shenzhen development bank responsive...

Annual Report 2008

Shenzhen Development Bank Tower,No. 5047 Shennan Road East,Shenzhen, Guangdong Province, ChinaPostal Code: 518001Telephone: +86 (755) 8208 8888Service Line: 95501

www.sdb.com.cnS

henzhen Developm

ent Bank

Annual R

eport 20

08

ResponsiveAdaptive

million Yuan

2004 2005 2007 2008

201,816232,206

281,277

360,514

166,897

20060

100,000

200,000

300,000

400,000

Total Deposits Profit before Provision and Taxmillion Yuan

2004 2005 2007 2008

2,411

4,027

5,776

8,138

2,440

20060

2,000

4,000

6,000

10,000

8,000

million Yuan

2004 2005 2007 2008

155,848182,182

221,036

283,741

126,195

20060

100,000

50,000

150,000

200,000

250,000

300,000

Total Loans Cost Income Ratio Percentage %

2004 2005 2007 2008

47.64

41.4138.93 35.99

46.80

20060

20

10

30

40

50

Percentage %

2004

Capital Adequacy Ratio Core Capital Adequacy Ratio

2005 2007 2008

3.713.70 3.71 3.68

5.77 5.77

8.58

5.27

2.30 2.32

20060

4

2

6

8

10

Capital Adequacy Ratio and Core Capital Adequacy Ratio

NPL Ratio

Percentage %

2004 2005 2007 2008

9.33

7.99

5.64

0.68

11.40

20060

4

6

2

8

10

12

A strong team culture and spirit is at the heart of SDB’s success. This is a journey in which SDB is committed to overcoming any challenge and achieving even higher rewards.

As one team SDB is forging ahead with one unifying service standard, strategy and objective.

Our approach to human resources is based on best Chinese and international practices. Staff training, retention and advancement are all important to our business success.

SDB endeavours to provide the best working environment for our staff and to foster their personal development so that they are capable of meeting challenges in our constantly-changing world.

Working Together

SDB took part in the event “Sailing farther, growing together – Voyage along the Coast on the 30th anniversary of the Reform” The sailboat “SDB” sailed along the wind to the China sea frontiers for four months.

Annual Report 2008


www.sdb.com.cn

Shenzhen D

evelopment B

ank A

nnual Report 2

00

8

ResponsiveAdaptive

million Yuan

2004 2005 2007 2008

201,816232,206

281,277

360,514

166,897

20060

100,000

200,000

300,000

400,000


2004 2005 2007 2008

2,411

4,027

5,776

8,138

2,440

20060

2,000

4,000

6,000

10,000

8,000

million Yuan

2004 2005 2007 2008

155,848182,182

221,036

283,741

126,195

20060

100,000

50,000

150,000

200,000

250,000

300,000


2004 2005 2007 2008

47.64

41.4138.93 35.99

46.80

20060

20

10

30

40

50

Percentage %

2004


2005 2007 2008

3.713.70 3.71 3.68

5.77 5.77

8.58

5.27

2.30 2.32

20060

4

2

6

8

10


NPL Ratio

Percentage %

2004 2005 2007 2008

9.33

7.99

5.64

0.68

11.40

20060

4

6

2

8

10

12

1Annual report 2008 Shenzhen Development Bank

2008 2007 Change in %

For the year ended 31 December RMB million

Net interest income 12,598 9,606 31%

Net fee & commission income 851 521 63%

Profit before provision and tax 8,138 5,776 41%

Assets impairment provision 7,334 2,054 257%

Net profit 614 2,650 -77%

Earnings per share (Yuan) 0.20 0.97 -79%

Note: In line with regulatory requirements for small and medium sized banks in the fourth quarter to deal with current domestic and overseas financial and economic situations, the Bank made a special provision of 5.6 billion Yuan and write-offs of 9.4 billion Yuan at the end of 2008. The total assets impairment provision for 2008 amounts to 7.3 billion Yuan.

At the year endRMB million

Total shareholder equity 16,401 13,006 26%

Total assets 474,440 352,539 35%

Total deposits 360,514 281,277 28%

Total loans 283,741 221,036 28%

Net assets per share (Yuan) 5.28 5.67 -7%

Key ratios

Non-performing loan ratio 0.68% 5.64% -496bps

Core capital adequacy ratio 5.27% 5.77% -50bps

Capital adequacy ratio 8.58% 5.77% +281bps

Provision adequacy ratio 364.65% 127.20% +23,745bps

Provision coverage ratio 105.14% 48.28% +5,686bps

Financial highlights

2

Financial Highlights

Message from the Chairman(CEO) and the President

Milestones in 2008

Review of SDB Business

SDB Officers

Social Responsibility

Basic Facts of the Company

Important Notes

Key Financial Data Highlights

Key Business Data Highlights

Changes in Share Capital and Shareholders

Information on Directors, Supervisors, Senior Management and Staff

Contents

1

4

6

8

20

22

23

23

24

28

37

42

48

50

51

70

72

77

191

194

196

196

Corporate Governance

Shareholders’ Meetings

Report of the Board of Directors

Report of the Board of Supervisors

Important Events

Financial Results

Internal Control Self-Appraisal Report

Assessment Report on Internal Control

Written Confirmation of Directors and Senior Management on Annual Report 2008

Reference Documents


Beijing

TianjinDalian

QingdaoJinan

Shanghai

HangzhouNingbo

FoshanShenzhen

Zhuhai

Haikou

Chengdu

Chongqing

Kunming

Nanjing

Yiwu

SDB: National CoverageSDB have branches in 19 cities throughout the country, and in 2008 set up 29 new sub-branches, adding up to 282 outlets.

Wenzhou

Guangzhou

4

On behalf of the Board of Directors and the management team, we are delighted to share with you significant achievements Shenzhen Development Bank made in 2008. While financial institutions in the rest of the world have been struggling with financial and economic challenges, we are pleased to announce that the Bank not only continued its success in many ways but also importantly cleared up most of the legacy problem loans, starting the year of 2009 with an extremely clean balance sheet.

2008 was a very successful and unusual year for the Bank. During the economic uncertainties and rapid policy changes, the whole team of the Bank demonstrated strong adaptability and further promoted the Bank’s growth and strength in many

Frank N. Newman

Message from the Chairman (CEO) and the President

ways. Operating Profit before Provision and tax rose 41% YOY to 8,138 million Yuan, a result of solid growth in deposits, loans, and fees, balance sheet management, active and profitable inter-bank investment, and conscious management of expenses.

Another key event of the year was the relief of large amount of legacy NPLs through the special program of large provision and write-off in the fourth quarter of 2008, under the guidance of the regulatory authorities, in light of global economic conditions. With only 1.9 billion Yuan Non Performing Loan (‘NPL’) amount and NPL ratio at 0.68% at the end of 2008, the Bank attained a very strong starting position for 2009. For years, the Bank has endeavored to resolve its heavy historical NPL portfolio from loans made before 2005. The good collection, strong credit control of new loans, together with this special move at end of 2008, allowed the Bank to finally clear up the old problem loans entirely on its own.

The Capital position of the Bank was also fundamentally improved in 2008. The Capital Adequacy Ratio reached the regulatory level, for the first time in many years, enabling the Bank to move ahead in a better position to embrace business opportunities. Commercial, retail, and inter-bank businesses all performed well during 2008. The Bank did not hold any investment in sub prime assets or assets issued by foreign financial institutions that went into problems, thus suffered no direct loss from the global financial crisis.

Key to overcoming all challenges and achieving progress is effective team work with clear vision. Since 2005, starting from a very low capital and very high NPL, the Bank has been pulling through a series of transformation steps, including cleaning up non performing loans, raising capital, overhauling its IT systems, making investment in selected business areas and people, as well as streamlining key processes. While the Bank has maintained a more solid fundamental and earning capability, in 2008, emphasis was given to further clarifying business objectives, building differentiated strength in key areas of focus, enhancing process efficiency, and speeding up outlet development.

In the meantime, the Bank maintained key principles of integrity, professionalism, customer service and efficiency, orienting all staff to building a competitive bank that customers can have great faith in.


2008 was the first year that the new session of the Board of Directors was in place for the full year, and the Bank benefited a great deal from directors’ very productive and professional guidance. The Board of Supervisors also performed diligent contributions. We believe the high standards set by the Board for the Bank have prompted us all to achieve more.

The guidance from regulatory authorities was also essential for the Bank to achieve what it has in 2008, from capital raising, adaptation to economic conditions, to conquering of historical NPLs.

As we look ahead in 2009, we are fully aware of new challenges. But starting with the momentum which brought the Bank out of the most challenging periods, we are confident that we can overcome obstacles and usher in an even brighter future. The Bank is addressing the economic uncertainties, the challenges faced by businesses and individuals, and the implications of policy changes as in 2009. The objective is to maintain the Bank in the right position to achieve healthy growth in light of the economic environment. While playing its role to support the economy, the Bank will continue high attention to its credit soundness as it works on building strength in key strategic areas, including developing and remodeling its outlet network, effective investment in IT infrastructure, training, and further streamlining processes in both operations and management.

On this occasion of sharing reports of progress, we also extend our sincere thanks to shareholders for your trust and support. We are happy about progress the Bank has made in the past and we will continue strong efforts towards further success.

Frank N. NewmanChairman (CEO)

Xiao SuiningDirector and President

Xiao Suining

6

21 March SDB issued RMB6.5 billion in subordinated debt on the National Interbank Bond Market. As at 31 March 2008, the Bank’s capital adequacy ratio was 8.41%, meeting the 8% minimum regulatory requirement for the first time during the past 5 years, and the core capital adequacy ratio was 5.71%.

12 May After the disaster of Sichuan earthquakes in Wenchuan , the Bank provided great supports on rescue and revitalization. The Bank, the employees, the Boards of directors and supervisors and the major shareholder donated in total more than RMB 15 million and sponsored the construction project of Yutang Primary School at Dujiangyan.

April SDB launched The Provision of Civilised and Standardised Services to Welcome the Beijing Olympic Games campaign. The campaign promoted quality financial services for the Games and tested the Bank’s customer service capabilities, which led to an improvement in the service provided to customers.

April The Woodpecker Risk Control Suggestion and Reward Fund was launched, encouraging all employees to develop ideas to guard against risk.

July Project Excellence, part of an internal restructuring exercise, commenced. This project was jointly conducted by the management consulting firm McKinsey & Company and the SDB project team. As at the end of November, the framework of each item in the project has been completed. The management office for Project Excellence” was opened in early December.

March May July

JuneApril

Milestones in 2008

June SDB started the restructuring of its business flow at the branch level. This programme was conducted in cooperation with the consulting firm Bain & Company and the Bank’s project team. Eleven businesses, including discounted bills, completed the restructuring process during the year. In August, the organisation adopted a vertical structure that helps the Bank support its across-the-board business continuity and development.

27 June The Bank’s SFC2 warrants expired with an exercising ratio of 91.42% for a total of approximately RMB1.8 billion. All proceeds after relevant charges were credited to the core capital.


19 September The Board of Directors announced that SDB did not have any investment in subprime debts in the United States nor did it have any investment in any bonds issued by Lehman Brothers or any other American financial institution. The subprime crisis and the recent problems of the financial institutions in the US did not have any direct impact on the operations of SDB.

24 October The bank issued 1.5 billion of subordinated debt in the national interbank bond market.

October The Bank implemented its 2008 interim dividend plan by issuing 3 bonus shares for every 10 shares held and a cash dividend of RMB0.335 (with tax). As a result, the aggregate issued share capital was 3,105,433,762 shares.

August SDB was granted licenses to run a securities investment fund custody business by the China Securities Regulatory Commission and China Banking Regulatory Commission.

28 December SDB celebrated its 21st anniversary with the Tian Ji Wealth Management New Year Concert. The Bank also organised a walkathon in celebration of the 30th anniversary of China’s reform and opening-up, which was held in cooperation with Shenzhen Satellite TV Station.

December During the fourth quarter of 2008, following the macro-economic measures to protect the economy, stimulate the growth and expand the expenditure, the Bank realigned the credit policy to lend out quality loans and ensure the business grow steadily.

December SDB had made special large provisions and write-off in response to the request by China’s regulatory authority in the fourth quarter of 2008 on dealing with the economic and financial situation in China and overseas. This enabled the Bank to resolve large amounts of legacy non-performing loans created before 2005.

August

September

October November

December

19 November SDB’s Peking University Scholarship and 2009 Campus Recruitment Kickoff Ceremony was held at Peking University.

21-22 November The 7th SDB Technical Skill Competition was held in Shenzhen, with nearly 300 employees from 19 branches participating in 7 competitive events.

8

ResponsiveFinancial and economic turmoil across world markets made 2008 a challenging year for all banks. Yet, despite the current environment, we at SDB were able to respond quickly and actively.

The Bank’s solution to the challenges we faced was to solidify our market positions, seize market opportunities, and execute innovative business strategies in a prompt and decisive manner. This approach made it possible for SDB to provide the right kind of financial support for our customers yet maintain quality loans. With a clear vision and a firm foundation, the Bank proceeded step-by-step to strengthen our industry position and capture market share.



Rhythm to Change, System to Echo

10 Review of SDB Business

CreativeIn 2008 our passion for innovation led SDB to winning the “Most Innovative China Brand Award of the Last 30 Years”.

Although we at SDB have established a strong reputation for creativity, SDB also recognize the need to continuously learn from our experience, observe the successes of others and put the knowledge SDB have gained into action.

Building up the information technologies provides a new innovative platform for further development of our business. The SDB website won the awards of the “China Excellent Financial, Economic and Securities Website” and the “Most Innovative Bank Website”.

Having good ideas is not enough to achieve our business goals. Understanding our clients, the markets and the financial figures are also essential, together with the drive for profitability. Emphasis is also placed on efficient marketing channels, effective risk management, adequate execution by trained professionals, with timely monitoring during the process.


Master Skills, Crafted Products

12

ServiceSDB is focused on meeting the needs of customers by constantly improving its range of products and services, thereby creating a competitive edge for the Bank.

SDB is proud of the comfortable banking environments and services SDB offer to provide a better customer experience. During the year, 12 of SDB outlets won the “2008 Model Bank for best services” award in China.

Through the implementation of “Project Excellence”, SDB have dramatically improved the internal structure and management processes. We upgraded and unified our business operations, from the headquarters to the branch level, in an effort to strengthen customer service and internal control.

Over the years, SDB has responded well to changing market conditions by introducing innovative products and services. SDB today is a respected and trusted brand in China.

SDB have also established a high standard of risk management and through best market practices SDB have come far towards realizing our goal of becoming a financial industry leader.



Excellence through Teamwork

14

StableThe Bank’s Capital Adequacy Ratio ("CAR") and Core CAR reached 8.58% and 5.27% respectively at the end of 2008, meeting the regulatory requirement. Through the Bank’s own earning capability, our net profits contributed RMB0.614 billion to the Bank’s core capital.

After the exercising of SFC2 warrants, the core capital increased by RMB1.8 billion. SDB successfully issued two tranches of subordinated debt totalling RMB8 billion in the interbank bond market, and our supplementary capital increased by RMB7.35 billion.

A resolution was approved at the first EGM in 2008, stating that in the next three years the Bank plans to issue up to RMB10 billion in subordinated debt and RMB8 billion in hybrid debt instruments.

As a result of the capital plan, the Bank's capital has been improving to support our business development, and the Bank is now better positioned to capture future growth opportunities.



On Target, On Track

16

Corporate deposit balances rose by 26% and general loan balances 20%, making SDB one of China’s top commercial banks in terms of growth. Net income from the intermediary business increased 55% from last year’s figure, which improved our income mixture.

The number of trade finance clients grew by 30% from the end of 2007. Credit facilities granted by local and overseas institutions increased by 10%, striking a good balance between business growth and asset quality.

The success of the trade finance business was a key factor in the growth of other SDB businesses. The Bank registered significant progress in its electronic Supply Chain Finance products, the professionalization of its factoring operations, and the growth in scale and revenue of its offshore divisions.

Corporate Banking

In 2008, the trade finance business achieved greater brand recognition with the publication of Supply Chain Finance – the New Finance in the New Economy, produced in cooperation with the China Europe International Business School. This book is a systematic compilation of both practical experiences in the profession and theory.

The year was also highlighted by a number of awards. For example, the Bank’s Supply Chain Finance product won the Gold Award and the Best Supply Chain Finance Service Provider award at the 2nd Annual Conference on Management Action, organised by the Harvard Business Review, and the Best Technical Innovation Award at the Annual Conference on China’s Corporate Competitiveness. The Account Receivables Pool financing solutions of SDB’s Supply Chain Finance business received the Shenzhen Excellent Innovation Award (Grade 2). Finally, SDB was selected for another year on the 10 Best Country-wide SME Supporting Commercial Bank list.

Supply Chain Finance business continued to extend greater influence in the market


Retail Banking

SDB’s retail banking arm is renowned for its continuously dynamic performance and expansion in the following areas: growth in the loan business; research and development of innovative products; emphasis on customer service; the strengthening of its internal corporate structure; and successful brand management.

Retail deposit balances reached a historic high with an increase of 42% from last year. Net fee income jumped 35%.

Retail loan balances grew by 16% as a result of market-oriented credit policies adopted for different real estate that contributed to asset quality.

Retail Banking experienced another year of fast growth, with savings deposit balances reaching a historic high as one of many bright spots

SDB’s credit card business underwent rapid expansion. The Bank now has over three million credit cards in force, an increase of 60%. Credit card loan instalments were up by 85%.

The retail customer relationships (RCM) system was strengthened during the year, new licenses for the asset custody business granted, and the sales force improved. The number of VIP customers grew by 56%.

Brand management strategies in 2008 proved successful for SDB’s retail business. The retail loan, wealth management, sales and customer services divisions won nearly 20 awards, including China’s Best Bank in Retail Loans and Best Bank in Retail Business (Wealth Management) awards, as well as many other prizes for individual wealth management products. Two of particular note were the Tian Ji Wealth Management winning the Best Wealth Management Centre award and the mortgage credit card winning the Most Innovative Functional Credit Card award.

18

Treasury and Inter-Bank

The Treasury and Inter-Bank business went through extensive expansion and reached record highs in terms of scale and revenue during the year. This was achieved by taking advantage of profitable opportunities in the domestic market, exercising tighter internal controls, and carefully developing new products. The Bank also maintained a reasonable level of liquidity, high management efficiency and good sales performance.

A careful balance between business scale expansion and quality management was achieved during the year, underpinned by product creativity and innovative new management practices

SDB saw a significant growth in its asset and liabilities balances, inter-bank transaction income, bond trading volumes and revenue RMB exchange and foreign exchange transaction and gold business volumes.

Investments in bonds denominated in foreign currency were reduced. The Bank focused on the domestic RMB bond market, and increased overall bond yields and trading revenue by seeking the bond market’s volatility.

The Bank continuously launched new wealth management products, and at the same time obtained a number of new business qualifications.

The Bank actively developed the business co-operations with domestic financial institutions, and deepened the relationships with non-bank financial institutions, including securities firms, investment funds, trust companies and other finance companies.


Risk Management

Despite the uncertainties of the current economic environment, SDB achieved excellent results through the implementation of a wide range of measures for managing asset quality. These measures were successful at keeping credit, market, interest rate, operational and liquidity risk well under control. Significant improvements were also made in the identification and management of risk, as well as the reversal of non-performing assets.

The Bank had no investments related to subprime mortgages or similar assets in overseas financial institutions. This ensured that SDB was not directly affected by the global crisis in subprime mortgages or the under-performance of institutions carrying them.

SDB responded rapidly to China’s regulatory authority, which requested that the country’s banking sector meet local and international financial challenges. In the fourth quarter of 2008, SDB set aside large loan loss provisions and made large write-offs. The results were encouraging, and the Bank was relieved from legacy non-performing assets created before 2005.

The NPL and the NPL ratio have dropped to RMB 1.9 billion and 0.68% respectively. As at the date of this report, the Bank’s provision coverage ratio and provision adequacy ratio reached 105% and 365% respectively.

Effective risk management measures increased the Bank’s valuation

SDB’s various measures went well beyond the basic regulatory requirements and increased the Bank’s core capital. They also led to the Bank winning the Best Bank in Risk Management award at the 2nd Annual Conference for Institutional Investors and China Times Selection Awards.

20

Frank N. Newman Chairman (CEO)

Xiao Suining Director and President

Wang Ji Party Secretary, Special Advisor

Hu Yuefei Director and Vice President, Head of Corporate Banking

Liu Baorui Director and Vice President, Head of Retail Banking

Wang Bomin Chief Financial Officer

Simon Lee Chief Credit Officer

Zhao Na Chief Human Resources Officer

He Zhijiang Chief Treasury Officer

Chen Rong Chief Operation Officer

Zhang Yuanliang Chief Information Officer

Xu Jin Board secretary, GM of Legal Affairs Department

SDB officers


Zhou Li Assistant President, Shenzhen Branch Manager

Huang Shouyan Assistant President

Zhao Wenjie Chief Internal Control Officer

Qiu Weiping Assistant President, Shanghai Branch Manager

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22

Social Responsibility

SDB is a strong advocate of the Joint Development, Shared Future concept. We consider it the Bank’s responsibility to contribute to the full development of the country and society and to take care of China’s natural environment and resources as well as the interests of all related parties.

The Bank also protects the interests of all stakeholders, including shareholders, customers and employees.

The Bank’s duties extend to providing financial support of China’s economic development and civil improvement. In doing so, SDB closely follows the pace of the nation’s economic development. In addition to conducting risk control, the Bank supports the development of the economy and the real estate market through community construction projects. A priority of the Bank is to support civil projects, creative enterprises and SMEs, the agricultural industry and the rural areas (the “Three Rural Issues”) and underdeveloped communities.

SDB has built a “risk-based” framework for the Bank’s anti-money-laundering system and fulfils its obligations in this area.

SDB contributes to a green environment at all levels of the Bank’s operations for the benefit of the economy and society.

Joint Development, Shared Future SDB gives back to those who have helped make the Bank successful. Its contributions include ongoing support for the less privileged, for education, and other charitable causes. The Bank made a donation of over RMB15 million to the earthquake-stricken areas of Sichuan and helped rebuild Yutang Primary School in Dujiangyan City.

The Bank received China’s Corporate Social Responsibility - Outstanding Contributing Firm award for two consecutive years, in 2007 and 2008. The Bank also won the first Shenzhen Charity Award – The Philanthropic Corporate award in 2008.


Legal Name

深圳发展银行股份有限公司(SDB or the Bank)Shenzhen Development Bank Co., Ltd.

Legal Representative

Mr Frank N. Newman

Secretary of the Board of Directors

Mr Xu Jin

Representative of Securities Affairs

Mr Lv Xuguang

Address: SDB Tower, 5047 Shennan Road East, Shenzhen City, Guangdong Province, ChinaBoard Office, Shenzhen Development BankTel.: +86 (755) 8208 0387Fax: +86 (755) 8208 0386Email address: [email protected]

Registered Address

Shenzhen Development Bank Tower,No. 5047 Shennan Road East,Shenzhen, Guangdong Province, ChinaPost code: 518001Website: www.sdb.com.cnEmail address: [email protected]

Periodicals Selected by the Bank for Information Disclosure

China Securities Journal, Securities Times and Shanghai SecuritiesAnnual Report Posting Website designated by China Securities Regulatory Commission: www.cninfo.com.cnPlace for keeping annual reports of the Bank: Secretariat of the Board of Directors of the Bank

Basic Facts of the Company

Important Notes

The Bank’s board of directors along with its directors, the board of supervisors along with its supervisors, and senior management team guarantee that this Report does not have any false documentation, misleading statements or material omission. They are fully responsible for the authenticity, accuracy and completeness of the Report both on a collective and individual basis.

The 13th meeting of the seventh board of directors of the Bank discussed the full text and abstract of the 2008 Annual Report. There were 14 directors present at the meeting. The board of the Bank approved the Report unanimously at the meeting.

The Ernst & Young Hua Ming Accounting Firm has audited the 2008 annual financial statements of the Bank, and has produced standard unqualified auditing report.

Mr Frank N. Newman, the Bank’s Chairman of Directors, Mr Xiao Suining, President, Mr Wang Bomin, Chief Financial Officer, and Mr Li Weiquan, head of the Accounting Department, guarantee the authenticity and completeness of the financial report in the 2008 Annual Report.

Stock Exchange with which the Shares of the Bank are Listed

Shenzhen Stock ExchangeAbbreviated name of share: SDB AStock code: 000001

Additional Related Information of the Bank

Date of initial registration: 22 December 1987The latest date of change of registration: 29 December 2007

Registered address: 5047 Shennan Road East, Luohu District, Shenzhen City

Business Registration No: 440301103098545

Tax registration Numbers: National tax: 440300192185379; local tax: 440300192185379

Domestic accounting firm appointed by the Bank: Ernst & Young Hua Ming Accounting Firm16/F, E&Y Tower, 1 Chang’an Street, Dongcheng District, Beijing

Overseas accounting firm appointed by the Bank: Ernst & Young Accounting Firm18/F, Two IFC, 8 Finance St., Central, Hong Kong

This Report is prepared both in Chinese and English. In the event of any dispute over the two versions, the Chinese version shall prevail.

24

A Key Financial Statistics

1 Operating performance

Changes of the reported year comparedIn RMB’000 Jan–Dec 2008 Jan–Dec 2007 Jan–Dec 2006 with last year (%)

Operating income 14,513,119 10,807,502 7,817,873 34.29

Pre-provision operating profit 8,137,588 5,775,701 4,027,256 40.89

Assets impairment provision 7,334,162 2,053,759 1,986,217 257.11

Operating profit 803,426 3,721,942 2,041,039 -78.41

Total profit 792,609 3,771,775 2,121,884 -78.99

Net profit attributed to shareholders of listed company 614,035 2,649,903 1,411,947 -76.83Net profit less non-recurring gains/losses attributed to shareholders of listed company 623,941 2,576,586 1,192,743 -75.78

Per share:Basic EPS (Yuan) 0.20 0.97 0.56 -79.38

Diluted EPS (Yuan) 0.20 0.95 0.56 -78.95

Basic EPS less non-recurring gains/losses (Yuan) 0.20 0.95 0.47 -78.95

Cash flowNet cash flows from operating activities 24,342,611 17,051,576 11,505,541 42.76

Net cash flows from operating activities per share (Yuan) 7.84 7.44 5.91 5.38

Note: As of 31 December 2008, the total shares of the Bank were 3,105.43 million shares; As of 31 December 2007, the total shares were 2,293.41 million shares. According to the requirements of 2006 Corporate Accounting Standard, for shares increased from stock dividend, EPS during the reported period shall be calculated based on shares number after adjustment. The above basic EPS and diluted EPS of 2007 are numbers after adjustment, and the basic EPS and diluted EPS during the reported period before adjustment are 1.27 Yuan and 1.22 Yuan respectively.

Non-recurring gains/losses of the Bank in 2008 are calculated based on the definition of CSRC Announcement 2008 No. 43 – Explanatory Announcement of Information Disclosure by Companies Publicly Offering Securities No. 1 – Non-recurring Gains/Losses, and statistics of 2007 and 2006 are adjusted correspondingly. All related items in this report are adjusted.

Items and amount of non-recurring gains/losses

In RMB’000 Amount

Gains/Losses on disposal of non-liquidity assets 24,551

Gains/Losses from contingency (29,712 )

Transfer of receivables impairment provision for independent impairment test 1,800

Changes on fair value of investment properties (15,087 )

Other non-operating income and expenses except the above items 6,368

Impact of income tax 2,174

Total (9,906 )

Key Financial Data Highlights


2 Profitability items

Changes of the reported year compared with last yearin % Jan–Dec 2008 Jan–Dec 2007 Jan–Dec 2006 (Percentage point)

Return on total assets 0.13 0.75 0.54 -0.62

Return on equity (fully diluted) 3.74 20.37 21.40 -16.63

Return on equity (fully diluted, less non-recurring gains/losses) 3.80 19.81 18.08 -16.01

Weighted return on average equity 4.32 33.41 24.45 -29.09

Weighted return on average equity (less non-recurring gains/losses) 4.39 32.49 20.66 -28.10

Cost to income ratio 35.99 38.93 41.41 -2.94

Credit cost 2.84 0.95 1.16 +1.89

Net interest spread 2.86 2.99 2.85 -0.13

Net interest margin 3.02 3.10 2.94 -0.08

Weighted return of pre-provision operating profit on average equity 57.29 72.83 69.75 -15.54

Notes: Credit cost = credit provision / average loan balance (including discount) of the period

Net interest spread = interest-earning asset yield – interest-bearing liability cost

Net interest margin = net interest income / average interest-earning asset balance

Weighted return of pre-provision operating profit on average equity = pre-provision operating profit / weighted average equity of the period

3 Scale items

Changes of the end of the reported 31 December 31 December 31 December year comparedIn RMB’000 2008 2007 2006 with last year (%)

Total assets 474,440,173 352,539,361 260,760,692 34.58

Including: financial assets designated at fair value and changes of which are booked as gains/losses in the period 332,192 1,769,441 450,121 -81.23

Held-to-Maturity investment 15,584,755 15,911,486 17,548,193 -2.05

Loans and receivables 363,900,753 270,791,277 193,642,453 34.38

Available-for-sale financial assets investments 48,799,716 17,850,892 18,052,342 173.37

Others 45,822,757 46,216,265 31,067,583 -0.85

Total liabilities 458,039,383 339,533,298 254,163,652 34.90

Including: financial liabilities designated at fair value and changes of which are booked as gains/losses in the period 98,018 1,501,830 511,866 -93.47

Inter-bank lending 7,380,000 2,300,000 – 220.87

Deposits 360,514,036 281,276,981 232,206,328 28.17

Others 90,047,329 54,454,487 21,445,458 65.36

Shareholders’ total equity 16,400,790 13,006,063 6,597,040 26.10

Net equity per share attributed to shareholders of listed company (Yuan) 5.28 5.67 3.39 -6.88

Total deposits 360,514,036 281,276,981 232,206,328 28.17

Including: Corporate deposits 302,309,165 240,370,951 197,387,598 25.77

Retail deposits 58,204,871 40,906,030 34,818,730 42.29

Total loans 283,741,366 221,035,529 182,181,947 28.37

Including: Corporate loans 209,835,181 157,492,816 143,271,049 33.23

General loans 167,617,360 149,712,815 126,797,390 11.96

Discount 42,217,821 7,780,001 16,473,659 442.65

Retail loans 73,906,185 63,542,713 38,910,898 16.31

Loan impairment provision (2,026,679 ) (6,023,964 ) (6,937,141 ) -66.36

Net loans and advances 281,714,687 215,011,565 175,244,806 31.02

26 Key Business Data Highlights

4 Assets quality items

Changes of the end of the reported year 31 December 31 December 31 December compared with theIn RMB’000 2008 2007 2006 end of last year (%)

Normal 278,119,642 206,550,728 161,850,678 34.65

Special Mention 3,694,118 2,009,464 5,766,296 83.84

NPL 1,927,606 12,475,337 14,564,973 -84.55

Including: Substandard 1,927,606 7,369,919 6,896,367 -73.84

Doubtful – 4,505,610 6,037,257 -100.00

Loss – 599,808 1,631,349 -100.00

Loans loss provision 2,026,679 6,023,964 6,937,141 -66.36

NPL ratio 0.68% 5.64% 7.99% -4.96 percentage point

Provision coverage ratio 105.14% 48.28% 47.63% +56.86 percentage point

Provision adequacy ratio 364.65% 127.20% 106.90% +237.45 percentage point

Note: Provision adequacy ratio = actual provision / accruing provision

Including: accruing provision = Special mention*2%+substandard*25%+doubtful*50%+loss*100% (in line with Banking Loan Loss Provisioning Guidelines)

5 Capital adequacy items

Changes of the end of the reported year 31 December 31 December 31 December compared with theIn RMB’000 2008 2007 2006 end of last year (%)

Net capital 23,959,430 12,691,876 6,419,812 88.78

Including: net core capital 14,710,153 12,692,620 6,379,384 15.90

supplementary capital 9,577,523 112,317 45,169 8,427.22

Net risk-weighted assets 279,112,744 220,056,277 173,222,058 26.84

Capital adequacy ratio 8.58% 5.77% 3.71% +2.81 percentage point

Core capital adequacy ratio 5.27% 5.77% 3.68% -0.50 percentage point

According to CBRC’s CAR computation formula, computable value of long-term sub debts is limited within 50% of net core capital. Up to 31 December 2008, the Bank’s net core capital was 14.7 billion Yuan, and issuance amount of long-term sub debts was 8 billion Yuan, thus 0.65 billion Yuan sub debts were not counted into supplementary capital, which can work as supplementary capital after net core capital is further improved.


6 Items designated at fair value

Gains/losses on fair value Fair value Impairment Opening variation during changes counted provision during EndingIn RMB’000 balance the period as equity the period balance

Financial assets 19,620,333 -75 1,276,798 -38,210 49,131,908

Financial assets designated at fair value and changes of which are booked as gains/losses in the period 1,769,441 -75 – – 332,192

Including: derivative financial assets 291,816 -6,045 – – 290,751

Available-for-sale financial assets 17,850,892 – 1,276,798 -38,210 48,799,716

Financial liabilities 1,501,830 209,771 – – 98,018

Financial liabilities designated at fair value and changes of which are booked as gains/losses in the period 1,501,830 209,771 – – 98,018

Including: derivative financial liabilities 255,173 207,031 – – 58,598

Investment properties 441,098 -15,087 3,816 – 411,690

Total 21,563,261 194,609 1,280,614 -38,210 49,641,616

7 Changes in shareholders’ equity in the reported period

In RMB’000 Opening balance Increase Decrease Ending balance

Share capital 2,293,407 812,027 – 3,105,434

Capital reserve 5,213,654 2,765,328 – 7,978,982

Surplus reserve 719,481 61,404 – 780,885

General provision 2,715,704 867,592 – 3,583,296

Undistributed profits 2,063,817 614,035 1,725,659 952,193

Including: dividend recommended for distribution – – – –

Total shareholders’ equity 13,006,063 5,120,386 1,725,659 16,400,790

28

A Added Financial Indices for Three Years up to the End of Reported Period

INDEX TYPE Statistics of the bank

31 December 2008 31 December 2007 31 December 2006

Index Monthly Monthly Monthly in % standard Year-end average Year-end average Year-end average

Liquidity ratio RMB ≥25 41.50 41.90 39.33 41.85 45.99 34.18

Foreign Currency ≥25 49.68 60.75 42.21 57.24 305.70 139.03

Loan to deposit ratio (including discount) RMB 78.85 78.60 78.68

Loan to deposit ratio (excluding discount) RMB 67.01 70.20 75.78 73.26 71.36 67.78

NPL ratio ≤8 0.68 3.70 5.64 6.68 7.98 8.63

Ratio of loans to top 1 single client ≤10 4.22 3.49 5.41 7.84 9.17 11.48

Ratio of loans to top 10 clients 26.90 26.58 42.74 63.35 71.38 –

Accumulated foreign exchange risk position ratio ≤20 0.45 1.67 0.77

Migration ratio of normal loans 2.78 1.46 3.15

Migration ratio of special mention loans 1.90 62.22 29.29

Migration ratio of substandard loans – 13.28 17.50

Migration ratio of doubtful loans – 10.59 9.36

Inter-bank borrowing to deposit ratio 2.13 1.16 0.85 0.50 – –

Inter-bank lending to deposit ratio 1.13 1.30 0.33 0.69 0.34 1.07

Cost to income ratio (excluding business tax) N/A 35.99 38.93 41.41

Key Business Data Highlights


B Branches of the Bank

Information about the branches of the Bank (excluding the head office) was as follows at the end of reported period:

NAME OF BRANCH Outlets Asset size Staff Address number (RMB million) number

Head office branch 1/F, SDB Tower, 5047 Shennan Road E., Luohu District, Shenzhen 1 10,731 116

Shenzhen Branch No. 7008, Shennan Road, Futian District, Shenzhen 87 60,922 1,882

Guangzhou Branch 66 Huacheng Avenue, New Pearl River City, Tianhe District, Guangzhou 20 48,819 800

Haikou Branch 22 Jinlong Road, Haikou 5 7,198 197

Zhuhai Branch 8 Yinhua Road, Xiangzhou District, Zhuhai 7 4,855 188

Foshan Branch 148 Lianhua Road, Chancheng District, Foshan 10 11,215 386

Shanghai Branch 1351 Pudong Road S., Pudong, Shanghai 27 70,170 981

Hangzhou Branch 36 Qingchun Road, Hangzhou 17 32,190 611

Ningbo Branch 138 Jiangdong Road N., Ningbo 7 15,604 392

Wenzhou Branch Guoxin Building, Renmin Road E., Wenzhou 5 10,469 269

Beijing Branch 158 Fuxingmen Nei Dajie, Beijing 23 59,544 792

Dalian Branch 130 Youhao Road, Zhongshan District, Dalian 9 10,026 303

Chongqing Branch 1 Xuetianwan Main Street, Yuzhong District, Chongqing 10 6,652 285

Nanjing Branch 28 Zhongshan Road N., Nanjing 12 24,997 456

Tianjin Branch 10 Youyi Road, Hexi District, Tianjin 12 16,581 399

Jinan Branch 138 Lishan Road, Jinan 7 14,875 251

Qingdao Branch 6 Hong Kong Road C., Qingdao 7 13,362 274

Chengdu Branch 206 Shuncheng Street, Chengdu 8 10,183 281

Kunming Branch 450 Qingnian Road, Kunming City 7 5,739 173

Special Assets Management Center No. 1054, BaoAn South Road 1 3,541 60

Total 282 437,673 9,096

C Loan Quality during the Reported Period

1 5-tier loan classification at the end of reported period

5-TIER GRADING 31 December 2008 31 December 2007

In RMB’000 Loan balance % Loan balance % ±%

Normal 278,119,642 98.02 206,550,728 93.45 34.65

Special mention 3,694,118 1.30 2,009,464 0.91 83.84

Substandard 1,927,606 0.68 7,369,919 3.33 -73.84

Doubtful – – 4,505,610 2.04 -100.00

Loss – – 599,808 0.27 -100.00

Total 283,741,366 100.00 221,035,529 100.00 28.37

As of 31 December 2008, NPL balance of the Bank was 1.9 billion Yuan, a decline of 10.5 billion Yuan or 85% compared with the beginning of the year. NPL ratio, dropped by 4.96 percentage points from the beginning of the year to 0.68%. 87% of the NPLs were initially made before 2005. NPLs initially issued after (including) 1 January 2005 were 0.25 billion Yuan, as 13 % of the total NPLs. In 2008, the bank recovered 1.66 billion Yuan non-performing assets in total, including 71% collected in cash, 27% from repossessed assets, and 2% from restructured loans.

In line with regulatory requirements for small and medium sized banks in the 4th quarter to deal with current domestic and overseas financial and economic situations, the Bank made a special massive provision and write-offs at the end of 2008, and wrote off 9.4 billion Yuan NPLs, including all loss and doubtful NPLs up to 31 December 2008 and big portion of subordinated loans. Most of the written-off loans were historic legacy NPLs made before 2005.


2 Restructured and overdue loans in the reported period

In RMB’000 Opening balance Ending balance Ending percentage (%)

Restructured loans 2,944,229 1,805,816 0.64

Overdue loans 277,081 789,145 0.28

Non-accruing loans 12,033,454 1,873,462 0.66

Note: Overdue loans refer to uncollected loans with principal overdue no more than 90 days; Non-accruing loans refer to uncollected loans with principal or interest overdue more than 90 days.

As of the end of the reported period, restructured loan balance was 1.8 billion Yuan, decreased by 39%, or 1.1 billion Yuan compared with the beginning of the year. Main reasons are: a) in line with regulatory requirements for small and medium sized banks in the 4th quarter to deal with current domestic and overseas financial and economic situations, the Bank made a special massive provision and write-offs at the end of the reported period, and wrote off some of the NPL restructured loans; b) the Bank reinforced management of restructured loans and strengthened collection and disposal of NPL restructured loans.

As of the end of the reported period, over due loan balance increased by 500 million Yuan from the beginning of the year to 790 million Yuan. It is primarily caused by the impact of domestic and overseas economic situations and business difficulties of some private SMEs.

As of the end of the reported period, non-accruing loan balance was 1,870 million Yuan, decreased by 10,200 million Yuan from the beginning of the year. The primary reasons are: a) the Bank made a special massive provision and write-offs at the end of the reported period; b) the Bank strengthened management of lending term, tracked repayment of matured loans and monitored assets quality, and took measures to urge clients and guarantee timely repayments.

3 Loan impairment charges and write-offs in the reported periodOn the basis of a number of factors including borrower’s capacity, principal and interest repayment status, values of collaterals and pledges, guarantor’s capacity, and loan management status, the Bank makes appropriate loan impairment provision from the income statement individually or collectively according to the risk level and recoverability and the estimated present value of future cash flow.

In RMB’000 Amount

Opening balance 6,023,964

Add: Reserves in the current year 6,972,839

Less: Reduced interest from impaired loan (384,238 )

Net provisions in the current year 6,588,601

Add: Recoveries in the current year 29,944

Add: Exchange difference (9,118 )

Less: Write-off in the current year (10,606,712 )

Ending balance 2,026,679

The Bank report the fully provisioned NPLs satisfying write-off conditions to board of directors for approval and then write off the NPLs from account. The write-off loans are off balance sheet, which are left for the Assets Collection Department for follow-up collection and disposal. For collected write-off loans, principal is subtracted prior to unpaid interests and expenses. The collected principal part will increase the loans impairment charges of the Bank, and the recovered interest and expenses will add interest income and offset expenses of the period.

D Composition of and Changes in Operating Income in the Reported Period

2008 2007

In RMB’000 Amount % Amount % ±%

Net interest income 12,597,888 86.80 9,605,849 88.88 31.15

Including: Net interest income on credit business 10,842,175 74.71 9,174,519 84.89 18.18

Net interest income on amounts due from banks and placements -307,001 -2.12 -869,775 -8.05 64.70

Net interest income on bond business 2,062,714 14.21 1,301,105 12.04 58.54

Net income on service fee and commission 851,388 5.87 520,713 4.82 63.50

Net other operating income 1,063,843 7.33 680,940 6.30 56.23

Total operating income 14,513,119 100.00 10,807,502 100.00 34.29

Note: The net income on amounts due from banks and placements includes the interest paid for inter-bank discount, which is counted as cost on basic bank but not inter bank business, in spite of the fact it is interest paid for inter-bank market. Income on amounts due from banks and placements after deducting the cost on inter-bank discount was 1,681 million Yuan in 2008, a positive increase of 80.44% compared with the 932 million Yuan in 2007.


Total operating income in 2008 increased by 34% compared with last year, among which net interest income increased by 31%, attributable to volume growth and interest spread management. Net fee income continued to maintain high growth rate of 64%, proportion of net fee income to operating income also increased by 1.05 percentage point over 2007, which is the result of customer base expansion and fee business exploration. Net other operating income grew by 56% over last year, on the back of substantial increase of bond investment income and foreign exchange gain compared with last year.

E Top 10 Industrial and Geographical Segments of Lendings

1 By industry

INDUSTRY 31 December 2008 31 December 2007

In RMB’000 Balance % NPL Ratio (%) Balance % NPL Ratio (%)

Agriculture and fish culture 598,700 0.21 – 506,927 0.23 8.90

Excavation (Heavy industry) 2,990,127 1.05 – 2,812,800 1.27 1.05

Manufacturing (Light industry) 69,633,354 24.54 1.10 55,249,167 25.00 5.56

Energy 12,437,428 4.38 – 7,832,400 3.54 0.50

Transportation, storage and communication 13,138,335 4.63 0.47 12,497,393 5.65 7.81

Commerce 44,889,464 15.82 0.29 26,281,499 11.89 13.45

Real estate 15,882,930 5.60 5.41 14,411,307 6.52 12.23

Social service, technology, culture and sanitation 38,325,644 13.51 0.07 29,969,369 13.56 7.61

Construction 10,770,355 3.80 – 7,340,077 3.32 1.04

Others (mainly personal loans) 75,075,029 26.46 0.11 64,134,590 29.02 1.04

Total loans and advances 283,741,366 100.00 0.68 221,035,529 100.00 5.64

In light of loans quality by industry, as of 31 December 2008, NPLs of the bank were mainly concentrated on real estate and manufacturing industries, and NPL ratios of other industries were lower than 1%. Real estate loans were mainly concentrated on Southern and Northern regions. NPLs were mainly concentrated on Southern region, real estate NPLs of this region were primarily legacy development NPLs made before 2005.

2 By geographical region

In RMB’000 Balance %

Southern China 87,983,053 31.01

Eastern China 100,457,432 35.40

Northern China 75,600,230 26.65

Southwest 19,700,651 6.94

Total 283,741,366 100.00

3 By guarantee type

In RMB’000 Balance %

Unsecured loans 47,041,232 16.58

Guaranteed loans 59,769,814 21.06

Collateralized loans 111,667,469 39.36

Pledged loans 23,045,030 8.12

Discount 42,217,821 14.88

Total 283,741,366 100.00

4 Loan balance and percentage in total loans of top 10 loan borrowersAs of the end of the reported period, the balance of the Bank’s top 10 loans was 6.45 billion Yuan, accounting for 2.3% of the year-end loan balance. The main borrowers are as follows: China Guangdong Nuclear Power Group, China Metallurgical Group Corp., Shenzhen Fuhongjin Precision Industry Co., Ltd, Shenzhen CITIC Plaza Investment Co., Ltd, Nanjing Subway Co., Ltd, Sinohydro Corporation, Jiangsu Expressway Operation & Management Center, CITIC Guoan Group, Chongqing City Construction Investment Corporation, Beijing State-owned Assets Management Co., Ltd.


F Repossessed Assets at the End of the Reported Period

In RMB’000 Balance

Land, premises and real estate 915,282

Others 22,021

Subtotal 937,303

Balance of repossessed assets impairment provisions 319,480

Net value of repossessed assets 617,823

G Average Annual Loan Balance and Interest Rates Classified on a Monthly Basis

In RMB’000 Average balance Average interest rate (%)

Short-term loans (home & foreign currencies) 129,344,503 7.20

Medium and long-term loans (home & foreign currencies) 87,625,752 6.97

Total 216,970,255 7.10

Note: The above short-term loans and medium and long-term loans exclude the trust receipt loans, discount, overdue loans and non-accruing loans.

H Information on Holdings of Financial Bonds at the End of Reported Period

At the end of the reported period, the face values of holdings of treasury bills and financial bonds (including PBOC bills, policy bank debts, various ordinary financial debts, and financial subordinated debts) of the Bank were 78.2 billion Yuan. The bonds of substantial amount are stated as below:

In RMB’000 Face value Nominal annual interest rate (%) Maturity date Provision

01 Book-entry treasury bond 1,068,210 4.66 – 6.80 2011/03 – 2011/08 –



02 Policy-based financial bond 3,206,000 2.60 – 4.88 2009/07 – 2022/05 –





PBOC bills 34,515,000 0.00 – 4.56 2009/01 – 2011/06 –

I Information on Holdings of Financial Derivative Instruments at the End of the Reported Period

Agreement/Nominal amount Fair value In RMB’000 Asset Liability

Foreign exchange derivative instruments 18,974,579 182,345 27,016

Interest rate derivative instruments 1,270,000 86,632 6,733

Equity derivative instruments 2,067,156 21,312 24,387

Other derivative instruments 426,279 462 462

J Changes of Interests Receivable and Bad Debt Reserves in the Reported Period

1 Changes of interests receivable

INTERESTS RECEIVABLEIn RMB’000 Amount

Opening balance 1,126,372

Increased amount of the reporting period 19,187,716

Collected amount of the reporting period 18,708,452

Ending balance 1,605,636


2 Provisions for interests receivable of bad debts

In RMB’000 Amount Provision

Interests receivable 1,605,636 –

3 Analysis of changes for interests receivable and bad debtsAt the end of the reported period, interest receivable rose by 43%, or 480 million Yuan compared with the end of last year, following interest-earning assets growth. Interest receivable arising from interest-earning assets such as loans would offset interest income of the period and be put off balance sheet while interest overdue for 90 days, with no provision set against it.

K Average Annual Balances and Interest Rates of Principal Types of Deposits in the Reported Period

Average annualIn RMB’000 Average annual balance deposit interest rate (%)

Corporate savings deposits (home & foreign currencies) 90,864,547 0.90

Corporate fixed deposits (home & foreign currencies) 92,775,101 3.89

Household savings deposits (home & foreign currencies) 17,278,407 0.63

Household fixed deposits (home & foreign currencies) 28,486,218 3.43

Guarantee deposits (home & foreign currencies) 100,902,361 2.99

Total 330,306,634 2.59

L Year-end Balance for Off-balance Sheet Business that may have Significant Impact on the Bank’s Financial Status and Operating Results

In RMB’000 Amount

Banker’s acceptance bills 164,888,094

Issuance of L/C 1,826,290

Issuance of letters of guarantee 1,884,883

Unused credit line 15,343,716

Leasehold promise 1,935,956

Loans guarantee contract 177,698

Capital expenditure commitment 144,000

M The Implementation and Gains/Loss of Entrusted Wealth Management, Assets Securitization, and Various Brokerage and, Custody Business in the Reported Period

1 Development of wealth management businessIn 2008, the Bank seized market trend and developed a series of wealth management products such as “Golden Bills”, “VIP Series”, “Excellence Plan”, and “IPO Subscription” to meet market requirements. Overall sales volume of retail RMB structural and trust products reached 13,300 million Yuan, and that of commercial RMB products 2,000 million Yuan, foreign currency products 1 million euros, and inter-bank RMB products 300 million Yuan.

2 Development of brokerage businessSales volume of insurance reached 160 million Yuan, an increase of 121% on a year-on-year basis. Sales of open-ended fund amounted to 3,200 million Yuan and realized fee income of 14 million Yuan.

3 Development of custody businessCBRC – Shenzhen granted qualification for trust & custody business to the Bank on 4 January 2008. Approved by CSRC and CBRC, the Bank got qualified for custody of securities investment fund on 6 August 2008. During the year the Bank entered into cooperation agreements with several fund houses for securities investment fund custody.

The Bank established a custody service brand of “Private Placement Housekeeper” in 2008, which explicitly set out the value-added service standard of custodian for the first time. There were 35 custody fund plans implemented this year, with accumulative custody amount of 4,527.58 million Yuan and custody revenue of 2.32 million Yuan.

In 2009, the Bank will actively explore fund houses, securities companies and trust clients, aiming at the custody service market of “private placement fund” and researching for feasibility of pension custody business. The Bank will improve service and efficiency through system optimization and process management, expand business capacity, and fully engage in custody market development.


N Various Risks Facing Commercial Banks and Risk Management Status

1 Credit riskCredit risk of the Bank mainly arises from loans and off-balance sheet credit business.

The Bank established Credit Portfolio Management Committee to review and determine the strategies for credit risk management, preference of credit risk and all sorts of credit risk management policies and standards. In 2008, pursuant to changes of external conditions, the bank strengthened study of economic tendencies and state macro policies, formulated and adjusted the guidelines of credit policy for corporate and retail business and for specific industries, emphasized development of SMEs, trade finance and retail credit, and strictly executed the state policy against “high energy consuming, high pollution” industries. Through establishment of strategic client classification and management system and the client entering and withdrawing system, the Bank realized continuous development of credit business.

The bank established an independent vertical system for credit risk management by implementing credit officer system, and appointed Chief Credit Officer in the head office. Credit officers are assigned to each line and branch, and directly report to Chief Credit Risk Officer. The Chief Credit Officer is in charge of the performance evaluation of each credit officer, and implementing standard credit authorization, credit approval, and procedure and standards for post-lending management. In 2008, the bank carried out the “Excellence Project”, optimized head office organization and improved efficiency of credit management and service of head office.

The Bank established a set of standard procedures for credit approval and management including credit survey, credit investigation/approval, credit lending, post-lending monitoring and management of collection; conducted deep and all-sided credit survey during the operating process strictly in accordance with “KYC” (Know Your Customer) principle, enhanced strict investigation on rationality of loans usage and authenticity of trade background, emphasized on analysis of the first repayment source of credit applicants, so as to strictly controlled credit risk. In 2008, the Bank increased daily monitoring work on credit business, carried out special investigations on key areas and weak segments, and discovered and disposed early warnings for credit risk in a timely manner; formulated special implementation measures for risk monitoring and early-warning on warehouse pledge business and reinforced the monitoring and early-warning work; built emergency treatments to credit business and reporting mechanism, and communicated and researched effective counter-measures timely; intervened in advance to mitigate risk in case a major early-warning signal appearing towards a customer. In 2008, the Bank’s new credit risk management system was extended to operate across the bank. This system covers the overall credit procedure including the steps of investigation, approval, lending and post-loan management.

Based on the CBRC 5-tier classifications, the Bank categorize credit assets risk into ten tiers, including tier-1 normal, tier-2 normal, tier-3 normal, tier-4 normal, tier-5 normal, tier-1 special mention, tier-2 special mention, subordinated, doubtful, and loss, and beside that a “write-off” tier is set aside. The Bank takes applies different management policies to different loan classifications, meanwhile strictly abides by the regulator’s provision on proportion of lending to a single group client and a single legal person client, and effectively controls concentration risk by strengthening capital ability and participating in consortium loan.

In 2008, while strengthening credit risk management, the Bank also enhanced disposal of NPLs and dealt with NPLs through various channels. NPLs kept stable decline and credit assets quality was improved remarkably. In 2008 4Q, the bank made a special massive provision and write-offs in accordance with regulatory requirements, effectively disposed legacy NPLs initially issued before 2005.

2 Market riskThe principal market risk facing the Bank comes from position of interest rate and exchange rate products. Either trading business or non-trading business of the Bank could incur market risk. The target of market risk management is to avoid excessive loss of revenue or equity caused by it, meanwhile to offset the impact of volatility risk of financial instruments on the Bank. The Bank set up the Asset/Liability Committee to formulate policies of market risk management and to determine the targets of both market risk management and position limit on market risk. The committee is also responsible for dynamically controlling business volume and structure, interest rate and liquidity. The specialized department under the Asset/Liability Management Committee undertakes regular responsibility of market risk monitoring, including determining a reasonable level of market risk exposure, monitoring daily operation of treasury business, giving advice to adjust maturity structure and interest rate structure of assets and liabilities.

Interest rate risk of the bank comes from the mismatch of maturity date or contract re-pricing date between interest-earning assets and interest-bearing liabilities. Interest-earning assets and interest-bearing liabilities of the Bank are primarily priced by RMB. PBOC has provisions on the lower rate limit for basic RMB loans and upper rate limit for basic RMB deposits. The bank manages interest rate risk primarily by adjusting assets/liability structure, regularly monitoring sensitive gaps of interest rate, and adopting risk exposure analysis to statically measure characteristics of assets/liability re-pricing. The Bank regularly convenes Assets/Liability Management Committee to predict future interest rate tendency, adjust assets/liability structure and manage interest rate risk exposure.

Exchange rate risk of the Bank mainly includes risk of loss due to negative exchange rate changes from foreign exchange exposure caused by currency structure imbalance between foreign currency assets and liabilities as well as foreign exchange exposure caused by foreign exchange derivatives trading. Exchange rate risk facing the Bank primarily derives from loans, advances, investment and deposits held by the Bank which are not priced by RMB. The Bank set limits for each currency position, daily monitor scale of currency position and controls the position within a settled limit by hedging strategy.


3 Liquidity riskLiquidity risk refers to the shortage of capital for repayment while liabilities maturing. Mismatched amount or maturity of assets and liabilities could incur the risk. In order to monitor the risk effectively, the bank emphasized on diversifying the capital sources, improving proportion of core deposits and monitoring capital sources, use of capital, as well as loan and deposit scale on a daily basis. The Bank maintained a scale of bonds with high liquidity, which can be converted into cash in time if needed. Besides, the Bank held a large quantity of high-quality HTM bonds available for Repo, which could be used as additional financing channel. Also, the bank has additional cash placed with other banks. The Bank regularly monitors and manages its cash position, made regular stress test on liquidity, and provided corresponding solutions to test results under different scenarios.

4 Operational riskOperational risk is the risk resulting from defective internal procedure, operator error or fraud, and external events. In 2008, the Bank kept the concept of controlling operational risk from six dimensions of "people, regulation procedure, system, inspection and supervision, report and database" to build the risk management system for accounting and settlement operations across the Bank; fulfilled the requirement of properly managing operational risk with regulatory authorities in a systematic manner; strengthened management and training for operational risk prevention and control staff; improved operations system; streamlined and reconstructed business procedures; optimized system functions; adopted new methods monitoring operational risk; reevaluated operational risk; analyzed and monitored indices changes of key operational risks on a daily basis; timely published risk reminders; carried out investigation on operational risk; enhanced supervision; combined risk monitoring, investigation and supervision in an effective way; improved comprehensive skill for preventing operational risk. On the other hand, incorporated suggestions of external consulting company on operational risk control of business procedures and the risk prevention and control suggestions from the “woodpecker” campaign, the Bank earnestly assessed and analyzed loopholes in operational risk prevention and control, formulated specified action plan and actively make rectification, so as to improve prevention and control ability of operational risk .

5 Other risksOther risks facing the Bank include compliance risk and legal risk. The Bank set up complete compliance management system at the Head Office and branches, responsible for such responsibilities as recognition, monitoring, and report of compliance risk, as well as compliance consultancy and education. The department regularly report to the Audit and Related Party Transaction Control Committee under the board, and receive guidance from the committee. In 2008, the Bank made a lot of work in improvement of compliance management structure, promotion of independence and leadership of compliance offices at branches, explanation and advocacy of policies and regulations, compliance risk recognition and control for new product and business, system streamlining, management of related party transaction, anti-money laundering, and cultivation of compliance culture, and as a result effectively managed the compliance risk. In respect of legal risk control, the bank focused on the step of legal approval in business procedures, standardized contract samples and articles, fully involved in the decision-making processes such as system formulation and development of new products. Meanwhile, the Bank engaged a well-known legal firm in China as the external legal consultant, in order to provide professional opinion about major legal affairs. Thus the legal risks of various businesses were effectively controlled.

