review of operations · recognizing the potential of this structure, divisional management took a...

REVIEW OF OPERATIONS

International Bank of Asia Limited Annual Repor t 200121

RETAIL BANKING

Retail banking forms the core of IBA’s business. The branch network serves as

the infrastructure for delivering the complete range of the Bank’s products and

services, deposits generated in the Retail Banking Division provide the bulk of

the Bank’s funding, and its systems support the majority of business activities.

With 24 branches, including 4 Superbranches, this network is a key par t of

IBA’s community presence and image.

Recognizing the potential of this structure , divisional management took a

number of steps to exploit these strengths, launching new products,

upgrading branches and expanding the customer base .

For almost four decades of interest rate regulation, the final removal of

restrictions on deposits in July enabled IBA to come out with one of the

most exciting banking products in Hong Kong in

decades. Launched on 3 July 2001, the Magic Money

Manager, commonly referred to as the 3M Account,

provides the convenience of a checking account with

the yield of a savings account. Paying a tiered interest

rate based on the level of balances in the account, the

3M relieves customers of the necessity of managing

two accounts, ending the time consuming task of

avoiding overdrafts and idle balances. The response from

customers has been gratifying, showing that the 3M

fills an important gap in consumer products. In less than

six months low cost deposits increased by HK$1 billion,

and 20,000 new accounts were opened. The increase in current/savings

accounts was a major contr ibutor to the decline in cost of funds during

2001. 3M is IBA’s flagship deposit product for the new millennium, with

other innovative products for thcoming in 2002.

The success of the Causeway Bay Superbranch served as the model for

three additional superbranches in 2001. Stimulated by survey results which

concluded that bigger premises, and in particular wide frontage, provided

clients and potential new customer s with a better impression of product

offerings and a clearer picture of IBA’s financial strength, the superbranch

concept is based on premises twice the size of our average branch space

of 1,000 square feet. The challenge is to locate strategic sites of the proper

size. Where possible , Wealth Management Centers (see Investment Banking

section) are integrated into the Superbranch.

Core infrastructure

Launch of Magic Money Manager Account

Magic Money Managerattracts new accounts

Superbranch network


Annual Repor t 2001 International Bank of Asia Limited 22

In May the Mei Foo Branch was upgr aded to a

Superbranch by doubling its size through the purchase

of the adjoining premises. In August the Tsuen Wan

Superbranch, with 10,000 square feet of self-owned

space on 3 floors, was inaugurated, merging our Tsuen

Wan and Tai Ho Road branches. This site also serves as

the regional headquarters for the New Territor ies, our

most rapidly expanding retail operation. The Tsuen Wan

Superbranch also incor porates a Wealth Management

Center and Consumer Finance Center, as well as an

office for credit card services. In November the

Whampoa Gardens and Hunghom branches were

merged with the acquisition of the site adjacent to the

original Hunghom Branch.

In a highly competitive environment, operating efficiency

is a must. The creation of the superbranches through

mergers, and the merger of our Wanchai and Hennessy

Road branches in the existing Wanchai Branch premises,

helps to achieve economies of scale. Other measures

to streamline operations, including the centralization

of processing while continuing to provide customers

with the convenience of dealing with their local

branches, is described in the Operations and Suppor t

section of this report.

Retail Banking’s primary customer base is comprised of the individuals

who live and work in the neighborhoods ser ved by our branches.

Branches also suppor t businesses in their local community, often with

relatively simple transaction processing. In recognition of the large

number of small and medium size enterpr ises, or SMEs, that are the

lifeblood of Hong Kong and the special needs they have , a commercial

lending team staffed by experienced officers was established within retail.

Exploiting their special expertise, they are able to assist branch managers

and business development officer s in identifying new customers and

formulating the appropriate credit facilities to support these corporate

customers. This new team fur ther diversifies the revenues of the Retail

Banking Division, and increases IBA ’s penetration of this impor tant

business segment.

SME Lending

Mei Foo Superbranch (top);

Hung Hom Superbranch (bottom)



The superbranches and traditional br anches have

prov ided an e f fec t i ve de l i ver y channe l , no w

supplemented by the commercial lending team. While

internet banking has been slow to win acceptance in

Hong Kong given the widespread presence of bank

branches and the preference for face-to-face contact,

the trend toward growing volume in electronic banking

is clear. IBA initiated the Vir tual ATM in March 2000,

enabling customers to conduct simple transfers from

their home. Through the Internet platform of Net

Alliance, IBA’s joint venture with three other banks

and a leading ISP, an expanded range of Internet banking services was

introduced in 2001. This collaborative effor t not only enables IBA to enjoy

the cost savings on product development and constant update of security

measures through common investment, but also to deliver a branded

electronic banking ser vice to our customers’ homes. Future linkage with

the data warehouse and CRM software , referred to later in this report,

will increase the effectiveness of Internet banking.

The retai l networ k and the customer base provide a wealth of

opportunities to sell the full range of IBA products. Retail Banking, Credit

Card and Consumer Finance, Investment Banking and Hire Purchase have

pur sued a “wr ap around” approach, exchanging customer lists and

conducting joint calls with product specialists to provide our clients with

comprehensive ser vices. This effor t has increased commission income

significantly and is strengthening our relationship with customer s,

encouraging them to direct more of their financial transactions to IBA.

The network, the systems, the products and the image are no better than

the ser vice that our retail staff provides to our customers. The 158

members of the division take pride in their ser vice pledge. Each member

is able to determine his or her career path through the Star Program. This

combination of written and oral examinations which combine the syllabus

of the Hong Kong Institute of Bankers and IBA’s ser vice standards offers

retail staff the opportunity to gain promotion at any time they can meet

the requirements of the next Star level. This program, along with the new

performance evaluation, encourages staff to achieve excellence.

Net Alliance Launch

Customer focus

Wrap around services

Star Program



IBA’s Regional Advisory Council, established in 1998,

provides each branch with a respected advisor from

the community to critique service levels and product

offerings. Quarterly updates for the Council members

permits us to conduct focus groups on proposed new

products, ensur ing that they genuinely address customer

requirements. The Council also serves as another channel

to inform the public about our activities, and strengthen

our roots in the community. The Council is chaired by

Mr. James So, independent director of the Bank who

was one of the founding members of the Council.

