中國工商銀行（亞洲）有限公司

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1 (STOCK CODE : 349) Together - Setting a Higher Vision 2005 Annual Report

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3 05 Event Highlights January 6 IBM Relocated and expanded Tsimshatsui East Branch in which securities services centre was newly established. Acted as a Coordinating Arranger to arrange USD600 million syndicated term loan for Lenovo Group Limited to finance its acquisition of the desktop and notebook businesses of IBM. March VISA Relocated and expanded Shamshuipo Branch in which securities services centre was newly established. Launched acquisition campaign for Generic Card, affinity cards (Caritas MasterCard and GEA VISA card) and MasterCard Corporate Card with home appliance to attract young families. Launched HKAAT VISA Card which is both a HKAAT membership card and credit card. May 70 Charity Dance Performance was held to raise funds for Caritas-Hong Kong and Hong Kong Dance Company. Nearly HKD700,000 donation was raised. March January May July February 16 Awarded by The Hong Kong Council of Social Service the Caring Company Logo. Appointed as a Mandated Lead Arranger to arrange USD1.6 billion global syndicated facility for Port Authority of the Government of Emirate of Dubai. April Step-up Issued HKD Step-up certificates of deposit through our retail branch network. June Applied Hong Kong Post e-cert as our internet banking two-factor authentication tool. Won the Bank s first financial advisory mandate relating to China properties acquisition.

4 July 60 Organized the Bank s second China Study Tour to Shanxi and Shanghai. 60 participants including secondary school students, social workers, teachers and bank staff joined the 8- day tour and it concluded successfully. September Launched the enhanced Phone Banking Service and customer can enjoy more functions via the new Customer Service Hotline. Launched the enhanced Personal Internet Banking and Commercial Internet Banking with a new look and different functions. November Bank Financial Strength RatingD D+ Being invited by The Hong Kong Mortgage Corporation Limited to become one of the six appointed banks to provide a new plan 1- Year to 10-Year Fixed Rate Mortgage Scheme to homebuyers. Became one of the first banks in Hong Kong introducing the Retail CNY NDF service to personal customers. Moody s upgraded our Bank Financial Strength Rating from D to D+. August October December August 8 12 ICICI1.25 Completed the acquisition of Chinese Mercantile Bank on 12 August Launched RMB & HKD Deposit Promotion with triple offers including interest rate, exchange rate and scratch cards. Won the Bank s first syndicated loan mandate in India, to arrange a USD125 million syndicated term loan facility for ICICI Bank. October Successfully completed the integration of Belgian Bank on 10 October Successfully launched Customer Relationship Management System and upgraded Core Banking System. Actively participated in the Caritas bazaar and raffle ticket sales by all level of staff. Close to HKD600,000 was raised for Caritas-Hong Kong in the event. December 500 IBM 6 International Financing Review 2005 International Financing Review Asia AAA Relocated and expanded Sheung Wan Branch in which securities services centre was newly established and provided the safe deposit box services. Launched Designated Business Customer RMB Deposit Account to enhance existing RMB services. Chinese Mercantile Bank was given an incentive award RMB5,000,000 by Shenzhen Government for future business development. Won three international renowned awards for arranging Lenovo Group s syndicated term loan facility, namely: International Financing Review s 2005 Award for Asia Pacific Loan; International Financing Review Asia s 2005 Award for Syndicated Loan of the Year; and The Asset s Triple A Best Syndicated Loan, 2005.

5 Contents Company Profile 5 Corporate Information 6 Financial Performance 31 Chairman s Statement 33 Management s Discussion & Analysis 45 Biographical Details of Directors & Senior Management 49 Report of the Directors 58 Corporate Governance Report 68 Auditors Report 69 Consolidated Profit and Loss Account 70 Consolidated Balance Sheet 71 Balance Sheet 72 Consolidated Statement of Changes in Equity 73 Consolidated Cash Flow Statement Supplementary Financial Information 189 Notice of Annual General Meeting 192 Analyst Coverage 193 Branches, Subsidiaries and Associate

6 * 349 A2/Prime-1/D+ 18% 02

7 Damis Jacobus Ziengs S.B.S., FHKIoD S.B.S., FHKIoD FHKIoD S.B.S., Damis Jacobus Ziengs FHKIoD ICBCA HX 872 UBHKHKHH 04

8 Financial Performance 2005 Financial Highlights For the Year (in HK$ million) % Change Net Interest Income 1,316 1, Other Operating Income Operating Expenses (Write-back of) Bad and Doubtful Debts (22) -100 Impairment Losses on Loans and Advances 6 Profit before Taxation 1, Taxation Profit Attributable to the Equity Holders of the Group At Year End (in HK$ million) % Change Loans and Advances 70,406 62, Total Assets 115,399 99, Total Deposits 70,341 63, The Equity Holders Funds of the Group 9,870 8, Financial Ratios Capital Adequacy (Adjusted) 15.7% 17.4% Average Liquidity for the Year 36.5% 37.8% Cost to Income 43.8% 41.9% Loans to Deposits 97.4% 94.9% Financial Calendar Final Results Announcement 21 March 2006 Posting Date for Annual Report 4 April 2006 Share Register Closing Period April 2006 Date of Annual General Meeting 27 April 2006 Dividend Payment Date 16 May Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

9 Financial Performance Five Year Summary As restated For the Year (in HK$ million) Net Interest Income 1,316 1, Other Operating Income Operating Expenses (Write-back of)/charge for Bad and Doubtful Debts (22) Impairment Losses on Loans and Advances 6 Profit before Taxation 1, Taxation Profit Attributable to the Equity Holders of the Group As restated Per Share (in HK$) Basic Earnings per Share Dividend per Share As restated At Year End (in HK$ million) Loans and Advances 70,406 62,740 41,811 32,874 28,452 Total Assets 115,399 99,344 75,320 62,262 43,497 Total Deposits 70,341 63,404 42,307 40,180 29,705 The Equity Holders Funds of the Group 9,870 8,541 5,917 5,907 5,071 As restated Financial Ratios Capital Adequacy (Adjusted) 15.7% 17.4% 16.7% 17.8% 16.1% Average Liquidity for the Year 36.5% 37.8% 41.3% 35.9% 39.7% Loans to Deposits 97.4% 94.9% 96.0% 80.0% 92.0% Loans to Total Assets 61.0% 63.2% 55.5% 52.8% 65.4% Impaired Loan/NPL ratio 0.9% 1.3% 1.7% 2.3% 6.8% * Collective/General Provision Coverage* 0.8% 0.8% 0.8% 0.9% 0.8% Cost to Income 43.8% 41.9% 27.4% 28.5% 41.9% Dividend Payout 60.6% 62.0% 66.4% 61.0% 59.9% Return on Average Assets 0.9% 0.9% 0.8% 1.0% 1.1% Return on Average Common Equity 11.0% 10.3% 10.2% 10.2% 9.3% * * Including Regulatory Reserve Operating Profit Before Impairment Losses/Provisions Profit Attributable to the Equity Holders of the Group HK$ million 1, % 1,143 HK$ million 1, % 981 1, % % % % % % % % Industrial and Commercial Bank of China (Asia) Limited Annual Report

10 Financial Performance Deposits By Type Current 4.9% 6.1% Savings 14.5% 19.3% Fixed 80.6% 74.6% Total 100.0% 100.0% By Remaining Maturity Repayable on Demand 19.5% 25.6% Three Months or Less 76.9% 70.9% One Year or Less, but Over Three Months 2.9% 2.7% Five Years or Less, but Over One Year 0.7% 0.8% Total 100.0% 100.0% By Currency HKD 51.9% 48.5% USD 39.7% 41.9% Others 8.4% 9.6% Total 100.0% 100.0% Other Operating Income Net Fees and Commission Income 56.1% 73.2% Net Gain from Foreign Exchange Activities 27.8% 10.8% Net Gain from Securities 13.1% 1.8% Dividend Income from Investments in Securities 0.5% 2.0% Others 2.5% 12.2% Total 100.0% 100.0% Total Assets Total Deposits HK$ million 120, ,000 80,000 60,000 40,000 20, % 43, % 62, % 75, % 115, % 99,344 HK$ million 80,000 60,000 40,000 20, % 29, % 40,180 +5% 42, % 63, % 70, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

11 Financial Performance * Loan Portfolio* By Industry Sectors Loans for Use in Hong Kong Industry, Commercial and Financial Property Development 6.2% 4.5% Property Investment 15.5% 13.9% Financial Concerns 5.4% 6.7% Stockbrokers 0.1% Wholesale and Retail Trade 2.4% 3.8% Civil Engineering Works 1.2% 1.1% Manufacturing 9.1% 10.6% Transport and Transport Equipment 13.7% 14.2% Electricity, Gas and Telecommunications 1.7% 2.3% Hotels, Boarding House & Catering 1.8% 3.4% Others 7.5% 8.0% Individuals Loans for the purchases of flats in Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Schemes 0.2% 0.2% Loans for the purchase of Other Residential Properties 16.8% 20.8% Credit Card Advances 0.1% 0.1% Others 1.4% 1.7% Trade Finance 8.0% 7.6% Loans for Use outside Hong Kong 8.9% 1.1% Total 100.0% 100.0% By Remaining Maturity Repayable on Demand 7.2% 3.3% One Year or Less 22.9% 18.7% Five Years or Less, but Over One Year 38.3% 44.0% Over Five Years 30.6% 31.4% Undated 1.0% 2.6% Total 100.0% 100.0% By Currency HKD 79.0% 82.0% USD 18.0% 14.2% Others 3.0% 3.8% Total 100.0% 100.0% * * Excluding Trade Bills and Advances to Banks and Other Financial Institutions Total Loans and Advances Impaired Loan/NPL Ratio HK$ million 80,000 60,000 40, % 28, % 32, % 41, % 62, % 70,406 HK$ million 10% 5% 6.8% 20, % 1.7% 1.3% 0.9% Industrial and Commercial Bank of China (Asia) Limited Annual Report

12 10 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

13 ICBC (Asia) creates a robust financial services platform that enables us to pursue growth on a broader front subsequent to the merger. Our new team is geared to offer banking products and services that our customers can trust upon. Industrial and Commercial Bank of China (Asia) Limited 11 Annual Report 2005

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15 () 29% % % 1.3%0.9%1,154 16% BBB- () () () 13

16 MR. ZHU QI Managing Director & Chief Executive Officer 14 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

17 % % 12% % 1.46%) % % 35% 23%) )2 1 29%41.9%43.8% 44.9%1.1% % % % 9% 8% 2% 17% 22% 5% 10% 20% 65% 42% 15

18 % 17.4% 15.7% 36.5% 37.8%) %0.9% ) ) A2/Prime-1D

19 2.50% 584% 28.7%9% 15% 0.15%0.28% 17

20 % 23% 18

21 33% % 6IBM International Financing Review 3, ICICI CSX IPO AAA 19

22 22% QDII ICBCVISA 14% 33% 3% 2.63% 1.46% Xplore VISA %11.40% 1,

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24 22 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

25 ICBC (Asia) offers novel banking services for customers both in Mainland China and Hong Kong. Equipped with expertise and great vision, we assist corporate clients to seek for further progression. Our goal is to become one of the leading banks with solid foundation and professionalism. Industrial and Commercial Bank of China (Asia) Limited 23 Annual Report 2005

26 Damis Jacobus Ziengs 8. S.B.S., FHKloD

27 ICBC Asia Wa Pei Limited ICBC (Asia) Nominee Limited ICBC (Asia) Nominee Limited ICBC Asia Wa Pei Limited A 25

28 Damis Jacobus Ziengs Ziengs Dennis Jacobus Ziengs ZiengsZiengs Ziengs Continental Bank Group Bereichsvorstand ZiengsThe Netherlands School of Business S.B.S. FHKIoD Cambridge INSEAD 26

29 ICBCA (C.I.) Limited ICBC (Asia) Wa Pei Nominees Limited ICBCA (C.I.) Limited Royal Melbourne Institute of Technology 27

30 42 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

31 Being ICBC s flagship company in Hong Kong, we will strive to fulfill the commitment to customers, staff, shareholders and society. It is also our endeavor to optimize full-range services and move along to reshape the next era of banking. Industrial and Commercial Bank of China (Asia) Limited 43 Annual Report 2005

32 Report of the Directors ,827, ,441, , B1,693,813,000 The Directors of Industrial and Commercial Bank of China (Asia) Limited (the Bank ) have pleasure in submitting their annual report together with the audited accounts of the Bank and the Group (the Bank together with its subsidiaries hereinafter referred to as the Group ) for the year ended 31 December PRINCIPAL ACTIVITIES AND SEGMENTAL ANALYSIS OF OPERATIONS The principal activities of the Bank are the provision of banking, financial and other financial related services. The principal activities of the subsidiaries are shown in Note 30 to the accounts. An analysis of the Group s performance for the year by business and geographical segments is set out in Note 5 to the accounts. LEGAL MERGER Pursuant to the Industrial and Commercial Bank of China (Asia) Limited (Merger) Ordinance (Chapter 1178), all the undertakings of Belgian Bank, Hong Kong Branch, were transferred to and vested in the Bank with effect from 10 October RESULTS AND APPROPRIATIONS The results of the Group for the year ended 31 December 2005 are set out in the consolidated profit and loss account on page 69. The Directors have declared an interim dividend of HK$0.18 per ordinary share, totaling HK$201,827,000 which was paid on 16 September The Directors recommend the payment of a final dividend of HK$0.35 per ordinary share, totaling HK$392,441,000. RESERVES Movements in the reserves of the Group and of the Bank during the year are set out in Note 38 to the accounts. DONATIONS Charitable and other donations made by the Group during the year amounted to HK$892,000. PROPERTY, PLANT AND EQUIPMENT Details of the movements in property, plant and equipment of the Group and of the Bank are set out in Note 28 to the accounts. LOAN CAPITAL AND SHARE CAPITAL Details of the movements in loan capital and share capital of the Group and of the Bank are set out in Notes 36 and 37 to the accounts. DISTRIBUTABLE RESERVES Distributable reserves of the Bank at 31 December 2005, calculated under section 79B of the Hong Kong Companies Ordinance, amounted to HK$1,693,813,000. Industrial and Commercial Bank of China (Asia) Limited 49 Annual Report 2005

33 Report of the Directors FIVE YEARS FINANCIAL SUMMARY A summary of the results and of the assets and liabilities of the Group for the last five financial years is set out below. As restated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Results Profit attributable to the equity holders of the Group 980, , , , ,412 Assets and liabilities Total assets 115,399,323 99,343,650 75,319,624 62,261,989 43,497,229 Total liabilities 100,190,694 85,454,003 65,224,015 53,100,345 37,217,910 Capital and reserve attributable to the Group s equity holders 15,208,629 13,889,647 10,095,609 9,161,644 6,279, ,399,323 99,343,650 75,319,624 62,261,989 43,497,229 Damis Jacobus Ziengs Dennis Jacobus Ziengs S.B.S. * * * * 93 94(1) 94(2) S.B.S. A.4.2 PURCHASE, SALE OR REDEMPTION OF THE BANK S LISTED SECURITIES During the year, the Bank has not redeemed any of its listed securities. Neither the Bank nor any of its subsidiaries has purchased or sold any of the Bank s listed securities. DIRECTORS The Directors of the Bank during the year and up to the date of this report are: Dr. Jiang Jianqing (Chairman) Ms. Wang Lili (Vice Chairman) Mr. Zhu Qi (Managing Director & Chief Executive Officer) Mr. Chen Aiping Mr. Wong Yuen Fai Mr. Zhang Yi (appointed on 15 March 2005) Mr. Damis Jacobus Ziengs (also known as Dennis Jacobus Ziengs) Professor Wong Yue Chim, Richard, S.B.S., J.P.* Mr. Tsui Yiu Wa, Alec* Mr. Yuen Kam Ho, George* Mr. Wang Yan (resigned on 15 January 2005) * Independent Non-executive Directors Mr. Zhang Yi will retire in accordance with Article 93 of the Bank s Articles of Association and Professor Wong Yue Chim, Richard, S.B.S., J.P., Mr. Tsui Yiu Wa, Alec and Mr. Yuen Kam Ho, George will retire by rotation at the forthcoming annual general meeting in accordance with Articles 94(1) and 94(2) of the Bank s Articles of Association. In compliance with the Code Provision A.4.2 of the Code on Corporate Governance Practices, Mr. Zhu Qi, the Managing Director of the Bank, will offer him for retirement at the forthcoming annual general meeting. All retiring Directors, being eligible, offer themselves for re-election. 50 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

34 Report of the Directors ,370,016,000 6,027,959, ,706,000 84,689,000 20,625,934,000 15,237,812,000 11,826,528,000 11,109,332,000 1,575,000,000 1,635,000, ,206, ,906,000 DIRECTORS (continued) The Non-executive Directors and the Independent Non-executive Directors of the Bank are not appointed for specific term but subject to the retirement by rotation and re-election at the annual general meetings in accordance with the Bank s Articles of Association. STATUS OF INDEPENDENT NON-EXECUTIVE DIRECTORS The Bank has received from each Independent Non-executive Director an annual confirmation of his independence pursuant to Rule 3.13 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Stock Exchange ) (the Listing Rules ) and the Bank considers all of its Independent Non-executive Directors to be independent. DIRECTORS SERVICE CONTRACTS None of the Directors who are proposed for re-election at the forthcoming annual general meeting has any existing or proposed service contract with the Bank which is not expiring or terminable within one year without payment of compensation, other than statutory compensation. DIRECTORS INTERESTS IN CONTRACTS No contracts of significance in relation to the Group s business to which the Bank or any of its holding company, subsidiaries, or fellow subsidiaries was a party and in which a Director of the Bank had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. CONNECTED TRANSACTIONS Continuing connected transactions During the year and in the normal course of business, the Group entered into a number of transactions which in the opinion of the Directors constitute continuing connected transactions under the Listing Rules. The transactions were with Industrial and Commercial Bank of China Limited (formerly known as The Industrial and Commercial Bank of China, ICBC ), the ultimate holding company, and the fellow subsidiaries and the details of these transactions are as follows: 1. Inter-bank lending and borrowing transactions As part of the Bank s day-to-day business, inter-bank placements are made to and inter-bank deposits are taken from the ultimate holding company and fellow subsidiaries. As at 31 December 2005, approximately HK$4,370,016,000 (2004: HK$6,027,959,000) of inter-bank placements were made by the Bank to the ultimate holding company and fellow subsidiaries. The interest income attributable to these placements in 2005 was approximately HK$159,706,000 (2004: HK$84,689,000). As at 31 December 2005, approximately HK$20,625,934,000 (2004: HK$15,237,812,000) of inter-bank deposits were placed with the Bank by the ultimate holding company and fellow subsidiaries. Included in this balance is an amount of HK$11,826,528,000 (2004: HK$11,109,332,000) representing utilisation of a standby credit facility of US$1,575,000,000 (2004: US$1,635,000,000) granted by the ultimate holding company to the Bank for working capital purposes. The interest expense attributable to these deposits in 2005 was approximately HK$569,206,000 (2004: HK$202,906,000). Industrial and Commercial Bank of China (Asia) Limited 51 Annual Report 2005

35 Report of the Directors 2. 10,753,668,000 10,807,885, ,392, ,906,000352,427, ,236, , , ,124,861,000 5,590,626, CONNECTED TRANSACTIONS (continued) Continuing connected transactions (continued) 2. Derivatives transactions The Bank entered into interest rate swaps on a back-to-back basis with the ultimate holding company for hedging against certain assets acquired by the Bank from the ultimate holding company. The Bank also entered into various derivatives transactions with the ultimate holding company and fellow subsidiaries, including interest rate swaps and various types of options contracts, for the purpose of balance sheet and/or interest rate risk management or as a result of customerdriven transactions. The total notional amount of the outstanding derivatives transactions between the Bank and the ultimate holding company and fellow subsidiaries as at 31 December 2005 was approximately HK$10,753,668,000 (2004: HK$10,807,885,000). The interest income and expense attributable to these transactions in 2005 were approximately HK$381,392,000 (2004: HK$372,906,000) and HK$352,427,000 (2004: HK$276,236,000) respectively. Net option premium expense attributable to these transactions in 2005 was approximately HK$271,000 (2004: HK$766,000). 3. Foreign exchange transactions The Bank also entered into foreign exchange contracts with the ultimate holding company and fellow subsidiaries in response to foreign exchange risk management and customer-driven transactions in a similar fashion as mentioned above for derivatives transactions. The total contractual amount of the outstanding foreign exchange transactions with the ultimate holding company and fellow subsidiaries as at 31 December 2005, including spot, forward and swap transactions, was approximately HK$6,124,861,000 (2004: HK$5,590,626,000). 4. Inter-bank capital markets transactions The Bank entered into the following types of transactions with the ultimate holding company and fellow subsidiaries: (a) (a) buying and selling debt securities (either issued by independent third parties, the ultimate holding company or fellow subsidiaries) from and to the ultimate holding company and fellow subsidiaries in the primary and secondary markets; and (b) (b) buying and selling debt securities on behalf of the ultimate holding company and fellow subsidiaries. 1,443,549,000 1,131,000,000 65,931, ,000, ,000, ,886,000 85,751,000 Approximately HK$1,443,549,000 (2004: HK$1,131,000,000) of debt securities were sold to the ultimate holding company and fellow subsidiaries, in primary and secondary markets in On the other hand, approximately HK$65,931,000 (2004: nil) debt securities were purchased from the ultimate holding company and fellow subsidiaries. The Bank issued and subscribed by the ultimate holding company fixed rate Certificates of deposit with nominal value of US$500,000,000 (2004: US$500,000,000). The interest expense attributable to these certificates of deposit in 2005 was approximately HK$175,886,000 (2004: HK$85,751,000). 52 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

36 Report of the Directors 495,000,000 1,500,000, ,000,000 1,500,000, ,117,000 80,714, ,815,203,000 1,552,106,000 1,348,854, ,000,000 2,700,000 2,083, CONNECTED TRANSACTIONS (continued) Continuing connected transactions (continued) In addition, the Bank issued subordinated floating rate notes totaling US$495,000,000 and HK$1,500,000,000 (2004: US$495,000,000 and HK$1,500,000,000) and were fully subscribed by the ultimate holding company. The interest expense attributable to these notes in 2005 was approximately HK$188,117,000 (2004: HK$80,714,000). 5. Capital markets transactions The Bank entered into various capital markets transactions with the Hong Kong branch of the ultimate holding company (the Branch ), the ultimate holding company and fellow subsidiaries, which include arranging of, participation/sub-participation in syndicated loans, acquiring and disposing of interests in loans including syndicated loans, subscription and/or issuance of debt securities and tax efficient financing. Approximately HK$4,815,203,000 (2004: HK$1,552,106,000) of the Bank s interest in loans including syndicated loans were disposed to the Branch, the ultimate holding company and fellow subsidiaries and approximately HK$1,348,854,000 (2004: HK$610,000,000) of the Branch s interest in loans including syndicated loans were purchased by the Bank in Fees attributable to the above transactions of approximately HK$2,700,000 (2004: HK$2,083,000) was paid to the Branch in Forfaiting transactions The Bank entered into forfaiting transactions with the ultimate holding company and fellow subsidiaries to buy and sell interests in certain trade finance products only in relation to bills of exchange secured under letters of credit. 7. Management services, premises incomes and premises expenses The Bank entered into the following types of agreements with the ultimate holding company, the Branch and the fellow subsidiaries: Industrial and Commercial Bank of China (Asia) Limited 53 Annual Report 2005

37 Report of the Directors 7. (a) CONNECTED TRANSACTIONS (continued) Continuing connected transactions (continued) 7. Management services, premises incomes and premises expenses (continued) (a) providing services such as accounting and budgeting, internal audit, marketing and back office settlement and clearing to the Branch; and (b) (b) providing services such as management, administrative and marketing functions in respect of credit card business of the Branch; and (c) (c) receiving services such as banking network, system and computer operations from the ultimate holding company; and (d) (d) using a portion of floor area rented by the Branch; and (e) (e) suits , 26th and portion of floor area of 28th floor of ICBC Tower used by to the Branch and a fellow subsidiary. (a) (b) 7,441,000 7,983,000(c) 8,407,000 5,173,000(d) 3,631,000 6,113,000(e) 5,906,000 (1) The total service fee income received from the Branch in respect of (a) and (b) above in 2005 was approximately HK$7,441,000 (2004: HK$7,983,000). The service fee expense paid to the ultimate holding company in respect of (c) above in 2005 was approximately HK$8,407,000 (2004: HK$5,173,000). In respect of (d) above, the total premises expense paid to the Branch in 2005 was approximately HK$3,631,000 (2004: HK$6,113,000). In respect of (e) above, the total premises incomes received from the Branch and a fellow subsidiary was HK$5,906,000 (2004: nil). Three conditional waivers for disclosure and shareholders approval requirements for the above continuing connected transactions between the Bank, its ultimate holding company and the fellow subsidiaries under the Listing Rules have been granted by the Stock Exchange in March 2002, February 2003 and April 2005 respectively. The Independent Non-executive Directors have reviewed and confirmed that the connected transactions to which three conditional waivers have been granted by the Stock Exchange were conducted in the following manner: (1) Such transactions were: (i) (i) entered into by the Bank in the ordinary and usual course of its business; (ii) (ii) entered into on an arm s length basis, as applicable; (iii) (a) (b) (iii) conducted either (a) on normal commercial terms; or (b) if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms that are fair and reasonable so far as the Bank and the independent shareholders are concerned; and (iv) (a)(b) (iv) entered into either (a) in accordance with the terms of the agreements governing such transactions; or (b) (where there are no such agreements) on terms that are no less favourable than those available to or from independent third parties, as applicable. 54 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

38 Report of the Directors (2) (i) (ii) (iii) (iv) (v) XV352 XV 2 (2) The annual aggregate value of each of the relevant categories of the connected transactions had not exceeded the annual upper limit or specified threshold, as applicable. A letter dated 21 March 2006 was received from the auditors of the Bank which stated that the auditors were not aware of any exceptions to (i) Continuing Connected Transactions are entered into in the ordinary and usual course of the Bank s business; (ii) Continuing Connected Transactions are approved in accordance with the Bank s policies and procedures which also apply to transactions entered into with third parties; (iii) Continuing Connected Transactions are within the management control limits which also apply to transactions with third parties, and the specific control limits which management have put into place for the purpose of complying with requirements of the Hong Kong Banking Ordinance and the Listing Rules on the connected transactions; (iv) the aggregated outstanding exposure to any member of the ICBC Group which is not registered or regarded as an authorized institution in Hong Kong at any point of time does not exceed relevant annual upper limits or specified threshold, as applicable and (v) Continuing Connected Transactions are entered into on terms no less favourable than terms available to or from independent third parties, as applicable. DIRECTORS AND CHIEF EXECUTIVE S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES As at 31 December 2005, the interests of the Directors and Chief Executive of the Bank in the shares, underlying shares and debentures of the Bank and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the SFO )) (the Associated Corporations ) as recorded in the register required to be kept under section 352 of the SFO, or as otherwise notified to the Bank and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, were as follows: Ordinary shares of HK$2 each in the Bank Total % of total Personal number of issued Name of Director interests shares held shares Dr. Jiang Jianqing 14,000 14, % Mr. Zhu Qi 50,000 50, % Mr. Zhang Yi 2,000 2, % Mr. Yuen Kam Ho, George 50,000 50, % All the interests stated above represent long positions. As at 31 December 2005, no short positions were recorded in the register required to be kept under Section 352 of the SFO. Save as disclosed above, as at 31 December 2005, none of the Directors or Chief Executive of the Bank or their spouses or children under 18 years of age were granted, or had exercised, any rights to subscribe for any equity or debt securities of the Bank or any of its Associated Corporations. Industrial and Commercial Bank of China (Asia) Limited 55 Annual Report 2005