O Integrity, Rationality and Effectiveness of Internal Control System

1 Self-appraisal on internal control by BODIn 2008, the management team of the Bank effectively operated under the guidance of board with its special committees, further improved internal control, and paid constant attention to internal control system building while developing business. The internal control system covers each business procedure and operational step, and control and management of current managing departments as well as branches and sub-branches. Although there are some areas needed to be further improved, the management team is highly aware of these issues and has scheduled improvement measures. On balance, internal control mechanism of the Bank is sufficient, solid and effective, internal control system is complete, and there subsists no material internal control deficiencies. (Please refer to the Internal Control Self-Appraisal Report of Shenzhen Development Bank disclosed on the same day for specifics.)

2 BOS’s comments on self-appraisal of internal controlDuring the report period, the Bank adhered to the basic principles of internal control in accordance with relevant provisions of CSRC and SSE, set up complete and rational internal control system based on the Bank’s actual status, and carried out good execution in business activities, which was generally consistent with relevant requirements of CSRC and SSE. The 2008 self-appraisal of internal control of the Bank accurately and completely reflects the current status of internal control and main aspects to be improved. The rectification plan is practical and satisfies the long-term development requirement of internal control.

3 Independent directors’ comments on self-appraisal of internal controlIn accordance with relevant provisions of the Commercial Banking Law of P.R.C, Guidance for Internal Control of Commercial Banks and Guidance for Internal Control of Listed Companies of Shenzhen Stock Exchange, SDB established and improved a series of systems, procedures and methods to prevent and control risks to fulfill risks prevention and cautious operation. An all-around, cautious, effective and independent internal control system established by the Bank play an effective role in maintaining sustainable business development and preventing financial risks. We do not detect any material internal control deficiencies in the Bank. The Internal Control Self-Appraisal Report of Shenzhen Development Bank is in conformity with the status quo of the Bank.


P Social Responsibility Report

In pursuit of economic benefit and protection of shareholders’ interests, the Bank safeguards depositors and employees’ legitimate rights and interests, serves clients with integrity, and actively takes part in environmental protection and community development, in order to facilitate harmonious development between the Bank and the society. The Bank advocates the concept of “integrity, professionalism, service, and efficiency” and aims for higher goals of adaptability, innovation, team work and excellence.

a. Improved corporate governance structure, served all shareholders in an impartial manner, and protected all legitimate rights and interests of shareholders; made innovation of financial products, strictly performed risk disclosure obligation of products, and provided professional and efficient service to customers; cared about employees, safeguarded employees’ legitimate rights and interests, and paid attention to employees’ career development.

b. Took up responsibility of providing support to economic development and improvement of social welfare, supported economic and industrial development and participated in regional construction, by following China’s economic and strategic development while making sure risk control. Preferentially supported programs supporting economy and people’s livelihood, including manufacturing of advanced equipment, electricity, municipal public infrastructure, IT, and transportation, assisted growth of innovative enterprises and SMEs, backed the development of rural program and helped the development of underdeveloped areas.

c. In conformity with Anti-Money Laundry Law of P.R.C and relevant rules and regulations, established “risk-based” anti-money laundry system and performed all anti-money laundry obligations, combining anti-money, anti-terrorism finance with establishment and improvement of internal control system of modern commercial banks.

d. Incorporating green environmental protection concept into enterprise operation, promoted harmonious development of economy, society and environment. Introducing the concept of “equator principle” and carried out green credit, effectively allocated financial sources, reduced energy consumption and emission at the office, and set up an economical institution; supported “Exploring the South Pole” campaign, followed up on news report on 2007– 2008 China’s Action in International Polar Year, organized environmental protection activities to lead a new lifestyle by using “Recycle Tote Bag”, and released SDB Light Green Card based on the theme of environmental protection.

e. The company together with its employees is always grateful, and repays the society with sincerity, through the efforts of poverty alleviation, aid in teaching, as well as charity donation. Donated over 15 million Yuan to the Sichuan Wenchuan Earthquake area and built the Dujiangyan Yutang Primary School, provided financial service for construction of the quake-stroke regions and set up financing green channel for re-construction. Supported development of education, and continuously participated in Project Hope. Signed strategic cooperation agreements with Beijing University and Nankai University, and built internship base for students with Central University of Finance & Economics and South China University of Technology, in order to help students to exert their potentials and create bigger value for the society.

The Bank advocates the concept of “Develop together for the future”, and takes up responsibilities to all-around development of the country and society, natural environment, resource and other stakeholders. In 2007 and 2008, the Bank was awarded as “Enterprise of Outstanding Contribution in Social Responsibility in China” in succession, and in 2007, the Bank obtained the first “Shenzhen Charity Award – Charity Award for Enterprise”.


A Changes in Share Capital

1 Table of changes in shares

SHARES TYPE Before changes Changes(+, -) After changes Changes of shares Restricted held by shares Directors, released Supervisors, from Exercise of Rendered and SeniorUnit: share Quantity % restriction warrants shares Managemen Subtotal Quantity %

Restricted shares 536,586,596 23.4 -289,729,135 7,420 74,037,238 -74,088 -215,758,565 320,828,031 10.33

i Held by the state

ii Held by state legal person 4,626,234 0.2 -4,626,234 – – -4,626,234 – –

iii Held by other domestic bodies 183,857,057 8.02 -180,764,984 7,420 907,622 -74,088 -179,924,030 3,933,027 0.13

Including: Held by domestic non-state legal person 183,313,981 7.99 -180,348,320 – 889,699 – -179,458,621 3,855,360 0.12

Held by domestic natural person 543,076 0.03 -416,664 7,420 17,923 -74,088 -465,409 77,667 0.002

iv Held by foreign institutions 348,103,305 15.18 -104,337,917 – 73,129,616 – -31,208,301 316,895,004 10.2

Including: Held by foreign legal person 348,103,305 15.18 -104,337,917 – 73,129,616 – -31,208,301 316,895,004 10.2

Held by foreign natural person

Unrestricted shares 1,756,820,549 76.6 289,729,135 95,380,637 642,601,322 74,088 1,027,785,182 2,784,605,731 89.67

i Ordinary shares in RMB 1,756,820,549 76.6 289,729,135 95,380,637 642,601,322 74,088 1,027,785,182 2,784,605,731 89.67

ii Foreign holdings of shares listed in China

iii Foreign holdings of shares listed outside China

iv Others

Total 2,293,407,145 100 – 95,388,057 716,638,560 – 812,026,617 3,105,433,762 100

Notes: 1. The new BOD and BOS of SDB were elected in December 2007. Personnel change of directors and supervisors led to decrease of 74,088 shares held by Directors, Supervisors, and Senior Management (“held by domestic natural person”) in the reporting period and increase of 74,088 unrestricted shares accordingly.

2. In the reported period, 289,729,135 restricted shares got released and listed. As a result, restricted shares declined by 289,729,135 shares and unrestricted shares increased by 289,729,135 shares accordingly.

3. In the reported period, 95,388,057 “SDB SFC2” warrants were exercised, which resulted an increase of 95,388,057 shares.

4. In the reported period, the bank carried out 2008 Interim Profit Distribution Plan (based on the total shares of 2,388,795,202 on 30 June 2008, rendered 3 shares and RMB 0.335 Yuan in cash for every 10 shares), which resulted an increase of 716,638,560 shares.

2 Table of changes in restricted shares

SHAREHoldER Restricted Unrestricted Restricted Restricted shares held shares released shares added shares held RestrictedUnit: share at year start in the year in the year at year end reason Date of release

Newbridge Asia AIV III, L.P. 348,103,305 104,337,917 73,129,616 316,895,004 Share reform 20 June 2009: 135,639,292

20 June 2010: 181,255,712

Shenzhen Zhongdian Investment Co., Ltd. 62,246,616 62,246,616 – – Share reform

Haitong Securities Co., Ltd. 33,924,466 33,924,466 – – Share reform

Shenzhen Hongye Science and Technology Industries Co., Ltd. 25,137,627 25,137,627 – – Share reform

Labor Union Working Committee of Agriculture Bank of China Shenzhen Branch 15,567,288 15,567,288 – – Share reform

Labor Union of Construction Bank of China Shenzhen Branch 7,120,866 7,120,866 – – Share reform

Labor Union Working Committee of People’s Insurance Company of China Shenzhen Branch 6,601,486 6,601,486 – – Share reform

Shenzhen Children Welfare Foundation 4,513,626 4,513,626 – – Share reform

Changes in Share Capital and Shareholders

38 Changes in Share Capital and Shareholders

SHAREHoldER Restricted Unrestricted Restricted Restricted shares held shares released shares added shares held RestrictedUnit: share at year start in the year in the year at year end reason Date of release

Labor Union Working Committee of Shenzhen Zhongdian Investment Co., Ltd. 4,458,468 4,458,468 – – Share reform

China Orient Asset Management Corporation 2,909,088 2,909,088 – – Share reform

Shenzhen Science & Technology Development Foundation 2,647,265 – 794,180 3,441,445 Share reform Note

China Huaneng Financial Liability Limited 2,351,142 2,351,142 – – Share reform

Shenzhen Wanke Financial Consultation Co., Ltd. 2,016,000 2,016,000 – – Share reform

China North Industries Company 1,717,146 1,717,146 – – Share reform

Shenzhen Kaili Group Corporation 1,471,992 1,471,992 – – Share reform

Communications Bank of China Shenzhen Branch 1,363,632 1,363,632 – – Share reform

Shenzhen Zhongguang Haiqiao Trade and Development Co., Ltd. 1,345,019 1,345,019 – – Share reform

Shenzhen Fudian District Public Health Service Center 1,188,780 1,188,780 – – Share reform

Shenzhen Green Foundation 1,149,235 1,149,235 – – Share reform

Shenzhen Xincheng Investment Co., Ltd. 974,022 974,022 – – Share reform

Financial Liability Limited of Zhenhua Group 939,555 939,555 – – Share reform

Futian Investment Development Company of Shenzhen 895,104 895,104 – – Share reform

Shenzhen Juvenile Development Foundation 745,920 745,920 – – Share reform

Shekou Neighborhood Office of Nanshan District, Shenzhen 716,082 716,082 – – Share reform

Shaoguan Jingfeng Trade Co., Ltd. 691,339 691,339 – – Share reform

Construction Bank of China Shenzhen Branch 671,328 671,328 – – Share reform

Shenzhen Shekou Dongdi Fishery Co., Ltd. 579,684 579,684 – – Share reform

Shenzhen Hongtai Dresses Co., Ltd. 559,434 559,434 – – Share reform

Returned Overseas Chinese and Their Relative Welfare Foundation of Shenzhen 513,618 513,618 – – Share reform

Hongling North Road Office, Agriculture Bank of China Shenzhen Branch 418,869 418,869 – – Share reform

Wang Lili 416,664 416,664 – – Share reform

Shenzhen Passenger Service Co., Ltd. 290,904 290,904 – – Share reform

Shenzhen Youhe Investment Development Co., Ltd. 290,904 290,904 – – Share reform

Shekou Nanshui Industries Co., Ltd. of Shenzhen 290,904 290,904 – – Share reform

Nanshui Community Resident Committee of Shekou Neighborhood, Nanshan District, Shenzhen 290,904 290,904 – – Share reform

China Merchants Bank 269,199 269,199 – – Share reform

Shenzhen Xia Mei Lin Industrial Co., Ltd. 223,776 223,776 – – Share reform

Shenzhen SAST Group Company 203,628 – 61,088 264,716 Share reform Note

Shenzhen Jinlong Industrial Development Co., Ltd. 145,446 145,446 – – Share reform

Shenzhen Chemical Dyeing Industries Development Co., Ltd. 144,540 144,540 – – Share reform

Xin’an Shopping Mall of Shenzhen 71,325 – 21,398 92,723 Share reform Note

Shenzhen Sha Jing Tou Cooperation Company 58,179 58,179 – – Share reform

Shenzhen Shangsha Industries Co., Ltd. 54,545 54,545 – – Share reform

Shenzhen Cai Pu Du Shu Industries Cooperatives 42,954 42,954 – – Share reform

Shenzhen SDG Communications Development Company 31,464 – 9,439 40,903 Share reform Note

Shenzhen Kaihong Industrial Co., Ltd. 29,088 29,088 – – Share reform

Shenzhen Futian Industrial Development Co., Ltd. 28,638 28,638 – – Share reform

Shenzhen Financial Lease Co., Ltd. 21,276 21,276 – – Share reform

Shenzhen Tourism Association 8,487 – 2,546 11,033 Share reform Note

Shenzhen Futian District Agriculture Development Service Company Yannan Agriculture Machine Trading 3,492 – 1,048 4,540 Share reform Note


SHAREHoldER Restricted Unrestricted Restricted Restricted shares held shares released shares added shares held Restricted Date Unit: share at year start in the year in the year at year end reason of release

Shenzhen Duty-free Commodity Supply Company 3,492 3,492 – – Share reform

Shenzhen Beitou Industrial Co., Ltd. 1,197 1,197 – – Share reform

Shenzhen Nanshan Liyuan Industrial Co., Ltd. 1,176 1,176 – – Share reform

Hu Yuefei 99 – 95 194 Held by Directors, Supervisors, and Senior Management

Zhou Jianguo – – 7,117 7,117 Held by Directors, Supervisors, and Senior Management

Total 536,460,283 289,729,135 74,026,527 320,757,675

Notes: 1. Restricted shares held by Shenzhen Science & Technology Development Foundation, Shenzhen SAST Group Company, Xin’an Shopping Mall of Shenzhen, Shenzhen SDG Communications Development Company, Shenzhen Tourism Association and Shenzhen Futian District Agriculture Development Service Company Yannan Agriculture Machine Trading matured on 20 June 2008, but relevant shareholders have not entrusted any company to apply to handle the procedure of releasing shares restriction.

2. The above table does not include the 70,356 unreleased restricted shares of directors, supervisors and senior executives that have left the bank.

B Securities Issue and listing Information

1 Securities issued by the Bank in three years prior to the end of reported periodIn accordance with the Proposal for Warrants Issue of Shenzhen Development Bank Co., Ltd reviewed and approved by the 2007 1st Extraordinary Shareholders’ Meeting & Relevant Shareholders’ Meeting and approved by the China Securities Regulatory Commission, basing on the total share capital of 2,086,758,346 shares after the share reform, the Bank issued free Bermuda Warrants at the ratio of 10:1, i.e. 208,675,834 warrants with the duration of 6 months to all shareholders who are registered on the equity registration day for warrant issue (25 June 2007); and issued free Bermuda Warrants at the ratio of 10:0.5, i.e. 104,337,917 warrants with the duration of 12 months to all shareholders who are registered on the equity registration day for warrant issuance (25 June 2007), as a total of 313,013,751 warrants issued. Each warrant could prescribe one share newly issued by the Bank at the price of 19.00 Yuan during the duration of warrants. The warrants were listed on the Shenzhen Stock Exchange on 29 June 2007. The warrants with the duration of 6 months (29 June 2007 to 28 December 2007) are entitled as “SFC 1”; the warrants with the duration of 12 months (29 June 2007 to 27 June 2008) are entitled as “SFC 2”.

2 Changes in outstanding shares and shareholding structure of the BankIn the reported period, 95,388,057 shares of “SDB SFC2” were exercised in total, which took up 91.4% of the total issuance of warrants; 8,949,860 shares of “SDB SFC2” warrants in total were not exercised, and were written off. The shares of the company increased 95,388,057 shares in total after the exercise of “SDB SFC2” warrants.

In the reported period, the bank carried out 2008 Interim Profit Distribution Plan: based on the total shares of 2,388,795,202 on 30 June 2008, render 3 shares and RMB 0.335 Yuan in cash for every 10 shares, which resulted in an increase of 716,638,560 shares. Total share amount at the end of reported period is 3,105,433,762 shares.

Changes in the shareholding structure could be referred to the Table of Changes in Shares.

As of the end of the reported period, owners’ equity of the Bank rose by 3,395 million Yuan to 16,401 million Yuan, an increase of 26.10% compared with the year start.

3 The Bank has no internal staff share.

40 Changes in Share Capital and Shareholders

C Shareholder Background Information

1 Number of shareholders and the shareholding position

Number of shareholders: 295,216

Top 10 shareholders

SHAREHoldER Shares Nature of Shareholding Restricted collateralizedUnit: share shareholder (%) Shares held Changes shares held or frozen

Newbridge Asia AIV III, L.P. Foreign 16.76 520,414,439 137,500,804 316,895,004 –

PingAn Life Insurance Company of China, LTD – Tradition – Ordinary insurance products Others 4.86 150,963,528 150,963,528 – –

Shenzhen Zhongdian Investment Co., Ltd. Others 2.81 87,302,302 18,831,024 – –

China Pacific Life Insurance Co., Ltd. – Tradition – Ordinary insurance products Others 2.64 82,109,947 55,558,402 – –

CBC – Boshi Theme Industry Stock Securities Investment Fund Others 1.71 53,000,000 24,060,174 – –

SPDB – Guangfa Growth Stock Securities Investment Fund Others 1.51 47,000,000 16,398,478 – –

Haitong Securities Co., Ltd. Others 1.50 46,499,639 9,182,726 – –

ICBC – Jingshun Great Wall Bluechip Securities Investment Fund Others 1.09 33,971,870 7,839,662 – –

CAB – Changshengtongde Theme Growth Stock Securities Investment Fund Others 0.96 29,879,960 29,879,960 – –

Shenzhen Hongye Science and Technology Industries Co., Ltd. Others 0.88 27,300,000 -351,390 – –

Top 10 unrestricted shareholders

SHAREHoldERUnit: share Unrestricted shares held Share nature

Newbridge Asia AIV III, L.P. 203,519,435 RMB ordinary shares

PingAn Life Insurance Company of China, LTD – Tradition – Ordinary insurance products 150,963,528 RMB ordinary shares

Shenzhen Zhongdian Investment Co., Ltd. 87,302,302 RMB ordinary shares

China Pacific Life Insurance Co., Ltd. – Tradition – Ordinary insurance products 82,109,947 RMB ordinary shares

CBC – Boshi Theme Industry Stock Securities Investment Fund 53,000,000 RMB ordinary shares

SPDB – Guangfa Growth Stock Securities Investment Fund 47,000,000 RMB ordinary shares

Haitong Securities Co., Ltd. 46,499,639 RMB ordinary shares

ICBC – Jingshun Great Wall Bluechip Securities Investment Fund 33,971,870 RMB ordinary shares

CAB – Changshengtongde Theme Growth Stock Securities Investment Fund 29,879,960 RMB ordinary shares

Shenzhen Hongye Science and Technology Industries Co., Ltd. 27,300,000 RMB ordinary shares

The relationship of the shareholders above and the explanation of any concerted action The Bank is not aware of their relationship or concerted action.

2 Position of the top 10 restricted shareholders with the restricted condition

No. Amount of Number of restricted shares to be Restricted shareholders shares Listing date listed Restriction condition

1 Newbridge Asia AIV III, L.P. 316,895,004 20 June 2009 135,639,292 Promises no transferring or trading the holding

20 June 2010 181,255,712 of non-tradable shares within 12 months

since the day acquiring trading right. After the

expiration of above commitment term, the

previous non-tradable shares traded through

the stock exchange shall not be over 5%

of total shares in 12 months, not over 10%

in 24 months.


3 Brief Introduction of the Bank’s largest shareholder: Newbridge Asia AIV III, l.P.Newbridge Asia AIV III, L.P. was established on 22 June 2000 in Delaware, USA with a registered capital of US$724 million. It focused on strategic investment. All the investment and operational decisions of the company are made by unlimited liabilities partners Newbridge Asia GenPar AIV III, L.P. while the investment and operational decisions of Newbridge Asia GenPar AIV III, L.P. are made by unlimited liabilities partners Tarrant Advisors, Inc. and Blum G.A., LLC (of which Blum G.A., LLC is managed by Blum Investment Partners, Inc.) Tarrant Advisors, Inc and Blum G.A., LLC are controlled by David Bonderman, James G. Coulter and Richard C. Blum (all of whom are U.S. citizens, namely, these three individuals are the eventual controlling parties of the Bank.

david BondermanMr David Bonderman is the partner and co-founder of Texas Pacific Group. Before the establishment of Texas Pacific Group, Mr David Bonderman served as Chief Executive in RMBG Group (Now Keystone) in Fort Worth, Texas. Before joining RMBG in 1983, Mr David Bonderman was a partner with Arnold & Porter, a law firm in Washington D.C.

Mr David Bonderman has served and is serving as a director on the boards of many listed and unlisted global corporations as well as non-profit organizations.

James G. CoulterMr James G. Coulter is the partner and co-founder of Texas Pacific Group. Before Texas Pacific Group was incorporated, Mr James G. Coulter served as vice president of Keystone from 1986 to 1992. From 1986 to 1988, Mr James G. Coulter was closely associated with SPO Partners, an investment firm specializing in stock market investment and private placement financing. Mr James G. Coulter was also the financial analyst for Lehman Brothers Kuhn Loeb. He graduated with honors from Dartmouth College and acquired MBA degree from Stanford Graduate School of Business.

Mr James G. Coulter is now serving and has served as a director on the boards of many listed and unlisted global companies.

Richard C. BlumMr Richard C. Blum is chairman of Blum Capital Partners. He founded Blum Capital Partners in 1975. Mr Richard C. Blum started his career in Sutro in 1958 and eventually became the youngest partner in the company’s 130 years history. Mr Blum left Sutro in 1975 as a director, a major shareholder and a senior management leader to found Blum Capital Partners. Mr Richard C. Blum is now serving and has served as a director on the boards of many listed and unlisted global companies.

Mr Richard C. Blum has a bachelor’s degree and an MBA from University of California at Berkley. He had also studied at Vienna University.

The relationship between the Bank and the ultimate controlling parties of Newbridge Asia AIV III, L.P. and are charted as follows:

In control of

Tarrant Capital Advisors, Inc. Blum Investment Partners, Inc.

Blum G. A., LLCTarrant Advisors, Inc.

Newbridge Asia GenPar AIV III, L.P.

Newbridge Asia AIV III, L.P. Limited Partners

Limited Partners

The Bank

Management & control

James G. CoulterDavid Bonderman Richard C. Blum

Management & control

16.76% shares

Investment

Investment

50% equity 50% equity 100% equity

42

A Brief Introduction

NAme Shares Shares Changes in Year held at held at shares held Position Gender of birth Office Tenure year start year end and reason

Frank N. Newman Chairman of BOD, CEO M 1942 Director: 2007.12–Expiration – – –

CEO: 2005.5–

Chen Wuzhao Independent director M 1970 2007.12–Expiration – – –

Daniel A. Carroll Director M 1960 2007.12–Expiration – – –

Hu Yuefei Director Vice president M 1962 Director: 2007.12–Expiration 1092 1484 392 shares added

Vice President: 2006.5– from warrant exercise

and render of shares

Li Jinghe Director M 1955 2007.12–Expiration – – –

Liu Baorui Director, Vice president M 1957 Director: 2007.12–Expiration

Vice President: 2000.3– – – –

Ricky Lau (Liu Weiqi) Director M 1970 2007.12–Expiration – – –

Mary Ma Director F 1952 2007.12–Expiration – – –

Michael O’Hanlon Independent director M 1955 2007.12–Expiration – – –

Robert T. Barnum Independent director M 1945 2007.12–Expiration – – –

Shan Weijian Director M 1953 2007.12–Expiration – – –

Wang Kaiguo Director M 1958 2007.12–Expiration – – –

Xiao Suining Director, President M 1948 Director: 2007.12–Expiration

President: 2007.2– – – –

Andy Xie (Xie Guozhong) Independent director M 1960 2007.12–Expiration – – –

Kang Dian Chairman of BOS M 1948 2007.12–Expiration – – –

(External supervisor)

Guan Weili External supervisor M 1943 2007.12–Expiration – – –

Jiao Jisheng Employee supervisor M 1955 2007.12–Expiration – – –

Ma Limin Employee supervisor M 1964 2007.12–Expiration – – –

Xiao Geng Supervisor M 1963 2007.12–Expiration – – –

Ye Shuhong Employee supervisor F 1962 2007.12–Expiration – – –

Zhou Jianguo Supervisor M 1955 2007.12–Expiration 7300 9490 2190 shares added

from render of shares

Wang Bomin Chief financial officer M 1963 2005.5– – – –

Xu Jin Board secretary & M 1966 2005.5– – – –

GM of Legal Affairs Dept.

B Positions held by Directors and Supervisors in Shareholder’s Company

NAme Name of Company Position Tenure

Daniel A. Carroll Newbridge Asia AIV III, L.P. Managing Partner 2000–Now

Li Jinghe China Electronics Shenzhen Company Vice Chairman 10 January 2008–Now

General Manager 2000–Now

Secretary of of CCP Committee 2006–Now

Ricky Lau Newbridge Asia AIV III, L.P. Managing Director 2000–Now

Mary Ma Newbridge Asia AIV III, L.P. Partner September 2007–Now

Shan Weijian Newbridge Asia AIV III, L.P. Managing Partner 2000–Now

Wang Kaiguo Haitong Securities Co., Ltd. Chairman of BOD, CPC committee secretary 2001–Now

Information on Directors, Supervisors, Senior Management and Staff


C Positions held concurrently by Directors, Supervisors and Senior management in other Companies

NAme Name of Company Position

Chen Wuzhao Accounting Research Institute of Tsinghua University Associate Professor

Guodu Securities Liability Limited Independent director

Ieslab Electronics Co., Ltd. Independent director

CITIC 21CN Company Limited Independent director

Daniel A. Carroll TPG Capital, Limited Partner

Myer Department Stores, Ltd. Director

Li Jinghe China National Electronics Import & Export Zhuhai Co., Ltd. Chairman

China National Electronics Import & Export Zhuhai Technological Industry Co., Ltd. Chairman

Shenzhen Jinghua Electronics Co., Ltd. Chairman

Shenzhen Huaqiang Industrial Co., Ltd. Independent director

Liu Baorui China Unionpay Co., Ltd. Supervisor

Ricky Lau TPG Capital, Limited Manager director

Guanghui Automobile Services Co., Ltd. Director

Nissin Leasing (H.K.) Limited Director

Nissin China Holdings Co., Ltd. (Cayman) Director

Mary Ma TPG Capital, Limited Partner, Manager director

Lenovo Group Co., Ltd. Non-executive vice chairman

Standard Chartered Bank (HK) Ltd. Independent Non-executive Director

Nissin China Holdings Co., Ltd. (Cayman) Director

Nissin Leasing (H.K.) Limited Director

Michael O’Hanlon Marix Servicing, LLC Director

Robert T. Barnum Ameriquest Mortgage Director, Chairman of Audit Committee

Waterfield Bank Director, Risk Management Committee

Shan Weijian Bank of China (Hong Kong) Limited Independent director

Bank of China Hong Kong (Holdings) Co., Ltd. Independent director

Guanghui Auto Mobile Services Co., Ltd. Director

Nissin China Holdings, LLC Director

TPG Capital, Limited Partner

TCC International Holdings Limited Non-executive director

Taiwan Cement Company Independent director

Taishin Financial Holding Co., Ltd. Director

China HWA BANK Director

Edenvale Holdings Limited Director

Wang Kaiguo Shanghai Shimao Co., Ltd. Director

Andy Xie Rosetta Stone Advisors Ltd. Director

Kang Dian Shirui Investment Management Co., Ltd. Director

Silver Grant International Industries Limited Independent non-executive director

BYD Co., Ltd. Independent director

Shenzhen Fanxing Technology Co., Ltd. Director

Guan Weili Beijing Baihuiqing Investment Management Co., Ltd. Chairman of BOD

Zhongfa International Assets Apprasial Co., Ltd. Honorary Chairman

DongFeng Automobile Co., Ltd. Independent director

Blue Star New Chemical Material Co., Ltd. Independent director

China Textile Machinery Group Co., Ltd. Director

Tianjin Eteda Technology Co., Ltd. Director

Xiao Geng Brookings-Tsinghua Center for Public Policy Director

Brookings Institution Senior Fellow

Zhou Jianguo Shenzhen Investment Holding Corporation Vice Ggeneral Manager

Guotai Junan Securities Co., Ltd. Director

Nanfang Fund Management Co., Ltd. Director

Shenzhen Capital Group Co., Ltd. Director

China Nanshan Development (Group) Co., Ltd. Supervisor

Xu Jin China International Economic and Trade Arbitration Committee Arbitrator

Shenzhen Arbitration Committee Arbitrator

44 Information on Directors, Supervisors, Senior Management and Staff

D Work experience of Directors, Supervisors and Senior executives

NAme Position Work experience

Frank N. Newman Chairman of BOD & CEO 1963–1969 KPMG consultancy manager

1969–1973 Citigroup vice president

1973–1986 Wells Fargo vice president, senior vice president, executive vice president,

and chief financial officer

1986–1993 Bank of America vice chairman, chief financial officer and vice chairman of BOD

1993–1995 Under secretary for U.S. Finance, and Deputy Treasury Secretary of

the United States Department of the Treasury

1995–1999 Senior vice chairman, president, chairman and CEO of Bankers Trust Co.

2000–2005 Director, Korea First Bank

2004–2004 CEO and vice chairman of the Broad Center for Management of School Systems

2004.12–2005.6 Independent director of SDB

2005.5–2005.6 Acting chairman and CEO of SDB

2005.6–Now Chairman and CEO of SDB

Chen Wuzhao Independent director 1995–1998 Zhonghua Accounting Firm, Project Manager

1998–2000 School of Economics and Management, Tsinghua University,

Instructor of Accounting

2000–Now Accounting Research Institute of Tsinghua University, Associate Professor

2007.12–Now Independent Director of SDB

Daniel A. Carroll Director 1995–Now Partner of TPG Capital, Limited

2000–2005 Director of Korea First Bank

2007–2008 Director of BankThai Public Co., Ltd.

2004.12–Now Director of SDB

Hu Yuefei Director Vice President 1990–2006.3 SDB Nantou Sub-branch manager, SDB Guangzhou Branch manager,

assistant president

2006.3–Now Vice president of SDB


Li Jinghe Director 1982–1985 Zhuhai Office of China National Electronics Import & Export – South China

Branch Sales man

1985–1987 Zhuhai Office of China National Electronics Import & Export – South China

Branch Vice Director

1987–2000 VGM, GM of China National Electronics Import & Export – Zhuhai Company

2003–Now COB of China National Electronics Import & Export – Zhuhai Company

2000–2006 Director, GM, Vice secretary of CCP Committee of the China National Electronics

Import & Export – Shenzhen Company

2006–2008.1 Director,GM, Secretary of CCP Committee of the China National Electronics

Import & Export – Shenzhen Company

2008.1–Now Vice Chairman, GM, Secretary of CCP Committee of the China National

Electronics Import & Export – Shenzhen Company


Liu Baorui Director Vice President 1998.8–2003.3 Assistant president and member of CPC committee, SDB

2000.3–Now Vice president and vice secretary of CPC committee, SDB


Ricky Lau Director 1993–1998 Hopewell Holdings Limited Investment Manager

1998–Now TPG Capital Managing Director


Mary Ma Director 1978–1990 Bureau of International Cooperation, Chinese Academy of Science

1990–2007 Senior Vice President and CFO of Lenovo Group Limited

2007.9–Now Partner and managing director of TPG Capital




Michael O’Hanlon Independent director 1980–2005 Managing director of Lehman Brothers Inc.

2000–2002 Director of Aozora Bank Ltd.


2006–2008 Senior Managing Director of Marathon Asset Management, LLC

2007–2007 Director of BankThai

2007–2008 Director of Doral Financial Corporation

2007–Now Director of Marix Servicing, LLC


Robert T. Barnum Independent director 1969–1970 US Saving & Loan Association, Analyst

1970–1973 VP Finance of FHLB Seattle

1973–1980 VP Finance of PMI Mortgage

1980–1982 VP of FNMA

1982–1984 CFO of Krupp Company EVP

1984–1989 EVP, CFO of First Nationwide Bank (already merged into CITIGROUP)

1989–1997 CFO and President & COO of American Savings Bank

1997–Now Poker Flats Investors


Shan Weijian Director 1998–Now Partner of TPG Capital, Limited



Wang Kaiguo Director 2001.6–Now Chairman and Party secretary of Haitong Securities Co., Ltd.


Xiao Suining Director President 1990–1995 BOC Chongqing Branch director of HR & Education Department,

assistant to general manager, vice president

1995–1999 BOC Zhuhai Branch president, secretary of CCP Group, secretary of CCP Committee

1999–2007.2 BOC Zhenzhen Branc h president, secretary of CCP Committee

2007.2–Now President of SDB


Andy Xie Independent director 1990–1995 World Bank, Economic Analyst

1995–1997 Associate Director of Macquaire Bank

1997–2006 Managing Director of Morgan Stanley

2007–Now Director of Rosetta Stone Advisors Ltd


Kang Dian Chairman of BOS 1984–1987 Vice director/director of CITIC

1987–1990 Vice general manager of China Rural Trust & Investment Co., Ltd.

1990–1994 Vice general manager of China National Packaging Corporation

1994–2000 Vice managing director of Guangdong Holdings Group Co., Ltd.

2001–2005 Chairman and CEO of Shirui Investment Management Co., Ltd.

2005.6–Now Chairman of BOS of SDB

Guan Weili External supervisor 1996–2004 President of China Enterprises Consulting Co., Ltd.

1997–2004 Honorary chairman of BoD of China Enterprise Appraisals

2004–Now Chairman of BOD of Beijing Baihuiqing Investment Management Co., Ltd.

2005.1–Now External supervisor of SDB

Jiao Jisheng Employee supervisor 1993–2007 SDB, Vice president of Shatoujiao Sub-branch and Changcheng Sub-branch,

VGM, GM of H.O Accounting Dept., GM of H.O IA Dept., VP of Dalian Branch,

Financial Officer of Shenzhen Branch, GM of H.O Accounting Dept.

2007–Now VP of SDB Dalian Branch

2007.12–Now Employee Supervisor of SDB

Ma Limin Employee supervisor 1988–1992 CBC Xi’an Branch, Vice director of International settlement Dept.

1992–1993 Shenzhen Xihu Corporation Development Co., Ltd.

1993–2005 SDB, Officer Manager, VGM, GM of Internationl Settlement Dept.

2005–Now SDB, GM of Trade Finance Dept.


46 Information on Directors, Supervisors, Senior Management and Staff


Xiao Geng Supervisor 1991–1992 Consultant of the World Bank

1992–2007 University of Hong Kong, Instructor, Associate Professor

2000–2003 Advisor and Head of Research, Securities and Futures Commission of Hong Kong

2007–Now Director of the Brookings-Tsinghua Center for Public Policy

2007–Now Senior Fellow of the Brookings Institution

2007.12–Now Supervisor of SDB

Ye Shuhong Employee supervisor 1988–2006 SDB, Director of Operation Dept. and Admin. Dept. of Changcheng Sub-Branch,

Chief Auditor, Office Manager of Accounting Office, AGM of H.O IA Dept. GM of

Southwesten Audit Center, Head of treasury and accounting line of H.O IA Dept.

2006–2008.1 AGM of H.O IA Dept and, Head of treasury and accounting line of H.O IA Dept.

2008.2–Now Deputy GM of H.O.IA Dept. of SDB


Zhou Jianguo Supervisor 1983–1996 Deputy Dean and Head of Adult Education Dept. of Jiangxi University of Finance &

Economics (Associate Professor)

1996–1997 VGM of Shenzhen Zhong Lv Xin Industrial Co., Ltd.

1997–2004 VGM, GM of Audit Dept. Head of Finance Supervision, Shenzhen Business & Trade

Investment Holding Corporation (2002–2004 Assistant President)

1999–2003 Board Chairman & Secretary of CPC, Shenzhen Business-holding Industrial Co., Ltd.

2004–Now VGM, Head of Accounting Dept., Shenzhen Investment Holding Corporation

2007.12–Now Supervisor of SDB

Wang Bomin Chief financial officer 1995–2002 Citibank Taiwan, Vice President, Treasury financial engineering and market

risk supervision

2002–2003 Head of Treasury Group of Taishin Financial Holding Co., Ltd.

(Senior vice president, Deputy CFO)

2003–2005 Head of Risk Control Group, senior vice president, Taishin Financial Holding Co., Ltd.

2005–Now Chief financial officer of SDB

Xu Jin Board secretary GM of 1999–2003 Vice general manager of Asset Security Department of SDB Head Office

Legal Affairs Dept. 2001–2003 Director of Shenzhen Special Asset Management Center of SDB

2003–Now General manager of Legal Affairs Department of SDB Head Office

2005.1–2005 Employee supervisor of 5th BOS of SDB

2005.5–Now Board secretary of SDB

e Annual Compensations

Annual compensation of directors, supervisors and senior executives of the Bank is decided in the following procedures and based on the following resolutions: the compensation program for directors of the 6th board of directors and supervisors of 5th board of supervisors was reviewed and approved by the 2004 SDB Annual Shareholders’ Meeting, and was reviewed and revised by the 2006 & 2007 SDB Annual Shareholders’ Meeting; the compensation program for senior executives of the Bank was reviewed and approved by the 2nd and 4th meeting of the 7th board of directors.

There was no change of non-executive directors’ compensation plan for 2008. The variations of specific compensation numbers were due to different number of board & committee meetings.


The following table shows the compensations (before-tax) paid to directors, supervisors and senior executives of the Bank for 2008 service (including amounts received during 2008 and received in 2009 for 2008 service):

NAme Position Total amount paid to each person (in RMB 10,000 Yuan)

Frank N. Newman Chairman of BOD & CEO 1,598

Xiao Suining Director, President 418

Chen Wuzhao Independent director 79

Daniel A. Carroll Director 48

Hu Yuefei Director, Vice president 299

Li Jinghe Director 42

Liu Baorui Director, Vice president 292

Ricky Lau Director 37

Mary Ma Director 48

Michael O’Hanlon Independent director 106

Robert T. Barnum Independent director 81

Shan Weijian Director 40

Wang Kaiguo Director 43

Andy Xie Independent director 57

Kang Dian Chairman of BOS (External supervisor) 145

Guan Weili External Supervisor 79

Jiao Jisheng Employee supervisor 138

Ma Limin Employee supervisor 165

Xiao Geng Supervisor 55

Ye Shuhong Employee supervisor 116

Zhou Jianguo Supervisor 53

Wang Bomin CFO 286

Xu Jin Board secretary, GM of Legal Affairs Dept. 148

Total 4,373

Note: During 2008, the Bank achieved 41% growth in operating profit before provision, reached the CAR requirement, grew loans and deposits significantly, managed risks, and improved operations in a number of ways. The Committee & Board recognized that the large provision taken in 2008 was related almost totally to the old portfolio, and did not reflect the current-year performance of the bank officers. The Committee & Board also took into consideration the current environment in setting the compensation for executives, and concluded that, despite the Bank’s very good achievements in 2008, it would be appropriate for the executive compensation reported above to generally decline from the figures reported for 2007. In the case of President Xiao, 2007 was his first year with the bank, and was a partial year, so 2007 and 2008 are not directly comparable. The Board has determined that, in light of the environment in 2009, salaries for executives will be frozen for 2009, and target amounts for performance bonuses for executives will be reduced from the levels set for 2008. In addition, the Compensation Committee is examining alternative ways in which portions of annual performance bonuses for executives would be deferred and made contingent on continued performance of the bank over a period beyond a single year. The Board Intends to implement such a program in 2009.

Many directors donated portions of their fees during 2008 to support relief and rebuilding after the earthquake in Sichuan.

F Changes of Directors, Supervisors and Senior management

1 Changes of directorsIn the reported period, there was no change of directors of the bank.

2 Changes of supervisorsIn the reported period, there was no change of supervisors of the bank.

3 Changes of senior executivesMr Hao Jianping was no longer the Vice President of the Bank starting from 31 December 2008.

G employees of the Bank

Up to 31 December 2008, the bank had 10,381 employees, among which there were 5,601 business employees, 3,223 financial and operating employees, and 956 managing and operation-supportive employees, 601 administrative and other employees. Among the bank’s employees, 67% of them have Bachelor’s Degree or the higher, and 94% of them have Diploma Degree or the higher. Besides, the Bank has 4,477 contingency employees and contract workers.

48

A Corporate Governance

The Bank abides by the Company Law, the Securities Law, the Commercial Banking Law and relevant rules and regulations, as well as regulatory requirements stipulated by China Securities Regulatory Commission (CSRC) and China Banking Regulatory Commission (CBRC), and keeps improving corporate governance system, improving corporate governance structure, enhancing the relevancy of the board decisions and promoting the overall governance standard.

All the directors of the Bank have honored their public promises and fulfilled their duties with diligence. They have actively participated in all meetings, fully expressed their opinions, and carried out their various duties with seriousness. The Bank’s Board of Directors is directly responsible to the Shareholders. The Board holds meetings according to due legal procedures and exercises its rights in strict adherence to laws. The Board of Supervisors has focused on maintaining contact and communication with the Board of Directors and senior management levels. By attending various Board of Directors meetings and Audit Committee meetings for special committees within the Board of Directors, our Supervisors have been able to fulfill their responsibilities to provide opinion after reviewing the periodic financial reports drafted by the board of directors. The bank built basic standards in conformity with corporate governance and relevant laws and regulations, and management structure which are applicable for the bank’s specifics. The duties and reporting lines of the senior management team are clear.

In the reported period, the Bank discloses information in a truthful, accurate, complete and timely manner. There is no case that the Bank released undisclosed information to large shareholders and actual controllers.

The Bank carried out and completed “Special Activity for Corporate Governance” in 2007. In accordance with the requirement of CSRC [2008] No. 27 Announcement & CSRC – Shenzhen Corporate (2008) No. 62 Document, the Bank disclosed Explanation of Rectification on Special Activity for Corporate Governance of Shenzhen Development Bank on 18 July 2008, which made specific explanations on the rectification of events listed in the rectification report of corporate governance.

In the evaluation activity of Sohu 2008 Annual Enterprise’s Public Image, the bank was honored as “Annual Enterprise Award for Best Corporate Governance”.

B Duty Performances by Independent Directors

Within the reported period, all independent directors performed their duties and participated in important decision-making at the Bank by expressing independent opinions on major events based on relevant laws, rules and regulations and defended the overall interests of the Bank, in particular the legitimate rights of small shareholders.

Meeting Attendance Record for the Bank’s Independent Directors of the 7th board

NAMe of No. of INDePeNDeNt scheduled Actual AttendancesDIReCtoR attendances attendances by agents Absences Objections to proposals

Michael O’Hanlon 10 9 1 0 Nil

Robert T. Barnum 10 9 1 0 Nil

Chen Wuzhao 10 10 0 0 Nil

Andy Xie 7 6 1 0 Nil

Note: The post qualification of independent director Andy Xie was approved by CBRC on 4 April 2008.

At present, there are 14 directors in the board, including 4 independent directors, 4 managing directors and 6 other directors. The post qualification for directors is approved by CBRC.

The bank will select qualified independent director candidate and submit to the shareholders meeting for review.

Corporate Governance at the Bank


C the Separation of the Bank from its Largest Shareholder in Areas of Business, Personnel, Assets, organization and finance

The Bank is completely separate from its controlling shareholder in areas of business, structure, personnel, finance and assets. The Bank is equipped to operate independently with its own independent business, complete assets, independent operations, and accountable for its own profitability and loss. Business-wise, the Bank has its own production and management and sales system, independent accounting, and bears liabilities and risks independently; Institution-wise, the Bank is structurally organized to be completely independent of its controlling shareholders, and no conditions whereby the Bank and its controlling shareholders joints office space exists, nor is there any superior-subordinate relationship between the Bank and its controlling shareholders; personnel-wise, the Bank and its controlling shareholders are independent in areas such as labor, human resource, wage management, with all business management personals obtaining their wages from the Bank and do not hold positions at controlling shareholders’ institutions; finance-wise, the Bank has its independent accountancy department, with independent financial management regulations and accounting systems in place, such that both accounting and tax payments are standalone; assets-wise, the Bank is complete in its assets, and its relations with its assets are well-defined. The Bank is also independent in its business operational space and industrial proprietary rights, trademark registration rights, and possesses intangible assets such as non-proprietary technologies.

In the reported period, there is no corporate governance non-standard that large shareholders and actual controllers interfere with the production, operation and management of listed companies.

D evaluation and Incentive of Senior Management

During the reported period, the Bank’s Shareholders’ Meeting and Directors have further improved the compensation management measure for senior management. The Board of Directors and compensation and performance appraisal committee under the board evaluate the performances of senior management based on the execution of annual work plan and achievement of major operating results. The bonus paid to senior management is based on the performance appraisal results. The Bank is continually refining the performance appraisal and incentive systems for senior management staff.

50

In the report period, the Company held totally 2 shareholders’ meeting, including 1 annual shareholders’ meeting and 1 extraordinary shareholders’ meeting. The brief information is as below:

A On 12 June 2008, the Company held the 2007 Annual Shareholders’ Meeting. The Resolution Announcement for 2007 Annual Shareholders’ Meeting of Shenzhen Development Bank Co., Ltd was disclosed on China Securities, Securities Times and Shanghai Securities News on 13 June 2008.

B On 15 October 2008, the Company held the 2008 1st Extraordinary Shareholders’ Meeting. The Resolution Announcement for 2008 1st Extraordinary Shareholders’ Meeting of Shenzhen Development Bank Co., Ltd was disclosed on China Securities, Securities Times and Shanghai Securities News on 16 October 2008.

Introduction on General Shareholders’ Meetings


A Discussion and Analysis of Operations in the Reported Period

1 Range of operationThe Bank engages in the range of various banking operations approved by the relevant authorities, primarily include:

• Renminbideposits,loans,settlement,andremittance;• Renminbidraftsacceptancesanddiscounting;• Trustbusiness;• IssuanceandtradingofRenminbi-denominatedsecuritiespermittedbytheregulatoryauthorities;• Foreigncurrenciesdepositsandremittance;• BorrowinginandoutsideofChina;• Issueandbrokeringtheissueofvaluablesecuritiesofforeigncurrency;• Tradingandnon-tradingsettlement;• Foreigncurrencydraftsacceptancesanddiscounting;• Foreigncurrencyadvances;• Brokeringforeigncurrencyandforeignsecuritiestrading,proprietaryforeigncurrencytrading;• Creditworthinessinvestigation,advisoryandwitnessbusiness;• Insuranceagency;• Goldtrading,goldpurchase,inter-banklendingandborrowingofgold,leasinggoldtoenterprise,goldfinancing,andprovidingretail

product of gold investment to individual citizens.• Otherbusinessesapprovedorpermittedbytheregulatoryauthorities

WeareoneofthecommercialbankslicensedtooperatenationwideinChina.WestrategicallyconcentrateourdistributionnetworksinChina’srelativelyaffluentregionssuchasPearlDeltaRegion,BohaiRim,andYangtzeRiverDeltaandmeanwhiledevelopnetworksinkeycitiesinWesternChina.

2 Financial Review

In RMB million Reportedyear Previousyear ±%

OperatingIncome 14,513 10,808 34.28

Pre-provisionoperatingprofit 8,138 5,776 40.89

OperatingProfit 803 3,722 -78.43

NetProfit 614 2,650 -76.83

In2008,thedomesticandinternationalenvironmentswereabnormallycomplex.Intheinternationalbackgroundofsubprimecrisisevolvingtofinancialcrisis,China’seconomyenteredintocorrectionafteraperiodofsustainablehighgrowth.Thedomesticeconomicpolicywentthroughtheprocessfrom“stable”,“tight”to“moderatelyloose”.Annualpre-provisionoperatingprofitrecorded8,140millionYuan,increasedby40.9%comparedwiththesameperiodoflastyear.Weightedreturnofpre-provisionoperatingprofitonaverageequitydecreasedby15.6percentagepointsfromlastyearto57.3%,inrelationtodilutedROEgrowthcausedbyequityincreasefromthetwoblocksofwarrantexerciseattheendof2007andinthemiddleof2008.Inlightofregulatoryrequirementsonsmallandmediumsizedbanksattheendof2008todealwithdomesticandoverseasfinancialandeconomicsituations,theBankmadeaspecialmassiveprovisionandwrite-offsinthe4thquarter.Afterthat,netprofitamountedto614millionYuan,droppedby76.8%comparedwiththesameperiodoflastyear.Averagereturnonequitywas4.32%,declinedby29.09percentagepointscomparedwithlastyear.BasicEPSwas0.20Yuan,adecreaseof79.4%fromlastyear.

Report of the Board of Directors

52 Report of the Board of Directors

Income and Profit

(1) Net interest incomeNetinterestincomeoftheBankincreasedby31%comparedwiththesameperiodoflastyearto12,600millionYuan,whichaccountsfor86.8%oftheoperatingincome,droppedby2.1percentagepointscomparedwith88.9%ofthesameperiodoflastyear.DecreaseoftheproportionofnetinterestincometooperatingincomereflectstheBank’sbusinessmixadjustmentandincomediversificationtrend.Growth ofnetinterestincomeisattributabletothegrowthofinterest-earningassets.

Thefollowingtableliststhedailyaveragebalanceofprimaryassetsandliabilities,relevantinterestincomeorinterestexpenditureanddailyaverage yield or daily average cost ratio of the bank in the reporting period.

2008 2007 Daily Daily Interest average Interest average income/ yield/cost income/ yield/costIn RMB million ADB payment ratio (%) ADB payment ratio(%)

ASSETSLoans and advances 245,544 19,406 7.90 204,001 14,222 6.97

Bonds investment 64,973 2,388 3.68 42,783 1,301 3.04

Placement at central bank 42,247 729 1.72 27,134 463 1.71

Totalinterest-earningassets 417,453 26,465 6.34 309,802 18,043 5.82

Total assets 426,560 26,465 6.20 315,813 18,044 5.71

LIABILITIESDeposits 330,307 8,564 2.59 261,208 5,048 1.93

Bonds issue 5,178 325 6.29Totalinterest-bearingliabilities 399,027 13,867 3.48 297,762 8,438 2.83

Total liabilities 410,358 13,867 3.38 308,621 8,438 2.73

Net interest income 12,598 9,606

NIS 2.86 2.99

NIM 3.02 3.10

Interests income of loans and advances

2008 2007 Average Average Interest yield/cost Interest yield/costIn RMB million ADB income ratio (%) ADB income ratio(%)

Corporateloans(Excl.discount) 165,023 11,687 7.08 141,288 8,789 6.22

Retailloans 68,720 4,891 7.12 52,316 3,268 6.25

Loans and advances (Excl. discount) 233,743 16,578 7.09 193,604 12,057 6.23

Interests paid for customer deposits

2008 2007 Interest Average Interest AverageIn RMB million ADB payment yield (%) ADB payment yield(%)

Corporatedeposits 183,640 4,461 2.43 149,808 2,874 1.92

Including:demanddeposits 90,865 817 0.90 78,540 743 0.95

time deposits 92,775 3,644 3.93 71,268 2,131 2.99

including: treasury and negotiation deposits 27,239 1,453 5.33 18,642 840 4.50

Retaildeposits 45,765 1,086 2.37 37,726 684 1.81

Including:demanddeposits 17,278 109 0.63 15,190 119 0.78

savings deposits 28,487 977 3.43 22,536 566 2.51

Guaranteedeposits 100,902 3,017 2.99 73,673 1,489 2.02

Total deposits 330,307 8,564 2.59 261,208 5,048 1.93


Analysis on change of composition, balance, and average cost ratio for average daily deposits (%)

Analysis on composition changes Analysis on Analysis on balance changes cost changes 2008 2007 %Change (%) (%)

Corporatedeposits 55.60 57.35 -1.75 22.58 0.51

Including:demanddeposits 27.51 30.07 -2.56 15.69 -0.05

time deposits 28.09 27.28 0.81 30.18 0.94

Including:treasuryandnegotiationdeposits 8.25 7.14 1.11 46.12 0.83

Retaildeposits 13.85 14.45 -0.60 21.31 0.56

Including:demanddeposits 5.23 5.82 -0.59 13.75 -0.15

savings deposits 8.62 8.63 -0.01 26.40 0.92

Guaranteedeposits 30.55 28.20 2.35 36.96 0.97

Total deposits 100.00 100.00 – 26.45 0.66

(2) Net fee incomeThenetnon-interestincomeofthebankpostedgoodperformancein2008,increasedby59%to1,900millionYuancomparedwiththesameperiodoflastyear,includingnetfeeandcommissionincomeupby64%to850millionYuan.Thegrowthofnetfeeandcommissionincome isasfollows:

In RMB million 2008 2007 ±%

Feeincomeofdomesticsettlement 216 162 33.33

Feeincomeofinternationalsettlement 131 104 25.96

Feeincomeofagencybusiness 69 62 11.29

Feeincomeofentrustedloans 15 8 87.50

Feeincomeofbankcards 221 131 68.70

Consultationfee 169Others 236 201 17.41

Subtotal of fee and commission income 1,057 668 58.23

Feeoutlayforbankcardandagencybusinesses 161 107 50.47

Others 45 40 12.50

Subtotal of fee and commission outlay 206 147 40.14

Net fee and commission income 851 521 63.34

Annualsettlementfeeincome(includingdomesticandinternationalones)roseby30%comparedwiththesameperiodoflastyear,onaccountofbusinessvolumegrowthandcustomerincrease.

Annualagencyfeeincomeroseby11%comparedwiththesameperiodoflastyear,largelyattributabletovolumegrowthofinsuranceandfund agency business.

Annualtrustloanfeeincomeroseby88%comparedwiththesameperiodoflastyear,followingvolumegrowthoftrustbusiness.

Annualbankcardfeeincomeroseby69%comparedwiththesameperiodoflastyear,inthefaceofgrowthofeffectivecardnumberandtransaction volume.

Otherfeeincomeincludesaccountmanagementfee,andtradefinancefeeincome.Otherfeeincomeincreasedby101%comparedwiththesameperiodoflastyear,reflectingcustomerbaseexpansionandincreaseoftradefinancebusinessvolumeandproductvarieties.

Feeandcommissionoutlayroseby40%,forthereasonthatthecreditcardissueamountgrowthledtocreditcardfeeoutlayincrease.


(3) Net other operating incomeNetotheroperatingincomeincludesinvestmentreturn,gains/lossesfromfairvaluechanges,foreignexchangegains/lossesandotherbusinessincome.In2008,netotheroperatingincomeincreasedby56%.Comparedwithlastyear,amongwhichgrowthofinvestmentreturnandgainsfromforeignexchangedifferenceplayalargerrole,asroseby110%and80%respectively.Augmentationofbondinvestmentin2008andtradingbenefitbroughtbyinterestcutledtothegrowthofinvestmentreturn.Exchangetradingvolumeincreasedrovebyforeignexchangevariationledtothegrowthofgainsfromforeignexchangedifference.

(4) Operating expenseComparedwiththe34%increaseoftheoperatingincome,operatingexpensesroseby24%,whichislargelyduetoheadcountand businessvolumegrowthaswellasenhancedinvestmentonmanagementprocesspromotionandITsystem.Costtoincomeratio(excludingbusinesstax)amountedto35.99%,droppedby2.94percentagepointsfrom2007.Laborcostincreasedby26%over2007to2,700millionYuan,businessexpensesincreasedby26%to1,800millionYuan,anddepreciation,amortizationandrentingfeeincreasedby14%to 730millionYuan.

Averageincometaxratewas22.5%,7.2percentagepointsdownfromthe29.7%of2007,onthebackofstateincometaxpolicyadjustmentandtaxrebateforNPLsdisposal.Theactualincometaxin2007and2008wereasfollows:

In RMB million 2008 2007 Growth(%)

Profitbeforetax 793 3,772 -78.98

Incometax 179 1,122 -84.05

Actualincometax 22.53% 29.74% -7.21percentagepoints

Assets size

In RMB million 2008 2007 ±%

Total assets 474,440 352,539 34.58

Total liabilities 458,039 339,533 34.90

Deposits 360,514 281,277 28.17

Loans 283,741 221,036 28.37

Owner’sequity 16,401 13,006 26.10

Inthereportedperiod,interest-earningassetswerefurtherexpanded,balancesheetstructurewasfurtheroptimized,andcapitalgoteffectivelysupplemented.Afterthespecialmassiveprovisionandwrite-offsinlinewithregulatoryrequirements,asof31December2008,totalassetsgrewby35%to474,400millionYuan;totalloans(includingdiscountbills)grewby28%to283,700millionYuan;totalliabilitiesgrewby 35%to458,000millionYuan;totaldepositsgrewby28%to360,500millionYuan;andowners’equityroseby26%to16,400millionYuan.

Corporatedepositsincreasedby26%comparedwithlastyearto302,300millionYuan,accountingfor84%oftotaldeposits;retaildepositsincreasedby42%to58,200millionYuan,as16%oftotaldeposits;corporateloans,increasedby33%to209,800millionYuan,as74%oftotalloans;andretialloansincreasedby16%to73,900millionYuan,as26%oftotalloans.


Assets qualityAssetqualitymeasurescontinueditsimprovementtrendsince2005,followingmeasurestoimproveitsinternalmanagementandcollectionprocesses.ThiswasachievedbyacombinationoftheBank’sowninitiativesandmarketmeasures.In2008theBankcollected1,660millionYuanNPLsin2008,amongwhich1,180millionYuanor71%wascollectedincash,450millionYuanor27%wascollectedfromrepossessedassets,and30millionYuanor2%wascollectedfromrestructuredloans.Basedonregulatoryrequirementsinlightofdomesticandoverseaseconomicandfinancialsituations,thebankprovisioned5.6billionYuanandwroteoff9.4billionYuanNPLsinthe4thquarter.Plustheprovisionandwrite-offsmadefromJanuarytoSeptember,theBanktotallyprovisioned7,300millionYuanprovisionin2008,includingcreditprovisionof6,970millionYuanandnon-creditprovisionof360millionYuan;wroteoff10,600millionYuanNPLsand440millionYuannon-creditassets.At31December2008,NPLbalanceamountedto1,900millionYuan,allofwhichwassubstandardloans;NPLratiodroppedby4.96percentagepointsfrom2007to0.68%;provisioncoverageratioroseby56.86percentagepointsfrom2007to105.14%;andprovisionadequacyratioroseby237.45percentagepointsfrom2007to364.65%.WiththematerialdeclineofNPLoverallassetsreturnwillgetlessimpactfromlowinterestassets.