CREDIT CARD AND CONSUMER FINANCE

IBA has developed solid expertise in consumer lending over the years,

carving out a niche in the highly competitive credit card market and

providing personal loans and asset-based financing for individuals. With

changes in the economy and the slowing of the residential proper ty market,

these segments will increase in importance to IBA’s earnings. During 2001

we mapped out a comprehensive strategy, introduced new products and

deliver y systems, upgraded technology and strengthened our human

resources to widen the scope of our business. The credit card and

consumer finance activities were combined in a single division based on

their common business characteristics and the ability to achieve economies

of scale.

IBA has become a leader in credit card business as the

forerunner in market segmentation through launching

of myCard for the female segment and Magiccard for

the youth segment. In addition, IBA also deliver s

standard, co-branded and affinity cards, as well as

providing merchant ser vices, which has also been a

major source of fee income. Benefit and retention

programs are an important par t of the card strategy,

and these must be constantly enhanced to meet

changing customer preferences. While credit card

business produces high yields, it also represents higher

risk, as evidenced by the impact of rising personal bankruptcies in Hong

Kong. Risk management is an integral par t of success in this business,

from acquisition and approval to monitoring and collection. A profitable

credit card operation requires a well-balanced mix of professional talent,

expense management, financial analysis and risk control.

Regional Advisory Council

Building on consumer lendingexpertise



IBA freshened its standard VISA and MasterCard

programs with a new look and a dining reward

program, as well as a dual product promotion with

the CashPlus product. New customers were also

attracted by a balance transfer program. magiccard,

the product aimed at the 18 to 28 year old youth

segment, offered special travel spending rewards. A

unique website , www.magiccard.com.hk has been

spec ia l ly es tab l i shed wi th cybergames and

enter tainment information favored by this age group.

myCa rd , I B A ’s h i g h p ro f i l e p rog r am fo r

contemporary females, are now provided with an

interactive for um, www.mycard.com.hk, with

information on topics r anging from health and fitness to investment and

finance. This includes a chatroom with advice from professional consultants,

a shopping cor ner with merchant privileges and a wr iting corner for

customers to submit their own articles. myCard holder s were also offered

a special low interest CreditPlus facility.

Merchant acquisition and relationships are also an important part of the

credit card business. Over the course of 2001 we added more than 1,100

new merchant accounts. We conducted a merchant satisfaction sur vey to

identify additional requirements, in the process confirming the high level

of satisfaction with our ser vices. IBA also worked with merchants to

combat fraud, providing training to their employees with a resulting sharp

reduction in acquirer fr aud, benefiting the merchant, the Bank and the

credit card system.

Protecting the revenues generated by cardholders and merchants is a

critical task that requires increasing sophistication. Monitoring and cross-

checking systems were upgraded over the year to automate r isk

management to a higher level. The collection teams for credit card and

consumer finance have been merged to achieve better behavioral analysis

and efficiencies. A new credit-scor ing program developed in conjunction

with one of the wor ld’s leading companies was completed at the end of

the year for implementation at the beginning of 2002. IBA has also been

actively involved in the taskforce of banks, regulators, consumer r ights

and bankruptcy administrators formed to address the r ise in personal

bankr uptcies.

magiccard Website

Credit card services formerchants



During 2001 IBA built on its experience in credit card,

personal loans and consumer hire purchase to expand

its network of Consumer Finance Centers and its

consumer hire purchase par tnerships with leading

merchants in Hong Kong. Four Consumer Finance

Centers are now in operation in Central, Causeway

Bay, Mongkok and Tsuen Wan. Thir ty-five merchants,

ranging from international giants such as Sony and

Samsung, leading retail chains such as Broadway Photo

Supply and Luk Fook Jewellery to providers of beauty

products, water purification and car security, are all part

of the IBA Credit consumer hire purchase business. Personal loans include

phone cash, children’s education and continuing education finance .

The risk management objectives described for credit card operations are

matched in the personal loan segment. Working with Hong Kong

Polytechnic University, a new consumer loan system has been developed

which will expedite loan processing as well as provide the management

information capabilities to enhance monitoring and collection of loans.

The merging of the two collection teams referred to above , along with

aggressive analysis of trends conducted by our business information

specialists, are proactive measures to maintain our traditionally low levels

of delinquency.

Credit card and consumer loans grew by 25% during 2001. The interest

income generated by these products more than offset the decline in

residential mor tgage loans, and were a major contributor to the 11%

increase in net interest income during the year. IBA is pur suing a strategy

of achieving higher returns, not asset growth for growth’s sake alone . The

success in expanding our existing consumer finance business is a pr iority

in our five-year plan.

Central Consumer Finance Center

New personal loan computersystem



CORPORATE BANKING AND HIRE

PURCHASE

One of IBA’s most important principles is diversification, including revenue

sources along with individual customer and industr y exposure. Financial

institutions that have been overly reliant on housing loans faced a dilemma

in 2001 as home purchases stagnated. They had to book new loans at

ever declining margins, or watch their loan por tfolios shr ink. IBA has

maintained a solid business ser ving customers among Hong Kong’s 300,000

SMEs, as well as a select group of larger companies with whom relationships

have been built up over the years based on good service, prompt response

and attention to customer needs.

SMEs require consistent support and flexible facilities

to sustain their operations. Many are sole proprietor

operations whose owner has invested all his resources

and who devotes every waking hour to achieving sales.

IBA has a long history of serving these customer s,

providing working capital, trade finance , equipment

financing, funds for the purchase of of f ice and

production space, and cash management. Clients are

involved in manufacturing of garments, toys, plastic

products, electronic and electr ic goods, moulds and

machining equipment; tr ading of consumer and

industr ia l products ; print ing and publ icat ions ;

enter tainment and cater ing; proper ty development; logistics; and

transpor tation services and utility operations.

IBA Credit, the bank’s wholly owned hire purchase and leasing subsidiary,

has achieved a leading position in providing equipment and vehicle finance,

garnering 10-12% and 5% market share, respectively. Equipment ranges

from machiner y, metal working and plastic production equipment to

construction equipment and barges. IBA credit also finances light and

heavy trucks, buses and taxis and private cars. Business is sourced through

dealers, direct marketing and referrals from other business divisions.