39 Report of the Directors 5% XV DIRECTORS RIGHTS TO ACQUIRE SHARES At no time during the year was the Bank or any of its holding company, subsidiaries, or fellow subsidiaries a party to any arrangement to enable the Directors of the Bank to acquire benefits by means of the acquisition of shares in, or debentures of, the Bank or any other body corporate. SUBSTANTIAL SHAREHOLDERS INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As at 31 December 2005, so far as the Directors were aware, the following persons (other than a Director or Chief Executive of the Bank) were interested in 5% or more of the issued share capital or short positions in shares or underlying shares of the Bank which would fall to be disclosed to the Bank under Divisions 2 and 3 of Part XV of the SFO or which were required to be kept under Section 336 of the SFO: Ordinary shares of HK$2 each in the Bank Total % of total number of issued Name of shareholders shares held shares Industrial and Commercial Bank of China Limited (formerly known as The Industrial and Commercial Bank of China) 669,587, % Fortis Bank SA/NV* Fortis Bank SA/NV* 100,913, % Fortis N.V.* Fortis N.V.* 100,913, % Fortis SA/NV* Fortis SA/NV* 100,913, % Fortis Brussels SA/NV* Fortis Brussels SA/NV* 100,913, % * Fortis Bank SA/NV100,913,330 Fortis N.V. Fortis SA/NV Fortis Brussels SA/NV Fortis Brussels SA/NVFortis Bank SA/NV Fortis N.V. Fortis SA/NV Fortis Brussels SA/NV 336 XV 336 * Fortis Bank SA/NV is the legal owner of 100,913,330 ordinary shares of the Bank. Each of Fortis N.V., Fortis SA/NV and Fortis Brussels SA/NV is interested in such shares as a result of Fortis N.V. and Fortis SA/NV being entitled to exercise, or control the exercise of, one-third or more of the voting power at the general meetings of Fortis Brussels SA/NV and Fortis Brussels SA/NV being entitled to exercise, or control the exercise of, one-third or more of the voting power at general meetings of Fortis Bank SA/NV. All the interests stated above represent long positions. As at 31 December 2005, no short positions were recorded in the register required to be kept under Section 336 of the SFO. Save as disclosed above, as at 31 December 2005, the Bank had not been notified by any persons (other than Directors and Chief Executive of the Bank) who had interest in or short positions in the shares or underlying shares of the Bank which would fall to be disclosed to the Bank under the provisions of Part XV of the SFO or which were required to be kept under Section 336 of the SFO. MANAGEMENT CONTRACTS No contracts concerning the management and administration of the whole or any substantial part of the business of the Bank were entered into or existed during the year. 56 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

40 Report of the Directors 30% (2) Damis Jacobus Ziengs MAJOR CUSTOMERS During the year, the five largest customers of the Group accounted for less than 30% of the total of interest income and other operating income of the Group. PUBLIC FLOAT As at the date of this report, the Bank has maintained the prescribed public float under the Listing Rules, based on the information that is publicly available to the Bank and within the knowledge of the Directors of the Bank. CORPORATE GOVERNANCE The Bank is committed to maintain high standards of corporate governance practices and also follows the module set out in the Supervisory Policy Manual entitled Corporate Governance of Locally Incorporated Authorised Institutions issued by the Hong Kong Monetary Authority on 21 September Details of the Bank s corporate governance practices are set out in the Corporate Governance Report on pages 58 to 67 of its 2005 Annual Report. COMPLIANCE WITH THE SUPERVISORY POLICY MANUAL ENTITLED FINANCIAL DISCLOSURE BY LOCALLY INCORPORATED AUTHORIZED INSTITUTIONS The Bank has fully complied with the disclosure requirements set out in the Supervisory Policy Manual entitled Financial Disclosure by Locally Incorporated Authorized Institutions issued by the Hong Kong Monetary Authority on 8 November DIRECTORS INTEREST IN COMPETING BUSINESS Set out below is information disclosed pursuant to Rule 8.10(2) of the Listing Rules as at the end of the year: Mr. Zhu Qi is the Deputy Chairman of ICEA Finance Holdings Limited and the Chairman of Industrial and Commercial International Capital Limited. Mr. Chen Aiping is the Director of Xiamen International Bank and ICEA Finance Holdings Limited. Mr. Damis Jacobus Ziengs is the Chief Executive Officer, Asia of Fortis Insurance International. AUDITORS The accounts have been audited by PricewaterhouseCoopers who will retire at the forthcoming annual general meeting of the Bank and, being eligible, offer themselves for re-appointment. On behalf of the Board Dr. Jiang Jianqing Chairman Hong Kong, 21 March 2006 Industrial and Commercial Bank of China (Asia) Limited 57 Annual Report 2005

41 Corporate Governance Report A.4.1 A.4.2E.1.2E.2.1 A. A.1 The Bank is committed to maintain high standards of corporate governance practices and also follows the module set out in the Supervisory Policy Manual entitled Corporate Governance of Locally Incorporated Authorised Institutions issued by the Hong Kong Monetary Authority on 21 September The Bank has complied with the code provisions set out in code provisions set out in the Code on Corporate Governance Practices (the Code ) contained in Appendix 14 of the Listing Rules throughout the financial year ended 31 December 2005, except for the deviations from Code Provisions A.4.1, A.4.2, E.1.2 and E.2.1 which are explained in the relevant paragraphs below. A. BOARD OF DIRECTORS A.1 The Board The Board of Directors has the collective responsibility for leadership and control of the Bank and be collectively responsible for promoting the success of the Bank by directing and supervising the Bank s affairs. The Board sets strategies for the Bank and monitors the performance and activities of the senior management. The Board meetings are held at least once every quarter, such regular Board meetings will normally involve the active participation, either in person or through other electronic means of communication, of a majority of Directors entitled to be present. Special Board meetings will be held when necessary. The Board of the Bank held four regular meetings in The attendance records of individual Directors are as follows: Number of Board Meetings held Number of during the Director s Term Meetings Name of Director of Office in 2005 Attended Dr. Jiang Jianqing (Chairman, Non-executive Director) 4 4 Ms. Wang Lili (Vice Chairman, Non-executive Director) 4 3 Mr. Zhu Qi (Managing Director and Chief Executive Officer) 4 4 Mr. Chen Aiping (Non-executive Director) 4 4 Mr. Wong Yuen Fai (Executive Director) 4 4 Mr. Zhang Yi (Executive Director, appointed on 15 March 2005) 2 2 Damis Jacobus Ziengs Mr. Damis Jacobus Ziengs (Non-executive Director) 4 4 Mr. Wong Yue Chim, Richard (Independent Non-executive Director) 4 2 Mr. Tsui Yiu Wa, Alec (Independent Non-executive Director) 4 4 Mr. Yuen Kam Ho, George (Independent Non-executive Director) 4 4 Mr. Wang Yan (Former Executive Director, resigned on 15 January 2005) Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

42 Corporate Governance Report D.2 A.2 A The Directors of the Bank are consulted to include matters in the agenda of for regular Board meetings. The Director(s) may seek independent professional advice in appropriate circumstances to assist him/her in discharging his/her duties to the Bank. The Directors also have access to advice and services of the Company Secretary to ensure due compliance of the Board procedures, and all applications rules and regulations. Notice of meeting shall be given to all Directors by the Company Secretary at least two weeks before the date of the meeting to provide sufficient notice to give all Directors an opportunity to attend. Under special circumstances, the Company Secretary will promptly contact all Directors by way of telephone. Minutes of the meetings of the Board and the Board committee have been recorded in sufficient detail the matters considered by the Board and the committees, decisions reached, including any concerns raised by Directors or dissenting views expressed. Draft and final versions of the minutes of the Board are sent to all Directors for their comment and records respectively. Minutes of the meetings of the Board, the Audit Committee, the Nomination Committee and the Risk Management Committee of the Bank are kept by the Company Secretary. Minutes of the meetings of the other Board committees (as listed under Section D.2 of this report) are kept by the appointed secretary of each committee. Minutes of the meetings of the Board and all the Board committees are open for inspection at any reasonable time on reasonable notice by any Director. A.2 Chairman and Chief Executive Officer Dr. Jiang Jianqing is a Non-executive Director and the Chairman of the Board. Mr. Zhu Qi is the Chief Executive Officer of the Bank. With the support of the experienced senior management, Mr. Zhu assumes the responsibility to supervise the daily management and operations of the Bank, including the implementation of major strategies and initiatives adopted by the Board of Directors from time to time. The roles of Chairman of the Board and Chief Executive Officer of the Bank are segregated, with a clear division of responsibilities. A.3 Board Composition As at the date of the report, the Board of the Bank consisted of 10 Directors comprising three Executive Directors, four Non-executive Directors and three Independent Non-executive Directors. All the Directors are expressly identified by such categories in all corporate communications that disclose their names. All the Independent Nonexecutive Directors meet the guidelines for assessment of their independence as set out in Rule 3.13 of the Listing Rules. Industrial and Commercial Bank of China (Asia) Limited 59 Annual Report 2005

43 Corporate Governance Report A.4 A.4.2 A.4.5(a) (d) The Bank benefits from the substantial business, banking and professional experience of its Directors. Biography of the Directors is set out in the Biographical Details of Directors and Senior Management section under the Bank s 2005 Annual Report. A.4 Appointments, Re-election and Removal The Non-executive Directors and the Independent Non-executive Directors of the Bank are not appointed for specific term but subject to the retirement by rotation at and re-election at the annual general meetings in accordance with the Bank s Articles of Association. Save for the Managing Director of the Bank, at each annual general meeting one-third of the Directors for the time being or, if their number is not a multiple of three, then the number nearest but not exceeding one-third, shall retire from office by rotation and any Director appointed by the Directors to fill a casual vacancy or as an addition shall hold office only until the next following annual general meeting. All the retiring Directors are eligible for re-election. In compliance with the requirement of Code Provision A.4.2, Mr. Zhu Qi, the Managing Director of the Bank, will offer himself for retirement at the forthcoming annual general meeting of the Bank and being eligible, will offer himself for re-election. Mr. Zhang Yi who was appointed as a Director of the Bank on 15 March 2005 should have retired at the 2004 Annual General Meeting of the Bank held on 14 April As the Notice of 2004 Annual General Meeting of the Bank was issued before the appointment of Mr. Zhang Yi and Mr. Zhang Yi would only be appointed for less than one month by the date of the 2004 Annual General Meeting. For the best interests of the Bank and its shareholders, Mr. Zhang Yi will retire at the forthcoming 2005 Annual General Meeting, and shall then be entitled for re-election. Save for the Managing Director who will offer himself for re-election at the forthcoming annual general meeting of the Bank, as at the date of this report, no Director held office for over three years. The Nomination Committee was established on 20 January 2005 with specific Terms of Reference, which state clearly with its authority and duties. The Terms of Reference of the Nomination Committee have included the specific duties set out in paragraphs A.4.5(a) to (d) of the Code, with appropriate modifications when necessary. It is responsible for assessing the suitability of the candidates and recommending to the Board all new appointments of Directors and senior executives (such as chief executive officer, alternate chief executive, chief financial officer). The Committee reports directly to the Board of Directors and meets at least once a year. The current members of the Nomination Committee are two Independent Non-executive Directors, namely Mr. Tsui Yiu Wa, Alec (Chairman) and Mr. Yuen Kam Ho, George, and a Non-executive Director, namely Mr. Chen Aiping. 60 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

44 Corporate Governance Report The Nomination Committee of the Bank held two meetings in 2005 and the attendance records of the individual members are as follows: Name of Committee Member Number of Meetings Attended Mr. Tsui Yiu Wa, Alec (Independent Non-executive Director and Chairman) 2 Mr. Yuen Kam Ho, George (Independent Non-executive Director) 2 Mr. Chen Aiping (Non-executive Director) 1 A.5 A.5.2(a) (d) A.6 During the year, the Nomination Committee of the Bank considered and recommended to the Board the appointment of Mr. Fung Siu Ming as the Chief Risk Officer and a Deputy General Manager of the Bank. A.5 Responsibilities of Directors The Bank regularly reminds all Directors of their functions and responsibilities and updates them of the legal and regulatory developments. Through regular Board meetings and circulation of regular financial reports and other materials (such as the minutes of the meetings of the other Board committees), all Directors are informed of the business operation and financial situation of the Bank. The functions of the Non-executive Directors of the Bank as set out in the Terms of Reference of the Board of Directors include the functions as specified in Code Provision A.5.2 (a) to (d) of the Code (with appropriate modifications when necessary). The Bank has adopted the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 of the Listing Rules as its own code of conduct regarding Directors securities transactions. The Bank confirms that, having made specific enquiry of all Directors (including those who have resigned to be Directors or who have become Directors during the year of 2005), the Directors have complied with the required standard set out in the Model Code for the year ended 31 December A.6 Supply of and Access to Information The Directors have full and timely access to all relevant information of the Bank so that they can make an informed decision in discharging their duties and responsibilities as Directors. The Board and each Director has separate and independent access to the management of the Bank. Industrial and Commercial Bank of China (Asia) Limited 61 Annual Report 2005

45 Corporate Governance Report B. B.1 S.B.S. Damis Jacobus Ziengs B. REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT B.1 The Level and Make-up of Remuneration and Disclosure The Remuneration Committee of the Bank was established on 20 January 2005 with specific Terms of Reference, which state clearly with its authority and duties. It oversees the remuneration of the Directors and senior management of the Bank to ensure that their remuneration is appropriate for their duties and consistent with the Bank s culture, strategy and control environment. The Committee is also responsible for recommending to the Board on the Bank s remuneration policy framework. The Committee reports directly to the Board of Directors and meets at least once a year. The current members of the Remuneration Committee are three Independent Non-executive Directors, namely Mr. Yuen Kam Ho, George (Chairman), Professor Wong Yue Chim, Richard, S.B.S., J.P., and Mr. Tsui Yiu Wa, Alec, and two Non-executive Directors, namely Mr. Chen Aiping and Mr. Damis Jacobus Ziengs. The Remuneration Committee of the Bank held one meeting in 2005 and the attendance records of the individual members are as follows: Name of Committee Member Number of Meetings Attended Mr. Yuen Kam Ho, George (Independent Non-executive Director and Chairman) 1 Mr. Wong Yue Chim, Richard (Independent Non-executive Director) 0 Mr. Tsui Yiu Wa, Alec (Independent Non-executive Director) 1 Mr. Chen Aiping (Non-executive Director) 1 Damis Jacobus Ziengs Mr. Damis Jacobus Ziengs (Non-executive Director) 0 13 Information relating to the remuneration of each Director for 2005 is set out in Note 13 to the Notes to Accounts of the 2005 Annual Report of the Bank. During the year, the Remuneration Committee considered and recommended to the Board the allocation of performance bonus of the Bank group (including that of the Executive Directors) for the year ended 31 December The Committee also considered and recommended to the Board the fees payable to the Nonexecutive Directors and the Independent Non-executive Directors for the year ended 31 December Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

46 Corporate Governance Report C. C.1 68 C.2 C.3 C.3.3 S.B.S. C. ACCOUNTABILITY AND AUDIT C.1 Financial Reporting Monthly reports on financial results are submitted to the Board for ongoing monitoring. Business performance and financial situation of the Bank are reported to the Board at each Board meeting to assist the Board to have a balanced, clear and comprehensive assessment of the Bank s performance, position and prospects. The Directors acknowledge their responsibility for preparing the accounts of the Bank. As at 31 December 2005, the Directors are not aware of any material uncertainties relating to events or conditions which may cast significant doubt upon the Bank s ability to continue as a going concern. The Directors have prepared the financial statements of the Bank on a going concern basis. A statement by the external auditors with respect to their financial reporting responsibilities is included in the Auditors Report on page 68 of the Bank s 2005 Annual Report. C.2 Internal Controls The Board is responsible for the system of the internal control and the review of the effectiveness of the Bank and its subsidiaries through well-established procedures, policies and systems of the Bank. The review covers all material controls, including financial, operational and compliance control and risk management functions. The Internal Audit Department evaluates the Bank s internal controls on an on-going basis and reports to the Audit Committee at least 4 times each year on significant findings on internal controls. Copy of the minutes of the Audit Committee meetings will also be sent to the Board for information. C.3 Audit Committee The Bank has established an Audit Committee with specific written Terms of Reference set out clearly its authority and responsibilities. The Terms of Reference of the Audit Committee have included the duties set out in Code Provision C.3.3 of the Code, with appropriate modifications when necessary. It reviews the effectiveness of both the external and internal audit and of internal controls and risk evaluation. The current members of the Audit Committee are Mr. Chen Aiping, a Non-executive Director and the three Independent Non-executive Directors, namely Professor Wong Yue Chim, Richard, S.B.S., J.P. (Chairman), Mr. Tsui Yiu Wa, Alec and Mr. Yuen Kam Ho, George. Industrial and Commercial Bank of China (Asia) Limited 63 Annual Report 2005

47 Corporate Governance Report The Audit Committee held four meetings in 2005 and all the meetings were with the participation of the external auditors of the Bank. The attendance records of the individual members at the Audit Committee are as follows: Name of Committee Member Number of Meetings Attended Mr. Wong Yue Chim, Richard (Independent Non-executive Director and Chairman) 3 Mr. Yuen Kam Ho, George (Independent Non-executive Director and Alternate Chairman) 4 Mr. Tsui Yiu Wa, Alec (Independent Non-executive Director) 4 Mr. Chen Aiping (Non-executive Director) 1 3,611,000 6,979,000 During the year, the fees paid to the external auditors of the Group for the audit services and non-audit services amounted to HK$3,611,000 and HK$6,979,000 respectively. Details of the significant non-audit service assignments and the fees paid are as follows: Nature of Non-audit Service Fees Paid Tax Service HK$260,000 Audit related services HK$1,800,000 Other Services HK$24,000 Ad Hoc Projects HK$4,895,000 During the year, the work performed by the Audit Committee of the Bank is summarised as follows: Met with the Hong Kong Monetary Authority to exchange view in the areas of internal controls, risk management and compliance functions; Met with the external auditors to discuss the general scope of their audit work; Reviewed external auditor s management letter and management s response; Reviewed and approved the appointment of external auditors for the year of 2005; Reviewed the external auditors 2005 audit plan; Reviewed the external auditors report and findings and the management s response; 64 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

48 Corporate Governance Report Reviewed the internal audit plan for the year of 2005; Reviewed the internal audit reports covering the evaluation of internal controls; Reviewed the audited accounts and final results announcement for the year of 2005; Reviewed the Interim Report and the interim results announcement for the six months ended 30 June D. D.1 D.2 C.3 B.1 A.4 1. D. DELEGATION BY THE BOARD D.1 Management Functions The Board assumes the responsibility for leadership and control of the Bank and delegates aspects of its management and administration functions to the Management. The Board sets up clear guidelines as to the powers to the Management, in particular, with respect to reporting mechanism and the matters that shall be subject to the approval of the Board (such as substantial changes in the management structure, the business objectives, strategies and business plans, the policies and manuals which may substantially affect the financial and risk management of the Bank). D.2 Board Committees Apart from the Audit Committee (particulars are disclosed under C.3), Remuneration Committee (particulars are disclosed under B.1) and the Nomination Committee (particulars are disclosed under A.4), the Board has also established the following four specialised committees which comprise Directors and where appropriate, other senior executives from relevant areas: 1. General Management Committee The General Management Committee was established on 24 September 2001 to supervise the overall operation of the Group. The Chairman of the Committee is the Chief Executive Officer, and the other committee members are the Deputy General Managers and the Assistant General Managers designated by the Chief Executive Officer. 15 meetings were held during the current financial year. Industrial and Commercial Bank of China (Asia) Limited 65 Annual Report 2005

49 Corporate Governance Report Credit Committee The Credit Committee sets up credit related policies and procedures in order to maintain the quality of the credit portfolio of the bank. It reviews and approves large credit exposures, manages credit risk concentration, accepts or rejects new credit strategies and responds to deteriorating credit customers. The Committee consists of the Head of Credit Risk Management Department (Chairman), the Chief Risk Officer and the heads of business lines. 3. Asset and Liability Management Committee The Asset and Liability Management Committee was established on 12 July 1999 to closely monitor the mix of liquid assets and funding channels, and the exposure to movements in interest rate and foreign exchange. The Committee members also meet to review the optimal liquidity level in response to internal requirements and external market indicators. It comprises the Chief Financial Officer (the Chairman and Secretary of the Committee), all Deputy General Managers, the Designated Assistant General Manager in charge of Business Units, the Chief Risk Officer, the Head of Middle Office Department, the Head of Treasury & Markets Department and the Head of Corporate Finance Department. The Committee meets on a monthly basis. 4. Risk Management Committee The Risk Management Committee was established on 5 September 2002 to review and report to the Board of Directors on the adequacy and efficiency of risk management procedures, policies and systems of the Group. It focuses on credit risk, interest rate risk, market risk, liquidity risk, operational risk, reputation risk and legal risk. The Committee comprises the Deputy General Manager in charge of Risk Management (Chairman), the Chief Executive Officer, an Independent Non-executive Director of the Bank, the Deputy General Manager in charge of Treasury & Markets, the Deputy General Manager in charge of Systems & IT Department, the Chief Financial Officer, the Chief Operation Officer, the Head of Treasury & Markets Department, Chief Risk Officer, the Head of Credit Risk Department, the Head of Middle Office Department, the Head of Systems & IT Department and the Head of Legal, Compliance and Company Secretarial Department. The Committee meets on a quarterly basis. 66 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

50 Corporate Governance Report E. E.1 E.2 In accordance with the Group asset portfolio structure and risk profile, the stress-testing program as part of an on-going risk monitoring exercise has been implemented. The stress test results are regularly reported to the Risk Management Committee for review. Policies and tolerances addressing risk identification, measurement, monitoring and control will be directly communicated to those areas affected throughout the Group. Each of these committees has specific written terms of reference which clearly sets out its authorities and duties. The Audit Committee, the Remuneration Committee and the Nomination Committee are required to report their decisions or recommendations to the Board. Material matters are reserved for the approval of the Board according to the terms of reference of such committees. E. COMMUNICATION WITH SHAREHOLDERS E.1 Effective Communication A separate resolution was proposed by the Chairman of the 2004 Annual General Meeting in respect of each separate issue including the re-election of the retiring Directors. The Bank organises press conferences and analysts meetings to explain its annual and interim results in detail. The website of the Bank contains the Investor Relations and About Us sections which offer timely access to the Bank s publications, press releases and other business information. The Chairman was unable to attend the 2004 Annual General Meeting due to other important business engagements. Two Executive Directors, one Non-executive Director and the Chairman of the Nomination Committee attended the 2004 Annual General Meeting of the Bank to answer questions from shareholders. E.2 Voting by Poll The procedures for voting by poll, which comply with the Listing Rules and the Articles of Association of the Bank, are set out in every circular sent to shareholders of the Bank, except for the omission in one circular, during the year of The Bank shall regularly inform shareholders of the procedure for voting by poll and ensure compliance with the requirements about voting by poll contained in the Listing Rules and the Articles of Association of the Bank. Industrial and Commercial Bank of China (Asia) Limited 67 Annual Report 2005

51 Auditors Report AUDITORS REPORT TO THE SHAREHOLDERS OF INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LIMITED (incorporated in Hong Kong with limited liability) We have audited the accounts set out on pages 69 to 175 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Hong Kong Companies Ordinance requires the directors to prepare accounts which give a true and fair view. In preparing accounts which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. BASIS OF OPINION We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the circumstances of the Bank and the Group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the accounts are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. We believe that our audit provides a reasonable basis for our opinion. OPINION In our opinion the accounts give a true and fair view of the state of affairs of the Bank and of the Group as at 31 December 2005 and of the Group s profit and cash flows for the year then ended and have been properly prepared in accordance with the Hong Kong Companies Ordinance. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 21 March Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

52 Consolidated Profit and Loss Account For the year ended 31 December Note HK$ 000 HK$ 000 Interest income 6 4,180,031 2,311,367 Interest expense (2,864,034) (1,036,529) Net interest income 1,315,997 1,274,838 Other operating income 7 716, ,427 Operating income 2,032,985 1,645,265 Operating expenses 8 (890,225) (744,309) Operating profit before impairment losses/provisions 1,142, ,956 Net (loss)/gain from disposal/reversal of revaluation deficits of property, plant and equipment 11 (699) 40,116 Net loss on disposal of non-trading securities (71) Net gain on disposal of held-to-maturity securities ,638 Net gain on disposal of available-for-sale securities 65,509 Net gain on disposal of loans 6,162 Write-back of bad and doubtful debts 10 21,557 Impairment losses on loans and advances 10 (6,324) Impairment losses on non-trading securities (200) Operating profit 1,207, ,996 Share of profits/(losses) of an associate (41,225) Loss on disposal of an associate (92) Profit before income taxation 1,207, ,679 Taxation 12 (227,252) (176,288) Profit attributable to the equity holders of the Group , ,391 Dividend , ,584 Earnings per share 15 Basic HK$0.91 HK$0.80 Diluted HK$0.91 HK$0.76 Industrial and Commercial Bank of China (Asia) Limited 69 Annual Report 2005

