Executives pay on a voluntary basis is 10% lower compared with 2007

China Construction Bank (601939) Annual Report released today shows that in 2008 the company achieved a total profit of 119.741 billion yuan, representing an increase of 18.77%; net profit of 92.64 billion yuan, an increase of 34.0%; the basic earnings per share 0.40 yuan, a 0.10 yuan improvement over the previous year.  The average return on assets and the weighted average return on equity reached 20.68 percent and 1.31 percent, a leading level among large banks in the world.

In order to further implement cost control, China Construction Bank chairman, president, chief supervisors and other senior managers agreed not to increase the reward fund, and cut compensation on a voluntary basis for about 10% compared with 2007.
 
Enhance profitability

Construction Bank pointed out, the profit growth was mainly due to the rapid growth of net interest income and net fees and commission.

In 2008, the Construction Bank realized net interest 224.92 billion yuan, an increase of 16.67 percent year-over-year.  In addition, the fee and commission income growth is also the main cause of the sharp growth in profits.  Data showed that in 2008 net income of fees and commissions grew 22.8 percent over the previous year to 38.45 billion yuan, accounting for the increased proportion of operating revenue of 14.3%, compared with 0.06 percentage points last year.  And cost control continues to be effective, the 2008 cost-to-income ratio fell to 30.71 percent.

In addition, because from January 1, 2008, the domestic enterprise income tax rate dropped from 33% to 25%, CCB’s income tax dropped to 27.099 billion yuan in 2008, representing a decrease of 4.575 billion yuan.

The Impact of Lehman, Fannie, and Freddie Notes fading

In 2008, the Construction Bank used innovative ways to speed up disposal of bad loans.  As of December 31, 2008, Construction Bank of non-performing loan ratio was 2.2%, decreased by 0.4 percentage points from previous year.  Ratio of reserve to non-performing loans is 131.6%, representing 27.2 percent increase from last year end.
 
In this regard, Li Xiaojiu, an analyst of International Transportation Bank believes that China Construction Bank asset performed well, non-performing loans in the second half was 0.3% [0.6% on yearly basis], the major sectors of the non-performing rate of loans remained stable or declining; but sub-prime loans increased by 25.7% in the last six months.

Although the Construction Bank continued to improve the quality of credit assets, its capital adequacy ratio over the same period suffered a slight decline.  The report shows that in December 31, 2008, China Construction Bank capital adequacy ratio of 12.16%, core capital adequacy ratio of 10.17%, represent a drop of 0.42 percentage points and 0.20 percentage points respectively over the previous year.

In order to improve the level of capital adequacy ratio, and enhance operational capabilities and ability to resist risks, China Construction Bank issued 40 billion yuan of subordinated bond on February 26, 2009 through the national inter-bank bond market public offering.
 
As of December 31, 2008, China Construction Bank has foreign currency bond portfolio book value of 15.814 billion U.S. dollars, representing a decrease of 22.309 billion U.S. dollars; foreign currency bond investment accounted for 4.96 percent of total bonds investment, accounted for 1.4% of total assets.  Over the same period, China Construction Bank net foreign exchange exposure was 15.76 billion yuan, accounted for only 0.2% of total assets.

CCB believes that the Group would focus on the control of credit risk of foreign currency bonds, and reduce the scale of foreign currency bonds investment, especially high-risk bond, in order to reduce losses.

Concerning Lehman Brothers-related bonds, Freddie and Fannie bonds, China Construction Bank report shows that as of December 31, 2008 the Group’s Lehman Brothers-related bonds of 190 million U.S. dollars notional were fully deducted from loan loss reserve; the Fannie Mae and Freddie Mac related bonds with the book value of 1.191 billion U.S. dollars are current in terms of bond principal and interest repayment.

Source:  http://www.cs.com.cn/xwzx/03/200903/t20090328_1803066.htm  中国证券报·中证网
Chinese Article Author:  张朝晖 张泰欣