Ping An (2318.HK / 2318 HK)

Transcription

1 Asia Pacific/China Equity Research Life Insurance (Financials) Rating OUTPERFORM* Price (20 Mar 15, HK$) Target price (HK$) ¹ Upside/downside (%) 30.3 Mkt cap (HK$ mn) 874,053 (US$112,666 mn) Enterprise value (Rmb mn) 501,715 Number of shares (mn) 9, Free float (%) week price range ADTO - 6M (US$ mn) *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance Price (LHS) Research Analysts Arjan van Veen arjan.vanveen@credit-suisse.com Frances Feng frances.feng@credit-suisse.com Rebased Rel (RHS) 40 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 20/03/15 On 20/03/15 the spot exchange rate was HK$7.76/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) (2318.HK / 2318 HK) RESULTS The FY14 result: "From the horse's mouth" Our From the horse s mouth series provides an easily archived and searchable transcript of the profit announcement presentation and Q&A session (for both and Bank) followed by our own interpretation of the results. "This is the first time that we have disclosed the free surplus for the life business. In relation to the new business strain, FYP from life is over Rmb50 bn and new business strain Rmb21 bn, so the strain is around 40%, which is relatively normal in the China market. On C-ROSS on the P&C insurance side, we should have an improved solvency position under the new regime. On the life side, we should be fairly neutral." Mr Jason YAO (Executive Director and CFO) "Overall, the IRR of our new business is in the high 20s' percent and the payback period is around two years." Mr Yuan Siong Lee (Senior Vice President and Group Chief Insurance Officer) "Our auto insurance result was quite good while the combined ratio continued to improve. The ROE of auto insurance was >20% which is a rare result even in a global context We have our own advantages: We have very high market recognition in risk management and services. Our claims service is very good as well, with more than 90% of claims cases solved within an hour We have done a lot of work on preparation for the pricing liberalisation. The pricing reform will be piloted in five provinces and we are still preparing some details. We think short term we will see some volatility; however, longer term this is positive for the industry. My personal view is the good companies with good underwriting and risk management capabilities will win." Mr Yuan Siong LEE (Senior Vice President and Group Chief Insurance Officer) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Life GWP (Rmb mn) 183, , , ,570 P&C GWP (Rmb mn) 143, , , ,723 Net profit (Rmb mn) 39,712 50,992 54,111 58,502 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) NTA per share (Rmb) EV per share (Rmb) Dividend yield (%) P/B (x) ROE (%) P&C combined ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Table of contents result briefing: The prepared remarks 3 Result briefing: Q&A 64 Bank result briefing: The prepared remarks 70 Bank result briefing: Q&A 94 Credit Suisse s FY14 results note 100 Slides source: Q&A transcript prepared by Credit Suisse research (2318.HK / 2318 HK) 2

3 Results briefing: The prepared remarks Mr YAO Jun (Group Secretary): Good afternoon, and thanks for attending s FY14 result. I am Mr YAO Jun, Group Secretary. Today s briefing will be coordinated by Secretary of the Board, Mr JIN Shaoliang. First, let me introduce management who is attending today s briefing in Hong Kong and Shanghai. In Hong Kong, we have Mr MA Mingzhe (Group Chairman and CEO), Mr YAO Bo (CFO) and Mr LEE Yuan Siong (Senior Vice President and Chief Insurance Business Officer). Next, let's welcome Mr JIN Shaoliang to introduce the management in Shanghai. Mr JIN Shaoliang (Secretary of the Board): In Shanghai, we have Mr SUN Jianyi (Vice Chairman and President of Bank), Mr Alex REN (Executive Director and President), Chief Investment Officer Mr CHEN Dexian (Timothy Chan) and President of Bank, Mr SHAO Ping. (2318.HK / 2318 HK) 3

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5 Mr YAO Jun (Group Secretary): For the agenda today, Dr Ma will deliver a speech first and then the management team will introduce Group s FY14 result. (2318.HK / 2318 HK) 5

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9 Dr Peter MA (Mingzhe) (Group Chairman and CEO): 2014 is the tenth year since the IPO of. We first announced our IPO in 2004 in Hong Kong. In the past ten years, through the hard work of our employees, the support of our shareholders and the help of our analysts, we have made progress. (2318.HK / 2318 HK) 9

10 Mr. Peter MA (Mingzhe) (Group Chairman and CEO): In the past 10 years, our total assets increased by more than 14 times. Net profit attributed to the shareholders increased by 12 times, with a CAGR of 28.8% p.a. EPS increased eightfold, with a CAGR of 24.3% p.a. kept stable, healthy and sustainable development. In 2014, we achieved sustainable and healthy development. Next, my colleagues in Hong Kong and Shanghai will discuss the 2014 results with you. Firstly, let's welcome Alex Ren, our Executive Director and President to introduce the result. Thank you. (2318.HK / 2318 HK) 10

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12 Mr Alex REN (Huichuan) (Group President): In 2014, the global economy recovered at a moderate pace. China's economy improved steadily, with active adjustments made to its structure and substantial breakthroughs achieved in reforms. enhanced its overall strategy and reinforced the " Chariot" model. We focused on the finance business and internet finance business, and achieved development in both its core finance and internet finance businesses. Insurance: The life insurance business grew steadily, of which individual life insurance realised rapid growth in both scale and value. The property & casualty business maintained sound profitability, with automobile insurance premiums exceeding Rmb100 bn. Banking: Business scale grew steadily and profitability increased significantly. Operating efficiency improved comprehensively and asset quality remained stable. Investment: Trust's private wealth management business recorded stable growth; projects at maturity were successfully redeemed; risks were managed. The net investment yield of insurance funds reached a three-year high; the third-party asset management business grew rapidly. Customer Migration: With our "Customer-oriented" philosophy, we further promoted integrated finance services and optimised cross-selling. We also steadily implemented customer migration, achieving outstanding results in Internet Finance Business: We formed the strategic framework of "One Gate, Two Focuses, Four Markets". The number of internet users reached 137 mn, while the application scenarios were enriched. (2318.HK / 2318 HK) 12

13 Mr Alex REN (Huichuan) (Group President): The number of individual customers reached mn, up 13.1% YoY, achieving double digits for the second year. New customers were mn, with 50.9% coming from P&C business and 17.2% from retail banking. (2318.HK / 2318 HK) 13

14 Mr Alex REN (Huichuan) (Group President): Next, let's look at the data of customer migration. Until the end of 2014, the accumulated customer migration number surpassed 15 mn. In 2014, total migrated customers were 7.02 mn, with 3.27 mn, 1.24 mn, 1.46 mn, 0.96 mn, 0.09 mn coming from Life, P&C, Retail Banking, Credit Card, and others, respectively. (2318.HK / 2318 HK) 14

15 Mr Alex REN (Huichuan) (Group President): The cross-selling channel contributed Rmb20.37 mn in premiums. Cross-selling contributed 43% of the group's short-term insurance business and 28% of the trust business. Cross-selling also contributed to the credit card business of banking. (2318.HK / 2318 HK) 15

16 Mr Alex REN (Huichuan) (Group President): focuses on the innovation of technology in the long term and has built an e-platform covering the front, mid and backend business process. In the traditional area, it provides IT services; i.e. development, operations, achieving stable operations, accelerating service delivery, cost efficiency and enhancing customer experience, to boost business development. In the innovation area, we focus on the research and study of the new technology, actively mapping out the cloud platform, to respond quickly to the various needs of internet finance strategy, to push customer migration. (2318.HK / 2318 HK) 16

17 Mr Alex REN (Huichuan) (Group President): China is still at a very important stage of strategic development. As the reforms further develop, the Chinese economy will continue to maintain healthy and stable growth. Personal financial services will enter a very important development period. In 2015, we will not only maintain a leading position for the core finance business, pushing customer migration, but also speed up the development of the internet finance business. Next, let's welcome Mr YAO Bo, our CFO, to introduce the next part. (2318.HK / 2318 HK) 17

