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Profile of Wing Lung Bank

Wing Lung Bank Limited (“WLB”), founded in 1933, is one of the oldest local Chinese banks in Hong Kong. It has at all times followed its motto of “Progress with prudence, service with sincerity” in providing personalized and sincere service to the public. The principal operations of WLB and its subsidiaries (“WL Group”) comprise deposit-taking, lending, credit cards, documentary bills, foreign exchange, futures and securities broking, wealth management service, insurance business, financial lease, property trustee and nominees service. As of 31 December 2011, the registered capital of WLB was HK$1.5 billion.

Business operation overview of Wing Lung Group

For the year ended 31 December 2011, Wing Lung Group recorded a consolidated profit after tax of HK$1.857 billion, representing an increase of 37.71% as compared to that of 2010, which was mainly driven by the net interest income. Non-interest income also increased significantly. In 2011, Wing Lung Group recorded a net interest income of HK$2.089 billion, representing an increase of 36.58% as compared to that of 2010; the net interest margin for the year was 1.47%, up by 14 basis points as compared with 2010. Net non-interest income was HK$1.356 billion, representing an increase of 26.14% as compared to that of 2010. Net fees and commission income amounted to HK$486 million, representing an increase of 13.99% from that of 2010. The insurance business achieved a net operating income of HK$83.22 million, representing a decrease of 4.13% as compared to that of 2010. Net gain from foreign exchange trading amounted to HK$356 million, representing an increase of 24.41% over 2010. Impairment charge for credit losses was HK$117 million, representing an increase of 37.79% from HK$85.18 million in 2010, primarily due to impairment charge for available-for-sale securities of HK$28.02 million in 2011 and the fact that a write-back of other credit losses of HK$13.07 million was included in 2010, which attributed to the difference in amount between the two years. Operating expenses amounted to HK$1.148 billion, representing an increase of 11.65% as compared to that of 2010. The cost-to-income ratio in 2011 was 33.34%, representing a decrease of 6.15 percentage points as compared to that of 2010.

At the end of 2011, the total assets and net assets of WL Group increased by 19.53% and 13.69% to HK$163.851 billion and HK$14.495 billion respectively when compared to that at the end of 2010. Loan- to-deposit ratio was 61.85%, which was lower by 4.48 percentage points as compared to that of 2010. As at 31 December 2011, the capital adequacy ratio and core capital adequacy ratio of WL Group were 13.86% and 9.63% respectively, and the average liquidity ratio for the reporting period was 43.32%, all above statutory requirements.

For detailed financial information on WL Group, please refer to the 2011 annual report of WLB, which is published at the website of WLB (www.winglungbank.com).

Deposits

As at 31 December 2011, total deposits of WL Group grew by 10.45% to HK$115.140 billion as compared with that at the end of 2010.

Among the various kinds of deposits, Hong Kong Dollar deposits increased by HK$114 million or 0.18%; US Dollar deposits after translation increased by HK$750 million or 4.53%; RMB deposits after translation rose substantially by HK$9,521 million or 119.91%; and deposits in other foreign currencies after being translated into Hong Kong Dollar grew by HK$503 million or 3.06% when compared to that at the end of 2010.

Advances to customers

As at 31 December 2011, WL Group’s total advances to customers, including trade bills, grew by 20.99% to HK$85.312 billion as compared with that at the end of 2010. Overall loan quality remained sound with a non-performing loan ratio (including that of trade bills) of only 0.41%.

With respect to corporate banking business, the total corporate loans amounted to HK$35.904 billion as at 31 December 2011, an increase of 10.15% over that at the end of 2010. During the reporting period, WLB devoted efforts to obtaining loans for overseas enterprises which are secured by guarantees from their respective parent companies, syndicated loans, corporate loans to enterprises in China and Hong Kong as well as bilateral loans and the result was remarkable. In order to expand the revenue source, WLB actively explored non-interest income business, including promoting sales of RMB bonds and wealth management products in overseas markets, acting as the receiving bank in initial public offering of newly listed shares and the dividend paying bank for listed companies.

As to commercial banking business, the balance of loans amounted to HK$4,113 million as at 31 December 2011, representing an increase of 49.83% as compared to that at the end of 2010, which was mainly contributed by construction loans and mortgage loans. In addition, documentary bill financing business also improved significantly. In 2011, WLB proactively promoted the “Cross-border Renminbi/Discount Notes Financing Guarantee” business, and continued to regard the expansion of cross-border Renminbi trade settlement business as its major driver. With respect to the hire purchase and lease business, the financing business for vehicles, barges and machinery grew steadily in the first half of the year. During the second half of the year, however, in view of more challenging operating environment faced by the manufacturing industry, WLB closely monitored the market conditions by implementing prudent operational strategies to fend off relevant risks.