(a) 5-tier loan classification at the end of reported period PleasereferstotheKeyBusinessDataHighlightsC.1.

(b) Loans structure and quality by regions in the reported period

31 December 2008 31December2007In RMB million Balance NPL Ratio (%) Balance NPLRatio(%)

SouthChina 87,983 1.41 78,646 12.46

EastChina 100,457 0.66 78,062 2.92

NorthChina&Northeastregion 75,600 0.01 49,967 0.41

Southwestregion 19,701 0.09 14,361 1.29

Total 283,741 0.68 221,036 5.64

Consideringloanmixofregionalsegments,newloansweremainlyconcentratedintheNorthern&NortheastandEasternregions,increasedby25.6billionYuanand22.4billlionYuanrespectivelycomparedwiththebeginningoftheyear,andrespectivelyaccountingfor41%and36%ofnewloansoftheyear.Consideringloanqualityofregionalsegments,NPLsweremainlyconcentratedinSouthernregionat31December2008,andNPLsofthisregionwereprimarilylegacyNPLsinitiallyissuedbefore2005.NPLratesoftherestregionswerealllowerthantheaverageNPL rate of the Bank.

(c) Loans structure and quality by products in the reported period

31 December 2008 31December2007 ChangeofIn RMB million Total loans NPL Ratio (%) Totalloans NPLRatio(%) NPLRatio(%)

Corporate loans 209,835 0.88 157,493 7.58 -6.70Including:generalloans 167,617 1.10 149,713 7.97 -6.87

discount 42,218 – 7,780 – –

Retail loans 73,906 0.12 63,543 0.85 -0.73Including:housingmortgageloans 44,431 0.07 41,752 0.51 -0.44

operationalloans 10,305 0.19 9,231 1.33 -1.14

creditcardsreceivables 3,722 0.64 2,011 3.88 -3.24

automobileloans 3,275 0.02 1,359 1.53 -1.51

others 12,173 0.08 9,190 1.10 -1.02

Total loans 283,741 0.68 221,036 5.64 -4.96

InNovember2008,theBankenteredanewSettlementAgreementwithBeidaJadeGroup,DongHuaPropertyandChengJianDongHua withregardtothe1.5billionYuanloans.(PleaserefertoBoardAnnouncementofMajorEventson21November2008forspecifics,Announcement:2008-081)


On26November2008,afterapplicationwasmadebybothpartiestotheSettlementAgreement,theSupremePeople’sCourtruledout(2008)Civil60SecondTrialReconciliationLetterundersuchthecausesofactionthattheBankfiledalawsuitagainstDongHanPropertyandChengJianDongHuaregardingthedisputeofrightofrevocation[Case(2005)HighCourtCivil1371FirstTrial],affirmingthattheaboveSettlementAgreementwasreachedbybothparties’authenticwillanditisnotinviolationoflaws,administrativeregulationsandotherprohibitiverules.

Onthesameday,thisReconciliationLettertookeffectbylawafterbothpartiessignedit.

UndersuchthecausesofactionthatChengJianDongHuadidnotperformtheobligationtopaycash0.7billionYuantotheBankwithinthestipulatedterm(withinthreedaysaftertheReconciliationlettercomesintoeffect)oftheaboveReconciliationLetter,nordidBeidaJadeandDong Hua Property perform the guarantee responsibility as the guarantors, on 15 December 2008, the Bank entrusted the representative lawyertofileApplicationLetterforEnforcementtoBeijingHighPeople’sCourt(“BeijingHighCourt”)whichruledthefirsttrialofthiscase.

On22December2008,BeijingHighCourtruledout(2009)HighCourtExecution2NoticeofAcceptanceofApplicationforExecution,whichconsideredthattheenforcementapplicationbytheBankissubjecttolegalconditionsanddeterminedtoregisterthecaseforexecution.

On1Febuary2009,BeijingHighCourtruledout(2009)HighCourtExecution2CivilRuling,appointingBejingNo.2IntermediatePeople’sCourttoexecutethedisputeofrightofrevocationbetweentheBankandDongHuaPropertyandChengJianDongHua.

Atpresent,thecaseisstillunderexecution.

Holding of foreign currency financial assetsTherearetwosortsofforeigncurrencyfinancialassetsheldbytheBank;thebrokerageinvestmentandproprietaryinvestment.Onepartofbrokerageinvestmentisforclosepositionofwealthmanagementproduct,structureofwhichcompletedmatchedwithwealthmanagementproductoftheBank,hedgingagainstmarketriskentirely;anotherpartofbrokerageinvestmentifforbrokerageforeigncurrencyexchange,whichhassimpleproductstructureandadequateliquidity,withmosttradingpartnersasdomesticmajorbanks.Proprietaryinvestmentismainlyforbondinvestmentandinter-bankborrowingandlending.Subjectsofbondinvestmentlargelyareforeigncurrencybondsissued bytheMinistryofFinanceofChinaordomesticpolicybanks,orbondsissuedbyoverseasmajorbanksbackedinfullamountbyforeigngovernments.Investmentproductofthiskindcomprisessimplestructure,consistentpriceandstablemarketvalue.Counterpartiesofinter-bankborrowingandlendingmainlyaredomesticbanks,thusfundsecurityisguaranteed.TheBankdoesnothaveanybondorassets/propertiesbackedsecuritiesinvestmentwithFreddieMacandFannieMae,oranyinvestmenttoLehmanBrothers.Mostoverseastradingpartnersaremajorinternationalinvestment/commercialbanks,homecompaniesofwhicharemostlyratedAAbyStandard&Poor’s.Wedo notdiscoveranymajorchangesoftheirratingsdespiteoverseasfinancialmarketvolatility.

TheBankisalwaysprecautioustowardsoverseassecuritiesinvestment,whichdoesnotmakeupforabigportionofoverallinvestment,thusimpact of its market risk on profit is limited.

Gains/losses Fairvalue Impairment on fair value changes provision Opening variationduring counted during EndingIn RMB’000 balance theperiod asequity theperiod balance

Financial assetsIncluding:1. financialliabilitiesdesignatedatfairvalue andchangesofwhicharebookedas gains/lossesintheperiod 43,471 52,137 – – 90,634

Including:derivativefinancialassets 34,474 51,329 – – 86,803

2. Loansandreceivables 6,208,399 – – -428,473 5,116,672

3. Available-for-salefinancialassets 116,094 – 771 -38,210 771

4. Held-to-Maturityinvestment 565,352 – – – 499,911

Total financial assets 6,933,316 52,137 771 -466,683 5,707,988

Financial liabilitiesIncluding:financialliabilitiesdesignatedatfairvalueand changesofwhicharebookedasgains/losses intheperiod 169,611 158,164 – – 49,578

Including:derivativefinancialliabilities 169,611 159,452 – – 10,159

Total financial liabilities 169,611 158,164 – – 49,578


3 Business Review

Corporate Banking BusinessIn2008,corporatebusinessoftheBankreportedgoodgrowth.Corporatedepositsroseby26%.ThegrowthcomparedwiththesameperiodoflastyearrankedNo.1among14nationalcommercialbanks(notes:growthrankingdoesnotincludeHengfeng,ZheshangandBohai,sameasbelow.);generalloanbalance(excludingNPL)roseby20%,rankedhighamong14nationalcommercialbanks.Netfeeincomeincreasedby55%comparedwiththesameperiodoflastyear.Thebrandname“SDBSupplyChainFinance”wasfurtherpromoted.On-and-offbalancesheetcreditbalanceroseby10%,asubstantialdropfromthepeakattheendSeptembertotheendoftheyearonthebackoftradefinancevolumeshrinkinginordertocontroltheriskofgoodspriceplummetinthe4thquarter.

Infaceofchangingdomesticandoverseaseconomicsituationsin2008,thebankstrengthenedcooperationwithlogisticscompanies,setbusinessearly-warningandemergencysystemsandregulatemonitoringprocesstogether,thusriskoftradefinancewascontrolledandmarketchallengeswasconqueredinthe4thquarter.Inthereportedperiod,thecorporatebankingcontinuedtopromoteelectronicproductsofsupplychainfinance,andreleasedseveralelectronicplatformsincluding“Bank-BoarderExpress”,newversionE-bankingforinternationalbusiness,factoringbusinesssystemand#2phase“CorporateGuard”.Anewfactoringbusinesscenterwassetunderthetradefinancedepartmenttorealize specialized operation.

In2008,theBankmadenotableprogressincorporatestrategicplanningandbrandbuilding.TheBankcooperatedwiththeEuro-ChinaInternationalBusinessCollegetopublishtheSupplyChainFinance–NewFinanceUnderNewEconomy,streamliningexperiencesandestablishingtheoryoftradefinance.In2008,theSDB“SupplyChainFinance”washonoredseveralawardsincludingtheGoldenPrizeofthe2ndBestPracticeAwardofHarvardBusinessReview,theBestSupplierofSupplyChainFinanceService,andMostInnovativeTechnologyAwardoftheAnnualChinaEnterpriseCompetitivenessMeeting.Aseriesofproductsofsupplychainfinance“PoolFinance”werehonored astheSecondPrizeoftheShenzhenFinanceInnovationAward;andreceivedthetitleof“Top10ChinaCommercialBankSupportingSMEDevelopment” again in 2008.

Developmentoftradefinancebusinessin2008isasfollows:

31 December 31December In RMB million 2008 % 2007 % Changes

Domestic trade finance 81,692 94.10 73,587 92.97 11.01

Including:SouthChina 30,593 35.24 33,414 42.22 -8.44

EastChina 17,618 20.29 14,002 17.69 25.82

NorthChina&Northeastregion 28,740 33.11 22,771 28.76 26.21

Southwestandotherregions 4,741 5.46 3,400 4.30 39.44

Internationaltradefinance(includingoff-shore) 5,119 5.90 5,563 7.03 -7.98

Including:exporttradefinance 1,436 1.66 1,369 1.73 4.89

Importtradefinance 3,683 4.24 4,194 5.30 -12.18

Total balance of trade finance 86,811 100.00 79,150 100.00 9.68

Facingglobalfinancialcrisisandmacroeconomydownturn,tradefinancebusinessoftheBankkeptmoderategrowthandmeanwhilecreditriskwaseffectivelycontrolled.Tradefinancebalanceamounted86,800millionYuan,increasedby10%,or7,700millionYuancomparedwithlastyear;NPLratiowas0.05%,droppedby0.47percentagepointcomparedwiththebeginningoftheyear.Over60%oftheNPLsweremadebefore 2005

Domestictradefinancebusinessremainsthemainsourceofgrowthandtheyear-endbalancereached81,700millionYuanwithanincrease of11%.Clientnumberroseby30%comparedwiththeendof2007.Duetodifferencesofregionalindustrialstructure,developmentoftradefinanceindifferentregionsvaries.Theexport-featuredSouthregionsstartedthebusinessearlywithlargersharesgotmoreimpactofexternaleconomy,wheretradefinancebusinessdeclinedby8%.TheEast,North,NortheastandSouthwestregionswerelessaffected,wherebusinessgrowthremainedabove25%.

Inlightofworseningglobaleconomyandshrinkingimport&exportbusinesses,andmaintaininghighcreditstandards,internationaltradefinancedeclined,withcreditbalancedownby440millionYuanfromlastyear.


Retail BankingIn2008,facingeconomicuncertaintiesandrattlingmarketenvironment,retailbankingreactedinlinewithcustomerdevelopmentstrategyproactively,andrealizedfastgrowthofliabilitiesbusinessandsustainableinnovationofassetsbusiness,achievingprocessesinproductdevelopment,brandbuilding,systemsetting,customerserviceandvolumegrowth.TheBankgottheassetcustodyqualificationandinitiatedtheeveruntouchedcustodybusiness.Uptotheendof2008,averagedailysavingsdeposits(includingguaranteedeposits)amountedto51,700millionYuan,anddepositbalancewas58,200millionYuan,arecord-highincreaseof42%comparedwithlastyear.Averagedailypersonalloans(includingcreditcards)increasedby31%to68,700millionYuan;balanceofpersonalloansamountedto73,900millionYuan,increasedby16%.Netfeeincomeroseby35%to300millionYuan.NewVIPcustomernumberincreasedby56%to71,839ones.1.23millioneffectivedebitcardswerenewlyissuedin2008accumulativelyasanincreaseof14%.1.44millioncreditcardswerenewlyissued,andcirculationofeffectivecardsincreasedby60%toover3million.NPLratioofpersonalloans(includingcreditcard)droppedto0.12%afterthelargewrite-offs,adecreaseof0.73percentagepointsfromthebeginningoftheyear.

Whileeconomyslowingin2008,retailbankingstrivedforpromotingoutletsalesskillandmanagementmethodsandapplydifferentiatedmarketingtocustomersinthemannerofresourcesintegration,CRMsystembuilding,andimplementationofSFEprojectandcross-selling,thuspassedonastronginformationtomarket,promotedenhancedclients’comprehensivecontribution,andpromotedcompetitivenessandsocialimageoftheBank.In2008,retailbankingobtainedsome20awardsinpersonalloans,wealthmanagementproducts,andmarketingandservicerecognizedbythemarketandcustomers,including“BestRetailCreditBankinginChina”,“BestRetail(WealthManagement)Bank”andseveralwealthmanagementproductsprizes.Meanwhile,retailbankingcarriedoutanall-aroundprocessstreamlining,systemimprovementandbusinesstraininginriskcontrolandinternalmanagement,remarkablyimprovedabilitytowithholdriskandconsolidatedfoundation for sustainable business development.

Table of personal loans

In RMB million 31 December 2008 % 31December2007 %

1. Personalloansexcludingcreditcards

SouthChina 23,145 32.97 23,251 37.78

EastChina 26,482 37.73 21,318 34.65

NorthChina 16,013 22.82 13,648 22.18

Southwest 4,534 6.46 3,256 5.29

HeadOffice 10 0.02 59 0.10

Totalpersonalloansexcludingcreditcards 70,184 100.00 61,532 100.00

Including:totalNPLs 61 0.09 462 0.75

2. Creditcardloans

Balance of credit card loans 3,722 100.00 2,011 100.00

Balance of credit card NPL 24 0.64 78 3.88

3. Totalpersonalloans(includingcreditcards) 73,906 100.00 63,543 100.00

Total NPL including that of credit cards 85 0.12 540 0.85

4. Mortgageloansinpersonalloans

Balance of mortgage loans 46,538 62.97 44,809 70.52

Including:housingmortgageloans 44,431 60.12 41,752 65.71

MortgageNPL 47 0.10 293 0.65

Including:housingmortgageNPL 31 0.07 214 0.51

Note: mortgage loans including mortgage for individual housing and commercial purpose, housing mortgage does not include housing both for residential and commercial purposes, office buildings and mortgage for stores. The “total personal loans (including credit card)” is the denominator for percentage of the “balance of mortgage loans” and “including: housing mortgage loans”; the “balance of mortgage loans” is the denominator for percentage of the “mortgage NPL”, and the “including: housing mortgage loans” is the denominator for percentage of the “including: housing mortgage NPL”. Up to the end of 2008, average LTV of personal loans is 63%

MostpersonalloansoftheBankfloatsonayearlybasis,andrateadjustmentsoccursthroughthemonths,soimpactofinterestcutsduring2008willgraduallycomeout.Furthermore,theBankincreasinglyadjustedinterestrateofqualifiedmortgageinlightofthe70%discountpolicyappliedtomortgagebyPBOCsince27October2008,whichdiminishednetinterestincome.

Treasury and Inter-Bank BusinessIn2008,theTreasuryandInter-BankBusinesssticktotheconceptof“Coordinateddevelopmentofvolumeandquality,emphasisbothonproduct innovation and management innovation”, accurately seized opportunity periodical opportunities in domestic market, reinforce internal control,andmakeproductinnovationprudentially.Onthepremiseofguaranteereasonableliquidity,inter-bankvolumeandprofitrecordedmultiplefoldsgrowthandhithistoricalhigh,basicallyrealizedthestrategictargetof“high-qualitygrowth”andachievedpromotionofbothmanagement and business performance.


In2008,inter-bankassetsroseby116%comparedwiththesameperiodoflastyearandinter-bankliabilitiesroseby80%.Inter-banktransactionincomeincreasedby119%,bondtradingvolume74%,bondinterestincome92%,bondpricedifferenceincome722%,andforeigncurrencysettlement87%.TradingvolumeofforwardcurrencysettlementrankedthefirstinShenzhenregion,andthatofspotcurrencysettlementrankedthesecond.Tradingvolumeofforeigncurrencypurchasewasupby76%comparedwiththesameperiodoflastyearandgoldbusinessvolumewasupby1100%.Personalgoldtradingvolumerankedthethirdinindustry,andaccountopennumberofgoldtradingrankedthefourth.Itdesignedandissued76wealthmanagementproducts,withthesalesvolumeonaparwiththatof2007.TheBankmadesubstantialbreakthroughincommercialwealthmanagementproductsandachievedgreatincrease.

In2008,putintoconsiderationtheoperationfeaturesofcapitalmarketandfeaturesofbalancesheetstructureofthebank,thebankexpandedinter-bankbusinessscaleandbondsinvestmentvolume.Althoughinterestspreadofinter-bankbusinessislowerthanthatofloanbusiness,andgrowthofinter-bankbusinessbringsdowntheaverageinterestspread,consideringinter-bankbusinesstakesuplessriskweightedasset,itisstillaprofitablebusinessdivision.Therefore,theBankexpandedinter-bankbusinessscalein2008.Meanwhile,thebankpurchasedPBOCnotesandtreasurybondswiththeincreasedfundfromtimedepositgrowthtoconsolidateliquidity,andrealizedinvestmentreturnpartlybroughtbythePBOCinterestcutin2008.TheBankrealized400millionYuaninvestmentreturnintotal.

InrespectofRMBbondinvestment,theBanktrackedthemarkettrendandadoptedflexibleoperationstrategy,seizingeveryopportunity ofbondyieldturnaround,soastorealizepricedifferenceincomeandpromoteportfolioprofitability;Inrespectofforeigncurrencybondsinvestment,thebankdealtwiththefinancialcrisisseriouslyandpreventednewrisksofforeigncurrencybusiness.Atthebeginningoftheyearanticipatedsubprimecrisiswillunravelin2008,theBankhaltedtradingofforeigncurrencybonds.Bondinvestmentmainlyconcentratedonthegovernmentbondswithhighcreditratingorbondsbackedbygovernment.

In2008,theBankontheonehanddevelopinginter-bankbusinesswithstablesteps,ontheotherhandactivelyimprovedplatformintegrationandprocessoptimization;improvedsystem,optimizedprocess,refinedauthorization,strengthenedtraining,strictlyregulatedtradingapproaches,emphasizedriskawareness,expandedtalentreservoir,improvedprofessionalskillsofstaff,andnotablyreinforcedteamspirit.TheBankimprovedliquiditymanagementandassuredliquiditysafetyforthewholeyear;realizedall-aroundliquiditygapmonitoringandliquiditymixmanagement,andimprovedabilityofpredictingliquiditygapandcapabilityofraisingcapital.Thesystemofpersonalfirmbidonbuyingandsellingforeignexchangewasputinplace,whichfilledabusinessgapoftheBank.TheBanklaunchedtheopen-endwealthmanagementsystemandupgradedthegoldtradingsystemforodd/evenmonthnewcontracttypes;launchednewproductsincludingcommercialsingle/collectivewealthmanagementproducts,wealthmanagementproductsforoff-shoreclients,billtrustwealthmanagementproducts,andinter-bankbrokeragewealthmanagementproducts,thusproductssystemandmarketingchannelstendedtobemorecomplete.TheBankmake abreakthroughinunderwritingdebtsfinancinginstrument,successfullyregisteredthreeissueprojectswhichwillbelaunchedin2009,thismeansthatthebusinessofdebtsfinancinginstrumentsunderwritingoftheBankcomestoanewstage.ThequalificationofgoldstoragebankwasapprovedbytheShanghaiGoldExchange,andthequalificationofgoldbusinessbrokerofsmallandmediumfinancialinstitutionswasapprovedbythePBOCShenzhenSub-Branch.

Liquidity managementManagementteamoftheBankplacesgreatattentiontoliquiditymanagement.Liquiditystatusissolid.Attheendof2008,allliquidityratiosmettheregulatoryrequirements.

Variousdepositsgrewquicklyin2008andgrowthbetweenmonthswasrelativelystable,onaccountofconsiderabledepositinflowfollowingcapitalmarketfluctuation.AslendinggrowthwasstrictlyincompliancewithPBOCrequirement,loantodepositratiofelldowncontinuouslycomparedwithpreviousyears.TheBankenhancedbondandPBOCnoteinvestmentinthereportedperiod,thebondsandPBOCnotesthatcanbesoldatsecondarymarketrightawayroseremarkablycomparedwiththebeginningoftheyear,thuscapacitytodealwithliquiditypressurewasreinforced.In2008,theBankissued8billionYuansubdebtsinaggregate;andexerciseofthesecondblockSFC2warrantsbroughtin1.8billionYuan.Thosetwolong-termfundsaddedsubstantialliquiditytotheBank.TheBankkeptondiversifyingliquiditymanagementmeasures,improvedprocessofliquidityriskmanagement,soastomonitoroverallliquiditystatusaccuratelyandtimely.

Sensitive analysis of interest rateInrespectofinterestratemanagement,asloanre-pricingisslowerthandepositre-pricinginlinewiththere-pricingmaturitystructureoftheBank,depositratedeclineisfasterthanloanratedeclineintheshorttermwhileinthedownwardratecycle.However,becausemajorityofdepositsoftheBankaredemanddepositsandshort-termtimedeposits,anddemanddepositratecutbyPBOCforthefivesessionswaslowerthan the other deposits and loans rate cut, therefore, effect of deposit rate decline appeared early than loan rate decline. But net interest marginwillnotbegreatlyincreasedintheshorttermbecausethetrendoftotaldepositsratedeclinewillbedraggeddownbydemanddeposit.Inthelongrun,withre-pricingeffectshowsup,impactofloanwillcoverimpactofdepositandincurnetinterestmarginnarrowingdown.

Organizational constructionIn2008,thebankset29newsub-branches,amongwhich9onesareinNorthernandNortheastChina,7inSouthwestChina,8inEasternChinaand5inSouthernChina.


4 Segmental operation information

Deposits by geographical region at the end of reported period

REgIONS 31 December 2008 31December2007

In RMB million Amount % Amount %

SouthernChina 126,900 35.20 102,539 36.45

EasternChina 123,023 34.12 93,612 33.28

NorthernChinaandNortheast 89,386 24.79 68,457 24.34

NorthwestChina 21,205 5.89 16,669 5.93

Total 360,514 100.00 281,277 100.00

Loans (including discount) by geographical region at the end of reported period

REgIONS 31 December 2008 31December2007

In RMB million Amount % Amount %

SouthernChina 87,983 31.01 78,646 35.58

EasternChina 100,457 35.40 78,062 35.32

NorthernChinaandNortheast 75,600 26.65 49,967 22.60

NorthwestChina 19,701 6.94 14,361 6.50

Total 283,741 100.00 221,036 100.00

Operating income and operating revenue by geographical region in the reported period

Year 2008

REgIONS Percentage of Pre-provision pre-provisionoperatingIn RMB million Operatingincome Operatingexpenses operatingprofit profitbyregions

SouthernChina 8,040 3,220 4,820 59.23

EasternChina 3,495 1,691 1,804 22.17

NorthernChinaandNortheast 2,150 1,133 1,017 12.50

NorthwestChina 828 332 496 6.10

Total 14,513 6,376 8,137 100.00

Year 2007

REgIONS Percentage of Pre-provision pre-provisionoperatingIn RMB million Operatingincome Operatingexpenses operatingprofit profitbyregions

SouthernChina 5,762 2,563 3,199 55.38

EasternChina 2,869 1,322 1,547 26.78

NorthernChinaandNortheast 1,626 885 741 12.83

NorthwestChina 551 262 289 5.01

Total 10,808 5,032 5,776 100.00

BusinessinsouthernChinacomprisesbusinessattheheadoffice.Asthebondandfundtradingbusinesswereconcentratedattheheadoffice,therevenuebeforeprovisionshowshigherproportioninsouthernChinacomparedwiththeotherregions.

Operating income by industries and products in the reported period

BuSINESS TYPESIn RMB million 2008 2007 ±%

Loan interest income 19,406 14,222 36.45

Inter-banktransactionincome 4,532 2,381 90.34

Reverserepurchaseincome 138 139 -0.72

Securitiesinvestmentinterestincome 2,388 1,301 83.55

Fee,commissionandotherbusinessincome 8,224 1,348 510.09

Total business income 34,689 19,391 78.89


5 Profit segments by periodsProfitbyperiodsin2008isasfollows:

In RMB million 1Q 2Q Jan–Jun 3Q 4Q Jul–Dec 2008

Operatingincome 3,553 3,562 7,115 3,626 3,772 7,398 14,513

Netinterestincome 3,145 3,157 6,303 3,176 3,119 6,295 12,598

Netfeeandcommissionincome 150 230 381 285 185 470 851

Netotheroperatingincome 258 173 431 165 467 633 1,064

Operatingexpenses 1,594 1,466 3,060 1,539 1,777 3,316 6,376

Businesstaxandsurcharge 283 286 568 291 293 584 1,152

Generalandadministrativeexpenses 1,311 1,182 2,492 1,248 1,484 2,732 5,224

Operatingprofitbeforeprovision 1,959 2,096 4,055 2,087 1,995 4,082 8,137

Assetimpairmentloss 583 631 1,214 564 5,556 6,120 7,334

Operatingprofit 1,376 1,465 2,841 1,523 -3,561 -2,038 803

Netnon-operatinggains/losses 3.0 -18.4 -15.3 -34.2 38.7 4.5 -10.8

Profitbeforetax 1,379 1,447 2,826 1,489 -3,522 -2,033 793

Incometax 375 307 682 316 -819 -503 179

Netprofit 1,004 1,140 2,144 1,173 -2,701 -1,528 614

6 Future expectation and action plans

Industry status quo, development trend and competition patternIn2008,theglobalfinancialcrisissweptrealeconomyandsomeindustriesweretrappedintodifficulty.Creditriskwasaddingandassetqualityofglobalbankingindustrywasunderpressure.

Accordingtopublicannouncement,infaceofdownwardmacroeconomy,China’seconomicpolicyswitchedfrompreventingeconomyoverheatingatthebeginningof2008tomaintainingthesmooth,steadyandrapideconomicdevelopmentastheprimarytaskfor2009. Chinawillemploythemoderatelyloosemonetarypolicyinthisyear.

TheBankwillactivelyadjustcreditpolicyinlinewithpolicyguidanceofcentralgovernment,embraceopportunitiesbroughtbynationaleconomystimulusprojects,andactivelyissuegoodqualityloanstorealizesustainablebusinessgrowth.TheBankwillalsopromotefundusingefficiencyandoffsetnegativeimpactofinterestcutbyenhancinginterestratemanagementandguidingbranchestopricerationally.Inthemeantime,theBankwouldalwaysstrictlycontrolvariousrisks,explorelowriskbusinessesandfeebusiness,andfurtherimproveinternalcontrol. The target is to promote both management and business performance through streamlining management methods, implementing process reengineering, and enhancing system development and training.

Inlinewithregulatoryrequirementsforsmallandmediumsizedbanksinthe4thquartertodealwithcurrentdomesticandoverseasfinancialandeconomicsituations,theBankmadeaspeciallargeprovisionandwrite-offsattheendof2008,whichsubstantiallydisposedlegacyNPLsandlaidagoodfoundationfortheBanktoresistfuturecreditriskandotheruncertainties.Meanwhile,improvedoverallassetprofitabilityoftheBankwillpavethewayforfutureprofitgrowth,whichwillalsohelpimproveprovisionlevelandriskwithholdingcapability.

Trends at start of 2009Inlightoftheunusualeconomicenvironment,theBanknotesthefollowingbusinesstrendsinearly2009:

(a) Business growthTheoverallbusinessoftheBankYTD2009hasbeenstableandsound.TheBankhasachievedcontinuousstronggrowthindeposits,bothcommercialandretail.Fromlate2008,afterPBCrelievedthelendinglimitonbanks,inresponsetothegovernmentstimulusprogram,thebankinitiatednewlendingprogramsandloansachievedgoodgrowth.However,inlightofuncertaintiesintheeconomy,theBankhasbeengivingspecialattentiontomattersofcreditquality,asaconditionofloangrowth.

(b) ProfitNetprofitforthefirst2monthsof2009exceededthatofthesameperiodin2008.Netinterestincomeinthefirst2monthsin2009achievedsingledigitpercentagegrowthcomparedwiththesameperiodin2008,duetogoodgrowthinaverageearningassetsandimprovementsin thebalancesheetmorethanoffsettingsomedeclineinNIM.TheBankexpectstheNIMtodeclineinfuturequartersof2009asaresultof theinterestratereductionbyPBOCinlate2008aswellasincreasesintheBank’sportfolioofinterbankassets,resultinglargelyfromstrongdepositgrowth.Thebankhopestohelpoffsetpartoftheeffectofspreadpressurebygrowthofgoodassets,combinedwithappropriatemanagement of the balance sheet.


(c) Asset QualityDespitethatNPLincreaseinthefirst2monthsof2009amountedlessthan0.05%oftotalloans,andNPLratiohasnomaterialchange.However,theBankmadeappropriateadditionstocreditprovisions,inlightoftheeconomy,andtheProvisionCoverageRatioandProvisionSufficiencyRatiosbothincreasedfromthefiguresof31December2008.

TheBankplanstorelease2009FirstQuarterReportduringlateApril.

Business plans for 2009Enteringinto2009,theBankhasmadepreparationfordomesticandoverseaseconomicuncertaintiesandsetagoodstartinaspectsofassetqualityandriskprevention.Consideringsituationinthe1stquarterof2009,assetqualityisoverallingoodshapeafterthebigprovisionandwrite-offs,andNPLvariationisundercontrol.Facingnarrowinginterestspreadin2009,theBankwilladoptactivebalancesheetmanagement,reduceimpactofinterestadjustmentoninterestmargin,andendeavortooffsetincomedeclinecausedbyinterestspreadshrinkbysolidbusinessgrowth

a.EnhancinginfrastructureanddevelopingserviceoutletsandchannelsandincreaseinvestmentonIT.NowthattheCCARmeetsandCARmetregulatoryrequirements,theBankhasplannedtoopenthreebranchesandmoresub-branches.TheimplementationofrelevantplansissubjecttotheapprovalofCBRC.Besides,theBankwillequipmoreself-servicemachinesacrossthecountryandupgradefunctionofonlinebanking and telephone banking.

In2008CapexforITprojectsamountedtosome250millionYuan(includingself-serviceequipments,190millionYuanifexcludingself-serviceequipments),increasedby39%over2007.TheBankwillcontinueimprovementofandinputtoITsystem.

b.Reinforcingcapitalmanagement.Aprudentialbalancesheetmanagementpolicywillbeadoptedinordertorealizerationalassetgrowthunderstrictcapitalconstraint,usingthemeasuresofplanandassessment,andlimitationmanagement.InthemeantimepromotingCARtomeetregulatoryrequirementandbusinessdevelopmentnecessitythroughcapitalplanssuchassub-debtsandhybridbondissue.

c.Incorporatebanking,taking“becomingaleadingbankprovidingprofessionalsupplychainfinanceserviceinChina”asthekeystrategy,activelyhandlingchangesofmacroeconomyandcustomernecessitiestendency,andexpandingbasicandstrategiccustomergroupthroughpromotingcomprehensiveserviceability.In2009,theBankwillreinforcecooperationwithcoreenterprises,promotewholesalemarketingofsupplychainfinance,andfastentheworkofbuildingelectronicplatformofsupplychainfinance.MeanwhiletheBankwillactivelyresearchforcooperativemechanismofconsortiumloanwithregionalbanks,expandmarketingchannelsforassetsbusinesses,strengthencross-sellingwithretailandinter-bankbanking,soastoimprovemarketingabilityinacomprehensivemanner.

d.Basicthinkingforretailbusinessin2009istoemphasizeondevelopingvaluablecustomersandbuildcorecompetitivenessinlinewiththestrategyof“advancedproduct,excellentservice,convenienttrading,appropriatepricing,anduniqueexperience”.

Theretailbankingwillgrasptheopportunityofeconomiccorrectiontoconsolidatebasicbusinessandmakeagoodefforttopromotedeposits,continuouslymakeproductinnovationandoptimizebusinessprocesssoastokeepstabledevelopmentofassetsbusiness;putemphasisontheideaofcustomergrading,promotecross-selling,andcultivatepotentialvalue-addedcustomers;striveforthepositionofprimarybankfortargetcustomers,andpromotecustomercontributioninanall-aroundmanner.

Theretailbankingwillfurtherbuildainnovativeandstableretailproductpoolwithampleproducts,enhancee-channeldevelopmentwithemphasisofoutletandself-serviceequipments,andestablishaintegralproductsellingandservicechannelsystem;continuetoimproveteam-building, promote selling ability of basic outlets, reform and improve assessment system, and set a consolidated business system that is in compliance.

e.Onthepremisesofriskcontrol,inter-bankingbusinesswillcultivatethecustomer-orientedtradingservice,expandcustomergroupofbrokeragebusinessfromvariouschannelsandgrowbrokeragebusinessthroughprovidingtailoredandcompetitiveproductsandservicesforbranchesandclients,regulateandpromoteassetmanagementservice,andobtainstablerevenue.Developinginvestmentwealthmanagementproductsandinvestmentbankingcontinuously;acceleratingdevelopmentofnewproductsandsystemsandimprovingfundproductsservice;strivingfornewbusinessqualificationssuchasforeignexchangemarketmaker;reinforcingmarketanalysisandprediction;improvingmeasuresofutilizingbondportfolio;endeavortoimproveinvestmentreturnandpricemarginincome;andactivelyexploringtimeprofitopportunities of certain markets.

f.Withrespecttoriskmanagement,asChinaemployedactivefiscalpolicyandmoderatelyloosemonetarypolicyin2009,theBankwillactivelygivelendingsupporttotheindustriesfavoredbystateindustrypolicyinaccordancewiththeprincipleof“applyingdifferentiatedtreatmenttotheindustriestobebracedandtheonestoberefrained”,onthepremisesofriskcontrol.TheBankwillcontinuetoputemphasisonSMEs,trade finance, and retail credit businesses.

g.Furtherimprovingcompliancemanagementsystemandcultivatingcomplianceculture,streamliningandoptimizingvarioussystemsandbusiness processes, and implementing business process reengineering.


7 Capital PlanIn2008,thebankrecordedprofitandadded0.614billionYuancorecapitalthroughselfaccumulation,completedtheexerciseof“SDBSFC2”warrantswhichbroughtin1.8billionYuancorecapital,andsuccessfullyissuedtwoblocksofsub-debtstotheinter-bankmarketswhichadded7.35billionYuansupplementarycapitaltothebank(Duetothelimitationonnetcapital,0.65billionYuanoutof8billionYuanhasnotbeencomputedintosupplementarycapital.).At31December2008,CCARandCARreached5.27%and8.58%respectively,allsatisfiedtheregulatoryrequirements.

Increaseofriskweightedassetswillconsumecapitalwithbusinessexpansion,andalthoughitprofitaccumulationaddstoTier1capital,itcannotaddtoTier2capital.Therefore,theBankwillengageaseriesofcapitalplanincludingsub-debtsissue,hybridcapitalbondissue,aimingatmeeting10%CARin2009.Continuousgrowthofcapitalbasewillsupportbusinessgrowth.

Atpresent,relevantsubordinateddebtsandhybridcapitalbondplansin2009arebeingreviewedbytheregulators.

In RMB million 31 December 2008 31December2007 31December2006

Core CAR 5.27% 5.77% 3.68%

CAR 8.58% 5.77% 3.71%

Capital compositionsCorecapital 15,038 12,806 6,384

Shareequity 3,105 2,293 1,946

Capitalreserve 6,963 5,203 1,558

Surplusreserve 934 719 454

Generalprovision 3,583 2,716 1,680

Undistributed profit 453 1,874 746

Minorityshareholders’equity – – –

Deducted item of core capital 328 113 5

Net core capital 14,710 12,693 6,379

Supplementarycapital 9,578 112 45

Generalloanlossprovisions 1,445 Re-evaluationreserve 778 112 45

Long-termsubordinateddebts 7,355Total capital 24,616 12,918 6,429

Less:goodwill

Unconsolidated shareholding investment 434 5 9

Others 223 221

Net capital 23,959 12,692 6,420

Totalrisk-weightedassets 279,113 220,056 173,222

On-balancesheetrisk-weightedassets 220,032 170,779 138,807

Off-balancesheetrisk-weightedassets 59,081 49,278 34,415

Note: 1. Capital reserve and undistributed profit in the above table have deducted unrealized gain caused by change of assets fair value, in accordance with the CBRC computation method.

2. Re-evaluation reserve includes re-evaluation reserve for available-for-sale financial assets and investment properties.


8 Investments of the Bank in the reported period

Shareholding of other listed company

CODE Portion Gains/Losses Changeof Initial oftotal Ending inreported equityin Accounting SharesIn RMB’000 Name investment shareholding facevalue period reportedyear subjects sources

000040 ShenHongJi 3,215 0.30% 2,790 – (9,980) Available-for-Sale Historic investment

000005 ShijiXinyuan 405 0.04% – – (2,372) Available-for-Sale Historic investment

000150 YihuaProperty 10,000 2.79% 10,000 – – Available-for-Sale Repossessed equity

000505 ZhujiangRealEstate 9,650 0.27% – – – Long-termequity Historic investment

600515 STZhuxin 664 0.22% – – – Long-termequity Historic investment

600038 HafeiShares 39,088 0.37% 5,631 (24,549) 776 Available-for-Sale Repossessed equity

600664 SHayaoshareholding 80,199 0.39% 48,467 (39,738) 12,875 Available-for-Sale Repossessed equity

000012 NanboA 1,739 0.15% – 13,312 – Available-for-Sale Repossessed equity

VisaInc. – 0.01% 771 771 Available-for-Sale Historic investment

Total 144,960 67,659 (50,975) 2,070

Shareholding of other unlisted financial institutions and unlisted companies

INvESTMENT COMPANY NAMEIn RMB’000 Investmentamount Impairmentprovision Endingfacevalue

ChengduIndustryInvestmentAssetsOperationCo.,Ltd. 269,065 (20,000) 249,065

ChinaBankUnionpayCo.Ltd. 50,000 – 50,000

WuhanSteelElectricityCo.,Ltd. 32,175 – 32,175

ShandongXinkaiyuanPropertyCo.,Ltd. 30,607 – 30,607

YonganInsuranceCompany 67,000 (38,470) 28,530

ChengduJuyouWebCo.,Ltd. 20,000 – 20,000

TaiyangSecuritiesCo.,Ltd. 4,283 – 4,283

ShenzhenZotoInvestmentCo.,Ltd. 2,500 – 2,500

SWIFT 230 – 230

JintianIndustrialGroupCo.,Ltd. 9,662 (9,662) –

MeizhouTeryleneGroupCompany 1,100 (1,100) –

GuangdongSamsungCorporateGroupCo.,Ltd. 500 (500) –

HainanBaiyunshanCo.,Ltd.Hainan 1,000 (1,000) –

HainanZhonghailianRealEstateCo.,Ltd 1,000 (1,000) –

HainanSaigeCo.,Ltd. 1,000 (1,000) –

HainanWuzhouTravelingCo.,Ltd. 5,220 (5,220) –

JunheTravelingCo.,Ltd. 2,800 (2,800) –

ShenzhenJiafenTextileCompany 16,725 (16,725) –

Total 514,867 (97,477) 417,390

TheaboveinvestmentsareallhistoricalinvestmentorrepossessedequityoftheBank.


Controlling companyTheBankdidnotincreaseinvestmentofcontrollingcompanyoranyotherequity.AttherequestofCBRC,theBankhascompletedthedecouplingwithandliquidationofitspreviouscontrollingsubsidiaryYuanshengCompany.

usage of raised fundUptotheendofreportedperiod,theBankhascompletedtheexerciseoffirstblockwarrantswiththeactualexerciserateof91.42%,raisingfundofsome1.8billionYuan.Thefundhasallbeenusedtoaddcorecapitalafterdeductingrelevantexpenses.

In RMB’000

Totalraisedfund 1,812,373 Investedraisedfundofthisyear 1,812,373

Raisedfundofchangeofusage 0Accumulativelyusedraisedfund 1,812,373

Raisedfundratioofchangeofusage 0

Whether Invested Accumulatively feasibility Change Amountto amount invested Predicted Return ischangedPromised items or not be invested of the year amount Progress return status substantially

Supplementarycapital No 1,812,373 1,812,373 1,812,373 100% – – No

Total No 1,812,373 1,812,373 1,812,373 100% – – No

Actual process of and return on major non-share-offering investment projectInthereportedperiod,theBankhasnonon-share-offeringinvestmentproject.

9 Items with over 30% growth in comparative financial statements

ITEMS IN FINANCIAL STATEMENTS ±% Causeforchange

Inter-bankplacement 435.69 Increaseofinter-bankbusiness

Inter-banklending 249.52 Increaseofinter-bankbusiness

Financialassetsdesignatedatfairvalueandchanges -97.20 Maturityofwealthmanagementproducts ofwhicharebookedasgains/lossesintheperiod

Available-for-salefinancialassets 173.37 Increaseofinvestmentscale

Interestreceivable 42.55 Increaseofinterest-earningassetsscaleandinterestrate

Accountreceivable 74.74 Increaseofre-financingforimportbusiness

Loansandadvances 31.02 Increaseofloansizevolume

Long-termequityinvestment 65.66 Increaseofrepoequity

Intangibleassets 68.21 Increaseofsoftwarepurchase

Assetsofdeferredincometax 82.20 Impactfromsaleofnon-performingassetsandbigprovision &write-offattheendoftheyear

Inter-bankborrowing 220.87 Increaseofinter-bankbusiness

Repurchaseagreementsoffinancialassets 136.32 Adjustmentofbusinessstructure

Financialliabilitiesdesignatedatfairvalueandchanges -96.84 Maturityofwealthmanagementproducts ofwhicharebookedasgains/lossesintheperiod

Derivativefinancialliabilities -77.04 Decreaseofderivativeinstrumentsforclosingpositionof wealthmanagementproducts

Salarypayable 34.80 Increaseofstaffnumber

Taxpayable 46.12 Increaseofincometaxintheperiod

Interestpayable 71.48 Growthofinterest-beringliabilitiesandinterestratehike

Accountpayable 49.13 Increaseofre-financingforimportbusiness

Subordinatedbondspayable 100.00 Newissuanceofsubordinatedbondsofthisyear

Predictedliability -66.67 Closureofunsettledlawsuitswithpayment

Liabilitiesofdeferredincometax 246.73 Improvementofprofitabilityindifferenttaxrateregions


ITEMS IN FINANCIAL STATEMENTS ±% Causeforchange

Otherliabilities -49.00 Decreaseofdissolvedpromissorynote

Sharesequity 35.41 Exerciseofsecondblockwarrants,rendersthreesharesforeveryten shares in the interim distribution plan

Capitalreserve 53.04 Exerciseofsecondblockwarrants

Generalprovision 31.95 Appropriate1%ofnewlyaddedriskassetsforgeneralprovision

Undistributedprofits -61.28 Increaseofprofitintheperiodandinterimprofitdistribution

Netinterestincome 31.15 Increaseofbusinesssize

Feeandcommissionincome 63.50 Increaseoffeesincomebroughtbyproducttypesandbusinessvolume

Investmentreturn 109.75 Increaseofinvestmentreturnbroughtbysellingavailable-for-salebonds

Foreignexchangegain 79.74 Increaseofbusiness

Otherbusinessincome -30.93 Value-addedtaxofGold-for-Interestprovision

Businesstaxandsurcharges 39.71 Largeincreaseofoperatingincome

Assetsimpairmentloss 257.11 Bigprovisionandwrite-offsinaccordancewithregulatoryrequirements at the end of the year

Non-operatingrevenue -41.70 Decreaseofincomeondisposaloffixedassetsandrepossessedassets

Non-operatingexpense 58.26 DonationforSichuanearthquakeandincreaseofpredictedliabilities

Expenseonincometax -84.08 Decreaseofprofitbeforetaxintheperiod

Netprofit -76.83 Bigprovisionandwrite-offsinaccordancewithregulatoryrequirements at the end of the year

10 Fair valuesSubjecttotheexistenceoffinancialinstrumentsinanactivemarket,thebankadoptsthepriceofactivemarketstodetermineitsfairvaluesforpreference.Subjecttotheexistenceoffinancialinstrumentsinaninactivemarket,thebankadoptsevaluationtechnologytodetermineitsfairvalues.Evaluationtechnologyincludesreferencetofamiliarcircumstancesandthepriceusedinlatestmarkettradingofeachpartyvoluntaryfortrading,andreferencetothecurrentfairvaluesanddiscountedcashflowtechniqueofotheressentiallysamefinancialinstruments.Evaluationtechnologymayusemarketparameteriffeasible.However,themanagementtemneedstoevaluateinlightofthecreditrisk,marketfluctuationrateandrelevanceofitselfandthetradingcounterpartswhenlackofmarketparameter.Thechangeofthoserelevantassumptionswillinfluencethefairvaluesoffinancialinstruments.

Thefollowingmethodsandassumptionshavebeenusedinestimatingfairvaluebythebank:

i Financialassets/financialliabilitiesatfairvaluethroughprofitorloss(includingderivativefinancialassets/derivativefinancialliabilities)aremeasuredatfairvaluebyreferencetothequotedmarketpriceswhenavailable.Ifquotedmarketpricesarenotavailable,thenfairvaluesareestimatedonthebasisofdiscountedcashflowsorbyreferencetothequotesprovidedbycounterparty.Thecarryingamountsoftheseitemsareequaltotheirfairvalues.

ii Thefairvaluesoftheheld-to-maturityinvestmentsandthereceivables-bondinvestmentsaredeterminedwithreferencetotheavailablemarketvalues.Ifquotedmarketpricesarenotavailable,thenfairvaluesareestimatedonthebasisofdiscountedcashflows.Thefairvalues ofbondsassetsofreceivablesaredeterminedbythecost;

iii Thefairvaluesofotherfinancialassetsandfinancialliabilitiesmaturingwithin12monthsareassumedtobeapproximatelyequaltotheircarrying amounts due to their short maturity.

iv Thefairvaluesofthefixedrateloansareestimatedbycomparingthemarketinterestrateswhentheloansaregrantedwiththecurrentmarketratesofferedonsimilarloans.Changesincreditqualityofloanswithintheportfolioarenottakenintoaccountindetermininggrossfairvalues as the impact of credit risk is recognised separately by deducting the amount of the impairment provision from both the carrying amount and the fair value.

v Interestratesoncustomerdepositsmighteitherbefloatingorfixeddependingonthetypesofproducts.Thefairvaluesofsavingaccountsanddepositswithoutmaturitydatearetheamountspayableondemandtocustomers.Thefairvaluesofdepositswithfixedtermsaredeterminedbythediscountedcashflowmethod.Thediscountrateadoptedisthecurrentinterestrateondepositswiththesamematurityasthe remaining maturity of those deposits.

vi Investmentrealestateisevaluatedbyindependentvaluewithcertifiedqualificationeachyear,andanalysisreportisissuedeveryquarter.


11 The work summary of the Board of Directors

Meetings and resolutions of the board of directors in the reported periodThe1stmeetingofthe7thboardofdirectorsoftheBankwasconvenedinthewayofvotingbycorrespondence.Thenoticeofthemeeting wassenttoeachdirectoron22January2008,andthevotingdeadlinewassetfor3:00pmon24January2008.ThemeetingreviewedandapprovedtheProposalforComponentMembersoftheAuditandRelatedPartyTransactionsCommitteeofthe7thBoardofDirectorsandProposalforComponentMembersoftheCompensationandExaminationCommitteeofthe7thBoardofDirectorsinthewayofvotingbycorrespondence.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson25January2008.

The2ndmeetingofthe7thBoardofDirectorswasconvenedon28January2008.ThemeetingreviewedandapprovedtheProposalforElectingtheChairmanofthe7thBoardofDirectors,Proposalfor20074QWrite-offofLossNPA,Proposalfor2008BusinessandFinancialPlan,ProposalforRelevantEventsofManagingDirectors’ParticipationinReviewofCompensationIssuesandProposalforAuthorizationofSellingAssetsinOperatingActivitiestotheChairman&CEO.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimes andShanghaiSecuritieson31January2008.

The3rdmeetingofthe7thBoardofDirectorswasconvenedon19March2008.ThemeetingreviewedandapprovedtheAnnualAccountingStatementandAuditReportasof31December2007ofShenzhenDevelopmentBankprovidedbyEY-HuamingAccountingFirm,theAnnualAuditReportofShenzhenDevelopmentBank(12December2007)providedbyEYAccountingFirm,2007AnnualProfitDistributionPlan,2007AnnualReportofShenzhenDevelopmentBank,2007AnnualReport&AbstractofShenzhenDevelopmentBank,2007AnnualInternalControlSelf-AppraisalReportofShenzhenDevelopmentBank,ProposalforEngagementofMrWangJiasSpecialConsultant,ProposalforEngagementofMrZhangYuanliangasChiefInformationOfficer,ProposalforPropertyPurchasebytheOperatingCenterofHeadOffice, andProposalforAuthorizationofAssetsPurchaseApprovaltotheChairman.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson20March2008.

The4thmeetingofthe7thBoardofDirectorswasconvenedon23April2008.ThemeetingreviewedandapprovedtheProposalfor2008 1QWrite-offofNPLs,20081QReportofShenzhenDevelopmentBank,ProposalforEngagementofAccountingFirmfor2008,ProposalforPurchaseofResponsibilityInsuranceforDirectorsandSeniorStaff,AdministrativeMeasuresforCapitalRaisingofShenzhenDevelopmentBank,GuidelinesforAuditandRelatedPartyTransactionsCommittee(RevisedinApril2008),ProposalforGrantingFacilitiestoChinaUnionPay,2007FinalFinancialReportofShenzhenDevelopmentBank,2008BudgetReportofShenzhenDevelopmentBank,2007Board ofDirectorsWorkReport,2007AnnualWorkReportofIndependentDirectors,Proposalfor2008TotalTargetBonusforSeniorExecutives,ProposalforRevisionofRelevantEngagementContracts,2008DeferredBonusPlan,ProposalforCompensationforDirectorsandSupervisors,ProposalforComponentMembersofRelevantSpecialCommitteesandProposalforPurchaseofOfficeBuildingbyNanjingBranch.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson24April2008.

The5thmeetingofthe7thBoardofDirectorswasconvenedon21May2008.ThemeetingreviewedandapprovedtheProposalforConvening2007AnnualShareholdersMeetingofShenzhenDevelopmentBank.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson22May2008.

The6thmeetingofthe7thBoardofDirectorswasconvenedon17July2008.ThemeetingreviewedandapprovedtheProposalforConfirmingMajorArticlesforSubBondsIssuance,ProposalforOpeningSpecialAccountforFundRaising,ExplanationoftheRectificationofSpecialActivityofCorporateGovernance,andSelf-examination&SummaryReportofFundsTakenupbyLargeShareholdersandtheRelatedParties.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson18July2008.

The7thmeetingofthe7thBoardofDirectorswasconvenedon20August2008.ThemeetingreviewedandapprovedtheProposalfor20082QNPLWrite-offs,AccountingStatementandAuditReportof30June2008ofShenzhenDevelopmentBankprovidedbyEY-HuamingAccountingFirm,2008InterimProfitDistributionPre-plan,2008HalfYearReportofShenzhenDevelopmentBank,2008HalfYearReport&AbstractofShenzhenDevelopmentBank,andProposalforWealthManagementStrategyandProductPolicyofShenzhenDevelopmentBank,andreviewedandapprovedeightRPTsonebyone,includingtheProposalforGrantingFacilitiestoShenzhenSmall&MediumEnterprisesCreditGuaranteeCenterCo.,Ltd.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson 21 August 2008.

The8thmeetingofthe7thBoardofDirectorswasconvenedon25September2008.ThemeetingreviewedandapprovedtheProposalforTerminationofSubscriptionAgreementwithBaoSteel,ProposalforAdjusting2008InterimProfitDistributionPlan,ProposalforSubBondIssuance,ProposalforFinancialBondIssuance,ProposalforAdjustingRelevantProvisionsofHybridBondIssuance,ProposalforConvening20081stExtraordinaryShareholdersMeetingandProposalforNPLPackagingSale.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson26September2008.


The9thmeetingofthe7thBoardofDirectorswasconvenedon23October2008.ThemeetingreviewedandapprovedtheProposalfor20083QNPLWrite-offs,20083QReportofShenzhenDevelopmentBank,ProposalforGrantingFacilitiestoShenzhenInvestmentHoldingsCo.,Ltd,andProposalforMrHeZhijiang’sPostTitle.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson24October2008.

The10thmeetingofthe7thBoardofDirectorswasconvenedon17December2008.ThemeetingreviewedandapprovedtheProposalforEstablishmentofNewBranchesandtheArrangementofCapitalExpenditureandProposalforMrHaoJianping’sSeparationofShenzhenDevelopmentBankasVicePresident.TherelevantresolutionswerepublishedonChinaSecurities,SecuritiesTimesandShanghaiSecuritieson 18 December 2008.

The Execution of Shareholders’ Meeting Resolution by the BoardTheBODoftheBankseriouslyexercisedeveryresolutionofshareholders’meetingduringthereportedperiod.Asoftheendofreportperiod,excepttheproposalsneedtogetregulatorsapproval,suchasProposalforSub-debtIssuance,ProposalforHybridCapitalBondIssuance andProposalforAdjustingRelevantProvisionsofHybridBondIssuanceapprovedbythe1stextraordinaryshareholders’meeting,theBankexercisedandimplementedalltheshareholders’meetingresolutionsincluding2007annualprofitdistributionplanand2008interimprofitdistribution plan.

Duty Performance of Audit and Related Party Transaction Control CommitteeDuringthereportedperiod,theAuditandRelatedPartyTransactionControlCommitteeheldtotally9meetings,assistingtheBODtosupervisethecompletenessofcorporatefinancialreportandinternalcontrolsystemandtheeffectivenessofinternalauditfunction;supervisingtheannualindependentauditoncorporatefinancialstatement,andmadeevaluationonindependentauditorsqualification,independenceandworkingbehavior;supervisingthecomplianceinmeetinglegalrequirementsandregulatoryrequirements;supervisingtheexerciseofcorporateinformationdisclosurecontrolandprocedureanditsefficiency;supervisingthefairnessandjusticeofrelatedpartytransactionandperformedotherdutiesspecifiedbytheworkingrulesoftheAuditandRelatedPartyTransactionControlCommittee.

AuditandRelatedPartyTransactionControlCommitteeformulatedWorkRulesforAnnualAudit,andcarriedoutcommunicationsandcoordinationwiththeaccountingfirmforannualaudit,inaccordancewithworkrulesandrulesoftheCommittee.

(a) Two audit opinions on corporate financial reportTheAuditandRelatedPartyTransactionControlCommitteealreadynegotiatedthetimearrangementfor2008annualreportauditingworkwiththeaccountingfirm,andurgedaccountingfirmtosubmitauditors’reportwithinthespecifiedtimelimit.

TheAuditandRelatedPartyTransactionControlCommitteereviewedthefinancialstatementpreparedbythecompanybeforetheannualauditingCPAofficiallycameintowork,andbelievedthatthefinancialreportalreadypreparedinaccordancewiththerulesofnewaccountingstandardandfullyreflectedtheasset-liabilitysituationasof31December2008andthebusinessresultandcashflowofthecompanyin2008in all significant respects.

AfterannualauditingCPAcametowork,theAuditandRelatedPartyTransactionControlCommitteestrengthenedthecommunicationwiththem.AfterissuingthepreliminaryauditopinionbytheannualauditingCPA,theAuditandRelatedPartyTransactionControlCommitteereviewedcorporatefinancialreportthesecondtimeinthemeetingheldon17March2009,andbelievedthatthefinancialreportistrue,accurateandcomplete,andisinaccordancewithcorporateaccountingstandardsandrelevantregulations,thereisnodisputewiththeaccountant on significant issues.

(b) Supervision on audit workTheAuditandRelatedPartyTransactionControlCommitteemadeannualauditdeploymentinadvance,andnegotiatedthescaleandtimeprogressofauditors’reportwiththeaccountingfirm.Afterauditorscametowork,theymadecommunicationwithmainprojectmanagersandknowtheauditingprogressandissuethatCPApayattentionto.theAuditandRelatedPartyTransactionControlCommitteealsourgedauditorsto hand in the report according to specified time limit so as to ensure the progress and accomplishment of annual auditing and information disclosurework,underthepre-conditionofensuringauditingworkquality.

(c) Submitted summary report on auditors work in last year to BODCurrentCPAcompletedtheauditingworkon20078annualreportandsemi-annualreport,andthereviewworkofagreeduponprocedureof 1Qreportand3Qreport.

AccordingtotheworkingrulesoftheAuditandRelatedPartyTransactionControlCommittee,itwillcarryoutannualevaluationontheworkingbehaviorofindependentauditors.Inthereviewprocess,theAuditandRelatedPartyTransactionControlCommitteeandmanagementwillcommunicatewiththeprinciplesofinternalauditandreviewthereportgettingfromtheindependentauditors.

TheAuditandRelatedPartyTransactionControlCommitteeissatisfiedwiththequalificationsandindependenceofcurrentCPA.Theycompletedthe2008financialstatementreviewandotherworksatisfactorilyaccordingtoauditregulationsandrules.