53 Consolidated Balance Sheet As at 31 December 2005 Restated Note HK$ 000 HK$ 000 Assets Cash and short-term funds 17 25,317,238 13,845,905 Placements with and advances to banks and other financial institutions 18 2,469,645 5,811,673 Trade bills 19 1,992,380 1,859,246 Trading securities Derivative financial instruments 22 44,720 Financial assets at fair value through profit or loss 20 1,690,010 Non-trading securities 21 2,716,081 Loans and advances to customers 23 68,152,663 59,500,978 Investment securities 13,219,310 13,047,042 available-for-sale 24 10,137,811 held-to-maturity 25 3,081,499 13,047,042 Investment in an associate 26 28,484 28,332 Intangible assets 27 1,080, ,054 Property, plant and equipment , ,099 Leasehold land and land use rights 29 91,704 93,029 Deferred income tax assets 33 27,403 Other assets 1,100,726 1,186,808 Total assets 115,399,323 99,343,650 Liabilities Deposits from banks and other financial institutions 25,095,384 17,520,277 Derivative financial instruments ,802 Deposits from customers 31 60,990,148 56,058,169 At fair value through profit or loss 487,255 At amortised cost 60,502,893 56,058,169 Certificates of deposit issued 9,351,305 7,345,360 At fair value through profit or loss 4,506,081 At amortised cost 4,845,224 7,345,360 Debt securities in issue 2,978,615 3,095,423 At fair value through profit or loss 32 2,978,615 At amortised cost 32 3,095,423 Current income tax liabilities 8,333 14,553 Deferred income tax liabilities 33 4,799 Other liabilities 1,604,308 1,420,221 Total liabilities 100,190,694 85,454,003 Capital and reserves attributable to the Group s equity holders Loan capital 36 5,338,775 5,348,229 Share capital 37 2,242,518 2,095,930 Retained earnings 38 2,106,340 1,461,177 Other reserves 38 5,520,996 4,984,311 Total equity 15,208,629 13,889,647 Total equity and liabilities 115,399,323 99,343,650 Jiang Jianqing Zhu Qi Wong Yuen Fai Cheng Pui Ling, Cathy Chairman Managing Director & Deputy Company Secretary Director & General Manager Chief Executive Officer 70 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

54 Balance Sheet As at 31 December 2005 Restated Note HK$ 000 HK$ 000 Assets Cash and short-term funds 17 24,888,944 12,317,117 Placements with and advances to banks and other financial institutions 18 2,469,645 5,811,673 Trade bills 19 1,992,380 1,060,805 Trading securities Derivative financial instruments 22 44,720 Financial assets at fair value through profit or loss 20 1,690,010 Non-trading securities 21 2,712,284 Loans and advances to customers 23 67,095,289 44,549,200 Investment securities available-for-sale 24 10,137,056 held-to-maturity 25 3,082,768 11,169,256 Investment in an associate 26 14,508 14,508 Investment in subsidiaries 30 3,318,639 2,711,204 Intangible assets , ,360 Property, plant and equipment , ,273 Leasehold land and land use rights 29 91,704 93,029 Deferred income tax assets 33 7,990 Other assets 1,102, ,409 Total assets 116,809,906 82,214,108 Liabilities Deposits from banks and other financial institutions 24,329,654 16,468,037 Derivative financial instruments ,802 Deposits from customers 31 66,475,461 38,636,457 At fair value through profit or loss 3,462,522 At amortised cost 63,012,939 38,636,457 Certificates of deposit issued 9,351, ,979 At fair value through profit or loss 4,506,081 At amortised cost 4,845,224 12,720,979 Current income tax liabilities 6,553 Deferred income tax liabilities 33 4,799 Other liabilities 1,594,956 1,049,415 Total liabilities 101,920,530 68,874,888 Capital and reserves attributable to the Bank s equity holders Loan capital 36 5,338,775 5,348,229 Share capital 37 2,242,518 2,095,930 Retained earnings 38 1,826, ,101 Other reserves 38 5,481,442 4,984,960 Total equity 14,889,376 13,339,220 Total equity and liabilities 116,809,906 82,214,108 Jiang Jianqing Zhu Qi Wong Yuen Fai Cheng Pui Ling, Cathy Chairman Managing Director & Deputy Company Secretary Director & General Manager Chief Executive Officer Industrial and Commercial Bank of China (Asia) Limited 71 Annual Report 2005

55 Consolidated Statement of Changes in Equity For the year ended 31 December Note HK$ 000 HK$ 000 Total equity (excluding loan capital) as at 1 January, as previously reported 8,541,418 5,917, Effect of adopting HKASs 17 and 39 2,1 221,468 Total equity (excluding loan capital) as at 1 January, as restated 8,762,886 5,917,305 Revaluation surplus on bank premises 38 25,791 Write-back of impairment loss on bank premises 38 64,069 Change in fair value of available-for-sale securities 38 (171,750) Change in fair value of non-trading securities 38 (82,974) Share of revaluation gain of investment properties held by an associate Change in deferred taxation 38 27,838 16,260 Exchange reserve realised on disposal of a foreign associate Exchange difference arising from translation of results of a foreign subsidiary 38 (122) 122 Net losses not recognised in the profit and loss account (118,243) (2,245) Profit attributable to the equity holders of the Group , ,391 Reserves from merger with Belgian Bank, Hong Kong Branch 1,427 Dividend 38 (526,696) (394,664) Issue of ordinary shares ,939 2,286,696 Share issue expenses 38 (60) (26,035) Capital duty for the increase in authorised ordinary share capital 38 (30) Total equity (excluding loan capital) as at 31 December 9,869,854 8,541, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

56 Consolidated Cash Flow Statement For the year ended 31st December Note HK$ 000 HK$ 000 Profit before taxation 1,207, ,679 Write-back of bad and doubtful debts 10 (21,557) Charge for impairment allowances on loans and advances 10 6,324 Amortisation of intangible assets 39,242 59,103 Amortisation of leasehold land 1,325 Interest paid on loan capital 41a(v) 188,117 80,714 Depreciation 29,006 30,752 Recoveries of advances written off 10 16,567 42,425 Net loss/(gain) from disposal/reversal of revaluation deficits of property, plant and equipment (40,116) Gain on disposal of loans (6,162) Impairment loss on non-trading securities 200 Loss on disposal of an associate Share of net (profits)/losses of associates 26 (260) 41,225 Dividend received from listed investments 7 (1,512) Dividend received from unlisted investments 7 (3,228) (5,893) Operating profit before working capital changes 1,479,483 1,122,112 Decrease/(increase) in operating assets: Treasury bills maturing beyond three months 385,572 (889,989) Placements with banks and other financial institutions maturing beyond three months 1,692,281 (1,851,369) Trade bills (131,596) (466,608) Held-to-maturity securities 10,165, ,042 Trading securities 20 (247) Financial assets at fair value through profit and loss (1,714,210) Available-for-sale securities (7,254,224) Non-trading securities 150,445 Loans and advances to customers and other assets (6,996,005) (5,577,236) Derivative financial instruments 22 (44,720) Increase/(decrease) in operating liabilities: Deposits and balances of banks and other financial institutions maturing beyond three months (4,205,399) (4,000,823) Deposits from customers 4,904, ,718 Certificates of deposit issued 1,987, ,487 Issued debt securities (96,135) 3,095,423 Other liabilities 31, ,263 Derivative financial instruments ,802 Net cash inflow/(outflow) from operating activities before taxation 361,778 (6,596,535) Industrial and Commercial Bank of China (Asia) Limited 73 Annual Report 2005

57 Consolidated Cash Flow Statement For the year ended 31st December Note HK$ 000 HK$ 000 Net cash inflow/(outflow) from operating activities before taxation 361,778 (6,596,535) Net Hong Kong profits tax paid (160,074) (275,131) Net overseas tax (paid)/refunded (5,187) 173 Net cash inflow/(outflow) from operating activities 196,517 (6,871,493) Investing activities Purchase of subsidiaries, net of cash and cash equivalent acquired ,864 3,843,901 Purchase of intangible assets 27 (54,650) (129,235) Purchase of property, plant and equipment 28 (60,476) (18,671) Proceeds from disposal of property, plant and equipment 2, ,807 Dividend received from listed investments 7 1,512 Dividend received from unlisted investments 7 3,228 5,893 Dividend received from an associate 3,750 Net cash inflow from investing activities 505,577 3,934,957 Financing activities Issue of loan capital 36 1,169,955 Issue of share capital 37 72,944 1,404,832 Share issue expenses 38 (60) (26,035) Capital duty for the increase in authorised ordinary share capital 38 (30) Interest paid on loan capital (188,117) (80,714) Dividend paid on ordinary shares 38 (526,696) (394,664) Net cash (outflow)/inflow from financing activities (641,929) 2,073,344 Effects of foreign exchange differences (13,380) 4,020 Net increase/(decrease) in cash and cash equivalents 46,785 (859,172) Cash and cash equivalents at 1 January 39 8,443,309 9,302,481 Cash and cash equivalents at 31st December 39 8,490,094 8,443, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

58 PRINCIPAL ACTIVITIES The principal activities of the Bank are the provision of banking, financial and other financial related services. The principal activities of the subsidiaries are shown in Note 30 to the accounts. Legal merger Pursuant to the Industrial and Commercial Bank of China (Asia) Limited (Merger) Ordinance (Chapter 1178), all the undertakings of Belgian Bank, Hong Kong Branch, were transferred to and vested in the Bank with effect from 10 October SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with Hong Kong Financial Reporting Standards (HKFRSs which is a collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ( HKASs ) and Statements of Standard Accounting Practice and Interpretations) issued by Hong Kong Institute of Certified Public Accountants (HKICPA), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosures provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of buildings, available-for-sale financial assets, financial assets and financial liabilities held for trading, financial assets, financial liabilities (including derivative instruments) at fair value through profit or loss and leasehold building. The preparation of financial statements in conformity with HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. Industrial and Commercial Bank of China (Asia) Limited 75 Annual Report 2005

59 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The adoption of new/revised HKFRS In 2005, the Group adopted the new/revised HKASs and HKFRSs as set out below, which are relevant to its operations. The 2004 comparatives have been amended as required, in accordance with the relevant requirements HKAS 1 HKAS 7 HKAS 8 HKAS 10 HKAS 16 HKAS 17 HKAS 21 HKAS 24 HKAS 27 HKAS 28 HKAS 30 HKAS 32 HKAS 33 HKAS 36 HKAS 38 HKAS 39 HKFRS 3 HKFRS 5 Presentation of Financial Statements Cash Flow Statements Accounting Policies, Changes in Accounting Estimates and Errors Events after the Balance Sheet Date Property, Plant and Equipment Leases The Effects of Changes in Foreign Exchange Rates Related Party Disclosures Consolidated and Separate Financial Statements Investments in Associates Disclosures in the Financial Statements of Banks and Similar Financial Institutions Financial Instruments: Disclosures and Presentation Earnings per Share Impairment of Assets Intangible Assets Financial Instruments: Recognition and Measurement Business Combinations Non-current assets held for sale and discontinued operations The adoption of new/revised HKASs 1, 7, 8, 10, 16, 21, 24, 27, 28, 30 and 33 did not result in substantial changes to the Group s accounting policies. In summary: HKAS 1 has affected the presentation of share of net after-tax results of associates and other disclosures In HKAS 21, the functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as the presentation currency for respective entity financial statements. HKAS 24 has affected the identification of related parties and some other related-party disclosures. 76 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

60 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The adoption of new/revised HKFRS (continued) HKAS 17 The adoption of revised HKAS 17 Leases has resulted in a change in accounting policy relating to leasehold land. Leasehold land and buildings were previously carried at cost less accumulated depreciation and impairment loss. Following the adoption of HKAS 17 Leases, a lease of land and building should be split into a lease of land and a lease of building in proportion to the relative fair values of the leasehold interests in the land element and the building element of the lease at inception. The land lease prepayment is stated at cost and amortised over the period of the lease or where there is impairment, the impairment is expensed in the profit and loss account, whereas the leasehold building is stated at fair value. Previously included in property, plant and equipment is the land element of the leasehold properties, which is now disclosed as leasehold land and land use rights. HKASs 32 and 39 The adoption of HKAS 32 Financial Instruments: Disclosure and Presentation and HKAS 39 Financial Instruments: Recognition and Measurement has resulted in a change in accounting policy for recognition, measurement, disclosure and presentation of financial assets and liabilities. It has also resulted in the recognition of derivatives at fair value and the change in the recognition and measurement of hedging activities. In prior year, where the Group had doubt on the ultimate recoverability of any loans and advances in full, specific provision was made to reduce the carrying value of the asset, taking into account available collateral, to the expected net realisable value based on the Group s assessment of the potential losses on those identified loans and advances on a case-by-case basis. In addition, amounts had been set aside as a general provision for bad and doubtful debts. On adoption of HKAS 39 Financial Instruments: Recognition and Measurement, impairment allowances are made on a financial asset when there is objective evidence of impairment as a result of the occurrence of certain loss events after the initial recognition of the financial asset, and these loss events will have impact on the estimated future cashflows of the financial assets. Impairment loss is assessed individually for individually significant financial assets, and individually or collectively for financial assets that are not individually significant. Where objective evidence of impairment exists, the recoverable amount of an asset is calculated by discounting the future cash flows to the present value using the original effective interest rate taking into account the value of collateral, if any. The difference between the carrying amount and the recoverable amount of the asset is recognised as impairment. Industrial and Commercial Bank of China (Asia) Limited 77 Annual Report 2005

61 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The adoption of new/revised HKFRS (continued) HKFRS 3, HKAS 36 and HKAS 38 In prior periods, positive goodwill was amortised on a straight-line basis over its useful life and was subject to impairment testing when there were indications of impairment. With effect from 1 January 2005, in accordance with HKFRS 3 Business Combinations and HKAS 36 Impairment of Assets, the Group no longer amortises positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial recognition, as well as when there are indications of impairment. Impairment losses are recognised when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amount. The new policy in respect of positive goodwill has been applied prospectively in accordance with the transitional arrangements under HKFRS 3 Business Combinations. As a result, comparative amounts have not been restated, but the cumulative amount of amortisation as at 1 January 2005 has been offset against the cost of the goodwill. The Group has re-assessed the useful lives of its intangible assets in accordance with the provisions of HKAS 38. No adjustment resulted from this re-assessment. HKFRS 5 The adoption of HKFRS 5 has resulted in change in accounting policy for repossessed collateral assets. Repossessed collateral assets are reported as Repossessed assets under Other assets and the relevant loans are derecognised. The repossessed collateral assets are measured at lower of carrying amount and net realisable value. In prior years, loans and advances where assets had been repossessed were reported as Advances to customers on the balance sheet and the carrying value was adjusted to net realisable value of the repossessed assets. All changes in the accounting policies have been made in accordance with the transition provisions in the respective standards. All standards adopted by the Group require retrospective application other than: 16 HKAS 16 the initial measurement of an item of property, plant and equipment acquired in an exchange of assets transaction is accounted at fair value prospectively only to future transactions; 21 HKAS 21 prospective accounting for goodwill and fair value adjustments as part of foreign operations; 78 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

62 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The adoption of new/revised HKFRS (continued) HKAS 39 does not permit recognition, derecognition and measurement of financial assets and liabilities in accordance with these standards on a retrospective basis. The Group continue to apply the previous standard, SSAP 24 Accounting for investments in securities, to investments in securities and also to hedge relationships for the 2004 comparative information. The adjustments required for the accounting differences between SSAP 24 and HKAS 39 are determined and recognised at 1 January HKFRS 3 applied prospectively after the adoption date. HKFRS 5 applied prospectively after the adoption date. Effect on opening balance of total equity at 1 January 2005 (as adjusted) Effect of new policies (increase/(decrease)) Retained Capital and profits other reserves Total HK$ 000 HK$ 000 HK$ 000 Prior period adjustments: 17 HKAS17 Property, plant and equipment (3,612) (132,636) (136,248) Deferred tax 23,212 23,212 (3,612) (109,424) (113,036) 39 HKAS39 Available-for-sale securities 110, , ,171 Fair value through profit and loss securities (24,200) (24,200) Deposit and balances of banks and other financial institutions 6,376 6,376 Deposits from customers 6,614 6,614 Derivatives (105,511) (105,511) Certificates of deposit issued (18,546) (18,546) Issued debts 20,673 20,673 Impairment allowance individual 47,690 47,690 Impairment allowance collective 201, ,784 Funding swap (3,414) (3,414) Current tax 1,329 1,329 Deferred tax (35,312) (24,150) (59,462) 208, , ,504 Total effect as at 1 January ,651 16, ,468 Industrial and Commercial Bank of China (Asia) Limited 79 Annual Report 2005

63 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Effect for the year ended 31 December 2005 (estimated) Effect of new policies (increase/(decrease)) Consolidated HK$ HKFRS 3 Amortisation of goodwill 64,140 64, HKAS17 Depreciation 3,232 Land lease prepayment amortisation (1,324) 39 HKAS39 Available-for-sale securities (56,968) Fair value through profit and loss securities (27,796) Deposits and balances of banks and other financial institutions (6,368) Deposits from customers 11,986 Derivatives (9,991) Certificates of deposit issued 79,858 Issued debts 81,018 Impairment allowance individual 23,174 Impairment allowance collective 171,509 Deferred tax (30,014) Current tax (16,610) 1, ,798 Total effect for the year ended 31 December ,846 Effect on earnings per share: Basic HK$0.27 Diluted HK$ Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

64 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Consolidation The consolidated accounts include the accounts of the Bank and all its subsidiaries made up to 31 December. (a) (a) Subsidiaries Subsidiaries are those entities in which the Bank, directly or indirectly controls the composition of the Board of Directors, controls more than half of the voting power or holds more than half of the issued share capital. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant intercompany transactions and balances within the Group are eliminated on consolidation. The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group s share of its net assets together with any goodwill or negative goodwill taken to reserves and which was not previously charged or recognised in the consolidated profit and loss account. In the Bank s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Bank on the basis of dividend received and receivable. (b) (b) Associates An associate is a company, not being a subsidiary, in which an equity interest is held for the long term and significant influence is exercised in its management. The consolidated profit and loss account includes the Group s share of the results of the associates for the year. The consolidated balance sheet includes the Group s share of the net assets of the associates including goodwill (net of accumulated amortisation) on acquisition. In the Bank s balance sheet, the investments in associates are stated at cost less provision for impairment losses. The results of the associates are accounted for by the Bank on the basis of dividend received and receivable. Equity accounting is discontinued when the carrying amount of the investment in an associate reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associate. Industrial and Commercial Bank of China (Asia) Limited 81 Annual Report 2005

65 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Interest income and expenses From 1 January 2004 to 31 December 2004 Interest income and interest expense were recognised in the profit and loss account as it accrued using the relative contract or coupon interest rates, except in the case of doubtful debts where interest was suspended and netted off in the balance sheet against the relevant balances. From 1 January 2005 onwards Interest income and expense are recognised in the profit and loss account for all instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 2.4 Financial assets From 1 January 2004 to 31 December 2004 All financial assets were stated at cost or amortised cost, net of impairment allowances, except for investments in securities classified as non-trading securities. Non-trading securities include debt securities held for liquidity purposes which are held primarily to maintain the liquidity ratio as defined in the Fourth Schedule of the Hong Kong Banking Ordinance and other debt and equity securities which are not held for trading purposes. Non-trading securities are stated at fair value on the balance sheet. Fair value represents the quoted market price for securities that are actively traded in a liquid market. For securities which are not actively traded or are unlisted, fair value is estimated by way of various pricing techniques including discounted cash flow and dividend yield analyses. 82 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

66 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Financial assets (continued) From 1 January 2004 to 31 December 2004 (continued) Changes in fair value of non-trading securities are recognised in the investment revaluation reserve until the security is sold, or is determined to be impaired, at which time the cumulative gain or loss representing the difference between the net sales proceeds and the carrying amount of the relevant security, together with any surplus/deficit transferred from the investment revaluation reserve, is dealt with in the profit and loss account. From 1 January 2005 onwards The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. (a) (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. A financial asset is typically classified as fair value through profit or loss at inception if it meets the following criteria: It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mis-match ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or A group of financial assets and/ or financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and this is the basis on which information about the assets and/ or liabilities is provided internally. Industrial and Commercial Bank of China (Asia) Limited 83 Annual Report 2005

67 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Financial assets (continued) From 1 January 2005 onwards (continued) (b) (b) Loans and receivables Loans and receivables, including cash and short term funds, placement with and advances to banks and other financial institutions, trade bills and loans and advances to customers, are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. (c) (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale. (d) (d) Available-for-sale Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Purchases and sales of financial assets are recognised on trade-date the date on which the Group commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. 84 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

68 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Financial assets (continued) From 1 January 2005 onwards (continued) (d) (d) Available-for-sale (continued) Available for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the profit and loss account in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in the profit and loss account. However, interest calculated using the effective interest method is recognised in the profit and loss account. Dividend on available-for-sale equity instruments are recognised in the profit and loss account when the Group s right to receive payment is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer s specific circumstances. Industrial and Commercial Bank of China (Asia) Limited 85 Annual Report 2005

69 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Impairment of financial assets From 1 January 2004 to 31 December 2004 Provisions were made against specific loans and advances as and when the directors had doubts on the ultimate recoverability of principal or interest in full. Specific provision was made to reduce the carrying value of the asset, net of any collateral, to the expected net realisable value based on the directors assessment of the potential losses on those identified loans and advances on a caseby-case basis. For loans and advances where assets had been repossessed, provision was made for any shortfall between the expected net realisable value of the repossessed assets and the outstanding advances. Where it was not possible to reliably estimate the loss, the Group applied pre-determined provisioning levels to the unsecured portion of loans and advances based on the Group s loan classification procedures. The Group internally classified loans and advances into five categories largely based on an assessment of the borrower s capacity to repay and on the degree of doubt about the collectibility of interest and/or principal. One important indicator of collectibility was the period that payments of interest and/or principal had been overdue In addition, amounts had been set aside as a general provision for doubtful debts. Both specific and general provisions were deducted from Loans and advances to customers in the balance sheet. When there was no realistic prospect of recovery, the outstanding debt was written off. Financial assets, other than loans and advances and trading securities, were reviewed on each balance sheet date to determine whether there was any indication of impairment. If the recoverable amount of the asset was estimated to be less than the carrying amount, the carrying amount of the asset was reduced to its recoverable amount and the impairment loss was recognised in the profit and loss account. For non-trading securities, any loss previously recognised in investment revaluation reserve was transferred to profit and loss account. From 1 January 2005 onwards (a) (a) Assets carried at amortised cost The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets 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 after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. 86 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

70 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Impairment of financial assets (continued) From 1 January 2005 onwards (continued) (a) (a) Assets carried at amortised cost (continued) Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the Group granting to the borrower, for economic or legal reasons relating to the borrower s financial difficulty, a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter into bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including adverse changes in the payment status of borrowers in the group; or national or local economic conditions that correlate with defaults on the assets in the group. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. Industrial and Commercial Bank of China (Asia) Limited 87 Annual Report 2005

71 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Impairment of financial assets (continued) From 1 January 2005 onwards (continued) (a) (a) Assets carried at amortised cost (continued) If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. If a loan or held-tomaturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group s grading process that considers asset type, industry, geographical location, collateral type, overdue status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. 88 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

72 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Impairment of financial assets (continued) From 1 January 2005 onwards (continued) (a) (a) Assets carried at amortised cost (continued) Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectable, it is written off against the related allowances for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the allowances for loan impairment in the profit and loss account. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit and loss account. (b) (b) Assets carried at fair value The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the profit and loss account. Industrial and Commercial Bank of China (Asia) Limited 89 Annual Report 2005

73 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial liabilities From 1 January 2004 to 31 December 2004 Financial liabilities, except trading securities short positions, were carried at cost or amortised cost. Trading securities short positions were carried at fair value and any gains and losses from changes in fair value were recognised through the profit and loss account. From 1 January 2005 onwards Financial liabilities are classified into two categories: financial liabilities at fair value through profit or loss and other financial liabilities. All financial liabilities are classified at inception and recognised initially at fair value. (a) (a) Financial liabilities at fair value through profit or loss This category has two sub-categories: financial liabilities held for trading, and those designated at fair value through profit and loss at inception. A financial liability is classified as held for trading if it is incurred principally for the purpose of repurchasing in the short term. It is carried at fair value and any gains and losses from changes in fair value are recognised in the profit and loss account. A financial liability is typically classified as fair value through profit or loss at inception if it meets the following criteria: It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mis-match ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or A group of financial assets and/or financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and this is the basis on which information about the assets and/ or liabilities is provided internally. Financial liabilities designated as at fair value through profit or loss, including our own debt securities in issue and deposits received from customers that are embedded with certain derivatives, are designated as such at inception or date of transition to the new HKFRS. Financial liabilities designated at fair value through profit or loss are carried at fair value and any gains and losses from changes in fair value are recognised in the profit and loss account. 90 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

74 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial liabilities (continued) From 1 January 2005 onwards (continued) (b) (b) Other financial liabilities Other financial liabilities are carried at amortised cost. Any difference between proceeds net of transaction costs and the redemption value is recognised in the profit and loss account over the period of the other financial liabilities using the effective interest method Derivative financial instruments and hedge accounting From 1 January 2004 to 31 December 2004 Off-balance sheet financial instruments included derivatives, such as futures, forwards, swaps, options and other transactions undertaken by the Group in the foreign exchange, interest rate, equity and other markets. The accounting for these instruments was dependent upon whether the transactions were undertaken for trading purposes or to hedge risk. Derivative financial instruments other than those transacted to hedge risk were deemed to be held for trading purposes. Transactions undertaken for trading purposes were measured at fair value. Fair values were obtained periodically from various sources, including quoted market prices, discounted cash flow models and option pricing models as appropriate. The gain or loss arising was recognised in the profit and loss account as Net gain/ (loss) from foreign exchange trading or Net gain/(loss) from other dealing activities. Unrealised gains on trading derivatives which were marked to market were included in Other assets. Unrealised losses on transactions which were marked to market were included in Other liabilities. Industrial and Commercial Bank of China (Asia) Limited 91 Annual Report 2005

75 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Derivative financial instruments and hedge accounting (continued) From 1 January 2004 to 31 December 2004 (continued) On the date a derivative contract was entered into, the Group designated certain derivative transactions as hedges. Derivatives were classified as a hedge when the following criteria were met: formal documentation of the hedging instrument, hedged item, hedging objective, strategy and relationship was prepared; and the hedge was documented showing that it was expected to be highly effective in offsetting the risk in the hedged item throughout the reporting period; and the hedge was effective on an on-going basis. Transactions designated as hedges were valued on an equivalent basis to the assets, liabilities or net positions that they were hedging. Any profit or loss was recognised in the profit and loss account on the same basis as that arising from the related assets, liabilities or net positions. If the derivative transaction no longer met the criteria for a hedge set out above, the derivative was deemed to be held for trading purposes and was accounted for as set out above. From 1 January 2005 onwards Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The best evidence of the fair value of a derivative at initial recognition is the transaction price (ie, the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (ie, without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognises profits on day Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

76 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Derivative financial instruments and hedge accounting (continued) (1) ; (2) From 1 January 2005 onwards (continued) Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the profit and loss account. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge); or, (2) hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge). Hedge accounting is used for derivatives designated in this way provided certain criteria are met. The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. (a) (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss account, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity. The adjustment to the carrying amount of a hedged equity security remains in retained earnings until the disposal of the equity security. Industrial and Commercial Bank of China (Asia) Limited 93 Annual Report 2005

77 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Derivative financial instruments and hedge accounting (continued) From 1 January 2005 onwards (continued) (b) (b) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cashflow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods in which the hedged item will affect profit or loss (for example, when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profit and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the profit and loss account. (c) (c) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the profit and loss account Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.9 Sale and repurchase agreements Securities sold subject to repurchase agreements ( repos ) are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell ( reverse repos ) are recorded as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. 94 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

