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Annual Report 2001
 
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Chairman's Message

姜建清行长

2001, the first year of the 21 century, was acclaimed by the world media as "the Year of China".  When world economy was slowing down, China, as an exception, maintained its rapid and healthy growth.  Beijing's successful bid for the 2008 Olympics not only demonstrated China's increasing national strength to the world, but also brought new opportunities of development to the Chinese economy.  The success of the Shanghai APEC meeting proved to the world China's determination and capability to globalize its economy.  China's accession into the WTO furthered up China's involvement in the global economy in a wider range, and thus turned on a new page for China's reforms and opening-up to the outside world. Great changes are taking place in China that will capture the world's attention.

The year 2001 recorded a successful onset of ICBC's drive towards modern commercial bank. Aiming at high profitability and quality, the Bank sped up its growth and improved its internal management by focusing on restructuring and reforms.  It made historical turn in all its businesses, entering into a circle of sound growth.  ICBC disclaims a more dynamic and vigorous look in the financial arena of the new millennium.
 
ICBC achieved remarkable progress in its operations. By year-end 2001, our profits before provisioning reached RMB34 billion, up RMB24 billion over the previous year, reaching a historical high for the Bank. ICBC netted RMB5.89 billion of book profits, up 15.8% over year 2000. It made a total of RMB17.478 billion worth of bad loan provision, up RMB7.356 billion over the previous year and wrote off RMB7.354 billion worth of interest receivables and RMB3.659 billion worth of other financial losses. Consequently, most branches witnessed better financial conditions and operations in the past year.
 
Asset quality also improved remarkably. The entire Bank's NPL ratio for 2001 dropped by 3.59% with total outstanding decreasing by RMB23.43 billion. The quality of incremental loans such as road construction, mortgages and other consumer loans  reached or even exceeded that of the world banking industry. The NPL ratio for new loans extended in 1999, 2000 and 2001 were only 1.1%, 0.47% and 0.22% respectively. The NPL ratio for consumer loans was as low as 0.3%, whereas that for road construction and real estate development loans was only 0.1% and 4.5% respectively.  For such local branches as Shanghai, Beijing and Zhejiang, the NPL ratio for total loans fell below 10%.
 
We witnessed innovation and growth in all businesses. Driven by market growth and customer demand, ICBC sped up its efforts in introducing advanced technology and products from the world banking industry, which enabled us to be more competitive and solid in operational strength. More intelligence-and-technology-intense new businesses such as wealth management, factoring, forfeiting, "Bank-securities Link", network settlement and agency services added to the traditional deposit, lending and remittance businesses. Various RMB deposits increased by 332 billion, up RMB65.9 billion over those of the previous year and RMB loans increased by RMB245.9 billion, with an improved loan structure and higher turnover. Traditional domestic settlement business enjoyed a cutting edge in terms of market share.  While newer businesses such as consumer credit, custody service, electronic banking and commercial bills discounting also rose to the top tier of the domestic market. ICBC has also established close business ties with hundreds of financial institutions both at home and abroad, which has brought about cross selling of services and expanded market opportunities.
 
A major breakthrough was accomplished with further reforms on the management and employment system. More loss-making and highly risky sub-branches were closed and redundant staff were laid off. By year-end 2001, the total number of domestic outlets and the total headcount were reduced to 28,345 and 429,709 respectively, which were 1/3 and 1/4 less than the historical high. Saying goodbye to the extensive-style operation resulting from historical burdens, we are heading towards a more intensive operational model. Drawing on advanced management experience from our international peers, we restructured our internal structures and furthered our reforms on logistics. Besides, we linked our business reforms to the technology advancement. The data center consolidation project integrated the 40-odd computer centers across China into two big data centers located respectively in the North and the South. By launching the comprehensive business processing system, we were able to offer "one-stop service" widely used by international banks. A data warehouse was established which not only provided decision-making support for management, but also strengthened the monitoring capability on various businesses carried on throughout the Bank. The completion of the above three major infrastructures signified the establishment of an advanced financial information technology platform and opened a new page for the development of information management.
 
Applying to international practice, we established a comprehensive business management appraisal system by adopting a unified indicator system and evaluation standard. We took a new approach to our centralized management that ensured direct control and/or supervision over branches in various businesses, internal control and employee performance. We improved our financial accounting system, launched total cost management and made risk provision for consumer loans in accordance with the international five classifications of loans, the first among domestic peers to take such method. Our accounting principles also conformed to international regulations and standards. Information technology helped to standardize the business operations, the risk management and the internal control in line with scientific principles.
 
On the international front, we purchased a listed bank, the Union Bank of Hong Kong in 2000 and renamed it into Industrial and Commercial Bank of China Asia Ltd. (ICBC Asia). In the year 2001, we injected ICBC Hong Kong Branch's major businesses into ICBC Asia and further improved its operation and management. As a result, ICBC Asia's financial strength and market influence improved substantially and it became one of the leading local banks in Hong Kong. We also relocated our treasury center to Hong Kong in good time, taking advantage of the market and talent resources there to expand our foreign exchange business. We encouraged close coordination between our institutions both at home and abroad, speeding up the growth of the Bank's entire international business in particular. The volume of international settlement and foreign exchange sales and purchases of our domestic institutions were increased by USD12.4 billion and USD 6.7 billion respectively. Our overseas institutions netted about USD100 million profits in 2001. Thanks to the increased financial strength and implementation of global operation strategy, ICBC rose up with international reputation. Since 1999, the Bank has been recognized among Fortune's Global 500 for three consecutive years. It has also won such awards as Bank of the Year, Best Domestic Bank and Best Bank of China from The Banker, Euromoney and Global Finance respectively since 2000. In The Banker's 2001 latest listing in terms of tier-one capital, ICBC ranked 7th among the top 1000 banks.
 
