China s banking sector: Hot topics and performance of listed banks in 2014 Q1

Transcription

1 China s banking sector: Hot topics and performance of listed banks in 2014 Q1 KPMG Huazhen (Special General Partnership) May

2 Page Contents Introduction 03 Hot topics Q1 economy and finance 26 Analysis of 2014 Q1 financial data of listed banks 35 Appendix: 2014 Q1 financial data of listed banks 54 2

3 Introduction China s Banking Sector: Hot Topics and Performance of Listed Banks is a KPMG publication that covers the important topics and performance of China s banking industry. It provides in-depth but accessible analysis of the hot issues to help you understand their impact and the future direction of the banking sector. It also gathers considerable data to analyse the financial position of China s listed banks. We believe our professional experience will help you better understand the current situation of the banking sector. This issue (first quarter 2014) focuses on current hot topics, including internet banking, interest rate liberalisation reform, corporate debt default, implementation of advanced methods of capital management, and a pilot scheme for switching from business tax to VAT. The publication also presents the financial position and business performance of the listed banks for the first quarter 2014 to help you better understand their current situation. For more information, please do not hesitate to contact one of the KPMG professionals in the Contact Us section.

4 01 Hot topics 4

5 Hot topics: Overview of internet finance Definition of internet finance As there is no single commonly-accepted definition of internet finance, we offer the definition proposed by Mr Xie Ping in 2012: Internet finance is a spectrum concept found under the influence of the technology and spirit of the internet, covering all financial transactions and organisational forms, from a financial intermediary and market condition involving traditional banks, securities, insurance and exchanges to the corresponding nonfinancial intermediary and market condition proposed in the idealised hypothesis of perfectly competitive market equilibrium. There are three main points in understanding the concept of internet finance: its perspective, its connection and difference with traditional finance, and its three major building blocks. Big data analysis Crowd funding Internet banking Internet finance Thirdparty payment P2P lending Traditional finance to provide services such as financing, payment and settlement through commercial banks Internet finance to provide digital financial services based on internet applications, featuring a decentralised and flat service model and minimised cost of interaction Small interne t loan Internet insurance & internet securities 5

6 Hot topics: Overview of internet finance (continued) Three building blocks of internet finance Features Improved resource accessibility Funds and information are two major market resources. The utilisation of internet technology enriches marketing information and expands transaction channels, resulting in improved resource accessibility. The more popularised financial service entities and flatter service path provide more diversified selection for participants and individuals. Payment Based on mobile payment and third-party payment, and active outside the traditional payment and settlement system dominated by banks, internet finance can effectively reduce transaction costs. Information processing Big data analysis is widely used in internet finance for information processing, which is reflected by an abundance of algorithms, as well as automatic and high-speed network arithmetic, thereby improving the efficiency of risk pricing and risk management and minimising information asymmetry. This is the fundamental difference that separates internet finance from the indirect financing of commercial banks and the direct financing of the capital market. Fund allocation Due to the close bond between financial products and the real economy in internet finance, the trade possibility frontier is greatly expanded. Therefore the allocation for demand and supply of funds according to time limit and volume can be carried out independent of traditional financial intermediary markets such as banks, securities firms and exchanges. Reduced cost The utilisation of internet technology improves the transparency and extent of information communication and reduces the costs of information exchange and transactions. Disintermediation The traditional commercial banks play an important role as financial intermediaries in financial transactions. Through internet finance, both borrow/loan transactions and payments can be conducted on internet platforms. Therefore the financial intermediary function of commercial banks will be gradually marginalised. 6

7 Hot topics: Overview of internet finance (continued) Regulatory development of internet finance August 2013 Led by People s Bank of China and founded by seven departments and ministries, including People s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security and the Legislative Affairs Office of the State Council, the Internet Finance Development and Regulatory Research Team conducted field research. Guo Ban Paper No.107 on Issues Related to the Reinforced Regulation of Shadow Banking ( Paper No. 107 ), issued by the General Office of the State Council, signified that internet finance was included in a new regulatory system. January 2014 March 2014 During two sessions 13 March 2014 Internet finance was mentioned in the Report on the Work of the Government for the first time and Premier Li Keqiang stressed the positive effects of internet finance on the national economy. The opinions of the leadership implied that the regulatory vacuum of internet finance was about to end. The Payment and Settlement Department of People s Bank of China issued an urgent paper entitled Opinions of the Payment and Settlement Department of People s Bank of China on Suspending Alipay s Offline Barcode (QR Code) Payment Service and Other Related Services. March & May 2014 Mr Sheng Songcheng, Secretary of the Statistics and Analysis Department of People s Bank of China, wrote two articles outlining his views that the bank deposits of monetary market investment funds (e.g. Yuebao) should be subject to the regulation of bank reserves. The direction of the regulations was getting clearer. 7

8 Hot topics: internet finance-internet wealth management products Yuebao has enjoyed rapid growth since its establishment Market size of Yuebao RMB billion As there is a relatively broad range of internet finance topics, we will continue to discuss them in subsequent reports. Here we will introduce internet wealth management products and P2P lending platforms. Yuebao established Yields of Yuebao RMB 6.6 million 万份收益 revenue per million yuan of funds RMB billion June , 年 月日 End 2013 of 年 June 6 月末 2013 End 2013 of December 年 12 月末 End 年 of 3 月末 March 日年化收益率 seven-day annualised interest Over 50 varieties of internet wealth management product have been developed, including: Yuebao, Caitong and Baizhuan (Baidu) by internet companies; Ping An Profit, Ru Yi Bao (Minsheng Bank) and Manager's Wallet by banks; and Hua Xia s Huoqi Tong, as well as Yifangda s E-wallet, by fund companies. Yuebao has increased its market size to RMB billion since it was established in June Yuebao-like online wealth management products have broken through bank caps. The current deposit interest rate in the banks is 0.35 percent, while the seven-day annualised interest of Yuebao is 5.23 percent. Most of the money is invested in bank savings agreements. The assets portfolio of Yuebao Tian Hong Zeng Libao monetary fund 4.00% 3.50% 0.18% 92.32% Total of bank deposits and 银行存款和结算备付 settlement provisions 金合计 Fixed 固定收益投资 income investment Redemptory 买入返售金融资产 monetary capital for sale Other 其他资产 assets Source: Tianhong Fund 8

9 Hot topics: internet finance-internet WMP (continued) The sustainability of high-yield internet wealth management products The main reference index for the yields of agreement savings in monetary fund investments is the Shanghai Interbank Offered Rate (SHIBOR), especially the one-month interest rate. The interest rate for interbank deposit agreements exceeded seven percent at the end of 2013, but the one-month SHIBOR interest rate decreased to four percent in April Since the launch of Yuebao, there have been subtle changes in the supply and demand relationship between monetary funds as capital suppliers and banks as capital demanders. Fund companies could raise the interest rate for high bids as the capital demand for agreement savings was greater than supply before Yuebao was launched. However, as Yuebao and Caitong achieved rapid growth around the spring of 2014, ChinaAMC and Tianhong Fund turned out to be competitors in the agreement savings market. Recently, the yield of Yuebao has decreased from 6% to 5%, which is a normal level for a monetary fund One-month SHIBOR trend (Source: Wind Info) The advantages of internet wealth management Low rates. The standard purchase rate for buying funds from banks is 1.5 percent, but it is 0.6 percent when buying online. Many third parties will subsidise the purchase rates for buying funds online as a preferential policy. Low threshold. The minimum threshold to buy a short-term wealth management product in banks is RMB 50,000, while online products like Alipay require lower thresholds, such as RMB 1, which caters to the needs of investors. Short-term periods. Wealth management plans with one-month, one-week or even one-day periods provide greater convenience for investors looking to invest in stocks and bonds. The advantages of the bank s wealth management Conventional channels. Investors can buy more diverse types of funds through banks, such as equity funds, bond funds, index funds, hybrid funds, private funds and futures funds. The internet channels mainly focus on monetary funds. High security. Fund companies operated by large state-owned banks provide investors with professional wealth management plans and advice, as well as abundant financial resources and a team of experienced finance management staff. Relatively low risks. Online wealth management is exposed to business risks, including default risk. Furthermore, it carries the risk of breaches in personal privacy due to information transparency. In addition, the safety of third party payments is lower than those of bank accounts and such payments are more vulnerable to theft. 9

10 Hot topics: internet finance-internet WMP (continued) The impact of internet wealth management products on banks From bank deposits to online wealth management products For commercial banks, Yuebao and Alipay are higher-yielding alternatives to traditional savings, which draws money away from bank deposits. As more and more customers get accustomed to Yuebao, they will slowly move away from the banks, leading to a decline in income from individual customers. The rapid growth of internet finance represented by Yuebao not only squeezes the profit margin of commercial banks, but also facilitates its disintermediation, which changes current customers financial habits and poses a challenge to the dominant position of commercial banks in the financing market. In fact, banks are facing other deposit-related pressures too, such as a significant decline of corporate deposits in large state-own banks and joint-stock banks. Interest rate liberalisation Yuebao attracts capital from bank deposits with higher interest rates through Alipay, and then deposits capital into the bank in the form of agreement savings. The money still stays in the system, but it turns cheap deposits into expensive agreement savings. This drives up the banks liability cost and, in turn, increases client s borrowing costs. Currently, the bank s benchmark interest rate is 3.25 percent, while the CPI in 2013 was 2.6 percent, which means depositors can only get a 0.65 percent return. By contrast, the annualised yield on online financial products is usually six to seven percent. Therefore, banks have also launched their own high-yield financial products. In this way, the liberalisation of interest rates seems to be accelerating. The most optimistic observers even believe that the interest rate will grow by at least 100 basis points within one to two years. Also, as key supporting mechanisms of liberalisation, the deposit insurance system and exit mechanism will soon be introduced. The narrowing down of the interest margin will slow down the growth of the banks net interest income. Responses of conventional banks Changes of net interest margin in five state-owned banks Source: annual reports of listed companies on the SSE website Faced with the pressure of losing deposits on its financial statements, some state-owned commercial banks are launching a counter-attack against Yuebao. Currently, the three main large state-owned commercial banks have refused to accept agreement deposits from Tianhong Asset Holdings, the mutual fund owned by e-commerce giant Alibaba. Contrary to the response of state-owned banks, joint-stock commercial banks are more inclined to maintain business cooperation with monetary funds. As they are financing banks, Yuebao is a very important counterparty to them with regards to transactions. 14% 12% 10% 8% 6% 4% Comparison of corporate deposit growth in five state-owned banks 工行 ICBC 中行 BOC 农行 ABC 建行 CCB 交行 Bocom Source: annual reports of listed companies on the SSE website 工行 ICBC 建行 CCB 中行 BOC 农行 ABC 交行 Bocom 均值 Average 10