78 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Sale and repurchase agreements (continued) Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability. 2.10Repossessed assets Repossessed collateral assets are reported as Assets held for sale under Other assets and the relevant loans are derecognised. The repossessed collateral assets are measured at lower of carrying amount and net realisable value. 2.11Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. 2.12Foreign currency translation (a) (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Hong Kong dollars, which is the Bank s functional and presentation currency. (b) (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equity held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation difference on nonmonetary items, such as equities classified as available-forsale financial assets, are included in the fair value reserve in equity. Industrial and Commercial Bank of China (Asia) Limited 95 Annual Report 2005

79 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.12 Foreign currency translation (continued) (c) (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each profit and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is sold, such exchange differences are recognised in the profit and loss account as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate Property, plant and equipment Leasehold buildings comprise mainly branches and offices. Leasehold buildings are shown at fair value, based on periodic, but at least triennial, valuations by external independent valuers, less subsequent depreciation. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other property, plant and equipment is stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. 96 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

80 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.13Property, plant and equipment (continued) Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the profit and loss account during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation of leasehold buildings are credited to other reserves in shareholders equity. Decreases that offset previous increases of the same asset are charged against fair value reserves directly in equity; all other decreases are expensed in the profit and loss account. Each year the difference between depreciation based on the revalued carrying amount of the asset expensed in the profit and loss account and depreciation based on the asset s original cost is transferred from the revaluation reserve to retained earnings. Depreciation of property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts to their residual values over their estimated useful lives, as follows: Leasehold buildings Over the remaining lease period of the land on which it is situated or 50 years, whichever is shorter Leasehold improvements Over the leaseterm of the leased premises or 10 years, whichever is shorter Furniture and equipments 4 to 10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Industrial and Commercial Bank of China (Asia) Limited 97 Annual Report 2005

81 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14 Intangible assets (a) (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associate/jointly controlled entity at the date of acquisition. Goodwill on acquisitions of subsidiaries and jointly controlled entities is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units is represented by each primary reporting segment. (b) (b) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (four years). Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as intangible assets are amortised over their estimated useful lives (not exceeding four years). 98 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

82 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.15Impairment of assets Assets that have an indefinite useful life are not subject to amortisation, but are tested annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). 2.16Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred tax related to fair value re-measurement of available-forsale investments and cash flow hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the profit and loss account together with the deferred gain or loss. Industrial and Commercial Bank of China (Asia) Limited 99 Annual Report 2005

83 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.17 Employee benefits (a) (a) Employee leave entitlements Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. An accrual is made for the estimated liability for annual leave and longservice leave as a result of services rendered by employees up to the balance sheet date. (b) (b) Pension obligations The Group operates a defined contribution retirement scheme under the Occupational Retirement Schemes Ordinance (the ORSO Scheme ) and another defined contribution retirement scheme under the Mandatory Provident Fund Schemes Ordinance (the MPF Scheme ) for those employees of the Group who are eligible and have elected to participate in the schemes. The Group s contributions to the ORSO Scheme are made based on a percentage of the eligible employees basic salaries and those made to the MPF Scheme are made based on a percentage of the eligible employees relevant income as defined in the MPF Scheme. These contributions are expensed as incurred and are reduced by contributions forfeited by those employees of the Group who leave the schemes prior to vesting fully in the contributions. The assets of the schemes are held separately from those of the Group in independently administered funds Provisions Provisions for restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are expensed in the profit and loss account on a straight-line basis over the period of the lease. The Group s interests in leasehold land and land use rights are also accounted as operating leases. 100 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

84 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.19Operating leases (continued) Where the Group is a lessor under operating leases, assets leased out are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term. 2.20Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including: cash, balances with banks and other financial institutions, treasury bills, other eligible bills and certificates of deposit. 3 FINANCIAL RISK MANAGEMENT 3.1 Strategy in using financial instruments By their nature, the Group s activities are principally related to the use of financial instruments including derivatives. The Group accepts deposits from customers at both fixed and floating rates, and for various periods, and seeks to optimise the interest margins by investing these funds in high-quality assets. The Group seeks to increase these margins generally by consolidating short-term funds and lending for longer periods at higher rates, while maintaining sufficient liquidity in the process to meet all claims that might fall due. The Group also seeks to raise its interest margins, net of allowances, through lending to commercial and retail borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances; the Group also enters into guarantees and other commitments such as letters of credit and performance, and other bonds. The Group also trades in financial instruments by taking positions in over-the-counter instruments to take advantage of short-term market movements in currencies, interest rates and securities prices. The Board places trading limits on the level of exposure for trading products. (a) 23,000,000 (a) Fair value hedges The Group hedges part of the existing Hong Kong dollar and foreign currency interest rate risk in its fixed rate assets by means of interest rate and cross-currency interest rate swaps. The net fair value of these swaps at 31 December 2005 was HK$23 million. (b) (b) Cash flow hedges There were no such transactions during the year. Industrial and Commercial Bank of China (Asia) Limited 101 Annual Report 2005

85 FINANCIAL RISK MANAGEMENT (continued) 3.2 Credit risk The Group takes on exposure to credit risk, which is the risk that a counterparty will become be unable to pay amounts in full when due. Impairment allowances are made for losses that have been incurred at the balance sheet date. Significant changes in the economy, or in the health of a particular industry segment, could result in losses that are different from those provided for at the balance sheet date. Management therefore carefully manages its exposure to credit risk. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product, industry sector and by country are reviewed quarterly by members of the Board of Directors. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees, although for a significant portion of corporate and personal lending, no such collateral can be obtained. (a) (a) Derivatives The Group maintains strict control limits on open derivative positions. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (ie, assets where their fair values are positive), which in relation to derivatives is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with counterparties on nominal amounts. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the Group requires margin deposits from counterparties. 102 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

86 FINANCIAL RISK MANAGEMENT (continued) 3.2 Credit risk (continued) (b) (b) Master netting arrangements The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, the credit risk is reduced by a master netting arrangement to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. (c) (c) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer to settle his obligations as required. Guarantees and standby letters of credit which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct lending. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments Geographical concentrations of consolidated assets, liabilities and off-balance sheet items Over 90% of the Group s operating income, profit before taxation, total assets, total liabilities, contingent liabilities and commitments arise from or are booked in Hong Kong. Industrial and Commercial Bank of China (Asia) Limited 103 Annual Report 2005

87 3 3.4 DV FINANCIAL RISK MANAGEMENT (continued) 3.4 Market risk The Group takes on exposure to market risks. Market risks arise from open positions in interest rate and currency products. The Group applies generally accepted methodologies to estimate the market risk of positions held and the potential losses, based upon a number of assumptions for various changes in market conditions. The Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. Product position limit specifies the maximum exposures of currencies, debts and other financial instruments which the group can take on. DV01 ( Dollar value change from one basis point change in yield ) measures the sensitivity of the bond portfolio value to changes in market yield. These limits are monitored daily by an independent department. 3.5 Currency risk The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The net open position limits set by the Board are monitored daily. The table below summarises the Group s exposure to foreign currency exchange rate risk at 31 December. Included in the table are the Group s assets and liabilities at carrying amounts, categorised by currency. The off-balance sheet gap represents the difference between the notional amounts of foreign currency derivative financial instruments, which are principally used to reduce the Group s exposure to currency movements, and their fair values. 104 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

88 FINANCIAL RISK MANAGEMENT (continued) 3.5 Currency risk (continued) The Group HK$ US$ Other Total At 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 3,277,172 19,097,174 2,942,892 25,317,238 Placements with and advances to banks and other financial institutions 8,537 2,051, ,942 2,469,645 Trade bills 45,203 1,816, ,650 1,992,380 Trading securities Derivative financial instruments 41,496 3,224 44,720 Financial assets at fair value through profit or loss 196,657 1,304, ,869 1,690,010 Loans and advances to customers 53,829,601 12,274,897 2,048,165 68,152,663 Available-for-sale investments 2,161,984 6,981, ,319 10,137,811 Held-to-maturity investments 1,363,985 1,397, ,861 3,081,499 Investment in an associate 28,484 28,484 Intangible assets 1,080,854 1,080,854 Property, plant and equipment 124,548 86, ,342 Leasehold land and land use rights 91,704 91,704 Other assets 507, , ,297 1,100,726 Total assets 62,758,427 45,395,870 7,245, ,399,323 Liabilities Deposits from banks and other financial institutions 7,126,767 17,959,462 9,155 25,095,384 Derivative financial instruments 65,571 87,987 4, ,802 Deposits from customers 31,683,163 24,181,331 5,125,654 60,990,148 Certificates of deposit issued 4,563,639 4,787,666 9,351,305 Debt securities in issue 2,978,615 2,978,615 Other liabilities, including current and deferred income tax liabilities 899, , ,670 1,617,440 Total liabilities 44,338,776 50,569,195 5,282, ,190,694 Net on-balance sheet position 18,419,651 (5,173,325) 1,962,303 15,208,629 Off-balance sheet net notional position (695,000) 524, ,000 Credit commitments 21,829,267 5,484, ,280 28,119,289 Industrial and Commercial Bank of China (Asia) Limited 105 Annual Report 2005

89 FINANCIAL RISK MANAGEMENT (continued) 3.5 Currency risk (continued) The Group HK$ US$ Other Total At 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 1,679,339 8,754,404 3,412,162 13,845,905 Placements with and advances to banks and other financial institutions 353,538 4,991, ,098 5,811,673 Trade bills 64,492 1,495, ,838 1,859,246 Non-trading securities 1,441, , ,318 2,716,081 Loans and advances to customers 48,730,825 8,492,254 2,277,899 59,500,978 Held-to-maturity investments 2,869,548 7,928,406 2,249,088 13,047,042 Investment in an associate 28,332 28,332 Intangible assets 620, , ,054 Property, plant and equipment 229, ,099 Leasehold land and land use rights 93,029 93,029 Other assets, including deferred income tax assets 480, , ,358 1,214,211 Total assets 56,589,806 32,775,285 9,978,559 99,343,650 Liabilities Deposits from banks and other financial institutions 4,410,869 13,003, ,031 17,520,277 Deposits from customers 27,187,858 23,487,800 5,382,511 56,058,169 Certificates of deposit issued 2,620,672 4,724,688 7,345,360 Debt securities in issue 3,095,423 3,095,423 Other liabilities 51, , ,988 1,434,774 Total liabilities 34,270,596 44,783,877 6,399,530 85,454,003 Net on-balance sheet position 22,319,210 (12,008,592) 3,579,029 13,889,647 Off-balance sheet net notional position (64,000) (11,000) 75,000 Credit commitments 22,573,529 4,589, ,943 27,860, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

90 FINANCIAL RISK MANAGEMENT (continued) 3.5 Currency risk (continued) The Bank HK$ US$ Other Total At 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 3,167,434 18,835,834 2,885,676 24,888,944 Placements with and advances to banks and other financial institutions 8,537 2,051, ,942 2,469,645 Trade bills 45,203 1,816, ,650 1,992,380 Trading securities Derivative financial instruments 41,496 3,224 44,720 Financial assets at fair value through profit or loss 196,657 1,304, ,869 1,690,010 Loans and advances to customers 53,759,714 11,287,410 2,048,165 67,095,289 Available-for-sale investments 2,161,229 6,981, ,319 10,137,056 Held-to-maturity investments 1,365,254 1,397, ,861 3,082,768 Investment in an associate 14,508 14,508 Investment in subsidiaries 3,318,639 3,318,639 Intangible assets 756, ,722 Property, plant and equipment 124, ,547 Leasehold land and land use rights 91,704 91,704 Other assets 516, , ,260 1,102,727 Total assets 65,568,646 44,059,518 7,181, ,809,906 Liabilities Deposits from banks and other financial institutions 7,136,179 17,184,320 9,155 24,329,654 Derivative financial instruments 65,571 87,987 4, ,802 Deposits from customers 31,716,675 27,156,041 7,602,745 66,475,461 Certificates of deposit issued 4,563,639 4,787,666 9,351,305 Other liabilities, including current and deferred income tax liabilities 886, , ,986 1,606,308 Total liabilities 44,368,800 49,790,600 7,761, ,920,530 Net on-balance sheet position 21,199,846 (5,731,082) (579,388) 14,889,376 Off-balance sheet net notional Position 2,390,000 8,000 (2,398,000) Credit commitments 21,767,553 5,387, ,280 27,960,579 Industrial and Commercial Bank of China (Asia) Limited 107 Annual Report 2005

91 FINANCIAL RISK MANAGEMENT (continued) 3.5 Currency risk (continued) The Bank HK$ US$ Other Total At 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 1,333,551 8,626,037 2,357,529 12,317,117 Placements with and advances to banks and other financial institutions 353,538 4,991, ,098 5,811,673 Trade bills 44, , ,666 1,060,805 Non-trading securities 1,437, , ,315 2,712,284 Loans and advances to customers 35,400,186 7,129,944 2,019,070 44,549,200 Held-to-maturity investments 2,601,178 7,928, ,672 11,169,256 Investment in an associate 14,508 14,508 Investment in subsidiaries 2,711,204 2,711,204 Intangible assets 711, ,360 Property, plant and equipment 208, ,273 Leasehold land and land use rights 93,029 93,029 Other assets, including deferred income tax assets 390, ,314 33, ,399 Total assets 45,299,295 30,614,787 6,300,026 82,214,108 Liabilities Deposits from banks and other financial institutions 3,239,922 13,069, ,966 16,468,037 Deposits from customers 17,149,439 19,344,664 2,142,354 38,636,457 Certificates of deposit issued 2,620,672 7,412,815 2,687,492 12,720,979 Other liabilities 483, , ,746 1,049,415 Total liabilities 23,493,693 40,186,637 5,194,558 68,874,888 Net on-balance sheet position 21,805,602 (9,571,850) 1,105,468 13,339,220 Off-balance sheet net notional Position 2,594,000 (13,000) (2,581,000) Credit commitments 11,859,493 3,268, ,866 15,327, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

92 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates and the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase, decrease or create losses. The Board sets limits on the level of mismatch of interest rate repricing which is monitored daily. The table below summarises the Group s exposure to interest rate risks. Included in the table are the Group s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. Industrial and Commercial Bank of China (Asia) Limited 109 Annual Report 2005

93 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk (continued) The Group Up to Over Non-Interest 1 month months months years 5 years Bearing Total At 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 24,420, ,402 25,317,238 Placements with and advances to banks and other financial institutions 426,176 1,938, ,694 2,469,645 Trade bills 671,081 1,023, ,750 60,467 1,992,380 Trading securities Derivative financial instruments 44,720 44,720 Financial assets at fair value through profit or loss 384, , ,145 1,690,010 Loans and advances to customers 47,751,596 14,371,376 5,512, , ,292 68,152,663 Available-for-sale investments 1,245,468 1,838,354 1,259,716 4,100,031 1,174, ,038 10,137,811 Held-to-maturity investments 1,187,647 1,185, , ,217 3,081,499 Other assets 45,538 2,467,572 2,513,110 Total assets 75,322,166 18,844,505 9,681,591 5,536,221 2,025,641 3,989, ,399,323 Liabilities Deposits from banks and other financial institutions 7,426,182 8,614,106 8,530, ,486 25,095,384 Derivative financial instruments 157, ,802 Deposits from customers 41,234,602 14,967,637 1,951,454 37,344 10,082 2,789,029 60,990,148 Certificates of deposit issued 249,987 1,164,493 5,410,188 2,526,637 9,351,305 Debt securities in issue 2,978,615 2,978,615 Other liabilities 85,911 1,531,529 1,617,440 Total liabilities 48,996,682 27,724,851 15,892,252 2,563,981 10,082 5,002, ,190,694 Total interest sensitivity gap 26,325,484 (8,880,346) (6,210,661) 2,972,240 2,015, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

94 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk (continued) The Group Up to Over Non-Interest 1 month months months years 5 years Bearing Total At 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 12,423,660 1,422,245 13,845,905 Placements with and advances to banks and other financial institutions 2,488,390 3,070, ,621 1,039 5,811,673 Trade bills 678, , ,291 2, ,948 1,859,246 Non-trading securities 125, ,381 31, , , ,984 2,716,081 Loans and advances to customers 42,230,484 12,844,532 3,773, , ,187 59,500,978 Held-to-maturity investments 1,933,095 2,216,989 1,290,258 5,228,184 2,378,516 13,047,042 Other assets 45,736 2,516,989 2,562,725 Total assets 57,436,813 19,122,000 8,348,476 6,595,204 3,244,952 4,596,205 99,343,650 Liabilities Deposits from banks and other financial institutions 4,343,845 5,782,623 6,343,876 1,049,933 17,520,277 Deposits from customers 33,250,460 17,637,609 1,534, ,214 10,106 3,176,664 56,058,169 Certificates of deposit issued 274,944 1,099,845 5,163, ,753 7,345,360 Debt securities in issue 3,095,423 3,095,423 Other liabilities 51,688 1,383,086 1,434,774 Total liabilities 37,920,937 27,615,500 13,041,810 1,255,967 10,106 5,609,683 85,454,003 Total interest sensitivity gap 19,515,876 (8,493,500) (4,693,334) 5,339,237 3,234,846 Industrial and Commercial Bank of China (Asia) Limited 111 Annual Report 2005

95 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk (continued) The Bank Up to Over Non-Interest 1 month months months years 5 years Bearing Total At 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 24,057, ,788 24,888,944 Placements with and advances to banks and other financial institutions 426,176 1,938, ,694 2,469,645 Trade bills 671,081 1,023, ,750 60,467 1,992,380 Trading securities Derivative financial instruments 44,720 44,720 Financial assets at fair value through profit or loss 384, , ,145 1,690,010 Loans and advances to customers 47,597,089 13,893,182 5,087, , ,292 67,095,289 Available-for-sale investments 1,245,468 1,838,354 1,259,716 4,100,031 1,174, ,283 10,137,056 Held-to-maturity investments 1,187,647 1,185, , ,217 1,269 3,082,768 Other assets 45,538 5,363,309 5,408,847 Total interest bearing assets 74,803,979 18,366,311 9,256,918 5,536,221 2,025,641 6,820, ,809,906 Liabilities Deposits from banks and other financial institutions 7,426,182 8,623,106 7,755, ,266 24,329,654 Derivative financial instruments 157, ,802 Deposits from customers 41,232,017 20,467,137 1,951,454 37,344 10,082 2,777,427 66,475,461 Certificates of deposit issued 249,987 1,164,493 5,410,188 2,526,637 9,351,305 Other liabilities 85,911 1,520,397 1,606,308 Total interest bearing liabilities 48,994,097 30,254,736 15,116,742 2,563,981 10,082 4,980, ,920,530 Total interest sensitivity gap 25,809,882 (11,888,425) (5,859,824) 2,972,240 2,015, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

96 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk (continued) The Bank Up to Over Non-Interest 1 month months months years 5 years Bearing Total At 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 11,402, ,826 12,317,117 Placements with and advances to banks and other financial institutions 2,488,390 3,070, ,621 1,039 5,811,673 Trade bills 258, , , ,948 1,060,805 Non-trading securities 125, ,381 31, , , ,187 2,712,284 Loans and advances to customers 29,199,552 11,706,143 3,328,811 27, ,459 44,549,200 Held-to-maturity investments 1,933,095 2,034, ,299 4,292,894 2,008, ,970 11,169,256 Other assets 45,736 4,548,037 4,593,773 Total assets 42,964,293 17,485,916 7,351,153 5,500,855 2,693,884 6,218,007 82,214,108 Liabilities Deposits from banks and other financial institutions 4,343,845 5,069,073 6,143, ,243 16,468,037 Deposits from customers 26,821,827 6,203,103 1,036,771 3,427,248 10,106 1,137,402 38,636,457 Certificates of deposit issued 2,282,350 4,275,246 5,356, ,753 12,720,979 Other liabilities 51, ,727 1,049,415 Total liabilities 33,499,710 15,547,422 12,537,277 4,234,001 10,106 3,046,372 68,874,888 Total interest sensitivity gap 9,464,583 1,938,494 (5,186,124) 1,266,854 2,683,778 Industrial and Commercial Bank of China (Asia) Limited 113 Annual Report 2005

97 FINANCIAL RISK MANAGEMENT (continued) 3.6 Interest rate risk (continued) The table below summarises the effective interest rate for the relevant periods of monetary financial instruments: Group Bank % % % % Assets Cash and short-term funds and placements with banks and other financial institutions Trade bills, advances to customers and advances to banks and other financial institutions Securities (Note) Liabilities Deposits and balances of banks and other financial institutions Deposits from customers Certificates of deposit issued Debt securities in issue Note: Securities include: 2005: Certificates of deposit held, trading securities, financial assets at fair value through profit and loss, available-for-sale investments and heldto-maturity investments. 2004: Certificates of deposit held, non-trading securities and held-tomaturity investments. 114 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

98 FINANCIAL RISK MANAGEMENT (continued) 3.7 Liquidity risk The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw-downs and guarantees, and from margin and other calls on cash-settled derivatives. The Group does not maintain cash resources to meet all of these needs, as experience shows that the rollover of a certain level of maturing funds can be predicted with a high level of certainty. The Board sets control on the funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover unexpected withdrawals. A Liquidity Risk Management Policy is in place to govern our liquidity initiatives and parameters. Stress test is done quarterly. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but also increases the risk of losses and in liquidity. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, as many of these commitments will expire or terminate without being funded. The tables on the following pages analyse the Group s assets and liabilities into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date. Industrial and Commercial Bank of China (Asia) Limited 115 Annual Report 2005

99 FINANCIAL RISK MANAGEMENT (continued) 3.7 Liquidity risk (continued) The Group Repayable 3 months Over 5 on demand or less months years years Undated Total At 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 896,402 23,454, ,169 25,317,238 Placements with and loans and advances to banks and other financial institutions 426,176 2,043,469 2,469,645 Trade bills 487,922 1,230, ,393 1,992,380 Trading securities Derivative financial instruments 44,720 44,720 Financial assets at fair value through profit or loss 693, ,758 1,690,010 Loans and advances to customers 4,942,590 7,210,495 8,670,718 26,096,208 20,796, ,388 68,152,663 Available-for-sale investments 242,038 1,137,012 6,079,123 2,159, ,038 10,137,811 Held-to-maturity investments 291, ,628 1,954, ,002 3,081,499 Investment in an associate 28,484 28,484 Intangible assets 1,080,854 1,080,854 Property, plant and equipment 211, ,342 Leasehold land and land use rights 91,704 91,704 Other assets 474, , ,396 1,100,726 Total assets 6,801,495 33,364,896 13,673,389 34,822,713 24,206,624 2,530, ,399,323 Liabilities Deposits from banks and other financial institutions 1,729,895 14,834,879 8,530,610 25,095,384 Derivative financial instruments 157, ,802 Deposits from customers 11,896,006 46,893,211 1,772, ,848 10,080 60,990,148 Certificates of deposit issued 603,228 1,845,259 6,902,818 9,351,305 Debt securities in issue 2,978,615 2,978,615 Other liabilities, including deferred current and deferred tax liabilities 556, , ,255 1,617,440 Total liabilities 14,182,067 63,192,139 12,147,872 10,300,281 10, , ,190,694 Net liquidity gap (7,380,572) (29,827,243) 1,525,517 24,522,432 24,196,544 2,171,951 15,208, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

100 FINANCIAL RISK MANAGEMENT (continued) 3.7 Liquidity risk (continued) The Group Repayable 3 months Over 5 on demand or less months years years Undated Total At 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 1,420,330 11,053,837 1,371,738 13,845,905 Placements with and loans and advances to banks and other financial institutions 2,489,429 3,070, ,621 5,811,673 Trade bills 815, , ,452 2,464 1,859,246 Non-trading securities 100, ,555 1,496, , ,984 2,716,081 Loans and advances to customers 14,486,108 4,010,495 3,685,667 22,247,924 14,561, ,182 59,500,978 Held-to-maturity investments 743,129 1,246,589 7,862,188 3,195,136 13,047,042 Investment in an associate 28,332 28,332 Intangible assets 998, ,054 Property, plant and equipment 229, ,099 Leasehold land and land use rights 93,029 93,029 Other assets, including deferred income tax assets 240, , ,406 1,214,211 Total assets 16,962,635 19,632,903 9,706,624 31,858,682 18,221,256 2,961,550 99,343,650 Liabilities Deposits from banks and other financial institutions 1,420,630 9,755,771 6,343,876 17,520,277 Trading liabilities Deposits from customers 14,346,645 39,735,117 1,535, ,165 56,058,169 Certificates of deposit issued 175,006 5,242,034 1,928,320 7,345,360 Debt securities in issue 3,095,423 3,095,423 Other liabilities, including current and deferred tax liabilities 81, , ,854 57, ,354 1,434,774 Total liabilities 15,848,659 50,493,764 13,424,006 5,522, ,354 85,454,003 Net liquidity gap 1,113,976 (30,860,861 ) (3,717,382) 26,336,462 18,221,256 2,796,196 13,889,647 Industrial and Commercial Bank of China (Asia) Limited 117 Annual Report 2005

101 FINANCIAL RISK MANAGEMENT (continued) 3.7 Liquidity risk (continued) The Bank Repayable 3 months Over 5 on demand or less months years years Undated Total As at 31 December 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 831,788 23,090, ,169 24,888,944 Placements with and loans and advances to banks and other financial institutions 426,176 2,043,469 2,469,645 Trade bills 487,922 1,230, ,393 1,992,380 Trading securities Derivative financial instruments 44,720 44,720 Financial assets at fair value through profit or loss 693, ,758 1,690,010 Loans and advances to customers 4,796,891 6,732,301 8,246,046 26,096,208 20,796, ,579 67,095,289 Available-for-sale investments 242,038 1,137,012 6,079,123 2,159, ,283 10,137,056 Held-to-maturity investments 291, ,897 1,954, ,002 3,082,768 Investment in an associate 14,508 14,508 Investment in subsidiaries 3,318,639 3,318,639 Intangible assets 756, ,722 Property, plant and equipment 124, ,547 Leasehold land and land use rights 91,704 91,704 Other assets 474, , ,397 1,102,727 Total assets 6,591,182 32,523,022 13,249,986 34,822,713 24,206,624 5,416, ,809,906 Liabilities Deposits from banks and other financial institutions 1,730,675 14,843,879 7,755,100 24,329,654 Derivative financial instruments 157, ,802 Deposits from customers 11,881,818 49,417,443 1,772,003 3,394,115 10,082 66,475,461 Certificates of deposit issued 684,626 2,388,253 6,278,426 9,351,305 Other liabilities, including current and deferred income tax liabilities 556, , ,123 1,606,308 Total liabilities 14,168,659 65,806,769 11,915,356 9,672,541 10, , ,920,530 Net liquidity gap (7,577,477) (33,283,747) 1,334,630 25,150,172 24,196,542 5,069,256 14,889, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