Contracts range from 2 years upwards, and include both fixed and floating

interest r ates. Outstandings rose by 24% over the year, an impressive

performance when the monthly amortization of existing contracts is taken

into account.

Serving the middle market

Leading position in hirepurchase and leasing



The Corporate Banking Division concentrates on working capital and trade

finance, along with term loans. IBA has also participated in a limited number

of multi-bank transactions for leading Hong Kong companies. The division

is organized into five teams to address differing segments such as SMEs,

transnational companies and stockbrokers. Customer turnover ranges from

HK$15 million to HK$1.5 billion, with the majority generating sales of

HK$100 to HK$250 million. Personalized service and strong support from

the Operations Division allows IBA to meet customer needs. IBA works

closely with owners and financial directors to formulate facilities that match

the trading patterns of the company, increasing cashflow and supporting

seasonal needs. Relying on expertise from the Treasury Division and the

Bills Department, the Bank helps to address key issues relating to

international trade, currency movements and collection of sales proceeds.

In addition to the normal corporate financing listed above, IBA provides

individually designed employee packages encompassing mor tgage finance,

deposit and credit card facilities and investment advice, as well as Mandatory

Provident Fund ser vices.

During 2001 IBA wrapped up the last major delinquencies in its PRC

portfolio. The strenuous effor ts paid off, with recoveries exceeding the

provisions previously made, resulting in writebacks over the year. A number

of well-managed PRC customers have been retained, providing the basis

for a renewed por tfolio. China’s entr y into WTO will bring major changes

to the landscape in the next few years, and additional needs for financial

support. IBA is pursuing a meticulous and conservative strategy.

INVESTMENT BANKING AND TREASURY

The Hong Kong public has undergone a fundamental

change in the manner in which they manage their assets.

Previously, property ownership created the opportunity

to accumulate wealth. With the onset of the Asian financial

crisis, real assets have declined in value , with residential

property values down by an estimated 60% from their

1997 peaks, and ver y limited prospects for r apid

appreciation in values. The stock market provides one

alternative avenue for personal investment, but it has been

subject to volatility, and more cautious individual investors

have periodically reduced their purchases. IBA has

recognized these trends, and deepened the scope of

wealth management products offered to clients to address risk appetite. The

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Hang Seng Index Chart

Comprehensive corporatebanking facilities



Investment Banking Division has expanded its outreach through Wealth

Management Centers, and intensified its collaboration with the Treasury

Division to provide true value added services. At the same time, having

accumulated a substantial investment por tfolio as the Bank’s deposit base

has grown, it was incumbent upon management to actively manage the highly

liquid bond holdings in concer t with the steep downward movement in

interest rates over the course of the year, and the inevitable reversal of this

trend at some point in 2002.

Investment Banking provides highl y personalized services to select

individuals through Ambassador Pr ivileged Banking. IBA Securities, our

wholly owned secur ities brokerage company, is also an operating arm of

the division. Investment Banking also coordinates unit trust and insurance

product mar keting, working in conjunction with Retail and Corporate

Banking as with external par tner s.

The IBA Ambassadors off er a complete portfolio of banking and

investment ser vices to VIP customer s. Dur ing 2001 the Ambassador

Professional Package, formulated to meet the needs of accountants,

lawyers, doctors, dentists and architects, was introduced, taking into

account the difficulty these individuals have in finding time to visit their

bankers. The Ambassadors make appointments to meet their clients in

their offices or outside regular business hours to handle their financial

transactions.

With the shift from the simple purchase of property and

riding market appreciation to more differentiated and

complex investment products, Hong Kong families have

faced two problems: how to gain an understanding of

these new instruments, and how to find the time to assess

their appropriateness. If the decision-maker in the family

is a housewife, it is not convenient to travel to the central

business district to obtain information and execute

transactions, and if the decision-maker works in an office,

they do not have time to get information during daytime

hours. IBA has addressed these two issues by opening

Treasury products andAmbassador Privileged Banking

Mei Foo Wealth Management Center



Wealth Management Centers in convenient locations

around Hong Kong. Clients have access to share price

information, market recommendations, and can place

their orders in the center s which are electronically

linked with the IBA Dealing Room in Central. Clients

can also choose from equity linked notes (notes issued

against an option on the price of shares comprising

the Hang Seng Index), high-grade fixed income bonds

such as Hong Kong Mortgage Corporation Mass Transit

Railway Corporation paper, unit trusts managed by

leading firms such as Schroders, Jardine Fleming and Templeton, or

insurance investment products. In order to provide clients with an

understanding of these products, more than 40 investment seminars were

conducted dur ing the year, f eatur ing exper ts from leading fund

management houses as well as IBA staff.

While stock market turnover declined by 35% in 2001 resulting in a 31%

decline in securities brokerage, the sale of equity linked notes, a proxy for

investing in the stock market, helped to offset some of the decline.

Guaranteed funds proved to be especially popular in 2001, contr ibuting

to a 15-fold increase in unit trust commissions. IBA is in par tnership with

Credit Suisse Insurance, enabling Bank clients to enjoy whole life and

investment products underwritten by this leading insurance firm. As deposit

rates declined in Hong Kong, bonds became an attractive alternative in

the second half of 2001, carrying over to the fir st part of 2002 as well.

Sales of these quality bonds to clients have surged, providing a new source

of revenues.

IBA practices relationship banking. Our aim is to provide value to

customers, and generate repeat sales. We have therefore been offering

investment advice based on customer needs rather than simply promoting

a product regardless of risk. We have designed a simple questionnaire to

assess individual customer risk appetite, and then outlined a portfolio

structure which matches the risk profile. IBA only partners with the most

respected and capable financial par tners, and ensures that IBA staff who

advise clients are properly qualified. 89% of the division’s marketing staff

took and passed the requisite examinations designated by the Securities

and Futures Commission and the Insurance Commissioner, one of the

highest success rates in the industr y. Individuals who have not passed the

exams are not permitted to market products, and all staff receive

continuous professional training during the year.