11 Hot topics: internet finance-internet WMP (continued) Discussion of regulations for internet wealth management products For Yuebao and other online financial products questioned by conventional banks, senior officials state that they will encourage internet finance instead of halting Yuebaolike products, as well as strengthen supervision. Experts in the banking and financing industry propose that online financial monetary funds should be included in general deposits management as bank saving deposits rather than interbank deposits and should therefore be subject to reserve requirements. They request that all banks comply with relevant regulations, adopt a cap of 1.1 times the benchmark interest rate, and ask clients to pay the demand-deposit rate on early withdrawals, or receive a penalty. Sheng Songcheng, the statistics chief at People's Bank of China (PBOC), published an article on 4 May to explain the reasons for applying the reserve requirement to such deposits, following the publication of Yuebao and Reserve Requirement Management in March He says that if the monetary fund agreement savings of banks were subject to reserve requirements, the cost for banks will rise, which will decrease the yield of Yuebao. It is estimated that the annualised return of Yuebao would be reduced by one percentage point if there were a 20 percent reserve requirement on the portion of its money placed as deposits with banks, calculated based on a six percent interest rate for fund agreement deposits and a 1.62 percent statutory reserve requirement ratio. 11

12 Hot topics: internet finance- P2P lending P2P lending model China s active P2P platforms exceeded 350 at the end of 2013 and accumulated transactions reached RMB billion. P2P loan size is expected to maintain a 100 percent growth rate for the next two years. China s P2P lending transactions will reach billion by Solely online P2P, such as PPDai. Borrowers are connected with lenders through online platforms, mostly for the purpose of negotiating loans. Borrowers can list loan requests and certificates of creditworthiness to be reviewed online. Investors can select from those requests and certificates and invest in loans. PPDai serves only as a platform for matching borrowers and lenders via online auctions, rather than being responsible for reviewing the qualification of borrowers. Solely offline P2P, such as CreditEase. CreditEase collects borrower s loan requests online and investors information offline, and matches them via offline channels. Online + offline, such as Renrendai. Renrendai combines online channels with offline channels, characteristically involving obtaining investment online and reviewing loan projects via conventional channels. This P2P platform offers guarantees and sells loans online, attracting investors online through high yields and principal guarantee plans. This is the most popular model in internet financing, and is adopted by about 60 percent of companies. Renrendai has also introduced an advanced bidding tool to diversify investment-priority plans, which allows investors to earn 13 percent annualised interest and to reinvest after receiving the principal and monthly interest. Standardised products, such as Lufax.com, a financial institution under Ping An Group. Lufax.com packages small loans into standardised financial products to make investment more convenient via online and offline channels with its professional competence and risk control management. What lenders invest in are not loans from borrowers, but financial products for sale composed of loan requests. Though not knowing where their money is being placed, investors rely on Ping An Group s reputation. Compared with the principal guarantee plans, Lufax.com offers better security. It has adopted an offline credit review model and set up 20 outlets around the country to examine the borrowers qualifications. 12

13 Hot topics: internet finance-p2p lending (continued) Advantages vs. risks of P2P Standardised model, lower interest rates Social financing structures must be changed as the rapid growth in the banking industry will not last for long. Financial resources will be invested in small enterprises in various forms. P2P will expand its development with lower interest rates and more regulated models. Meet folk financing demand and improve the efficiency of capital utilisation With longer time to grant loans, conventional banks are not able to satisfy the needs of small businesses and individuals for short-term funding. P2P helps reduce the interest costs for borrowers due to its efficiency and its quick and easy approval process. Some platforms launch a daily auction to meet shortterm demand, such as three-day to seven-day demand, with interest rates calculated on a daily basis. Innovative financing caters to the niche market of small businesses The reserve requirement ratio continues to remain at a relatively high level. It was adjusted to 21.5 percent by large commercial banks at the end of 2011, but currently remains at 20.5 percent. A high reserve requirement ratio will inevitably result in a preference for state-owned enterprises among the banks. The innovative financing of P2P lending platforms will help meet the loan requests from small enterprises and cater to its niche market. VS VS VS Credit ratings and information reviews might not be genuine. In America, a complete and transparent personal credit certification system is established and borrowers information, including personal credit records, social security numbers, personal tax numbers and bank account status, is fully verified. However, China s credit system is still in the nascent stage and needs to be improved. The difficulty of following up after lending Due to cost restraints, P2P platforms find it difficult to satisfy the need of lenders to know where their money is being placed. In the event that borrowers invest loans in high-risk sectors to earn high returns, there will be a risk of default if large losses occur. Bad loans tend to involve a substantial risk of default, which may spiral out of control Some P2P companies will set up a risk fund with a certain amount of money to repay lenders and then pursue recovery from borrowers in the event of bad loans. If there is a repayment crisis and several defaults occur due to social or economic changes, the risk fund will not be of much help in controlling the resultant risks. 13

14 Hot topics: internet finance-p2p lending (continued) The impact of P2P on conventional banks Financial disintermediation is the core of P2P. The establishment of peer to peer lending platforms transforms borrowing from banks and other financial institutions to borrowing directly from investors. Experts within the industry hold different ideas about P2P s impact on conventional banks: Little Impact The P2P lending model is not very stable. Unable to implement controls on credit risks based on big data, the operational cost of P2P is significantly high and there is a flaw in indentifying risks. The vision for P2P in the future is to use big data to conduct risk control. The P2P industry can develop effectively on the premise that institutions provide credit ratings for small businesses and individuals based on big data. In this way, the pricing of P2P lending will rely on credit ratings and excessive profit will be obtained by ratings agencies. Big Impact The guarantee model of P2P has a big impact on banks. It transforms retail loans to packaged loans, and underground lending to bank business. In addition, it operates as large platforms and institutions. Thanks to the support of guarantees, investors are discovering that P2P offers higher yields and lower risks than similar bank products. From the client s perspective, young customers are familiar with the internet and more willing to accept P2P. As the standard for retail loans in the P2P industry is lower than that in the banking industry, there will not be big impact on banks regarding capital. However, in the wholesale loan sector P2P will expand aggressively and pose a challenge to the non-standard loan business of the banks due to its quick approval process. Complementary roles Banks mainly target big, multi-million dollar lending projects due to cost and risk control constraints, while P2P can manage small lending projects involving much smaller sums of money. P2P and banks should supplement each other. 14

15 Hot topics: internet finance-p2p lending (continued) Banks enter into P2P sector China Merchants Bank (CMB) launched the "e+ Stable Financing Projects for loans in September 2013, which was the first attempt of the banks to get involved in the P2P sector. According to the data provided by CMB, it has introduced five investment projects involving transactions of up to RMB 150 million so far. This is equal to one third of the total transactions of the first P2P platform PPDai in the past five years. The success of CMB s trial launch has inspired the other banks. An increasing number of them, including China Guangfa Bank and Ping An Bank, are tapping into P2P business. The expansion of the banks into online lending services seems to be a growing trend. Attitude of the regulatory authorities China Banking Regulatory Commission ( the CBRC ) issued the Notice on Risk Alert for P2P Services, which disclosed the risks existing in online P2P lending services. Backdoor investment. Due to the introduction of tighter policies for the real estate industry, as well as industries with high pollution, high resource consumption and excessive capacity, private funds may try to invest in restrictive industries through peer to peer lending intermediaries; Low market access threshold. Renrendai.com and other intermediaries may get involved with illegal lending institutions or illegal fund-raising; Difficulty in controlling business risks. P2P intermediaries are not able to evaluate borrowers credit or conduct supervision on afterlending activities in the manner that banks do; Impact on the banking sector s reputation due to false advertising by these intermediaries. If the banks open accounts for Renrendai.com, it will be mistaken as one of the banks partners due to misleading advertisements; Credit risk concerns. Overseas experiences show that the credit risk of this operational model tends to be high, with far lower loan quality than that of financial institutions in the banking sector; Legal and regulatory uncertainty. P2P lending may be beset by unclear legal definitions, as well as ambiguities with regards to regulatory roles and responsibilities; Potential risks in engaging in second property mortgages Regulatory trends The development of self-discipline in microfinancing is mainly about improving its transparency in order to win market trust, instead of relying on the endorsement of financial supervision. Lacking laws and regulations, P2P lending is conducting selfdiscipline. Currently, P2P lending institutions are planning to set up a Professional Committee under the board of directors of CAM to carry out research, identification, and information disclosure work and ensure the healthy development of P2P lending business through self-discipline, which will become a standard for the industry if it is accepted widely. There are five key aspects regarding self-discipline: Develop clear standards for P2P within the industry; Communicate client information within the industry and prevent borrowers from repeat lending and excessive levels of debt; Ensure the committee conducts certification of platforms; Provide transparent disclosure of financial knowledge and industry interest rates to borrowers to help them understand the financing costs of all platforms; Work together to obtain approval through laws, policies and regulations, and eventually obtain a license like third party payments. 15

16 Hot topics: the impact of interest rate liberalisation on the bond market and strategies for coping with it The process of interest rate liberalisation Floating of discount and rediscount interest rates Banks allowed to offer small business lending rates 20% above the official benchmark and rural credit cooperatives allowed to offer lending rates 50% above the official benchmark Floating interbank offered rate introduced Banks allowed to offer small business lending rates 20% above the official benchmark and rural credit cooperatives allowed to offer lending rates 50% above the official benchmark Introduction of floating retail deposit interest rates for the British pound, the Canadian dollar and the Swiss franc; ceiling imposed on the retail deposit interest rates of the US dollar, Japanese yen and HK dollar; and floor under foreign currency retail deposit interest rates removed Banks allowed to offer lending rates 20% below the official benchmark Banks allowed to offer borrowing rates 10% above the official benchmark Floating interbank bond repurchase rate and spot trading price introduced Tendered treasury bills introduced Approval granted to Chinese banks and insurance companies to negotiate interest rates for deposits of above RMB 30 million and with maturities of more Floor under RMB deposit interest rates removed Floating interest rates introduced for retail foreign currency deposits with maturities of more than one year Ceiling on RMB loan interest rates lifted and banks allowed to offer lending rates 10% below the official benchmark. Urban and rural credit cooperatives allowed to offer lending rates 130% above the official benchmark Banks allowed to offer individual housing loan interest rates 10%,15% and 30% below the official benchmark Launch of the loan prime rate centralised negotiation and offer system Large-denomination negotiable certificates of deposit issued and traded than five years 16

