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Edited Transcript of 2388.HK earnings conference call or presentation 30-Aug-19 9:00am GMT

Half Year 2019 BOC Hong Kong Holdings Ltd Earnings Presentation

- Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of BOC Hong Kong Holdings Ltd earnings conference call or presentation Friday, August 30, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bing Wang

BOC Hong Kong (Holdings) Limited - Deputy Chief Executive

* Nan Luo

BOC Hong Kong (Holdings) Limited - Company Secretary

* Shu Yuan

BOC Hong Kong (Holdings) Limited - Deputy Chief Executive of Financial Markets

* Xiangqun Zhong

BOC Hong Kong (Holdings) Limited - COO

* Yang Sui

BOC Hong Kong (Holdings) Limited - CFO

* Yingxin Gao

BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive

* Zhikun Qiu

BOC Hong Kong (Holdings) Limited - Deputy Chief Executive

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Conference Call Participants

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* Jia Wei Lam

HSBC, Research Division - Analyst & Head of Greater China Banks Research

* S. Huang

JP Morgan Chase & Co, Research Division - Financial Analyst

* Sik Tin Chan

Haitong International Research Limited - Executive Director

* Yafei Tian

Citigroup Inc, Research Division - Assistant VP and Analyst

* Yaoping Wang

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Nan Luo, BOC Hong Kong (Holdings) Limited - Company Secretary [1]

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Ladies and gentlemen, good afternoon. Welcome to the 2019 Interim Results Briefing of Bank of China (Hong Kong) Limited. I am Kenny Luo, Company Secretary.

Before we start, please take note of the forward looking statement on the screen as well as the explanation of our new reporting basis.

Let's now kick off our results briefing. First of all, I would like to introduce to you our senior executives who are with us today: Mr. Gao Yingxin, Vice Chairman and Chief Executive; Mme. Wang Qi, Deputy Chief Executive; Mr. Yuan Shu, Deputy Chief Executive; Mr. Zhong Xiangqun, Chief Operating Officer; Mr. Wang Bing, Deputy Chief Executive; Mr. Qiu Zhikun, Deputy Chief Executive; Mme. Sui Yang, Chief Financial Officer; Mme. Kung Yeung Yun Chi, Deputy Chief Executive; and Mr. Yung King Fun, Chief Credit Officer.

Today's meeting consists of 3 parts. CE Gao will share with you a progress review of the Group's strategy implementation then our CFO, Mme. Sui, will present our financial and business results for the period. This will be followed by remarks on the Group's outlook and the second half priorities from CE Gao. Finally, there will be a Q&A session. Now let's welcome CE Gao.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [2]

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Good afternoon, ladies and gentlemen. Before going into our result, I am pleased to introduce to you our new DCE, Mr. Qiu Zhikun. Mr. Qiu joined us in July to take charge of our Southeast Asian business. He has long been engaged in managing BOC's overseas entities and has ample management experience and a broad international vision. I'm convinced his arrival drive forward our Southeast Asian business development and create even stronger momentum.

Now I'm going to give you our strategic overview for the first half of 2019. Since the start of the year, the local banking industry has faced various challenges. This include slowing global economy growth, rising trade for [tax NIM] and losing monetary policies. At the same time, the further expansion of China is opening up efforts into the launch of the online development plan for Greater Bay Area, provide new [business] to Hong Kong, presume the strategic mission of building a top-class full service and internationalize the regional bank. We actively start with the market environment changes, firmly adhere to our customer-centric principles and steadily drive our business innovation and transformation. As a result, our growth quality has improved as can be seen in the stable financial indicators.

In the first half of this year, our profit attributable to equity holders and other equity instrument holders grew to HKD 17.949 billion, up 2.2% year-on-year. Our ROE was 12.5%, while our total capital ratio remained healthy and stood at 23%. Same as the interim dividend per share in recent years, our Board has declared an interim dividend of HKD 0.545 per share. Throughout our long history, Hong Kong has always been our core market. By deepening local market penetration, we have built an even more solid and diverse foundation for our sustainable development.

In the first half, our personal banking franchise further improved, with the number of mid- to high-end customers rising by 7.8%. We have sustained our leading position with the new residential mortgage loans market. We accelerate the development of our mobile banking platform, with active users increasing by 20.6% from the end of the previous year. We continue to maintain our leading position as the top syndicated loan arranger in the Hong Kong and the Macao region as well as the top IPO receiving bank. We supported the Hong Kong strategy to develop into a hub for corporate treasury business.

