As BOCHK may or may not proceed with the Proposed Issue, shareholders of the Company and prospective investors are advised to exercise caution when de

Transcription

1 Exchanges and Clearing Limited and The Stock Exchange of Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. This announcement is not for distribution in the United States. This announcement is for information purposes only and does not constitute or form a part of any offer of securities for sale in the United States or elsewhere. The securities have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act. There will be no public offering of securities in or the United States. ANNOUNCEMENT PROPOSED ISSUE OF USD SUBORDINATED NOTES DUE 2020 BY BANK OF CHINA (HONG KONG) LIMITED AND RESULTS OF BANK OF CHINA (HONG KONG) LIMITED FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2009 AND APPOINTMENT OF CHIEF RISK OFFICER This announcement is made by the Company pursuant to Rule of the Listing Rules. A. Proposed Issue of Subordinated Notes by BOCHK The Board wishes to announce that BOCHK, the principal subsidiary of the Company and an authorised institution under the Banking Ordinance (Chapter 155 of the Laws of ), proposes to carry out the Proposed Issue to offer and issue the Subordinated Notes to professional and institutional investors in transactions exempt from the registration requirements under the Securities Act. The Subordinated Notes will be denominated in U.S. dollars and have a maturity of 10 years due in There will be no public offering of the Subordinated Notes in or the United States. The Subordinated Notes will qualify as Tier 2 Capital of BOCHK pursuant to the regulatory requirements of the HKMA. BOCHK intends to raise funding through the Proposed Issue to early repay in full or in part the Subordinated Credit Facility. BOCHK has appointed BOC International, Deutsche Bank and UBS AG as the Lead Managers for the Proposed Issue. It is proposed that BOCHK enters into a Purchase Agreement with the Lead Managers after the pricing of the Subordinated Notes. 1

2 As BOCHK may or may not proceed with the Proposed Issue, shareholders of the Company and prospective investors are advised to exercise caution when dealing in the securities of the Company. B. Results of BOCHK for the nine months ended 30 September 2009 The unaudited financial information of BOCHK for the nine months ended 30 September 2009, together with the review report issued by the independent auditors of BOCHK, PricewaterhouseCoopers, are contained in the attachment to this announcement. C. Appointment of Chief Risk Officer The Board announces that Mr. Alex Cheung Yau Shing ( ) will relinquish his position as the Chief Risk Officer of the Group, and all his other positions within the Group with effect from 1 March 2010 as his term of office comes to an end. The Board is pleased to announce the appointment of Mr. Li Jiuzhong ( ), currently the Deputy Chief Risk Officer of the Group, as the Chief Risk Officer of the Group with effect from 1 March This announcement is made by the Company pursuant to Rule of the Listing Rules. A. PROPOSED ISSUE OF SUBORDINATED NOTES BY BOCHK Proposed Issue of the Subordinated Notes The Board wishes to announce that BOCHK, the principal subsidiary of the Company and an authorised institution under the Banking Ordinance (Chapter 155 of the Laws of ), proposes to carry out the Proposed Issue to offer and issue the Subordinated Notes which are denominated in U.S. dollars and have a maturity of 10 years due in It is intended that interest on the Subordinated Notes will be charged at a fixed rate over its term. The interest rate will be determined at pricing and interest will be payable semi-annually in arrears. BOCHK intends to offer the Subordinated Notes to professional and institutional investors in transactions exempt from the registration requirements under the Securities Act. There will be no public offering of the Subordinated Notes in or the United States. In addition, it is intended that, upon completion of the Proposed Issue, the Subordinated Notes will be listed and traded on the Stock Exchange as selectively marketed securities and an application has been made to the Stock Exchange for the listing of the Subordinated Notes. BOCHK has appointed BOC International, Deutsche Bank and UBS AG as the Lead Managers for the Proposed Issue. An offering memorandum which will be distributed to prospective investors of the Subordinated Notes will contain, amongst other things, details of the Proposed Issue, the terms and conditions of the Subordinated Notes, and the unaudited financial information of BOCHK for the nine months ended 30 September 2009, together with the review report issued by the independent auditors of BOCHK, PricewaterhouseCoopers. 2

