EAST ASIA SECURITIES COMPANY LIMITED 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile:

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Paul Sham 9 th March FUBON BANK (HONG KONG) LIMITED ( 富邦銀行 ( 香港 )) Sector : Banking Chairman : Mr. Tsai Ming-Hsing, Richard HKSE Code : Market Price : HK$4.95 (09/03/2011) Managing Director & CEO : Mr. Liang Pei-Hwa, Thomas Shares Issued : 1,172.2m Mkt. Cap. : HK$5,802m 52 weeks Hi/ Lo : HK$4.96 / HK$3.00 HSI : 23, (09/03/2011) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2010 Final Results Highlights Vs FY2009 (%) Vs 30/06/2010 (%) Net interest income % Non-interest income % Total operating income 1, % Operating expenses (856.2) -10.3% Operating profit before impairment losses % Impairment losses on loans and advances (9.7) -98.0% Profit before taxation % Taxation (46.2) % Profit attributable to equity holders % Preference share dividend (83.9) +0.5% Attributable profit to ordinary shareholders NA* Total loans 29, % +3.5% Total deposits 46, % +6.2% Total assets 61, % +5.4% Basic EPS (HK$) NA^ Final DPS (HK$) % Total DPS (HK$) % Selected Ratios FY2010 FY2009 1H2010 Net interest margin 1.56% 1.94% 1.71% Cost-to-income ratio 75.2% 67.2% 68.2% Return on average assets 0.43% 0.04% 0.50% Return on average equity 5.31% 0.48% 6.2% Impaired loan ratio 0.66% 1.78% 1.72% Impaired advances coverage 96.0% 87.0% 118.4% Loan-to-deposit ratio 62.2% 61.7% 63.8% Capital adequacy ratio 18.2% 17.2% 18.2% Average liquidity ratio 51.4% 48.7% 49.9% Remarks: (*) Fubon HK recorded an attributable loss to ordinary shareholders of HK$60.5m in FY09; (^) The corresponding loss per share in FY09 was HK$ FY10 net profit missed market expectations Fubon Bank (Hong Kong) (Fubon HK) recorded a net profit attributable to ordinary shareholders of HK$183.1m for FY10, worse than the consensus forecast of HK$191m, due to the shrinkage of its interest income business and the unexpected revaluation loss of HK$13.7m on its investments (collateralised debt obligations, CDOs ). The bank proposed a final dividend of HK$0.03 per share, bringing the full-year DPS to HK$0.05 per share, up 66.7% y-o-y. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.

2 Disappointing net interest income Net interest income plunged 25.4% y-o-y, attributable to lower net interest margin (NIM) as well as shrunken loan portfolio. NIM decreased by 38bps to 1.56% in FY10 from 1.94% a year earlier, caused by fierce price competition among peers for lending, especially in the residential mortgage business, and the switch from higher yield prime-based loans to HIBORbased loans. Lagging behind the sector s loan growth of 28%, Fubon HK s total advances to customers rose only marginally at 0.1% y-o-y, with significant loan contraction in loan outside Hong Kong (-30.3% y-o-y). Flat non-interest income due to unexpected CDO loss Net fee income saw a satisfactory growth of 22% y-o-y in FY10. The growth was broad-based, underpinned by higher business volumes in consumer finance, wealth management and corporate banking segments. Nevertheless, the revaluation loss of HK$13.7m on the CDO portfolio dragged the overall non-interest income. As of 31/12/2010, there was no carry value for its investments in CDOs (HK$13.1m as of 31/12/2009). Lower cost efficiency Fubon HK s operating expenses decreased 10.3% to HK$856m in FY10, primarily due to the absence of the cost incurred for the repurchase of Lehman Minibonds from customers in Staff cost, the main cost driver which represented more than 50% of its total expense, decreased 3.9% y-o-y due to the reduction of total headcounts. The cost-to-income ratio increased to 75.2% for 2010, compared with 67.2% for 2009 as a result of falling net interest income which dragged down operating income by 20%. Much lower impairment losses amid better credit condition Impairment losses reduced significantly by 98% in FY10, mostly resulting from lower individual impairment losses charged on SME and hire purchase loans. With continual improvement in asset quality in 2010, the impaired loans ratio further decreased to 0.66% as of 31 st December 2010 (vs 1.72% as of 30 th June 2010, 1.78% as of 31 st December 2009). The impaired loans coverage ratio improved from 87% at 31 st December 2009 to 95% at 30 th June 2010 and further to 96% at 31 st December Capital position topped peers at the moment Fubon HK completed the issuance of US$200m 10- year subordinated debt in November 2010 for replenishing the outstanding US$200m subordinated debt callable in April Fubon HK showed relative strong capital position with the CAR ratio reaching 18.2% as of 31 st December Nevertheless, the CAR ratio should drop after April 2011 once the bank exercises the option to end the callable debt. Outlook & Prospects Privatization in progress The parent company of Fubon HK made a cash tender offer in January 2011 to acquire the remaining 25% stake of Fubon HK at HK$5.0 per share to fully privatize Fubon HK as a 100%-owned subsidiary. The deal is subject to regulators approval and the transaction is expected to complete in 2Q11. The rationale for the privatization as quoted by management is to increase the operating efficiency of Fubon HK, simplify the shareholders' structure, and reduce costs associated with maintaining a listed entity. Given improved cross-strait relations, turning Fubon HK into a wholly owned subsidiary could make it easier to pursue cross-strait opportunities with higher operational flexibility. Privatization likely approved given reasonable offering price The implied P/B multiple for the offer price of HK$5 per share is around 1.3x, which is lower than the 2.1x ICBC paid to privatize ICBC(Asia) and still at a discount to most listed HK banks. However, given Fubon HK s low ROE, the offer price should be reasonable, especially as Fubon HK has been losing market share in Hong Kong. Fubon HK s current share price (HK$4.95 as of 9 th March 2011) is only HK$0.05 below the offer price, suggesting the privatization proposal is likely to succeed. As further upside potential is minimal, we recommend a Sell rating on the counter. Recommendation: Sell 2