In April this year, we successfully launched our Global Transaction Banking Platform, iGTB NET, to provide our corporate customers one-stop regional online integrated service. We also sped up the development of key business such as cash management, trade finance, et cetera. Our efforts help us to maintain our market leadership in the cross-border cash pooling business.

We consolidate our leading position in RMB business. In the first 6 months of 2019, the offshore RMB clearing volume handled by BOC Hong Kong reached RMB 129 trillion, up 19.7%. We completed the first settlement deal in the primary market for negotiable CD under Bond Connect. Our custody funds value for Bond Connect also hit a new high.

To support financial inclusion, we have canceled all service charges for integrated banking and the general banking accounts for personal customers in Hong Kong since 1st of August. We fully participate in supportive measures program launched by the government for SME and continue to meet the financing needs of quality, commercial and the industry corporate as well as SME's customers, sustaining a faster loan growth than our peers in SFGS market. We launched Business Lite account so as to provide simplified account opening to start-up companies and foreign companies investing in Hong Kong. The number of our business integrated accounts for small enterprises has increased by 6.9%.

We see the Greater Bay Area as key market for us and have successfully tapped it by offering livelihood finance. We pushed forward regional interconnectivity and further strengthened our featured cross-border services. As it is the end of June, our middle to high-end cross-border customer base increased by 12.8% from the end of last year. As part of strategy to pursue financial innovation in the GBA, in March this year, we became the first bank to launch a brand-new attestation service that allows Hong Kong resident to open a Mainland bank account. As of June, the number of applicants for this service had already exceeded 50,000. We continue to enhance the cross-border payment, funds transfer and the bill payment functions of our BOC Pay, which is now already available to non-BOC users.

Following the Guangdong-Hong Kong Business Registration and Banking Services Connect, we cooperated with BOC'S (inaudible) and extended such service to Shenzhen and Shanghai in April and May, respectively, which will make business registration easier for Hong Kong corporate and the individuals going into the Mainland market. BOC Hong Kong Asset Management Company launched the BOC Hong Kong All Weather Greater Bay Area Strategy Fund, the first thematic bond fund in the market.

Southeast Asia is a growth market with strong potential for our bank. Earlier this year, we successfully integrate the BOC branch in Laos and further enhanced our regional presence. At the same time, we have fully implemented a differentiated regional management model to improve our synergies and growth quality. Our corporate banking stepped up co-marketing efforts and closed a number of deals for project involving roads and bridges, communication equipment, oil and energy as well as seaports and airports. This project gave us a great chance to become part of the mainstream market in Southeast Asia. We also made solid progress in our Personal Banking business as we completed the pilot launch of BOC Wealth Management brand in Malaysia and enriched our product shelf with more investment funds and bond products.

Our financial markets unit further strengthened its business line management to enhance the capability of our Southeastern Asian trading teams and our regional RMB business growth. In the first half, our Southeast Asia entities grew their net operating income before impairment allowances by 22.8% year-on-year to HKD 1.39 billion. Their customer deposit and the loan reached HKD 51 billion and HKD 44.9 billion, respectively. The corresponding growth rate were 6.7% and 12.9% from the end of the previous year. In addition, we continue to strengthen our regional credit risk management. The NPL ratio stood at 1.27%, which is a manageable level.

In order to earn the trust of stakeholders and ensure our solid operation on a sustainable pace, we firmly push forward the development of our customer-centric corporate culture and the service model. We revisited customer journey and improved customer value by enriching service scenario, improving branch network layout and pursuing digital operations. Employees are our biggest asset. We take care of their career development and provide them better workplace. By doing so, we hope to build a strong sense of belonging in us. We promote our colleague to fulfill our bank values in their daily work by sticking to customer-first principles and defending the risk redline.

These values and concepts are important in ensuring our solid and compliant operation. Deeply rooted in Hong Kong for more than a century, BOC Hong Kong has always been repaying the society. In the future, we will continue to pursue long-term sustainable development by aligning the interest of our stakeholder's ESG issues. We will make relentless contributions to Hong Kong's prosperity and stability, livelihood improvement, environmental protections and the financial inclusion. This marks the end of our strategic strategy review.