3 All liabilities of BOCHK under the Subordinated Notes will be subordinated to the claims of depositors and other unsubordinated creditors of BOCHK but will rank pari passu with all its liabilities accruing under the agreement in respect of a subordinated credit facility of 660 million between BOC and BOCHK dated 25 June 2008, and in respect of the Subordinated Credit Facility, to the extent of any outstanding amount that would not be repaid by using the net proceeds from the Proposed Issue. Please refer to the information below for further details of the proposed repayment. The Subordinated Notes will qualify as Tier 2 Capital of BOCHK pursuant to the regulatory requirements of the HKMA. Proposed Purchase Agreement In connection with the Proposed Issue, it is proposed that BOCHK enters into a Purchase Agreement with the Lead Managers, as initial purchasers, to provide for the terms and conditions for the distribution of the Subordinated Notes by the Lead Managers severally (but not jointly) on behalf of BOCHK. It is proposed that the Purchase Agreement will be entered into between the parties after the pricing of the Subordinated Notes. To the best of the Directors knowledge, information and belief having made all reasonable enquiry, each of Deutsche Bank and UBS AG is an independent third party and not a connected person of the Company. BOC International and its intermediate holding company, BOC, are connected persons of the Company as BOC is an intermediate holding company of the Company. The Directors (including the independent non-executive Directors) consider that the terms of the Subordinated Notes and the proposed terms of the Purchase Agreement are on normal commercial terms, fair and reasonable and in the interest of the Company and its shareholders as a whole. By virtue of BOC International being a connected person of the Company, the appointment of BOC International by BOCHK as one of the Lead Managers and the arrangements between BOCHK and BOC International under the Purchase Agreement will constitute a connected transaction of the Company under the Listing Rules. Based on the current expectation, the relevant percentage ratios of the Company in respect of the amount of fees and commissions payable by BOCHK to BOC International should be less than 0.1%, and hence the connected transaction will be exempted from compliance with the relevant requirements under the Listing Rules. An independent board committee of the Company, comprising of all of its independent non-executive Directors and chaired by Mr. Tung Chee Chen, has reviewed the terms and conditions of the appointment of BOC International as one of the Lead Managers and of the arrangement between BOCHK and BOC International under the proposed Purchase Agreement. As these terms and conditions are consistent with those for the appointment of, and arrangement with, the other two Lead Managers who are independent third parties of the Company, the independent board committee considers that these terms and conditions are fair and reasonable. As no binding agreement in relation to the Proposed Issue has been entered into as at the date of this announcement, the Proposed Issue may or may not materialise. As BOCHK may or may not proceed with the Proposed Issue, shareholders of the Company and prospective investors are advised to exercise caution when dealing in the securities of the Company. A further announcement in respect of the Proposed Issue will be made by the Company should the Purchase Agreement be signed between BOCHK and the Lead Managers. 3

4 Reasons for the Proposed Issue and proposed use of proceeds The Company considers that the creation of a new type of listed securities will help BOCHK and the Company to broaden their investor base and provide an alternative for investment in their securities. The Proposed Issue will also establish a market benchmark to enable the Group and the BOCHK Group to tap the debt market as an alternative source of future funding for their growth and development. As the Proposed Issue will be offered and marketed to institutional investors globally, the Company believes that it would diversify the Group s funding channels and increase its international profile. Taking advantage of the improving market conditions, BOCHK intends to raise funding through the Proposed Issue to early repay in full or in part the Subordinated Credit Facility. As at the date of this announcement, the amount outstanding under the Subordinated Credit Facility is US$2,500 million. As the Subordinated Notes will qualify as Tier 2 Capital of BOCHK, which has the same capital quality as the capital obtained by BOCHK under the Subordinated Credit Facility, the repayment of the Subordinated Credit Facility using the net proceeds derived from the Proposed Issue will not affect the capital position of BOCHK. The HKMA has approved the early repayment of the Subordinated Credit Facility using the proceeds to be derived from the Proposed Issue. For details of the Subordinated Credit Facility, please refer to the announcement dated 12 December 2008 issued by the Company. B. RESULTS OF BOCHK FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2009 The unaudited financial information of BOCHK for the nine months ended 30 September 2009, together with the review report issued by the independent auditors of BOCHK, PricewaterhouseCoopers are contained in the attachment to this announcement. C. APPOINTMENT OF CHIEF RISK OFFICER The Board announces that Mr. Alex Cheung Yau Shing ( ) will relinquish his position as the Chief Risk Officer of the Group, and all his other positions within the Group with effect from 1 March 2010 as his term of office comes to an end. The Board is pleased to announce the appointment of Mr. Li Jiuzhong ( ), currently the Deputy Chief Risk Officer of the Group, as the Chief Risk Officer of the Group with effect from 1 March Mr. Li Jiuzhong ( ), aged 47, is currently the Deputy Chief Risk Officer of the Group with the responsibility for assisting the Chief Risk Officer in overseeing the Group s various risk management function. He is also a director of BOC Life. Mr. Li has over 26 years experience in the banking industry. Mr. Li joined BOC in 1983 and, since then, he had assumed various positions at BOC Head Office and overseas branch. He was Assistant General Manager and Deputy General Manager of BOC London Branch, respectively, from 1996 to 2002; and Deputy General Manager of Corporate Banking Department of BOC Head Office from 2002 to 2004; and then General Managers of Corporate Banking Department, Risk Management Department, and Global Markets Department of BOC Head Office, respectively, from 2004 to Mr. Li graduated from Daqing Petroleum Institute in 1983 with a Bachelor s Degree in Science in Oilfield Development and Management and obtained a Master s Degree in Science in International Banking and Financial Studies from Heriot- Watt University (UK) in