Range of wealth managementproducts

Professionally qualified staff



The Treasur y Division functions as the Bank’s banker

as well as product specialist in foreign exchange and

bond products. In addition to the daily quoting of

deposit rates and the management of liquidity and cash

flows, Treasur y played a key role in the r aising of HK$1.1

billion in medium term funds. IBA completed a very

successful HK$800 million three-year FRCD in May

funded by 9 banks and rated BBB by Standard & Poor’s,

and received HK$260 million in private placements. The

A-3 shor t-term, BBB long-term ratings from S&P, and

the upgrade in the outlook to stable , reflect IBA’s strong capital base, the

diver sity of revenues, the quality of the portfolio, and IBA’s ability to

compete in the newly deregulated environment.

Treasur y provides foreign exchange services for corporate customers

who wish to hedge their currency exposure or settle trade transactions.

Individual clients are also able to enter into leveraged foreign exchange

contracts as an investment vehicle.

IBA’s investment portfolio has grown from HK$766 million in 1996 to

HK$3.4 billion in 2001. As interest r ates declined over the course of the

year, IBA was able to realize the increase in value of those investments,

generating the HK$132 million profit reported in the income statement.

The securities sold were replaced with investments of shor ter duration

or floating rate instruments, reducing the future impact of an upward

swing in rates. Going forward, the size of the investment por tfolio clearly

requires active management. By recruiting a highly respected Treasurer,

acquiring the leading Value At Risk (VAR) software and the current upgrade

of systems, IBA has positioned itself to generate added value in Treasury

operations, taking advantage of customer transaction flows and holding

in Exchange Fund paper. This rounds out IBA’s product offerings, fur ther

reducing dependence on loan bookings in any particular business segment.

RISK MANAGEMENT

The weakening of the Hong Kong economy, increased competition, the rise

in personal bankruptcies, industr y and interest rate deregulation and the

volatility of markets, all occurring at the same time could have been a

prescription for deterioration in the risk profile of the Bank. The temptation

exists to enter new areas of business activity without first installing the

necessary management systems, and to emphasize asset growth to counter

the effects of margin squeeze. However, by focusing on basic principles of

banking, nurturing a strong credit culture and relying on a multi-layer approach

to risk management, IBA actually improved the quality of its portfolio, reducing

the percentage of non-performing loans from 6.54% to 5.01%.

Profitable investment portfolio

Strong credit culture



By analyzing the impact of the Asian financial crisis on both individual and

corporate borrowers, IBA was able to identify valuable indicators and to

refine credit analysis to address the potential impact of an economic

slowdown. The focus of our credit proposals has shifted from an

examination of past performance to analysis of projected cash flows. The

Credit Administration Division has also acted proactively to detect ear ly

warning signs of troubled credits. Immediately after 11 September a

complete review of corporate borrowings which were not ful ly

collateralized was conducted, followed by revaluation of collater al to

ensure that risk parameters remained within acceptable levels.

Risk management requires timely receipt of data and clear analysis to

determine any required action. During the cour se of 2001, IBA broadened

the scope of automated reports and compilation of regulator y information.

The completion of the data warehouse in 2002 will further enhance this

capability. IBA also adopted an online property valuation procedure for

popular estates, expediting the approval process and permitting regular

reassessment of underlying proper ty collateral. In order to improve the

effectiveness of collection effor ts, a centr alized team was created to handle

housing loan and corporate loan delinquencies. This resulted in a reduction

of overdue loans, giving a unified and eff icient approach to customers

facing difficulties.

Credit Administration has no revenue responsibilities, and therefore acts

as an objective and independent assessor of credit proposals. A second

layer of protection is provided by the Internal Control Unit, staffed by

experienced auditors and repor ting directly to the Audit Committee of

the Board of Directors. The Audit Committee is comprised solely of

independent directors of the Bank and excludes al l members of

management. It ensures management recommendations are subject to

independent assessment. Each meeting of the committee is attended by

KPMG, our external auditors. Internal Control conducted 24 major branch

and department audits during the year, issuing detailed reports which require

a full response from each audited unit. Remedial action must be implemented

immediately, and Internal Control will confirm if the remedial action has

properly addressed their findings, ensuring that any necessary rectif ication

steps are completed. Internal Control also performed a review of more

than 2,600 loan accounts, again issuing a detailed report that requires any

deficiencies to be addressed. An internal audit committee, comprised of

senior management and internal auditors, meets on a quar terly basis to

discuss the findings of the internal audits to propose any changes to

procedures or training to prevent recurrence of the deficiencies. The Audit

Committee of the Board of Directors reviews all audit findings and confirms

Faster access to data

Multi-layer management ofcredit risk



that adequate action has been taken to address any deficiencies. The Head

of Internal Control and the Head of Credit Administration are members of

the Managing Director’s Office, and actively participate in the daily morning

briefing. Through this mechanism they are able to relay their concerns

immediately and directly to business department heads, and to be apprised

of all activities in the Bank.

Internal Control becomes involved in the formulation of new policies

and procedures and the development of new products at an early stage .

Through this process, appropr iate risk management measures are

incorporated in procedures and product design from the outset, minimizing

the possibility of unexpected results. Internal Control collaborates with

the Corporate Governance and Compliance Department in its work

outlined below.

The Corporate Governance and Compliance Department was established

in 2000 to coordinate compliance with regulatory requirements and

internal policies. The depar tment also has the responsibility for updating

existing and drafting new procedures manuals. The depar tment head

or iginally served as head of Internal Control and subsequently head of

Credit Administration, and thus brings an unusual level of experience to

this position. With the added importance of corporate governance , The

Compliance Off icer has taken on the added duties of Corporate

Governance Officer, outlined in a separate section of this repor t. The

Corporate Governance and Compliance Department oversees all training

in the prevention of money laundering, continuous professional training

mandated under SFC, Insurance Commissioner and HKMA regulations,

and special programs such as preparation for the forthcoming Basel II

Accords.

It was noted in the Investment Banking and Treasury section that IBA

acquired VAR software to assist in managing our investment por tfolio.

We have also introduced a new unit in Treasury, the Risk Management

and Control Department, repor ting directly to the Chief Financial Officer.

This depar tment will be headed by the former head of Treasury, ensuring

that a fully experienced individual is maintaining independent oversight

on defined limits, and conducting scenario analysis to assist the Treasurer

and Asset and Liability Committee in assessing r isk and refining policy.

