Business Overvie · pursue monetary easing in an attempt to sustain the fragile economic recovery....

Business Overview

23The Hong Kong Mortgage Corporation Limited Annual Report 2013

Business Overview

Performance Highlights

Themajorachievementsof theCorporation for theyearincluded:

• PurchasingatotalofHK$3.2billionloanassets.

• Helpinghomebuyersborrowa totalofHK$13.3billionmortgage loans through theMortgage InsuranceProgramme(MIP),representingausagerateof8.4%(intermsof the totaldrawdownamountunder theMIPagainstthetotalmarketmortgagedrawdownamount).

• ImplementingtheUseofEnduringPowerofAttorney/CourtOrderunderPartIIoftheMentalHealthOrdinancebyborrowersundertheReverseMortgageProgramme(RMP). Since inceptionup to the endof 2013, theCorporationapprovedmorethan530applications,withanaveragepropertyvalueofaroundHK$4.5million.

• ApprovingatotalofHK$28.1millionloanssinceinceptionuptotheendof2013throughtheMicrofinanceScheme(MF Scheme) tobusinessstartersandself-employedpersonsfromdifferentbackgroundsandprofessions.

• Extendingtheapplicationperiodforthe80%guaranteeproductsunder theSMEFinancingGuaranteeScheme(SFGS)foroneyearto28February2014andrelaxedthetreatmentofapplicationsinvolvingrelatedentities,whichbettermeet the financingneedsof local small andmedium-sizedenterprises (SMEs).More than8,000applications fora total loanamountofapproximatelyHK$33.9billionwereapprovedunderthe80%guaranteeproductsunder theSFGSsince theproduct launch inMay2012.

• IssuingHK$10.2billionofdebtsecurities(withmaturityof1-yearandabove)inacost-effectivemanner,promotingthe localdebtmarketdevelopmentasoneofthemostactiveissuersinHongKong.

• Safeguardingexcellentcreditquality,with(over90-day)delinquencyratiosof0.006%forthemortgageinsuranceportfolio, 9.52% for the SME guarantee portfolio(excludingthe80%guaranteeproductsundertheSFGS),0.06%fortheHongKongresidentialmortgageportfolio(industryaverageof0.02%),1.3%formicrofinanceloanportfolioand0.05%acrossallassetclassesasat31December2013.

• Maintaining theHKMC’s long-term foreignand localcurrencyratingsofAAAandAa1byStandard&Poor’s(S&P)andMoody’s InvestorsService, Inc. (Moody’s) respectively.

TheCorporationachievedsolidfinancialpositionfor2013:

• ProfitattributabletoshareholdersofHK$982million.

• Netinterestmarginof1.4%.

• Returnonassetsof1.9%.

• Returnonshareholders’equityof10.4%.

• Cost-to-incomeratioof18.1%.

• Capitaladequacyratioof21%,wellabovetheminimumrequirementof8%stipulatedbytheFinancialSecretary.

Market Overview

General Economic ConditionsTheHongKongeconomygrewmoderatelyin2013,by2.9%year-on-year inrealterms,comparedwith1.5%growth in2012.Thesoliddomesticdemandprovidedimpetustothelocaleconomy.Privateconsumptionrosemoderatelyamidstrong labourmarketconditions.Theunemploymentratestayedatalowlevelofaround3.2%–3.5%.

Nevertheless, the sluggish global economic growthcontinued toweighon theHongKongeconomy. Thehousingand labourmarkets in theUS improvedtowardstheendoftheyearwhiletheeuroareaeconomyshowedsignsofmildrecoveryinthesecondhalfof2013.However,theglobaleconomicrecoverywas impededby the fiscalstandoff in theUS.Moreover, theUSFederalReserve’searliersignal in Junetocurb itspaceofassetpurchaseselevated global financial volatility and caused capitaloutflowsfromsomedevelopingcountries,notablyBrazil,Indiaand Indonesia.Thefinancialmarketstabilised inthefourthquarter,andwassupportedbybetter-than-expecteddatareleasesfromMainlandChina.ThetaperingofassetpurchasesbytheUSFederalReservebeganinJanuary2014andwascalmlyreceivedbythemarket.

24 The Hong Kong Mortgage Corporation Limited Annual Report 2013

Business Overview

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Best Lending Rates (BLRs)Weighted Average BLR-based Gross Mortgage Rate

Liquidity and Interest-Rate EnvironmentCentralbanksacrossadvancedeconomiescontinued topursuemonetaryeasinginanattempttosustainthefragileeconomicrecovery.InJapan,theBankofJapanlaunchedinAprilanaggressivereflationarypolicyplanwhichaimedtorevitalise theeconomy. InEurope, theEuropeanCentralBankcut itsrefinancingratetoahistorical lowof0.25%inNovembertocombatrisingdeflation.

Though theUS Federal Reservemaintained its easymonetarystancebykeepingshort-terminterestrateslow,itannounced its intention inJunetoscaledown itsassetpurchaseplan.WhiletheglobalfinancialconditionsbecamevolatilewiththeUSFederalReserve’sassettaperingplan,theHong Kong dollar exchangemarket continued tooperate inanorderlymanner.With limitedcapitaloutflowpressure, the liquidity inHongKong’s banking sectorremainedhealthythroughout2013.Meanwhile,MainlandChina-relateddemandforoffshore lending inHongKongcontinuedtostayhighwhiledepositgrowthdidnotkeeppacewith loangrowth.Asaresult, theHongKongdollarandtheforeigncurrencyloan-to-depositratiorosein2013(Figure 1).

Figure 1

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Impacted by theUS Federal Reserve’s gradual assettaperingplan, theglobal interest ratewastrendingup in2013.Overall, themortgagerate inHongKongremainedlowduringtheyear.WhiletheBestLendingRates (BLRs) remainedstableat5%and5.25%throughouttheyear,theHongKong InterbankOfferedRates (HIBORs) declinedprogressively,withtheone-monthHIBORfallingfrom0.25%in January to0.21% inDecember, in termsof theperiodaverage1.AlthoughlocalmajorbankstooktheleadinMarchtoraisemortgageratesby0.25%inviewofthe increasedcostoffunding,theysubsequentlycutthemortgageratesbacktothepreviouslevelasthecompetitionformortgagebusinesswaskeen.Asaresult, themortgagerateswerelittlechangedattheendof2013withBLR-basedmortgageratesataboutBLR-3.1%toBLR-1.85%andHIBOR-basedmortgageratesatHIBOR+1.7%toHIBOR+3.15%(Figure 2).

Figure 2

Best Lending Rates and Gross Mortgage Rate

Sources:HKMA,andHKMCestimates

1 Source:HKMAMonthlyStatisticalBulletin


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Property MarketWithaseriesofgovernmentcoolingmeasuresremaininginforce, theresidentialpropertymarket remainedsubduedwith thin sales volume and slow pricemovementthroughout2013.ThemarketbegansofteningfurtherinlateFebruarywhen theGovernmentannouncedadditionaldemand-sidemanagementmeasuresbydoubling thestamp duty on both residential and non-residentialproperties.Furthermore, theResidentialProperties (First-handSales)OrdinancetookeffectinlateAprilandledtoasignificant drop in primarymarket transactions. Theresidential propertymarket showed signs of furthersofteningaftertheUSFederalReserveannouncedthestartofitsassetpurchasetaperinginDecember.

FollowingtheGovernment’s introductionofanotherroundof demand-sidemanagementmeasures in February,residentialsalesvolumedroppedsignificantly.Inthefourthquarter,primarymarketturnoversawsignsofpickingupasaresultofthedevelopers’aggressivepricingpackagesandtax rebates for primaryprojects.However, secondarymarketactivitywasalmost frozenas theprimarymarketattractedmostof themarketattention.On thewhole,propertytransactionsin2013declinedby38%year-on-yearto50,676whilethetotalvalueoftransactionsfellby34%(Figure 3).

Figure 3

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Agreements of Sale and Purchase of Residential Building Units

Source:LandRegistry

Thepaceofgrowth inresidentialpropertypricesshowedvisiblemoderation in 2013 alongwith subdued salesactivities.Thepricesurgedeceleratedfrom3.2%inthefirstquarterto-0.1%inthefourthquarter.Ingeneral,residentialpropertyprices2recordedaround8%cumulativeincreasein2013, comparedwith 26% increase in 2012.With thecontinuedsurgeinpricesinthepastfewyears,residentialpropertypricessurpassedthe1997peakbyaround42%asattheendof2013(Figure 4).

Figure 4

Private Domestic Price Index (1999 = 100)

Source:RatingandValuationDepartment

Mortgage MarketTostrengthentheriskmanagementofthebankingsector’smortgage lendingbusiness, theHongKongMonetaryAuthority (HKMA) inFebruaryrequiredbankstoassumeahighermortgage rate increase for stress-testing theborrowers’repaymentability.Thetightenedlendingcriterionmight further increasethedownpaymentrequirementofprospective buyers. In tandemwith the reduction inresidentialproperty transactions,mortgage lendingalsodeclinedin2013,withthegrossvalueofnewloansdrawndown3droppingby17%year-on-year(Figure 5).Alongwiththe slower growth innewmortgage lending, the totaloutstanding value of all residentialmortgage loansregisteredamoderateannualincreaseof3.9%toHK$950.2billion.