5 The Board wishes to thank Mr. Alex Cheung Yau Shing for his contributions to the Group during his tenure of office. D. GENERAL (a) Information of the Company The Company was incorporated in on 12 September 2001 to hold the entire equity interest in BOCHK, its principal operating subsidiary. BOC holds a substantial part of the interests in the shares of the Company through certain of its direct and indirect wholly-owned subsidiaries. The Company began trading on the main board of the Stock Exchange on 25 July 2002, with stock code 2388, ADR OTC Symbol BHKLY. (b) Information of BOCHK DEFINITIONS The BOCHK Group is a leading commercial banking group in. As of 30 September 2009, the BOCHK Group had over 270 branches, 470 ATMs and other delivery channels in. With these channels, the BOCHK Group offers a comprehensive range of financial products and services to individual and corporate customers. BOCHK is one of the three banknote issuing banks in. BOCHK is appointed by the People s Bank of China as the Clearing Bank for Renminbi business in. In addition, as of 30 September 2009, the BOCHK Group had 23 branches and sub-branches in the PRC. Through these branches and sub-branches, the BOCHK Group provides local and cross-border banking services to customers in Hong Kong and the PRC. In this announcement, the following terms have the meanings set forth below unless the context requires otherwise: Board BOC BOC International BOC Life the board of Directors or a duly authorised committee thereof Bank of China Limited, a joint stock commercial bank with limited liability established under the laws of the PRC and an intermediate holding company of the Company BOCI Asia Limited, a company incorporated under the laws of Hong Kong and an indirect wholly-owned subsidiary of BOC and a connected person of the Company BOC Group Life Assurance Company Limited, a company incorporated under the laws of, in which the Company and BOC, through its wholly-owned subsidiary, held equity interests of 51% and 49% respectively 5

6 BOCHK BOCHK Group Company Deutsche Bank Directors Group HKMA Lead Managers Listing Rules PRC Proposed Issue Purchase Agreement Securities Act Stock Exchange Subordinated Credit Facility Bank of China () Limited, a company incorporated under the laws of and an authorised institution under the Banking Ordinance (Chapter 155 of the Laws of ). BOCHK is the principal subsidiary of the Company and is wholly-owned by the Company BOCHK and its subsidiaries BOC (Holdings) Limited Deutsche Bank Securities Inc. the directors of the Company the Company and its subsidiaries, which include the BOCHK Group the Monetary Authority the Special Administrative Region of the PRC BOC International, Deutsche Bank and UBS AG, acting as the joint lead managers and joint bookrunners for the Proposed Issue The Rules Governing the Listing of Securities on the Stock Exchange The People s Republic of China, for the purposes of this announcement, excluding, Macau Special Administrative Region of the PRC and Taiwan the proposed issue and offering of the Subordinated Notes by BOCHK the purchase agreement proposed to be entered into between BOCHK and the Lead Managers to provide for the terms and conditions for the distribution of the Subordinated Notes by the Lead Managers on behalf of BOCHK U.S. Securities Act of 1933, as amended The Stock Exchange of Limited the US$2,500 million subordinated credit facility extended by BOC to BOCHK pursuant to a subordinated credit facility agreement dated 16 December 2008 as disclosed in the announcement of the Company dated 12 December

7 Subordinated Notes United States US$ the subordinated notes due in 2020 proposed to be issued and offered by BOCHK to professional and institutional investors which are denominated in U.S. dollars and having a maturity of 10 years the United States of America the U.S. dollar(s), the lawful currency of the United States By Order of the Board Jason C.W. Yeung Company Secretary, 3 February 2010 As at the date of this announcement, the Board comprises Mr. XIAO Gang* (Chairman), Mr. LI Lihui* (Vice-chairman), Mr. HE Guangbei (Vice-chairman and Chief Executive), Mr. LI Zaohang*, Mr. ZHOU Zaiqun*, Mdm. ZHANG Yanling*, Mr. GAO Yingxin, Dr. FUNG Victor Kwok King**, Mr. KOH Beng Seng**, Mr. SHAN Weijian**, Mr. TUNG Chee Chen**, Mr. TUNG Savio Wai-Hok** and Mdm. YANG Linda Tsao**. * Non-executive Directors ** Independent Non-executive Directors 7

8 UNAUDITED financial information OF BOCHK FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2009 Condensed Consolidated Income Statement (Unaudited) (Unaudited) Nine months ended 30 September 2009 Nine months ended 30 September 2008 Notes Interest income 16,553 25,890 Interest expense (4,174) (11,980) Net interest income 4 12,379 13,910 Fees and commission income 6,474 5,688 Fees and commission expenses (1,431) (1,433) Net fees and commission income 5 5,043 4,255 Net trading income 6 1,313 1,661 Net gain/(loss) on financial instruments designated at fair value through profit or loss 255 (117) Net gain on investment in securities Other operating income Net operating income before impairment allowances 19,402 20,066 Net charge of impairment allowances 9 (21) (5,870) Net operating income 19,381 14,196 Operating expenses 10 (9,165) (6,166) Operating profit 10,216 8,030 Net gain from disposal of/fair value adjustments on investment properties 11 1, Net gain from disposal/revaluation of properties, plant and equipment Share of profits less losses of associates 4 9 Profit before taxation 11,510 8,519 Taxation 13 (1,912) (1,331) Profit for the period 9,598 7,188 Profit attributable to: Equity holders of the Bank 9,474 6,989 Minority interests ,598 7,188 Dividends 14 3,469 3,960 A-6 A-59 The notes on pages A-6 to A-59 are an integral part of this financial information. A-1

9 Condensed Consolidated Statement of Comprehensive Income (Unaudited) Nine months ended 30 September 2009 (Unaudited) Nine months ended 30 September 2008 Notes Profit for the period 9,598 7,188 Net change in fair value of available-for-sale securities 5,448 (6,494) Revaluation of premises 3,199 1,208 Currency translation difference (5) 194 Net deferred tax on items taken directly to equity (1,389) 498 Reclassification adjustments Release upon disposal of available-for-sale securities (69) 23 Net impairment charges on availablefor-sale securities transferred to profit or loss ,959 Amortisation with respect to availablefor-sale securities transferred to held-to-maturity securities (50) (67) Other comprehensive income for the period, net of tax 7,340 (1,679) Total comprehensive income for the period 16,938 5,509 Total comprehensive income attributable to: Equity holders of the Bank 16,810 5,285 Minority interests ,938 5,509 A-6 A-59 The notes on pages A-6 to A-59 are an integral part of this financial information. A-2