17 Hot topics: the impact of interest rate liberalisation on the bond market and strategies for coping with it (continued) The impact of interest rate liberalisation on the bond market It will have a negative impact on bond prices and reduce the demand for bond investment in the short term The launching of the loan prime rate centralised negotiation and offer system and the issuing and trading of certificates of interbank deposit mean that the process of interest rate liberalisation is accelerating. As the central bank maintains its tight monetary policy, the yields of bonds issued in RMB has been rising since Q and China s treasury bond yields reached a nine-year high in November Bond yields are expected to rise continuously and thereby reduce the demand for bonds. Furthermore, interest rate liberalisation will increase interest rate fluctuations during its early stages and therefore increase the risks of investing in bonds, which will result in reduced demand for bond products. It will increase the difference between the interest rates of short-term and long-term bonds Interest rate liberalisation will lead to structural adjustments in the bond yield curve by reflecting market factors such as market expectations and risk assessment due to the following reasons: Interest rate liberalisation will increase the issuance of short-term bonds and enhance their price discovery function Increasing the variety of innovative products in the market and improving the trading mechanism will help restore missing market functions, such as risk hedging and asset portfolios, and will help the market form reasonable expectations and risk assessments. This will be reflected in long-term bond yield rates, which will experience a relative increase. Interest rate liberalisation will lead to greater fluctuations in short-term bond interest rates and will influence the slope and curvature of the curve, exerting a greater influence on the latter than the former. The yield curve will become more concave. 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1 year Treasury bond yield curve 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years 31/12/ /12/ /12/ /03/

18 Hot topics: the impact of interest rate liberalisation on the bond market and strategies for coping with it (continued) The impact of interest rate liberalisation on the bond market (continued) It will improve the structure and functions of the bond market and increase its size in the long term. Interest rate liberalisation will enable the bond market to play a greater role in price discovery, asset portfolio and hedging functions and improve its breadth and depth. The impact will be seen in the following three aspects: 1 Growth of a uniform bond market. Currently, exchanges, the interbank market and counters co-exist with each other. Though there has been a gradual convergence in these markets with regard to investors and yield level, they are still divided with regards to such fundamental market conditions as clearing and settlement systems. The advance of interest rate liberalisation will promote the growth of a uniform bond market and lay a good foundation for a market-based interest rate. 2 Improvement of the functions of the bond market and its trading mechanism. As the interest rate becomes more market-based, investors will be more sensitive to it and its functions in price leverage will become more obvious. Investors will look for trading tools to hedge interest rate risks and make gains through interest rate fluctuations. All this will improve the trading mechanism and help restore some of the missing market functions. 3 Improvement of the bond market s pricing function, as well as the creation of a more proper, diversified and stratified market structure with regard to its main body, products and yield. The size of the bond market will expand and the supplies of bond products will increase when the structure and functions of the market are improved. The liquidity and investment value of the market will also increase, resulting in greater demand for bond products. The bond market will therefore grow larger in the long run. However, changes in bond interest rate are subject to the influence of various uncertain factors, such as future economic conditions, inflation, liquidity premiums and returns on investment. Long-term interest rate trends will depend on how these factors interact with each other. 18

19 Hot topics: the impact of interest rate liberalisation on the bond market and strategies for coping with it (continued) Strategies for commercial banks to cope with its impact Set up credit bond pricing models On the one hand, interest rate liberalisation will intensify financial disintermediation. On the other, rising returns on deposits will increase commercial banks demand for high-yield bonds. As a result, a higher level of issuance of credit bonds will be seen in the future, especially corporate bonds. Setting up credit bond pricing models will lay an important foundation for commercial banks to ensure safety and steady growth in the bond investment business. Currently, China s credit rating system is still in the development stage and not much reliance is placed on its rating agencies. It is difficult to meet commercial banks demand for investment profit and risk management by depending on foreign rating agencies to price credit bonds. It is therefore of vital importance for commercial banks to make use of their own professional expertise and resource advantages to set up uniform and comprehensive internal credit rating systems based on their credit assets, which will enable them to assess risk-adjusted returns on investment in bonds in order to ensure safety. Furthermore, commercial banks might find it worthwhile to try setting up credit bond pricing models based on their business, the quality of their assets and their risk preferences, and in conformity with the internal credit risk rating system laid out in Guidance for the Capital Management of Commercial Banks. However, the fact that there is not enough historical data about the bond market and almost no data about bond market defaults will result in challenges with regards to the accuracy of the models. Introduce innovative interest rate hedging instruments With the advance of interest rate liberalisation, financial institutions will face increasing interest rate risks. They are bound to implement proactive interest rate risk management strategies, adopt interest rate risk hedging instruments and develop interest rate swaps, interest rate forwards, total return swaps, credit default swaps and other hedging instruments in order to maximise earnings while making sure that risks are kept under control. 19

20 Hot topics: corporate bond default On 5 March 2014, Shanghai Chaori Solar Energy Science and Technology Co., Ltd. (Chaori Solar Energy) issued a notice saying that it was unable to make full payment of the current interest of the bond due on 7 March 2014 and that only RMB 4 million of the total amount could be paid on that day. 11 Chaori Solar bond has symbolic significance as the first case of material breach in the bond market. Short-term impact: It has broken the unspoken rule that fixed income products must not fail to be redeemed, which will change investors expectations and force market players to enhance their risk awareness It will have an obvious impact on the prices of high-yield bonds issued by companies in high-risk industries or industries with excess capacity. Market players investing in highrisk assets will soon be faced with risk aversion. It will make it more difficult for SMEs to raise capital and will increase borrowing costs for privately-owned enterprises Long-term impact: It will affect the conditions for issuing bonds and favour the survival of the fittest, not only in the bond market but also in the whole capital market, by promoting healthy competition. The unspoken rule that fixed income products must not fail to be redeemed has distorted the market pricing system. The system will be able to right itself now that the rule has been broken, which in turn will improve the capital pricing system. It will enhance investors risk awareness and their ability to identify risks. This will create more rational and mature investors and systemic risks will therefore be reduced. More importance will be attached to credit rating, which in turn will promote healthy competition in the credit rating industry, help develop the industry and enable it to play a more efficient role in exposing risks. It will favour the development of such derivative products as CRM by driving investors demand for risk hedging and turning their attention to such derivative products as CRM. It will oblige regulatory authorities to make improvements to relevant laws, which is conducive to the creation of a healthy bond market. 20

21 Hot topics: corporate bond default (continued) In the current economic environment, financial institutional investors are recommend to take the following actions: pay attention to bonds issued by privately-owned enterprises in high-risk industries and with unsatisfactory performance; take more proactive measures to monitor issuer s default risk, e.g. periodically conduct the site visit, rather than just relying on the credit rating report; develop more powerful risk monitoring and warning system, which need consider both financial indicators and non-financial indicators, including industry, financial condition, debt-paying abilities, cash flow analysis, tacit support provided by local government; change in the utilization of liquidity facility; involvement in private lending; other financial institutions judgment on the same issuer, (e.g. rejecting its loan application). 2% Manufacturing 制造业综合类 General 建筑业 Farming, forestry, animal 农 林 牧 渔业采掘业 Mining husbandry and fishery Information technology 信息技术业 0% 1% 0% 4% 1% 6% 4% 2% 6% 14% 批发和零售贸易 Transportation & Warehousing 交通运输 仓储业社会服务业 Social services Communication 传播与文化产业 & Culture 房地产业 Real estate 其他 Construction Wholesale & Retail Others 60% In conclusion, bonds issued by privately-owned enterprises in high-risk industries and with unsatisfactory performance are subject to greater default risk. According to Wind Info, as at 31 March 2014, real estate, mining and construction accounted for 4.04%, 5.54% and 2.26%, respectively, of the total amount of issued bonds classified by industry. 21

22 Hot topics: advanced methods of capital management China Banking Regulatory Commission (CBRC) recently approved six banks, ICBC, ABC, BOC, CCB, BoCom and CMB, to implement advanced methods of capital management in accordance with Administrative Measures for the Capital of Commercial Banks (Trial) (hereinafter referred to as the "Capital Measures ). The implementation of advanced methods will drive the transformation of the risk management in China s banking industry from a purely qualitative basis to a qualitative and quantitative basis. This will help banks to improve risk management, offer more effective policy support for business operations and management, implement organic integration of risk, business and capital, and accelerate the change of development and operational models. The scope of approval CBRC s approval for implementation of advanced methods of capital management shall be made at both the level of the banking group and the level of a single legal entity. The detailed scope of approval includes Pillar 1 internal rating approaches for credit risk, internal model approaches for market risk, and standard approaches for operational risk. Six banks are required to calculate riskweighted assets and capital adequacy ratio based on advanced methods. The policy for parallel running period after the implementation of advanced methods of capital management The challenge of implementing advanced methods of capital management After advanced methods of capital management are approved, management needs to consider how to determine the coverage of advance measurement approaches and the boundaries for risk exposures beyond the standards previously used. This will be a key factor for calculating capital in a complete and correct way. As a system model is applied in an advanced capital measurement approach, the data source for calculating the capital adequacy ratio will increase the system data. Therefore, much attention should be paid to it when manual data is used with system data in consolidation. The CBRC will set a parallel running period for commercial banks approved to implement advanced capital measurement approaches, according to the requirements of the Capital Measures. During the parallel running period, the commercial bank should calculate capital adequacy ratio in accordance with advanced capital measurement approaches and other approaches, and comply with relevant minimum capital requirements. This means that banks that are approved to adopt advanced methods of capital management not only need to calculate capital under these methods, but also calculate risk-weighted assets in accordance with the Capital Measures in order to calculate the capital minimum. All the banks also need to calculate Capital Adequacy Ratio at the level of the banking group and the level of a single legal entity in accordance with the Measures for the Management of Capital Adequacy Ratios of Commercial Banks until After the approval for advanced methods of capital management, all departments in the banks should coordinate with each other to continuously check and verify the advanced capital measurement approach and its supporting systems in order to achieve the objectives of strengthening the stability and reliability of the advanced capital measurement approach, facilitating the improvement of methods and systems, and ensuring that capital accurately reflects risks. Applying an advanced capital measurement approach requires management to calculate six versions of the capital adequacy ratio, including under the new and old measures, and at the level of banking groups and a single legal entity. The verification of multiple relationships between different versions and analysis of the changing trends for capital adequacy ratio under different versions are areas that all banks should pay attention to. 22