(d) Resolution on reappointing accounting firm in the next yearSuggestShenzhenDevelopmentBankCo.,LtdengagingE&YHuamingasthedomesticauditserviceagencyandE&Yastheinternationalauditserviceagencyin2009.


Performance of Compensation and Assessment CommitteeWithinthereportperiod,theCompensationCommitteeheldtotally5meetings,reviewedseniormanagementexaminationbenchmarkandcarriedoutexamination,andmadeinvestigationoncompensationpolicyandplanofdirectors,supervisorsandseniormanagement,andimplementedothercompensationrelevantissueauthorizedbytheBOD.

(a) Examination opinion of compensation of directors, supervisors and senior management disclosed by this reportTheCompensationCommitteepaidsocialattentiontoseniorexecutives’compensationneededtobedisclosed,onthebasisofregulatoryrequirements.TheCompensationCommitteeexaminedthecompensationofdirectors,supervisorsandseniormanagementdisclosedbythisreport,andbelievedthatitisconsistentwithrelevantresolutionsofshareholders’meeting,BODmeeting,CompensationCommitteemeeting,and relevant system of the Bank. The disclosure is truthfulness, accuracy and completeness.

(b) The Bank didn’t implement equity incentive plan

12 The 2008 profit distribution plan

The2008legitimatedfinancialstatement(auditedbydomesticCPA–E&YHuamingAccountingFirm)reportednetprofit614,034,806Yuan,anddistributableprofits1,058,180,871Yuan.

Inmid-2008,theBankappropriatedlegitimatedsurplusreserveof214,383,444Yuanataratioof10%ofprofitsaftertaxauditedbydomesticCPA;andappropriatedgeneralprovisionof608,623,820Yuan;meanwhile,renders3sharesforevery10sharesandRMB0.335incash(includingtax),onthebasisoftotalequityof2,388,795,202shareson30June2008.The2008interimprofitsdistributionplanhasbeenapprovedbythe20081stExtraordinaryShareholders’Meetingandhasbeenimplemented.

Accordingtothesaidprofitresultandrelevantstateregulations,theprofitsdistributionforthe2008fullyearisasfollows:

i TheBankshouldappropriateRMB61,403,481Yuanlegitimatedsurplusreserveas10%oftheannualnetprofitofRMB614,034,806Yuanin2008.ConsideringRMB214,383,444Yuanlegitimatedsurplusreservehasbeensetasideinthemiddleof2008,theBankreversesurplusreserveofRMB152,979,963Yuanattheyearendof2008.

ii Appropriatedgeneralprovisionof258,968,249Yuan;

iii Inordertofacilitatethelong-termdevelopmentofthebank,theBankhasnocashdividendsandnostatutorycommonreserveconvertingintocapitalatpresent;

iv Uponthesaidprofitsdistribution,asof31December2008,balanceofsurplusreserveamountedto780,884,544Yuan;generalprovision3,583,296,414Yuan;andundistributedprofit952,192,585Yuan,usedforsupplementingcapital,leftforprofitdistributioninthefutureyears.

Theaboveplanissubjecttoreviewandapprovalby2008AnnualShareholders’MeetingoftheBank.

Cashdividenddistributionin2008andthepreviousthreeyears:

Netprofitattributedto Cashdividendtonetprofit Cashdividend holdingcompanyinthe attributedtoholdingcompanyIn RMB’000 (taxincluded) consolidatedreport intheconsolidatedreport

2008 80,024 614,035 13.03%

2007 12,666 2,649,903 0.48%

2006 – 1,411,947 0%

2005 – 324,544 0%

70

In 2008, the Board of Supervisors (BOS) of Shenzhen Development Bank has seriously exercised its responsibilities and obligations, and fully implemented its supervising functions on directors and senior executives, on the basis of protection the interests of our shareholders and staff, in accordance with Corporate Law, Securities Law, AOA of the bank and Rules of Procedure for BOS. This has had positively effect on the standardized operation and development of the bank.

A Meetings of the BOS

8 BOS meetings were held during the reported period. Detailed contents of the meetings are as follows:

1 The 1st meeting by the 6th BOSThe BOS held the 1st meeting on the afternoon of 3 January 2008 at the conference room of Beijing Branch. Mr Kang Dian was elected as the Chairman of the 6th BOS; Mr Guan Weili was elected as the Chairman of Audit and Risk Management Committee of the 6th BOS, and Zhou Jianguo, Jiao Jisheng and Ma Liming as the members of Audit and Risk Management Committee; Mr Kang Dian was elected as the Chairman of Nomination Committee of the 6th BOS, and Mr Xiao Geng and Miss Ye Shuhong are the members of Nomination Committee.

2 The 2nd meeting by the 6th BOSThe BOS held the 2nd meeting on the afternoon of 18 March 2008 at the conference room on 6th floor of the head office. Discussed Work Report of BOS for 2007 of SDB; Reported on “2.27 Case” of SDB and relevant matters of Audit Committee meeting of BOD on 17 March; Reviewed and approved 2007 BOS Report of SDB, 2007 Annual Report of SDB and 2007 Internal Control Self-Appraisal Report of SDB.

3 The 3rd meeting by the 6th BOSThe BOS held the 3rd meeting on the afternoon of 22 April 2008 at NO. 2804 conference room on the 28th floor of the heard office. Reviewed and approved Commenting Report on 2008 1Q Report of SDB by BOS; The Chairman of BOS Mr Kang Dian reported on relevant matters of Audit Committee meeting of BOD on 21 April and visit to Shenzhen CBRC on 15 April.

4 The 4th meeting by the 6th BOSThe BOS held the 4th meeting of the 6th BOS on 6 June 2008 by telephone conference. The Chairman of BOS Mr Kang Dian reported on the latest progress of “2.27 Case” of the bank and Chairman Mr Frank Newman’s visit to Chairman Liu Mingkang of CBRC on 4 June; Secretary of the BOS Miss Liu Zhiling reported to the supervisors at the meeting on CBRC’s Supervisory Notice to SDB for 2007, and supervisors at the meeting had a deep discussion based on this notice.

5 The 5th meeting by the 6th BOSThe BOS held the 5th meeting of the 6th BOS at 9:00am on 1 August 2008 in Zhuhai. Supervisors at the meeting discussed the collection of information by BOS and communications; Summarized and discussed relevant status of Surveys by Joint-Stock Commercial Banks for 2008 of the BOS, and raised constructive suggestions on the revision of Summary of Survey Report; Full discussions were made on the BOS 2008 Patrol Inspection Work, and constructive suggestions on revising the Petrol Inspection Work Report were raised.

6 The 6th meeting by the 6th BOSThe BOS held the 6th meeting of the 6th BOS on the afternoon of 19 August 2007 in No. 2 conference room on the 6th floor of the head office. BOS Chairman Kang briefly reported to the BOS issues on the Audit Committee meeting of the BOD on 18 August, and invited CFO Mr Wang Boming to make relevant analysis and explanation on the 2008 Half Year Report to the BOS; The meeting reviewed and approved 2008 Half Year Report of SDB, Audit Opinion Report of 2008 Half Year Report of SDB, and Code of Conduct for Directors and Supervisors of SDB (Revised in August 2008).

7 The 7th meeting by the 6th BOSThe BOS held the 7th meeting of the 6th BOS on the afternoon of 22 October 2008 at the conference room on the 32nd floor of the head office. Supervisor Guan Weili reported to the BOS on issues about Audit Committee meeting of BOD held on 21 October; Chairman Kang reported to the BOS about CBRC’s organization and convening of Operation and Analysis Meeting for the Third Quarter; the meeting reviewed and approved 2008 3Q Report of SDB and Audit Opinion Report of 2008 3Q Report of SDB.

8 The 8th meeting by the 6th BOSThe BOS held the 8th meeting of the 6th BOS on the afternoon of 17 December 2008 at the conference room on the 32nd floor of the head office. Chairman Kang reported to the BOS on the latest regulatory requirements to the Bank issued by CBRC, Speech Abstract of Deputy Director Chen Minggang on the Year-end Work Symposium of Joint-Stock Commercial Banks, Speech of Vice Chairman Wang Zhaoxing on the (Telephone) Conference of BOD, Operational Team and Supervising Cadre of Joint-Stock Commercial Banks and recent issues of the bank.

Report of Board of Supervisors


B BOS hereby express its independent opinion on the following matters:

1 Legal compliance on corporate operationIn the reported period, the bank established and improved the corporate governance structure in accordance with relevant laws of the state, administrative rules and Article of Association of the bank, and decision procedures were in line with relevant regulations; There is no discoveries of BOD or senior executives breaching the laws, policies, AOA of the bank or resolutions of the Shareholders meeting.

2 Inspection of the Bank’s financial statusIn 2008, the bank standardized the conducts in conformity with the AOA of the bank in terms of major aspects including financial accounting, and there is no discovery of displaying conducts which are detrimental to the interest of the bank and the shareholders.

3 Fund raising, purchase/sale of assetsDuring the reported period, no major purchase or sale of assets happened.

4 Related party transactionAll Related party transactions are conducted under normal business processes and policies during the reporting period and there is no occurrence of any actions that might detriment to the interest of the bank and the shareholders.

72

A Material Lawsuits and Arbitrations

Within the reported period, there were no lawsuits and arbitrations that have material impact on operation of the Bank. The Bank, as defendant, was involved in 35 lawsuits and up to RMB 179 million Yuan in disputed funds, all of which had no verdicts yet.

B There were no Merger and Acquisition, Asset Sales in the Reported Period

The bank sold its subsidiary controlling company in the reported period, as requested by CBRC.

C Important Related Party Transactions during the Reported Period

Related party loans to legal persons where the Bank’s directors, supervisors and senior executives with their close relatives hold positions.

Up to 31 December 2008, the Bank approved related party loans to legal persons where the Bank’s directors, supervisors and senior executives with their close relatives hold positions totaling 2,602 million Yuan with 1,089 million in outstanding balance. The off-balance sheet credit line balance totaled 267 million Yuan.

D Important Contracts and their Implementation

1 There were no significant custodian, contracting and leasing business in the reported period.

2 Except normal guarantees business approved by the China Banking Regulatory Commission, the Bank had no other significant guarantees.

3 The Bank did not entrust others to handle management of cash assets in the reported period.

4 Significant contract commitment: The Bank had no significant contract disputes in the reported period.

E Commitment by the Bank or the Bank’s Shareholders holding 5% of Stake or above

In June 2008, the major shareholder of the Bank Newbridge Asia AIV III, L.P. made the following commitments when the first batch of restricted shares after the reform were to be listed:

1 Our company has no plan at present to publicly sell the released shares which account for 5% of the total shares through SSE trading system in six months after the release. If our company plans to sell the released SDB shares through SSE trading system in the future and the sold amount in six months would be over 5% from the first batch of selling, our company would disclose a reminding announcement for the selling through SDB in two trading days prior to the first batch of selling.

2 If we expect to publicly sell the released shares which accounts for more than 1% of the total shares of SDB within one month in the future, our company would sell the shares through SSE block trading system.

3 If we sell the shares through SSE block trading system, our company would promise to observe the relevant rules and regulations of the SSE and Clearing Company – Shenzhen Branch.

4 While the SDB shares we sell reach 1% of released shares or above, our company would promise to perform the obligation of information disclosure timely and accurately in accordance with the SSE rules.

5 Our company understands and would strictly abide by the “Guidance on Transfer of Released Shares of Listed Company and other rules and regulations.

F Certified Public Accountants Engagement

The Bank engaged the Ernst & Young Hua Ming Accounting Firm for the auditing assignment in the reported period. According to regulations by the China Securities Regulatory Commission, the Bank engaged the Ernst & Young Accounting Firm to workout the supplementary financial statement under IFRS.

In 2008, the Bank paid 5.04 million Yuan to the Ernst & Young Hua Ming Accounting Firm, and 0.6 million Yuan to the Ernst & Young Accounting Firm. Travel expenses of these two accountant firms were not reimbursed by the Bank.

The Ernst & Young Hua Ming Accounting Firm has provided services for the Bank for 2 years; the Ernst & Young Accounting Firm has provided services for the Bank for 8 years;

Important Events


G During the reported period, the Bank, the Board of Directors and its members were not examined or penalized by the China Securities Regulatory Commission, nor publicly denounced by the Shenzhen Stock Exchange.

H Fund Utilization by Controlling Shareholder and its Subsidiaries

At the end of the report period, there were no funds used by controlling shareholders of the Bank its subsidiaries and other related parties:

I Explanations and Independent Opinions of Independent Directors Concerning External Guarantee offered by the Bank

We, as independent directors of Shenzhen Development Bank, checked the external guarantee offered by the Bank in an impartial, fair and objective manner pursuant to Document [2003] 56 of CSRC. We think that the external guarantee business conducted by Shenzhen Development Bank is a regular banking business approved by the PBOC and CBRC. Shenzhen Development Bank attaches importance to the risk management of this business, and strictly follows the relevant operation flow and examination and approval procedures, thus ensuring effective control of the risk of the external guarantee business.

J Bonds Issuance

On 21 March 2008, the bank issued 6.5 bn Yuan sub bonds in inter-bank bonds market after approved by CBRC and PBOC (CBRC [2008] No. 59, Inter-bank Market Permission [2008] No. 11). Those sub bonds are fixed interest rate type and floating interest rate type, among which the issuance amount of fixed interest rate type is 6 bn Yuan and the floating interest rate type 0.5 bn Yuan. The term of those bonds is 10 years. The bank has call option at the end of the fifth year. UBS Securities Company Limited is the main underwriter, book runner and rating consultant. After the comprehensive rating by China Lianhe Credit Rating Co., Ltd, the rating for bonds issuing main body is AA+, and the credit rating for the bond is AA.

On 24 October 2008, the bank issued 1.5 bn Yuan sub bonds in inter-bank bonds market after approved by CBRC and PBOC (CBRC [2008] No. 374, Inter-bank Market Permission [2008] No. 42). Those sub bonds are fixed interest rate type, and the term of those bonds is 10 years. The bank has call option at the end of the fifth year. ICBC is the main underwriter and book runner. After the comprehensive rating by China Lianhe Credit Rating Co., Ltd, the rating for bonds issuing main body is AA+, and the credit rating for the bond is AA.

K Reception of Investigation, Communication and Interview within the Reported Period

In the reported period, the Bank conducts communication with institutions for many times in the manner of performance press conference, analyst meeting, and investor investigation in respect of performance, financial status, and other issues. The Bank also accepts inquiry by phone from individual investors. The contents mainly include: development strategy, exercise of warrants, periodic report, interim report with illustration, disclosed business and management information and major events, corporate culture, and other related information. According to the requirement of SSE Guidelines on Fair Information Disclosure of Listed Company, the Bank and relevant information disclosure obligators strictly observe the principle of fair information disclosure, and there is no situation in violation of it.

The main information of investors received by the company are as follows:

TIME Location Reception manner Subject Contents and provided materials

11 January 2008 Shenzhen Face to face interview Morgan Stanley Fundamental

15 January 2008 Shenzhen Face to face interview Merrill Lynch Fundamental

22 January 2008 Shenzhen Face to face interview Tx Investment Fundamental

26 January 2008 Shanghai Face to face interview Investor Fundamental

26 Feburary 2008 Shenzhen Face to face interview Merchant Securities, Fundamental Boshi Fund, AIG-Huatai

19 March 2008 Shenzhen Press release & conference call Investor, analyst Performance press release of Annual Report

20 March 2008 Beijing Face to face interview Investor, analyst Investors interview of Annual Report

21 March 2008 Shanghai Face to face interview Investor, analyst Investors communications meeting of Annual Report

25 March 2008 HK Face to face interview Investor, analyst Investors interview of Annual Report

74 Important Events

TIME Location Reception manner Subject Contents and provided materials

1 April 2008 Shenzhen Face to face interview Credit Suisse Fundamental

23 April 2008 Shenzhen Press release & conference call Investor, analyst 1Q performance press release

24 April 2008 Beijing Face to face interview CICC, Goldman Sachs 1Q performance

24 April 2008 Beijing Face to face interview Investor, analyst 1Q performance press release

7 May 2008 Shenzhen Face to face interview Guotai Junan Securities Fundamental

20 May 2008 Shenzhen Face to face interview UBS Fundamental

23 May 2008 Shenzhen Face to face interview Morgan Stanley Fundamental

27 May 2008 Shenzhen Face to face interview Merchant Securities, Fundamental BOC International, Essense Securities, Penghua Fund, Jiashi Fund

5 June 2008 Qingdao Face to face interview Xingye Securities/Dacheng Fund, Fundamental Huaxia Fund, Guangfa und, South Fund

16 June 2008 Shenzhen Conference call Goldman Sachs Fundamental

24 June 2008 Shenzhen Conference call Guangfa Fund Fundamental

25 June 2008 Shanghai Face to face interview Essense Securities/JP Morgan, Fundamental Baoying Fund and other institutional investors

27 June 2008 Kunming Face to face interview Guoxin Securities, Guangfa Fund, Fundamental Jinying Fund, Merchant Fund

27 June 2008 Shenzhen Face to face interview Zhongtou Securities, Yifangda Fund Fundamental

3 July 2008 Shenzhen Face to face interview Fox-Pitt Kelton Fundamental

16 July 2008 Shanghai Face to face interview Zhongjin and other institutional investor Fundamental

17 July 2008 Shenzhen Face to face interview Merchant Securities and Fundamental other institutional investor

31 July 2008 Shenzhen Face to face interview Qilu Securities Fundamental

20 August 2008 Shenzhen Press release & conference call Investor, analyst Half Year performance press release

22 August 2008 Shanghai Face to face interview Investor, analyst Half Year performance press release

26 August 2008 Guangzhou Face to face interview Guangfa Funds, Yifangda, Investors communications meeting Jinying Funds of Annual Report

27 August 2008 Shenzhen Face to face interview CITIC Securities Investors communications meeting of Annual Report

28 August 2008 Shenzhen Face to face interview Pacific Assets Manangement Company Investors communications meeting of Annual Report

28 August 2008 Shenzhen Face to face interview Goldman Sachs, NEZU Investors communications meeting of Annual Report

29 August 2008 HK Face to face interview Investor, analyst Half Year Performance Press Release

3 September 2008 Shenzhen Face to face interview Bohai Securities Fundamental

3 September 2008 Shenzhen Conference call Fortress, Macq.sec. Fundamental

10 September 2008 HK Face to face interview Overseas investors Fundamental

11 September 2008 Singapore Face to face interview Overseas investors Fundamental

22 September 2008 Shenzhen Face to face interview Shumway Capital Fundamental

24 October 2008 Shenzhen Press release & conference call Investor, analyst 3Q performance press release

27 October 2008 Beijing Face to face interview Investor, analyst 3Q performance press release

29 October 2008 HK Face to face interview Investor, analyst 3Q performance press release

4 November 2008 Beijing Face to face interview Goldman Sachs and Fundamental other institutional investors

28 November 2008 Shanghai Face to face interview Haitong Securities and Fundamental other institutional investors

13 December 2008 Haikou Face to face interview Guotai Junan and Fundamental other institutional investors

18 December 2008 Xiamen Face to face interview Merchant Securities and Fundamental other institutional investors


L Reference of Other Important Information Disclosure

ISSUE Date Publication

Announcement regarding the exercise of “SDB SFC1” and “SDB SFC2” warrants 4 January 2008, China Securities, Securities Times 8 January 2008, and Shanghai Securities 18 January 2008, 22 March 2008, 8 April 2008, 18 April 2008, 26 April 2008, 30 April 2008, 9 May 2008, 15 May 2008, transaction days from 16 May to 27 June 2008, 30 June 2008, 4 July 2008

Resolution Announcement of Board of Supervisors 8 January 2008 China Securities, Securities Times and Shanghai Securities

Announcement of 2007 Annual Performance Forecast 18 January 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 1st Meeting of the 7th Board of Directors 25 January 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 2nd Meeting of the 7th Board of Directors 31 January 2008 China Securities, Securities Times and Shanghai Securities

Clarification Announcement of SDB 5 March 2008 China Securities, Securities Times and Shanghai Securities

Announcement of Approval for Sub Bonds Issuance from Regulator 14 March 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 3rd Meeting of the 7th Board of Directors 20 March 2008 China Securities, Securities Times and Shanghai Securities

2007 Annual Report & Abstract 20 March 2008 China Securities, Securities Times and Shanghai Securities

Special Explanation of Funds Taken up by Controlling Shareholders 20 March 2008 China Securities, Securities Times and Other Related Parties and Shanghai Securities

Resolution Announcement of Board of Supervisors 20 March 2008 China Securities, Securities Times and Shanghai Securities

Announcement of the Completion of Sub Bonds Issuance 25 March 2008 China Securities, Securities Times and Shanghai Securities

Announcement of 2008 1Q Performance Forecast 15 April 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 4th Meeting of the 7th Board of Directors 24 April 2008 China Securities, Securities Times and Shanghai Securities

2008 1Q Report 24 April 2008 China Securities, Securities Times and Shanghai Securities

Announcement of Major Events of Board of Directors 15 May 2008 China Securities, Securities Times and Shanghai Securities

Clarification Announcement of SDB 20 May 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 5th Meeting of the 7th Board of Directors 22 May 2008 China Securities, Securities Times and Shanghai Securities

Notice of Convening 2007 Annual SH Meeting 22 May 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of 2007 Annual SH Meeting 13 June 2008 China Securities, Securities Times and Shanghai Securities

Announcement of 2008 Interim Performance Forecast 23 June 2008 China Securities, Securities Times and Shanghai Securities

Reminder Announcement of Restricted Shares to be Listed 25 June 2008 China Securities, Securities Times and Shanghai Securities

76 Important Events

ISSUE Date Publication

Explanation of the Rectification of Special Activity of Corporate Governance 18 July 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 6th Meeting of the 7th Board of Directors 18 July 2008 China Securities, Securities Times and Shanghai Securities

Announcement of Signing Third-Party Supervision Agreement of Capital Raising 15 August 2008 China Securities, Securities Times and Shanghai Securities

2008 Half Year Report & Abstract 21 August 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 7th Meeting of the 7th Board of Directors 21 August 2008 China Securities, Securities Times and Shanghai Securities

Announcement: Approval of the Qualification for Post-holding of Senior Managers 27 August 2008 China Securities, Securities Times of YE Ping Fund Custodian Industry and Shanghai Securities

Announcement: Approval of the Qualification for Securities Investment Fund Custodian 27 August 2008 China Securities, Securities Times and Shanghai Securities

Announcement of Board of Directors 19 September 2008 China Securities, Securities Times and Shanghai Securities

Notice of Convening 2008 1st Extraordinary SH Meeting 26 September 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 8th Meeting of the 7th Board of Directors 26 September 2008 China Securities, Securities Times and Shanghai Securities

Announcement of 2008 3Q Performance Forecast 13 October 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of 2008 1st Extraordinary SH Meeting 16 October 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 9th Meeting of the 7th Board of Directors 24 October 2008 China Securities, Securities Times and Shanghai Securities

2008 3Q Report 24 October 2008 China Securities, Securities Times and Shanghai Securities

Implementation Announcement of 2008 Interim Dividend Distribution Plan 24 October 2008 China Securities, Securities Times and Shanghai Securities

Announcement of the Completion of Sub Bonds Issuance 30 October 2008 China Securities, Securities Times and Shanghai Securities

Announcement of Major Events of Board of Directors 21 November 2008 China Securities, Securities Times and Shanghai Securities

Resolution Announcement of the 10th Meeting of the 7th Board of Directors 18 December 2008 China Securities, Securities Times and Shanghai Securities

PRC GAAP Financial Statements

IFRS Financial Statements

Our finance team

Financial Results

PRC GAAP Financial Statements

Auditors’ Report

Balance Sheet

Income Statement

Cash Flows Statement

Statement of Changes in Shareholders’ Equity

Notes to the Financial Statements

Appendix: Supplementary Financial Information

IFRS Financial Statements

Independent Auditors’ Report

Income Statement

Balance Sheet

Statement of Changes in Equity

Cash Flows Statement


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Ernst & Young Hua Ming (2009) Shenzi No. 60438538_H01

To the shareholders of Shenzhen Development Bank Co., Limited

We have audited the accompanying financial statements of Shenzhen Development Bank Co., Ltd. (the “Company”), which comprise the balance sheet as at 31 December 2008, and the income statement, statement of changes in shareholders’ equity and cash flow statement for the year then ended and notes to the financial statements.

Management’s Responsibility for the Financial StatementsThe management is responsible for preparing financial statements in accordance with Accounting Standards for Business Enterprises. This responsibility includes (1) designing, implementing and maintaining the internal control relevant to the preparation of the financial statements that are free from material misstatement whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Chinese Auditing Standards issued by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain a reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider the internal control relevant to the entity’s preparation of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting polices used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements of the Company have been prepared in accordance with Accounting Standards for Business Enterprises, and present fairly, in all material aspects, the financial position of the Company as of 31 December 2008 and the results of its operations and its cash flows for the year ended.

Ernst & Young Hua Ming Chinese Certified Public Accountant

Beijing, the People’s Republic of China Zhang Xiaodong19 March 2009

Chinese Certified Public Accountant

Xu Xuming

Auditors’ Report

80 PRC GAAP Financial Statements

Balance Sheetat 31 December 2008

In RMB’000 Note D 31 December 2008 31 December 2007

ASSETSCash on hand and due from the Central Bank 1 39,767,901 40,726,387

Precious metals 9,225 8,200

Placement of deposits with other financial institutions 2 21,500,809 4,013,690

Funds loaned to other financial institutions 3 9,236,676 2,642,656

Financial assets at fair value through profit or loss 4 41,441 1,477,625

Derivative financial assets 5 290,751 291,816

Reverse repurchase agreements 6 34,733,353 33,768,925

Accounts receivable 7 1,359,592 778,069

Interest receivable 8 1,605,636 1,126,372

Loans and advances 9 281,714,687 215,011,565

Available-for-sale financial assets 10 48,799,716 17,850,892

Held-to-maturity investments 11 15,584,755 15,911,486

Receivables – bond investments 12 13,750,000 13,450,000

Long term equity investments 13 417,390 251,948

Investment properties 14 411,690 441,098

Fixed assets 15 1,674,924 1,554,278

Intangible assets 113,917 67,725

Deferred tax assets 16 1,811,816 994,389

Other assets 17 1,615,894 2,172,240

Total assets 474,440,173 352,539,361

LIABILITIESPlacement of deposits from other financial institutions 19 36,063,032 32,388,762

Funds borrowed from other financial institutions 20 7,380,000 2,300,000

Financial liabilities at fair value through profit or loss 4 39,420 1,246,657

Derivative financial liabilities 5 58,598 255,173

Repurchase agreements 21 38,916,115 16,467,582

Customer deposits 22 360,514,036 281,276,981

Employee benefits payable 23 1,247,420 925,411

Tax payable 24 1,197,849 819,756

Accounts payable 25 507,483 340,297

Interest payable 26 2,963,224 1,728,071

Subordinated bonds payable 27 7,964,282 –

Provisions 25,809 77,447

Deferred tax liabilities 16 341,679 98,544

Other liabilities 28 820,436 1,608,617

Total liabilities 458,039,383 339,533,298

SHAREHOLDERS’ EQUITYShare capital 29 3,105,434 2,293,407

Capital reserve 30 7,978,982 5,213,654

Surplus reserve 31 780,885 719,481

General reserve 32 3,583,296 2,715,704

Unappropriated profit 33 952,193 2,063,817

Total shareholders’ equity 16,400,790 13,006,063

Total liabilities and shareholders’ equity 474,440,173 352,539,361

The accounting policies and explanatory notes (page 86 – 134) form an integral part of the financial statements.

Legal Representative President Chief Financial Officer Accounting ManagerFrank N. Newman Xiao Suining Wang Bomin Li Weiquan


Income Statementfor the year ended 31 December 2008

In RMB’000 Note D 2008 2007

Operating incomeInterest income 34 26,465,264 18,043,900

Interest expense 34 (13,867,376 ) (8,438,051 )

Net interest income 34 12,597,888 9,605,849

Fee and commission income 35 1,056,647 667,751

Fee and commission expense 35 (205,259 ) (147,038 )

Net fee and commission income 35 851,388 520,713

Investment income 36 421,556 200,984

Share of profits of associates 22,675 –

Gains or losses from changes in fair values 37 65,800 57,641

Net foreign exchange difference 38 462,543 257,346

Other operating income 39 113,944 164,969

Total operating income 14,513,119 10,807,502

Operating costsBusiness tax and surcharge (1,151,665 ) (824,307 )

General and administrative expenses 40 (5,223,866 ) (4,207,494 )

Total operating costs (6,375,531 ) (5,031,801 )

Operating profit before impairment losses on assets 8,137,588 5,775,701

Impairment losses on assets 41 (7,334,162 ) (2,053,759 )

Operating profit 803,426 3,721,942

Add: Non-operating income 52,310 89,720

Less: Non-operating expenses (63,127 ) (39,887 )

Profit before tax 792,609 3,771,775

Less: Income tax expense 42 (178,574 ) (1,121,872 )

Profit for the year 614,035 2,649,903

Earnings per shareBasic earnings per share (Renminbi Yuan) 43 0.20 0.97

Diluted earnings per share (Renminbi Yuan) 43 0.20 0.95




Cash Flows Statementfor the year ended 31 December 2008

In RMB’000 Note D 2008 2007

Cash flows from operating activitiesNet increase in customer deposits and placement of deposits from other financial institutions 82,911,325 64,390,171

Net increase in funds borrowed from other financial institutions 5,080,000 2,300,000

Net increase in repurchase agreements 22,448,533 15,726,572

Cash receipts from interest and fee and commission income 24,691,230 16,685,740

Cash receipts relating to other operating activities 2,076,226 1,216,409

Subtotal of cash inflows from operating activities 137,207,314 100,318,892

Net increase in loans and advances 74,220,352 42,083,860

Net increase in amounts due from the Central Bank and placement of deposits with other financial institutions 14,782,982 15,582,324

Net increase in funds loaned to other financial institutions 2,090,056 806,570

Net increase in reverse repurchase agreements 648,650 11,279,835

Cash payments for interest and fee and commission expenses 12,813,497 7,799,556

Cash payments for salaries and staff expenses 2,363,094 1,819,547

Cash payments for taxes 1,821,485 1,784,754

Cash payments relating to other operating activities 4,124,587 2,110,870

Subtotal of cash outflows from operating activities 112,864,703 83,267,316

Net cash flows generated from operating activities 24,342,611 17,051,576

Cash flows from investing activitiesCash receipts from disposal of a subsidiary 61,000 –

Cash receipts from investments upon disposal/maturity 104,701,106 111,371,414

Cash receipts from investment income 1,509,948 680,642

Cash receipts from disposal of fixed assets and investment properties 42,977 128,240

Subtotal of cash inflows from investing activities 106,315,031 112,180,296

Cash payments for investments 133,691,351 123,539,875

Cash payments for fixed assets, intangible assets and construction in progress 838,003 372,198

Subtotal of cash outflows from investing activities 134,529,354 123,912,073

Net cash flows used in investing activities (28,214,323 ) (11,731,777 )

Cash flows from financing activitiesCash receipts from exercise of warrants 2,602,335 3,136,366

Cash receipts from bond issue 8,000,000 –

Subtotal of cash inflows from financing activities 10,602,335 3,136,366

Cash payments for dividend distribution and bond interest 101,712 20,858

Cash payments for bond issue 37,865 –

Cash payments for expenses of share reform and exercise of warrants 22,003 13,120

Subtotal of cash outflows from financing activities 161,580 33,978

Net cash flows generated from financing activities 10,440,755 3,102,388

Effect of exchange rate changes on cash and cash equivalents – –

Net increase in cash and cash equivalents 6,569,043 8,422,187

Add: Cash and cash equivalents at beginning of the year 30,555,415 22,133,228

Cash and cash equivalents at end of the year 44 37,124,458 30,555,415




In RMB’000 Note D 2008 2007

SUPPLEMENTARY INFORMATIONAdjustment of profit for the year to cash flows generated from operating activitiesProfit for the year 614,035 2,649,903

Impairment losses on assets 7,334,162 2,053,759

Interests related to unwinding of discounts of provisions for impaired financial assets (384,238 ) (518,592 )

Depreciation of fixed assets 211,925 206,652

Amortisation of intangible assets 20,852 14,275

Amortisation of long term prepaid expenses 78,108 71,404

Losses/(gains) on disposal of fixed assets and investment properties 158 (14,700 )

Gains from changes in fair values (65,800 ) (57,641 )

Interest on bond investments and investment income (2,694,272 ) (1,484,248 )

Decrease/(increase) in deferred tax assets (830,289 ) 32,941

Decrease in deferred tax liabilities (8,781 ) (151,705 )

Interest paid on subordinated bonds 325,488 –

Increase in operating receivables (90,547,887 ) (71,311,740 )

Increase in operating payables 110,229,494 85,503,209

Collections of amounts already written-off 29,944 34,061

Increase in provisions 29,712 23,998


Net increase in cash and cash equivalentsCash at end of the year 44 981,859 1,062,241

Less: Cash at beginning of the year 1,062,241 909,080

Add: Cash equivalents at end of the year 44 36,142,599 29,493,174

Less: Cash equivalents at beginning of the year 29,493,174 21,224,148





Statement of Changes in Shareholders’ Equityfor the year ended 31 December 2008

Of which: Of which: Cumulative Revaluation changes in surplus on fair value of owner-occupied available- properties for-sale transferred to Share Capital financial investment Surplus General UnappropriatedIn RMB’000 Note D capital reserve assets properties reserve reserve profit Total

At 1 January 2008 2,293,407 5,213,654 (60,120 ) 10,240 719,481 2,715,704 2,063,817 13,006,063

Movements in the year 1. Profit for the year – – – – – – 614,035 614,035

2. Gains and losses recognised directly in shareholders’ equity – 1,055,592 1,062,915 2,803 – – – 1,055,592

(i) Net change in fair value of available-for-sale financial assets – 1,326,680 1,326,680 – – – – 1,326,680

(a) Valuation gain/ (loss) taken into equity – 1,276,798 1,276,798 – – – – 1,276,798

(b) Transferred to the income statement – 49,882 49,882 – – – – 49,882

(ii) Revaluation surplus on owner-occupied properties transferred to investment properties – 3,816 – 3,816 – – – 3,816

(iii) Share of the changes in owners’ equity of an associate – (10,126 ) – – – – – (10,126 )

(v) Tax on items taken directly into or transferred from equity – (264,778 ) (263,765 ) (1,013 ) – – – (264,778 )

Total recognised income and expense for the year – 1,055,592 1,062,915 2,803 – – 614,035 1,669,627

3. Exercise of warrants 95,388 1,709,736 – – – – – 1,805,124

4. Profit appropriation 716,639 – – – 61,404 867,592 (1,725,659 ) (80,024 )

(i) Appropriation to surplus reserve 31 – – – – 61,404 – (61,404 ) –

(ii) Appropriation to general reserve 32 – – – – – 867,592 (867,592 ) –

(iii) Dividends – stock dividends 33 716,639 – – – – – (716,639 ) –

Dividends – cash dividends 33 – – – – – – (80,024 ) (80,024 )

At 31 December 2008 3,105,434 7,978,982 1,002,795 13,043 780,885 3,583,296 952,193 16,400,790




Of which: Of which: Cumulative Revaluation changes in surplus on fair value of owner-occupied available- properties for-sale transferred to Share Capital financial investment Surplus General UnappropriatedIn RMB’000 Note D capital reserve assets properties reserve reserve profit Total

At 1 January 2007 1,945,822 1,648,517 76,787 – 454,491 1,679,704 868,506 6,597,040

Movements in the year 1. Profit for the year – – – – – – 2,649,903 2,649,903

2. Gains and losses recognised directly in shareholders’ equity – (126,667 ) (136,907 ) 10,240 – – – (126,667 )

(i) Net change in fair value of available-for-sale financial assets – (162,975 ) (162,975 ) – – – – (162,975 )

(a) Valuation gain/ (loss) taken into equity – (102,259 ) (102,259 ) – – – – (102,259 )

(b) Transferred to the income statement – (60,716 ) (60,716 ) – – – – (60,716 )

(ii) Revaluation surplus on owner-occupied properties transferred to investment properties – 12,489 – 12,489 – – – 12,489

(iii) Tax on items taken directly into or transferred from equity – 23,819 26,068 (2,249 ) – – – 23,819

Total recognised income and expense for the year – (126,667 ) (136,907 ) 10,240 – – 2,649,903 2,523,236

3. Exercise of warrants 206,649 3,698,598 – – – – – 3,905,247

4. Expenses of share reform plan – (6,794 ) – – – – – (6,794 )

5. Profit appropriation 140,936 – – – 264,990 1,036,000 (1,454,592 ) (12,666 )

(i) Appropriation to surplus reserve 31 – – – – 264,990 – (264,990 ) –

(ii) Appropriation to general reserve 32 – – – – – 1,036,000 (1,036,000 ) –

(iii) Dividends – stock dividends 33 140,936 – – – – – (140,936 ) –

Dividends – cash dividends 33 – – – – – – (12,666 ) (12,666 )

At 31 December 2007 2,293,407 5,213,654 (60,120 ) 10,240 719,481 2,715,704 2,063,817 13,006,063




A General Information

Shenzhen Development Bank Co., Ltd. (the “Company”) was established in the People’s Republic of China (the “PRC”) as a result of the restructuring of six agricultural credit co-operatives into a joint stock commercial bank with limited liability. The Company was established on 22 December 1987 after the initial public offering of its RMB ordinary shares on 10 May 1987. The Company was listed on the Shenzhen Stock Exchange on 3 April 1991 and the stock code is 000001.

The institution number of the Company on the 00000028 approval document issued by the China Banking Regulatory Commission is B0014H144030001. The business licence number of the Company issued by the Shenzhen Municipal Administration of Industry and Commerce is 440301103098545.

The Company is principally engaged in authorised commercial and retail banking activities in the PRC.

The registered office of the Company is located at No. 5047, Shennan Road East, Luohu District, Shenzhen, Guangdong Province, PRC. Headquartered in Shenzhen, the Company operates its business in the PRC.

B Basis of Preparation

The financial statements have been prepared in accordance with the “Accounting Standards for Business Enterprises – Basic Standard” and 38 specific standards, Implementation Guidance, Interpretations and other relevant regulations (hereafter collectively referred to as “ASBEs”), issued by the Ministry of Finance, PRC (hereafter referred to as the “MOF”) in February 2006.

The financial statements of the Company are prepared on a going concern basis.

Statement of complianceThe financial statements have been prepared in accordance with ASBEs and present fairly the financial position of the Company as at 31 December 2008 and the results of its operation and its cash flows for the year ended 31 December 2008.

C Summary of Significant Accounting Policies and Accounting Estimates

1 Accounting yearThe accounting year of the Company is from 1 January to 31 December.

2 Functional currencyThe Company’s functional and presentation currency is Renminbi (“RMB”). Unless otherwise stated, the values are rounded to the nearest thousand of Renminbi.

3 Basis of accounting and measurementThe Company’s financial statements have been prepared on an accrual basis using the historical cost as the basis of measurement, except for financial assets and financial liabilities held at fair value through profit or loss, available-for-sale financial assets, investment properties and share-based payments that have been measured at fair value. If an asset is impaired, a provision for impairment loss of the asset is recognised in accordance with the relevant requirements.

4 Foreign currency translationThe Company translates the amount of foreign currency transactions into its functional currency.

A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the spot exchange rate at the balance sheet date. All exchange differences are recognised in the income statement. Foreign currency non-monetary items measured at historical cost continue to be translated at the spot exchange rates at the dates of the transactions. Non-monetary items measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined. All exchange differences are recognised in the income statement.

5 Precious metalThe Company’s precious metals represent gold. Precious metals are initially measured at cost. At the balance sheet date, precious metals are measured at the lower of cost and net realisable value. If the cost of precious metals is higher than the net realisable value, a provision for the decline in value of precious metals is recognised in the income statement.



C Summary of Significant Accounting Policies and Accounting Estimates (Continued)

6 Reverse repurchase and repurchase agreementsAssets sold under agreements to repurchase at a specific future date are not derecognised from the balance sheet. The corresponding proceeds are recognised on the balance sheet under “Repurchase agreements”. The difference between the sale price and the repurchase price is treated as interest expense and is accrued over the life of the agreement using the effective interest method.

Conversely, assets purchased under agreements to resell at a specific future date are not recognised on the balance sheet. The corresponding cost is recognised on the balance sheet under “Reverse repurchase agreements”. The difference between the purchase price and the resale price is treated as interest income and is accrued over the life of the agreement using the effective interest method.

7 Financial assetsThe Company classifies its financial assets into four categories: financial assets at fair value through profit or loss; held-to-maturity investments; loans and receivables; and available-for-sale financial assets. When financial assets are recognised initially, they are measured at fair value. In the case of a financial asset at fair value through profit or loss, transaction costs are charged to the income statement. For other financial assets, transaction costs are included in their initial recognition amounts.

Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss include financial assets held for trading and those designated as at fair value through profit or loss by management upon initial recognition. Financial assets classified as held for trading include those financial assets that meet one of the following conditions: 1) they are acquired principally for the purpose of selling in the near term; 2) they are part of a portfolio of identified financial instruments that are managed together and for which there is objective evidence of a recent pattern of short-term profit-taking; or 3) they are derivative instruments unless they are designated and effective hedging instruments. After initial recognition, these financial assets are measured at their fair values. All related realised and unrealised gains or losses are included in the income statement. Of which, changes in fair value are recognised in “Gains or losses from changes in fair values” and interest earned is accrued in interest income according to the terms of the contract.

A hybrid instrument can be designated as a financial asset or financial liability at fair value through profit or loss unless the embedded derivative does not significantly modify the cash flows of the hybrid instrument; or it is clear with little or no analysis when a similar hybrid instrument is considered that separation of the embedded derivative is prohibited.

A financial asset or financial liability may be designated, on initial recognition, as at fair value through profit or loss only when one of the following conditions is met:

(i) the designation eliminates or significantly reduces a measurement or recognition inconsistency of the related gains or losses that would otherwise result from measuring assets or liabilities on a different basis.

(ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, and the information about the group is reported on that basis to the Company’s key management personnel. Formal documentation has been prepared with respect to such risk management or investment strategy.

(iii) the hybrid instrument is embedded with derivatives which are required to be separately accounted for.

Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and a fixed maturity date that the Company has the positive intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the effective interest method. Gains or losses are recognised in the income statement when the held-to-maturity investments are derecognised or impaired, and through the amortisation process. If the Company has, during the current financial year, sold or reclassified (to available-for-sale financial assets) items of held-to-maturity investments, whose amount is significant in relation to the total amount of the held-to-maturity investments before the sale or reclassification, the Company shall reclassify the remaining portion of the held-to-maturity investments as available-for-sale investments, and the Company shall not again classify any financial assets as held-to-maturity investments in the current and the next two financial years. However, sales or reclassifications under the following circumstances are exceptions to the above:

(i) sales or reclassifications are so close to maturity or the financial asset’s call date (for example, less than three months before maturity) that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value.

(ii) sales or reclassifications of the remaining portion of the financial asset occur after the Company has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments.

(iii) sales or reclassifications are attributable to an isolated event that is beyond the Company’s control and is non-recurring and could not have been reasonably anticipated by the Company.




7 Financial assets (Continued)

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are subsequently measured at amortised cost using the effective interest method. Gains or losses are recognised in the income statement when the loans and receivables are derecognised or impaired, and through the amortisation process. Loans and receivables mainly include loans and advances to customers, receivables and discounted bills.

Discounted bills are granted by the Company to its customers based on the bank acceptance held which has not matured. Discounted bills are carried at fair value less unrealised interest income. The interest income of the discounted bills is recognised on an accrual basis.

Available-for-sale financial assetsAvailable-for-sale financial assets are those non-derivative financial assets that are designated on initial recognition as available-for-sale or those financial assets that are not classified as other categories. After the initial recognition, available-for-sale financial assets are subsequently measured at fair value. Interest earned whilst holding available-for-sale financial assets is reported as interest income using the effective interest rate. Gains or losses arising from a change in the fair value of available-for-sale financial assets are recognised directly in owner’s equity, except for impairment losses and foreign exchange gains and losses resulted from monetary financial assets, until the financial assets are derecognised, at which time the cumulative gains or losses previously recognised in owner’s equity are removed from owner’s equity and recognised in the income statement.

8 Impairment of financial assetsAn assessment is made at each balance sheet date to determine whether there is evidence of impairment of financial assets (other than those at fair value through profit or loss) as a result of one or more events that occur after the initial recognition of those assets (an incurred “loss event”) and whether that loss event has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and the situation where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised costIf there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments has been incurred, the carrying amount of the financial asset is reduced to the present value of estimated future cash flows (excluding future credit losses that have not been incurred). The amount of reduction is recognised as an impairment loss in the income statement. Present value of estimated future cash flows is discounted at the financial asset’s original effective interest rate and includes the value of any related collateral.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

Future cash flows of a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the impact of current conditions that did not affect the period on which the historical loss experience is based and to eliminate the impact of historical conditions that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Company.

If, subsequent to the recognition of an impairment loss on a financial asset carried at amortised cost, there is objective evidence of a recovery in value of the financial asset which can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss shall be reversed and recognised in the income statement. However, the reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed.

Financial assets carried at costIf there is objective evidence that an impairment loss on a financial asset has been incurred, the amount of the impairment loss is measured as the difference between the carrying amount of that financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The impairment loss on the financial asset shall not be reversed.



8 Impairment of financial assets (Continued)

Available-for-sale financial assetsIf an available-for-sale asset is impaired, the cumulative loss arising from the decline in fair value that had been recognised directly in owners’ equity shall be removed from owners’ equity and recognised in the income statement. The amount of the accumulated loss that is removed from owners’ equity shall be the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement. A provision for impairment is made for available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below its cost or where objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgement.

If, after an impairment loss has been recognised on an available-for-sale debt instrument, the fair value of the debt instrument increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss shall be reversed, with the amount of the reversal recognised in the income statement. Impairment losses recognised for an investment in an equity instrument classified as available-for-sale shall not be reversed through the income statement.

9 Financial liabilitiesThe Company classifies its financial liabilities into financial liabilities at fair value through profit or loss, financial guarantee contracts, deposits and other financial liabilities.

Financial liabilities at fair value through profit or lossThe Company classifies its financial liabilities at fair value through profit or loss into financial liabilities held for trading and financial liabilities designated as at fair value through profit or loss by management upon initial recognition. Changes in fair value are recognised in “Gains or losses from changes in fair values” and interest incurred is accrued in interest expense according to the terms of the contract.

Financial guarantee contractsThe Company gives financial guarantees consisting of letters of credit, guarantees, and acceptances. Financial guarantee contracts are initially recognised at fair value, in “Other liabilities”, being the premium received. The guarantee fee is amortised over the period of the contract and is recognised as fee and commission income. Subsequent to initial recognition, the Company’s liability under each guarantee contract is measured at the higher of the initial fair value less cumulative amortisation, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is taken to the income statement.

Other financial liabilitiesExcept for financial liabilities at fair value through profit or loss and financial guarantee contracts, deposits and other financial liabilities are subsequently measured at amortised cost using the effective interest method.

10 Recognition and derecognition of financial instrumentsA financial asset or a financial liability is recognised when the Company becomes a party to the contractual provisions of the financial instrument.

A financial asset is derecognised when one of the following conditions is met:

(i) the contractual rights to the cash flows from the financial asset expire; or

(ii) the financial asset has been transferred and the transfer qualifies for derecognition as set out below.

Transfer of financial assetsThe Company transfers a financial asset in one of the following ways:

(i) the Company transfers the contractual rights to receive the cash flows of the financial asset to another party; or

(ii) the Company retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to the eventual recipient(s) in an arrangement that meets all of the following conditions:

(a) the Company’s obligation to pay amounts to the eventual recipient(s) arises only when it has collected equivalent amounts from the original financial asset. Short-term advances by the Company with the right of full recovery of the amount lent plus accrued interest at market rates for bank loans of equivalent terms do not violate this condition.

(b) the Company is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipient(s) for the obligation to pay them cash flows.

(c) the Company has an obligation to remit any cash flows it collects on behalf of the eventual recipient(s) without material delay. In addition, the Company is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents during the intervening period between two consecutive payments, which are invested in accordance with the terms of the contract. Income earned on such investments (i.e., reinvesting the cash flows according to the terms of the contract) is passed to the eventual recipient(s) according to the contract terms.

When the Company transfers substantially all the risks and rewards of ownership of a financial asset to the transferee, the financial asset is derecognised. When the Company retains substantially all the risks and rewards of ownership of a financial asset, the financial asset is not derecognised.




10 Recognition and derecognition of financial instruments (Continued)

Transfer of financial assets (Continued)

When the Company neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, it accounts for the transaction as follows:

(i) when the Company has not retained control of the financial asset, the financial asset is derecognised;

(ii) when the Company has retained control of the financial asset, the financial asset is recognised to the extent of the Company’s continuing involvement in the transferred financial asset and an associated liability is recognised.

A financial liability is derecognised when the underlying present obligation is performed, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

11 Derivative financial instrumentsDerivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the hybrid instrument is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognised in the income statement.

Certain derivative transactions, while providing effective economic hedges under the Company’s risk management positions, do not qualify for hedge accounting and are therefore treated as derivatives held for trading with fair value gains or losses recognised in the income statement.

12 Long term equity investmentsA long term equity investment is measured initially at its investment cost.

A long term investment is accounted for using the cost method if the Company can exercise control over the investee, or does not have joint control or significant influence over the investee and the investment is not quoted in an active market and its fair value cannot be reliably measured.

Under the cost method, a long term equity investment is measured at its initial investment cost. Cash dividends or profit distributions declared by the investee are recognised as investment income in the current period. However, investment income recognised is limited to the amount distributed to it out of accumulated net profits of the investee arising after the investment was made. Any cash dividends or distributions received in excess of this amount are treated as a recovery of initial investment cost.

When the Company can exercise joint control or significant influence over the investee, a long term equity investment is accounted for using the equity method.

Under the equity method, when the initial investment cost of a long term equity investment exceeds the Company’s interest in the fair values of the investee’s identifiable net assets at the acquisition date, no adjustment is made to the initial investment cost. When initial investment cost is less than the Company’s interest in the fair value of the investee’s identifiable net assets at the acquisition date, the difference is charged to the income statement for the current year, and the cost of the long term equity investment is adjusted accordingly.

Under the equity method, after acquiring a long term equity investment, the Company recognises its share of the net profits or losses made by the investee as investment income or losses, and adjusts the carrying amount of the investment accordingly. The carrying amount of the investment is reduced by the portion of any profit distributions or cash dividends declared by the investee that is attributed to the Company. The Company shall discontinue recognising its share of net losses of the investee after the carrying amount of the long term equity investment together with any long term interest that in substance form part of the investor’s net investment in the investee are reduced to zero, except to the extent that the Company has incurred obligations to assume additional losses. The Company shall adjust the carrying amount of the long term investment for other changes in owners’ equity of the investee (other than net profits or losses), and include the corresponding adjustment in equity.

On disposal of a long term equity investment, the difference between the proceeds actually received and the carrying amount is recognised in the income statement. For a long term equity investment accounted for using the equity method, any changes in the owners’ equity of the investee (other than net profits or losses) included in the owners’ equity of the Company, is transferred to the income statement on a pro-rata basis according to the proportion disposed of.

For a long term equity investment accounted for using the cost method and which is not quoted in an active market and its fair value cannot be reliably measured, the amount of impairment loss is measured as the difference between the carrying amount of that financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The impairment loss on the financial asset shall not be reversed. For long term equity investments accounted for using the equity method, any impairment is accounted for in accordance with the accounting policy set out in Note C.17.



13 Investment propertiesInvestment properties are properties held to earn rentals or for capital appreciation or both. The investment properties of the Company are buildings that are leased out. The Company adopts the fair value model for the measurement of investment properties which are not depreciated or amortised. At each period end, the carrying value of the investment properties is adjusted based on the fair value, and any difference between the carrying amount and the fair value is accounted for in the income statement.

For a transfer of owner-occupied property to investment property, the investment property is measured at its fair value at the date of transfer. If the fair value at the date of transfer is less than the original carrying amount, the difference is charged to the income statement. If the fair value at the date of transfer exceeds the original carrying amount, the difference is recognised as capital reserve in owners’ equity. On disposal of an investment property, the amount that had been recognised in equity is transferred to the income statement.

For a transfer from investment property to owner-occupied property, its fair value at the date of transfer is regarded as the carrying amount of the owner-occupied property. The difference between the fair value and the original carrying amount is recognised in the income statement.

14 Fixed assets

Recognition of fixed assetsFixed assets are tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and have useful lives more than one accounting year.

A fixed asset is recognised only when it is probable that economic benefits associated with the asset will flow to the Company and the cost of the asset can be measured reliably.

Subsequent expenditures incurred for a fixed asset that meet the above conditions are included in the cost of the fixed asset, otherwise they are recognised in the income statement in the period in which they are incurred.

Measurement and depreciation of fixed assetsFixed assets are initially measured at cost. All fixed assets are stated at cost less any accumulated depreciation and any impairment losses. The cost of an asset comprises the purchase price, related taxes, and any directly attributable expenditures of bringing the asset to working condition for its intended use, such as delivery and handling costs, installation costs and professional fees.

Depreciation is calculated using the straight-line method. The Company reasonably determines the useful lives and estimated net residual values of the fixed assets according to the natures and use patterns of the fixed assets as follows:

Estimated net Annual depreciation Useful life residual value (%) rate (%)

Properties and buildings 30 years 1 3.3

Transportation vehicles 6 years 3 16.2

Computers 3 or 5 years 1 33.0 or 19.8

Electronic appliances 5 or 10 years 1 19.8 or 9.9

Owner-occupied property improvement 5 or 10 years – 20.0 or 10.0

The useful life and estimated net residual value of a fixed asset and the depreciation method applied are reviewed at each balance sheet date.

15 Construction in progressConstruction in progress represents costs incurred in the construction of fixed assets. Costs comprise direct costs incurred during the period of construction. Interest charged on related borrowings for the construction is capitalised and such capitalisation of interest ceases when the assets under construction are completed and are ready for their intended use. No capitalisation of interest is made if the cost incurred during the construction is from the Company’s own fund. Construction in progress is not depreciated.

Construction in progress is reclassified to the appropriate category of fixed assets when completed and ready for use.




16 Intangible assetsIntangible assets are identifiable non-monetary assets without physical substance owned or controlled by the Company. The Company’s intangible assets comprise the value of computer software.

Intangible assets are measured initially at cost. The Company analyses and assesses the useful life of an intangible asset on its acquisition. An intangible asset is regarded as having an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate economic benefits for the Company.

When the asset is available for use, an intangible asset with a finite useful life is amortised over its useful life. The amortisation method selected reflects the pattern in which the asset’s economic benefits are expected to be realised. If that pattern cannot be determined reliably, the straight-line method is used. An intangible asset with an indefinite useful life is not amortised.

The useful life and amortisation method for intangible assets with finite useful lives are reviewed at each balance sheet date. If the expected useful life of the asset or the amortisation method differs significantly from previous assessments, the amortisation period or amortisation method is changed accordingly as a change in accounting estimate.

17 Impairment of assetsFor assets excluding financial assets and repossessed assets, the Company assesses impairment of assets as follows.

At each balance sheet date, the Company assesses whether there is any indication that assets may be impaired. If there is any indication that an asset may be impaired, a recoverable amount is estimated for the asset. For an asset with an indefinite useful life, the asset is tested for impairment at least at each financial year-end, irrespective of whether there is any indication of impairment.

The recoverable amount of an asset is the higher of its fair value less costs to sell and the present value of the future cash flows expected to be derived from the asset. The Company estimates the recoverable amount of an asset on an individual basis.

If the result of the recoverable amount calculation indicates the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is recognised as an impairment loss and charged to the income statement. A provision for impairment loss of the asset is recognised accordingly.

Once an impairment loss is recognised, it shall not be reversed in a subsequent period.

18 Repossessed assetsRepossessed assets are initially recognised at fair value. The difference between the initial fair value and the sum of the related loan principal, interest receivable and impairment provision is taken into the income statement. At the balance sheet date, the repossessed assets are measured at the lower of their carrying value and net realisable value. When the carrying value of the repossessed assets is higher than the net realisable value, a provision for the decline in value of repossessed assets is recognised in the income statement.

19 Revenue recognitionRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and when the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Interest income and interest expenseFor all financial instruments measured at amortised cost and interest-bearing financial instruments classified as available-for-sale financial investments, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not the future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Company revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate. The change in carrying amount is recorded as interest income or expense.

Once the recorded value of a financial assets or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount.

Fee and commission incomeFee and commission income is recognised when the services have been rendered and the proceeds can be reasonably estimated.



20 Income taxIncome tax comprises current tax and movements in deferred tax balances.

Current tax is the amount of income taxes payable in respect of the taxable profit for a period. Taxable profit is the profit for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable.

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the tax authorities.

Deferred tax is provided on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, using tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax assets also arise from unused tax losses and unused tax credits.

A deferred tax liability is recognised for all taxable temporary differences, except:

(i) where the deferred tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction which contains both of the following characteristics, in this case the transaction is not a business combination; and it affects neither accounting profit nor taxable profit (or deductible loss) at the time of the transaction;

(ii) in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in jointly-controlled enterprises, where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

For deductible temporary differences, the carryforward of unused deductible losses and tax credits, the Company recognises the corresponding deferred tax asset to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences, the deductible losses and tax credits can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: 1) is not a business combination; and 2) at the time of the transaction, affects neither accounting profit nor taxable profit (or deductible loss).

For deductible temporary differences arising from investments in subsidiaries, associates, and interests in jointly-controlled enterprises, the corresponding deferred tax asset is recognised, to the extent that, it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available in the future, against which the temporary differences can be utilised.

At the balance sheet date, deferred tax assets and deferred tax liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, according to the requirements of tax laws.