Next, Madam Sui Yang, our CFO, will walk you through the detailed financial and business performance in the first half of this year.

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Yang Sui, BOC Hong Kong (Holdings) Limited - CFO [3]

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Thank you, CE Gao. In the first half, BOC Hong Kong achieved a continuous growth in the operating earnings, with key financial and risk indicators remaining solid. At the end of June, our customer deposits exceeded the HKD 2 trillion mark, up 6.3% from the end of previous year, notably, higher than the market average.

Our deposit market share in Hong Kong has further expanded by 0.64 percentage points to 14.85%. We [stretched] our mid- to high-end customer base in personal banking and cultivated stronger relationship with larger corporate and financial institutions customers, which pay off well for our deposit business. Thanks to our integrated solution that have combined payroll, wealth management and payments services as well as our expansion in cash management segment and IPO receiving bank business, our CASA saw a steady growth. In the first half year, our CASA balance increased by 5.3% from the end of last year, generally outperforming the market.

As at the end of June, our customer loans was HKD 1.35 trillion, up 6.7% from the end of last year. Our loan market share in the Hong Kong increased by 0.26 percentage points to 12.9%, with solid growth in the major loan categories. We proactively expanded our local business and satisfied the financing demands of large corporate, high-quality commercial and industry firms and SME customers.

Loan for use in Hong Kong grew by HKD 50 billion or 6%. We overcome the global economic headwinds and actively capture the cross-border Southeast Asia and other overseas market opportunities by strengthening collaboration with BOC and they're taking down the market with our Southeast Asian entities. As a result, loan for use outside Hong Kong increased by HKD 20 billion or 4.6%. We explored customer demand and grew our trade finance book by HKD 15.1 billion.

In the first half year, HIBOR laws are made [flagged] to Asians where labor and travel continue to fall. Against this sort of backdrop, we proactively managed our assets and the liability by refining asset structure and expanding the size of average interest-earning assets. We also strived to enhance our returns of our customer loans and debt securities investment while stabilizing funding cost. Adjusted for swap-related impact, the Group's net interest margin rose 13 basis points year-on-year to 1.69% whilst net interest income rising by 12.2%.

Our net fee and commission income was HKD 6.05 billion, 6% lower than the same period of last year. This drop was mainly due to the decrease in the security brokerage and the funds distribution incomes, which went down by 36% and 16% year-on-year, respectively, as a result of weak market sentiment. In addition, our loan commission fee income struggled to achieve year-on-year growth due to a high base effect.

In the face of complicated market conditions, we proactively explored the business opportunities. We enhanced our insurance product and portfolio innovation and drove the insurance fee income growth of 34% year-on-year. Our banknotes business expanded further into local Mainland and the Southeast Asian market and grew in currency exchange income by 21%. Our net fee and commissioning income rose by 25% from the second half of last year, mainly driven by income from loan commissions, insurance, funds distribution and security brokerage.

We continue to maintain good efficiency. Our total operating expense was HKD 7.53 billion, up 7.4% year-on-year. Cost-to-income ratio inched up by 0.4 percentage points year-on-year to 25.8%, which continued to compare favorably against our local peers. Within this, staff cost grew by 5%, mainly due to annual salary adjustment and the increase in staff members. Due to the adoption of Hong Kong IFRS 16 this year, our premise and equipment expense dropped by 24%, while our depreciation charge increased by 41%. According to the new standard, property lease are accounted for as a right-of-use assets and the (inaudible) are represented in the depreciation expense of right-of-use assets.

We consistently adhere to the principle of pursuing compliant and legal operations and to comprehensively enhance our management capabilities in risk management, compliance and internal control as well as AML. We continually improved our standard and the effectiveness of our risk management in order to ensure solid business development. The Group's classified or impaired loan ratio was 0.20%, relatively stable from the year of -- the end of last year.

Credit cost was 0.11%, inching up by 1 basis points compared with the full year level of 2018. We provided adequate coverage for our portfolio and our provision coverage ratio reached 227.5%. As of the end of June, our on-balance sheet non-bank Mainland exposure accounted for 21.47% of our total assets, standing at a relative low level among peers. Within this exposures, our NPL ratio was 0.14%, lower than the group average.