23 Hot topics: Replacing business tax with value-added tax in the banking industry China s value-added tax reform progress Tib et Beijing Jian gxi Fuji an Tianjin Anhui Jiangsu Shanghai Zhejiang Fujian Since January 2012, Shanghai has been the first pilot zone for the tax reform program to replace business tax with value-added tax. Since the reform programme s initial launch in the transportation industry and some of the modern service industries in Shanghai, other provinces and cities, such as Beijing, Guangdong and Tianjin, have also begun to introduce VAT tax reform. It has gradually been expanded to the postal industry, the railway transportation industry and the telecom industry, and will be further extended to the finance and insurance industry in Guangdong Hubei 23

24 Hot topics: Replacing business tax with value-added tax in the banking industry (continued) Treatments for operations after replacing business tax with value-added tax Current operations Current treatment under business tax regime Possible treatment under valueadded tax regime Financial products trading Engaging in investment activities (e.g. financial products trading) and profiting from the fluctuation of their fair value From 1 December 2013, business tax for different types of financial products is charged after their profit and loss being offset in the same period. Tax exempt. Balanced taxing. The previous method to calculate the profit and loss by categorising four major types of financial products no longer applies. Direct charge business Business that profits from directly charging service fees (e.g. handling charges) Five percent of total handling charge income shall be paid as business tax. Value-added tax will be charged by the general taxation method. Value-added tax may be charged for other service fee income acquired by financial institutions. Value-added tax may be charged for brokerage services, such as stock brokerage and mortgage brokerage, as well as consulting services and agency services. The tax scope may also include the service fee for payment systems. General lending and borrowing Bank operations other than inter-bank transactions Business tax is charged for five percent of interest income from financial intermediary services provided by domestic banks, with a tax basis of the total interest income (including additional fees and charges, if any), from which the turnover tax for relevant cost and expenditure is not deductible. In addition, business tax will be charged for the acquired interest income from lenders or borrowers that are Chinese entities or citizens. The most probable tax rate is six percent. The general simplified method for taxation may be applied, i.e. the service provider cannot offset the input tax by deposit interest payment but can offset the input tax arising from purchasing other dutiable goods and services, while the service receiver can offset the input tax by loan interest payment. 24

25 Hot topics: Replacing business tax with value-added tax in the banking industry (continued) Treatments for operations after replacing business tax with value-added tax Inter-bank transactions Cross-border borrowing Cross-border lending Current operations Providing services to or cooperating with other financial institutions for the purpose of inter-bank financing Borrowing by Chinese entities or citizens from overseas banks Lending by Chinese domestic banks to overseas borrowers Current treatment under business tax regime Under the current business tax regime, income arising from interbank transactions is tax free As long as the borrowers are Chinese entities or citizens, the overseas banks shall pay business tax for the interest income acquired in China Five percent of interest income acquired by domestic banks for providing financial services to overseas entities or persons shall be paid as business tax. Possible treatment under valueadded tax regime Value-added tax may be charged for inter-bank transactions. The financial and taxation authorities are considering whether inter-bank transactions are deposits or loans. The reverse charge model used in many countries (e.g. Australia and European countries) may be applied to replace the current withhold and remit model. Under the reverse charge model, the domestic service receiver pays valueadded tax based on the paid service fee while deducting the input tax according to the paid value-added tax. Zero tax rate may be applied to reduce the additional cost for the domestic banks in order to ensure their high competiveness in the international market. 25

26 Q1 economy and finance 26

27 In 2014 Q1, faced with a severe and complex economic environment, the Chinese government continued to push forward reform and innovation, focusing on economic restructuring and the improvement of people s livelihoods; generally speaking, the national economy performed well and enjoyed a good start to the year. Agricultural production remained steady, while industrial manufacturing growth began to drop off; fixed asset investment growth slowed down from an elevated level; market sales grew steadily; there was a minor fall in imports, and exports experienced a dropoff compared to last year; CPI remained steady; the incomes of urban residents grew rapidly; economic restructuring achieved positive progress; and money and credit grew steadily Q1 economy and finance Q1 data analysis Q1 GDP growth slowdown: From a preliminary calculation, China s GDP in 2014 Q1 was RMB trillion, a year-on-year increase of 7.4 percent at comparable prices. GDP growth continued to slow. In terms of the performance of different industry sectors, the added values of the primary sector, the secondary sector and the tertiary sector amounted to RMB trillion, RMB trillion and RMB trillion, respectively, representing year-on-year increases of 3.5, 7.3 and 7.8 percent. A major drop-off in export growth and a minor fall in imports: In 2014 Q1, export and import value amounted to USD trillion, a yearon-year decrease of one percent; trade balance (exports minus imports) was USD billion, a year-on-year decrease of percent. Steady growth in consumption: Total retail sales of consumer goods in 2014 Q1 reached RMB trillion, a nominal increase of 12 percent (10.9 percent in real terms). Overview of key macroeconomic indicators Unit 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 GDP YoY(%) CPI YoY(%) PPI YoY(%) Industrial added value YoY(%) Total retail sales of consumer goods YoY(%) Fixed asset investment YoY(%) Exports YoY(%) Imports YoY(%) Trade surplus USD 100 million M2 YoY(%) RMB loan growth YoY(%) Source: Wind Info 27

28 2014 Q1 economy and finance Monetary expansion and national economic output RMB 100 million Money supply and inflation rate 货币供应量及通胀率 1,400,000 1,200,000 1,000, , , , , CPI 货币流通速度 Velocity of money January 2012 March 2012 May 2012 July 2012 September 2012 November 2012 January 2013 March 2013 May 2013 July 2013 September 2013 November 2013 January 2014 March M2/ GDP Q1 M2 M2 balance 余额 CPI 指数 Source: Wind Info The CPI growth rate in 2014 Q1 was 2.3 percent. The urban CPI grew by 2.4 percent and the rural CPI by two percent. Specifically, food prices increased by 3.5 percent YoY; prices for tobacco, liquor and articles decreased by 0.7 percent; clothing prices increased by 2.2 percent; prices for household equipment and maintenance services rose by 1.3 percent; prices for medical and personal care products rose by 1.1 percent; prices for transportation and communication fell by 0.2 percent; prices for entertainment and educational products and services rose by 2.5 percent; and house prices increased by 2.7 percent. At the end of March 2014, the broad money (M2) balance was RMB trillion, a year-on-year increase of 12.1 percent; the RMB loan balance was trillion, a year-on-year increase of 13.9 percent; the RMB deposit balance was trillion, a year-on-year increase of 11.4 percent. In 2014 Q1, the RMB loan increment was 3.01 trillion, a year-on-year increase of RMB trillion; the RMB deposit increment was 4.72 trillion, a year-on-year decrease of 1.39 trillion, indicating an easing in the growth of RMB deposits. At the end of March 2014, the narrow money (M1) balance was RMB trillion, a year-on-year increase of 5.4 percent; the balance of currency in circulation (M0) was RMB 5.83 trillion, a year-on-year increase of 5.2 percent. In 2014 Q1, total social financing was 5.60 trillion, a year-on-year decrease of RMB trillion. Compared to 2013, the ratio of new broad money to economic added value in 2014 Q1 remained relatively high, indicating that the efficiency of new money still fell short. 28

29 2014 Q1 economy and finance Operating performance China Manufacturing PMI China Manufacturing PMI sub-index Production 生产 供应商配送时间 Lead time 新订单 Fresh order January 2012 年 月 March 2012 年 月 2012 May 年 月 2012 July 年 月 September 2012 年 月 November 2012 年 月 January 2013 年 月 March 2013 年 月 2013 May 年 月 2013 July 年 月 September 2013 年 月 November 2013 年 月 January 2014 年 月 March 2014 年 月 Employee 从业人员 原材料库存 Raw material inventory March 2014 年 月 December 2013 年 12 月 September 2013 年 9 月 June 2013 年 月 March 2013 年 月 Source: National Bureau of Statistics of China In general, the national economy was running normally in 2014 Q1, with positive progress in economic restructuring and upgrading. However, the results also indicate that the economic environment is still complex and ever-changing, and that the domestic economy is still subject to a certain level of downward pressure. In March 2014, China s manufacturing PMI was 50.3 percent, a slight increase of 0.1 percentage points compared to the previous month and the first rebound since November last year, indicating smooth growth of China s manufacturing sector; specifically, the PMI of large enterprises was 51.0 percent, 0.3 percentage points higher than in the previous month, and remained above the breakeven mark; the PMI of medium-sized enterprises was 49.2 percent, 0.2 percentage points lower than in the previous month; and the PMI of small enterprises was 49.3 percent, 0.4 percentage points higher than in the previous month, and the highest point since August 2013, but still below the break-even mark. The fresh order index was 50.6 percent, 0.1 percentage points higher than in the previous month and still above the break-even mark, reflecting the rebound of manufacturing market demand. The production index was 52.7 percent, 0.1 percentage points higher than in the previous month, and remained above the break-even mark, signifying the continuous growth of domestic production and the solidification of the positive development trend of large and medium-sized enterprises. The business activities expectation index was 62.7 percent, 0.9 percentage points higher than in the previous month, and had stayed above the break-even mark for three consecutive months, indicating manufacturers positive outlook for business activities for the next three months. 29