The year 2002 is the first year for China to meet its commitment it has made to the WTO. The reforms and opening-up of the Chinese banking industry has entered into a new stage. In face of new challenges and opportunities, we shall follow the decisions made at the National Financial Working Meeting and set up our general goal for development in the next five years. We shall try to further reduce our NPL ratio to less than 10% in the next five years and get rid of all our financial burdens. We shall endeavor to make ICBC a modern financial institution with rational management structure, sound operation mechanism, good financial status and international competitiveness.
 
With firm mind and set goals, we shall go all out for business reforms and innovations and endeavor to improve the corporate governance with thorough reforms in the Bank. We are stepping up every effort to set up a profit-driven, market-and-client-oriented operational mechanism. In accordance with international practice and regulations, we shall transform the bank to be more effective in internal control, more advanced in risk management, more strict in financial accounting system and more scientific in business operations. We shall also commit ourselves to building a world-class information and technology infrastructure, which is to be composed of the huge data warehouse, the comprehensive business processing system and the data center.  The human resources management is to be improved with appropriate incentive and regulative mechanisms for a modern commercial bank.  We shall build a strong and internationally competitive professional team.  Aiming at new business opportunities generated in the process of boosting domestic demands and opening up further to the outside world, and with help of the information technology, we shall accelerate the business innovation and enhance the marketing forces. All our businesses including corporate banking, personal banking, institutional business, intermediary business, electronic banking and investment banking will be marching forward in concert with high profitability and high quality.  Internationally, we continue to prioritize in Hong Kong and extend to all the major international financial centers and major regions.   Our global network enables us to offer full range of services and products both at home and abroad.  We shall make the Bank into a real internationalized modern commercial bank.
 
Looking into the future, we realized the road is long but broad and clear. ICBC is committed to maintaining healthy and stable growth in face of international financial competition, to gaining remarkable progress in the world economic and financial globalization, and to earning its place among the world's leading banks with its excellent business operations and management.  We are mindset towards that goal.


Jiang Jianqing

Chairman and President

Industrial and Commercial Bank of China

January 1, 2002

Financial Highlights

Unit: RMB 100 Million Yuan
 

2 0 0 0

2 0 0 1

growth rate(%)

Operating Performance      
Interest Incomes
1,410.89
1,151.07
-18.42
Interest Expenses
992.60
727.60
-26.70
Net Interest Incomes
418.29
423.47
1.24
Incomes from Securities Investment
198.56
241.13
21.44
Other Incomes
214.15
256.35
19.71
Other Expenses
780.13
862.02
10.50
Profits
50.87
58.93
15.84
Assets and Liabilities items
 
 
 
Total Assets
39,737.37
43,180.71
8.67
Loans
24,135.91
26,594.66
10.19
Total Liabilities
37,863.71
41,270.77
9.00
Deposits
32,485.19
35,804.70
10.22
Owners' Equity
1,873.66
1,909.94
1.94
Index (%)
 
 
 
Profits / Total Assets
0.13
0.14
4.98
Profits / Capital
2.72
3.09
13.44
Interest Incomes / Total Incomes
77.37
69.82
-9.75
Interest Expenses / Total Expenses
55.99
45.77
-18.25

Members of ICBC Executive Committee

The Supervisory Board

The State Council appointed Supervisory Board for ICBC in 2000. The Board supervises ICBC's asset value and quality on behalf of the state.
The supervisory board, composed of the Chairman, full-time members, part-time members and other staff, performs four major functions:
To supervise the implementation of the state's financial and economic laws, rules and regulations;
To examine accounting and management materials in order to verify the integration and legitimacy of financial and treasury reports;
To oversee the operation efficiency, profit distribution, appreciation of the state assets and treasury;
To assess the activities of senior executives and the performance of ICBC, and put forward proposals for promotion and/or demotion, recognition and punishment of senior executives.

Mainline Operations

2001 witnessed a steady and healthy growth in deposits and loans. By the end of 2001, ICBC's various deposits and loans outstanding increased by RMB332 billion and RMB245.9 billion respectively. The loan structure was further optimized with higher turnover.
ICBC's operational income achieved a historical high last year, with profit realized at RMB5.89 billion, increasing by 15.8% from the previous year. The profits before provisioning were realized at RMB34 billion, increasing by RMB24 billion.

I. Corporate Banking

Corporate Deposit Business
By the end of 2001, ICBC's corporate deposits outstanding reached RMB1,564.7 billion, increasing by RMB139.9 billion than the previous year, up by 9.8%. Corporate deposits outstanding took up 44% of the total deposits outstanding.

Corporate Loan Business

As of year-end 2001, ICBC's corporate loans outstanding reached RMB2,449.6 billion, increasing by RMB159.9 billion than the previous year.
In the whole loan profile, working capital loans increased by RMB63.3 billion, with an outstanding of RMB1,790.1 billion, taking up 67.3% of the total loan outstanding. An increment of RMB72.8 billion worth of project finance loans were extended, with an outstanding of RMB541.2 billion, taking up 20.3% of the total loans. Housing finance loans for developers increased by RMB16.7 billion, with an outstanding of RMB95.1 billion, taking up 3.6% of the total loans.
Incremental loans for key and emerging industries amounted to 22% of the total incremental loans, totaling RMB54.8 billion in 2001. Infrastructure loans took up a higher proportion over the previous year. The amount of loans extended in 2001 for infrastructure projects such as transportation, electric power, telecommunications and petrochemical projects amounted to RMB106.7 billion, more than 65% of the total, increasing by 14% than the previous year. These loans have given considerable support to a number of key projects such as the construction of major national and inter-provincial highways, west-to-east power and gas transmission, China Unicom's CDMA, Guangzhou Baiyun International Airport, the Fifth Ring Road of Beijing and the extension of the Shanghai metro system.