Our capability to withstand the liquidity risk was further enhanced. This was evidenced by our solid liquidity position. In the first half of this year, our average LCR was 170% and our NSFR at the end of June was 119.14%, both at levels above regulatory requirement.

This concludes the review of our first half results. Let's pass it back to CE Gao, who will talk about our second half priorities.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [4]

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Thank you, CF Sui. Looking to the second half, the IMF made several downgrades to global growth forecast, and prospects of China-U. S. trade friction remain uncertain. In addition, the recent social unrest in Hong Kong have start creating negative impact on its economic development. On the bright side, Hong Kong's special status and advantage in the new round of reform and the opening up of China remained unchanged. More opportunities will arise from the Belt and Road Initiative via Hong Kong as an international service hub. And for us here, as a direct beneficiary along the route and the online development plan for the GBA, more supportive policy will be launched and create additional benefits to enterprise and the individuals in the GBA, whereas the collaboration between Guangdong-Hong Kong and Macau will make more material progress.

We continue to see solid internal driver for Hong Kong's future development. In particular, the Hong Kong government will launch more measures to boost the local economy, and supporting the commercial sectors and the labor market and the easing livelihood difficulties. In the second half, steadily implement our strategy and strengthening our execution ability. We will strive to make better contributions to Hong Kong's economy growth, improvement of people's livelihood, integration with the state's development plan and the joint developments of GBA into a beautiful common home. We will continue to focus on the Hong Kong local market to cement our foundation for sustainable development. We will take the lead in driving financial innovation and the collaboration in the GBA.

In addition, we will deepen and enhance the regional management model of our Southeast Asian entities and speed up in building our regional competitive advantages. We will continue to invest in FinTech innovation and pursue our ESG development to achieve high-quality sustainable development. Any complicated operating environment, we will further refine our asset and liability management, optimize our business mix and enhance the management of all types of risk. Our goal is to ensure solid operations across all business lines and to maintain healthy financial conditions, and therefore, keep on generating steady growth for our stakeholders.

This is the end of our presentation. Thank you. You're welcome to ask any questions.

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Nan Luo, BOC Hong Kong (Holdings) Limited - Company Secretary [5]

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(Operator Instructions)

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Questions and Answers

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Nan Luo, BOC Hong Kong (Holdings) Limited - Company Secretary [1]

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Now I would like to invite the first question. Okay, Gary.

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Jia Wei Lam, HSBC, Research Division - Analyst & Head of Greater China Banks Research [2]

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[Interpreted] I'm from HSBC. I'm an analyst. My name is Gary. I have got 2 questions. One question is related to our growth, most importantly the growth for the loans and the credits because definitely, we'll be affected by the macro environment or market sentiments. And thus, for BOC Hong Kong, how are you going to change your risk appetite in the second half of this year? What do you think the growth rates will be, especially for the loans and for the credits? And also, we need to consider the market demand. What is the market demand for the loans? This is the first question.

The second question is also associated with the first one. For the core common stock Tier 1 for BOC Hong Kong, it's already more than 20%. So under the current market circumstances, I think BOC Hong Kong has a sufficient capital. You have a sufficient capital, but maybe now the growth rates will slow down a little bit. So in the future, BOC Hong Kong will maintain a pretty high capital adequacy ratios. And where do you think BOC Hong Kong can try to make more loans?

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [3]

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[Interpreted] Thank you for your question. For your first question, it's about BOC Hong Kong's growth of our loans. At the beginning of this year, BOC Hong Kong, I think, at the time made a forecast. We believe this year will be a high single-digit growth for our loans. But up to now, in the first half of this year, I think, BOC Hong Kong already has achieved a higher than market average growth of our loans. Therefore, the market demand for loans, you see, globally, there are many economic uncertainties. There are also the continuing U.S. and the China trade tensions, and there is economic slowdown. There are also some other regional uncertainties. So I think for the market demand for loans, it's not as strong as in the past. But for BOC Hong Kong, we have a good client base.

Moreover, for our clients, I think our clients are more diversified. So for our BOC Hong Kong clients in the Mainland, we have clients who are Chinese companies and who are going global. We also have clients in Hong Kong. We also have clients in Southeast Asia. We also have multinational clients. So you see, our client base is more diversified. If you look at our loan structure or loan mix, you will see that our loans also are more diversified.