As for the mortgage and personal loan business, as at 31 December 2011, the balance of loans amounted to HK$26.071 billion, increased by 1.09% as compared with the end of 2010. Of the total loans, the balance of residential mortgage loans amounted to HK$8.619 billion, decreased by 3.28% as compared with the end of 2010. WLB will closely monitor the market development, take flexible measures and design competitive lending strategy to secure its market share. During the reporting period, WLB provided facility overdraft service for SMEs via “Xiao Dai Tong”「小貸通」, mortgage programme for the elderly and “Dai Nin Xiang”「貸您 想」 and “Dai Tou Ru”「貸投入」programmes for retail customers. In addition, WLB launched comprehensive banking services for micro enterprises in mid-October 2011, thereby increasing cross-selling opportunities and achieving initial positive results.

With respect to the business of Mainland Branches, the total loans to customers amounted to HK$8.039 billion, increased by 46.02% as compared to that at the end of 2010. During the period, WLB actively acquired RMB deposits and vigorously expanded various businesses including direct discount business and RMB loans business, so as to optimize its asset structure and to increase net interest margin.

Investments

As at 31 December 2011, WL Group’s debt securities investment amounted to HK$23.926 billion, which was approximate to that at the end of 2010. As at the end of the period, WL Group’s foreign currencies (including Hong Kong dollar) debt securities investment amounted to HK$18.270 billion. More than 94.70% of the foreign currencies (including Hong Kong dollar) debt securities were rated A3 or above and were exposed to comparatively low risks.

Treasury business

In 2011, with RMB offshore business, RMB non-deliverable forward contracts and its related businesses, income from WL Group’s foreign exchange trading business amounted to HK$145 million, representing an increase of 18.04% as compared with 2010. Revenue from foreign money exchanges amounted to HK$53.49 million, representing an increase of 21.42% as compared with 2010. In addition, income from foreign exchange swaps achieved remarkable growth. Net gain from foreign exchange business grew by 24.41%. Strongly supported by the Company, WLB seized the opportunities in RMB related business through actively participating in RMB connected transactions and expanding non-trade-based RMB client base, so as to increase transaction volume and related revenue. With the growth of RMB business and increase of commercial customers, WLB will continuously launch new RMB products with a view to attracting more commercial customers. Since April 2011, corporate customers are permitted to purchase options within the PRC, which brings WLB an opportunity to expand its option business with commercial customers. In addition, WLB also strived to invest in on-shore RMB bond market and develop proprietary trading business by introduction of spot and options proprietary transactions, thereby increasing income streams.

Wealth management

WL Group’s wealth management business realised a revenue of HK$37.89 million in 2011, representing an increase of 24.83% as compared to 2010.

WLB will continue to focus on developing its wealth management service branded “Sunflower”, with a view to providing a comprehensive financial service platform to customers. During the reporting period, WLB aggressively launched promotional activities for its wealth management business and devoted itself to diversifying wealth management products, thereby successfully attracting new and existing customers to conduct transactions, thus transaction volume of funds, currencies linked deposits and debt securities all increased significantly. Looking forward, WLB will continue to provide more qualified funds and securities products available for customers to choose.

Credit card

WLB issued more than 250,000 credit cards as at 31 December 2011, representing an increase of 5.88% as compared to that at the end of 2010. The credit card receivables amounted to HK$421 million, representing an increase of 9.16% as compared to that of 2010. Merchant business turnover was HK$3.613 billion, representing a sharp increase of 24.39% as compared to 2010, reflecting the rigorous efforts in promoting the merchant business and the continuous growth of the Hong Kong consumption market.

Since WLB issued the world’s first diamond credit card “Luxe Visa Infinite” and the first “World MasterCard for Business” in the Greater China, the number of high-end individuals and corporate customers have been in a steady growth. In order to attract and retain customers, WLB has launched “CUP (China UnionPay) Dual Currency Credit Card”, as well as a number of flexible cash revolving and spending reward programs.

Securities broking

In 2011, Wing Lung Securities Limited (“Wing Lung Securities”) realised a brokerage commission and related income of HK$178 million, representing a decrease of 15.58% as compared to that of 2010. During the reporting period, given the uncertain external economic environment and concerns over the sovereign debt problem in Europe, investors in Hong Kong market maintained a prudent attitude. In spite of that, Wing Lung Securities increased its efforts in the construction of electronic channels, aggressively introduced promotional plans related to securities business, promoted cross-selling and expanded customer base to enhance its trading volume.