30 2014 Q1 economy and finance Operating performance (continued) Industrial 工业生产运行情况 production YoY 累计主营业务收入与利润总额同比增速 growth of accumulative operating income from principal activities and total profit Feb 年 月 2012 Mar 年 月 2012 Apr 年 月 2012 May 年 月 2012 Jun 年 月 2012 Jul 年 月 2012 Aug 年 月 2012 Sept 年 月 2012 Oct 年 月 2012 Nov 年 月 2012 Dec 年 2012 月 2013 Jan 年 月 2013 Feb 年 月 2013 Mar 年 月 2013 Apr 年 月 2013 May 年 月 2013 Jun 年 月 2013 Jul 年 月 2013 Aug 年 月 2013 Sept 年 月 2013 Oct 年 月 2013 Nov 年 月 2013 Dec 年 月 2014 Jan 年 月 2014 Feb 年 月 2014 Mar 年 月 Feb 2012 Apr 2012 Jun 2012 Aug 2012 Oct 2012 Dec 2012 Mar 2013 May 2013 Jul 2013 Sept 2013 Nov 2013 Feb 2014 工业增加值 Monthly industrial : 当月同比 added value growth year on year 发电量 Monthly : 当月同比 power generation growth year on year Growth 主营业务收入增速 of operating (%) income 利润总额增速 Growth of total (%) profit (%) from principal activities (%) Source: Wind Info and National Bureau of Statistics of China In 2014 Q1, the added value of the above-scale industry grew by 8.7 percent year on year at comparable prices and the rate of increase was 0.8 percentage points lower than in the same period last year. State-owned and state-holding enterprises, collective enterprises, joint-stock enterprises, foreign-invested and Hong Kong, Macau and Taiwan invested enterprises grew by 4.5%, 3.1%, 10.0% and 7.8%, respectively. As for specific industries, the mining industry, the manufacturing industry and the production and supply of electricity, heat, gas and water grew by 3.3, 9.9 and 4.5 percent year-on-year, respectively. In terms of regions, the eastern region grew by 8.1 percent year-on-year, the central region by 8.9 percent and the western region 10.4 percent. The current period inventory of above-scale industrial enterprises in 2014 Q1 reached 97.1 percent, 0.1 percentage points lower than in the same period last year. In 2014 Q1, the operating income from principal activities of above-scale industrial enterprises was RMB trillion, a year-on-year increase of eight percent; the cost of operating income from principal activities was RMB trillion, a year-on-year increase of 8.7 percent; the increase in cost was slightly higher than that in income; above-scale industrial enterprises realised profits of RMB trillion, an increase of 10.1 percent year-on-year; and profit from principal activities amounted to RMB trillion, an increase of 9.4 percent year-on-year. In 2014 Q1, the mining industry realised profits of RMB billion, a year-on-year decrease of 15.1 percent; the manufacturing industry gained profits of RMB trillion, a year-on-year increase of 13.9 percent; and the production and supply of electricity, heat, gas and water achieved profits of RMB billion, an year-on-year increase of 29.7 percent. 30

31 2014 Q1 economy and finance Dynamics of money and bond market interest rates Money market rate 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Jan 2012 April 2012 July 2012 Oct2012 Jan 2013 银行间回购加权利率 Weighted repo rate: :77 天 SHIBOR:3 个月 央行票据到期收益率 Yield to maturity of :1 年 days months central bank bills: 1 year The yield to maturity of one-year central bank bills in 2014 Q1 was basically at the same level as that of the same period last year, with an increase of about 0.63 percentage points; at the end of March, the above-mentioned yield to maturity was 3.5 percent, 0.81 percentage points lower than at the end of December last year. In 2014 Q1, the RMB/USD exchange rate experienced a depreciating trend and trading was active, while the fluctuation range of the RMB/USD exchange rate was expanded to two percent, resulting in larger single day fluctuations; direct trading between the RMB and the New Zealand Dollar was launched and active transactions were seen; and the prices of foreign exchange derivatives remained low, while the volatility of options rose. Compared to the beginning of the year, the overnight SHIBOR rate, one-week SHIBOR rate and one-month SHIBOR rate at the end of March was down 33 basis points, 80 basis points and 129 basis points, to 2.80, 4.18 and 4.62 percent, respectively. Multiple factors, such as continued monetary easing, weak economic fundamentals and the fund allocation demand of entities at the beginning of the year contributed to the recovery of the bond market. The overall treasury yield curve has moved down from that at the beginning of the year. At the end of March, the yield to maturity of three-year and seven-year treasury bonds in the inter-bank market were 3.82 and 4.34 percent, down 58 basis points and 25 basis points, respectively, from the beginning of the year. April 2013 July 2013 Oct 2013 Jan 2014 Bond yield 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Jan Apr Jul Oct Jan Apr Jul Oct Jan Yield 交易所固定利率国债到期收益率 to maturity of fixed-rate treasury :1 年 bonds issued by an exchange: 1 year Yield 交易所固定利率国债到期收益率 to maturity of fixed-rate treasury :5 年 bonds issued by an exchange : 5 years Yield 交易所固定利率企业债到期收益率 to maturity of fixed-rate corporate (AAA):1 bonds 年 issued by an exchange: (AAA): 1 year Yield 交易所固定利率企业债到期收益率 to maturity of fixed-rate corporate (AAA):5 bonds 年 issued by an exchange (AAA): 5 years In 2014 Q1, after three seasons of consecutive decline, the inter-bank bond market finally had a chance to revive. With the anticipated improvement of funding and regulators reinforced examination for nonstandard investment, the money started to flow back into the bond market. The market funding experienced some very stressful situations last June and at the end of last year. Just before the 2014 spring festival, People s Bank of China conducted a number of reserve operations to relax the funding market, such as executing reverse repurchases one week before the spring festival. As a result, the overall funding situation at the time of the spring festival was smooth and steady. With the subsequent money backflow, inter-bank funding was fully relaxed, reflected by the short-term interest rate declining to the lowest point in several years and the interest rate of the inter-bank seven-day pledge-style repo remaining below three percent in March. In conclusion, the funding situation was looser than in 2013 Q4, which was also a key driving force in the decline of bond yields. Source: Wind Info 31

32 2014 Q1 economy and finance Residential housing Growth of saleable area, floor space completed and under construction 80% 60% 40% 20% Housing price indexes of 100 cities % % -40% Feb 2012 Apr 2012 Jun 2012 Aug 2012 Oct 2012 Dec 2012 Feb 2013 Apr 2013 Jun 2013 Aug 2013 Oct 2013 Dec 2013 Feb Jan 2012 Mar 2012 May 2012 Jul 2012 Sept 2012 Nov 2012 Jan 2013 Mar 2013 May 2013 Jul 2013 Sept 2013 Nov 2013 Jan 2014 Mar 2014 New floor space under construction: 房屋新开工面积 : 累计同比 cumulative year-on-year growth Saleable 商品房销售面积 area of : commodity 累计同比 housing: cumulative year-on-year growth Floor space completed: 房屋竣工面积 : 累计同比 cumulative year-on-year growth 一线城市 First-tier cities: : 同比二线城市 Second-tier : 同比 cities: 三线城市 Third-tier : cities: 同比 year on year year on year year on year Source: Wind info In 2014 Q1, national real estate investment amounted to RMB trillion, a nominal year-on-year increase of 16.8 percent (15.5 percent in real terms). Residential housing investment grew by 16.8 percent. The new floor space under construction was 290,900,000 square metres, a year-on-year decrease of 25.2 percent; and the new construction area for residential housing fell by 27.2 percent. The saleable area of commodity housing was 201,110,000 square metres, a year-on-year decrease of 3.8 percent, among which the saleable area for residences fell by 5.7 percent. The total sales of commodity housing reached RMB trillion, a year-on-year decrease of 5.2 percent, among which residential housing sales dropped by 7.7 percent. The land purchase area of the real estate developers reached 59,900,000 square metres, a year-on-year decrease of 2.3 percent. At the end of March, the available-for-sale area of commodity housing was 521,630,000 square metres, a year-on-year increase of 22.9 percent. In 2014 Q1, the paid-in capital of the real estate developers amounted to RMB trillion, a year-on-year increase of 6.6 percent. In 2014 Q1, the growth of sales of commodity and residential housing slowed down compared to the same period last year, but its absolute level was still at a historic high. The high level of the available-for-sale area is resulted in a major decline in new floor space under construction. In addition, the slowdown in saleable area growth led to diversification in the supply and demand balance in different cities. The short supply situation in popular cities therefore began to ease and oversupply risk began to emerge in third- and fourth-tier cities, and even in second-tier cities. Price rises for newly built commodity housing in 100 cities gradually shrank, while those in first-tier cities still led the market. Affected by the high cardinal number of the previous year, the sales growth of both commodity and residential housing in Q1 declined compared to that of the same period last year, but its absolute level was still at a historic high. It should be noted that while commodity housing sales declined, commercial housing sales grew, with a 6.0% year-on-year increase in saleable area and a 7.9% year-on-year increase in sales volume. 32

33 2014 Q1 economy and finance Government finance Monthly fiscal balances (RMB 100 million) 20, , , , Fiscal revenue and GDP (RMB 100 million) 600, , , ,000 80,000 70,000 60,000 50,000 40,000-5, , , , ,000 30,000 20,000 10,000-20, January 2012 February 2012 March 2012 April 2012 May 2012 June 2012 July 2012 August 2012 September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 年 1 月 2012 年 2 月 2012 年 3 月 2012 年 4 月 2012 年 5 月 2012 年 6 月 2012 年 7 月 2012 年 8 月 2012 年 9 月 2012 年 10 月 2012 年 11 月 2012 年 12 月 2013 年 1 月 2013 年 2 月 2013 年 3 月 2013 年 4 月 2013 年 5 月 2013 年 6 月 2013 年 7 月 2013 年 8 月 2013 年 9 月 2013 年 10 月 2013 年 11 月 2013 年 12 月 2014 年 1 月 2014 年 2 月 2014 年 3 月 财政收支差额 Fiscal balance : 当月值 of payments: value of the current month April 2013 May 2013 June 2013 July 2013 August 2013 September 2013 October 2013 November 2013 December 2013 公共财政收入 Public revenue: : 当月值 value of the current month January 2014 February 2014 March 年 年 年 年 年 年 年 年 GDP 中央财政收入 Central fiscal Local 地方财政收入 fiscal revenue revenue Source: Ministry of Finance In 2014 Q1, national fiscal revenue amounted to RMB trillion, a year-on-year increase of RMB billion, or 9.3 percent: central fiscal revenue reached RMB trillion, a year-on-year increase of 6.4 percent; local fiscal revenue totalled RMB trillion, a year-on-year increase of 11.8 percent. National fiscal expenditure in 2014 Q1 amounted to RMB trillion, a year-on-year increase of RMB billion, or 12.6 percent: central fiscal expenditure totalled RMB billion, a year-on-year increase of 8.4 percent; local fiscal expenditure reached RMB trillion, a year-on-year increase of 13.3 percent. National fiscal revenue in 2014 Q1 grew by 9.3 percent, with successive monthly falling rates of increase of 13, 8.2 and 5.2 percent. Central fiscal revenue grew by 6.4 percent, 0.6 percentage points lower than the budgeted target of seven percent. 33