2 Source:ThePrivateDomesticPrice Indexpublishedby theRatingandValuationDepartment

3 Source:HKMA’sMonthlyResidentialMortgageSurvey (“The HKMA Survey”)


Business Overview

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Fixed rate

With reference to HIBOR

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Figure 5

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New Residential Mortgage Loans Drawn Down

Source:HKMA

Although BLR-basedmortgage plans remained themainstreamproductinthemortgagemarket,theproportionof borrowersopting forHIBOR-basedmortgageplanspickedupduring2013asbanksreducedtheirHIBOR-basedmortgage interest rates to compete forbusiness. TheproportionofnewmortgageloanspricedwithreferencetoHIBORroseto30.5%inDecemberfrom7.7%ayearearlier.TheshareofnewBLR-basedmortgagesdroppedto67.7%from90.4%duringthesameperiod,withthelargestportionpricedatamortgagerateof2%tobelow2.25%(Figure 6).

Figure 6

Pricing of New Residential Mortgage Loans Approved

Source:HKMA

TheconcernthattheUSFederalReservemightbecurbingitspaceofassetpurchasestriggeredareboundofmarketinterest rates fromthehistorical low level in thesecondquarter.Tocapturethepotentialmarketdemandforfixed-ratemortgage products, banks andmoney lendersaggressively launchedfixed-ratemortgages inthesecondquarter. InviewoftheearlierthanexpectedtimingoftheUS Federal Reserve’s curbing of its asset purchases,competitioninthefixedratemortgagemarketsubsidedinthethirdquarter.Theshareofnewfixedratemortgagesdroppedto0.2%inDecemberafterreachingtheyearhighof3.1%inMay.


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Total LoansPrivate Residential Mortgage Loans Share of Private Residential Mortgage Loans

HK$ billion

With thestable labourmarketand theHKMA’sprudentsupervisionof themortgage lending sector, theassetqualityofresidentialmortgageloansremainedexcellent in2013.Theover-90-daydelinquencyratioofmortgageloans4 stayedatahistorical lowof0.01%-0.02%formostof theyear,reflectingtheprudentunderwritingstandardsadoptedbythebanks.Thecombinedratio,whichtakesintoaccountbothdelinquentandrescheduledloans,alsoremainedlowatbetween0.01%and0.02%formostof2013(Figure 7).Givenhighresidentialpropertyprices,mortgage loans innegativeequityremainedata lowlevelof26casesattheendofDecember.

Figure 7

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Combined Ratio (with Rescheduled Loans)Delinquency Ratio (Overdue > 90 days)

Delinquency Ratio of Residential Mortgage Loans

Source:HKMA

4 Source:TheHKMASurvey

Banking-Sector ExposureThetotaloutstandingvalueofmortgage loansforprivateresidentialproperties increasedtoHK$908.7billionat theendof2013 (end-2012:HK$872.6billion),accounting formorethanone-fifthoftotalloansinHongKong(Figure 8).Adding to this the lending forbuildingandconstruction,alongwithpropertydevelopmentand investment, theamountofproperty-related loanstotalledHK$1,902billion,representingabouthalf thetotal loanbookofbanks.Theoutstandingvalueofmortgage loans for thepurchaseoff lats in Home Ownership Scheme, Pr ivate SectorParticipationSchemeandTenantsPurchaseSchemefelltoHK$41.5billionat theendof 2013 (end-2012:HK$41.9billion).

Figure 8

Total Loans and Private Residential Mortgage Loans ofAll Authorized Institutions

Source:HKMA

Asset Acquisition

TheCorporation strives toperform itsongoing roleofmaintainingbankingandfinancialstability inHongKong.Anumberofbanksexpressed their interest inoffloadingassets to theCorporation for liquidityandbalancesheetmanagement in2013.During theyear, theCorporationsuccessfullyacquireda totalofHK$3.2billionofassets,whichincludedresidentialmortgageloansandotherassets.


Business Overview

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Mortgage Loan Amount Drawn DownUsage Rate for the Year

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Extension and Enhancement of the 80% guarantee products under the SME Financing Guarantee Scheme (80% SFGS)

The80%SFGSwaspartofthepackageofsupportmeasuresannouncedby theFinancialSecretary in the2012–2013BudgetSpeechforSMEstotideovertheuncertainglobaleconomic environment and the possible f inancingdifficultiesasaresultofcreditcrunch.SupportedwiththeGovernment’stotalguaranteecommitmentofuptoHK$100billion,the80%SFGSaimstoofferguaranteeprotectionon80%ofeligible loan facilitiesapprovedbyparticipatinglenderstoencouragelendingtoSMEsforgeneralworkingcapital or acquiring equipment or assets to supportbusinessoperations.Theapplicationperiodof the80%SFGSexpiredon28February2013.

In the faceofpersistentlyweakexportmarketsand thechallengingexternaleconomicenvironment, theFinancialSecretaryannounced inthe2013–2014BudgetSpeechtoextendthe80%SFGSforoneyearfrom1March2013.TheCorporationchargesatsubstantiallyloweredguaranteefeerate to reduce the f inancing burden of SMEs andadministers the 80% SFGS on prudent commercialprinciples.Theguaranteefeesaresetasidetopaydefaultclaims from participating lenders and out-of-pocketexpensestobeincurredunderthearrangement.

InresponsetothefeedbackfromthemarketparticipantstobettermeetthefinancingneedsofSMEs,theCorporationannouncedinMarch2013therelaxationofthetreatmentofapplications involving relatedentitieswhenassessingwhether to consider separately themaximum facilityamountofHK$12million.Suchrelaxation furtherassistsSMEs inobtaining financing in thecommercial lendingmarket.

The80%SFGShasbeenwellreceivedbythemarket.Atotalof30AuthorizedInstitutions(AIs)havejoinedtheSFGSasparticipating lenders. As at 31 December 2013, theCorporationapprovedmorethan8,000applications foratotal loanamountofapproximatelyHK$33.9billionunderthe80%SFGS,benefitingover5,500 localSMEsandmorethan144,000relatedemployees.

TopromotepublicawarenessoftheSFGS,inparticularthe80%SFGS,theCorporationdistributes informationleafletsandprovidescontinuingsupport in introducingthespecialmeasuresatSMEseminarsarrangedby lenders, industrialandtradeorganisationsandgovernmentagenciesontopofa series of advertising campaign rolled out by theGovernment.

Mortgage Insurance

Over theyears, theMIPhasrepeatedlydemonstrated itseffectiveness inhelpingpotentialhomebuyersovercomethehurdle ofmeeting the substantial downpaymentrequiredtopurchaseaproperty.Fromtheperspectiveofthebanking industryasawhole, theMIPallowsbankstoengage in higher loan-to-value (LTV) lendingwithoutincurringadditionalcredit risksandaffecting theoverallstability of the entire banking system.All in all, theprogramme creates a win-win s i tuat ion for bothhomebuyersandbanks.

Since its inception inMarch1999, theMIPhasgainedincreasingpublicacceptanceandhasplayedasignificantroleinpromotinghomeownershipinHongKong.Owingtoslowdownofpropertymarkettransactionsandprudentialmeasuresonpropertyandmortgagemarkets, thevolumeofloansdrawndownundertheMIPdecreasedtoHK$13.3billion in2013and theusage rate (in termsof the totaldrawdownamountundertheMIPagainstthetotalmarketdrawdownamount)stoodat8.4%(Figure 9). It isnotablethat 84% of theMIP applications receivedwere forsecondarymarketproperties,demonstratingthatmortgageinsurancehasbeencrucial inassistinghomebuyers inthesecondarymarket.

Figure 9

Mortgage Loan Amount Drawn Down and Usage Rate* of MIP

Sources:HKMAandHKMC

TotaldrawdownamountundertheMIP*UsageRate= Totalmarketdrawdownamountbasedon HKMA’sMonthlyResidentialMortgageSurvey


Since1999,theMIPhashelpedmorethan107,000familiesachievethedreamofhomeownership,withaggregateloandrawdownofHK$245billion.

Taking into consideration themarket conditions andprudentialapproachtoriskmanagementontheexposureofhighLTVmortgagelending,theCorporationtightenedtheeligibilitycriteriaof theMIP inFebruary2013.After therevisions,onlymortgageloanofpropertieswithvalueatorbelowHK$4millionareeligibleforthemaximumLTVratioof90%.PropertieswithvalueaboveHK$4millionandbelowHK$4.5millionwillbeeligible forMIPcoveruptoHK$3.6million,being80%to90%LTV,whilepropertieswithvalueator aboveHK$4.5millionwill onlybeeligible for themaximum LTV ratio of 80%. The cap on the value ofpropertiesunder theMIP remainsunchangedatHK$6million.Owingtoslowdownofproperty transactionsandsuchtighteningmeasures, theaggregatedrawdown loanamountundertheMIPdecreasedtoHK$13.3billionfromHK$22billionin2012.