At the balance sheet date, the Company reviews the carrying amount of a deferred tax asset. The carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profits will be available in future periods to allow the benefit of the deferred tax asset to be utilised. Any such reduction in the amount is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Current and deferred tax of the Company is recognised as income or an expense and included in the income statement for the current period, except to the extent that the tax arises from a business combination or a transaction or event which is recognised directly in owner’s equity.

21 Employee benefits

Short term employee benefitsSalaries and bonuses, social security contributions and other short-term employee benefits are accrued in the period in which services are rendered by the employees of the Company.

Defined contribution plansAccording to the statutory requirements in Mainland China, the Company is required to make contributions to the pension and insurance schemes that are separately administered by the local government authorities. Contributions to these plans are recognised in the income statement as incurred. In addition, the Company participates in a defined contribution retirement benefit insurance plan managed by an insurance company. Obligation for contributions to the insurance plan is borne by the Company, and contributions paid by the Company are recognised in the income statement as incurred.

Supplementary retirement benefitsCertain employees of the Company in Mainland China can enjoy supplementary retirement benefits after retirement. These benefits are unfunded. The cost of providing benefits is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in the income statement in the period in which they occur.




21 Employee benefits (Continued)

Share-based payment transactionsThe Company grants equity instruments or incurs liabilities for amounts that are determined based on the price of equity instruments, in return for services rendered by employees or other parties.

The cost of cash-settled transactions is measured initially at fair value at the grant date using an appropriate pricing model taking into account the terms and conditions upon which the instruments were granted. The fair value is expensed over the period until vesting with recognition of a corresponding liability. The liability is remeasured at each balance sheet date up to and including the settlement date, with changes in fair value recognised in the income statement.

22 Definition of cash equivalentsCash and cash equivalents are short-term, highly liquid monetary assets that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, including the unrestricted balance with the Central Bank, amounts due from banks and other financial institutions and reverse repurchase agreements that have short original maturity of generally within three months.

23 Related partiesIf a party has the power to control, jointly control or exercise significant influence over another party in making financial and operating decisions, they are regarded as related parties. Two or more parties are also regarded as related parties if they are subject to control, joint control or significant influence from the same party. The following are related parties of an enterprise:

(1) the enterprise’s parents;(2) the enterprise’s subsidiaries;(3) other enterprises which are controlled by the enterprise’s parents;(4) an investor who has joint control over the enterprise;(5) an investor who can exercise significant influence over the enterprise;(6) a joint venture in which the enterprise is a venturer;(7) an associate of the enterprise;(8) principal individual investors of the enterprise, and close family members of such individuals;(9) key management personnel of the enterprise or its parent, and close family members of such individuals;(10) other enterprises that are controlled, jointly controlled, or significantly influenced by the enterprise’s principal individual investors, key management personnel, or close family members of such individuals.

Enterprises are not regarded as related parties simply because they are under common control from the state, if no other related party relationships exist between them.

24 Fiduciary activitiesWhere the Company acts in a fiduciary capacity such as nominee, trustee or agent, assets arising thereon together with the related undertakings to return such assets to customers are excluded from the financial statements.

Entrusted loans granted by the Company on behalf of third-party lenders are recorded as off-balance sheet items. The Company acts as an agent and grants such entrusted loans to borrowers under the direction of the third-party lenders who fund these loans. The Company has been contracted by the third-party lenders to manage the administration and collection of these loans on their behalf. The third-party lenders determine both the underwriting criteria for and the terms of all entrusted loans including their purposes, amounts, interest rates, and repayment schedules. The Company charges a commission related to the management of the entrusted loans. The commission income is recognized pro rata over the period in which the service is provided. The risk of loan loss is borne by the third-party lenders.

25 LeasesA lease that transfers in substance all the risks and rewards incident to ownership of an asset is classified as a finance lease. An operating lease is a lease other than a finance lease.

Operating leases for lesseesLease payments under an operating lease are recognized by a lessee on a straight-line basis over the lease term, and either included in the cost of another related asset or charged to the income statement.

Operating leases for lessorsLease income from operating leases is recognized by the lessor in the income statement on a straight-line basis over the lease term.



26 Contingent liabilitiesA contingent liability is a possible obligation that arises from past transactions or events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events. It can also be a present obligation arising from past transactions or events but is not recognised because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

27 ProvisionsAn obligation related to a contingency is recognised as a provision when all of the following conditions are satisfied:

(i) the obligation is a present obligation of the Company;

(ii) it is probable that an outflow of economic benefits will be required to settle the obligation; and

(iii) the amount of the obligation can be measured reliably.

A provision is initially measured at the best estimate of the expenditure required to settle the related present obligation. Factors pertaining to a contingency such as the risks, uncertainties and time value of money are taken into account as a whole in reaching the best estimate. The Company reviews the carrying amount of a provision at the balance sheet date. When there is clear evidence that the carrying amount of a provision does not reflect the current best estimate, the carrying amount is adjusted to the current best estimate.

28 Trade date accountingExcept for loans and receivables, all regular way purchases and sales of financial assets are recognised on the trade date, that is, the date on which the Company commits to purchase or sell the asset. A regular way purchase and sale is the purchase or sale of financial assets that requires delivery of assets within the time frame generally established by regulation or convention in the marketplace.

29 OffsettingFinancial assets and financial liabilities are offset only when the Company has a legally enforceable right to offset the recognised amounts and both parties of the transaction intend to settle on a net basis.

30 DividendsDividends are recognized as a liability and deducted from equity when they are approved by the Company’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Company. Dividends for the year that are approved after the balance sheet date are disclosed as an event after the balance sheet date.

31 Significant accounting judgements and estimatesIn the process of applying the Company’s accounting policies, management has made assumptions of impacts arising from uncertain future events on the financial information. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year/period are discussed below. Apart from those assumptions and estimations, judgements are also made and are set out below.

Designation of held-to-maturity investmentsNon-derivative financial assets with fixed or determinable payments and a fixed maturity are classified as held-to-maturity investments when the Company has the positive intention and ability to hold the investments to maturity. Accordingly, in evaluating whether a financial asset shall be classified as held-to-maturity investment, significant management judgement is required. If the Company fails to correctly assess its intention and ability to hold the investments to maturity and the Company sells or reclassifies more than an insignificant amount of held-to-maturity investments before maturity, the Company shall classify the whole held-to-maturity investment portfolio as available-for-sale.

Impairment losses of loans and advancesThe Company determines periodically whether there is any objective evidence that an impairment loss on loans and advances has been incurred. If any such evidence exists, the Company assesses the amount of impairment losses. The amount of impairment losses is measured as the difference between the carrying amount and the present value of estimated future cash flows. Assessing the amount of impairment losses requires significant judgement on whether objective evidence for impairment exists and also significant estimates when determining the present value of the expected future cash flows.




31 Significant accounting judgements and estimates (Continued)

Income taxDetermining income tax provisions requires the Company to estimate the future tax treatment of certain transactions. The Company carefully evaluates tax implications of transactions in accordance with prevailing tax regulations and makes tax provisions accordingly. In addition, deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This requires significant estimates on the tax treatments of certain transactions and also significant assessment on the probability that adequate future taxable profits will be available for the deferred income tax assets to be recovered.

Fair value of financial instrumentsIf the market for a financial instrument is not active, the Company establishes fair value by using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable willing parties, if available, reference to the current fair value of another instrument that is substantially the same, and a discounted cash flow analysis. To the extent practicable, the valuation technique makes maximum use of market inputs. However, where market inputs are not available, management needs to make estimates on areas such as credit risk (both the Company’s and the counterparty’s), volatility and correlation. Changes in assumptions about these factors could affect the reported fair values of financial instruments.

Impairment of available-for-sale and held-to-maturity investmentsIn determining whether there is any objective evidence that impairment losses on available-for-sale and held-to-maturity investments have occurred, the Company assesses periodically whether there has been a significant or prolonged decline in the fair value of the investment below its cost or carrying amount, or whether other objective evidence of impairment exists based on the investee’s financial conditions and business prospects, including industry environment, change of technology, operating and financing cash flows, etc. This requires significant level of judgement of the management, which would affect the amount of impairment losses.

32 TaxesMajor taxes and related tax rates applicable to the Company are as follows:

TAX Basis of tax assessment Tax rate (%)

Business Tax Business income (not including interest income from transactions 5 with financial institutions)

City Maintenance and Construction Tax Amount of business tax 1 to 7

Corporate Income Tax Amount of taxable income 18, 25

During the 5th Session of the 10th National People’s Congress, which was concluded on 16 March 2007, the PRC Corporate Income Tax Law (“the New Corporate Income Tax Law”) was approved and became effective on 1 January 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. The income tax rate applicable to the branches in Shenzhen, Zhuhai and Haikou will progressively increase to the tax rate of 25% in five years. The income tax rate applicable to the branches in other regions decreased from 33% to 25% effective from 1 January 2008.


D Notes to Key Items in the Financial Statements

1 Cash on hand and due from the Central Bank

In RMB’000 31 December 2008 31 December 2007

Cash on hand 981,859 1,062,241

Statutory reserve with the Central Bank – RMB 29,321,249 28,894,261

Statutory reserve with the Central Bank – foreign currency 309,783 327,038

Unrestricted balance with the Central Bank 9,144,712 10,436,341

Other deposits with the Central Bank – fiscal deposits 10,298 6,506

Total 39,767,901 40,726,387

Based on the related RMB and foreign currency deposits, the Company places respective statutory reserves with the Central Bank in accordance with the requirements from the People’s Bank of China. These reserve deposits are not available for use in the Company’s daily operations.

Fiscal deposits represent the amounts received from government-related bodies that are required to be deposited with the Central Bank according to the relevant regulations.

2 Placement of deposits with other financial institutions

Analysed by location and counterparty


Domestic banks 18,313,172 2,273,251

Other domestic financial institutions 45,462 68,150

Overseas banks 3,182,870 1,739,075

Subtotal 21,541,504 4,080,476

Less: Impairment provision (Note D.18) (40,695 ) (66,786 )

Total 21,500,809 4,013,690

As at 31 December 2008, included in this total amount of placements of deposits with other financial institutions is an amount of RMB 44,520 thousand (31 December 2007: RMB 69,920 thousand) impaired assets brought forward from prior years.



D Notes to Key Items in the Financial Statements (Continued)

3 Funds loaned to other financial institutions



Domestic banks 4,101,050 687,940

Domestic financial companies 158,550 48,550

Domestic trust investment companies 25,022 80,511

Overseas banks 4,981,133 2,135,552

Subtotal 9,265,755 2,952,553

Less: Impairment provision (Note D.18) (29,079 ) (309,897 )

Total 9,236,676 2,642,656

As at 31 December 2008, included in this total amount of loans funded to other financial institutions is an amount of RMB 33,572 thousand (31 December 2007: RMB 323,771 thousand) impaired assets brought forward from prior years.

4 Financial assets/financial liabilities at fair value through profit or loss

Financial assets at fair value through profit or loss


Bonds held for trading 36,610 276,802

Financial assets designated at fair value through profit or loss 4,831 1,200,823

Total 41,441 1,477,625

Bond investments analysed by issuerGovernments and the Central Bank – 816,669

Policy banks 36,610 616,136

Other banks and non-bank financial institutions 4,831 44,820

Total 41,441 1,477,625

In the opinion of management, there are no significant restrictions on realising the financial assets at fair value through profit or loss.

Financial liabilities at fair value through profit or loss


Financial liabilities designated at fair value through profit or loss 39,420 1,246,657

As at 31 December 2008, the Company designated financial liabilities of RMB 39,420 thousand (31 December 2007: RMB 1,246,657 thousand) as at fair value through profit or loss upon their initial recognition. The amount of change in their total fair value that was attributable to changes in the credit risk was not significant as the credit spread of the Company remained stable during the year. The difference between the carrying amount and the amount that the Company would be contractually required to pay at maturity to the holders of these financial liabilities is RMB 567 thousand (31 December 2007: RMB 31,506 thousand).



5 Derivative financial instrumentsA derivative is a financial instrument, the value of which is derived from the value of another “underlying” financial instrument, an index or some other variables. Typically, an “underlying” financial instrument is a share, a commodity or bond price, an index value or an exchange or interest rate. The Company uses derivative financial instruments such as forward contracts, swaps and options.

The notional amount of a derivative represents the amount of an underlying asset upon which the value of the derivative is based. It indicates the volume of business transacted by the Company but does not reflect the risk.

The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm’s length transaction.

At each balance sheet date, the Company has positions in the following types of derivatives:

31 December 2008

Notional amounts with remaining lives of Fair value Up to 3 monthsIn RMB’000 3 months to 1 year 1 to 5 years Total Assets Liabilities

Foreign exchange derivative instrumentsForward foreign exchange contracts 11,720,148 7,181,310 73,121 18,974,579 182,345 (27,016 )

Interest rate derivative instrumentsInterest rate swap contracts – 130,000 1,140,000 1,270,000 86,632 (6,733 )

Equity derivative instrumentsEquity option contracts 511,437 1,508,952 – 2,020,389 21,312 (21,312 )Equity swap contracts – 46,767 – 46,767 – (3,075 )

Other derivative instruments 19,219 407,060 – 426,279 462 (462 )Total 12,250,804 9,274,089 1,213,121 22,738,014 290,751 (58,598 )

31 December 2007


Foreign exchange derivative instrumentsForward foreign exchange contracts 5,847,222 5,077,180 – 10,924,402 166,122 (139,604 )

Interest rate derivative instrumentsInterest rate swap contracts – – 170,000 170,000 – (1,553 )

Equity derivative instrumentsEquity option contracts 805,824 224,966 1,531,691 2,562,481 71,417 (76,149 )

Equity swap contracts – 482,036 – 482,036 16,410 –

Other derivative instruments – 1,482,337 – 1,482,337 37,867 (37,867 )

Total 6,653,046 7,266,519 1,701,691 15,621,256 291,816 (255,173 )

As at 31 December 2008 and 31 December 2007, no derivatives were designated as hedging instruments.




6 Reverse repurchase agreements

Analysed by counterparty


Banks 31,854,311 22,499,511

Non-bank financial institutions 2,908,042 11,299,963

Subtotal 34,762,353 33,799,474

Less: Impairment provisions (Note D.18) (29,000 ) (30,549 )

Total 34,733,353 33,768,925

As at 31 December 2008, included in this total amount of reverse repurchase agreements is an amount of RMB 50 million (31 December 2007: RMB 51,722 thousand) impaired assets brought forward from prior years.

Analysed by collateral


Securities 1,020,000 551,722

Bills 33,572,353 22,470,502

Loans 170,000 10,777,250

Subtotal 34,762,353 33,799,474


Total 34,733,353 33,768,925

Fair value of collateralUnder certain reverse repurchase agreements, the Company has held collateral that is permitted to be sold or re-pledged in the absence of default by the owners of the collateral. At the balance sheet date, the fair values of the collateral held on such terms are as follows:

31 December 2008 31 December 2007

Amount of Amount of reverse repurchase Fair value reverse repurchase Fair valueIn RMB’000 agreements of collateral agreements of collateral

Bills 33,572,353 33,572,353 11,425,106 11,425,106

Loans 170,000 170,000 10,777,250 10,777,250

Total 33,742,353 33,742,353 22,202,356 22,202,356

The above fair value of collateral included bills amounting to RMB 15,578,493 thousand (31 December 2007: RMB 1,393,049 thousand) that were re-pledged at the year end. The Company has an obligation to return such collateral.

7 Accounts receivable


Receivables with respect to making payments on behalf of customers 1,119,445 778,069

Receivables under factoring 240,147 –

Total 1,359,592 778,069

8 Interest receivable

Balance at beginning Increase during Collection during Balance at end In RMB’000 of the year the year the year of the year

Interest receivable on bond investments 548,480 1,819,818 (1,508,071 ) 860,227

Interest receivable on loans and amounts due from other financial institutions 577,892 17,367,898 (17,200,381 ) 745,409

Total 1,126,372 19,187,716 (18,708,452 ) 1,605,636



9 Loans and advances

a Analysed by corporation and individual


Loans and advances to corporationsLoans 167,617,360 149,712,815

Discounted bills 42,217,821 7,780,001

Subtotal 209,835,181 157,492,816

Loans and advances to individualsCredit cards 3,722,178 2,010,827

Residential mortgages 65,861,574 59,297,346

Others 4,322,433 2,234,540

Subtotal 73,906,185 63,542,713

Total loans and advances 283,741,366 221,035,529

Less: Loan impairment provisions (Note D.9f) (2,026,679 ) (6,023,964 )

Loans and advances, net 281,714,687 215,011,565

As at 31 December 2008, included in the discounted bills is an amount of RMB 12,691,340 thousand (31 December 2007: Nil) that was pledged for repurchase agreements.

In addition, as at 31 December 2008, the Company has transferred out (without recourse) discounted bills amounting to RMB 30.5 billion (31 December 2007: RMB 28.3 billion) that have not yet matured at the year end.

b Analysed by industry


Agriculture, husbandry and fisheries 598,700 506,927

Extraction (Heavy industry) 2,990,127 2,812,800

Manufacturing (Light industry) 69,633,354 55,249,167

Energy 12,437,428 7,832,400

Transportation, storage and communication 13,138,335 12,497,393

Commercial 44,889,464 26,281,499

Real estate 15,882,930 14,411,307

Service, technology, culture and sanitary industries 38,325,644 29,969,369

Construction 10,770,355 7,340,077

Others 75,075,029 64,134,590




c Analysed by type of collateral held or other credit enhancement


Unsecured 47,041,232 31,864,556

Guaranteed 59,769,814 62,372,647

Secured by collateral 134,712,499 119,018,325

of which: secured by mortgages 111,667,469 89,703,166

secured by monetary assets 23,045,030 29,315,159

Subtotal 241,523,545 213,255,528








9 Loans and advances (Continued)

d Ageing analysis of past due loans

31 December 2008

Overdue by Overdue by 90 days to Overdue by Overdue by 1 to 90 days, 1 year, 1 to 3 years, more thanIn RMB’000 inclusive inclusive inclusive 3 years Total

Unsecured 480,859 23,932 – – 504,791Guaranteed 217,842 221,673 6,204 261,646 707,365Secured by collateral 2,554,398 494,824 586,104 640,253 4,275,579of which: secured by mortgages 2,315,592 466,465 406,337 520,253 3,708,647 secured by monetary assets 238,806 28,359 179,767 120,000 566,932Total 3,253,099 740,429 592,308 901,899 5,487,735

31 December 2007


Unsecured 239,346 46,310 100,395 25,132 411,183

Guaranteed 120,429 126,920 2,527,372 3,996,214 6,770,935

Secured by collateral 2,265,619 836,882 1,449,149 2,724,078 7,275,728

of which: secured by mortgages 1,977,097 559,370 1,029,084 1,881,857 5,447,408

secured by monetary assets 288,522 277,512 420,065 842,221 1,828,320

Total 2,625,394 1,010,112 4,076,916 6,745,424 14,457,846

Overdue loans refer to the loans with either principal or interest being overdue by one day or more.

e Analysed by geographical region


Southern China 86,815,602 78,054,481

Eastern China 100,457,432 78,061,876

Northern and north-eastern China 75,600,230 49,966,780

South-western China 19,700,651 14,360,528

Offshore businesses 1,167,451 591,864




f Movements in impairment provisions for loans and advances

2008 2007

In RMB’000 Indiviual Collective Total Individual Collective Total

Balance at beginning of the year 5,073,555 950,409 6,023,964 6,452,271 484,870 6,937,141

Charge for the year 5,667,836 1,305,003 6,972,839 1,380,948 565,295 1,946,243

Amounts written off (9,896,652 ) (710,060 ) (10,606,712 ) (2,202,225 ) (99,756 ) (2,301,981 )

Reversal for the year

Recovery of loans written off previously 29,944 – 29,944 34,061 – 34,061

Unwinding of discounts of provisions for impaired loans and advances (384,238 ) – (384,238 ) (518,592 ) – (518,592 )

Other changes for the year (9,118 ) – (9,118 ) (72,908 ) – (72,908 )

Balance at end of the year (Note D.18) 481,327 1,545,352 2,026,679 5,073,555 950,409 6,023,964



10 Available-for-sale financial assets


Bond investments analysed by issuerGovernments and the Central Bank 29,697,175 10,733,081

Policy banks 18,789,453 6,621,821


Corporations 133,094 88,522

Total bond investments 48,732,057 17,716,275

Equity investments 67,659 134,617

Total 48,799,716 17,850,892

As at 31 December 2008, included in the bond investments is an amount of RMB 1,984,666 thousand (31 December 2007: Nil) that was pledged for repurchase agreements.

11 Held-to-maturity investments



Policy banks 5,786,616 5,738,760



Total 15,584,755 15,911,486

As at 31 December 2008, included in the bond investments are amounts of RMB 205,485 thousand (31 December 2007: RMB 1,124,046 thousand), RMB 3,612,979 thousand (31 December 2007: Nil), RMB 5,405,600 thousand (31 December 2007: RMB 14,555,660 thousand) that were pledged for loan guarantee contracts, agreements of time deposit from PBOC and repurchase agreements, respectively.

There are no changes in the assessment of the Company’s intention and ability to hold the investments to maturity.

12 Receivables – bond investments


PBOC bills 13,450,000 13,450,000

Subordinated bonds issued by financial institutions 300,000 –

Total 13,750,000 13,450,000

These bond investments are financial assets with fixed or determinable payments that are not quoted in an active market.





13 Long term equity investments

NAME OF INVESTEEIn RMB’000 31 December 2008 31 December 2007

Cost methodShenzhen Yuan Sheng Industrial Co., Ltd. – 507,348

China UnionPay Co., Ltd. 50,000 50,000

Gintian Industry (Group) Co., Ltd. 9,662 9,662

Hainan Pearl River Holdings Co., Ltd. 9,650 9,650

Hainan Wuzhou Travel Co., Ltd. 5,220 5,220

Meizhou Polyester (Group) Co. 1,100 1,100

Shenzhen Zoto Investment Co.,Ltd. (Note 1) 2,500 2,500

Hainan Junhe Travel Co., Ltd. 2,800 2,800

Guangdong Sanxing Enterprises (Group) Co., Ltd. 500 500

Hainan Baiyunshan Co., Ltd. 1,000 1,000

Hainan Saige Co., Ltd. 1,000 1,000

Hainan Zhuxin Investment Co., Ltd. (Note 2) 500 500

Hainan Zhonghailian Real Estate Co., Ltd. 1,000 1,000

Shenzhen Jiafeng Textile Industrial Co., Ltd. 16,725 16,725

SWIFT 230 230

Yong An Property Insurance Co., Ltd. 67,000 67,000

Wuhan Steel Electricity Co., Ltd. 32,175 32,175

Founder Securities Co., Ltd. (Note 3) 4,283 4,283

Yihua Real Estate Co., Ltd. (Note 4) – 10,000

Chengdu Unionfriend Network Co. Ltd. 20,000 –

Total 225,345 722,693

Equity methodAssociates

Chengdu Gongtou Assets Management Co., Ltd. 269,065 –

Shandong Xinkaiyuan Real Estate Co., Ltd. 30,607 –

299,672 –

Long term equity investments 525,017 722,693


Long term equity investments, net 417,390 251,948

Notes: 1. Shenzhen Zoto Investment Co., Ltd. was originally named as Shenzhen Central South China Industrial Co..

2. Hainan Zhuxin Investment Co., Ltd. was originally named as Hainan First Investment Co., Ltd..

3. The original investee was Sun Securities Co., Ltd.. At 12 May 2008, Founder Securities Co., Ltd. was approved to acquire Sun Securities Co., Ltd..

4. Yihua Real Estate Co., Ltd. was originally named as Macat Optics & Electronics Co., Ltd..

The movement in impairment provisions for long term equity investments is as follows:

Balance at beginning Charged for Balance at endIn RMB’000 of the year the year Other movements of the year

Shenzhen Yuan Sheng Industrial Co., Ltd. 391,118 55,184 (446,302 ) –

Chengdu Gongtou Assets Management Co., Ltd. – 20,000 – 20,000

Others 79,627 8,000 – 87,627

Total 470,745 83,184 (446,302 ) 107,627



13 Long term equity investments (Continued)

The movements in the associates during the year are as follows:

Jan–Dec 2008

Movements in equity

Percentage Share of Accumulated Change

Impairment provision Balance at

of registered Initial profit for Dividend share of in other Charge for Accumulated end ofIn RMB’000 capital (%) investment the year distribution profit equity the year balance the year

Chengdu Gongtou Assets Management Co., Ltd. (Note 1) 33.20 259,836 22,675 (3,320 ) 19,355 (10,126 ) (20,000 ) (20,000 ) 249,065Shandong Xinkaiyuan Real Estate Co.,Ltd. (Note 2) 15.42 30,607 – – – – – – 30,607 290,443 22,675 (3,320 ) 19,355 (10,126 ) (20,000 ) (20,000 ) 279,672

Notes: 1. At 30 January 2008, the Company obtained 33.2% of the shareholding of Chengdu Gongtou Assets Management Co., Ltd. as repossessed assets.

2. At 18 August 2008, the Company obtained 15.42% of the shareholding of Shandong Xinkaiyuan Real Estate Co., Ltd. as repossessed assets. The Company has appointed a representative at the board of the investee.

The key financial information of the associates is as follows:

Percentage of Percentage of Place of Nature of Registered equity held by voting right held byIn RMB’000 registration business capital the Company (%) the Company (%)

Chengdu Gongtou Assets Management Co., Ltd. Chengdu Asset management 518,700 33.20 33.20

Shandong Xinkaiyuan Real Estate Co.,Ltd. Jinan Real estate 50,000 15.42 15.42

From 30 January 2008 31 December 2008 to 31 December 2008

In RMB’000 Total assets Total liabilities Operating income Net profit (Note)

Chengdu Gongtou Assets Management Co., Ltd. 1,458,061 632,679 72,994 68,300

From 18 August 2008 31 December 2008 to 31 December 2008

In RMB’000 Total assets Total liabilities Operating income Net profit

Shandong Xinkaiyuan Real Estate Co.,Ltd. 288,105 78,102 – –

Note: The amount represents the net profit attributable to the parent company on the face of the consolidated income statement of Chengdu Gongtou Assets Management Co., Ltd.

14 Investment properties


Balance at beginning of the year 441,098 460,656

Disposals during the year (2,058 ) (25,251 )

Fair value changes recognised in the income statement (15,087 ) 42,733

Transferred to owner-occupied properties during the year, net (12,263 ) (37,040 )

Balance at end of the year 411,690 441,098

The Company’s investment properties are mainly properties and buildings, which are rented to third parties under operating leases. The investment properties are situated in locations where there are active property markets and the fair value of the investment properties can be reliably determinable on a continuing basis. Accordingly, management decided to adopt the fair value model for subsequent measurement of the investment properties, which are valued by independent professionally qualified valuers on, at least, an annual basis. The revaluation as at 31 December 2008 was performed by Shenzhen Guozi Land and Real Estate Valuation Co., Ltd. In connection with this, the valuation was carried out by qualified persons who are members of the Shenzhen Institute of Real Estate Appraisers. Certain investment properties were transferred to owner-occupied properties mainly because the rental agreements of these properties expired during the year.




14 Investment properties (Continued)

The gross rental income earned from the investment properties during the year amounted to RMB 38,982 thousand (2007: RMB 45,377 thousand). The total direct operating expense (including repairs and maintenance expenses) for the investment properties, with or without rental income generated during the year, was RMB 2,589 thousand (2007: RMB 3,284 thousand).

15 Fixed assets

2008

Balance at Transfer from beginning of construction Balance at endIn RMB’000 the year Addition in progress Subtraction of the year

At costProperties and buildings 1,536,206 35,262 – (32,966 ) 1,538,502Transportation vehicles 95,235 15,612 957 (29,010 ) 82,794Computers 700,932 194,663 7,132 (126,691 ) 776,036Electronic appliances 307,632 88,250 16,383 (19,033 ) 393,232Owner-occupied property improvement 318,845 6,677 10,759 (653 ) 335,628Total 2,958,850 340,464 35,231 (208,353 ) 3,126,192

Accumulated depreciationProperties and Buildings 413,076 51,594 – (9,299 ) 455,371Transportation vehicles 73,338 7,278 – (25,170 ) 55,446Computers 471,129 97,726 – (120,125 ) 448,730Electronic appliances 203,740 36,116 – (16,621 ) 223,235Owner-occupied property improvement 243,289 19,211 – (303 ) 262,197Total 1,404,572 211,925 – (171,518 ) 1,444,979Less: Impairment provision (Note D.18) – (6,289 )Net book value 1,554,278 1,674,924

2007


At costProperties and buildings 1,518,063 53,708 – (35,565 ) 1,536,206

Transportation vehicles 218,195 6,535 – (129,495 ) 95,235

Computers 601,519 134,271 1,114 (35,972 ) 700,932

Electronic appliances 269,035 49,125 10,157 (20,685 ) 307,632

Owner-occupied property improvement 301,766 2,489 25,139 (10,549 ) 318,845

Total 2,908,578 246,128 36,410 (232,266 ) 2,958,850

Accumulated depreciationProperties and Buildings 373,005 51,728 – (11,657 ) 413,076


Computers 413,418 83,560 – (25,849 ) 471,129

Electronic appliances 182,440 32,609 – (11,309 ) 203,740

Owner-occupied property improvement 225,340 21,434 – (3,485 ) 243,289

Total 1,365,789 206,652 – (167,869 ) 1,404,572

Net book value 1,542,789 1,554,278

As at 31 December 2008, the original cost and net book value of properties and buildings amounting to RMB 143,053 thousand (31 December 2007: RMB 130,831 thousand) and RMB 88,723 thousand (31 December 2007: RMB 87,453 thousand) respectively, are in use by the Company without having the registration certificates of property rights.



16 Deferred tax assets/deferred tax liabilities

2008

Balance at Recognised in Recognised beginning the income directly Balance at end of the year statement in equity of the yearIn RMB’000 (Note D.42)

Deferred tax assetsImpairment provisions 945,647 796,813 – 1,742,460Others 48,742 33,476 (12,862 ) 69,356Subtotal 994,389 830,289 (12,862 ) 1,811,816

Deferred tax liabilitiesTax losses deducted against taxable profits of different tax rate (54,135 ) 54,135 – –Changes in fair values (44,409 ) (45,354 ) (251,916 ) (341,679 )Subtotal (98,544 ) 8,781 (251,916 ) (341,679 )Total 895,845 839,070 (264,778 ) 1,470,137

2007

Balance at Recognised in Recognised beginning the income directly Balance at end of the year statement in equity of the yearIn RMB’000 (Note D.42)

Deferred tax assetsImpairment provisions 988,120 (42,473 ) – 945,647

Others 27,810 9,532 11,400 48,742

Subtotal 1,015,930 (32,941 ) 11,400 994,389

Deferred tax liabilitiesTax losses deducted against taxable profits of different tax rate (211,652 ) 157,517 – (54,135 )

Changes in fair values (40,747 ) (16,081 ) 12,419 (44,409 )

Others (10,269 ) 10,269 – –

Subtotal (262,668 ) 151,705 12,419 (98,544 )

Total 753,262 118,764 23,819 895,845




17 Other assets

a Analysed by nature


Prepayments 167,323 93,963

Prepaid legal expenses 113,948 164,437

Long term deferred expenses 355,458 276,758

Repossessed assets (Note D.17b) 937,303 1,005,318

Construction in progress 257,040 10,809

Receivable of exercise of warrants – 789,961

Receivable of bills due from other banks 54,274 2,288

Others 262,665 265,297

Total other assets 2,148,011 2,608,831

Less: Impairment provision

Repossessed assets (Note D.17b) (319,480 ) (198,143 )

Others (Note D.18) (212,637 ) (238,448 )

Total impairment provision (532,117 ) (436,591 )

Other assets, net 1,615,894 2,172,240

b Repossessed assets


Land, properties and buildings 915,282 983,027

Others 22,021 22,291

Total 937,303 1,005,318

Less: Provision for decline in value (Note D.18) (319,480 ) (198,143 )

Repossessed assets, net 617,823 807,175

During the year, the Company took possession of collateral held as security with a carrying amount of RMB 52,152 thousand (2007: RMB 37,319 thousand). The collateral mainly comprises buildings. During the year, the Company disposed of repossessed assets with their gross carrying value amounting to RMB 120,167 thousand (2007: RMB 175,270 thousand). The Company plans to dispose of the repossessed assets through auctions, bidding or transfers in future.



18 Impairment losses on assets

2008

Unwinding of discounts of Balance at Charge/ Recovery of provisions for Balance beginning (reversal) Amounts loans written impaired loans Other at end of the year for the year written off off previously and advances movements of the yearIn RMB’000 Note D (Note D.41)

Provision for decline in value of precious metals 61 198 – – – – 259Impairment provision for placement of deposits with other financial institutions 2 66,786 (1,496 ) (25,400 ) – – 805 40,695Impairment provision for funds loaned to other financial institutions 3 309,897 8,619 (284,987 ) – – (4,450 ) 29,079Impairment provision for reverse repurchase agreements 6 30,549 172 (1,721 ) – – – 29,000Impairment provision for loans and advances 9f 6,023,964 6,972,839 (10,606,712 ) 29,944 (384,238 ) (9,118 ) 2,026,679Impairment provision for long term equity investments 13 470,745 83,184 – – – (446,302 ) 107,627Provision for decline in value of repossessed assets 17b 198,143 126,114 – – – (4,777 ) 319,480Impairment provision for fixed assets 15 – 6,289 – – – – 6,289Impairment provision for other assets 17a 238,448 37,990 (61,447 ) – – (2,354 ) 212,637Total 7,338,593 7,233,909 (10,980,267 ) 29,944 (384,238 ) (466,196 ) 2,771,745

2007

Unwinding of discounts of Balance at Charge/ Recovery of provisions for Balance beginning (reversal) Amounts loans written impaired loans Other at end of the year for the year written off off previously and advances movements of the yearIn RMB’000 Note D (Note D.41)

Provision for decline in value of precious metals – 61 – – – – 61

Impairment provision for placement of deposits with other financial institutions 2 67,425 361 (1,000 ) – – – 66,786

Impairment provision for funds loaned to other financial institutions 3 324,985 8,283 (17,498 ) – – (5,873 ) 309,897

Impairment provision for reverse repurchase agreements 6 27,550 2,999 – – – – 30,549

Impairment provision for loans and advances 9f 6,937,141 1,946,243 (2,301,981 ) 34,061 (518,592 ) (72,908 ) 6,023,964

Impairment provision for long term equity investments 13 470,745 – – – – – 470,745

Provision for decline in value of repossessed assets 17b 189,538 14,419 – – – (5,814 ) 198,143

Impairment provision for other assets 17a 188,891 51,393 – – – (1,836 ) 238,448

Total 8,206,275 2,023,759 (2,320,479 ) 34,061 (518,592 ) (86,431 ) 7,338,593




19 Placement of deposits from other financial institutions


Domestic banks 21,891,481 16,789,193

Domestic non-bank financial institutions 14,171,551 15,599,569

Total 36,063,032 32,388,762

20 Funds borrowed from other financial institutions


Domestic banks 7,380,000 2,300,000

21 Repurchase agreements


Analysed by collateralSecurities 10,360,000 14,110,800

Bills 28,556,115 2,356,782

Total 38,916,115 16,467,582

Analysed by counterpartyBanks 36,006,698 11,099,633


Total 38,916,115 16,467,582

22 Customer deposits


Current depositsCorporate customers 86,279,463 80,950,179

Personal customers 19,234,242 16,518,537

Subtotal 105,513,705 97,468,716

Fixed depositsCorporate customers 100,842,409 76,783,023


Subtotal 139,679,311 101,154,501

Guarantee deposits 104,393,453 74,801,665

Fiscal deposits 6,772,448 6,717,154

Time deposits from PBOC 3,000,000 –

Inward and outward remittances 1,155,119 1,134,945

Total 360,514,036 281,276,981



23 Employee benefits payable

2008

Balance at beginning Increase during Payment made Balance at endIn RMB’000 of the year the year during the year of the year

Salaries, bonuses, allowances and subsidies 706,104 2,034,524 (1,740,211 ) 1,000,417 including: Deferred bonus accrual (Note) 42,800 89,148 – 131,948Social insurance, supplementary pension contributions and staff welfare 219,307 494,408 (466,712 ) 247,003Housing funds – 89,934 (89,934 ) –Labour union and training expenses – 56,875 (56,875 ) –Others – 9,362 (9,362 ) –Total 925,411 2,685,103 (2,363,094 ) 1,247,420

2007


Salaries, bonuses, allowances and subsidies 453,633 1,599,861 (1,347,390 ) 706,104

including: Deferred bonus accrual (Note) 9,000 33,800 – 42,800

Social insurance, supplementary pension contributions and staff welfare 160,995 364,568 (306,256 ) 219,307

Housing funds – 69,842 (69,842 ) –

Labour union and training expenses – 54,177 (54,177 ) –

Others – 41,882 (41,882 ) –

Total 614,628 2,130,330 (1,819,547 ) 925,411

Note: The amount of deferred bonus is determined based on the indicators of asset quality and profitability and the share price of the Company; and will be settled in cash in accordance with the terms of the arrangement. No payment has been made by the Company since the set up of the deferred bonus schemes.

24 Tax payable


Corporate income tax 688,812 412,970

Business tax and surcharges 382,269 320,823

Others 126,768 85,963

Total 1,197,849 819,756

25 Accounts payable


Payables with respect to amounts owed to other financial institutions 507,483 340,297

26 Interest payable

Balance at beginning of Increase during Payment made Balance at endIn RMB’000 the year the year during the year of the year

Interest payable for deposits from customers and financial institutions 1,728,071 13,232,505 (12,298,855 ) 2,661,721

Interest payable for subordinated bonds – 323,341 (21,838 ) 301,503

Total 1,728,071 13,555,846 (12,320,693 ) 2,963,224




27 Subordinated bonds payable


Subordinated bonds payable 7,964,282 –

As approved by the CBRC and PBOC, the Company issued three sets of subordinated bonds with a total amount of RMB 8 billion in the inter-bank bond market on 21 March 2008 and 28 October 2008. These subordinated bonds comprise two sets of fixed-rate bonds with nominal values of RMB 6 billion and RMB 1.5 billion respectively; and one set of floating-rate bonds with a nominal value of RMB 0.5 billion. The duration of the bonds is of 10 years with a call option at the end of the fifth year. The coupon rates for the first five years are 6.10% and 5.30% for the two sets of fixed-rate bonds; and SHIBOR3M+1.40% for the floating-rate bonds. If the Company does not exercise the call option at the end of the fifth year, both the fixed and floating coupon rates will increase by 3%.

28 Other liabilities


Bank drafts 195,295 712,635

Amounts pending for settlement and clearing 57,917 91,552

Financial guarantee contracts 53,324 32,595

Amounts payable for bond redemption as intermediaries 29,456 25,425

Accrued expenses 108,002 90,511

Amounts payable for acquisition of bonds – 250,000

Inactive deposit account balances 44,414 62,367

Dividends payable 14,172 14,022

Subscription monies of open-ended funds 16,798 106,481

Others 301,058 223,029

Total 820,436 1,608,617

29 Share capitalAs at 31 December 2008, the number of the Company’s registered, issued and fully paid shares was 3,105,434 thousand, with a price of RMB 1 each. The nature and the structure of the share capital are as follows:

31 December Movement for 31 DecemberIn RMB’000 2007 % the year 2008 %

Restricted tradable sharesState-owned corporation shares 4,626 0.20 (4,626 ) – –

Domestic non-state-owned corporation shares 183,314 8.00 (179,459 ) 3,855 0.13

Domestic individual shares 543 0.02 (465 ) 78 –

Foreign corporation shares 348,103 15.18 (31,208 ) 316,895 10.20

Total restricted tradable shares 536,586 23.40 (215,758 ) 320,828 10.33

Unrestricted tradable sharesRMB ordinary shares 1,756,821 76.60 1,027,785 2,784,606 89.67

Total unrestricted tradable shares 1,756,821 76.60 1,027,785 2,784,606 89.67

Total shares 2,293,407 100 812,027 3,105,434 100.00

In accordance with the Measures for the Administration of the Share-trading Reform of Listed Companies, the original non-tradable shareholders of the Company promised not to conduct any transfer or trading of the non-tradable shares held within 12 months since the day when the trading right is acquired. After the expiration of the above commitment term, the former non-tradable shares trading through the stock exchange shall not be over 5% of the total shares of the Company within 12 months, and not over 10% within 24 months.



29 Share capital (Continued)

The increase in share capital during the year was because of the exercise of warrants and appropriation of share dividends.

Pursuant to the resolution of the first 2007 extraordinary shareholders’ meeting held on 8 June 2007, the Company has issued 104,337,917 12-month Bermuda warrants (hereinafter referred to as “SFC 2”) to the shareholders registered in the shareholders’ register on the registration date of warrant issue. Each shareholder obtains 0.5 warrants for every 10 shares. Each warrant can be used to purchase one share of the Company, at an exercise price of RMB 19 Yuan for each share. According to the relevant rules of the warrant issue, the warrants held by the holders of restricted tradable shares, and directors, supervisors and senior management of the Company are not tradable whereas the other warrants are tradable. Up to the last trading date for SFC 2 on 27 June 2008, there were 95,388,057 SFC 2 exercised in total, increasing the share capital of the Company by RMB 95,388,057 Yuan.

Pursuant to the resolution of the first 2008 extraordinary shareholders’ meeting held on 15 October 2008, the Company appropriated dividends of 3 shares for every 10 shares, based on 2,388,795,202 outstanding shares prior to the share dividend. After the appropriation of share dividend, the total number of shares increased by 716,638,560 to 3,105,433,762 as at 31 October 2008.

30 Capital reserve


Share premium 6,973,270 5,263,534

Cumulative changes in fair value of available-for-sale financial assets 1,002,795 (60,120 )

Revaluation surplus on owner-occupied properties transferred to investment properties 13,043 10,240

Share of the changes in owners’ equity of an associate (10,126 ) –

Total 7,978,982 5,213,654

31 Surplus reserve


Statutory surplus reserve 780,885 719,481

In accordance with the Company Law, the Company is required to appropriate 10% of its profit after tax to its statutory surplus reserve until the reserve balance reaches 50% of its registered capital. Subject to the approval of shareholders, the statutory surplus reserve may be used to offset accumulated losses, if any, and may also be converted into capital, provided that the balance of the statutory surplus reserve after such capitalisation is not less than 25% of the registered capital. The Company may also appropriate its profit after tax to the discretionary surplus reserve upon approval of the shareholders in general meetings.

As at 31 December 2008 and 31 December 2007, the amount of the surplus reserve represented the statutory surplus reserve.

32 General reservePursuant to the relevant regulations issued by the MOF, the Company is required to maintain a general reserve within equity, through the appropriation of net profit, which should not be less than 1% of the year end balance of its risk assets. The reserve is to be appropriated over a period of not more than five years, beginning in July 2005. As at 31 December 2008, the Company has met the above reserve requirement.

33 Unappropriated profitPursuant to a board resolution on 19 March 2008, based on the audited profit for the year as reported in the statutory financial statements for the year ended 31 December 2007, in addition to the profit appropriations for the first half of 2007, the Company appropriated its net profit amounting to RMB 152,592 thousand and RMB 136,000 thousand to the statutory surplus reserve and the general reserve, respectively for the second half of 2007. The above appropriations were approved at the Company’s annual general meeting held on 12 June 2008.

Pursuant to a board resolution on 20 August 2008, an appropriation of RMB 214,384 thousand based 10% of net profit as reported in the Company’s statutory financial statements for the first half of 2008 was made to the statutory surplus reserve; an appropriation of RMB 608,624 thousand was made to the general reserve; and dividends of 3 shares and RMB 0.335 Yuan for every 10 shares were appropriated from the unappropriated profit, amounting to RMB 796,663 thousand in total. The above appropriations were approved at the Company’s shareholders’ meeting held on 15 October 2008.

Pursuant to a board resolution on 19 March 2009, based on the audited profit for the year as reported in the statutory financial statements for the year ended 31 December 2008, the Company reversed the statutory surplus reserve amounting to RMB 152,980 thousand in the second half of the year considering the respective appropriation in the first half of 2008, with the result that an appropriation of RMB 61,404 thousand was made to the statutory surplus reserve for 2008 based on 10% of the profit for the year; and an appropriation of RMB 258,968 thousand was made to the general reserve for the second half of 2008. The above proposed appropriations are pending approval from shareholders at the forthcoming annual general meeting.




34 Net interest income

In RMB’000 2008 2007

Interest incomeDue from the Central Bank 728,694 463,496

Due from financial institutions 3,941,979 2,057,207

Loans and advances

Corporate loans and advances 11,686,554 8,789,274

Individual loans and advances 4,891,174 3,268,017


Interest income on investment securities (excluding financial assets at fair value through profit or loss) 2,330,843 1,261,540

Subtotal 26,407,905 18,004,335

Interest income on financial assets at fair value through profit or loss 57,359 39,565

Total 26,465,264 18,043,900

Including: Interest related to unwinding of discounts of provisions for impaired financial assets 384,238 518,592

Interest expenseDue to financial institutions 4,977,674 3,390,478

Customer deposits 8,556,601 5,014,596

Subordinated bonds 325,488 –

Subtotal 13,859,763 8,405,074

Interest expense on financial liabilities at fair value through profit or loss 7,613 32,977

Total 13,867,376 8,438,051

Net interest income 12,597,888 9,605,849

35 Net fee and commission income

In RMB’000 2008 2007

Fee and commission incomeSettlement fee income 215,993 161,744

International settlement fee income 131,020 103,565

Agency business fee income 69,372 62,113

Entrusted loan fee income 14,683 8,305

Bank card fee income 221,086 131,102

Others 404,493 200,922

Subtotal 1,056,647 667,751

Fee and commission expenseBank card fee and agency business fee expenses 160,538 106,579

Others 44,721 40,459

Subtotal 205,259 147,038

Net fee and commission income 851,388 520,713

36 Investment income

In RMB’000 2008 2007

Gain on disposal of bond investments held for trading 41,810 4,352

Loss on disposal of bond investments designated as at fair value through profit or loss (91 ) (31,408 )

Gain on disposal of available-for-sale bond investments 322,953 40,017

Gain on disposal of available-for-sale equity investments 804 175,736

Gain on disposal of long term equity investments 12,443 –

Share of profits of associates under equity method of accounting 22,675 –

Dividend income 4,554 6,955

Realised gain on derivative financial instruments (excluding foreign exchange derivative financial instruments) 16,408 5,332

Total 421,556 200,984



37 Gains or losses from changes in fair values

In RMB’000 2008 2007

Financial instruments held for trading 1,241 (459 )

Financial assets designated as at fair value through profit or loss 4,729 12,534

Financial liabilities designated as at fair value through profit or loss 2,740 (10,925 )

Derivative financial instruments (excluding foreign exchange derivative financial instruments) 72,177 13,758

Investment properties (15,087 ) 42,733

Total 65,800 57,641

38 Net foreign exchange difference

In RMB’000 2008 2007

Gains or losses from changes in fair values on foreign exchange derivative financial instruments 128,809 24,530

Others 333,734 232,816

Total 462,543 257,346

39 Other operating income

In RMB’000 2008 2007

Rental income 63,365 65,994

Others 50,579 98,975

Total 113,944 164,969

40 General and administrative expenses

In RMB’000 2008 2007

Staff expensesSalaries, bonuses, allowances and subsidies 2,034,524 1,599,861

Social insurance, supplementary pension contributions and staff welfare 494,408 364,568

Housing funds 89,934 69,842

Labour union and training expenses 56,875 54,177

Others 9,362 41,882

Subtotal 2,685,103 2,130,330

General and administrative expensesRental expenses 421,725 358,887

Computer system maintenance fees 168,425 138,120

Telecommunications and postage expenses 95,546 77,285

Water and electricity expenses 47,769 40,381

Publication and stationery expenses 197,604 151,377

Travel expenses 90,173 87,515

Marketing and public relation expenses 358,019 241,706

Motor vehicle expenses 128,463 134,107

Legal expenses 44,080 35,754

Professional fees (Note) 169,425 100,047

Sundry tax expenses 30,269 36,014

CBRC supervisory fee 51,582 44,473

Amortisation of leasehold improvements 61,179 53,909

Others 441,727 356,662

Subtotal 2,305,986 1,856,237

Depreciation and amortisationDepreciation of fixed assets 211,925 206,652


Subtotal 232,777 220,927

Total 5,223,866 4,207,494

Note: Included in the professional fees is an amount of RMB 44,886 thousand (2007: RMB 40,333 thousand) of consultancy fees payable to GE Management Technology Consulting (Shanghai) Co., Ltd..




41 Impairment losses on assets

In RMB’000 2008 2007

Charge/(reversal) of impairment losses on

Precious metals 198 61

Placement of deposits with other financial institutions (1,496 ) 361

Funds loaned to other financial institutions 8,619 8,283

Reverse repurchase agreements 172 2,999

Loans and advances 6,972,839 1,946,243

Long term equity investments 83,184 –

Available-for-sale financial assets 100,253 30,000

Repossessed assets 126,114 14,419

Fixed assets 6,289 –

Other assets 37,990 51,393

Total 7,334,162 2,053,759

42 Income tax expense

In RMB’000 2008 2007

Current taxCharge for the year 1,381,363 1,216,465

Adjustment in respect of current income tax for prior years (363,719 ) 24,171

Deferred income taxImpact of changes in tax rates – (117,288 )

Impact of impairment provision for assets (Note D.16) (796,813 ) 42,473

Other movements (42,257 ) (43,949 )

Total 178,574 1,121,872

The reconciliation of income tax expense applicable to profit before tax at the statutory tax rate to income tax expense at the Company’s effective income tax rate is as follows:

In RMB’000 2008 2007


Income tax at the statutory rate of 25% (2007: 33%) 198,152 1,244,686


Non-taxable income (131,617 ) (152,226 )

Non-deductible expenses and other adjustments 475,758 5,241

Income tax expense 178,574 1,121,872



43 Earnings per share

The Company’s basic earnings per share amount is calculated as follows:

In RMB’000 2008 2007

Net profit attributable to ordinary shareholders of the Company 614,035 2,649,903

The weighted average number of ordinary shares outstanding (in thousands) 3,060,103 2,721,446

Basic earnings per share (Renminbi Yuan) 0.20 0.97

The Company’s diluted earnings per share amount is calculated as follows:

In RMB’000 2008 2007



Dilutive effect – weighted average number of ordinary shares

Warrants 17,984 74,140

Adjusted weighted average number of ordinary shares outstanding (in thousands) 3,078,087 2,795,586

Diluted earnings per share (Renminbi Yuan) 0.20 0.95

Note: The number of ordinary shares increased by 716,639 thousand as a result of a scrip dividend in October 2008. Since there was no effect on the amount of shareholders’ equity, the earnings per share for 2007 were recalculated on the basis of the adjusted number of shares.

No changes occurred during the period between the balance sheet date and the date the financial statements are authorised for issue.

44 Cash and cash equivalents


Cash on hand 981,859 1,062,241

Cash equivalentsWithin three months before original maturity date

Placement of deposits with other financial institutions 5,489,878 2,372,907

Funds loaned to other financial institutions 5,846,025 1,337,892

Reverse repurchase agreements 15,661,984 15,346,034


Subtotal 36,142,599 29,493,174

Total 37,124,458 30,555,415

E Segmental Reporting

The Company mainly organises and manages its operating businesses geographically, and therefore, the primary reporting format for reporting segment information is geographical segments.

Segment assets and liabilities, and segment revenues and profit are calculated according to the accounting policies of the Company.

In presenting information on the basis of geographical segment, operating income and expense are based on the location of the branches that generated the revenue and incurred the expense. Segment assets and liabilities are allocated based on the geographical locations of the underlying assets.

The details of the geographical segments of the Company are as follows:

Southern China: Shenzhen, Guangzhou, Foshan, Zhuhai, HaikouEastern China: Shanghai, Hangzhou, Ningbo, Wenzhou, NanjingNorthern and north-eastern China: Beijing, Tianjin, Dalian, Jinan, QingdaoSouth-western China: Chongqing, Kunming, ChengduOffshore businesses



E Segmental Reporting (Continued)

2008

Northern and north-eastern South-western OffshoreIn RMB’000 Southern China Eastern China China China businesses Eliminations Total

Net interest income 6,441,460 3,285,472 1,969,345 796,640 104,971 – 12,597,888Including: External net interest income 6,439,463 3,308,557 1,992,005 796,669 61,194 – 12,597,888 Internal net interest income/(expense) 1,997 (23,085 ) (22,660 ) (29 ) 43,777 – –Net fee and commission income 464,314 172,548 122,609 27,069 64,848 – 851,388Other income 941,427 37,117 57,840 4,357 23,102 – 1,063,843Operating income 7,847,201 3,495,137 2,149,794 828,066 192,921 – 14,513,119Business tax and surcharges (407,564 ) (406,859 ) (268,002 ) (69,240 ) – – (1,151,665 )General and administrative expenses (2,812,246 ) (1,284,277 ) (864,602 ) (262,741 ) – – (5,223,866 )Operating expenses (3,219,810 ) (1,691,136 ) (1,132,604 ) (331,981 ) – – (6,375,531 )Impairment loss of assets (4,330,943 ) (2,344,424 ) (453,660 ) (175,689 ) (29,446 ) – (7,334,162 )Operating profit 296,448 (540,423 ) 563,530 320,396 163,475 – 803,426

Depreciation and amortisation (143,910 ) (34,659 ) (35,361 ) (18,847 ) – – (232,777 )

Capital expenditure 341,475 321,947 94,155 39,502 – – 797,079

31 December 2008Segment assets 281,926,989 151,290,327 113,882,801 22,435,574 7,323,869 (104,231,203 ) 472,628,357Deferred tax assets 1,811,816Total assets 474,440,173

Segment liabilities 267,542,455 151,820,166 113,298,504 22,116,868 7,150,914 (104,231,203 ) 457,697,704Deferred tax liabilities 341,679Total liabilities 458,039,383

2007


Net interest income 4,810,811 2,693,923 1,485,325 525,796 89,994 – 9,605,849

Including: External net interest income 4,810,811 2,693,923 1,485,325 525,796 89,994 – 9,605,849

Internal net interest income – – – – – – –

Net fee and commission income 277,462 116,143 71,000 20,336 35,772 – 520,713

Other income 538,516 58,816 69,411 4,733 9,464 – 680,940

Operating income 5,626,789 2,868,882 1,625,736 550,865 135,230 – 10,807,502

Business tax and surcharges (282,563 ) (300,549 ) (189,233 ) (51,962 ) – – (824,307 )

General and administrative expenses (2,280,845 ) (1,021,335 ) (695,421 ) (209,893 ) – – (4,207,494 )

Operating expenses (2,563,408 ) (1,321,884 ) (884,654 ) (261,855 ) – – (5,031,801 )

Impairment loss of assets (1,772,992 ) (184,862 ) (49,857 ) (31,507 ) (14,541 ) – (2,053,759 )

Operating profit 1,290,389 1,362,136 691,225 257,503 120,689 – 3,721,942



31 December 2007Segment assets 213,890,764 105,849,188 80,366,622 21,728,490 3,621,120 (73,911,212 ) 351,544,972

Deferred tax assets 994,389

Total assets 352,539,361

Segment liabilities 204,208,241 104,486,345 79,674,242 21,471,851 3,505,287 (73,911,212 ) 339,434,754

Deferred tax liabilities 98,544

Total liabilities 339,533,298


F Commitments and Contingent Liabilities

1 Capital commitmentsAt the balance sheet date, the Company had capital commitments as follows:


Contracted, but not provided for 144,000 –

2 Operating lease commitmentsThe Company has entered into commercial leases on certain premises and equipment. At the balance sheet date, the total future minimum lease payments payable under non-cancellable operating leases were as follows:


Within one year, inclusive 370,634 263,204

After one year but not more than two years 320,964 216,752

After two years but not more than three years 281,920 189,963

More than three years 962,438 502,250

Total 1,935,956 1,172,169

3 Credit commitments


Financial guarantee contractsBank acceptances 164,888,094 121,882,685

Guarantees issued 1,884,883 2,212,937

Letters of credit issued 1,826,290 1,912,162

Loan guarantee contracts 177,698 963,135

Subtotal 168,776,965 126,970,919

Irrevocable loan commitmentsCredit limit of credit cards 15,343,716 8,804,290

Total 184,120,681 135,775,209

Credit risk weighted amounts of credit commitments 59,080,564 49,277,576

Financial guarantee contracts commit the Company to make payments on behalf of customers upon the failure of the customers to perform the terms of the contracts.

Commitments to extend credit represent contractual commitments to make loans to customers. Commitments generally have fixed expiry dates. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

4 Fiduciary transactions


Entrusted deposits 10,867,862 5,551,762

Entrusted loans 10,867,862 5,551,762

Entrusted funding 3,427,869 2,007,738

Entrusted investments 3,427,869 2,007,738

Entrusted deposits represent funds that depositors have instructed the Company to use to make loans to third parties as designated by them. The credit risk remains with the depositors.

Entrusted funding and entrusted investments represent the investment and asset management services provided by the Company to third parties in accordance with the agreed investment plans. The third parties provide funding for the related investments. Income from such investment activities is collected on behalf of and paid to the third parties according to the relevant contractual terms.



F Commitments and Contingent Liabilities (Continued)

5 Contingent liabilities

Legal proceedingsAs at 31 December 2008, the total claimed amount of the litigation cases of which the Company is the defendant was RMB 179 million (31 December 2007: RMB 161 million). These litigation cases are under legal proceedings. In the opinion of management, the Company has made adequate allowance for any probable losses based on the prevailing facts and circumstances.

Apart from the above pending litigation cases, the respective liquidators of DeHeng Securities Co., Ltd. and the China Southern Securities Co., Ltd. had requested the Company to repay a total amount of RMB 430 million. The Company had opposed all such repayment requests. At the year end, based on the legal opinion from an independent third-party lawyer, the Company had no immediate obligation to repay the monies.