In product innovation, a number of new products such as working capital revolving loan and loans with installment repayment of principal and interest were created, decreasing our clients' burden of payment. The buyer's credit business grew to serve a wider range of industries and products. Repurchase Factoring was offered to quality clients with enormous assets, good profitability and great prospects for business growth. Commercial bills discounting business was provided in a wider range, allowing the commercial bills accepted by eligible clients to be discountable at various branches all over China. Syndicated loan business kept a steady growth in that ICBC played key roles in the financing for CNOOC-Shell, Shanghai SECCO and Jiangsu Yangze-BASF projects.
On the loan administration level, ICBC carried out a unified credit line granting mechanism to strengthen credit risk control, setting credit ceilings for 258,900 industrial and commercial clients. The Head Office set unified credit lines for 75 large conglomerates and their related clients, placing our credit exposure to them under effective control. The establishment and operation of a special credit rating and approval center at the Head Office guaranteed a professional, efficient and effective credit service. A credit risk monitoring and control system was established to monitor credit business and loan quality on a daily basis, and it put strict control over generation of non-performing loans from new loans.

 

II. Personal Banking

Individual Savings Deposits
By year-end 2001, the total savings deposits outstanding reached RMB 2,015.8 billion, increasing by RMB192.1 billion over the previous year. Despite the impact brought by the opening of B share market to the local residents in China, the total volume of foreign exchange savings deposits increased by USD1 billion, the total outstanding reaching USD14.3 billion. Increasing steadily, savings deposits continued to function as the major funding source for treasury operations.

Personal Intermediary Services
ICBC provided payroll payment services for 374,000 companies to their 61.44 million employees with an aggregate volume of RMB461.5 billion. A total of 529 million payments and collections, valued at RMB89.1 billion, were recorded for the year. Securities-and bond-trading-related agency business kept robust growth. As many as 270,200 clients now use our "Bank-securities Link" system to transfer accounts to 1,577 securities companies. What's more, treasury bonds of RMB60.5 billion were sold out by ICBC, and agency collection and payment of insurance premiums amounted to RMB 41.7 billion. Cross sales of insurance products also witnessed substantial increase.

 

Consumer Credit Business
Inresponse to the policy of stimulating the internal demand, ICBC made efforts to develop the market of consumer credit business, aiming at optimizing the loan structure. The amount of consumer loans increased by RMB86 billion, with the outstanding reaching RMB209.9 billion, taking up 7.9% of the total loans outstanding.
This portion of loans kept high quality all through the year, with a mere rate of 0.3% of non-performing loans. Among the consumer loans, ICBC's residential housing loans developed rapidly. The outstanding of residential housing mortgage loans totaled RMB186 billion, accounting for 66% of the Bank's total housing loans.

 

Bank Card Business
The number of Peony cards issued totaled 79.93 million, a net increase of 5.17 million over the previous year. Among them, the number of credit cards issued was 6.48 million, increasing by 480,000, up 8% from the previous year; the number of international Peony cards issued totaled 350,000, a net increase of 220,000, up 169% from the previous year. The aggregate transactions for the year were valued at RMB978.2 billion, up 9% over year 2000. The accumulative transactions of international bankcard acquirings reached RMB2.6 billion, up 37% over the previous year.
Catering to the need of the market, ICBC issued a series of new cards to capture the most important customer market. They included eony Master International Debit Card eony Jinmao International Co-branding Card Peony VISA Winter Olympics Debit Card Peony AIA Co-branding Credit Card and eony Guoshou Co-branding Card.
Peony card payment system was improved considerably. Cash can be deposited and withdrawn from one account across 319 cities through the Peony MoneyLink cards. The number of city branches which is able to accept Peony International Card and billing for foreign cards increased from 56 at the end of year 2000 to 116 this year. The number of branches linked to the credit card cross-region automatic authorization system increased from 156 to 298; Credit cards, Money Link cards and international cards are acceptable at almost all banking counters, ATMs and POS terminals.

III. Intermediary Business
In addition to integrating the present intermediary business, ICBC also quickened its steps of product innovation by further developing new intermediary product markets such as custody service for open-ended funds and gold trading settlement. The revenue of intermediary business totaled RMB3,065 million, up 18% from the previous year.

Custody Service
ICBC made new breakthrough in the fund custody service. It was the distributor and custodian of one of the first open-ended funds in the country—South Robust Growth Fund. The number of funds in custody reached 16, with a total of RMB26 billion assets under custody. All of ICBC's custody business indicators mounted to the top of the country's financial industry for four consecutive years.

Trust Agency Services
ICBC's trust agency services maintained a steady increase. The accumulative agency export credit loans made for China Ex-Im Bank added up to RMB21.63 billion. The actual loans issued for the year amounted to RMB5,223 million, the outstanding of which was RMB8,960 million; the letter of credits negotiated on behalf of China Ex-Im Bank added up to USD1,300 million. The settlements made for State Development Bank added up to RMB30 billion and loans under ICBC's management totaled RMB15.9 billion. To disburse the compensation fund to the migrants affected by the Three-Gorges Project, ICBC fulfilled RMB1,161 million of payment accumulatively, of which RMB430 million were disbursed in 2001, up 59.24% compared with the year before. The entrusted loans of the year totaled RMB13 billion, with the outstanding of RMB11.728 billion. The total entrusted loans issued in the last year and the outstanding were, respectively, 10 and 12 times as those in the previous year.