3 Appendix I I. Impairment allowances, overdue and rescheduled advances of Fubon HK As % of total customer advances Individual allowance Portfolio allowance Non-performing loans Overdue and rescheduled advances As of 31/12/ % 0.41% 0.66% 0.42% As of 30/6/ % 0.60% 1.72% 1.48% As of 31/12/ % 0.60% 1.78% 1.48% II. Comparison of Fubon HK s loan book: 31/12/2010 vs 31/12/2009 Loans-by industry 31 st Dec, 2010 Up/(down) 31 st Dec, 2009 Property related 9, % 9,392.7 Financial concerns % Wholesale & retail trade % 64.5 Manufacturing 1, % 1,666.3 Transport & transport equipment % Residential mortgages, HOS/PSPS 8, % 7,500.9 Credit card % Others 3, % 3,375.3 Trade finance 1, % Stockbrokers % 13.7 Loans outside HK 3, % 4, , % 29,112.7 III. Comparison of Fubon HK s loan book: 31/12/2010 vs 30/06/2010 Loans-by industry 31 st Dec, 2010 Up/(down) 30 th Jun, 2010 Property related 9, % 9,183.2 Financial concerns % Wholesale & retail trade % Manufacturing 1, % 1,830.1 Transport & transport equipment % Residential mortgages, HOS/PSPS 8, % 7,511.5 Credit card % Others 3, % 3,728.0 Trade finance 1, % Stockbrokers % 38.0 Loans outside HK 3, % 3, , % 28,

4 Appendix II Breakdown of loan book of Fubon HK Loans outside HK Breakdown of Loan Book as of 31/12/ % Total customer advances: HK$29,144.8 million Property related Stockbrokers 34.2% 0.0% Trade finance 3.6% Others 11.5% Credit card 2.4% Residential mortgages, HOS/PSPS/TPS 28.2% Transport and transport equipment 0.8% Financial concerns 1.3% Whoelsale & retail trade 1.4% Manufacturing 5.1% Breakdown of Loan Book as of 31/12/2009 Total customer advances: HK$29,112.7 million Stockbrokers 0.0% Trade finance 2.8% Others 11.6% Loans outside HK 16.4% Property related 32.3% Financial concerns 1.4% Credit card 2.1% Residential mortgages, HOS/PSPS/TPS 25.8% Transport and transport equipment 1.6% Whoelsale & retail trade 0.2% Manufacturing 5.7% 4

5 Important Disclosure / Analyst Certification / Disclaimer This document is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited (BEA). The research analyst primarily responsible for the content of this report, in part or in whole certifies that the views on the companies and their securities mentioned in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. Information and opinions expressed herein reflect a judgment as of the date of this document and are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is not to be taken in substitution for the exercise of judgment by respective readers of this report, who should obtain separate legal or financial advice. East Asia Securities Company Limited and / or The BEA Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein the report, while BEA along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its associates, its directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company or companies mentioned in the report. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. 5