approach (other publicly traded equity exposures) 24 Equity Equity exposures under PD/LGD approach (other equity exposures) 25 Equity Equity exposures associated with equity investments in funds (CIS exposures) 26 Other Cash items 27 Other Other items (a) Precredit derivatives RWA (b) Actual RWA 28 Total (under the IRB calculation approaches) N/A N/A The IRB approach is not applicable to the Company as there is no recognized credit derivative contracts used as recognized credit risk mitigation to effect on risk weighted assets. 30 P a g e

31 Template CR8: RWA flow statements of credit risk exposures under IRB approach 30 Jun 2018 In 000 (a) Amount 1 RWA as at end of previous reporting period N/A 2 Asset size N/A 3 Asset quality N/A 4 Model updates N/A 5 Methodology and policy N/A 6 Acquisitions and disposals N/A 7 Foreign exchange movements N/A 8 Other N/A 9 RWA as at end of reporting period N/A The IRB approach is not applicable to the Company. 31 P a g e

32 Template CR10: Specialized lending under supervisory slotting criteria approach and equities under simple riskweight method for IRB approach 30 Jun 2018 In 000 I. Specialized Lending under supervisory slotting criteria approach HVCRE Supervisory Rating Grade Remaining Maturity (a) (b) (c) (d) (e) (f) Onbalance sheet exposure amount Offbalance sheet exposure amount SRW Strong^ Less than 2.5 years 70% Strong Equal to or more than 2.5 years 95% Good^ Less than 2.5 years 95% Good Equal to or more than 2.5 years 120% Satisfactory 140% Weak 250% EAD amount RWA Expected loss amount Default 0% Total N/A N/A N/A N/A N/A ^ Use of preferential riskweights. 32 P a g e

33 II. Specialized Lending under supervisory slotting criteria approach Other than HVCRE Supervisory Rating Grade Remaining Maturity (a) (b) (c) (d)(i) (d)(ii) (d)(iii) (d)(iv) (d)(v) (e) (f) Onbalance sheet exposure amount Offbalance sheet exposure amount Strong^ Less than 2.5 years 50% Strong Equal to or more than 2.5 years 70% Good^ Less than 2.5 years 70% Good Equal to or more than 2.5 years 90% Satisfactory 115% Weak 250% Default 0% Total N/A N/A ^ Use of preferential riskweights. SRW EAD amount PF OF CF IPRE Total RWA Expected loss amount N/A N/A N/A N/A N/A N/A N/A III. Equity exposures under the simple riskweight method Categories (a) (b) (c) (d) (e) Onbalance sheet exposure amount Offbalance sheet exposure amount Publicly traded equity exposures 300% All other equity exposures 400% Total N/A N/A SRW EAD amount RWA N/A N/A 33 P a g e

34 Part IV: Counterparty Credit Risk The Company does not incur a counterparty credit risk capital under Part 6A of the Banking (Capital) Rules ( BCR ), including the CVA capital charges and charges applied to exposures to CCPs as at 30 June 2018, all semiannually disclosure templates (CCR1, CCR2, CCR3, CCR4, CCR5, CCR6, CCR7 and CCR8) under this Part IV are not applicable to the Company. Part V: Securitization Exposures The Company does not incur securities exposures arising from securitization transactions to satisfy the risk transference criteria set out in Schedule 9 (for traditional securitization transactions) or in Schedule 10 (for synthetic securitization transactions) of the BCR as at 30 June 2018, all semiannually disclosure templates (SEC1, SEC2, SEC3 and SEC4) under this Part V are not applicable to the Company. Part VI: Market Risk The Company uses STM approach for calculating its market risk exposures. Zero is reported in the template MR1 because HKMA issued an exempt letter to the Company and changed its market risk reporting frequency from quarterly basis to annually basis with effect from the reporting position of 31 Mar P a g e

35 Template MR1: Market risk under STM approach 30 Jun 2018 In 000 Outright product exposures 1 Interest rate exposures (general and specific risk) 0 2 Equity exposures (general and specific risk) 0 3 Foreign exchange (including gold) exposures 0 4 Commodity exposures 0 Option exposures 5 Simplified approach 0 6 Deltaplus approach 0 7 Other approach 0 8 Securitization exposures 0 9 Total 0 (a) RWA 35 P a g e