10 Condensed Consolidated Balance Sheet (Unaudited) (Audited) At 30 September 2009 At 31 December 2008 Notes ASSETS Cash and balances with banks and other financial institutions , ,268 Placements with banks and other financial institutions maturing between one and twelve months 98,486 89,718 Financial assets at fair value through profit or loss 16 12,072 16,404 Derivative financial instruments 17 18,722 19,628 SAR Government certificates of indebtedness 37,560 34,200 Advances and other accounts , ,220 Investment in securities , ,353 Interests in associates Investment properties 20 9,024 7,727 Properties, plant and equipment 21 25,301 22,788 Deferred tax assets Other assets 16,001 14,555 Total assets 1,197,325 1,117,996 LIABILITIES SAR currency notes in circulation 37,560 34,200 Deposits and balances of banks and other financial institutions 81,871 88,779 Financial liabilities at fair value through profit or loss 22 9,988 21,938 Derivative financial instruments 17 15,557 20,450 Deposits from customers , ,866 Debt securities in issue at amortised cost 78 1,042 Other accounts and provisions 24 34,393 33,662 Current tax liabilities 1, Deferred tax liabilities 4,402 2,799 Subordinated liabilities 25 27,076 26,604 Total liabilities 1,101,821 1,035,781 EQUITY Share capital 26 43,043 43,043 Reserves 27 51,055 37,714 Capital and reserves attributable to the equity holders of the Bank 94,098 80,757 Minority interests 1,406 1,458 Total equity 95,504 82,215 Total liabilities and equity 1,197,325 1,117,996 A-6 A-59 The notes on pages A-6 to A-59 are an integral part of this financial information. A-3

11 Condensed Consolidated Statement of Changes in Equity Share capital Premises revaluation reserve (Unaudited) Attributable to equity holders of the Bank Reserve for fair value changes of availablefor-sale securities * Regulatory reserve* Translation reserve Retained earnings Total Minority interests Total equity At 1 January ,043 8,563 (605) 4, ,598 81,743 1,549 83,292 Comprehensive income 1,083 (2,913) 191 6,924 5, ,509 Release upon disposal of premises (42) 42 Transfer from retained earnings 544 (544) final dividend paid (107) (107) interim dividend paid (3,960) (3,960) (200) (4,160) At 30 September ,043 9,604 (3,518) 4, ,060 83,068 1,466 84,534 Bank and subsidiaries 43,043 9,604 (3,518) 4, ,007 83,015 Associates ,043 9,604 (3,518) 4, ,060 83, At 1 October ,043 9,604 (3,518) 4, ,060 83,068 1,466 84,534 Comprehensive income (1,230) (607) 21 (495) (2,311) 9 (2,302) Release upon disposal of premises (61) 61 Transfer from retained earnings (171) interim dividend paid (17) (17) At 31 December ,043 8,313 (4,125) 4, ,797 80,757 1,458 82,215 Bank and subsidiaries 43,043 8,313 (4,125) 4, ,747 80,707 Associates ,043 8,313 (4,125) 4, ,797 80, At 1 January ,043 8,313 (4,125) 4, ,797 80,757 1,458 82,215 Comprehensive income 2,719 4,671 (5) 9,425 16, ,938 Release upon disposal of premises (91) 91 Transfer from retained earnings 358 (358) final dividend paid (180) (180) interim dividend paid (3,469) (3,469) (3,469) At 30 September ,043 10, , ,486 94,098 1,406 95,504 Bank and subsidiaries 43,043 10, , ,435 94,047 Associates ,043 10, , ,486 94,098 * 39 A-6 A-59 * In accordance with the requirements of the HKMA, the amounts are set aside for general banking risks, including future losses or other unforeseeable risks, in addition to the loan impairment allowances recognised under HKAS 39. The notes on pages A-6 to A-59 are an integral part of this financial information. A-4

12 Condensed Consolidated Cash Flow Statement (Unaudited) Nine months ended 30 September 2009 (Unaudited) Nine months ended 30 September 2008 Notes Cash flows from operating activities Operating cash inflow before taxation 28(a) 22,885 65,513 profits tax paid (126) (645) Overseas profits tax paid (110) (100) Net cash inflow from operating activities 22,649 64,768 Cash flows from investing activities Purchase of properties, plant and equipment (257) (371) Proceeds from disposal of properties, plant and equipment Proceeds from disposal of investment properties Dividends received from associates 3 2 Net cash outflow from investing activities (73) (190) Cash flows from financing activities Dividends paid to equity holders of the Bank (3,469) (3,960) Dividends paid to minority shareholders (180) (307) Proceeds from subordinated liabilities 8,144 Interest paid for subordinated loans (539) Net cash (outflow)/inflow from financing activities (4,188) 3, Increase in cash and cash equivalents Cash and cash equivalents at 1 January 18,388 68, , , Cash and cash equivalents at 30 September 28(b) 193, ,512 A-6 A-59 The notes on pages A-6 to A-59 are an integral part of this financial information. A-5