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19 Mr Jason YAO (Bo) (Group CFO): Thank you, Alex. Let s go through the financial analysis. Overall, our business achieved stable growth in FY14. Net profit attributable to the shareholders of the parent company increased by 39.5% YoY to Rmb39.3 bn. EPS was Rmb4.93. Total assets surpassed Rmb4 tn, up 19.2% YoY. Equity attributable to shareholders of the parent company reached Rmb289.6 bn, up 58.5%. ROE was 18.3%. (2318.HK / 2318 HK) 19

20 Mr Jason YAO (Bo) (Group CFO): Now let s look at net income by business segment. Life insurance net profit growth was up 28.4%, to Rmb15.7 bn, while banking business increased by 28.5%. The net income from P&C, banking, trust and asset management all achieved substantial growth. Life insurance now contributes 39.8% of total net profit, while P&C is 22.3%, banking is 28.8%, and others is 9.1%. (2318.HK / 2318 HK) 20

21 Mr Jason YAO (Bo) (Group CFO): This page is the final profit distribution proposal. Cash dividend: Based on the latest total shares of 9,140 mn, we will distribute a final dividend in cash of Rmb0.5 per share, a total of Rmb4,570 mn. The interim cash dividend has been distributed with a total amount of Rmb1,979 mn. The sum of the interim final dividend in cash is Rmb6,549 mn, up by 27.3% over the last year. Converting capital reserve into share capital: Based on the latest total shares of 9,140 mn, we are converting Rmb9,140 mn in total, in the proportion of 10 shares for every 10 shares held. The above profit distribution still needs to be approved by a shareholder meeting. (2318.HK / 2318 HK) 21

22 Mr Jason YAO (Bo) (Group CFO): In 2014, total equity attributable to shareholders increased by 58.5%, among which the profit contribution was Rmb39.3 bn, the change in the fair value of AFS financial assets and others was Rmb30.3 bn, the issuance of H shares was Rmb28.8 bn and the conversion of A-share convertible bonds was Rmb14.0 bn. (2318.HK / 2318 HK) 22

23 Mr Jason YAO (Bo) (Group CFO): Overall, the group's solvency and capital adequacy ratio remained healthy. In FY14, the Group solvency margin was 205.1%, while Life's solvency ratio reached 220% and P&C's was 165%. bank's capital adequacy ratio was 10.86%, which are all above regulatory requirements. (2318.HK / 2318 HK) 23

24 Mr Jason YAO (Bo) (Group CFO): This slide shows the movement of the Group's solvency margin. The solvency ratio improved as a result of the H-share placement and tier-2 capital bonds, as well as the subordinated bonds. (2318.HK / 2318 HK) 24

25 Mr Jason YAO (Bo) (Group CFO): Now, let's move on to the growth in embedded value. Life EV reached Rmb bn, while other businesses was Rmb bn, with the overall EV reaching Rmb bn. (2318.HK / 2318 HK) 25

26 Mr Jason YAO (Bo) (Group CFO): Total embedded value was up by 39.2% YoY, while the value of business in-force increased by 24.3% and adjusted net asset value increased by 50%. Currently, EVPS is Rmb51.65 per share, up 23.9% YoY. (2318.HK / 2318 HK) 26

27 Mr Jason YAO (Bo) (Group CFO): The next is the change in embedded value, which mainly comes from expected return, the value of new business and investment return variance. The total EV before dividend was Rmb269.2 bn. (2318.HK / 2318 HK) 27

28 Mr Jason YAO (Bo) (Group CFO): Now, let's look at the growth in new business value (NBEV). NBEV increased by 20.9% YoY to Rmb21.97 bn in FY14. Individual life insurance increased by 23.4% YoY to Rmb20.8 bn due to the fact that we mainly pushed protection products. Regarding the bancassurance channel, the overall NBEV decreased by 35% YoY. The NBEV margin decreased by 0.4pp to 30.4%, impacted by the bancassurance channel products. (2318.HK / 2318 HK) 28

29 Mr Jason YAO (Bo) (Group CFO): This page is newly added this year, which is about the free surplus of life insurance, which is calculated by the net asset after adjustment minus the required capital for solvency. At the end of 2014, the free surplus of the life insurance business was Rmb39.5 bn, up Rmb18.7 bn, mainly due to the free surplus generated from in-force business, offset by the free surplus used to support new business. The above was the financial analysis and embedded value. Next, Mr. Lee will introduce the insurance business. (2318.HK / 2318 HK) 29

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31 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Life insurance business: We steadily developed individual life business, diversified its product lines, promoted the sales of products with protection functions, built up a saleable and efficient sales network, and as a result, achieved steady and valuable business growth. New business of the individual life insurance realised written premiums of Rmb bn, up by 20.7% over the last year, with a stable increase in the number of sales agents and productivity. The market share of telemarketing maintained the first position. The NBEV margin of individual life business reached 44.5%, up 0.9 pp compared with last year. Corporate Annuity Business: Annuity strived to become the leading pension asset management company and leading medical insurance service provider in China. Assets under management of Annuity exceeded Rmb200 bn, maintaining a leading position. The medicare business made a great breakthrough. Property & Casualty Insurance Business: Property & Casualty continued to enhance its capabilities on risk selection, optimised cost structure and resource utilisation efficiency, and pushed through the operating service concept of "providing customers with the best experience". Premium income was Rmb143,150 mn, up by 23.8% over the previous year. The market share of Property & Casualty reached 18.9%, up 1.1 pp over the last year. The combined ratio was 95.3%, maintaining sound business quality. (2318.HK / 2318 HK) 31

32 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Written premiums of our life insurance business in FY14 were Rmb252.7 bn, an increase of 15% YoY. Written premiums of telemarketing were Rmb9.354 bn, up 41.5% YoY, with market share the first in the market. (2318.HK / 2318 HK) 32

33 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Individual life written premiums were Rmb bn, up 14.4%, among which were first-year regular premiums of Rmb50.4 bn, up 21.3%. The renewal business increased by 12.5% YoY to Rmb172 bn. The number of sales agents surpassed 635,000, up 14.1% YoY. First-year written premiums reached Rmb6,244, while salaries were up 10% YoY. (2318.HK / 2318 HK) 33

34 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Bancassurance propelled strategic transformation, while group insurance strived to develop the employee benefits scheme. The written premiums of group insurance increased by 21.5% to Rmb13.5 bn. (2318.HK / 2318 HK) 34

35 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Customers increased steadily with a sound persistency ratio. (2318.HK / 2318 HK) 35

36 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): We reinforced the sales of protection-type products, optimising the product mix, with participating and universal life still our main product, but the percentage decreased, while the traditional life and accident and health make more now. (2318.HK / 2318 HK) 36

37 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): This slide shows 's annuity. Annuity business led the industry, while the medicare business made great breakthroughs. At the end of 2014, total assets under management increased by 40% YoY to Rmb bn, ranking one of the top in annuity companies in China. In addition, annuity is actively involved in the city and county major illness insurance projects, with the number of covered people nearly 0.1 bn. (2318.HK / 2318 HK) 37

38 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): The premium income of our P&C insurance business saw a strong increase of 23.8% to Rmb143.2 bn, among which auto premiums reached Rmb110.7 bn. We were awarded the title of first rank in the auto insurance industry. The combined ratio was maintained at a healthy 95.3%, down 2 pp compared to (2318.HK / 2318 HK) 38

39 Mr Yuan Siong LEE (Group Chief Insurance Business Officer): Premiums from cross-selling and telemarketing increased by 22.3% to Rmb62.1 bn, while cross-selling and telemarketing contributed 43.3% of total premiums. Car dealer premiums were Rmb29.3 bn, up 24% YoY with the channel contribution 20.4%. That's all for the insurance part of the presentation. Next, Mr SHAO Ping, President of Bank, will introduce the banking business. (2318.HK / 2318 HK) 39