Agency Settlement Service
So far ICBC signed settlement agency service agreements with 27 banks, including policy banks, joint-stock banks and foreign banks. A total of 254,000 bank bills were accepted in the last year, or RMB62.1 billion. The bank also conducted 1.39 million transactions of agency payment settlements, or RMB334.7 billion.
Network settlement grew rapidly. In 2001, ICBC signed network settlement agreements with more than 30 conglomerate clients such as China Mobile and CNPC. It also signed capital settlement agreements with three futures exchanges, taking up a market share of more than 50 percent.
Securities agency services achieved great progress. In 2001, ICBC signed framework agreements of cooperation with 14 securities companies. After the ordination of Regulation of Customers' Transaction Settlement by China Securities Regulatory Commission, ICBC signed main bank agreements with 39 securities companies, and also signed agreements with 90 securities companies to be the legal person custodian, taking more than 50 percent market share. Bank-Securities Link service witnessed a quick growth. There are outlets providing such service under each tier-one branch and branches directly controlled by the head office. The number of outlets providing SSE shareholder code card service increased to 600. Through the RMB real-time clearing system and SWIFT, ICBC provided B-share market settlement and ensured that the fund transfer could be completed within 2 hours. ICBC has officially become a member of the Shanghai Gold Exchange.

IV. International Business
The year witnessed a sound development of the bank's international business and good performance of its overseas branches. ICBC's foreign exchange assets totaled USD36.8 billion, up by USD5.6 billion than the previous year. The bank netted an aggregate profit of USD561 million, of which 100 million was made by the overseas branches, hitting ICBC's record high.

Foreign Exchange Deposits and Loans
The bank's various foreign exchange deposits outstanding stood at USD23.9 billion, USD850 million higher than the previous year. Foreign exchange savings deposits outstanding reached USD14.3 billion, with an increase of USD1 billion. Foreign exchange corporate deposits outstanding totaled USD9.6 billion.

International Settlement
International settlement increased greatly over the past year. The total transaction amounted to USD111.9 billion. The domestic and overseas branches handled USD77.5 billion and USD34.4 billion worth of international settlements respectively. USD42.3 billion of foreign exchange purchases and sales were conducted. The international settlements and foreign exchange trading grew by USD12.4 billion and USD6.7 billion respectively as compared with 2000.

Foreign Exchange Trading
The foreign exchange trading amounted to USD254 billion. At the year-end, ICBC conducted USD20.7 billion worth of foreign exchange trading for customers' accounts, up 19 percent than the previous year. USD14.6 billion worth of local currency exchange was conducted, up USD2.82 billion than the previous year, with a net profit of USD175 million, an increase of USD89 million, a record high for the Bank.

Overseas Operation and Correspondent Banks
ICBC saw a breakthrough in the integration of overseas operational network and acceleration of its international operation. Major achievements included the injection of ICBC Hong Kong Branch's major business into ICBC Asia and the establishment of ICBC Treasury Center (Hong Kong).
At the year-end, the aggregate assets of ICBC's six overseas branches and one subsidiary reached USD4.64 billion, with an increase of 28.3% on the year-on-year basis. None of the overseas branches got into red last year. The profits generated totaled USD100 million. Additional 242 correspondent banks were added to the bank's large correspondent banking network during the year, which made the number of correspondent banks reach 778. Today, ICBC's correspondent banking network covered 87 countries and regions on 6 continents around the world.

V. Cooperation with Financial Institutions
While strengthening its competitive edge, ICBC enhanced its cooperation with domestic and foreign banks to face up the challenges arising from China's entry into WTO. Having partnered with millions of banks at home and abroad, the Bank signed framework agreements of cooperation with China Ex-Im Bank, Everbright Bank of China and Huaxia Bank, and began to work with the Russia's Bank for Foreign Trade-Venshtorgbank, Hanvit Bank and Sparbanken Forenings-SWEDBANK on all fronts in 2001. The collection and settlement business covered all domestic joint-stock banks, regional commercial banks and the Chinese offices and branches of most foreign banks.
Tactic alliance was established with insurance companies and securities houses. Last year, ICBC signed cooperation agreements with Pacific Insurance Company and Taiping Life Insurance Company, and signed clearing agreements with three futures exchanges, and framework agreements of cooperation with Beijing Securities, Huaxia Securities, CITIC Securities, Xiangcai Securities and other ten securities companies. All these efforts further enhanced ICBC's irreplaceable position in securities fund clearing business.

VI. Down-sizing and Human Resources Management
The operation was further intensified in 28,300 outlets last year by consolidating 3,400 money-losing offices that showed no sign of turnaround. A real commercial bank structure took its initial shape after optimizing the internal organization.
Personnel reform was carried forward. ICBC introduced a recruitment mechanism, performance evaluation mechanism and human resource management mechanism that functioned well in commercial banks. Staff now needed to compete for their positions and were designated through standard procedures. Labor force reform was continued together with the downsizing program. Altogether 47,000 people were laid off, streamlining the personnel structure. ICBC now had 429,000 employees under standardized labor contracts who were better qualified for their jobs.
The year also saw the launching of a comprehensive staff training program. ICBC improved its training system in line with modern commercial banking operations. Targeted trainings modeled by project management were conducted and programs for heads of branches or sub-branches initiated as well. The first IMBA program targeted at senior management was held in cooperation with Hong Kong University and Fudan University. Altogether 1,046,219 people participated in the training program. The online education was also conducted at some branches through advanced computer network.

Risk Management

I. Credit Risk Management
ICBC established a credit risk management committee, which further perfected the credit risk management, and an asset quality control and monitoring mechanism, which ensured a full-spectrum examination of non-performing assets, ranging from ordinary loans to other assets. The risk reporting system analyzes and discloses quality of the loans on a regular basis. Thanks to the use of advanced technology, the credit management computer system was further perfected with risk alert and conversion functions. It performed effective real-time monitoring on the quality and operations of the credit assets. Penalties like early-warning, suspension and close-down of business are imposed on misbehaviors in mortgages, consumer loans, bank acceptance and bank cards. The credit authorization management was further improved, with more clearly-defined credit coverage and a series of credit line control from ceiling credit-line, credit line for clients and specialized line. Credit Policy Committee at the Head Office level was established to strengthen the credit decision-making mechanism. A panel of experts on credit were selected for the Credit Assessment and Approval Center and it thus improved the quality and efficiency of the credit decisions. A new credit rating system for corporate clients was put into effect and standardized the credit rating in the Bank. A total of 211,605 key clients were rated through the new system. Aiming at sound operation and to reflect authentic financial status, ICBC adopted international standards to make provisions for consumer loans. In consequence, both the percentage and absolute amount of NPLs declined in 2001.