13 Notes to the Financial Information 1. Basis of preparation and accounting policies Basis of preparation The unaudited financial information has been prepared in accordance with HKAS 34 Interim Financial Reporting issued by the HKICPA. Accounting policies Except as described below, the accounting policies and methods of computation used in the preparation of the unaudited financial information are consistent with those used in the Group s financial statements for the year ended 31 December 2008 and should be read in conjunction with the Group s Annual Report for The following new standard, revised standard, amendment to standard, and interpretation are mandatory for the first time for the financial year beginning 1 January HKAS 1 (Revised), Presentation of financial statements. The revised standard prohibits the presentation of items of income and expenses (that is non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity. All non-owner changes in equity are required to be shown in a performance statement. The Group has elected to present the performance in two separate statements: an income statement and a statement of comprehensive income. The financial information has been prepared under the revised disclosure requirements. The adoption of this revised standard affects the presentation of the Group s financial statements. HKFRS 7 (Amendment), Financial instruments: disclosures. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosures and requires some specific quantitative disclosures for financial instruments on the lowest level in the hierarchy. It also requires entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements. In addition, the amendment clarifies and enhances the existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. The Group will make additional relevant disclosures in its financial statements ending 31 December It is not required to provide comparative disclosures in the first year of application. HKFRS 8, Operating Segments. HKFRS 8 replaces HKAS 14 Segment Reporting. It requires a management approach under which segment information, that reflects the operating result of segments reviewed regularly by the management for operation decisions making and performance assessment, is presented on the same basis and in the same manner as that used for internal reporting to the management. The adoption of HKFRS 8 has no change in the number of reportable segments presented. However, there is a change in inter-segment funding, details of which are disclosed in notes 31. As the impact is not significant, no restatement of prior year figure has been made. A-6

14 HK(IFRIC)-Int 13 HK(IFRIC)-Int A. HK(IFRIC)-Int 13, Customer Loyalty Programmes. HK(IFRIC)- Int 13 clarifies that when an entity provides customers with incentives to buy goods or services under a customer loyalty programme (for example, customers accumulate loyalty points to redeem free or discounted products or service), the fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale or service. The interpretation does not have significant impact on the Group s results of operations and financial position. 2. Critical accounting estimates and judgements in applying accounting policies Except as described below, the Group makes estimates and assumptions that are consistent with those used in the Group s financial statements for the year ended 31 December Amount recoverable from the Lehman Brothers minibonds In determining the Group s charge to the income statement in respect of the Lehman Brothers minibonds ( Minibonds ) (Note 10), the Group took into account the estimated aggregate amount paid and payable under the Repurchase Scheme and the voluntary offer, the provision made prior to the date of the Repurchase Scheme and the amount recoverable from the Minibonds. The amount recoverable from the Minibonds is uncertain and dependent on a number of factors including resolution of certain legal matters, which may result in a wide range of recovery outcomes. The Group has made an assessment of the amount recoverable taking into account such uncertainties. The final amount recovered by the Group could be different from the assessment and may result in a significant credit being recognised in the income statement in the period when it is realised. 3. Financial risk management The Group is exposed to financial risks as a result of engaging in a variety of business activities. The principal financial risks are credit risk, market risk (including currency and interest rate risk) and liquidity risk. This note summarises the Group s exposures to these risks. 3.1 Credit Risk A. Gross loans and advances (a) (a) Impaired advances A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred and that loss event(s) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. If there is objective evidence that an impairment loss on loans has been incurred, the amount of loss is measured as the difference between the carrying amount and the present value of estimated future cash flows generated by the financial asset. Objective evidence that a financial asset is impaired includes observable data that comes to the attention of the holder of the asset about the loss events. A-7

15 At 30 September 2009 At 31 December 2008 Gross impaired advances to customers 794 1,326 Individually assessed loan impairment allowances made in respect of such advances Current market value of collateral held against the covered portion of advances to customers Covered portion of advances to customers Uncovered portion of advances to customers Gross impaired advances to customers as a percentage of gross advances to customers 0.16% 0.29% The loan impairment allowances were made after taking into account the value of collateral in respect of impaired advances. Classified or impaired advances to customers are analysed as follows: At 30 September 2009 At 31 December 2008 Gross classified or impaired advances to customers 1,495 2,138 Gross classified or impaired advances to customers as a percentage of gross advances to customers 0.29% 0.46% Classified or impaired advances to customers follow the definitions set out in the Banking (Disclosure) Rules and represent advances which are either classified as substandard, doubtful or loss under the Group s classification of loan quality, or individually assessed to be impaired. A-8

16 (b) 3 (b) Advances overdue for more than 3 months Advances with a specific repayment date are classified as overdue when the principal or interest is past due and remains unpaid. Advances repayable by regular instalments are classified as overdue when an instalment payment is past due and remains unpaid. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the instruction or when the advances have remained continuously outside the approved limit that was advised to the borrower. 3 The gross amount of advances overdue for more than 3 months is analysed as follows: At 30 September 2009 At 31 December 2008 % of gross % of gross Amount advances to customers Amount advances to customers Gross advances to customers which have been overdue for: 3 6 six months or less but over three months % % 6 1 one year or less but over six months % % 1 over one year % % 3 Advances overdue for over three months 1, % % Individually assessed loan impairment allowances made in respect of such advances At 30 September 2009 At 31 December 2008 Current market value of collateral held against the covered portion of advances to customers 1,334 1,436 Covered portion of advances to customers Uncovered portion of advances to customers A-9

