About IB

Minutes of Industrial Bank Half-year Performance Meeting of 2015

Industrial Bank (IB) Half-year Performance Meeting of 2015 was held on the afternoon of August 28 (Friday) by means of teleconference. The attendees include Vice President Chen Xinjian of IB, Board Secretary Tang Bin, General Manager Li Jian of the Financial Planning Department, General Manager Zou Jimin of the Risk Management Department, and General Manager Huang Wanru of the General Office of Board of Directors. At the meeting, they shared information and ideas with over 60 investment managers and securities analysts from about 50 institutions both at home and abroad with regard to the areas including business performance of IB in the first half of 2015, and future business development ideas of the bank. The minutes of the meeting are shown as follows:

Tang Bin: Good afternoon, every investors and analysts! Welcome to IB Half-year Performance Meeting of 2015. We are very happy to share the business performance of IB and exchange ideas on and discuss issues that we are commonly concerned with. I am Tang Bin, a director of IB and Board Secretary. Today, I will preside over the meeting. Now, I declare that the business performance meeting starts.

Today’s meeting is still divided into two parts: first, introduction to the general performance, and second, the question & answer section. Please raise questions according to the hint given by the teleconference system. Next, let's first welcome Mr. Li Jian, General Manager of the Financial Planning Department to share with us the general business performance of IB in the first half of 2015.

Li Jian: In the first half of 2015, China's macroeconomy faced the pressure of adjustment, the reform in market-oriented interest rates was basically in place, and the capital market and new financial forms flourished. All of these both brought austere test to the business operation and management of commercial banks and created new opportunities. Adhering to the basic work line of “maintaining steady development, guaranteeing security and boosting transformation”, the Company grasped and adapted to the New Normal, kept speeding up the business structure adjustment, transformation and upgrading, and maintained steady and sound development in various businesses, with the general business performance meeting the anticipation.

In the report period, the Company actively improved the asset-liability structure. In the aspect of assets, while grasping market opportunities effectively, the Company continued increasing investment in quality assets, with the total assets hitting RMB 5.13 trillion, up by 16.33% over the beginning of this year. In the aspect of liabilities, the Company developed various liabilities in an active way. The deposits of customers increased by RMB 177.2 billion, up by 7.82%; institutional deposits increased by RMB 518.3 billion, up by 40.87%; the volume of NCDs issued remained No. 1 in the industry, with the balance at the end of the period hitting RMB 137.0 billion; and the volume of CDs issued for the first time ranked No. 1 among banks of the same category. The net profits attributable to the shareholders of the parent company realized in the report period hit RMB 27.744 billion, up by 8.68% YoY, and the return on total assets and the return on equity were 0.59% and 10.77% respectively, remaining at a good level among similar banks in China. Asset quality was controllable as a whole, and the non-performing loan ratio at the end of the period was 1.29%. With sufficient provisions and accruals, the assets depreciation loss increased by 74.98% YoY. The LLR/loan ratio was 2.85% and the provision coverage 221.21%, both remaining at a high level.

The Company further reinforced the business foundation and sped up transformation and upgrading. In the area of corporate finance, taking it as a measure to implement the overall marketing plan, the Company adhered to the customer-centered principle, witnessing steady increase in the number of strategic core customers across the bank. With steady growth of trade finance, the Company witnessed further improvement in cash management capability. The volume of loans granted in environment finance kept growing at a fast rate, the financial services for small- and mini-sized enterprises and those for automobile, energy, and metallurgy industries saw desired development. In the area of retail finance, the Company continued pushing the building and development of community banking, and reinforced the strategy of cultivating four brands related to life, namely “Enjoyable Life”, “Universal Life”, “Wealthy Life” and “Vigorous Life”, witnessing significant improvement in the effects of pushing forward the enhancement of business structure of wealth management and speeding up the development of retail credit. With regard to the financial market, the Company responded to the changes and challenges in the market in an active way and kept intensifying innovation in the business of institutional assets. While achieving steady development in all services related to the financial market, the Company extended its market influence constantly. Characteristic institutional businesses such as bank-bank platform and technological output kept developing, and the internet finance platform based on the brand of “Money Manager” became a blue sea for the development and innovation of bank-bank platform. The Company pushed forward the standardization of basic assets, regulated the business operation of wealth management, and advanced the transformation of wealth management toward assets management. Under increasingly furious competition in the industry, the business scale of assets custody maintained a growing momentum, and the net value of assets under custody of the Company at the end of the period hit RMB 5.98 trillion.