The Legal Affairs Depar tment straddles functions, like so many activities

in the Bank. The depar tment reviews all standard documentation used by

the bank to ensure that our interests are properl y protected. The

depar tment also prepares facility letter templates and simple loan

Developing new proceduresand products

Ensuring compliance andexercising good corporategovernance

Value at Risk Software installed



agreements, while wor king with outside counsel on more complex

agreements. Legal Affairs also oversees cases in the cour t system. The

opinion of the Legal Affairs Department, as well as the Internal Control

Department, Corporate Governance and Compliance Depar tment and

and external auditors, will overrule any proposal by a business depar tment.

Legal Affairs also fulfills the Company Secretary function of the Bank.

OPERATIONS, SUPPORT ANDINFORMATION TECHNOLOGY

Behind the scenes all of our marketing effor ts are sustained by the effor ts

of a highly professional team that ensures that transactions are processed,

business units are staffed, accounts are maintained, and our physical plant

is in proper condition.

The Loan Administrat ion Depar tment, Bi l ls Depar tment, Cash,

Communications and Clearing, and Treasur y Settlements service all the

business units of the Bank, and also interface with IBA customers. Their

timely execution of tr ansactions is par t of our pledge to satisfy our

customers. In an effort to achieve greater efficiency and increase the

amount of time available for business promotion in branches, overseas

funds transfers have been centralized in operations, easing a heavy burden

on branch staff. Branch Operations has responsibility to ensure that staffing,

systems, forms and repor ting as well as the physical condition of branches

are all handled smoothly.

Operational efficiency has become ever more impor tant as loan demand

has stagnated and margins have come under pressure. It is vital to reduce

costs in this environment. Two initiatives were taken in 2001 to increase

efficiency. Cross training and pooling of operations staff has provided more

flexibility in meeting changes in transaction volume. Under this new system

it is not necessary to hire temporar y staff or new permanent staff; rather,

personnel are redeployed from other depar tments which are not

experiencing the increased volume at that time. The second initiative was

the engagement of PWC to review transaction processing in branches,

credit processing and Operations Depar tment procedures. (IBA is

cognizant of the conflict of interest in asking external auditors to act as

consultants when the same firm wil l evaluate the suitabi l i ty of

recommendations of the consultant). This sur vey identified a number of

areas which could result in reduced costs. A Process Engineering Execution

Committee has been formed to oversee the implementation of the

recommendations. Going forward, this committee will have the authority

to approve changes in procedures in conjunction with Internal Control

Department and Corporate Governance and Compliance Depar tment.

The committee will also have leading role in proposals to increase

headcount in the future.

Timely execution oftransactions

Increasing operating efficiency



The Human Resources Department is charged with recruitment, selection,

retention, compensation and evaluation policies. In reviewing therequirements of banking in the new economy and thepersonnel who will implement our retur ns drivenstrategy, the Bank concluded that an entirely newevaluation system was necessary. Patterned after theVitality Curve concept developed by Jack Welch aschairman of GE, the system focuses on Energy, Execution,Energizing and Edge, rating all staff on a standard bellcurve. The top 10% of staff are rated 1, the second 15%rated 2, the middle 50% rated 3, the next 15% rated 4and the bottom 10% rated 5. The Ones will receivesubstantial rewards through a combination of payincreases, bonuses, shadow stock options and additional

leave. Twos and Threes will selectively receive such awards. The Fives willbe given a specified period to meet performance standards, failing whichthey will be replaced. This r igorous process provides all staff with a clearset of goals and an unambiguous measure of their performance. Managersand employees are stimulated to perform, and compensation is directlyrelated to increasing shareholder value.

An Employee Relations Officer acts as a conduit for employee commentson var ious issues within the Bank. This officer also provides professionaladvice not only on career matters but also family issues such as developinga healthy relationship with teenage children. This concern for the welfareof the staff is appreciated. Another aspect of this staff suppor t program isthe IBA Fitness Center, a fully equipped training room in which professionalstaff advise employees on health matters and design training programs toimprove physical and mental health. A staff bulletin, IBA Care , providesinformation on nutritional and emotional issues.

The Bank has a responsibility to provide each employeewith the tools to do his or her job. This is not limited to

equipment or forms, but also to the skills necessary toexcel. The Training Depar tment conducts in-houseprograms and coordinates par ticipation in exter nalcourses offered by the Institute of Bankers and theVocational Training Council, as well as other institutions.In 2001 this totaled 3,133 man-days, an average of 5.4man -day s pe r emp loyee . I B A con t i nued i t sgroundbreaking partnership with DePaul University,offering both MBA and BA degrees to staff and to thepublic. The MBA program consists of 16 courses in

marketing and finance conducted over a 24-month period, each cour selasting 4 weeks with 11 hours of class per week. The BA program extendsover a period of approximately 30 months, covering a r ange of courses inbusiness, science and the humanities. A joint graduation ceremony of thesecond MBA program and the first BA program was held in May.

Vitality Curve performanceassessment

Caring for staff

10% 15% 50% 15% 10%

54321

70%

60%

50%

40%

30%

20%

10%

0%

Performance Distribution

Ideal Performance Rank

Dis

trib

utio

n



In November a special ceremony was held at the IBA/DePaul Auditorium in the IBA Headquarters to present

an Honorary Doctorate of Humane Letters to theHonorable George Bush, 41st President of the United

States, in recognition of his record of service to peoplearound the wor ld. President Bush requested that the

degree be presented at IBA because of his strong

support for this program which enhances internationalunderstanding as well as providing tremendous career

opportunities for each graduate . A third MBA programand second BA progr am are underway. The intellectual

skills and the self-confidence gained by the staff throughthese programs hav e t rans la ted in to greater

contributions to the bank and a highly motivated staff.

The Accounting and Management Information Systems

Department has responsibility for managing the generalledger, completing regulator y repor ts, preparing

management reports, and payment of invoices. As thevolume of transactions and the scope of business have

grown, the demands on this department have increased.The depar tment is benefiting from the upgrade of

systems, with greater automation assisting in completingtheir tasks.