Redemption commitments of government bondsAs an underwriting agent of the PRC Government, the Company underwrites certain PRC government bonds and sells the bonds to the general public. The Company is obliged to redeem the bonds at the discretion of the holders at any time prior to maturity. The redemption price for the bonds is based on the nominal value of the bonds plus any interest accrued up to the redemption date. As at 31 December 2008, the Company had underwritten and sold bonds with an accumulated amount of RMB 3.1 billion (31 December 2007: RMB 3.67 billion) to the general public which have not matured or been redeemed.

The MOF will not provide funding for the early redemption of these government bonds on a back-to-back basis but is obliged to repay the principal and the respective interest upon maturity.

As at 31 December 2008, the unexpired underwriting commitment of the PRC government bonds amounted to RMB 2.35 billion (31 December 2007: RMB 2.65 billion).

G Capital Management

The primary objectives of the Company’s capital management are to ensure that the Company complies with regulatory capital requirements, to maximise shareholders’ value and to support the continuous growth in business. The Company regularly reviews its capital structure and makes adjustments to it through asset and liability management, so as to maintain the overall balance of the capital structure and maximisation of capital return. The required information of capital adequacy is filed with the CBRC by the Company on a quarterly basis.

The CBRC requires banks that are established in Mainland China to maintain the capital adequacy ratio and core capital ration not below the minimum of 8% and 4%, respectively. The risk-weighted assets are measured according to the nature of individual assets and counterparty, reflecting an estimate of related credit, market and other risks after taking into account of any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposures, with adjustments made to reflect the contingent nature of any potential losses.

The Company calculated and reported the core capital adequacy ratio and capital adequacy ratio in accordance with the “Regulation Governing Capital Adequacy Ratio of Commercial Banks” promulgated by the CBRC and the CBRC’s notice relating to the computation of the capital adequacy ratio after the implementation of ASBEs.

The core capital includes share capital, capital reserve, surplus reserve, general reserve and unappropriated profit. The supplementary capital includes revaluation surplus, long term subordinated bonds and other supplementary capital.


Net core capital 14,710,153 12,692,620

Supplementary capital 9,577,523 112,317

Net capital 23,959,430 12,691,876

Risk weighted assets and market risk capital adjustment 279,112,744 220,056,277

Core capital adequacy ratio 5.3% 5.8%

Capital adequacy ratio 8.6% 5.8%


H Risk Disclosure

1 Credit riskCredit risk is the risk of loss arising from a borrower’s or counterparty’s inability to meet its obligations. The Company’s credit risk mainly arises from the loans and advances to customers, financial guarantees and loan commitments.

The Company has established a Credit Portfolio Management Committee, which approves and determines the Company’s credit risk management strategies, credit risk preferences as well as its various credit risk management policies and standards. The Company has also formulated guidelines on corporate and retail credit policies across the Company and for specific industries. Furthermore, the Company has implemented a strategic customer categorisation management system, and set up a customer entry and exit mechanism to facilitate the sustainable development of its credit underwriting business.

The Company implements a credit risk officer system, in which the Chief Credit Officer at the Head Office appoints credit officers to various business lines and branches. The credit officers directly report to the Chief Credit Officer, who is responsible for evaluating the performance of the credit officers and establishing an independent and transparent vertical credit risk management system.

The Company has formulated a complete set of operational procedures for credit approval and management. These procedures are being enforced across the Company. Credit management procedures for its corporate and retail loans comprise the processes of credit origination, credit review, credit approval, disbursement, post-disbursement monitoring and collection. In addition, the Company has formulated the “Policies of Credit Underwriting”, which have defined the functions and responsibilities of different credit operational processes, and have enhanced the monitoring of the related compliance for improving the overall effective control of credit risk.

The Company has strengthened its early warning monitoring system for the credit business with measures applicable to the portfolio level and to individual customers, resulting to early detection and effective management of credit risks.

The Company sub-divides credit asset risks into 10 categories based on the five-tier loan classification system promulgated by the CBRC, namely, Pass One, Pass Two, Pass Three, Pass Four, Pass Five, Special Mention One, Special Mention Two, Substandard, Doubtful and Loss. Furthermore, a separate “Write-off” category has been added to the classification system. The Company applies different management policies to the loans in accordance with their respective loan categories.

Risks arising from financial guarantees and loan commitments are similar to those associated with loans and advances. Transactions of financial guarantees and loan commitments are, therefore, subject to the same portfolio management and the same requirements for application and collateral as loans and advances to customers.

Maximum exposure to credit risk without taking account of any collateral and other credit enhancements


Due from the Central Bank (excluding cash on hand) 38,786,042 39,664,146



Financial assets at fair value through profit or loss 41,441 1,477,625

Derivative financial assets 290,751 291,816



Available-for-sale financial assets 48,799,716 17,850,892

Held-to-maturity investments 15,584,755 15,911,486

Receivables – bond investments 13,750,000 13,450,000

Long term equity investments 417,390 251,948

Other assets 3,350,801 2,981,939

Total 468,206,421 347,316,688

Financial guarantee 168,776,965 126,970,919

Irrevocable loan commitments 15,343,716 8,804,290

Maximum exposure to credit risk 652,327,102 483,091,897



H Risk Disclosure (Continued)

1 Credit risk (Continued)

Risk concentration of the maximum exposure to credit riskCredit risk is often greater when counterparties are concentrated in a single industry or geographic location or have comparable economic characteristics.

The majority of the loans and financial guarantee contracts of the Company are related to the local customers within Mainland China. However, different areas in Mainland China have their own unique characteristics in terms of economic development. Therefore, each area in Mainland China could present different credit risks.

Please refer to Note D.9 for an analysis of concentration of loans and advances by industry and geographical region.

Collateral and other credit enhancementsThe amount and type of collateral required are determined by the Company based on its assessment of the credit risk of the counterparty. The Company has implemented guidelines regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

• Forreverserepurchasetransactions:bills,loansorsecurities• Forcommerciallending:chargesoverrealestateproperties,inventories,sharesortradereceivables• Forretaillending:mortgagesoverresidentialproperties

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the provision for impairment losses.

Credit qualityThe credit quality by class of financial asset (gross amount before deducting any impairment provision) of the Company is analysed as follows:

31 December 2008

Neither past due Past due butIn RMB’000 nor impaired not impaired Impaired Total

Placement of deposits with other financial institutions 21,496,984 – 44,520 21,541,504Funds loaned to other financial institutions 9,232,183 – 33,572 9,265,755Financial assets at fair value through profit or loss 41,441 – – 41,441Reverse repurchase agreements 34,712,353 – 50,000 34,762,353Accounts receivable 1,359,592 – – 1,359,592Loans and advances 278,177,474 912,582 4,651,310 283,741,366Available-for-sale financial assets (excluding equity investments) 48,732,057 – – 48,732,057Held-to-maturity investments 15,584,755 – – 15,584,755Receivables – bond investments 13,750,000 – – 13,750,000Total 423,086,839 912,582 4,779,402 428,778,823

31 December 2007


Placement of deposits with other financial institutions 4,010,556 – 69,920 4,080,476

Funds loaned to other financial institutions 2,628,782 – 323,771 2,952,553

Financial assets at fair value through profit or loss 1,477,625 – – 1,477,625

Reverse repurchase agreements 33,747,752 – 51,722 33,799,474

Accounts receivable 778,069 – – 778,069

Loans and advances 206,160,615 265,602 14,609,312 221,035,529

Available-for-sale financial assets (excluding equity investments) 17,673,235 – 73,040 17,746,275

Held-to-maturity investments 15,911,486 – – 15,911,486

Receivables – bond investments 13,450,000 – – 13,450,000

Total 295,838,120 265,602 15,127,765 311,231,487



1 Credit risk (Continued)

Credit quality (Continued)

Neither past due nor impaired loans and advancesAt the balance sheet date, the aggregate amounts of neither past due nor impaired loans and advances to customers are “pass” and “special mention” loans graded in accordance with the five-tier classification.


Pass 275,559,031 204,432,482

Special mention 2,618,443 1,728,133

Total 278,177,474 206,160,615

Past due but not impaired loans and advancesAt the balance sheet date, an ageing analysis of the past due but not yet impaired loans and advances is as follows:

31 December 2008

Within 1 to 2 2 to 3 More than Fair valueIn RMB’000 1 month months months 3 months Total of collateral

Corporate loans and advances 475,139 112,009 56,624 268,810 912,582 231,650

31 December 2007

Within 1 to 2 2 to 3 More than Fair valueIn RMB’000 1 month months months 3 months Total of collateral


Impaired loans and advancesImpaired loans and advances are defined as those loans and advances having objective evidence of impairment as a result of one or more events that occur after initial recognition, resulting in an impact on the estimated future cash flows of loans and advances that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and the situation where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

The fair value of the collateral that the Company holds relating to corporate loans and advances individually determined to be impaired at 31 December 2008 amounted to RMB 859 million (31 December 2007: RMB 1,988 million).

The carrying amount of loans and advances that would otherwise be past due or impaired and whose terms have been renegotiated is as follows:


Loans and advances to customers 215,638 390,718




2 Liquidity riskLiquidity risk is the risk that the Company will be unable to meet its payment obligations when they fall due. The risk is attributable to any mismatch in amounts and terms between the assets and liabilities. To limit the risk, management has arranged diversified funding sources, and monitors loan and deposit balances on a daily basis. The Company also maintains a portfolio of highly marketable assets that can be easily liquidated in the event of an unforeseen interruption of cash flows. Furthermore, the Company performs stress testing regularly to assess and identify the actions that can meet the payment obligations under different critical scenarios.

As at 31 December 2008, the remaining contractual maturity analysis of the Company’s financial assets and financial liabilities (based on contractual undiscounted cash flows) was as follows:

31 December 2008

Overdue/ Within 1 to 3 3 monthsIn RMB’000 On demand 1 month months to 1 year 1 to 5 years Over 5 years Undated Total

Non-derivative cash flowsFINANCIAL ASSETSCash on hand and due from the Central Bank 10,126,571 – 16,172 14 – – 29,641,330 39,784,087Amounts due from other financial institutions (Note 1) 3,519,455 23,253,047 16,249,397 23,157,756 – – – 66,179,655Financial assets at fair value through profit or loss – – – 41,971 – – – 41,971Accounts receivable – 280,151 815,359 174,561 131,346 – – 1,401,417Loans and advances 1,143,450 18,997,224 45,723,741 144,324,383 57,233,863 50,539,389 – 317,962,050Available-for-sale financial assets – 1,251,174 577,858 20,909,548 20,479,700 9,694,987 67,659 52,980,926Held-to-maturity investments – 17,508 92,812 2,400,633 13,164,405 2,245,821 – 17,921,179Receivables – bond investments – – – 515,735 14,319,015 – – 14,834,750Long term equity investments – – – – – – 417,390 417,390Other financial assets 81,762 2,103 126,460 568 100 7,257 – 218,250Total financial assets 14,871,238 43,801,207 63,601,799 191,525,169 105,328,429 62,487,454 30,126,379 511,741,675

FINANCIAL LIABILITIESAmounts due to other financial institutions (Note 2) 12,283,928 47,033,925 19,854,362 3,394,422 – – – 82,566,637Financial liabilities at fair value through profit or loss – 483 – 39,325 – – – 39,808Accounts payable – 25,243 482,385 39,269 – – – 546,897Customer deposits 125,935,704 48,911,972 60,430,312 96,550,156 37,119,340 2 – 368,947,486Subordinated bonds payable – – 370,537 93,363 9,843,008 – – 10,306,908Other financial liabilities 620,318 60 947,503 176,041 176,381 56,937 – 1,977,240Total financial liabilities 138,839,950 95,971,683 82,085,099 100,292,576 47,138,729 56,939 – 464,384,976

Derivative cash flowsDerivative financial instruments settled on net basis – – – (4,965 ) 81,789 – – 76,824

Derivative financial instruments settled on gross basis

Of which: Cash inflow – 7,075,865 4,677,483 7,299,089 73,801 – – 19,126,238 Cash outflow – (7,052,537 ) (4,622,963 ) (7,223,253 ) (72,156 ) – – (18,970,909 ) – 23,328 54,520 75,836 1,645 – – 155,329

Notes: 1. Amounts due from other financial institutions included financial assets of placement of deposits with other financial institutions, funds loaned to other financial institutions and reverse repurchase agreements.

2. Amounts due to other financial institutions included financial liabilities of placement of deposits from other financial institutions, funds borrowed from other financial institutions and repurchase agreements.



2 Liquidity risk (Continued)

As at 31 December 2007, the remaining contractual maturity analysis of the Company’s financial assets and financial liabilities (based on contractual undiscounted cash flows) was as follows:

31 December 2007


Non-derivative cash flowsFINANCIAL ASSETSCash on hand and due from the Central Bank 11,517,094 – – – – – 29,227,805 40,744,899

Amounts due from other financial institutions (Note 1) 2,191,516 20,336,743 14,696,117 3,128,556 504,226 – – 40,857,158

Financial assets at fair value through profit or loss – 721,811 100,000 591,999 53,198 57,710 – 1,524,718

Accounts receivable – 52,859 479,744 282,850 – – – 815,453

Loans and advances 6,806,547 14,208,320 31,291,316 103,559,631 43,896,193 53,124,173 – 252,886,180

Available-for-sale financial assets 43,040 1,946,360 2,991,745 3,310,196 9,876,833 1,079,676 134,617 19,382,467

Held-to-maturity investments – 13,818 132,068 1,544,100 10,360,242 6,147,147 – 18,197,375

Receivables – bond investments – – – 497,975 14,445,950 – – 14,943,925

Long term equity investments – – – – – – 251,948 251,948

Other financial assets 88,579 – 846,069 2,457 562 45,502 366 983,535

Total financial assets 20,646,776 37,279,911 50,537,059 112,917,764 79,137,204 60,454,208 29,614,736 390,587,658

FINANCIAL LIABILITIESAmounts due to other financial institutions (Note 2) 27,167,521 17,475,221 5,152,738 1,526,586 – – – 51,322,066

Financial liabilities at fair value through profit or loss – – 690,015 516,118 43,103 – – 1,249,236

Accounts payable – 53,173 66,653 239,319 – – – 359,145

Customer deposits 106,168,886 40,621,695 49,282,780 70,122,182 20,188,968 318 – 286,384,829

Other financial liabilities 723,493 887,713 546,389 307,496 36,342 – – 2,501,433

Total financial liabilities 134,059,900 59,037,802 55,738,575 72,711,701 20,268,413 318 – 341,816,709

Derivative cash flowsDerivative financial instruments settled on net basis – – 206 16,409 (6,492 ) – – 10,123

Derivative financial instruments settled on gross basis

Of which: Cash inflow – 3,190,724 2,321,797 4,949,715 – – – 10,462,236

Cash outflow – (3,200,767 ) (2,315,881 ) (4,919,068 ) – – – (10,435,716 )

– (10,043 ) 5,916 30,647 – – – 26,520






3 Market riskMarket risk is the risk of loss, in respect of the Company’s on or off-balance sheet activities, arising from adverse movements in market rates including foreign exchange rates, interest rate, commodity prices and stock prices. Market risk arises from both the Company’s trading and non-trading businesses. The aim of market risk management of the Company is to mitigate undue losses of income and equity, and simultaneously, to reduce the Company’s exposure to the volatility inherent in financial instruments. The Company considers the market risk arising from commodity or stock prices in respect of its investment portfolio is immaterial.

The Company’s Risk Management Committee and the Asset and Liability Management Committee are responsible for setting up market risk management policies, establishing market risk management objectives and determining market risk limits. The Asset and Liability Management Committee is responsible for controlling the volume, structure, interest rate and liquidity of the Company’s business. The Company’s Financial Information and Asset and Liability Management Department discharges the daily market risk monitoring function on behalf of the Asset and Liability Management Committee, including the determination of reasonable levels of market risk exposures, monitoring the daily treasury operation and proposing adjustments to the maturity profile of the assets and liabilities and the interest rate structure.

Gap analysis is the key method used by the Company to monitor the market risk of its non-trading business activities. This method measures the impact of interest rate changes on income, with interest-earning assets and interest-bearing liabilities grouped by their respective re-pricing bands for the calculation of the re-pricing gap. By multiplying this position with an assumed interest rate change, an approximate effect on the net interest income resulting from the assumed interest rate change is quantified.

The market risk management information system is being developed for further improvement in market risk management measures.

Financial derivative transactions entered into by the Company primarily provide effective economic hedges to other financial instruments held by the Company for the mitigation of interest and exchange rate risks. In the opinion of management, as the market risk of the Company’s trading business activities is not material, the Company has not separately disclosed quantitative information about exposure to market risk arising from the trading portfolio.



3 Market risk (Continued)

Currency riskThe Company's foreign exchange risk exposure mainly comprises exposures from the mismatch of foreign currency assets and liabilities, and off-balance sheet foreign exchange position arisen from derivative transactions. The currency risk of the Company mainly arises from loans and advances, investments and deposits denominated in foreign currencies. The Company has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.

As at 31 December 2008, the Company’s financial assets and financial liabilities by currency are analysed as follows:

31 December 2008

In RMB’000 RMB USD HKD Others Total

ASSETSCash on hand and due from the Central Bank 39,228,570 372,005 155,085 12,241 39,767,901Precious metals 9,225 – – – 9,225Amounts due from other financial institutions (Note 1) 49,278,442 14,267,058 964,733 960,605 65,470,838Financial assets at fair value through profit or loss and derivative financial assets 241,558 89,615 833 186 332,192Accounts receivable 238,826 1,108,327 12,439 – 1,359,592Loans and advances 277,718,781 3,736,356 217,667 41,883 281,714,687Available-for-sale financial assets 48,798,945 771 – – 48,799,716Held-to-maturity investments 15,084,844 452,928 – 46,983 15,584,755Receivables – bond investments 13,750,000 – – – 13,750,000Long term equity investments 417,189 201 – – 417,390Fixed assets 1,674,924 – – – 1,674,924Others 5,385,685 154,191 16,037 3,040 5,558,953Total assets 451,826,989 20,181,452 1,366,794 1,064,938 474,440,173Including: Impact of fair value of foreign exchange derivative financial instruments 101,413 80,066 833 33 182,345

LIABILITIESAmounts due to other financial institutions (Note 2) 79,726,137 2,568,477 64,533 – 82,359,147Financial liabilities at fair value through profit or loss and derivative financial liabilities 48,440 48,771 9 798 98,018Accounts payable – 507,483 – – 507,483Customer deposits 346,651,180 10,959,758 1,923,193 979,905 360,514,036Subordinated bonds payable 7,964,282 – – – 7,964,282Others 6,498,739 81,888 14,020 1,770 6,596,417Total liabilities 440,888,778 14,166,377 2,001,755 982,473 458,039,383Including: Impact of fair value of foreign exchange derivative financial instruments 21,729 4,633 9 645 27,016Net position of assets and liabilities 10,938,211 6,015,075 (634,961 ) 82,465 16,400,790

Notional amount of foreign exchange derivative

financial instruments 5,961,351 (5,911,075 ) 197,768 (47,636 ) 200,408

Net position of foreign currency (Note 3) Not applicable 28,366 (438,017 ) 35,441 Not applicable

Off-balance sheet credit commitment 180,573,370 3,085,518 17,499 444,294 184,120,681



3. The net position of foreign currency comprised the related net position of assets and liabilities (excluding the fair value of foreign exchange derivatives and the non-monetary assets and liabilities) and the notional amount of foreign exchange derivatives.





Currency risk (Continued)


31 December 2007


ASSETSCash on hand and due from the Central Bank 39,982,987 455,463 277,444 10,493 40,726,387

Precious metals 8,200 – – – 8,200

Amounts due from other financial institutions (Note 1) 36,512,797 2,894,457 572,489 445,528 40,425,271

Financial assets at fair value through profit or loss and derivative financial assets 1,725,970 30,696 8,660 4,115 1,769,441

Accounts receivable – 778,069 – – 778,069

Loans and advances 209,581,235 4,570,397 761,477 98,456 215,011,565

Available-for-sale financial assets 17,734,798 116,094 – – 17,850,892

Held-to-maturity investments 15,346,134 542,929 22,423 – 15,911,486

Receivables – bond investments 13,450,000 – – – 13,450,000

Long term equity investments 228,616 23,332 – – 251,948

Fixed assets 1,554,278 – – – 1,554,278

Others 4,652,261 116,023 32,650 890 4,801,824

Total assets 340,777,276 9,527,460 1,675,143 559,482 352,539,361

Including: Impact of fair value of foreign exchange financial instruments 161,794 11 202 4,115 166,122

LIABILITIESAmounts due to other financial institutions (Note 2) 49,269,603 1,774,301 112,440 – 51,156,344

Financial liabilities at fair value through profit or loss and derivative financial liabilities 1,332,219 153,975 13,918 1,718 1,501,830

Accounts payable – 340,297 – – 340,297

Customer deposits 270,811,155 7,764,505 2,061,236 640,085 281,276,981

Others 5,126,495 97,309 31,520 2,522 5,257,846

Total liabilities 326,539,472 10,130,387 2,219,114 644,325 339,533,298

Including: Impact of fair value of foreign exchange financial instruments 139 128,667 9,080 1,718 139,604

Net position of assets and liabilities 14,237,804 (602,927 ) (543,971 ) (84,843 ) 13,006,063

Notional amount of foreign exchange derivative financial instruments (1,006,099 ) 460,252 558,098 (3 ) 12,248

Net position of foreign currency (Note 3) Not applicable (37,351 ) 23,005 (87,243 ) Not applicable









The table below indicates the sensitivity analysis of exchange rate changes of the currencies to which the Company had significant exposure on its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement in the exchange rates against the RMB, with all other variables held constant on profit before tax. A negative amount in the table reflects a potential net reduction in profit before tax, while a positive amount reflects a net potential increase. As the Company has no cash flow hedges and has only a minimal amount of available-for-sale equity instruments denominated in foreign currencies, changes in exchange rates do not have any material potential impact on the equity.

CURRENCY 31 December 2008

Change in exchange rate in % Effect on profit before tax

USD +/-1 +/-284HKD +/-1 -/+4,380



USD +/-8 -/+2,988

HKD +/-8 +/-1,840





Interest rate riskThe Company’s interest rate risk mainly arises from the mismatch of contractual maturity or re-pricing dates between interest-earning assets and interest-bearing liabilities. The interest-earning assets and interest-bearing liabilities of the Company are mainly denominated in RMB. The PBOC sets a cap and a floor on interest rates on deposits and loans, respectively.

The Company manages its interest rate risk by adjusting the composition of assets and liabilities, monitoring indicators such as the interest rate sensitivity gap on a regular basis and measuring risk exposure in accordance with the re-pricing characteristics of assets and liabilities. The Asset and Liability Management Committee meets regularly to discuss future movements in interest rates and manages interest rate risk exposures by adjusting the composition of the assets and liabilities.

As at 31 December 2008, the contractual re-pricing dates or maturity dates, whichever were earlier, of the Company’s financial assets and financial liabilities are analysed as follows:

31 December 2008

Within 3 months More than Non-interest-In RMB’000 3 months to 1 year 1 to 5 years 5 years bearing Total

ASSETSCash on hand and due from the Central Bank 38,671,784 – – – 1,096,117 39,767,901Precious metals – – – – 9,225 9,225Amounts due from other financial institutions (Note 1) 42,794,464 22,676,374 – – – 65,470,838Financial assets at fair value through profit or loss and derivative financial assets – 41,441 – – 290,751 332,192Accounts receivable 1,053,623 65,822 – 240,147 1,359,592Loans and advances 136,284,356 138,707,587 6,144,749 577,995 – 281,714,687Available-for-sale financial assets 5,677,900 27,529,814 10,196,378 5,187,617 208,007 48,799,716Held-to-maturity investments 946,344 5,547,784 8,499,347 515,680 75,600 15,584,755Receivables – bond investments – – 13,750,000 – – 13,750,000Long term equity investments – – – – 417,390 417,390Fixed assets – – – – 1,674,924 1,674,924Others – – – – 5,558,953 5,558,953Total assets 225,428,471 194,568,822 38,590,474 6,281,292 9,571,114 474,440,173

LIABILITIESAmounts due to other financial institutions (Note 2) 78,992,335 3,356,887 – – 9,925 82,359,147Financial liabilities at fair value through profit or loss and derivative financial liabilities – 39,420 – – 58,598 98,018Accounts payable 442,000 65,483 – – – 507,483Customer deposits 240,037,645 86,149,026 33,050,066 2 1,277,297 360,514,036Subordinated bonds payable 498,195 – 7,466,087 – – 7,964,282Others – – – – 6,596,417 6,596,417Total liabilities 319,970,175 89,610,816 40,516,153 2 7,942,237 458,039,383Interest rate risk exposure (94,541,704 ) 104,958,006 (1,925,679 ) 6,281,290 Not applicable Not applicable






Interest rate risk (Continued)


31 December 2007


ASSETSCash on hand and due from the Central Bank 39,308,438 – – – 1,417,949 40,726,387

Precious metals – – – – 8,200 8,200

Amounts due from other financial institutions (Note 1) 36,982,611 2,952,660 490,000 – – 40,425,271

Financial assets at fair value through profit or loss and derivative financial assets 857,867 569,758 – 50,000 291,816 1,769,441

Accounts receivable 509,370 268,699 – – – 778,069

Loans and advances 98,461,358 109,379,700 6,340,160 830,347 – 215,011,565

Available-for-sale financial assets 7,063,115 4,748,776 5,063,178 841,206 134,617 17,850,892

Held-to-maturity investments 609,625 4,683,237 6,331,275 4,287,349 – 15,911,486

Receivables – bond investments – – 13,450,000 – – 13,450,000

Long term equity investments – – – – 251,948 251,948

Fixed assets – – – – 1,554,278 1,554,278

Others – – – – 4,801,824 4,801,824

Total assets 183,792,384 122,602,830 31,674,613 6,008,902 8,460,632 352,539,361

LIABILITIESAmounts due to other financial institutions (Note 2) 49,692,464 1,463,880 – – – 51,156,344

Financial liabilities at fair value through profit or loss and derivative financial liabilities 690,015 550,390 6,252 – 255,173 1,501,830

Accounts payable 113,974 226,323 – – – 340,297

Customer deposits 197,468,485 65,092,412 17,481,005 315 1,234,764 281,276,981

Others – – – – 5,257,846 5,257,846

Total liabilities 247,964,938 67,333,005 17,487,257 315 6,747,783 339,533,298

Interest rate risk exposure (64,172,554 ) 55,269,825 14,187,356 6,008,587 Not applicable Not applicable



The Company principally uses sensitivity analysis to measure and control interest rate risk. In respect of the financial assets and liabilities at fair value through profit or loss, in the opinion of management, the interest rate risk to the Company arising from this portfolio is not significant. For other financial assets and liabilities, the Company mainly uses gap analysis to measure and control the related interest rate risk.

As at 31 December 2008 and 31 December 2007, the gap analyses of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) are as follows:


Changes in interest rate (basis point) Changes in interest rate (basis point) In RMB’000 -100 +100 -100 +100

Effect on the net interest income increase/(decrease) 433,655 (433,655 ) 355,998 (355,998 )

Effect on equity increase/(decrease) 649,171 (649,171 ) 90,170 (90,170 )

The above gap analyses assume that the interest rate risk profile of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) remains static.






The sensitivity of the net interest income is the effect of a reasonable possible change in interest rates on the net interest income for one year, in respect of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) held at the balance sheet date. The sensitivity of equity is calculated by revaluing the year end portfolio of fixed-rate available-for-sale financial assets, based on a reasonable possible change in interest rates.

The above sensitivity analyses are based on the following assumptions: (i) all assets and liabilities that are re-priced/due within three months (inclusive), and between three months and one year (inclusive) are assumed to be re-priced in the mid of the respective bands; and (ii) there are parallel shifts in the yield curve.

Regarding to the above assumptions, the effect on the net interest income and equity as a result of the actual increases or decreases in interest rates may differ from that of the above sensitivity analyses.

4 Fair value of financial instrumentsThe following table summarises the carrying values and the fair values of receivables, held-to-maturity debt securities and subordinated bonds for which their fair values have not been presented or disclosed above:

31 December 2008

In RMB’000 Carrying value Fair value

Receivables – bond investments 13,750,000 13,926,630Held-to-maturity debt securities 15,584,755 16,093,150Subordinated bonds payable 7,964,282 8,574,308

31 December 2007



Held-to-maturity debt securities 15,911,486 15,330,545

Subject to the existence of an active market, such as an authorised securities exchange, the market value is the best reflection of the fair value of financial instruments. As there is no available market value for certain financial assets and liabilities held and issued by the Company, the discounted cash flow method or other valuation methods described below are adopted to determine the fair values of these assets and liabilities:

(1) The receivables are non-transferable. The fair values of these receivables are estimated on the bases of pricing models or discounted cash flows.

(2) The fair value of held-to-maturity debt securities and subordinated bonds are determined with reference to the available market values. If quoted market prices are not available, fair values are estimated on the bases of pricing models or discounted cash flows.

All of the above-mentioned assumptions and methods provide a consistent basis for the calculation of the fair values of the Company’s assets and liabilities. However, other institutions may use different assumptions and methods. Therefore, the fair values disclosed by different financial institutions may not be entirely comparable.

Financial instruments, for which their carrying amounts are the reasonable approximation of their fair values because, for example, they are short term in nature or are re-priced to current market rates frequently, are as follows:

Assets Liabilities

Cash and due from the Central Bank Placement of deposits from other financial institutions

Placements of deposits with other financial institutions Funds borrowed from other financial institutions

Funds loaned to other financial institutions Repurchase agreements

Reverse repurchase agreements Customer deposits

Loans and advances Other financial liabilities

Other financial assets



4 Fair value of financial instruments (Continued)

The following table shows an analysis of financial instruments recorded at fair value.

31 December 2008

Valuation Valuation techniques – techniques – market non-market Quoted observable observableIn RMB’000 market price inputs inputs Total

FINANCIAL ASSETSFinancial assets at fair value through profit or loss – 41,441 – 41,441Derivative financial assets – 290,751 – 290,751Available-for-sale financial assets 57,659 48,742,057 – 48,799,716Total 57,659 49,074,249 – 49,131,908

FINANCIAL LIABILITIESFinancial liabilities at fair value through profit or loss – 39,420 – 39,420Derivative financial liabilities – 58,598 – 58,598Total – 98,018 – 98,018

31 December 2007

Valuation Valuation techniques – techniques – market non-market Quoted observable observableIn RMB’000 market price inputs inputs Total

FINANCIAL ASSETSFinancial assets at fair value through profit or loss – 1,477,625 – 1,477,625

Derivative financial assets – 291,816 – 291,816

Available-for-sale financial assets 134,617 17,716,275 – 17,850,892

Total 134,617 19,485,716 – 19,620,333

FINANCIAL LIABILITIESFinancial liabilities at fair value through profit or loss – 1,246,657 – 1,246,657

Derivative financial liabilities – 255,173 – 255,173

Total – 1,501,830 – 1,501,830

I Related Party Relationships and Transactions

Details of the Company’s major shareholder are as follows:

NAME Place of registration Percentage of equity interest held (%)


Newbridge Asia AIV III, L.P. Delaware, USA 16.76 16.70

Newbridge Asia AIV III, L.P. is an investment fund whose register form is a limited partnership and its registered capital is USD724 million. It focuses on strategic investment. It was established on 22 June 2000 and its initial existing period is 10 years. The ultimate controlling parties of Newbridge Asia AIV III, L.P. are Mr David Bonderman, Mr James G. Coulter and Mr Richard C. Blum.

The Company’s former subsidiary, Shenzhen Yuan Sheng Industrial Co., Limited, was disposed of during the year.



I Related Party Relationships and Transactions (Continued)

The related party transactions between the Company and the key management personnel during the year are listed below:

LOANSIn RMB’000 2008 2007

Balance at beginning of the year 712 –

Increase during the year – 800

Decrease during the year (169 ) (88 )

Balance at end of the year 543 712

Interest income on loans 9 20

At the year end of 2008, the annual interest rates of these loan transactions range from 1.62% to 1.8%.

DEPOSITSIn RMB’000 2008 2007


Increase during the year 116,066 89,627

Decrease during the year (127,257 ) (81,797 )


Interest expense on deposits 40 29

These deposit transactions were under normal business terms and conditions and were processed under normal procedures.

As at 31 December 2008, the Company has authorised a total credit facility of RMB 2.602 billion (31 December 2007: RMB 2.772 billion) for entities relating to the key management personnel of the Company and their close family members, which included an outstanding loan balance amounting to RMB 1.089 billion (31 December 2007: RMB 1.19 billion) and an outstanding facility of the off-balance sheet items amounting to RMB 0.267 billion (31 December 2007: RMB 0.39 billion).

Details of the compensation for key management personnel are as follows:

In RMB’000 2008 2007

Salaries and other short-term employee benefits 43,071 70,156

Post-employment benefits 665 556

Other long term employee benefits – –

Termination benefits – –

Deferred bonus accrual (Note) 28,884 6,278

Total 72,620 76,990


J Post Balance Sheet Events

Up to the date that these financial statements are authorised for issue, there were no other significant post balance sheet events which required disclosure or adjustment to the financial statements.

K Comparative Figures

Certain comparative figures have been reclassified to conform with the current year’s presentation.

L Approval of the Financial Statements

The financial statements were approved and authorised for issue by the board of directors on 19 March 2009.


Net Asset Return and Earnings per Share

2008

Profit for the year Net asset return Earnings per share (In RMB'000) (In RMB) Fully Weighted diluted (%) average (%) Basic Diluted

Net profit attributable to ordinary shareholders of the Company 614,035 3.74 4.32 0.20 0.20Net profit attributable to ordinary shareholders of the Company after deduction of non-recurring profit and loss 623,941 3.80 4.39 0.20 0.20

2007

Profit for the year Net asset return Earnings per share (In RMB'000) (In RMB) Fully Weighted diluted (%) average (%) Basic Diluted

Net profit attributable to ordinary shareholders of the Company 2,649,903 20.37 33.41 0.97 0.95

Net profit attributable to ordinary shareholders of the Company after deduction of non-recurring profit and loss 2,576,586 19.81 32.49 0.95 0.92

Of which, net profit attributable to ordinary shareholders of the Company after deduction of non-recurring profit and loss:

2008 2007In RMB (Restated)


Add/(deduct)Non-recurring profit and loss items

Gain on disposal of fixed assets and settled assets (12,527 ) (44,230 )

Gain on disposal of investment properties 419 6,311

Gain on disposal of long term equity investments (12,443 ) –

Provision for litigation 29,712 23,998

Changes in fair value of investment properties 15,087 (42,733 )

Reversal of provision for placement of deposits with other financial institutions (1,800 ) –

Other non-operating income and expenses (6,368 ) (29,602 )

Income tax effect (2,174 ) 12,939

Net profit attributable to ordinary shareholders of the Company after deduction of non-recurring profit and loss 623,941 2,576,586

The above net asset return and earnings per share are calculated in accordance with the rules stipulated in the Regulation on Information Disclosure of Public Companies No. 9 as revised by the China Securities Regulatory Commission on 2 February 2007. The non-recurring profit and loss is calculated in accordance with the rules stipulated in the Interpretation of Information Disclosure of Public Companies No. 1 – Non-recurring profit and loss, effective from 1 December 2008.

Appendix: Supplementary Financial Information

136 IFRS Financial Statements

Independent Auditors’ Report

To the shareholders of Shenzhen Development Bank Co., Limited(Established in the People’s Republic of China with limited liability)

We have audited the accompanying financial statements of Shenzhen Development Bank Co., Ltd. (the “Company”) set out on pages 137 to 190, which comprise the balance sheet as at 31 December 2008 and the income statement, the statement of changes in equity and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statementsThe directors of the Company are responsible for the preparation and the fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. Our report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2008 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Certified Public AccountantsHong Kong19 March 2009


Income Statementfor the year ended 31 December 2008

In RMB’000 Note 2008 2007

Interest income 4 26,465,264 18,043,900

Interest expense 4 (13,867,376 ) (8,438,051 )

Net interest incme 4 12,597,888 9,605,849

Fee and commission income 5 1,056,647 667,751

Fee and commission expense 5 (205,259 ) (147,038 )

Net fee and commission income 5 851,388 520,713

Investment income 6 398,881 200,984

Gains or losses from changes in fair values 7 65,800 57,641

Net foreign exchange difference 462,543 257,346

Other net income 8 103,127 214,802

Total operating income 14,479,627 10,857,335

Staff expenses 9 (2,685,103 ) (2,130,330 )

General and administrative expenses 9 (2,244,807 ) (1,802,328 )

Depreciation and amortisation 9 (293,956 ) (274,836 )

Business tax and surcharges (1,151,665 ) (824,307 )

Profit before impairment losses on assets 8,104,096 5,825,534

Impairment losses on assets 10 (7,334,162 ) (2,053,759 )

Operating profit 769,934 3,771,775

Share of profits of associates 22,675 –


Income tax expense 11 (178,574 ) (1,121,872 )

Profit for the year 614,035 2,649,903

Earnings per shareBasic earnings per share (Renminbi Yuan) 12 0.20 0.97

Diluted earnings per share (Renminbi Yuan) 12 0.20 0.95

The accounting policies and explanatory notes on pages 142 through 190 form an integral part of the financial statements.


Balance Sheetat 31 December 2008

In RMB’000 Note 31 December 2008 31 December 2007

ASSETSCash on hand and due from the Central Bank 13 39,767,901 40,726,387

Precious metals 9,225 8,200

Placement of deposits with other financial institutions 14 21,500,809 4,013,690

Funds loaned to other financial institutions 15 9,236,676 2,642,656

Financial assets at fair value through profit or loss 16 41,441 1,477,625

Derivative financial assets 17 290,751 291,816

Reverse repurchase agreements 18 34,733,353 33,768,925

Accounts receivable 19 1,359,592 778,069

Loans and advances 20 281,714,687 215,011,565

Available-for-sale financial assets 21 48,797,086 18,027,517

Held-to-maturity investments 22 15,509,155 15,826,998

Receivables – bond investments 23 13,750,000 13,450,000

Investments in associates 24 279,672 –

Investment properties 25 411,690 441,098

Property and equipment 26 1,915,446 1,710,094

Intangible assets 113,917 67,725

Deferred tax assets 27 1,811,816 994,389

Other assets 28 3,196,956 3,302,607

Total assets 474,440,173 352,539,361

LIABILITIES Placement of deposits from other financial institutions 29 36,063,032 32,388,762

Funds borrowed from other financial institutions 7,380,000 2,300,000

Financial liabilities at fair value through profit or loss 16 39,420 1,246,657

Derivative financial liabilities 17 58,598 255,173

Repurchase agreements 18 38,916,115 16,467,582

Customer deposits 30 360,514,036 281,276,981

Employee benefits payable 31 1,247,420 925,411

Corporate income tax payable 688,812 412,970

Accounts payable 32 507,483 340,297

Subordinated bonds payable 33 7,964,282 –

Deferred tax liabilities 27 341,679 98,544

Other liabilities 34 4,318,506 3,820,921

Total liabilities 458,039,383 339,533,298

SHAREHOLDERS’ EQUITY Share capital 35 3,105,434 2,293,407

Share premium 6,973,270 5,263,534

Reserves 36 5,370,653 3,386,065

Unappropriated profit 37 951,433 2,063,057

Total shareholders’ equity 16,400,790 13,006,063

Total shareholders’ equity and liabilities 474,440,173 352,539,361



Statement of Changes in Equityfor the year ended 31 December 2008

Of which: Revaluation Of which: surplus on Cumulative owner- changes in occupied fair value of properties available-for- transferred to Of which: Share Share sale financial investment general Unappropriated capital premium Reserves assets properties reserve profit TotalIn RMB’000 (Note 36) (Note 37)

Balance as at 1 January 2008 2,293,407 5,263,534 3,386,065 (60,120 ) 11,000 2,715,704 2,063,057 13,006,063

CHANGES IN EQUITY FOR 2008Available-for-sale financial assetsValuation gain taken into equity – – 1,273,554 1,273,554 – – – 1,273,554

Amortisation of unrealised gain of the held-to-maturity investments transferred from available-for-sale financial assets – – 3,244 3,244 – – – 3,244

Transferred to the income statement upon disposal – – 49,882 49,882 – – – 49,882

Investment properties

Fair value adjustments taken into equity – – 3,816 – 3,816 – – 3,816

Share of the changes in owners’ equity of an associate – – (10,126 ) – – – – (10,126 )

Tax on items taken directly into or transferred from equity – – (264,778 ) (263,765 ) (1,013 ) – – (264,778 )

Net income recognised directly in equity – – 1,055,592 1,062,915 2,803 – – 1,055,592

Profit for the year – – – – – – 614,035 614,035

Total recognised income and expense for the year – – 1,055,592 1,062,915 2,803 – 614,035 1,669,627

Exercise of share warrants 95,388 1,709,736 – – – – – 1,805,124

Profit appropriation 716,639 – 928,996 – – 867,592 (1,725,659 ) (80,024 )

Balance as at 31 December 2008 3,105,434 6,973,270 5,370,653 1,002,795 13,803 3,583,296 951,433 16,400,790



Statement of Changes in Equity (Continued)for the year ended 31 December 2008

Of which: Revaluation Of which: surplus on Cumulative owner- changes in occupied fair value of properties available-for- transferred to Of which: Share Share sale financial investment general Unappropriated capital premium Reserves assets properties reserve profit TotalIn RMB’000 (Note 36) (Note 37)

Balance as at 1 January 2007 1,945,822 1,571,730 2,211,742 76,787 760 1,679,704 867,746 6,597,040

CHANGES IN EQUITY FOR 2007Available-for-sale financial assetsValuation gain taken into equity – – (105,991 ) (105,991 ) – – – (105,991 )

Amortisation of unrealised gain of the held-to-maturity investments transferred from available-for-sale financial assets – – 3,732 3,732 – – – 3,732

Transferred to the income statement upon disposal – – (60,716 ) (60,716 ) – – – (60,716 )

Investment properties

Fair value adjustments taken into equity – – 12,489 – 12,489 – – 12,489

Tax on items taken directly into or transferred from equity – – 23,819 26,068 (2,249 ) – – 23,819

Net income recognised directly in equity – – (126,667 ) (136,907 ) 10,240 – – (126,667 )

Profit for the year – – – – – – 2,649,903 2,649,903

Total recognised income and expense for the year – – (126,667 ) (136,907 ) 10,240 – 2,649,903 2,523,236

Exercise of share warrants 206,649 3,698,598 – – – – – 3,905,247

Expenses of share reform plan – (6,794 ) – – – – – (6,794 )

Profit appropriation 140,936 – 1,300,990 – – 1,036,000 (1,454,592 ) (12,666 )

Balance as at 31 December 2007 2,293,407 5,263,534 3,386,065 (60,120 ) 11,000 2,715,704 2,063,057 13,006,063



Cash Flows Statementfor the year ended 31 December 2008

in RMB’000 Note 2008 2007

Cash flows from operating activities 38 25,491,200 18,155,886

Income tax paid (1,148,589 ) (1,104,310 )


Cash flows from investing activitiesPurchases of property and equipment (798,627 ) (316,764 )

Purchases of intangible assets (39,376 ) (55,434 )

Proceeds from disposal of items of property and equipment 17,158 109,300

Proceeds from disposal of investment properties 25,819 18,940

Interest received from investment securities 1,508,070 673,687

Dividend received from investment securities 1,878 6,955

Purchases of bond investments (133,691,351 ) (123,539,875 )

Proceeds from disposal of bond investments 104,670,827 111,192,097

Proceeds from disposal of a subsidiary 61,000 –

Proceeds from disposal of equity investments 30,279 179,317

Net cash flows used in investing activities (28,214,323 ) (11,731,777 )

Cash flows from financing activitiesProceeds from exercise of warrants 2,602,335 3,136,366

Dividends paid (101,712 ) (20,858 )

Payment of expenses relating to share reform and exercise of warrants (22,003 ) (13,120 )

Cash receipts from bond issue 8,000,000 –

Cash payments for bond issue (37,865 ) –

Net cash flows generated from financing activities 10,440,755 3,102,388


Cash and cash equivalents at beginning of the year 30,555,415 22,133,228

Cash and cash equivalents at end of the year 37,124,458 30,555,415

Analysis of balances of cash and cash equivalentsCash on hand 981,859 1,062,241

Cash equivalents

Within three months before original maturity date Placement of deposits with other financial institutions 5,489,878 2,372,907




37,124,458 30,555,415

Supplementary informationInterest received 25,090,736 16,652,111

Interest paid (12,630,076 ) (7,648,161 )


142


1 General Information

Shenzhen Development Bank Co., Ltd. (the “Company”) was established in the People’s Republic of China (the “PRC”) as a result of the restructuring of six agricultural credit co-operatives into a joint stock commercial bank with limited liability. The Company was established on 22 December 1987 after the initial public offering of its RMB ordinary shares on 10 May 1987. The Company was listed on the Shenzhen Stock Exchange on 3 April 1991 and the stock code is 000001.

The institution number of the Company on the 00000028 approval document issued by the China Banking Regulatory Commission is B0014H144030001. The business licence number of the Company issued by the Shenzhen Municipal Administration of Industry and Commerce is 440301103098545.

The Company is principally engaged in authorised commercial and retail banking activities in the PRC.

The registered office of the Company is located at No. 5047, Shennan Road East, Luohu District, Shenzhen, Guangdong Province, PRC. Headquartered in Shenzhen, the Company operates its business in the PRC.

2 Accounting Policies

Basis of preparationThe financial statements have been prepared on a historical cost basis, except for derivative financial instruments, financial assets and financial liabilities held at fair value through profit or loss, available-for-sale financial assets, investment properties and share-based payments, that have been measured at fair value, as further explained in the respective accounting policies below.

The Company maintains its books and prepares its statutory financial statements in accordance with “Accounting Standards for Business Enterprises—Basic Standard” and 38 specific standards, Implementation Guidance, Interpretations and other relevant regulations (hereafter collectively referred to as “ASBEs”) issued by the Ministry of Finance (the “MOF”) of the PRC in February 2006. As the accounting policies adopted in the preparation of the statutory financial statements are basically the same as those adopted in these financial statements, there is no significant difference in the results of operations and financial performance.

Statement of complianceThese financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) and its interpretations promulgated by the International Accounting Standards Board (the “IASB”).

Basis of consolidationConsolidated financial statements comprise the financial statements of the Company and its subsidiaries. The financial statements of subsidiaries, for the purpose of preparation of the consolidated financial statements, are prepared for the same reporting period as the Company, using consistent accounting policies.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Where there is a loss of control in a subsidiary, the consolidated income statement includes the result of that subsidiary for the part of the reporting period during which the Company has control. All intra-group balances, transactions, incomes and expenses and profits and losses resulting from intra-group transactions are eliminated in full.

Significant accounting judgements and estimatesIn the process of applying the Company’s accounting policies, management has made assumptions of the effects of uncertain future events on the financial information. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year/period are discussed below. Apart from those assumptions and estimations, judgements are also made and are set out below.

Designation of held-to-maturity investmentsNon-derivative financial assets with fixed or determinable payments and a fixed maturity are classified as held-to-maturity investments when the Company has the positive intention and ability to hold the investments to maturity. Accordingly, in evaluating whether a financial asset shall be classified as held-to-maturity investment, significant management judgement is required. If the Company fails to correctly assess its intention and ability to hold the investments to maturity and the Company sells or reclassifies more than an insignificant amount of held-to-maturity investments before maturity, the Company shall classify the whole held-to-maturity investment portfolio as available-for-sale.

Impairment losses of loans and advancesThe Company determines periodically whether there is any objective evidence that an impairment loss on loans and advances has been incurred. If any such evidence exists, the Company assesses the amount of impairment losses. The amount of impairment losses is measured as the difference between the carrying amount and the present value of estimated future cash flows. Assessing the amount of impairment losses requires significant judgement on whether objective evidence for impairment exists and also significant estimates when determining the present value of the expected future cash flows.


2 Accounting Policies (Continued)

Significant accounting judgements and estimates (Continued)

Income taxDetermining income tax provisions requires the Company to estimate the future tax treatment of certain transactions. The Company carefully evaluates tax implications of transactions in accordance with prevailing tax regulations and makes tax provisions accordingly. In addition, deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This requires significant estimation on the tax treatments of certain transactions and also significant assessment on the probability that adequate future taxable profits will be available for the deferred income tax assets to be recovered.

Fair value of financial instrumentsIf the market for a financial instrument is not active, the Company establishes fair value by using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable willing parties, if available, reference to the current fair value of another instrument that is substantially the same, and discounted cash flow analysis. To the extent practicable, valuation technique makes maximum use of market inputs. However, where market inputs are not available, management needs to make estimates on areas such as credit risk (both own and counterparty’s), volatility and correlation. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

Impairment of available–for-sale and held-to-maturity investmentsIn determining whether there is any objective evidence that impairment losses on available-for-sale and held-to-maturity investments have occurred, the Company assesses periodically whether there has been a significant or prolonged decline in the fair value of the investment below its cost or carrying amount, or whether other objective evidence of impairment exists based on the investee’s financial conditions and business prospects, including industry environment, change of technology, operating and financing cash flows, etc. This requires significant level of judgement of the management of the Company, which would affect the amount of impairment losses. Impact of new and revised International Financial Reporting StandardsThe Company has adopted the following new interpretations and amendments to IFRSs for the first time for the current year’s financial statements. The adoption of these new interpretations and amendments has had no significant financial effect on these financial statements.

IAS 39 & IFRS 7 Amendments to IAS 39 Financial Instruments: Recognition and Measurement and Amendments IFRS 7 Financial Instruments: Disclosures – Reclassification of Financial AssetsIFRIC – Int 11 IFRS 2 – Group and Treasury Share Transactions IFRIC – Int 12 Service Concession ArrangementsIFRIC – Int 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

The Company has also early adopted IFRIC Interpretation 13 – Customer Loyalty Programmes as of 1 January 2008.

The principal effects of adopting these new interpretations and amendments are as follows:

Amendments to IAS 39 and IFRS 7The amendments to IAS 39 permit an entity to reclassify a non-derivative financial asset classified as held for trading, other than a financial asset designated by an entity as at fair value through profit or loss upon initial recognition, out of the fair value through profit or loss category if the financial asset is no longer held for the purpose of selling or repurchasing in the near term, if specified criteria are met.

A debt instrument that would have met the definition of loans and receivables (if it had not been required to be classified as held for trading at initial recognition) may be classified out of the fair value through profit or loss category or (if it had not been designated as available for sale) may be classified out of the available-for-sale category to the loans and receivables category if the entity has the intention and the ability to hold it for the foreseeable future or until maturity.

In rare circumstances, financial assets that are not eligible for reclassification as loans and receivables may be transferred from the held-for-trading category to the available-for-sale category or to the held to maturity category (in the case of a debt instrument), if the financial asset is no longer held for the purpose of selling or repurchasing in the near term.

The financial asset shall be reclassified at its fair value on the date of reclassification and the fair value of the financial asset on the date of reclassification becomes its new cost or amortised cost, as applicable. The amendments to IFRS 7 require extensive disclosures of any financial asset reclassified in the situations described above. The application of the amendments may be implemented retrospectively but not before 1 July 2008. Any reclassification of a financial asset made in the periods beginning on or after 1 November 2008 shall take effect only from the date when the reclassification is made.

As the Company has not reclassified any of its financial instruments, the amendments have had no impact on the financial position or results of operations of the Company.




Significant accounting judgements and estimates (Continued)

IFRIC – Interpretation 11IFRIC Interpretation 11 requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity settled scheme, even if the entity buys the instrument from another party, or the shareholders provide the equity instruments needed. As the Company currently has no such transactions, the interpretation has had no impact on the financial position and results of operations of the Company.

IFRIC – Interpretation 13IFRIC Interpretation 13 requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred. This is then recognised as revenue over the period that the award credits are redeemed. The Company maintains a loyalty point programme within its bank card business and has historically recorded an expense based on the costs incurred in providing the awards. The Company has amended its accounting policy accordingly which did not result in any significant impact on these financial statements. IFRIC Interpretation 13 has no specific provisions on transition. Therefore, the Company has followed IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” and considered that the adoption of the new policy has no material financial effect on prior years.

IFRIC – Interpretation 14IFRIC Interpretation 14 addresses how to assess the limit under IAS 19 “Employee Benefits”, on the amount of a refund or a reduction in future contributions in relation to a defined benefit scheme that can be recognised as an asset, including situations when a minimum funding requirement exists. As the Company’s defined benefit schemes have been in deficit and are not subject to any minimum funding requirements, the adoption of this interpretation has had no impact on the financial position or results of operations of the Company.

Summary of significant accounting policies

Investments in associatesAn associate is an entity, not being a subsidiary or a jointly-controlled entity, in which the Company has a long-term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Company’s investments in associates are accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the balance sheet at cost plus post-acquisition changes in the Company’s share of the net assets of the associate, less any impairment losses. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. After application of the equity method, the Company determines whether it is necessary to recognise any additional impairment loss with respect to the Company’s net investment in the associate. The income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the Company recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.

The reporting dates of the associates and the Company are identical and the associates’ accounting policies conform to those used by the Company for like transactions and events in similar circumstances.

Revenue recognitionRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and when the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

(a) Interest income is recognised as it accrues (using the effective interest method by applying the rate that exactly discounts estimated future cash receipts through the expected life of a financial instrument to the net carrying amount of the financial asset). Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is thereafter recognised using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss.

(b) Fee and commission income is recognised when the services have been rendered and the proceeds can be reasonably estimated.

(c) Dividend income is recognised when the shareholders’ right to receive payment has been established. Precious metalThe Company’s precious metals represent gold. Precious metals are initially measured at cost. At the balance sheet date, precious metals are measured at the lower of cost and net realisable value. If the cost of precious metals is higher than the net realisable value, a provision for the decline in value of precious metals is recognised in the income statement.



Summary of significant accounting policies (Continued)

Financial assetsThe Company classifies its financial assets into four categories: financial assets at fair value through profit or loss; held-to-maturity investments; loans and receivables; and available-for-sale financial assets. Management determines the classification of a financial asset at its initial recognition and evaluates this designation at each reporting date. When a financial asset is recognised initially, the Company measures it at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

(a) Financial assets at fair value through profit or lossThere are two sub-categories of financial assets at fair value through profit or loss:

(i) Financial assets held for trading A financial asset is classified as held for trading if it is:

• acquiredprincipallyforthepurposeofsaleinthenearterm;• partofaportfolioofidentifiedfinancialinstrumentsthataremanagedtogetherandforwhichthereisevidenceofarecentactualpatternof

short term profit-taking; or• aderivative(exceptforaderivativethatisdesignatedandaneffectivehedginginstrument).

(ii) Financial assets designated at fair value through profit or loss by management upon initial recognitionA financial asset, other than one held for trading, may be designated as financial asset at fair value through profit or loss upon initial recognition, if it meets the criteria set out below, and is so designated by management:

• eliminatesorsignificantlyreducesameasurementorrecognitioninconsistencythatwouldotherwisearisefrommeasuringfinancialassets or financial liabilities or recognising the gains and losses on them on a different basis;

• appliestoagroupoffinancialassets,financialliabilitiesorboththataremanagedandtheirperformanceevaluatedonafairvaluebasis,inaccordance with a documented risk management or investment strategy, and where information about that group of financial instruments is provided internally on that basis to key management personnel; or

• relatestofinancialinstrumentscontainingoneormoreembeddedderivativesthatsignificantlymodifythecashflowsresultingfromthosefinancial instruments; or it is clear with little or no analysis when a similar hybrid instrument is first considered that the embedded derivatives should be separated.

After the initial recognition, these financial assets are measured at their fair values, without any deduction for transaction costs that the Company may incur on sale or other disposal. Changes in fair value are recognised in “Gains or losses from changes in fair values” and interest earned is accrued in interest income according to the terms of the contract.

The Company assesses whether embedded derivatives are required to be separated from host contracts when the Company first becomes a party to the contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

(b) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and a fixed maturity that the Company’s management has the positive intention and ability to hold to maturity. These investments are carried at amortised cost using the effective interest method, less provision for impairment in value. The Company shall reclassify any remaining held-to-maturity investments as available-for-sale and shall not classify any financial assets as held-to-maturity if it has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity other than sales or reclassifications that:

(i) are so close to maturity or the financial asset’s call date (for example, less than three months before maturity) that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;

(ii) occur after the Company has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or

(iii) are attributable to an isolated event that is beyond the Company’s control and is non-recurring and could not have been reasonably anticipated by the Company.





Financial assets (Continued)

(c) Loan and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and the Company has no intention of trading the assets immediately or in the near term. Loans and receivables are carried at amortised cost using the effective interest method, less provision for impairment in value. Loans and receivables mainly include loans and advances to customers, receivables and discounted bills.

Discounted bills are granted by the Company to its customers based on the bank acceptance held which has not matured. Discounted bills are carried at fair value less unrealised interest income. The interest income of the discounted bills is recognised on an accrual basis.

(d) Available-for-sale financial assetsAvailable-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss. After the initial recognition, financial assets which are classified as available-for-sale are stated at fair value. Premiums and discounts on available-for-sale financial assets are amortised using the effective interest method and taken to the interest income.

Changes in fair value of available-for-sale financial assets are reported as a separate component of equity until the financial asset is derecognised or the financial asset is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported as “cumulative changes in fair value – available-for-sale financial assets” within equity is included in the income statement for the year.

A financial asset is derecognised when:

• therightstoreceivecashflowsfromtheassethaveexpired;• theCompanyretainstherightstoreceivecashflowsfromtheasset,buthasassumedanobligationtopaytheminfullwithoutmaterialdelay

to a third party under a “pass-through” arrangement; or• theCompanyhastransferreditsrightstoreceivecashflowsfromtheassetandeither(i)hastransferredsubstantiallyalltherisksand

rewards of ownership of the financial asset; or (ii) has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset, but has transferred control of the asset.

Fair value measurementFor investments and derivatives quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities.