December 31, 2001
 
Unit: RMB 100 Million Yuan
Item
2 0 0 1
2 0 0 0
 
Outstanding Percentage (%)
Outstanding Percentage(%)
Total Loans
26,594.66
-
24,135.91
-
Five-Category Classifications
Performing
14,475.47
54.43
11,423.53
47.33
Special Mention
4,199.30
15.79
4,402.39
18.24
Sub-standard
1,691.42
6.36
2,382.21
9.87
Doubtful
4,497.16
16.91
4,482.04
18.57
Loss
1,731.31
6.51
1,445.74
5.99
Old Classification
Normal
19,757.17
74.29
17,064.09
70.70
Overdue
446.79
1.68
1,356.44
5.62
Doubtful
5,935.93
22.32
5,162.67
21.39
Bad Loans
454.77
1.71
552.71
2.29

Note: ICBC classified its lending in both international five-category classification standard and old Chinese classification standard in 2001. The non-performing loans outstanding was RMB791.989 billion according to the former five-category approach and RMB683.749 billion with the latter one, RMB39.01 billion and RMB23.433 billion less respectively than the previous year. The non-performing ratio was 29.78% and 25.71% respectively, down 4.65% and 3.59% from the previous year.

II. Liquidity Management
ICBC managed its liquidity level by level. On the one hand, we strengthened the asset portfolio management and increased the proportion of quality bond with favorable liquidity in the total assets, balancing the objectives of liquidity and profitability. On the other hand, we were keen on developing capital market investments, getting financed from the money market, and developing commercial paper related businesses, margin finance and inter-bank borrowing and lending. On the primary bond market, our total purchase of various government and financial bonds recorded at RMB59.4 billion. Inter-bank trading was valued at RMB830.9 billion. In the open market activities, we won the bidding of treasury securities accumulatively worthy of RMB208.5 billion, topping among all domestic financial institutions. ICBC adopted a centralized administration model in liquidity management. The branches must have a reserve account for payment with the head office, through which the head office may implement liquidity control over the branches. Intra-bank clearing was completed simultaneously and in event of long or short position, the head office would be responsible for moving the fund to balance its liquidity position.

III. Market Risk Management

RMB Interest Rate Risk Management
ICBC continued to structure its asset and liability management system and improve the gap management which focuses on maturity and effective continuity with explicit regulations on interest rate risk management and monitoring procedures to get the Bank prepared for the forthcoming liberalization of interest rate. We are building a large professional interest rate risk management team, and constructing the IT infrastructure. We also perfected our regular monitoring system on interest rate structure by setting up a floating interest rate indexes to create a sound basis for RMB interest rate risk management.

Foreign Exchange Interest Rate Risk Management
ICBC adjusted its interest rates for large loans and deposits in foreign currency in view of the interest rate changes on the international financial market. On the basis of analyses and utilization of risk control tools, ICBC rationalized its foreign currency pools of assets and liabilities, targeting at effective control of the foreign exchange interest rate risks.
In terms of foreign exchange treasury management, ICBC used Reuter Kondor+ risk management system and Bloomberg bond trading management system, through which real time monitoring and unified credit line management was conducted in foreign exchange trading, money market business and fixed income portfolio at the head office.

IV. Internal Control
We emphasized on improvement of management through risk hedging approaches and internal control. By playing the role of the six regional commissioner's offices to the fullest extent, large-scale compliance, specialized auditing on financial prudence, loan quality and computer appliance were conducted respectively. The problems hence disclosed were settled and tracked. The acceptability of ICBC's bank cards was monitored and regulated. Comprehensive appraisal for internal control over tier-one branches was implemented. A total of 7,317 auditing tasks were finished by the end of last year, with 61,896 pieces of advice put forward on auditing and supervision.

Management and Innovation

I. Monitoring and Management Mechanism
A new monitoring mechanism was adopted, which greatly enhanced the supervision and control over total cost. The head office not only put a direct control over tier-one branches, but also monitored tier-two branches, whereas the tier-one branches monitored sub-branches while putting a direct control over tier-two branches. In like manner, the tier-two branches directly controlled sub-branches while monitoring the performance of the savings and banking offices. All this was accomplished by an advanced computer network that connected the whole bank. In this way, effective control and supervision over the asset quality, profits, costs, compliance and performance of business executives were enforced. When anything irregular or illegal happened with those institutions under control and/or supervision, measures like warning, suspension or closing-down of business would be implemented accordingly so as to minimize the risks and optimize resources.

II. Credit Management System
A real-time monitoring and monthly reporting system was established for credit business, which enabled the tracking down on the quality of loans extended on a daily basis. The fast-responding credit risk management mechanism played a major role in regulating credit management and putting effective control over credit risks. By the end of 2001, an aggregate of 478,700 loans worth of RMB1,613.2 billion were under effective monitoring. The 2001 NPL ratio for incremental loans was only 0.22%, with 96% of the new loans extended to AA and/or AA+ clients.

III. Overseas Restructuring
In 2001, the major assets of ICBC Hong Kong Branch — a total of HKD13 billion — were successfully injected into ICBC Asia. After the restructuring, the total assets of ICBC Asia exceeded HKD40 billion with the NPL ratio as low as 6.8%. It thus became a quality bank with the bulk of business in syndicated lending, offering wholesale and retail banking services in parallel. ICBC Asia acted as a flagship as ICBC was moving forward with its expansion of overseas businesses.