Reverse Mortgage Programme

TheRMPhas receivedgoodmarket receptionsince itslaunch inmid-2011, followedbythe introductionof threeenhancementsinlate2012whichincluded:(1)loweringtheminimumageofborrowersfrom60to55,(2)increasingthemaximumspecifiedpropertyvalueforpayoutcalculationfromHK$8milliontoHK$15million,and(3) increasingthemaximumlump-sumpayoutamount.Bytheendof2013,theCorporationhadreceivedover6,000publicenquiriesonreverse mortgage and approved more than 530applications,withanaveragepropertyvalueofaroundHK$4.5millionandanaveragemonthlypayoutamountofHK$14,100.Theaverageageofborrowerswas69yearsold.

In2013,theCorporationadoptedamorefocusedstrategytopromotebetterpublicawarenessandunderstandingoftheRMP.TheCorporationhasapproachedvarioustargetcustomergroupsthroughaseriesofmarketing initiativesincluding: advertising campaign using diversemediachannels,jointpromotionwithbanks,rovingexhibitiontour,educationseminarswithprofessionalbodies,andpublictalkswithnon-governmentalorganisations(NGOs),retireeassociations and residential clubhouses. Since theprogrammeinception,atotalof77talksandseminarshave

beenorganised,with attendanceofmore than 5,400persons. In2013,theCorporationheld26publictalksandseminars,andorganised3trainingsessionsforthefrontlinebank staff on theRMP. InNovember, theCorporationimplemented an initiative of encouraging the use ofEnduringPowerofAttorney (EPA)byexistingborrowersandnewapplicantsundertheRMP.ApamphletintroducingtheEPAandrelatedarrangementshasbeenissuedtoraisepublicawareness.

Tooffergreaterflexibilityandbenefitstobothexistingandprospectiveborrowers,theCorporationhasbeenstudyinganewenhancementwhichallowsaborrowertoassignhis/her life insurancepolicy to thebank as an additionalsecurityunderthereversemortgage, therebyobtainingahighermonthlypayoutand lumpsumpayoutsduringthepayment term. This initiativewill serve to provide anaddit ional col lateral buffer for improving the r iskmanagementpositionoftheHKMCundertheRMP.

Microfinance Scheme

TheCorporationcontinuedtoruntheMFSchemeforatrialperiodof three yearswith a tentativemaximum loanamountofHK$100million.TheMFSchemeoffers threecategoriesof loans,namelyMicroBusinessStart-upLoan,Self-employmentLoanandSelf-enhancementLoan.Thetargetborrowersarebusiness starters, self-employedpersonsandthosewanting toachieveself-improvementthroughtraining,upgradingofskillsorsecuringprofessionalcertification.Apart fromextending loans, theMFSchemealsoprovidesmentoringservices,entrepreneurial trainingandancillarysupport to theborrowers to improve theirbusinessviability.

TheMFSchemehasoperatedsmoothlysinceits launchinJune 2012. By the end of 2013, theMF Scheme hadapprovedatotalof106 loanswithatotal loanamountofHK$28.1million.

TheMFSchemehasagoodmixofborrowersfromdifferentbackgroundsandprofessions,suchasyoungbeauticians,fashiondesigners, IT graduates,middle-agedChinesemedicinepractitioners,reinvigoratedrehabilitatedoffendersandnativeEnglishspeakingforeigners,etc.


Business Overview

TheCorporationlaunchedaseriesofpromotionalactivitiesincluding advertising campaigns,media interviews,exhibition,in-classintroductorytalkstostudentsofdifferenttraining courses and public seminars to raise publicawarenessandunderstandingof theMFScheme.TheCorporation also participated in trade exhibitions topromote theMFScheme.TheCorporationcontinued toworkcloselywiththeschemeparticipantstoenhancetheMFScheme.Frequentandregulardialoguewasmaintainedwith banks andNGOs to improve the efficiency andeffectivenessoftheMFScheme. In2013,theCorporationheld21sharingsessionsandpublicseminarson theMFScheme.

Joint Ventures Outside Hong Kong

TheCorporation’sBoardgaveapproval inSeptember2012for theCorporationtodisposeof itsstake in itsoverseasjoint venture, Bauhinia HKMC Corporation Limited(BHKMC).TheCorporationsignedanagreement in2013withabuyer,whichwasanassociatedcompanyofitsjointventurepartnerShenzhenFinancialElectronicSettlementCentretoselltheCorporation’sentirestake.ThesaleoftheCorporation’sstake inBHKMCwascompleted in January2014.

Funding

Theglobal financialmarketsremainedvolatile in2013,asaffectedbytheuneveneconomicrecovery intheUSandthestillweakeconomyinEuropeaswellastheUSFederalReserve’s decision to scale back its asset purchaseprogramme. Inspiteofthechallengingmarketconditions,theCorporationmanagedtosecureprudentpre-fundingtocater for loanpurchasesandrefinancingactivities.Giventhe Corporat ion’s strong background as a whol lygovernment-ownedentityand itssolidcredit rating, theCorporationraisedatotalofHK$10.2billionofdebts(withmaturityof1-yearandabove) in2013.Attheendof2013,theCorporation’s total outstandingdebt amounted toHK$31.4billion.

TheCorporationiscommittedtodevelopingthelocaldebtmarketthroughregulardebtissuancesandtheintroductionofnewdebtproducts.Asoneof themostactivebondissuersinHongKong,theCorporationwillcontinuetoissue

debt inboth local institutional and retailmarkets, anddiversifyitsfundingsourcesandinvestorbasetooverseasinstitutionalmarkets.ThiswillnotonlyhelpbroadentheCorporation’s fundingbase,butalsoprovide institutionalandretail investorswithhighqualitydebt instruments tosatisfy theirneed forportfoliodiversificationandyieldenhancement.

TheCorporationhas threedebt issuanceprogrammes,whichallowthe issuanceofdebtsecurities inanefficientandeffectivemanner.With its strongcredit rating, theCorporation’s debt issues arewell received by theinvestmentcommunity,suchaspensionfunds, insurancecompanies, investment funds, charities, government-related funds and retail investors. The Corporationundertakesproactiveinvestorcommunicationstomeetandupdateinvestorsregularly.

Medium Term Note ProgrammeTheCorporationestablished themulti-currencyMediumTermNote(MTN)ProgrammeinJune2007tobroadenitsinvestorbaseandfundingsourcesin internationalmarket.ItwassetupwithaninitialprogrammesizeofUS$3billion,whichwassubsequently increasedtoUS$6billion in July2011 tomeetgrowingdemand fromoverseas investors.Themulti-currencyfeatureoftheprogrammeenablestheCorporationto issuenotes inmajorcurrencies, includingHongKongdollars,USdollars,renminbi,Australiandollars,euroandJapaneseyen, tomeetdemandfromboth localandoverseas investors.All foreigncurrency-denominatedMTNdebt is fullyhedged intoeitherUSdollarsorHongKongdollars.Theprogrammeincorporatesflexibleproductfeaturesandofferingmechanismsforbothpublicissuancesandprivateplacementsto increaseitsappealto investorswithdifferentinvestmenthorizonsandrequirements.Asattheendof2013,anextensivedealergroupcomprising10major internationalandregional financial institutionshadbeen appointed to support futureMTN issuance andprovidesecondarymarketliquidity.

In2013, theCorporation launched16MTNprivatedebtissues, includingdebtdenominated inHongKongdollars,USdollars,AustraliandollarsandBritishpounds,totallinganequivalentofHK$10.2billion (withmaturityof1-yearandabove).


Debt Issuance ProgrammeTheDebtIssuanceProgramme(DIP)wasestablishedinJuly1998totargetinstitutionalinvestorsintheHongKongdollardebtmarket.ItwassetupwithaninitialprogrammesizeofHK$20billion,whichwassubsequentlyincreasedtoHK$40billion in2003.TheDIPhassinceprovideda flexibleandefficientplatform for theCorporation to issuedebtandtransferableloancertificateswithatenorofupto15years.AtotalofsixPrimaryDealersand16SellingGroupMembershad been appointed under the DIP to providewidedistributionchannels forbothpublic andprivatedebtissues.

Retail Bond Issuance ProgrammeTheCorporation isdedicatedtopromotingthe localretailbondmarket with the object ive of extending theCorporation’s investorbasebeyond its already stronginstitutional investorcommunity. InNovember2001, theCorporation successfully pioneered a new offeringmechanismfortheretailbondmarketinHongKong.

Tosupportthedevelopmentoftheretailbondmarket,theCorporationestablished theHK$20BillionRetail BondIssuanceProgrammeandmadeitsdebut issuanceinJune2004.Underthisprogramme,placingbanksusetheirretailbranchnetworks,telephoneandelectronicbankingfacilitiestoplacedebtsecurities issuedby theCorporationwithre ta i l i nves to rs . To ensure the l i qu id i t y o f theaforementioned retail bonds, the placing banks arecommittedtomakingfirmbidpricesfor thebonds inthesecondarymarket.Since2001,theCorporationhasissueda totalamountofHK$13.7billion retailbonds.Over theyears, the Corporation’s retai l bonds have gainedwidespreadrecognitionasasafeandsimple investmentchoice,with reasonablyattractive returns,giving retailinvestors anopportunity to invest in high-gradedebtsecuri t ies issued by a whol ly government-ownedcorporation.Whenthemarketenvironment isconducive,theCorporationaims to issue retailbonds regularly toprovideanadditionalinvestmenttoolforHongKong’sretailinvestors.