General Administration has responsibility for maintainingall offices of the Bank, managing vendor relationships,

providing security and all messenger and mail services.Adhering to a strict standard for supplies purchasing and

construction contracts, this department plays a key rolein controlling expenses. General Administration has not limited itself to a

purchasing relationship with vendors, but has taken the initiative to conductjoint calls with business units to obtain lending and deposit business as well

as credit card services. The security aspect of banking has gained additional

prominence as counterfeit currency has increased and individuals attempt toexploit loopholes in bankruptcy regulations to defraud banks. Staff training

and alerts from the Security Depar tment have effectively addressed thesetrends.

Technology has become a driving force in the banking industry, and it functions

in both a business development and business support mode. Thirteen years

ago IBA management concluded that the demands of technology could

outstrip the abilities and financial capacity of a bank our size, and elected to

outsource data processing and IT functions to take advantage of the exper tise

and efficiencies of EDS, perhaps the largest IT service provider in the world.

This decision has proven to be an effective means of both achieving continuous

President George Bush visits IBA

Exploiting technology toenhance business performance



upgrades of technology and controlling operating costs. Instead of being the

only bank in Hong Kong to outsource, IBA is now one of several institutions

making use of outside providers. IBA’s agreements with EDS fully comply

with the new HKMA guidelines on outsourcing. In 2001 IBA signed a new

extension with EDS, as well as agreements covering the installation of an

advanced call center, data warehouse and customer relationship management

(CRM) system. New terminals were installed in IBA branches in 2001, along

with upgraded software.

The Electronic Banking Team is another example of a

unit which straddles functions. It provides operational

support for the IBA website and IBA’s par ticipation in

Net Alliance , our joint venture with Asia Commercial

Bank, Chekiang Fir st Bank and Liu Chong Hing Bank as

well as iMerchants, an Internet ser vice provider. IBA

delivers Internet banking through the Net Alliance

platform. The Electronic Banking Team participates in

all Net Alliance Working Group meetings, providing

IBA’s input on new product development. The team is

also the interface with EDS on the development of

the Call Center, data warehouse and CRM. The Call

Center is designed to handle incoming calls, but its major function is to

conduct intelligent telemarketing. Linked to the CRM, it will permit highly

effective segmentation of the customer base , with each Call Center

customer service operator provided with predesigned scripts and full

relationship details on their computer screen.

BUSINESS PROMOTION AND PUBLIC

RELATIONS

The Bank serves four constituencies. Shareholders have created the bank,

investing capital and deserve a reasonable return on their investment.

Customers provide the business of the bank, paying interest and fees and

providing funding through their deposits, and deser ve quality services,

fair costs and convenience. Staff deploy the shareholders’ capital and

provide the service create the revenues of the bank; they deser ve fair

compensation and career opportunities. The community provides the

economic environment for the bank’s activity, and deser ves employment,

tax revenues and good corporate citizenship.

Business promotions bring new revenues to the bank. They require thorough

planning to determine the specific target segments for each promotion,

the financial objectives to be attained and the monitoring of progress toward

Call Center

Serving our constituencies



those objectives. Bank Product Marketing has responsibility for these

functions, working in conjunction with Financial Control. Due to the

specialized nature of its business, the Credit Card and Consumer Finance

Division also has a marketing team to design its promotional activities. Bank

Product Marketing works with advertising agencies and business units to

develop its marketing themes. Promotions include television and radio

commercials, print advertising, direct mail and poster s and pamphlets in

IBA networks. The advent of Internet banking and the Call Center provide

additional channels for promotions.

During 2001 a digital message board and an arena size

LCD screen were installed on the facade of the IBA

Building, providing yet another channel for business

promotions. In addition to promoting IBA products, the

LCD screen displays Bloomberg Television under a

special agreement with the leading financial information

broadcaster. IBA also broadcasts videos advertising

client products, supporting their business through this

highly visible medium. IBA is the only bank in Hong

Kong to utilize this technology to provide information,

promote the bank’s products and assist customers.

IBA places a high value on investor relations. The

Bank’s internal analyst, who analyzes the local banking

industry and benchmarks IBA’s performance against these standards,

provides regular reports that are shared with investors, secur ities analysts

and the public through the media and the IBA website. The analyst also

has responsibility for tracking brokerage repor ts and media ar ticles to

ensure that these reports are accurate, contacting the relevant individuals

to correct error s. Corporate Communications maintains contact with

the media and arranges inter views to provide the public with up-to-

date information on new products and the business direction of the

Bank. This depar tment also works with Financial Control to arrange the

publication of statutory financial repor ts and the printing and distribution

of the annual and interim repor ts.

Corpor ate Communications also has responsibility for responding to

customer complaints to ensure that an objective examination of the issue

is conducted and customer satisfaction is achieved. It is gratifying that we

also receive frequent letters of praise for service quality. The responsible

staff member receives recognition for these compliments.

Promoting products andgenerating new reverses

IBA Headquarter s

Investors relations and industryanalysis



Internal communication is an important aspect of management, especially

in a rapidly changing industry. Corporate Communications coordinates

all such communication. This would include ad hoc distribution of memos,

the internal IBA Ambassador bulletin, and special briefings.

IBA enjoys playing a positive role in the community.

The IBA Staff Club arranges participation in pub lic

events. During Chinese New Year IBA staff make visits

to homes for the elder ly to share good cheer. IBA

par ticipated in competition among members of the

Bank Consor tium to raise money for the Community

Chest, and joined in the Po Leung Kok fundraising walk

from Hong Kong Stadium to Aberdeen.

The Regional Advisor y Council , described in the

Retail Banking section, provides another channel to

educate the public not only about IBA’s products and

sound financial state , but also to discuss issues of

impor tance to the comm unity. There was much

confusion about the role of deposit insur ance , a

ser ious shortcoming of the Hong Kong banking

system. IBA provided its advisors with a concise and

informative descr iption of the function of deposit

insurance and the contr ibutions it can mak e to

financ ia l s tab i l i ty. IBA is p leased to of f er such

information to the public so that informed choices

can be made.

FINANCIAL CONTROL AND STRATEGIC PLANNING

IBA is engaged in a wide range of activities and participates in constantly

changing markets. Shareholders have entrusted us with their capital, and

customers have entr usted us with their deposits. Business activities have

to be planned and evaluated, not run on the whim of an individual. Rigorous

financial planning and analysis is absolutely vital to effective management

of the Bank.