102 FINANCIAL RISK MANAGEMENT (continued) 3.7 Liquidity risk (continued) The Bank Repayable 3 months Over 5 on demand or less months years years Undated Total As at 31 December 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Cash and short-term funds 55,312 11,620, ,729 12,317,117 Placements with and loans and advances to banks and other financial institutions 2,489,429 3,070, ,621 5,811,673 Trade bills 395, , ,222 1,060,805 Non-trading investments 100, ,555 1,496, , ,187 2,712,284 Loan and advance to customers 1,809,363 2,872,106 3,240,532 22,091,330 14,380, ,995 44,549,200 Held-to-maturity investments 560, ,600 6,926,898 2,824,796 11,169,256 Investment in an associate 14,508 14,508 Investment in subsidiaries 2,711,204 2,711,204 Intangible assets 711, ,360 Property, plant and equipment 208, ,273 Leasehold land and land use rights 93,029 93,029 Other assets, including deferred income tax assets 240, , , ,399 Total assets 2,500,653 18,563,058 8,081,261 30,766,798 17,670,188 4,632,150 82,214,108 Liabilities Deposits from banks and other financial institutions 1,281,939 9,042,221 6,143,877 16,468,037 Deposits from customers 5,878,750 28,300,612 1,037,897 3,419,198 38,636,457 Certificates of deposit issued 5,357,813 5,434,846 1,928,320 12,720,979 Other liabilities, including current and deferred income tax liabilities 81, , ,998 54,538 1,049,415 Total liabilities 7,242,073 43,369,141 12,861,618 5,402,056 68,874,888 Net liquidity gap (4,741,420) (24,806,083 ) (4,780,357) 25,364,742 17,670,188 4,632,150 13,339,220 Industrial and Commercial Bank of China (Asia) Limited 119 Annual Report 2005

103 FINANCIAL RISK MANAGEMENT 3.8 Fair values of financial assets and liabilities The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Dealer quotes are used for debt securities and structured derivatives. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair values of financial assets and liabilities are estimated as follows: (a) (b) a) Balances and placements with banks and other financial institutions The fair value of floating rate placements and overnight deposits is their carrying amounts. The estimated fair value of fixed interest bearing deposits, all of which are less than one year, is based on discounted cash flows using prevailing money-market interest rates and remaining maturity. Therefore the fair value is approximately equal to its carrying value. b) Trade bills and loans and advances to customers, bank and other financial institutions Trade bills and loans and advances to customers, banks and other financial institutions are net of allowances for impairment. All except a very insignificant portion of loans and advances to customers bear interest at a floating rate. The Group has assessed the fair value of trade bills and loans and advances to customers, bank and other financial institutions, after taking into account the relevant market interest rates and noted that the total fair value is not materially different from the total carrying value. 120 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

104 3 3.8 (c) 3 FINANCIAL RISK MANAGEMENT 3.8 Fair values of financial assets and liabilities (continued) c) Deposits and balances from banks and other financial institutions and customers The estimated fair value of deposits and balances with no stated maturity, is the amount repayable on demand. The fair value of those balances having an interest at a floating rate is their carrying value. The estimated fair value of fixed interest-bearing deposits of banks and deposits from customers without quoted market price is based on discounted cash flows using interest rates for new debts with similar remaining maturity. As they are normally less than one year, their fair value are approximately equal to their carrying values. (d) (e) d) Certificates of deposit issued The Group has assessed the fair value of certificates of deposit after taking into account the relevant yield curve and noted that the total fair value is not materially different from the total carrying value. e) Other assets and other liabilities The estimated fair value of the other assets and other liabilities, which are normally non-interest bearing balances, is their carrying value. Except for the above balance sheet items, the following table summaries the carrying amount and fair values of other financial assets not presented on the Group s balance sheet at their fair value. Carrying value Fair value The Group HK$ 000 HK$ 000 HK$ 000 HK$ 000 Financial assets Exchange Fund Bills and Treasury Bills 966,169 1,371, ,176 1,353,674 Held-to-maturity securities 3,081,499 13,047,042 3,078,672 13,274,760 4,047,668 14,418,780 4,045,848 14,628,434 The Bank Financial assets Exchange Fund Bills and Treasury Bills 966, , , ,889 Held-to-maturity securities 3,082,768 11,169,256 3,079,940 11,388,786 4,048,937 11,810,985 4,047,116 12,030,675 Fair value for held to maturity assets is based on market prices or broker/dealer price quotations. Industrial and Commercial Bank of China (Asia) Limited 121 Annual Report 2005

105 4 4 CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) (a) Impairment allowances on loans and advances The Group reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the profit and loss account, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (b) (b) Fair value of derivatives The fair values of financial instruments that are not quoted in active markets are determined by using various valuation techniques according to the nature of the financial instruments. These include third party price quotation, discounted cash flow and option pricing models. These models are built by reputable system suppliers and are widely used in the market. They are reviewed and calibrated by qualified personnel independent of the area that created them. Valuation outputs are generated from these systems using relevant current market parameters and are verified before they are used for financial reporting purposes (c) (c) Impairment of available for-sale equity investments The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement, the Group evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of a deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. 122 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

106 4 4 CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS (continued) (d) 39 (d) Held-to-maturity investments The Group follows the guidance of HKAS 39 on classifying nonderivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances for example, selling an insignificant amount close to maturity it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. (e) (e) Fair value of leasehold building The fair value of the leasehold building is estimated based on the valuation made by an independent professional valuer on an open market basis. (f) (f) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates of discount rate and long-term growth rate. (g) (g) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant estimates are required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 5 5 SEGMENT REPORTING (a) (a) Geographical area The Group operates predominantly in Hong Kong. Less than 10% of the Group s income, profit, assets, liabilities, contingent liabilities or commitments is attributable to the Group s overseas operations. (b) (b) Class of business The Group operates predominantly in commercial banking which comprises commercial and retail banking, treasury and markets, and corporate and investment banking activities. Commercial and retail banking includes retail banking, commercial lending and trade finance. Treasury and markets activities include foreign exchange, money market and capital market activities. Corporate and investment banking activities mainly comprise corporate banking, the provision of debt capital market and corporate finance and advisory services. Industrial and Commercial Bank of China (Asia) Limited 123 Annual Report 2005

107 5 5 SEGMENT REPORTING (b) (b) Class of business (continued) Corporate Commercial Treasury and and retail and investment banking markets banking Unallocated Total 2005 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Net interest income 881, , ,265 30,327 1,315,997 Other operating income 324, , ,116 19, ,988 Operating income 1,205, , ,381 50,220 2,032,985 Operating expenses (608,069) (73,371) (46,425) (162,360) (890,225) Operating profit/(loss) before 597, , ,956 (112,140) 1,142,760 impairment losses (Charge for)/write-back of individual impairment allowances (99,360) (30,443) 32,737 (97,066) (Charge for)/write-back of collective impairment allowances 50,429 (4,139) 25,429 19,023 90,742 Operating profit/(loss) 548, , ,942 (60,380) 1,136,436 after provisions Net gain on disposal of available-for-sale securities 51,064 1,559 12,886 65,509 Net gain on disposal of loans 3, ,261 6,162 Net (loss)/gain from disposal/reversal of revaluation deficits of property, 65 (764) (699) plant and equipment Net gain on disposal of held-to-maturity securities Share of profits of an associate Profit/(loss) before income taxation 552, , ,762 (47,998) 1,207,853 Segment assets 43,548,154 42,204,381 25,597, , ,994,362 Investment in an associate 28,484 28,484 Unallocated assets 3,376,477 3,376,477 Total assets 43,548,154 42,204,381 25,597,546 4,049, ,399,323 Segment liabilities 47,668,748 27,864,857 14,698,752 1,123,684 91,356,041 Unallocated liabilities 8,834,653 8,834,653 Total liabilities 47,668,748 27,864,857 14,698,752 9,958, ,190,694 Capital expenditure 20,239 1, , ,804 Depreciation and amortisation charges 15,627 1, ,257 68, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

108 5 5 SEGMENT REPORTING (b) (b) Class of business (continued) Corporate Commercial Treasury and and retail and investment banking markets banking Unallocated Total 2004 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Net interest income 778, , ,145 (52,553) 1,274,838 Other operating income 234,273 51,107 46,589 38, ,427 Operating income 1,012, , ,734 (14,095) 1,645,265 Operating expenses (475,031 ) (61,258) (33,714) (119,713 ) (689,716) Amortisation of goodwill (3,280 ) (51,313) (54,593) Operating profit/(loss) before provisions 534, , ,020 (185,121 ) 900,956 (Charge for)/write-back of bad and doubtful debts (33,423) (2,036) (6,940) 63,956 21,557 Operating profit/(loss) after provisions 501, , ,080 (121,165 ) 922,513 Net (loss)/gain from disposal of property, plant and equipment (602 ) (272) 32,378 31,504 Write-back of impairment loss on bank premises 8,612 8,612 Net gain on disposal and redemption of 15,567 15,567 held-to-maturity and non-trading securities Impairment loss on non-trading securities (200 ) (200) 500, , ,080 (80,375) 977,996 Share of net losses of an associate (41,225) (41,225) Loss on disposal of an associate (92) (92) Profit/(loss) before taxation 500, , ,080 (121,692 ) 936,679 Segment assets 38,378,987 33,869,853 24,098, ,088 97,135,851 Investments in an associate 28,332 28,332 Unallocated assets 2,179,467 2,179,467 Total assets 38,378,987 33,869,853 24,098,923 2,995,887 99,343,650 Segment liabilities 39,790,711 18,319,930 15,305, ,363 73,566,066 Unallocated liabilities 11,887,937 11,887,937 Total liabilities 39,790,711 18,319,930 15,305,062 12,038,300 85,454,003 Capital expenditure 5,814 4, , ,906 Depreciation and amortisation charges 21,474 1, ,782 89,855 Industrial and Commercial Bank of China (Asia) Limited 125 Annual Report 2005

109 6 6 INTEREST INCOME HK$ 000 HK$ 000 Interest income on listed investments 308, ,668 Interest income on unlisted investments 339, ,280 Other interest income 3,531,537 1,707,419 4,180,031 2,311,367 9,188,442 7 Other interest income includes the amount of interest income on unwinding of discount on loan impairment losses of HK$9,188,442 for the year ended 31 December OTHER OPERATING INCOME HK$ 000 HK$ 000 Fees and commission income 412, ,746 Less: Fees and commission expense (9,789) (6,427) Net fees and commission income 402, ,319 Net gain from foreign exchange activities 199,361 40,019 Net gain from trading securities 689 6,665 Net gain on disposal of fair value through 21,340 profit and loss securities Net loss from available-for-sale securities (56,968) Net loss from fair value through profit (27,796) and loss financial assets Net gain from fair value through profit and loss financial liabilities 166,494 Net loss on derivatives financial instruments (9,991) Dividend income from investments in securities Listed investments 1,512 Unlisted investments 3,228 5,893 Others 18,065 45, , , Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

110 8 8 OPERATING EXPENSES Note HK$ 000 HK$ 000 Staff costs Salaries and other costs 462, ,302 Redundancy payment 425 Retirement benefit costs 28,850 23, , ,009 Premises and equipment expenses, excluding depreciation Rental of premises 92,822 70,000 Others 71,209 55, , ,390 Depreciation and amortisation expenses (including goodwill) 27, 28 68,248 89,855 Auditors remuneration 3,611 3,213 Computer expenses 39,267 25,006 Business promotion expenses 24,874 17,548 Communication expenses 30,853 23,376 Other operating expenses 67,171 72, , , ,307,000 3,258, ,000 96,000 9 RETIREMENT BENEFIT COSTS The retirement benefit scheme cost charged to the profit and loss account represents contributions payable by the Group to the ORSO Scheme and the MPF Scheme (the Schemes ). Under the Schemes, the Group s contributions are reduced by contributions forfeited by those employees who leave the Schemes prior to vesting fully in the contributions. Forfeited contributions totaling HK$4,307,000 (2004: HK$3,258,000) were utilised during the year leaving HK$111,000 (2004: HK$96,000) available at the year-end to reduce future contributions. No contributions were payable to the Schemes at the year-end (2004: HK$Nil). The assets of the Schemes are held separately from those of the Group in independently administered funds. Industrial and Commercial Bank of China (Asia) Limited 127 Annual Report 2005

111 10 10 IMPAIRMENT LOSSES ON LOANS AND ADVANCES/ (WRITE-BACK OF) BAD AND DOUBTFUL DEBTS HK$ 000 HK$ 000 Charge for/(write-back of) impairment losses on loans and advances Individually assessed 97,066 Collectively assessed (90,742) (Write-back of)/charge for bad and doubtful debts Specific provision (79,119) General provision 57,562 6,324 (21,557) Of which new allowances 209,037 91,452 releases (186,146) (70,584) recoveries (16,567) (42,425) Net charge/(write-back) to the profit and loss account 6,324 (21,557) NET (LOSS)/GAIN FROM DISPOSAL/REVERSAL OF REVALUATION DEFICITS OF PROPERTY, PLANT AND EQUIPMENT HK$ 000 HK$ 000 Net (loss)/gain on disposal of property, plant and equipment (986) 31,504 Reversal of revaluation deficits of premises 287 8,612 (699) 40, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

112 %17.5% 12 TAXATION Hong Kong profits tax has been calculated at the rate of 17.5% (2004: 17.5%) on the estimated assessable profits arising in Hong Kong for the year. Taxation for overseas branches and subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant countries. The amount of taxation charged to the consolidated profit and loss account represents: HK$ 000 HK$ 000 Current taxation Hong Kong profits tax 180, ,960 Overseas taxation 23, Over provisions in prior years (932) (10,195) Deferred taxation relating to the origination and reversal of temporary differences 23,790 14, , ,288 The taxation on the Group s profit before taxation differs from the theoretical amount that would arise using the current taxation rate as follows: HK$ 000 HK$ 000 Profit before taxation 1,207, , %17.5% Calculated at a taxation rate of 17.5% 211, ,919 (2004: 17.5%) Effect of different taxation rates in other countries 5, Income not subject to taxation (10,706) (10,913) Expenses not deductible for taxation purposes 2,120 33,440 Over recognitions in prior years (932) (10,195) Tax provision for a foreign subsidiary 20,000 Taxation charge 227, ,288 Industrial and Commercial Bank of China (Asia) Limited 129 Annual Report 2005

113 13 13 DIRECTORS AND SENIOR MANAGEMENT S EMOLUMENTS (a) (a) Directors emoluments The remuneration of every director for the year ended 31 December 2005 is set out below: Contribution Salaries and Discretionary To pension Fees allowances Bonuses Schemes Total Name of director HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Dr. Jiang Jianqing Ms. Wang Lili Mr. Zhu Qi 2,300 1, ,712 Mr. Chen Aiping Mr. Wong Yuen Fai 3, ,343 Mr. Zhang Yi 1, ,746 Damis Jacobus Ziengs Mr. Damis Jacobus Ziengs S.B.S. Professor Wong Yue Chim, * Richard, S.B.S. J.P.* * Mr. Tsui Yiu Wa, Alec* * Mr. Yuen Kam Ho, George* ,080 7,850 2, ,881 * * Independent Non-executive Directors The remuneration of every director for the year ended 31 December 2004 is set out below: Contribution Salaries and Discretionary To pension Fees allowances Bonuses Schemes Total Name of director HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Dr. Jiang Jianqing Ms. Wang Lili Mr. Zhu Qi 2,300 1, ,512 Mr. Chen Aiping Mr. Wong Yuen Fai 1, ,276 Mr. Zhang Yi Damis Jacobus Ziengs Mr. Damis Jacobus Ziengs S.B.S. Professor Wong Yue Chim, * Richard, S.B.S. J.P.* * Mr. Tsui Yiu Wa, Alec* * Mr. Yuen Kam Ho, George* Mr. Wang Yan 1, ,735 Mr. Kwok Kin Hung 1,346 1, , ,180 3, ,313 * * Independent non-executive directors There was no arrangement under which any Director waived or agreed to waive any remuneration during the year. 130 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

114 13 13 DIRECTORS AND SENIOR MANAGEMENT S EMOLUMENTS (continued) (b) (b) Five highest paid individuals The five individuals whose emoluments were the highest in the Group for the year include three Directors (2004: two) whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two (2004: three) individuals during the year are as follows: HK$ 000 HK$ 000 Basic salaries, housing allowances, other allowances and benefits-in-kind 3,680 5,655 Bonuses 1,000 3,505 Contributions to pension schemes ,087 9,786 The emoluments fall within the following bands: Number of Individuals Emolument bands ,000,0012,500,000 HK$2,000,001 HK$2,500, ,500,0013,000,000 HK$2,500,001 HK$3,000, ,000,0013,500,000 HK$3,000,001 HK$3,500, ,500,0014,000,000 HK$3,500,001 HK$4,000, ,338,266, ,588, ,070, ,967, ,196,000318,379, PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE GROUP The profit attributable to equity holders of the Group is dealt with in the accounts of the Bank to the extent of HK$1,338,266,000 (2004: HK$211,588,000), representing gross profit of HK$956,070,000 (2004: HK$529,967,000) plus the exchange gain of HK$382,196,000 (2004: loss HK$318,379,000) arising from the fair value of foreign exchange contracts entered to hedge the exposure of a foreign subsidiary. The exchange gain of the Bank is offset by the exchange loss of the foreign subsidiary in the consolidated profit and loss account. Industrial and Commercial Bank of China (Asia) Limited 131 Annual Report 2005

115 15 15 EARNINGS PER SHARE Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the year Profit attributable to equity holders of the Group (HK$ 000) 980, ,391 Weighted average number of ordinary shares in issue (thousands) 1,076, ,122 Basic earnings per share (HK$ per share) ,003,163,059 Diluted earnings per share is calculated by adjusting weighted average number of shares outstanding to assume conversion of all dilutive potential ordinary shares. There are no dilutive potential ordinary shares during the year (2004: 1,003,163,059 shares, being the weighted average number of ordinary shares and convertible preference shares in issue) Profit attributable to equity holders of the Group (HK$ 000) 980, ,391 Weighted average number of ordinary shares and convertible preference shares (thousands) 1,076,479 1,003,163 Diluted earnings per share (HK$ per share) DIVIDEND HK$ 000 HK$ Interim, paid of HK$0.18 (2004: HK$0.14) 0.14 per ordinary share 201, , Final, proposed of HK$0.35 (2004: HK$0.31) 0.31 per ordinary share 392, , , , Note: At a meeting held on 21 March 2006, the Directors proposed a final dividend of HK$0.35 per ordinary share. These proposed dividend are not reflected as dividend payable in these accounts, but will be reflected as an appropriation of retained earnings for the year ending 31 December Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

116 17 17 CASH AND SHORT-TERM FUNDS Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cash and balances with banks and other financial institutions 896,402 1,420, , ,911 Placement with banks and other financial institutions maturity within one month 23,454,667 11,053,837 23,090,987 10,762,477 Treasury bills (including Exchange Fund Bills) 966,169 1,371, , ,729 25,317,238 13,845,905 24,888,944 12,317, PLACEMENTS WITH BANKS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS Group and Bank HK$ 000 HK$ 000 Placements with other banks and other financial institutions maturing between one and twelve months 2,364,951 5,132,657 Gross advances to banks and other financial institutions 104, ,016 2,469,645 5,811, TRADE BILLS Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Trade bills 2,001,557 1,869,961 2,001,557 1,071,520 Less: impairment allowances on trade bills 23 Individually assessed (Note 23) (3,402) (3,402) 23 Collectively assessed (Note 23) (5,775) (5,775) 23 Specific provision (Note 23) 23 General provision (Note 23) (10,715) (10,715) 1,992,380 1,859,246 1,992,380 1,060,805 Industrial and Commercial Bank of China (Asia) Limited 133 Annual Report 2005

117 20 20 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING SECURITIES) Group and Bank 2005 HK$ 000 Debt securities (included in trading securities): listed in Hong Kong 98 unlisted 149 Total trading securities 247 Financial assets at fair value through profit or loss 1,690,010 Total financial assets at fair value through profit or loss (including trading securities) 1,690,257 Market value of listed securities 1,146,573 Included within debt securities are: Certificates of deposit held 385,526 Other debt securities 1,304,731 1,690,257 Trading securities are analysed by categories of issuers as follows: Central governments and central banks 211,652 Public sector entities 200,398 Banks and other financial institutions 483,509 Corporate entities 794,698 1,690, The Group has adopted HKAS 39 in Under the prospective adoption requirement of HKAS 39, certain financial assets and financial liabilities were designated as financial assets/liabilities at a fair value through profit or loss on 1 January There was no such re-designation in Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

118 21 21 NON-TRADING SECURITIES Group Bank HK$ 000 HK$ 000 Debt securities: Listed in Hong Kong 144, ,672 Listed outside Hong Kong 627, ,279 Unlisted 1,443,665 1,442,253 2,215,616 2,214,204 Equity securities: Listed in Hong Kong 403, ,088 Unlisted 97,377 94, , ,080 Total non-trading securities 2,716,081 2,712,284 Market value of listed securities 1,175,039 1,175,039 Included within debt securities are: Certificates of deposit held 1,180,371 1,180,371 Other debt securities 1,035,245 1,033,833 2,215,616 2,214,204 Industrial and Commercial Bank of China (Asia) Limited 135 Annual Report 2005

119 22 At 31 December DERIVATIVE FINANCIAL INSTRUMENTS Group and Bank Contractual/ Notional Fair value Fair value amount assets liabilities HK$ 000 HK$ 000 HK$ 000 1) 1) Derivatives held for trading a) a) Foreign exchange derivatives Currency forwards 24,879,928 32,247 (11,095) OTC currency options brought and sold 3,310,175 5,101 (4,428) Total OTC derivatives 37,348 (15,523) b) b) Interest rate derivatives Interest rate swaps 26,413,818 (161,445) OTC interest rate options 8,374,692 2,857 (3,007) Other interest rate contracts 600,000 3,983 (762) Total OTC derivatives 6,840 (165,214) c) c) Equity derivatives Equity options 71, (533) Total derivative assets/(liabilities) held for trading 44,720 (181,270) 2) 2) Derivatives held of hedging a) a) Derivatives designated as fair value hedges Interest rate swaps 2,711,327 24,241 Cross currency interest rate swaps 32,653 (773) Total derivative assets/(liabilities) held for hedging 23,468 Total recognised derivative financial assets/(liabilities) 44,720 (157,802) 136 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

120 22 22 DERIVATIVE FINANCIAL INSTRUMENTS (continued) The contractual or notional amounts of off-balance sheet instruments provide only an indication of the volume of business outstanding at the balance sheet date and bear little relation to the underlying risks of the exposures. Group Credit risk Credit risk Replacement weighted Replacement weighted cost amount cost amount HK$ 000 HK$ 000 HK$ 000 HK$ 000 Exchange rate contracts 111,974 75,752 85,360 92,370 Interest rate contracts 537, , ,926 95,144 Other contracts 533 1, , , , ,514 Bank Credit risk Credit risk Replacement weighted Replacement weighted cost amount cost amount HK$ 000 HK$ 000 HK$ 000 HK$ 000 Exchange rate contracts 111,974 75,752 80,349 80,174 Interest rate contracts 537, , ,377 95,274 Other contracts 533 1, , , , ,448 The replacement costs and credit risk weighted amounts of the off-balance sheet exposures do not take into account the effects of bilateral netting arrangement. The notional principal amounts of outstanding derivative contracts as of 31 December 2004 were as follows: Group HK$ 000 Bank HK$ 000 Currency forward 5,993,405 2,986,265 Currency swap 22,016,734 23,428,468 Currency options 4,538,551 3,019,258 Interest rate swaps 35,220,123 35,120,826 Interest rate options 8,855,728 8,855,728 Equity options 166, ,910 76,791,451 73,577,455 Industrial and Commercial Bank of China (Asia) Limited 137 Annual Report 2005

121 23 23 LOANS AND ADVANCES TO CUSTOMERS Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Advances to customers 68,299,287 60,190,657 67,158,009 44,929,735 Accrued interest 321, , , ,850 Individual impairment allowances (264,016) (181,902) Collective impairment allowance (203,808) (193,197) Specific provision (332,637) (106,811) General provision (492,820) (379,574) Loans and advances to customers 68,152,663 59,500,978 67,095,289 44,549,200 Group Bank HK$ 000 HK$ 000 Impaired loans are analysed as follows: Loans and advances to banks and other financial institutions Trade bills 3,304 3,304 Loans and advances to customers 657, , , ,974 Group Bank HK$ 000 HK$ 000 (i) Gross impaired loans (i) 661, ,974 Impairment allowances made in respect of such loans 267, ,304 As a percentage of total loans and advances 0.9% 0.8% 138 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

122 23 23 LOANS AND ADVANCES TO CUSTOMERS (continued) Group Bank HK$ 000 HK$ 000 Non-performing loans are analysed as follows: Loans and advances to banks and other financial institutions Trade bills Loans and advances to customers 764, , , ,619 Group Bank HK$ 000 HK$ 000 (ii) Gross non-performing loans (ii) 764, ,619 Specific provision made in respect of such advances 332, ,718 As a percentage of total loans and advances 1.3% 0.6% Amount of interest in suspense 69,176 20,427 (i) (ii) 39 Note (i) Impaired loans are defined as those loans having objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event has an impact on the estimated future cash flows of the loans that can reliably estimated. Note (ii) Non-performing loans are loans and advances to customers on which interest is being placed in suspense or on which interest accrual has ceased under the requirement of HKMA. Upon adoption of HKAS 39, the concepts of suspended interest and nonperforming loans are no longer relevant as interest continues to be recognised on the recoverable element of impaired loans. There were no impaired advances to banks and other financial institutions as at 31 December 2005 nor advances on which interest is being placed in suspense or on which interest accrual has ceased as at 31 December 2004 nor were there any individual impairment allowances/specific provision made for them on these two respective dates. Industrial and Commercial Bank of China (Asia) Limited 139 Annual Report 2005

123 23 23 LOANS AND ADVANCES TO CUSTOMERS (continued) Group 2005 Individual Collective assessment assessment Total HK$ 000 HK$ 000 HK$ 000 Movement in impairment allowances on loans and advances Balance at 1 January 2005, as restated 302, , ,990 Transferred from acquisition of a subsidiary 7,822 7, Impairment losses (Note 10) 97,066 (90,742) 6,324 Gain on disposal of loans (6,162) (6,162) Loans written off as uncollectible (148,454) (148,454) Recoveries of advances written off in previous years 16,567 16,567 Exchange and other adjustments (3,086) (3,086) At 31 December , , ,001 Deducted from: 19 Trade bills (Note 19) 3,402 5,775 9,177 Loans and advances to customers 264, , , , , ,001 Group 2004 Specific General Suspended provision provision Total interest HK$ 000 HK$ 000 HK$ 000 HK$ 000 Movement in provision for bad and doubtful debts Balance at 1 January , , , ,679 Transferred from acquisition of a subsidiary 111, , ,352 2,594 / Charge/(write back) to profit and loss 10 account (Note 10) (79,119) 57,562 (21,557) Loans written off as uncollectible (51,534) (51,534) (49,003) Recoveries of advances written off in previous years 42,425 42,425 Interest suspended during the year 35,010 Suspended interest recovered (37,137) Exchange and other adjustments (31) 3,142 3, At 31 December , , ,172 69,176 Deducted from: 19 Trade bills (Note 19) 10,715 10,715 Loans and advances to customers 332, , ,364 Accrued interest and other accounts , , , Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