36 Template MR2: RWA flow statements of market risk exposures under IMM approach 30 Jun 2018 In RWA as at end of previous reporting period (a) (b) (c) (d) (e) (f) VaR Stressed VaR IRC CRC Other Total RWA N/A 2 Movement in risk levels N/A 3 Model updates/changes N/A 4 Methodology and policy N/A 5 Acquisitions and disposals N/A 6 Foreign exchange movements N/A 7 Other N/A 8 RWA as at end of reporting period N/A The Company uses STM approach for calculating its market risk exposures, both IMM approach and MR2 are not applicable. Template MR3: IMM approach values for market risk exposures 36 P a g e

37 30 Jun 2018 In 000 VaR (10 days onetailed 99% confidence interval) (a) Value 1 Maximum Value N/A 2 Average Value N/A 3 Minimum Value N/A 4 Period End N/A Stressed VaR (10 days onetailed 99% confidence interval) 5 Maximum Value N/A 6 Average Value N/A 7 Minimum Value N/A 8 Period End N/A Incremental risk charge (IRC) (99.9% confidence interval) 9 Maximum Value N/A 10 Average Value N/A 11 Minimum Value N/A 12 Period End N/A Comprehensive risk charge (CRC) (99.9% confidence interval) 13 Maximum Value N/A 14 Average Value N/A 15 Minimum Value N/A 16 Period End N/A 17 Floor N/A Templates MR3 above and MR4 (Comparison of VaR estimates with gains or losses) are not applicable to the Company. 37 P a g e

38 Part I: Key Prudential Ratios, Overview of Risk Management and RWA Template KM1: Key Prudential Ratios Regulatory capital (amount) In 000 (a) (b) (c) (d) (e) 30 Jun Mar Dec Sep Jun Common Equity Tier 1 (CET1) 135, , ,635 98, ,322 2 Tier 1 135, , ,635 98, ,322 3 Total capital 135, , ,635 98, ,322 RWA (amount) 4 Total RWA 88,339 84,901 85,351 72,446 74,667 Riskbased regulatory capital ratios (as a percentage of RWA) 5 CET1 ratio (%) % % % % % 6 Tier 1 ratio (%) % % % % % 7 Total capital ratio (%) % % % % % Additional CET1 buffer requirements (as a percentage of RWA) 8 Capital conservation buffer requirement (%) 1.875% 1.875% 1.25% 1.25% 1.25% 9 Countercyclical capital buffer requirement (%) 0.348% 0.287% 0.229% 0.333% 0.331% 10 Higher loss absorbency requirements (%) (applicable only to GSIBs or DSIBs) 11 Total AIspecific CET1 buffer requirements (%) 2.223% 2.162% 1.479% 1.583% 1.581% 12 CET1 available after meeting the AI s minimum capital requirements (%) Basel III leverage ratio % % % % % 13 Total leverage ratio (LR) exposure measure 226, , , , , LR (%) 60.12% 56.99% 54.71% 42.77% 40.67% 38 P a g e

39 Liquidity Coverage Ratio (LCR) / Liquidity Maintenance Ratio (LMR) Applicable to category 1 institution only: (a) (b) (c) (d) (e) 31 Mar Dec Sep Jun Jun Total high quality liquid assets (HQLA) N/A N/A N/A N/A N/A 16 Total net cash outflows N/A N/A N/A N/A N/A 17 LCR (%) N/A N/A N/A N/A N/A Applicable to category 2 institution only: 17a LMR (%) % % % % % Net Stable Funding Ratio (NSFR) / Core Funding Ratio (CFR) Applicable to category 1 institution only: 18 Total available stable funding N/A N/A N/A N/A N/A 19 Total required stable funding N/A N/A N/A N/A N/A 20 NSFR (%) N/A N/A N/A N/A N/A Applicable to category 2A institution only: 20a CFR (%) Liquidity maintenance ratio Six months ended 30 June 2017 Average LMR for the period 136.1% The liquidity maintenance ratio is calculated as the arithmetic mean of each calendar month s average value on a Hong Kong office basis in accordance with rule 10(1)(a) of the Banking (Liquidity) Rules. 39 P a g e