17 Collateral held against overdue or impaired loans is principally represented by charges over business assets such as commercial and residential premises for corporate loans and mortgages over residential properties for personal loans As at 30 September 2009 and 31 December 2008, there were no advances to banks and other financial institutions that were overdue for more than three months. (c) (c) Rescheduled advances 3 At 30 September 2009 At 31 December 2008 % of gross % of gross Amount advances to customers Amount advances to customers Rescheduled advances to customers net of amounts included in advances overdue for more than 3 months % % As at 30 September 2009 and 31 December 2008, there were no rescheduled advances to banks and other financial institutions. Rescheduled advances are those advances that have been restructured or renegotiated because of deterioration in the financial position of the borrower or of the inability of the borrower to meet the original repayment schedule and for which the revised repayment terms, either of interest or of repayment period, are non-commercial. Rescheduled advances, which have been overdue for more than three months under the revised repayment terms, are included in overdue advances. A-10

18 (d) (d) Concentration of advances to customers (i) (i) Sectoral analysis of gross advances to customers The information concerning gross advances to customers has been analysed into loans used inside or outside by industry sectors of the borrowers as follows: Gross advances % Covered by collateral or other security At 30 September 2009 Classified or impaired * Overdue* Individually assessed impairment allowances Collectively assessed impairment allowances Loans for use in Industrial, commercial and financial Property development 26, % Property investment 72, % Financial concerns 11, % 4 37 Stockbrokers 5, % 23 Wholesale and retail trade 20, % Manufacturing 23, % Transport and transport equipment 27, % Recreational activities % 1 Information technology 4, % 13 Others 34, % Individuals Loans for the purchase of flats in Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 12, % Loans for purchase of other residential properties 124, % 137 1, Credit card advances 6, Others 10, % Total loans for use in 381, % 1,020 3, Trade finance 27, % Loans for use outside 98, % Gross advances to customers 506, % 1,495 3, ,420 A-11

19 Gross advances % Covered by collateral or other security At 31 December 2008 Classified or impaired * Overdue* Individually assessed impairment allowances Collectively assessed impairment allowances Loans for use in Industrial, commercial and financial Property development 19, % Property investment 71, % Financial concerns 12, % 1 56 Stockbrokers % Wholesale and retail trade 18, % Manufacturing 16, % Transport and transport equipment 21, % Recreational activities % Information technology 6, % 3 19 Others 23, % Individuals Loans for the purchase of flats in Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 13, % Loans for purchase of other residential properties 116, % 153 1, Credit card advances 6, Others 11, % Total loans for use in 337, % 1,206 4, Trade finance 24, % Loans for use outside 99, % Gross advances to customers 461, % 2,138 4, ,501 * * Advances with a specific repayment date are classified as overdue when the principal or interest is past due and remains unpaid. A-12

20 (ii) (ii) Geographical analysis of gross advances to customers and overdue advances The following geographical analysis of gross advances to customers and overdue advances is based on the location of the counterparties, after taking into account the transfer of risk in respect of such advances where appropriate. Gross advances to customers At 30 September 2009 At 31 December , ,233 Mainland China 71,332 55,318 Others 29,420 30, , ,174 Collectively assessed loan impairment allowances in respect of the gross advances to customers At 30 September 2009 At 31 December ,040 1,172 Mainland China Others ,420 1,501 Overdue advances At 30 September 2009 At 31 December ,525 4,622 Mainland China Others ,858 4,917 A-13

21 Individually assessed loan impairment allowances in respect of the overdue advances At 30 September 2009 At 31 December Mainland China Others Collectively assessed loan impairment allowances in respect of the overdue advances At 30 September 2009 At 31 December Mainland China Classified or impaired advances At 30 September 2009 At 31 December ,229 1,792 Mainland China Others ,495 2,138 Individually assessed loan impairment allowances in respect of the classified or impaired advances At 30 September 2009 At 31 December Mainland China Others A-14

22 Collectively assessed loan impairment allowances in respect of the classified or impaired advances At 30 September 2009 At 31 December Mainland China Repossessed assets The estimated market value of repossessed assets held by the Group as at 30 September 2009 amounted to HK$106 million (31 December 2008: HK$173 million). They comprise properties in respect of which the Group has acquired access or control (e.g. through court proceedings or voluntary actions by the borrowers concerned) for release in full or in part of the obligations of the borrowers. A-15

23 B. B. Debt securities The table below represents an analysis of the carrying value of debt securities by credit rating and credit risk characteristic, based on Moody s ratings or their equivalent to the respective issues of the debt securities. Aaa Aa1 Aa3 Aa1 to Aa3 A1 A3 A1 to A3 At 30 September 2009 A3 Lower than A3 government and government bodies Unrated Other governments and government agencies Other Total Investment in securities non-agency US non-agency residential mortgage-backed Subprime Alt-A Alt-A Prime Prime 1, ,024 9,253 Fannie Mae issued debt securities 1,349 1,349 mortgage-backed securities Freddie Mac issued debt securities mortgage-backed securities 1,249 1,249 Other MBS/ABS 4, ,757 8,066 Other debt securities 66,620 68,503 35,260 5,458 19,172 29,736 46, ,396 Subtotal 74,747 69,564 36,206 12,998 19,172 33,802 46, ,136 Financial assets at fair value through profit or loss Other MBS/ABS Other debt securities ,200 1,150 8, ,921 Subtotal ,200 1,150 8, ,945 Total 74,821 70,132 37,406 14,148 27,699 33,957 46, ,081 A-16