Moreover, with the BOC headquarters, so we are closely connected, and we have a closer collaboration, especially for the overseas market for BOC headquarters. BOC Hong Kong plays a very important role. So we have a business not only locally or regionally. We also play other important roles for the BOC Group business, globally. So even though the current market environment might not be very favorable but still, we have a good growth rate of our loans. And you see, if you look at our client base, our clients, I think, are high-quality clients. And our loans also go to those sectors with better returns, better outlooks.

Yes. We still face quite some market uncertainties for BOC Hong Kong. I don't think we are going to change our risk appetite. We will maintain our existing risk appetite. And that's why, I think, this year, we will achieve the loan growth rates as our target, as the forecast, at the beginning of this year. I think we are still quite confident.

Now our Deputy Chief Executive Wang Bing, what is your additional remark?

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Bing Wang, BOC Hong Kong (Holdings) Limited - Deputy Chief Executive [4]

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[Interpreted] Thank you. In fact, for our CFO, Madam Sui, she has made a good presentation. In the first half of this year, we had a market stress, but our loan growth was 2 percentage higher than the market average. Moreover, this year, in the first half of this year, our loan growth was more balanced and 6.1% and 5.7% for corporate and personal loans and 6% and 5.6% of our local loans and loans for use outside Hong Kong, so that also shows the high quality of our clients.

For Mr. Gao, he also has told us that we have advantages not only in Hong Kong but also for the cross-border business. In recent years, for Southeast Asian market, our loan growth, I think, is quite good. For this year, the global economy is having a lot of downward pressure, but Southeast Asia is different. For Southeast Asia, its economic growth rate is decent. Moreover, it's also the heart of an important region for the relocation of industrial capacities of One Belt, One Road Initiative. So the loan growth rates, I think, for Southeast Asia is meeting our targets.

At the beginning of this year, we already said that we were confident that we will maintain the growth rates of our loans for 2019, the same rate as of 2018. Although we have uncertainties in the market environments, but we are still confident that we are able to achieve the high single-digit growth of our loans targets made already at the beginning of this year.

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Yang Sui, BOC Hong Kong (Holdings) Limited - CFO [5]

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[Interpreted] So for the common stock Tier 1 capital ratio, let me answer. Yes, you have to listen to my colleague's answers. So our capital will flow through where it's needed. If you look at the geographies and the clients, you see our loan growth will still be a good number, be a good decent number. For our common stock Tier 1 capital ratio, it's already more than 20%. Why is that? In the first half of this year, our profits were also good. Our post-tax profits were good enough. Then for the future, of course, we need to meet the regulatory requirements. That is our top priority.

Second, we also need to satisfy, and we also need to make use of the market opportunities if they are available. For example, for Hong Kong, for Southeast Asia and for the Greater Bay Area, these are our very important geographies. And for the dividend payments, I think you're also asking that question. 40% to 60% of the dividend payment is stable. Last year, we issued the capital instrument. We've also considered the impacts of the capital instruments to the common stocks. So we want to realize the balanced development between BOC Hong Kong and also our shareholders.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [6]

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[Interpreted] I'm Tian Yafei, an analyst with Citibank. I have 2 questions. The first question is also about the growth of the BOC Hong Kong loans and your market share in this regard. We know for the first half of this year, in fact, the growth rates of loans for the whole banking sector is relatively slow, and the market competition is very tough. But how could BOC Hong Kong maintain such a good growth rate of your loans? And in the second half of this year, if your funding cost can also be better, your market margins can also expand more if you want to maintain such a growth rate.

The second question is about depreciation of the RMB and its impacts upon your business. I think about 10% of your balance sheet is related to RMB. You're also the only RMB clearing bank. But RMB is depreciating. So what will be the impacts upon your business? And what is your new consideration about the RMB business?

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [7]

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[Interpreted] I think we already partially answered your question. Shall we explain again? Wang, yes, you should explain again.

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Bing Wang, BOC Hong Kong (Holdings) Limited - Deputy Chief Executive [8]

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[Interpreted] Yes. I will give you highlights. For the market environment, yes, it's not very good, with a lot of uncertainties, and the economy has some big challenges. But even in that scenario, still people need to borrow money. Companies need to borrow money. That will not change. Why could BOC Hong Kong perform better in terms of our growth rates of loans? Because we have high-quality clients, and our loan portfolios are more diversified. As Mr. Gao has said, BOC Hong Kong has such advantages, and therefore, we outperformed the market and our competition.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [9]

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[Interpreted] Another question. Yes, your second question.