The Chief Financial Officer is responsible for repor ting financial results,

both under statutor y regulations and for management planning purposes.

Projections are a critical part of this management reporting process. The

projections serve as the basis for allocating resources. A team of financial

analysts and former auditors, comprising Strategic Planning and Control,

repor t to the Chief Financial Officer. This team was enlarged in 2001 to

Community Chest event (top);

Charity Walk (bottom)

Financial analysis to guidebusiness descisions



enhance its capabilities and increase the sophistication

of the analytical work.

Daily repor ts on lending activity, cost of funds and loan

yields, and balance sheet statistics are produced and

discussed at the MDO meeting. Mid-month forecasts

of full month results are produced to enable managers

to make rapid adjustments in their business plans. Mid-

year and full year forecasts are prepared and updated

on an ongoing basis. Profitability reports for divisions,

branches, business teams and individual account off icers are used to

measure performance. All business promotion campaigns must have an

approved budget. Daily reports of the progress of the campaigns are

delivered to managers, and a final assessment is prepared by Strategic

Planning and Control to permit planning of future campaigns. All new

products are approved on the basis of a f inancial analysis prepared by

this department.

Stress tests on the balance sheet are prepared biweekly to project the

impact of declines in Prime without a corresponding decrease in funding

costs, and an increase in funding costs without a cor responding increase

in Prime . The results are used by the Asset and Liability Committee to

evaluate alternatives in business plans and to take any recommended

steps to hedge the impact of such changes.

Strategic Planning and Control also prepares ad hoc reports at the request

of business units so that they can have a better understanding of their

business.

MANAGEMENT COMMITTEES

Banking is a complex business made more difficult by the impact of

globalization. Given the complexity of our activities and the r isks inherent

in having a single person make decisions, IBA brings together individuals

with different backgrounds and exper ience to evaluate issues and propose

well considered solutions.

The Managing Director ’s Office (MDO) is comprised of the Chief

Executive, the Executive Vice Presidents and the heads of key depar tments,

currently including Retail banking, Corporate Banking, Investment Banking,

Hire Purchase and Leasing, Credit Card and Consumer Finance,

Operations, Treasur y, Treasur y Risk Management and Control, Internal

Control, Corporate Governance and Compliance, Industr y Analysis and

1.50

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DecNovOctSepAugJulJunMayAprMarFebJan

2001

IBA Share Price (HK$)

Interest rates stress test

Explorting the full range ofmanagerial talent



Credit Administration. The MDO meets each morning to review activities

and discuss market conditions. This ensures that all senior managers are

aware of the current status of all major depar tments and the immediate

task to be accomplished under our business strategy. This meeting often

cover s broader issues, and may assign these issues to the Str ategy

Committee, a working group of the MDO. Each Saturday the MDO and

assorted other managers meets to discuss strategic issues, and receive

presentations from internal staff and outside experts. This has allowed

the bank to refine its strategy through a group effor t.

The Asset and Liability Committee (ALCO) meets weekly to discuss

specif ic topics related to the balance sheet and earnings statement.

Detailed repor ts are reviewed, and adjustments in the business plan taking

into account changing market conditions are decided upon. ALCO must

approve all new products and campaigns, as well as exceptions to standard

pricing. ALCO also directs Treasury on funding issues, including the raising

of medium term funding.

The Investment Committee administer s the investment portfolio

comprising debt securities, equities, fund investments and direct

investments. Using the VAR repor t and outside commentary on market

trends, it directs Treasury on the execution of purchases and sales.

The Credit Committee meets twice weekly to approve credit proposals.

All credit proposals are fir st vetted by Credit Administration. If they

endorse the proposal, it will be added to the agenda, and any questions

or comments from Credit Administration will be addressed by the account

officer at the Credit Committee meeting. The account officer will also

respond to questions raised by the members of the committee. The Credit

Policy Committee regularl y reviews the credit policy and authorities to

ensure they properly address risk issues, and recommends additions or

amendments. Credit policy issues arising from the introduction of new

products must be approved before the formal launch of any new product.

The Process Engineer ing Execution Committee was set up in 2001 to

expedite the implementation of transaction streamlining. This is a pr iority

in improving the Bank’s cost/income ratio.

The Personnel Management Committee oversees the operations of the

Human Resources Depar tment, and conducts the final review of the top

and bottom rated individuals in the staff performance evaluation program.

It reviews staff expense statistics, overtime , turnover and exit interviews.

It also recommends changes in staff benefit programs and staff policy.

Managing the balance sheetunder changing conditions

Obtaining product investmentreturns within equityparameters

Independent assessment ofcredit proposals

Increasing productivity

Developing human resources

Updating credit policies



The Technology Committee oversees the status of systems, implementation

of upgrades and installation of new equipment, and staff satisfaction with

the performance of EDS. A subcommittee reviews service requests from

departments to prioritize tasks in a manner consistent with overall Bank

requirements.

The Classified Loans Committee reviews portfolio status and individual

borrowers to ensure that credit quality remains high. Account officers

are quizzed on the status of specific customers. If patterns are detected,

the committee will recommend appropriate action. A subcommittee

comprised only of the Head of Internal Control, the Head of Corporate

Governance and Compliance, the Head of Credit Administration and the

Chief Financial Officer will set provisions on a monthly basis, subject to

approval of the Audit Committee , as well as the external auditor s and

the HKMA.

CORPORATE GOVERNANCE

Corporate governance has gained increasing prominence as Hong Kong

moves to solidify its position as a leading international financial center,

and as events such as the collapse of Enron focus attention on the actions

of directors and management in protecting the r ights of all shareholders.

It is the practice of IBA to ensure that all shareholders are treated fair ly

and equitably. This is especially true in the banking industry because our

one true asset is public trust. IBA has three highly capable independent

directors serving on the Board. In addition, the Bank has taken the initiative

to appoint a Corporate Governance Officer to ensure that we comply

with best practice. Specific aspects of our corporate governance practice

are discussed in the following paragraphs.

All shareholders and potential investors are fully aware of the ownership

structure of IBA through our annual repor t, website and frequent public

announcements which highlight the 55% ownership of ABC, 20%

ownership of China Everbright and 25% freely traded on the Hong Kong

stock exchange. The list of shareholders is available through Central

Registration H.K. Ltd, which serves as share registrar.

