Recently, China Enterprises Confederation and China Enterprises Directors Association have publicly announced the “Top 500 Chinese Enterprises 2007”.  CCB, ranking eighth last year, was not among the top ten this year.  This has aroused concerns from some quarters of the news media.  For this, CCB’s spokesman has granted CCB Website an interview.  Excerpts:

Reporter: With the size of its assets and liabilities already in second place in China by the end of last year, its profitability topping all major banks and its net interest margin the best in the banking industry, how come that CCB is not among the top 10 in this list?

Spokesman: This ranking result simply has not truly reflected CCB’s status in the domestic banking industry.  The main reason is that there is a disparity in the criteria applied, and we have to bear much of the responsibility for this.  What we submitted for the ranking was the amount of our operating income (net income) for 2006, which was 151,600 million yuan.  Had we used the same criterion as the rest of the participants, CCB’s operating income would have been 227,500 million yuan and would be the seventh in place.  Right now we are clarifying the situation with the ranking organisers.  We are deeply sorry for all the misunderstandings arising out of this.

Since our share restructuring and listing, we have implemented reforms, improved results and realised rapid development in all areas of our business.  In 2006, there was a 22% year-on-year increase in our operating income, and our profitability was among the best in all domestic banks.  In assessing the profitability of a commercial bank, three indicators are usually used, viz, return on average assets (ROA), return on average equity (ROE) and net interest margin (NIM).  In 2006, our ROA and ROE were respectively 0.92% and 15.00%, which were the best for China’s top four banks.  Our NIM of 2.79% was among the highest level in China’s banking sector.  In the first half of this year, there have been further improvements in corresponding results and our ROA and ROE had reached 1.18% and 20.88% respectively, while our NIM had increased to 3.11%.  Such financial data are at par with the best banks not only domestically but also internationally.  Such achievements were not only the results of the Central Bank’s lending rates hikes, but also due to our efforts in strengthening active liability management, minimising high cost liabilities, optimising asset structures and actively downsizing businesses of low returns.  2006 was a year in which we had achieved rapid development in our intermediary business, and the increase in our net fee and commission income was the top in China’s banking industry.  In CCB we stress the importance of cost management and have boosted up our cost controls.  In 2006, the rate of increase of our expenses was three percent less than the rate of increase of our operating income, and our cost to revenue ratio had decreased by 1.1 percent and remained at a rather low level.

This year we have been able to continue maintaining a good development momentum.  As at June 30th 2007, our domestic and overseas assets had exceeded 6,000,000 million yuan and were second in place in the industry.  Our total liabilities was 5,792,100 million yuan and we had realised an operating income of 99,786 million yuan, a profit before tax of 50,542 million yuan and a net profit of 34,255 yuan, all of which were among the best in the domestic banking industry.

CCB's outstanding earning performance is evident to our investors and has been receiving full recognition in the international capital market.  Globally, the main investment banks have been continuously adjusting CCB's rating upwards in general.  CCB stock has become an important leading stock in the Hong Kong market and its price has been rising steadily.  In terms of market price to net assets ratio, CCB is ahead of all H-share listed banks and its market capitalisation is ranked fifth among the top ten listed banks in the world.

Reporter: CCB has been driving for business transformation and service quality improvement in recent years.  This should have helped increase its profitability.  Could you give us some specifics?

Spokesman: In recent years, we have been embracing a “customer focussed and market orientated” operation concept and seizing on market development opportunities to continuously drive for business transformation and improvement in business processes.  So far, we have achieved substantial gains in service quality improvement, service capability enhancement and income structures optimisation.

While we are leveraging our advantages in our established businesses, we are striving to develop emerging businesses.  In such traditional business areas as infrastructure loans, construction cost consultancy, housing trust financing and proxy financial services, we continue to remain in a leading position in the banking sector.  In the areas of emerging businesses, we have been actively developing investment banking business, small to midsize enterprise financing, financial market business and asset custody business and the results we have achieved are satisfying.  For example, in underwriting short-term financing bills, we are now having a major market share.  Our small enterprise loan business is rapidly expanding and is representing 9.86% of all our corporate loans.  Also, we are number two in the industry in the number of new funds under our custody.  All these new businesses are bringing in significant operating income to us.

We have been striving to develop first-rate retail banking in China.  After driving for branch network transformation and implementing business process optimisation and reengineering in recent years, we have achieved significant enhancement in counter transaction efficiency.  As at June 30th this year, we have completed the transformation of 1,320 branches and have raised transaction efficiency in our banking outlets by almost 40%, with over 90% of our customers having to wait for servicing for less than 10 minutes.  According to our schedule, all 14,000 or so of our branches will have been transformed by the end of next year.  Through product innovation and service quality improvements, our personal loan business is expanding in big strides: we are now number one in the industry in terms of loan balance and market share in new loans and have become China’s number one bank for extending personal loans and personal housing loans.  In addition, in our credit card business, we have achieved multiple increases in the number new cards issued, in consumption transaction amounts and in overdraft balances.

Reporter: CCB has carried out some proactive and meaningful studies and practice in the area of income and risk balancing and have achieved significant results.  Could you brief us on this?

Spokesman: Banking is a business of risk management.  So we must uphold the principle of prudent operation and search the best point of equilibrium between earnings and risks.  What is more, risk management capability is also one “touchstone” in assessing the success or failure in the reformation of a Chinese state-owned commercial bank.

In CCB we always give the highest priority to risk management.  As early as in 1999, we had already set up a system of appointing full-time loan screening staff and separated the functions of loan screening and loan extension.  In 2000, we had standardised the operation processes of our credit business and had started implementing and continuously improving a credit accountability system to hold our senior staff accountable.  In 2002, we started a pilot project in economic capital budget management and economic added value management.  In 2004 we started to practise economic capital management as an important component of our risk management.  In 2005 we started appraisal of Key Performance Indexes (KPI) and implemented post-risk adjustment management of returns as well as vertical management of the auditing function.  In 2006 we started restructuring our risk management system with vertical management and horizontal operation as its main elements.  At present, we have finished setting up a comprehensive risk management system covering all our organisations and all of our business and operating management processes.  Risk management is now carried out through the five areas of maintaining a stable development status, enhancing security and strengthening the management of credit risks, market risks and operational risks.  In this system, every staff member from the chairman downwards is fully aware of his or her risk management duties.  In the now unified risk management system, risk management is divided into three levels.  At the board of directors’ level, a special risk management committee is set up to oversee risk management throughout the bank.  At the senior management level, a chief risk officer has been appointed to take up risk management responsibilities of the whole bank.  At the branch level, risk controllers and risk officers have been appointed.  Such a governing structure ensures the independent, professional, systematic and effective management of risks throughout the bank.

In the first half of this year, we have responded to macro-economic situation by implementing a number of measures and by raising our provisions in order to increase our risk resisting capabilities.  As at June 30th, our allowance to non-performing loan ratio was 90.67%, which was an increase of 8.43% from the end of last year.  If only general allowance is considered, provision coverage is 118%.  Meanwhile, there has been a continual improvement in our asset quality, with simultaneous decrease both in the amount and the ratio of our non-performing loans.  In particular, the latter has dropped to 2.95% and is the lowest level among China’s four biggest commercial banks.