40 Template OV1: Overview of RWA The following table sets out the RiskWeighted Assets ( RWA ) by risk type and its corresponding minimum capital requirements (i.e. 8% of RWA) as required by Hong Kong Monetary Authority ( HKMA ). The Company reports NIL market risk exposure for the position of 30 June 2018 because its calculation and reporting frequency has been changed from quarterly to yearly basis in accordance with HKMA s exemption letter. In 000 (a) (b) (c) 30 June 2018 RWA 31 March 2018 Minimum capital requirements 30 June Credit risk for nonsecuritization exposures 67,439 65,888 5,395 2 Of which STC approach 67,439 65,888 5,395 2a Of which BSC approach 3 Of which foundation IRB approach 4 Of which supervisory slotting criteria approach 5 Of which advanced IRB approach 6 Counterparty default risk and default fund contributions 7 Of which SACCR* 7a Of which CEM 8 Of which IMM(CCR) approach 9 Of which others 10 CVA risk 11 Equity positions in banking book under the simple riskweight method and internal models method 12 Collective investment scheme ( CIS ) exposures LTA* 40 P a g e

41 (a) (b) (c) RWA Minimum capital requirements 30 June March June CIS exposures MBA* 14 CIS exposures FBA* 14a CIS exposures combination of approaches* 15 Settlement risk 16 Securitization exposures in banking book 17 Of which SECIRBA 18 Of which SECERBA 19 Of which SECSA 19a Of which SECFBA 20 Market risk 21 Of which STM approach 22 Of which IMM approach 23 Capital charge for switch between exposures in trading book and banking book (not applicable before the revised market risk framework takes effect)* 24 Operational risk 20,900 19,013 1, Amounts below the thresholds for deduction (subject to 250% RW) 26 Capital floor adjustment 26a Deduction to RWA 26b 26c Of which portion of regulatory reserve for general banking risks and collective provisions which is not included in Tier 2 Capital Of which portion of cumulative fair value gains arising from the revaluation of land and buildings which is not included in Tier 2 Capital 27 Total 88,339 84,901 7,067 Point to note: (i) Items marked with an asterisk (*) will be applicable only after their respective policy frameworks take effect. Until then, Not applicable should be reported in the rows. 41 P a g e

42 Part IIA: Composition of Regulatory Capital Template CC1: Composition of Regulatory Capital CET1 capital: instruments and reserves (a) Amount 30 Jun (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 1 Directly issued qualifying CET1 capital instruments plus any related share premium 363,000 [e] 2 Retained earnings / (accumulated losses) (220,679) (2) 3 Disclosed reserves 3,464 (3) 4 Directly issued capital subject to phaseout arrangements from CET1 (only applicable to nonjoint stock companies) 5 Minority interests arising from CET1 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in CET1 capital of the consolidation group) 6 CET1 capital before regulatory adjustments 145,785 CET1 capital: regulatory deductions 7 Valuation adjustments 8 Goodwill (net of associated deferred tax liabilities) [a] [c] 9 Other intangible assets (net of associated deferred tax liabilities) 9,853 [b] [d] n/a (1) n/a (4) 42 P a g e

43 (a) Amount 10 Deferred tax assets (net of associated deferred tax liabilities) 11 Cash flow hedge reserve 12 Excess of total EL amount over total eligible provisions under the IRB approach (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 13 Creditenhancing interestonly strip, and any gainonsale and other increase in the CET1 capital arising from securitization transactions 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Defined benefit pension fund net assets (net of associated deferred tax liabilities) 16 Investments in own CET1 capital instruments (if not already netted off paidin capital on reported balance sheet) 17 Reciprocal crossholdings in CET1 capital instruments 18 Insignificant capital investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 19 Significant capital investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 20 Mortgage servicing rights (net of associated deferred tax liabilities) n/a n/a 21 Deferred tax assets arising from temporary differences (net of associated deferred tax liabilities) n/a n/a 22 Amount exceeding the 15% threshold n/a n/a 23 of which: significant investments in the ordinary share of financial sector entities n/a n/a 24 of which: mortgage servicing rights n/a n/a 25 of which: deferred tax assets arising from temporary differences n/a n/a 26 National specific regulatory adjustments applied to CET1 capital 43 P a g e

