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Mei Feiqi – General Manager, Personal Finance Department

Chen Siqing – Vice Chairman and President

Yue Yi – Executive Vice President

Ren Deqi – Executive Vice President

Zhang Jinliang – Executive Vice President

Bank of China, Ltd. (OTCPK:BACHY) Q2 2014 Interim Results Conference Call August 19, 2014 6:15 AM ET

Mei Feiqi

[Interpreted] Good afternoon, ladies and gentlemen. I'm Mei Feiqi, spokesman of Bank of China Limited. Welcome to our 2014 Interim Results Presentation. Attending the meeting today, we have 88 reporters from 76 media. This presentation is made in Beijing and audio linked to our Hong Kong venue. Thank you for your support. And we would like to have better communication with you, so as to create more positive energy and create more noises. We allow live webcast through our website if there are reporters who are not available to attend the meeting. Please pay attention to our disclaimer.

All the financial data in our presentations are prepared according to IFRS unless otherwise stated. We are going to focus on the first-half performance and business review. Later on, our management is going to take us through the performance in the first-half and then answer your questions. So we have the Beijing venue and Hong Kong venue. We have audio and video link connecting the two venues.

First of all, I would like to introduce our management team to you, Mr. Chen Siqing, our President; Executive Vice President, Mr. Yue Yi; Executive Vice President, Mr. Zhang Jinliang; Executive Vice President, Mr. Ren Deqi. The year 2014 was the year for us to show the social responsibility, realize our strategies. We have achieved very good results.

Now, I would like to invite Mr. Chen, our President to deliver his speech.

Chen Siqing

[Interpreted] Ladies and gentlemen, dear media friends, good afternoon. Welcome all of you to attend today's results announcement. The development of Bank of China has received your long-term support and help. I would like to take this opportunity to express my sincere gratitude to all of you and hope that you can continue to express your concern and support to Bank of China in the future.

Today, I'm pleased to introduce the Bank's interim results with three Executive Vice Presidents. To my left is Mr. Yue Yi, Executive Vice President. Since most of you are familiar with Mr. Yue, we are old friends and I'm not going to introduce him any further. To my right is Mr. Zhang Jinliang, Executive Vice President.

Mr. Zhang obtained his Doctorate in Economics from Xiamen University. He is a Certified Public Accountant. After joining the Bank in 1997, Mr. Zhang worked in the Financing and Accounting Department of the Head Office for many years. He has served as Deputy General Manager of the Financing and Accounting Department of the Head Office, and also General Manager of the IT Blueprint Implementation Office. He also served as General Manager of Financial Management Department of the Head Office. And since July 2014, he served as Executive Vice President of the Bank.

On his left – on Mr. Yue's left is, Mr. Ren Deqi, our Executive Vice President. He obtained Master Degree in Engineering from Tsinghua University. He worked in China Construction Bank for many years, and held various positions. He served as Deputy General Manager of Credit Approval Department, General Manager of Risk Control Department, General Manager of Credit Management Department, General Manager of the Hubei Branch of CCB. And then before he joined us, he was also the General Manager of Risk Management Department of CCB. He joined the Bank in May 2014, and has served as Executive Vice President of our Bank since July 2014.

Now, I will introduce the Bank's interim results first, and then answer questions with Mr. Yue, Mr. Zhang, and Mr. Ren. In the first-half of the year, guided by the strategic goal of Serving Society, Delivering Excellence, we calmly responded to the complicated operational environments. We enhanced our business development, tightened risk management, deepened reform and innovation, strengthened team building, and delivered excellent results.

The Bank recorded a profit after-tax of RMB93.4 billion and profit attributable to the equity holders, RMB89.7 billion, increased 10.97% and a 11.5% year-on-year respectively. The ROA and ROE recorded at 1.27% and 18.57% respectively. Asset quality remained stable in a reasonable range, NPL ratio stood at 1.02% with NPL coverage ratio at 217%. Advanced capital management approach was approved to implement by the regulator. The capital adequacy ratio and common equity tier 1 capital adequacy ratio recorded at 12.41% and 10.11% respectively.

We have optimized our debt structure, controlled our capital costs. We continue to extend our value chain to climb upstream and also downstream. We continue to expand our client base. By the end of June, hence customer deposits amounted to RMB11.19 trillion, an increase of RMB1.09 trillion, or 10.8% compared with prior year end.

Domestic renminbi deposits reached RMB8.05 trillion, an increase of RMB735.3, or 9.5% compared with the prior year end, funding cost are under pressure due to the risk of the rise of market interest rates. The Bank expanded the resources to absorb low-cost funding by issuing bonds globally and actively developed cash management platform, custody, and bond underwriting businesses together stable customer deposits.