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Yang Sui, BOC Hong Kong (Holdings) Limited - CFO [10]

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[Interpreted] So given our good growth rates of loans, our -- Mr. Wang, Mr. Gao have said that, so we still have achieved a high single-digit growth of the loans. In fact, our deposits also grow correspondingly. For the deposits, yes, for the market deposit growth in June was only 1.7%. For July, it was 0 growth of deposits. So the market is changing. So for the funding cost, we will also be more cautious about funding cost.

For CASA, current account/savings accounts, our share in terms of the CASA is declining a little bit, but our CASA growth is still good. So in July, CASA growth was good. Although, there was a decline over the fixed term deposits. So we have advantages in terms of the funding cost, but if you look at the changes over the HIBOR and over the market stress, yes, there is market stress. But anyway, in terms of deposits, in terms of attracting CASA, we will work even harder and -- for example, for FinTech, so we will have a FinTech innovation. We will further develop the settlements, cash management and IPO receiving banking business. In that way, we will, I think, continue to improve our CASA deposits. Thank you.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [11]

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[Interpreted] For your second question about the RMB, let me ask my colleague to answer.

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Shu Yuan, BOC Hong Kong (Holdings) Limited - Deputy Chief Executive of Financial Markets [12]

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[Interpreted] Yes. You know already the dollar to RMB ratio is more than 7, and some people say that the trend is not very good. But how about pound sterling? Pound sterling this year also is very fluctuating. They both also has declined to, I think, by about almost 10%. So for the RMB fluctuation, it's still normal -- or it's still normal, yes, the RMB and the U.S. dollar exchange rate.

Secondly, I think your question has 2 parts. As you can see, our positioning and also it's about the risk exposure. Also, you expressed some concern over the BOC Hong Kong's Mainland RMB-denominated lendings or loans. So for the first part, I would say that BOC Hong Kong is a Chinese bank, and our risk exposure is quite limited. And secondly, as for the potential impact, the credits or loans at the moment in terms of the existing position, companies are not affected or our asset -- the credit quality is not affected. So this is my response to your questions.

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S. Huang, JP Morgan Chase & Co, Research Division - Financial Analyst [13]

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[Interpreted] My name is Jemmy. I have 2 questions. The first is in the assumption, I don't know, compared with the second half of last year, is the first half of this year has many major -- has any major changes? And secondly, with the increase of the external and internal risks, is it likely that for the second half of this year, you will be more conservative?

The second question is about the Southeast Asia. We can see that it is growing. So among the 9 ASEAN countries, could you please share with us who are the ones enjoy sound momentum of growth, while who are the ones who have more risks of asset quality?

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Zhikun Qiu, BOC Hong Kong (Holdings) Limited - Deputy Chief Executive [14]

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[Interpreted] I will try to use Mandarin to answer your question first. For the risks, for the second half of last year, there was a similar question. Actually, at that time, we had already fitted in the expectation or the forecast for the trade frictions. And also, you can see that if you also analyze the performance of other banks, you can see BOC Hong Kong had a low level of risk exposure. And of course, as you have mentioned, there are uncertainties externally and internally. So we will try our best to maintain the low risk level or exposure. But as you can see, we will continue to try our best to prevent the risks.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [15]

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[Interpreted] As for your second question, based on our initial analysis of the first half year, Southeast Asia countries or the region in terms of net profit increase or the lendings increase, we can see that the performance is better than the Head Office. And the major change is that as the Corporate Banking for the whole region, we are following very closely the Chinese investment in Southeast Asia, and also, we focus on the mainstream businesses. Previously, we didn't have the -- we may not enjoy the adequate capacity, but now, with the new change, I believe that this is just a start, a very good start, and we will see the growth trend even more remarkably in the coming 1 or 2 years.

So to answer your question, I think the most remarkable country is Indonesia. If you have followed the recent news coverage, as you can see, the Jakarta branch ranked the top among the foreign banks in Indonesia in Jakarta in terms of the overall performance, the total asset and the asset quality. This is really remarkable. As for the other countries like Vietnam, Malaysia and the Philippines, you can also see very sound momentum of growth. And of course, in other countries, we are developing the markets in a prudent but sound way. And what we need to do is to control well the risks and constantly develop the market. The priority is to identify the high-quality clients.