The estimated fair value of deposits with no stated maturity, which include non-interest-bearing deposits, is the amount payable on demand.

The fair value of forward exchange contracts is calculated by reference to forward exchange rates with similar maturities.

For unquoted financial instruments, fair value is normally based on the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics.

The fair value of unquoted derivatives is determined either by discounted cash flows or internal pricing models.




Impairment of financial assetsThe Company assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets (other than those at fair value through profit or loss) is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

(a) Financial assets carried at amortised costIf there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an impairment provision account and the amount of the loss is recognised in the income statement.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

Future cash flows of a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the impact of current conditions that did not affect the period on which the historical loss experience is based and to eliminate the impact of historical conditions that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Company.

If, in a subsequent period, the amount of an impairment loss decreases and the decrease can be attributed objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

When a loan and receivable is uncollectible, it is written off against the related allowance for impairment losses. Such loans and receivables are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of the amounts previously written off decrease the amount of the provision for impairment losses in the income statement.

(b) Financial assets carried at costIf there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of impairment loss is measured as the difference between the carrying amount of that financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

(c) Available-for-sale financial assetsIf an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal repayment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. A provision for impairment is made for available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below its cost or where objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgement.

Reversals in respect of equity instruments classified as available-for-sale are not recognised in the income statement. Reversals of impairment losses on debt instruments classified as available-for-sale are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the income statement.





Financial liabilitiesThe Company classifies its financial liabilities into two categories: financial liabilities at fair value through profit or loss and financial liabilities carried at amortised cost. Management determines the classification of a financial liability at its initial recognition. When a financial liability is recognised initially, the Company shall measure it at its fair value plus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability.

(a) Financial liabilities at fair value through profit or lossFinancial liabilities at fair value through profit or loss are financial liabilities which are either classified as held for trading or, based on the criteria in the accounting policies of “Financial assets” (a) (ii) above, designated by the Company as fair value through profit or loss upon initial recognition. Gains and losses from changes in fair value are recognised in the income statement.

A financial liability is classified as held for trading if it is:

• incurredprincipallyforthepurposeofrepurchasinginthenearterm;• partofaportfolioofidentifiedfinancialinstrumentsthataremanagedtogetherandforwhichthereisevidenceofarecentactualpatternof

short term profit-taking; or• aderivative(exceptforaderivativethatisadesignatedandaneffectivehedginginstrument).

After initial recognition, these financial liabilities are measured at their fair values, without any deduction for transaction costs it may incur on sale or other disposal. Changes in fair value are recognised in “Gains or losses from changes in fair values” and interest incurred is accrued in interest expense according to the terms of the contract.

(b) Financial liabilities carried at amortised costAfter initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

Derivative financial instrumentsDerivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the hybrid instrument is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognised in the income statement.

Certain derivative transactions, while providing effective economic hedges under the Company’s risk management positions, do not qualify for hedge accounting and are therefore treated as derivatives held for trading with fair value gains or losses recognised in the income statement.

Trade date accountingExcept for loans and receivables, all regular way purchases and sales of financial assets are recognised on the trade date, that is, the date on which the Company commits to purchase or sell the asset. A regular way purchase and sale is the purchase or sale of financial assets that requires delivery of assets within the time frame generally established by regulation or convention in the marketplace.

OffsettingFinancial assets and liabilities are offset and the net amount is reported in the balance sheet only when the Company currently has a legally enforceable right to offset the recognised amounts; and the Company intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Reverse repurchase agreements and repurchase agreementsAssets sold under agreements to repurchase at a specific future date are not derecognised from the balance sheet. The corresponding proceeds are recognised on the balance sheet as “Repurchase agreements”. The difference between the sale price and the repurchase price is treated as interest expense and is accrued over the life of the agreement using the effective interest method.

Conversely, assets purchased under agreements to resell at a specific future date are not recognised on the balance sheet. The corresponding cost is recognised on the balance sheet as a “Reverse repurchase agreements”. The difference between the purchase price and the resale price is treated as interest income and is accrued over the life of the agreement using the effective interest method.




LeasesLeases that transfer substantially all the rewards and risks of ownership of assets to the Company, other than legal title, are accounted for as finance leases.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Company is the lessor, rentals receivable under operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Company is the lessee, rentals payable under the operating leases net of any incentives received from the lessor are charged to the income statement on the straight-line basis over the lease terms.

Construction in progressConstruction in progress represents costs incurred in the construction of office premises including furniture and fixtures. Costs comprise direct costs incurred during the period of construction. Interest charged on related borrowings for the construction is capitalised and such capitalisation of interest ceases when the assets under construction are completed and are ready for their intended use. No capitalisation of interest is made if the cost incurred during the construction is from the Company’s own fund. Construction in progress is not depreciated.

Construction in progress is reclassified to the appropriate category of property and equipment when completed and ready for use.

Property and equipmentAll property and equipment are stated at cost less any accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the items of property and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment, the expenditure is capitalised as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Properties and buildings 3.3%

Transportation vehicles 16.2%

Computers 19.8% or 33.0%

Electronic appliances 9.9% or 19.8%

Owner-occupied property improvement 10.0% or 20.0%

Leasehold improvement Over the lease terms

Residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date.

An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year/period the asset is derecognised.

Intangible assetsIntangible assets are identifiable non-monetary assets without physical substance owned or controlled by the Company. The Company’s intangible assets comprise the value of computer software.

Intangible assets are measured initially at cost. The Company analyses and assesses the useful life of an intangible asset on its acquisition. An intangible asset is regarded as having an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate economic benefits for the Company.

When the asset is available for use, an intangible asset with a finite useful life is amortised over its useful life. The amortisation method selected reflects the pattern in which the asset’s economic benefits are expected to be realised. If that pattern cannot be determined reliably, the straight-line method is used. An intangible asset with an indefinite useful life is not amortised.

The useful life and amortisation method for intangible assets with finite useful lives are reviewed at each balance sheet date. If the expected useful life of the asset or the amortisation method differs significantly from previous assessments, the amortisation period or amortisation method is changed accordingly as a change in accounting estimate.





Impairment of non-financial assetsThe Company assesses at each balance sheet date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined on an individual basis, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. In assessing value in use of an asset, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the income statement under those expense categories consistent with the function of the impaired assets.

An assessment is made at each balance sheet date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of any depreciation/amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement. After such a reversal, the depreciation/amortisation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Investment propertiesInvestment properties are interests in land or buildings held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes, or for sale in the ordinary course of business. The Company adopts the fair value model for the measurement of investment properties which are not depreciated or amortised. At each period end, the carrying value of the investment properties is adjusted based on the fair value, and any difference between the carrying amount and the fair value is accounted for in the income statement.

Repossessed assetsRepossessed assets are measured at the lower of the carrying amount of the loans and advances and interest receivables being settled, and fair value of the related repossessed assets less costs to sell. Impairment losses for any initial or subsequent write-down of the repossessed assets to fair value less costs to sell are recognised in the income statement.

Foreign currency translationThe financial statements are presented in RMB, being the functional and presentation currency of the Company’s operations.

Foreign currency transactions are translated into the functional currency using the exchange rates ruling at the dates of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the applicable exchange rates ruling at the balance sheet date. Exchange differences arising on the settlement of monetary items or on translating monetary items at year/period end rates are recognised in the income statement.

Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rates ruling at the dates of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates ruling at the date when the fair value was determined.

Fiduciary activitiesWhere the Company acts in a fiduciary capacity such as nominee, trustee or agent, assets arising thereon together with the related undertakings to return such assets to customers are excluded from the financial statements.

Entrusted loans granted by the Company on behalf of third-party lenders are recorded as off-balance sheet items. The Company acts as an agent and grants such entrusted loans to borrowers under the direction of the third-party lenders who fund these loans. The Company has been contracted by the third-party lenders to manage the administration and collection of these loans on their behalf. The third-party lenders determine both the underwriting criteria for and the terms of all entrusted loans including their purposes, amounts, interest rates, and repayment schedules. The Company charges a commission related to the management of the entrusted loans. The commission is recognised pro rata over the period in which the service is provided. The risk of loan loss is borne by the third-party lenders.




Financial guarantee contracts The Company gives financial guarantees consisting of letters of credit, letters of guarantees, and acceptances. These financial guarantee contracts provided for specified payments to be made to reimburse the holder for a loss it incurs when a guaranteed party defaults under the original or modified terms of a debt instrument, loan or other obligation.

Financial guarantee contracts are initially recognised at fair value, in “Other liabilities”, being the premium received. The guarantee fee is amortised over the period of the contract and is recognised as fee and commission income. Subsequent to initial recognition, the Company’s liabilities under such contracts are each measured at the higher of the initial fair value less cumulative amortisation, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is taken to the income statement.

Related partiesA party is considered to be related to the Company if:

(i) the party, directly or indirectly through one or more intermediaries, (a) controls, is controlled by, or is under common control with, the Company; (b) has an interest in the Company that gives it significant influence over the Company; or (c) has joint control over the Company;

(ii) the party is an associate of the Company;

(iii) the party is joint venture in which the Company is a venturer;

(iv) the party is a member of the key management personnel of the Company or its parent; (v) the party is a close member of the family of any individual referred to in (i) or (iv);

(vi) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or

(vii) the party is a post-employment benefit plan for the benefit of the employees of the Company, or of any entity that is a related party of the Company.

Income taxIncome tax comprises current tax and movements in deferred tax balances.

Current tax is the amount of income taxes payable in respect of the taxable profit for a period. Taxable profit is the profit for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable.

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the tax authorities.

Deferred tax is provided on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, using tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax assets also arise from unused tax losses and unused tax credits.

A deferred tax liability is recognised for all taxable temporary differences, except:

(i) where the deferred tax liability arises from the initial recognition of goodwill; or the initial recognition of an asset or liability in a transaction which contains both of the following characteristics: the transaction is not a business combination; and at the time of the transaction, it affects neither accounting profit nor taxable profit (or deductible loss);

(ii) in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in jointly controlled enterprises, where the timing of the reversal of the temporary difference can be controlled; and it is probable that the temporary difference will not reverse in the foreseeable future.

For deductible temporary differences, the carryforward of unused deductible losses and tax credits, the Company recognises the corresponding deferred tax asset to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences, the deductible losses and tax credits can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: 1) the transaction is not a business combination; 2) at the time of the transaction, it affects neither accounting profit nor taxable profit (or deductible loss).

For deductible temporary differences arising from investments in subsidiaries, associates, and interests in jointly controlled enterprises, the corresponding deferred tax asset is recognised, to the extent that, it is probable that: the temporary differences will reverse in the foreseeable future; and taxable profits will be available in the future, against which the temporary differences can be utilised.





Income tax (Continued)

At the balance sheet date, deferred tax assets and deferred tax liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, according to the requirements of tax laws.

At the balance sheet date, the Company reviews the carrying amount of a deferred tax asset. The carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profits will be available in future periods to allow the benefit of the deferred tax asset to be utilised. Any such reduction in the amount is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Current and deferred tax of the Company is recognised as income or an expense and included in the income statement for the current period, except to the extent that the tax arises from a business combination; or a transaction or event which is recognised directly in owner’s equity.

Employee benefits

(a) Short term employee benefitsSalaries and bonuses, social security contributions and other short term employee benefits are accrued in the period in which services are rendered by the employees of the Company.

(b) Defined contribution plans According to the statutory requirements in Mainland China, the Company is required to make contributions to the pension and insurance schemes that are separately administered by the local government authorities. Contributions to these plans are recognised in the income statement as incurred.

(c) Supplementary retirement benefitsCertain employees of the Company in Mainland China can enjoy supplementary retirement benefits after retirement. These benefits are unfunded. The cost of providing benefits is determined using the projected unit credit actuarial valuation method. The present value of such benefits is recorded under “Employee benefit payable” in the balance sheet. Actuarial gains and losses are recognised in the income statement in the period in which they occur.

(d) Share-based payment transactions The Company grants equity instruments, or incurs liabilities for amounts that are determined based on the price of equity instruments, in return for services rendered by employees or other parties.

The cost of cash-settled transactions is measured initially at fair value at the grant date using an appropriate pricing model taking into account the terms and conditions upon which the instruments were granted. The fair value is expensed over the period until vesting with recognition of a corresponding liability. The liability is remeasured at each balance sheet date up to and including the settlement date, with changes in fair value recognised in the income statement.

Cash and cash equivalentsCash and cash equivalents represent cash on hand, general deposits with the Central Bank, placement of deposits with other financial institutions and funds loaned to other financial institutions with original maturity of three months or less, and short term highly liquid investments (maturity within three months from the date of acquisition) which are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value.

ProvisionsProvisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate.

Contingent liabilitiesA contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events but is not recognised because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that the outflow is probable, it will then be recognised as a provision.




DividendsDividends are recognised as a liability and deducted from equity when they are approved by the Company’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Company. Dividends for the year that are approved after the balance sheet date are disclosed as an event after the balance sheet date.

Impact of issued but not yet effective International Financial Reporting StandardsThe Company has not applied the following new and revised IFRSs and IFRIC Interpretations that have been issued but are not yet effective, in these financial statements.

IFRS 1 and IAS 27 Amendments to IFRS1 First-time Adoption of IFRSs and IAS 27 Consolidated and Separate Financial Statements – Amendments Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate 1

IFRS 2 Amendments Amendments to IFRS 2 Share-based Payment – Vesting Conditions and Cancellations 1

IFRS 3 (Revised) Business Combinations 2

IFRS 8 Operating Segments 1

IAS 1 (Revised) Presentation of Financial Statements 1

IAS 23 (Revised) Borrowing Costs 1

IAS 27 (Revised) Consolidated and Separate Financial Statements 2

IAS 32 and IAS 1 Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – Amendments Puttable Financial Instruments and Obligations Arising on Liquidation 1

IAS 39 Amendment Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items 2

IFRIC – Int 15 Agreements for the Construction of Real Estate 1

IFRIC – Int 16 Hedges of a Net Investment in a Foreign Operation 3

IFRIC – Int 17 Distribution of Non-cash Assets to Owners 1

Apart from the above, the International Accounting Standards Board has also issued Improvements to IFRSs* which sets out amendments to a number of IFRSs primarily with a view to removing inconsistencies and clarifying wording. Except for the amendment to IFRS 5 which is effective for the annual periods on or after 1 July 2009, the amendments are effective for annual periods beginning on or after 1 January 2009 although there are separate transitional provisions for each standard.1 Effective for annual periods beginning on or after 1 January 20092 Effective for annual periods beginning on or after 1 July 20093 Effective for annual periods beginning on or after 1 October 2008* Improvements to IFRSs contain amendments to IFRS 5, IFRS 7, IAS 1, IAS 8, IAS 10, IAS 16, IAS 18, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34,

IAS 36, IAS 38, IAS 39, IAS 40 and IAS 41.

The Company is in the process of making an assessment of the impact of these new and revised IFRSs upon initial application. So far, it has concluded that while the adoption of IFRS 8 and IAS 1 (Revised) may result in new or amended disclosures and the adoption of IFRS 3 (Revised) and IAS 27 (Revised) may result in changes in accounting policies, these new and revised IFRSs are unlikely to have a significant impact on the Company’s results of operations and financial position.

3 Segmental Reporting

The Company mainly organises and manages its operating businesses geographically, and therefore, the primary format for reporting segment information is geographical segments.

Segment assets and liabilities, and segment revenues and profit are calculated according to the accounting policies of the Company.

In presenting information on the basis of geographical segment, operating income and expense are based on the location of the branches that generated the revenue and incurred the expense. Segment assets and liabilities are allocated based on the geographical locations of the underlying assets.

The details of the geographical segments of the Company are as follows:

Southern China: Shenzhen, Guangzhou, Foshan, Zhuhai, HaikouEastern China: Shanghai, Hangzhou, Ningbo, Wenzhou, NanjingNorthern and north-eastern China: Beijing, Tianjin, Dalian, Jinan, QingdaoSouth-western China: Chongqing, Kunming, ChengduOffshore businesses



3 Segmental Reporting (Continued)

2008


Net interest income 6,441,460 3,285,472 1,969,345 796,640 104,971 – 12,597,888Including: external net interest income 6,439,463 3,308,557 1,992,005 796,669 61,194 – 12,597,888 internal net interest income/(expenses) 1,997 (23,085 ) (22,660 ) (29 ) 43,777 – –Net fee and commission income 464,314 172,548 122,609 27,069 64,848 – 851,388Other income 904,200 36,612 61,234 5,158 23,147 – 1,030,351Total operating income 7,809,974 3,494,632 2,153,188 828,867 192,966 – 14,479,627Business tax and surcharges (407,564 ) (406,859 ) (268,002 ) (69,240 ) – – (1,151,665 )General and administrative expenses (2,812,246 ) (1,284,277 ) (864,602 ) (262,741 ) – – (5,223,866 )Impairment losses on assets (4,330,943 ) (2,344,424 ) (453,660 ) (175,689 ) (29,446 ) – (7,334,162 )Operating expenses (7,550,753 ) (4,035,560 ) (1,586,264 ) (507,670 ) (29,446 ) – (13,709,693 )Operating profit 259,221 (540,928 ) 566,924 321,197 163,520 – 769,934



31 December 2008Segment assets 281,926,989 151,290,327 113,882,801 22,435,574 7,323,869 (104,231,203 ) 472,628,357Deferred tax assets 1,811,816Total assets 474,440,173

Segment liabilities 267,542,455 151,820,166 113,298,504 22,116,868 7,150,914 (104,231,203 ) 457,697,704Deferred tax liabilities 341,679Total liabilities 458,039,383

2007


Net interest income 4,810,811 2,693,923 1,485,325 525,796 89,994 – 9,605,849

Including: external net interest income 4,810,811 2,693,923 1,485,325 525,796 89,994 – 9,605,849

internal net interest income – – – – – – –

Net fee and commission income 277,462 116,143 71,000 20,336 35,772 – 520,713

Other income 572,903 66,052 76,526 5,828 9,464 – 730,773

Total operating income 5,661,176 2,876,118 1,632,851 551,960 135,230 – 10,857,335

Business tax and surcharges (282,563 ) (300,549 ) (189,233 ) (51,962 ) – – (824,307 )

General and administrative expenses (2,280,845 ) (1,021,335 ) (695,421 ) (209,893 ) – – (4,207,494 )

Impairment losses on assets (1,772,992 ) (184,862 ) (49,857 ) (31,507 ) (14,541 ) – (2,053,759 )

Operating expenses (4,336,400 ) (1,506,746 ) (934,511 ) (293,362 ) (14,541 ) – (7,085,560 )

Operating profit 1,324,776 1,369,372 698,340 258,598 120,689 – 3,771,775

Depreciation and amortisation (146,890 ) (53,155 ) (49,180 ) (25,611 ) – – (274,836)


31 December 2007Segment assets 213,890,764 105,849,188 80,366,622 21,728,490 3,621,120 (73,911,212 ) 351,544,972

Deferred tax assets 994,389

Total assets 352,539,361

Segment liabilities 204,208,241 104,486,345 79,674,242 21,471,851 3,505,287 (73,911,212 ) 339,434,754

Deferred tax liabilities 98,544

Total liabilities 339,533,298


4 Net Interest Income

In RMB’000 2008 2007

Interest incomeInterest income on loans and advances (Note) 19,406,389 14,222,092

Interest income on amounts due from financial institutions 4,670,673 2,520,703

Interest income on investment securities (excluding financial assets at fair value through profit or loss) 2,330,843 1,261,540

Subtotal 26,407,905 18,004,335

Interest income on financial assets at fair value through profit or loss 57,359 39,565

Total 26,465,264 18,043,900

Interest expenseInterest expense on amounts due to financial institutions 4,977,674 3,390,478

Interest expense on customer deposits 8,556,601 5,014,596

Interest expense on subordinated bonds 325,488 –

Subtotal 13,859,763 8,405,074

Interest expense on financial liabilities at fair value through profit or loss 7,613 32,977

Total 13,867,376 8,438,051

Net interest income 12,597,888 9,605,849

Note: Included within interest income is RMB 384 million (2007: RMB 519 million) in respect of interest related to unwinding of discounts of impairment provisions for financial assets (see Note 20f).

5 Net Fee and Commission Income

In RMB’000 2008 2007

Fee and commission incomeSettlement fee income 215,993 161,744

International settlement fee income 131,020 103,565

Agency business fee income 69,372 62,113

Entrusted loan fee income 14,683 8,305

Bank card fee income 221,086 131,102

Others 404,493 200,922

Subtotal 1,056,647 667,751

Fee and commission expensesBank card fee expenses 160,538 106,579

Others 44,721 40,459

Subtotal 205,259 147,038

Net fee and commission income 851,388 520,713

6 Investment Income

In RMB’000 2008 2007

Gain on disposal of bond investments held for trading 41,810 4,352

Loss on disposal of bond investments designated at fair value through profit or loss (91 ) (31,408 )

Gain on disposal of available-for-sale bond investments 322,953 40,017

Gain on disposal of available-for-sale equity investments 13,247 175,736

Dividend income 4,554 6,955

Realised gain on derivative financial instruments 16,408 5,332

Total 398,881 200,984



7 Gains or Losses from Changes in Fair Values

In RMB’000 2008 2007

Financial instruments held for trading 1,241 (459 )

Financial assets designated at fair value through profit or loss 4,729 12,534

Financial liabilities designated at fair value through profit or loss 2,740 (10,925 )

Derivative financial instruments 72,177 13,758

Investment properties (15,087 ) 42,733

Total 65,800 57,641

8 Other Net Income

In RMB’000 2008 2007

Gain on disposal of property and equipment, net 261 21,011

Loss on disposal of investment properties, net (419 ) (6,311 )

Rental income 63,365 65,994

Gain on disposal of repossessed assets, net 12,266 23,218

Provision against litigation claims (29,712 ) (23,998 )

Others 57,366 134,888

Total 103,127 214,802

9 Operating Expenses

In RMB’000 2008 2007

Staff expensesSalaries, bonuses, allowances and subsidies 2,034,524 1,599,861

Including: Deferred bonus accrual (Note 31) 89,148 33,800

Social insurance, supplementary pension contributions and staff welfare 494,408 364,568

Housing funds 89,934 69,842

Labour union and training expenses 56,875 54,177

Others 9,362 41,882

Subtotal 2,685,103 2,130,330

General and administrative expensesRental expenses 421,725 358,887

Computer system maintenance fees 168,425 138,120

Telecommunication and postage expenses 95,546 77,285

Water and electricity expenses 47,769 40,381

Publication and stationery expenses 197,604 151,377

Travel expenses 90,173 87,515

Marketing and public relations expenses 358,019 241,706

Motor vehicle expenses 128,463 134,107

Legal expenses 44,080 35,754

Professional fees (Note) 169,425 100,047

Sundry tax expenses 30,269 36,014

CBRC supervisory fee 51,582 44,473

Others 441,727 356,662

Subtotal 2,244,807 1,802,328

Depreciation and amortisationDepreciation of property and equipment 273,104 260,561


Subtotal 293,956 274,836

Total operating expenses 5,223,866 4,207,494

IncludingAuditors’ remuneration – audit service fees 5,635 4,700

Note: Included in the professional fees are amounts of RMB 44,886 thousand (2007: RMB 40,333 thousand) of consultancy fees payable to GE Management Technology Consulting (Shanghai) Co., Ltd.


10 Impairment Loss of Assets

2008

Unwinding of Balance at Charge/ Recovery of discounts of Balance beginning (re-versal) Amounts loans written impairment Other at end ofIn RMB’000 of the year for the year written off off previously provisions movements the year

Provision for decline in value of precious metals 61 198 – – – – 259 Impairment provision for placement of deposits with other financial institutions (Note 14) 66,786 (1,496 ) (25,400 ) – – 805 40,695 Impairment provision for funds loaned to other financial institutions (Note 15) 309,897 8,619 (284,987 ) – – (4,450 ) 29,079 Impairment provision for reverse repurchase agreements (Note 18) 30,549 172 (1,721 ) – – – 29,000 Impairment provision for loans and advances (Note 20) 6,023,964 6,972,839 (10,606,712 ) 29,944 (384,238 ) (9,118 ) 2,026,679 Impairment provision for available-for-sale financial assets carried at cost (Note 21) 470,745 63,184 – – – (446,302 ) 87,627 Investments in associates (Note 24) – 20,000 – – – – 20,000Provision for decline in value of repossessed assets (Note 28) 198,143 126,114 – – – (4,777 ) 319,480 Impairment provision for property and equipment (Note 26) – 6,289 – – – – 6,289 Impairment provision for other assets 238,448 37,990 (61,447 ) – – (2,354 ) 212,637 Total 7,338,593 7,233,909 (10,980,267 ) 29,944 (384,238 ) (466,196 ) 2,771,745 Impairment losses on available-for-sale financial assets carried at fair value 100,253Total impairment losses 7,334,162

2007

Unwinding of Balance at Recovery of discounts of Balance beginning Charge for Amounts loans written impairment Other at end ofIn RMB’000 of the year the year written off off previously provisions movements the year

Provision for decline in value of precious metals – 61 – – – – 61

Impairment provision for placement of deposits with other financial institutions (Note 14) 67,425 361 (1,000 ) – – – 66,786

Impairment provision for funds loaned to other financial institutions (Note 15) 324,985 8,283 (17,498 ) – – (5,873 ) 309,897

Impairment provision for reverse repurchase agreements (Note 18) 27,550 2,999 – – – – 30,549

Impairment provision for loans and advances (Note 20) 6,937,141 1,946,243 (2,301,981 ) 34,061 (518,592 ) (72,908 ) 6,023,964

Impairment provision for available-for-sale financial assets carried at cost (Note 21) 470,745 – – – – – 470,745

Provision for decline in value of repossessed assets (Note 28) 189,538 14,419 – – – (5,814 ) 198,143

Impairment provision for other assets 188,891 51,393 – – – (1,836 ) 238,448

Total 8,206,275 2,023,759 (2,320,479 ) 34,061 (518,592 ) (86,431 ) 7,338,593

Impairment losses on available-for-sale financial assets carried at fair value 30,000

Total impairment losses 2,053,759



11 Income Tax Expense

In RMB’000 2008 2007

Current taxCharge for the year 1,381,363 1,216,465


Deferred income taxImpact of changes in tax rates – (117,288 )

Impact of impairment provision for assets (Note 27) (796,813 ) 42,473

Other movements (42,257 ) (43,949 )

Total 178,574 1,121,872

The reconciliation of income tax expense applicable to profit before tax at the statutory tax rate to income tax expense at the Company’s effective income tax rate is as follows:

In RMB’000 2008 2007


Income tax at the statutory rate of 25% (2007: 33%) 198,152 1,244,686

Adjustment in respect of current tax for prior years (363,719 ) 24,171

Non-taxable income (131,617 ) (152,226 )

Non-deductible expenses and other adjustments 475,758 5,241

Income tax expense 178,574 1,121,872

12 Earnings per Share

The Company’s basic earnings per share amount is calculated as follows:

In RMB’000 2008 2007



Basic earnings per share (Renminbi Yuan) 0.20 0.97

The Company’s diluted earnings per share amount is calculated as follows:

In RMB’000 2008 2007



Dilutive effect – weighted average number of ordinary shares Warrants 17,984 74,140

Adjusted weighted average number of ordinary shares outstanding (in thousands) 3,078,087 2,795,586

Diluted earnings per share (Renminbi Yuan) 0.20 0.95

Note: The number of ordinary shares increased by 716,639 thousand as a result of a scrip dividend in October 2008. Since there was no effect on the amount of shareholders’ equity, the earnings per share for 2007 were recalculated on the basis of the adjusted number of shares.

No changes occurred after the balance sheet date but before the financial statements are authorised for issue.


13 Cash on Hand and due from the Central Bank


Cash on hand 981,859 1,062,241

Statutory reserve with the Central Bank – RMB 29,321,249 28,894,261

Statutory reserve with the Central Bank – foreign currency 309,783 327,038


Other deposits with the Central Bank – fiscal deposits 10,298 6,506

Total 39,767,901 40,726,387

Based on the related RMB and foreign currency deposits, the Company places respective statutory reserves with the Central Bank in accordance with the requirements from the People’s Bank of China (the “PBOC”). These reserve deposits are not available for use in the Company’s daily operations.

Fiscal deposits represent the amounts received from government-related bodies that are required to be deposited with the Central Bank according to the relevant regulations.

14 Placement of Deposits with other Financial Institutions



Domestic banks 18,313,172 2,273,251

Other domestic financial institutions 45,462 68,150

Overseas banks 3,182,870 1,739,075

Subtotal 21,541,504 4,080,476

Less: Impairment provision (Note 10) (40,695 ) (66,786 )

Total 21,500,809 4,013,690

As at 31 December 2008, included in this total amount of placements of deposits with other financial institutions is an amount of RMB 44,520 thousand (31 December 2007: RMB 69,920 thousand) impaired assets brought forward from prior years.

15 Funds Loaned to other Financial Institutions



Domestic banks 4,101,050 687,940

Domestic financial companies 158,550 48,550

Domestic trust investment companies 25,022 80,511

Overseas banks 4,981,133 2,135,552

Subtotal 9,265,755 2,952,553


Total 9,236,676 2,642,656

As at 31 December 2008, included in this total amount of loans funded to other financial institutions is an amount of RMB 33,572 thousand (31 December 2007: RMB 323,771 thousand) impaired assets brought forward from prior years.



16 Financial Assets /Financial Liabilities at Fair Value through Profit or Loss

Financial assets at fair value through profit or loss


Bonds held for trading 36,610 276,802

Financial assets designated at fair value through profit or loss 4,831 1,200,823

Total 41,441 1,477,625


Bond investments analysed by issuerGovernments and the Central Bank – 816,669

Policy banks 36,610 616,136


Total 41,441 1,477,625

In the opinion of management, there are no significant restrictions on realising the financial assets at fair value through profit or loss.

Financial liabilities at fair value through profit or loss


Financial liabilities designated at fair value through profit or loss 39,420 1,246,657

As at 31 December 2008, the Company designated financial liabilities of RMB 39,420 thousand (31 December 2007: RMB 1,246,657 thousand) as at fair value through profit or loss upon their initial recognition. The amount of change in their total fair value that was attributable to changes in the credit risk was not significant as the credit spread of the Company remained stable during the year. The difference between the carrying amount and the amount that the Company would be contractually required to pay at maturity to the holders of these financial liabilities is RMB 567 thousand (31 December 2007: RMB 31,506 thousand).


17 Derivative Financial Instruments

A derivative is a financial instrument, the value of which is derived from the value of another “underlying” financial instrument, an index or some other variables. Typically, an “underlying” financial instrument is a share, commodity or bond price, an index value or an exchange or interest rate. The Company uses derivative financial instruments such as forward contracts, swaps and options.

The notional amount of a derivative represents the amount of an underlying asset upon which the value of the derivative is based. It indicates the volume of business transacted by the Company but does not reflect the risk.

The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm’s length transaction.

At each balance sheet date, the Company has positions in the following types of derivatives:

31 December 2008


Foreign currency derivative instrumentsForward foreign exchange contracts 11,720,148 7,181,310 73,121 18,974,579 182,345 (27,016 )

Interest rate derivative instrumentsInterest rate swap contracts – 130,000 1,140,000 1,270,000 86,632 (6,733 )

Equity derivative instrumentsEquity option contracts 511,437 1,508,952 – 2,020,389 21,312 (21,312 )Equity swap contracts – 46,767 – 46,767 – (3,075 )

Other derivative instruments 19,219 407,060 – 426,279 462 (462 )Total 12,250,804 9,274,089 1,213,121 22,738,014 290,751 (58,598 )

31 December 2007


Foreign currency derivative instrumentsForward foreign exchange contracts 5,847,222 5,077,180 – 10,924,402 166,122 (139,604 )

Interest rate derivative instrumentsInterest rate swap contracts – – 170,000 170,000 – (1,553 )

Equity derivative instrumentsEquity option contracts 805,824 224,966 1,531,691 2,562,481 71,417 (76,149 )

Equity swap contracts – 482,036 – 482,036 16,410 –

Other derivative instruments – 1,482,337 – 1,482,337 37,867 (37,867 )

Total 6,653,046 7,266,519 1,701,691 15,621,256 291,816 (255,173 )

As at 31 December 2008 and 31 December 2007, no derivatives were designated as hedging instruments.



18 Reverse Repurchase Agreements and Repurchase Agreements

Analysed by counterparty


Reverse repurchase agreements analysed by counterpartyBanks 31,854,311 22,499,511


Subtotal 34,762,353 33,799,474


Total 34,733,353 33,768,925

Repurchase agreements analysed by counterpartyBanks 36,006,698 11,099,633


Total 38,916,115 16,467,582

As at 31 December 2008, included in this total amount of reverse repurchase agreements is an amount of RMB 50 million (31 December 2007: RMB 51,722 thousand) impaired assets brought forward from prior years.

Analysed by collateral


Reverse repurchase agreements analysed by collateralSecurities 1,020,000 551,722

Bills 33,572,353 22,470,502

Loans 170,000 10,777,250

Subtotal 34,762,353 33,799,474


Total 34,733,353 33,768,925

Repurchase agreements analysed by collateralSecurities 10,360,000 14,110,800

Bills 28,556,115 2,356,782

Total 38,916,115 16,467,582

Fair value of collateralUnder certain reverse repurchase agreements, the Company has held collateral that is permitted to be sold or re-pledged in the absence of default by the owners of the collateral. At the balance sheet date, the fair values of the collateral held on such terms are as follows:


Amount of Amount of reverse repurchase Fair value reverse repurchase Fair valueIn RMB’000 agreements of collateral agreements of collateral

Bills 33,572,353 33,572,353 11,425,106 11,425,106

Loans 170,000 170,000 10,777,250 10,777,250

Total 33,742,353 33,742,353 22,202,356 22,202,356

The above fair value of collateral included bills amounting to RMB 15,578,493 thousand (31 December 2007: 1,393,049) that were re-pledged at the year end. The Company has an obligation to return such collateral.

19 Accounts Receivable


Receivables with respect to making payments on behalf of customers 1,119,445 778,069

Receivables under factoring 240,147 –

Total 1,359,592 778,069


20 Loans and Advances

a Analysed by corporation and individual


Loans and advances to corporationsLoans 167,617,360 149,712,815


Subtotal 209,835,181 157,492,816

Loans and advances to individualsCredit cards 3,722,178 2,010,827

Residential mortgages 65,861,574 59,297,346

Others 4,322,433 2,234,540

Subtotal 73,906,185 63,542,713


Less: Loan impairment provisions (Note 20f) (2,026,679 ) (6,023,964 )


As at 31 December 2008, included in the discounted bills is an amount of RMB 12,691,340 thousand (31 December 2007: Nil) that was pledged for repurchase agreements.

In addition, as at 31 December 2008, the Company has transferred out (without recourse) discounted bills amounting to RMB 30.5 billion (31 December 2007: RMB 28.3 billion) that have not yet matured at the year end.

b Analysed by industry


Agriculture, husbandry and fisheries 598,700 506,927

Extraction (Heavy industry) 2,990,127 2,812,800

Manufacturing (Light industry) 69,633,354 55,249,167

Energy 12,437,428 7,832,400

Transportation, storage and communication 13,138,335 12,497,393

Commercial 44,889,464 26,281,499

Real estate 15,882,930 14,411,307

Service, technology, culture and sanitary industries 38,325,644 29,969,369

Construction 10,770,355 7,340,077

Others 75,075,029 64,134,590




c Analysed by type of collateral held or other credit enhancements


Unsecured 47,041,232 31,864,556

Guaranteed 59,769,814 62,372,647

Secured by collateral 134,712,499 119,018,325

of which: secured by mortgages 111,667,469 89,703,166

secured by monetary assets 23,045,030 29,315,159

Subtotal 241,523,545 213,255,528







20 Loans and Advances (Continued)

d Ageing analysis of past due loans

31 December 2008


Unsecured 480,859 23,932 – – 504,791Guaranteed 217,842 221,673 6,204 261,646 707,365Secured by collateral 2,554,398 494,824 586,104 640,253 4,275,579of which: secured by mortgages 2,315,592 466,465 406,337 520,253 3,708,647

secured by monetary assets 238,806 28,359 179,767 120,000 566,932Total 3,253,099 740,429 592,308 901,899 5,487,735

31 December 2007


Unsecured 239,346 46,310 100,395 25,132 411,183

Guaranteed 120,429 126,920 2,527,372 3,996,214 6,770,935

Secured by collateral 2,265,619 836,882 1,449,149 2,724,078 7,275,728

of which: secured by mortgages 1,977,097 559,370 1,029,084 1,881,857 5,447,408

secured by monetary assets 288,522 277,512 420,065 842,221 1,828,320

Total 2,625,394 1,010,112 4,076,916 6,745,424 14,457,846

Overdue loans refer to the loans with either principal or interest being overdue by one day or more.

e Analysed by geographical region


Southern China 86,815,602 78,054,481

Eastern China 100,457,432 78,061,876

Northern and north-eastern China 75,600,230 49,966,780

South-western China 19,700,651 14,360,528

Offshore businesses 1,167,451 591,864




f Movements of the impairment provisions for loans and advances

2008 2007

In RMB’000 Indiviual Collective Total Individual Collective Total

Balance at beginning of the year 5,073,555 950,409 6,023,964 6,452,271 484,870 6,937,141

Charge for the year 5,667,836 1,305,003 6,972,839 1,380,948 565,295 1,946,243

Amounts written off (9,896,652 ) (710,060 ) (10,606,712 ) (2,202,225 ) (99,756 ) (2,301,981 )

Reversal for the year

Recovery of loans written off previously 29,944 – 29,944 34,061 – 34,061

Unwinding of discounts of provisions

for impaired loans and advances (384,238 ) – (384,238 ) (518,592 ) – (518,592 )

Other changes for the year (9,118 ) – (9,118 ) (72,908 ) – (72,908 )

Balance at end of the year (Note 10) 481,327 1,545,352 2,026,679 5,073,555 950,409 6,023,964


21 Available-for-sale Financial Assets



Policy banks 18,789,453 6,621,821



Subtotal 48,591,709 17,640,952

Equity investments (Note 21a) Tradable shares 67,659 134,617

Non-tradable shares (Note) 225,345 722,693

Less: Impairment provisions (Note 10) (87,627 ) (470,745 )

Non-tradable shares, net 137,718 251,948

Subtotal 205,377 386,565

Total available-for-sale financial assets 48,797,086 18,027,517

Note: These available-for-sale unlisted equity investments which do not have any quoted market prices and whose fair values cannot be reliably measured are stated at cost.


a Equity investments


Tradable shares

Shenzhen Hongkai (Group) Co., Ltd. 2,790 12,770

Shenzhen Fountain Corporation – 2,559

Hafei Aviation Industry Co.,Ltd. 5,631 39,089

Harbin Pharmaceutical Group Co.,Ltd. 48,467 80,199

Yihua Real Estate Co., Ltd. (Note 4) 10,000 –

Visa Inc. 771 –

Subtotal 67,659 134,617

Non-tradable shares

Shenzhen Yuan Sheng Industrial Co., Ltd. – 507,348

China UnionPay Co., Ltd 50,000 50,000

Gintian Industry (Group) Co., Ltd. 9,662 9,662

Hainan Pearl River Holdings Co., Ltd. 9,650 9,650

Hainan Wuzhou Travel Co., Ltd. 5,220 5,220

Meizhou Polyester (Group) Co. 1,100 1,100

Shenzhen Zoto Investment Co., Ltd. (Note 1) 2,500 2,500

Hainan Junhe Travel Co., Ltd. 2,800 2,800

Guangdong Sanxing Enterprises (Group) Co., Ltd. 500 500

Hainan Baiyunshan Co., Ltd. 1,000 1,000

Hainan Saige Co., Ltd. 1,000 1,000

Hainan Zhuxin Investment Co., Ltd. (Note 2) 500 500

Hainan Zhonghailian Real Estate Co., Ltd. 1,000 1,000

Shenzhen Jiafeng Textile Industrial Co., Ltd. 16,725 16,725

SWIFT 230 230

Yong An Property Insurance Co., Ltd. 67,000 67,000

Wuhan Steel Electricity Co., Ltd. 32,175 32,175

Macat Optics & Electronics Co., Ltd. – 10,000

Founder Securities Co., Ltd. (Note 3) 4,283 4,283

Chengdu Unionfriend Network Co., Ltd. 20,000 –

Less: Impairment provisions (Note 10) (87,627 ) (470,745 )

Subtotal 137,718 251,948

Equity investments, net 205,377 386,565

Notes: 1. Shenzhen Zoto Investment Co., Ltd. was originally named as Shenzhen Central South China Industrial Co..

2. Hainan Zhuxin Investment Co., Ltd. was originally named as Hainan First Investment Co., Ltd..

3. The original investee was Sun Securities Co., Ltd. At 12 May 2008, Founder Securities Co., Ltd. was approved to acquire Sun Securities Co., Ltd..

4. Yihua Real Estate Co., Ltd. was originally named as Macat Optics & Electronics Co., Ltd..



22 Held-to-maturity Investments



Policy banks 5,786,616 5,738,760



Total 15,509,155 15,826,998

As at 31 December 2008, included in the bond investments are amounts of RMB 205,485 thousand (31 December 2007: RMB 1,124,046 thousand), RMB 3,612,979 thousand (31 December 2007: Nil), and RMB 5,405,600 thousand (31 December 2007: RMB 14,555,660 thousand) that were pledged for loan guarantee contracts, agreements of time deposit from PBOC and repurchase agreements, respectively.

There are no changes in the assessment of the Company’s intention and ability to hold the investments to maturity.

23 Receivables-bond Investments


PBOC bills 13,450,000 13,450,000

Subordinated bonds issued by financial institutions 300,000 –

Total 13,750,000 13,450,000

These bond investments are financial assets with fixed or determinable payments that are not quoted in an active market.



24 Investments in Associates


Associates

Chengdu Gongtou Assets Management Co., Ltd. 269,065 –

Shandong Xinkaiyuan Real Estate Co., Ltd. 30,607 –

299,672 –

Less: Impairment provisions (Note 10) (20,000 ) –

Net investment balance 279,672 –

The movements in the associates during the year are as follows:

Jan–Dec 2008

Movements in equity

Percentage Share of Accumulated Change

Impairment provision Balance at

of registered Initial profit for Dividend share of in other Charge for Accumulated end ofIn RMB’000 capital (%) investment the year distribution profit equity the year balance the year

Chengdu Gongtou Assets

Management Co., Ltd. (Note 1) 33.20 259,836 22,675 (3,320 ) 19,355 (10,126 ) (20,000 ) (20,000 ) 249,065Shandong Xinkaiyuan Real

Estate Co.,Ltd. (Note 2) 15.42 30,607 – – – – – – 30,607 290,443 22,675 (3,320 ) 19,355 (10,126 ) (20,000 ) (20,000 ) 279,672

Notes: 1. At 30 January 2008, the Company obtained 33.2% of the shareholding of Chengdu Gongtou Assets Management Co., Ltd. as repossessed assets.

2. At 18 August 2008, the Company obtained 15.42% of the shareholding of Shandong Xinkaiyuan Real Estate Co., Ltd. as repossessed assets. The Company has appointed a representative in the board of the investee.

The key financial information of the associates is as follows:

Percentage of Percentage of Place of Nature of Registered equity held by voting right held byIn RMB’000 registration business capital the Company (%) the Company (%)

Chengdu Gongtou Assets Management Co., Ltd. Chengdu Asset management 518,700 33.20 33.20

Shandong Xinkaiyuan Real Estate Co., Ltd. Jinan Real estate 50,000 15.42 15.42


In RMB’000 Total assets Total liabilities Operating income Net profit (Note)

Chengdu Gongtou Assets Management Co., Ltd. 1,458,061 632,679 72,994 68,300


In RMB’000 Total assets Total liabilities Operating income Net profit

Shandong Xinkaiyuan Real Estate Co., Ltd. 288,105 78,102 – –

Note: The amount represents the net profit attributable to the parent company on the face of the consolidated income statement of Chengdu Gongtou Assets Management Co., Ltd.



25 Investment Properties



Disposals during the year (2,058 ) (25,251 )

Fair value changes recognised in the income statement (15,087 ) 42,733

Transferred to owner-occupied properties during the year (12,263 ) (37,040 )


The Company’s investment properties are mainly properties and buildings, which are rented to third parties in the form of operating leasing. The investment properties are situated in locations where there are active property markets and the fair value of the investment properties can be reliably determinable on a continuing basis. Accordingly, management decided to adopt the fair value model for subsequent measurement of the investment properties, which are valued by independent professionally qualified valuers on, at least, an annual basis. The valuation as at 31 December 2008 was performed by Shenzhen Guozi Land and Real Estate Valuation Co., Ltd. In connection with this, the valuation was carried out by qualified persons who are members of the Shenzhen Institute of Real Estate Appraisers. Certain investment properties were transferred to owner-occupied properties mainly because the rental agreements of these properties expired during the year.

The gross rental income earned from the investment properties during the year amounted to RMB 38,982 thousand (2007: RMB 45,377 thousand). The total direct operating expense (including repairs and maintenance expenses) for the investment properties, with or without rental income generated during the year, was RMB 2,589 thousand (2007: RMB 3,284 thousand).


26 Property and Equipment

2008


At costProperties and buildings 1,536,206 35,262 – (32,966 ) 1,538,502Transportation vehicles 95,235 15,612 957 (29,010 ) 82,794Computers 700,932 194,663 7,132 (126,691 ) 776,036Electronic appliances 307,632 88,250 16,383 (19,033 ) 393,232Owner-occupied property improvement 318,845 6,677 10,759 (653 ) 335,628Leasehold improvement 527,275 76,094 70,788 (1,048 ) 673,109Total 3,486,125 416,558 106,019 (209,401 ) 3,799,301

Accumulated depreciationProperties and buildings 413,076 51,594 – (9,299 ) 455,371Transportation vehicles 73,338 7,278 – (25,170 ) 55,446Computers 471,129 97,726 – (120,125 ) 448,730Electronic appliances 203,740 36,116 – (16,621 ) 223,235Owner-occupied property improvement 243,289 19,211 – (303 ) 262,197Leasehold improvement 371,459 61,179 – (51 ) 432,587Total 1,776,031 273,104 – (171,569 ) 1,877,566Less: Impairment provision (Note 10) – (6,289 )Net book value 1,710,094 1,915,446

2007


At costProperties and buildings 1,518,063 53,708 – (35,565 ) 1,536,206


Computers 601,519 134,271 1,114 (35,972 ) 700,932

Electronic appliances 269,035 49,125 10,157 (20,685 ) 307,632

Owner-occupied property improvement 301,766 2,489 25,139 (10,549 ) 318,845

Leasehold improvement 484,551 46,838 39,713 (43,827 ) 527,275

Total 3,393,129 292,966 76,123 (276,093 ) 3,486,125

Accumulated depreciationProperties and buildings 373,005 51,728 – (11,657 ) 413,076


Computers 413,418 83,560 – (25,849 ) 471,129

Electronic appliances 182,440 32,609 – (11,309 ) 203,740

Owner-occupied property improvement 225,340 21,434 – (3,485 ) 243,289

Leasehold improvement 333,400 53,909 – (15,850 ) 371,459

Total 1,699,189 260,561 – (183,719 ) 1,776,031

Net book value 1,693,940 1,710,094

As at 31 December 2008, the original cost and net book value of properties and buildings amounting to RMB 143,053 thousand (31 December 2007: RMB 130,831 thousand) and RMB 88,723 thousand (31 December 2007: RMB 87,453 thousand), respectively are of no registration certificates of property right, but are in use by the Company.



27 Deferred Tax Assets/Liabilities

2008

Balance at Recognised in Recognised beginning the income directly Balance at end of the year statement in equity of the yearIn RMB’000 (Note 11)

Deferred tax assetsImpairment provisions 945,647 796,813 – 1,742,460Others 48,742 33,476 (12,862 ) 69,356Subtotal 994,389 830,289 (12,862 ) 1,811,816

Deferred tax liabilitiesTax losses deducted against taxable profits of different tax rate (54,135 ) 54,135 – –Changes in fair values (44,409 ) (45,354 ) (251,916 ) (341,679 )Subtotal (98,544 ) 8,781 (251,916 ) (341,679 )Total 895,845 839,070 (264,778 ) 1,470,137

2007

Balance at Recognised in Recognised beginning the income directly Balance at end of the year statement in equity of the yearIn RMB’000 (Note 11)

Deferred tax assetsImpairment provisions 988,120 (42,473 ) – 945,647

Others 27,810 9,532 11,400 48,742

Subtotal 1,015,930 (32,941 ) 11,400 994,389

Deferred tax liabilitiesTax losses deducted against taxable profits of different tax rate (211,652 ) 157,517 – (54,135 )

Changes in fair values (40,747 ) (16,081 ) 12,419 (44,409 )

Others (10,269 ) 10,269 – –

Subtotal (262,668 ) 151,705 12,419 (98,544 )

Total 753,262 118,764 23,819 895,845


28 Other Assets

a Analysed by nature


Interest receivable on investment securities 1,076,175 708,291

Interest receivable on loans and interbank placements and loans 745,409 577,892

Long term prepayments 114,936 120,942

Prepayments 167,323 93,963

Prepaid legal expenses 31,673 62,664

Repossessed assets (Note 28b) 617,823 807,175

Construction in progress 257,040 10,809

Receivable of exercise of warrants – 789,961

Others 186,577 130,910

Total 3,196,956 3,302,607

b Repossessed assets


Land, properties and buildings 915,282 983,027

Others 22,021 22,291

Total 937,303 1,005,318

Less: Provision for decline in value (Note 10) (319,480 ) (198,143 )

Net value of repossessed assets 617,823 807,175

During the year, the Company took possession of collateral held as security with a carrying amount of RMB 52,152 thousand (2007: RMB 37,319 thousand). The collateral mainly comprises buildings. During the year, the Company disposed of repossessed assets with their gross carrying value amounting to RMB 120,167 thousand (2007: RMB 175,270 thousand). The Company plans to dispose of the repossessed assets through auctions, bidding or transfers in future.

29 Placement of Deposits from other Financial Institutions


Domestic banks 21,891,481 16,789,193

Domestic non-bank financial institutions 14,171,551 15,599,569

Total 36,063,032 32,388,762

30 Customer Deposits


Current depositsCorporate customers 86,279,463 80,950,179


Sub-total 105,513,705 97,468,716

Fixed depositsCorporate customers 100,842,409 76,783,023


Sub-total 139,679,311 101,154,501

Guarantee deposits 104,393,453 74,801,665

Fiscal deposits 6,772,448 6,717,154

Time deposits from PBOC 3,000,000 –

Inward and outward remittances 1,155,119 1,134,945

Total 360,514,036 281,276,981



31 Employee Benefits Payable

2008


Salaries, bonuses, allowances and subsidies 706,104 2,034,524 (1,740,211 ) 1,000,417including: Deferred bonus accrual (Note) 42,800 89,148 – 131,948Social insurance, supplementary pension contributions and staff welfare 219,307 494,408 (466,712 ) 247,003Housing funds – 89,934 (89,934 ) –Labour union and training expenses – 56,875 (56,875 ) –Others – 9,362 (9,362 ) –Total 925,411 2,685,103 (2,363,094 ) 1,247,420

2007


Salaries, bonuses, allowances and subsidies 453,633 1,599,861 (1,347,390 ) 706,104

including: Deferred bonus accrual (Note) 9,000 33,800 – 42,800

Social insurance, supplementary pension contributions and staff welfare 160,995 364,568 (306,256 ) 219,307

Housing funds – 69,842 (69,842 ) –

Labour union and training expenses – 54,177 (54,177 ) –

Others – 41,882 (41,882 ) –

Total 614,628 2,130,330 (1,819,547 ) 925,411


32 Accounts Payable


Payables with respect to amounts owed to other financial institutions 507,483 340,297

33 Subordinated Bonds Payable


Subordinated bonds payable 7,964,282 –

As approved by the CBRC and PBOC, the Company issued three sets of subordinated bonds with a total amount of RMB 8 billion in the inter-bank bond market on 21 March 2008 and 28 October 2008. These subordinated bonds comprise two sets of fixed-rate bonds with nominal values of RMB 6 billion and RMB 1.5 billion respectively; and one set of floating-rate bonds with a nominal value of RMB 0.5 billion. The duration of the bonds is of 10 years with a call option at the end of the fifth year. The coupon rates for the first five years are 6.10% and 5.30% for the two sets of fixed-rate bonds; and SHIBOR3M+1.40% for the floating-rate bonds. If the Company does not exercise the call option at the end of the fifth year, both the fixed and floating coupon rates will increase by 3%.


34 Other Liabilities


Interest payable 2,963,224 1,728,071

Bank drafts 195,295 712,635

Financial guarantee contracts 53,324 32,595

Tax payable – other than income tax 509,037 406,786

Amounts pending for settlement and clearing 57,917 91,552

Amounts payable for bond redemption as intermediaries 29,456 25,425

Provision for litigation 25,809 77,447

Inactive deposit account balances 44,414 62,367

Accrued expenses 108,002 90,511

Amounts payable for acquisition of bonds – 250,000

Dividends payable 14,172 14,022

Subscription monies of open-ended funds 16,798 106,481

Others 301,058 223,029

Total 4,318,506 3,820,921

35 Share Capital

As at 31 December 2008, the Company’s registered, issued and fully paid shares was 3,105,434 thousand, with RMB 1 each. The nature and the structure of the share capital are as follows:

31 December Movement for 31 DecemberIn RMB’000 2007 % the year 2008 %

Restricted tradable sharesState-owned corporation shares 4,626 0.20 (4,626 ) – 0.00

Domestic non-stated-owned corporation shares 183,314 8.00 (179,459 ) 3,855 0.13

Domestic individual shares 543 0.02 (465 ) 78 0.00

Foreign corporation shares 348,103 15.18 (31,208 ) 316,895 10.20

Total restricted tradable shares 536,586 23.40 (215,758 ) 320,828 10.33

Unrestricted tradable sharesRMB ordinary shares 1,756,821 76.60 1,027,785 2,784,606 89.67

Total unrestricted tradable shares 1,756,821 76.60 1,027,785 2,784,606 89.67

Total shares 2,293,407 100.00 812,027 3,105,434 100.00

In accordance with the Measures for the Administration of the Share-trading Reform of Listed Companies, the original non-tradable shareholders of the Company promised no transfer or trading of the non-tradable shares held within 12 months since the day when the trading right is acquired. After the expiration of the above commitment term, the former non-tradable shares trading through the stock exchange shall not be over 5% of the total shares within 12 months, and not over 10% within 24 months.

The increase in share capital during the year was because of the distribution of stock dividends and the exercise of warrants.

Pursuant to the resolution of the first 2007 extraordinary shareholders’ meeting held on 8 June 2007, the Company has issued 104,337,917 12-month Bermuda warrants (hereinafter referred to as “SFC 2”) to the shareholders registered in the shareholders’ register on the registration date of warrant issue. Each shareholder obtains 0.5 warrants for every 10 shares. Each warrant can be used to purchase one share of the Company, at an exercise price of RMB 19 Yuan for each share. According to the relevant rules of the warrant issue, the warrants held by the holders of restricted tradable shares, and directors, supervisors and senior management of the Company are not tradable whereas the other warrants are tradable. Up to the last trading date for SFC 2 on 27 June 2008, there were 95,388,057 SFC 2 exercised in total, increasing the share capital of the Company by RMB 95,388,057 Yuan.

Pursuant to the resolution of the first 2008 extraordinary shareholders’ meeting held on 15 October 2008, the Company appropriated dividends of 3 shares for every 10 shares, based on 2,388,795,202 outstanding shares prior to the share dividend. After the appropriation of share dividend, the total number of shares increased by 716,638,560 to 3,105,433,762 as at 31 October 2008.



36 Reserves


Statutory surplus reserve 780,885 719,481

General reserve 3,583,296 2,715,704

Share of the changes in owners’ equity of an associate (10,126 ) –

Cumulative changes in fair value of available-for-sale financial assets 1,002,795 (60,120 )

Revaluation surplus on owner-occupied properties transferred to investment properties 13,803 11,000

Total 5,370,653 3,386,065

In accordance with the Company Law, the Company is required to appropriate 10% of its profit after tax to its statutory surplus reserve until the reserve balance reaches 50% of its registered capital. Subject to the approval of shareholders, the statutory surplus reserve may be used to offset accumulated losses, if any, and may also be converted into capital, provided that the balance of the statutory surplus reserve after such capitalisation is not less than 25% of the registered capital. The Company may also appropriate its profit after tax to the discretionary surplus reserve upon approval of the shareholders in general meetings.

As at 31 December 2007 and 31 December 2008, the amount of the surplus reserve represented the statutory surplus reserve.

Pursuant to the relevant regulations issued by the MOF, the Company is required to maintain a general reserve within equity, through the appropriation of net profit, which should not be less than 1% of the year end balance of its risk assets. The reserve is to be appropriated over a period of not more than five years, beginning in July 2005. As at 31 December 2008, the Company has met the above reserve requirement.

37 Unappropriated Profit

Pursuant to a board resolution on 19 March 2008, based on the audited profit for the year as reported in the statutory financial statements for the year ended 31 December 2007, in addition to the profit appropriations for the first half of 2007, the Company appropriated its net profit amounting to RMB 152,592 thousand and RMB 136,000 thousand to the statutory surplus reserve and the general reserve, respectively for the second half of 2007. The above appropriations were approved at the Company’s annual general meeting held on 12 June 2008.

Pursuant to a board resolution on 20 August 2008, an appropriation of RMB 214,384 thousand based 10% of net profit as reported in the Company’s statutory financial statements for the first half of 2008 was made to the statutory surplus reserve; an appropriation of RMB 608,624 thousand was made to the general reserve; and dividends of 3 shares and RMB 0.335 Yuan for every 10 shares were appropriated from the unappropriated profit, amounting to RMB 796,663 thousand in total. The above appropriations were approved at the Company’s shareholders’ meeting held on 15 October 2008.