As noted above, the holdings of the two major shareholder s are public

knowledge, and no director can own shares in their own name, primar ily

due to the need to insure that 25% of the bank’s shares are in free float

in order to meet the requirements of the stock exchange.

Coordinating technologyactivities

Managing credit quality

Equitable treatment for allshareholders

Transparency of ownership

Concentration andinfluence of ownership



IBA informs shareholders of upcoming meetings at least 21 days in advance,

with notice of such meetings being sent individually to shareholders and

being posted on the IBA website. Meetings are held in Hong Kong and

hence easily accessible for the minority shareholders, although this requires

representatives of the majority shareholders to travel considerable distance

to attend. All shareholders are entitled to appoint a proxy to attend and

vote at shareholder meetings.

There is a clear ly ar ticulated set of voting procedures at shareholder

meetings. Voting is conducted in a simple, transparent and cheap procedure

for voting by those present or by those unable to attend the meeting but

voting by proxy.

Secure ownership rights exist via a transparent and independent registrar

system, with Central Registration H.K. Ltd. acting as share registrar ; Central

Registration H.K. Ltd. has no connection financial or otherwise with

shareholders or management of IBA other than their contractual

obligations as registrar. There is one class of common share that has clearly

ar ticulated rights. The charter clearly establishes the concept of one share,

one vote. At the time of listing the listing prospectus stated the intention

of paying out approximatel y 40% of net earnings as dividends, and that

policy has been adhered to. Dur ing the economic downturn the

percentage of earnings paid out in dividends exceeded 40% because the

directors wished to provide shareholders with a reasonable cash return,

supported by the fact that IBA enjoys a high level of capital adequacy and

therefore could afford to pay out a higher percentage without endangering

the ongoing value of the bank. All declared dividend payments are made

on the dates announced for such payments. There are no anti-takeover

provisions, although it is the stated intention of the two major shareholders

to retain their cur rent ownership percentages, as demonstrated by their

pro-rata participation in each of the capital increases subsequent to the

or iginal listing of the bank.

Regularity of, ease of accessto, and information onshareholders’ meetings

Voting and shareholdermeeting procedures

Ownership rights

Commitment of majorshareholders



The bank’s financial statements (both annual report and interim repor ts)

are prepared in compliance with the requirements of the Companies

Ordinance, Listing Rules, Statements of Standard Accounting Practices of

the Hong Kong Society of Accountants and the Guideline on Financial

Disclosure by Locally Incorporated Authorized Financial Institutions of

the Hong Kong Monetary Authority. Details of investments and holdings

in subsidiaries are disclosed in adequate detail and there is adequate

disclosure of related party and internal connected party transactions.

Records of all shareholder meetings are properly maintained by the

company secretary and are accessible at IBA headquarters. Shareholders

are notified of all major events through the IBA website, publication of

annual and inter im results in the English and Chinese press along with

press releases to all major newspaper publishers in Hong Kong, and press

conferences from time to time and always after the release of the annual

results. IBA occasionally issues circulars in line with listing requirements

to explain certain issues to shareholder s.

Public repor ts are always filed on time, and public information is available

to shareholders in a timely manner. To this end, IBA will be making greater

use of its website to supplement the normal distribution of statutory

announcements. Publicly filed financial statements are sent to all registered

shareholders. Records of shareholder meetings, and other public and

statutory information are available on request by any shareholder at IBA’s

head office.

The auditor is a reputable and experienced audit company, KPMG, which

audits a significant number of banks operating in Hong Kong. IBA takes

particular pride that the Audit Committee of the Board of Directors is

solely comprised of independent, non-executive directors who are highly

experienced in the review of business operations. KPMG, as external

auditor, attends all Audit Committee meetings.

The Board is comprised of highly capable, exper ienced and well-informed

directors. Three independent directors serve among a total of ten directors.

The Chairman is a non-executive director, and is separate from the Chief

Executive. Only two management executives serve on the Board, ensuring

a healthy basis of independence vis-à-vis the bank ’s management.

Remuneration and Nominating committees have been established.

Quality and content ofpublic disclosure

Timing and access to publicdisclosure

Independence and standingof auditor

Board structure andcomposition



The Board sets broad policy and delegates authority to implement that

policy to professional management. Monitoring compliance with this policy

is car ried out by the Internal Control Depar tment, headed by an

experienced for mer bank auditor, repor ting directly to the Audit

Committee of the Board of Directors. In addition, the Audit Committee

and the Board of Director s have ful l access to al l reports and

correspondence of the Hong Kong Monetary Authority and the risk asset

review conducted by the internal auditor s of ABC as parent bank. In

addition to quarter ly meetings of the Board, directors receive frequent

written and oral communication about the performance of IBA, trends in

the banking industry and general economic conditions from management.

Credit authority above a specified limit is reserved for the Executive

Committee of the Board, ensuring that significant credit facilities are subject

to proper scrutiny.

All monetar y, financial and commercial relationships between non-

executive directors and IBA are repor ted to the full Board to ensure

there is no conflict of interest. External directorships held by Board

members do not interfere with the quality of their involvement.

Compensation of the Chief Executive and the executive vice presidents

is determined by the Remuneration Committee, and is reported in the

annual report in accord with the relevant regulator y requirements.

Compensation is cash based (and therefore is clearly reflected in the

financial statements) because the requirements for minimum free float of

the bank’s shares prevent the implementation of a true stock option

scheme. A shadow stock option scheme which links a cash payment to

the performance of the bank’s share pr ice has been instituted. Under a

new staff performance evaluation scheme , compensation for senior

executives has been more strictly aligned with the net profit repor ted by

the bank with var iable compensation being a primary component and

increases in basic salary reduced. The senior management structure of

IBA, and the existence of a Managing Director’s Office comprised of the

16 executives is designed to create a team capable of providing the

necessar y leadership irrespective of the presence of any single individual,

and training multiple candidates for the role of chief executive .

Role and effectiveness ofthe Board

Role and independence ofNon-Executive Directors

Board/Executivecompensation, evaluationand succession policies

review of operations · recognizing the potential of this structure, divisional management took a...

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