New progress was made in the group-based, integrated and globalized business operation. The total net profits contributed by subsidiaries reached RMB 1.219 billion, up by 16.43% YoY. Industrial Financial Leasing, a subsidiary solely owned by the Company, and Industrial Trust and Industrial Fund, two subsidiaries controlled by the Company, witnessed steady growth in both scale and benefits. With fast arrangement in the small-value consumption credit market, Industrial Consumer Finance Co., Ltd. made a good start in its business development. Bringing into play the advantages of IB Hong Kong Branch and branch offices in the free trade zones, the Company gradually formed an integrated development pattern covering domestic and overseas services, home currency and foreign currency services, and cross-border financial services. Industrial Economic Research and Consulting Co., Ltd. was put into operation smoothly, becoming the first professional research institute with independent legal personality in the banking industry in China.

In the second half of 2015, the Company will, in respect of general tactics, adhere to the basic work line of “maintaining steady development, guaranteeing security and boosting transformation” and stick to the development path characterized by “light capital, light assets, improved structure and high efficiency” uncompromisingly. Efforts will be focused on the following areas:

First, the Company will reinforce planned management to set the tempo and structure of assets and liabilities in a reasonable way. Second, the Company will adapt to changes, strengthen coordination, and keep accelerating business transformation and innovation. Third, the Company will deepen reform, improve relevant mechanisms, and enhance the internal power for business transformation and development. Fourth, the Company will intensify the reform of risk management system, keep improving the risk management policies and tools, and handle the disposal, prevention and control of non-performing assets in a desired way.

Tang Bin: Now, let’s enter the question & answer section.

BNP Paribas: What arrangements does your bank have with regard to SOE reform, in particular in the aspects of shareholding of employees and executives and mixed ownership? Your bank announced early that executives planned to increase their exposure to shares of the Company. How about the latest progress?

Chen Xinjian: Banking is a competitive industry, so the most crucial step for SOE reform is to settle properly the issue how the government transits from controlling SOEs to managing state-owned capital. Based on the evolution of the Bank, local governments play a very positive role in assembling quality resources both from home and abroad for investment in banking and encouraging banks to conduct independent business operation. After a range of market-based equity financing, the Bank has basically mixed the state-owned capital with that of other types of ownership in an organic manner and established a sound restriction mechanism and modern enterprise system of comparative maturity, achieving an effect of 1+1>2. Next, the Bank will continue pushing the progress in system innovation in state-owned capital to build a new state-owned capital management system.

The Bank will, pursuant to the relevant guiding opinions of the state on reform of mixed ownership, explore shareholding of employees inside steadily, establish a long-acting incentive and restrictive mechanism to better embody the value of human capital, and achieve the true market-based operation step by step in an orderly manner from the top-level structure to the operation mechanism on the principle of fair competition.

The Bank issued the “Announcement on Undertakings of the Biggest Shareholder and Senior Executives” on July 10, 2015. All senior executives promised that, based on the confidence in the sustainable and stable development of the Company in the future, they would, on the principle of being lawful and compliant and bearing risks on their own, purchase shares of the Company voluntarily with their own funds recently, and committed to lock the shares purchased for a whole year from the conclusion of such purchase. After the above announcement, Vice Presidents of IB including Lin Zhangyi, Li Weimin, Xue Hefeng and I, as well as other senior executives including General Manager Li Jian of the Financial Planning Department bought a total of 302,300 shares of the Company from the secondary market many times from July 14 to July 27. Up to now, the above-mentioned senior executives hold a total of 384,300 shares of the Bank.

BNP Paribas: How does IB analyze the changes in net interest margin in the first half year? Considering factors including market-oriented interest rates, what judgment does IB make on the tendency of debt cost and interest margin in the next stage?