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41 Mr SHAO Ping (President of Bank): Thank you. Next, I'll walk you through Bank s FY14 results. In terms of core indicators, net profit, total assets, total deposits and total loans, all achieved great results. In terms of business development, net non-interest income was up by 77%. Its contribution to operating income was up by 5.7 pp. The cost/income ratio was down 4.44 pp YoY. Retail deposits amounted to Rmb252,753 mn and retail loans Rmb282,096 mn, up 19.4% and 18.1% over the beginning of the year, respectively. In terms of asset quality, the non-performing loan ratio was 1.02%, up 0.13 pp from beginning of the year, which was better than the industry average. The provision coverage ratio was %. We increased our provisions and the loan loss provision ratio was 2.06%, up by 0.27 pp over the beginning of the year. In terms of capital adequacy ratio, this was 10.86%, the tier 1 capital adequacy ratio was 8.64% and the core tier 1 capital adequacy ratio was 8.64%, all meeting regulatory requirements. (2318.HK / 2318 HK) 41

42 Mr SHAO Ping (President of Bank): Next, I'll introduce s new initiatives from another perspective. 1. Achieved drastic growth in investment banking and custody operations. Achieved a breakthrough in the notes and bills operation. Small and micro business focusing on Dai Dai. By the end of 2014, outstanding loans of Dai Dai were Rmb44.8 bn. 2. Optimise the asset and liability structure to improve profitability. As a result, NIM was improved. Strengthened management and control effect, centralised control on capital use and the setting up of an initial evaluation system on risk asset performance. Improved capital efficiency. 3. Encourage financial innovation and differentiation strategy, established Orange-e-Platform, Orange, Hang-E Tong and Gold Bank. Created Pocket Bank, a differentiated internet financial product. Increased asset securitisation. Active participation in SOE reform, such as PPP. 4. Renovate our business model and broaden business channels. We initiated a whole-industry chain business model and increased our penetration into target sectors and customers. Besides, we achieved a breakthrough in fiscal business. 5. Undertake business reorganisation to set up a large retail business unit (Da Shiyebu) to better suit our strategy. Our retail business focuses on service upgrades, deepening our financial product portfolio, wealth management and customer service, and internet finance to improve our competitiveness. Besides, we are enhancing the strategic positioning of sector business units, such as property, energy, metal and mining, transportation, logistic, agriculture and so on, achieving whole coverage of the industry chain. 6. We take a hard line on minimising risk to ensure stable operations. In 2014, the operating risk for the banking sector increased significantly. has prudent risk management besides rapid business development, successfully alleviating the operating risk. The asset quality trend moderated from a downward trend. (2318.HK / 2318 HK) 42

43 Mr SHAO Ping (President of Bank): Next, let s look at business size and profitability. The business size of Bank increased dramatically. At the end of 2014, total assets reached Rmb2.19 tn, up 15.6% YoY. Total deposits reached Rmb1.53 tn, up 26.0% YoY. Total loans reached Rmb1.02 tn, up 20.9% YoY. Meanwhile, net profit was good net profit reached Rmb19.8 bn, up 30.0% YoY. (2318.HK / 2318 HK) 43

44 Mr SHAO Ping (President of Bank): Looking at income composition and operating ratios, 2014 Ping An Bank took the initiative to restructure the asset and liability structure, improved pricing management and thus profitability and efficiency. ROA was 0.91%, up by 0.1 pp YoY. NIS was 2.4% and NIM was 2.57%, each up by 0.26 pp YoY. Bank strengthened its cost control. The cost/income ratio was 36.33% in 2014, down by 4.44 pp YoY. At the same time, we actively adjusted our business structure, greatly advanced our intermediary business and improved our income composition. In 2014, net non-interest income was Rmb20.36 bn, up by 77% YoY, contributing to 27.7% of operating income, compared to 22% in (2318.HK / 2318 HK) 44

45 Mr SHAO Ping (President of Bank): Next, let s look at asset quality and capital adequacy. In terms of asset quality, due to the economic slowdown and industry upgrading/ adjustment, some small and medium enterprises (SME) faced operating difficulty. The asset quality of Bank was affected by this trend. At the end of 2014, the NPL ratio was 1.02%, up 0.13 pp YoY, better than the industry average. We reiterated our focus on risk control and increased the extent that we have taken provisions. The loan-loss provision ratio was 2.06%, up by 0.27 pp YoY, greatly improving asset quality. Meanwhile, to speed up the clean-up of NPLs, we had good results on the clean-up, with total assets classified as NPL of Rmb3.225 bn. We will continue to improve the operating structure and take preventive measures for outstanding loans, and control the formation of new NPLs, continuing to strengthen the effort to clean up NPLs, to ensure asset quality stability. In terms of capital adequacy ratio, end-2014 CAR was 10.86% and the core tier CAR was 8.64%, both meeting regulatory requirements. The above is the situation for Bank. Now let s welcome our CIO Mr Timothy CHAN to introduce our investment business. (2318.HK / 2318 HK) 45

46 Mr Timothy CHAN (Chief Investment Office): Thank you, Mr SHAO. Next, let s review our investment business. (2318.HK / 2318 HK) 46

47 Mr Timothy CHAN (Chief Investment Office): First, we visit the overall results of our investment business. Investment portfolio of insurance funds. Based on the characteristics of the liability structure, we increased our position on alternative investment. Meanwhile, we strengthened the requirement on pledges for our counterparties of alternative investments, as well as scrutinising the sectors and regions they belong to. The net investment fund yield was 5.3% in 2014, reaching a three-year high. Trust business. Trust focuses on private wealth management. The high net-worth customers exceeded 30,000. The assets held in trust were Rmb399.8 bn, up 37.3% YoY, among which collective trusts accounted for 70%, a better mix than peers'. We had strict risk management while developing rapidly, successfully meeting our payment obligations when they became due. The third-party asset management business developed rapidly, achieving a net profit of Rmb977 mn in 2014, up by 44.5% YoY. (2318.HK / 2318 HK) 47

48 Mr Timothy CHAN (Chief Investment Office): Next, let s visit the result of investment results and yields. In 2014, net investment income was Rmb66.7 bn, up 25.6% YoY. Net investment yield was 5.3%, reaching a three-year high. Our net realised and unrealised gains were Rmb5.905 bn. Due to the distressed A-share market in 1H14, we booked an impairment loss of Rmb8.828 bn. Overall, the total investment income was Rmb63.7 bn, up 21% YoY. Total investment yield was 5.1% due to the impairment losses. (2318.HK / 2318 HK) 48

49 Mr Timothy CHAN (Chief Investment Office): Next, let s visit the asset allocation of insurance funds. Fixed income investment weight was down by 2.5 pp to 79.7%. Equity investment was up 3.6% to 14.1%. The lower weight of fixed income investments was due to net premium inflow. The debt scheme accounted for 8% while wealth management products accounted for 5.5%, their weight was up by 1.8 and 3.0 pp, respectively, compared to We based our asset allocation on a comprehensive system and under various stress tests, to ensure risk is under control. Our counterparties of debt schemes and equity schemes are mainly large SOEs, government, or financing entities with bank guarantees. In terms of their payback ability, 67% had guarantees (from other parties) and 29% had pledged assets. In terms of their sector and region, they were mainly from the developed eastern coast, as well as strategic industries. The alternative investments we have invested in by now had a high credit rating overall: AAA accounted for 94% and AA+ accounted for 5%. (2318.HK / 2318 HK) 49

50 Mr Timothy CHAN (Chief Investment Office): Next let s move to trust business. Our trust business focused on private wealth management. In the face of fierce competition, we enhanced our business model and service upgrades. In 2014, the operating income of trust business was Rmb5.186 bn, up by 25.2% YoY. Net profit was Rmb2.199 bn, up 12.1% YoY. (2318.HK / 2318 HK) 50