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Yaoping Wang, China International Capital Corporation Limited, Research Division - Analyst [16]

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[Interpreted] My name is Wang Yaoping from (inaudible), and my question is fairly of a longer term. We can see that the BOC Hong Kong does a good job in risk control. However, overall, we can see the environment is uncertain. The global economic slowdown or also the interest reduction, and we may find more countries reduce their interest rates. And also, there are some unrests in Hong Kong in recent months. It is said that Hong Kong -- there are Hong Kong individual clients who put their capital to other countries in the region. So my question is how about the potential impact to BOC Hong Kong's business?

And my second question is in the context of the overall slowdown, the 20% Tier 1 capital adequacy ratio, do you think it is too high? And do you have any other considerations, different from previous years?

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [17]

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[Interpreted] Okay. I will answer the question first and ask my colleagues to make additions. You mentioned the uncertainties in the world and also the difficulties in Hong Kong. I think it is fair to say that now in Hong Kong, the priority is to control risks. For Hong Kong, the credit risk is not so outstanding. So we need to pay more attention to liquidity and the market risks. The risk awareness at the moment in Hong Kong is quite strong.

Also, as you mentioned, in Hong Kong, the local business, the companies, the SMEs, the local companies and the SMEs, are facing difficulties, but Hong Kong is a global financial center for banks in particular. As you can see, for those banks present in Hong Kong, be it foreign banks or Chinese banks, as they are in Hong Kong, the global financial center, you can see the Hong Kong business contributes a remarkable part. That's to say Hong Kong definitely is an international financial center, and therefore, the clients come from different areas. And there are business opportunities everywhere. So not only Hong Kong is affected. In fact, the global economy is also affected. So for the demand for loans, the growth of the loans, there might be some changes. But don't forget that Hong Kong has enough diversity, and therefore, BOC Hong Kong, our clients also are diversified. In the past few years, we also have realized a transition. In the past, we were a Hong Kong city bank. But now, BOC Hong Kong is already a regional bank.

For Southeast Asia, well, even without U.S.-China trade tensions, already, many manufacturers have already been relocating to Southeast Asia. Southeast Asia is a major recipient of the relocation of manufacturing capabilities. So BOC Hong Kong is a regional bank. Why don't we follow? Of course, we can also follow, and we also go to Southeast Asia for infrastructure developments in Southeast Asia and other investments there. Yes, investments will have risks, but if you compare Southeast Asia with other regions, Southeast Asia also has undergone some financial crisis, and Southeast Asia, in fact, has drawn some lessons. So if you look at Southeast Asian countries, I think they have made a lot of progress in terms of financial regulation and oversight. So we see big opportunities in Southeast Asia. But still, in the end, it depends on the bank's own capacity and the capability for risk management. It depends on how good a bank is, whether or not you can take advantage of the opportunities. I think BOC Hong Kong has that capacity and the capability. So I know your question.

The overall market growth would not be so high, and BOC Hong Kong has more than 20% CET1. So are we going to do something else? Madam Sui already has said 20% is very high for CET1. But if you look at banks globally, if you look at the regulation over the banks, if you look at the regulatory requirements among the banks, you'll see

BOC already is G-SIB, that's globally systematically important bank. The BOC Hong Kong is regionally systematically important bank. So the capital adequacy requirements upon BOC Hong Kong is already pretty high. We need to meet the regulatory requirements, of course, but at the same time, BOC Hong Kong also needs to achieve organic loan growth rates. That is appropriate. But still it depends on whether or not we can have acceptable growth rates. If there are changes, if there are opportunities elsewhere, of course, we can also make some adjustments to our lending and the loan policy.

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Sik Tin Chan, Haitong International Research Limited - Executive Director [18]

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[Interpreted] I have -- Steven Chan. I have 2 questions. One is about asset quality. Still, I want to continue to ask, the NPL increases only slightly, but where do you have an increase of NPLs, which sectors, which industries? I'm very happy that you have disclosed your NPL ratio in Southeast Asia. For the NPL ratio in June as compared with the end of last year, increase or decrease? And for the NPL in the second half of this year, what is your outlook? This is my first question.