In order to meet the needs of the real economy, the Bank continuously optimized our credit structure and maintained bonds growth in loan portfolio. The Bank's loans and advances to customers amounted to RMB8.42 trillion, an increase of 10.7% compared to the prior year end.

Domestic RMB loans increased RMB338.1 billion, or by 6.1% from the last year end. The Bank made greater efforts to support the key areas, the component of the national economy. The proportion of the domestic RMB personal loans to domestic RMB loans increased 0.4 percentage point from last year end. The growth rate of loans by BOC Credit Factory and loans to medium-sized enterprises exceeded the overall growth rate of domestic corporate loans by 5.7 percentage points and 1.1 percentage points respectively. The loans to strategic emerging industries increased 21.8% and the balance of agriculture-related loans increased by 6.1% from last year end.

In the first-half of the year, the Bank faced heavier pressure given the up-trend of funding cost due to proactive efforts to optimize its assets and liability structure and enhance profitability of overseas business. The Bank expanded net interest margin by 3 basis points from last year to 2.27%.

Adapting to customer demands, the Bank made greater efforts in product innovation and promotion to expand the sources of non-interest income. In the first-half, non-interest income increased 13.4% year-on-year, while net fee and commission income increased by 14.6%. Non-interest income represented about 33.3% of our total operating income. The Bank strengthened its traditionally competitive businesses such as international settlement and foreign exchange business and achieved rapid growth in fee income from its custodian consultants and also bank card businesses.

Seizing the market opportunities arising from RMB internationalization and Chinese enterprises going global, the Bank stepped up the collaborations of its domestic and overseas operations, improved its global service capabilities and enhanced its market competitiveness.

In the first-half of 2014, the Bank’s total overseas assets increased 21.3% compared to the prior year-end, and it also accounted for 27.7% of our total assets. Overseas profit before tax increased 35.8% year-on-year, and accounted for 22.2% of the Bank’s total profit before tax.

The deposits and loans of overseas commercial banks achieved rapid growth rates at 16.1% and 24.1% respectively. The Bank strengthened support for Chinese enterprises’ going global and provided whole process in all around cross-border financial products and services to assist their overseas expansion.

In the first-half, the Bank had supported 1,187 going global projects, with its loan commitment growing 26% year-on-year. The Bank continued to focus on its contribution to renminbi internationalization progress and expanded our competitive advantages.

In the first-half, the Bank conducted cross-border RMB settlement and clearing volumes amounted to RMB2.79 trillion and RMB112.5 trillion respectively, an increase of 63% and 98.7% compared with the same period of the prior year, ranking first among its international peers.

RMB global clearing network was further expanded. Our Frankfurt branch became the first RMB clearing bank in the euro zone. We also have further enhancement of our global renminbi clearing service network centered in Hong Kong and Shanghai.

Overseas RMB assets and liabilities expanded rapidly. The Bank actively pushed forward the issuance and underwriting of offshore renminbi bonds, and seize the business opportunities arising from the Shanghai free trade zone to explore and promote renminbi internationalization business.

The Bank fully leveraged on the competitive advantages arising from its diversified business platform, including investment banking, insurance, investment and leasing businesses, enhanced the synergies across the group, and provided comprehensive and high quality financial services to our customers. The Bank’s comprehensive business income stood at RMB33.7 billion, a year-on-year increase of 20%, the proportion to the total operating income increased 0.71 percentage points.

The Bank actively promoted e-finance bank construction, diversified and improved e-banking service channels, optimized product functions and operating processes to enhance customer experience. The Bank's substitution ratio of e-banking channels for traditional outlets continuously increased.

The e-banking transaction volume grew 29.7% compared with the same period of the prior year. The Bank continuously improved its Open platform, and launched online wealth management, Financial e-Manager, e-Home, online cross-border financial products, mobile payment, BOC e-shipping, and other innovative services. Its Future Bank flagship branches achieved preliminary development.

In the first-half, the banking industry faced increasing pressure on asset quality in the process of economic structure adjustment and growth rate slowing down. The Bank continuously improved its comprehensive risk management, strengthened risk prevention, early warning and resolution, and maintained asset quality within the reasonable range.

Non-performing loans ratio at the end of June of 2014 was 1.02% and overdue loan ratio was 1.35%, up 0.06% and 0.19 percentage points from the prior year end respectively. Special-mention loan ratio recorded 2.28%, down 0.21 percentage point. The provision was sufficient and the ratio of provision to total loans of domestic institutions increased 9 basis points to 2.71%.