51 Mr Timothy CHAN (Chief Investment Office): High net-worth customers reached 30,000 by end of 2014, a rapid 37.3% YoY increase. was able to grab both high-net-worth individual and institutional customers, such as corporate funds and insurance funds. In terms of funding source structure, individuals and banks accounted for 27.2% each, insurance company accounted for 13.2% and other institutional customers accounted for 32.4%. Trust developed a risk adaptation model to meet the different risk tolerances of customers. The risk adaptability rate of customers was as high as more than 95%, effectively avoiding the risk of misleading caused by salespeople or information asymmetry. (2318.HK / 2318 HK) 51

52 Mr Timothy CHAN (Chief Investment Office): Next let's look at the structure of the trust business as well as risk prevention measures of trust business. By the end of 2014, the assets held in trust reached Rmb399.8 bn. Among these, collective trusts, which showed the ability for active management, reached Rmb279.8 bn, up by 44.3% YoY and accounting for 70% of total assets held in trust, beating the industry average of 30.7%. Among trust assets, the major risk that investment trusts face is market risk, with the trust return fluctuating as the economic situation and government policy change. The major risk facing financing trusts is credit risk. Financing trusts accounted for 35.3% of total trusts, up by 3.3 pp YoY. In terms of asset and risk management, took measures such as pre-screening, continuous monitoring and liquidity control to reduce the risk. (2318.HK / 2318 HK) 52

53 Mr Timothy CHAN (Chief Investment Office): Next, is the real estate trust. Real estate trusts accounted for 16.4% of total assets held in trust. We took four measures to manage risk. We partnered with large real estate companies with high credit ratings. They mainly focus on first- and second-tier cities. We asked for their accounts receivables, houses, lands as pledges and we set upper limits to the pledged ratios. We shortened the duration of real estate financing projects from 1.62 years in 2013 to 0.96 years in In terms of project screening, we did on-side due diligence for all projects. We hired the big four audit firms, the famous five international real estate consulting firms and various qualified law firms to conduct due diligence for us. In terms of post-investment management, we had specialised personnel under postinvestment departments to do the business. In terms of liquidity management, Trust relied on high-liquidity, low-risk money market funds, to increase its ability to handle risk situations. Building on sound management, in 2014 Trust met all its payment obligations when they became due. Among these, real estate redemptions were Rmb40 bn and fully met. (2318.HK / 2318 HK) 53

54 Mr Timothy CHAN (Chief Investment Office): Let s visit the third-party asset management business. After ten years of development, Asset Management had become the third-largest asset management institution in China. By the end of 2014, AuM exceeded Rmb1.6 tn, up 28% YoY. Of this, third-party asset management was Rmb169 bn, up 103.9% YoY. Management fee income for third-party asset management was Rmb726 mn, up 38% YoY. The investment business introduction ends here. Now let s welcome REN Huichuan (Group President) to introduce the internet finance business. (2318.HK / 2318 HK) 54

55 Mr Alex REN (Huichuan) (Group President): Now, let s review our internet finance business. While our traditional finance business was doing well, our internet finance business also had solid achievements. Our Internet finance formed the eco-system of One Gate, Two Focuses, Four Markets. (2318.HK / 2318 HK) 55

56 Mr Alex REN (Huichuan) (Group President): One door refers to the Magic Gate of, allowing customers to travel through the services of Living, Dining, Housing, Transportation and Entertainment seamlessly. Magic Gate could become a one-stop shop and a comprehensive finance service platform for customers. Two Focuses refers to focusing on asset management and health management. Asset management is built around the core of "Yizhangtong" (One account management system), while healthcare is built around e-health files and Doctor APP. We used big data mining to tap into the potential of asset management and healthcare management, and increased cross-selling with other parts of internet finance. Four Markets refers to the asset transaction market, loyalty points' transaction market, automobile transaction market and real estate financing market. Among this, Lufax was a major market of internet finance asset transactions. "Wanlitong" aimed to build the largest loyalty points' transaction market. "PA Haoche" has become one of the largest second-hand auto transaction platforms. PA Haofang officially entered the real estate financing market. (2318.HK / 2318 HK) 56

57 Mr Alex REN (Huichuan) (Group President): In terms of our Internet users, nurtured a group of customers and successfully created comfortable scenarios for them to potentially spend on internet finance. By the end of 2014, internet users reached 137 mn, annual active users reached around 70 mn, APP users were close to 20 mn. internet finance companies include Lufax, Wanlitong, Pay, PA Haofang, PA Haoche, Financial Technology had total internet users of mn, among which users holding traditional financial products, reached mn, or 41.7% of the total, while annual active users reached mn. actively promoted co-development of mobile business among mn total APP users and annual active users reached mn. Of this, users of internet finance companies reached mn and annual active users reached 7.04 mn. This is the first time that we have disclosed our internet finance user data details. (2318.HK / 2318 HK) 57

58 Mr Alex REN (Huichuan) (Group President): Next let s look at customer migration between traditional finance customers and internet finance customers. Based on the strong customer base of individual customers, acquired a huge amount of internet finance users. Internet finance comprehensively covered Living, Dining, Housing, Transportation and Entertainment, showing more and more synergies of cross-selling. In 2014, migration from core finance business to internet finance business reached mn person-time. Migration from the internet finance business to the core finance business reached mn person-time. (2318.HK / 2318 HK) 58

59 Mr Alex REN (Huichuan) (Group President): Next let s look at Four Markets and Two Focuses. Building on its low-cost and large user base, Lufax aimed to become an open, safe and convenient information platform for investment and financing. By the end of 2014, Lufax acquired 5 mn registered users. In 2014, asset value transaction volume on Lufax increased 6x YoY. Transactions conducted through mobile terminal exceeded 40%. Individual retail transaction increased over 19x YoY, among which P2P transaction volume increased nearly 5x. Meanwhile, Lufax strengthened its safety measure by adopting international advanced risk management model and risk management system, connecting online sales channel and off-line asset channel seamless. Integrating financial capacity to build up an un-copiable business model. The operating prowess and brand building capacity of Lufax had earned high regards from customers and investors. (2318.HK / 2318 HK) 59

60 Mr Alex REN (Huichuan) (Group President): The second market, loyalty points market. Wanlitong strived to become the largest general loyalty points platform in China. Based on big data from mobile internet, Wanlitong wished to provide a customer loyalty programme solution service as well as promotion service to corporations, while creating best loyalty points consumption experience for customers. By the end of 2014, Wanlitong had over 70 mn registered users transaction volume of Wanlitong was Rmb46.6 bn, up by 284.5% YoY. Among which, mobile transactions accounted for 27.6%, Loyalty points issuance was Rmb19.6 bn, up by 183% YoY. Our royalty points platform accumulated 500,000 merchants both on-line and off-line. Led by Wanlitong, the first loyalty points union in China was founded in Shanghai. (2318.HK / 2318 HK) 60

61 Mr Alex REN (Huichuan) (Group President): PA Haoche aimed to become the largest automobile e- commerce service platform in China. PA Haoche provides vehicle inspections, bidding, ownership transfer, transaction and finance to customers. By the end of 2014, PA Haoche had created a nation-wide O2O automobile platform, with 90 off-line service outlets, covering 27 provinces and cities. In 2014 alone, the second-hand car on-line appraisals were 1.7 mn. Off-line vehicle inspections about 80 thousand units. Total bidding volume was over Rmb8 bn. Co-operating car dealers reached nearly 2,000. Loans to car dealers were over Rmb50 mn. PA Haoche had become the largest C2B platform for second-hand vehicles in China, and had initiative strategy investments in B2B, B2C and new car business. Another market is PA Haofang. PA Haofang aims to build a real estate financing platform. In 2014, it created innovative internet finance products such as Haofang Bao, Haofang Loan, Real Estate Crowd Funding. We opened online channels such as new housing, overseas real estate, finance manager etc and gradually introduced channels such as second-hand housing and house leasing. Meanwhile, PA Haofang established branches in eight Tier 1 and Tier 2 cities including Beijing, Shanghai, Guangzhou and Shenzhen. In the future, PA Haofang aims to establish a closed eco-circle under the O2O model for real estate finance. (2318.HK / 2318 HK) 61