Pursuant to a board resolution on 19 March 2009, based on the audited profit for the year as reported in the statutory financial statements for the year ended 31 December 2008, the Company reversed the statutory surplus reserve amounting to RMB 152,980 thousand in the second half of the year considering the respective appropriation in the first half of 2008, with the result that an appropriation of RMB 61,404 thousand was made to the statutory surplus reserve for 2008 based on 10% of the profit for the year; and an appropriation of RMB 258,968 thousand was made to the general reserve for the second half of 2008. The above proposed appropriations are pending approval from shareholders at the forthcoming annual general meeting.


38 Note to the Cash Flows Statement

In RMB’000 2008 2007


Adjustments to reconcile profit before tax to cash flows arising from operating activities

Non-cash items included in profit before tax and other adjustmentsDepreciation of property and equipment 273,104 260,561

Impairment provision on loans 6,972,839 1,946,243

Interest income on impaired loans (384,238 ) (518,592 )

Impairment provisions on other assets 361,323 107,516

Provision against litigation claims 29,712 23,998

Amortisation of long term prepayments 16,929 17,495


Net unrealised gain of financial assets/liabilities at fair value through profit or loss (80,887 ) (14,908 )

Gain on disposal of property and equipment (261 ) (21,011 )

Interest income on debt investments (2,330,843 ) (1,261,540 )

Dividend income from investment securities (4,554 ) (6,955 )

Gain on disposal of investment securities (336,200 ) (215,753 )

Loss on disposal of investment properties 419 6,311

Changes in fair value of investment properties 15,087 (42,733 )

Interest expense on subordinated bonds 325,488 –

Share of profits and losses of an associate under equity method of accounting (22,675 ) –

Net decrease/(increase) in operating assetsDeposits reserves with the Central Bank (413,525 ) (14,324,470 )

Placement of deposits with other financial institutions (14,369,457 ) (1,257,854 )

Funds loaned to other financial institutions (2,090,056 ) (806,571 )

Reverse repurchase agreements (648,650 ) (11,279,835 )

Financial assets at fair value through profit or loss 1,420,953 (1,343,977 )

Loans and advances (74,220,352 ) (42,083,861 )

Long term prepayments (11,568 ) (29,763 )

Other assets (185,288 ) (151,348 )

Net increase/(decrease) in operating liabilitiesPlacement of deposits from other financial institutions 3,674,270 15,319,518

Interbank borrowings 5,080,000 2,300,000

Repurchase agreements 22,448,533 15,726,572

Financial liabilities at fair value through profit or loss (1,306,628 ) 989,964

Customer deposits 79,216,880 49,002,123

Inward and outward remittances 20,175 68,530

Other liabilities 1,227,209 1,960,176

Cash flows from operating activities 25,491,200 18,155,886



39 Commitments and Contingent Liabilities

Capital commitmentsAt the balance sheet date, the Company had capital commitments as follows:


Contracted, but not provided for 144,000 –

Operating Lease commitments

Operating lease commitments – Company as lesseeThe Company has entered into commercial lease on premises and equipment. At the balance sheet date, the total future minimum lease payments payable under non-cancellable operating leases were as follows:



After one year but not more than five years 1,021,447 627,439

More than five years 543,875 281,526

Total 1,935,956 1,172,169

Operating lease commitments – Company as lessorThe Company has entered into commercial property leases on its investment portfolio. All investment properties are leased out under operating leases. Future minimum rentals receivable under non-cancellable operating leases at the balance sheet date were as follows:



After one year but not more than five years 45,254 29,342

More than five years 252 588

Total 79,392 64,654

Credit commitments


Financial guarantee contractsBank acceptances 164,888,094 121,882,685

Guarantees issued 1,884,883 2,212,937

Letters of credit issued 1,826,290 1,912,162

Loan guarantee contracts 177,698 963,135

Sub-total 168,776,965 126,970,919

Irrevocable loan commitmentsCredit limit of credit cards 15,343,716 8,804,290

Total 184,120,681 135,775,209

Credit risk weighted amounts of credit commitments 59,080,564 49,277,576

Financial guarantee contracts commit the Company to make payments on behalf of customers upon the failure of the customers to perform the terms of the contracts.

Commitments to extend credit represent contractual commitments to make loans to customers. Commitments generally have fixed expiry dates. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.


39 Commitments and Contingent Liabilities (Continued)

Fiduciary transactions


Entrusted deposits 10,867,862 5,551,762

Entrusted loans 10,867,862 5,551,762

Entrusted funding 3,427,869 2,007,738

Entrusted investments 3,427,869 2,007,738

Entrusted deposits represent funds that depositors have instructed the Company to use to make loans to third parties as designated by them. The credit risk remains with the depositors.

Entrusted funding and entrusted investments represent the investment and asset management services provided by the Company for third parties in accordance with the agreed investment plans. The third parties provide funding for the related investments. Income from such investment activities is collected on behalf of and paid to the third parties according to the relevant contractual terms.

Contingent liabilities

Legal proceedingsAs at 31 December 2008, the total claimed amount of the litigation cases of which the Company is the defendant was RMB 179 million (31 December 2007: RMB 161 million). These litigation cases are under legal proceedings. In the opinion of management, the Company has made adequate allowance for any probable losses based on the prevailing facts and circumstances.

Apart from the above pending litigation cases, the respective liquidators of DeHeng Securities Co., Ltd. and the China Southern Securities Co., Ltd. had requested the Company to repay a total amount of RMB 430 million. The Company had opposed all such repayment requests. At the year end, based on the legal opinion from an independent third-party lawyer, the Company had no immediate obligation to repay the monies.

Redemption commitments of government bondsAs an underwriting agent of the PRC Government, the Company underwrites certain PRC government bonds and sells the bonds to the general public. The Company is obliged to redeem the bonds at the discretion of the holders at any time prior to maturity. The redemption price for the bonds is based on the nominal value of the bonds plus any interest accrued up to the redemption date. As at 31 December 2008, the Company had underwritten and sold bonds with an accumulated amount of RMB 3.1 billion (31 December 2007: RMB 3.67 billion) to the general public which have not matured or been redeemed.

The MOF will not provide funding for the early redemption of these government bonds on a back-to-back basis but is obliged to repay the principal and the respective interest upon maturity.

As at 31 December 2008, the unexpired underwriting commitment of the PRC government bonds amounted to RMB 2.35 billion (31 December 2007: RMB 2.65 billion).

40 Capital Management

The primary objectives of the Company’s capital management are to ensure that the Company complies with regulatory capital requirements, to maximise shareholders’ value and to support the continuous growth in business. The Company regularly reviews its capital structure and makes adjustments to it through asset and liability management, so as to maintain the overall balance of the capital structure and maximisation of capital return. The required information of capital adequacy is filed with the CBRC by the Company on a quarterly basis.

The CBRC requires banks that are established in Mainland China to maintain the capital adequacy ratio and core capital ration not below the minimum of 8% and 4%, respectively. The risk-weighted assets are measured according to the nature of individual assets and counterparty, reflecting an estimate of related credit, market and other risks after taking into account of any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposures, with adjustments made to reflect the contingent nature of any potential losses.

The Company calculated and reported the core capital adequacy ratio and capital adequacy ratio in accordance with the “Regulation Governing Capital Adequacy Ratio of Commercial Banks” promulgated by the CBRC and the CBRC’s notice relating to the computation of the capital adequacy ratio after the implementation of ASBEs.



40 Capital Management (Continued)

The core capital includes share capital, capital reserve, surplus reserve, general reserve and unappropriated profit. The supplementary capital includes revaluation surplus, long term subordinated bonds and other supplementary capital.


Net core capital 14,710,153 12,692,620

Supplementary capital 9,577,523 112,317

Net capital 23,959,430 12,691,876

Risk weighted assets and market risk capital adjustment 279,112,744 220,056,277

Core capital adequacy ratio 5.3% 5.8%

Capital adequacy ratio 8.6% 5.8%

41 Maturity Analysis of Assets and Liabilities

A maturity analysis of the assets and liabilities of the Company as at 31 December 2008 was as follows:

31 December 2008

Overdue/ Within Within 3 monthsIn RMB’000 On demand 1 month 3 months to 1 year 1 to 5 years Over 5 years Undated Total

ASSETSCash on hand and due from the Central Bank 10,126,571 – – – – – 29,641,330 39,767,901Precious metals 9,225 – – – – – – 9,225Amounts due from other financial institutions (Note 1) 3,519,315 23,226,652 16,048,497 22,676,374 – – – 65,470,838Financial assets at fair value through profit or loss and derivative financial assets – 28,202 68,279 147,433 88,278 – – 332,192Accounts receivable – 277,498 779,875 170,873 131,346 – – 1,359,592Loans and advances 1,100,587 18,084,808 42,767,591 137,094,540 41,978,384 40,688,777 – 281,714,687Available-for-sale financial assets – 1,219,607 458,485 19,866,795 18,354,295 8,692,528 205,376 48,797,086Held-to-maturity investments – – 71,510 1,879,307 11,641,589 1,916,749 – 15,509,155Receivables – bond investments – – – – 13,750,000 – – 13,750,000Investments in associates – – – – – – 279,672 279,672Property and equipment – – – – – – 1,915,446 1,915,446Others 81,765 797,038 237,479 795,307 1,932,804 7,257 1,682,729 5,534,379Total assets 14,837,463 43,633,805 60,431,716 182,630,629 87,876,696 51,305,311 33,724,553 474,440,173

LIABILITIESAmounts due to other financial institutions (Note 2) 12,277,306 46,961,045 19,773,124 3,347,672 – – – 82,359,147Financial liabilities at fair value through profit or loss and derivative financial liabilities – 4,873 13,760 74,541 4,844 – – 98,018Accounts payable – 25,005 446,395 36,083 – – – 507,483Customer deposits 148,834,502 44,211,379 48,269,061 86,149,026 33,050,066 2 – 360,514,036Subordinated bonds payable – – – – 7,964,282 – – 7,964,282Others 652,830 1,773,034 1,869,207 1,295,128 949,281 56,937 – 6,596,417Total liabilities 161,764,638 92,975,336 70,371,547 90,902,450 41,968,473 56,939 – 458,039,383Liquidity net value (146,927,175 ) (49,341,531 ) (9,939,831 ) 91,728,179 45,908,223 51,248,372 33,724,553 16,400,790




41 Maturity Analysis of Assets and Liabilities (Continued)

A maturity analysis of the assets and liabilities of the Company as at 31 December 2007 was as follows:

31 December 2007

Overdue/ Within Within 3 monthsIn RMB’000 On demand 1 month 3 months to 1 year 1 to 5 years Over 5 years Undated Total

ASSETSCash on hand and due from the Central Bank 11,498,582 – – – – – 29,227,805 40,726,387

Precious metals 8,200 – – – – – – 8,200

Amounts due from other financial institutions (Note 1) 2,191,196 20,283,485 14,507,930 2,952,660 490,000 – – 40,425,271

Financial assets at fair value through profit or loss and derivative financial assets – 720,993 149,154 748,642 100,652 50,000 – 1,769,441

Accounts receivable – 50,300 459,070 268,699 – – – 778,069

Loans and advances 6,806,547 13,070,871 29,193,395 97,641,259 31,199,641 37,099,852 – 215,011,565

Available-for-sale financial assets 43,040 1,928,133 2,904,950 3,001,922 8,851,488 911,419 386,565 18,027,517

Held-to-maturity investments – – 109,424 1,075,462 8,803,074 5,839,038 – 15,826,998

Receivables – bond investments – – – – 13,450,000 – – 13,450,000

Property and equipment 1,710,094 1,710,094

Others 140,815 1,118,653 810,358 36,629 221,218 45,502 2,432,644 4,805,819

Total assets 20,688,380 37,172,435 48,134,281 105,725,273 63,116,073 43,945,811 33,757,108 352,539,361

LIABILITIESAmounts due to other financial institutions (Note 2) 27,144,470 17,450,302 5,097,692 1,463,880 – – – 51,156,344

Financial liabilities at fair value through profit or loss and derivative financial liabilities – 13,808 733,606 646,395 108,021 – – 1,501,830



Others 770,532 3,393,978 652,184 228,819 212,333 – – 5,257,846

Total liabilities 134,030,993 61,248,662 55,214,732 71,148,864 17,889,732 315 – 339,533,298

Liquidity net value (113,342,613 ) (24,076,227 ) (7,080,451 ) 34,576,409 45,226,341 43,945,496 33,757,108 13,006,063





42 Risk Disclosure

Credit riskCredit risk is the risk of loss arising from a borrower’s or counterparty’s inability to meet its obligations. The Company’s credit risk mainly arises from the loans and advances to customers, financial guarantees and loan commitments.

The Company has established a Credit Portfolio Management Committee, which approves and determines the Company’s credit risk management strategies, credit risk preferences as well as its various credit risk management policies and standards. The Company has also formulated guidelines on corporate and retail credit policies across the Company and for specific industries. Furthermore, the Company has implemented a strategic customer categorisation management system, and set up a customer entry and exit mechanism to facilitate the sustainable development of its credit underwriting business.

The Company implements a credit risk officer system, in which the Chief Credit Officer at the Head Office appoints credit officers to various business lines and branches. The credit officers directly report to the Chief Credit Officer, who is responsible for evaluating the performance of the credit officers and establishing an independent and transparent vertical credit risk management system.

The Company has formulated a complete set of operational procedures for credit approval and management. These procedures are being enforced across the Company. Credit management procedures for its corporate and retail loans comprise the processes of credit origination, credit review, credit approval, disbursement, post-disbursement monitoring and collection. In addition, the Company has formulated the “Policies of Credit Underwriting”, which have defined the functions and responsibilities of different credit operational processes, and have enhanced the monitoring of the related compliance for improving the overall effective control of credit risk.

The Company has strengthened its early warning monitoring system for the credit business with measures applicable to the portfolio level and to individual customers, resulting to early detection and effective management of credit risks.

The Company sub-divides credit asset risks into 10 categories based on the five-tier loan classification system promulgated by the CBRC, namely, Pass One, Pass Two, Pass Three, Pass Four, Pass Five, Special Mention One, Special Mention Two, Substandard, Doubtful and Loss. Furthermore, a separate “Write-off” category has been added to the classification system. The Company applies different management policies to the loans in accordance with their respective loan categories.

Risks arising from financial guarantees and loan commitments are similar to those associated with loans and advances. Transactions of financial guarantees and loan commitments are, therefore, subject to the same portfolio management and the same requirements for application and collateral as loans and advances to customers.

Maximum exposure to credit risk without taking account of any collateral and other credit enhancements


Due from the Central Bank (excluding cash on hand) 38,786,042 39,664,146



Financial assets at fair value through profit or loss 41,441 1,477,625

Derivative financial assets 290,751 291,816



Available-for-sale financial assets 48,797,086 18,027,517

Held-to-maturity investments 15,509,155 15,826,998


Investments in associates 279,672 –

Other assets 3,566,749 3,141,750

Total 468,206,421 347,316,688

Financial guarantee 168,776,965 126,970,919

Irrevocable loan commitments 15,343,716 8,804,290

Maximum exposure to credit risk 652,327,102 483,091,897


42 Risk Disclosure (Continued)

Credit risk (Continued)

Risk concentration of the maximum exposure to credit riskCredit risk is often greater when counterparties are concentrated in a single industry or geographic location or have comparable economic characteristics.

The majority of the loans and financial guarantee contracts of the Company are related to the local customers within Mainland China. However, different areas in Mainland China have their own unique characteristics in terms of economic development. Therefore, each area in Mainland China could present different credit risks.

Please refer to Note 20 for an analysis of concentration of loans and advances by industry and geographical region.

Collateral and other credit enhancements The amount and type of collateral required are determined by the Company based on its assessment of the credit risk of the counterparty. The Company has implemented guidelines regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

• Forreverserepurchasetransactions:bills,loansorsecurities• Forcommerciallending:chargesoverrealestateproperties,inventories,sharesortradereceivables• Forretaillending:mortgagesoverresidentialproperties

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the provision for impairment losses.

Credit qualityThe credit quality by class of financial asset (gross amount before deducting any impairment provision) of the Company is analysed as follows:

31 December 2008


Placement of deposits with other financial institutions 21,496,984 – 44,520 21,541,504Funds loaned to other financial institutions 9,232,183 – 33,572 9,265,755Financial assets at fair value through profit or loss 41,441 – – 41,441Reverse repurchase agreements 34,712,353 – 50,000 34,762,353Accounts receivable 1,359,592 – – 1,359,592Loans and advances 278,177,474 912,582 4,651,310 283,741,366Available-for-sale financial assets (excluding equity investments) 48,591,709 – – 48,591,709Held-to-maturity investments 15,509,155 – – 15,509,155Receivables – bond investments 13,750,000 – – 13,750,000Total 422,870,891 912,582 4,779,402 428,562,875

31 December 2007


Placement of deposits with other financial institutions 4,010,556 – 69,920 4,080,476

Funds loaned to other financial institutions 2,628,782 – 323,771 2,952,553

Financial assets at fair value through profit or loss 1,477,625 – – 1,477,625

Reverse repurchase agreements 33,747,752 – 51,722 33,799,474

Accounts receivable 778,069 – – 778,069

Loans and advances 206,160,615 265,602 14,609,312 221,035,529

Available-for-sale financial assets (excluding equity investments) 17,597,912 – 73,040 17,670,952

Held-to-maturity investments 15,826,998 – – 15,826,998

Receivables – bond investments 13,450,000 – – 13,450,000

Total 295,678,309 265,602 15,127,765 311,071,676




Credit risk (Continued)

Credit quality (Continued)

Neither past due nor impaired loans and advancesAt the balance sheet date, the aggregate amounts of neither past due nor impaired loans and advances to customers are “pass” and “special mention” loans graded in accordance with the five-tier classification.


Pass 275,559,031 204,432,482

Special mention 2,618,443 1,728,133

Total 278,177,474 206,160,615

Past due but not impaired loans and advancesAt the balance sheet date, and ageing analysis of the past due but not yet impaired loans and advances is as follows:

31 December 2008

Within 1 1 to 2 2 to 3 Over 3 The fair valueIn RMB’000 month months months months Total of the collateral


31 December 2007

Within 1 1 to 2 2 to 3 Over 3 The fair valueIn RMB’000 month months months months Total of the collateral


Impaired loans and advancesImpaired loans and advances are defined as those loans and advances having objective evidence of impairment as a result of one or more events that occur after initial recognition, resulting in an impact on the estimated future cash flows of loans and advances that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and the situation where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

The fair value of the collateral that the Company holds relating to corporate loans and advances individually determined to be impaired at 31 December 2008 amounted to RMB 859 million (31 December 2007: RMB 1,988 million).

The carrying amount of loans and advances that would otherwise be past due or impaired and whose terms have been renegotiated is as follows:


Loans and advances to customers 215,638 390,718

Liquidity riskLiquidity risk is the risk that the Company will be unable to meet its payment obligations when they fall due. The risk is attributable to any mismatch in amounts and terms between assets and liabilities. To limit the risk, management has arranged diversified funding sources, and monitors loans and deposit balances on a daily basis. The Company also maintains a portfolio of highly marketable assets that can be easily liquidated in the event of an unforeseen interruption of cash flows. Furthermore, the Company performs stress testing regularly to assess and identify the actions that can meet the payment obligations under different critical scenarios.



Liquidity risk (Continued)

At the balance sheet date, the remaining contractual maturity analysis of the Company’s financial liabilities (based on contractual undiscounted cash flows) was as follows:

31 December 2008


Amounts due to other financial institutions (Note 1) 12,283,928 47,033,925 19,854,362 3,394,422 – – – 82,566,637Financial liabilities at fair value through profit or loss and derivative financial liabilities – 483 – 39,325 – – – 39,808Derivative financial instruments

Contractual amounts payable – 2,500,170 1,107,226 484,693 4,844 – – 4,096,933 Contractual amounts receivable – (2,495,298 ) (1,093,466 ) (449,571 ) – – – (4,038,335 )Accounts payable – 25,243 482,385 39,269 – – – 546,897Customer deposits 125,935,704 48,911,972 60,430,312 96,550,156 37,119,340 2 – 368,947,486Subordinated bonds payable – – 370,537 93,363 9,843,008 – – 10,306,908Other financial liabilities 620,318 60 947,503 176,041 176,381 56,937 – 1,977,240Total undiscounted financial liabilities 138,839,950 95,976,555 82,098,859 100,327,698 47,143,573 56,939 – 464,443,574

Note: 1. Amounts due to other financial institutions included financial liabilities of placement of deposits from other financial institutions, funds borrowed from other financial institutions and repurchase agreements.

31 December 2007


Amounts due to other financial institutions (Note 1) 27,167,521 17,475,221 5,152,738 1,526,586 – – – 51,322,066

Financial liabilities at fair value through profit or loss and derivative financial liabilitie – – 690,015 516,118 43,103 – – 1,249,236

Derivative financial instruments

Contractual amounts payable – 2,626,943 1,273,982 2,545,114 65,946 – – 6,511,985

Contractual amounts receivable – (2,613,136 ) (1,230,390 ) (2,413,286 ) – – – (6,256,812 )



Other financial liabilities 723,493 887,713 546,389 307,496 36,342 – – 2,501,433

Total undiscounted financial liabilities 134,059,900 59,051,609 55,782,167 72,843,529 20,334,359 318 – 342,071,882

Note: 1. Amounts due to other financial institutions included financial liabilities of placement of deposits from other financial institutions, funds borrowed from other financial institutions and repurchase agreements.

Market riskMarket risk is the risk of loss, in respect of the Company’s on or off-balance sheet activities, arising from adverse movements in market rates including foreign exchange rates, interest rate, commodity prices and stock prices. Market risk arises from both the Company’s trading and non-trading businesses. The aim of market risk management of the Company is to mitigate undue losses of income and equity, and simultaneously, to reduce the Company’s exposure to the volatility inherent in financial instruments. The Company considers the market risk arising from commodity or stock prices in respect of its investment portfolio is immaterial.

The Company’s Risk Management Committee and the Asset and Liability Management Committee are responsible for setting up market risk management policies, establishing market risk management objectives and determining market risk limits. The Asset and Liability Management Committee is responsible for controlling the volume, structure, interest rate and liquidity of the Company’s business. The Company’s Financial Information and Asset and Liability Management Department discharges the daily market risk monitoring function on behalf of the Asset and Liability Management Committee, including the determination of reasonable levels of market risk exposures, monitoring the daily treasury operation and proposing adjustments to the maturity profile of the assets and liabilities and the interest rate structure.

Gap analysis is the key method used by the Company to monitor the market risk of its non-trading business activities. This method measures the impact of interest rate changes on income, with interest-earning assets and interest-bearing liabilities grouped by their respective re-pricing bands for the calculation of the re-pricing gap. By multiplying this position with an assumed interest rate change, an approximate effect on the net interest income resulting from the assumed interest rate change is quantified.




Market risk (Continued)

The market risk management information system is being developed for further improvement in market risk management measures.

Financial derivative transactions entered into by the Company primarily provide effective economic hedges to other financial instruments held by the Company for the mitigation of interest and exchange rate risks. In the opinion of management, as the market risk of the Company’s trading business activities is not material, the Company has not separately disclosed quantitative information about exposure to market risk arising from the trading portfolio.

Currency riskThe Company's foreign exchange risk exposure mainly comprises exposures from the mismatch of foreign currency assets and liabilities, and off-balance sheet foreign exchange position arisen from derivative transactions. The currency risk of the Company mainly arises from loans and advances, investments and deposits denominated in foreign currencies. The Company has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.


31 December 2008


ASSETSCash on hand and due from the Central Bank 39,228,570 372,005 155,085 12,241 39,767,901Precious metals 9,225 – – – 9,225Amounts due from other financial institutions (Note 1) 49,278,442 14,267,058 964,733 960,605 6 65,470,838Financial assets at fair value through profit or loss and derivative financial assets 241,558 89,615 833 186 332,192Accounts receivable 238,826 1,108,327 12,439 – 1,359,592Loans and advances 277,718,781 3,736,356 217,667 41,883 281,714,687Available-for-sale financial assets 48,796,114 972 – – 48,797,086Held-to-maturity investments 15,009,244 452,928 – 46,983 15,509,155Receivables – bond investments 13,750,000 – – – 13,750,000Investments in associates 279,672 – – – 279,672Property and equipment 1,915,446 – – – 1,915,446Others 5,361,111 154,191 16,037 3,040 5,534,379Total assets 451,826,989 20,181,452 1,366,794 1,064,938 474,440,173Including: Impact of fair value of foreign exchange derivative financial instruments 101,413 80,066 833 33 182,345

LIABILITIESAmounts due to other financial institutions (Note 2) 79,726,137 2,568,477 64,533 – 82,359,147 Financial liabilities at fair value through profit or loss and derivative financial liabilities 48,440 48,771 9 798 98,018 Accounts payable – 507,483 – – 507,483 Customer deposits 346,651,180 10,959,758 1,923,193 979,905 360,514,036 Subordinated bonds payable 7,964,282 – – – 7,964,282 Others 6,498,739 81,888 14,020 1,770 6,596,417Total liabilities 440,888,778 14,166,377 2,001,755 982,473 458,039,383Including: Impact of fair value of foreign exchange derivative financial instruments 21,729 4,633 9 645 27,016 Net position of assets and liabilities 10,938,211 6,015,075 (634,961 ) 82,465 16,400,790

Notional amount of foreign exchange derivative financial instruments 5,961,351 (5,911,075 ) 197,768 (47,636 ) 200,408

Net position of foreign currency (Note 3) Not applicable 28,366 (438,017 ) 35,441 Not applicable










31 December 2007


ASSETSCash on hand and due from the Central Bank 39,982,987 455,463 277,444 10,493 40,726,387

Precious metals 8,200 – – – 8,200

Amounts due from other financial institutions (Note 1) 36,512,797 2,894,457 572,489 445,528 40,425,271

Financial assets at fair value through profit or loss and derivative financial assets 1,725,970 30,696 8,660 4,115 1,769,441

Accounts receivable – 778,069 – – 778,069

Loans and advances 209,581,235 4,570,397 761,477 98,456 215,011,565

Available-for-sale financial assets 17,888,091 139,426 – – 18,027,517

Held-to-maturity investments 15,261,646 542,929 22,423 – 15,826,998

Receivables – bond investments 13,450,000 – – – 13,450,000

Property and equipment 1,710,094 – – – 1,710,094

Others 4,656,256 116,023 32,650 890 4,805,819

Total assets 340,777,276 9,527,460 1,675,143 559,482 352,539,361

Including: Impact of fair value of foreign exchange financial instruments 161,794 11 202 4,115 166,122

LIABILITIESAmounts due to other financial institutions (Note 2) 49,269,603 1,774,301 112,440 – 51,156,344

Financial liabilities at fair value through profit or loss and derivative financial liabilities 1,332,219 153,975 13,918 1,718 1,501,830

Accounts payable – 340,297 – – 340,297

Customer deposits 270,811,155 7,764,505 2,061,236 640,085 281,276,981

Others 5,126,495 97,309 31,520 2,522 5,257,846

Total liabilities 326,539,472 10,130,387 2,219,114 644,325 339,533,298

Including: Impact of fair value of foreign exchange financial instruments 139 128,667 9,080 1,718 139,604

Net position of assets and liabilities 14,237,804 (602,927 ) (543,971 ) (84,843 ) 13,006,063

Notional amount of foreign exchange derivative financial instruments (1,006,099 ) 460,252 558,098 (3 ) 12,248

Net position of foreign currency (Note 3) Not applicable (37,351 ) 23,005 (87,243 ) Not applicable


Notes: 1. Amounts due from other financial institutions included financial assets of placement of deposits with other financial institutions, funds loaned to other financial nstitutions and reverse repurchase agreements.



The table below indicates the sensitivity analysis of exchange rate changes of the currencies to which the Company had significant exposure on its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement in the exchange rates against the RMB, with all other variables held constant on profit before tax. A negative amount in the table reflects a potential net reduction in profit before tax, while a positive amount reflects a net potential increase. As the Company has no cash flow hedges and has only a minimal amount of available-for-sale equity instruments denominated in foreign currencies, changes in exchange rates do not have any material potential impact on the equity.



USD +/-1 +/-284HKD +/-1 –/+4,380








USD +/-8 –/+2,988

HKD +/-8 +/-1,840

Interest rate riskThe Company’s interest rate risk mainly arises from the mismatch of contractual maturity or re-pricing dates between interest-earning assets and interest-bearing liabilities. The interest-earning assets and interest-bearing liabilities of the Company are mainly denominated in RMB. The PBOC sets a cap and a floor on interest rates on deposits and loans, respectively.

The Company manages its interest rate risk by adjusting the composition of assets and liabilities, monitoring indicators such as the interest rate sensitivity gap on a regular basis and measuring risk exposure in accordance with the re-pricing characteristics of assets and liabilities. The Asset and Liability Management Committee meets regularly to discuss future movements in interest rates and manages interest rate risk exposures by adjusting the composition of the assets and liabilities.


31 December 2008

Within 3 months More than Non-interestIn RMB’000 3 months to 1 year 1 to 5 years 5 years bearing Total

ASSETSCash on hand and due from the Central Bank 38,671,784 – – – 1,096,117 39,767,901Precious metals – – – – 9,225 9,225Amounts due from other financial institutions (Note 1) 42,794,464 22,676,374 – – – 65,470,838Financial assets at fair value through profit or loss and derivative financial assets – 41,441 – – 290,751 332,192Accounts receivable 1,053,623 65,822 – – 240,147 1,359,592Loans and advances 136,284,356 138,707,587 6,144,749 577,995 – 281,714,687Available-for-sale financial assets 5,677,900 27,529,814 10,196,378 5,187,617 205,377 48,797,086Held-to-maturity investments 946,344 5,547,784 8,499,347 515,680 – 15,509,155Receivables – bond investments – – 13,750,000 – – 13,750,000Investments in associates – – – – 279,672 279,672Property and equipment – – – – 1,915,446 1,915,446Others – – – – 5,534,379 5,534,379Total assets 225,428,471 194,568,822 38,590,474 6,281,292 9,571,114 474,440,173

LIABILITIESAmounts due to other financial institutions (Note 2) 78,992,335 3,356,887 – – 9,925 82,359,147Financial liabilities at fair value through profit or loss and derivative financial liabilities – 39,420 – – 58,598 98,018Accounts payable 442,000 65,483 – – – 507,483Customer deposits 240,037,645 86,149,026 33,050,066 2 1,277,297 360,514,036Subordinated bonds payable 498,195 – 7,466,087 – – 7,964,282Others – – – – 6,596,417 6,596,417Total liabilities 319,970,175 89,610,816 40,516,153 2 7,942,237 458,039,383Interest rate risk exposure (94,541,704 ) 104,958,006 (1,925,679 ) 6,281,290 Not applicable Not applicable








31 December 2007


ASSETSCash on hand and due from the Central Bank 39,308,438 – – – 1,417,949 40,726,387

Precious metals – – – – 8,200 8,200

Amounts due from other financial institutions (Note 1) 36,982,611 2,952,660 490,000 – – 40,425,271

Financial assets at fair value through profit or loss and derivative financial assets 857,867 569,758 – 50,000 291,816 1,769,441

Accounts receivable 509,370 268,699 – – – 778,069

Loans and advances 98,461,358 109,379,700 6,340,160 830,347 – 215,011,565

Available-for-sale financial assets 7,063,115 4,738,453 4,998,178 841,206 386,565 18,027,517

Held-to-maturity investments 600,387 4,659,390 6,279,872 4,287,349 – 15,826,998

Receivables – bond investments – – 13,450,000 – – 13,450,000

Property and equipment – – – – 1,710,094 1,710,094

Others – – – – 4,805,819 4,805,819

Total assets 183,783,146 122,568,660 31,558,210 6,008,902 8,620,443 352,539,361

LIABILITIESAmounts due to other financial institutions (Note 2) 49,692,464 1,463,880 – – – 51,156,344

Financial liabilities at fair value through profit or loss and derivative financial liabilities 690,015 550,390 6,252 – 255,173 1,501,830

Accounts payable 113,974 226,323 – – – 340,297

Customer deposits 197,468,485 65,092,412 17,481,005 315 1,234,764 281,276,981

Others – – – – 5,257,846 5,257,846

Total liabilities 247,964,938 67,333,005 17,487,257 315 6,747,783 339,533,298

Interest rate risk exposure (64,181,792 ) 55,235,655 14,070,953 6,008,587 Not applicable Not applicable



The Company principally uses sensitivity analysis to measure and control interest rate risk. In respect of the financial assets and liabilities at fair value through profit or loss, in the opinion of management, the interest rate risk to the Company arising from this portfolio is not significant. For other financial assets and liabilities, the Company mainly uses gap analysis to measure and control the related interest rate risk.

As at 31 December 2008 and 31 December 2007, the gap analyses of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) are as follows:


Changes in interest rate (basis point) Changes in interest rate (basis point) In RMB’000 –100 +100 –100 +100

Effect on the net interest income increase/(decrease) 433,655 (433,655 ) 355,998 (355,998 )

Effect on equity increase/(decrease) 649,171 (649,171 ) 90,170 (90,170 )

The above gap analyses assume that the interest rate risk profile of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) remains static.






The sensitivity of the net interest income is the effect of a reasonable possible change in interest rates on the net interest income for one year, in respect of the financial assets and liabilities (excluding financial assets and liabilities at fair value through profit or loss) held at the balance sheet date. The sensitivity of equity is calculated by revaluing the year end portfolio of fixed-rate available-for-sale financial assets, based on a reasonable possible change in interest rates.

The above sensitivity analyses are based on the following assumptions: (i) all assets and liabilities that are re-priced/due within three months (inclusive), and between three months and one year (inclusive) are assumed to be re-priced in the mid of the respective bands; and (ii) there are parallel shifts in the yield curve.

Regarding to the above assumptions, the effect on the net interest income and equity as a result of the actual increases or decreases in interest rates may differ from that of the above sensitivity analyses.

Fair value of financial instrumentsThe following table summarises the carrying values and the fair values of receivables, held-to-maturity debt securities and subordinated bonds for which their fair values have not been presented or disclosed above:

31 December 2008


Receivables – bond investments 13,750,000 13,926,630Held-to-maturity debt securities 15,509,155 16,017,550Subordinated bonds payable 7,964,282 8,574,308

31 December 2007



Held-to-maturity debt securities 15,826,998 15,246,058

Subject to the existence of an active market, such as an authorised securities exchange, the market value is the best reflection of the fair value of financial instruments. As there is no available market value for certain financial assets and liabilities held and issued by the Company, the discounted cash flow method or other valuation methods described below are adopted to determine the fair values of these assets and liabilities:

(1) The receivables are non-transferable. The fair values of these receivables are estimated on the bases of pricing models or discounted cash flows.

(2) The fair value of held-to-maturity debt securities and subordinated bonds are determined with reference to the available market values. If quoted market prices are not available, fair values are estimated on the bases of pricing models or discounted cash flows.

All of the above-mentioned assumptions and methods provide a consistent basis for the calculation of the fair values of the Company’s assets and liabilities. However, other institutions may use different assumptions and methods. Therefore, the fair values disclosed by different financial institutions may not be entirely comparable.

Financial instruments, for which their carrying amounts are the reasonable approximation of their fair values because, for example, they are short term in nature or are re-priced to current market rates frequently, are as follows:

Assets Liabilities

Cash and due from the Central Bank Placement of deposits from other financial institutions

Placements of deposits with other financial institutions Funds borrowed from other financial institutions

Funds loaned to other financial institutions Repurchase agreements

Reverse repurchase agreements Customer deposits

Loans and advances Other financial liabilities

Other financial assets



Fair value of financial instruments (Continued)

The following table shows an analysis of financial instruments recorded at fair value.

31 December 2008

Valuation Valuation techniques – techniques – Quoted market non-marketIn RMB’000 market price observable inputs observable inputs Total

FINANCIAL ASSETSFinancial assets at fair value through profit or loss – 41,441 – 41,441Derivative financial assets – 290,751 – 290,751Available-for-sale financial assets 57,659 48,601,709 – 48,659,368Total 57,659 48,933,901 – 48,991,560

FINANCIAL LIABILITIESFinancial liabilities at fair value through profit or loss – 39,420 – 39,420Derivative financial liabilities – 58,598 – 58,598Total – 98,018 – 98,018

31 December 2007

Valuation Valuation techniques – techniques – Quoted market non-marketIn RMB’000 market price observable inputs observable inputs Total

FINANCIAL ASSETSFinancial assets at fair value through profit or loss – 1,477,625 – 1,477,625

Derivative financial assets – 291,816 – 291,816

Available-for-sale financial assets 134,617 17,640,952 – 17,775,569

Total 134,617 19,410,393 – 19,545,010

FINANCIAL LIABILITIESFinancial liabilities at fair value through profit or loss – 1,246,657 – 1,246,657

Derivative financial liabilities – 255,173 – 255,173

Total – 1,501,830 – 1,501,830

43 Related Party Relationships and Transactions

Details of the Company’s major shareholder are as follows:

NAME Place of registration Percentage of equity interest held (%)


Newbridge Asia AIV III, L.P. Delaware, USA 16.76 16.70

Newbridge Asia AIV III, L.P. is an investment fund whose register form is a limited partnership and its registered capital is USD724 million. It focuses on strategic investment. It was established on 22 June 2000 and its initial existing period is 10 years. The ultimate controlling parties of Newbridge Asia AIV III, L.P. are Mr. David Bonderman, Mr. James G. Coulter and Mr. Richard C. Blum.

The Company’s former subsidiary, Shenzhen Yuan Sheng Industrial Co., Limited, was disposed of during the year.



43 Related Party Relationships and Transactions (Continued)

The related party transactions between the Company and the key management personnel during the year are listed below:

LOANSIn RMB’000 2008 2007

Balance at beginning of the year 712 –

Increase during the year – 800

Decrease during the year (169 ) (88 )

Balance at end of the year 543 712

Interest income on loans 9 20

At the year end of 2008, the annual interest rates of these loan transactions ranged from 1.62% to 1.8%.

DEPOSITSIn RMB’000 2008 2007


Increase during the year 116,066 89,627

Decrease during the year (127,257 ) (81,797 )


Interest expenses on deposits 40 29

These deposit transactions were under normal business terms and conditions and were processed under normal procedures.

As at 31 December 2008, the Company has authorised a total credit facility of RMB 2.602 billion (31 December 2007: RMB 2.772 billion) for entities relating to the key management personnel of the Company and their close family members, which included an outstanding loan balance amounting to RMB 1.089 billion (31 December 2007: RMB 1.19 billion) and an outstanding facility of the off-balance sheet items amounting to RMB 0.267 billion (31 December 2007: RMB 0.39 billion).

Details of the compensation for key management personnel are as follows:


Salaries and other short-term employee benefits 43,071 70,156

Post-employment benefits 665 556

Other long-term employee benefits – –

Termination benefits – –

Deferred bonus accrual (Note) 28,884 6,278

Total 72,620 76,990


44 Post Balance Sheet Events

Up to the date that these financial statements are authorised for issue, there were no other significant post balance sheet events which required disclosure or adjustment to the financial statements.

45 Comparative Figures

Certain comparative figures have been reclassified to conform with the current year’s presentation.

46 Approval of the Financial Statements

The financial statements were approved and authorised for issue by the board of directors on 19 March 2009.


According to the requirement of the Law of the People's Republic of China on Commercial Banks, the Guidelines for Internal control of Commercial Banks, and the Shenzhen Stock Exchange Guidelines upon Internal Controls of Listed Companies, the Bank has formulated a set of risk management rules, procedures and mechanism with the consideration of risk prevention and prudent operation. The sufficient, effective and independent internal control system has been built up, which enable the Bank continued to develop healthily in all business areas and effectively prevented financial risk.

A Overview

In 2008, management, under the guidance of the BOD and its special committees, further improved internal controls. Management believes that there are no material weaknesses in the Bank’s internal controls. Nonetheless, the Bank will continue to improve its internal controls in areas such as accounting, branch operations and information technology.

B Material Internal Control Activities

1 Related Party TransactionsThe Bank established and implemented Shenzhen Development Bank Related Party Transaction Policy, in which the review authorities and procedures are stipulated. The significant RPT must be reported to AC and BOD for approval; CCO or CEO has the authority to approve the RPT under certain amount but need to report the transaction approved to AC and BoD regularly. In 2008 RPT the total number of deals, the maximum amount for a single deal, standards and processes of approving, reviewing and filing RPTs of SDB all strictly followed the Policy and also were in compliance with regulatory stipulations.

2 GuaranteeGuarantee business is an ordinary banking business approved by PBOC and CBRC. The Bank has paid much attention to risk management of the business by strictly following related operational processes and approval procedures. Risks in the guarantee business are under control.

In 2008, except for opening guarantee letters, the Bank did not have any significant guarantee transactions that were not approved by the Board of Directors.

3 Use of raised capitalIn 2008, the Bank issued call warrants in accordance with the Proposal for Call Warrants Issuance of Shenzhen Development Bank Co., Ltd, which were approved at the 2007 1st Extraordinary Shareholders’ Meeting & Relevant Shareholders’ Meeting and by the China Securities Regulatory Commission. As of 27 December 2008, a total amount of RMB 1.812 billion was raised, which has been used to supplement capital after deducting related expenses. Ernst & Young has provided the corresponding capital verification report (E&Y (2008) Yan #60438538_H04).

In 2008, the Bank issued secondary debentures in accordance with the Proposal for secondary debentures of Shenzhen Development Bank Co., Ltd., which were approved at the 2007 2nd Extraordinary Shareholders’ Meeting. A total amount of RMB 8 billion was raised, which has been used to supplement affiliated capital after deducting related expenses.

4 Significant investmentsIn this reporting period the Bank did not conduct any material investment projects.

5 Information ReleaseThe Bank formulated and implemented Administrative Rules for the Release of Information for Shenzhen Development Bank, in which the scope and content of significant information is clearly defined. The chairman was designated as the first responsible person for information releases and the BOD Office was the directly responsible person. Principles, areas of responsibilities, procedures and other related matters have been clarified.

In 2008 the Bank released all public information in a timely manner strictly following the rules, and ensured the information was released in a timely, accurate, legal, authentic and integrated manner.

6 Restructuring HO Depts. & Streamlining Decision Making Process and Responsibilities SDB started the “Project Excellence” which is the internal renovation program of HO in July 2008 and carried out in November. The projects include the improvement of the organization structure and responsibility of HO, the HO official documentation management, the development of new products, the approval management, advertising management, budget management and the optimization of other material management system. The plans help the bank enhance the efficiency of HO management.

7 Operation Management Reform and Control on OperationIn order to prevent operational risk, improve operation efficiency and quality, and enhance the service quality, SBD practiced renovation on operation management in 2008. For the operation management, the Bank establishes “H.O–Branch–Sub-branch” vertical management structure, meanwhile, the bank integrated the back-office function of accounting clearance, retail, treasury and inter-bank business, and established integrated platform for business operating. The Bank launched “Operation Process Re-engineering” program to streamline, diagnose, and analyze operation process, and made the reform plan, in an effort to improve risk prevention mechanism. The Bank has

Internal Control Self-Appraisal Report

192 Internal Control Self-Appraisal Report

earnestly and actively promoted the program and implemented it at some branches as pilot. Significant interim achievement has been accomplished. For the management manuals stipulation, the Bank has refined the current policies, and established the new operation system framework including staff management, elements management, accounts management, IT system management, authorization management, and monitoring management to meet the requirement of operation management and business development. In the IT construction, the Bank set up new standards of operation control on the systems, and stressed the teller card management The Bank centralized authorization management on teller’s access to system, tightened the authorization of transaction control, and strengthened the improvement and optimization of IT system to enhance the IT support for operation. In the operational risk monitoring aspect, the Bank renovated the monitoring, conducted KRIs monitoring and analysis, built up a system for dynamic monitoring, carried out operational risk sweep, and incorporated the dynamic monitoring into review, guiding, and post-supervision. The Bank established operational risk monitoring system with three levels of H.O–Branch–Sub-branch to monitor, identify and control the operational risk. In the meanwhile, the Bank established Operation and Control of New Product (Business) Committee to standardize the process and strengthen the internal control on new business operation.

While practicing operation management reform, the Bank has been working on intensifying operational risk control and achieved considerable accomplishment. In 2008, the bank successfully prevented 11 cases which could have caused a potential loss of RMB 53.51 million.

8 Controls on Finance and Accounting Information Vertical management structures have been established in the finance and accounting areas: a financial officer was assigned to each branch and an accounting manager was assigned to each outlet.

The Bank standardized the reimbursement procedure by implementing a series of management guidance to enhance the internal control and improve the leaning management efficiency. Meanwhile, the Bank implemented Capital Expenditure Management Manuals to ensure the authenticity, reasonableness and completeness of the expenditure.

In 2008, the Bank made all efforts on detailed management and intensified all kinds of accounting practice, resulting in the costs being reduced effectively and the total G&A expenses within year-budget.

The Bank improved and refined the system construction to reduce the manual work and improve work efficiency, launched the management accounting system to complete the summary of capital expenditure budget in 2008, The bank has developed and tested SAP2 managerial accounting system and assets/liabilities management system to improve the financial information quality and financial analysis ability, enhance the control and supervising ability so that it can meet the requirement of the accuracy of financial management.

9 Controls on Credit RiskVertical credit risk management structure was built up. With reference to international best practices, SDB improved the overall risk management system.

The bank established Credit Portfolio Management Committee to study and decide on important credit management policies. Based on the principle of “Separating credit administrations from credit review”, independent credit approval centers were established in both the head office and the branches to enhance portfolio management and monitoring of important loans. Business control lines were set up to target important loans such as government-related loans, medium and long-term loans, real estate loans and so on; the Bank strengthened credit assignment on Related Legal Entities. Portfolio indicators for the important loans were monitored on a monthly basis to control the total origination volumes. A post-loan monitoring mechanism was established.

Meanwhile, in an effort to achieve the year-target for asset quality, the Bank conducted serious performance evaluation on business units and personnel at key posts with respect to asset quality.

Professional NPL team was set up in 2005 to integrate resources, conduct intensive workouts and boost the pace of recoveries.

10 Controls on Treasury businessProcedures were set up to improve the monitoring and control of liquidity risk. In 2008, with the Bank facing the challenge the global finance crisis, SDB control strictly various risks and develop low risk business. The bank improved the monitoring of net cash flow, liquidity indicators, the liquidity gap and cash reserves. In addition, management conducted stress tests of liquidity, in an effort to prevent liquidity risk. The Bank refined its Asset Liability Management System in order to improve the quality of its dynamic and scenario analytics and other management tools.

With respect to market risk and portfolio management, the Bank has developed a regular monitoring process. The Bank emphasized the balance between risk and the speed of new product development. For RMB trading, the Bank controls the average duration and over-night credit limits. For the foreign exchange and broker businesses, the Bank reduced the over-night liquidity risk exposure.

11 Controls on ITAccording to our IT management policies, the Bank made its IT strategic plan in 2008, upgraded IT service management, performed a CMMI information security rating, reviewed policies and procedures, etc, all with the focus of improving operational effectiveness.

i Revise the net structure overall and update the principal network to make sure our network the rationale, safety, stability, reliability and expansibility with mix-links, high bind-width on logic structure, physical structure, safety structure and visit structure.


ii Complete the set-up of magnetic tape storehouse to realize the back-up method as one to more to reduce the cost of back-up and drop the strength of operation and difficulty of management.

iii Established or refined: the data back up mechanism, regular maintenance schedules, record keeping for equipment and system failures, and procedures for the disposal of hardware. Also provided standards for the maintenance of electronic equipment to ensure their sound operation.

iv Plan and design on storage network and volume to improve the level and efficiency of storage management.

v Enhanced mainframe operations and network administration to ensure the safe and smooth operations.

vi Refined the emergency plan for our information systems in order to ensure the data safety to open the platform application system, stress the centralization and conforming of open platform application, improve the level and efficiency of storage management. The plan prepared data and technology for ODS system and the date management, client information inquiring system and so on.

12 Internal audit and compliance management

Internal AuditA vertical management structure has been put in place and the Internal Audit Department directly reports to AC, which complies with Internal Audit Guidance for Banking Institutions. IA dept. completed all audit projects required by AC in 2008, and the audit findings and issues have been reported to AC and BOS. The IA Dept is responsible for follow-up rectification on audit findings and issues in a timely manner.

In 2008, some of the audit projects included: assessment/audit of the IC quality of the Bank, compliance risks, RPT management across the bank, full/follow-up audit projects on 7 branches & sub-branches; 24 special audit projects in the areas of Retail Banking, Finance & Accounting, Corporate Banking, Trade Finance, and IT; Departure audit on 123 staff; spot audits with coverage 100% including seals & authenticity code management, authorization cards (counter staff cards), blank vouchers, cash box, reconciliation, job rotation, and environmental security. IA Dept. also conducted survey on ethics and responsibility. Meanwhile, following the supervising instructions from CBRC, audit issues from external audit firm and IA Dept, in December 2008, the supervising team of IA Dept did on-field inspection branches with coverage of 100% on the rectify of issues found before. All typical issues identified in audits have been circulated to branches to facilitate them to identify and rectify the similar issues, avoiding the repeating of the similar problems.

To satisfy auditing demand, the Bank recruited professionals with financial skills and banking industry. By the end of 2008, there were 82 employees in IA. In addition, to enhance the monitoring to branches and out-lets by flying audit. SDB set up the guest audit team composed of the backbone of accounting department of branches and outlets, which focused on the audit of seals & authenticity code management, authorization cards (counter staff cards), blank vouchers, cash box, reconciliation, job rotation, and environmental security and so on.

Compliance ManagementIn 2008, the Bank improved the compliance management structure, established compliance committee on the key business-lines such as company line, retailing line, inter-bank line and IT line, to undertake compliance work. and enrich the compliance team of branches and outlets. By the end of 2008, there were 71 employees in compliance department, increasing 29% compared to that of 2007.

For management on compliance risk, SDB carried out the “woodpecker” plan to make prevent, control and suggestion, which require that we should set up effective operation procedure with launching all staff’s participation. Meanwhile, the bank should develop overall procedure to follow up every suggestion, eliminate various potential risks in order to raise the management level on internal control. SDB has conducted Anti-Money-Laundry special investigations, improved the reporting quality, and completed the AML systems development in order to improve the quality and effectiveness of AML reporting and optimize the AML system. Meanwhile, we develop the “negative system” to support the counter-terrorism financing and improve the ability to counter terrorism financing.

For the construction of compliance culture, series of compliance posters have been circulated to publicize the compliance concept from Basel Committee, CBRC and the bank’s corporate compliance culture, to create a sound compliance atmosphere and send out a new compliance image.

C The whistle-blowing policies and procedures

In the Bank’s policies “Whistle-blowing Management Manuals” and the “Implementation of Whistle-blowing Management”, it further improved the mechanisms for “whistle-blowing”, which helps the Bank identify information of any violation in ethics and take actions to ensure the safety of assets and the reputation of the Bank.

In 2008 the Bank was not publicly punished by CBRC or Shenzhen Stock Exchange.

In a summary, the Bank has placed significant emphasis on the building of internal control systems as business scale grows. The internal control system covered step of business process and operation, and the management and control of all departments/branches of the Bank. Although there are some areas need to be further improved, both the BOD and the management team has awareness of these issues and has scheduled improvement measures, In overall, the internal control system of the Bank is sufficient, sound and effective, and the internal control mechanism is sound. No material internal control deficiencies exist.

194

E&Y Hua Ming (2009) Special No. 60438538 H02

The board of directors of Shenzhen Development,

We audited the Self-appraisal Report on Internal Control of Shenzhen Development Bank prepared by the senior management of Shenzhen Development Bank (“your Bank”) under your delegation, with respect to establishment and implementation of internal control related to financial statement at 31 December 2008 of your Bank as stated in the Report. Your Bank made self-appraisal on the availability of establishment and implementation of internal control related to financial statement at 31 December 2008 in accordance with the relevant rules on normative standard set out in the MOF Internal Accounting Control Regulation – Basic Regulation (Pilot Version). It is responsibility of senior management of your Bank to establish an integral and reasonable internal control system and maintain its availability, ensure the availability of establishment and implementation of internal control related to financial statement as stated in the said Self-appraisal Report, and also guarantee the authenticity and integrity of the said Self-appraisal Report.

Our audit is based on the Guidance Opinion about Internal Control Audit issued by the China Institute of Certified Public Accountants. In the process of auditing, we implemented the procedures including inquiry, test, assessment on establishment and implementation of internal control, and other procedures as we deemed necessary. We believe that our audit provided reasonable basis for issuing opinion.

Subject to inherent limit of internal control, there is possibility of mistakes incurred by errors or frauds but not observed. Besides, there is certain risk of deducing the future availability of internal control on the basis of current assessment result, because the change of environment may lead to inappropriate internal control, or decline in compliance with internal policies and procedures. Therefore, the valid internal control in this term may not guarantee the validity in the future.

We are of the view that the internal control related to financial statement of your Bank as stated in the said Self-appraisal Report is in line with the relevant rules on normative standard set out in the MOF Internal Accounting Control Regulation – Basic Regulation (Pilot Version) in all major aspects.

The Report is just for the purpose of filing with relevant departments of the China Securities Regulatory Commission and the Shenzhen Stock Exchange. Any aftereffect resulted from misusage will be irrelevant with the CPA executing the business and the accounting firm.

Ernest & Young Hua Ming CICPA

People's Republic of China Beijing, Zhang Xiaodong19 March 2009

CICPA

Steven Xu

Assessment Report on Internal Control


IFRS financial statements Financial statements prepared under International Financial Reporting Standards. These are the Bank’s supplementary financial statements and are used for reference purposes.

PRC GAAP A general term for financial statements prepared under PRC Accounting Standards for business financial statements enterprises. PRC GAAP financial statements represent the statutory financial statements of the Bank

Total lending Unless otherwise stated, total lending represents total loans plus discounted bills and trade finance exposures.

CSRC The China Securities Regulatory Commission

CBRC The China Banking Regulatory Commission

Domestic CPA Refers to Ernst & Young Hua Ming, the CPA firm responsible for auditing our statutory financial statements.

Overseas CPA Refers to Ernst & Young, the CPA firm responsible for auditing our IFRS financial statements.

NPL Non-performing loan. A non-performing loans is any loan classified as substandard grade, doubtful or loss.

Capital Adequacy Ratio (CAR) Net capital / Total risk-weighted assets

Core Capital Core capital / Total risk-weighted assets. Core capital is defined as total capital less Adequacy Ratio (CCAR) supplementary capital arising from sub-ordinated debt and any provision surplus.

Repossessed assets Repossessed assets are assets such as properties, vehicles and equipment which are recovered from borrowers whose loans are deemed to be non-performing loans, and who have failed to settle an obligation in cash upon the maturity of the loan, thereby prompting the Bank to foreclose.

MOF The Ministry of Finance, PRC

CPC Communist Party of China

Glossary

196

Written Confirmation of Directors and Senior Management on Annual Report 2008

In accordance with Securities Law and No. 2 Regulation on Contents and Format of Information Disclosure on Publicly Listed

Companies – Contents and Format of Annual Report (Revised in 2007), we, as directors and senior executives of Shenzhen

Development Bank Co., Ltd., provide the following opinions after studying and checking Annual Report 2007 of Bank and

its “Abstract”:

1. The Bank operates in strict accordance with Accounting Standards for Enterprises, Accounting System for Enterprises and

Accounting System for Financial Enterprises, and the Bank’s 2007 Annual Report and its abstract give a fair view of the financial

position and operating results of the Bank.

2. Ernst & Young Huaming Accounting firm and Ernst & Young Accounting firm have audited the annual financial statement of the

Bank in compliance with the national and international audit standards, have audited the annual financial statement of the Bank,

and have issued standard unqualified audit reports.

3. We undertake that the information disclosed in Bank’s 2007Annual Report and its abstract is true, accurate and complete and that

this Annual Report contains no false record, misrepresentation or material omissions, and we are severally and jointly liable for the

truthfulness, accuracy and completeness thereof.

Reference Documents

1. Financial statements bearing the signatures and stamps of the chairman of BoD, chief executive officer and officer-in-charge of the

accounting institution.

2. Original copies of the audit reports bearing the chop of the accounting firm and signatures of CPAs.

3. Original copies of all documents and notices disclosed on the China Securities, Securities Times and Shanghai Securities by the

Bank during the report period.

Board of Directors of Shenzhen Development Bank

20 March 2009

A strong team culture and spirit is at the heart of SDB’s success. This is a journey in which SDB is committed to overcoming any challenge and achieving even higher rewards.

As one team SDB is forging ahead with one unifying service standard, strategy and objective.

Our approach to human resources is based on best Chinese and international practices. Staff training, retention and advancement are all important to our business success.

SDB endeavours to provide the best working environment for our staff and to foster their personal development so that they are capable of meeting challenges in our constantly-changing world.

Working Together

SDB took part in the event “Sailing farther, growing together – Voyage along the Coast on the 30th anniversary of the Reform” The sailboat “SDB” sailed along the wind to the China sea frontiers for four months.

Annual Report 2008


www.sdb.com.cn

Shenzhen D

evelopment B

ank A

nnual Report 2

00

8

ResponsiveAdaptive

million Yuan

2004 2005 2007 2008

201,816232,206

281,277

360,514

166,897

20060

100,000

200,000

300,000

400,000


2004 2005 2007 2008

2,411

4,027

5,776

8,138

2,440

20060

2,000

4,000

6,000

10,000

8,000

million Yuan

2004 2005 2007 2008

155,848182,182

221,036

283,741

126,195

20060

100,000

50,000

150,000

200,000

250,000

300,000


2004 2005 2007 2008

47.64

41.4138.93 35.99

46.80

20060

20

10

30

40

50

Percentage %

2004


2005 2007 2008

3.713.70 3.71 3.68

5.77 5.77

8.58

5.27

2.30 2.32

20060

4

2

6

8

10


NPL Ratio

Percentage %

2004 2005 2007 2008

9.33

7.99

5.64

0.68

11.40

20060

4

6

2

8

10

12