Revolving Credit Facility Provided by the Exchange FundIn January1998,during theAsianFinancialCrisis, theExchangeFundextendedaHK$10billionRevolvingCreditFacilitytotheCorporationthroughtheHKMA.ThisFacilityenables theCorporation tomaintain smoothoperationunderexceptionalcircumstances,sothatitcanbetterfulfilitsmandate topromotebankingand financialstability inHongKong.While theCorporation obtains long-termfundingfromlocaland internationaldebtmarketstofunditsoperations,theFacilityalsostandsasaliquidityfallbackfortheCorporation. In lightoftheglobal financialcrisis in2008,thesizeoftheFacilitywassubsequentlyincreasedtoHK$30billion inDecember2008,whichdemonstratedtheHKSARGovernment’srecognitionoftheimportanceof,andfurthersupportfor,theCorporation.

TheCorporationusedtheRevolvingCreditFacilityduringtimesofmarketstressin1998and2008topartiallyfundtheacquisitionofHongKongresidentialmortgageassetsfromlocalbanks.Atbothtimes,theRevolvingCreditFacilitywasfully repaidby fundsraised fromtheCorporation’scost-effectivedebt issuancewhen themarketsstabilised. In2013,therewerenodrawdownsundertheRevolvingCreditFacility.

Credit RatingTheCorporation’sability toattract investment in itsdebtsecurities is underpinned by its strong credit rating,equivalenttothatoftheHKSARGovernmentaccordingtoS&PandMoody’s.

Credit Ratings of the HKMC

Standard & Poor’s Moody’sShort-term Long-term Short-term Long-term

LocalCurrency A-1+ AAA(Stable) P-1 Aa1(Stable) (Outlook)

ForeignCurrency A-1+ AAA(Stable) P-1 Aa1(Stable) (Outlook)


Business Overview

The credit rating agencies havemade very positivecomments on theCorporation’s credit standing. Thefollowingcommentsareextracts from thecredit ratingreportsofS&PandMoody’saftertheirannualsurveillanceinMay2013:

S&P“S&PequalisestheratingsonHKMCwiththeratingonHongKong (SpecialAdministrativeRegion). This reflectsourexpectationofan‘almostcertain’ likelihoodoftimelyandsufficient extraordinary support from theHong Konggovernment—thesoleownerofHKMC— ineventsoffinancialdistress… Inourview,HKMC’sundertakingofadditionalpolicy initiativesoverthepastthreeyearshasamildlysolidifyingeffectonHKMC’stieswiththeHongKonggovernment, and reinforced its integral linkwith thegovernment.”

“OurviewisbasedontheCorporation’sprudentcreditandmarket riskmanagement, verygoodassetquality,andstrongliquidityandcapitalprofiles.”

“The HKMC has a traditional and generally prudentapproach to riskmanagement. TheCorporation hasrecognisedcredit riskas its focusof riskappetite. Ithasadoptedstringentpolicies,asimpleandeffectivebusinessmodelandmanagementstructure,andvarioushedgingtoolstomitigateothertypesofrisks.”

“Inourview,riskassociatedwithfundingandliquidityarewellmanaged...TheCorporationalsomaintainssignificantlevelsof liquid assets in the formofmarketabledebtsecurities, cash andbankdeposits,whichprovides aliquidityfallback.”

Moody’s“HKMCisfullyownedbythegovernment,andcarriesoutpublicpolicyfunctionsinitsdailyoperations.HKMC’spolicymandatesincludeenhancingfinancialandbankingstabilityinHongKong,promotinghomeownership,andfacilitatingthedevelopmentof the localdebtmarket.Aspartof itsmandate topromotebankingstability,HKMCactsasanalternative ‘lenderof last resort’ by standing ready topurchase residentialmortgages fromHongKongbanksduringtimesofstress.”

“ThegovernmentprovidesHKMCwithaHKD30billionrevolvingcredit facility,apaid-upcapitalofHKD2billion,andHKD1billionofcapitalcallableondemand.IntheeventHKMC’screditprofileisweakenedinastressscenario,weexpect thegovernment toprovide timelyextraordinarysupport.”

“HKMChasmaintainedverysoundassetqualitymetricssinceitsestablishment…HongKongresidentialmortgageshavehistoricallyperformedverywell througheconomiccycles.Evenwhenpropertypricefellbyupto70%between1997and2003, overallmortgagedelinquenciesneverexceeded2%.Currentaverage loan to value ratiosonHKMC’sHongKongmortgageportfolioisbelow40%.”

“Asawholesalefundedentitywithnocustomerdeposits,HKMCreliesonongoingaccesstothedebtcapitalmarketstofunditsoperation.Nevertheless,thecompanyexecutesprudentpre-fundingandmaintainsaverystrong liquidityprofileduringnormaleconomicconditions.Ithasverygoodaccess to capitalmarkets due to its strong financialfundamentalsandgovernmentaffiliation.HKMChasaHKD30billionrevolvingcreditfacilityfromthegovernment’sExchangeFund.Thecompanyhassufficient liquidassetsandgovernmentrevolvingcredit facility torepayallof itsoutstandingdebtsasofend-2012.”

Mortgage-Backed Securitisation

TheCorporationstrivestopromotethedevelopmentofthemortgage-backedsecurities (MBS)market inHongKong.MBS isaneffective financial instrumentthatcanchannellong-termfundingfromthedebtmarkettosupplementtheneedforlong-termfinancinggeneratedbymortgageloans.Banksand financial institutionscanmakeuseofMBStomanagerisks inherent inmortgage loans,suchascreditrisks, liquidity risks, interest rate risksandasset-liabilitymaturitymismatchrisks.AdeepandliquidMBSmarketcanhelpenhancethedevelopmentofanefficientsecondarymortgagemarketand furtherpromoteHongKongasaninternationalfinancialcentre.

TheCorporationhas issuedatotalofHK$13.2billionMBSsince1999.TheUS$3billionBauhiniaMortgage-Backed


SecuritisationProgrammewasestablished in 2001 toprovideaconvenient,flexibleandcost-efficientplatformforthe Corporation to issueMBSwith various productstructures,creditenhancementsanddistributionmethods.

Risk Management

TheCorporation operates under prudent commercialpr inciples, and the principle of “prudence beforeprofitabi l i ty” guides the design of the overal l r iskmanagementframeworkanddisciplineitusesinitsday-to-daybusinessexecution.Over theyears, theCorporationhascontinuouslymaderefinementstoitswell-established,robustand time-tested riskmanagement framework toreflectchangesinthemarketsandbusinessstrategies.

Corporate Risk Management CommitteeTheBoard isthehighestdecisionmakingauthorityof theCorporationandholds theultimateresponsibility for riskmanagement. The Board,with the assistance of theCorporateRiskManagementCommittee (CRC),has theprimary responsibility for formulating riskmanagementstrategies intheriskappetitestatementandforensuringthat theCorporationhasaneffective riskmanagementsystemto implement thesestrategies.The riskappetitestatementdefinestheconstraintsforallrisk-takingactivitiesandtheseconstraintsare incorporatedintorisk limits,riskpoliciesandcontrolproceduresthattheCorporationfollowstoensurethattherisksareproperlymanaged.

TheCRC is responsible foroverseeingtheCorporation’svarioustypesofrisks, reviewingandapprovinghigh-levelrisk-relatedpolicies,overseeingtheir implementation,andmonitoringimprovementeffortsingovernance,policiesandtools. It also assigns priorities and responsibilities toindividualdepartmentstoenhancetheriskmanagementframework. TheCommittee is chairedbyanExecutiveDirector,withmembers including another ExecutiveDirector,aswellasChiefExecutiveOfficer,SeniorVicePresident (Operations), SeniorVicePresident (Finance),GeneralCounsel,SeniorVicePresident (Risk),andseniorstafffromtheRiskManagementDepartment.

ThemajortypesofrisktheCorporationmanagesarecreditrisk,marketrisk,operationalrisk,legalrisk,leveragingrisk,longevityriskandpropertyrisk.

Credit RiskCredit risk is theCorporation’sprimary riskexposure. Itrepresents thedefault riskpresentedby loanborrowersandcounterparties.

(a) Default riskToaddressdefault riskeffectively, theCorporationadoptsa four-prongedapproach tosafeguardandmaintain the quality of its assets,MIP and SMEguaranteeportfolios:

• CarefulselectionofApprovedSellers,Servicers,ReinsurersandLenders

• Prudentassetpurchase, insuranceandguaranteeapplicationeligibilitycriteria

• Effective duediligenceprocess formortgagepurchase,default loss, insuranceandguaranteeclaims

• Enhancedprotectionforhigher-riskmortgagesandtransactions

Lossesmayariseifthereareshortfallsintherecoveryamountreceivedfordefaulted loansthat fallundertheMortgage Purchase Programme (MPP). Tomitigate thisdefault risk, theCorporationadoptsprudentloanpurchasecriteriaandconductseffectiveduediligencereviewsaspartandparcelofthe loanpurchaseprocess inorder tomaintain thecreditquality of loans. In addition, depending on theprojected risk exposureof eachunderlying loanportfolio,creditenhancementarrangements,suchasreservefundsforabsorbingcredit losses,areagreeduponwithsellersonadeal-by-dealbasis toreducethepotentialcredit lossesthatcouldarisefromtheborrower’sdefault.

