Report Q1) common size analysis 2008 Describe risk incurred in conducting traditional banking business Unexpected changes

s in interest rate e.g p.521 book Traditional banking business Accept deposits(liabilities) and make loans(loans) 1) Asset side Advances and other accounts Bank core business-> making loans Approximately 40.92 % of total assets in 2008-> largest portion of total assets Approximately 39.36% of total assets in 2007 Slightly increase Total advances to customers rose by 11.5% from HK$413,062 million to HK$460,447 million Reason: Growth in both corporate and individual loans as well as loans for use outside HK, this was attributable to the successful implementation of the Groups business strategies under new business model Total loans: Fall into 2 major classes 98.07% of Advances and other accounts are advances to customers Personal loans and advances-> 65.74% of advances and other accounts Corporate loans and advances-> 32.33%of advances and other accounts Loan impairment allowances grow by 66.14 % in 2008 Card advances surged by 13.7% More vulurnable Credit risk exposure 1a) Derivative financial instruments p.186 Increase slightly in 2008-> 1.71% of total assets, 1.36% of total assets in 2007 A significant increase in total amount of interest rate contracts from HK $48461 million in 2007 to HK $103433 million in 2008 1b) Investment in securities p.109, p.194 -> 25.42% of total assets-> drop by approximately 2.79% compared to last year 3 main parts of securities -> Available-for sale securities, Held- to maturity securities, Loans and receivables

->Rise in holdings of Available-for sale securities in 2008=> approximately 59.18% of total investment in securities, while only 34.75% of total investment last year -> Decrease in holdings of Held- to maturity securities=> approximately 36.5% of total investment in securities, while 54.93% of total investment last year => Decrease in holdings of loans and receivables => approximately 4.32% of total investment in securities, while 10.33% of total investment last year . We noticed that there was an increase in holdings of, Held- to maturity securities, which occupied around 59.18% of total investment in securities, whereas Available-for sale securities only occupied 34.75% of total investment last year. Holdings of Held- to maturity securities and loans and receivables by BOCHK decreased in 2008

1c) Physical assets Investment properties -> Drop slightly-> 0.67 % of total assets in 2008, 0.75% of total asset in 2007 Properties, plant and equipment-> drop from 2.18% of total asset in 2007 to 1.99% in 2008 Physical assets of BOCHK is less than 3% of total assets-> 97% of assets are financial assets 2) Liabilities Another source of fund: deposit from customers Deposit from customers-> increase from HK$ 793606 million in 2007 to HK$ 802577 million in 2008, 65.96% of total assets in 2008, 74.33% of total assets in 2007 The two major sources of deposits consist of savings deposits and Time, call and notice deposits. There is an increase in savings deposits in 2008 and decline in Time, call and notice deposits. 3) Equity A slightly drop in total capital , the total equity is 7.37% of total assets in 2008 but 8.9% of total assets in 2007. BOA is highly leverage and hold little equity compared with total assets Approximately 93% of funds are coming from deposits Credit risk exposure

Decline in business loans in major assets Rise in holdings of securities and mortgages Insolvent Net operating income fall due to increase in net charge of loan impairment allowance Asset quality worsened, rise in provisions for loan p.10 Mortgage business, credit card business larger shares of RMB deposit p.29 ,31loan-to-deposit ratio =56.47% Income statement Significant increase in impairment charge on securities investments Impaired loan ratio-> up->

b) ROE in 2008-> 3.55%, ROE in 2007 16.64%, ROE in 2008 is more worser than 2007 ROA in 2008-> 0.26% ROA in 2007 ->1.48% A big drop in net income in 2008 to HK$3007 million, 15817 million in 2007 Profit margin plummeted to -> 5.97% in 2008, 24.24% in 2007 Due to dramatic increase in provision for loan losses to HK $685 million in 2008 TOTAL operating income 50394 in 2008 , 65258 in 2007 Asset utilization 0.06% in 2007 to 0,04% in 2008 Net charge of impairment allowances increase significantly from HK$1448 million in 2007 to HK$12573 million in 2008 Increase in Net charge of impairment allowances on securities investments including Held-to-maturity securities and Available-for sale securities from HK$2133 million in 2007 to HK$11900 in 2008 Debt securities(MBS/ABS) HK$ 12242 million MBSABS were impaired in 2008, compared to HK $ 4294 million in 2007 p.143 Annual report 2008 reflected the damage of banking business during financial crisis, economic environment turned sluggish in the aftermath of the global financial crisis, triggered by the bankruptcy of the investment bank Lehman Brothers. Due to the innovation of financial products, assets of banks were funded by different kinds of derivative products, those products are low

transparency and it was difficult to evaluate their credit quality. With an unfavorable economic environment, Individuals or corporations had significant financial difficulty and could not repay the loan, leading to a significantly increase in impairment losses on loans and securities investments. BOA is highly leverage and hold little equity compared with total assets Approximately 93% of funds are coming from deposits Credit risk exposure Credit risk management: external credit rating and assessment on credit quality of underlying assets adopt a comprehension methodology in determining whether a particular asset/mortgage backed securities is impaired, not only consider the mark to

1. 2.

market price of issue, also consider other factors including level of collateral protection, prepayment speed of underlying asset, etc. 3. establish a mechanism to update and value of main types of collateral, real properties. Liquidity risk The average liquidity ratio of BOCHK dropped from 50.92% in 2007 to 41.74% in 2008. The bank held more long maturity non-derivative cash flows (over 5 years) in 2008 than in 2007, which recorded as HK$32765 million and HK$865 million respectively. Also, bank had more indefinite maturity assets and liabilities in 2008 compared to 2007, such performance also increased liquidity risk exposure. Bank held large proportion of loans (40.9%) in their asset side, as loans are illiquid, the bank might not meet the unexpected loan request from quality customer, the increase in provision of loan losses in 2008 also reduced the liquidity of bank, bank needed to reserve large amount of money for impaired loan reserves. Liquidity risk management Maintain strong liquidity ratio to comply with both internal and external regulatory requirement Monitor the structure and stability of deposit portfolio