The trading floor of the head office was relocated to Hong Kong in line with the international practice of treasury operations. The treasury business management was thus centralized, a successful preliminary step towards the establishment of a global treasury network.

IV. E-Banking Business
A series of marketing activities were carried out for electronic banking services, which raised not only the brand but also the market shares. The spectrum of Internet Banking services was further expanded, with a series of such new products as personal remittance, Moneylink Card shopping payment and Internet remittance. Our Internet Banking service covered a total of 292 cities around China. Corporate finance products played a major role for a considerable number of quality clients like large conglomerates, multinational firms and financial institutions in their efforts to implement efficient and effective internal financial supervision and cost control. ICBC established a reputable brand "95588" for the call center. The call centers covered approximately 300 cities and offered such business as accounts inquiries, money transfer, fund transfer between banks and securities companies, foreign exchange trading, "Bank-Securities Link", agent payment, etc. Enterprise banking, mobile phone banking and self-service banking were developed rapidly. The total transaction volume via electronic banking reached RMB3.62 trillion, taking the lead among all domestic peers. The transaction volume via Internet Banking exceeded RMB640 billion, an increase of 40 times over the previous year, and telephone banking transaction volume exceeded RMB250 billion, 6 times that of 2001.

Information Technology

I. Data Center Consolidation
The Data Center Consolidation Project was well on the way in 2001. The current 40 data centers in ICBC will gradually be integrated into 2 connected ones, one in the South and the other in the North, providing back-up to each other. The processing capacity of the mainframe exceeded 5,000 MIPS, making the centers among the most advanced ones in international banks. By the end of 2001, the data were processed centralizedly for 19 branches and the Bills Processing Center on a standard and information-sharing basis.
To meet the consolidation's needs, the network technology and equipment management was also improved. Technical upgrading was completed on tier-one network. A network management system was applied to enhance the operation security of the entire network.

II. Comprehensive Business Processing System
The corporate banking sub-system was applied in 35 tier-one branches and branches directly controlled by the head office and 317 tier-two branches. Personal banking and bank card sub-systems (integrated edition) was also installed in 97 tier-two branches at 24 tier-one branches. As a result, there was a powerful banking application platform in ICBC, which effectively supported the reform and development of business operations.

III. Operation Computerization
With the progress of data center consolidation, the capacity of the mainframes and self-service banking were increased. 80 self-service banks were newly built and as many as 1,014 million deals, on a monthly basis, were transacted on ICBC's 11,863 ATMs and 70,223 POS terminals.

Financial Statements

1. Consolidated Balance Sheet

Dec.31,2001

Unit: RMB 100 Million Yuan

Assets

2 0 0 1

2 0 0 0

Cash
258.45
301.86
Deposit in Central Bank
3,479.45
2,958.12
Due from Other Banks
354.83
253.91
Lending to Other Banks
1,298.75
1,239.00
Loans
26,888.77
24,319.44
    Short-term
16,160.67
15,431.51
    Medium & Long-term
10,728.10
8,887.93
Less: Allowance for Credit Losses
86.86
129.79
Interest Accrued
479.57
591.73
Investment in Securities
7,998.18
7,893.11
Fixed Assets
852.44
937.61
Less: Accumulated Depreciation
206.28
201.90
Other Assets
2,072.55
1,815.36
Total assets
43,389.85
39,978.45

LIABILITIES

2 0 0 1

2 0 0 0

Deposit
36,121.94
32,667.92
    Short-term
17,943.36
16,061.06
    Long-term
18,178.58
16,606.86
Due to Other Banks
2,890.54
3,119.05
Amount Borrowed from Other Banks
210.93
157.92
Borrowings
334.04
239.08
Issued Bonds
13.12
0.21
    Short-term
 
 
    Long-term
13.12
0.21
Other Liabilities
1,890.01
1,907.71
Total Minority Shareholders' Equity
16.74
11.50
Owners' Equity
1,912.53
1,875.06
    Paid-in Capital
1,674.17
1,674.17
    Capital Reserves
11.48
12.07
    Reserve Fund
147.61
135.09
    Undistributed Profit
79.27
53.73
Total liabilities and owners' equity
43,389.85
39,978.45

2. Balance Sheet

Dec 31,2001

Unit: RMB hundred million Yuan

ASSETS

2 0 0 1

2 0 0 0

Cash
257.59
295.02
Deposit in Central Bank
3,479.17
2,957.66
Due from Other Banks
358.03
238.51
Lending to Other Banks
1,456.88
1,207.48
Loans
26,594.66
24,135.91
    Short-term
15,999.04
15,371.69
    Medium & Long-term
10,595.62
8,764.22
Less: Allowance for Credit Losses
80.46
111.14
Interest Accrued
514.65
588.19
Investment in Securities
7,944.52
7,925.37
Fixed Assets
840.77
926.16
Less: Accumulated Depreciation
204.02
200.01
Other Assets
2,018.92
1,774.22
Total assets
43,180.71
39,737.37

LIABILITIES

2 0 0 1

2 0 0 0

Deposit
35,804.70
32,485.19
    Short-term
17,918.97
16,039.86
    Long-term
17,885.73
16,445.33
Due to Other Banks
2,932.35
3,086.35
Amount Borrowed from Other Banks
319.94
151.08
Borrowings
327.26
240.01
Issued Bonds
0.27
0.21
    Short-term
 
 
    Long-term
0.27
0.21
Other Liabilities
1,886.25
1,900.87
Owners' Equity
1,909.94
1,873.66
    Paid-in Capital
1,674.17
1,674.17
    Capital Reserves
11.47
12.04
    Reserve Fund
147.61
135.09
    Undistributed Profit
76.69
52.36
Total liabilities and owners' equity
43,180.71
39,737.37