62 Mr Alex REN (Huichuan) (Group President): Lastly, Two Focuses, asset management and health management. Our Yizhangtong (one account management system) was the first one-stop integrated asset management platform in China, providing customers with safe, timely and accurate internet finance service. By establishing the One Customer, One Account, Multiple Products and One-stop Services account platform, we laid a solid foundation for the internet finance of the group. Yizhangtong integrated the financial account and internet account of the six companies of life insurance, P&C insurance, bank, broker, Wanlitong and Pay under group. Yizhangtong utilised Super Internet Bank technology to integrate the accounts of 29 external banks. By the end of 2014, Yizhangtong accumulated over 40 mn registered users, and managed over Rmb500 bn for customers. Pay provides a core payment platform to the group. In 2014, Pay handled payment transactions of over Rmb220 bn. The mobile electronic wallet, Yiwallet, operated only for a year and had nearly 10 mn registered users and over 10% monthly average activity. Sales volume of wealth management products reached Rmb20 bn. Pay had built up a financial industry-standard security, an intelligent, highefficiency risk monitoring system operating 24/7. Health Cloud, focusing on health management, combined the three networks of medical care, medicine and information. Doctor APP was launched at the end of 2014, and acquired a high level of satisfaction rate. Health Cloud will seize the opportunity of healthcare reform in China, and push for integration of Medicare resources. In the future, It aims to build a multi-layer platform of doctors, medicine and Medicare. Online and offline services will be combined to provide customers with diversified and comprehensive medical health services. In the future, we will continue to build up our advantageous internet finance platform via our two focuses of asset management and health management to satisfy the Living, Dining, Housing, Transportation and Entertainment need of individual customer. Above is our 2014 results briefing, now let s enter Q&A session. (2318.HK / 2318 HK) 62

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64 Mr JIN Shaoliang Now let's begin the Q&A session. (2318.HK / 2318 HK) 64

65 Results briefing: Q&A Mr JIN Shaoliang (Secretary of the Board): Thank you management team. Now we will open the floor for questions. We will take questions from Shanghai and Hong Kong alternatively and please ask no more than two questions each and also please state your name and the name of your company before asking your questions. We will take questions from Shanghai first. 23 March 2015 Question 1: I have two questions. The first one relates to the new disclosure. The new business value strain measure as a percentage of new business value looks relatively high compared to Prudential plc and AIA Group. Is there anything you can do to improve the efficiency / reduce the new business strain which will help accelerate the creation of free surplus and allows paying of higher dividend or fund more growth? The second question is for the CFO. Can you give some clarity as to how C-ROSS will impact your reported EV? It is my understanding that the big increase in statutory book value will not move through into the EV, but there could be a risk in terms of the definition of implied value of option or guarantees and increased cost of solvency. And in relation to C-ROSS, what impact does it have on your current solvency level and your equity asset allocation? Mr Jason YAO (Executive Director and CFO): I will answer your two questions. The first one is related to free surplus. As you can see over the past few years we have been listening to investors and analysts and tried to improve our disclosure and we try to benchmark against companies like AIA and Prudential. This is the first time that we have disclosed the free surplus for the life business. In relation to the new business strain, we have not done a deep comparison, but for our business, FYP from life is over Rmb50 bn and new business strain Rmb21 bn, so the strain is around 40%, which is relatively normal in the China market. AIA and Prudential have a lot of business in different jurisdictions. Secondly on C-ROSS. The CIRC recently released new draft regulations which we have been following closely. In terms of structure, it is very similar to Solvency II. Overall this is a risk-based approach. On the P&C insurance side, we should have an improved solvency position under the new regime. On the life side, we should be fairly neutral. This year is still the transition period; more details will be released by the end of this year. The traditional method of calculating EV may have a fairly big change, because the new regime is totally different from the current Solvency I regime. In the second half, the industry will have some work to do on this new valuation approach, but that has not been finalised yet. Mr Yuan Siong LEE (Senior Vice President and Group Chief Insurance Officer): The new business strain of our business is creeping up as we sell more participating products, but overall, the IRR of our new business is the high 20s percentage and the payback period around two years. Question 2: The combined ratio decreased this time. We noticed that the credit guarantee contributed most of the underwriting profits. We want to ask what will be the next step in terms of the arrangement. What is the strategy for the auto insurance business? Secondly, regarding the mix of the life insurance, universal insurance percentage has been decreasing for last three years. We wonder that in the background of the universal life interest rate liberalisation, what is your strategy in the universal life business? Thanks. Mr LEE Yuan Siong (Senior Vice President and Chief Insurance Business Officer): We are quite satisfied with P&C insurance this year. We believe we did a great job this year. The quality of our auto insurance is pretty good. The loss ratio of our auto business decreased in FY14. The reason that the combined ratio of auto insurance increased is because of higher investment in new business. Our auto premium growth is much higher than the market average, causing the deterioration of the combined ratio. The combined ratio of the P&C business decreased 2% in FY14 which is not just the contribution of the credit guarantee insurance, but the property insurance business also achieved profits last year, from a loss the previous year. So excluding the credit guarantee insurance, the combined ratio was 98% for last year, which is a pretty good performance last year. We did see that the credit guarantee insurance achieved the highest growth among all business last year (2318.HK / 2318 HK) 65

66 while the combined ratio was pretty good and most profitable. We will continue to develop this kind of product in a cautious manner. Our life insurance products are comprehensive, including traditional, universal, participating, investment-linked products and also riders on these products. In terms of product strategy, we hope that we can improve the protection for our clients and the embedded value of our products. As to which kind of product customers like traditional, universal, participating or investment-linked, it is up to our customers. Question 3: I have two questions. We can obviously see your strength on the liability side. What kind of measures you will take on the asset side as we can see that after the pricing liberalisation, you have your competitive advantage on the asset side. As we can see from Fosun and Anbang, what's the difference between them and. Secondly, helped by very strong products and business model, you have already achieved a very large number of customers. In the future, will you introduce more products to these customers, making a real vertical platform? Thanks. Chief Investment Officer Mr CHEN Dexian (Timothy Chan): I will answer your question on the asset side. Regarding fund management, our basic principle is asset and liability management with the core ALM strategic allocation. For all insurance companies, the core return comes from the asset allocation. Personally, I believe it can be resolved in two dimensions, width and depth. Width can be divided into two perspectives. The first perspective is class while the second is the interest yield. In terms of classes, we were always looking for new class to invest in, including the capital market and non-capital market. For example, last year we were considering investing in the hedge funds. In the non-capital market, we invested in the debt schemes, mezzanine finance. Of course, this includes China and overseas investment. In terms of depth, the first is to increase yield while the second is to prevent the risks. Regarding increasing the yield, the funds we delegated outside to manage reached Rmb22 bn. In the future, we hope we can find the best managers with specific professionalism to provide us good investment outcomes. On the other hand, we will also consider stock lending, in which we could get some interest and increase our investment yield. Regarding the risk control, we will further complete the internal risk management and strengthen researching on the hedging tools to reduce the asset yield fluctuations. Mr Alex REN (Executive Director and President): I will answer your second question. Indeed, customer numbers have reached more than 80 mn. has two strengths. First is the rich financial experience. Second is the strong customer base. I will answer your question from two perspectives: inside Ping An and outside. Inside, we focus on customer migration between different products, which we call integrated finance customer migration. We have disclosed the data for last year that the customer migration is 7.02 mn. Second, it is the transformation between the traditional finance and internet finance. From internet finance to traditional finance, the number of people is mn while the reverse is mn. So through internet finance, we can find customers other than the existing customer base and then gradually migrate to finance customers. On the other hand, in 's subsidiary, other than the traditional financial agency, we have already founded separated and open platform business, i.e. Lufax, which provides the asset trading information. It is an open platform on both asset and liability sides. We welcome all customers to use this platform. Regarding the financial vertical platform, we believe that finance is the core of internet finance. However, we found that the old way close door and entertaining guests doesn't meet the requirement of the new era. So doing finance has to move one step further into the real life scene (clothes, food, living, travelling) and move one step up, from offline trading to online services. So definitely, we need to do finance, from offline to online and provide more products to our customers. You could call it vertical or more close to life. Mr MA Mingzhe (Group Chairman and CEO): We have two focuses, one is asset portal and another is health portal. One of our biggest challenges in the future is the differentiation of our vertical portal. The assets of our finance model includes bank, insurance and security companies. In the past, services were for sales while in the future, services will bring sales. The frequency of services of finance is low. Customers won't reach out to you if they don't have claims. As Alex just mentioned, we will integrate the real life scene into finance. Second, the health insurance market will be very big in China. It is now difficult to sell a health insurance product in China. We enter in this area by healthcare services, including health and social insurance in 16 cities, helping them control and manage the hospitals, doctors, medical expenses and so on, during which we lowered the cost of social insurance and health insurance by 10%. Our target for this year is to help 100 cities manage their social and medical insurance. Through managing the drugs, doctors, hospitals, medical insurance, we will have (2318.HK / 2318 HK) 66