124 23 23 LOANS AND ADVANCES TO CUSTOMERS (continued) Bank 2005 Individual Collective assessment assessment Total HK$ 000 HK$ 000 HK$ 000 Movement in impairment allowances on loans and advances Balance at 1 January 2005, as restated 98, , ,004 Additions through merger with Belgian Bank, Hong Kong Branch, as restated 66,677 96, ,095 Transferred from acquisition of a subsidiary Impairment losses 107,131 (70,931) 36,200 Gain on disposal of loans (6,162) (6,162) Loans written off as uncollectible (101,062) (101,062) Recoveries of advances written off in previous years 14,201 14,201 At 31 December , , ,276 Deducted from: 19 Trade bills (Note 19) 3,402 5,775 9,177 Loans and advances to customers 181, , , , , ,276 Bank 2004 Specific General Suspended provision provision Total interest HK$ 000 HK$ 000 HK$ 000 HK$ 000 Movement in provision for bad and doubtful debts Balance at 1 January , , ,984 38,695 Transferred from acquisition of a subsidiary / (Write back)/charge to profit and loss account (44,163) 48,225 4,062 Loans written off as uncollectible (12,617) (12,617) (12,344) Recoveries of advances written off in previous years 17,671 17,671 Interest suspended during the year 20,316 Suspended interest recovered (26,242) Exchange and other adjustments 2 At 31 December , , ,100 20,427 Deducted from: 19 Trade bills (Note 19) 10,715 10,715 Loans and advances to customers 106, , ,292 Accrued interest and other accounts , , ,100 Industrial and Commercial Bank of China (Asia) Limited 141 Annual Report 2005

125 24 24 AVAILABLE-FOR-SALE SECURITIES Group Bank HK$ 000 HK$ 000 Debt securities: listed in Hong Kong 607, ,010 listed outside Hong Kong 4,456,407 4,456,407 unlisted 4,561,334 4,560,579 9,624,751 9,623,996 Equity securities: listed in Hong Kong 415, ,684 listed outside Hong Kong unlisted 97,376 97, , ,060 Total available-for-sale securities 10,137,811 10,137,056 Market value of listed securities 5,479,103 5,479,103 Included within debt securities are: Certificates of deposit held 3,186,907 3,186,907 Other debt securities 6,437,844 6,437,089 9,624,751 9,623,996 Available-for-sale securities are analysed by categories of issuers as follows: Central governments and central banks 406, ,779 Public sector entities 564, ,497 Banks and other financial institutions 3,575,785 3,575,785 Corporate entities 5,589,199 5,589,199 Others 1, ,137,811 10,137, The Group did not classify any investment securities as available-for-sale securities in 2004 as prospective adoption from the period beginning from 1 January 2005 is required under the transitional provision of HKAS Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

126 25 25 HELD-TO-MATURITY SECURITIES Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Debt securities: Listed in Hong Kong 1,118,293 1,118,293 Listed outside Hong Kong 836,232 4,300, ,232 4,300,998 Unlisted 2,245,267 7,627,751 2,246,536 5,749,965 Total held-to-maturity securities 3,081,499 13,047,042 3,082,768 11,169,256 Market value of listed securities 837,923 5,597, ,923 5,597,201 Included within debt securities are: Certificates of deposit held 1,327,971 5,384,156 1,327,971 5,384,156 Other debt securities 1,753,528 7,662,886 1,754,797 5,785,100 3,081,499 13,047,042 3,082,768 11,169,256 Held-to-maturity securities are analysed by issuer as follows: Central governments and central banks 263,523 2,095, , ,105 Public sector entities 254, ,002 Banks and other financial institutions 1,675,994 3,915,023 1,675,994 3,915,023 Corporate entities 887,980 7,036, ,249 6,768,128 3,081,499 13,047,042 3,082,768 11,169,256 Industrial and Commercial Bank of China (Asia) Limited 143 Annual Report 2005

127 26 26 INVESTMENT IN AN ASSOCIATE Group HK$ 000 HK$ 000 Share of net assets 28,484 28,332 Bank HK$ 000 HK$ 000 Investment at cost, unlisted shares 14,508 14,508 The Group s interest in its principal associate, which is unlisted is as follows: / Assets Liabilities Revenues Profit/(loss) Country of % Interest Name incorporation HK$ 000 HK$ 000 HK$ 000 HK$ 000 held 2005 China Ping An Insurance (Hong Kong) Hong Kong Company Limited 39,541 11,057 4, % 2004 China Ping An Insurance (Hong Kong) Hong Kong Company Limited 40,265 11,933 6,290 2,513 25% 24.9%12.45% The Tai Ping Insurance Company, People s Limited (In November 2004, the Bank s Republic equity interest has been diluted of China from 24.9% to 12.45%) ( PRC ) 6,237 (43,738 ) 12.45% 40,265 11,933 12,527 (41,225 ) 200, China Ping An Insurance (Hong Kong) Company Limited engages in general insurance business in Hong Kong. The Group held 200,000 ordinary shares of HK$100 each. 144 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

128 27 27 INTANGIBLE ASSETS Computer Trading Goodwill software rights Total Group HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cost At 1 January ,019, ,235 6,900 1,155,374 (i), (ii) (iii) Additions (Note (i), (ii) and (iii)) 67,392 54, ,042 At 31 December ,086, ,885 6,900 1,277,416 Accumulated amortisation At 1 January ,725 3,590 5, ,320 Charge for the year 39,242 39,242 At 31 December ,725 42,832 5, ,562 Net book value At 31 December , ,053 1,895 1,080,854 At 31 December , ,645 1, ,054 Computer Goodwill software Total Bank HK$ 000 HK$ 000 HK$ 000 Cost At 1 January , , ,192 Additions through merger with Belgian Bank, Hong Kong Branch 39,374 39,374 (i) Additions (Note (i)) 54,650 54,650 At 31 December , , ,216 Accumulated amortisation At 1 January ,242 3, ,832 Additions through merger with Belgian Bank, Hong Kong Branch 9,420 9,420 Charge for the year 39,242 39,242 At 31 December ,662 42, ,494 Net book value At 31 December , , ,722 At 31 December , , ,360 Industrial and Commercial Bank of China (Asia) Limited 145 Annual Report 2005

129 27 27 INTANGIBLE ASSETS (continued) Notes: (i) (i) The Core banking system was upgraded in October 2005 with direct costs including software development consultancy fees and employee costs recognised as intangible asset as at 31 December (ii) (ii) The Group has completed the acquisition of Chinese Mercantile Bank on 12 August The excess of the acquisition cost over the fair value of the net assets of Chinese Mercantile Bank at the date of acquisition is recognised as goodwill on the consolidated balance sheet. (iii) (iii) In the sale and purchase agreement of the acquisition of Belgian Bank, Hong Kong Branch section 7.13, it was agreed that the purchaser (our bank) shall pay to the seller (Fortis Bank) the difference between the payment by the debtor of Belgian Bank s debt and the amount paid by purchaser (our bank) during the period while the tax deed is in effect. The clause of the tax deed stipulated that the seller (Fortis Bank) will pay to the purchaser (our bank) the tax liability which has arisen in respect of income, profits or gains earned, accrued or received on or before the completion date. The goodwill represents the difference between amount paid on Belgian Bank s debts and the amount received from tax deeds. (iv) (iv) Impairment tests for cash-generating units containing goodwill Goodwill is allocated to the Group s cash-generating units (CGU) identified according to business segment as follows: HK$ 000 HK$ 000 Corporate Banking 585, ,715 Commercial Banking 192, ,575 Retail Banking 118, ,224 Others 41, , , % 13% The recoverable amount of the CGU is determined based on value-inuse calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimate rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. The discount rate used for value-in-use calculations is 10% and the longterm growth rate is 13%. Management determined the budgeted financial performance based on past performance and its expectation for market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. 146 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

130 28 28 PROPERTY, PLANT AND EQUIPMENT Group Bank Furniture premises and Leasehold and properties improvements equipment Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cost or valuation At 1 January , , , ,490 Reclassification (229,277) (229,277) 42 Acquired from a subsidiary (Note 42) 98,810 8, ,300 Additions 39,381 21,095 60,476 i Revaluation (Note i) 26,186 26,186 Disposals (5,683) (9,974) (23,655) (39,312) At 31 December , , , ,863 Accumulated depreciation and impairment At 1 January 2005 Acquired from a subsidiary 42 (Note 42) 86, , ,362 Charge for the year 35,131 7,737 42,868 Revaluation 2,481 11,962 14,563 29,006 Disposals (3,417) (9,995) (22,303) (35,715) At 31 December ,195 88, , ,521 Net book value At 31 December ,041 56,380 50, ,342 At 31 December ,171 28,940 44, ,099 The analysis of cost or valuation of the above assets is as follows: At 31 December 2005 At cost 144, , ,627 At professional valuation in December , , , , , ,863 At 31 December 2004 At cost 115, , ,290 At professional valuation in December , , , , , ,461 Industrial and Commercial Bank of China (Asia) Limited 147 Annual Report 2005

131 28 28 PROPERTY, PLANT AND EQUIPMENT (continued) Bank Bank Furniture premises and Leasehold and properties improvements equipment Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cost or valuation At 1 January ,200 80, , ,082 Reclassification (229,277) (229,277) Additions through merger with Belgian Bank, Hong Kong Branch 34,995 85, ,061 Additions 39,381 20,189 59,570 i Revaluation (Note i) Disposals (9,974) (19,512) (29,486) At 31 December , , , ,522 Accumulated depreciation and impairment At 1 January ,489 92, ,780 Additions through merger with Belgian Bank, Hong Kong Branch 23,777 75,458 99,235 Charge for the year ,962 14,525 27,372 Revaluation Disposals (9,995) (18,417) (28,412) At 31 December , , ,975 Net book value At 31 December ,610 56,380 49, ,547 At 31 December ,171 17,722 35, ,273 The analysis of cost or valuation of the above assets is as follows: At 31 December 2005 At cost 144, , ,027 At professional valuation in December ,495 19,495 19, , , ,522 At 31 December 2004 At cost 80, , ,882 At professional valuation in December , , ,171 80, , , Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

132 28 28 PROPERTY, PLANT AND EQUIPMENT (continued) Note: (I) A.G.Wilkinson & Associates (i) The bank premises were revalued at 31 December 2005 based on the open market value by A.G. Wilkinson & Associates, an independent professional valuer. The subsidiary s premises were revalued on 12 August 2005 based on the open market value by Shenzhen GJL Real Estate Asset Evaluation and Consultation Co. Ltd, independent property consultant LEASEHOLD LAND AND LAND USE RIGHTS The Group s interest in leasehold land and land use rights represent operating leases and their net book value are analysed as follows: Group and Bank HK$ 000 HK$ 000 In Hong Kong, held on: 50 Leases over 50 years 76,096 77, Leases between 10 to 50 years 15,608 15,984 91,704 93, INVESTMENT IN SUBSIDIARIES Bank HK$ 000 HK$ 000 Investment at cost, unlisted shares 3,318,639 2,711, ,717, % 42 The bank acquired 100% interest of Chinese Mercantile Bank on 12 August 2005 for a cost of HK$710,717,000, which was satisfied by cash and allotment of shares (Note 42). Industrial and Commercial Bank of China (Asia) Limited 149 Annual Report 2005

133 30 30 INVESTMENTS IN SUBSIDIARIES (continued) The following is a list of subsidiaries held by the Bank at 31 December 2005: Place of Particulars of issued shares Name incorporation Principal activities held/registered Capital Interest held # 85,300, % Chinese Mercantile Bank # People s Republic Non-Renminbi banking US$85,300,000 of China business 6,000, % 100% 1 ICBC (Asia) Bullion Company Hong Kong Inactive 6,000,000 ordinary shares Limited of HK$1 each 26,000, % 100% 1 ICBC (Asia) Futures Limited Hong Kong Inactive 26,000,000 ordinary shares of HK$1 each ICBC (Asia) Nominee Limited % 100% Hong Kong Provision of nominee 100 ordinary shares services of HK$100 each 12,000, % 100%* ICBC (Asia) Securities Limited Hong Kong Provision of securities 12,000,000 ordinary shares brokerage services of HK$1 each ICBC (Asia) Wa Pei Nominees % 100%* Limited Hong Kong Inactive 100 ordinary shares of HK$1 each ICBC Asia Wa Pei Limited 415, % 100% Belgium Inactive 415,879 ordinary shares of EUR each ICBCA (C.I.) Limited % 100% Cayman Islands Being a special-purpose 1 ordinary share vehicle for bond issuance of US$1 each % 100% UB China Business British Virgin Management of the Bank s 1 ordinary share Management Co. Ltd. Islands PRC Impaired Loan Portfolio of US$1 each * # * Share held indirectly by the Bank # Company not audited by PricewaterhouseCoopers Foreign-owned enterprise 150 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

134 31 31 DEPOSITS FROM CUSTOMERS Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Demand deposits and current accounts 2,992,817 3,415,738 2,981,215 1,288,495 Saving deposits 8,839,142 10,843,446 8,840,286 4,503,618 Time, call and notice deposits 49,158,189 41,798,985 54,653,960 32,844,344 60,990,148 56,058,169 66,475,461 38,636, DEBT SECURITIES IN ISSUE Group US$ fixed rate note: HK$ 000 HK$ 000 At fair value through profit or loss 2,978,615 At amortised cost 3,095,423 ICBCA (C.I.) Limited400,000, % In September 2004, ICBCA (C.I.) Limited, a wholly-owned subsidiary of the Bank, issued notes with an aggregate principal amount of US$400,000,000 at coupon rate of 4.125% per annum maturing on 16 September The notes are unconditionally and irrevocably guaranteed by the Bank. Industrial and Commercial Bank of China (Asia) Limited 151 Annual Report 2005

135 % 17.5% 33 DEFERRED INCOME TAX Deferred income tax is calculated in full on temporary differences under the liability method using a principal taxation rate of 17.5% (2004: 17.5%). The movement on the deferred income tax assets/(liabilities) account is as follows: Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January, as previously reported 27,403 8,026 7,990 8,026 Effect of changes in accounting policies (36,250) (37,800) At 1 January, as restated (8,847) 8,026 (29,810) 8,026 Additions through merger with Belgian Bank, Hong Kong Branch, restated 20,963 Transferred from acquisition of a subsidiary 17, Charged to profit and loss account (Note 12) (23,790) (14,448) (23,790) (16,296) Credited to equity 27,838 16,260 27,838 16,260 At 31 December (4,799) 27,403 (4,799) 7, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

136 33 33 DEFERRED INCOME TAX (continued) The deferred income tax credited to equity during the year is as follows: Group and Bank HK$ 000 HK$ 000 Fair value reserves in shareholders equity 38 Bank premises (Note 38) (50) 1, Available-for-sale financial assets (Note 38) 30, Non-trading securities (Note 38) (2,204) 14,517 27,838 16,260 The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same taxation jurisdiction) during the year are as follows: Deferred income tax assets Group Collective impairment allowances/ Investment Accelerated tax General provision revaluation reserves depreciation Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January, as previously reported 60,429 43,698 13,060 11,090 84,579 43,698 Effect of changes in accounting policies (35,312) (24,150) (59,462) At 1 January, as restated 25,117 43,698 (11,090) 11,090 25,117 43,698 Transferred to deferred income tax liabilities after merger of Belgian bank, Hong Kong Branch (11,090) (11,090) Transferred from acquisition of a subsidiary 7,370 10,195 17,565 (Charged)/credited to profit and loss account (13,499) 9, (13,499) 10,256 Credited to equity 27,888 13,060 27,888 13,060 At 31 December 11,618 60,429 16,798 13,060 11,090 28,416 84,579 Industrial and Commercial Bank of China (Asia) Limited 153 Annual Report 2005

137 33 33 DEFERRED INCOME TAX (continued) Bank Collective impairment allowances/ Investment General provision revaluation reserves Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January, as previously reported 52,106 43,698 13,060 65,166 43,698 Effect of changes in accounting policies (36,862) (24,150) (61,012) At 1 January, as restated 15,244 43,698 (11,090) 4,154 43,698 Additions through merger with Belgian Bank, Hong Kong Branch 9,873 9,873 (Charged)/credited to profit and loss account (13,499) 8,408 (13,499) 8,408 Credited to equity 27,888 13,060 27,888 13,060 At 31 December 11,618 52,106 16,798 13,060 28,416 65,166 Deferred income tax liabilities Group and Bank Bank premises Investment Accelerated tax revaluation reserve revaluation reserves depreciation Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January, as previously reported 23,461 25,204 1,457 33,715 9,011 57,176 35,672 Effect of changes in accounting policies (23,212) (23,212) At 1 January, as restated ,204 1,457 33,715 9,011 33,964 35,672 Transfer from deferred income tax asset/additions through merger of Belgian Bank, Hong Kong Branch (11,090) (11,090) Charged to profit and loss account 10,291 24,704 10,291 24,704 Debited/(Credited) to equity 50 (1,743) (1,457) 50 (3,200) At 31 December ,461 32,916 33,715 33,215 57, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

138 33 33 DEFERRED INCOME TAX (continued) The amounts shown in the balance sheet include the following: Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet. Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Deferred income tax assets 28,416 84,579 28,416 65,166 Deferred income tax liabilities (33,215) (57,176) (33,215) (57,176) (4,799) 27,403 (4,799) 7,990 Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Deferred income tax assets to be recovered after more than 12 months 28,416 84,579 28,416 65,166 Deferred income tax liabilities to be settled after more than 12 months (22,261) (51,367) (22,261) (51,367) Industrial and Commercial Bank of China (Asia) Limited 155 Annual Report 2005

139 34 34 BALANCES WITH GROUP COMPANIES (a) (a) Included in the following balance sheet captions are balances with the ultimate holding company: Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 On-balance sheet Cash and short-term funds Placements with banks and other financial institutions maturing within one month 1,946,048 1,278,235 1,628,273 1,278,235 Cash and balances with banks and other financial institutions 59,017 58,121 52,983 58,121 2,005,065 1,336,356 1,681,256 1,336,356 Placements with banks and other financial institutions maturing between one and twelve months 2,364,951 4,691,603 2,364,951 4,691,603 Other assets 87,729 84,617 87,729 84,617 4,457,745 6,112,576 4,133,936 6,112,576 Deposits from banks and other financial institutions 20,513,379 15,134,478 19,737,869 15,134,478 Certificates of deposit issued 3,877,550 3,887,100 3,877,550 3,887,100 Other liabilities 240, , , ,840 24,631,911 19,178,418 23,856,401 19,178,418 Loan capital 5,338,775 5,348,229 5,338,775 5,348,229 11,826,528,000 11,109,332,000 1,575,000,000 1,635,000,000 Note: Included in deposits and balances of banks and other financial institutions is an amount of HK$11,826,528,000 (2004: HK$11,109,332,000) representing utilisation of a standby credit facility of US$1,575,000,000 (2004: US$1,635,000,000) granted by the ultimate holding company to the Bank for working capital purposes. 156 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

140 34 34 BALANCES WITH GROUP COMPANIES (continued) (a) (a) Included in the following balance sheet captions are balances with the ultimate holding company: (continued) Group and Bank HK$ 000 HK$ 000 Off-balance sheet Foreign exchange contracts contractual amount 6,124,861 5,559,672 Interest rate swaps notional principal 7,766,655 7,946,905 Currency options contractual amount options purchased 44,966 options written 44,966 Interest rate options contractual amount options purchased 994, ,307 options written 1,645,751 1,807,902 2,640,374 2,605,209 Other commitments with maturity within 1 year overdraft facility 2,753,061 1,010,646 (b) (b) Included in the following balance sheet captions are balances with fellow subsidiaries: Group and Bank HK$ 000 HK$ 000 On-balance sheet Other assets 3,023 3,499 Deposits from banks and other financial institutions 112, ,334 Deposits from customers 267, ,967 Other liabilities 5,394 1, , ,866 Off-balance sheet Foreign exchange contracts contractual amount 30,954 Interest rate swaps notional principal 301, ,771 Industrial and Commercial Bank of China (Asia) Limited 157 Annual Report 2005

141 34 34 BALANCES WITH GROUP COMPANIES (continued) (c) (c) Included in the following balance sheet captions are balances with subsidiaries of the Bank: Bank HK$ 000 HK$ 000 On-balance sheet Senior PLNs issued by UBCBM included in the balance sheet under Held-to-maturity securities 1, ,969 Other assets 1,840 15,702 3, ,671 Deposits from banks and other financial institutions 9, ,965 Deposits from customers 5,519,158 3,143,740 Certificates of deposit issued 5,375,619 Other liabilities 73, ,712 5,602,859 8,956,036 Off-balance sheet Foreign exchange contracts contractual amount 28,608 3,773,895 Interest rate swaps notional amount 159,926 Currency options contractual amount options purchased 199,787 Interest rate options contractual amount options purchased 145,000 (d) (d) Included in the following balance sheet captions are balances with an associate: Group and Bank HK$ 000 HK$ 000 On-balance sheet Deposits from customers 15,770 18,934 Other liabilities 4 15,774 18, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

142 35 35 OFF-BALANCE SHEET EXPOSURES (a) (a) Contingent liabilities and commitments The following is a summary of the contractual amounts of each significant class of contingent liability and commitment: Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Direct credit substitutes 1,429,763 1,448,759 1,429,763 1,388,788 Transaction-related contingencies 131, , , ,170 Trade-related contingencies 2,698,287 2,742,368 2,698, ,454 Other commitments with an original maturity of: under 1 year or which are unconditionally cancellable 13,602,099 15,102,129 13,602,099 4,875,051 1 year and over 9,886,108 8,027,091 9,727,398 7,874,060 Forward deposits placed 371, , ,097 28,119,289 27,860,576 27,960,579 15,327,523 The credit risk weighted amount of credit commitments 6,338,082 5,159,075 6,258,727 4,652,465 (b) (b) Capital commitments Capital commitments for property, plant and equipment outstanding as at 31 December not provided for in the accounts were as follows: Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Expenditure contracted but not provided for 2,319 11,539 11,539 Expenditure authorised but not contracted for ,319 12,159 12,159 Industrial and Commercial Bank of China (Asia) Limited 159 Annual Report 2005

143 35 35 OFF-BALANCE SHEET EXPOSURES (continued) (c) (c) Operating lease commitments At 31 December 2005 the Group and the Bank had future aggregate minimum lease payment under non-cancellable operating leases as follows: Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Land and buildings Not later than one year 83,644 89,054 83,596 58,042 Later than one year and not later than five years 174, , , ,693 More than five years 112, , , , , , , , LOAN CAPITAL Group and Bank HK$ 000 HK$ 000 Subordinated floating rate notes with a final maturity on 2 July 2011 (callable on 3 July 2006) 584, ,820 with a final maturity on 12 December 2011 (callable on 13 December 2006) 623, ,808 with a final maturity on 26 March 2012 (callable on 27 March 2007) 545, ,916 with a final maturity on 8 December 2012 (callable on 10 December 2007) 500, ,000 with a final maturity on 28 April 2014 (callable on 28 April 2009) 1,169,955 1,169,955 perpetual (callable on 10 December 2012) 1,935,916 1,935,916 Exchange adjustment (21,640) (12,186 ) 5,338,775 5,348,229 Loan capital was raised by the Bank for the development and expansion of business and have been fully subscribed by the ultimate holding company. These notes qualify for and have been included as the Bank s supplementary capital in accordance with the Third Schedule to the Hong Kong Banking Ordinance. 160 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

144 37 37 SHARE CAPITAL Ordinary Preference Number of Ordinary share share shares shares premium premium Total (thousands) HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,047,965 2,095,930 4,700,602 16,126 6,812,658 Allotment of new share to ultimate holding company as consideration shares for the acquisition of Chinese Mercantile Bank on completion date 12 August , , , ,995 Allotment of new shares to Fortis Bank upon the exercise of Anti-dilution Right, on 12 August 2005 regarding the acquisition of Chinese Mercantile Bank 6,596 13,192 59,752 72,944 Share issue expenses (60) (60) At 31 December ,121,259 2,242,518 5,323,893 16,126 7,582,537 At 1 January ,374 1,248,749 1,786, ,496 3,540,931 Allotment of new shares to the ultimate holding company to satisfy the cash portion of the acquisition of Fortis Bank Asia HK (renamed as Belgian Bank) 124, ,748 1,155,084 1,404,832 Conversion of convertible non-cumulative preference shares to ordinary shares 204, ,799 1,091,667 (489,370) 1,011,096 Allotment of new shares to Generale Belgian Generale Belgian Holding Holding B.V. B.V. as Consideration Shares for the acquisition of Fortis Bank Asia HK (renamed as Belgian Bank) 94, , , ,864 Share issue expenses (26,065) (26,065) At 31 December ,047,965 2,095,930 4,700,602 16,126 6,812,658 2,000,000,000 2,000,000, ,000, ,000, The total number of authorized ordinary shares is 2,000 million shares (2004: 2,000 million shares) with a par value of HK$2 per share (2004: HK$2 per share). All issued shares are fully paid. The total number of authorized convertible non-cumulative preference shares is 232 million shares (2004: 232 million shares) with a par value of $5 per share (2004: $5 per share). There is no convertible noncumulative preference share in issue as at 31 December Industrial and Commercial Bank of China (Asia) Limited 161 Annual Report 2005

145 37 37 SHARE CAPITAL (continued) Share options (a) (a) Employee share option scheme During the year, no option has been granted and at 31 December 2005, there were no option outstanding. (b) ,211,063,000 (b) Issue of options in connection with the issue of Junior PLNs. In connection with the issue of Junior PLNs by UBCBM, the shareholders of the Bank had by a resolution passed at the Extraordinary General Meeting held on 28 March 2000 approved the issue of options to subscribe for shares of the Bank at the end of the five-year term of the Junior PLNs subject to the fulfillment of certain conditions. These options, if issued, will allow the holders of the Junior PLNs to subscribe for shares in the Bank at an exercise price of HK$7.78. However, no option will be issued if total recoveries of the PRC impaired loans Portfolio at the end of the five-year term of the Junior PLNs are below HK$1,211,063, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