Insurance

Wing Lung Insurance Company Limited (“Wing Lung Insurance”) realised a gross premium income of HK$683 million in 2011, representing an increase of 15.24% as compared to that of 2010. Total insurance claims increased by 14.27% to HK$367 million. Underwriting business recorded a profit of HK$24.40 million, indicating an improvement as compared to that of 2010. The gross premium income was higher than the budget due to large construction projects underwritten by Wing Lung Insurance. Significant increase in contractors all risks insurance and employees’ compensation businesses also contributed to the increase.

Branch network

At present, WLB has a total of 43 banking offices in Hong Kong. WLB is speeding up the construction and renovation of branches to expand network. Kowloon City Branch and Hong Kong Science Park Branch were inaugurated in mid-June and mid-September 2011 respectively.

Currently, WLB has 4 branches and representative offices in the PRC, a branch in Macau and two overseas branches, located respectively in Los Angeles, the United States and Cayman Islands.

Human resources

As at 31 December 2011, the total number of employees of WLB is 1,693 (31 December 2010: 1,726), of which 1,522 are in Hong Kong, 123 are in the PRC, 31 are in Macau and 17 are overseas.

Progress of Integration with WLB

After the acquisition of WLB, the Company attached great importance to integration of business, and prepared a detailed integration plan. We aim to enhance the coordination of domestic and overseas business and strengthen our key competencies. In 2011, the Company vigorously pushed forward the integration on the basis of the abovementioned policy and objective and reinforced the coordinated promotion of the emerging wholesale business and retail business with low capital consumption, which in turn accelerated the transformation of WLB. With persistent efforts, the two banks’ business coordination as well as WLB’s key capabilities and strategic transformation were enhanced significantly.

Firstly, coordinated business grew rapidly and signs of synergies emerged. The Company and WLB jointly put great efforts and focused on the main business opportunity arising from demand from cross-border financial market. Sharing the customer resources and connecting the domestic and overseas business brought new break through to us and obtained sound effect. The Company and WLB worked together in various areas, such as accepting guarantees from domestic enterprises as security for loans granted to overseas entities, accepting guarantees from overseas entities as security for loans granted to domestic enterprises, international settlement, trade finance, financial market trading business, acting as receiving banker for IPOs, dividend distribution for listed companies, import bill advance by overseas institutions (海外代付), cross- border Renminbi trade settlement, Renminbi bonds, export collection, documentary bills, Account Opening Witnessed by CMB Manager (見證開戶), Sunflower Wealth Management, Professional Investor Program, Capital Investment Entrant Scheme and sharing merchant offers for credit card businesses. During the reporting period, WLB was authorized to access the domestic inter-bank bond market where it completed the launch and issuance of 8 Renminbi bonds. WLB also launched a number of innovative new businesses such as cross-border housing loan, wine financing and comprehensive financial service targeting “micro enterprises”. In addition, WLB also extended its business of Account Opening Witnessed by CMB Manager (見證開戶) to retail customers in certain regions beyond the Pearl River Delta, thus further improved its cross-border financial products and service system. As at the end of the reporting period, our branches within China have successfully recommended corporate customers to WLB with corporate deposits of HK$7.854 billion and corporate loans of HK$31.512 billion and realized income from intermediary business for corporate customers of HK$360 million, representing an increase of 105.71% as compared to that of 2010. The Company has successfully recommended individual customers to WLB with retail deposits of HK$394 million and loans of HK$306 million, and total assets under management amounted to HK$894 million respectively, representing an increase of 203.08%,123.36% and 149.03% respectively as compared to that of 2010.

Secondly, internal management was strengthened continually and key competencies were gradually enhanced. Based on the need of business development and under the guidance of the new management concept, and with the strong support and assistance of the Company, the construction and management of business channels of WLB has been improved continuously, while the streamlining of the operating procedures relating to deposits, documentary bills, Account Opening Witnessed by CMB Manager and internal review and approval has achieved progress. WLB has kept on enhancing its electronic channels and service capability. Its development of online corporate banking has been successfully completed, while the second phase construction of its new “call center” project as well as the development of mobile banking have achieved smooth progress. WLB and CMB have continued to reinforce co-operation in respect of risk management, and commenced a test of group modeling of credit risk and market risk assessment. The performance management standard and planned finance management standard of WLB also improved. During the reporting period, WLB made new progress in network construction with the commencement of business of its Kowloon City branch and the branch in Hong Kong Science & Technology Park in Shatin. The IT system building is being rolled out with the goal to “establish an integrated service platform featuring cross-border services”. The replacement of core system has completed its first stage target. Encouraging results were obtained in the upgrading of business system and IT-based management system. At the same time, the communications and interactions between the two banks have been increasing, fostering a cultural integration between them.