LossesmayalsoarisefromdefaultonloansundertheMIP’s insurancecoverage.EachMIPapplication isunderwrittenbytheCorporationinaccordancewithaset of eligibility criteria, and each claim fromaparticipatingbank isauditedby theCorporation toensurethefulfilmentofallMIPcoverageconditionsand todetectany fraudelements.Asa result, thedefault risk for loanswithMIPcoveragehasbeen


Business Overview

greatly reduced. To reduce the risk of possibleconcentrationof thisdefault risk, theCorporationtransfersaportionof therisk-in-force toApprovedReinsurersviareinsurancerisk-sharingandexcess-of-lossarrangements.

TheCorporationadoptsathree-prongedapproachtomanagethedefaultriskundertheMFScheme,whichincludes: (a) prudent assessment of borrowers’repaymentcapability; (b)avettingpanel toconsiderbus iness v iab i l i t y and approva l o f the loanapplications; and (c) provision of training andmentoringsupporttoborrowers.

Portfolio performance and analysis reports arecompiledonaregularbasistoprovidemanagementwith updated information on critical credit riskindicators,suchas loandelinquency ratios,equitypositionsandcumulativecredit losses, toenabletimelyreviewsandaswiftresponsetochangesintheoperatingenvironment.

Stress tests are also conducted to analyse theCorporation’sfinancialcapabilitytoweatherextremescenarioswhentheyarise.

(b) Seller/Servicer counterparty riskCounterparty risksmayarise from the failureofaSeller/Servicer of an acquiredportfolio to remitscheduledpayments to theCorporation ina timelyandaccuratemanner.TheCorporationhasadoptedacounterparty risk limit framework that limits theaggregateamountofassetsitcanpurchasefromtheApprovedSellers.Therearealso individual limitsseton the maximum amount of assets that theCorporationcanpurchasefromacounterparty.Therisk limit frameworkactsasabeneficialdevice formanagingcounterpartyexposureontheriskprofilebasisofeachSeller/Servicerand foravoiding theconcentrationofacquisitionfromonlyafewSellers.

TheSellers/Servicersaresubject toregular review,where their f inancial strengths,managementcapabilities, loanservicingqualityand transactionexperiencearetakenintoconsiderationinthereview.

(c) Reinsurer counterparty riskReinsurercounterpartyriskreferstothefailureofanApprovedReinsurertomakeclaimpaymentstotheCorporat ion . In order to mi t igate re insurercounterparty riskeffectively, theCorporationhasestablishedaframeworkfortheassessmentofeachmortgagereinsurer’sfinancialstrength,creditratingandrelevantexperienceinmortgageinsurance.

TheCorporationperformsanannualreviewofeachApprovedReinsurer’s financial strength,businessappetiteandcapacity.Thereviewresultsareusedtodeterminetheongoingbusinessallocationandrisk-sharingportions.TheCorporationalsohascollateralarrangementswithApprovedReinsurers to reducecounterpartyriskexposures.

(d) Treasury counterparty riskTreasurycounterparty riskariseswhen there isadelayorfailurefromtreasurycounterpartiestomakepaymentswith respect to treasury instrumentstransacted with the Corporat ion. Hence, theCorporat ion has adopted a prudent treasurycounterparty limit framework, underwhicheachpotential treasurycounterparty isassessedon thebasis of its credit rating, financial strength andcapability in treasuryproducts,etc.Basedon theevaluation results,a treasurycounterparty limit isassignedforeachspecifictypeoftreasuryinstrumentexposure.The limits for treasurycounterpartiesarereviewedandadjustedonaregularbasis,whicharebasedontheirfinancialstrengthandthecapitalbaseoftheCorporation.Todate,theCorporationhasnotexperiencedanylossonatreasurytransactionduetoacreditdefaultbyacounterparty.

(e) Lender riskTheCorporation isexposed to lender risk inSMElendingthatarises from: (a)a lender’sunderwritingbeingincompliantwith itscreditpolicy; (b)a lender’slooselyformulatedcreditpolicywhich isnotspecificenoughorsufficientlydefinedforcompliance;and(c)themoralhazardofa lenderbeing lessprudent inunderwritingaguarantee-protectedapplication.TheCorporationadoptsprudenteligibility criteria forapplicationvetting,monitorsdelinquencyandworkout


plans,andconductsduediligencereviewsonclaimstomitigatedefaultriskonthepartofborrowersandmoralhazardonthepartoflenders.

At the heart of the Corporat ion’s credit r iskmanagement frameworkare twocommittees: theCreditCommittee and the TransactionApprovalCommittee.

Credit CommitteeTheCreditCommittee is responsible forsettingtheCorporation’soverall creditpoliciesandeligibilitycriteria,particularly forassetacquisition,mortgageinsurance,SMEguaranteebusinessandMFScheme.TheCommitteeoperatesunderaframeworkthathasbeenapprovedbytheBoard.TheCommittee is theapproval authority for accepting applications tobecomeApprovedSellers/ServicersundertheMPP,ApprovedReinsurersundertheMIP,ApprovedLendersunderSFGSandeligibletreasurycounterparties. It isalsoresponsibleforsettingriskexposurelimitsforthecounterparties.Should thebusinessandoperatingenvironmentchangedrastically,creditpolicieswillbeimmediatelysubject toreviewandtimelymeasuresbased on the findingswill be presented to theCommitteeforapproval.

Transaction Approval CommitteeTheTransactionApprovalCommitteeconductsanin-depthanalysisofpricingeconomicsandassociatedcredit risks forbusiness transactions,whilst takingintoconsideration the latestmarketconditionsandbusinessstrategiesapprovedby theBoard.MajortransactionsapprovedbytheCommitteearesubjecttoendorsementbyanExecutiveDirector.

TheCreditCommitteeandtheTransactionApprovalCommitteearebothchairedbytheChiefExecutiveOfficer,withmembersincludingSeniorVicePresident(Operations),SeniorVicePresident(Finance),GeneralCounsel,SeniorVicePresident(Risk)andseniorstafffromtherelevantfunctionaldepartments.

Market RiskMarketrisksarisewhentheCorporation’s incomeor thevalueof itsportfoliosdecreasesdue tomovements inmarketprices.Market riskconsistsof interest rate risk,asset-liabilitymaturitymismatch risk, liquidity riskandcurrencyrisk.

(a) Interest rate riskNet interest income is thepredominant sourceofearningsfortheCorporation.Itrepresentstheexcessof interest income (from theCorporation’s loanportfolio,cashanddebt investments)over interestexpenses(fromdebtissuanceandotherborrowings).Interest rate risksarisewhenchanges inmarketinterest ratesaffect the interest incomeassociatedwiththeassetsand/or interestexpensesassociatedwiththeliabilities.

Theprimaryobjectiveofinterestrateriskmanagementis thereforeto limit thepotentialadverseeffectsofinterestratemovementsoninterestincome/expense,whilemaintainingstableearningsgrowth.TheinterestrateriskfacedbytheCorporationistwo-fold,namelyinterestratemismatchriskandbasisrisk.InterestratemismatchriskisthemostsubstantialriskaffectingtheCorporation’snetinterestincome.Itarisesmainlyasaresultofthedifferencesinthetimingof interestratere-pricingfortheCorporation’sinterest-earningassetsandinterest-bearingliabilities. Interestratemismatchrisk ismostevident inthe loanportfolioswherethemajorityof the loansearna floating interest rate(benchmarked against thePrime rate,HIBORorComposite InterestRate),whilst themajorityof theCorporation’s liabilitiesarefixed-ratedebtsecurities.TheCorporation thereforemakesprudentuseofarangeof financial instruments,suchas interestrateswaps, interestrateswaptions,basisswaps,forwardrateagreementsand issuancesofMBS, tomanageinterestratemismatchrisk.Theproceedsofthefixed-ratedebtsecuritiesaregenerallyswappedintoHIBOR-basedfundsviainterestrateswapsinordertobettermatch the floating-rate incomes frommortgageassets.


Business Overview

The Corporation also uses duration gap as anindicator tomonitor,measureandmanage interestratemismatch risks.Adurationgapmeasures thedifferenceininterestratere-pricingintervalsbetweenassetsandliabilities.Thewiderthedurationgap,thehigher the interest ratemismatch risk.Apositivedurationgapmeans that thedurationofassets islonger than that of the liabilities, and therefore,representsgreater riskexposure to rising interestrates.Anegativedurationgap, incontrast, indicatesgreaterriskexposuretodeclininginterestrates.

Dependingontheprevailinginterestrateoutlookandmarketconditions, theCorporationproactively re-balancesthedurationgapofitsasset-liabilityportfolioundertheguidanceandsupervisionoftheAssetandLiabilityCommittee(ALCO).