67 our core competence in this area. Through managing the doctors and hospitals, we could guarantee a lower price and better services. Regarding the development of PA, we do a lot of things. Actually, PA has two focuses, two vertical platforms. One is the asset vertical portal while the other is the medical and health vertical portal to differentiate ourselves. The finance now is not just selling insurance. It is actually service-oriented. Why Alipay is successful? It is due to its good services. So today's financial services is involved with internet. This kind of service is competitive. Question 4: I have two questions. The first one is on investment. In the investment mix, you first invest in infrastructure. What is the percentage? In increasing the equity investment, how much would be from actual buying. Secondly, after the Solvency II implementation, will there be a one-time increase in NBV or EV? How much does the investment impact your NBV or EV? Which factor impacts the most? Chief Investment Officer Mr CHEN Dexian (Timothy Chan): We adjusted our equity investment twice last year, first in January while the second in October, all when the market was below 3,000 points. The overall purchase was Rmb21 bn, while the net adjustment was more than Rmn9 bn last year. Mr. YAO Bo (CFO): The structure of Solvency II is much different from Solvency I. Solvency II is more like the financial reserve. The high margin product will not even create a new business strain, with profit achievable in the first year itself. So the overall structure will change materially. So there are still uncertain factors. The Society of Actuaries, in conjunction with CIRC, will study how to calculate this under the new solvency regime. So we don't need to worry too much about that. Solvency II is just like the financial reserve and we will disclose it in detailed profits. Now there are still too many uncertainties. Conditions will be more mature next year. During this process, we will discuss with analysts, industry experts, etc. Question 5: Two questions please, one technical and one a bit more strategic. The first one is on EV. There were some changes made to assumptions, and there was a very unusual positive Rmb2.3 bn impact. Can you let us know what the VNB impact was? It sounds as though you improve the discontinuance rates, and maybe allowed for a few retirees to die how do you justify that and the VNB impact? The second question is on the solvency ratio and your plans for the next five or ten years. The last time the company had this much free surplus, was about seven or eight years ago; and there was a strategy to go offshore. I would be interested to understand to what extent going beyond mainland China is part of 's strategy over the next five years? What sort of activities beyond mainland China should we expect? Mr Jason YAO (Executive Director and CFO): In the EV movement, this assumption change is mainly regarding the in-force business. So there is very little impact on the new business side. New business is fairly straight forward, the change was more to do with respect to some legacy products. Mr. Peter MA (Mingzhe) (Group Chairman and CEO): In terms of strategy, we are always studying the asset allocation. In the past, due to the RMB appreciation, we stayed in the "watching" stage in terms of overseas strategy, as the other countries' currency depreciation would impact our yield. In terms of asset and liability matching, risk diversification, investment yield and exchange rate, we will consider investing gradually based on our liabilities. But before making an investment decision, we will watch for a little bit longer. (2318.HK / 2318 HK) 67

68 Question 6: I have an old question. The commercial motor insurance pricing liberalisation is just around the corner, I would like to know your view on the competitive landscape. It shows that the auto result stabilised at a level in your result and for the industry, it was loss making according to news reports in Mr Yuan Siong LEE (Senior Vice President and Group Chief Insurance Officer): Thank you for your question. Our auto insurance result was quite good while the combined ratio continued to improve. The ROE of auto insurance was >20%, which is a rare result even in a global context. Aside from industry conditions, including CIRC's guidance towards a healthy market, we have our own advantages. We have very high market recognition in risk management and services. Our claims service is very good as well with more than 90% of claims cases solved within an hour. We also introduced new services in 2014 including mobile claims service, which has got good feedback from our customers. Also, through our risk management, our combined ratio has improved with the percentage of cars claims dropping. We will continue to expand our business with an increase in business expenses. Hence our auto insurance premium growth was quite strong. We have done a lot of work on preparation for the pricing liberalisation. The pricing reform will be piloted in five provinces and we are still preparing some details. We think short term we will see some volatility, but longer term this is positive for the industry. My personal view is the good companies with good underwriting and risk management capabilities will win. Question 7: I have two questions. The first one is internet finance and customer migration. Thanks a lot for providing the data. I would like to understand how you decide the KPIs for the new businesses because compared to the traditional financial segments, the customer stickiness and the profitability can be very different. Do you just look at the number of customers or you have any financial indicators as KPIs for example on platforms such as Lufax? Another question on internet, the largest customer migration is from Wanlitong, is it the access to biggest customer base? What is the incentive for customers to use Wanlitong? The second question is about life insurance. I saw that the protection business is 40% of agency new business premium; my question is whether there is still room to increase? Dr MA Mingzhe (Group Chairman and CEO): Let me answer the first question. Every subsidiary has its KPIs at benchmarked to the market on growth rate and business quality. The result-oriented culture at Ping An has been very clear for the past 20 years. The KPIs are different for different companies in the nontraditional segment. The most important thing to remember is quantity, frequency and value. Different companies are in different stages. Taobao customers cannot shift to online games. Wechat users cannot shift to e-commerce. It is not that you have a number of customers and the platform and you can transfer these customers. Secondly on the traffic, we offer all services from one system, i.e., banking, auto insurance, other investment products, healthcare products on the same system. The system pushes the most relevant content based on customers' clicks. We have 79 types of services that are related to each other. Not only Wanlitong, Life's one account management including auto insurance customers will have traffic. Why do we do Haoche? Because our customers regularly have the need to sell cars. And we also add oil, car wash services, with a whole eco-system. We have seven main types of traffic. Hence we very much focus on the number of customers, frequency and value creation. Eventually we focus on value creation. It's hard for some internet services to create value. Mr Yuan Siong LEE (Senior Vice President and Group Chief Insurance Officer): Over the past several years, we have focused on increasing the protection product sales and improving our product mix. I remember, at the Sichuan Earthquake, the insurance coverage was just Rmb20,000 which increased to Rmb150,000 in the Yunan Earthquake later. However, I think that the protection coverage is still not enough. Hence, we still have plenty of opportunities to increase the insurance protection. (2318.HK / 2318 HK) 68