The Bank enhanced non-performing assets resolution. In the first-half of the year, the non-performing assets were sold by domestic branches amounted to RMB27 billion, up RMB9.2 billion year-on-year, in which cash recoveries accounted for 48%.

The Bank strictly controlled the overall credit exposure to local government financing vehicles, and strengthened the risk management of overcapacity industries, real estate, wealth management businesses, innovative interbank businesses et cetera. Adhering to the balance of safety, liquidity, and profitability, the Bank maintained sound liquidity situation.

Looking into the second-half of 2014, with a series of stabilizing growth policies implemented and affecting the internal impetus to economic growth would be gradually stimulated. The economy will maintain stable growth, but still face downward pressure, and are expected to operate in a less advantageous environment and face dual challenges from NIM construction and asset quality pressure.

The Bank will stick to its strategic goal of serving the society and delivering excellence. We will honestly carry out China's macroeconomic policies. It will deepen reform to promote transformation, improve service to win our market, strengthen collaboration to consolidate competitiveness, enhance efficiency to control risk, and strengthen fundamental construction and team building.

We will turn challenges into opportunities. We will continue to show the social responsibility. We will adhere to a balanced approach, and we will continue to identify development opportunities, complete transformation. We will continue to strengthen collaboration, enhance efficiency to lower the risk level. The Bank will make great efforts to deliver the sound results and bring long-term sustainable value to all our shareholders, employees, and also the entire society, and the whole nation.

Thank you very much.

Question-and-Answer Session

Mei Feiqi

[Interpreted] Thank you, Mr. Chen. We'll now open the floor for questions. Please raise your hand if you like to ask questions and inform us of your name and who you represent. Because of time constraints, we ask you to raise only one question at a time. We now invite the participants in Beijing to raise their questions first.

In the middle, the gentlemen in the first row. Sorry, this person is not speaking into the mike.

Unidentified Analyst

[Interpreted] I'm from Xinhua News Agency. BOC is one of the first banks among the largest banks to announce its results. People felt that the profitability range would become more narrow in the first-half, while you present very positive figures. So what do you think will happen in the second-half, what is your projection? And what are the major reasons for the double-digit growth?

Chen Siqing

[Interpreted] It is indeed very difficult to achieve such growth. We have worked very hard. In the first-half, we focused on social responsibility and delivering excellence. I think this important strategy has helped us to achieve very good results. And throughout the entire Bank, we have worked around this theme, and we have promoted business development. We've done risk management in an outstanding manner. We've reformed an innovative and we have achieved great results mainly because of the following three reasons:

First, we served the real economy to achieve new progress through restructuring. We have identified the correct market opportunities. For example, concerning renminbi business, there has been very good growth in the first-half newly added business. It's the highest in recent years and non-interest income also grew by 13.8%. Our overseas business also grew very quickly, profit before tax increased or improved by 35.8%.

If you compare domestic and overseas business by looking at profit before tax, there may be some differences. Our revenue has improved greatly. We continue to adhere to compliance and also sustainable growth. We have expanded our supporting level for the domestic economy. We offer more loans to small to medium enterprises, the growth level is 8% and 12% for BOC Credit Factory type of SMEs. And you will see that we have done something for emerging enterprises and also overcapacity enterprises. We support going global projects.

As I have said, we have supported 1,187 such projects and the commitment is up to a US$100, growth of 26%. The second reason is that, we have identified and leveraged on development opportunities. We have made use of renminbi internationalization to expand our advantages. If you look at settlement of clearing amount we're already number one in the world, concerning renminbi.

So cross-border renminbi business will continue to take the lead in the world and we have become the largest service provider offshore. Clearance and settlement levels, we both rank number one. We have established a very effective network. We have branches all over Europe. Overseas asset scale continues to expand, perhaps you have seen some reports presenting renminbi sales. For example, in Australia and also Luxembourg and Paris, we have launched our renminbi bonds for the first time in these places.

We continue to enhance our level of competitiveness. We continue to diversify and become more international very quickly. There will be more revenue coming from such diversified businesses. We are also going to improve our business by launching new products and we successfully issued a supporting securities, and we now have direct transactions between renminbi and also the New Zealand currency. And we also launched settlement and clearing businesses in Brazilian currency.

We also leverage on the opportunity of online sales and online channels to improve the customer experience. We see huge growth concerning revenue coming in through our e-banking channels. In terms of transaction client figures and transaction podium, year-on-year growth was as high as 380% and 740%.