Bas is r i sk represents the d i f fe rence in theCorporation’sPrime-based interest-earningassetsand its HIBOR-based interest-bearing liabilities.However,thereareonly limitedfinancial instrumentscurrentlyavailableinthemarkettohedgethePrime-HIBORbasis risk fully. Ingeneral,basis riskcanbeeffectivelyaddressedonlywhenmortgageassetsandnon-mortgageassetsarebasedonHIBORtomatchthefundingbase,orwhenrelatedriskmanagementinstrumentsbecomemoreprevalentoreconomical.Over the past few years, the Corporation hasconsciouslyadoptedastrategy thatacquiresmoreHIBOR-basedassets.Asa result, thePrime-HIBORbasisriskfortheCorporationhasbeensubstantiallyreduced. In addition, theCorporationhad issuedPrime-basedMBSandusedhedgingderivativesinthepasttomitigatesuchbasisrisk.

(b) Asset-liability maturity mismatch riskTheactualaverage lifeofaportfolioofmortgageloans,which isusuallyshorter thanthecontractualmaturityof themortgage loans, dependson thespeed of scheduledmortgage repayments andunscheduledprepayments.Higherprepaymentratesshorten theaverage lifeofaportfolioofmortgageloans.InHongKong,prepaymentoccursfortwomainreasons: (i)housingturnover—borrowersrepayingtheirmortgageloansuponthesalesoftheunderlyingpropert ies, and ( i i ) ref inancing— borrowersrefinancing theirmortgage loans toobtain lowermortgagerates.

Asset-liabilitymaturitymismatch riskcanbemorespecificallycharacterisedas reinvestment riskandrefinancingrisk.ReinvestmentriskreferstotheriskofalowerreturnfromthereinvestmentofproceedsthattheCorporation receives fromprepayments andrepaymentsofitsloanportfolio.Refinancingriskistheriskofrefinancingliabilitiesatahigherlevelofinterestrateorcreditspread.TheCorporationisexposedtorefinancingrisk (inbothfundingamountandcostoffunds)when itusesshort-term liabilities to financelong-term,floating-rate loanportfolios.Reinvestmentriskismanagedthroughtheongoingpurchaseofnewloans to replenish the rundown in the retainedportfoliosandthroughtheinvestmentofsurpluscashindebtsecuritiesorcashdeposits to fine tunetheaveragelifeoftheoverallassetspool.Inaddition,theCorporationmakesuseof the issuanceofcallablebondsandtransferable loancertificatestomitigatereinvestmentrisk.Thecalloptionincludedincallablebondsand transferable loancertificatesallows theCorporationtoadjusttheaverage lifeof its liabilitiestomatchmoreclosely thatof theoverallpoolofassets.

TheCorporationmanagesitsrefinancingriskthroughthe flexibledebtsecurities issuancewithabroadspectrumofmaturities.Thisagainservestoadjusttheaverage life of the overall liability portfolio in adynamicfashion. Inaddition,refinancingriskcanbemitigatedbyadjustingthematuritiesofassets intheinvestmentportfoliooroff-loadingmortgageassetsthroughsecuritisationofmortgageloansintoMBS.

TheCorporationusesasset-liabilitymaturitygapratiotomeasure,monitor andmanage asset-liabilitymaturitymismatchrisk, toensureaproperbalancebetweentheaveragelifeoftheCorporation’sassetsandliabilities.

(c) Liquidity riskLiquidity riskrepresents theriskof theCorporationnotbeingable torepay itsobligations,suchas theredemption of maturing debt, or to fund thecommitted purchases of loan portfol ios. TheCorporationimplementsitsliquidityriskmanagementframework in response to changes inmarketconditions. The Corporation has continuously


monitoredtheimpactofrecentmarketeventsonitsliquiditypositions,andhaspursuedaprudentpre-fundingstrategywhichhashelped tocontain theimpacttheglobalfinancialturmoilhadonitsliquidity.Liquidity risk ismanagedbymonitoring thedailyinflowandoutflowof funds,andbyprojecting thelonger-terminflowsandoutflowsoffundsacrossthefullmaturityspectrum.TheCorporationuses liquidassetratiotomeasure,monitorandmanageliquidityrisk.

Givenitsstrongbackgroundasawhollygovernment-owned ent i ty and i ts sol id credit rat ing, theCorporation isefficient in raising funds fromdebtmarketswithboth institutional and retail fundingbases. This advantage is supplemented by theCorporation’sportfolioofhighly liquid investments,

whichareheldtoenableaswiftandsmoothresponsetounforeseen liquidity requirements. TheHK$30billionRevolvingCreditFacility fromtheExchangeFundfurtherprovidestheCorporationwithaliquidityfallbackeven ifexceptionalmarketstrains last foraprolongedperiod.

TheCorporationmanagespre-fundingprudentlythroughwell-diversified fundingsources,sothatallforeseeablefundingcommitmentsaremetwhentheyfalldue,inordertosupportthegrowthofitsbusinessand themaintenanceof awell-balanced liabilityportfolio.SuchdiversificationallowstheCorporationto pursue a pre-funding strategy at the lowestpossible cost,whilst at the same time offeringsafeguardsagainst the inability to raise funds indistortedmarket conditions. Thecurrent fundingsourcesareillustratedinTable1below:

Table 1: Current Funding Sources for the HKMC

Funding Source Description

US$6BillionMediumTermNote(MTN)Programme

Thereare10Dealerswhounderwriteanddistributelocalandforeigncurrencydebttointernationalinstitutionalinvestorsundertheprogramme

HK$40BillionDebtIssuanceProgramme(DIP) Thereare6PrimaryDealersand16SellingGroupMemberswhichunderwriteanddistributedebttoinstitutionalinvestorsundertheDIP.TheTransferableLoanCertificateSub-ProgrammeundertheDIPprovidesfurtherdiversificationofitsfundingsourcesandbroadeningofitsinvestorbase

HK$20BillionRetailBondIssuanceProgramme

Thisdebtissuanceprogrammehas19PlacingBankswhichassistinofferingretailbondstoinvestors

US$3BillionBauhiniaMortgage-BackedSecuritisationProgramme

Withatotalof8Dealers,thismulticurrencymortgage-backedsecuritisationprogrammepermitstheCorporationtooriginateMBSinboththelocalandinternationalmarkets

CashandDebtInvestmentPortfolio Thisportfoliocomprisesmainlycashandbankdeposits,commercialpaper,high-qualitycertificatesofdeposit,andnotesthatarereadilyconvertibleintocash

MoneyMarketLines TheCorporationhasprocuredmoneymarketlinesfromalargenumberoflocalandinternationalbanksforshort-termfinancing

HK$30BillionRevolvingCreditFacility TheExchangeFundcommitstoprovidingtheCorporationwithHK$30billioninrevolvingcredit


Business Overview

(d) Currency riskCurrency risk arises from the impact of foreignexchange rate fluctuations on theCorporation’sfinancialpositionandforeign-currency-denominatedcashflows.TheCorporationmanagesitscurrencyriskinstrictaccordancewith the investmentguidelinesapprovedbytheBoardandunderthesupervisionoftheALCO,which sets dailymonitoring limits oncurrencyexposure.

Inaccordancewith thisprudent risk-managementprinciple, thenetexposureof the foreigncurrencydenominateddebtsissuedundertheMTNProgrammeand the overseas residential mortgage loanspurchased is fully hedged by the use of cross-currencyswaps.

Control mechanismTransactionexecutionissegregatedamongthefront,middleandbackofficestoensureadequatechecksandbalances.TheTreasuryDepartment,actingasthefrontoffice, is responsible formonitoring financialmarketmovementsandexecutingtransactionsinthecash,derivatives,debtandsecuritisationmarkets, inaccordancewith the strategies laiddownby theALCO.TheFinancialControlDepartment,assumingthemiddle-office role,monitors compliancewithtreasurycounterpartiesandmarket risk limits.TheOperationsDepartment,actingasthebackoffice, isresponsible for deal verification, confirmation,settlementandthepaymentprocess.

Asset and Liability CommitteeTheALCOisresponsiblefortheoverallmanagementofmarket risksof theCorporation. It follows theprudent r iskmanagement principles and theinvestmentguidelinesapprovedby theBoard. It isresponsible forreviewingandmanagingthemarketrisk of interest rate risk, asset-liabilitymaturitymismatchrisk,currencyrisk,andliquidityandfundingriskoftheCorporation.Regularmeetingsareheldtoreviewthe latestfinancialmarketdevelopmentsandformulate relevant asset-liabil itymanagementstrategiesfortheCorporation.

TheALCO ischairedbytheChiefExecutiveOfficer,andhasamongitsmembersaSeniorVicePresident(Finance),SeniorVicePresident (Operations),SeniorVicePresident(Risk)andseniorstafffromtherelevantfunctionaldepartments.

Operational RiskOperational riskrepresents theriskof lossesarisingfromexternal interruptions,or inadequaciesor the failureofinternalprocesses,peopleorsystems.

TheCorporationadoptsabottom-upapproachinidentifyingoperationalriskbycarryingoutanin-depthanalysisofnewproducts, business act iv i t ies, processes, systemenhancements and due di l igence reviews of newoperational flows. Comprehensive validation rules,management informationsystemreportsandaudit trailsareinplacetotrackandreportanyerrorsordeficiencies.