Li Jian: The net interest margin of the Company in the first half of 2015 was 2.44%, up by 4 base points YoY; the average interest rate of interest-bearing assets was 5.48%, down by 30 base points YoY, mainly because the loan interest-earning rate went down by 34 base points YoY; the average interest rate of interest-paying debts was 3.25%, down by 38 base points, mainly because the market interest rate kept decreasing and the institutional deposit interest-paying rate went down 153 base points in this year.

Considering factors including market-oriented interest rates, it is estimated that the net interest margin level of the Company will keep stable, or go down slightly in the second half of 2015. On the one hand, the People’s Bank of China (PBC) has reduced the interest rates five times since 2014. As a result, the assets and liabilities have basically been re-priced in place and there is no much room for further narrowing the loan/deposit interest margin. On the other hand, steady growth is still the main task of macroeconomic control in the second half of 2015, so it is estimated that the monetary policy will remain neutral and a bit easy and that in the second half year, the average interest rate of institutional deposit will keep stable, thus imposing little influence to the level of net interest margin.

APS Asset Management Pte Ltd: The capital sufficiency dropped obviously in the second quarter compared with the first quarter. Could you analyze the causes? Please give an introduction to measures of capital-intensive operation in the following period and the future capital supplementation plan.

Chen Xinjian: In the second quarter of 2015, following the external macroeconomic environment where the state promoted steady growth, the PBC enacted easy monetary policies, and the RMB interest rates kept decreasing, the Company actively grasped market opportunities, increased the scale of credit extension, and boosted the configuration of bonds and institutional assets of low risk weight. With significant growth in asset scale, the Company witnessed obvious drop in capital sufficiency on a quarter-on-quarter basis. This part of newly-added assets, from which the incomes will be seen in the second half year, builds a solid foundation for fulfilling the year-round business plan smoothly.

In the second half, the Company will reasonably control the pace for the development of asset business, slow down the development of on-sheet assets to an appropriate extent, and control the growth of risk assets strictly. Meanwhile, the Company will continue furthering the capital-intensive oriented business operation and management, push the adjustment of asset business structure, and speed up business transformation: First, we will carefully analyze the structure of on-sheet and off-sheet assets and the situation of capital occupation, drive the improvement of asset business structure based on interest spread incomes and overall returns of different types of businesses, so as to improve the capital utilization efficiency. Second, we will actively push ahead business transformation, adhere to the road of light-capital development. In particular, the Bank will endeavor to boost the business transformation toward “greater investment banking, greater wealth and greater assets management”, and bring into full play the group-based and multi-licensed advantages. Third, we will intensify innovation and exploration in asset securitization, and take a variety of eligible and effective risk-relieving measures actively to control risks and reduce the capital occupation of on-sheet assets. Fourth, in terms of internal management, we will continue taking the yield of risk weighted assets as the management direction, reasonably distribute the scale of risk weighted assets according to the actual business development in different business lines and business institutions, put into effect the rigid restriction mechanism for capital allocation and control, facilitate capital conservation by price-related means, and make rational innovation in business models to reduce capital occupation.

To support the sturdy and sustained development of all businesses in the future, in the second half year, the Bank plans to start the work related to the offering of secondary capital bonds at a proper time according to external market environment and regulatory policies. Capital supplementation by introducing secondary capital instruments to a moderate extent is helpful for the Bank to keep appropriate leverage in capital structure and increase returns to shareholders.

APS Asset Management Pte Ltd: What are the main forms of businesses of your bank related to the capital market and what are the main risk control measures? Do the recent fluctuations in the stock market pose threats to the security of the above businesses? In the next stage, which adjustments will the Company make in the attitude, development strategy and risk control measures regarding businesses related to the capital market?

Zou Jimin: The businesses of the Bank related to the capital market mainly include structured capital allocation, margin trading and short selling asset package, stock pledged repo, etc. In adaptation to the needs of developing capital market business, the Bank keeps improving the management concepts and prevention and control measures for the capital market business, both lending vigorous support to the development of innovative businesses and preventing and controlling relevant risks in an effective way.