3. Consolidated Income Statement

End of 2001

Unit: RMB 100 Million Yuan

Item

2 0 0 1

2 0 0 0

OPERATING INCOME
1,641.15
1,827.02
    Interest Income
1,162.60
1,423.14
    Inter-bank Income
192.08
161.15
    Fee & Commission Income
35.51
35.25
    Bond Interest Income
241.64
200.91
    Exchange Income
6.71
3.86
    Other Operating Income
2.61
2.71
OPERATING EXPENSES
1,497.29
1,667.66
    Interest Expenses
735.28
1,003.04
    Inter-bank Expenses
130.54
116.52
    Fee & Commission Expenses
2.86
3.33
    Operating Expenses
388.60
386.31
    Other Operating Expenses
240.01
158.46
OPERATING PROFIT
143.86
159.36
    Investment Income
1.10
1.71
    Non-operation Income
24.50
23.86
    Non-operating Expenses
17.74
9.16
    Business Tax
89.28
122.88
    Minority Shareholders' Income
1.19
0.69
TOTAL PROFIT FOR THE YEAR
61.25
52.20


4. Income Statement

End of 2001

Unit: RMB 100 Million Yuan

Item

2 0 0 1

2 0 0 0

OPERATING INCOME
1,621.81
1,798.04
    Interest Income
1,151.07
1,410.89
    Inter-bank Income
190.23
156.11
    Fee & Commission Income
30.65
26.08
    Bond Interest Income
241.13
198.56
    Exchange Income
6.55
4.15
    Other Operating Income
2.18
2.25
OPERATING EXPENSES
1,483.26
1,641.49
    Interest Expenses
727.60
992.60
    Inter-bank Expenses
130.63
115.09
    Fee & Commission Expenses
2.85
3.46
    Operating Expenses
384.61
383.27
    Other Operating Expenses
237.57
147.07
OPERATING PROFIT
138.55
156.55
    Investment Income
2.26
1.71
    Non-operation Income
24.48
23.85
    Non-operating Expenses
17.16
8.54
    Business Tax
89.20
122.70
TOTAL PROFIT FOR THE YEAR
58.93
50.87


5. Consolidated Cash Flow Statement

For Year 2001

Unit: RMB 100 Million Yuan

Item

AMOUNT

CASH FLOWS FROM OPERATING ACTIVITIES
 
Interest Income from Loans
1,239.65
Inter-bank Income
61.54
Other Operating Income
44.83
Net Increase in Current Deposit
1,887.25
Net Increase in Fixed Deposit
1,573.58
Borrowings from Central Bank
91.96
Sub-total of Cash Inflows
4,898.81
Interest Paid for Deposit
760.74
Other Operating Expenses
244.64
Cash Paid to and on Behalf of Employees
157.01
Net Increase in Short-term Loans
741.98
Net Increase in Medium and Long-term Loans
1,840.17
Decrease in Due to Other Banks
192.95
Increase in Lending to Other Banks (Less: Borrowings from Other Banks)
6.75
Payments of All Types of Taxes
95.45
Cash Paid Relating to Other Operating Activities
579.01
Sub-total of Cash Outflows
4,618.70
Net Cash Flows From Operating Activities
280.11
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
 
Interest Income Received from Bond Investment
162.46
Dividends or Profits Received From Investment
2.09
Sub-total of Cash Inflows
164.55
Cash Paid to Acquire Fixed Assets, Intangible Assets and Other Long-term Assets
91.11
Cash Paid to Acquire Equity Investment
55.93
Cash Paid to Acquire Bond Investment
320.97
Sub-total of Cash Outflows
468.01
Net Cash Flows From Investing and Financing Activities
-303.46
NET CASH FLOWS FROM UNUSUAL ITEMS
7.50
NET INCREASE IN CASH AND CASH EQUIVALENTS
-15.85
Add: Cash and Cash Equivalents at the Beginning of the Period
6,824.70
Cash and Cash Equivalents at the End of the Period
6,808.85
of which: Cash and Bank Deposits
258.45
Deposit in Central Bank
3,479.45
Due from Other Banks
127.01
Short-term Investements in Securities
2,943.94

6. Capital Adequacy Ratio

Unit: RMB 100 Million Yuan

Item

2 0 0 1

2 0 0 0

Tier 1 Capital
1,909.94
1,873.66
Total Capital
1,990.40
1,984.80
Total Risk-weighted Assets
24,460.59
24,643.31
Tier 1 Capital Adequacy Ratio (%)
5.76
5.38
Total Capital Adequacy Ratio (%)
5.76
5.38

7. Audit Report

Zhong Tian Hua Zheng (Jing) Shen [2002] No. 062

Industrial and Commercial Bank of China:
We were engaged to audit the accompanying consolidated balance sheet of Industrial and Commercial Bank of China ("the Bank") as of December 31, 2001, the related consolidated income statement and the consolidated cash flow statement for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on the audit scope set by engagement letter. We conducted our audit in accordance with Independent Auditing Standards for Chinese Certified Public Accountants. Our audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the practical circumstances of the Bank.
 
In our opinion, such financial statements are prepared in conformity with "Accounting Standards for Business Enterprises" and "Accounting Regulations for Financial Enterprises " and, in all material respects, present fairly the financial position of the Bank as of December 31, 2001 and the results of its operations and cash flows for the year then ended. The accounting policies adopted follow the consistency principle.

ZHONG TIAN HUA ZHENG CPA CO., LTD
CHINESE CERTIFIED PUBLIC ACCOUNTANT
March 25, 2002
BEIJING, CHINA



8. Notes to The Financial Statements

(1) FINANCIAL ACCOUNTING SYSTEM
The following rules and regulations as set forth by the Ministry of Finance in China are applicable to the Industrial & Commercial Bank of China (ICBC): General Financial Rules for Business Enterprises, Accounting Standards for Business Enterprises, Financial Regulations for Financial and Insurance Enterprises and Accounting Regulations for Financial Enterprises.
 