TheCorporationactivelymanagesoperationalriskwith itscomprehensivesystemofwell-establishedinternalcontrols,authenticationstructuresandoperationalprocedures.Theoperational infrastructure iswelldesignedtosupport thelaunch of newproducts in different business areas.Rigorousreviewsareconductedbeforetheimplementationofoperationalorsysteminfrastructure inorderto identifypossible operational risks and to ensure adequatesegregationofduties.

Toensureanefficient andeffectivedischargeofdailyopera t ions , the Corpora t ion pursues advancedtechnologicalsolutionsalongsiderobustbusiness logisticsandcontrols tocarryout itsoperational activitiesandbusinessprocesses.Stepshavebeentakentoensuretheaccuracy,availabilityandsecurityof thesesystems.TheCorporationhasalso takencautious steps to instituteadequatechecksandbalances in financial controls toensurethatitsoperationsareproperlycontrolled.Effectivefinancialcontrolsalsohelptominimise financial riskandsafeguard itsassetsagainst inappropriateuseor loss,includingthepreventionanddetectionoffraud.


TheCorporation’s Information SecurityManual (ISM) documents the requirementsofsecuritystandardsandpractices relating to informationanddata security forobservancebyallstaff.TheCorporationimplementsvarioussecuritymeasures, suchasdouble firewallprotection,intrusion-detection systems, virus alerts, quarantinesystemsandvulnerabilityscanningsystemstominimiseitsexposure toexternalattacks. Internally, theCorporationalsohasavirtual LocalAreaNetworkwithworkstationsecurity policies to reduce damage in the event of amalicious intrusion. TheCorporationengagesexternalconsultantswhen appropriate to conduct intrusionvulnerabilityteststoenhancesystemsecurity.

Toensureahighdegreeofcompliance,theCorporation’scoreoperating systemsandprocesses are subject toregular reviewby internal auditors, andalsoexternalauditors’ reviewaspartof theannual statutoryaudit.Furthermore,allstaffarerequiredtosignanundertakingtocomplywith the ISMrequirementsannually.The ISM isupdatedwhenever there isanewsecuritymeasureorsystem,andanychangeswillrequireapprovalfromseniormanagement.

Business Continuity PlanTheCorporation’sbusiness recoveryplanensures thatmaximumpossibleservicelevelsaremaintainedatallunitstosupportbusinesscontinuityandminimisetheimpactofbusinessdisruptionfromdifferentdisasterscenarios.Eachbusinessunitassessestheimpactofdisasterscenariosandupdatesrecoveryproceduresfromtimetotime.Toensurethatbusinessrecoveryproceduresarepractical,abusinessrecoverydrill isconductedannually.Dailyback-upsandoffsitestorageofback-uptapesareinplacetoprotecttheCorporationfromITdisasters.

Product Sign-off MechanismTo ensure that all risk factors are consideredwhendesigningandimplementinganewproduct,theCorporationhas developed a product developmentmanagementframework underwhich proper sign-off of productspecificationisconductedpriortoanynewproductlaunch.Theproductdriver isclearlyassignedat thestartof theproduct development process to be responsible forinstituting the sign-off process. Products canonly belaunchedafterall functionaldepartmentshavesignedoffandconfirmedfunctionalreadiness.

Complaint Handling MechanismTheCorporationmakescontinuouseffort to improve itscoreprocesses toensure that itsproductsandservicesmeetcustomers’expectations.Tomakesurecustomers’feedbackisattendedtoinatimelyandappropriatemanner,theCorporation has put in place a formal complainthandlingmechanismtoimprovethetracking,reportingandhandlingofcomplaints.

Operational Risk CommitteeTheOperationalRiskCommittee (ORC) is responsible forensuringthatallbusinessentitiesandlinefunctions intheCorporationmaintainaneffectiveoperational riskandinternalcontrolframework.TheORCisalsoresponsibleforprovidingdirectionsandresolvingissuesrelatedtopolicies,controlsandmanagementofoperationalissuesreferredtoby l ine functions, as well as ensuring prompt andappropriatecorrectiveactioninresponsetoauditfindingsrelatedtooperationalrisksorinternalcontrols.

TheORC ischairedby theChiefExecutiveOfficer.Othermembersof thecommittee includeSeniorVicePresident(Operations), SeniorVicePresident (Finance),GeneralCounsel,SeniorVicePresident(Risk)andseniorstaffintherelevantfunctionaldepartments.

Legal RiskLegal riskarises fromuncertainty in theapplicationorinterpretationof laws,regulationsor legaldocuments,orfailure to complywith statutory, regulatory or legalobligations.LegalriskalsoarisesfromanyunenforceabilityoforineffectivenessoflegaldocumentsinsafeguardingtheinterestsoftheCorporation.

TheLegalOffice,headedbyGeneralCounselandCompanySecretary,advisestheCorporationonlegalmatterswithaview to controlling legal risk.Whennewproducts orbusinessactivitiesareconsidered, theLegalOfficewilladviseon therelevant laws (and theupdates thereafter)and regulatory environment, as wel l as the legaldocumentation,and identifypossible legalpitfallswithaviewtoprotecting thebest interestsof theCorporation.Whereappropriate,externalcounselwillbeengaged toassisttheLegalOffice inprovidingfull legalsupporttotheCorporation.TheLegalOfficealsoworkscloselywiththeotherdepartmentsof theCorporation toadviseon legalissuesanddocumentation.


Business Overview

Inviewof the increasingcomplexityof theCorporation’sproductsanddevelopments in theexternal regulatoryenvironment,Managementdecided,in2013,toestablishadedicatedComplianceFunctionwithintheLegalOfficeforthe bettermanagement of the legal, regulatory andcompliancerisks.TheComplianceFunctionwithintheLegalOfficehadundertakenpreparatoryandplanningworkfortheroll-outof itssupportservicesoverthecourseof2014and 2015. For a more detai led descript ion of theComplianceFunctionand itswork,please refer to theInternalControl sectionof theCorporateGovernanceReport.

TheORCisthegovernancecommitteeforlegalrisks.

Leveraging RiskInorder toensure that theCorporationwouldnot incurexcessiveriskwhenexpanding itsbusinessandbalancesheet in relation to itsowncapitalbase, theFinancialSecretary,inhiscapacityasFinancialSecretaryandnottheshareholder,actedastheregulatoroftheCorporation,byissuingasetofguidelinesoncapital-to-assets ratio forcompliancebytheCorporationupontheestablishmentoftheCorporation in1997.TheguidelineshavesincebeenupdatedfromtimetotimetotakeaccountofnewproductslaunchedbytheCorporation.TheFinancialSecretaryissuedinOctober 2011anewsetof guidelinesby referenceprincipally to theBasel II risk-basedcapital adequacyframework,theGuidelinesonCapitalAdequacyRatio(CAR),whichtookeffecton31December2011.TheminimumCARstipulated inthenewGuidelines is8%,which isthesameminimumcapitalrequirementundertheBasel II.Asat31December2013,theCorporation’sCARwas21%.

Theprudentuseofregulatorycapital ismonitoreddaily inaccordancewith thenewcapital guidelines. TheChiefExecutiveOfficer (CEO) reports theCARand thedailyminimumratio to theBoardofDirectorsonaquarterlybasis.Anearlywarningsystemisalso inplace. If theCARdropstothethreshold levelof14%,theCEOwillalerttheExecutiveDirectors. If theCARfalls to12%orbelow, theBoard of Directorswill be informed and appropriateremedialactionswillbetaken.

Longevity RiskLongevity risk refers to theheightening risk of largerpayoutsunder theRMP.The longer thepayoutperiod is,the largerthe loanbalancewillbeovertime,andthe lessbuffertherewillbeforthesaleofthepropertytocovertheoutstanding loanbalance.A lossmayarise if there isashortfall in therecoveryamountafter thedisposalof theproperty.Theterminationrateoftheloansdependslargelyonthemortalityrate(i.e.lifeexpectancy)oftheborrowers.

Annual riskanalysis isconducted inorder toassess thepotential financial impactof longevity risk for reversemortgage loans, aswell as the interactionamong thevarious r isk factors under the RMP. Themortal ityassumptions are reviewed on a regular basis by theTransactionApprovalCommittee.

Property RiskProperty riskarises from the fluctuation in thevalueofpropertywhichactsascollateralfortheCorporation’sloanandguaranteeportfoliosundertheMPP,MIPandRMP.TheCorporat ionmanages the r isk by sett ing prudentassumption in therecoverablevalueof thecollateralizedproperty,restrictingmaximumLTVratiosoftheloansundertheprogrammesandconductingstresstesttoexaminetheimpactunderadversemarketscenarios.

Process Management and Information Technology

Sinceitsinception,theCorporationhasdevotedsubstantialresourcesandefforttocontinuously improve itsbusinessoperations, to strengthen its internal controls and toenhance its application systems. Thepast year is noexception.

In 2013, by leveraging the advances in informationtechnologyandkeepingabreastoftimes,theCorporationupgradeditsinformationsysteminfrastructureincludingtheimplementationofnewcomputer roomtocopewith thebusiness growth and to equip staffwith the tools toembrace the opportunit ies ahead. Infrastructuralimprovementsbenefitedthepublicaswell.TheCorporationhas joinedtheGovernment’sWebAccessibilityCampaignto ensure our publicwebsite complieswith theWeb


ContentAccessibilityGuidelines(WCAG)2.0.Thisensuresthat theCorporation’spublic information isaccessible topeoplefromallwalksoflife,includingthosewithdisabilitiessuchasblindnessanddeafness.Theproject isscheduledforcompletioninearly2014.