69 Question 8: I have two questions. The first one is on life insurance. The life insurance margin in the agency channel continued to increase and my question is on the outlook. The second question is on dividend which has increased. My question is on your dividend policy for the next three years. Mr Yuan Siong LEE (Senior Vice President and Group Chief Insurance Officer): The margin increase in the agency channel was mainly due to the product mix improvement which is driven by our product strategy to gradually improve our product margin. Mr Jason YAO (Executive Director and CFO): We have kept a stable dividend policy since our listing, i.e., a cash payout ratio of 15-30% to balance our business development need and shareholders' interest. This year we have a special capital reserve conversion into share equity, ten shares for ten shares which is relatively special given this is the first time in the past ten years. We make the change to react to some of the international investors and local investors' feedback. Management always keeps the communication with investors and you could see that we have improved our disclosure, and to improve the confidence in our operation and results. (2318.HK / 2318 HK) 69

70 Bank: Result briefing Board Secretary: Dear everyone, good afternoon. Let me introduce our management first: our Chairman Mr. SUN Jianyi, CEO Mr. SHAO Ping, Deputy CEO Hu Yuefei, Deputy CEO SUN Xianlang, Deputy CEO Mrs CAI Lifeng, Mr FU Wei, Mr. ZHOU Qiang Chairman Mr. SUN Jianyi: Good afternoon, my friends. Our management welcomes you to the FY14 Bank result briefing. Firstly, the financial institution should bear the cost of reform and have to develop new business in the transformation. Secondly, financial regulation further improved, interest rate liberalisation accelerated, which will force the banks to strengthen their risk management and develop competitive advantages. Thirdly, as the technology further develops and the further deepening of internet, competition of banking industry intensifies which provides small banks opportunities to catch up is the second operating year after the consolidation of PAB and Shenzhen Development Bank. Our transformation has delivered good results while management capabilities and skills have improved, providing a foundation for our five-year plan and three-stage strategy. We always focus on expanding our scale, improving the efficiency, controlling the risks, optimising management and maintaining our brand. We have many operating highlights in FY14, which will be introduced by Deputy CEO SUN Xianlang is the year for us to see the effects of the reforms. We will continue to follow the three-stage strategy, stick to the reform and development strategy. We will also improve the capabilities of scientific decisionmaking, focusing on capital management, completing the encouragement system, strengthening the corporate governance, and creating value for our shareholders. (2318.HK / 2318 HK) 70

71 Deputy CEO SUN Xianlang: In 2014, Bank (PAB) promoted business transformation through reform and innovation. Further integrating resources, improving mechanisms, strengthening management and accelerating innovation, hence promoted the rapid development of business, further optimisation of business structure and the comprehensive enhancement of operational efficiency. The deposit, net operating income and net profit grew at an industry-leading pace through 2014, with a sharp rise in provisions and a significant improvement in the ability to withstand risks. Our excellent performance has gained wide recognition from the media and the community. The bank was named as the "Best Joint-stock Bank of the Year" in the "Gold Medal List of Chinese Financial Institutions" organised by The Financial Times, and ranked 9th in "Top 100 Investor's Most Respected Listed Companies" co-organised by the China Association for Public Companies and China Securities Investor Protection Funds. (2318.HK / 2318 HK) 71

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73 Deputy CEO, Mr. SUN Xianlang: In FY14, Bank's total assets increased by 15.6% to Rmb219.7 bn. Total loans balance was Rmb102.4 bn, up 20.9%. Total liabilities reached Rmb206.6 bn, up 15.5% YoY, among which total deposits were Rmb153 bn, up 26%. Total shareholders' equity increased by 16.8% to Rmb13.1 bn. (2318.HK / 2318 HK) 73

74 Deputy CEO, Mr. SUN Xianlang: Revenue was Rmb73.4 bn, up 40.7% YoY. Non-interest income was Rmb20.4 bn, up 77% YoY. Expenses were Rmb32.2 bn, up 26.9% YoY, among which operating expenses were Rmb26.7 bn, up 25.3%. Operating profit before provision was Rmb41.3 bn, up Rmb14.4 bn YoY and 53.7% YoY. Asset impairment loss was Rmb15.0 bn, up Rmb8.1 bn and up 117.9% YoY. Net profit was Rmb19.8 bn, up Rmb4.6 bn and up 30.0% YoY. (2318.HK / 2318 HK) 74

75 Deputy CEO, Mr. SUN Xianlang: The non-performing loans (NPL) balance was Rmb10.5 bn, up 39.3% YoY. NPL ratio was 1.02%, up 0.13 pp compared to last year. Provision to loan ratio was 2.06%, up 0.27 pp. Provision coverage ratio was 200.9%, down 0.16 pp compared to last year. Deposit-loan spread was 5.01%. Net Interest Spread (NIS) was 2.40% while Net Interest Margin (NIM) was 2.57%. Cost-to-income ratio was 36.3%, down 4.44 pp. (2318.HK / 2318 HK) 75

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77 Deputy CEO, Mr. SUN Xianlang: Deposit balance amounted Rmb1,533.2 bn, up 26% or Rmb316.2 bn YTD. Deposit growth in 2014 was 1.6x that of Average daily deposit balance was Rmb1,414.7 bn, up by Rmb272.9 bn YoY. In recent two years, average daily deposits have continued to grow at a rate of more than 24%, showing a stepwise upward trend. In 2H14, when deposits were generally falling in the banking sector, the bank's deposits maintained steady growth and increased by Rmb24.3 bn from the end of June. The deposit base was thus further solidified. In a macro environment under the impact of interest rate marketisation and internet finance, the proportion of new wealth management deposit to the bank's new deposits was significantly lower than the sector average. Thus, the overly-rapid rise in deposit costs was effectively controlled. (2318.HK / 2318 HK) 77

78 Deputy CEO, Mr. SUN Xianlang: In 2014, on the back of shrinking market needs, the bank supported development of the real economy and stayed ahead of the market in terms of loan growth. At the end of 2014, the bank's loan balances amounted to Rmb1,024.7 bn (i.e., an increase of 21% or Rmb177.4 bn YTD, breaking the trillion level for the first time). Assets structure was optimised constantly. The percentage of micro-lending loans, "New One Loan", and other high-yield loans in total loans continued to rise. The average loan pricing increased significantly. (2318.HK / 2318 HK) 78

79 Deputy CEO, Mr. SUN Xianlang: Operating income was Rmb73.4 bn, up by 41% YoY; Profit before provision was Rmb41.3 bn, up by 54% YoY. Asset impairment loss was Rmb15 bn, up by 118% YoY; net profit was Rmb19.8 bn, up by 30% YoY. Profit before provision doubled when compared with two years ago and profitability was greatly enhanced. Non-interest income in 2014 was Rmb20.4 bn, up by 77% YoY, which was 3.1x that of two years ago. Non-interest income as a percentage of the total rose to 27.7% from 16.9% in 2012, jumping to the top echelon in the industry. (2318.HK / 2318 HK) 79

80 Deputy CEO, Mr. SUN Xianlang: In 2014, the bank achieved a qualitative leap in operational efficiency, recording a significant increase in the deposit-loan spread, net interest spread and net interest margin. The bank's cost-to-income ratio declined 4.44 pp YoY to 36.3% in 2014, which was the year with the most outstanding result in optimising input-output in history. (2318.HK / 2318 HK) 80

81 Deputy CEO, Mr. SUN Xianlang: In 2014, new provisions amounted to Rmb15 bn, up by 118% and nearly 5x that of 2012; the balance of provisions was Rmb21.1 bn at the end of 2014, up by 39% or Rmb5.9 bn YTD. At the end of 2014, the provision-to-loan ratio stood at 2.06%, up by 27 bp YoY. On the back of a general decline in the level of provisioning in the industry, the bank's provision coverage ratio for 2014 was 201%, same as that of last year. (2318.HK / 2318 HK) 81

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83 Deputy CEO, Mr. SUN Xianlang: The reasons we achieved great result are as follows. (2318.HK / 2318 HK) 83