First, classified management of business admittance. For standardized businesses like structured securities investment, the admittance requirements are specified, covering the scope of underlying stock, control of concentration, leverage ratio, warning closing line, inferior creditor, investment manager, etc. For the business of stock pledged repo, differentiated management is conducted according to the level of stock liquidity. For businesses related to usufruct of creditor’s right, such as stock pledge business for which institutional customers bear relevant risks and margin trading and short selling, the main considerations are the strength of institutional customers, quality of relevant underlying asset, pledge ratio, leverage ratio, etc.

Second, intensifying mark to market and monitoring. For asset-allocating businesses such as stock pledge and structured securities investment, the specialized management department under the Head Office conducts mark-to-market management and concentration management each day. For products involving risk events such as touch of the warning closing line, the handling situation of each one should be tracked for propelling the risk disposing measures to be taken. For businesses related to usufruct of creditor’s right like margin trading and short selling, tracking management should be intensified for cooperative brokerages and basic creditor's rights.

Third, improving the management measures under extreme conditions. Under the circumstance of continuous decline in the stock market, the Bank requires investment managers to increase the frequencies of reporting net product values, and urges cooperative institutions to cover short position and close position strictly according to the risk control criteria and requirements of the Bank. The Bank intensifies communication with investment managers to make prior arrangement of risk response plan. Where the position cannot be closed or the net product value drops below the prior principal and interest guarantee line due to the loss of liquidity in the market or trading suspension, it will be considered to transfer part of the assets in question by agreement or bulk trading, so as to safeguard that the risks of businesses in stock are controllable.

Recently, the stock market was under acute fluctuations, the capital market related businesses of the Bank, mainly the asset-allocating businesses like structured securities investment, were under certain market risk pressure, and some businesses triggered the warning position closing mechanism. All managers timely took relevant measures to prohibit buying in, covering short position and closing position in accordance with relevant contracts. Up to now, no prior principal and interest of the Bank have been impaired, and the overall risks are controllable. With this round of fast and in-depth adjustment, it is expected that investment behaviors in the stock market will be more rational. In the long run, the capital market still has good development opportunities. Hence, the Bank will, based on improving the capability in controlling business risks constantly, intensify efforts in business innovation and speed up business transformation and upgrading by offering services to the capital market.

Shenwan Hongyuan: Which industries and regions are the non-performing and overdue loans mainly from in the first half year? What is the expectation of the management team to the situation of non-performing loans across the year?

Zou Jimin: By the end of June, the balance of non-performing loans across the Bank hit RMB 22.203 billion, and overdue loans RMB 58.120 billion. Both of them are of similar industries and regional distribution. In terms of industries, they were mainly distributed in manufacturing, wholesale and retailing, and retail loan; in terms of regions, they were mainly distributed in Fujian, Guangdong and Zhejiang.

In the coming period, domestic economy will continue its in-depth adjustment, which will both cause difficulties and bring opportunities. In the aspect of difficulties, the macroeconomy is still in the stage characterized by “superimposition of three periods”, namely the transition period in respect of the growth rate, the throes period for structural adjustment, and the digestion period for early-stage stimulus policies, and the pressure of downward economy remains high. Thus, the conventional industries and enterprises will still face the difficult operation situation for a long period, and we can be hardly optimistic toward the quality control of banking assets. With regard to opportunities, the strategic adjustment of economic structure is deepened step by step, the atmosphere becomes more encouraging for people to start their own businesses and to make innovations, and some new growth points come into existence gradually. All of these create a favorable environment for commercial banks to adjust and improve business structure, develop new profit growth points and digest non-performing assets.

In the control of asset quality, the Bank will continue attaching importance to both “controlling the new” and “reducing the old”, not only controlling the admittance of new customers, but also improving the disposal efficiency and benefits by way of specialized operation of non-performing assets. From the perspective of outer operation environment and inner business performance, the Bank is confidential to continue keeping the asset quality at a good level in the banking industry.

Shenwan Hongyuan: What arrangements are made regarding the scale and structure of newly-increased asset-liabilities across the year? In respect of assets, what is the focus of allocation in the second half year? Is it still the proprietary investment?