34 2014 Q1 economy and finance Foreign trade and exchange rate Import and export trade Bank valet exchange settlement and sale and exchange rate 2,500 2,000 1,500 1, Jan 年 月 2012 Feb 年 月 2012 Mar 年 月 2012 Apr 年 月 2012 May 年 月 2012 Jun 年 月 2012 Jul 年 月 2012 Aug 年 月 2012 Sept 年 月 2012 Oct 年 月 2012 Nov 年 月 2012 Dec 年 2012 月 2013 Jan 年 月 2013 Feb 年 月 2013 Mar 年 月 2013 Apr 年 月 2013 May 年 月 2013 Jun 年 月 2013 Jul 年 月 2013 Aug 年 月 2013 Sept 年 月 2013 Oct 年 月 2013 Nov 年 月 2013 Dec 年 月 2014 Jan 年 月 2014 Feb 年 月 2014 Mar 年 月 Trade balance: Value of exports: Value of imports: value 贸易差额 of the : 当月值出口金额 value of the : 当月值 value 进口金额 of the : 当月值 current month current month current month 2,500 2,000 1,500 1, Jan 年 月 2012 Feb 年 月 2012 Mar 年 月 2012 Apr 年 月 2012 May 年 月 2012 Jun 年 月 2012 Jul 年 月 2012 Aug 年 月 2012 Sept 年 月 2012 年 Oct 月 2012 Nov 年 月 2012 Dec 年 月 2013 Jan 年 月 2013 Feb 年 月 2013 Mar 年 月 2013 Apr 年 月 2013 May 年 月 2013 Jun 年 月 2013 Jul 年 月 2013 Aug 年 月 2013 Sept 年 月 2013 年 Oct 月 2013 Nov 年 月 2013 Dec 年 月 2014 Jan 年 月 2014 Feb 年 月 2014 Mar 年 月 Bank valet exchange settlement and 银行代客结售汇顺差 sale surplus: value : 当月值 of the current month 银行代客售汇 Bank valet exchange : 当月值 sale: value of the current month Source: Wind info 银行代客结汇 Bank valet exchange : 当月值 settlement: value of the current month 平均汇率 Mid-point-rate: : 美元兑人民币 dollar against RMB In 2014 Q1, the value of imports and exports amounted to USD billion, a year-on-year decrease of one percent. The value of exports was USD billion, a year-on-year decrease of 3.4 percent; the value of imports was USD billion, a year-on-year increase of 1.6 percent; and the trade surplus was USD billion. In March, the value of imports and exports was USD billion, a year-on-year decrease of nine percent: the value of exports was USD billion, a year-on-year decrease of 6.6 percent; the value of imports was USD billion, a year-on-year decrease of 11.3 percent. In 2014 Q1, bank valet exchange settlement and sales added up to USD billion and USD billion, respectively. Thus, the valet exchange settlement and sales surplus added up to USD billion. Compared to 2013 Q4, the exchange rate of the RMB against the USD gradually depreciated in 2014 Q1, with the monthly average exchange rate of the USD against the RMB rising from to

35 03 Analysis of 2014 Q1 financial data of listed banks As at 31 April 2014, sixteen A-share listed banks (the 16 banks) had published their 2014 Q1 reports: Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agricultural Bank of China (ABC), Bank of Communications (BOCOM), China Merchants Bank (CMB), China CITIC Bank (CNCB), China Minsheng Bank (CMBC), Shanghai Pudong Development Bank (SPDB), Industrial Bank Co., Ltd. (CIB), China Everbright Bank (CEB), Ping An Bank (PAB), Hua Xia Bank (HXB), Bank of Beijing (BOB), Bank of Nanjing (BON) and Bank of Ningbo (NBCB). 35

36 Analysis of 2014 Q1 financial data of listed banks Profitability Net profit attributable to equity holders of the parent company RMB million As at 31 March 2014, net profit attributable to equity holders of the parent company experienced slower growth than during the same period in 2013, falling from 13 to 12 percent. 350, , , , , , , , ,352 13% 12% 307,083 The first quarter of 2014 The first quarter of % 10% 5% 0% Net profit attributable to equity holders of the parent company growth rate As at 31 March 2014, net profit attributable to equity holders of the parent company of all 16 banks had increased. PAB had the highest rate of increase at 41 percent, while SPDB, CIB and HXB all achieved growth rates of above 20 percent. CEB had the lowest rate of increase at 3 percent. In general, net profit grew more slowly than in the previous year. Source: The banks 2013 & 2014 Q1 report, KPMG China research 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - RMB million 73,302 7% 65,780 10% 45,363 14% 53,430 16% 14% 20% 22% 15% 15% 18,690 14,945 10,706 12,676 13,363 6% 10,710 8,167 26% 41% 3,722 5,054 4,522 3% 10% 19% 18% 1,420 1,502 ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB The first quarter of 2014 The first quarter of 2013 growth rate 36 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

37 Analysis of 2014 Q1 financial data of listed banks Profitability Financial performance indicator As at 31 March 2014, return on weighted average equity (ROE) of some banks had increased, while the other banks had decreased. CEB, CMB and CMBC had a higher rate of decrease, while HXB, PAB and BON had a higher rate of increase. CIB recorded the highest ROE rate of percent. 30% 25% 20% 15% 10% 5% 0% 26.00% 24.47% 24.80% 25.80% 26.93% 23.71% 25.11% 22.27% 24.52% 25.04% 21.72% 22.72% 24.28% 21.79% 23.89% 19.14% 20.36% 20.62% 21.68% 20.64% 18.73% 22.32% 17.44% 19.56% 17.00% 17.64% 18.86% 18.22% 18.40% 15.48% 15.61% 18.84% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Return on weighted average equity The first quarter of 2014 Return on weighted average equity The first quarter of 2013 As at 31 March 2014, CIB had the highest rate of EPS at RMB 0.70, which was RMB 0.16 lower than during the same period of the prior year, followed by CMB at RMB 0.59, representing an decrease of RMB 0.01 from the same period of RMB ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB 0.20 Earning per share The first quarter of 2014 Earning per share The first quarter of 2013 Source: The banks 2013 & 2014 Q1 report, KPMG China research 37

38 Analysis of 2014 Q1 financial data of listed banks Profitability Financial performance indicator (continued) As at 31 March 2014, the net asset value per share of all 16 banks increased compared with the same period in PAB had the highest rate at RMB 12.32, an increase of RMB 0.55 over the previous year. RMB ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Net asset value per share 31/03/2014 Net asset value per share 31/12/2013 Thirteen banks experienced a drop in their share price in the first quarter of 2014 compared with 2013, while that of three banks rose. PAB suffered a drop of as much as 12 percent, while CNCB had the highest rise of 20 percent. RMB ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Closing price 31/03/2014 Closing price 31/12/2013 Source: The banks 2013 & 2014 Q1 report, KPMG China research 38

39 Analysis of 2014 Q1 financial data of listed banks Profitability Operating income and income structure analysis Components of operating income in the first quarter of 2014: Net interest income accounted for percent, a 2.37 percentage points drop compared to the same period in the previous year; Net fee and commission income accounted for percent, increasing by 0.69 percentage points compared to the same period in the previous year. The increase mainly resulted from the development of clearing and settlement services, bank cards, investment banking and wealth management business. Interest income on investment accounted for 2.33 percent, increasing by 1.14 percentage points compared to the same period in the previous year. Other operating income accounted for 4.55 percent, an increase of 0.54 percentage points compared to the same period of the prior year. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4.55% 4.01% 2.33% 1.19% 22.01% 21.33% 71.11% 73.48% The first quarter of 2014 The first quarter of 2013 Net interest income Net fee and commission income Investment income Other operating income Note:Interest income on investment includes interest income on investment and gain or losses on fair value changes. Source: The banks 2013 & 2014 Q1 report, KPMG China research 39

40 Analysis of 2014 Q1 financial data of listed banks Profitability Operating income and income structure analysis (continued) As at 31 March 2014, all 16 banks had experienced an increase in operating income. PAB recorded the highest increase, caused by substantial rises in net interest income and net fee and commission income, followed by CMB, which enjoyed substantial increases in net interest income. 200, , ,000 50,000 - RMB million 162, , ,100 49% 147,351 32% 37% 15% 44,728 24% 25% 20% 17% 14% 40,871 17,939 11% 14% 29,800 31,231 27,602 28,602 14% 12,262 10% 16,100 8,830 6% 8% 7% 3,425 3,530 ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Operating income The first quarter of 2014 Operating income The first quarter of % 50% 40% 30% 20% 10% 0% As at 31 March 2014, all 16 banks had experienced an increase in net interest income, with PAB and BON enjoying the highest growth rate, caused by increases in interest-earning assets and net interest margin. As at 31 March 2014, all 16 banks had experienced an increase in net fee and commission income. Joint stock banks recorded a higher increase, and some banks achieved growth rates of above 50 percent. PAB enjoyed an increase of 91 percent due to its fast-growing investment banking, asset custody business, and net fee and commission income of wealth management business, clearing and bank cards. RMB million 140, , ,000 80,000 60,000 40,000 20,000 - Source: The banks 2013 & 2014 Q1 report, KPMG China research 14% 16% 17% 16% 12% 14% 11% 11% 9% 5% 6% 5% 1% 0% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Net interest income The first quarter of 2014 Net interest income The first quarter of 2013 Growth rate RMB million 45,000 40,000 91% 72% 35,000 80% 30,000 68% 69% 25,000 58% 20,000 41% 15,000 34% 10,000 22% 17% 22% 24% 5,000 11% 11% 5% 9% - ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Net fee and commission income The first quarter of 2014 Net fee and commission income The first quarter of 2013 Growth rate 33% 33% 35% 30% 25% 20% 15% 10% 5% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 40