146 RESERVES Group Convertible non-cumulative Bank Ordinary preference premises Investment share share revaluation revaluation Exchange General Retained premium premium reserve reserve reserve reserve earnings Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,700,602 16, ,638 (62,377) ,200 1,461,177 6,445, Effect of adopting HKASs 17 and 39 (Note 2.1) (109,424) 126, , ,468 At 1 January 2005, as restated 4,700,602 16,126 1,214 63, ,200 1,665,828 6,666, Issue of shares (Note 37) 623, , Share issue expenses (Note 37) (60) (60) Change in fair value of available-for- sale securities (171,750) (171,750) Revaluation surplus on bank premises 25,791 25,791 Reserves from merger with Belgian Bank, Hong Kong Branch 1,427 1,427 Partial transfer of retained earnings to general reserve 14,820 (14,820) Exchange differences (122) (122) Profit for the year 980, , Change in deferred taxation (Note 33) (50) 27,888 27, final dividend paid (Note 16) (324,869) (324,869) interim dividend paid 16 (Note 16) (201,827) (201,827) At 31 December ,323,893 16,126 26,955 (79,998) 234,020 2,106,340 7,627,336 Representing: Bank and subsidiaries 5,323,893 16,126 27,024 (79,190) 234,020 2,091,914 7,613,787 Associate (69) (808) 14,426 13,549 At 31 December ,323,893 16,126 26,955 (79,998) 234,020 2,106,340 7,627,336 (a) (a) The general reserve comprised of previous year s transfers from retained earnings and is distributable. (b) 392,441, (b) The Directors proposed a final dividend of HK$392,441,000 after the year-end which will be reflected as an appropriation of retained earnings for the year ending 31 December 2006 (Note 16). (c) 352,028,000 (c) As at 31 December 2005, the Group has earmarked a Regulatory Reserve of HK$352,028,000 from the retained earnings. The regulatory reserve is maintained to satisfy the provisions of the Hong Kong Banking Ordinance for prudential supervision purpose. Movements in the reserve are made directly through retained earnings and in consultation with the Hong Kong Monetary Authority. Industrial and Commercial Bank of China (Asia) Limited 163 Annual Report 2005

147 RESERVES (continued) Bank Convertible non-cumulative Bank Ordinary preference premises Investment share share revaluation revaluation General Retained premium premium reserve reserve reserve earnings Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,700,602 16, ,599 (61,567) 219, ,101 5,895, Effect of adopting HKASs 17 and 39 (109,423) 113, , ,895 At 1 January 2005, as restated 4,700,602 16,126 1,176 52, ,200 1,080,569 6,069,956 Additions through merger with Belgian Bank, Hong Kong Branch, as restated 12,391 56,321 68, Issue of shares (Note 37) 623, , Share issue expenses (Note 37) (60) (60) Change in fair value of available-forsale securities (171,750) (171,750) Revaluation surplus on bank premises Reserves from merger with Belgian Bank, Hong Kong Branch (121,819) (121,819) 14 Profit for the year (Note 14) 1,338,266 1,338, Change in deferred taxation (Note 33) (50 ) 27,888 27, final dividend paid 16 (324,869) (324,869) interim dividend paid (Note 16) (201,827) (201,827) At 31 December ,323,893 16,126 1,411 (79,188) 219,200 1,826,641 7,308, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

148 RESERVES (continued) Group Convertible non-cumulative Bank Ordinary preference premises Investment share share revaluation revaluation Exchange General Retained premium premium reserve reserve reserve reserve earnings Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,786, , ,816 6,080 (239) 219,200 1,021,421 3,657, Issue of shares (Note 37)) 1,155,084 1,155,084 Issue of Consideration shares to GBH37 GBH (Note 37) 693, , Share issue expenses (Note 37) (26,035) (26,035) Capital duty for the increase in authorized 37 share capital (Note 37) (30) (30) Conversion of convertible non-cumulative preference shares to ordinary shares 37 (Note 37) 1,091,667 (489,370 ) 602,297 Change in fair value of non-trading securities (79,905) (79,905) Disposal of non-trading securities (3,069) (3,069) Disposal of bank premises (74,029) 74,029 Revaluation of bank premises 64,069 64,069 Share of revaluation gain of investment properties held by an associate Disposal of an associate Exchange differences Profit for the year 760, , Change in deferred taxation (Note 33) 1,743 14,517 16, final dividend paid (247,949) (247,949) 2004 interim dividend paid 16 (Note 16) (146,715) (146,715) At 31 December ,700,602 16, ,638 (62,377) ,200 1,461,177 6,445,488 Representing: Bank and subsidiaries 4,700,602 16, ,599 (61,569) ,200 1,447,012 6,432,092 Associate 39 (808) 14,165 13,396 At 31 December ,700,602 16, ,638 (62,377) ,200 1,461,177 6,445,488 Industrial and Commercial Bank of China (Asia) Limited 165 Annual Report 2005

149 RESERVES (continued) Bank Convertible non-cumulative Bank Ordinary preference premises Investment share share revaluation revaluation General Retained premium premium reserve reserve reserve earnings Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,786, , ,816 6, ,200 1,019,148 3,656, Issue of shares (Note 37) 1,155,084 1,155,084 GBH37 Issue of Consideration shares to GBH (Note 37) 693, , Share issue expenses (Note 37) (26,035) (26,035) Capital duty for the increase in 37 authorized share capital (Note 37) (30) (30) Conversion of convertible non-cumulative 37 preference shares to ordinary shares (Note 37)) 1,091,667 (489,370) 602,297 Change in fair value of non-trading securities (79,905) (79,905) Disposal of non-trading securities (3,069) (3,069) Disposal of bank premises (74,029) 74,029 Revaluation of bank premises 64,069 64, Profit for the year (Note 14) 211, , Change in deferred taxation (Note 33) 1,743 14,517 16, final dividend paid (247,949) (247,949) interim dividend paid (Note 16) (146,715) (146,715) At 31 December ,700,602 16, ,599 (61,567) 219, ,101 5,895, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

150 39 39 CASH AND CASH EQUIVALENTS For the purposes of the cast flow statement, cash and cash equivalents comprises the following balances with less than three months maturity from the date of acquisition. Group Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cash and balances with banks and other financial 17 institutions (Note 17) 896,402 1,420, , ,911 Certificates of deposit/treasury bills 277,623 19, ,623 19,997 Placements with banks and financial institutions 23,880,843 12,556,384 23,517,163 12,142,966 Deposits and balances of banks and other financial institutions (16,564,774) (5,553,402) (16,574,554) (5,263,156) 8,490,094 8,443,309 8,052,020 7,812, B(4B) 40 LOANS TO OFFICERS Particulars of loans made to officers and disclosed pursuant to section 161B(4B) of the Hong Kong Companies Ordinance are as follows: Balance outstanding at Maximum balance 31 December during the year HK$ 000 HK$ 000 HK$ 000 HK$ 000 Aggregate amount outstanding in respect of principal and interest 127,367 61, ,381 89,797 Industrial and Commercial Bank of China (Asia) Limited 167 Annual Report 2005

151 41 41 RELATED PARTY TRANSACTIONS During the year, the Group entered into various transactions in the normal course of business with related parties, including the ultimate holding company, fellow subsidiaries and associated companies. (a) (a) Summary of transactions entered into during the ordinary course of business with related parties The aggregated income and expense arising from related party transactions with the ultimate holding company, fellow subsidiaries and associate are summarised as follows: HK$ 000 HK$ 000 Interest income (i) Placements (Note (i)) 159,706 84,689 (ii) Interest rate swaps (Note (ii)) 381, ,906 Interest expense (iii) Deposits (Note (iii)) (569,206) (202,906) (ii) Interest rate swaps (Note (ii)) (352,427) (276,236) (iv) Certificates of deposit issued (Note (iv)) (175,886) (85,751) (v) Loan capital (Note (v)) (188,117) (80,714) Net option premium expense (vi) (Note (vi)) (271) (766) (vii) Management fee income (Note (vii)) 6,000 6,000 (viii) Securities brokerage commission income (Note (viii)) 14 (ix) Service fee income (Note (ix)) 1,441 1,983 (xii) Data processing service fee expense (Note (xii)) (7,435) (4,517) (x) (xi) Premises income (Note (x) & (xi)) 5,906 (xiii) Premises expense (Note (xiii)) (3,631) (6,113) (xiv) PRC loan service fee expense (Note (xiv)) (972) (656) (xv) Fee expense on sub-participation of syndicated loan (Note xv) (2,700) (2,083) Notes: (i) (i) Interest income was received on inter-bank deposits placed with the ultimate holding company and fellow subsidiaries at prevailing market rates. (ii) (ii) Interest income and expense was received from and paid to the ultimate holding company and fellow subsidiaries on the interest rate swaps at prevailing market rates. These transactions included interest rate swaps entered on a back-to-back basis with the ultimate holding company and fellow subsidiaries. (iii) (iii) Interest expense was paid on the deposits taken from the ultimate holding company and fellow subsidiaries. (iv) 500,000,000 (iv) Interest expense was paid to the ultimate holding company for certificates of deposit issued by the Bank and subscribed by the ultimate holding company with nominal value of US$500,000,000. (v) 495,000,0001,500,000,000 (v) Interest expense was paid to the ultimate holding company for subordinated floating rate notes issued by the Bank and fully subscribed by the ultimate holding company totaling US$495,000,000 and HK$1,500,000, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

152 41 41 RELATED PARTY TRANSACTIONS (continued) (a) (vi) (a) Summary of transactions entered into during the ordinary course of business with related parties (continued) (vi) Net option premium expense was paid to the ultimate holding company and fellow subsidiaries on the various option contracts at prevailing market rates. (vii) (vii) In accordance with the Collaboration Agreement dated 3 July 2001 and the Supplemental Collaboration Agreement dated 4 February 2005, management fee income was received from the Hong Kong Branch of ICBC (the Branch ) for the provision of services such as accounting and budgeting, internal audit, marketing and back office settlement and clearing. (viii) (viii) Commission income was received on delivering securities brokerage services to fellow subsidiaries. (ix) (ix) In accordance with the Outsourcing Agreement dated 18 December 2002, and the Supplemental Outsourcing Agreement dated 4 February 2005, service fee income was received from the Branch for the provision of management, administrative and marketing services in respect of credit card business of the Branch launched in Hong Kong commencing from 18 December (x) (xi) (xii) (xiii) 3 28 ICEA Services Limited (x) In accordance with the Licence Agreement dated 31 December 2004, premises expense was paid by the Branch to the Bank for using a portion of floor area on the 28th floor, ICBC Tower, 3 Garden Road, Central, Hong Kong. (xi) In accordance with two Licence Agreements dated 31 December 2004 and 1 April 2005 respectively, premises expenses was paid by ICEA Services Limited to the Bank for using Suites and the 26th floor, ICBC Tower, 3 Garden Road, Central, Hong Kong. (xii) In accordance with Service Levels Agreement dated 21 February 2002 and the Supplemental Services Levels Agreement dated 4 February 2005, service fee expense was paid to the ultimate holding company for the provision of data processing services to the Bank. (xiii) In accordance with the Collaboration Agreement dated 3 July 2001, the Supplemental Collaboration Agreement dated 4 February 2005 and the Licence Agreement dated 27 December 2001, premises expense was paid to the Branch for using a portion of floor area rented by the Branch. (xiv) (xiv) Service fee was paid to related ICBC Branches for assisting the Bank in PRC loan business. (xv) (xv) Fee was paid to the Branch on sub-participation of syndicated loans. Industrial and Commercial Bank of China (Asia) Limited 169 Annual Report 2005

153 41 41 RELATED PARTY TRANSACTIONS (continued) (b) (b) Buy and sale of certain assets from/to related parties 4,815,203,000 1,552,106,000 1,348,854, ,000,000 2,700,000 2,083,000 Sub-participation of syndicated loans During the year, the Bank entered into various capital market transactions with the Branch, the ultimate holding company and fellow subsidiaries. These transactions included sub-participation in syndicated loans of the Bank by the Branch, the ultimate holding company and fellow subsidiaries for a total of HK$4,815,203,000 (2004: HK$1,552,106,000) and similar sub-participation in syndicated loans of the Branch, the ultimate holding company and fellow subsidiaries by the Bank for a total of HK$1,348,854,000 (2004: HK$610,000,000). Fee attributable to the above transactions of HK$2,700,000 was paid to the Branch in 2005 (2004: HK$2,083,000). These transactions were priced based either on the terms of the underlying loan agreement, if applicable, or prevailing market rates if such comparable rates are available, or on terms that are no less favourable than those available to other independent syndicate members. 65,931,000 1,443,549,000 1,131,000,000 Buy and sale of debt securities During the year, the Bank bought debt securities of HK$65,931,000 (2004: Nil) from the ultimate holding company and fellow subsidiaries. Debt securities of carrying value of HK$1,443,549,000 (2004: HK$1,131,000,000) were sold by the Bank to the ultimate holding company and fellow subsidiaries. These transactions were entered into on normal commercial terms with reference to prevailing market rates. (c) 9,000,000, ,745,000157,075, ,196, ,212,000 (c) Undertaking from the ultimate holding company To demonstrate its support to the Bank, a Letter of Comfort dated 3 July 2001 was executed by the ultimate holding company, pursuant to which it will provide the Bank with such funding as may be required by the Bank to ensure that it will maintain sufficient capital and liquidity levels. Simultaneously on 3 July 2001, the ultimate holding company and the Bank entered into a guarantee agreement whereby the ultimate holding company agreed to guarantee to the extent of HK$9,000,000,000 the payment obligations of certain customers whose large exposures were transferred to the Bank pursuant to the Business Transfer Agreement and to indemnify the Bank in respect of any losses incurred if any obligation of such customers becomes unenforceable. The amount of such on-balance sheet and off-balance sheet large exposures of the Bank covered by this guarantee as at 31 December 2005 was HK$601,745,000 and HK$157,075,000 respectively (2004: HK$849,196,000 and HK$504,212,000 respectively). 170 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

154 41 41 RELATED PARTY TRANSACTIONS (continued) (d) 50% (d) Transactions with other state controlled entities The state controlled entities are those over which the PRC government directly holds over 50% of the outstanding shares or voting rights, and has the ability to control or the power to govern their financial or operational policies. It should be noted, however, the PRC government may indirectly hold interest in many PRC companies. Some of these interests may, in themselves or when combined with other indirect interest. Such interests, however, would not be known to the Group and are not reflected below. The Group enters into banking transactions with other state controlled entities in the ordinary course of business. These include loans, deposits, investment securities, money market transactions and off-balance sheet exposures. These transactions are executed at the relevant market rates at the time of the transactions. The outstanding balances of related party transactions and related provisions at the period/year end, and the related major income and/or expense for the period/year are as follows: (i) (i) Loans and advances to customers HK$ million HK$ million Outstanding balance at the beginning of the year 6,239 6,507 Less: allowance for impairment losses (157) (105) 6,082 6,402 Outstanding balance at the end of the year 7,138 6,239 Less: allowance for impairment losses (82) (157) 7,056 6,082 Interest income Recovery of allowance for impairment losses/provision for bad and doubtful debts 6 1 The allowance for impairment losses only relates to the amount of individual assessments. Industrial and Commercial Bank of China (Asia) Limited 171 Annual Report 2005

155 41 41 RELATED PARTY TRANSACTIONS (continued) (d) (d) Transactions with other state controlled entities (continued) (ii) (ii) Investment securities HK$ million HK$ million Outstanding balance at the beginning of the year Held-to-maturity securities Available-for-sale securities ,232 Outstanding balance at the end of the year Held-to-maturity securities 384 Available-for-sale securities Interest income (iii) (iii) Due from other banks and financial institutions HK$ million HK$ million Outstanding balance at the beginning of the year 11,279 12,024 Outstanding balance at the end of the year 9,559 11,279 Other income (iv) (iv) Due to other banks and financial institutions HK$ million HK$ million Outstanding balance at the beginning of the year 15,290 20,457 Outstanding balance at the end of the year 22,501 15,290 Interest expense Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

156 41 41 RELATED PARTY TRANSACTIONS (continued) (d) (d) Transactions with other state controlled entities (continued) (v) (v) Due to customer HK$ million HK$ million Outstanding balance at the beginning of the year 2,391 1,827 Outstanding balance at the end of the year 2,952 2,391 Interest expense (vi) (vi) Others HK$ million HK$ million Outstanding balance at the beginning of the year 5,366 4,196 Outstanding balance at the end of the year 5,392 5,366 Other expenses (vii) (vii) Off balance sheet exposures HK$ million HK$ million Outstanding balance at the beginning of the year 16,516 18,203 Outstanding balance at the end of the year 17,053 16,516 Industrial and Commercial Bank of China (Asia) Limited 173 Annual Report 2005

157 42 100% 4,900, ACQUISITION OF SUBSIDIARY On 12 August 2005, the Group acquired 100% of the share capital of Chinese Mercantile Bank in China. The acquired company contributed operating profit of HK$4.9 million to the Group for the period from 12 August to 31 December The details of the assets and liabilities acquired and goodwill arising are as follows: HK$ 000 Cash and cash equivalents 645,617 Placements with and advances to banks and other financial institutions 948 Loans and advances to customers 782, Property, Plant and Equipment (Note 28) 64,432 Other assets 11,090 Deposits from banks and other financial institutions (777,440) Deposits from customers (18,690) Other liabilities (38,680) Goodwill 41, ,717 Cost of acquisitions (3,531) Add: Cash and cash equivalents in subsidiary acquired 645,617 Cash inflow on acquisition 642, (1) (2) (3) 43 EVENTS AFTER THE BALANCE SHEET DATE Acquisition of receivables, benefits and other ancillary assets relating to the credit card business of Industrial and Commercial Bank of China Limited, Hong Kong Branch On 21 February 2006, the Bank entered into a sale and purchase agreement with ICBC under which the Bank agreed to purchase from ICBC (1) all the credit card receivables under the Hong Kong dollar credit card accounts and the credit card related instalment loan receivables of ICBC, Hong Kong Branch as at the completion date, (2) all the benefits under the cardmembers agreements and instalment loan agreements in relation to the above credit card receivables and the above instalment loan receivables made between ICBC, Hong Kong Branch and the cardholders; and (3) certain credit card related equipment, credit card bonus points redemption gifts and the benefit to use certain software programs previously used by ICBC, Hong Kong Branch in processing credit card related data. 174 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

158 ,000, EVENTS AFTER THE BALANCE SHEET DATE (continued) Acquisition of receivables, benefits and other ancillary assets relating to the credit card business of Industrial and Commercial Bank of China Limited, Hong Kong Branch (continued) The cash consideration payable to ICBC shall be the aggregate of the following as at the end of the completion date: 1. the total of the book value of the above credit card receivables and the above instalment loan receivables, net of the aggregate amount of any credit balances; 2. the book value of the equipment and the gift items; and 3. HK$1 million representing the commercial goodwill of the credit card business; Less 4. the value of ICBC s obligation in respect of bonus points accumulated in respect of the credit cards; and 5. the total accumulated amount of provision for impairment. 56,249, The estimated amount of the consideration based on the unaudited management accounts as at 31 December 2005 is approximately HK$56,249,000. Completion is scheduled to take place by no later than 26 March ULTIMATE HOLDING COMPANY ICBC is the ultimate holding company of the Bank. With the approval of the State Council of the PRC, ICBC has been reorganised into a joint stock company with limited liability in the PRC and was renamed Industrial and Commercial Bank of China Limited on 28 October APPROVAL OF ACCOUNTS The accounts were approved by the Board of Directors on 21 March Industrial and Commercial Bank of China (Asia) Limited 175 Annual Report 2005

159 Supplementary Financial Information 1 The following information is disclosed as part of the accompanying information to the accounts and does not form part of the audited accounts. 1 CAPITAL ADEQUACY AND LIQUIDITY RATIOS Capital adequacy ratio 15.8% 17.4% Adjusted capital adequacy ratio 15.7% 17.4% Liquidity ratio 36.5% 37.8% ICBC (Asia) Nominee Limited ICBCA (C.I.) Limited ICBC Asia Wa Pei Limited ICBC (Asia) Nominee Limited ICBCA (C.I.) Limited ICBC (Asia) Nominee Limited ICBCA (C.I.) Limited ICBC Asia Wa Pei Limited ICBC (Asia) Nominee Limited ICBCA (C.I.) Limited The capital adequacy ratio represents the consolidated ratio of the Bank, Belgian Bank, ICBC (Asia) Nominee Limited, ICBCA (C.I.) Limited and UB China Business Management Company Limited as at 31 December 2004, and the Bank, ICBC Asia Wa Pei Limited (formerly known as Belgian Bank), ICBC (Asia) Nominee Limited, ICBCA (C.I.) Limited, UB China Business Management Company Limited and Chinese Mercantile Bank as at 31 December 2005, computed in accordance with the Third Schedule of the Hong Kong Banking Ordinance. The adjusted capital adequacy ratio represents the consolidated ratio of the Bank, Belgian Bank, ICBC (Asia) Nominee Limited, ICBCA (C.I.) Limited and UB China Business Management Company Limited as at 31 December 2004, and the Bank, ICBC Asia Wa Pei Limited, ICBC (Asia) Nominee Limited, ICBCA (C.I.) Limited, UB China Business Management Company Limited and Chinese Mercantile Bank as at 31 December 2005, computed in accordance with the guideline Maintenance of Adequate Capital Against Market Risks issued by the Hong Kong Monetary Authority. The adjusted ratio takes into account both credit and market risk as at 31 December. The liquidity ratio is calculated as the simple average of each calendar month s average liquidity ratio for the twelve months of the financial year of the Bank and Belgian Bank for the year ended 31 December 2004, and of the Bank and Chinese Mercantile Bank for the year ended 31 December 2005, computed in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance. 176 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

160 Supplementary Financial Information 2 2 COMPONENTS OF CAPITAL BASE AFTER DEDUCTIONS The capital base after deductions used in the calculation of the above capital adequacy ratios as at 31 December and reported to the Hong Kong Monetary Authority is analysed as follows: Group HK$ 000 HK$ 000 Core capital: Paid up ordinary share capital 2,242,518 2,095,930 Ordinary share premium 5,323,893 4,700,602 Convertible preference share premium 16,126 16,126 Reserves 1,404,323 1,309,690 Deduct: Goodwill (936,520) (870,514) 8,050,340 7,251,834 Eligible Supplementary capital: Reserves on revaluation of land and interests in land 18,917 77,420 Reserves on revaluation of holding of securities not held for trading purpose (67,821) (2,390) General provision for doubtful debts 503,535 Collective impairment allowances for impaired assets and regulatory reserves 561,611 Perpetual subordinated debts 1,930,612 1,932,904 Term subordinated debts 3,408,163 3,415,325 Total eligible supplementary capital 5,851,482 5,926,794 Total capital base before deductions 13,901,822 13,178,628 Deductions: Shareholdings in subsidiaries or holding company (28,806) (15,202) Exposures to connected companies (580,761) (578,761) Equity investment of 20% or more in non-subsidiary companies (14,508) (14,508) (624,075) (608,471) Total capital base after deductions 13,277,747 12,570,157 Industrial and Commercial Bank of China (Asia) Limited 177 Annual Report 2005

161 Supplementary Financial Information 3 10% 3 CURRENCY CONCENTRATIONS The net position in foreign currencies are disclosed when each currency constitutes 10% or more of the total net position of all foreign currencies. As at 31 December 2005 Group US$ Euro JPY AUD RMB Total Equivalent in Hong Kong dollars HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Spot assets 45,309,000 1,806, ,000 47,389,000 Spot liabilities (54,237,000) (227,000) (193,000) (54,657,000) Forward purchases 17,817, ,000 1,485,000 19,722,000 Forward sales (8,349,000) (1,921,000) (1,508,000) (11,778,000) Net option position (16,000) (1,000) (17,000) Net long position 524,000 77,000 58, ,000 As at 31 December 2004 Group US$ Euro JPY AUD RMB Total Equivalent in Hong Kong dollars HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Spot assets 35,587,000 3,964,000 3,219, ,000 42,945,000 Spot liabilities (51,425,000 ) (1,852,000) (3,178,000) (116,000) (56,571,000 ) Forward purchases 27,449, , ,000 1,296,000 29,358,000 Forward sales (11,622,000 ) (2,598,000) (159,000 ) (1,294,000) (15,673,000 ) Net (short)/long position (11,000) (4,000) 13,000 61,000 59,000 The net options position is calculated using the model user approach which has been approved by the Hong Kong Monetary Authority. 178 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

162 Supplementary Financial Information 4 4 SEGMENTAL INFORMATION (a) (a) Loans and advances to customers (i) (i) Gross loans and advances to customers by industry sectors Group HK$ 000 HK$ 000 Loans for use in Hong Kong Industrial, commercial and financial Property development 4,202,630 2,694,880 Property investment 10,554,322 8,347,495 Financial concerns 3,709,737 4,022,477 Stockbrokers 91,305 19,159 Wholesale and retail trade 1,665,212 2,306,936 Civil engineering works 830, ,885 Manufacturing 6,195,831 6,354,464 Transport and transport equipment 9,323,538 8,555,892 Electricity, gas and telecommunications 1,140,181 1,378,126 Hotels, boarding house and catering 1,232,911 2,070,985 Others 5,136,568 4,825,332 Individuals Loans for the purchase of flats in Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 130, ,481 Loans for the purchase of other residential properties 11,447,846 12,512,124 Credit card advance 51,198 63,315 Others 980,815 1,038,187 Trade finance 5,501,227 4,547,376 Loans for use outside Hong Kong 6,105, ,543 68,299,287 60,190,657 (ii) 90% (ii) Gross loans and advances to customers By geographical areas At 31 December 2005 and 31 December 2004, over 90% of the Group s loans and advances to customers, impaired/nonperforming loans and overdue loans were made to counterparties located in Hong Kong. In determining this analysis, it has not been taken into account of transfer of risk with respect to claims guaranteed by a party in a country different from that of the counterparty. Industrial and Commercial Bank of China (Asia) Limited 179 Annual Report 2005

163 Supplementary Financial Information 4 4 SEGMENTAL INFORMATION (continued) (b) 10% (b) Cross-border claims The Group analyses cross-border claims by geographical area. In determining this analysis, it has been taken into account of any transfer of risk with respect to claims guaranteed by a party in a country different from that of the counterparty. Those areas which constitute 10% or more of the aggregate cross-border claims are as follows: Group Banks and other Public financial sector institutions entities Others Total HK$ million HK$ million HK$ million HK$ million As at 31 December 2005 Asia Pacific excluding Hong Kong 10, ,569 19,711 North and South America 1, ,776 7,215 Middle East and Africa ,401 Europe 20, ,049 21,480 As at 31 December 2004 Asia Pacific excluding Hong Kong 12, ,702 17,316 North and South America ,865 5,006 Europe 9,698 2,146 1,181 13, Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