We will expedite the launch of further services. We will continue to keep our platform open, so that, wealth management and other products can be well supported. The third reason, we continue to solidify our foundation and improve internal management to provide new growth impetus. We continue to perfect our internal mechanisms. We are now making or launching measures to result risk coming from local government financing vehicles. We are improving the level of risk assessment and prevention.

We also continue to launch reform measures to improve our structure and also human resources. I think we will be able to perfect risk management processes and drop all the reports. We are well prepared well in advance and we will continue to build our foundation and everything will be done in relation to risk management.

So that the quality of our asset will continue to be kept at an optimal level. We also continue to perfect management of deposit and loans. We implement differential pricing and all these measures will penetrate the entire Bank domestically and also internationally. We have 10,000 points of sale in our network. So we have good strategy as to lead and we have this well established network to continue on to win this race.

We have strengthened the construction work of IT and operation systems. We have invested heavily into such measures. We'll continue to invest into new projects in the second-half. We expect some fluctuations. The economic situation will go through changes, but we will continue to restructure ourselves. We will make adjustments to respond to such changes. We will adhere to our development strategies. We will tie our development in with the overall development of the macro situation of our nation, so that we will be deeply rooted in the domestic market. We'll continue to serve the real economy and secondly, minimize risk exposure, effectively control risk levels. We will insist on innovation and focus on major projects.

And fourthly, we will continue to improve our infrastructure. We are confident that in the second-half, when we announced the whole year results for 2014, I think you will be very happy with our performance.

Mei Feiqi

[Interpreted] Thank you, Mr. Chen. Second question over here, the lady in the second row.

Unidentified Analyst

[Interpreted] Thank you. I'm from CCTV. I see that SMEs are facing difficulties in financing with high cost, state council has expressed concern. So there has been some measures launched. My question is what have you done in terms of assisting such SMEs, you talked about serving the real economy in the second-half, you're going to launch some new machines?

Chen Siqing

[Interpreted] Thank you for the question. This is something that our society, our nation is very concerned about, the Bank is also very concerned about this. Right now we face some downward pressure and we are at a turning point in making our adjustments. We understand that financing is difficult and costly for SMEs, that is the actual situation.

The state council has launched a number of measures to tackle this problem. Our Bank has also launched a number of measures. According to our analysis, the financing cost has increased due to three areas. First, capital cost for banks has gone up, so everything has become more exclusive, because what is flowing in has become more expensive. People are taking about wealth management and not so much focusing on primary deposits.

So the asset flowing into the banks has become more expensive, and therefore that naturally affects things that are going out. Secondly, the whole loan cycle has been extended. There are many more channels available in the market such as trust channels. Thirdly, for microenterprises, they face the highest level of risk, they don’t have that much that can be used as collateral, so the risk exposure is particularly high. So we must consider this factor as well.

In the first-half, according to the state policies, we have adopted many measures. We have expressed concern to the national policies to assist transformation of certain industries and enterprises. We would like to show the corporate social responsibility that is one of our strategies. So in terms of micro to small and medium enterprises, we are very concerned about their financing needs. We've actually launched a number of measures before other competitors, so as to tackle the problem of expensive and difficult financing for microenterprises.

So, now, I would like to share with you the actual measures that we have launched to assist such small to medium enterprises. There are number of measures that we have already adopted, for example, enhancing renminbi loan efforts so that we can face more directly the needs and demands of micro to small enterprises. We ask our branches to adopt the two minimum limits, continue to perfect our loan products and services to micro to small enterprises.

In terms of investigation, assessment and certain efficiency level has been enhanced. The cycle has been shortened from one-month to within one week. At the same time, we are focusing on education relatively medical, greening and energy saving enterprises. We have looked at their industry characteristics to adopt relevant measures, that is the first thing we need to do.

And the next step, we're going to leverage on our internationalization advantages. We are going to focus more on foreign currency loans. In the past, you have noticed, our loan growth exceeded RMB800 billion. You can do the math and you would know, our loans are not just in renminbi, but also in foreign currencies. This is because we would like to lower the financing cost for more enterprises.

We have stepped up our efforts in terms of foreign currency and loans, and we are talking about US$311.8 billion as the total volume of such loans. We continue to provide assistance to going global projects. The corresponding growth in the segment was 24.1%. Firstly, we have waived a number of fees. We have optimized the management of fee collection.

I will offer more details and you will understand that what we offer is very effective. Many fees and charges have been waived for microenterprises and small enterprises. For example, finance consultation fees, financial market consultation fees, company financing consultation fees.