41 Analysis of 2014 Q1 financial data of listed banks Profitability The average proportions of net fee and commission income and interest on investment income in the 2014 Q1 operating income of the 16 banks stood at percent and 2.33 percent, respectively. Net interest income accounted for the highest proportion of operating income. Operating income and income structure 2014 Q1 4.69% 7.21% 2.97% 7.48% 3.27% 6.05% 0.82% 0.92% 0.95% 1.49% 1.15% 3.27% 4.26% 3.41% 3.76% 0.04% 100% 1.36% 11.02% 5.59% 2.05% 7.89% 8.30% 3.09% 23.17% 19.76% 21.80% 17.08% 20.70% 24.13% 28.41% 27.90% 18.16% 14.15% 9.21% 80% 22.07% 22.84% 19.92% 19.61% 12.20% 20.35% 60% 40% 20% 0% -20% Operating income and income structure analysis (continued) 18.20% 71.22% 70.04% 63.70% 75.78% 72.17% 64.06% 74.28% 67.87% 78.41% 74.24% 72.91% 84.18% 71.74% 75.94% 83.90% 89.01% -1.03% -0.33% -1.90% -3.64% -0.38% -5.31% % ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Net interest income Net fee and commission income Interest income on investment Other operating income The proportion of net interest income to operating income of all 16 banks decreased compared to the same period in the previous year. The proportion of CMB s net interest income to its operating income decreased by percentage points, and PAB s proportion decreased by 8.87 percentage points, mainly due to the development of investment banking, asset custody, bank card and wealth management business. Operating income and income structure 2014 Q1 1.98% 1.79% 3.35% 2.63% 1.29% 0.85% 1.42% 6.51% 4.80% 0.07% 0.82% 0.86% 0.82% 0.27% 0.57% 1.57% 100% 0.43% 5.35% 1.76% 1.69% 0.87% 1.13% 23.14% 21.78% 16.44% 14.97% 13.27% 20.56% 11.84% 0.29% 3.28% 2.42% 2.11% 1.26% 13.93% 24.93% 16.70% 10.83% 12.23% 80% 23.01% 20.98% 18.86% 16.92% 23.45% 60% 40% 20% 0% -20% Source: The banks 2013 & 2014 Q1 report, KPMG China research 79.51% 87.05% 80.40% 73.51% 75.92% 72.22% 63.49% 74.82% 74.70% 82.81% 84.15% 77.71% 80.61% 86.34% 69.65% 92.05% -0.87% -0.48% -0.06% -7.56% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Net interest income Net fee and commission income Interest income on investment Other operating income 41

42 Analysis of 2014 Q1 financial data of listed banks Profitability Net profit margin and intermediate business income ratio In the first quarter of 2014, the proportion of net fee and commission income to operating income of most listed banks increased compared with that of the previous year, with an average increase of 20.63%. CMB, CNCB, SPDB and NBCB had higher increases, with CMB enjoying the highest increase of 7.43 percentage points, caused by an increase in trust business and financial advisory fees. CCB and ABC suffered a drop, mainly due to an increase in charges for clearing and settlement services and bank cards. Intermediate business income ratio 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 28.41% 27.90% 23.17% 21.80% 24.13% 22.07% 22.84% 19.76% 20.70% 17.08% 18.16% 14.15% 19.92% 19.61% The first quarter of 2014 The first quarter of % 20.63% 18.20% Source: The banks 2013 & 2014 Q1 report, KPMG China research 42

43 Analysis of 2014 Q1 financial data of listed banks Profitability Cost control Cost-to-income ratio The operating costs of the 16 banks increased in the first quarter of BON, CMB and PAB experienced the highest increases of 70, 54 and 45 percent, respectively. This rise was mainly due to the increase in asset depreciation reserves, business growth and an increased business network. CCB experienced an increase of 28 percent, which was caused by the increase in other operating costs due to the growth of its insurance business. Operating expenses RMB million 80,000 70,000 60,000 54% 50,000 40,000 30,000 20,000 10,000-70% 45% 28% 31% 31% 22% 7% 16% 15% 15% 13% 9% 10% 4% 5% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Operating expenses The first quarter of 2014 Operating expenses The first quarter of 2013 Growth rate 80% 70% 60% 50% 40% 30% 20% 10% 0% In the first quarter of 2014, nearly all 16 banks experienced a decrease in their cost-to-income ratios, except for HXB. BOB experienced the highest decrease of 8.29 percentage points. As a comprehensive effect of asset structure optimisation, interest rate increases and the rapid growth of intermediary business, the average cost-to-income ratio in the first quarter of 2014 was percent, representing a decrease of 4.55 percentage points as compared with the previous year. Cost-to-income ratio 45.00% 39.42% 40.00% 37.65% 35.00% 26.78% 23.08% 28.86% 23.25% 24.86% 24.23% 27.28% 28.07% 29.49% 31.57% 30.00% 25.48% 26.13% 27.18% 25.00% 21.44% 20.00% 17.22% 15.00% 10.00% 5.00% 0.00% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Average Cost-to-income ratio 31/03/2014 Cost-to-income ratio 31/12/2013 Source: The banks 2013 & 2014 Q1 report, KPMG China research Source: The banks 2013 & 2014 Q1 report, KPMG China research 43

44 Analysis of 2014 Q1 financial data of listed banks Profitability Cost control General and administrative expenses and impairment losses In the first quarter of 2014, BON (57 percent) and PAB (45 percent) experienced the highest increases in general and administrative expenses among the 16 banks. This was mainly due to increases in business growth and business networks. General and administrative expenses RMB million 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Growth rate 60% 30% 26% 23% 18% 16% 23% 16% 20% 22% 19% 20% 12% 20% 8% 14% 14% 15% 15% 10% 8% 8% 9% 11% 10% 10% 7% 6% 6% 6% 6% 3% 0% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB 3% CIB CEB HXB PAB BOB BON NBCB 45% 41% 57% 50% 40% General and administrative expenses The first quarter of 2014 General and administrative expenses The first quarter of 2013 Growth rate of general and administrative expenses Growth rate of net profit In the first quarter of 2014, CMB experienced the highest rise in impairment losses, recording an increase of 260 percent. This was mainly due to the increased loan provision in industries affected by overcapacity, along with the trend of slowing economic growth. Impairment losses Growth rate RMB million ,096 13, % 13, % 250% 11, % 7, % 150% % 5, % 53% 98% 100% 83% 4,525 43% 4,949 3, % 2,810 50% 1,027 1,566 2,067 13% 5% 7% 5% -9% -6% 2% % % ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Source: The banks 2013 & 2014 Q1 report, KPMG China research The first quarter of 2014 The first quarter of 2013 Growth rate 44

45 Analysis of 2014 Q1 financial data of listed banks condition of assets Asset scale and structure In the first quarter of 2014, the total scale of assets of the listed banks increased. BON was the fastestgrowing bank in this respect, with an increase of 16 percent, which was caused by rapid growth in securities investment. Due to the economic slowdown in the Yangtze River delta region, as well as a rising NPL ratio, BCM s total scale of assets experienced almost no growth. RMB billion 25,000 16% 14% 20,000 15,000 9% 9% 11% 10% 10,000 5% 4% 5% 7% 5,000 2% 3% 2% 4% 4% 0% - ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB 31/03/ /12/2013 Growth rate 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% In the first quarter of 2014, the asset structure of the listed banks changed. Compared with the end of 2013, the ratio of loans and advances to customers decreased by one percentage point, while the ratio of cash and balances with central banks, due from banks and other financial institutions and securities investments remained the same as in the previous year. The ratio of other assets increased by one percentage point. Source: The banks 2013 & 2014 Q1 report, KPMG China research 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cash and balances with central banks Investment Other assets 4% 3% 11% 11% 20% 20% 49% 50% 16% 16% 31/03/ /12/2013 Loans and advances to customers Due from banks and other financial institutions 45

46 Analysis of 2014 Q1 financial data of listed banks condition of assets Asset structure In the first quarter of 2014, the average ratio of loans and advances to customers of the 16 banks was 49 percent. BCM and CCB recorded a ratio of 54 percent, which was the highest. The average securities investment ratio of the listed banks was 20 percent. BON and NBCN recorded the highest ratios of 38 and 36 percent, respectively, while HXB recorded the lowest of 11 percent. The average due from banks and other financial institutions ratio was 11 percent. CIB recorded the highest ratio of 31 percent. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% 2% 5% 3% 4% 2% 2% 6% 2% 3% 5% 2% 4% 2% 2% 3% 6% 7% 10% 12% 9% 13% 14% 14% 15% 24% 21% 23% 23% 19% 16% 22% 21% 31% 15% 22% 18% 20% 21% 23% 22% 12% 11% 19% 21% 38% 36% 20% 51% 54% 53% 47% 54% 52% 50% 49% 48% 48% 46% 42% 43% 35% 30% 34% 18% 16% 15% 18% 14% 13% 13% 13% 12% 10% 13% 15% 12% 11% 12% 11% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Cash and balances with central banks Loans and advances to customers 31/03/2014 Investment Due from banks and other financial institutions Other assets Compared with 2013, there were few changes in the asset structures of the 16 banks. The due from banks and other financial institutions ratio of CIB increased by two percentage points, while the ratio of CMBC decreased by three percentage points. The securities investment ratio of NBCB increased by five percentage points. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% 2% 5% 3% 4% 4% 2% 2% 6% 2% 3% 4% 2% 2% 2% 3% 6% 5% 10% 10% 10% 13% 15% 15% 15% 23% 20% 22% 18% 17% 23% 22% 24% 29% 16% 22% 18% 19% 18% 23% 20% 12% 9% 21% 21% 35% 31% 20% 51% 54% 54% 47% 54% 53% 52% 48% 48% 47% 47% 44% 43% 36% 36% 33% 17% 16% 15% 18% 15% 13% 14% 13% 13% 11% 13% 16% 12% 13% 11% 13% Source: The banks 2013 & 2014 Q1 report, KPMG China research 31/12/2013 Cash and balances with central banks Investment Other assets Loans and advances to customers Due from banks and other financial institutions 46

47 Analysis of 2014 Q1 financial data of listed banks condition of assets Total loans In the first quarter of 2014, the total scale of credit assets of the listed banks was RMB trillion, 2.29 trillion more than in 2012, an increase of 4.7 percent. The rate of growth was slower than during the same period in the previous year, due to asset structure adjustment, risk control and a rise in the interest rates of credit assets. RMB billion 60,000 50,000 40,000 30,000 20,000 10,000-51, % 49, % 31/03/ /12/2013 Credit assets Growth rate 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% In the first quarter of 2014, NBCB saw the biggest growth in total loan scale, with a growth ratio of eight percent. This was mainly because NBCB developed specific customers, retail business, and community branches and promoted branch transition. BOC and CMB greatly increased credit to small and medium-sized companies, with a growth rate of seven percent, significantly higher than the average growth rate of other banks. BCM and CIB had the smallest growth rate of only one percent. RMB billion 12,000 10,000 8,000 6,000 4,000 2,000 Source: The banks 2013 & 2014 Q1 report, KPMG China research - 10,372 5% 8,921 4% 7% 8,158 7,553 5% 3,310 1% 7% 5% 2,349 2,044 4% 4% 1,635 1,837 1,367 1,222 1% 5% 5% 5% 5% 5% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB 31/03/ /12/2013 Growth rate 8% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 47