Li Jian: In the first half of 2015, the Company actively grasped market opportunities and increased investment in quality assets, thus building a solid foundation for the steady growth of business performance in the second half. In the second half, the Company will, following the moderate business strategies, slow down the growth rate of on-sheet assets to an appropriate extent, and meanwhile, develop the asset businesses of controllable credit risks and low capital occupation actively and speed up transformation. In the aspect of loans, more consideration will be given to how to strengthen the “combination of investment and loan”. The Company will combine loan, assets securitization and investment together to offer integrated services and get composite incomes. In the aspect of institutional investment, the Company will, based on market opportunities, give priority to assets of low capital occupation and make allocation upon proper occasions.

From the perspective of year-round arrangement of business scale, in the area of assets, the loan scale will be arranged in line with the amount given under the dynamic reserve policy of the central bank, up around RMB 200 billion around the year, and with various investments increasing by RMB 930 billion, the redemptory assets for sale will reduce RMB 400 billion. In the area of liabilities, customers’ deposits will increase by RMB 350 billion, including the newly-increased CDs of RMB 200 billion. It is estimated that the deposits of non-deposit financial institutions will see an increase of RMB 500 billion, and deposit taking of banking institutions RMB 100 billion. It is estimated that the issue of NCDs will increase by RMB 130 billion.

Sinolink Securities: At present, some real industries are confronted with difficult business situations, which main industries or regions will the Company extend the newly-increased credit or quasi-credit in the second half year? Which industries will be restricted for extension?

Zou Jimin: In the second half, the Bank will continue lending support to the development of real economy and improve the allocation of credit resources. Based on the new urbanization, “the Silk Road Economic Belt and the 21st-Century Maritime Silk Road (the Belt and Road)”, the coordinated development of Beijing, Tianjin and Hebei, and the development of Yangtze River Economic Belt, and reform of free trade zone, the Bank will grasp business opportunities contained in long-term social demands such as urbanization finance, environment finance, pension finance, and consumer finance, and continue adhering to the credit policy of “ensuring the development of some industries while restricting the growth of others”. In terms of industries, priority will be given to development of infrastructure, strategic emerging industries, livelihood, modern agriculture, and green and environment-friendly industries, and support will be lent to industries of weak periodic characteristics involving livelihood and consumption, such as medical care, education, tourism, and communications. In terms of regions, key support will be lent to the regions benefiting from the “Belt and Road Initiative”, integration of Beijing, Tianjin and Hebei and the Yangtze River Economic Belt. Meanwhile, restrictions will be imposed on investment in industries of excessive capacities, and involvement will be prohibited in projects which fail to satisfy the national industrial policies and environmental protection requirements.

Sinolink Securities: Why was the wealth management developing at a fast rate in the first half year? How does the Bank judge the tendency in the second half year and what is the year-round business plan?

Li Jian: In the first half of 2015, the wealth management of the Company witnessed fast growth. By the end of the first half year, the balance of wealth management products hit RMB 1,403.044 billion, up by 68% over the beginning of this year, and the revenues from intermediary businesses gained from wealth management totaled RMB 4.526 billion, up by 33.39% YoY. There are mainly two reasons for the fast development of wealth management in the first half year: First, the overall market liquidity kept easy and the macroeconomy continued going down, a large among of capital flowed to banking wealth management products of low risks and high returns. Second, the domestic capital market went strong, and equity based wealth management products related to the capital market grew at a fast rate.

In the second half year, from the perspective of demand, the overall market liquidity will remain easy, and the demands for wealth management products will not decline. From the perspective of supply, with intensive fluctuation of the capital market, the Bank adjusted the investment strategies for wealth management products, reducing the allocation of equity based assets significantly. It is estimated that the scale of equity based wealth management products will go down substantially compared with the first half year.

As the wealth management is highly market-oriented, the all-year business plan may be adjusted at any time according to the market situation. Under the circumstance where wealth management products are still in great demand, the Company will mainly consider the availability of assets allocated for wealth management products in the second half year. Stress will be put on catching the market opportunities of non-standard debt assets related to urban investment, seize the market opportunities of China concept stock returning home, and grasp the investment opportunities in tailored additional shares brought by market adjustment.

Tang Bin: Due to the limited time, our meeting today is coming to the end. If you have other questions, please feel free to contact our investor relationship team. Thank all of you again for your invaluable time and presence. Today’s meeting comes to an end here.