And moreover, many analysts also have asked a question I am very interested in. They have asked Mr. Gao that risk, of course, is a very important factor. Now in Hong Kong, the economy this year might decline, might be contracted. In the second half of this year, how about the virtual bank? The virtual bank will be operational in the second half of this year, but the economy is not doing very well or even unemployment rate is picking up. So you are launching the Livi, the virtual bank, mainly I think it makes personal loans or high-risk personal loans. And today, the management authorities also have even relaxed some rules about it. So I want to ask, given the current not very good economic outlook, what will be the impact upon your virtual banking, Livi, given the also increasing unemployment rate? So for the virtual bank business, are you going to change some plans for your virtual banking business, for example, in terms of growth or in terms of the loans?

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Zhikun Qiu, BOC Hong Kong (Holdings) Limited - Deputy Chief Executive [19]

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[Interpreted] I think, Stanley (sic) [Steven], thank you for your question. At the end of last year, our NPL was 0.19%. Now in Q2, 0.2%. Only a slight increase, mainly because of some isolated cases of the client. So only 1 or 2 -- only attributable to 1 or 2 clients who are not doing very well. Then for Southeast Asia, our -- it's only more than HKD 40 billion. Not very -- not a lot of loans outstanding. Only one Malaysian client has contributed to our NPL. Last year, it was 1.13% of the NPL ratio, so only 40 bp change.

Then for the second half of this year, I also have said that yes, we face a lot of uncertainties. What will be the impacts upon our asset quality? Of course, we will work our best. As always, you can look at the BOC Hong Kong track record. Our NPL ratio maintains only a very low level. So for the asset quality, if you -- you can also look at our provisioning level. We are in a better position to withstand any headwinds.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [20]

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[Interpreted] Thank you. For the second question, you are going to answer?

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Xiangqun Zhong, BOC Hong Kong (Holdings) Limited - COO [21]

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[Interpreted] Thank you for your question about our virtual banking business. There are 8 licenses issued for virtual banking business, and the license holders, I think, are making intensive preparations. You have asked a very good question. That's -- now the macroeconomic situation is changing, and it's not very favorable. And therefore, for the virtual banking, who will be the clients? And what will be the growth rates? Are we going to change our outlook? Personally, virtual banking and traditional banking are different, especially they should have different products, so they should also have different clients. I think there are 3 major differences, whether or not you are talking about the payment, the deposits or loans, there are 3 differences.

First, virtual bank will have products embedded in scenarios that -- loans or deposits embedded in scenarios. Second, virtual banking will use AI, cloud computing, Big Data and other such advanced technologies. Third, for virtual banking, it's very much based upon data. So for virtual banking, the products will be embedded in scenarios, will depend on technologies and it will depend on data. They are quite different from the conventional products by conventional banking.

So for the virtual banking's clients, who will be the clients? Are we going to change our outlook for the borrowers? If they are individuals or they are micro-businesses, we will look at their data. We will monitor their scenarios to decide whether or not to lend money. And we will also have follow-up monitoring at the management, and we will also have the warnings and the alerts. Today, of course, we are not going to give you too many details about this, but I think for virtual banking, there is still a good outlook for the growth of our virtual banking. Virtual banking is only opening up the first chapter. So for the new ecology or for ecosystem for economic changes, economic changes might be a catalyst for the growth of virtual banking.

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Yingxin Gao, BOC Hong Kong (Holdings) Limited - Vice Chairman & Chief Executive [22]

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[Interpreted] Let me add a little bit. I remember that when we had the release of the first half year's performance, we mentioned the major purpose of the launch of virtual bank for BOC Hong Kong. Of course, we expect to have virtual banks contributing to the profitability, to the overall performance. However, the major objective is to have the virtual bank to facilitate and to promote the transfer or the transition and upgrading of the conventional banking to a modern bank.

Previously, as always, we emphasize our customer orientation and scenario-based. On top of that, we wish our bank to become more agile. So with the virtual bank, I hope you can see that the overall bank, the BOC Hong Kong as a whole, is changing, is improving. So from payment to other businesses, we are advancing the virtual bank practices. So despite the current obstacles or difficulties because of the overall environment, we hope to address the various concerns. So just as my colleague has mentioned, this is the major purpose of virtual bank.

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Nan Luo, BOC Hong Kong (Holdings) Limited - Company Secretary [23]

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You're free to contact our IR team. Thank you for coming. See you next time.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]