84 Deputy CEO, Mr. SUN Xianlang: We highlighted business and achieved rapid growth. The bank's focus on the originally weaker links, such as investment banking, custody, small and micro business as well as notes and bills, driving the rapid growth of the Bank's business size and efficiency. 1. Drastic growth in investment banking and custody operations Investment banking fee income was Rmb3.2 bn and derivative income was Rmb1.1 bn, as a result of which comprehensive income was Rmb4.2 bn, up by 77% YoY. Custody business size has expanded 123% YTD to Rmb1,800 tn, with custody fees amounting to Rmb1.4 bn, up by 177% YoY. 2. Early results in the strategy on small and micro business Under the impact of accelerated interest rate marketisation and the narrowing of spreads, the bank launched its "Dai Dai " ( 贷贷平安 ) card at the end of 2013 to focus on the small and micro business strategy. The "Dai Dai " ( 贷贷平安 ) business achieved rapid development in At the end of year, it had 800,000 customers, a loan balance of Rmb44.8 bn and an average yield of 15.75%, making great contribution to the bank's optimisation of customer, asset and income structure. 3. Breakthroughs in the notes and bills operations The bank promoted a rapid development of the notes and bills operations, quickening the turnover rate and launching the market making platform " Piao Ju" ( 平安票据 ). The spread income amounted to Rmb2.5 bn, up by 200% YoY. (2318.HK / 2318 HK) 84

85 Deputy CEO, Mr. SUN Xianlang: The bank strengthened the operational control and allocation of resources, thus the business structure further optimised and operational efficiency significantly improved. We optimised asset and liability structures which laid a foundation for improvement in spreads and earnings: Liability structure Encouraging absorption of low-cost deposits to deal with interest rate marketisation. Strengthening management and guidance of wealth management, structure and foreign currency deposits, and insisting on quota management. Using active debt instruments, and exploring liability source. Asset structure Promoting an orderly expansion of interbank business and adhering to the ratio management. The percentage of interbank assets in total assets fell as a result. Focusing lending resources of high-yield businesses; general loan yield stood at an industry leading level of 7.66%. (2318.HK / 2318 HK) 85

86 Deputy CEO, Mr. SUN Xianlang: Stronger guidance on management and control led to a marked improvement in efficiency: Capital resources Strengthening centralised capital management and building up a "risk-asset return" evaluation system to enhance capital efficiency. Increasing capital strength: The issue of Rmb15 bn Tier 2 capital bonds was completed and Rmb10 bn private placement + Rmb20 bn preferred stock financing plan was launched. Credit resources Managing loan quota as basic credit line, special credit line and bid credit line for higher efficiency. Financial resources Strengthening financial management and promoting standardised cost control. The cost-to-income ratio decreased significantly. Human resources Stimulating the potential of human resources; net profit, deposits and loans per capita have grown sharply. (2318.HK / 2318 HK) 86

87 Deputy CEO, Mr. SUN Xianlang: The bank accelerated innovation and successively launched products and service platform, such as Orange-e-Platform ( 橙 e 网 ), Hang-E-Tong 2.0, Gold Bank and Pocket Bank, to create internet banking features which attracted a wide attention in the market. Platform innovation Orange-e-platform: An online integrated financial service platform for SMEs with over 200,000 registered clients, including Business Manager, Orange-E-Financing, Orange-E-Wealth and mobile Payee. Hang-E-Tong 2.0: An upgraded online financial mall for small and medium financial institutions and their customers, significantly increasing average daily interbank liabilities as a percentage of the total. Gold Bank: The industry's first platform specialised in the management of gold assets integrating gold investment of financing, physical gold, gold saving and gold wealth management. Product innovation Pocket Bank: A mobile financial service platform integrating debit card, credit card, wealth management, mobile payment, and the number of clients exceeding 5.4 mn now. Asset securitisation: " No.1 Petty Customer Loan Asset-backed Securities', the first of its kind in China, were successfully launched. Trade Finance: A series of new trade finance products was launched to meet the diverse needs of customers. Industry funds The industry find business model was commenced and the first project was formally launched to actively participate in the reform of state-owned assets and the promotion of PPP financing. (2318.HK / 2318 HK) 87

88 Deputy CEO, Mr. SUN Xianlang: To give full play to the advantages of integrated finance, the bank seized development opportunities arising from economic reforms and financial markets to achieve new breakthroughs, opening up a new dimension for rapid business developments. A whole-industry-chain approach was developed to increase penetration in sectors and customers. For example, the cooperation with Haier achieved whole-industry-chain operation, by using internalised industry and finance combination, hence generating a paradigm for cross-border cooperation and industry integration. Net operating income from corporate integrated development channel was Rmb928 mn, up by 141% YoY. Average daily corporate deposits referred by P&C and annuity amounted to Rmb13.8 bn, up by 39% YoY. Operating income was Rmb380 mn, up by 32% YoY. 111 new cooperation projects between PAB and investment subsidiaries were implemented, with investments and financing totalling Rmb140.4 bn. The average daily deposit balance was Rmb9 bn, up by 117% YoY, operating income was Rmb300 mn, up by 146% YoY. Premiums sold for P&C and Annuity rose 89% YoY. Subsidiaries within Group contributed Rmb248 mn to custody income. In December, the bank became the central fiscal non-tax revenue collection agency, achieving a historic breakthrough in the central fiscal agency business, hence laying a good foundation for the bank's fiscal business developments. (2318.HK / 2318 HK) 88

89 Deputy CEO, Mr. SUN Xianlang: The retail business unit was set up. And placing and establishing of Industry Bus and Product Bus were accelerated. The specialised operation of BUs has become a distinctive feature of Bank. Promoting the placement of industry BUs to achieve a full coverage of industry chain including real estate, energy, and mines, transportation, logistics, and agriculture. New industry BUs, such as logistics and agriculture, were active in exploring new markets, hence established a good foundation for business growth in The Energy and Real Estate BUs demonstrated their specialised advantages against the backdrop of a significant decrease in the industry's business sentiment, and achieved a good performance. At the end of 2014, the Energy BU had deposits of Rmb39.3 bn, loans of Rmb49.8 bn, AUM of Rmb151.4 bn and profit before provisions was Rmb 1.5 bn, the Real Estate BU had deposits of Rmb39.8 bn, loans of Rmb71.2 bn, AuM of Rmb144.6 bn and profit before provisions was Rmb2.9 bn. In active response to the regulatory requirements, the bank completed the reform of Inter-Bank Proprietary Trading BU and Asset Management BU to implement professional operation in the inter-bank business and the asset management business. Established retail BU. And structural reform, business administration and asset-liability management were successfully implemented to achieve the objectives of specialised operation and authorised management, laying a foundation for developing the retail business. (2318.HK / 2318 HK) 89

90 Deputy CEO, Mr. SUN Xianlang: In 2014, the industry experienced a volatile economic environment. The bank closely monitored business development and tackled risk mitigation, achieving notable results in the recovery and maintaining the stabilisation of asset quality. The bank recovered non-performing assets of Rmb3.325 bn, of which credit assets (loan principals) were Rmb3.081 bn. Among the loan principals recovered, Rmb739 mn was from the written-off books and Rmb2.342 bn was on the books % of the amount recovered was cash while the remaining amount was recovered by way of repayment in kind, etc. In 2014, China's banking industry has shown an accelerated upward trend of NPL balances and ratios. Bank performed better in keeping its NPL balance and ratio in control: NPL balance was Rmb10.5 bn and NPL ratio was 1.02% at the end of the year. Both the NPL ratio and its change were better than the sector average level. (2318.HK / 2318 HK) 90

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92 Deputy CEO, Mr. SUN Xianlang: In 2015, the bank will continue to put its "customer-oriented" business philosophy into practice with a focus on the strategic goal of creating the "best bank", continuously emphasising development priorities, improving incentive mechanisms, accelerating business innovation, optimising business structure, advancing integrated finance, enhancing management efficiency, keeping risks in strict control, promoting capital replenishment and maintaining a market-leading growth in scale and profitability, trying the best to return the shareholders and the public with excellent achievement. (2318.HK / 2318 HK) 92

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