We have also cancelled some regular financial consultation fees in order to serve the real economy and facilitate a growth of micro to small enterprises beginning from the August 1, we have done seven things. First, we have waived financing, consultation and services fees for micro to small enterprises. The regular finance consultation fee is also waived or cancelled.

Thirdly, we have also cancelled some processing fees for loan commitments and personal cyclical loan commitment fee that has also been cancelled. We have cancelled processing fees for changing the terms and conditions for company financing services. We have removed the financing consultation fees in relation to (inaudible) and we have also (inaudible) all the registration fees for using property as collateral, and we have prevented the transfer of such costs to our clients. The seventh measure is to waive annual fees and account management fees for our small clients. We provide them with a free account.

Fourthly, we continue to offer more comprehensive services. BOC is a large enterprise among all the Chinese banks. Well, our colleagues focus on overseas branches and businesses among all the Chinese banks. Our overseas asset ratio is the greatest profit coming from overseas business, is also the greatest. Our branches and our network is also the greatest with more than 600 branches. We have wide coverage, we all know this, but perhaps, you are not aware of something else. They owned commercial banks. We are the one with best quality asset domestically and internationally.

So, we'll continue to offer comprehensive services and products beginning from 2011. We started developing bank branches at town level and city level. We even set a greater target for ourselves. We want to have a wide network covering more than 70 towns and cities within four major provinces.

We will continue to be deeply rooted in rural areas, cities, and towns. Our loan level has grown by 66%. We will also support urbanization and identify new demands derived from urbanization. We're going to continue to provide this efficient global investment service platform for micro to small enterprises.

Concerning the real economy, of course, we need to continue to support it. We will pay close attention to the documents issued by the state council, including a number of guiding comments on tackling high or costly financing costs for enterprises. We'll continue to strengthen our spirit in serving the real economy and achieve positive interaction between ourselves and the real economy.

Mei Feiqi

[Interpreted] Thank you for the question and also Mr. Chen's reply. We will now shift over to the Hong Kong venue. May I ask our colleague in Hong Kong to take the next question, the lady in the second row.

Unidentified Analyst

[Interpreted] Good afternoon. In the first-half, your overseas business obtained very good growth. Profit before tax grew by 35.8%. Could you talk about what is happening to development of properties business and future strategies?

Chen Siqing

[Interpreted] Thank you for the question. That is also something we are very concerned about. We want to see sustainable healthy growth with our overseas business. Mr. Yue Yi will take this question.

Yue Yi

[Interpreted] As we all know, BOC is very diversified and very international bank. Inside China, we are the only Bank with collaboration with overseas banks for more than 100 years. We have been chosen as one of the most important international banks in the world. As Mr. Chen has pointed out, we have a wide network of overseas asset, revenue, profit, also rank number one among all the Chinese banks.

In recent years, we have strengthened our level support for going global projects. If you look at the contribution after the asset and profit before tax, coming from our overseas business to take out 27.7% and 22.2% respectively. We continue to solidify international settling, trade financing and foreign exchange business.

In the first-half, we have dealt with international settlement business to US$182.4 billion, which is about one-third of import and export (inaudible) of China. And we have achieved US$5.658 billion of custodian services. And we are number one in many areas and we'll continue to maintain our advantages. We have many Chinese enterprises going global and international enterprises trying to come into the Chinese market. These are unprecedented and historical opportunities for us. We've supported 1,187 going global projects, commitment up to US$102.8 billion a growth of 26%.

We also successfully supported M&A projects, for example, recently acquisition of a U.S. enterprise. We have actually participated in the syndicate loan and we have also participated in IPO practice. So we're fully utilizing internationalization of renminbi and we have expanded such business in the first-half, settlement and clearance volume of cross-border renminbi increased by 63% and 99%, which is again number one among our international peers.

We've already become the largest renminbi service provider in the offshore market. Not long ago in Europe we've been designated, our Frankfurt branch has been designated as the first renminbi clearing branch for the Euro zone. And we're using Shanghai and Hong Kong as the core for our global around-the-clock renminbi clearing and settlement service network. We continue to improve this service network, and continue to upgrade our capability in renminbi clearing and settlement.

So we'll continue to focus on our overseas business. This is one of our greatest competitive advantages. We continue to focus on professional operation, streamlined management. We'll combine domestic efforts with overseas work so that we can actively leverage on internationalization of renminbi. We'll invest more resources into assisting Chinese enterprises and in officials in going global. We'll continue to open up more channels, maintain our level of competitiveness and enhance our market leader position.