24 Aaa Aa1 Aa3 Aa1 to Aa3 A1 A3 A1 to A3 At 31 December 2008 A3 Lower than A3 government and government bodies Unrated Other governments and government agencies Other Total Investment in securities non-agency US non-agency residential mortgage-backed Subprime ,047 Alt-A Alt-A 1, ,334 Prime Prime 9,549 1,558 2,878 1,950 15,935 Fannie Mae issued debt securities 1,504 1,504 mortgage-backed securities Freddie Mac issued debt securities ,026 mortgage-backed securities 1,633 1,633 Other MBS/ABS 6, ,807 10,768 Other debt securities 40,537 83,827 26,437 4,371 12,175 51,368 35, ,588 Subtotal 61,486 85,954 29,682 6,857 12,175 56,896 35, ,923 Financial assets at fair value through profit or loss Other MBS/ABS Other debt securities 243 1,814 1, , ,295 Subtotal 270 1,814 1, , ,322 Total 61,756 87,768 31,482 7,586 23,533 56,896 36, ,245 1, , A-18 The total amount of unrated issues amounted to HK$108,574 million (31 December 2008: HK$116,653 million) as at 30 September 2009, of which only HK$6,620 million (31 December 2008: HK$8,971 million) were without issuer ratings. For details, please refer to page A-18. A-17

25 For the above debt securities with no issue rating, their issuer ratings are analysed as follows: Aaa Aa1 Aa3 Aa1 to Aa3 At 30 September 2009 A1 A3 A1 to A3 A3 Lower than A3 Unrated Total Available-for-sale securities 17,341 38,302 7,091 2,076 5,464 70,274 Held-to-maturity securities ,451 2, ,078 15,080 Loans and receivables 1,716 10,275 2,276 14,267 Financial assets at fair value through profit or loss 155 8, ,953 Total 19,923 67,556 12,244 2,231 6, ,574 Aaa Aa1 Aa3 Aa1 to Aa3 At 31 December 2008 A1 A3 A1 to A3 A3 Lower than A3 Unrated Total Available-for-sale securities 18,180 49,408 3, ,481 76,397 Held-to-maturity securities ,140 2,037 3,151 15,952 Loans and receivables 3,386 8, ,595 Financial assets at fair value through profit or loss 1 11, ,709 Total 22,191 79,729 5, , ,653 The impaired debt securities by credit rating are analysed as follows: Aaa Aa1 Aa3 Aa1 to Aa3 At 30 September 2009 Carrying values A1 A3 A1 to A3 A3 Lower than A3 Unrated Total Of which accumulated impairment allowances Investment in securities non-agency US non-agency residential mortgage-backed Subprime Alt-A Alt-A Prime Prime ,202 7,251 3,336 Other MBS/ABS Other debt securities Total , ,969 4,623 Of which accumulated impairment allowances , ,623 A-18

26 Aaa Aa1 Aa3 Aa1 to Aa3 At 31 December 2008 Carrying values A1 A3 A1 to A3 A3 Lower than A3 Unrated Total Of which accumulated impairment allowances Investment in securities non-agency US non-agency residential mortgage-backed Subprime Alt-A Alt-A ,750 1,302 Prime Prime 5,162 1,295 1,312 1,825 9,594 6,479 Other MBS/ABS Other debt securities Total 6,588 1,678 1,801 2, ,053 9,001 Of which accumulated impairment allowances 4,195 1, , ,001 3 Debt securities overdue for more than 3 months are analysed as follows: At 30 September 2009 Available-for-sale securities 1 Overdue for over 1 year 68 At 31 December 2008 Available-for-sale securities 3 6 Overdue for 6 months or less but over 3 months 35 A-19

27 MBS/ABS The table below represents an analysis of the Group s exposure to MBS/ABS by geographical location. At 30 September 2009 Carrying values Total Impaired securities Of which accumulated impairment allowances US MBS/ABS Non-agency Non-agency residential mortgage-backed Subprime Alt-A Alt-A Prime Prime 9,253 7,251 3,336 Ginnie Mae 2,757 Fannie Mae 60 Freddie Mac 1,249 Commercial mortgage-backed 911 Others 1,789 17,546 8,418 3,894 Other countries MBS/ABS Residential mortgage-backed 2, Commercial mortgage-backed 160 Others 77 2, Total MBS/ABS 20,179 8,490 3,948 A-20