164 Supplementary Financial Information 5 5 OVERDUE, RESCHEDULED ADVANCES AND REPOSSESSED ASSETS (a) (a) The gross amount of the Group s advances to customers which have been overdue are analysed as follows: Group Market Individual Gross Percentage value of Secured Unsecured impairment Specific advances of collateral amount amount allowance provision advances to HK$ 000 customers HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 December 2005 Six months or less but over three months 105, % 50,134 26,060 79,862 41,454 One year or less but over six months 94, % 22,797 12,039 82,514 69,171 Over one year 136, % 21,114 13, , , , % 94,045 51, , ,619 At 31 December 2004 Six months or less but over three months 35, % 44,299 28,544 6,944 8,311 One year or less but over six months 17, % 21,287 14,308 3,567 4,133 Over one year 425, % 126, , , , , % 191, , , ,016 Industrial and Commercial Bank of China (Asia) Limited 181 Annual Report 2005

165 Supplementary Financial Information 5 5 OVERDUE, RESCHEDULED ADVANCES AND REPOSSESSED ASSETS (continued) (b) (b) The gross amount of the Group s trade bills which have been overdue are analysed as follows: Group Market Individual Gross Percentage value of Secured Unsecured impairment Specific advances of collateral amount amount allowance provision advances to HK$ 000 customers HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 December 2005 Six months or less but over three months 1, % 2,295 1,440 1,440 One year or less but over six months 1, % 1,864 1,962 Over one year 0.0% 3, % 2,295 1,440 1,864 3,402 At 31 December 2004 Six months or less but over three months One year or less but over six months Over one year At 31 December 2005 and 31 December 2004, there were no advances to banks and other financial institutions and debt securities which were overdue for over three months. 182 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

166 Supplementary Financial Information 5 5 OVERDUE, RESCHEDULED ADVANCES AND REPOSSESSED ASSETS (continued) (c) (c) Rescheduled advances Group 2005 Percentage of 2004 Percentage of advances advances HK$ 000 to customers HK$ 000 to customers Rescheduled advances to customers 68, % 115, % (a) Rescheduled advances which have been overdue for more than three months under the revised repayment terms are included in the analysis of overdue advances in (a) above. At 31 December 2005 and 31 December 2004, there were no rescheduled advances to banks and other financial institutions. (d) (d) Other overdue assets Group HK$ 000 HK$ 000 Accrued interest Six months or less but over three months One year or less but over six months 193 Over one year Rescheduled assets ,050 (e) 9,110,000 25,003,000 (e) Repossessed assets At 31 December 2005, the estimated market value of the repossessed assets of the Group amounted to HK$9,110,000 (2004: HK$25,003,000). Industrial and Commercial Bank of China (Asia) Limited 183 Annual Report 2005

167 Supplementary Financial Information 6 6 RISK MANAGEMENT The Group has established policies and procedures for the identification, measurement, control and monitoring of risk factors (including credit, liquidity, market, interest rate, operational, legal and compliance risks). The management and the relevant functional committees review these policies and procedures on a regular basis, and the Group s Internal Audit Department also performs regular checks to ensure due compliance with policies and procedures. (a) (a) Credit risk management Credit risk is the risk that a borrower or counterparty of the Group will be unable or unwilling to honour a repayment obligation. The Group has standards, policies and procedures and designated functional departments in place to control and monitor these risks. The Group recognizes that sound credit risk management is essential to business growth and maximization of the return on Group s resources employed. The management has set credit policies and system to identify, measure, monitor and control risks inherent in the operation of various lending business. This process ensures prudence and enables potential problems to be detected and tackled earlier than otherwise, thereby minimizing business loss. With the enlarged lending operation of the Bank to SMEs after merging, credit policies and practice apposite to their risk monitoring are adopted or modified to maintain the desired credit standard and to cope with the Bank s increasing penetration into the SME sector. Basel II High-level credit policies of the Group are set, reviewed and constantly updated by the relevant functional committees, and for prominent issues, by the Board of Director to take balanced accounts of the dynamic market situation, regulatory development, the Group s usual prudent lending practices and the latest business strategies. All these credit policies, processes and practices, as they are developed, updated, reviewed and revised, are written into Credit Manuals and supplementary lending product manuals for internal control and compliance purposes. Given the Basel II capital accord to be implemented in 2007, the Group has been adjusting its credit risk management practice in line with relevant guidelines releases of the Hong Kong Monetary Authority. Credit authorities are delegated to individual approvers for maintaining efficiency and competitiveness. Except for small business loans and consumer loans, no business originator can singly approve any loan. The Group generally requires dual approval whereby loan proposals shall require the approval by the Business Line and Credit Function jointly. Credit Function approvers also sit prominently in the Bank s Credit Committee, which approve all credit policies and large loans. Only the loan proposals approved by Credit Committee would be submitted to CEO s signature where it is needed. 184 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

168 Supplementary Financial Information 6 6 RISK MANAGEMENT (continued) (a) (a) Credit risk management (continued) Credit Risk Management Department is the centralized department in the Bank mandated to carry out credit policies. It performs independent credit assessment, post-approval credit administration and other credit control functions to ensure that the credit process complies with credit policies and guidelines laid down by the management. Apart from the independent credit assessment and matrix approval process, regular credit audits are conducted on specific loan portfolio or operating units in the credit process. To maintain its independence, the Credit Risk Management Department of the Bank has a direct reporting line to a Deputy General Manager independent of business. 15 Basel II The management spares no efforts in monitoring the quality and behavior of the loan portfolio. The Group s internal credit risk grading system was first introduced in the last quarter of 2000 to track the health of the Group s loan portfolio. A new 15-grade credit rating system built on Basel II complaint attributes is adopted after the merger to align the two separate credit rating models of the two Banks that existed before the merger. With internal data being constantly enriched through years of experience, it is expected that the Group could make further use of the credit statistics to profile and track down credit risk migration, to measure loan default probabilities and to practise other credit risk management processes, of which the new credit rating model is substantially an integral part. (b) (b) Liquidity risk management Liquidity risk is the risk that the Group cannot meet its financial obligations as and when they fall due. Liquidity risk management is therefore to ensure adequate cash flows to meet all financial obligations under both normal and contingency circumstances in a cost-effective manner and within regulatory requirements. To manage liquidity risk, the Group has established asset and liquidity management policies which are reviewed by the relevant functional committees, with prominent issues approved by the Board of Directors. Liquidity is also managed and forecast on a daily basis to enable Treasury and Markets ( T&M ) and the relevant functional committee to act proactively according to changing market conditions and to implement contingency plans on a timely basis. Stress tests are regularly performed to assess contingent funding needs, for which corresponding remedial measures are planned. The Group continues to explore and diversify funding channels to capitalise on opportunities for the Group s business expansion. Concrete funding availability is proven from the parent company, ICBC in strengthening our liquidity capability. As at 31 December, 2005, the Group has a total of approximately HKD25 billion certificates of deposit issued to secure longer term funding. 36.5% 37.8%25% The liquidity position remained affluent throughout 2005 with an average liquidity ratio at 36.5% (Average for 2004: 37.8%), which was well above the statutory requirement of 25%. Industrial and Commercial Bank of China (Asia) Limited 185 Annual Report 2005

169 Supplementary Financial Information 6 6 RISK MANAGEMENT (continued) (c) 9.6% 15.7% (c) Capital management The Group manages its capital to execute its strategic business plans and support its growth and investments in an efficient way. The Group s level of capital base and capital ratio as at 31 December 2005 remained strong, with capital adequacy ratios well above the regulatory requirements. The Group s adjusted Tier 1 and total capital adequacy ratios were 9.6% and 15.7%, respectively as at 31 December The Group adjusts its business strategy from time to time to optimize its risk-return profile. (d) (d) Market risk management Market risk is the risk that market rates and prices on assets, liabilities and off-balance sheet positions change, thus causing profits or losses. Generally, the Group s market risk is associated with its positions in foreign exchange, debt securities and derivatives. Most off-balance sheet derivative positions arise from the execution of customer-related orders and positions taken for hedging purpose. Market risk exposure for different types of transactions is managed within risk limits and guidelines approved by the management and the Asset and Liability Management Committee ( ALCO ), and for prominent issues, by the Board of Directors. Exposures are measured and monitored against limits on positions, stop-loss, valueat-risk, sensitivity, delta, gamma, etc. Daily risk monitoring is carried out by an independent Middle Office Department, which ensures all dealing activities are conducted within approved limits. The Group s market risk exposures are reviewed by the ALCO and the Risk Management Committee. All exceptions to limits are reported to the ALCO. Stress tests are performed regularly to estimate the possible losses under extreme circumstances. The Group s Internal Audit Department also performs regular review and testing on dealing activities to ensure compliance with all internal guidelines. Besides, various reputable treasury systems are being used to further strengthen the functions of control and monitoring. 324, , , ,000 The average daily revenue earned from the Group s market risk related activities during the period ended 31 December, 2005 was HK$324,000 (2004: HK$130,000) and the standard deviation for such daily revenue was HK$573,000 (2004: HK$484,000). The Group gradually increases its market risk activities to complement its conventional reliance on loan assets for revenue. 186 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

170 Supplementary Financial Information 6 6 RISK MANAGEMENT (continued) (d) (d) Market risk management (continued) The following histograms show the frequency distribution of daily revenues related to market risk activities of the Group in 2005 and For the year ended 31 December Number of days (3,000) (2,500) (2,500) (2,000) (2,000) (1,500) (1,500) (1,400) (1,400) (1,300) (1,300) (1,200) (1200) (1100)0 (1100) (1000) (1000) (900) (900) (800) (800) (700) (700) (600) (600) (500) (500) (400) (400) (300) (300) (200) (200) (100) (100) (0) ,000 1,000 1,100 1,100 1,200 1,200 1,300 1,300 1,400 1,400 1,500 1,500 2,000 2,000 2,500 2,500 3,000 Revenue HK$ 000 For the year ended 31 December Number of days (4,000) (4,500) (1,500) (2,000) (550) (1,000) (500) (550) (450) (500) (400) (450) (350) (400) (350) (300) (300) (250) (250) (200) (200) (150) (150) (100) (100) (50) (50) (0) Revenue HK$ Industrial and Commercial Bank of China (Asia) Limited 187 Annual Report 2005

171 Supplementary Financial Information 6 6 RISK MANAGEMENT (continued) (e) (e) Interest rate risk management Interest rate risk is the risk that the Group s position may be adversely affected by a change in market interest rates. Interest rate risk arises mainly from the maturity mismatch of interest bearing assets and liabilities and yield curve movement. Interest rate risk exposure is managed within risk limits approved and monitored by ALCO with the participation of the Middle Office Department. 39 The Group manages its interest rate risk by way of entering into on or off balance sheet interest risk hedging instruments. The effectiveness of the hedging activities is assessed regularly in accordance with the Hong Kong Accounting Standard 39. The Group s interest rate risk position is further regularly reported to and scrutinized by the Risk Management Committee. Foreign currency funding used to fund Hong Kong dollar assets is normally hedged using currency swaps or forward exchange contracts to neutralize foreign exchange risk. (f) (f) Operational risk management Operational risk is the risk of unexpected financial losses resulting from inadequate or failed internal processes, people, systems and from external events. It is inherent to every business organization and covers a wide spectrum of issues. Enhanced efforts in identifying and understanding the underlying operational risks in processes are taken. Such risk is mitigated through the implementation of comprehensive internal control systems, adequate insurance cover, offshore computer back-up sites and contingency plans with periodic drills. The Group s Internal Audit Department also plays an important role in detecting any deviations from operating procedures and identifying weaknesses at all operating levels independently and objectively. (g) (g) Legal and compliance risk management Legal and compliance risk is the prospective risk of legal and regulatory sanctions, financial loss, or reputation loss that the Group may suffer as a result for violations of, or non-compliance with, all applicable laws, regulations, internal policies with respect to the conduct of business. Legal and compliance staff members advise the management on the legal and regulatory developments and assist them in establishing policies, procedures and monitoring program to ensure compliance with the legal and regulatory requirements. They conduct regular compliance checking so that the Group can identify any potential non-compliance issue and take remedial action on a timely basis. They also issue monthly bulletin and arrange training at least quarterly to enrich the knowledge of all staff in the legal and regulatory requirements. Furthermore, regular reports on noncompliance issue and the legal and regulatory developments are made to the Risk Management Committee. 188 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

172 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the Annual General Meeting of the Members of Industrial and Commercial Bank of China (Asia) Limited (the Bank ) will be held at 33/F., ICBC Tower, 3 Garden Road, Central, Hong Kong on Thursday, 27 April 2006 at 10:00 a.m. for the following purposes: 1. To receive and consider the audited Statement of Accounts and the Reports of the Directors and of the Auditors for the year ended 31 December To declare a final dividend. 3. To elect Directors. 4. To approve the payment of Directors fees for the year ended 31 December To appoint PricewaterhouseCoopers as the Auditors of the Bank and to authorize the Directors to fix their remuneration. To consider and, if thought fit, pass with or without amendments the following Ordinary Resolutions by way of special business: 6. THAT (a) (b) (a) subject to paragraph (b) below, the exercise by the Board of Directors of the Bank during the Relevant Period (as defined below) of all the powers of the Bank to allot, issue and deal with additional shares in the capital of the Bank, and to make or grant offers, agreements or options (including warrants, bonds and debentures convertible into shares of the Bank) which would or might require the exercise of such powers, be and is hereby generally and unconditionally approved; (b) (a) (i)(ii) (iii) (iv) 20% (b) the aggregate nominal amount of shares in the capital of the Bank allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Board of Directors of the Bank pursuant to the approval in paragraph (a) above, otherwise than pursuant to (i) a Rights Issue (as defined below); (ii) the exercise of rights of subscription or conversion under the terms of any warrants of the Bank or any securities which are convertible into shares of the Bank; (iii) any script dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares of the Bank pursuant to the Articles of Association of the Bank from time to time; or (iv) any option scheme or similar arrangement for the time being adopted for the grant or issue to employees of the Bank, and/or any of its subsidiaries of shares or rights to acquire shares of the Bank, shall not exceed 20% of the aggregate nominal amount of the share capital of the Bank in issue as at the date of passing of this Resolution and the said approval shall be limited accordingly; and (c) (c) for the purpose of this Resolution: Relevant Period means the period from the passing of this Resolution until whichever is the earlier of: (i) (i) the conclusion of the next Annual General Meeting of the Bank; Industrial and Commercial Bank of China (Asia) Limited 189 Annual Report 2005

173 Notice of Annual General Meeting (ii) (ii) the expiration of the period within which the next Annual General Meeting of the Bank is required by the Articles of Association of the Bank or the Companies Ordinance to be held; or (iii) (iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the shareholders of the Bank in general meeting. 7. THAT Rights Issue means an offer of shares of the Bank open for a period fixed by the Board of Directors of the Bank to holders of shares of the Bank whose names appear on the register of members of the Bank on a fixed record date in proportion to their then holdings of such shares or class thereof (subject to such exclusions or other arrangements as the Directors of the Bank may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognized regulatory body or any stock exchange in, any territory applicable to the Bank). (a) (b) (a) subject to paragraph (b) below, the exercise by the Board of Directors of the Bank during the Relevant Period (as defined below) of all the powers of the Bank to repurchase shares in the capital of the Bank, subject to and in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as amended from time to time, be and is hereby generally and unconditionally approved; (b) (a) 10% (b) the aggregate nominal amount of shares in the capital of the Bank which may be repurchased by the Bank pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the issued share capital of the Bank as at the date of passing of this Resolution, and the said approval shall be limited accordingly; and (c) (c) for the purpose of this Resolution: Relevant Period means the period from the passing of this Resolution until whichever is the earlier of: (i) (i) the conclusion of the next Annual General Meeting of the Bank; (ii) (ii) the expiration of the period within which the next Annual General Meeting of the Bank is required by the Articles of Association of the Bank or the Companies Ordinance to be held; or (iii) (iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the shareholders of the Bank in general meeting. 8. THAT, conditional upon the passing of the Ordinary Resolution Nos. 6 and 7 as set out in the notice convening this Meeting of which this Resolution forms part (the Notice ), the general mandate granted to the Directors of the Bank and for the time being in force to exercise the 190 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

174 Notice of Annual General Meeting 10% powers of the Bank to allot, issue and deal with additional shares pursuant to the Ordinary Resolution No. 6 set out in the Notice be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of shares in the capital of the Bank repurchased by the Bank under the authority granted to the Board of Directors of the Bank pursuant to the Ordinary Resolution No. 7 set out in the Notice, provided that such amount of shares so repurchased shall not exceed 10 per cent. of the aggregate nominal amount of the issued share capital of the Bank at the date of the said Ordinary Resolution. Hong Kong, 21 March 2006 Notes: By Order of the Board Cheng Pui Ling, Cathy Company Secretary (a) (a) A member entitled to attend and vote at the meeting is entitled to appoint one or a maximum of two proxies to attend and, on a poll, to vote on his behalf. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed. A proxy need not be a member of the Bank. (b) (b) To be valid, a form of proxy, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power of attorney, must be lodged with the Bank s Share Registrars, Tengis Limited at 26/F., Tesbury Centre, 28 Queen s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the meeting (or any adjournment thereof) and in default the proxy shall not be treated as valid. Completion and return of a form of proxy will not preclude members from attending in person and voting at the meeting or any adjournment thereof should they so wish. (c) (c) The register of members of the Bank will be closed from Friday, 21 April 2006 to Thursday, 27 April 2006, both days inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed dividend, all transfers, accompanied by the relevant share certificates, must be lodged for registration with the Bank s Share Registrars, Tengis Limited at 26/F., Tesbury Centre, 28 Queen s Road East, Wanchai, Hong Kong before 4:00 p.m. on Thursday, 20 April (d) (d) A circular containing details in respect of the re-election of Directors and an explanatory statement (as required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules )) in relation to the Ordinary Resolution No. 7 will be sent to the Bank s shareholders together with the 2005 Annual Report of the Bank. (e) 20% (e) In connection with the Ordinary Resolution Nos. 6 and 7 above, approval is being sought from members, as a general mandate in compliance with the Companies Ordinance and the Listing Rules, so that in the event it becomes desirable for the Bank to issue any new shares or to repurchase any existing shares of the Bank, the Board of Directors of the Bank are given the flexibility and discretion to allot and issue new shares up to 20% of the issued share capital of the Bank, together with such number of shares as may be repurchased by the Bank pursuant to the general mandate under the Ordinary Resolution No. 7, as more particularly described in the Ordinary Resolution Nos. 6, 7 and 8. Damis Jacobus Ziengs SBS, JP As at the date of this notice, the Board of Directors comprises Mr. Zhu Qi, Mr. Wong Yuen Fai and Mr. Zhang Yi as executive directors, Dr. Jiang Jianqing, Ms. Wang Lili, Mr. Chen Aiping and Mr. Damis Jacobus Ziengs as non-executive directors and Professor Wong Yue Chim, Richard, SBS, JP, Mr. Tsui Yiu Wa, Alec and Mr. Yuen Kam Ho, George as independent non-executive directors. Industrial and Commercial Bank of China (Asia) Limited 191 Annual Report 2005

175 Analyst Coverage Company Name Name Tel Fax Bear Stearns Asia Limited Patrick W. W. Ho BNP Paribas Peregrine Securities Limited Steven S. T. Chan BOCI Research Limited Anthony Lok Capital Intelligence (Cyprus) Ltd George Lee CASH Research Limited Ken Lee Cazenove Asia Limited Grant Chan CCB International Securities Ltd Bonnie Lai China Everbright Research Limited Tony Tong John Caparusso Citigroup Global Markets Asia Limited CLSA Limited Dominic Chan Core Pacific Yamaichi International (H.K.) Limited Kent Yau Credit Suisse (Hong Kong) Limited Jay C Luong [email protected] CSC Securities (HK) Limited Philip S. Y. Chan DBS [email protected] DBS Vickers (Hong Kong) Limited Jasmine Lai [email protected] Deutsche Bank AG, Hong Kong Branch Alan Chua [email protected] Fitch (Hong Kong) Ltd. Kate Lin [email protected] Goldman Sachs (Asia) L.L.C. Darwin Lam [email protected] ICEA Securities Asia Limited Ernie Hon [email protected] J.P. Morgan Securities (Asia Pacific) Limited Michael Chan [email protected] Lehman Brothers Asia Limited Tracy Yu [email protected] Merrill Lynch (Asia Pacific) Limited Alistair Scarff [email protected] Nomura International (Hong Kong) Limited Kevin Chan [email protected] South China Research Ltd. Patrick Pong [email protected] Sun Hung Kai Investment Services Ltd. Kevin Yim [email protected] TIS Securities (HK) Limited Beverly F.N. Ng [email protected] VC Brokerage Ltd Benny Yu [email protected] Tai Fook Research Limited Paul K. H. Lee 192 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

176 Branches, Subsidiaries and Associate ICBCA HX 872 UBHKHKHH F A HEADQUARTERS 33/F., ICBC Tower 3 Garden Road, Central, Hong Kong Telephone: Facsimile: Telex: ICBCA HX Post Box: GPO Box 872 SWIFT: UBHKHKHH Website: INVESTMENT SERVICE CENTRE 2/F., Kai Tak Commercial Building, Des Voeux Road Central, Sheung Wan, Hong Kong Telephone: BRANCHES Hong Kong Island West Point Branch Queen s Road West, Sai Ying Pun, Hong Kong Telephone: Sheung Wan Branch Shop F, G/F., Kai Tak Commercial Building, Des Voeux Road Central, Sheung Wan, Hong Kong Telephone: Queen s Road Central Branch Queen s Road Central, Central, Hong Kong Telephone: Central Branch G/F-2/F., 10 Pottinger Street, Central, Hong Kong Telephone: Caine Road Branch G/F., Caine Building, 22 Caine Road, Hong Kong Telephone: Wanchai Branch Hennessy Road, Wanchai, Hong Kong Telephone: Hennessy Road Branch Shop 2A, G/F. & Basement, Cameron Commercial Centre, 468 Hennessy Road, Causeway Bay, Hong Kong Telephone: Happy Valley Branch 23 King Kwong Street, Happy Valley, Hong Kong Telephone: Industrial and Commercial Bank of China (Asia) Limited 193 Annual Report 2005

177 Branches, Subsidiaries and Associate 50 A B B C 1D Causeway Bay Branch Shop A, G/F., Jardine Center, 50 Jardine s Bazaar, Causeway Bay, Hong Kong Telephone: Electric Road Branch Electric Road, Tin Hau, Hong Kong Telephone: City Garden Branch Shop Unit 23, G/F., Maximall, City Garden, 233 Electric Road, North Point, Hong Kong Telephone: North Point Branch Shop B2, G/F., Hang Ying House, King s Road, North Point, Hong Kong Telephone: Quarry Bay Branch G/F., King s Road, Quarry Bay, Hong Kong Telephone: Shau Kei Wan Branch 195 Shau Kei Wan Road, Hong Kong Telephone: BRANCHES Kowloon Tsimshatsui East Branch Shop B, G/F., Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon Telephone: Tsim Sha Tsui Branch Shop 6-7, G/F., Hankow Centre, 5-15 Hankow Road, Tsimshatsui, Kowloon Telephone: Jordan Branch Shop 1C & 1D, G/F., Austin Plaza, 83 Austin Road, Jordan, Kowloon Telephone: Yaumatei Branch 542 Nathan Road, Yaumatei, Kowloon Telephone: Mongkok Branch G/F., Belgian Bank Building, Nathan Road, Mongkok, Kowloon Telephone: Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005

178 Branches, Subsidiaries and Associate G F18-F G A G Prince Edward Branch 777 Nathan Road, Mongkok, Kowloon Telephone: Shamshuipo Branch G/F., 290 Lai Chi Kok Road, Shamshuipo, Kowloon Telephone: Nam Cheong Street Branch Shops 10-12, G/F., Nam Cheong Centre, Nam Cheong Street, Shamshuipo, Kowloon Telephone: Lai Chi Kok Branch Shop G06, G/F., Cheung Sha Wan Plaza, 833 Cheung Sha Wan Road, Lai Chi Kok, Kowloon Telephone: Oi Man Branch Shop F18 & F19, Oi Man Commercial Complex, Oi Man Estate, Homantin, Kowloon Telephone: To Kwa Wan Branch G/F., To Kwa Wan Road, Kowloon Telephone: Mok Cheong Street Branch Mok Cheong Street, Tokwawan, Kowloon Telephone: San Po Kong Branch Shop G10, Yue Xiu Plaza, 3-23 Ning Yuen Str eet, San Po Kong, Kowloon Telephone: Hong Ning Road Branch 58 Hong Ning Road, Kwun Tong, Kowloon Telephone: Kwun Tong Branch G/F., Lemmi Centre, 50 Hoi Yuen Road, Kwun Tong, Kowloon Telephone: BRANCHES New Territories Tseung Kwan O Branch Shop Nos , Level 2, Metro City, Plaza II, 8 Yan King Road, Tseung Kwan O, New Territories Telephone: Kwai Chung Branch Unit G02, Tower A, Regent Centre, 63 Wo Yi Hop Road, Kwai Chung, New Territories Telephone: Industrial and Commercial Bank of China (Asia) Limited 195 Annual Report 2005

179 Branches, Subsidiaries and Associate A-F J P.O. Box 501, Scotiabank Centre, 6 Cardinal Avenue, George Town, Grand Cayman, Cayman Islands, British West Indies ICBC (Asia) Nominee Limited ICBC (Asia) Wa Pei Nominees Limited ICBC Asia Wa Pei Limited * ICBCA (C.I.) Limited Tsuen Wan Castle Peak Road Branch G/F., Castle Peak Road, Tsuen Wan, New Territories Telephone: Sha Tsui Road Branch Shop 4, G/F., Chung On Building, Sha Tsui Road, Tsuen Wan, New Territories Telephone: Tuen Mun Branch 217 A-F Central Services Building, Nan Fung Industrial City, 18 Tin Hau Road, Tuen Mun, New Territories Telephone: Tai Hing Branch Shop Tai Hing Commercial Complex, Tai Hing Estate, Tuen Mun, New Territories Telephone: Yuen Long Branch G/F., Castle Peak Road, Yuen Long, New Territories Telephone: Tai Wo Branch Shop 216, 2/F., Tai Wo Shopping Centre, Tai Wo Estate, Tai Po, New Territories Telephone: Tai Po Branch 9 Kwong Fuk Road, Tai Po, New Territories Telephone: Shatin Branch Shop 22J, Level 3, Shatin Centre, New Territories Telephone: OVERSEAS BRANCH Cayman Islands Branch P.O. Box 501, Scotiabank Centre, 6 Cardinal Avenue, George Town, Grand Cayman, Cayman Islands, British West Indies SUBSIDIARIES Chinese Mercantile Bank ICBC (Asia) Bullion Company Limited ICBC (Asia) Futures Limited ICBC (Asia) Nominee Limited ICBC (Asia) Securities Limited ICBC (Asia) Trustee Company Limited ICBC (Asia) Wa Pei Nominees Limited ICBC Asia Wa Pei Limited (formerly known as Belgian Bank) ICBCA (C.I.) Limited UB China Business Management Co. Ltd. ASSOCIATE China Ping An Insurance (Hong Kong) Company Limited * 196 Industrial and Commercial Bank of China (Asia) Limited Annual Report 2005