So we have the following four strategies, we need to continue to expand and solidify our advantages in renminbi business. We will rely on cross-border renminbi clearing to strengthen our leading position. We will open up renminbi business in relation to trade financing, transactions and also capital market opportunities so that we will become the biggest cross-border renminbi service provider in the world.

We will provide the most important renminbi products, because our overseas business really hinges upon its filament of cross-border renminbi business, beginning from last year. Our overseas revenue, one-third of that came from cross-border renminbi business. Secondly, we will pay close attention to domestic and overseas enterprises with cross-border operations. We will strive to be the bank of first choice for enterprises going global, which is in line with our state policy.

We want to be the bank of first choice for domestic enterprises who like to conduct M&A overseas. We also want to be the bank of first choice for the 500 global strongest clients and quality overseas client when they do business in China. We're focusing financial institutions and also non-banking financial institutions.

We'll continue to provide support and guidance to private enterprises in China and individuals when they go abroad. Thirdly, we will continue to strengthen our traditional characteristics and our brand advantages, deepen professionalized operation and streamlined management, step-up our efforts in innovation in our products and services, so that we can better satisfy the demands of our clients in all areas. So our nation has become one of the most important trading partners in the world. We must grow together with our country.

We will maintain a very large market share. Fourthly, we will continue to insist on organic growth and expansion overseas, we will expedite the construction of overseas e-channels, further expand and optimize our global network layout, take active measures to construct a reasonable, functional, and comprehensive global service providing system to all our local enterprises going abroad and also enterprises coming into China. Thank you.

Mei Feiqi

[Interpreted] Second question from Hong Kong site. The gentleman in the fifth row.

Unidentified Analyst

[Interpreted] Good afternoon. I'm from (inaudible). I would like to ask a question about Shanghai-Hong Kong Connect, which is going to be launched very soon. Do you think Shanghai-Hong Kong Connect will present new business opportunities? Shanghai exchange also did some testing. What is the level of participation? And what about renminbi exchange issues. Do you have any proposed solutions?

Chen Siqing

[Interpreted] Thank you for the question. The market is indeed very concerned about Shanghai-Hong Kong Connect as a new product. As for our bank, I believe we have the right condition and foundation to enjoy the benefits. I think it is time for us to take a big leap forward with our headquarter in Shanghai. We need to make an early move. And on the Hong Kong side, we also enjoy our advantages. Among all the Chinese banks, I think, we are the best positioned one. So when it comes to advantages brought forth by Shanghai-Hong Kong Connect, I'm sure, we will make very good use of that.

And Mr. Ren, will take your question.

Ren Deqi

[Interpreted] As Mr. Chen has said, Shanghai-Hong Kong Connect is going to present good opportunities to our business in Shanghai and also in Hong Kong. On the 10th of April this year, the CSRC in China, also SFC in Hong Kong made this joint announcement concerning running this pilot scheme called Shanghai-Hong Kong Connect. It is going to supplement QDII, QFII, and RQFII systems. This is going to be very meaningful. It is going to create new impetus for financial reform and opening up in China. It will also help perfect investor structure in the market. For commercial banks or investment banks, there will be new business opportunities.

Concerning BOC we are going to fully leverage on internationalization efforts and diversified competition to hold on to new development opportunities. Actually, one of our share controlling companies has become an important player in the Hong Kong market. We will also look issuing bank in Hong Kong. Many companies are trying to become the service provider for the first batch of the business under Shanghai-Hong Kong Connect. We will step-up internal collaboration and launch in October cross-border investment one-stop services under Shanghai-Hong Kong Connect as well.

Mei Feiqi

[Interpreted] Thank you for the participants in the Hong Kong venue. We still have some time left, so we'll come back to the Beijing venue. The lady in the third row.

Unidentified Analyst

[Interpreted] Thank you. I'm a reporter from the First Financial Daily. I see that there is more and more pressure or downward pressure coming from the economy and as the quality of the bank is also facing pressure, according to the data you have just mentioned NPL or NPL ratio have both gone up. So I will like to ask you what do you think will happen in the second-half concern over the Bank's asset quality? Do you think it will continue to worsen? What measures are you going to adopt to strengthen risk management and ensure controllable asset quality?

Chen Siqing

[Interpreted] Thank you to this reporter. This issue that you are concerned about is also our major concern throughout the Bank. Asset quality is very important to any bank. And we are dedicated to keep the quality level of our asset at a reasonable level. I will invite my colleague Mr. Zhang to take this question.