44 26a Cumulative fair value gains arising from the revaluation of land and buildings (ownuse and investment properties) (a) Amount 26b Regulatory reserve for general banking risks 26c Securitization exposures specified in a notice given by the MA 26d Cumulative losses below depreciated cost arising from the institution's holdings of land and buildings 26e Capital shortfall of regulated nonbank subsidiaries 26f Capital investment in a connected company which is a commercial entity (amount above 15% of the reporting institution's capital base) 27 Regulatory deductions applied to CET1 capital due to insufficient AT1 capital and Tier 2 capital to cover deductions 28 Total regulatory deductions to CET1 capital 9,853 (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 29 CET1 capital 135,932 AT1 capital: instruments 30 Qualifying AT1 capital instruments plus any related share premium [f] 31 of which: classified as equity under applicable accounting standards 32 of which: classified as liabilities under applicable accounting standards 33 Capital instruments subject to phaseout arrangements from AT1 capital 34 AT1 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in AT1 capital of the consolidation group) 35 of which: AT1 capital instruments issued by subsidiaries subject to phaseout arrangements 36 AT1 capital before regulatory deductions 44 P a g e

45 AT1 capital: regulatory deductions (a) Amount 37 Investments in own AT1 capital instruments 38 Reciprocal crossholdings in AT1 capital instruments 39 Insignificant capital investments in AT1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 40 Significant capital investments in AT1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation 41 National specific regulatory adjustments applied to AT1 capital 42 Regulatory deductions applied to AT1 capital due to insufficient Tier 2 capital to cover deductions 43 Total regulatory deductions to AT1 capital (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 44 AT1 capital 45 Tier 1 capital (T1 = CET1 + AT1) 135,932 Tier 2 capital: instruments and provisions 46 Qualifying Tier 2 capital instruments plus any related share premium 47 Capital instruments subject to phaseout arrangements from Tier 2 capital 48 Tier 2 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in Tier 2 capital of the consolidation group) 49 of which: capital instruments issued by subsidiaries subject to phaseout arrangements 50 Collective provisions and regulatory reserve for general banking risks eligible for inclusion in Tier 2 capital 51 Tier 2 capital before regulatory deductions 45 P a g e

46 Tier 2 capital: regulatory deductions (a) Amount 52 Investments in own Tier 2 capital instruments 53 Reciprocal crossholdings in Tier 2 capital instruments 54 Insignificant capital investments in Tier 2 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 55 Significant capital investments in Tier 2 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments applied to Tier 2 capital 56a Add back of cumulative fair value gains arising from the revaluation of land and buildings (ownuse and investment properties) eligible for inclusion in Tier 2 capital 57 Total regulatory adjustments to Tier 2 capital (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 58 Tier 2 capital (T2) 59 Total regulatory capital (TC = T1 + T2) 135, Total RWA 88,339 Capital ratios (as a percentage of RWA) 61 CET1 capital ratio % 62 Tier 1 capital ratio % 63 Total capital ratio % 64 Institutionspecific buffer requirement (capital conservation buffer plus countercyclical capital buffer plus higher loss absorbency requirements) % 46 P a g e

47 (a) Amount (b) Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation 65 of which: capital conservation buffer requirement 66 of which: bank specific countercyclical capital buffer requirement 67 of which: higher loss absorbency requirement 68 CET1 (as a percentage of RWA) available after meeting minimum capital requirements % National minima (if different from Basel 3 minimum) 69 National CET1 minimum ratio n/a n/a 70 National Tier 1 minimum ratio n/a n/a 71 National Total capital minimum ratio n/a n/a Amounts below the thresholds for deduction (before risk weighting) 72 Insignificant capital investments in CET1, AT1 and Tier 2 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation 73 Significant capital investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation 74 Mortgage servicing rights (net of associated deferred tax liabilities) n/a n/a 75 Deferred tax assets arising from temporary differences (net of associated deferred tax liabilities) n/a n/a Applicable caps on the inclusion of provisions in Tier 2 capital 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to the BSC approach, or the STC approach and SECERBA, SECSA and SECFBA (prior to application of cap) 77 Cap on inclusion of provisions in Tier 2 under the BSC approach, or the STC approach, and SEC ERBA, SECSA and SECFBA 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to the IRB approach and SECIRBA (prior to application of cap) 47 P a g e