48 Analysis of 2014 Q1 financial data of listed banks condition of assets Loan quality In the first quarter of 2014, most of the non-performing loan (NPL) ratios of the listed banks increased. The average NPL ratio was 0.94%. BOB (0.65%) had the lowest ratio. The NPL ratios of 12 of the listed banks increased. 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 0.97% 1.02% 0.98% 1.22% 1.09% 0.85% 1.15% 0.87% 0.77% 0.84% 0.97% 0.91% 0.91% 0.65% 0.89% 0.89% 0.94% NPL rate 31/03/2014 NPL rate 31/12/2013 In the first quarter of 2014, most of the allowance for NPL ratios of the 16 banks decreased. ABC s ratio of % was the highest among the listed banks. In the first quarter of 2014, the banks experienced different changes in their allowance to total loans ratios. ABC (4.42 percent) saw the largest change due to a discrete risk control principle and an increased NPL rate, while PAB (1.83 percent) recorded the smallest due to discrete control of its newly increased NPL. 400% 350% 300% 250% 200% 150% 100% 50% 0% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Source: The banks 2013 & 2014 Q1 report, KPMG China research % % % % % % % % % % % % % % % % ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BON NBCB Average 2.38% 2.65% 2.22% 4.42% Allowance to NPL 31/03/2014 Allowance to NPL 31/12/ % 2.28% 2.21% 2.23% 2.48% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BON NBCB Average 2.83% 2.02% 2.73% 1.83% 2.71% Allowance to total loans ratio 31/03/2014 Allowance to total loans ratio 31/12/ % 2.50% 48

49 Analysis of 2014 Q1 financial data of listed banks condition of assets Loan-to-deposit ratio 80.00% 75.00% 70.00% 65.00% 67.30% 69.38% 71.21% 74.35% 73.04% 72.47% 72.10% 66.17% 70.19% 70.82% 63.75% 71.20% 60.00% 60.25% 60.97% 55.00% 50.00% 48.65% 45.00% ICBC CCB BOC ABC BCM CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Loan-to-deposit ratio 31/03/2014 Loan-to-deposit ratio 31/12/2013 In the first quarter of 2014, the 15 banks saw various changes in their loan-to-deposit ratios. The ratios of ICBC, BCM, CIB, HXB and BOB increased, while those of the other banks decreased. BON s ratio was the lowest at percent, mainly because high yield WMPs absorbed deposits, causing deposits to decrease considerably compared to those at the end of Moreover, the allocation of more loans for securities investment led to a smaller rate of increase for loans compared with that for deposits. Source: The banks 2013 & 2014 Q1 report, KPMG China research 49

50 Analysis of 2014 Q1 financial data of listed banks condition of assets Securities investment With regards to the structure of the listed banks securities investment in the first quarter of 2014, the ratios of held-tomaturity investments and available-for-sale financial assets decreased, while those of investments classified as receivables and financial assets at fair value through profit or loss increased. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 18.14% 16.38% 49.38% 51.43% 25.47% 26.49% 7.01% 5.69% 31/03/ /12/2013 Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity investments Investment classfied as receivables In the fist quarter of 2014, the securities investment structures of the listed banks differed. ICBC, CCB, BOC, BCM and HXB mainly focused on held-to-maturity investments, for which they recorded ratios of more than 50 percent. CMBC and NBCB mainly focused on available-for-sale financial assets, for which they recorded ratios of about 45 percent. CEB, CNCB, BON, CIB and PAB mainly concentrated on receivables financial investments, for which they recorded ratios of 59, 57, 53, 49 and 45 percent, respectively. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: The banks 2013 & 2014 Q1 report, KPMG China research 8% 6% 12% 11% 19% 38% 57% 63% 60% 55% 48% 62% 38% 25% 19% 24% 23% 24% 29% 21% 33% 36% 22% 8% 9% 4% 10% 6% 4% 3% 7% 8% 4% 2% 3% 6% 3% 3% 1% 31/03/ % 21% 30% 0% 33% 24% Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity investments Investment classfied as receivables 0% 4% 100% 19% 26% 26% 90% 43% 45% 80% 8% 49% 59% 53% 63% 70% 37% 60% 50% 16% 21% 40% 49% 18% 48% 65% 30% 20% 10% 0% 8% 6% 12% 20% 11% 31% 47% 61% 62% 54% 63% 44% 56% 39% 53% 28% 16% 26% 24% 21% 48% 63% 23% 22% 37% 50% 38% 35% 31% 33% 35% 27% 21% 28% 30% 23% 9% 11% 3% 0% 6% 3% 2% 7% 9% 6% 3% 4% 3% 0% 5% 2% 1% 31/12/2013 0% 12% 44% 44% 53% Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity investments Investment classfied as receivables 6% 21% 25% 47% 42% 11% 50

51 Analysis of 2014 Q1 financial data of listed banks condition of liabilities Liability structure In the first quarter of 2014, the growth trends of the total liabilities and total assets of the listed banks were the same as those at the end of 2013, except for NBCB, BON and PAB, which experienced the highest rates of growth. The liability scales of the four major state-owned commercial banks grew steadily. As previously stated, deposit taking was the major component of liabilities. RMB million 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000-4% 5% 9% 5% 0% 10% 10% 1% 1% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Due to customers 31/03/2014 Due from banks and other financial institutions 31/03/2014 Bonds payable 31/03/2014 Others 31/03/2014 Total liability 31/03/2014 Total liability 31/12/2013 Total liability Growth rate 3% 7% 4% 11% 4% 17% 14% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% In the first quarter of 2014, the total scale of deposits of the listed banks was RMB trillion, five percent more than at the end of the previous year. BON recorded the highest rate of increase at 22 percent, mainly due to the attraction of financial products with high return rates. The total deposit taking of BOCOM and CIB decreased by one and five percent, respectively. The reasons for the decreases were fierce competition, a hike in deposit rates, independent adjustment by banks of the liability structures and cost control of liabilities. Source: The banks 2013 & 2014 Q1 report, KPMG China research 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 RMB million - 4% 5% 9% 6% -1% 10% 6% 5% 5% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Total Deposits 31/03/2014 Total Deposits 31/12/2013 Total Deposits Growth rate -5% 8% 4% 14% 4% 22% 10% 25% 20% 15% 10% 5% 0% -5% -10% 51

52 Analysis of 2014 Q1 financial data of listed banks condition of liabilities Liability structure (continued) In the first quarter of 2014, deposit taking was the major component of the liabilities of the 16 banks. ABC and CCB had the highest rates, which were both over 80 percent. CIB, NBCB, BON and BOB had a high proportion of due from banks and other institutions, with ratios of 37.29, 35.12, and percent, respectively. liability structure 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9.80% 11.16% 10.57% 13.17% 11.14% 7.03% 10.91% 11.47% 1.35% 2.60% 9.19% 1.68% 1.86% 1.59% 10.86% 10.21% 4.01% 8.81% 2.31% 2.00% 2.27% 3.66% 1.64% 0.51% 18.54% 3.06% 9.52% 17.03% 12.79% 6.77% 15.08% 6.46% 20.56% 1.77% 20.91% 21.09% 17.67% 37.29% 24.04% 23.52% 0.86% 2.16% 3.66% 22.44% 26.83% 29.33% 29.60% 35.12% 78.30% 80.06% 70.07% 80.54% 70.82% 66.23% 65.73% 68.46% 64.32% 56.39% 64.51% 67.17% 53.77% 58.09% 51.21% 48.43% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Due to customers 31/03/2014 Due to banks and other financial institutions 31/03/2014 Bonds payable 31/03/2014 Others 31/03/2014 liability structure In the first quarter of 2014, the liability structure of the listed banks remained basically unchanged. In relative terms, CCB and ABC retained the highest ratios of deposit taking, while CIB recorded the highest ratio of amounts due from banks and other financial institutions. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6.79% 5.59% 5.42% 5.17% 3.23% 3.03% 2.12% 4.80% 3.66% 2.03% 2.74% 1.64% 2.53% 1.37% 1.56% 1.43% 1.74% 1.94% 1.48% 1.84% 2.25% 3.04% 1.82% 1.95% 1.87% 0.53% 0.46% 3.17% 2.52% 6.41% 8.89% 6.78% 4.18% 2.50% 14.64% 20.23% 21.13% 17.87% 21.12% 24.84% 24.43% 23.60% 28.63% 33.59% 29.15% 32.03% 6.37% 31.69% 82.89% 85.54% 78.20% 86.10% 75.06% 74.00% 77.75% 71.04% 69.67% 62.43% 70.97% 74.23% 68.38% 66.31% 63.89% 57.72% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BOB BON NBCB Due to customers 12/31/2013 Due to banks and other financial institutions12/31/2013 Bonds payable 12/31/2013 Others 12/31/2013 Source: The banks 2013 & 2014 Q1 report, KPMG China research 52

53 Analysis of 2014 Q1 financial data of listed banks condition of liabilities Capital adequacy ratio and core capital adequacy ratio In the first quarter of 2014, the capital adequacy ratios of the 16 banks slightly fluctuated from one to another, with an average figure of percent. 16% 14% 12% 10% 8% 6% 4% 2% 0% 13.25% 13.84% 12.95% 12.94% 12.94% 12.53% 12.05% 10.90% 11.09% 10.96% 10.21% 10.79% 11.27% 11.04% 11.78% 9.93% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BON NBCB Average Capital adequacy ratio 31/03/2014 Capital adequacy ratio 31/12/2013 Note:There is no information about capital adequacy ratio of BOB 12% 10.66% 11.29% 10.32% 10.34% 10.55% The core capital adequac y ratios of the 16 banks d iffered from those as at t he end of The avera ge ratio increased to 9.44 percent in 2014 Q1. 10% 8% 6% 4% 9.09% 8.89% 8.66% 8.61% 9.34% 9.09% 8.17% 8.70% 9.03% 8.81% 9.44% 2% 0% ICBC CCB BOC ABC BCM CMB CNCB CMBC SPDB CIB CEB HXB PAB BON NBCB Average Core capital adequacy ratio 31/03/2014 Core capital adequacy ratio 31/12/2013 Source: The banks 2013 & 2014 Q1 report, KPMG China research Note:There is no information about capital adequacy ratio of BOB 53

54 04 Appendix: 2014 Q1 financial data of listed banks 54