Zhang Jinliang

[Interpreted] Yes, this is indeed a common problem faced by the entire banking industry and also the wider community. We have seen increases for NPL and also NPL rate. Towards the end of June, NPL volume reached RMB85.9 billion, which is an increase of RMB12.6 billion, NPL ratio 1.02% which represents an increase of 0.06 percentage points. The new NPL focused on manufacturing, retail and wholesale business and also transportation business. For example, steel business, and also freight handling, small to medium enterprises. In terms of regional breakdown they are focused in places like Guangdong, Jiangsu, Zhejiang, Shandong, which are coastal regions. We believe such changes are reflecting the situation of slowing down of the Chinese as well as overseas economies and also because of the restructuring of the banking system.

I think our quality asset is still within the reasonable range and NPL ratio is still below the industry average of 1.08%. We'll continue to take proactive measures to control risk. And we are also going to spare no effort in tackling non-performing credit assessment and the concerned type loan by the end of June, the ratio was 2.28%, a drop of 0.21 percentage points, this is because of our efforts. And we have a provision of RMB27.5 billion, an increase year-on-year of RMB13.6 billion and the credit cost is 0.69%, up 30 basis points.

Our NPL coverage ratio of 217% and we have an increase of 0.09 percentage points compared to prior year end. So looking forward, we continue to face a lot of pressure coming from non-performing loans, and we will continue to work according to what Mr. Chen has said. We will be very well prepared. We will take proactive measures to tackle problems, and we will spare no efforts. We will enhance the level of risk assessment and (inaudible). We will continue to target high risk clients and industries. Hopefully, we can have early identification and early resolving of any NPL issues.

For example, for local government financing vehicle, industries such as real estate industry and those with overcapacity, we're going to step-up comprehensive control measures. And the local government vehicle loan has dropped to RMB347.2 billion, NPL ratio is 0.13%. We are going to adopt a number of measures, for example, marketized measures to handle NPL and enhance the collection level. We will continue to maintain the overall credit risk level within reasonable and resolvable range and maintain the overall NPL range within a stable range.

Mei Feiqi

[Interpreted] Thank you. Can we have this next question? The gentleman in the third row.

Unidentified Analyst

[Interpreted] I'm from Economic Daily. Cross-border renminbi business is a key area for your business, but we see more and more fierce competition. How are you going to maintain your competitive edge? Can you provide some guidance in this area?

Chen Siqing

[Interpreted] Economic Daily, yes. Thank you for the question. Yes, we enjoy advantages, we do face challenges at the same time. I will ask Mr. Yue Yi to answer.

Yue Yi

[Interpreted] Cross-border renminbi business is a matter of concern among all the banks and also around the world as we all know. BOC is one of the earliest players participating in this segment. We have also been recognized as an off-shore center for handling renminbi clearing business. We're one of the first banks to use the cross-border OCIT [ph] system. Now, the system has been copied by many other banks.

We're also one of the first banks to move into Europe, Southeast Asia, in terms of publicity work, promoting cross-border renminbi trading and clearance. In Europe and also Asia Pacific, BOC China, BOC have organized many conferences and activities. So in terms of cross-border renminbi business, when renminbi continues to be internationalized, we're playing a very important role.

In terms of renminbi clearing channels, products, number of clients, professional technologies, our IT systems, and talents, we have already established a leading position in the market. Clearing volume is the first in the market. We're talking about RMB2.79 trillion in the first-half, year-on-year increase of 63%. Our domestic branch handled RMB1.29 trillion. We're also using Hong Kong and Shanghai to have this around the clock clearance channel.

Why do we say Shanghai and Hong Kong, Hong Kong is offshore, Shanghai is onshore, so combining the two, we adopt two different models to satisfy different demands. Our bank is very widely recognized by our clients. We have already established such around the clock clearance services. So total clearance volume was over RMB112 trillion. Right now, our Bank can provide renminbi clearance services to more than 120 countries. So, truly, we are providing internationalized services and products.

In terms of renminbi internationalized products, loans, and also foreign exchange, credit card business as Mr. Chen explained earlier, we have our bonds issued in Luxemburg and also in Sydney, Australia, we will continue to issue bonds in other European countries. We have signed agreements with world level well established players in the market. For example, Tokyo, Australia exchanges, and also Seoul, Korea, we have signed strategic collaboration agreements.

So many new opportunities can be brought to these overseas places. The BOC also issued a white paper concerning cross-border renminbi business, covering many professional areas and also presenting the actual level of using renminbi in international settling and clearance.