Apart from IT infrastructureupgrade, theCorporationcontinuedto improveprocessautomation,data integrity,systemresilienceandinformationsecuritythroughsystemsdevelopment and enhancements to support variouscorporateandbusinessinitiatives,e.g.theSFGS,theRMP,theMFScheme,theMIP,andthetreasuryoperations.Suchsteps are vital in ensuring efficiency, accuracy androbustnessinbusinessoperationsthattranslateintobetterservices to the community. In addition, our systemenhancementsandprocessre-engineeringmeasuresalsoaimtoachievepaperlessoperationsthathelpcontributetoabetterandgreenerenvironment.

Corporate Social Responsibility

In recognitionof theCorporation’scontribution to thecommunity and its commitment to corporate socialresponsibility (CSR) inthepastyears,theCorporationhasbeenawardedtheCaringOrganisationLogobytheHongKongCouncilofSocialServicesince2008andhasnowsteppedintothesixthyearofCSRparticipation.

Caring Company Recognition Ceremony

Asasocially responsibleorganisation, theCorporationcares forboth itsemployeesand thecommunity. TheCorporationhasunderlined itscommitmenttocorporatesocialresponsibilitybycaringforitsemployees’well-being,participating in charity activities and implementingenvironmentalprotectionmeasures.

Care for EmployeesStaffing and RemunerationTheCorporationattractsandgroomstalenttoensuretheefficientperformanceof its coremissionofenhancingstability in thebanking sector, promotingwiderhomeownershipand facilitating thedevelopmentof thedebtsecuritiesmarket.Employeesareprovidedwithcompetitiveremunerationpackagesand fringebenefits,apromisingcareerpathanddevelopmentopportunities,andahealthyandsafeworkingenvironment.TheCorporationhasalsoadopted family-friendlypracticesbyofferinga five-dayweektohelpemployeesmaintainagoodwork-lifebalance,aswellascomprehensivemedicalanddental insuranceplanswhichcoverboth theemployeesand their familymembers.

Throughsystemsautomationandprocessre-engineering,theCorporation hasmaintained a lean and efficientworkforce,despitean increase inthescopeofoperationsandthecomplexityof theproducts itoffers. In2013, thepermanentstaffestablishmentoftheCorporationwas178,andthestaffturnoverratewas10.64%.

Training and DevelopmentTheCorporation recognises the importanceofongoingtrainingandhasdevotedconsiderable resources to thecontinuousenhancementof itsemployees’professionalknowledgeandskills. In2013, theCorporationarrangeddifferentprogrammesandworkshopstohelpemployeesenhance theirproductknowledge,andstrengthen theirmanagerialandtechnicalcompetenceandsoftskills.


Business Overview

The in-housetrainingworkshopscoveredawiderangeoftopicssuchaseffectivecommunication,riskmanagement,complainthandlingandbusinesswriting.Duringtheyear,seminarsonCompetitionOrdinance,PreventionofBriberyOrdinance,andEqualOpportunitiesLegislationwerealsoheld.ITworkshopswereorganisedonsoftwareapplications.

Effective Communication training

Training on the New Companies Ordinance

Training on the Prevention of Bribery Ordinance

Equal Opportunities Legislation and its application in the Workplace

TheCorporationalsosponsoredemployees forexternaljob-related traininganddevelopmentcoursescoveringawiderangeof topics, frommortgage-related issues, riskmanagement, corporate governance, f inance andaccounting to information technology and leadershiptraining.

Inaddition, all newemployeeswereprovidedwithaninductionsession toprovide themwitha foundationofknowledgeabouttheCorporation’sorganisationstructure,functionsandpolicies.


Health and SafetyAsacaringorganisation, theCorporation isdedicatedtolookingafterboth thephysicalandmentalhealthof itsemployees.AnEmployeeSupportProgrammeisinplacetoprovideconfidentialexternalcounsellingandconsultationservicestoemployeesandtheirfamilymembers,ifneeded.Avaccinationprogrammefor thepreventionof influenzaandhealth-checkprogrammesatprivilegedrateswerealsoofferedtoemployees.

TheCorporationhas from time to time reviewedandstrengtheneditscontingencyplanswhichaimtominimiseany unexpected or sudden disruption to businessoperations,suchas fromanoutbreakofcommunicablediseaseamongemployees.Periodicdrillsareorganisedtomakesureemployeesareconversantwiththeactivationoftheback-upfacilities,contingencyplansandcommunicationarrangementsincaseofemergency.

Employee Relations and Staff ActivitiesTopromoteahealthywork-lifebalanceandfosterafamily-friendlyworkingenvironment,theHKMCStaffClubregularlyorganisesstaffactivitiestocultivatebetterrelationshipsandcommunicationamongemployees.In2013,theseactivitiesincludedhiking, interestclasses,Work-LifeBalanceWeek,outingsandotherstaffgatherings,allofwhichwerewellreceivedbyemployeesandtheir families.Ouremployeesalsoparticipated inHongKongMonetaryAuthorityHouseCompetition for funandteambuilding.Thee-newsletter“MindChannel” regularly disseminates short stories,epigramsandhealth tips toallemployees tocreateandmaintainanoptimumwork-lifebalanceandfulfilment.Thein-house staff publication “HKMConnection” recapssnapshotsoftheHKMCstaffactivities.

Hiking on the Dragon Back Trail

Work-life Balance Week

Eco Tour to Hong Kong Global Geopark of China


Business Overview

To fac i l i tate ef fect ive communicat ion wi th in theCorporation, the intranetStaffHomepage is frequentlyupdatedsothatuseful informationcanbesharedamongdifferentdepartments.There isalso theStaffSuggestionScheme,whichencouragesstaff tomakesuggestionsforimprovementsinworkflowandtheworkplace.

Care for the CommunityCharities and Social ActivitiesThe Corporation promotes various charitable andcommunityfunctions,suchasfund-raisingevents,donationcampaigns and voluntary services. Employees areencouragedtosupportcharityactivitiesandjoinvoluntaryworkorganisedby theHKMCVolunteersTeam,CaringLeague.

In2013, theCorporationorganiseddonationcampaigns,suchasDressCasualDay2013fortheCommunityChest,andhelditsannualBloodDonationDayeventfortheHongKongRedCross.

Employeeshavebeenkeen toparticipate in voluntaryservices,demonstrating theirconcern for theneedybydedicating timeandeffort tovariouscauses.TheCaringLeague has partnered with several social serviceorganisations to participate in a number of voluntaryservices,includingthefollowing:

• Care for theenvironment—a recyclingcampaign inpartnershipwith theSalvationArmy tocollectbooks,stationery,toys,etc.

• Care for theelderly—organisedby theMongkokKaiFongAssociationLtd—ChanHingSocialServiceCentreand HOPEWorldwide respectively, involving ourvolunteersvisitingNgongPing360withelderlypeople,visiting thehomesofelderlypeople livingaloneandbringing them“luckybags”withdailynecessities towelcome the ChineseNewYear andMid-AutumnFestival.

Dress Casual Day

Blood Donation

Outing to Ngong Ping 360 with the elderly


Home visit to elderly living alone before Mid-Autumn Festival

Seniors Day 2013

Student Internship and Executive Trainee ProgrammesTohelpnurture talent for the future, theCorporationprovides a number of internship programmes forundergraduatestogivethematasteof therealbusinessworldandhelpthembetterpreparefortheirfuturecareers.Thestudentswhojoinedtheprogrammesappreciatedthelearningexperienceandworkopportunities theywereexposedto.

In2011, theCorporation launchedtheExecutiveTraineeProgrammewith the objective of attracting youngexecutiveswithgoodpotential tomeettheCorporation’soperationalneedsand long-termstaffdevelopmentplan.Throughout the two-year programme, the ExecutiveTraineeshavetheopportunitytoundergojobrotationsandattendstructured learninganddevelopmentprogrammesfromtimeto time.The firstbatchofTraineescompletedtheir two-yearprogrammeinAugust2013and joinedtheCorporation’streasuryandriskmanagementfunctionsforfurthercareerdevelopment.

Environmental ProtectionTheCorporationcontinuouslysupportsand implementsvariousgreenmeasurestocreateamoreenvironmentallyfriendlyofficeandraiseemployees’awarenessofmethodsofwastereductionandenergyconservation. In2013, theCorporationcontinuedaGreenOfficeCampaignduringwhichusefulgreen tipsweresharedamongemployees.Employeesareencouraged toadoptpaperlessworkingpracticesbyusingmoreelectroniccommunication.Theyarealsoencouragedtocollectwastepaperandusedtonercartridges for recycling.Since2006, theCorporationhastakenvariousmeasures, includingbettercontrolofofficetemperature, in the interest of energy efficiency. TheCorporationwelcomessuggestions fromemployeesongreenofficeideasandencouragesitssupplierstouseandoffermoreenvironmentally friendlyproductswheneverpossible.

Business Overvie · pursue monetary easing in an attempt to sustain the fragile economic recovery....

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