(2) FINANCIAL MANAGEMENT SYSTEM
ICBC is carrying out unified accounting and management by different levels. According to the Bank Law of People's Republic of China and regulations set forth by Ministry of Finance in China, ICBC assumes full responsibility for the profits or losses of the entire bank.
 
(3) ACCOUNTING PERIOD
The accounting period of ICBC is identical with the calendar year, commencing on January 1 and ending on December 31.
 
(4) BOOKKEEPING METHOD
ICBC adopts debit-credit system as its bookkeeping method.
 
(5) ACCOUNTING PRINCIPLE
ICBC recognizes its fiscal revenue and expenditure in accordance with accrual basis principle.
 
(6) VALUATION STANDARD
The assets of ICBC are valued at their historical costs and generally are not reevaluated at the end of each fiscal year.
 
(7) BOOKKEEPING UNIT AND CURRENCY EXCHANGE
ICBC uses RMB as the reporting currency. Assets, liabilities, losses and profits denominated in foreign currencies are converted into RMB at the exchange rate announced by the People's Bank of China at the end of the year (generally on December 15). The exchange rate for 2001 is US$1=RMB8.2767.
 
(8) PROVISIONS
The calculation and recording of provision for credit losses are based on the regulations issued by the Chinese Ministry of Finance for commercial banks.The provisions calculated by all of the branches abroad are in conformity with the related regulations of their country and region.
 
(9) DEPRECIATION OF FIXED ASSETS
ICBC adopts a corresponding straight-line method of depreciation for different categories of fixed assets. The depreciable life of the various categories of fixed assets is determined as follows: 30 years for buildings and fixtures; 4-6 years for motor vehicles; 3-5 years for computers and 5 years for other facilities.
 
(10) PROFIT DISTRIBUTION
ICBC distributes its profits centrally by the Head Office in line with the regulations set by the Ministry of Finance:
(1.)It pays income tax at the rate of 33%.
(2.) It sets aside 10% of its after-tax profit as lawful surplus reserve.
 
(11) REPORTING SYSTEM OF TOTAL ASSETS, TOTAL LIABILITIES, TOTAL INCOMES AND TOTAL EXPENSES
ICBC showed the write-off difference of internal receivable and payable accounts in the Balance Sheet as of December 31, 2001.
 
(12) The Content of ICBC's Financial Statements
The financial statements of ICBC included all of the branches in China and other countries. The inter-bank receivables and payables have already been written-off.
 
(13) THE CONTENT OF ICBC'S CONSOLIDATED FINANCIAL STATEMENTS
The consolidated Financial Statements included all of the businesses in China and abroad, and other banks owned by ICBC in excess of fifty percent of their equity ownership, namely ICBC (Asia) Limited Company, Industrial and Commercial East Asia Finance Holding Limited Company, Qingdao International Bank, Chinese Mercantile Bank and IBPS. The inter-bank receivables and payables have already been written-off.

Subsidiaries

Industrial and Commercial Bank of China(Asia) Ltd.
In 1999, ICBC purchased a listed bank-the Union Bank of Hong Kong and renamed it Industrial and Commercial Bank of China (Asia) Ltd. (ICBC Asia). Before the acquisition, ICBC Asia's NPL ratio was as high as 31.4% and it ran in loss of HKD540 million. With the injection of ICBC Hong Kong Branch's major business and two years' restructuring, the financial strength and market image of ICBC Asia improved remarkably. By the end of last year, the total assets value exceeded HKD43.5 billion, with NPL ratio dropped from 23% to 6.8% within a year's time. The total profit reached HKD330 million. It is by now one of the top local banks in Hong Kong.

Industrial and Commercial East Asia Finance Holdings Ltd.
As the investment banking arm of ICBC, Industrial and Commercial East Asia Finance Holdings Ltd. (ICEA) has a wide business scope that covers equity capital market, debt capital market, direct investment, research, principal trading, investment brokerage for institutional investors and retail brokerage. ICEA is particularly strong at its core business in the equity capital market. It acted as sponsor for seven corporations to get listed on the Main Board and GEM Board of Hong Kong. It ranked 7th in the role of sponsor and lead underwriter last year. The underwriting of the Xin'ao Gas on the GEM Board was awarded the best IPO for Asia SMEs. ICEA's retail business also ranked among the top 20 Hong Kong banks in terms of trade volume. By the year-end, ICEA had a total assets of HKD1.69 billion and recorded HKD130 million in profits before tax.

Qingdao International Bank
ICBC and Korea First Bank jointly established Qingdao International Bank (QIB) in June 1996. QIB has a registered capital of USD36 million, evenly shared by both sides. As of the end of 2001, its total assets and profits reached USD82.94 million and USD130 thousand.

The International Bank of Paris and Shanghai (IBPS)
As the first joint-venture bank in Shanghai, the International Bank of Paris and Shanghai (IBPS) was established in November 1992, with a registered capital of USD60 million. ICBC and BNP share 50% of its stake each. Targeting at state-owned large and medium-sized enterprises, joint-stock companies, transnational corporations and foreign-invested companies, IBPS has a remarkable performance. By the end of 2001, its total assets reached USD157 million, with a total profits of USD910 thousand.

Chinese Mercantile Bank
Founded in September 1993 by Hong Kong Chinese Bank, CTS Hong Kong and ICBC, Chinese Mercantile Bank has a registered capital of USD30 million. The three sides hold 40%, 30% and 30% of its total stake respectively. The registered capital of Chinese Mercantile Bank now grows to USD85.3 million, 75% of which being held by ICBC, and the rest by Hong Kong Chinese Bank. By the year-end, the total assets value reached USD217 million, with a total profits of USD200 thousand.

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