Looking ahead, we have a number of strategic directions. We like to be the forerunner who want to lead the market. We want to be the best in cross-border renminbi business. We want to be the major bank supporting internationalization of renminbi. We want to be the bank providing major clearance and settlement channel for renminbi. We want to be the best service provider in the market and also the major player to provide relevant growth concerning exchange rates.

I would like to present a bit more details to you. We need to leverage on important policies, so that we can take the lead in renminbi business. You may already know for renminbi going abroad, it’s just not easy, it’s not just about clearing and settlement to be rooted overseas to become a currency that is widely adopted in trading. It is a very long path. In the future, we will need to continue to focus on improving the processes of clearance and settlement. We need to set a collaboration with exchanges in overseas countries, so that renminbi can truly enter the trading systems abroad.

It should be a trading currency. In order to enhance the position of renminbi in the international world, we will also make use of Shanghai free-trade zone and some new policy launched by the Central Government to centralize operation of assets and other relevant demands for capital.

We will support the flow of cross-border renminbi capital. In various countries at the local exchanges, we will explore offshore renminbi business opportunities and also provide other supporting products and services, such as derivatives. At the same time, we will promote more transactions between renminbi and other international currencies, so the renminbi can truly become an active currency in trading in various large markets.

And our measures have been very well received in Europe. Concerning QDII and QFII products and also Shanghai-Hong Kong Connect, we also provide supporting services. We will continue to establish a comprehensive system. We will focus on this so-called silk-road on the sea, so that we can do well the planning work for clearance of renminbi. BOC Hong Kong has started this around the clock coverage for various places, including Asia and Europe.

So when Shanghai-Hong Kong Connect is officially launched, we will be very much ready. We will do coordinating work and promote a structured and well balanced development of renminbi in other countries. We were fully leveraged on the high level of liquidity in the euro zone and their economic recovery has not yet in full swing. We're going to connect the capital pools in two continents. We're going to encourage and support overseas enterprises in using more of our renminbi loan and deposit opportunities.

So that renminbi can be more widely used in other countries. And, of course, we'll continue to promote the level of acceptance both domestically and internationally and, of course, we'll continue to perfect our white paper. We will issue CRI surrounding the use of renminbi and also ORI. So that BOC can better promote the use of renminbi around the world.

Mei Feiqi

[Interpreted] Thank you, Mr. Yue. Well, we are already overrunning. I have received some questions or requests from the Beijing venue. I have balanced the needs to answer questions and also going to dinner. So we will leave the final question to 21st Century Net [ph]. May I have the final question please? In the fourth row.

Unidentified Analyst

[Interpreted] Good afternoon. I have a question concerning your fees income for the first-half, there's a rapid growth, but on the August 1, you have announced that there will be downward adjustment of the fee level. So can you tell us where such reductions will be focused on, is it going to affect the second-half income on our fees segment, and one about your strategies in the future, concerning growing non-interest income?

Chen Siqing

[Interpreted] That is a very high level question is how to answer, because in the first-half, the growth in fee income was very positive. But beginning from the August 1, we are waiving many fees and charges and that will, of course, affect our income. We need to maintain healthy growth, so it is indeed a very tricky question. I'm going to ask my colleague Mr. Zhang to respond.

Zhang Jinliang

[Interpreted] The Group realized RMB78.2 billion of fees income. We are a very diversified bank. So non-interest income has a higher level of contribution, which is about 30%. I'm not going to repeat the same data offered by Mr. Chen. When we waive certain fees and charges, it is actually more relevant to shouldering corporate social responsibility beginning from the August 1.

BOC has a large number of new cost control measures. We will adhere to guiding prices offered by the government and also other government pricing measures have already been stringently implemented. So for the items involving waivers, Mr. Chen has already taken us through, and I'm not going to repeat that. So, of course, the certain income level may be effective, but for the longer-term, there will be more interactive exchanges promoting healthy and long-term development. I think, this is heart of our direction in transformation and restructuring.

We'll continue to be more adoptive and responsive to the market changes. We will focus more on innovation of our products and services and propel forward our transformation from a more narrow range of services to a wide range of comprehensive services. We will continue to offer cards, clearance, settlement, remittance, et cetera in terms of our business segments. We are also going to focus more on intermediary services and business, cross-border renminbi services and international businesses. We will continue to step up our efforts on innovation to maintain high level of income.

Mei Feiqi

[Interpreted] Thank you. Thank you, Mr. Zhang. Thank you again all friends from the media, because of time constraints, we cannot answer all your questions today. If you have other questions, please contact us anytime and we will make necessary arrangements for you. This is the end of our interim results announcement, and thank you for your concern and support. I hope that you will have all the success in the coming time. Thank you.

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