28 Carrying values Total At 31 December 2008 Impaired securities Of which accumulated impairment allowances US MBS/ABS Non-agency Non-agency residential mortgage-backed Subprime 1, Alt-A Alt-A 2,334 1,750 1,302 Prime Prime 15,935 9,594 6,479 Ginnie Mae 3,807 Fannie Mae 88 Freddie Mac 1,633 Commercial mortgage-backed 929 Others 2,806 28,579 12,173 8,120 Other countries MBS/ABS Residential mortgage-backed 2, Commercial mortgage-backed 454 Others 150 3, Total MBS/ABS 31,832 12,242 8,147 At 30 September 2009 At 31 December 2008 Increase/(decrease) in fair value taken to available-for-sale securities reserve on MBS/ABS for the period/year (net of impairment charges taken to income statement excluding deferred tax impact) 1,899 (1,340) Closing balance of available-for-sale securities reserve relating to MBS/ABS (excluding deferred tax impact) 192 (1,707) A-21

29 The table below represents an analysis of impairment charges/(releases) for the period/year for MBS/ABS held as at 30 September 2009 and 31 December Aaa Aa1 Aa3 Aa1 to Aa3 At 30 September 2009 A1 A3 A3 A1 to A3 Lower than A3 Unrated Total US MBS/ABS Non-agency Non-agency residential mortgage-backed Subprime (14) (2) 16 Alt-A Alt-A (10) (1) 22 Prime Prime Other countries MBS/ABS Residential mortgage-backed Total MBS/ABS ,019 Aaa Aa1 Aa3 Aa1 to Aa3 At 31 December 2008 A1 A3 A3 A1 to A3 Lower than A3 Unrated Total US MBS/ABS Non-agency Non-agency residential mortgage-backed Subprime (90) (36) Alt-A Alt-A ,209 Prime Prime 3,725 1, ,094 6,532 4,029 1, ,480 7,705 Other countries MBS/ABS Residential mortgage-backed Total MBS/ABS 4,056 1, ,480 7,732 Note: The impairment charges/(releases) for MBS/ABS disposed during the period/year are excluded. A-22

30 3.2 A. 99% Market Risk A. VAR The Group uses VAR technique to measure potential losses and market risks of its trading book for reporting to the RC and senior management on a periodic basis. VAR is a statistical technique which estimates the potential losses that could occur on risk positions taken over a specified time horizon within a given level of confidence. BOCHK, being the banking entity within the Group with the major trading positions, which are mainly foreign currency positions in major currencies, uses VAR technique to monitor and control market risk on a daily basis. The Group uses a historical simulation approach, a 99% confidence level and a 1-day holding period to calculate portfolio and individual VAR. Historical movements in market prices are calculated by reference to market data from the last two years. The following table sets out the VAR for all trading market risk exposure 1 of BOCHK. VAR for all market risk At 30 September Minimum for the first three quarters Maximum for the first three quarters Average for the first three quarters VAR for foreign exchange risk products VAR for interest rate risk products VAR for equity risk products VAR for commodity risk products B. In the first three quarters of 2009, the average daily revenue 2 of BOCHK earned from market risk-related trading activities was HK$3.7 million (first three quarters of 2008: HK$5.4 million). 1 Structural FX positions have been excluded. 2 Revenues from structural FX positions and back to back transactions have been excluded. B. Currency risk The tables below summarise the Group s exposure to foreign currency exchange rate risk as at 30 September 2009 and 31 December Included in the tables are the Group s assets and liabilities at carrying amounts in HK$ equivalent, categorised by the original currency. A-23

31 Renminbi US Dollars HK Dollars At 30 September 2009 Euro Japanese Yen Pound Sterling Others Total Assets Cash and balances with banks and other financial institutions 54,202 42,309 66, ,630 2, ,551 Placements with banks and other financial institutions maturing between one and twelve months ,011 31,232 4,250 3,163 4,424 98,486 Financial assets at fair value through profit or loss 617 1,981 9, ,072 Derivative financial instruments , ,722 SAR Government certificates of indebtedness 37,560 37,560 Advances and other accounts 15, , ,517 4,368 1, , ,791 Investment in securities Available-for-sale securities 2,123 94,185 40,834 22,115 17,675 1,670 28, ,843 Held-to-maturity securities 1,745 30,351 24,045 6,587 1, ,623 72,545 Loans and receivables 2,887 10, ,267 Interests in associates Investment properties 30 8,994 9,024 Properties, plant and equipment ,936 25,301 Other assets (including deferred tax assets) , ,074 Total assets 75, , ,569 38,833 21,106 7,008 51,491 1,197,325 Liabilities SAR currency notes in circulation 37,560 37,560 Deposits and balances of banks and other financial institutions 36,781 30,421 9,731 3,006 1, ,871 Financial liabilities at fair value through profit or loss 698 8, ,988 Derivative financial instruments 1,964 12, ,557 Deposits from customers 33, , ,993 14,868 1,874 15,394 46, ,967 Debt securities in issue at amortised cost Other accounts and provisions (including current and deferred tax liabilities) 1,085 11,061 26, ,724 Subordinated liabilities 19,547 7,529 27,076 Total liabilities 71, , ,966 26,813 3,104 16,273 49,162 1,101,821 Net on-balance sheet position 3, ,978 (37,397) 12,020 18,002 (9,265) 2,329 95,504 * Off-balance sheet net notional position* 132 (94,037) 123,094 (12,362) (18,025) 9,199 (2,955) 5,046 Contingent liabilities and commitments 5,310 69, ,374 5, ,197 1, ,099 * * Off-balance sheet net notional position represents the net notional amounts of foreign currency derivative financial instruments, which are principally used to reduce the Group s exposure to currency movements. A-24